Zillow Takes an "L" and Stable Coins FTW

In this episode, we discuss:

Zillow makes a huge blunder in their attempt to buy homes.
Stable coins are proliferating as part of the crypto asset and financial ecosystem.
The 4% Rule for Retirement Income appears to be on shaky ground.

Unedited Transcript

Michael Baker 00:17

Welcome to the Money huddle, a podcast that discusses financial topics for families, retirees, and small business owners, hosted by Michael Baker and rosemary now, all opinions expressed by Michael and Ross or any podcast guests are solely their own opinions and may not reflect the opinions of advisory alpha. The podcast recording is for informational purposes only and should not be relied upon for investment decisions. Clients of advisory Alpha may maintain positions in securities discussed on the program. Welcome back to the money huddle. My name is Michael Baker. And I'm here with Ross Murray now, Ross. What's up, buddy? How are you today?

Ross Marynell 00:53

Michael? I'm back. And Cam Newton is back

Michael Baker 00:56

at that's the big news here in Carolina. The prodigal cam has returned.

Ross Marynell 01:01

Great. I saw a great tweet from this gentleman Dion Berry. He said David Tepper is current is currently paying cams replacement, the replacement of Canons replacement, and can't replace the replacement for his own replacement. So we've got the basis companies kind

Michael Baker 01:20

of just kind of goes to show you that like you might be the greatest investor in the world. But does that mean you get all of the decisions, right?

Ross Marynell 01:30

Hey, in NFL football is stuff no matter how smart you are? Like you said, you can be a fantastic hedge fund manager and in the NFL will humble you.

Michael Baker 01:44

I agree. What What an amazing time have I've been to, I've actually been able to go to two games this year to home games. And both of them were losses. One of them was the Eagles game which the Panthers led the entire time and just coughed it up near the end. Thanks to some poor decision making at quarterback. And then the New England game was just a disaster. So it doesn't surprise me that they've made some moves. What's surprising is I feel like we we've we've run a marathon only to come right back to where we were two years ago.

Ross Marynell 02:27

It's a good point. But for all of you like Cam Newton Jersey owners out there, there's a lot of us in the Carolina area. You get a few more cracks at it. You can wear that jersey with pride, knowing that calves back in the building so to every Cam Newton jersey on are out there a you've got a few more. You got a few more rodeos here before before that show might end again. Ace Boogie

Michael Baker 02:52

SuperCam is back. And if anything, they'll sell some tickets, right? I think I think part of it was you're not for nothing. They're thinking, hey, we'll sell some tickets.

Ross Marynell 03:03

Well, look, they give the same darn experience and try. It's not paying out. It's not panning out. He's injured anyway. And why not? So good. Good on him to bring him back. Let's give it a go and see what happens. So Michael, Roger that. A lot of stuff happening in the financial markets. A lot, a lot. Just just a few things, a few things.

Michael Baker 03:27

Just a few things.

Ross Marynell 03:28

Where did you want to start today? I've got a couple topics that I thought were intriguing. And curious to see what you might want to jump in with today?

Michael Baker 03:36

Well, I personally think it's fascinating that we now live in a world where a company can be a billion dollar company and have no revenue, or virtually no revenue, especially if you're in the right industry. So if you if you want to make electric vehicles, now is your time to shine. Because this week we had the rivian IPO and the Wall Street Journal article The it's an opinion article says rivian. The government unicorn. It says the Eevee truck maker is worth 120 point 5 billion. It has sold 156 vehicles. Wow. I don't I don't know about you, man. But we need to see something that makes sense. In this story. We The only thing I can think of is that Amazon's involved and people are just giving them you know, huge pass because of the Amazon's involvement and how popular Tesla says they rolled

Ross Marynell 04:43

that new rivian truck electric vehicle downtime square. That driver hopped out opened up the side cabinet pulled the grill out. Hey, listen, it was pretty neat. I think

Michael Baker 04:57

that his view is beautiful. beautiful truck, I won't deny that you

Ross Marynell 05:02

open up a side compartment and pull an electric grill out of the Interior, the car or the truck, you got my attention. Now I agree with you, just because you make an interesting looking vehicle that is got some incredible statistics behind it for what it can what they what they're stating it can do from a performance standpoint, it doesn't mean that that is within the reality of what their market cap should be. So when you talk about $126 billion market cap for a company that has sold, what do you say 156 trucks at this point? It is all built on future growth and massive sales massive. And I don't know, we don't make stock recommendations on this podcast. So don't take any of our guidance or discussion as stock advice. It's a it's an expensive market cap. And it doesn't make sense to me. And it's hard to compute where we're headed with some of these electric vehicle entities.

