When it comes to making financial decisions, we often think of logic and reason. After all, money is about numbers, calculations, and profits. We like to believe that we make logical choices based on the information we have available, but that’s not always the case.
Emotions, not logic, often dictate our decisions, and this is true for corporations as well. This is because they are run by people, not robots, and humans have a natural inclination towards social validation and fear of exclusion.
This fear of being left out leads to a phenomenon where corporations follow their competitors’ actions even if they don’t make logical sense.
In today’s episode, Dylan dives into the inverted yield curve, layoffs and their implications for the market, corporate capital structures, and the emotional thread that ties it all together.
- [01:22] Why money is emotional
- [03:06] What is an inverted yield curve?
- [07:33] How corporate layoffs can signal a recession
- [09:58] Why interest rates and company debt aren’t related
- [13:25] Why we make emotional decisions
- [20:37] How social media optimizes validation through dopamine hits
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Happy Friday, everybody. If you are just joining us for the first time on Fiscally Savage, on Fridays, we take something in the news and go a few steps deeper. And today, like this whole week has been just an absolute glut of interesting news, and so it was kind of hard to pick as to what I was gonna talk about. Do I wanna talk about the jobs report? Do I wanna talk about layoffs? Do I wanna talk about interest rates? Do I wanna talk about Trump? What do I wanna talk about? But then it hit me that when I’m looking at all of this — and part of my job on Fiscally Savage is to read the news so you don’t have to, which means I find myself just kind of in this cacophony of headlines all competing for my attention. And I think that this relates to one of the reasons that I love finances so much.
[00:01:08] If we go all the way back to my undergrad, there was this moment in time where I was taking a business class because the stock market really fascinated me. And I was at the time very resistant to the idea of going into business. I wanted to be more creative and insightful and blah, blah, blah, blah. So I was doing this computer science degree. I had a second major in history. But I took this business class and they were talking about how to assess individual stocks in the stock market and pick them. And one of the questions I asked the professor was, well, what happens with the total market? He paraphrased a quote from a movie that basically goes with the idea that an individual person is smart, but people are stupid. And what he means by that is that the individual person might be able to pick a stock, but when put in a bigger group of people, the zeitgeist of that group is gonna override it. That is to say that on a short term basis, things like the stock market are highly emotional. And it’s that type of thread that really just fascinates me because at the core of so much of our money stories, the emotions are what are driving the car. Money is emotional. I’ve made this claim on the show. I feel like I’ve made a very strong case for my point. And more to the point, my coaching clients come to me to work on their emotional money stories, and my success and track record with my clients speaks for itself money. Money is emotional and those emotions are driving the car. So when you’re seeing different phenomenons out in the world, I think there’s a temptation for us to believe that somebody’s actually making rational decisions when the terrifying reality is they’re really not.
[00:02:43] And so as I was scrolling through the headlines, it kind of occurs to me that there’s this emotional thread that’s woven through things like the bond yields, corporate capital structures, therapy, and even doomscrolling. And so today on the show, I’m gonna bring all four of those things together with one emotional thread. So buckle up, buttercups, ’cause we’re gonna go for a ride.
[00:03:05] Let’s start with the inverted yield curve, which you might have seen all over the news. And while they’re late to the train, NPR has put out a sensationalist headline that the inverted yield curve is screaming for recession. That’s an energetic headline, but the question you might have had is what the fuck’s an inverted yield curve? So here’s how an inverted yield curve works: a yield curve is literally just a graph of interest rates over time. And you typically see them presented different types of debt instruments are presented on the same graph, and so you’ll have things like the 10-Year Treasury Bond, which is kind of like the bellwether litmus test for most of the health of the bond market. Where things are going is the 10-Year Treasury Bond, but they sell them in shorter denominations. There’s three-month bills, there’s on-eyear bills, and so on and so forth, and they all have different interest rates. Those interest rates are set when the United States government is auctioning off those bills. But you might say, well, hold on, Dylan. We have this debt ceiling thing. The government’s not issuing debt. And you’d be right. But that doesn’t mean that we’re not auctioning these things off and selling them on the markets. Because remember part of what got Silvergate, Silicon Valley, and Signature in trouble was that the price of their bonds, the government bonds they were holding as part of their backstop or their capital reserves, was decreasing as interest rates rose. Now, those banks have been liquidated, and now all those bonds are for sale, which means that the interest rates are still being set. And when those sales of those bonds occur, the feeling of and the risk appetite of the people buying them will set those interest rates. What you would expect though is that I’m gonna get a lower interest rate for a shorter period of time. That is to say, if I tell somebody, Hey, I’m gonna give you this money, but I want it back in a year, I can expect one interest rate. But if I give them money and say, Hey, I want this back in 10 years, they’re gonna want a higher interest rate to compensate for the uncertainty over that period of time.
