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A Look at the Real Impact of “Inflation”

There has been good news and bad news for American consumers. Wages, especially at the bottom end of the workforce have been rising, but those gains have seen their impact muted by price increases in a number of areas. Some have called this inflation, but it’s not that simple. While there likely is some inflation in the market, there are also clear supply chain issues that have driven up prices for cars, appliances, some electronics, and more. Maxx Chatsko joins Dan Kline on “7investing Now” live at noon eastern to discuss what this might mean for the stock market

August 11, 2021

There has been good news and bad news for American consumers. Wages, especially at the bottom end of the workforce have been rising, but those gains have seen their impact muted by price increases in a number of areas. Some have called this inflation, but it’s not that simple. While there likely is some inflation in the market, there are also clear supply chain issues that have driven up prices for cars, appliances, some electronics, and more. Maxx Chatsko joins Dan Kline on “7investing Now” live at noon eastern to discuss what this might mean for the stock market



Sam Bailey  0:14

Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:24

Good afternoon 7investors and welcome to the Wednesday edition of 7investing Now my name, of course, is Daniel Brooks Kline, I’m the host of the program. And as you can see, I’m being joined today by Maxx Chatsko. Maxx, how are things in? Oh God, what’s the nickname for Pittsburgh? This? Yeah, I don’t know. You’re not the City of Brotherly Love. That’s Philadelphia. What is Pittsburgh’s nickname.

Maxx Chatsko  0:47

Yeah, you always confuse us with that you always talk about our cheese steaks. That’s also Philadelphia. We’re the Steel City, Dan steelcity.

Dan Kline  0:53

Ah the Steel City, so that that is of course due to your proud history of steel manufacturing.

But that is not what we’re going to talk about today, we are going to talk about the real impact of and I’m putting inflation in quotes, because I’m going to push back and argue that, and the Fed agrees with me, by the way, that what we’re calling inflation isn’t really inflation. It’s not like I called up the Fed and they said, Hey, we agree with you, Dan. There’s just a quote from a CNBC article that backs this up.

But let’s talk about the consumer price index, not the sexiest thing. But the CPI rose by 5.4% in July, that sounds like a huge number. But that’s a year over year number, the fact that it’s a year over year is left out of a lot of the reporting, that’s about the same amount it was up in June. So we haven’t really seen an increase in numbers. We’ve just seen the regular, not the regular and it this is a high number. But we’ve seen a steady number here, the CPI measures changes in how much American consumers pay for everyday goods and services, including groceries, gasoline, clothes, restaurant, restaurant meals, haircuts, concerts, and automobiles. And I say automobiles loudly, because that one’s really important because automobiles are a giant drag here.

So Maxx, I’ll get to you in a second, I apologize for having so much preamble here. These numbers, they sound scary. But let’s take a closer look. The government said CPI increased 0.5% in July on a month over month basis. If you take out energy and food and energy can be very volatile. We’ve seen oil prices and gas prices be up quite a bit, but then go down and sort of be be a little bit all over the place. If you take those numbers out. It went up 0.3%. So kind of throw out that 5.4% that’s the year over year number and that number matters. But we didn’t have a giant spike, we had a 0.3% or 0.5% depending on how you look at it. So Maxx, we’re gonna dig into this in depth. But before we do, what are your top line takeaways?

Maxx Chatsko  2:52

It’s actually I think the 0.3% increase is month over month. So that’s not year over year. That’s a slight right?

Dan Kline  2:57

That is a month over month number,

Maxx Chatsko  3:00

So it rose 4.5% compared to last year 0.3% compared to June. I think that’s excluding energy. And that is the other thing food. We like food here in America. Yeah, so look, this is definitely higher than the historical averages. If we think about the historical averages, it’s about between 1% and 3%. I don’t know why I’m the only person on screen right now. I actually like looking at Dan, it cheers me up. There we go. Dan, how are you?

Alright, so on the one hand, this is a little bit misleading, right? Think about last year what was going on in May in June of 2020. Most of us were stuck at home, there was travel restrictions, all kinds of things, lots of people working from home. So things are a bit different. So that your year increase? Kind of makes sense, right? I mean, there should be inflation compared to where we were last year. On the other hand, 5.4%, inflation is still pretty high, that’s still considerable right? If you made $50,000 in annual income last year, well, this year, that money is gonna go $2,700 less this year. So it’s $225 a month in less buying power that you have this year. So it does matter. It matters for investors, too. I mean, if you’re going to get 11% returns in the stock market, just pulling that number out of thin air. And then inflation is 5%. Well, your real returns if you adjust for inflation are actually only 6%. So it matters quite a bit.

Dan Kline  4:22

Yeah, now let me jump in with that one, Maxx, because that scenario is absolutely true. But it assumes that everything else is the same. So why do I bring that up? Well, we’re going to talk wages in a second. And wages have gone up, especially at the bottom end of the economy. We also have expense differences. Now this is year over year, and last year, we were definitely not spending as much money, many of us were not going to work. We weren’t traveling like we were but if you look at it this on a two year basis, a lot of people who commute to work aren’t commuting to work as often. I know my wife is in the office today, and she’s going to go back to the office two days a week. A lot of people aren’t going back at all. So yes, absolutely, there are going to be some people who this makes their life more expensive. There are also going to be some people that have this offset by other areas where they are not spending is that is that a fair read on it? Feel free to disagree here?

Maxx Chatsko  5:14

Yeah, that makes sense. And and wages are increasing, but so are prices. So it’s kind of this right now we’re kind of in the thick of it’s hard to kind of tell, really, is this gonna be temporary or not? But you think otherwise? I think you think it is gonna be transitory.  You called up Jay Powell this morning. And Jay said, Dan Kline. Love the show. Also. Yes, I agree with you. It’s going to be transitory.