Michael Baker 06:05

Well, it looks like from the article that there's multiple things going on, it looks like Amazon has, you know, placed a large order order for the vans. There's also government tax credits, you know, some potential subsidies. So it looks like there's there's a healthy mix of I don't want to say crony capitalism, but I want to say it looks like the government's involved in you know, making this this vehicle or this this car company, one that can actually go out and compete for, you know, investor dollars right out the gate just because people are thinking, there's too many big hands in the pot for this company to fail. So we'll see. We'll see what happens. But interesting developments, I should say

Ross Marynell 06:58

it sure is. And so one of the things that I wanted to chat about today with you was what's happened with Zillow over the last couple quarters. Have you been following some of their story with their ibuying they're doing they called it Zillow offers, which was an eye buying platform where they would directly buy homes from people. Have you followed any of that story at all, Michael,

Michael Baker 07:24

I haven't. But I would say that if they're buying based on their Zestimates or the Z estimate that they give, they probably been getting kicked in the shorts.

Ross Marynell 07:34

So that's, that's an interesting perspective. So most people know Zillow as sort of a data search engine. If you're in the home buying market, want to know what your home may be worth want to look in the your community and see what homes may be for sale. People are familiar with Zillow as a search engine for real estate, they sort of built a pretty good brand around providing a lot of real estate data. Whether it's whether it's completely accurate or not is up for debate, but they have become a source a sort of a go to source for real estate data. Well, what they had decided to do, fairly recently was, through their Zillow offers program begin buying direct buying homes, that they would then turn around and resale. The challenges that they ran into was that this is coming from their CEO Rich Barton. He went on to say during their last quarterly call that the unpredictability of forecasting home prices far exceeds what we anticipated. And they're now looking at about 9800 homes that they have to sell with another 8200 that were they were in contract to buy that they're probably going to lose between five and 7% on those homes. So this is a big they really stepped in it. And they're going to lose a decent amount of money. And it's it's sort of mind boggling that the company that has all the data relating to these transactions or a lot of big data warehouse it could miss so so big, so big on their algorithm to buy homes. What are your quick thoughts on that?

Michael Baker 09:16

It sounds awful. I think, I don't know. I mean, I believe the lesson could be no know what you're good at. Because they do have a ton of a ton of data. They do have lots of stuff, you know available to them, but they are not in there, or they weren't in the home purchasing business. And I think that maybe they they got a little too greedy thinking hey, this should be easy for us. They dove in and now you know they're they realizing that hey, this might not have been the best use of our capital and, and it sounds like it's not gonna it's not gonna go well for them for a little while. So since

Ross Marynell 09:58

that and now announcement, they also announced that they were laying off 2000 employees that represents about 25% of their workforce. Their stock has fallen about 69% from all time highs that were reached earlier in February of this year. And, you know, I'm thinking about this because we talked about this, this sort of ibuying phenomenon, probably a couple years ago, when we had Flint Foley on as a guest on our show. And we were talking about some of these companies that were making these internet offers and getting involved in the real estate transaction. And it seems to me that Zillow really picked our timing wrong, because some of the advantages of doing one of these internet buys if you're the homeowner and you're selling to a corporation, like Zillow, you know, what are some of the advantages, right? Well, they make almost an instantaneous offer. So it's very, very quickly, very quick that they make an offer, maybe they have some which

Michael Baker 10:58

we like, yeah, right. So you get people like that we don't wait for anything anymore. We want what we want. Now, actually, yesterday was preferable to now that's, that's where we are. Now as a society, we want everything like, immediately, we have the thought it should already have manifested,

