Episode Summary
Mike explains the economy in this episode, while Maggie chimes in with some random comments and thoughts, and growls like a bear (market). Mike explains the situation around the world, from the unemployment rates to the things the Fed is doing to attempt to improve the economy. He compares how a CEO runs a company to how a person runs their personal finances.
Episode Notes
In an attempt to explain the economy to everyone, we talk through a number of topics during this episode:
- Broad economic realities that unemployment is at an all time high and the stock market took a huge drop and then rebounded dramatically because of government intervention.
- The highest new unemployment claims during the 2008 recession was ~600K, and we’re seeing 5-6M a week right now.
- We are unsure how long all of this will last, but consumer confidence is down. Though this is unprecedented, bear markets are not.
- How you can understand the economy by explaining how a CEO runs a company to how you run your personal finances.
- Your household personal finances have some key activities:
- You make decisions based on expectations of cash flows
- You borrow money
- You invest in certain assets
- Companies are the same:
- Companies have real estate, supplies, employees, etc. All based on expectation of cash.
- When that cash stops, they have to either absorb it or reduce costs.
- 5 main things you can do with cash and how that compares to your personal finances:
- Reinvest into the business–renovate your house
- Pay shareholders–give it away or spend it on your family
- Acquire something–buy a new house
- Pay down debt–pay off mortgage
- Stock buybacks–Mike’s not sure what the equivalent is
- Companies have a disincentive to just hold cash. And households just don’t like to, but they should.
- So when this all hits, companies, like people, can’t pay their bills because they have no cash.
- Companies with an emergency fund like a household can survive longer.
- Why is the market rebounding?
- The situation now is cash flow, so the government is basically flooding the economy with cash.
- Unemployment benefits are increased
- Business can get loans
- Sectors are getting bailouts
- Mike explains what the Fed is
- It’s like taking a personal loan though. You have cash, but you haven’t created any value. The fundamentals of your life are no different, you just have cash now to pay bills.
- The economic fallout of what is happening will be significant and last for many years. We recommend managing your personal finances with this in mind.
- The good news is that we’re seeing some fascinating human behavior coming out of this. The world is uniting around a common cause, and we’re seeing people unite around a uniquely unifying event in a way we’ve never seen before. This means we’ll get through this as a world, but it will be a tough road for many to get to the other side of this. And the other side may look different than things look today.
- Mike also shares that his favorite sources of financial information and news are Yahoo! Finance and the Motley Fool.
Top 3 Takeaways:
- Companies are like households in that they spend money based on the expectation of cash flow.
- Companies don’t have an incentive to keep cash because of investor demands, but you do have an incentive to keep cash.
- This will be tough. Live like you lost your job. Don’t take risks with your health or your money.
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Show References