Liquor and Leverage? -- How A Famous Investor Lost $17 Billion So Far This Year

  

Investing In Yourself – Using Pillars to Build Your Core	https://urbanomics.blogspot.com/2015/04/urbanomics-pillars-path-set-for.html
Setting Budgets + Saving for Black Swans	https://urbanomics.blogspot.com/2013/02/personal-finance-budget-101-free-credit.html
	https://urbanomics.blogspot.com/2019/11/hey-henry-high-earner-not-yet-rich.html
How to Open My First Brokerage Account	https://urbanomics.blogspot.com/2015/04/personal-finance-101-starting.html
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LIQUOR AND LEVERAGE

“I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” — Warren Buffett

I wanted to share a brief article on Carl Icahn and how he's lost $17 Billion, yes with a "B" dollar in roughly 3 months. For a brief backdrop, you need to understand the players:

Carl Icahn is an investor who is known as a Corporate Raider. I'm not sure if that term is completely fair because there is a common term used in the investment community which is used to describe the INTENT of investment firms who accumulate a large amount of shares in a company. You must formally file a document that indicates if you plan to be a "PASSIVE" investor or an "ACTIVITST " investor. Icahn is the typically an activist investor. I guess activist investors also have an offshoot branch of their party called Corporate Raiders. Change can be positive and of course it can be negative. The Corporate Raider typically forces change in a company that some may see as a negative force. An example may be buying up large shares in a company, then firing a majority of the staff to quickly reap the profits and then leaving. The character most often associated with this label is Gordon Gekko from my favorite movie Wall Street. 

I wanted to share an article and a link on the negative impacts of leverage. That means borrowing money to invest in something. Over the years, I written about the perils of borrowing money. It can be a very dangerous tool to use. But it is so commonplace we forget that many of us use credit cards, mortgages, payday loans, buy now pay later schemes to fund our lifestyles. I call these items instant gratification. I believe there are rules to leverage and for example, I use mortgages to purchase my homes/investment properties. But I am also aware of my sources of income that would be used to buy said properties and homes. If those sources dried up...I'm sorry to say it's time to sell or give that home back to the bank. I would do it in a heartbeat. As for other types of credit or leverage, I stay clear of them. Here are a few examples:

Credit Cards - Yes, I use them, but I pay the balance in full each month. A future post on why then I even use credit cards at all coming soon.

Borrowing from Friends - I don't do it because it could end a great friendship.

Borrowing Against a Home - I don't do it because now, if I took out a loan against my home, now I've leverage my home as collateral. This is a possible way to lose my home and I definitely wouldn't do this against my primary home.

Now these are just my personal thoughts and yes, they are strict, but like Buffett I'm just not a fan of leverage and for the past five years liquor either (except Tequila or Cognac on special occasions).

It turns out Icahn has been using leverage as he runs his investment firm as a public company trading on the US stock exchange. Please read the first article which exposes his leverage:

1) Hindenburg Research Work on Carl Icahn's Company: Hindenburg Research - ICAHN

Key Takeaways that risks of Debt, Leverage, and Conflicts of Interest:

a) Debt: Hindenburg alleged that Icahn's firm has sell new shares (called units) to distribute new dividend payouts, which they called an unsustainable economic structure. Why might this be unsustainable?? Well Icahn's firm has not performed well dating back to 2014, losing 53% during this time. 

    Don't Believe me Just Watch: Since 2014 Icahn lost $4.9 billion in free cash flow BUT the firm continued to pay cash dividends of almost $1.5 billion during this period. And these types of results or returns have continued since then. 

    Urbanomics Lesson: Do get into too deep to debt, it only leads to hard times. Balance in life and     balance in your finances

b) Stop Playing Game 'Hoe': Hindenburg then noted that Icahn's portfolio valuations are inflated. This might be considered financial shenanigans and using these valuations to pay dividends or get other loans could come back to haunt you. 

