Episode 8

HOMEOSTASIS: THE QUEST FOR BALANCE

Episode Description

In episode #8 of The Big Bo $how, Big Bo (a.k.a. Jason Blumstein, CFA®) reviews the process of Homeostasis.  How this dynamic, self-regulating process plays out in our personal financial life, current market dynamics, and the Miami Dolphins. Additional topics Discussed:  

- 2 things Big Bo has never done before in his life, and how this played out! 

- The effects of higher interest rates, and how they might actually be a good thing 

- New "Bo Knows" segment featuring NFL prediction 

Hope you enjoy the $how!

Episode 8 Key Takeaways:

• 00:00 Searching for homeostasis in personal finance — and enjoying the short term while planning for the long term.

• 08:52 A short breakdown of why the Fed raises and lowers interest rates. 

• 12:32 A simple baseball analogy to explain how the Fed handles interest rates. 

• 14:10 Why higher interest rates are actually good for savers.

• 19:17 A brand new segment: Bo Know$

Episode Transcript

Homeostasis. Funny word, doesn't come off the tongue very well. Britannica.com defines homeostasis as any self-regulating process by which biological systems tend to maintain stability while adjusting to conditions that are optimal for survival. The stability obtained is actually a dynamic equilibrium in which continuous change occurs, yet relatively uniform conditions prevail. In episode eight of The Big $how, I will give three examples where homeostasis is playing out in personal finances, financial markets, and football — sneak peek, one of these is not good. Welcome to episode eight of The Big Bo $how.

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  All right, let's talk about personal financial homeostasis, which I will define as striking the proper balance between wants versus needs, short term versus long term and work versus life. And why am I talking about this? On my son's birthday, I did something, actually two things that I've never done before in my life. I surprised my son. And we bought tickets to sit right behind home plate for Jacob deGroms season home debut. And these tickets were not inexpensive folks, I spent over $1,000 to get these two tickets. And when I purchased these tickets, believe me I almost passed out, I've never spent even close to this amount and two tickets or an event. Right? You're talking to a person that as a child, I used to spend max $2 to go to the Florida Marlins game and sit in what they called at the time the fish tank tickets, which were the last two seats, sorry, the last two rows in the stadium. Me and my friend who used to always go to the game, we'd have one adult, we'd ask for one adult fish tank tickets. And then a bunch of children's fish tank tickets cost $2. And that's the most we would ever spend. And if you know anything about the Marlins, once you get in pretty much can sit wherever you want. So spending this type of money on a ticket to a sporting event was definitely out there for me. Now, we went on to have an amazing day. 

  First thing that took place is as I knew this was taking, I called the Mets and I said to them, Hey, I'm taking my son to the game trying to understand a little bit more about where these tickets are. There was a special entrance. They said, well, what's the occasion? I said it's my son's birthday and right away they said, let's give them a tour of the stadium beforehand. Get here two hours before the game and we'll give them a tour. My son did not know about that. When we arrived they gave us a tour. He saw Pete Alonso warming up hitting in the batting cage. He loved it. The second was Jacob deGrom, who is my son's favorite player. My son is also a pitcher watching Jacob deGrom pitch from that close is a spectacle to see. And the second thing that we did, and the first time I've ever done this in my life is during that game, we got a foul ball. I've been going to baseball games for 40 years, and I've never even come close to getting a foul ball. And it was a foul ball off Francisco Lindor’s bat. The ball and right behind those two sections back, ricocheted, must’ve hit a seat or something, came back and given that I’m much taller than your average person, I was able to stand up, reach to the ball and grab that ball. And when I got the ball, I handed it to my son and my son made a sign that said, today is my 10th birthday, let's go Mets. And we held up that sign as I gave them the ball and showed it to the stadium and the entire stadium started cheering for my son. That was an amazing moment. And of course, the Mets won that game. 

  Now when we're driving home, we get home. And as we get out of the car, and start to walk towards the front door, my son says to me, Dad , I will remember this day for the rest of my life. And this is where I bring in the concept of financial homeostasis, or the search for balance. As I constantly talk to people about and which I also have portrayed in my entire life. I've always focused on the long term and focusing on needs versus wants. But sometimes once you put in the work for that long term, sometimes it makes sense to splurge to have that balance in your life to have some financial homeostasis. I didn't have to purchase those tickets. But you put in the work, you put in the discipline, you focus on the long term. And sometimes those short term items play out beautifully. And it added a tremendous amount of balance to my life. And I hope this is an example of why sometimes you need to have that proper balance in your life. And if you're always going after the long term, which I have been for my whole life, sometimes you need that sprinkle of the short term. And believe me, when you have a lot of that short term, you're gonna need to balance that off with the long term. So I hope that example provided some gray color. And after a quick break, we're going to go into the second area of homeostasis that is currently taking place in financial markets.

