Paul Winkler: Welcome. This is “The Investor Coaching Show.” Paul Winkler, Ira Work, and Anne Sawasky here talking about money and investing.
So my first real job was working with computers. I started fixing computers at a computer company that serviced the New York State Lottery. So hence, I became very well-versed in how lotteries worked and how people handled money.
AS: Or didn’t handle money.
PW: Or didn’t handle money, yeah. And it was fascinating to watch how all that stuff worked behind the scenes. So hence, when I saw the article we’re going to talk about today, I went, “Ooh, this might be interesting to talk about.”
“What the $1.3 Billion Mega Millions Jackpot Reveals About the Economy,” it reads. So they decided that they were going to equate the economy with the lottery and go, “Hey, is there anything we can tell about the economy based on how many people play the lottery and what’s going on there?” Lo and behold, there is.
A Connection Between the Lottery and the Economy
Two things tend to boost lottery ticket sales: massive jackpots and economic downturns. Last week, both seemed to be in play. On Thursday, the Commerce Department said that the country’s gross domestic product fell. Of course, we heard about the recession, that two quarters in a row the GDP had dropped.
It fell at an annual rate of 0.9% in the second quarter. When you have two quarters in a row, that is the definition of recession. That’s how we define that.
Then on Friday, Mega Millions had its second largest drawing ever of $1.3 billion, with a “B”. You have to know that the government loves that. If you get a payout that big, most of that money goes to the federal government in the form of taxes. So basically, you have people paying extra taxes voluntarily.
Ira Work: Well, one of my friends on Facebook said, “This is the only time we get a billionaire to pay what they owe.”
PW: Oh, that’s funny. That’s really funny. The outsized jackpot generated $703 million in sales nationally. Lottery officials said, “For comparison, the $20 million drawing held April 19th, which kicked off this run, accounted for 15.8 million in sales.”
So nobody gets really excited when it’s a small jackpot. They get really excited when it’s a big one.
The fact that people spend so much on lottery tickets on its own is no confirmation the economy is or isn’t in a recession.
You can’t look at that and go, “Is it a recession? How much are people spending?” Because people do spend more money when there’s a big jackpot, regardless of what the economy’s doing.
“But the number of people grasping at a dollar, a dream, is an economic indicator of sorts,” said David R. Just, an economics professor at Cornell. “Declines in GDP and incomes and increases in unemployment correlate with the increase in lottery ticket sales, several studies have found.”
So they’ve actually looked at correlation. Now correlation isn’t necessarily causation, as they say, but if you have two things that are positively correlated, one correlation, they both move together, then that tells you you’ve got something there.
If you’ve got a high correlation, that means there might be something going on there. If it’s a low correlation or negative correlation, you might not have anything, but several studies have shown it.
The Role of Desperation in the Economy
And Dr Just said, “It’s a little bit of desperation.” And what I thought was interesting regarding this.
Okay, so you’ve got people going, “You know what? The economy’s getting a little soft. Unemployment’s going up. It’s getting harder to meet the bills. There’s more inflation. The cost of gas is a little bit higher.”
Have you heard about people drilling into gas tanks?
AS: No I hadn’t, but I’m not surprised, I guess. Yeah.
PW: Drilling into gas tanks. My wife and I were talking about it this morning. I guess because the liquid’s there, you’re not going to get a spark by drilling. I was thinking it would go ba-boom.
Apparently that doesn’t happen, though. You can drill, and apparently that is a thing people are doing. I remember in the early 1980s when the economy was lousy, I was playing in a band in upstate New York, and I would come back at night and see people siphoning gas tanks at 2:00 in the morning.
PW: Oh yeah. That’s a thing now too. But I think people are getting a little bit desperate.
Well, it’s a shame what you see people do. Yeah. It is absolutely sad. But I’m thinking that this is not the only place that people gamble.
When things get soft, when the economy gets soft, when the market goes down, when things are a little bit weird, people don’t just gamble by going out and buying lottery tickets, they also try to time the stock market.
“When the market goes down, people don’t just gamble by buying lottery tickets, they gamble away their money by trying to time the stock market.