    Don't Believe me Just Watch: Hindenburg found a few situations where Icahn's firm valued companies they invested in on their books MORE than than the entire worth of the company itself. 

  Urbanomics Lesson: Don't fake the funk. Stop claiming your car is worth $XX when you've had it for     5 years. It loses value, you can't sell it for what you bought it (usually). Next using these false                 valuations to get more leverage could squeeze you.

a) Leverage: Hindenburg also alleged that Icahn's firm obtained credit debt between the years 2017 and 2021. Debt was super cheap during this time. Well like interest only loans, these debs will need to be refinanced and now rates are much higher. Nothing is wrong with refinancing again if you use my motto of knowing your sources of income. But it was alleged that Icahn is using his own shares in the company as collateral to obtain loans.

    Don't Believe me Just Watch: 60% of his Icahn's shared are being used to support the loans. This type of leverage is a risky because if the price of the stock declines, the banks can ask for him to fork over those shares AND even come up with more money. I assume the banks would want to sell those shares right away to recoup their loan investments. Icahn has not disclosed his collateral agreements used for these loans and quite SIMPLY that could be risky for people owning the stick.

    Urbanomics Lesson: While Icahn may understand the risk, using leverage and not knowing the     details could bring pain to investors in this stock.

Since this article came out in MAY, the stock in Icahn's firm as plummeted and he personally has lost over $17 Billion dollars. Don't cry for him as he is still worth over $7 Billion, but its a great case study on how to be careful and why I'm not a fan of debt and leverage.

#liquorandleverage 

The Art of Negotiation - Know Your Worth | Leverage | Optionality

   

Investing In Yourself – Using Pillars to Build Your Core	https://urbanomics.blogspot.com/2015/04/urbanomics-pillars-path-set-for.html
Setting Budgets + Saving for Black Swans	https://urbanomics.blogspot.com/2013/02/personal-finance-budget-101-free-credit.html
	https://urbanomics.blogspot.com/2019/11/hey-henry-high-earner-not-yet-rich.html
How to Open My First Brokerage Account	https://urbanomics.blogspot.com/2015/04/personal-finance-101-starting.html
Diversify your Life (Mind, Body, Soul, + Investments) HOW TO SEARCH MY BLOG:	Get Updates to Your Email When I Create A New Post:

THE ART OF NEGOTIATION

Hello and happy Tuesday. It's cliche but it's August and we all wonder where has the time gone. So I want to drop a little bit of knowledge in how I negotiate deals. As of this writing, my technology security company has signed a number of contractual deals with corporate entities in the past few years. We provide security solutions that help them better secure their organizations. The hardest part is getting your foot in the door and speaking to new clients but right after that the most difficult thing is negotiating terms of a deal. I find it very odd that this is not something that is taught in schools and is something I advocate for people that work and train with me. If you look back at my blogging history, I've been a HUGE advocate for college and even high school athletes to get paid. You could probably go back 10 or 15 years ago and see my posts on this subject. I was so surprised when I would communicate my thoughts on this subject how many people, mainly men, across different demographics argued that players should not be paid. 

I used this interaction as a case study in systemic systems and unfortunately this one includes race when it came to playing college athletes. Remember, I spoke to young, old, and men of different races and a majority of the time they stated college players don't deserve to get paid -- they often defaulted the school is paying for their education. The reason why I called this practice systemic is because even though most of these discussions resulted in the person across from me agreeing with my evidence, they found it easy to fall back to what is status quo.

When I consult for my clients, I follow a few simple mantras. You can't hit what you can't see (Visibility). You can't solve a problem you can't quantify (Measure). You can't solve a problem you if you don't take action (Solve).  My opps (as the young folks say today) didn't stop to find contextual data of the argument I was making. Here was my point:

Visibility: There was not a proliferation of data involved when my opps would fall back to their status quo position. They didn't often state that a majority of the players in college football and basketball are African American. 