Dan Kline  5:33

Yeah, so so I’m gonna, I’m gonna, we’re gonna go completely out of order here. So this conversation is not going to go according to our document. Before we talk about wages. Before we talk about housing, I think we need to look at supply and demand. And I’ve talked about this a lot of times, but nobody knew when the pandemic was going to, I say end, because we’re not clearly not at an end, but change when things were going to open up when people are going to be able to travel. So there’s all sorts of short term shortages, airfares got more expensive, because airlines can only ramp up so fast. Rental cars are next to impossibly expensive for a whole variety of reasons, partially due to a car shortage, but partially also due to increased demand. I’ve talked about this before, but things like inexpensive beach towels were out of stock at the target near my vacation home in the Orlando area, because nobody expected that May was going to be a giant comeback month.

So I don’t think we know what the, let’s call it post pandemic. And I don’t know if the pandemics a thing of the past in one month or three months or eight months. Who knows. We’ll talk about that a little bit later when we talk about booster shots or the potential for booster shots in the next segment. But I would argue that we need to sort out the economy. It’s very much like I’ve talked about the demand at Starbucks (NASDAQ: SBUX), that it used to be really clear, like people left for work somewhere between like 6:30am and 8:30am, there was a line at Starbucks until about nine o’clock, then it got a little bit less than there was a lunch rush. Now Starbucks might be busy at 11:30am. It’s really confusing. And I think our entire supply chain is dealing with that because very few retailers can turn on a dime. Yep, Walmart (NYSE: WMT) can adjust in maybe a month or two, Amazon (NASDAQ: AMZN) can adjust in a month or two. Target (NYSE: TGT) maybe nobody else can.

So the reality is we’re in a situation where inflation doesn’t mean price increases, and we’re seeing price increases. We’re also seeing, you talk about food, it’s more expensive to go out to eat than it is to eat in, you know what a lot of people have been excited to do pre delta variants, go out to eat. So like, I’m not sure I buy that any of this is inflation, with some notable exceptions in housing and an automobile, not in automobiles and housing, and automobiles are up for a reason we can explain.

Maxx Chatsko  7:46

Yeah, so I think that’s true. So there’s this supply part of it, as you pointed out, but it’s I think, is broader than that, right? So like, it’s not just that the price of goods is going up and raw materials are going up, it’s that the packaging cost is going up, the shipping costs are going up, that’s a little bit different than like, we just need to tune factory output for 2021 compared to 2020, that’s still a component, I guess I just lean towards it being maybe stickier than, the Fed thinks or stickier than it’s gonna be.  I don’t think it will be transient. And that’s, of course, depending on the timeframes. But I think we’re gonna see some higher inflation for a few years, much higher than the 2% level, the Fed thinks. And, look, I mean, we’re gonna get into this, let’s just get into it. Now. What are some of those big components that are dragging up inflation and CPI Dan? I mean, we talked about cars.

Dan Kline  8:36

Cars is the biggest one.

Maxx Chatsko  8:37

Yeah, it’s like a third right isn’t like a third of all the inflation or something

Dan Kline  8:40

Something like that. And by the way, we welcome your questions and comments. So feel free to weigh in, wherever you are. Give us your thoughts here. Yeah, cars are about a third. And cars are not expensive purely because of demand, or because because, aluminum is more expensive or plastic or whatever. They make cars out of steel, I suppose. You would know you’re in Pittsburgh. This is one of those things where cars are expensive, because there is a chip shortage that is forcing car manufacturers to slow down their ability to make cars. So right now, they’re making the cars that are most likely to sell at the best prices. That has a ripple effect on rental cars because rental cars are very stripped down low margin cars that’s actually pushed the rental car companies into the used car market, the used car market is insane. Let me give an example. And then Maxx, you can jump in.

So I bought my car for a little over $10,000. It’s a 2016 Toyota Prius, I sold my Nissan Versa back to Carvana (NYSE: CVNA) for about $4,700. I could not buy my Nissan Versa back for $10,000 right now, and there is no such thing as a car under $11,000 on Carvana. The prices simply have gone astronomically higher. And that’s based on demand. And that will go away. Now that might take three years to go away, because first we’ll fix the chip shortage, then we will have a spike in demand because there’s a lot of people that are holding their cars together with, scotch tape and gum to get through this. But again, that’s just expanded supply chain issues. And it ripples across the entire economy. Look, it’s a negative for me that there are no rental cars. My vacation property is off site from Walt Disney World. So it’s hard for me to get people who want to go to Disney. So I just think there’s a big economic ripple for all of this. Maxx, I know you disagree a little bit, so feel free to jump in.

Maxx Chatsko  10:36

Yeah, I mean, I agree with that. Right. So for car prices, used cars, rental cars, that should be temporary, right? Because it’s free, because of the chip shortage. A lot of manufacturers, automakers are kind of curtailing or even stopping production facilities, because it doesn’t make sense to continue. Lots are filling up, and they’re just waiting to put chips in it and other components in later. So that makes sense that that’s temporary. Of course, it’s no solace if you are in the market for a car. And I’ve actually thought about this, I just drove out to Philadelphia, right to visit family. And I was thinking, man, this would be a really bad time to my first accident, on a big road trip like this. Like buying a new car now would really, really suck. So that’s definitely true. Another thing, though, another, like 1/3 of inflation is actually called shelter inflation. So it’s the price of rent and housing. That looks a little more worrisome, a little less temporary to me, Dan, and you have some thoughts on this, at least in your home market in Florida.

Dan Kline  11:29

Yeah. So so let’s, let’s talk about this, because I think this is actually the big story. So let’s pretend you, you’re a retail worker, hey, my son’s been working at Wendy’s (NASDAQ: WEN). He’s 17. So he doesn’t have housing issues. But let’s say you’re a retail manager. And because your company, and a lot have, your company raised wages, to $15 an hour, all of a sudden, you had to raise your manager wages. So maybe you were making $50,000, and now you’re making $58,000. But the price of buying a home in your market went up 30%. And the price of renting a home in your market went up, I don’t know somewhere between 10% and 50%. Depending where you are here, it could literally be 50%.

