Lee Michael Murphy: [00:00:00] Welcome in to The Free Retiree Show. Your go-to podcast for your career, your money, and where we learn from people that have made bad financial mistakes. Matt Mackelroy. How’s your Hummer doing?

Matt McElroy: I wouldn’t know. I haven’t driven it in quite a while.

Sergio Patterson: He’s not allowed to drive it.

Matt McElroy: Yeah. Yeah. Just

moving it around. The driveway is too expensive.

Lee Michael Murphy: So welcome into our show today. We’re going to be talking about the economic update. What does the economy look like? We’ll be talking about inflation. Gas. We’ll also be talking about investment themes, to think about in this current environment, we got rising rates, as we said, inflation is running out of control.

Market is very volatile. All things that we’re going to be discussing today. So Matthew. Jury’s still out. Are you happy with your beautiful Hummer?

Matt McElroy: Yes, and no, I still,I still love the car,

Lee Michael Murphy: you afford to drive

Matt McElroy: now I don’t really drive it.[00:01:00]

Sergio Patterson: You got to get the Hummer Evie dude,

Matt McElroy: Oh, I know. I’ve seen it. It’s pretty actually a pretty cool looking car.

Sergio Patterson: yeah, it looks bad

Lee Michael Murphy: it looks bad. It looks bad. So guys, what’s your thoughts on the economy right now?

What are you guys concerned about? What things are on your mind?

Matt McElroy: You guys, I don’t know. I’ve seen a lot of news articles kind of like saying, Hey, I think it was a Bank of America says a recession is coming. this person says a recession is coming and it’s like, the thing that’s kind of weird about that, right? Is that like in 2008, I don’t think anybody was like saying, Hey, this recession. So the fact that this is so blatantly obvious to everybody that it’s calming, it does not. It’s kind of scary in a way like, Hey, what, how bad is it really going to be?

I will say, I will say this though. I haven’t gone a month where I’ve where I haven’t seen a dozen articles in the last decade and a half where they’re talking about the next recession coming. So yeah, maybe the rhetoric is, gone up a bit, but that’s a consistent thing that I’ve seen for a decade and a half.

Lee Michael Murphy: So I’ve got to [00:02:00] look at

Matt McElroy: saying it though? Like, because it’s different when you have like the banks. Cause they have these people that are like, train, analysts, like looking at the market and they’re coming. They’re not just like saying it. Right. They’re coming to this conclusion based off the data and everything

Lee Michael Murphy: Yeah. I mean, I would say that there’s a lot of analysts out there and a wide majority of, you know, the so-called analysts, get it wrong, like over and over and over again. well, CEO, Jamie Diamond, he’s the CEO of Chase. He is said he is concerned. banks have had great profits over the last year.

And now I think it’s coming to a screeching halt based off everything that’s going on with the rates and banks are concerned right now. I think it’s, everyone’s always thinking, oh, there could be a recession, but there’s nothing that’s ever not even the banks are saying, oh, it’s for sure this next year we’re going into recession, but they are concerned.

I think like to your point, Matt,

Sergio Patterson: We’ve been hearing about this crash for awhile and, I just don’t believe anything I hear now, but like, I think we’re, I’m concerned about a little bit is the, and I’d love [00:03:00] your thoughts. Lee is like the stock market. I feel like I don’t check my stocks that often, but when I do it seems like it’s, there’s a downward trend happening right now, across the board on everything I own.

So I just be curious to see, like, is this a phase? Is this just wait and see, like, that’s kind of where my.

Lee Michael Murphy: Yeah. So I would say that right now we are in this, alarm. The alarms are sounding at this point in time. if you look at, past recessions w the common trend, when we look for potential recessions, 2008 was something of an abnormal. different situation. But historically, when we look at recessions, there’s a couple things that we look at, the number one thing, being inflation.

now most people. Don’t think about that, but inflation has a massive impact on everything. And the reason that is, is, when you go through these cycles where the economy is doing fantastic. Companies are making record profits. They’re hiring people, they’re they end up, offering employees more.