Measure: They didn't measure or take into consideration the rate at which these players 'make it to the pros' or go on to play at a professional level to earn a living. According to the National Collegiate Athletic Association: 1 in 2,451 men's high school basketball players will be drafted by a National Basketball Assocation team. 

They didn't measure the dramatic increase in youth leagues, parents spending insane amounts of money for these leagues, or the impact this drive has on families. What's the cost of obsessed parents who lose track of time spent, neglect to their spouse and other kids, or even missed school.

Solve: I don't claim to have all the answers but if we want to teach families and kids true economics we can start with sports:  

1. Many kids play sports for the love of the game. So, consider youth sports a sunk cost: Set a budget and define up front what you'll spend and how much time kids should dedicate to sports. There is always a cost but start with the basics, what's wrong with kids in a neighborhood league playing each other every week just for the fun of it. The business of travel sports and super youth complexes is just that a BUSINESS.

2. I often quote Shark Tank "If after a few years, you're not making money from it -- it's just a hobby". Well said Mr. Wonderful! Sports should be a hobby until someone is profiting from you. When they begin profiting from you pay you need a piece of that pie. Nothing is more American, Capitalistic, or dare I say fair. 

3. My go to silencer of my opps was a simple comparison to other sports. I knew for a fact that youth can turn pro and be paid as professionals in Tennis, Golf, Baseball, and other sports that were traditionally dominated by white players. I found it strange that my opps discarded this fact and suddenly were allergic to sports where African American youth dominated in participation. 

If the Fab 5 (Jalen Rose, Juwan Howard, and company) could literally turn around the University of Michigan's basketball program and profit to the tune of billions of dollars, should they NOT have benefitted in those gains? Should college football not compensate a star player that packed stands for years and then suddenly suffers a tragic injury? Should college sports profit from these amateur players knowing that the percentages are miniscule that most won't make it to the professional levels? Should a player not be able to market himself, if not is he "property" and who owns him?

Let's fast forward and it's beautiful to see athletes in college getting paid via their Name, Image, and Likeness or often called NIL deals. Last time I checked these students are not property owned by someone. I passionately watch Overtime Elite (OTE) which is a league that pays high school, yes I said high school players $100K a year to play in it's league. The chance to earn from your skill is the LEVERAGE you need to take advantage in determining your WORTH. You can't just show up you must provide skills someone values. Clearly the audiences VALUE these players and a lot of money is being made. Finally, I respectfully remind the players to have OPTIONALITY. Similar to what I learned in sports applies to like -- you must be a triple threat! Because your athletic skills will diminish and you must always remember what THEY, your opps think of you. 

I close with this caption from the disheartening treatment of Jonathan Taylor, the star running back of the Indianapolis Colts. Look closely at what the owner Jim Irsay says. Take into account, that Jonathan Taylor is the BEST player on this team. If you don't have optionality in LIFE, you will be simply looked at as property and stuck to unfavorable terms you may have to accept. I have the most euphoric feeling when I negotiate terms for myself and consultants -- "At the end of the day, I can walk away from the table and say no thanks". I also strangely find is less disruptive when I accept less than favorable terms in a deal -- "I signed that deal and if I don't like it I can terminate the deal (based on the terms I agreed upon).

I don't have any beef with what Jim Irsay is saying because it's just business. But I do know my opps and my job is to use my leverage and optionality to get the best deal -- because I do know after that contract is done, life goes on. Fortunately, nowadays my skill is my mind, and I am missed by my clients who call back but that will not always be the case. Here is that quote that sparked this post:

Per James Boyd of The Athletic, Jim Irsay said: “If I die tonight and Jonathan Taylor is out of the league, no one’s gonna miss us,” “The league goes on. We know that. The National Football (League) rolls on. It doesn’t matter who comes and who goes, and it’s a privilege to be a part of it.”

