What Every Guy in His 20s Should Know About Money with Jack Farley

Josh Felgoise (00:00.438)

Welcome to Guy's Set, the guy's guide to what you should be talking about. I'm Josh, I'm 23 years old, and I'm here to find all the tips, advice, and recommendations for guys in their 20s. Let's get into it.

Josh Felgoise (00:17.647)

What's up everybody welcome back to I said the guys guide to what should be talked about today's guest is Jack Farley the host of the forward guidance podcast where he talks about Finances with the brightest minds in finance, which if you know me, that's not me. That is not me whatsoever but that is why I've brought Jack on to start learning about the basics of finances and stocks and investing and this is just the start of

kind of my journey of understanding any of this or all of this. And I'm going to bring you along for that because that's what a podcast is. So did I make an entire podcast to ask somebody what an interest rate is and blame the listeners and say for someone that may not know what an interest rate is or understand that. Can you can you answer that and where it's actually just me asking that question. Yeah. Yeah I did actually. That's exactly right. So if you're wondering throughout this if

I know what the hell I'm talking about. The answer was absolutely fucking not. I have no fucking clue what I'm talking about when it comes to any of this, but I really want to learn and I would rather get the answers from somebody like this in a podcast setting than Google and have to put the pieces together myself. I would prefer to listen to something like this, listen to a podcast about this and get answers in a conversational manner where the language relates more to me as somebody in my 20s than

find some lofty explanation online. This is my preferred method. I'm bringing it to you. Jack and I talk about stocks and how to learn about them. Obviously, he is way smarter than me in this area, more likely actually just in general. And there's certainly a knowledge disparity between the two of us. And you'll hear that throughout. But I did ask him to break down a ton of these complicated questions or terms. And I really love the analogies he used.

In this episode, for a lack of better words, he dumbed down a lot of things to explain them better and it was extremely helpful. We talk about building a portfolio. We talk about financial advisors, bonds, interest rates, again, topics way above my pay grade, but he was super helpful in explaining everything. So if something is over your head in this podcast, don't feel like it's going to stay that way. I think Jack did a really great job of pulling each topic apart and

Josh Felgoise (02:40.055)

Bringing it down to a level of somebody that may not understand any of this as that literal person is me If you don't know where to start with any of the topics that I mentioned before I really hope this helps and I think it will and if you already have a Basis to understand all this or maybe work in this area. This is still a great conversation I think you'll really enjoy it. So without further ado, please welcome Jack Farley to Geissex

Josh Felgoise (03:10.137)

How are you? Nice to meet you. I'm doing well. How do you like being a podcast host so far? I really like it. I think it's really fun. I mean, I genuinely like having conversations with people and learning more. I mean, I've been looking for a way to kind of find all these answers and meet people that have the answers to these questions. And I feel like this is probably the best way to do it. So this I think this is the best format as well. also love listening to podcasts. How do you like being a host?

Well, I was just laughing at, you know, me being seen as kind of an expert, but I'll do my best. I like being a podcast host. mean, I've, I've done a lot of episodes. So I kind of, you know, fall into a rhythm. Whereas, you know, I used to get nervous being a podcast host. I'm kind of no longer, but I am nervous as a guest. So I'm much more nervous as a guest. I'm, you know, it's, it's a little more difficult, you know, because I'm, I'm having to like answer questions and stuff. Yeah, no, I mean, it's like, how many episodes have you done so far?

So the current podcast I have, think like 250. Wow. Okay. mean that, that constitutes making you an expert. feel like that gives you that leg up at least. So, yeah. Yeah. So I in podcasting. Yeah. I thought you meant like finance and stuff. I'll give you both. Why not? Why not? Why not? Also out of curiosity, uh, what Mike do you recommend? I see you have a sure Mike, right? I have a sure. Yeah. I can get you the number. can text you the number later. Okay. Okay. But you recommend that.

It's good, yeah, it's much better than I used to have a Yeti snowball. You wanna get one of these. And it's got a nice like stand so you can move it all around. I have this Rode Mini Mic. So I'll get that, I think that's probably the move. Yeah, let's get into it. So tell us about yourself, how you got to where you are and what you're up to right now. Well, so Josh, how old are you? I ask? I'm 23.