[00:05:08] Side note: this is what makes the 30-year fixed mortgage in the United States an absolute weird thing in the world because the only way you have interest rates on mortgages as low as they are in this country is because they’re backstopped by the federal government. Just an interesting note to just throw out there because if you’ve been thinking about the comparison between long-term interest rates are, you’d expect mortgage rates to be much, much higher. Okay. End of side note.
[00:05:31] So in a typical healthy bond market, what you should see are lower interest rates on shorter bills, and that would reflect that what the investor’s looking for is a better return on their investment the longer they lock up their money. When the yield curve inverts, what it means is shorter bills are actually charging higher interest rate than longer term ones. The reason this happens is when investors are spooked, they’re going to run to safety. They don’t want the short-term stuff because they think in the short term, things are gonna be crazy. But they want the long-term stuff because they think that’s where — the safety’s not in the present. It’s in the future. And so when investors are spooked, what happens is they clamor in to buy things like the 10-Year Bond, and that of course will drive up the price because they want them, so they’re willing to pay more for them, which of course would then drive down the rate. And this makes complete total sense. I mean, we’re like, what, two months away from US default? And as it stands right now, the Republicans are demanding that Biden come to the table to negotiate something that the Republicans themselves haven’t even put out yet while Biden continues to just sit there and pretend as if none of this is happening. There are no innocents in politics. There are only just different types of assholes.
[00:06:41] Anyway. So when we’re looking at this inverted yield curve, one of the things to note is that what you’re seeing is a sudden flight to safety. And this inverted yield curve is a fairly decent predictor of recessions. There is a group of people who will say that every recession was predicted by an inverted yield curve. And there are a group of people who will say, well, it’s about 50/50. The devil’s in the details here, and I don’t wanna get into it too deeply. But let’s just say that on a long-enough timeline, everything’s going to occur, and so whether or not the inverted yield curve is predictable of a recession as some people want it to be is really anyone’s guess. But for my money, it’s better than most. But what it’s really showing you is that people are fleeing to safety in the markets. And that should be interesting because humans are hurt animals, which means something spooked them. And when you look around, you see things like layoffs. And I’ve made the point on the show before, well, these corporate layoffs make very little sense considering the companies doing the layoffs are still making money hand over fist. So why are they doing it? Well, they’re doing it because they expect a recession. And what happened is one company did it and then the other company went, well, they must know something I don’t, so they did it. And this creates this cascade effect. Eventually, investors go, oh my God, look at these layoffs. Well, we better flee to safety. So they go in the bond market, they buy the safest of the safe, the 10-Year Note, and it drives the prices up and the yields down, thus inverting the yield curve. But if you follow the story, none of these companies were in trouble. Like if you go back three months ago, all these companies were wildly profitable. They were doing some of the best business they’ve ever done. Corporate profits are at a 50-year high and sales and volume and consumer sentiment and the job market were all really strong. None of those are recession indicators. And so what I’m pointing out to you is that this is entirely possible to cause a recession by just talking about a recession enough, and that’s probably what you’re seeing with inverted yield curves. But you don’t have to take my word for it. You can just look at things like corporate capital structures.