That puts you in a tough situation where all of a sudden, you’re making more, but you can afford less. But for a lot of people that’s factoring into the, where am I going to live equation. So I know and Maxx, you can tell your story after that my wife and I sold our home, because it was worth so much during the peak of all of this. We bought our vacation property, which has since appreciated by like, I don’t know, like, like, like $50,000 I can’t do the math on that, like a third of what we paid for it. And we’re looking at at some point when my son’s out of school, moving from expensive West Palm Beach, South Florida to much less expensive Central Florida, we could afford a much nicer house.

Not everyone could do that. But I do think as you’re seeing housing inflation, that is going to be smoothed out by population shifts. And I do think we saw this huge migration to Florida to warm places Miami prices went insane. West Palm Beach prices went insane. We’ve seen Texas prices go go mad. And I do you think we’re going to see more of that shift like you might see in Pittsburgh an increase in prices. Because compared to New York, Pittsburgh is really, really inexpensive. I think we’ve seen that in Cleveland, I think Boston, which sounds crazy to not talk a Boston is an expensive city. But if you live in San Francisco, Boston’s not so expensive. So I do think it’s a much bigger question than inflation.

And we see some questions and comments. They’re not related to this topic. So if we can answer them, we’ll get to them later in the show. But we’d Of course, like your relevant questions and comments, not that the ones that aren’t aren’t ones we’re happy to take. We just won’t take it in this segment, Maxx.

Maxx Chatsko  13:55

Yeah, so I live in Pittsburgh. And so it’s one of the lower costs of living cities, right in the major metro areas, if I can extend the definition of major metro area, Dan. But so housing prices here are insane right now. And they had a low base to be fair. So I don’t know that’s just people moving into the area from outside the area. We do have a big tech presence. A lot of tech companies here. Believe it or not, we are no longer this Steel City, unfortunately, or maybe fortunately, is probably a better thing. I can walk outside without a handkerchief over my face like they used to 100 years ago. So that’s a good thing. But I was casually looking at houses because I read

Dan Kline  14:28

But don’t walk inside without one. The CDC right now is recommending

Maxx Chatsko  14:34

So I was casually looking just like hey, my lease renews at the end of the year, like what can I get? And I mean, on Zillow, at least, they have like the historical chart of like that, what did this house cost? And some of it’s an estimate right over time, but like in like mid late 2000 it just spikes really, really high for a lot of houses that I’ve looked at, so I could afford it. But I’m like, Man, I think maybe this will come down or I can afford more if I just wait another year or two. So I think I’m going to do that. But a lot of economists are starting to be worried about this is called shelter inflation. So again, rent and housing. And as you mentioned, it’s a big component of people’s budgets, also about a third of inflation.

So economists that Fannie Mae have said shelter inflation is probably going to more than double from it’s 2% now year over year to maybe four and a half percent or more year over year, and they think it’s going to remain at those levels for a few years. That’s just due to there’s a lack of supply in the housing market, we’re not building enough. A lot of millennials, right? There’s demographic shifts or demographic shifts are, pushing more millennials into their peak home buying years, and then there’s just not enough supply for everybody. So even if other parts of inflation like maybe cars and rental cars come down, shelter inflation, housing market could actually more than pick up the slack. So this could actually be one of the things that keeps inflation pretty high and well above what the Fed expects, for a few years.

Dan Kline  15:59

Yeah, and I actually agree with that, because here’s the reality. Moving takes time. And we talk about this from an investing point of view. I think, a lot of smart companies, certainly the big tech companies, the biggest players are looking at, well, where else can we operate? Does it make sense to to open an office in Orlando, because it’s it’s an inexpensive place to live? Should we open in Las Vegas, because it’s an easy place to fly to that’s actually also a pretty inexpensive place to live. But you can’t do that quickly. So it’s one thing to say like, hey, yep, we believe you can work out of these 10 new cities, and that would be great for us. And you can live less expensively. And maybe you’ll take a pay cut, but you’ll still come out ahead. I think that’s the trend. But that’s a trend that’s going to take some time.

Like I mentioned that my wife and I are looking at moving. Well, I have a son who’s in school to the end of the year, I have a lease that runs, it will renew in December. And so then it would be run through December, do I want to own two homes? Do I want to buy something and rent it out? Like, that’s all very tricky, and not everyone can manage that. So I do think we’re actually in a massive population shift that will lead to housing inflation, it’s just going to lead to call it more palatable housing inflation. What do I mean by that? I mean, okay, I’m willing to move to the greater Orlando area where $350,000 buys you a 2200 square foot four bedroom house with a pool, in a resort or a resort like setting. That to me is fabulous, that same house cost $289,000. So a year ago, so is there inflation there? Absolutely.

But it’s going to price out certain people, those people might move to a farther away from Disney World part of Central Florida. So you’re going to see, I think, a pretty big repositioning of the populace. And that is going to be really good for Amazon, which can deliver pretty much anywhere, it is going to be really good for the bigger players. It is going to create some challenges. We’ve seen this with Starbucks every few years, they announced they’re closing four or 500 stores. Well, that’s due to population shift. Wouldn’t shock me if you saw that number double coming up this year, because you’re obviously seeing a lot of business areas where people aren’t going back to work full time. And maybe in New York, where I once checked there were 82 Starbucks within a mile of where I was near Madison Square Garden. Well, maybe you’re only going to need 52 because not every building is going to be as busy. So Maxx, is this something like have you thought about Geez, maybe I should move somewhere to follow this tide?

Maxx Chatsko  18:32

Well, I mean, I’m anchored in the Pittsburgh area for family reasons. But I’ve definitely thought about changing what neighborhoods I would want to buy a house in. I work from home so we’re a little bit lucky in that sense. We don’t need to necessarily worry about commute times for the most part here at 7investing. So I’ve at least expanded what neighborhoods I would look at but it’s still depressing. I don’t know.

