Sunday Jun 05, 2022

Ep 019 - Market Update

Summary:

  • Are We Heading Towards A Great Depression? [0:03:39]
  • Current News Update On Crypto And Bitcoin [0:06:33]
  • Just What Happened To The Luna? [0:11:16]
  • Trevor Shares His Personal Strategies In These Unique Times [0:17:37]
  • Leverage: An Interesting Strategy [0:20:16]
  • Sometimes, It All Boils Down To A Person’s Emotional Well-being [0:23:16]

 

 

Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board-certified ophthalmologist with a full-time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.

 

Jon: Welcome to The Financial MD Show. We’ve got an exciting show for you today. We’ll, it’ll be an interesting show anyway. I’m here with my ever-present partner, Dr. Trevor Smith. How are you, Trevor?

 

Trevor: Been well, Jon. Good to see you.

 

Jon: Yeah, you too, buddy. Excited to be back in the saddle and back on the mic and we’re coming in hot with all sorts of things on our mind and we’ll try to give you some good financial info that’s going to help you. They might not be necessarily connected topics but we’re going to talk today and you’ll get to listen to our thoughts and expertise in different areas but hopefully you can walk away with something that will help you out just by spending a few minutes with us. So, today, on the Financial MD Show, we’re going to touch a bit on some market commentary about what’s been going on. As of today’s recording, it is May 16th and it’s been a rough year, pretty much every sector – for stocks, funds, crypto – whatever you want to talk about, there is nowhere safe.

 

Trevor: Except commodities, if you bought them last year.

 

Jon: That’s right, and we’ll have to probably educate some people on what commodities are but that’s okay. That’s the point of the Financial MD Show. As of today, at any given point in time, S&P 500 is down probably 15 percent, give or take, from its high in December. What does that mean for you? Most of you listening to this are young physicians and that really means nothing to you and if you’re a resident and you’re putting money into a Roth IRA and you’re saving into your residency’s 403(b) or 401(k) – keep doing that. At end of the day, if history tells us anything, it’s a great time to put money into the market. I’m just going to be honest. We need to chill out and if you’re older and you’re listening to this, kudos to you for finding podcasts and you’re probably a little more concerned and maybe rightly so, but if you were aggressively invested, meaning, if you had a lot of your investments in stocks and Bitcoin or whatever, then you knew this could happen, and that’s always a possibility. So let this be a lesson to you. This is why we say aggressive because it’s risky. This is what risky means, and even this isn’t drastic. I mean, it was worse during pandemic, worse in 2008. Could it get worse still? Sure.  We can talk about recession, but there’s really between stocks, bonds, crypto like all of those things – what’s causing this. In the stock market, at least I can speak to that and then Trevor’s going to touch on Bitcoin and just kind of state of the Bitcoin address.

 

Are We Heading Towards A Great Depression? [0:03:39]

 

Things are weird as we’re coming out of the pandemic and recovering from that. Some of the big companies that really had some gains last year – your Zoom, your Amazon, your different things – I’ve had to pull back because they haven’t had the same scenarios. It’s not the same atmosphere. We’re getting back to “normal.” People are going back to the office. Zoom isn’t used as much. Peloton’s not being used as much. You know, all these things that are hitting some lows that are affecting the market and the interest rate increase, I think, is leading to a lot of this. You’ll probably see it affect the housing market shortly, not as drastic as buyers want it to but some and we may be looking at a recession which means two consecutive quarters of negative GDP – gross domestic products. Basically, the country is going down for two consecutive quarters, that means a recession. Now, again, we’ll get through it. We have every time. This has happened before. It’s not a Great Depression type of scenario, but just be prepared that that may be a thing and I’ll just say it. I said this three years ago that the Feds needed to start raising interest rates. The economy was doing well. I didn’t know why they were waiting but you’ll probably all say it because of politics and you’re probably right which just is one of those frustrating things that pisses me off when politics get in the way. This is people’s money. These are mortgages – it’s people’s livelihood – and the Federal Reserve is supposed to be a fiduciary, meaning, I don’t know if they’re technically a fiduciary but like their job is to handle things like inflation and interest rates and all those things and then they come in like they have recently and jumped them drastically which we see it in reflection in things like mortgage rates that go from 3 percent up to 5.5 percent. It’s insane, and it just hurts, I think, the average consumers. I think they should have raised rates years ago. We still would have gotten some inflation but it wouldn’t be as drastic and we still would have had interest rate increases but it would have been more gradual and so this is them being reactionary because they didn’t want to raise them during an election year, right before an election year or all this kind of things. So that’s stuff, just kind of pisses me off. So we could be heading for recession, increased unemployment, high inflation, things like that. You’ll see this concept called stagflation which means rising prices without rising income and that’s a thing. So who knows but that’s my explanation for why stock markets looking like they have bonds have been doing poorly because when you look at current bonds out there, they weren’t paying great interest rates and then when the Federal Reserve raises the interest rates that these bonds are paying, that makes current bonds out there look even worse so they lose value so there’s just no place to get any steady rate of return right now. Some of you guys have been watching Bitcoin or Ethereum or any crypto. Trevor, can you speak to that at all or what are your thoughts on that?