#knowyourworth #leverage #optionality

Managing Dave Chappelle's Contract | Leeds x Roc Nation | Chris Paul + Bill Ackman

 My job is to manage risks and for some of the largest organizations around the world. They run some of the most complex business activities and I often keep my head on a swivel to ensure that the impact of various risks (political, economic, social, technology, legal, and environment) are thoughtfully considered. It often leads me to believe that people often incorrectly:

a) take on too much risk

b) assume risks they were unaware of

c) calculate risk vs reward (can lead to not taking action when things are actually in your favor)

Here are the concepts I consider everyday when managing risks and negotiating deals:

1) Leverage / Strength in Numbers - I list this as my first concept I often think about when I'm doing business negotiations. It's necessary because far too often the persons on the other side of the table do NOT look like me, may not take/respond to my call or business offer, or take your meeting BUT do not take you seriously. Here is Dave Chappelle with little leverage when he was first pitching his show:

Chappelle revealed that he pitched the concept for “Chappelle’s Show” to HBO before it landed at Comedy Central in the early 2000’s. The comedian claimed that the premium cabler’s execs “kicked me out of the office,” and asked him “what do we need you for?”

2) Own Your Work / Know The Terms of the Deal - You often hear me cite this as my most important principle because everyone signs contracts/agreements in life. IF you do not know what any terms in that document mean...use my rule: stop / question / demand. Being a risk manager, I read many of my own and other people's contracts - so I stop reading, question a section, and demand a change that's more favorable to my cause. A recent example of this is I was awarded my 2nd contract in as many months. I spent over 4 hours reading the 18+ page contract and made significant changes to the language that were NOT in my best interest. If you have "Leverage" (like I shared before) it will be easier to get these changes across. And always know which terms/risks are dealbreakers --- yes some terms are not meant to be compromised. Once you hand me a contract, I trust no one. And for very complex items, I am NOT afraid or too cheap to go and get additional legal representation to further review the deal. 

Dave on his first Contract: “I was desperate, I needed a way out,” Chappelle claimed was his reasoning at the time. “It wasn’t good money and it wasn’t good circumstances, but what else am I going to do I said? All these white people sitting at that table told me trust us Dave it’s a good contract, and I looked around the table and they all seemed to agree it was a good contract. But what if it was like that game of three-card monte? What if they were all friends and I didn’t know it?”

I often focus on terms that indicate "all the ways" I might owe you money (usually I'm on the receiving end of being paid as an in demand consultant) and "all the ways" you owe me or might make money off of me. It's unclear but I think Dave may have had a resident deal - meaning he got paid as long as he worked/was an employee of the company. My question to a younger Dave is: a) Who owns the work, you or them?? b) what happens if you leave -- do you still get paid? c) What happens if your show hits syndication, re-run status, sold to another network do you get incremental / royalty / payments for your work still being used?? (Notice a simple question like this is not unheard of as the Cosby Show went into syndication if I am correct AND it would have address future situations and oddly enough new tech like streaming)

Dave on NOT being paid after leaving ViacomCBS: "They (ViacomCBS) didn't have to pay me because I signed the contract" "But is that right? I found out that these people were streaming my work and they never had to ask me or they never had to tell me. Perfectly legal 'cause I signed the contract. But is that right?"

3) Know Your Value / "ADD VALUE" to your Customers - At the beginning, negotiating deals was difficult because I would often think every deal is the most important deal and then I would be frustrated as the deals were close to being completed but NOT ultimately the terms I wanted. I had my lightbulb moment one day, when 3 companies called me about the same deal. haha the funniest or most maddening thing was the terms of the deal were very different even though all 3 companies were calling about THE SAME PROJECT. I started with the highest bidder and forced the others to match and/or come in higher -- amazingly I got the following "please allow me to escalate this to my senior level executive we don't want to lose you". Yeah that's what I thought. So from then on I set my own terms, take it or leave it. I know my value/my worth and what I offer and I'm sure it's hard to find in the industry. Please put me in contact with a decision maker. As you know, I am owner of Manchester United's stock so I was pleased to see another English Premier League club in the news and THEY had decided to partner their marketing/growth vision with Roc Nation. Leeds is tiny compared to Man U but relax and take notes, they wanna go places and teaming up with a black-owned enterprise when you participate in a sport that has many black, African and international players is simply strategic. I hope more ownership in the NFL take note as Colin Kaep is still not on the field...unacceptable. Here is the Leeds Mural celebrating their partnership:

4) Social Justice (No Longer Be Silent) - Affordable housing is becoming a bigger issue as the United States is becoming more of a renter nation. The new trend is new homes are built and being sold to investors like myself who in turn rent those immediately to renters. Not sure who can afford to rent a brand new house but I am just sharing the latest trends we talk about. Well my billionaire buddy Bill Ackman (who is worth $2.2 Billion) and Chris Paul appear to be investing through their family foundations (yeah you're rich when your family has a foundation) in affordable housing. The $357 million investments appear going to Bobby Turner the CEO of Turner Impact Capital to develop affordable housing for working families. This appears to have a social impact to it, but to be clear, I've not read the prospectus for this fund. I truly hope it targets the communities of color that are disproportionately affected by the affordable housing crisis. But again I don't judge, maybe I'll see if I can learn more about the investment fund and if I like what I see...why not invest.

Bill Ackman and Chris Paul Affordable Housing

A House of Cards --- Pt. 2 (Debt - The Gift & The Curse)

First, I wanted to apologize to a reader. When I was asked in my last post whether I thought the system is built like a house of cards --- I said I wouldn't use those words. But in fact, I actually did  just that during the financial crisis of 2009. See here: A House of Cards Pt. 1  🎴

Sorry Bill Maher, it was my very rare attempt at trying to be politically correct but I got caught so I thank the readers for keeping me honest. I recently spent some time reading my own posts from late 2007 into 2010 to remind myself of what we lived through in the last crisis. There were the market highs I wrote about in 2007 which were peppered with my incessant rants about the housing market being eerily over inflated. My saving grace was the Lord blessing me ☝ with an opportunity to be in town while my sister was house hunting for her first home. While I applauded her for getting a newly built home for a great price, I kept giving her grief for moving to the boondocks --- yep right across from cornfields. I soon began my path to homeownership and then stopped. My sister made more money than I did but somehow I was pre-approved for a loan almost double her amount. It didn't add up so I told myself back in 2005 something doesn't feel right. But what's the saying if you build it they will come. And of boy did they ever -- the city continued to extend and while some cornfields are still there, I see less and less as the years pass. I guess that's the perfect picture of the America dream, the big home -- but who is going to stop you when you can't afford it. My accounting background saved me I guess.

While I would love to get back to what I'm buying and selling, my goal right now honestly is on educating people about risk. I'm blessed to be able to sit back and write a blog because I have a rainy day fund built to withstand this disease and economic fallout still to come. I de-risked by moving my retirement fund to cash --- because it's purpose is just for that...RETIREMENT. And I'm blessed with a pot of funds I've saved over the years to take risks at a time when many are unfortunately being squeezed. These are pillars that you can implement to ensure you're built to last. And what I hope will stay with you is I did it the old-fashioned way --- I saved day after day reminding myself I grew up po' middle class and I'm not in a HURRY to go back. With 2 cars both going on 15+ years of age means, our cars are paid off (one less bill to fret about). Yes, they are showing their age and one is in the shop but that repair bill is looking better and better that getting a fancy new car in an environment like this. When my wife was my then girlfriend, she would jokingly introduce me as the guy who bought a new home but got his coach off of Craigslist. Yup that was me, but I shop well and it was Macy's higher end furniture and I helped a couple who needed it gone because they had to leave for Australia. But on my financial terms and that coach is sitting in my second home and still complimented to this day. 