Okay, 2023. All right. So you definitely know probably better than I, just the feeling of being in college and you may be a junior, you're a senior and you don't have a job and you're stressed out about what am going to do for not just my job, but my career, my life. And I, that was a very stressful period for me. And I was very into finance. I took economics, which

Josh Felgoise (05:34.033)

you know, economics in undergraduate, it's pretty theoretical, maybe a little bit like light on the details, unlike finance, which is all about like getting in the weeds. I feel like I've learned like so much more about finance after I graduated than like at school. So I was doing finance and I kind of wanted to be a journalist, but I didn't really like writing articles. I wanted to do new media. At the same time, I was entertaining the idea of like

being a banker, being a trader. was, you know, I feel like a lot of times, a lot of mistakes that people made and I've made is when you have like six different goals at the same time. And like if you have one goal or maybe two goals, like you actually can achieve it, I find, but five or six is very tough. So I ultimately found this, so I was doing a lot of networking, know, emailing people, oh, can you put me in touch with so and so? Oh, hello, so and so, can you put me in touch with so and so? So ultimately I,

found someone who, when I said what I wanted to do, he said, you should talk to so and so. You should go to Real Vision. And that was my first job where I interviewed a lot of financial people, and it was video. a lot of journalism is still written, and this is new media. And it wasn't a big network like Bloomberg or CNBC, so I got a chance to.

do a lot of things that would not be entry level at a large financial media firm. And yeah, that's how I got started. Can I ask how old you are? Yes, I'm 27. OK, great. So can I ask you to dive a little bit deeper into that networking part of when you were a junior, senior? feel like that what you said, I think you hit the nail on the head.

people struggle with that so much and it's a lot like I've gotten asked that question to talk about that on the podcast. So let's let's do it here. What what tips do you have for networking? How did you do that and what should someone do that is in that position? So it's the type of thing where the more you need to network the harder it is. know if you if you have like a lot of connections and you know a lot of people in the industry already you're like

Josh Felgoise (07:52.247)

of the 30 people I know, talked to one of them, can you put me in touch with the 31st person? That's very easy to do. Whereas if you don't have zero people in the industry, the only people you know are people who are not in the industry and they may be able to put you in touch with someone in the industry. So yeah, I mean, it was a while back, but I just reached out to professors, economists, political economists and journalists.

And let's see, some of it was cold reach out. Some of it was a professor, you know, knew this person put me in touch, um, stuff like that. But I, yeah, I'd say like looking back on it, I think I did a mediocre job of networking, but I feel like now if I were to sort of travel back in time, I would have a lot of advice and I would just be a little bit more, uh, process oriented on like, Oh, I'm going to email 15 people a day.

And that sounds like a lot. But if my hit rate in terms of, let's say 10 people a day, hit rate is like two people are going to get back to me and I get like one meeting, that's one meeting a day. That's pretty good. And if you need 10 meetings for it to be a meaningful connection for you to ultimately find a job, you can get a job in a month. Exactly. Go ahead. No, no, you go ahead. No, I mean, that's a similar thing that I said in

I say to people and I did myself, think if you reach out to five to 10 people a day, you're bound to hear back from one at least, one to two. So would you say that number is like five, what would you say, 10? And what type of outreach would you recommend? Like LinkedIn, email, cold messaging, DMs, what do you think? So definitely not LinkedIn, definitely not LinkedIn. I have LinkedIn and I pay for LinkedIn premium and I never use it. I think it's a very good business model.

for Microsoft, but I, and that's just my industry, but I feel like journalism and finance is much more email oriented, whereas tech definitely has a linking component. For journalism, Twitter and finance is Twitter's big as well, so it's like find the medium of what you wanna do in. If everyone in film is on Letterboxd and you can connect people on Letterboxd, it sounds silly, but do that.

Josh Felgoise (10:16.431)

you know, you're on some forum that's niche for what you're trying to do that you can connect that. But yeah, mean, email is great. And then like, you know, number of texting is good as well. I'd say I'd say, I mean, this is pretty obvious advice, but tailor it to the specific person and, you know, like research the most latest thing they just put out, watch it, read it, have an opinion about it. And if you like it, be like, I just

saw your paper you wrote and I loved it. And by the way, I, you know, have been doing some work on this myself and I'd love to pick your brain, but would you want to get coffee? So and so, you know, stuff, something like that. and you know, balance of have some nice sort of like flattery in there, but not too long. think looking back, I wrote emails that were way, way, way too long. and yeah. I think that's really, really great advice. And I specifically tailoring it to the industry.

I would say for me, LinkedIn has worked sometimes for tech for this type of thing. But depending on what you're going for, like finding the medium that works best and tailoring it to them, making it a good length. think that's all really great advice. So yeah, great, thanks. So let's start with similar age, maybe someone that's a senior starting out first job. Let's start with like somebody that has

no real finance background, doesn't really have a background with managing money. And let's say they've graduated, they have their first job and they've gotten their first paycheck. What should they do? They now have money in the bank. Should they start investing? How much is too much in the bank? I'll start with just, let's start with that person. What advice would you give them? Okay, so start off by saying that I interview a lot of people about

somewhat technical, like financial markets. And so I know a little bit about that and speak on that. But the world of personal finance is not something that I consider myself an authority on at all. I'm talking to PhDs who are doing neurobiology and stuff of how the muscles work. I'm not talking to people about what are the best ways of people who want to lose weight.

