Hey.

There. It's financial expert, Nicole Lappin. And I'm Magnify, your AI Investing Assistant. We're working together on this new podcast, Money Assistant, where we talk to people about their money problems and then help them create an actionable plan to solve them. If we take a look at how that will impact future Paola, she will be dead free in under six years and have a million dollars in retirement. How does that sound? Wait, what? Meet Mom and Assistant, premiering September fourth, wherever you get your.

Favorite podcasts. I'm Nicole.

Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. I've been called many things in life. Not all of them are great. But one of the favorite nicknames I've been given is the only financial expert you don't need a dictionary to understand. Because the financial world has a language problem. There is so much jargon. And if you try to look up the definition for that jargony term, there is even more jargon in the definition. And then you have to look up those words, and it becomes a nesting doll of jargon. So to decode some of the terms that you've heard most in the headlines lately, I'm bringing back on Josh Brown, aka the reformed broker. Josh and I go way back to CNBC Days, and he is one of the smartest and coolest financial advisors out there. I invited Josh back on the show so we could unpack some of the terms we get the most questions about together. And no, of course, you want me to dictionary to follow along. Preamble is over. Foreplay is over. Let's fucking go. Josh Brown, aka the reform to broker, one of my favorite guys on Wall Street.

Welcome back to Money Rehab.

So happy to be here, Nicole. How are you?

I'm doing better now that I see you.

And your flower wall. I have a team. They're called New York backdrops, and they decorate some of the biggest and best restaurants and hotels and weddings all over New York City. They come in here and give me a refresh every season. This is what summer looks like.

Okay, all right. What summer looks like for me, my Hot Girl Summer is nerd girl summer. I get so many DMs, lips that are not the fun, sexy kind. They're just like, Can you decode this jargon of Wall Street? And as we both know, there is so much jargon.

We like our jargon. It makes us sound so smart.

So wicked smart. I think people hide behind the jargon, right? Even the not-so-smart folks.

I would agree with that too.

I'd love to just go through some of the most common ones I get asked about, and we can just decode them in real English. You do speak English, right?

With a Long Island accent, but still, it is English.

I'm here for it. All right, so Alpha is the one I.

Get a lot. This one's really simple. So people use the term Alpha to describe the excess returns that they get versus the plain vanilla stock.

Market return. Like a benchmark. So the stock market, the S&P 500 would be like the benchmark return.

Most professional investors who manage funds compare themselves to the S&P 500, which is the index that any investor can just buy for free. If the S&P 500 is up 10 % year to date right now, which it is, and Nicole, your mutual fund or hedge fund is up 13 %, then the alpha would be that three % difference. Very simple, very cut and dry.

Okay, so people who work with fund managers are looking for the most alpha possible. Otherwise, they can just go on their brokerage app and buy S&P 500 index funds.

Yeah, so they're looking for alpha, maybe not necessarily the most alpha possible because as we both know, and you tell your listeners all the time, the more reward or return you want, the more risk you're going to have to take. But I do think that for an investor paying a mutual fund manager 100 basis points or 1 %, or paying a hedge fund manager two and two % management fee and 20 % of the profits, yes, there is that expectation that the manager will be able to generate alpha above what the regular market would have given them. Otherwise, why.

Bother paying? Yeah, so justifying those costs. That's right. This dovetails with another one that I get. Often they're like together, Alpha and beta. What is Beta?

Beta is just a representation of the market return itself. If it's the bond market, then people would be looking at an index called the Barclays aggregate bond market, which basically looks at all of the publicly traded US Treasury bonds and corporate bonds. It's an index. What did the index do this year? That's the beta. The S&P 500's return is what we would say is the stock market's beta. Beta, just very simply is what the index return is. Alpha should be above beta, meaning there should be excess returns if it's an active manager. Of course, most managers cannot generate alpha every year. It's not reliable. If it were, then everybody would invest with that manager. There'd be no questions asked. So most active managers who are running a fund, they have some years where they can generate alpha above the regular beta that the market gives you, but almost none of them can do it on a consistent basis. That's the game that we all are playing on Wall Street.