[00:08:46] When I was doing my MBA, I had a professor who taught us all about the weighted average cost of capital or WACC. And he started off class by standing up in front of everybody and informing us that in his entire career — both as an academic, as an investment banker, and as a regulator within the SEC — that he had determined that it was in no one’s interest for financial statements to ever be stated correctly. It wasn’t good for the investor who wants to use those statements to be able to jack the price of the stock. It wasn’t good for the consumer because it meant that they were going to be milked even more if they were stated appropriately. It wasn’t good for the auditor because the auditors, if they sign off on it, then everyone’s happy and that’s why they get paid, and so on and so forth. But his point to us was it makes a lot of sense when you kinda look at the Kool-Aid around the markets and saying, well, of course we want all the financial statements to be adequately stated, and that’s in everyone’s best interest. And his point was it isn’t because if you actually look at the stated preference versus the revealed preference — so what they say versus what they do — it’s a completely different thing. And this applies to the weighted cost of capital because corporate structures, their capital structures, are basically a balance between equity and debt. What is equity? Equity is stocks, and so that’s investors. And those investors may or may not get a dividend or a return on their stock. But the other side, debt, those are also investors who bought bonds who are guaranteed a payment on those bonds at a regular interval at a set rate. And so if interest rates are really low or high, you would expect the capital structure — that is, the balance between equity and debt — to change based upon the interest rate for what’s financially advantageous for a company.
[00:10:28] Now, you might think to yourself, well, hold on a second. Then that would mean that debt would be higher if we had lower interest rates because the cost of that money is so much lower than a dividend would be. And you would be right. And so there’s an entire school of people who will sit down and say, well, no. This is the way to go. If interest rates are low, load up and lever up on bonds and debt, all you corporations, and then do cool stuff like buy new machines, train your staff, and just carve out a niche in the market with all that financial firepower. And so that camp will expect to see debt versus equity increase when there’s low interest rates. There’s another school of thought on here though because it turns out that you and I, when we pay our interest rates to our bond holders, which are typically our credit cards and mortgages and car loans and student loans, we don’t typically get to deduct the interest on that, but corporations always do because it’s an expense on their income statement. And so there’s a totally another group that says, no, no, hold on. A higher rate environment might be better for us because that provides a tax shield. It’s a tax deduction to us, and who likes paying their taxes? So we would expect debt to rise when interest rates are higher. And you might notice that both of those things can exist.
[00:11:44] And so during that class, we had to sit down with all the different equations and balance out all the different factors to determine what is the optimum capital structure for a company given a certain set of conditions. That is to say, ladies and gentlemen, there is a precise mathematical way to figure out what is the financially optimal capital structure given a certain interest rate environment for companies. That is to say very simply, there’s a right answer here. Now, the question you should be asking yourself though, do corporations follow this? If you’re a publicly traded company, it’s all public knowledge. Like me, Dylan, I could pull the 10-Ks and look at everything and run the equation and figure out what the optimal capital structure would be. So I would expect all of these capitalistic, market-driven, publicly traded companies on the US stock exchange to be optimized for the most financial advantage, right, ’cause that’s what we see, right? And the answer is the fuck we do. Nobody follows this, like literally no corporation. There is no relationship whatsoever to interest rates versus debt-to-equity capital structures inside of companies. It’s bonkers. I mean, you would think that something that where we have a mathematical right answer on how to financially optimize, the companies would follow that, but they don’t. And so the entire theory that like, oh, here’s the mathematical right answer, and these companies — the most logical, capitalistic, optimizing companies — they’re gonna follow this thing, right? The problem is they’re not run by robots. They’re run by humans, and the humans don’t really operate on logic. They operate on emotions. That’s right, ladies and gentlemen. You can tell more and it has a greater predictive power to listen to the different words and descriptive words specifically that CEOs use on investor calls as a predictor of the capital structure of a company. That should be a surprising result, but it’s true nonetheless. The reality here is like the inverted yield curve, the investors are all responding because the other investors are doing things so they figure, well, they must know something I don’t because that’s how you get an edge in a perfectly efficient market. You have to have a piece of information that everyone else doesn’t. And the corporations are doing the same things and they all believe that like, oh, well, this boring mathematical equation, well, it can’t possibly be right because my gut’s telling me to do this thing. And I mean, how many times have you heard that, like go with your gut? Well, your gut’s not your logic brain. It’s your emotions. And so even in something like corporate capital structures, we’re seeing this emotional game play out day after day regardless of what interest rates are doing. Like it literally has no correlative effect.