When I think about this crisis, I wonder how much pain it will inflict physically from the disease, economically to the country, financially to all of us, but emotionally to most of us who did not or unfortunately cannot save enough to weather the storm to make rent or the mortgage or the car bill or the utilities. It makes me wonder how many lives could have been saved if the country did not need to remain "Open for Business" because of the curse of debt. I stand in awe at stimulus package after package that is thrown at this crisis and think about the gift it will provide to many to reflate the economy. I hurt thinking the richest nation does not have enough equipment to battle the viruses newest target --- the great people of New York, especially New York City. Two people to a respirator was an update I heard today and I was in disbelief --- mainly because I had spent over a month watching Eunice Yoon, a CNBC reporter from China day by day paint a vivid picture of how a bustling nation like China was slowly ground to a halt. Wuhan in lockdown, then further cities like Beijing take stringent precautions. Bleaching of streets and temperature readers shown on TV and then she would narrate about the strict restrictions just to get into her building which included ID and temperature checks. If this was in January and Wall Street and I were digesting this information you would assume we were preparing for what was to come. CNBC is a channel I'm positive many in the White House had turned on just as I did each morning. So hopefully you understand where I was coming firm almost a month ago when I was frantically asking for things to be locked down. My goal is not to ruin the dream, just a reminder than lives were at stake.

-------------------------------------------Debt - A Gift?-------------------------------------------------------------

A quick story of the gift and curse of debt. This a Bloomberg story on my buddy Tilman Feritta. I have a nice stake in Ceasar's which I think Tilman does as well so I wanted to highlight how debt is used to lever up to be a rock star. He is feeling some pain but it's a quick insight into how those more fortunate will not suffer like many others will. My next posts will show you the other side. 

Tilman Fertitta:

• Personal fortune of over $5 billion before the crisis.
• Most of his wealth is in the travel and leisure industry:
• Casinos -- Golden Nugget 🎲
• Restaurants -- The Landry’s Inc. portfolio includes Del Frisco’s steakhouse and Bubba Gump Shrimp 😋
• Sports Franchises - Houston Rockets🏀

Tilman has worked hard but he used an amazing amount of DEBT 💰💰(financial leverage) to amass his empire. How you ask:

• Well, leverage of course. He took an outstanding amount of debt out against all the companies he owned. To the tune of roughly $5 billion against Golden Nugget the parent company for his restaurants and casinos. So there is a big risk he could lose this part of his empire due to the crisis. 

How might this play out for Tilman, maybe coin flip odds in my view:

• Heads -- Confident the company will have access to enough cash to weather the storm
• Tails -- Fertitta said: "This year, his restaurants and casinos were expected to generate well over $700 million of cash, more than enough to pay $250 million to service the debt and invest as much as $200 million in new projects, he said." "That leaves you with around $300 million of free cash flow,” he points out. “I don’t think it’s a bad business model.”  

Heads would definitely require a sizable bailout and the economy being jump started within a few months. Tails if feels like he acknowledges I built the thing on steroids 💪 and if he loses he went out like a true Texas cowboy.

No worries on how this story plays out because the Houston Rockets, his bankroll, and other properties he owns are not tied up in his highly levered businesses. Great risk management Tilman but how many folks on main street will have an outcome with odds like this. 🤔 I hope we all have heads or tails outcomes like this as we learn more about how our economy works.

Source: Bloomberg Davide Scigliuzzo

Q&A Session --- Questions About A Coronavirus Recession

Yo, why is Jadakiss as hard as it gets?
Why is the industry designed to keep the artist in debt?

Why you don't stack instead of trying to be fly?
Why is ratting at an all time high?