Josh Felgoise (12:41.691)

When you want to lose weight, you want to expend more calories than you consume. it's like, expend more calories, exercise. Consume is what you eat. And that is literally the only thing that is the important principle. Everything else comes from that, but it's so much complicated because it's based on people's lives. And with money and saving money and growing wealth, it's the same thing. want to consume less. Except it's the opposite. You want a surplus instead of a deficit. You want a calorie deficit to lose weight.

to accrue wealth, you want to surplus to save more than you spend. So that's pretty simple. on, and again, like even if I was a personal finance expert, I hope a responsible personal finance expert would say it matters to you. know, and this is with investment advice. If someone was to ask me like, should I invest in this stock or this instrument or this thing? It's like, well, what are your investment goals?

How old are you? mean, you smart-assly, someone who's 25, they should probably be investing in stocks if they save money, which hopefully they do. But I mean, if they don't save money, then you've got to have a conversation about saving money. The advice of which stock to an asset allocation is not that relevant for someone who's not a net saver. And then someone who's 25, yeah, probably all stocks, not a lot of bonds.

someone who's 65, a lot more bonds, which are a lot safer. So it really depends on you. So there's no one answer for like asset allocation and there's no one answer for what should they be doing with their money. Yeah. And I mean, I like what you're saying. I think we should go in that direction of somebody who has no real background of finance or stocks. Where should that person start? And let's, this isn't like a financial advice thing. This is more about

what you recommend for learning about stocks for starting with stocks in general. Yeah, so just go into a gym analogy. Like I think keeping it simple is really, really important. Like I just allocate to an index fund, which is a basket of holding different stocks. Maybe you want to add international exposure, but you know, I mean, doing what the hedge fund titans and the pros do of like, oh, I'm going to

Josh Felgoise (15:05.263)

be long JP Morgan and I'm going to be short Citigroup into earnings. I'm going to do that. Levered it 20 times. Like really the pros aren't even that successful at that. And so you probably aren't going to be that successful at it either. And you could lose a lot of money. So I'd say keep it simple and you own index funds. And if you want to invest in individual stocks or even more adventurous to trade individual stocks or even short them on occasion, just know that you're

going into a field where there's a lot of luck involved, a lot of variance involved, volatility, then also you're competing against extremely well compensated players. So the way that you can win as an individual investor is not by trading in and out and in and out, you kind of get picked off. It's by long-term asset allocation and being able to take advantage of significant dips in the market when everyone in the investment world is having a lot of trouble.

So how should, well I want to dive into each of those topics, but how should someone follow those trends, follow those dips? What should somebody do for that? Well the answer is when the market crashes, buy stocks. The problem is you have to have money to do it. So that means that you'd have to have as part of your allocation a little bit of cash, which

can be responsible and can be thing, but the problem is that if you always are holding on to 50 % cash, you're gonna miss out on a bull market. And it usually is a bull market for most of our lives. It has been. So I don't know if I would recommend that, but what I really meant is that you can take advantage of the behavioral inefficiencies or...

problems in the institutional investment world, I'll give you an example. Meta, the Facebook stock, traditionally a very well performing stock, its earnings continue to compound. Mark Zuckerberg spent a lot of money on a metaverse idea, changed the company's name to Meta. So the same time, the company's

Josh Felgoise (17:23.149)

earnings stopped growing a little bit and their costs were exploding. So it looked very, very bad for the stock. So the stock went down, I don't know, 70, 80%. And that was a very good time to buy Meta stock. mean, it was trading at like a price to earnings ratio of I think around seven, which for a large cap tech stock is pretty much unheard of in the US. But I think a lot of investment managers are really maximizing their own a lot of you some of them maximizing

career risk, like, Metta is down. I don't want to seem like an idiot to my clients for owning Metta because it's been down. I'm going to, after losing all this money, I'm going sell it, or I'm not going to take an opportunistic position and go in. When I feel like as an individual investor, you don't have to be comparing yourself to all the investment managers and be chasing performance. I think that...

individual investors can take advantage of that. that make sense? don't know if I did a good job explaining it. Yeah, I'm going to ask you a couple of like simplified questions just to bring it back even further and like go behind the curtain of all of this. How does for an individual investor, somebody that's in their twenties, has their first job, has built some savings and feels comfortable to start investing. Let's take that person. How

should they start in the first place? Do you recommend them using a investing platform? Do you recommend them starting with somebody? Yeah. And like, how do they even build an index at first? How do they start a portfolio? That type of thing. Okay. So there's two answers. The first is what is objectively the best if you can sort of predict that person's behavior over a long-term time horizon. And then there's given

you know, everyone's flaws and given that people might make a mistake, you actually want to have a little bit of cushion. if you know, the best performing portfolio of just an index would be don't hire an advisor at all, a robo advisor or a financial advisor and literally just park it into SPY ETF. I think that's the iShares ETF for the S &P 500. And actually think there are like 505 tickers in there instead of 500.