[00:14:38] And to me, where I’m sitting here, and I — the first thought that goes through my head when I first realized this — and, ladies and gentlemen, I’m Dylan, right? Like anybody who’s met me personally can realize a couple things real quickly. Number one: I tend to be very intense, and number two: I tend to go after whatever I get my teeth in. So when I was in graduate school, this flew in the face of everything I believed. I really believe that part of the excitement for me to be working in capital markets to get this degree so I could go work in these areas was because everybody would be like really logical and really looking at what are the numbers, what are the numbers saying, where are the numbers leading. And they just aren’t. And so I started to ask myself like, why? Like why is it that we see this emotional behavior in things like the bond market and corporate capital structure? And I believe part of the answer, not the entire answer but part of the answer, is that humans are afraid to be alone. That’s right. I actually think what we’re seeing is humans being afraid that they’re on the outside of the group that they think they should be in, whether it’s a bond investor or corporate CFO. Because evolutionarily speaking, the most deadly thing for us for the majority of human history was to be ostracized from your tribe; to be exiled. Because to be alone meant certain death. Human beings are communal animals. We need other people. This is why things like solitary confinement are such exquisite psychological torture devices because human beings need contact — emotional, energetic, spiritual, mental contact — not to mention physical as well. And so what I think’s actually happening when we see this is that the human goes, oh my God, that company, our competitor, did layoffs. So Smith, get over here, Smith. We gotta do layoffs, too. And then they go, ah, okay. I’m part of the companies. We’re — me and my competitor were both making good decisions with our investors’ money, and they pat themselves on the back and give themselves a nice big bonus and smoke a couple cigars. But at the end of the day, they didn’t make a logical decision. They made an emotional one, and they made it because they didn’t wanna be alone. They didn’t wanna be in the outside group. They didn’t wanna be the loner.
[00:16:52] I mean, fear might actually be one of humanity’s most core emotions because on some levels, at least we believe this to be true, that fear equals not dead. That if I’m afraid of something, I’m gonna react to something. Now, that’s not how it works at all, but we do believe it because a scared monkey that jumps at shadows tends to, on a slightly more statistically relevant metric, will survive more against the puma than the monkey that walks out into the woods with supreme confidence that they’re gonna be just fine. And again, you don’t have to take my word for it. Like stop and think about the stereotypical therapist. Tell me about your day. And the person goes on, well, my day was terrible. I started off the morning and I got up to my car and there was a boa constrictor in the car and it was terrifying. And the therapist goes, how did that make you feel? Can you tell me how that made you feel inside? What are they doing? Well, the therapist is validating you. Like that’s step one — a big way that we as humans emotionally regulate on a fully embodied level. And I see this with my clients all the time where they get wound up about some fear. Well, I don’t wanna live like a monk. I don’t want you to live like a monk either, and that’s really scary. What did I just do? I validated them and I just told them that they’re not alone; that I’m right here with them. And what do they do? And they lower. Their entire energetic profile lowers. They relax. They soften. Why? Because they’ve been validated. Think about the best listeners you know — people who are really good at that game. All they’re doing is they’re validating that what is in your heart is worth listening to and that your feelings are valid and legitimate and okay. And ladies and gentlemen, that’s amazing. But that’s what we’re doing in the bond market and with corporate layoffs and corporate structures and all sorts of other things.