This feels like we're in sorority, pan-howe system.

Yeah. It's important, though, when you are being pitched an investment by someone who looks and sounds like me that when they start using Greek letters, you stop them dead in their tracks and say, Speak to me in my native tongue and tell me what you are actually saying because I may not be Wall Street smart, but I'm street smart, and I know when someone is trying to confuse me. So never be shy about saying, I don't know what-What do you mean by Delta. Start over and let's speak English.

I love that because people say it sounds like Greek to me, and there is a lot of actual Greek.

Yeah. And listen, it's not these things haven't been invented to confuse people. You have to understand that the underpinnings of modern investment management are mathematics. These terms originate from somewhere with the right intentions, and then they get bastardized by people who are trying to sell something. I was.

Just going to say bastardized.

Yes, that's right. The terms themselves are not bad. The way that they are used when retail investors are being pitched can be misleading.

Yeah, to make it seem like they're smarter than you are because they have all this jargon arbitrage.

Arbitrage is an investment strategy where usually a hedge fund will try to benefit from the difference between two prices that eventually are supposed to meet. The best example I can give you is a merger. Let's say hypothetically, LappinCorp is going to buy downtown Josh Brown Industries, and LappinCorp is willing to pay $58 a share for DTJB. My share price, though, is not trading at 58 on that news, it's trading at 56. If you believe as an investor that the merger is going to close, meaning the FTC doesn't have a problem with it and there's no regulatory concerns and the money will be raised, then you would buy DTJB at 56, you would sell short, lap and corp at 58. As the amounts between 56 and 58 get closer together and the deal closes, you would profit on that two-point spread in between. That is called merger arbitrage. Some of the largest, most famous hedge funds have made a lot of money on those bets, and they usually pay off. When they don't pay off, it's because something happens that wrecks the deal. We recently had a situation where Microsoft was trying to acquire Activision, which is everyone's favorite video game maker, and the regulators had a problem with that merger going through.

The people who were betting that it would close lost a lot of money because when that news came out, Microsoft shares rallied higher because they weren't going to spend all this money on Activision, and Activision shares fell because they were no longer getting acquired. So that spread blew out, as they say. And if you were short Microsoft, you lost there. And if you were long Activision, you lost there. So it does happen where an arbitrage trade doesn't work out, and that's a somewhat recent example.

And it's not just with mergers, too.

No, just one example.

It's used colloquially on Wall Street, I suppose, or in financial circles around exploiting some differential.

That's a great point, Nicole.

Absolutely. You can use it if you're buying something like an asset in London, you're selling it in New York, but also just general business terms for how to take advantage of some price differential. Yeah.

There are very few edges left on Wall Street, but sometimes you'll have an edge where you will see, for example, that a specific oil stock tends to trade in a correlation with the price of oil. Then for some reason, there is this really wide differential. You would go in there as an investor and you would say, I'm going to arbe out that differential because I think it's going to, here's another jargony term, mean revert or return back to its normal state. You'll have investors trying to arbe out the difference between a stock and a commodity or two different stocks that are trading at very wide valuation spread. They'll say, I'm going to arbe out this versus that. Yeah, it has become a term that it's become like a colloquialism when you think you have some an edge or you think some historic relationship is about to snap into place that's currently out of whack.

Yeah, arm out. I got the cool.

Kids say. I'm about to arm somebody out right after this recording.

I wouldn't put it past you. All right, over the counter, stocks. So over-the-counter at a pharmacy, you can buy the weaker... What is it? Pseudofed? And then you have to get the good stuff behind the counter.

So over-the-counter is a term that's fallen out of use because it's become less relevant. There are so many exchanges that you could trade markets on. Most stocks are listed somewhere. But the historical term over the counter was in reference to a stock, usually a security that is not listed on an exchange. One really prominent example of that would be Nestlé. Nestlé is a European mega, gigantic corporation. They don't list on a regulated US exchange here in New York. They're not on the Nasdaq, they're not on the New York Stock Exchange. They've deliberately chosen not to be because they don't want to pay the cost or satisfy the listing requirements. That stock does trade here. You would buy it on what's called the pink sheets. The tip-off that a stock is OTC or over-the-counter is that it will have five letters and a ticker symbol, and usually they'll end with an F or a Y. There are very large corporations that are from another country, for example, that trade over the counter only in the United States. It also refers to penny stocks. So penny stocks, either the company is too small or they're not filing the proper regulatory documents, so they can't be listed by Nasdaq or by the New York Stock Exchange, but they still can trade over the counter.