 

Current News Update On Crypto And Bitcoin [0:06:33]

 

Trevor: Yeah, absolutely. I mean, in my circle, people know that I’m a Bitcoin fan, right, so I often get the question why did the Bitcoin price do this or that. I’d say, first, it’s interesting that people – we talk about price of Bitcoin because really it’s an exchange rate like it’s another currency rate.

 

Jon: Yup.

 

Trevor: It’s really is an exchange rate, but we think of it as an investment so we talk a lot about price. Bitcoin is one of the most volatile assets out there. It goes up and down a lot. That is what it means for it to be volatile. So, usually I just say Bitcoin’s just being Bitcoin. That’s how it works. It’s a true free market so it really follows the psychology – the human psychology of markets very, very closely. You can Google image search the human psychology of markets and see a very obvious trend of what spikes and troughs look like and they don’t always match up, but the 2018 cycle matched up pretty well for how fast it went up and the pace and the ups and downs even along the way. It’s just kind of doing one of those things where, you know, why did the price go down like the answer is there’s more sellers than buyers like that’s the reason. It doesn’t get propped up in the same way. If there’s a lot of selling in the stock market, they’ll actually halt trading. If it’s going up too fast in the stock market, they’ll halt trading and it’s a really manipulated system and the idea there is just to control volatility because then investors don’t get nervous or buy too much or sell too much. There’s some good intentions there but it’s not truly a free market. So, Bitcoin’s going to be inherently more volatile because it’s a global free market. It’s pretty much the last free market. These other cryptocurrencies can be manipulated, that is absolutely true, just based on the size and it’s based on who controls the creation of new coins so similar to the Fed in the U.S. The Federal Reserve prints money. I don’t get to print U.S. dollars. They get to print U.S. dollars. But with these alternative cryptocurrencies, non-Bitcoin – some would call them unregulated securities because you’re creating a token and then you’re raising money potentially from other people and then you can sell it in an open market. Regardless, that’s not really been enforced totally by the SEC so that’s to be determined, but those are more manipulatable because they’re centrally controlled and their supply is controlled. So if I made a new currency and I had 50 percent of it sitting here in my house and then I sold a bunch of it to other people and I gave it to some people and then more people wanted it because they thought my business model of how I was going to somehow use this makes a lot of sense starts to go up, and now I have this 50 percent pile here and everyone else is buying and buying, I can just sell as people are buying it so people would be like selling into retail or selling into bull market or whatever it is. It’s not full-on like pump and dump. Even the name doesn’t even matter but if you’re pumping it and you’re selling your own, I mean that is kind of the definition of a pump and dump. So that is where you’ll see the legitimacy of a market is oftentimes seen in the downturn and what happened in the 2018 cycle after the big crypto top end of 2017, early 2018 is you saw 95, 99 percent drawdowns in these alternative coins – cryptocurrencies – and if you have a similar bear market which were pretty much undoubtedly in for Bitcoin and other digital assets, yeah, it’s going to get rough. It’s probably going to get – if you haven’t been through it before, you know, it’s rough. I don’t feel it emotionally after being through it before. Part of that is because experiencing how unregulated all these alternative coins are. It’s not that there’s no value in them or there can’t be another new thing in the future but Bitcoin is very well established. So, for me, I don’t have to really worry too much about that portion of my holdings because I understand it. I know what it is. I know that it does these quick highs and lows and I’m not in it for the short term and that mental framework translates to not being too stressed out about it.

 

Jon: Yup, yeah, exactly. If you know the purpose of it why you chose the investment you did or the strategy you did whether it’s Bitcoin or stock market or whatever the case might be, then it all comes back to that same concept. I think that’s a great reminder.

 

Trevor: There was another event too. Should I tell them about the Luna thing we were talking about?

 

Jon: Yeah, I think that’s worthwhile. Explain what that means.