Ross Marynell 11:17

right. And so you want speed in the transaction and getting under contract, you want the convenience of having a quick closing, and you want a highly approved buyer, right? So if Zillow can come in and make a cash offer, the process is streamlined. There's not really much back and forth negotiation, which can be uncomfortable for people. That can be an appealing outlet for for folks. The problem is you're in a housing market, that is already moving at lightning pace. We've seen people list their homes and have multiple offers in a day. A lot of homes are selling before the stake is in the ground, with the for sale sign because the real estate agents know that it's going to move. You're seeing people buy homes, waiving inspection reports, essentially buying the home as is,

Michael Baker 12:18

which is which is terrifying to me,

Ross Marynell 12:20

we have I'll come back to that we have tighter lending standards than we've had in a long time. So since the Great Recession, and the financial crisis and the the loose mortgage lending that that helped explode those home values. The bank, the pendulum has sort of swung the other way, and banks have become more constrained and who they're offering credit to. If anyone's gotten a mortgage loan, you know, the process you go through, it's not easy. So there's already tighter lending lending standards, which means when you're having multiple offers, you have highly qualified buyers. So what's the purpose of needing an eye buyer? If I have, I can sell list list and sell my home within a few days. I'm getting multiple offers, and in some cases, not having to be on the hook for repairs. And I'm working with highly qualified people. And so I think they really stepped in. And so, you know, imagine having almost 10,000 homes that you have to sell for a loss. How does that spiral out of control so quickly. And I think you've made a wonderful point, which is that the some of the toughest things that we have to do, even with our own wealth planning is just stick to what works and what our core competency is. There's always a next, the next new thing and the next shiny object and when we detract from that and pull away from what we know we're good at, then bad things like this can happen.

Michael Baker 13:43

Absolutely. And you look in here's the thing, to me is like, look at how they're dealing with it. Somebody, you know, this is a C level decision that they decided to do, you know, the the rank and file employees didn't like hold the vote and say, You know what, let's let's go into the house purchasing business. Someone thought, hey, we we've got all this data, we need to we need to deploy it and make ourselves even more profitable. And you know, it, it didn't work. And then they're slashing jobs and they're costing people you know, so this is this is one of those things where you can see it actually play out is this. The the impact of this is not just on the stock price. It's people losing their jobs because, you know, the higher ups that Zillow decided that they were going to get in bed with like all these other you know, direct purchasing entities where That's where they started out from the beginning. You know, they didn't you know, some of their competition in that space. We're never trying to do what Zillow was doing. They were directly you know, trying to purchase homes and then you go into a market where you are dealing with you know, qualified buyers and because of COVID, and the migrations that we've seen, especially where we are down here in the south, we have a lot of people coming here from high tax states where their property values when they sell, they're coming down here as cash buyers, they're coming down here and never being able to, you know, we don't even need the banks, we don't even need the financing. We've got, you know, several $100,000 in cash, here you go. I just heard a story the other day someone, someone that we know, sold the property that they inherited. And it was a it was $485,000 transaction, cash purchase, closed in like a week. How do you compete with that? You know, I don't, I don't know how, like, people compete with that I especially don't know how to get like a a company, that's going to have to do some level of due diligence on a property. It competes with that. So it, you know, I haven't followed that story. But it sounds like they stepped in it. Hopefully they can figure it

Ross Marynell 16:09

out well, and just to go back to kind of what your references part of what has made the home buying transaction work in the past is that you weren't buying your home necessarily for an investment, you were buying it because that's where you wanted to live. I mean, it was providing shelter, right, you wanted to be in a particular neighborhood or community to get your children into schools, that in what made that work, in the long run was time. Because as you lived in your home, inflation creeped up, you home prices naturally could could rise, you would pay down your mortgage balance to the point you made, maybe you made upgrades to your property. And then over time, you look back 810 years later, and you can make a little money selling it to do that within a couple of weeks to buy and sell a property when you're paying over fair market value just seems insane. And so yes, they they really stepped in it cost 2000 people their jobs, and, and a lot of market cap, but we'll see how they pivot and move forward. And if they return back to their core competency. So what's what's next, Michael, what do you got for us?

