Angus Deaton is the proud owner of the recent Nobel Prize for his economic formula to establish poverty levels, and a brave Chinese banker takes on Goldman Sachs (GS +1.72%) while the latter is using Snapchat in an unexpected way.
A full transcript follows the video.
Gaby Lapera: Hello, everyone! Welcome to Industry Focus, financials edition. Normally, I try to say something clever at the beginning before the promo music, but I've been told that I'm terrible at it by my co-host today. I'm just going to let him say something funny instead, once he recovers.
Mark Reeth: Hey, everybody! I'm Mark Reeth and we talk about money.
Lapera: That's not clever.
Reeth: That's so clever. It's accurate.
Lapera: I have Mark Reeth on the show here with me today because John Maxfield is on vacation. This week, we've decided to bring you some hard-hitting financial news in preparation for earnings season. Why don't we start with one of our lighter topics? Who won the Nobel Prize in economics?
Reeth: Close one. I was really afraid that they were going to give it to that Blundell fellow from UCL. Really glad it went to Deaton. My heart was on Deaton from the get-go, but my head said Blundell after he got all those citations and academic papers over the last year or so. I'm really glad Angus Deaton pulled it out.
Lapera: Yeah, Mark. Why don't you tell us a little bit more about Angus Deaton's work?
Reeth: I would love to. Angus Deaton is an economist. He's over at Princeton right now, and he graduated from Cambridge a while back. I'll start from the top, I guess. Most of the time to measure poverty you survey a population with the usual economic factors: income, spending, etc. You then tally it all up and make policy decisions or decide how much foreign aid to provide based on that data.
If an area's median income is below their respective poverty level, maybe you shouldn't put a tax on food or maybe you should send a bit more in foreign aid. Deaton went a different direction. Instead of focusing on large groups of data for policy making, he drilled down on individual household spending. I know this is probably already boring to some people, but this is actually really important.
It changes the way the development economics looks. It goes from a theoretical field to an actual empirical field that you can make changes using his information. I'm going to quote the academy here. "If, for instance, a government decides to change the value added tax on food, you can -- through Deaton's research -- see how that affects consumption and what impact it would have on food and other goods."
In other words, it's not just some broad look at a large population. It's a drilled-down, household-by-household look on who can afford to eat. That's a very important thing. I don't know if you know that, Gaby.
Lapera: It is very important. I really like eating. In all seriousness, though, Deaton really did manage to link microeconomics and macroeconomics in a novel way. This is very exciting for him. Congratulations, Angus Deaton.
Reeth: Angus Deaton, everybody!
Lapera: Moving on to more serious news. Alien abduction insurance. Thoughts?
Reeth: OK. A week ago, deep here, we could talk about the Drake Equation, Carl Sagan's work with Fermi Paradox as I'm sure you're aware -- it's some pretty hard-hitting information. Basically, the idea here is that there are some companies out there that allow you to insure yourself against alien abductions. At first, you hear that and a lot of people roll their eyes, but you've got to remember that Jennifer Lopez insured her butt. Bruce Springsteen insured his voice. People don't roll their eyes at those things.
I've insured my house against burning down. I don't think it's going to burn down, but I've insured against it. I don't think I'm going to be abducted by aliens, but maybe I should insure against it for a pretty nominal fee. I think it's only $155 a year. That's more than reasonable.
Lapera: That's a steal.
Reeth: It's a steal and a deal!
Lapera: As long as you can prove...
Reeth: That's the problem.
Lapera: That you've been abducted by aliens recently.
Reeth: Which, I don't know if you're allowed to take selfies on the mothership with the hive queen, or I don't know if you're allowed to bring the probe back with you. It's got to be difficult to actually prove that you were abducted by aliens. If you can, though, what's the payout on this thing? The company pays the claimant $1 per year until their death or for 1 million years, whichever comes first. I really like that. I think I can guess which one is going to come first.
There's also insurance against alien impregnation. Men are also able to get this insurance because who knows what the capabilities of aliens are?
Lapera: That is so true. I don't know if you've watched Star Trek. That happened a bunch of times in Star Trek.
Reeth: Hard-hitting financial information.