Dan Kline  18:58

Yeah, so I here’s the thing, I don’t want to poopoo the idea of raising and raising prices. I just don’t necessarily want to call it inflation because let’s we talked about cars, that is a big piece of it. We talked about housing, that’s a big piece of it. But appliances, who knew we were all going to put our refrigerator freezers through the paces we’ve put them through in the past year. I bought a refrigerator freezer right before we put our house on the market. So that was an incredible waste of $1,800 but it took like four months to get it. We’ve ordered a couch and a chair for our new home. And that was was was a delay. Did we price shop. No. We literally went found what we wanted. And and looked at different colors and said well which color could we get fast and and pick maybe not our favorite color so we could get it and fast was not fast fast was like was like two months?

So obviously you don’t have to discount when you’re backordered. So again, I do think a lot of this will shake out and I think we need to know, as we figure out call it 18 months from now, how many of us are still working from home most of the time? Well, that’s going to impact say, the laptop market, the the chair market, all the housing market because you want a bigger house, if you’re going to work from home. So I’m just hesitant here, Maxx to use the word inflation. But I do think we are going to pay more for a lot of things. I recognize that that’s,

Maxx Chatsko  20:20

That’s the definition of inflation Dan!

Dan Kline  20:22

It is, but the underlying reason for it will correct. And I’ll go back to, it’s the last piece of my document. It’s what Jerome Powell said, he said, the recent acceleration, and he acknowledges the recent acceleration of prices, but believes that the inflation is transitory, and that prices won’t continue to increase at their current pace for too long.

That’s not entirely saying that they’ll go back because prices tend to not fall. But I do think there will be a pretty significant raise in wages. We didn’t talk about this, but there are more jobs available by a million, then there are people looking for work. That was the case before the pandemic, we are back to that. There’s a lot of reasons for that large childcare is a big piece of that. But I just think, and I talked about this a lot with every stock that reports, I almost think you have to throw out the last six months and the next 12 months, it doesn’t really matter if Papa John’s (NASDAQ: PZZA) pizza had a great quarter because people decided to stay home because the Delta variant that doesn’t necessarily tell me that Papa John’s is a good business, it might tell me that Domino’s was so busy that they were a 45 minute wait, or that the better restaurants, were backed up, we absolutely made ordering decisions based on wait. This place we like has a 90 minute delivery time. I just I throw a lot out this year. I’ll give you the last word max.

Maxx Chatsko  21:43

It’s interesting, if you have a historical perspective, the Federal Reserve is often wrong in their big policy decisions. And at the worst times, you can look at like the last three or four chairman and chair women, in the last several decades, and they’ve gotten it wrong later. And then we all just kind of ignore it, and everybody else has to deal with the repercussions. Now, it is interesting to me, though, like there’s a growing amount of criticism from economists, like world leading economists, lawmakers, even people who are in the Federal Reserve, right, who think that the Fed’s doing too much right now. And I think one way I look at it, Dan, if I could see your beautiful face again, all right. The Fed is currently buying $120 billion per month in treasuries and mortgage backed securities. If they weren’t doing that now, there was no stimulus and we had the exact same economy. Everything else is the same right now. Inflation, unemployment, everything was the same as it is now. Do you think they would start buying $120 billion worth of securities right now? Would they start doing that?

Dan Kline  22:50

I don’t know. I think the reality is

Maxx Chatsko  22:53

I think it’s an obvious, No. Go ahead. I’m sorry.

Dan Kline  22:55

I think the reality is that once they’re doing it, it, they’re going to be very careful to undo doing it. I’ve argued that they’ve put a small percentage of that into Pokemon collectibles, but they have not, they have not agreed. But I think the Fed is going to be very, very, very careful to move in a measured way. Because we’ve seen, like Twitter (NYSE: TWTR), rumors of what the Fed might do, will send the market up or down by 400 or 500 points.

That being said, those tend to be very, very short term moves, we don’t see, Fed meeting notes, cause the market to change course for six months or even a week. Usually, it’s usually at the most, two or three days of the sky is falling. And then like some minor company, that like Wendy’s will come out with good earnings. And people are like, Oh, it’s fine. Like, everything’s good. So I really, I think the Fed gets way more coverage than its actual impact. Not if it was to move radically quickly, but it doesn’t move radically quickly. It moves like a glacier. Bad if you’re the Titanic, generally easy to avoid.

Maxx Chatsko  24:01

Yeah, I think there’s a risk of moving too slowly now. They just keep pumping money into the economy when it doesn’t need it. Imagine if something else hits. There’s no other tools the Fed has to respond to the next crisis. If there is one. So then we’re all going to be on the breadline I think. But I think there’s risks of moving too slowly. And yeah, would the market hated if they start, like tapered more quickly, and maybe raising interest rates more quickly than expectation. Sure. But I mean, the consequences of moving too slowly might be worse than that. So I think, I don’t know. It’s just a delicate situation for investors. I agree with you, the Fed’s probably not going to do anything too. too quickly, too hastily. But I think there’s risks to that as well.

Dan Kline  24:46

And we did see that even in a very divided country, there was a pretty strong federal government backstop. Obviously stimulus wasn’t perfect. None of the programs worked 100% Well, but there was a pretty good big effort there. So if we get murder hornets that shoot COVID 20 or, or I don’t know, fire breathing lava monsters, I can’t even picture what the horrors are going to be. I’m actually pretty confident that even our divided government will stop us from all being in the breadlines.

I want to take a quick comment from Ravi Shah, if you want to pull that up JT Street and let me just give a heads up. We are going to talk whether we need booster shots. Next, we’re going to follow that up by closing out the show with talking about a new partnership between Pepsi (NASDAQ: PEP) and the Boston Beer Company (NYSE: SAM) regarding boozy Mountain Dew. Yes, you have that right. Ravi Shah says, “living in the Bay Area, you cannot find two to three bedroom condos for under $1.2 to $1.3 million”. Yeah. And we’re also seeing people are leaving the Bay Area because of it. We saw this in New York now did the New York market crash? Absolutely not it fell by like five or 6% and then recovered a little bit. And you can get, it’s a little easier to rent someplace. And maybe the price didn’t fall, but you’re getting last month free or some sort of six months of a storage space or whatever it is.