  Welcome back. And now we're going to talk about the second area of homely homeostasis that is taking place in current financial markets. And I'm talking about interest rates, the Fed has been raising interest rates. And no matter where you go, or you get your news, I think we can all agree that the tone has been overwhelmingly negative on what this means. However, like I've talked about before, we talked about a little bit on the last show. If you just listen to the headlines and you just listen to the financial media, you'll probably be another sheep that's following the herd. So let's understand, first of all, why the Federal Reserve is raising interest rates and actual reasons why this can be positive. 

  So first, a quick tutorial on why the Fed the Federal Reserve raises and lowers interest rates. The Federal Reserve raises interest rates and lowers interest rates to either stimulate or cool down the economy. When they're looking to stimulate the economy, they’ll lower interest rates, and when they're looking to cool the economy down, they will look to raise interest rates. And when they're lowering interest rates, the way that it stimulates the economy is, for example, when someone has some cash, though a rational person will say, Well, where can I get the best return on my cash for the level of risk that I'm looking to take? So since the pandemic, and actually since the Great Recession, you've actually seen interest rates in bank accounts, close to zero. So if you're sitting in a bank account with your cash, you're earning nothing on your money, you're not taking on much risk, but you're also earning nothing. Now we actually want to earn something, you might say, Okay, well, maybe I'll own a treasury bond or a bond that's backed by the full faith of the United States government. Then, since the pioneers, the pandemic has actually fallen below 1%, and averaged roughly around 1.5%. So again, not much return. So up the risk spectrum, you go pushing people further and further out onto the risk spectrum, which is what you saw during the COVID 19. pandemic. Now, so why can this be good? Because right now, what the Fed’s trying to do is pull people back down. And this is actually the first reason why this is good is because it's a normalization of the economy. Now, let's understand some context here. When everyone says, Oh, the Fed’s raising interest rates, oh, it's about 2.5% right now, maybe it'll get up to 3.5%. Well, looking at the history of the Fed funds rate, the history of the Fed funds rate, it's actually averaged about 4.6% since 1954, since the history of it. So we're currently about 2.3 2.3% is exactly half. So we're halfway to average. And again, yes, there's a lot of different dynamics between economies then and economies now,  but 2.3%, even getting up to 3.5%, this needs to be looked at in some context. And we can't leave interest rates at zero forever, because some negative consequences could take place. 

  And I'll and I relate this back to sports, right? So for example, I talked about Jacob deGrom earlier. If you know what happened with Jacob deGrom. Last year, he had some forearm and elbow issues. So what the Mets did when this took place, their best pitcher, one of the best pitchers in baseball, they took zero risk, they said we're shutting him down. We do not want him to pitch. That's the equivalent of in a crisis, the Fed dropped interest rates. Let's shut things down. Let's try to rehab the patient. And then Jacob deGrom started to get a little bit better and a little bit better. And as he was getting ready to make his comeback, didn't just say okay, Jacob deGrom, we're going to shut you down, and then you're going to go pitch a nine inning ballgame. No, they sent him to minor leagues to make a couple of minor league starts. Then, after now that he's back in the major leagues, they're only letting them pitch five to six innings tops, because they want to make sure that the patient is fully healthy, to make sure that he's around for the playoffs when it really counts. And that is actually a good analogy, in my opinion of what's going on in the economy. The economy is recovering, we're taking the patient off of the max that it needs for rehab, and getting the patient back on its feet to be able to pitch for the World Series using the Jacob deGrom analogy. 