 

Just What Happened To The Luna? [0:11:16]

 

Trevor: There was this company that came along that – I’ll try to keep it as brief and digestible as possible and you can listen to other podcasts or check out on Twitter – but there’s this company called Luna and their goal was to create an algorithmic stablecoin so we’re getting into the weeds a little bit already. So we’ll just say they create these coins that are supposed to match the price of the dollar and you can trade in and out of them and it’s just faster, it’s more efficient than sending your dollars around, and the idea is if you think Bitcoin is going to go down, you could sell into this coin and it’s just a little bit faster than really settling out into true U.S. dollars and then the real trick – the reason people were buying this – is because you could go on to a certain platform and you could get a 20 percent yield on your stablecoin. So you’ve got – it’s this feeling, this idea of I can take my U.S. dollars, not have the volatility risk literally none ideally, sit in a stablecoin and earn 20 percent. It’s like if you could earn 20 percent on your cash that you put under your mattress, it’s kind of that similar feeling that people would get about this. It feels secure, and then the question is what is that backed by? Well, Luna kind of tapped into the Bitcoin safety, the stability of Bitcoin that people like which non-Bitcoiners would laugh at, but in this space, Bitcoin is seen as a true long-term store of value. So, if it’s backed by that, people kind of like that – oh that’s interesting, okay. So, now it feels extra safe and plus they’re buying Bitcoin as people put more and more U.S. dollars in there. They’re kind of like matching it up and they’re going to use Bitcoin as their reserve – kind of like this idea of a Bitcoin standard rather than a gold standard. So they’ve got this narrative. It sounds pretty nice and plus you’re earning a 20 percent yield and people when they’re earning a 20 percent yield don’t always ask as many questions as they should, right?

 

Jon: You’d think you would at 20 percent, like doesn’t that sound a little too good to be true?

 

Trevor: In the Bitcoin space, in the digital assets space, it’s a little unclear as to how it works until one of them blows up. So, what happened in this one is they got a bunch of people in and they had about 70 billion dollars, I believe, is the number of value. This, in the last week, was what people would have read. This got erased all the way down to about two. So, how did that happen? The way they were backing the coin so like if I bought hundreds of millions of dollars in the stablecoin and then I decided to sell it, they would have to be able to back it up to trade like dollar to dollar.

 

Jon: That’s the definition of a stablecoin, right?

 

Trevor: Yeah, right. So, they have to match it up. So, if you exit it, when you trade one thing for another, there has to be like a shift. They’re backing it up with their own coin that they made called Luna and then their reserves were some in Bitcoin as well. So somebody decided – it’s very obvious how they would do this. I guess people were publishing articles on how you could basically attack the system and break it and somebody went and did that. So they shorted Bitcoin to bring the price down and they shorted Luna and they sold the stablecoin. When they sold a bunch of the stablecoin, it had to be switched out for something like Luna and Bitcoin but as Bitcoin was losing value this last week and Luna was losing value, now the thing that they had to kind of like hold that stablecoin at a dollar, they didn’t have enough money to back it up. So, people were trading out of it and they couldn’t trade them back. They basically were like – it’s like a bank run. They couldn’t make these people whole so as they couldn’t make them whole as they tried to exit, the value of that currency drops dramatically, and in a matter of hours, it went from basically worth a dollar worth nothing. It was kind of associated with Bitcoin so maybe that news got misinterpreted and Bitcoin went down a little bit further – irrelevant. I mean Bitcoin is volatile but this was a specific attack on Luna is what failed in that scenario and not Bitcoin. It should be reason for everybody to be very, very cautious for any of these new projects, for things that have too good to be true yields, and there’s also a lot of big-named folks that were involved in the project. Frankly, you should know better. Anyways, it’s good reason to be cautious the whole YOLO-ing approach to the spaces. It is not wise and know what you’re buying. I mean, know what you’re buying with stocks, with the diversified portfolio. This is your money. If you’re investing, it’s ultimately your responsibility you can have a great guide like Jon here and he’ll help you and it’s still ultimately your responsibility to understand what you have and what you’re buying and creating your own plan and your own reasons for having what you have.

 

Jon: Yeah, and full disclosure. If you are simply looking for Bitcoin advice, I would contact Trevor.

 

Trevor: Not financial advice for me, but I’m happy to discuss the technology and the features.

 

Jon: How about Bitcoin consultant? How about that?

 

Trevor: Sure. No problem.