Lee Michael Murphy: Because, the [00:04:00] economy is doing so well. And what happens is inflation creeps in, it takes away from the profits, that they were forecasting because everything becomes more expensive. And then they realize, oh man, although we’re making tons of money, our bottom line, isn’t that great because we’re spending so much.

Because of inflation. So how do we change that easiest way to change it is you start firing people that, that makes the balance sheet look much better. And then you got a bunch of people that are unemployed that basically, they can’t put money into the economy and that’s how you get your standard recession.

Everything gets reset. And, then the fed is in the situation where now we have to stimulate the economy. So. That’s kind of your basic, recession. So I would say right now, things are very serious. We have had a record high inflation, that we haven’t seen in 40 years. And as of March, the inflation is at 8.2.

Year over year, which is crazy [00:05:00] because if you think about what we’re trying to do is, as a, as an economy is we try to, we want to keep inflation around 2%. So we are way above. The fed, wants to keep it to where 8.2. So that’s concerning.

Matt McElroy: Well also didn’t they say that we were going to be in the realm of like 7% in like now it’s like, oh, it’s 8%. And it’s like, it just shows that they don’t have a grasp on it. Like they should have. Right. . I think that’s another way to say it is like they don’t have control.

Like they think they do, but they are, they try to portray this maybe image that they do this picture that they do, but they don’t. I mean, the way I think of it, I mean, correct me if I’m wrong, but it’s almost like they’re walking a tight rope and they’re trying to balance between raising interest rates and inflation.

And it’s like this perfect little balancing walk and it’s like, something’s going to give it some.

Lee Michael Murphy: Yeah. And a lot of that has to do with COVID. we talked about this before, I think a couple of months ago we were, I remember we had our episode on dating. Oh, is this transitory is not. And I think we were all under the impression that, the, the storyline was a [00:06:00] little bit of.

a skew. I, it was crap, basically what, the media was telling us and what the fed was telling us, and now it’s come out. I think that, they did print just too much money. Obviously the war with Russia and Ukraine isn’t helping because, you think about all the oil that we were getting from Russia.

That is stopped and, oils that plays a big impact on the economy because most families don’t have a ton of disposable income. And, if you’re paying an excessive amount at the gas pump, that’s less money that you can put in other areas. So it has a trickle effect. So I’d say right now,

Sergio Patterson: Do you

guys buy that though? Dubai, like w we’re getting that much oil from Russia, and then isn’t like the cost of oil lower. Like, I think oil companies are just treating.

Lee Michael Murphy: I think it has a little bit to do with both. And I’ve heard that argument. I think it’s probably a bit of truth on a, we work probably getting quite a bit of oil from Russia, but also I think the oil companies are probably screwing us at the pump. So I think it’s combination of both, but.

Sergio Patterson: Yeah.

Lee Michael Murphy: But either way. it’s a, it is a difficult [00:07:00] time. I wouldn’t say sound the alarm. Definitely. Don’t be selling all your assets right now, trying to go to cash. Cause that’s a major mistake. As we’ve said on the show, you don’t want to do those sorts of things, but we’ll talk about some investment themes today that you might want to think about.

So right now, when you think about everything that’s happening, you want to look at where can we invest and what things make sense. So with the current environment, inflation being as high as it is, the theme of value investing. It’s something that we should look at more favorably. over the past decade, if we look at the stock market, people have been in a growth focus mode.

So we look at growth stocks. These are stocks that are high earning. They’re priced to earning is very high. So they’re very expensive. And that investment theme has worked out very well over the last decade, paying a high price for these awesome companies that Sergio tends to work at that are just monstrosities that make a ton of money overvalued, and that has worked out well.

But now with the current environment, value [00:08:00] investing is something that’s more favorable. And, if you guys are unfamiliar value investing, the way I could frame it is. we’re looking at buying companies that are just significantly undervalued the price to earnings isn’t as high, and they have this greater potential of appreciation.