  Now, another reason why interest rates, higher interest rates are positive, is because they're actually good for savers. If you're trying to live off of your income, higher interest rates are actually a good thing. Now, I remember when I was first learning about investing from my grandfather, Julius, this was in the 90s when he was retired and he had about a 6-7% need to live off of his assets of what he was spending. And back then in the early 90s, you can actually get a 6-7% return on high quality AAA corporate bonds. I vividly remember my grandfather walking into his office with his advisor, and discussing this and saying, Well, we can just own high quality AAA corporate bonds, we can get a 6-7% return. Well, that was the 90s. In recent years, if you look, since 2015, down into the financial crisis, sorry, the COVID-19 crisis, interest rates on AAA bonds have averaged around 2.5%. So far away from the 6-7% return that my grandfather was getting in the 90s. So again, higher interest rates are good for savers, good for people that are living off of fixed incomes, mainly people that are currently in the financial freedom phase of their lives, where they have no income, but need to take on the need to have income generated from another source in a conservative manner. Another reason why higher interest rates are good, is because you're taking on the same level of risk for a higher expected return. Now, this gets into the risk reward dynamics and going back up and down the risk spectrum that I talked about earlier. So for example, if you're a younger person, if you are in your 20s, or 30s, or early 40s, many, many of which we work with, right? People that have high incomes that are not wealthy yet, in their early 30s to early 40s. They need to grow their assets. So if you think about the dynamics of risk reward, if you're getting zero in cash, and 2.5% on a fixed on high quality bonds, well, you're gonna have a lower expected return for owning businesses, or equities. Because the reason the dynamic around that is because you're gonna have to, we're going to command the spread for the for the extra risk that you're taking, right or spread or a difference between the the return on cash and high quality bonds to owning equities, as the returns on cash go up, and the returns on high quality fixed income, go up. Now, let's say you're getting three, four or 5%. on fixed income, we're not there yet. But let's just say you are in high quality fixed income, wouldn't you then demand the higher return expectation for owning businesses, right? It just makes logical intuitive sense. And that's what typically takes place. 

  So owning a bunch of businesses owns a ton of businesses in a diversified way. That risk is constant. What is different is the return expectations that one would expect. So again, what is taking place? It's not new, the Fed has raised interest rates before they will eventually in our lifetimes most likely have to raise interest rates. Again, they're just trying to pull people back down the risk spectrum and have the economy normalize, get back to homeostasis, get back to this position of balance. And as I said earlier, the definition of homeostasis is constant change to find that balance. That's what's taking place in the economy today in my opinion. So the bigger picture is to stop looking at the headlines and dig a little bit deeper and do your homework and now we're gonna go into a new segment that we call Bo Know$.

  Welcome to a new segment called Bo Know$. This segment is meant for me to make a prediction on either finance, food or football and for a viewer to send in a question for me to answer on one of those subjects so please send me in some questions to info@juliuswealth.com or Jason@juliuswealth.com. 

  For the new Bo Know$ segment, for the introductory segment, I thought I'd make a prediction on the upcoming football season since by the time our next show will be aired. Football season will start So of course, if you've been listening prior or you know me, you know I'm a huge Miami Dolphins fan so I will make a prediction on my Miami Dolphins for the upcoming season. A lot riding on the season for the Dolphins. We made some big splashes in the offseason with Tyreek Hill. We got a new head coach recently even got some tampering allegations and a first round draft pick taken away. So a lot is going on with the Dolphins this offseason. My prediction for the Dolphins this season is I think we will start off hot I think we'll start off with an eight and three record. Expectations are high. And I think the Dolphins will see that in the beginning of season two will prove to people that they've been overly pessimistic about him. However, we have a brutal and I mean brutal stretch run for games in December. Listen to this lineup of games in December at the 40 Niners at the Chargers at Buffalo in the cold home, versus the Green Bay Packers, then at New England, then we finish it off against the lonely jets, all of that combined. I don't think the Dolphins are going to beat any of those teams will beat the Jets at the end of the season. But although those actually meaningful teams like the Niners, chargers, buffalo, Green Bay and New England, I don't think we're going to win any of these games, we could beat New England, we might be able to knock off the Chargers maybe. But we're not beating New England at the end of the season in the cold. So we're going to finish the season. In my opinion. 

  My prediction is we're going to finish the season nine and eight and not make the playoffs. And wrapping this all the way back to the concept of homeostasis nine and eight would put the Dolphins as a franchise at perfect homeostasis with a record of 241 wins and 241 losses over the past 30 seasons. And like I said at the beginning of the show, sneak peak. This is where homeostasis is bad. Imagine being a fan of a team that has been .500 for 75% of a person's life. That's me 30 out of 40 years in case we couldn't do that math. And this is why homeostasis is bad. Obviously, it would have been a lot better if the Dolphins were either great or terrible, but to be constantly mediocre. Not good. 

  So let's wrap this up on episode eight of The Big Bo $how. We talked about homeostasis, which is the constant dynamic of the pursuit of balance for living things. You saw this in personal financial life with the example of taking my son to the Mets game and what a great time that wasn't a great moment with the economy of higher interest rates. And unfortunately with my Miami Dolphins sorry I stumbled on that I get so caught up when I talk about the Dolphins and their mediocrity. So let's wrap it up. Thank you for joining us here Jason Blumstein, The Big Bo $how, CEO and founder of Julius Wealth Advisors, always constantly reminding people to live a life of integrity, live a life of knowledge, and always pursue your passions. Until next time.

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