Michael Baker 17:18

Well, as you know, I've been spending over the last couple of weeks have been just digging back into the digital asset space with crypto trying to get my head wrapped around this because these we've just seen so many developments happening. And I wanted to share a couple things that that come out that I thought were relevant. One is I think there's still a healthy debate out there on people on both sides of people who think you know, digital assets are all unicorn fairy dust. But again, unicorn fairy dust is in we just we just talked about electronic vehicle maker that doesn't make vehicles yet but it's worth $120 billion dollars. So you know, anything's possible. But I'm more and more in the school of thought that these digital assets are not going to go away. And some of the people that are you know, have gone the deepest down the rabbit hole can make some pretty compelling arguments for why they believe you know what they believe. Anyway, all that to say a couple things came out just this week. One is there seems to be some kind of rat race between city leadership, major US city leaders talking about taking payments of their paycheck in Bitcoin. The I think the mayor of Miami has said something about he would take a paycheck in Bitcoin. The newly elected mayor of New York City came back out like a day or two later said, You know what, I'm going to take my first three paychecks in Bitcoin. And then it was announced yesterday the mayor of Miami said that they would begin paying their citizens of the city, a Bitcoin dividend. And to kind of go through how all that's going to work out is a little complex but all that to say this stuff seems to really be taking hold we know that we just had the launch of the first Bitcoin futures ETF so not not spot price Bitcoin, but Bitcoin futures ETF came out a couple weeks ago. We know that there are multiple applications in right now for Bitcoin spot price ETF, which would actually allow institutional investors financial advisory teams to be able to have some type of Bitcoin exposure without directly holding the asset, which could result in another huge upswing in Bitcoin adoption. And then I saw this, this came out. This came out this week. And I thought this is interesting because in addition to Bitcoin, we have these things called stable coins and stable coins are essentially a coin that designed to be pegged to something else or to basically hold its value. And so think of like a like a USD stable coin would be a coin that is pegged to the dollar. Well, the President's team just issued a report. And I'll give you the name of the team. It's the Presidential See, report on stable coins from the President's Working Group on Financial Markets, the FDIC and the Office of the Comptroller of the Currency. So we're talking about the the folks at the top who call the shots, right. So they came out and they basically issued this 20 Something page report and one of the recommendations was legislation, it says, to accomplish the objectives that they're proposing, legislation should limit stable coin issuance and related activities of redemption and maintenance of reserve assets to entities that are insured depository institutions. The legislation would prohibit other entities from issuing payments stable coins, legislation should also ensure that supervisors have authority to implement standards and promote interoperability among stable coins. I don't purport to be an expert in all this. But what that says to me is that we're about to see the banks getting involved in a big way. Because you have to be if you're going to do the stable coin thing, you have to be the, you know, insured deposit institution, which is, all the banks are. So this is going to be this is going to continue to build out. I don't know what shape the ecosystem is going to take as we go. But it's something that I'm watching. And it's fascinating to see how quickly this is developing.

Ross Marynell 21:47

It's continuing, it's continuing to gain momentum. Bitcoin prices is sort of back to where its all time high, was it's kind of hovering that like 65,000 range or so. It's very close. Yes. And so I was looking through coin basis, q3 earnings report, it was not pretty. So they had a 30% drop in trade volume in q3. q2 company reported 7.4 million transacting users down from 8.8 million the quarter before. And I think just not knocking Coinbase. But this is probably going to ebb and flow a little bit with just what's happening in the broader markets. And what I found interesting about this was that Bitcoin accounted for about 90% of trading volume Aetherium, accounted for 22%. And the remaining 59% came from other crypto assets. So yeah, it's not necessarily Bitcoin driven, or theorem driven. It's all the other things that are popping up. Probably, I don't know how frequently these new forms are, are pulled brought it to market. But it seems like it's just an abundance. And so maybe some of these coins have some scarcity to them, but the marketplace doesn't, right, because it's, it's anyone's best guests know, how many of these there will be over time. So it's a little it's intriguing to me that bitcoin does, it does not make up the primary trading asset, and the longer a coin base, that it's all of the other coins that are springing up, you know, as fast as someone can invent them.