Josh Felgoise (19:41.349)

But that's just the S &P 500 and the charge like eight basis points. And I think VOO is an exchange traded fund ETF that has an even lower expense ratio. So you're basically getting it for free. You're basically paying nothing. But... Can I bring you back for one second? Can you just define that for somebody that has no idea what you just said in all those terms? Can you just define that? So an ETF is an exchange traded fund which owns a basket of stocks and it owns a

500, 505 of them, and that is exactly the same thing as the S &P 500, which is an index, a basket of stocks. Back in old days, before ETFs, used to have to invest them into a mutual fund. Now these things trade on the exchange every single day. So it's kind of, it's just a basket. That's it. Thanks. But sorry, sorry to interrupt. Go ahead. Okay. So if you could...

you know, accurately say every single two weeks when I get paid, I'm going to be putting money into, you know, VO or SPY. And I'm going to be doing that when the stock market is at an all time high and the economy is booming. I'm going to be doing that when the economy is in recession and the stock market is a drawdown of 50%. That is great. And longterm, mean, like it really is surprising. Like you can do a calculations of just, you know,

relatively small amount of savings every two weeks and allocations of dollar cost averaging into the market. You become a millionaire by age 60 or I mean, really is, the compound interest is magical. But a lot of people, and I know this from personal experience for myself, when the market crashes, they stop putting money into the market or they sell their stocks even worse and then they never get back in because they're so scared.

So the value of a financial advisor is they'd be like, hey, Josh, actually, I understand that you're, you they're basically like a financial therapist. And, you know, they're very, very smart people, but a lot of the value that they provide is advising people don't, when the market is, you know, at all time highs, don't be buying all this, you know, ridiculous bubble stocks that have no underlying business. And then when the market's crashing, you should actually be investing. You should be buying more, not selling.

Josh Felgoise (22:00.315)

and doing stuff like that. financial advisors charge 50 basis points, 100 basis points, I don't really know, 80 basis points. A basis point is a 100th of a percentage. So 80 basis points is 0.8%. So if you had $1,000, an 80 basis point charge would be $8 a year. And that sounds like nothing, it basically is nothing for a year, but over a 50 year time horizon, that does add up. So that's why if you can actually act rationally and not sort of be pulling your hair out,

during a market crash, I'd recommend people going their own way. But most people aren't that way. So a financial advisor could be a good choice. So you don't pay a financial advisor directly, you pay them through basis points? So that's a great question. OK, so I think for, you pay them in basis points of the portfolio. But I think if you actually have like $1,000 as opposed to a larger amount, I actually think

because that eight bucks a year is not a great return for the financial advisor, I think they may charge you a little bit more. And that's another thing about in finance is that it's a scale matters. So the more money you have for individual investors, the more money you have, the more you can spend on services and financial advisors and have it be a smaller percentage of the thing. However, once you get to a large amount of money, particularly institutional portfolios,

And this is not really owning the market, this is your investment strategies. I know people who are very good at trading volatility and can make a lot of money trading volatility with less risk than the S &P 500. They can pretty much beat the S &P 500, which is very, very, very, very, very hard to do. But they can only do it for $20 million portfolio, $100 million portfolio, which sounds large and it is large, but for an institutional pool of money, it's really not. if some university or

the Saudi sovereign wealth fund was going to call them up and say, Hey, my God, your returns are amazing. We, you know, we heard about you on Jack's podcast. like they probably would have to decline that because they were not be able to replicate the exemplary performance with a larger portfolio because they are the market. You know what mean? You can exploit structural inefficiencies when you're kind of a small to middle sized player. But when you become so big and wieldly, it's, know, it's like a giant who it's, very easy to shoot a giant with an arrow, you know? Right.

Josh Felgoise (24:25.275)

Can you also explain that trading volatility you were just talking about? Yeah, I mean, I was thinking of someone specific in my mind when I said that. I won't name that person, advanced trading, advanced financial instruments that are derivatives of the underlying movement of the S &P 500. basically betting the bets not about where the market is headed, but bets about

how volatile the market will be over a certain time horizon and being able to trade those market expectations over time. Okay. And then for someone that wants to learn more about this or find a financial advisor, start with any of this. What resources, what podcasts, platforms, blogs do you recommend people looking at to start learning?

So, you I would be remiss if I didn't plug my own podcast, Forward Guidance, which is under, you know, it's available on Apple Podcasts, Spotify, and then on YouTube, it's under the channel BlockWorks Macro. And I interview investors in depth about all of this and much more. I talk, you know, stocks, bonds, commodities, the Federal Reserve, inflation, know, bonds, like bond, you know, math, like inflation.

pricing, in the market, volatility, asset allocation, stuff like that. And honestly, it's probably more, a little bit more technical than what we've been talking about now, which is. So, but for kind of the nuts and bolts, I think the website Investopedia is great. I think the show, the compound on YouTube,

has good content that it's very much in the spirit of what I have been talking about, how about long term, like you wanna own the market and all these recession calls, like yes, those recession calls may be right, but you don't even know if they are right, which is kinda scary. But even if they are right, like and you sold at the top, but if you didn't get back in the bottom and then you didn't buy for, as the market was coming out, you actually were just better to just buy and hold. So those kind of like key.