 

Jon: I think that helps a lot. I mean that was the gist of what we wanted to mention today is some reasons for what’s going on in the market and some of you are staying on top of that. Some of you – I think most of our listeners know what’s going on but I wanted to have us come in and give some perspective on the various markets of why and ultimately not to panic but I think that Trevor’s point, too, like know why you’re getting into what you are – this YOLO approach or just whatever it is. When you’re getting into something that is potentially risky or volatile, fine, if that’s money you can stand to lose, but if you’re investing your life savings or retirement savings or whatever the case might be, everything’s kind of a purpose. We talked with our clients about at a certain point we put together an investment philosophy statement which basically says regardless of the market or our emotions or whatever, we want these guidelines to guide what my family, my company, invests into and why, and so it just helps to maintain some stability at least of emotion and thought through ups and downs. Be aware that I think long-term investment strategy doesn’t change. This has happened before. It will happen again. We are certainly in unique times in terms of – it’s hard to say, gosh, where I can turn to the find stable growth. I don’t know, but where most of us are just staying the course because we had a strategy and a plan and this doesn’t change that. Anything else to add to that, Trevor?

 

Trevor Shares His Personal Strategies In These Unique Times [0:17:37]

 

Trevor: No. I don’t have anything else to add to that. Yeah, I’ll just share a little bit of my own personal strategy that I’m obviously into Bitcoin and I am heavily weighted in that in my portfolio. I won’t say exactly how much unless I said it before which I may have. I’ll just use it as an example for the purpose of having a specific asset or equity or stock in your portfolio or combination or ETF. When you know something’s going to be volatile, you want to size it appropriately and if you think Bitcoin is going to 10x in five years which I think is totally possible from a point of 30,000 – could be wrong – but that’s kind of like my thesis. So 10x from here in five years, I would totally consider that reasonable. So, if I have 10 percent of my net worth, let’s say, in that and we get a 10x, we’ll, that portion of my portfolio will now be 100 percent value. I don’t need to have 90 percent of my wealth in asset that I think is going to go up really high, and if I know it’s volatile and it could drop in half or 80 percent then I can tolerate from 10 percent down to 2 percent and my overall portfolio could drop a good 8 percent or something if it goes down 80 percent, and for me being 35 and losing 8 percent of my net worth is not a big deal. It’s not going to ruin me. It’s not going to affect my payments and I am not YOLO-ing into any sort of investment. I am looking at this soberly knowing it’s going to suck when I see it go down and I’m going to put in 10 percent because 10x should be plenty good for me and having 100 percent return over five years for my entire net worth would be ridiculous. It’d be amazing especially in the current inflationary world we live in, that’s great. That’s going to keep up with inflation and that’s one of my goals and I only have to really “bet”, stand to lose 10 percent of my net worth. My dad’s like at retirement. Do I want him to have 50 percent of his net worth in Bitcoin? No, that would be crazy. If it drops down by 80 percent, then he could lose 30, 40 percent of his net worth. That’s too much. You know, that’s irresponsible, unquestionably. But 5 percent, 2 percent Bitcoin and then at 10x’s and then now he’s got a 20 percent boost with such an extremely low risk, that’s where it’s valuable and it’s outside of the current system and the Fed can’t print in a way that can manipulate Bitcoin as much, although it’s a liquid asset. It's going to be affected, at least in the short term, but yeah, just to land the plane on that.

 

Leverage: An Interesting Strategy [0:20:16]

 

With that in mind, leverage is an interesting thing. So you can have a 100 percent net worth but if you leverage your money, you actually can have a higher percentage than 100 so you can invest like 120 percent of your net worth if you have 20 percent leverage in. People are, well, that sounds crazy. Well, most of you are doing that because you have a home so it’s balanced out by the debt but if the value of your home goes down then you are actually leveraged above. So, let’s say, you got 100 percent net worth and then you borrow against the home and you get a 400,000-dollar loan for a 400,000-dollar house. So you’re still at 100 percent because those cancel each other out, right?

 

Jon: Yeah.

 