Michael Baker 23:33

It's, well, it doesn't surprise me for a couple of reasons. Number one is a hate to be cynical, but a lot of people had their had their government subsidy money dry up, you know, the enhanced unemployment stuff, like completely was over on Labor Day, you know, a lot of people that might have been receiving, you know, subsidy payments, or the stimulus checks. I mean, they, you know, burned through that. So, folks that, you know, were given cash to play with and a lot of people went to, you know, these, these exchanges, and we're, you know, trading and speculating. And then number two is, I think there's still a huge, a huge amount of people who fundamentally don't really understand Bitcoin, and the Devitt divisibility of it. And so they see the price of Bitcoin and they see, oh, it's $69,000 I can't invest in that. But I can buy, you know, X amount of Dogecoin over here, because maybe Dogecoin is going to go to $60,000 a coin too. And I think people are looking at the price versus not understanding that, you know, you can you know, we can buy fractional shares of stock. Well, Bitcoin is divisible into Satoshis. And so you can actually buy, you know, a portion of a Bitcoin with some of your money, but I don't you know, we're so we've been people have been so conditioned For years and years and years to see like, this is what the price is, oh, I can't afford to invest in that. Because it's, you know, $1,000 a share. You know, I

Ross Marynell 25:08

don't think that people don't understand it. I think this is the new like these these cheap coins that are fractions of a penny. They're like the new penny stocks. If you hit one, and it was really, then maybe you have an insane return in a very short amount of time. I mean, she he knew this little, you know more about this stuff than I do. But this this little current, this fake currency had an 89,000,000% return 89 mil it's just ridiculous, no actions of opinion. You know, and then the volume or however many they create is is like, enormous, but so yeah, you can have these, like short run just insane bursts in price. And then, you know, a lot of times the subsequent fall from grace. But that's what they're speculating on. Right is one of these little rinky dink, you know, these, you know, fractions of a penny coin is going to take off, and you can turn small amount into a large amount very quickly.

Michael Baker 26:09

Absolutely. So that was that was one thing that I thought was interesting. And then there was also this article that came out in the Wall Street Journal, and probably more in the wheelhouse of the folks that we work with and that might be listening to our podcast, is the forest has the 4% retirement rule is in doubt, will your nest egg last. And of course, this these types of articles are great for people who are looking for and scouring the internet for information. I was actually it came out today, based upon the articles written up based upon a report that was released by Morningstar. And so you and I, we know this right, we because we've been studying this stuff and involved for years that the 4% rule is has been has been challenged and somewhat argue outdated for quite some time. Because we didn't have zero interest rate policy, zero based interest rate policy, back when that study was created. And there are a lot of people that are looking at numbers based upon, you know, projected equity returns in the future, what interest rates might be doing in the future. And they're saying, You know what 4% retirement rule is probably old and outdated, and we can't use it anymore. Here's just another article, kind of affirming that. And so, you know, we I would just encourage people that if you're looking at retirement, and you're looking at planning for retirement, there are multiple ways to construct a retirement income plan. And I think that trying to use rules of thumb, that are very general in nature, can be very, very dangerous. Because your specific situation is going to be specific to you, you might have specific needs specific circumstances for your household, that need to be talked through and not just, you know, apply like a very basic standard. But it's great for Internet content. And it's great for getting clicks on articles. But I can't stress enough that if you are somebody who is preparing for retirement, or you are about to embark on your retirement, as we've talked about in the show, there's been excess number of retirements just due to COVID. You need to get with somebody who can actually walk you through a you know, several different ideas on how to generate retirement income, not just one way but multiple ways so that you can talk through what might work best for you and your household.