Josh Felgoise (26:44.933)

core concepts, the compound, it's called like something, the compound and friends, and then the show is called Animal Spirits. Other financial podcasts, Odd Lots is very good, but it's also somewhat in the weeds. So I would say to start with the Investopedias and then go to your podcast and get into the weeds there. think that's a great trajectory for somebody. You mentioned bonds. I want to talk a little bit about that. What are, so you're, so.

For somebody that's starting investing, can invest in stocks, they can also invest in bonds. What are bonds? How should somebody start there? So for someone who's our age, 20s, if interest rates were still at zero, I would say, next question, they don't have to worry about bonds at all because they earn so little in return. And for a person who needs to build a retirement, you have 40 years.

to do so. you really you should be focusing mostly on stocks. I'd say arguably that's still true with interest rates so much higher now. But it was I mean it was it was especially true when interest rates were at zero. So bonds you're also known as fixed income securities. They are securities that you buy that yield a fixed income. So if you buy a stock of Apple is you know it's like close to 200 bucks but let's just say Apple's 100 bucks.

the dividends maybe like 1%, maybe a little bit less than 1%, it earns let's say 4 % of that. So it earns four bucks a share and it pays you, I guess, one buck a share. So it has a price to earnings ratio of 25. But as it grows, as those earnings grow and it reinvest its earnings into the business, like in 10 years, Apple is making 20 bucks a share. So you're actually.

when you bought it at $100, you bought it with an earnings ratio of 25 or 4%, but now it's earning 20 bucks. So that's an earning ratio of 20 % or a PE of five. So earnings grow in stocks and that you're buying into their growth, whereas hopefully they grow. mean, sometimes they don't grow and that's fine too. But you also own the upside. Like if something spectacular happens, if, let's say this, if you owned equity in

Josh Felgoise (29:03.675)

my Monday afternoon and someone else owns the bond of my Monday afternoon. Like I'm gonna pay them back, the bond is $100. Like I'm gonna pay that $100 back, but let's say something fantastic happened to me. Like let's say I literally found like 800 bucks on the street. Like you would get to participate in that upside amazing thing that happened to me. Whereas someone who owned the bond, it's like, sorry, no, you.

don't get to participate in the upside. I'm going to pay you back with interest that we agreed upon, but you don't get to participate in that upside. Now, why do bondholders sacrifice that upside? Because they get a lot of extra protections. They are more protected in what's called the capital stack. So when the business can go into default, it's the equity holders, the stockholders who get wiped out first, and the bondholders have protection. So they have a more senior claim on the assets.

If a manufacturing plant went bankrupt, the bondholders could seize the factory as collateral, whereas the equity holders would be left with basically nothing. And that's why when First Republic Bank went under in, I think it was early April, the stock is basically at zero now. Silicon Valley Bank is a month earlier, the more prolific or well-known example.

This the stock is trading at zero. I haven't looked at the bonds, but imagine that the bonds are not trading at zero They're trading at something because you can get a sort of claim on the the asset So it's does that does that come to come to make sense? Or do you think I explained it in a way that would make sense to a non-financial audience? Your Monday afternoon example was perfect. Like that's exactly how I Processed this type of stuff and I think people listening to this will also understand it that way. That was

Exactly what I'm looking for. So thank you for explaining it that way. Can you go back really quickly and explain interest rates as well? Yes, so interest rates are how much you get paid back on a bond on a fixed income instrument they I think started in you know, Sumer or ancient Babylonia like modern-day Iraq and it was basically lending out barley seeds and

Josh Felgoise (31:18.403)

you the barley, you plant the barley, would yield grain and then more barley seeds. So you get paid back, you know, let's say you've landed them in the fall, they planted them in the spring, you got paid back in the fall. And there was, know, like if you gave 100, if I lent you 100 barley seeds, you'd have to give me 130 back. So an interest rate of 30%, that's the coupon or the yield. And then the principal, P-A-L not P-L-E.

is the $100, that's kind of the face value that you have to get paid back. So if you don't get paid back, you don't get the principal, and that's really where you have a catastrophic loss. So fast forward a few thousand years, you have people lending, you have the emergence of banks, and gradually as society improves, things get a little less risky. If I'm gonna lend you to do a voyage, to make some sort of merchant trade,

it gets a little less risky, so interest rates go down over time, and that's kind of what happened. And then you have the emergence of central banks, which is kind of basically funding the government. central banks begin, well, later on, now interest rates are controlled by central banks, so in the United States we have the Federal Reserve, in Europe we have the European Central Bank, Bank of England, Bank of Japan, People's Bank of China.