So you didn’t see a collapse in those markets. You saw just a slight downtrend. And I think you’re gonna see more of that as these big companies and I talked about it,  a bunch of times on the show, as these companies say, Hey, what, let’s open up in Houston, Texas, which seems crazy expensive until you look at the prices in San Francisco. Let’s open up in Denver, Colorado, all of these other hubs cities with airports, you might see some companies do some interesting things and say like, what, what if we put a campus in Portsmouth, New Hampshire, like, all right, the air travels, not that great there, but lands pretty open pretty cheap. There’s a lot of housing available.

So we’re going to revisit this topic. This is what we’re going to talk about quite a bit. We’ll take the last comment from Anna Gomez. And then we will move on here. “Colorado is getting inundated by folks coming in from other areas”. Yeah, so is West Palm Beach. So is Miami. And here’s the thing, as much as it made it hard for me to find a place to live, I welcome you. Because the more the more people that come in, I don’t know. I like people I enjoy people. I’m sure you could tell that.

We are going to move on to talk about booster shots in a second. Before we do that, I want to talk about 7investing. We are of course lead advisors for 7investing. What does that mean? Each month we share our highest conviction stock pick with our members. What does that mean? we sift through dozens, hundreds, thousands… No, probably not 1000s, dozens or hundreds of stocks each month to figure out which one is our best pick. And I’m honing in on a couple for September. I have one that’s one of my favorite stocks in my portfolio. And I just think the market is incredibly undervaluing it. So I think there’s a decent chance I will say, hey, that’s my stock.

But a lot of research goes into this, what do members get, well, if you’re a member, you get those new picks on the first of the month, you get them along with a write up, and a video where in our videos, we pitch the other members, we do a PowerPoint presentation with all sorts of shiny graphics, there might be a marching band. There’s all sorts of cool stuff in these videos, called a deep dive where you can watch as much or as little so maybe you have some feelings about a company but want to know about its management or worried about its valuation. You can move right to those sections of the report and dial in and say okay, here’s what Maxx says, here’s what Dan says, I use our picks to counterbalance my own relatively conservative nature. I buy almost all of Maxx’s picks and lots of picks from from Steve and Anirban and Simon and occasionally from everybody really. So there’s lots of different ways to use it.

How do you become a member that is really easy. If you go to www.7investing.com/subscribe, you can sign up for either $49 a month that gives you access to all our current picks. All our past picks the table that shows you our full performance and and I’ll point out, it helps to read what our goals are in some of these because if you look at say, oh, that one’s a negative. Well, maybe our horizon on it from the beginning was seven years or 10 years like we are getting that’s a lot of Maxx’s pics, we are giving you that story. So I’ve seen a lot of self congratulations after some companies reported results and the stock goes up 10-12%. I’ve seen this widely on Twitter. That’s kind of not how we operate. We’re not focused on the quarter. We’re focused on the long term. You also get access to members only calls, discounts on members only jackets. No that is not a thing, that is an 80’s reference. But we would love to have you, we have a good time. The membership is like a family. We are quick to respond to people. We take a lot of questions at the members only calls and I can’t say it more.

Maxx, let’s segue a little bit we’ll get back to your questions and comments towards the end of the show. But Maxx you wanted to talk about the need for boosters as far as I can tell. The only people who are talking about boosters in the short term are the CEOs of companies that make COVID shots. And I don’t want to downplay that. But hey, if I was Coca Cola (NASDAQ: COKE), I would probably be touting a study that says, you need more fizzy caffeine in your diet, even if it wasn’t that credible. What are your thoughts here?

Maxx Chatsko  30:22

Yeah, so I just wanted to touch this topic, again, given, the Delta variant wave that we’re going through right now, in certain parts of the country. And look, in recent months, companies have been going back and forth over what they’ve publicly said about boosters. It kind of started like Pfizer (NYSE: PFE), a couple months ago said, we’re going to need boosters, we’re going to ask, the FDA and CDC to authorize our booster shots. And federal health agencies were like, hey, before you announce things like that, and ruin our public messaging on a very sensitive topic, maybe you should give us a heads up because we don’t think you need boosters yet. So cool it Jack. And then Pfizer said, oh, we’re just gonna wait for health agencies whatever they decide. So they kind of backtrack a little bit. And then you saw all the vaccine manufacturers kind of all of them kind of backtracking. And were quiet for a little bit.

But they’ve kind of taken advantage, I think in of the Delta wave, and then with on Q2, earnings results and quarterly updates. A lot of them again, kind of made this pitch for, well, we have boosters ready, we have all these studies underway, we’re probably going to need boosters by the end of the year. And so you’re starting to see this, like swing back to all these companies, again, are saying we need boosters. Real world evidence doesn’t really say that that’s going to be true, even with the Delta variant. It just if you’re vaccinated, you’re pretty much going to be fine.

So there’s 40 states and Washington DC that have data, they published data on hospitalization rates and death rates from COVID-19. In all of them, it ranges from hospitalizations and deaths of vaccinated individuals are less than 1% to up to 6% of the total hospitalizations and deaths. So if you’re vaccinated, even with the Delta variant, this means that COVID or Coronavirus, is actually less deadly than the seasonal flu. So, this isn’t like the headlines make it seem like we’re going to need boosters, this is going to be with us for years and years, there’s going to be variants, and that’s just doesn’t really seem to be supported by real world evidence. So to me, it just seems like vaccine manufacturers kind of wanting to keep the gravy train going.

Dan Kline  32:30

And Maxx, let me be very careful when I when I introduced this, but that 1% to 6% that that’s that is vaccinated, that is getting hospitalized, and some percentage of them dying, the vast majority of that is actually people that have other issues. So that that leads to our next question. “Might it make sense to give boosters to some populations”. I would assume elderly or or people that have certain issues. I have a cousin who has leukemia, and the first two shots did not produce a robust immune response, because he’s taking other drugs that that that get in the way of that, and his doctors are trying to figure out if like he should be taking a different one or try. And I hate to say he is kind of an experiment, because obviously it’s a unique case. But might we see elderly populations or at risk populations be a good case for a booster here?