I think for your audience, and frankly, most of my audience, this is an area that they should not be involved with at all. If a stock does not meet the requirements to be listed on the New York or the Nasdaq, you probably don't want to be trading it.

Right, because it's important to remember that there's not a lot of trades that happen. You need a bid and an ask.

Yeah, it's highly illiquid. The less liquid a stock, the more shenanragons can take place between buyers and sellers. There's enough risk buying listed companies. Nobody needs more risk and nobody needs illiquidity risk. If you're investing in equities, they should be liquid stocks.

Right. Ain't nobody have time for that. If you bought Microsoft today and you want to sell Microsoft later today or tomorrow, no problemo. An OTC thing?

Not so much. Yeah, it's trillions of dollars washing through stocks like Microsoft every day. The bid-ask spread. So let's get into that really quickly. The bid-ask spread on Microsoft is a penny, meaning the bid, what somebody wants to buy it for is just hypothetically, let's say it's 100, and the ask or what the seller is willing to sell it for is $100.01. There's not much of a spread in between because there are so many buyers, there are so many sellers. That's a stock that's highly liquid. That's, I think, what an investor should be concerned with. You don't want to buy something where it barely ever trades and you're forced to accept a price that's way far away from the last price traded.

As we were talking, you said liquidity.

It refers to the breadth and depth of a given market. That could be the market of shares in one particular stock, or it could be an entire commodity or stock or bond market. But just liquidity is how much buying and selling is taking place in a given day, not just in share amounts, but in dollar amounts, and also how many regular participants there are in a given market. How many market makers? How many people are there buying and selling that particular issue for a living? Obviously, the larger stocks will have more liquidity. Generally speaking, smaller stocks will have less liquidity. Can be affected by how many analysts are covering a stock, can be affected by how many institutions are in a stock, whether or not that stock is listed in an index, which means that there's an ETF out there ready to buy it or sell it at all times. So liquidity usually is also going to be a function of size.

I think of it like an ice cube, like how quickly can it melt? Right? That's how you get your liquid. It's not terrible. It's not terrible. It's not terrible. Okay. A house is an illiquid asset, right? Because it takes a while to melt that ice cube to sell it.

Good.

Point. It's not cash. It can't be like, or same, same as cash, like Microsoft stock.

Yeah. And houses trade very infrequently. So Microsoft, you have a stock price every nanosecond, there's a trade going off. A typical house doesn't move even inside of a decade. You have a price from 1997, and then you have a price in 2023. There's been no trading in between, and those prices will be wildly separated by time. That's a good analog for... Although very few stocks don't trade inside of one day. But yes, the principle is definitely the same.

Or if you have a founder who says they have a gazillion dollar valuation or whatever, and they have all this private equity, not private equity as in they have a private equity firm, but it's equity in a company that's not publicly listed and therefore not liquid, right? Because nobody wants your maybe dog shit equity in your tech company.

Yeah. One of the great stories I've told to illustrate the concept, I knew a guy who was trading bonds at J. P. Morgan a million years ago. One of the ways that Jamie Diamond was early, the CEO of J. P. Morgan, one of the ways in which he was early to figure out that there was a potential crisis, financial crisis brewing, is that he walked up and down the floors and talked to traders and asked them, What is the price of that mortgage bond? What is the price of this? What is the price of that? Of course, the trader would point to the screen and say, Look, there's the price. He would say, Okay, sell 10 %. Then the trader would actually try to sell something and test the liquidity of the market. It turned out the bids, the buyers were significantly below the prices that were being published on the screen.

Right. Because something is only as valuable as someone's going to pay for it.

