In this episode of Solid Financial Advice, Steve Deppe joins host Ryan Hughes to discuss his career, day-to-day life, the stock market, and the economy. Steve is the co-founder of Nerad and Deppe Wealth Management. He spends most of his days centered around the thirst for knowledge about managing his clients’ monies as prudently as possible. In his personal life, he’s the father of three kids.

Outline of This Episode

– 0:31 – Steve Deppe: Co-Founder of Nerad and Deppe Wealth Management

– 3:18 – Time Management and Leaving Work at Work

– 6:00 – Market Outlook and How the Government Policies Impact Recession

– 15:45 – Long-Term Implications

– 24:00 – Universal Base Income (UBI) What is it?

– 30:15 – UBI and the Markets

– 34:25 – All-time Low-Interest Rates and the Fixed Income Market

– 40:49 – How far is the Federal Reserve willing to go to manage recessions?

– 48:15 – Importance and Influence of Personal Behavior

Market Outlook and How the Government Policies Impact Recession

Ryan and Steve discuss the end of an 11-year bull market and the rally we are currently experiencing from the steep drop in March. Steve shared his thoughts on whether or not the worst recession since the Great Depression is over after only a couple of months, and notated that this is the trillion-dollar question. He noted that as any pragmatic person would say, we don’t know, but that the rebound has extended the levels that few thought likely and that resilience is bringing about a change in sentiment. Is this a bear market rally or indeed the start of a new bull market? Ironically, would this be considered a bear market or an unprecedented crash? The market seems to indicate that the recession, while severe and violent, was short-lived, but he has trouble subscribing to that and noted that the reality is that the economy will not be growing near the rate that it was before COVID-19. Ryan and Steve agree that it will be a long time before the economy returns to that type of economic growth.  

Steve noted that to the everyday consumer, the recession might not have even begun, stating that what the government did fiscally with unemployment benefits, lending, and stimulus payments was so powerful that it softened the blow to the everyday person. 

This has created a scenario where many have income higher than their expenses regardless of if they were affected, and demand has pulled back. This is a sturdy bridge for consumers to the other side in a world free from some of the fears and restrictions currently in place. Ryan noted that coupling this with less spending and increased savings creates from the market participant standpoint is exceptionally bullish. Steve stated that confident consumers with a healthy balance sheet provide the ignition to jump-start the economy and get things rapidly moving. So much of this is psychological; people are tired of being at home and unable to spend money. The possibility of a vaccine or herd immunity is a light at the end of the tunnel and that the market could be correcting to meet the optimistic outlook. The market pricing at the moment may be different from 3 to 6 months from now, depending on the demand and consumer behavior relative to the continuation of unemployment benefits and forbearance programs.

Long Term Implications

So what does the passing of multiple trillion-dollar packages mean? Personally, Steve is not a fan of the moral hazard and precedents this set, and it furthers the lessons learned in 2008. Once upon a time, recessions were considered healthy, but 2008 was so devastating that it changed the guard of what we do with the policy when faced with challenging times. A precedent was set that when the economy contracts, you can tinker with things to impact how the economy moves. If there continues to be support for corporate and consumer bailouts, it is a dangerous precedent for the long-term health of the economy and capitalism.  

Ryan noted that this is all happening during an election year, and politicians will stand on the platform of self-righteousness, and this is not true capitalism, its “crony capitalism.” Steve referred to a statement from Jerome Powell indicating that action needed to be decisive and implications would be dealt with later. It’s hard to believe that we will escape this cycle without facing the unintended consequences of “crony capitalism.” Steve noted that even in business, in this scenario, there is a situation where the rich get richer, and those not deemed rich have little competitiveness that remains. Many small businesses may have trouble surviving, while larger ones will be able to ride the storm as things reopen. 

Ryan and Steve discussed a leadership issue: the lack of long-term planning, and the potential opportunity for good leadership in the next ten years as the general public realizes that change is needed. They touched on the issue of the country operating in a mindset where deficits don’t matter and the danger of operating that way as a country when we wouldn’t personally.  

Universal Base Income, what is it?

BASIC-INCOME-1-1024x569.jpg" alt="UNIVERSAL BASIC INCOME" width="1024" height="569">UBI, Universal Basic Income, is an idea that will gain more momentum if the $600 COVID-19 unemployment benefit kicker is extended the rest of the year, bringing about the question of why not keep it on forever to help people meet their basic living needs. It has only been tested in a limited capacity and not a major economy like the United States, but it provides government payment to meet base needs such as housing, groceries, and utilities.  