Lyrics from Jadakiss --- Why ft. Anthony Hamilton

Q&A with the Lyrics from Why

Let me help my guy Jada out really quick: Jada Question: Why is the industry designed to keep the artist in debt? Urbanomics Response: Well Jada the bigger question is why was your song written in 2009 but this question is still applicable even today. Ripped from the headlines: Taylor Swift, Mase, Megan thee Stallion --- all recently complained about contract dealings in the past year. You heard me hear say Jay Z and Master P gave you the blueprint -- independent. Funny you were referring to the music industry but ironically this seems to apply to most every industry I can think off. Let's take the NFL and NBA players who constantly are asking for a fairer share of the total profits as live sports is cable's last hope. We see players as spoiled, rich and entitled but do you find it interesting that someone pays their salary AND no one (main street, public, suburbs, politicians, etc.) ever calls the OWNERS spoiled, rich and entitled? How about the fact that college athletes in America can make universities AND coaches millions of dollars but the players don’t get paid…let alone their are no where near their fair share OR market value of the contribution they made to the profits of the college sports industry. I just saw that disgraced college basketball coach Rick Pitino, who once had a $55 Million dollar at the university of Louisville, is now allowed to coach again at Iona…even though he was the coach during the school’s biggest scandal which uncovered players getting perks and incentives (under the table) to come and play for the school. Did all the players on his team become millionaires during that run -- funny in the business world we have a fancy word called profit sharing. Maybe the NCAA didn't get that economic memo. Jada Question: Why you don't stack instead of trying to be fly? Urbanomics Response: Let me help those who are a little challenged by our smooth language --- to stack means to save money. Trying to be fly --- insert: spoiled, rich, and entitled.  Jada we haven’t even talked about the “economic” industry --- is this designed to keep the aritist public in DEBT? The public continues to take on debt at an alarming rate AND from a young age: Student Loans, Credit Cards, Auto/Car Loans, Home Loans. If the system is working and fair, why is every article about students swimming in debt. Every piece of mail is another company asking me to take my already high credit card debt and “consolidate” it with more debt they are willing to offer me. Wait there’s more --- I can take debt out to purchase my brand new fancy car and of course my home which has more seats and rooms than people in it, respectively.  The US is one of the few developed to offer a 30 year mortgage. What a beautiful concept --- let’s give you debt for something you spend most of your adult life paying for. With interest IF you ever held your home until paid off you likely spent more 40+ years paying for that home. But similar to the whiny NFL players who we complain about --- who are the owners that allow people to take debt out like this?? I could rattle off every company but what’s the point --- the real question is why is main street not taught money, budgeting, debt, savings, retirement, wills, insurance, and how healthcare works?    Real Questions I Received this Week Q: Do you like leverage and is now the time to lever up? A: For those of you out there, leverage is borrowing debt (money you don’t own) and using it for purposes like investing in assets (home, stocks, etc.). I do not think now or ever is truly the time to borrow money.  Something I learned from Warren Buffet is during tough times, when tide comes in you’ll see who was swimming naked. What he is referring to is debt, and the tide is an economic or financial crisis. When it hits, swimming naked means you are OVER LEVERED --- you have too many debts that cannot be paid.  My motto since my dad required I get a job at 14 was that I would never take on true debt. I sacrificed for the greater good and went to a state school so the fees would be less and I earned scholarships to help with the cost. Was it enough – no I used debt (my credit card) to get me through the lean moments which were usually the last few months of each year. But only because I made a promise that every penny of my summer job would go to paying off that debt.  I treat debt like the Lannisters in the Game of Thrones --- don’t get into debt but when you do always plan to pay if off. While I pay my debts on time, it's because I want to have the privilege to access credit (mainly during bad times to benefit on fire sales). Public Service Announcement: If you are in too deep, see if your lendor/creditor will work with you to forgive some of the debt...do not be ashamed many people do this and many corporations go through bankruptcy all the time (it's easier for businesses). A: Now is not the time to borrow more debt because the markets are too turbulent and more downside is to come. I do think you should have Money/Capital/Savings set aside to take advantage of the upside when we do get through this crisis. But those funds should rarely ever be someone else’s money --- then you forgot one our cardinal rules --- never take on debt or you may be the one they find swimming naked. What someone giveth, they will taketh and they usually come knocking only when times are bad. Don’t confuse leverage or debt with equity.  