Ross Marynell 28:44

A whole heart wholeheartedly agree, this low interest rate environment has really become challenging for soon to be retirees, because now that we're looking at our assets differently, instead of accumulation mode, where we're just purely looking at growth and appreciation, we also start to look at income distribution, and how do we smartly withdraw funds without overextending ourselves. And so I think taking an extra look at those plans before you launch from work is a very wise thing to do. 100% i One more thing I'll throw out there. It's kind of falls in line. I saw a good tweet from Ben Carlson. This past week. He said over the past year, inflation is his risen and is sort of growing at about 6.2%. He said the s&p 500 return over that period of time is right around 32%. Gold is minus 1.1%. And bonds were minus point 6%. So his take was in a rising rate environment. Bonds were still a better equities than than gold. And obviously equities were yes hedge against inflation. That's funny. You keep waiting When is gold's moment going to be there? And we've always heard,

Michael Baker 30:04

isn't it? Isn't it wild, though? Isn't it wild that so many people in this environment, they're nervous about the stock market, like they know inflation exist, but they're so nervous about the stock market, that they're going to hold cash, or want to go to cash and be safe. When right now year over year, inflation has been 6.2%. And you're getting point a 1.0? Nothing on your cash at a bank? We're, I mean, most people if, if you had a regular portfolio and the s&p 500, went up 25%. And you were negative 6%, you would ask questions, right? But we don't, we don't challenge our own thinking, when it comes to inflation, and how to maintain purchasing power. And that was a conversation I had with someone the other day, because we were having a very general discussion about investing. And I said, Well, you have to think one of the one of the first hurdles that you're trying to overcome with investing, just from a return standpoint, is whatever the inflation rate is, you know, whatever the inflation rate is, is one of your first hurdles. Because if you're not at least getting inflation, you're not maintaining your purchasing power. So if we're going to ratchet up inflation, to you know, three, four or 5%, you know, what are we doing? You know, so it's gonna be interesting to see in the weeks ahead, but, you know, hopefully they can get this thing reined in, if it continues to, you know, pick its head up, you know, you know, we're getting ready to go into the holiday season, which is where a lot of people tend to spend money, you know, spend money that they've been saving for, you know, trips for family get togethers for Christmas presents, you know, it's gonna be wild to see like how the consumer dynamics of this quarter play out with the inflation that we already have, not to mention that they might want to pass another trillion dollar spending bill

Ross Marynell 32:06

looks like have. And so yeah, there's, there's more spending coming. And we'll we'll see how that continues to affect inflation going forward. But it's going to be challenging to say the least. And we've talked about that in detail a couple of weeks ago. And I don't know that it's anything that we've seen in the last couple of weeks makes me feel

Michael Baker 32:29

better. Nothing, nothing. Nothing has made you feel better in the last couple of weeks regarding inflation.

Ross Marynell 32:33

But I am getting tired of hearing about it all day. I think we all experienced it. It's it's in everyone's purview. We know what's happening, let's just figure out how to fix it. So I don't want to talk about inflation. I

Michael Baker 32:46

think it's I think it's been in the news and will continue to be in the news. Because you know, it's one of those topics that it's like red meat for news and media outlets to write about and constantly put in front of people's faces. But it was interesting that the market kind of shrugged off the latest inflation number it came in, you know, over 6% and, you know, I know, yesterday was Veterans Day, but for the most part just kind of shrugged. So we're gonna have to watch wait and see, I still think I still think one of the, the, you know, there's still things to be watching. But the big key is gonna be how the Federal Reserve plays this, you know, what, you know, what they do if they, if they try to, you know, accelerate the unwinding of their bond purchases, and get to hiking rates earlier next year, that that could be, that could be disruptive. And so we're having to, you know, watch them carefully and unfortunately goes into my least favorite type of market environment where everybody's gonna hang on the words of the Federal Reserve, the Board of Governors and, and Jerome Powell, whatever he says could literally move markets. So I don't like that. I don't think that's a healthy place to be. But it looks like that's where we're headed.

Ross Marynell 34:00

Well, Well buckle up and watch nothing like catching some FOMC meeting notes. And it being riveting.

Michael Baker 34:07

I love the read. Those are read those while I'm watching college football Saturday.

Ross Marynell 34:12

All right. It was good to catch up with you. Thanks to everybody out there for tuning in and check this out. Reach out to us anytime you have questions or any topics you want us to cover Farmar way, and we'll be happy to

Michael Baker 34:23

do it. Absolutely as As always, this is fun just to sit down and talk through the various stories of the week. If you got any topics or any guests you'd like us to have on the show, feel free to give us a shout at the money huddle at VC planning.com. And as always, we'll talk to you next time.