These are all central banks which are public entities that are controlled by, it's kind of a public-private partnership where technically it has private stockholders. But if you look up and you read some conspiracy theory on like, the Rothschilds own the Federal Reserve, like that's BS, okay. Like it is the large private banks own nominal shares in the Federal Reserve, so it is technically privately owned by the member branches, but.

the board of governors is appointed by the Senate as well as the member branches. So it's an institution, somewhat bureaucratic, and it sets interest rates. It gets to choose the price of money. let's say two years ago, 15 months ago, interest rates were literally at zero. So if you were a risk-free entity, so the risk-free interest rate are at zero.

Josh Felgoise (33:39.884)

Right? So back in ancient Babylonia, we didn't really know what the risk free rate was. I don't think that concept had really been invented yet. But it's like the lowest cost of money to someone who has a credit risk of zero. For example, the U.S. government is presumed to have a credit risk of zero. You will get paid back. I know there's the debt ceiling stuff and that's very technical and we can get into that in a second. But

Like let's say if interest rates are at zero, the US government can borrow short term at basically zero, let's say 10 basis points. Apple, the most profitable successful company in the world, they can probably borrow at 11 basis points or 12 basis points. So they have to pay slightly more. Oh, Microsoft, they have to pay 13 basis points. Oh, a...

mid cap stock, they have to pay 30 basis points and then very risk, you know, the entities, they have to pay much, much more. And of course this is all at the short end of the, what's called the yield curve. So there's a duration of how much you want to borrow. Like I'm talking about overnight money. And you know, when you, when you borrow from a bank or a bond, it's typically like a two year note, a three year or 10 year note. And those have higher rates than when interest rates were at zero. So when interest rates were at zero,

which was from, let's see, two, the last, from 2008 to like 2015, and then from 2020 to 2022, the first half of, the first few months of 2022. Those were just like short term, very short term loans you could get at zero, but you couldn't, because the market was pricing for interest rates to rise more, so it would be more expensive. So,

The nature of what an interest rate is changes with what's the maturity, sometimes called the tenor, which is think a technically different thing, of how long you want to borrow for, and then your credit risk profile. So those are probably the two most important things. The Federal Reserve, the central bank sets the overnight rate for riskless entities. then where everything else is depends on the economy.

Josh Felgoise (36:02.628)

what particular entity is borrowing, demand and supply of credit and stuff like that. it's a lot of things I just threw at you, but does that make sense? Yeah, no, I think that I think that totally makes sense. Cool. You mentioned the banks failing and the Silicon Valley Bank and all that. We talked about that really briefly. I wait to get back into that for someone like me who really doesn't have a financial background knows it happened. What the hell happened?

Great question. So banks are levered institutions. They, by their very nature, they borrow way more money than they have in equity or in assets. So when you deposit money at a bank, that deposit is going to be transformed into a loan, a security holding, or just cash at the bank. banks are typically levered

10 to one, which means so it's commonly said like, my God, the thing you got to know about banks is your money's not actually at the bank. So it actually is, it's just in a different form of money that cannot be easily converted into cash. the correct, yeah, the cash is not there. That's because they lent it out to other parties. So if you deposit money at the bank, the bank made a loan to me. And so I quote, have your money. And that's actually not how it technically works, but we'll stick with that for now because it conceptually is true.

So that banks are at risk of a bank run where you'd withdraw your money, suddenly I withdraw my money and there's a bank panic and everyone withdraws at once. The bank doesn't have enough cash to meet withdrawal requests and then the bank goes under. in the early days of banking, not actually the early days, but let's say American banking, and America is actually pretty distinct in that there are so many freaking banks in America.

Think Canada, are literally a single digit of banks. Like let's say it's just five. I don't know if that's technically true. Whereas in America, we have 3,000. So people talk about bank consolidation, the big banks getting bigger, and that's true. But we went from like 9,000 banks to 3,000. So the US has a very sort of carved out banking system. Yeah, so banks are subject to runs. That happened horribly in the great.

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depression and I think 1931, 1932. so there's something called the Federal Deposit Insurance Corporation, which basically means that our deposits are safe. So in the old days, if you had $1,000 at the bank and the bank went under, you would be basically an unsecured creditor of the bank, of the failed bank, which is basically like, let's say Celsius. Have you heard of the crypto company Celsius? Like, I don't think I have actually,

Okay, so don't worry that's very normal. think most people haven't heard of it who aren't in crypto. I've only heard of the drink, yeah, no. Okay, yeah, yeah. Is the drink good? I haven't had it. It is. Some flavors are good, some flavors are bad, but anyway, sorry. So Celsius, somewhat dishonestly in my opinion, and I think it's pretty objective right now, called what people were doing a deposit. So deposit money with us. You can't trust the banks.

Banks are paying you 0%. We'll pay you 8%. We'll pay you 10%. Deposit with us. And they made it seem like it really was a bank, but those products were not FDIC insured. So people who had money with Celsius, in some cases a lot of money with Celsius, Celsius went bankrupt, sorry to spoil the story, and now people are having to wait in court to get back their money. And it doesn't matter if they had a million dollars or if they had $200, they have to wait in court. And that is a really, really rough thing.