[00:19:00] And it also turns out, it’s super profitable. And I’m not just talking for therapists because doomscrolling is the exact same thing. Doomscrolling hijacks this validation system because when your feelings and your thoughts are validated, when you feel that you are part of a group and that group has the same values, has identified the same enemies, and are facing in the same direction, your brain produces dopamine. And so we’re set up as humans to seek this validation. This is why kids will constantly bring you drawings. Mama, mama, look at this. It’s amazing. And as I’m recording this, I can look over to my right and my entire wall is taken up of owl pictures that say “To Papa; From my daughter; I love you to the moon and back.” And she brings that to me and she shows it to me and I go, this is amazing and it is amazing, and I’ve also validated that her work is valuable and she gets a dopamine hit, which then creates attachment. And you can see how this is going. And again, you don’t have to take my word for any of this stuff. Like there is a group of scientists who have a joke of what happens when a neuropsychologist and a neuroeconomist walk into a bar. That’s right. You get a company called Dopamine Labs whose job and mission statement is to make every app as addictive as Facebook, and they named it Dopamine Labs. Like that’s a little on the nose. Like that’s like a Superman villain level of like transparency on what you’re trying to do in this world.
[00:20:37] And so how does Facebook do it? Well, Facebook will look at your profile and then statistically go, okay. This person’s likely to believe these things and then they show you more of those things and you go, aha. I knew I wasn’t the only one who thought that. That’s right. That’s right. The Hamburglar is loose and he is stealing things from my house. That’s the type of stuff that they’re optimized for. Like one of the things I’ve noticed is that over, you know, the years of pre-Facebook, like a lot of the opinions that people put out there — and I’m I make no distinction on the political spectrum with this statement — but like prior to like 2010, well, we’ll probably go back a little bit, probably like 2006. So prior to 2006, those people, all look at them and be like, God, that person’s crazy. And what we found out was, well, yeah, they’re still crazy, but the reason we all kind of were like, no, no, no, no, no, we don’t agree with that guy was ’cause we were afraid that everyone else would ostracize us, so we ostracized them. But on the internet, no one knows you’re a dog, and so now as a result, we have people going, ugh, there’s somebody else who believes this. I can’t believe it. I’m not alone anymore. Ping — dopamine into the brain. This company, that’s what they do. And every social media company is optimized to do this. TikTok, Instagram, Twitter — all of them. Like this is why people get addicted to Twitter. They can’t help it. This is why we’re constantly like phantom checking our phones. I mean, even me as I’m sitting here recording this, I don’t have my phone at my desk ’cause I don’t want it to buzz and then you hear it and then I gotta go back and edit that out. So I put my phone in another room. But like I find myself absentmindedly reaching to the place on my desk where it normally sits. Well, that’s because my brain is looking for that dopamine because the doomscrolling that I do, reading the news to do things like make this podcast, has conditioned me to really like that.
[00:22:29] And so we go to these systems because we feel afraid, and then those systems reward us by showing us our opinion and the malice of other people, and then we feel like we’re part of something. And this is how these weird cult-like forums form — is that they become communities. If you’ve ever been to a big sports game or a megachurch, you felt this. When you’re in this big group of people and they’re all cheering for this team and they’re all excited, you kind of can’t help but jump on your feet and start cheering as well. And to put maybe even a dramatically fine point on it, 9/11 might have been the last time the United States was truly united. But if you remember those days, that kind of makes sense, doesn’t it? We were all part of something. We were all afraid. But we all believed that we should do something about this. And so for a blessed few weeks after that terrible, horrific attack on US soil, we all felt part of something bigger and we all felt united. It’s the exact same system. It’s all tied together. And so when I’m looking at the news this week and I’m seeing an inverted yield curve, I just find myself kind of chuckling because it’s the bond market version of doomscrolling — as everybody gets terrified, runs the safety, and then starts making decisions for a recession that may or may not have been inevitable in the first place. Because at the end of the day, money’s emotional. Our logic brains are not at the driver’s seat. They’re in the passenger seat, desperately trying to argue with the madman of our emotions as they continue to drive the car.
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