And they don’t think of it that way. They think, “Ah, I’ve got to move things off to the side right now. Things are looking a little dicey out there. I think we ought to pull it off and stick it off in cash.”
Then, of course, the investment industry says, “Oh yeah, I think you probably ought to. Mrs. Jones, let’s take some of your money and stick it off into cash.” Remember that article from 2007?
AS: Yes.
PW: What was the title of that article? It was something like: The brokerage firms made money, but the people didn’t.
What Is the Real Problem?
PW: Yeah. I can’t even think of it, but literally this article was written, and there was, from the end of the month to the end of the year, a 68% increase in the stock market, and yet the fixed income that the brokerage firm stuck people’s money into made less than 1%. It was shameful.
But the investment industry is every bit a part of the problem as anything because they will sell you whatever you will buy. And if you’re scared, they’ll stick your money.
IW: Well, I’ll say it this way.
The investment industry is not part of the problem. The investment industry is the problem.
PW: Well, it is.
IW: Because rather than like what we do, we take the education approach first, the investment industry will just take your money.
PW: They’re order takers.
IW: I had somebody, and I had to send her a letter as a fiduciary that I can’t help her. They had this $40,000 account that they wanted to move over to me. And I said to them, “Well, let me see all your statements, so I can just do an overall review and show you where you’re at in order to make the best recommendation.”
Well, they sent me the first statement of the $40,000 and said, “We’re not ready to do that yet. We’re not comfortable.” So I said, “Well, as a fiduciary, I cannot make a recommendation unless I know your full financial position.
Regardless of what you do with those other accounts, I need to know what you have so that what I do recommend is suitable for you.”
PW: I don’t want to prescribe a medicine if I think it’s going to counteract some other medicine that you’re taking and end up killing you.
IW: But I am sure you can find an advisor that will be willing to take your $40,000 and make a commission.
PW: Or not even make a commission, but just get it under management, simply because it’s just getting money in transactions. And I love what Jonathan always said. He worked at the bank and he says, “It was just to get the next warm body in the door, and it was just production.”
What Big Investment Firms Are Likely to Do
IW: Yeah. And the title of that article came to mind as we were talking, it was called “Your Money Swept Away.”
IW: It was Smart Money magazine.
PW: Yeah, March of 2009. Yeah, that’s right.
IW: So, and they talked about how the brokerage firm was making money on the money sitting on the sidelines just in money market accounts, because they’re lending it and all that other stuff.
PW: Right. They get the spread on it. They’re making money. They’re fine. Yeah. So you look at this lottery and see that there is an increase in the number of people that want to play the lottery when things get a little bit dicey in the economy.
I always think about people timing the market and tactical asset allocation, and they don’t think about it that way. They go and move it over into this area, and they move it into this area because they think this area’s going to do better than others or whatever.
When people feel scared, the fear of failure can move them to make bigger mistakes than what would have happened in the first place.
But people get scared, and then they think they’re going to fail. They think that somehow they’re going to fail in their life, and then they’re going to take measures that they think are going to prevent it.
Whatever they think they can do to prevent their failure, but they end up only exacerbating the problem is really what ends up happening.
And I was thinking about this and going, you know what? This is really about people living into the future. Our anxiety, of course, comes from when we’re thinking about the future and thinking that something is going to happen in the future.
People think they aren’t going to make it somehow, and then they take actions to try to make sure that they do make it. This is what happens so often.
We watch the news. It’s why we watch the news, quite frankly. Why do I turn on the TV to watch the news?
IW: Because I want to get scared.
PW: Yeah, you know what they’ll say. It’s, “I want to know what’s going on.” Why do you want to know what’s going on? Dig down. Let’s be real.
We Want to Protect Ourselves
We’re typically trying to figure out the future. We’re trying to figure out if there’s something that is going to happen that is going to go bad, that maybe somehow we can take action right now to protect ourselves from it.
This is particularly true with investment news. We think it’ll help us predict what’s coming and we’ll protect ourselves.
People tend to think they’ll be able to predict what’s coming and then protect themselves from it.
