SoFi, which was founded a decade ago as a company focused on the student loan market, has since expanded into mortgages, personal loans, credit cards and investments, including ETFs, stocks, cryptocurrencies and robo-advisory. Liz Young is the Head of Investment Strategy at SoFi and stopped by the ETF Think Tank to offer up her macro views on the economy and the markets.
SoFi’s business model appeals to a newer and less affluent client base, so how does the company try to educate new investors? Young explains that one of SoFi’s goals is to make sure people are cutting through the information that’s out there and focusing on what’s really important. Using the Evergrande situation in China as an example, she focused less on the initial overreaction comparing it to the Lehman bankruptcy and shifted the narrative towards why the market reacted the way it did. Like the 2016 election result and the Brexit vote, the markets hated it for a day or two, got over it really fast and then moved on. One of her philosophies is that “a pullback or drawdown absent a recession is a buying opportunity”.
Young is concerned about how newer investors haven’t yet experienced a protracted recession or bear market. Most investors define risk as losing money, but people newer to the markets might define risk as making less than 10%. The new investor realizes that drawdowns are possible, but they haven’t really felt it and we don’t know how they might react. The current definition of a bull market is probably getting inflated.
The topic of inflation and global supply chain issues is raised and Young emphasizes that she is not buying the “transitory” story. She believes that inflation probably begins relaxing below the 5% level but does not think it goes back down to 1.5%. If a company pushes up prices on goods and services, those will stick. They’re not going to lower prices again once customers begin paying those higher prices. With wages rising and consumers still sitting on a lot of cash, there’s a chance that spending and inflation could rise again. The question is will it rise enough that the central bank needs to do something to contain it.
Speaking of the central bank, Young says she thinks the Fed is in a really bad spot right now. It has helped create a “too big to fail” culture and that has impacted expectations of how the markets will perform. The Fed has succeeded in signaling by clearly telegraphing the steps it’s planning on taking, but the execution could cause problems if growth and inflation get out of balance. If growth stagnates and inflation runs hot, the Fed may have to try to solve for one and just let the other be a problem. The tapering doesn’t scare her as much as the idea that it’s going to have to do something sooner than expected on rates. There’s a good chance the Fed may need to speed up the taper, so they don’t have to shock the market with an earlier rate hike.
Some other key takeaways:
- You can do all the research in the world, but you get some of your best ideas from other people. It can be dangerous if you’re just following people, but there can be some value in learning from different perspectives.
- The younger investor crowd isn’t all that different from the older generation. There are things, such as student loan debt, that are different, but this group still wants to buy and furnish a house, buy a car, and financially plan for a family and retirement. The biggest difference is how they want to work and spend their time professionally. Startups, tech companies and small businesses are more attractive.
- The pandemic forced the marriage between the sector and technology to speed up. That probably won’t go away and the companies that perform best are the ones that are the quickest to adapt. If you’re a brick-and-mortar business that’s failed to keep up with the shift to online commerce, you’re probably struggling.
- The current generation skews smarter. They’re probably going to be prone to more bubbles (debt, assets), but Young doesn’t know if that makes them better off. One of the most advantageous things is that they’re getting involved in investing a lot earlier than those before them. In order to build wealth, they need to invest.
This week our guest will be Douglas Boneparth, joining us to discuss DeFi, inflation, and valuations. Sign up here.
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