Maxx Chatsko  33:21

Yes, I think that makes sense. And that is actually what like the CDC or FDA are actually looking at, maybe boosters make sense in certain populations, the elderly, who just tend to have a less robust immune response to vaccinations in general, they might need to get boosters, obviously, if you’re immunocompromised, and that means a lot of different things, depending on how you’re immunocompromised, maybe you need a booster more frequently. In terms of the the general population, I don’t think we’ll need boosters very frequently. Meaning like, I don’t think we’ll need them every year, this is not going to be like the seasonal flu, even though, some of these strains are gonna be mutating and things like that.

So again, I’ve explained this in the past, and I’ll touch on it again. But we see a lot of these studies and we see about, effectiveness of vaccines over time, or we see things like you were vaccinated six months ago, and what are your antibody levels in your blood that we can detect, now, or what are they going to be, six more months from now. And those are a little bit misleading because your immune health isn’t just about antibodies, right? Actually, what’s more important is T cells and B cells. Those are way more important in terms of your long term immunity, that’s what actually retains memory to the vaccine or to the virus if you’ve had an infection. So after exposure to a vaccine or the actual virus, your body is going to pump up levels of antibodies because it’s going to be on high alert. But over time, it’s going to be wasteful, if you haven’t seen that threat again. So your body will eventually start to reduce the amount of antibodies that it produces. That doesn’t mean you’ve lost a memory of it. It just means it’s pouring resources into other bodily functions and other parts of immunity.

But if you saw that, the virus again, your body would start ramping up levels of antibodies again, right most likely. So, it’s possible that we got vaccinated, and it lasts for 2, 3, 5, 10 years we don’t even know yet. But, so that’s important to keep in mind when we’re talking about like antibody titers, which is something you’ll see in a lot of press releases, or articles or studies and things like that.

Another reason this is kind of interesting and newer, for why we might not be rolling out, these vaccines across the general population, if you look at some of the studies, and these are still very new and early of the booster shots, there’s some other concerns. So Moderna (NASDAQ: MRNA) has been testing two different versions of a booster. So this would be a third dose, and there’s two different compounds they’re looking at. Well, in that study, they saw a 10%, or a 15% rate of grade three adverse events. So that just means a grade three adverse event means it’s a side effect that often requires medical intervention, so you need another treatment, or you need maybe even hospitalization, because of that reaction, that’s a pretty high rate of a grade three event for something you’re going to roll out across the entire country. if you think there’s vaccine hesitancy now. 15% of people or 10% of people that might, end up in the hospital, because they get really sick from a side effect to a vaccine, which is really just going to be their immune response. But they still might feel terrible and need to go to the hospital, there’s, that’s going to cause a lot of confusion and hesitancy for boosters.

So that does make some suggestions that we can’t just be rolling out mRNA technology is a very valuable tool, but we can’t just be rolling it out like candy. And then every six months, we need boosters, just because the company said we do.  That could cause some problems, we might need to space these out much further due to the immune reactions that are causing, or this is also going to cause companies to maybe, go back to the drawing boards and innovate and create booster shots or mRNA technology that creates less, side effects over time. But there’s also suggest to like, we want to roll this out for seasonal flu. And it’s a bit different, because the fluid changes so much. But, that could cause some problems for mRNA vaccines for seasonal flu. If three years later, after you get your third mRNA flu vaccine in the future, you’re gonna have some really terrible reaction. So we want to really be good stewards of this tool and technology. It’s great. It’s powerful. It was a very amazing technology for, handling the pandemic, but we have to be very careful with it going forward. It’s not just, it’s not a free ride. It’s not a silver bullet.

Dan Kline  37:34

So Maxx, I have one last question here. But first I’d like to share, and put Maxx on the screen if you could JT. I want this as a reactionary thing. I pictured my T cells, as full on A-Team, B.A. Baracus taking on the virus and my B cells as Sully the Bruins fan, who had a few too many before the game against the Flyers. So So I picture there was a lot of excitement going on in my body battling the possible COVID infection.

But let me ask one last question. I asked you this on Slack, and it got lost in the shuffle here. If you’ve had an mRNA vaccine, might it make sense to get the Johnson and Johnson vaccine? And conversely, we have seen in some cases, people who have had the Johnson and Johnson (NYSE: JNJ) vaccine, at least they’re testing this, get a booster of an mRNA vaccine.  Is there? Can you be too safe? Can you wear too many raincoats in the rain? Or is this? Again, Maxx is not a doctor? Matt Maxx has a master’s degree. He’s researched this stuff. If you don’t know the answer, that is okay. But I’m somebody who really believes in science. So getting another vaccine is a thing. I’d be happy to do that because I’m going to Vegas Sunday, I’m going to cruise in September, I want to go places.

Maxx Chatsko  38:44

Yeah, I’ll say I don’t know, it could make sense to to mix and match the vaccines within certain settings. I know actually, I think I think it’s Germany. One country is actually giving boosters of an mRNA vaccine to individuals, I think health care workers, if they received like the AstraZeneca (LON: AZN) vaccine. So again, those work a little bit differently. The immune responses should be about the same. But yeah, that’ll be interesting to see. I mean, again, we have these tools, so we could use them. We’re just going to require some more studies and some more, work from regulators and things. But that could be possible. I think if you got two doses of the mRNA vaccines, or one dose of Johnson and Johnson, all the studies so far say you’re pretty much going to be fine. So hopefully we won’t need to mix and match at all, but that could be possible.

Dan Kline  39:32

And let me throw out one last thing. Don’t buy Pfizer, Johnson and Johnson or Moderna because of the COVID vaccine. Maxx has talked about this that even if we do take a booster and they get another benefit, another 20%, 30% profit, significant short term profits. Maxx has explained to me why it’s unlikely we would ever get a fourth and if we ever did that would probably be the max. So this is not going to be the flu shot. This is not going to be a pure on revenue producer. Maxx, I’ll give you 45 seconds to close out here.