And all I could think of as I’m going through this and thinking about it, I think it’s just a mighty good idea, not that I need to tell God this, but it was a mighty good idea that he decided that he wasn’t going to let us know how everything was going to end for us personally.
Imagine the lengths that we would go to, to try to thwart it, if we really knew how each of us individually, how it was going to end.
And then once you find out how it’s going to go, then you take all kinds of measures to prevent it. Then it still happens to you but in a different way than you thought it was going to happen to you.
Speaking of, now I’ll end this segment on a positive note because after that negativity. But there was an article in Reader’s Digest a little while back, and I just ran across it again. It was a cover story, looking to the future. It was “What Will the Next 100 Years Bring?”
“Our collective future,” the author says, “is actually pretty bright. When we look beyond the headlines to the trend lines, we find that humanity overall is healthier, richer, longer-lived, better fed, better educated, safer from war, murder and accidents than in decades and centuries past.
Having documented these changes in two books, I’m often asked whether I believe in ‘progress.’ The answer is no.”
Progress Has Brought Us a Long Way
But anyway, he says, “I don’t believe in anything you have to believe in.” He says, “Do you believe in progress?” It was a trick.
He’s goofing around playing with words. He says, “Although many,” because he’s basically saying no, it’s not do I believe in progress. Progress is real. I believe in it.
“Although many measures of human well-being when plotted over time show a gratifying increase, though not always or everywhere, it’s not because of some force or dialectic or evolutionary law that lifts us ever upward.”
“On the contrary, nature has no regard for our well-being, and often within pandemics and natural disasters, it looks as if it’s going to grind us down.”
It’s like the law of thermodynamics, everything goes from a higher to a lower state.
That’s basically what he’s saying there.
But literally what he believes in here is our desire as humans, as I’ve always said, to somehow figure it out.
He further says, “The explanation is rationality. When humans set themselves to the goal of improving the welfare of their fellow human beings as opposed to other dubious pursuits such as glory or redemption, and they apply their ingenuity in institutions that pool with others, they occasionally succeed.”
And it says, “We live longer. From the beginning of the second half of the 19th century, life expectancy at birth went from around 30 years to 72.4 years worldwide, 83 years in most fortunate countries.”
Germ theory, drinking water, sewers, large-scale vaccinations, antibiotics, antisepsis, anesthesia, transfusions, and medication, all of these things have been fairly recent.
Really when it comes down to it, we’re living a lot longer as a result of it.
IW: We didn’t have that stuff in the good old days. Is what you’re saying?
PW: For most of history, about 90% of humanity lived in what we would today call extreme poverty. In 2020, less than 9% do.
The Future Is Bright
There is a lot of fraud as far as the economic system. Governments have been able to root out a lot of fraud. Of course, you’re always going to have fraud, but we have much more reliable money in general now.
Think about Argentina. They have a currency that stinks. What did the Argentinians do? They went and started using the US dollar to protect themselves against inflation.
Yeah. And that was one of the reasons that I was against these digital currencies as an investment, but I wasn’t against the idea of digital currency in general, because you have some countries that have lousy currencies.
It gives them a means of being able to buy and sell and trade with each other.
I don’t think that’s a terrible idea. That’s one of the things I always thought was actually a fairly decent reason to have a digital currency, not invest in it, as I said.
We fight less. There is more democracy and international trade.
I’ve always talked about how when you’re trading with another country on a regular basis, it gives you less impetus to go to war with them because they’re a trading partner. So that’s one of the reasons that trade is such a big deal.
When we talk about pulling the military out of countries around the world, the big reason we have our military in all these countries is to reduce the friction to trade in order to make it so that we can trade with countries and not worry about pirating. That’s a big deal. That’s why we do that.
Another is international trade and investments, and it’s cheaper to buy things than it is to steal them. International organizations can be helpful in keeping some of the peace around the world and getting countries to actually join together and making sure that they’re actually in cohort with each other so that they can reduce some of the impetus for war and have better relations for trade.
There are plenty of reasons to be optimistic about the future.
So I thought that was just a really hopeful article. And I just wanted to add a couple of thoughts that would be important in that discussion because I think there are a lot of reasons to be optimistic about the future. The future is bright. I’m still wearing shades.
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