Even if you get all of your money back, which is not guaranteed, you have to wait five years. And psychologically, takes all this toll. if we had an economy where that happened for everyone in the banking system, that would be a total disaster. And that's what happened in 1931, 32. So we have Federal Deposit Insurance Corporation, where if a bank goes under and you're deposited, you're safe up to a certain limit. I think the limit is now a quarter of a million dollars. if you have

Any amount of money up to a quarter million dollars you're safe now if you're a business and you have three hundred thousand dollars your first quarter million is safe and then the fifty thousand on top of that will be you'll be a creditor to the bank, but that has not only helped out depositors when banks fails, but it it eases the process of a bank failing because There's you don't have that psychological component of my god if this bank fails. I'm screwed. So I I'm gonna be

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very jumpy to be first in line when the bank opens at nine on Monday morning. By the way, a plug, I interviewed Sheila Baer, was the, she ran the FDIC, the Federal Deposit Insurance Corporation, during the great financial crisis. And so she shut down the largest bank failure in American history, Washington Mutual, in 2009. Silicon Valley Bank was the second largest bank failure in American history. And so what happened with Silicon Valley Bank?

So now we have some key principles. there was a run on the bank and venture capitalists pulled all of their money from the bank at the same time and Silicon Valley Bank couldn't meet the redemption request. Why did they do so? Well, number one, the venture capitalists, first of all, a lot of them are on Twitter. They all follow each other. They all follow each other into the deals and they follow each other into the banks and out of the banks. So they're kind of, you know, yet herd mentality.

group think there. That's a little bit anecdotal, but I think it is true. Much more importantly, Silicon Valley Bank banked all of the large, not the large, but so many venture capital backed deals. So venture capital, you're funding early stage companies with the hope of getting a 50 times return because, I funded Facebook, I funded Stripe, for example. And then the dream is to get an IPO where you could finally can sort of cash out.

So many early stage companies are not profitable. So actually, and I think this is pretty under reported. the later on, I'll talk about the thing that everyone's talking about, but this is under reported is that so many of these companies were burning money because they were not profitable. So they were reliant on new venture capital funding to fund their growth. And I'm not even talking about the company now, but literally the bank deposits, like their banking accounts would just going down month over month because they were unprofitable.

And so the Silicon Valley Bank had to rely more on other types of funding to fund their assets. like, you know, the federal home loan bank, callable deposits. So they were relying on non-core deposits to fund their assets. And the venture capital market slowed down a lot. mean, 2021 was probably like the most

Josh Felgoise (43:15.684)

bubble-ish time in venture capital funding. know, a lot of people tie that to negative rates and stuff like that. But I mean, it's kind of like, oh my God, I just invented this company. Here's a billion dollars. Obviously, I'm exaggerating a lot, but it was a very bubble-ish time. You had all these companies raise all this money, and it really slowed down in 2022. And so that's fewer money leaving the venture capitalists and going to the companies. And that means

fewer money, less money at those companies' bank accounts. Okay, now Silicon Valley Bank, because there was such an influx of deposits, they actually had too much money in 2020 and 2021. I think their deposits literally tripled. So they bought a lot of securities. They actually couldn't loan, they had too much money that they couldn't even loan it out. Like there's only so much.

venture capitalists that you make a mortgage against their house for a super low rate in a sweetheart deal. You can only do that so many times. You can only make so many loans. They had a capital call business where they're basically lending against money for private equity or in this case, venture capital. And by the way, those loans actually very rarely went bad. was not 2008, their loans went bad. They made loans to people who didn't pay back. That was not the story at all. So they had all this excess money. They bought.

securities at a time when interest rates were very low and they bought those securities because you had an upward sloping yield curve. So short term money was yielding zero. means what? Well, which means if you were to buy a short term fixed income security with an interest rate of zero, you'd get 0%. Got it. Because interest rates are zero from the Federal Reserve. However, you had an upward sloping yield curve because everyone's like, oh, the Fed is gradually going to raise interest rates over time because we've got a strong economy. I'm simplifying.

And so they bought treasury bonds or fixed income securities, treasury bonds from the government or agency mortgage backed securities, which yields a lot more than zero. They yielded 1.5 % or 2%. And those things seemed like an amazing deal compared to zero because the deposits cost zero and they get to buy all these securities with a 2 % yield. get a really, you know,

Josh Felgoise (45:35.757)

they get a nice solid spread in between there. And then they lever it up 10 times. I mean, that's what a bank is. And that works working really well. But then the Federal Reserve raised interest rates from 0 % to 5%, 5.25%, which is the largest and most drastic interest rate increase in American history since the 1980s when you had Paul Volcker, who was this really, really tall.