Yeah. Look, my dad said I told him how much I was worth in comic books when I was 11 years old, and he said, Okay, find a buyer. Prove it. I went to the comic book store in my town, and how much are you willing to offer me? I have Alpha Force issues 1-12, mint condition. Look, they're in plastic, never read, never touched, never breathed on. He said, That's nice.

Found sand.

I had a book this thick. It was like a telephone book of all the latest published values of my issues of comics. He said, That's great that it says it in the book. Here's what I'm going to offer you. That was a really good lesson in price versus liquidity. Oftentimes, it's not until you go to sell something or buy something that you really find out what it's worth.

Yes, such a good point. Also, we could double-click on phone book, but it would just make us look way old. Hold onto your wallets, money rehab will be right back. Now, for some more money rehab. All right, so now that we've talked about liquidity, let's double-click on liquidity crunch because that's something that's been in the headlines lately.

Well, it's exactly what it sounds like. A liquidity crunch is when a lot of people want to transact on one side of the market and there's nobody else on the other side of the market. We're actually going through a liquidity crunch right now in slow motion with commercial real estate, specifically office real estate. You've got tons of owners and even banks that have portfolios of office buildings. There are no buyers on the other side. No one in their right mind is interested in even an A property, what you would call an A building, like the brand new building they built in Midtown 1, Vanderbilt. I think they're at 95% occupancy. They're doing fine. They have all the best tenants. They have a brand new beautiful, lead-certified skyscraper. That's not what we're talking about. We're talking about buildings that were built in the '60s and the '70s. They have bad sight lines. They have concrete pillars running through the middle of the floors. They have small windows. There is no interest in that real estate at all. A lot of these properties need to refinance. The amount that it will cost them to refinance has now gone up a lot with interest rates.

As a result, they are looking to sell who in their right mind is a buyer. That market has to clear. A market clears when there's just such ridiculously low prices that somebody says, Okay, this is a piece of shit, but at this price, I'm willing to take the risk that it might not be a piece of shit at some point in the future. We're not there yet. You have a liquidity crunch in the office, real estate market, specifically parts of Manhattan and San Francisco. San Francisco, yeah.

I don't think enough people are talking about this, honestly. I think we're really fucked with commercial real estate.

Well, we're not, but a lot of people are. The question is, how big is the impact on the overall economy and when will it be felt? One of the things that's peculiar about office real estate is that it moves at a glacial pace because it is very hard to get an owner out of their building, even once they stop paying their bills. Everything's a workout. Everything's, All right, let's sit down. Let's figure it out. It's one of these asset classes where everyone involved has an incentive to pretend. Pretend it's not as bad. Pretend the rents aren't going down. Pretend there's going to be better demand a year from now than there is today. The banks don't want to end up with these buildings that they've lent money to.

Well, that's where we get fucked, I think. You and I don't have a bunch of commercial buildings, unless I don't know something about you, Josh. We're no Steve Ross or whatever with a bunch of buildings in New.

York, but- I own a shed in my backyard. I own a gardening shed. Excellent. Let me know if I can quote you a price.

On that. I can't wait. $5. But what happens is when they get screwed, it trickles through the credit that they're taking out of the banks, right? Yes. That's ultimately how we, you and I, the rest of normal people get fucked.

The banks don't want to own these properties. So it's extend and pretend, extend and pretend. Actually, a friend of mine in commercial real estate on the investment side, so not a landlord, but somebody that lends money to landlords, said that the new mantra is survive till 25. They all know they're fucked next year. They all know that there are all these bonds and financing issues that are going to come up for refinance and it's going to be ugly. They all know that five-day-a-week thing is not coming back and companies are downsizing, and they still want space, they just maybe want less or they want to pay a better price when they re-up, etc. It's going to be ugly and it could be ugly for years. But there's this prevailing idea amongst the commercial real estate community, if you can just survive till 25, something will.

Get better. Hold on for one more day. That's right. That's right. When you talk about amortization, I mean, that's a term that people are used to if they have a mortgage, right? So in case you don't, what is amortization? It's also been used colloquially too.