The concern is that as we face unprecedented unemployment levels, there will be a strong call to make UBI a reality. Steve noted that when the precedent that has been established with the unemployment benefits is a slippery slope to UBI, that would create dependency and be difficult to take away. Philosophically, he isn’t aligned with UBI being the best path for the country, and it is another example of policy actions that may be driven by short-term rather than long-term benefits. Ryan noted that it’s a well-intentioned concept and that the main driver behind this is technological advancements and a rapid rate of individuals left behind due to automation. There are many major concerns facing this. How will we pay for UBI? Can Americans be taxed at a level to fund UBI indefinitely? Once you turn UBI on, you cannot turn it off, taking something like this away is typically what spurs revolutions. The other philosophical issue with UBI is that there is no incentive for individuals to be productive and have a meaningful life.

Steve continued, stating that the United States became a superpower because of the collective spirit of individuals putting their boots on and going to work. He doesn’t really see how the country would collectively choose UBI, rather than create a more robust economic climate to increase opportunities for those left behind. From a philosophical point of view, this would have more support and create a better foundation over the short, intermediate, and long term rather than handouts to those in need.  

UBI and the Markets

Steve discussed that the market has to be attempting to assess or discount something like this in the future when we are in such an unprecedented climate. The fact we’re even discussing UBI can be argued both ways; the market is not going to discount that far into the future because there’s no clarity of what is coming or perhaps there is confidence about UBI because of what’s been done with the unemployment benefits and the probability of them being extended past July. He estimated the likelihood of these benefits continuing at 75% or higher, noting that the government doesn’t really have the ability to turn them off.

Ryan feels that UBI will not be a thing next year, but that the market recognizes that there will be extended payments through the end of 2020, but it will not continue on forever and that there will be a vaccine or herd immunity or something that will allow for the full opening of the economy next year.

All-time Low-Interest Rates and the Fixed Income Market

Interest rates are at all-time lows, meaning that a typical bond portfolio has a very limited upside. Since interest rates have continued to fall, even during equity bull markets, this has helped to create this problem. The Fed has actively tried to manipulate the yield curve, ensuring that it does not lead to a high inflationary environment. It has also forced investors to other asset classes, those that will offer more attractive yields. TINA (there is no alternative) is at last part of the reason why we have seen equities bounce so high the past few months. 

How far is the Federal Reserve willing to go to manage recessions?

Desctruction-1024x569.jpg" alt="Creative Destruction" width="1024" height="569">Ryan and Steve discussed how far the Federal Reserve is willing to go, noting a notion from Richard Russell, a legendary stock market guru from San Diego, in which he stated that the “Federal Reserve has one mandate and one mandate only: inflate or die.” This is the idea that the last thing they will ever allow is for an economy to feel deflation; they will stop at nothing to create inflation rather than to allow a deflationary spiral to take hold. This is a learning lesson from the Great Depression with the resulting damage and severity, something that no leader will want to face again. Battling to avoid deflation at any and all costs is the motive behind these stimulus payments, benefits, etc.  

Ryan noted that COVID-19 would have caused a major depression without major fiscal and monetary intervention. He posed the question that if these academic-based individuals believe in creative destruction and capitalism, why not let recessions run their course? Steve referenced that this is another example of short-termism and a sign of the times. Recessions create opportunity and are a part of the necessary business cycle, but now there seems to be an action at the first sign of recession to ensure that it doesn’t materialize. The Federal Reserve’s actions may not be the most intelligent, but these are intelligent people who realize that there are implications, but are choosing not to swallow that pill now.

Importance and Influence of Personal Behavior

Ryan and Steve closed by talking about the importance and influence of personal behavior. It’s interesting to discuss these topics, but the future remains unknown. Predicting your own behavior is far more important and influential than that of the market and the economy’s outcome. Ensuring that you are behaving monetarily prudent, saving as much as you can, saving intelligently, and maintaining a disciplined investment strategy is essential. If you can predict and plan for good behavior for yourself, you will come out well. 

Ryan and Steve strive to do this for their clients by helping people plan and predict their behavior so that they can thrive regardless of the severity of the recession we are facing.

Control what you can, know what you can’t, and put your head down and go to work, and you will be in okay shape.

Finland Tried and Failed: Universal Basic Income

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market, stock market, economy, economics, recession, finances, COVID-19