guy, someone forwarding guy who people in finance respect him a lot because wrongly or rightly, say, oh, he raised interest rates and he killed inflation. And obviously, there's so many secular factors in the 1980s that are also why inflation fell. But he was kind of like the big bad guy who raised interest rates by a ton and killed inflation. so Jay Powell, the chairman of the Federal Reserve, he raised interest rates from 0 % to 5.25%. And suddenly,

the securities that suddenly were worth $100, let's say, are now worth $80 because interest rates went up so much. And why did they raise them? Why did the Federal Reserve raise interest rates? Correct. Because the economy was running too hot and we had inflation. So inflation, I think, peaked out at around 9 % over a year ago in June of 2022. And why do we have inflation? Because in no particular order,

The price of oil went to $120. There were supply chain issues. There was excess demand for goods created by a lot of money printing, fiscal stimulus and monetary stimulus in 2020. And the economy was running too hot. Great. OK. I'm happy you answered that question before I even answer it. Perfect. OK. So basically, what does that have to do with somebody our age? they?

worry about that? Does that matter to me? Does it matter to us? So for an individual depositor, no. If you have less than a quarter of a million dollars in your bank account, no. You will be safe. the Federal Deposit Insurance Corporation will make available those funds shortly after the bank goes down. So even if your bank goes down, you're all right. Got it. OK, cool. And I want to go into a bit about your podcast and what you focus on. We've talked a lot about

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the questions I've had for guys in their 20s. You've simplified a lot for me, which I greatly appreciate. What do you talk about? And you focus on macroeconomics. So talk to us a little bit about that. So macroeconomics is just how the economy is doing and how that interacts with people's everyday lives and then financial markets. So if inflation is hot and you have to spend way more, it's costing way more money,

That's obviously something in people's real lives. Inflation is the macroeconomic phenomena and then interest rates is the financial market component, which likely go up either because everyone's selling their bonds because why the hell would you want bonds when inflation's at 9 % or because they're anticipating the Federal Reserve will increase rates, which it drastically did. So I interview a lot of people who used to work at the Fed, hedge fund managers.

People who are institutional investors like long long short managers people who know long this short that People who are macroeconomics? Macroeconomists who are sort of kind of trying to predict where bond deals are headed based on how they read the economy People who have a certain you know outlook like I'll do an I do an interview with a very well-respected technical analyst who looks at basically like the

fundamentals of the market in terms of like what the chart is saying and that's kind of chart reading and I early on in my financial journey I was very much into valuation and I still very much am the fundamentals and I kind of dismissed technical analysis but I have to give it some people are actually good technical analysts and I try to talk to them too so

Yeah, just kind of stocks, bonds, everything in finance and the Federal Reserve. Great. And do you have any last tips, any things I could use to follow trends or start with any stocks that you'd recommend even starting with something that would be simple to try and follow and just learn? Yeah. So I'd recommend The Wall Street Journal, Financial Times, and Bloomberg. Those are kind of the

Josh Felgoise (50:16.673)

Holy Trinity for TV, mean, Bloomberg and CNBC are your two options. CNBC has its merits. mean, some very good people are working there, but it does kind of follow the trend of if stocks are up, I mean, and we're kind of in a new bull market now, maybe, and people get really excited. They kind of tell people what they want to hear,

And Bloomberg is kind of the, everyone's wearing a bow tie, not really, but you know, everyone's wearing a tie and it's very institutional. They're talking about like hedge funds, stuff like that. but yeah, mean, both those channels definitely have their advantages and I, I'd recommend, mean, you're not, you're going to learn, you're going to learn way more than if you don't, if you don't watch them. So, that's good. And then the podcast, there, there are many, I, again, mine, mine is called a forward guidance. Who's your favorite interview you've done? I'd say it's probably.

an interview I did with Vincent Daniel and Porter Collins from January 2022. And they basically saw all of it coming, like the Fed rate hikes. Who are they? So they were actually Vincent. They were written about in the book, The Big Short, and then they were in the movie The Big Short. So, Vincent Daniel is played by Jeremy Strong, who plays Kendall in succession. Of course.

So that adds a little cinematic flair on it, but I do think that at that time, like my podcast had just launched, so was doing a ton of prep work and it was such a great, perfect time. The stars aligned, the guests were amazing. That was really good. I'm really proud of my interview with Sheila Bear, former head of the FGIC. Well, this was really great. I think you gave some really great advice and some tangible tips for people to...

find more advice to find more research and when they want to dive into this on their own, think they know where to start and you have given them a really great background for that. So thank you so much for this really. My pleasure, Josh. Thanks for having me. If you like this podcast, I really hope you did. Please give it five stars and leave a review and send any questions, topics, things you want me to talk about or things that just should be talked about to my email, josh at guyset.com, j-o-s-h at g-u-y-s-e-t.com.

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and I'll be sure to talk about it. You guys want to hear something also like really super cool. You can also follow guyset on TikTok and Instagram at the guyset. T H E G U I S E T. You can also check out the website guyset.com for so much more content on all of the topics I'll be talking about on here. shit. Sorry. I think I forgot to say to leave this podcast five stars and our positive review. Thank you so much for listening and I will see you guys next Tuesday. Let's fucking go.