Yeah, it's spreading out cost over a period of time as opposed to absorbing it all at once. You can amortize payments over the life of something, whether it's like a loan or whatever the case may be. Yeah, for most people, they're going to come into contact with this term when they're talking about a mortgage.

If I owe you, I guess, just for easy math, $1,200 bucks. Amortizing would be $100 a month.

Yeah. You have to factor in some interest payment.

No, you're not charging me interest.

Because you love me. If I'm the lender, I'm happy if you want to amortize because that becomes consistent cash flow for me that I can model and I can base my own budgeting on. Also, I can say, Okay, no problem. We'll amortize this out over 24 months or 10 years. Here is the additional cost that I'm going to add on because I'm letting you.

Amortize this. You're not just a nice guy. Yeah, but you are. I am. But lenders aren't or they're just not in for it for funsies.

It's a business. Of course. If you're a borrower, you have to make that decision. What's in my best interest? Do I give up all of my liquid capital right now and not pay the higher interest associated with an amortization? Or do I spread my payments out because I'd rather have my liquidity today because maybe I can invest that money and make more than what my payments will be? Nothing is in absolute terms. One thing for your audience is that financial decisions are not made in a vacuum. It's always trade-offs. It's this versus that, not this or not this. And so once you start thinking in those terms, it helps you answer questions of which option should.

I pick? Yeah. And when you think about comparing interest rates, I guess that would be a colloquial way to talk about arbitrage, like comparing what you're getting versus what.

You're owing. Absolutely. Absolutely.

Can you talk through a basic example of that? If I'm paying four % in student loans and I'm making seven % in my index fund?

Yeah. Look, I don't recommend that most people try to use the stock market to pay off their bills that they already know that they're going to incur, especially because most people's debt takes the form of credit card debt. Statistically, if you have debt, you probably have credit card debt. The rates on credit card debt really have nothing to do with the Fed or interest rate. They just go up. I think they're 23-.

Well, it depends on your credit score, but yeah.

It's insane. It depends on your credit score more than it depends on what the central bank is doing. With that being said, if you have a stock that you're really excited about, let's say these days, NVIDIA, the idea that you're going to carry $20,000 in credit card debt, but you're going to put $5,000 into Invidea, banking on the fact that it can go up five-fold, and you can make 25,000, and then you could pay your credit card debt, and you'll have that excess return. That's the bet that people should not be making. We always tell people from a personal finance perspective, take care of your high-cost debt first before you worry about generating a return on your money. It's unlikely that your stock market performance is going to outrun something like a 23 % credit card loan.

But when somebody talks about rate arbitrage, that's what they're doing. They're comparing interest rates of their assets and their liabilities.

Corporations do this all the time. But corporations, Fortune 500 companies, they spent the last three years borrowing at two and.

Three %. Go, go, days.

Right. That was a really smart bet, which was to say, let's arbitrage between what it's going to cost us to raise a billion dollars in the debt market, just hypothetically, and almost every other option to spend money, invest money looked better and just pay the two %. You had companies do that to fund stock buybacks. You had companies do that to fund acquisitions, R&D, capital expenditure, billion. That is not the same calculation now. Money actually has a cost attached to it, and it's 5, 6, 7, 8 %. Now all of a sudden, some of these projects that looked like a smart bet when interest rates were zero, now all of a sudden it's a much tougher decision, and that's arbitrage.

When you talked about the central banks, you talked about monetary policy. Something that I hear get screwed up a lot in financial blogs or news or whatever is like monetary versus fiscal policy. People use that interchangeably, but it's not.

The same. Right. Fiscal policy is what the government decides, and monetary policy is what the Federal Reserve decides. The Federal Reserve is quasi-government, but it is not controlled by Congress or the White House. It confuses people. But the easiest way to think about this is the Federal Reserve is independent. It's got a board and it's got a chairman. The chairman is appointed by the president. The board members are appointed by the president. But presidents change. In fact, presidents change more often than Fed board appointees do. It looks a little bit more like the Supreme Court, although their tenure is not for life. But so there is some independence there. Yes, it's government, but it's not controlled necessarily by Congress. The Federal Reserve conducts monetary policy. What they're basically doing is controlling the cost of money for borrowers like banks and businesses, and the availability of money in the form of just how many dollars are out there in supply. That is monetary policy. Fiscal policy is what we just witnessed with the debt ceiling debate. That is the House and the Senate making decisions about the federal budget.