Trevor: If your house value drops in half and you got now 400,000 dollars you owe and 200,000 dollars of house value left and you’ve got a million dollars, well, now you’re minus an extra 200,000. So you’ve got 1.2 in assets but you have 400,000-dollar loan, so now you’re at 800,000. So, yeah, it’s right about 20 percent. People might not be leveraged right now but depending on what you own, you could be. So, with that same kind of thing in mind, I have student loans and I have been investing so there’s always that discussion – should I be investing or should I pay off my student loans or a little bit of both – personal decision. Talk with the financial advisor and then scope it out, maybe two different directions, know where you’re headed and pick the one that sits well with you. Well, recently, what sat well with me was, I’d like to kind of de-leverage. I’m basically when I’m making payments and I’m investing at the same time, it’s almost like I’m borrowing to invest that money because I’m effectively not paying off the loan. You can do some mental gymnastics. My loan was at a 5 percent rate. That’s not too bad with inflation. Some people would say borrow that money all day long and there’s been times where I felt that way and I was just like, you know what, there’s a peace of mind I could just feel myself desiring and I wanted to pay it off and I had the funds and then looking at the environment of recession – potentially – I did this before where, you know, a year ago, all my assets were up a lot higher than they are now because I was in volatile assets and I could have paid it off with a smaller percentage of my net worth than I had to do this last week. But I just thought, you know what, that percentage of my net worth I would have to sell to pay this off could double again in the next year if things keep going down. I just want to de-leverage myself and have that peace of mind and so I decided to pay off. I still have some student loans remaining but I paid off about 50 percent of what I owe and that lowers my monthly payments and making the cash flow more comfortable. It allows me to more conservatively pursue the career that I want to have so I don’t feel as limited by that and that was my financial decision.

 

Sometimes, It All Boils Down To A Person’s Emotional Well-being [0:23:16]

 

Jon: Sometimes, I recommend that. I usually, in the interest rates we’ve had in the last several years, have said, don’t pay off your loans early. We can get a much better rate of return in the market or investments, but there have been times when I knew it had to with a person’s emotional well-being. We had a client that really hated their job, hated where they were at, just a bunch of stuff, and it was affecting his family and I just said, hey man, I think you’re going to be happier if we switch, alter course a little bit and try to aggressively get these loans paid off, then you can move, you know, because he was a thousand of miles away from home where he grew up and he’s trying to raise a family away from his parents and their family. It’s like all these things that – I’d been a financial planner long enough to say and a therapist for a little bit to say – yeah, I think you’re going to be better served. The numbers are not going to make sense but your happiness and emotional well-being just outweighed the numbers.

 

Trevor: If you can’t do stuff like that and you’re making money and you’re saving money, you got to remember what’s the point of the money? It’s not just to get more of the money. It’s you want to preserve your buying power.

 

Jon: To what end, yeah.

 

Trevor: Yeah, part of it I was like what I’ve sacrificed lots of emotions, learning and investing in a volatile market and assets and taking on lots of debts and stuff. I was like, you know, I’ve paid the price for this, and occasionally, you just need to reap the rewards. I’m not going out and buying a car. I still like driving my old used cars. They’re great, but this is a big goal and I don’t regret it at all and then the market dipped 25 percent so that was particularly satisfying. I don’t think that usually happens but I was like, well, there you go. I would have otherwise had to just wait another year because I’m not going to sell down at that. I’m not going to sell at the bottom, but selling in the middle – the middle-ish – that’s all right.

 

Jon: I can get onboard with that. All right, well, it seems that covers it for today. Trevor, thanks for sharing. Your perspective is always valuable and I appreciate you doing this with me, and for the rest of you out there in Financial MD world, just keep at it one day at a time. Stick with the plan. If you’re unsure, consult your financial planner. Find somebody you like and you trust and you feel like has your best interest in mind. You know how to reach us at financialmd.com. We’re coming out with new Didactic Minute videos every week; kind of blowing up on TikTok and Instagram so if that’s convenient for you, follow there. Otherwise, we’re still always on Facebook and YouTube for the video piece but if you haven’t yet shared the Financial MD Show, please do. If you care about somebody, you’ll share the Financial MD Show. Get this information out to as many people as possible and share the love. Subscribe on iTunes and Spotify and Google. Other than that, until next time, it’s Jon Solitro saying goodbye, and Dr. Trevor Smith. We’ll see you next time.

 

Trevor: Good to see you, Jon. Bye.

 

Jon: All right, see you later.

 

Thanks for joining us for another Financial MD Show. Be sure to head over to financialmd.com to get more in-depth resources on financial tips for physicians and don’t forget to join the Financial MD community group on Facebook, where physicians at all stages of their career gather to share tips and get ideas on achieving true financial success. We’ll see you next time.

 

The Financial MD Show is for informational purposes only and is not an offer to invest. It is not financial, tax, or legal advice. Be sure to seek financial, legal, or tax professionals when making any financial decisions. Before investing, you should make sure that any investment strategy or investment meets your individual investment needs, goals, and objectives. Financial MD makes no claims or guarantees to individual investment performance. All investing involves the risk of loss as well as the potential for gain.

 

 

Resources and Links:

https://www.thebalance.com/current-federal-reserve-interest-rates-4770718

https://podcasts.apple.com/us/podcast/the-financialmd-show/id1548024586

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