Maxx Chatsko  40:05

Yeah, some of those valuations make sense if you’re looking at like revenue for this year next year, but this idea that we need billions of doses of mRNA vaccines for Coronavirus for a decade plus is probably not correct. So it’s gonna be very difficult to sustain those levels of revenue. And that’s how we value drug developers. So I think, a lot of these are trading on momentum right now, like Moderna is like a $200 billion market valuation, that’s more than Amgen (NASDAQ: AMGN) and Merck (NYSE: MRK). It kind of makes sense based on the sales now, but it’s gonna be hard to sustain. So I think you’ll just be reasonable think about three years, five years from now, that valuation will be quite a bit lower, if things don’t work out. Also, a lot of the vaccines, that are in the supply now have guaranteed purchase prices from governments a year from now or a booster shot. That might not be the case, they might be at the will of the market. There’s more competition. So those profit margins and the revenue they can get from each subsequent mRNA vaccine for Coronavirus might be quite a bit lower. So a lot of these things factor into the equation.

Dan Kline  41:07

Mike Fee gives a little bit of explanation here on something Maxx said earlier the bottom comment if you want JT.  “Thrilled that German health care workers, I think that’s the German flag. I can’t quite see it. So I’m just guessing are getting AstraZeneca boosters, third shots after receiving two doses of the, yeah, I think it’s fair to call it the controversial China Sinovac vaccine”. Yep, I think that is, I think that is what happening. We’re seeing some mixing and matching in Australia as well, where there is supply issues. So this is a story that is still developing.

We appreciate that so many of you have had questions and comments. We don’t really have time in this show to get to ones that aren’t sort of related to the topic at hand. But I do want to share the one from Ravi Shah. Because if you say something nice about us, there’s a solid chance we are going to share it. And if you say something mean, we will take that to heart as well. “Dan, you boost my Monday and Wednesday and Friday with happiness”. I try to be upbeat. “You’re spotting us with so much good content that Tuesday and Thursday mornings feel empty sometimes”. On Tuesdays and Thursdays, you get the 7investing podcasts. Sometimes that’s me, sometimes that’s Maxx, sometimes that’s a combination of any of us. But you get some amazing content there.

I actually just completed an interview with the Chief Investment Officer for GXO Logistics (NYSE: GXO), have you heard of that company? No, you have not, it is a spin off of XPO Logistics (NYSE: XPO). And it is in theory, the biggest pure play in that space. And you’ve heard me talk about XPO Logistics, and not kindly, XPO does the last mile and I had a bad experience with it. And I have to say, I’m pretty excited about GXO, which isn’t doing last mile and sort of what their opportunities are. And it was a really illuminating interview. And Maxx, you’re smiling because you remember all of my complaints about XPO Logistics and not getting my refrigerator.

Maxx Chatsko  42:57

Well, that and that company doesn’t have very creative ways to come up with names for companies, they just throw a bunch of random letters together and name a company. Is that how they do it, Dan?

Dan Kline43:05

Yeah, I’m not sure. And it’s it is a full spin off. So while they might be customers of each other, they’re there, they have no more. There’s nothing more tying them together. And I have to say it was an illuminating conversation. I do think infrastructure and supply chain are going to be massive, going forward. And this is going to be a player in that space. I bring this back to Ravi’s comment. That yes, this, this show has has a different tone. I am way more upbeat than the average person doing this for a living. I’m an optimistic guy. I think it comes across that all of us like each other. I think that’s very, very important. But there’s amazing content, not just on our Tuesday and Thursday podcast, but at 4:00pm ET on Twitter. If you have a Twitter account, you should bookmark that Maxx and I today will be doing market focus that is the 4:00pm ET Monday through Thursday, Twitter Spaces we do so we don’t have to put on our nice clothes and and turn on the video. It’s just audio. And today Maxx, what are we going to talk about. And I ask, cause I don’t remember what we’re gonna be talking about.

Maxx Chatsko  44:08

We were going to talk about, actually forget to we just we just figured it out this morning. I’m sorry, I forgot too.

Dan Kline  44:14

We’re going to talk about some aspect of the rental market.

Maxx Chatsko  44:17

Rental bidding wars, which is gonna put me into a deep depression around 4:15pm. Eastern time. But Dan wanted to talk about this. So we’re going to talk about it.

Dan Kline  44:26

So join us from 4:00pm to 4:15pm ET. Today live on Twitter Spaces, go to @7investing, and please you can set a reminder so that pops up and it really helps us while you’re listening if you share it with your audience. The more people that share it, the bigger Twitter audience it gets to and of course, tell your friends about 7investing Now. This is unlike any other show. And we actually think that’s pretty important because we take a long term view on investing and we clear out the noise and the clutter.

But we’re going to switch from the noise and the clutter to something that made me smile when I saw this. PepsiCo and Boston Beer are going to create an alcoholic Mountain Dew drink. I have never had any sort of Mountain Dew drink. But let me ask the question. So they’re creating hard Mountain Dew it’s an alcoholic flavored malt beverage. It’s gonna be 5% alcohol by volume. So as someone who is a bourbon drinker it’s it’s not going to be all that alcoholic but that that is in line with your typical beer or malt beverage. Early images of the product show that it will contain zero sugar that may not be the case. It’s expected to hit shelves in early 2022. And Pepsi has leveraged the Mountain Dew brand for years there’s the Mountain Dew products in in Taco Bell’s. There’s all sorts of variants of Mountain Dew’s aimed at gamers and other spaces they have an energy drink that’s a big seller.