So, one of the most famous value investors that’s out there, Warren Buffet, that’s what he believes in. He looks at companies that might have really good profits. And that’s the key thing. We don’t look for crap, but we want to look for solid companies with good profits and their valuations are lower.

And historically value investing has done much better than growth investing. So I would say that is one theme that makes sense at this current point in time.

Sergio Patterson: Do you see any like industries where a lot of those types of companies are like right now? Like any, I don’t, you don’t need to name companies, but like, are there sectors where there’s more

of those types of companies?

Lee Michael Murphy: I would say that it’s spread out across the board. I will tell you where it’s not right now. Traditionally tech is more, [00:09:00] growth oriented. So as you’ve seen, if you look at how the tech has done, in the recent months, it’s been abysmal in terms of, all the tech companies. But as we said, investing is a long game.

So you want to make sure that just because you’re seeing one sector get beat up, it’s not a short term investment decision. but you know, there’s, it’s all across the board. if you look at Berkshire Hathaway and you look at their whole. I mean, they hold Coca-Cola, they hold of America, they hold Geico insurance, their dairy queen.

It really just depends. There’s not a specific sector, but it really comes down to looking at balance sheets, looking at profits and finding those gems during this time.

The other theme that I would say makes sense right now is international stocks. International stocks I’ve really come to favor mainly because U S stocks are priced so high.

So right now it’s, it’s worthwhile to take a look at your portfolio, look at the cash on the sideline and say [00:10:00] like, right, well, let me look at the potential, making the international play, because I think right now, international price significantly better than us. Don’t invest in Russia right now, or the ruble.

Those would be bad decisions. And then theme number three, talked about this before real estate. Real estate is a great hedge for inflation. So for people that are looking for regular income, real estate is a great way to go. And even though it’s becoming more expensive to buy a piece of property because they’re raising the rates, real estate is still a solid place, in the current economic engine.

Matt McElroy: I just, I don’t know if I agree with real estate right now. I feel like it’s so expensive. And then, I mean, if you look at the difference that these, an increase in interest rates make, you know what I mean? Properties when they’re already priced so high.

I mean, these loans are getting out of control, right? Like the average person, isn’t going to be able to [00:11:00] afford an average home here in the bay area, just based off interest rates and the, the current value.

Lee Michael Murphy: Yeah, I would say that I agree with you on that part of it. It’s becoming more expensive. So make sure if you’re getting into USA, we always talk about like, look at your cashflow, make sure you’re not over leveraging yourself to get yourself into real estate. That’s the most important part I’m not telling you to.

If you don’t have the financial strength to go in there and buy a house right now, that would be stupid. Make sure you have that financial strike, make sure, roughly your debts don’t make more than 36% of your income that you’re making. If you can get into that requirement of purchasing real estate, I say, still go ahead because yes, maybe in the short term, there’s the potential that real estate prices go down, but.

there’s other benefits as well. There’s tax benefits.

Lee Michael Murphy: And if we’re holding this for the long haul, it’s going to make sense, right? So we always look at, assets that have a history of doing well over a long period of time. Stocks, real estate. [00:12:00] I feel like you can’t go wrong with those as long as you have the time.

Right. We don’t want, we don’t. No one wants to be a market timer. market timing. I’ve never met a good one. I don’t think they exist. there’s people that can like believe, oh, I timed the market and you might’ve done it one time and you got it wrong 30 other times. So don’t be a market timer. but always gauge your success by the time in a market.

I think that is something that’s really powerful is, yeah, sure. You get in right now and you went and you’re like, oh, I’m a loser. I got to the real estate market and everything would go. But if you hold this asset for 10 years, You’re going to, it’s going to be a great decision. And so that’s why you have to look at all.

I was looking at investing that way. Look at it as, not as timing the market, but time in a market.