Taxing, spending. Yeah.

Yeah, sometimes they want to stimulate the economy because we're in a pandemic and they want to conduct fiscal policy that supports growth. Sometimes they want to pull the reins back because they want to simultaneously cut taxes. That's fiscal policy. One of the most astonishing things about the last few years is the way in which fiscal and monetary policy were conducted hand and glove to get us through the pandemic. The chairman of the Federal Reserve, Jay Powell, worked very closely with Steve Minuchin, who was involved with fiscal policy from the White House to the Treasury Secretary. They worked very closely with Congress, and they passed a whole bunch of stimulus plans. It was monetary and fiscal policy working together in an emergency.

In this conversation, you hear Fiat currency a lot. That's not like a little car.

Yeah, Fiat is a word primarily used by douchebags.

Tell me how you really feel, Josh.

It's a way for them to promote crypto and/or talk about the US dollar. But Fiat currency is basically currency that's not backed by any hard asset. Back in the prehistoric times, most currencies were backed by physical gold, like actual. There was a gold bar in place for every quantity of dollars. We got away from that type of currency. The pejorative term, it's mostly used pejoratively, is to say it's Fiat currency. But again, almost nobody you will meet in your normal life actually uses that term. It's mostly used by people who are selling gold or selling Bitcoin and are trying to convince you that the dollar is on the verge of ruin. Maybe they'll be right, just hasn't happened yet.

All right, futures.

Futures are just another way of saying contracts that trade based on people's beliefs about the prices of commodities. The big futures exchange is in Chicago. There are two of them. Basically, that whole world came about because farmers were taking a lot of risk in what they were planting. They didn't know what the prices would be when they harvested their crop and brought it to market. If you were growing corn, or you were growing tobacco, or you were raising hogs and cattle, you're planting in February, in March, in April, you have no idea what it's going to be worth come September, October. So futures contracts allowed the agriculture economy to hedge their risk or to lock in prices that might not have been the best possible prices, but were good enough that it offset the cost of doing the actual planting. Then, of course, you had large corporations who were big users of commodities like coal, and iron, and large food companies that had sugar costs and apparel companies that had cotton costs, and they would then use the futures market to offset their risk because, remember, they have to purchase this stuff in order to turn out finished goods like a sweater or a building.

The futures market is where people can either hedge or speculate on where they think the price of things will be six months from now, three days from now, two years from now. It's a very important part of not just trading and investing, but how business gets done in this world. Now, of course, it's not just commodities, it's not just agriculture, or precious metals, or oil and energy come out of these now. You have people trading bond futures. They want to know what the treasury price will be. You have people trading cryptocurrency futures because they're insane. You have people basically looking for ways to either profit on their opinions or hedge the risks that they're forced to take in the normal course of business. It's a very large market, it's very important to global and local economies.

Fun fact. Did you know that when I was 18, I started on the floor of the Chicago Merck, and I didn't know anything at the time. I was like, There's pork belly. This shit is traded? So it's like, is this... I thought I was getting punked.

Yeah. Somebody else just told me that. Oh, my friend Joe Schlesinger, her father was a commodities trader.

I love her. Yes.

She's awesome. She started as an options trader and didn't go out. The story is she wasn't physically big enough to trade commodities in Chicago because back then it was open, outcry pits. They were hired.

Hey there. It's financial expert, Nicole Lappin. I'm Magnify, your AI Investing Assistant. We're working together on this new podcast, Money Assistant, where we talk to people about their money problems and then help them create an actionable plan to solve them. If we take a look at how that will impact future Paola, she will be dead free in under six years and have a million dollars in retirement. How does that sound? Wait, what? Meet Money Assistant, premiering September fourth, wherever you got your.

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