But let me ask the question Maxx. Is this a good way to leverage a brand name to win share in a crowded space. I don’t know if this, but pretty much every third company has a hard seltzer or similar product. Like would it shock you if I told you that i don’t know city furniture was was releasing a, I should have picked more national brand there. I can’t think of a, Macy’s (NYSE: M) is coming out with a hard seltzer. Like if Radio Shack was coming back as a hard selter is Mountain Dew going to attract attention in this market? And is this a smart move by PepsiCo and Boston Beer company?

Maxx Chatsko  46:21

It is a crowded market Dan and I don’t know for Pepsi or does it make sense if they even capture like a few percent? Is that worth it for them? I don’t know what Mountain Dew has been doing lately. I’ve never had it. When I was a kid remember like I mean it was like Mountain Dew Red came out and then a  Mountain Dew Blue or something like that was fun because like turned your tongue blue and red. I don’t know about the hard seltzer stuff but does it make sense if they capture like 3% of the market or 5%

Dan Kline  46:51

Well I wonder if it undermines their brand. I know Mountain Dew has been pushed in recent years as a gamer brand. But the core of its marketing was always was always like sort of an athletic like a a counterculture skateboarding was a big part of their iconography and imagery. So I do wonder if is that a positive that that audience wants an alcoholic beverage or are they sort of is this might be overreach and I wonder. Look, I think the hard seltzer market is here to stay unlike say like the wine cooler market in the 80’s when Maxx certainly wasn’t around to do that. But that was a really big thing. The akin to this.

But I do think there’s got to be some contraction because I went to our to our liquor store. We have a really nice ABC Liquors near us in the in Davenport actually think that one’s in Kissimmee. But it’s about a mile from us. And I went in and I was buying some housewarming gifts for a friend who bought a house in the area. And I’m like, Yeah, I should throw some hard seltzer or something like in my fridge, or in my owner’s closet for when I’m here. if the bars closed at the pool, have a have a have a drink available. And there were so many choices. I didn’t buy anything. It was overwhelming. It was like, like, I’d have three things in my cart. And then like, well, maybe I want to premix Margarita, maybe I want a hard iced tea, like, Oh, wait, that is too. It was too much.

So I like this idea. I think anything you can do to stand out is probably good. I do think there’s a small percentage of the Mountain Dew core audience that’s not going to like this. But I don’t think that matters. I think if they like Mountain Dew, they’re not going to stop drinking it for that reason. So yeah, I think anything you could do to get attention for your hard seltzer or whatever exactly this beverage is. This alcoholic soda. I think it’s not the worst idea. I don’t think it’s a game changer. But I do think it is a smart niche partnership. Maxx, your thoughts here?

Maxx Chatsko  48:38

Yeah, I mean, there’s nothing to lose the Mountain Dew brand, if you can leverage that or reinvigorated somehow. And also, I mean, I went to college not that long ago. I mean, this could be big around like weekend parties and things and like that demographic, I don’t know, maybe it’s trending on Reddit, Mountain Dew seltzers or whatever. you never know, maybe they could, get a couple percent 5% 10% of the market. Maybe that does make sense. Why not?

Dan Kline  49:02

When I was in college, there was still beer that came in a white can that just said beer. And it was pretty common that if you went to a Friday or Saturday night, and I wasn’t the guy going to these things, for the most part, if you went to a Friday or Saturday night beer event, you were just handed a plastic cup and you never knew what type of beer you were drinking. I think there is much more of a beer culture now. And I do think that transcends there are winners here. I will say that anecdotally having been on a lot of cruises, Corona, their light beer and they’re hard seltzer and truly and White Claw have really become market leaders here. But we saw with Boston Beer company, that they had a big drop in sales here. So this is going to be very volatile. There’s always going to be interest in what’s new. Coca Cola has experimented with that alcoholic Topo Chico, I don’t even

Maxx Chatsko  49:59

We appeared to have lost Dan the man Kline. Oh, there he is. But yeah, there’s gonna be other things coming to it’s not just seltzers. I mean, if we think a few years out, there’s gonna be like cannabinoid infused beverages. They have to make cannabinoid, cannabinoids that are standardized and pure enough for these big brands to want to, pony up and like commit to that in their drinks and launch a brand nationally, because they need that consistency across a product. You can’t get that with plants, you can get that with some synthetic biology innovations as well. But yeah, I mean, like you said, this could be a trend that only is valid for a few years, and then maybe a dip. So the next big thing comes up. But it’ll be interesting to see nonetheless,

Dan Kline  50:39

I’ll be in Las Vegas from Sunday through Thursday. And I’ll point out that while I did not spend a lot of time dwelling on them. The various cannabis dispensaries do have various

Maxx Chatsko  50:54

Dan is cutting in and out. So I think we’re just going to wait for him to come back. Oh there he is. Want to hit our finisher now?

Dan Kline  51:01

Yeah, we’re having internet troubles, because Maxx has gone out a few times too. So why don’t we hit our finisher and get to the end of the show here. “Does fear of inflation slash rising prices for consumer goods impact how you invest in the stock market”? Overwhelmingly, 60% of you said it No, I agree with this. I think there might be a couple of companies that are positives because of it. Maybe I would look at some of the homebuilders, though I think the commodity prices make that less attractive. But I do think that it’s something you keep an eye on. It’s something that creates a lot of short term noise. But Maxx it doesn’t impact me at all in the in the short or long term

Maxx Chatsko  51:38

Doesn’t impact me I invest mostly in drug developers. So inflation, deflation, stagnation, stagflation. It doesn’t matter to drug developers at all. It might matter for some energy companies that don’t have as much pricing power, like electric utilities or things like that. But for the most part no, absolutely not doesn’t change how I view and if you take a long term view really doesn’t matter that much at all.

Dan Kline  51:59

I have no idea what’s going on with the internet. We lost internet last night. There’s crazy weather here. So I’m gonna say thanks to JT Street thanks to Sam Bailey. For Maxx Chatsko, I am Dan Kline. If you want to get in touch with us. That is info@7investing.com. If you want to watch us on Twitter Spaces later, that is @7investing, please set a reminder and tell your friends.

Thanks for watching. We’ll see you on Friday.

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