Sergio Patterson: Yeah. I think real estate, like I think a Bay Area is kind of out of the question now for most people, if we’re realistic, the appreciate, I don’t see the pre like San Jose, everything’s like a million Gilroy is coming up to a million. I think like those li you and I have talked about it. I think for the listeners, it’s finding those growth markets, even going [00:13:00] back to your other point about these growth companies, but same with real estate,

likeSacramento,

Lee Michael Murphy: that’s a very stew observation,

Sergio Patterson: All

those spotsthat’s where I’ve been looking like all those spots outside of like San Jose

Lee Michael Murphy: Just like what we talked about. that’s spot on, like, we’re talking about these growth companies, these large growth companies being overvalued, and it’s going to be a rough ride. I mean real estate isn’t the same across the board, as we’ve said before, like it depends if we’re buying a high price real estate in the bay area, probably rough decision, I mean, you will, you make money in the long haul.

I believe you will, but it’s gonna, it might be rough for quite some time. Look at the growth trends, right. If you’re looking at real estate and here’s a great thing about real estate that, That makes it not so difficult. If you’re looking for a real estate that can have the potential to appreciate what you do is whatever market you’re in.

You look at the best spot and realize that’s the most expensive and realize everyone thinks the same way [00:14:00] that you do. They all want to move away from that expensive spot and commute into it. So all you gotta do is you look at these areas in a. around the high price real estate and realize people all think the same.

They want to go to the next city. that’s cheaper so they can commute to it. And so wherever you’re at, use that same rationale. And so, whether it’s the bay area, whether it’s New York, whether it’s, Miami, Florida, these principles are the same. So, but that’s a great, that’s a great, observation search.

The last one. The last investment theme that kind of makes sense at this point in time is clean energy and that’s a theme that has been consistent. For many years now, we’re all, we all feel that shift that, as a society, we want to make a shift towards just using clean energy, but right now with the war and the price of fuel, it makes even more sense.

So that’s an investment theme that I see right now and in the near future, [00:15:00] being a very interesting place. So none of this is investment advice, but these are all things that we want you guys to think.

Sergio Patterson: Good stuff, man.

Lee Michael Murphy: All right. Questions, Matt, any objections? I know you got, I know you got some skills, got some objections for me.

Matt McElroy: No. I agree with what you guys are saying. I mean, like, especially what Sergio is saying, but The only problem with looking at like those outlier towns from like, say like the barrier, right. As an example, and like go looking at a like Sacramento, Modesto, Los banjos, all those kinds of surrounding outlier cities that are a little bit cheaper.

The thing that you have to keep in mind is that, if recession and things, you come, those areas often get hit the worst. Right. They get hit a lot harder than say like San Jose or Santa Clara, because they’ll retain, the desired area that for everybody, right. They’ll retain their value a little bit better than,somewhere like Modesto or Sacramento.

I mean, you could use like 2008, what happened there is an example where, like, I mean, I’m just talking about pop my head. I don’t, but it’s like San Jose Santa Clara values dropped 25 to 30% during the recession [00:16:00] Sacramento. I mean, he saw losses down anywhere from 40 to 60%. You know what I mean?

So it’s just a little different. Yeah. Yeah. I mean, I’m looking at that same strategy to, looking at these outlier accounts because

you can get the best deals.

Sergio Patterson: I was thinking if you hold. 15, like, let’s say a recession hits tomorrow, but you’re planning on holding the house for 15 years. Like, could you ride out that dip and then it,

Matt McElroy: Oh, a hundred percent. You just have to be able to float the mortgage during that time.

Sergio Patterson: during that time, you

Lee Michael Murphy: And that goes all down to like what we said before. Like make sure you have that financial strength before you jump into something. Hold on to, and like we said, they, real estate is a great asset class. it’s how people become wealthy. We can all attest to that. we know so many people that have had success there and that theme will continue.

So just keep your eye on the long game and you will be fine. All right. Thanks for joining us, everybody. You’ve been listening to the free retiree show so long for now.