For example, I plan to invest during the downturn but I would rather put my rainy day savings to use OR my equity in my home.  If I lose my own money, I have no one to blame but myself. Losing someone else’s money may mean a lot of sleepless nights. I am evaluating using my home’s equity but this does involve risk. If you look back to my posts in 2009-2010, I was one of the few who had savings and no debt during the depths of the crisis.  Unfortunately, there were many home foreclosures and asset repossessions going on. I bought my home on a fire sale from a local bank that similar to many people fell in love with giving people too much debt or the wrong people debt. Revisit that process here (note my house is one of those in the pictures): https://urbanomics.blogspot.com/2010/04/homebuying-101-tour-baby-tour.html My equity in my home means I have gains since I first made my purchase and I can borrow against that --- but the risk IS your home is the collateral. So to reduce your risk, I advise if you try this approach DO NOT take the full amount of equity in your home. If we are headed for a downturn and your home value decreases that $100K in gains may be more like $50K. Q: Why is oil going down so much? A: Haha be happy and take advantage of cheap prices. Prices are so low, someone commented to me I don’t remember the last time prices were below $2. The reason prices went down are primarily because of Saudi Arabia, no conspiracy theory here just market forces at work.  And this IS NOT linked to the coronavirus.  The Saudis increased oil output after they could not reach an agreement with Russia to limit oil production. In economics if you have too much product that you cannot sell --- prices WILL come down and they fell to the floor. The virus has made this worse because if people are being quarantined or staying at home the demand for the oil is now dropping.  Urb Lesson 101 – if supply goes up or demand comes down --- the value of a product usually drops. We have both.  I’ve provided a source here as well:  https://www.nytimes.com/2020/03/08/business/saudi-arabia-oil-prices.html Q: Can you believe it, 3 states have just now issued the shelter-in place strategy that you shared weeks ago were needed? A: Yeah and many more states have closed schools and are allowing people to work from home. I think this is a well needed step in the plan to starve the virus. People are its host and you need to reduce people being in close contact for extended periods of time to starve the virus. The concern I still have as testing is finally ramping up, what is the damage by not doing this sooner and because it is NOT a true national strategy and states are electing to shutdown individually we all may not resume being productive as soon as we’ve seen in other places.  I think many people are using grocery store pickup and delivery, drive thru’s, Uber Eats, and I’ve seen stocks around meal delivery services popping but I’m not as big on this service for the masses.  Q: So when I start to process everything I am seeing and hearing is this all a House of Cards? A: To start, I have never seen the show so I don’t fully know the premise. But I truly understand the disbelief people have in how this has been handled. I think there has been poor leadership and people are panicking, hence the toilet paper craze. I think there are two things at play working separately: 1) Poor leadership results in no trust of the data/information coming from the top. It’s displayed when Trump would rather yell at the reporters than calmly answer the questions we are ALL hoping to hear the plan or solutions too. It’s clear when I get FEMA texts minutes apart from many people that everyone is on high alert and susceptible to hoaxes. That does not happen unless if you don’t TRUST the daily briefing you’re receiving from your CEO or leader. 2) If a virus can bring world to its knees because the fact is revealed that most of us do not have enough saving to cover two weeks of shelter-in place that is a scary proposition.  The new questions that will come are: a) When a family is so far in debt you go into bankruptcy….what does a country do to get out of a mountain of debt? b) If a lot of that debt is used on our medical system why is it being called fragile --- and we only have 400K medical beds nationally?  c) Will every virus, major climate change, and/or recession cause panic and markets to crash like this? d) Who get's a bailout --- it seems this time like everyone needs one?  I pray we are all patient to get through this together and help each outer out. Because it will be a long drawn out process that is leading to an economic recession.  Next week, news is already coming out that the unemployment numbers will skyrocket to somewhere between 2.5 to 3 Million people. Stay tuned in and stay positive. We'll provide more on how we hold it down during a recession