Lapera: Just for the record, I went to see if I could purchase some alien abduction insurance because I was curious. I couldn't actually find a web presence for any company that has it, but they could have all just been abducted by aliens.
Reeth: Maybe someone out there is trying to silence the truth. The Men in Black are coming. Watch out.
Lapera: If you would like to try, I believe they're called Goodfellow Rebecca Ingram and Pearson. I'm not kidding.
Reeth: GRIM. Good. GRIP?
Lapera: GRIP. They're in London. We're all about the acronyms today. At The Motley Fool, we're all about long-term investing and the validity of this approach was tested by a British newspaper. They pitted seasoned stock-picking professionals against some students and a cat, and the cat won... by a lot.
Reeth: I heard about this story. I presumed we were going to talk about it. This story must be catnip for you. I know you find this really a-mew-sing.
Lapera: Was that supposed to be a meow? That was a terrible meow.
Reeth: Mew. Kittens go "mew."
Lapera: Kittens do not "mew." They "meow."
Reeth: The story is, as you said, somebody had the great idea of setting up professionals against students, against a cat for stock picking for a year. The cat pretty much kicked their butts. He clawed his way to the top of the pile. He's really the cat's meow. It's incredible what he was able to do. I can see why people would read this story and get ticked off.
There are a lot of folks out there who have tried to invest on their own and maybe gotten burned by the market and they just throw up their hands and say, "Screw it! I'm just going to give my money to a broker, or invest in a fund."
Lapera: Or give it to a cat.
Reeth: Or give it to a cat. Then they see this and they go, "The cat can beat me! What the heck?!" I don't like that. I don't believe in the efficient market hypothesis, which this is kind of corollary to that. I believe that Adam Smith and John Maynard Keynes, when it's a lot more behaviorally focused, choosing the right stocks.
So I don't think this cat's really going to beat you. If you can be fearful when others are greedy and greedy when others are fearful and focus on good, long-term buys of sound companies, I think even the cat would have to agree that's the way to invest.
Lapera: Absolutely. Part of the reason that the cat potentially won is because of the way that the contest was formulated.
Reeth: That's true.
Lapera: What they did was, they gave each of the teams £5,000, because they're British so they wouldn't give them dollars, and they were allowed to pick new stocks at the end of each quarter. That meant that they were only investing in companies for a grand total of three or four months at a time.
Reeth: Right. That's a little short term for us here at The Motley Fool.
Lapera: Yeah, we look down our very long noses at them.
Reeth: Right. The cat was A-OK with it.
Lapera: We have a purrfect investing strategy.
Reeth: You feel good about that?
Lapera: I feel really good.
Reeth: Good. I'm happy for you.
Lapera: Let's talk about Goldman Sachs.
Reeth: Let's.
Lapera: Yeah. Goldman Sachs. There's a bank in China named Goldman Sachs, and it's not our Goldman Sachs. There's this guy in China who said, "I'm going to start a bank and I'm going to call it Goldman Sachs." They've already released a statement saying they have nothing to do with the real Goldman Sachs when someone called them out on it, but they haven't really said anything since. Goldman Sachs is trying to get their name back. I haven't heard that they've managed it so far.
Reeth: No, they have not. This is a pretty amazing story and it gets juicier. As you said, some guy decided to set up a Goldman Sachs bank and completely, randomly happen to pick the name Goldman Sachs. They used the same font that Goldman Sachs uses in all of their...
Lapera: Same Chinese characters?
Reeth: Same everything. It was totally coincidental. What's really juicy is the guy who's running this, Cheung Chi-tai, allegedly has links to organized crime and the bank itself is very close to Macau, where a lot of organized crime gets into gaming and the casinos over there. The theory is that this bank was used to funnel funds to criminals, which Goldman Sachs heard about and said, "That's not great for our image."
What really blows me away is where we're used to China as this place for counterfeits -- it's the world's workshop -- a lot of counterfeits come from China, simply because a lot of our products come from China so it's easier to jump in on the good stuff -- on the money, on the products. You don't often hear about a bank. It's not something you can just build with your two hands and fake and sell on the storefront. Someone had to go out...
Lapera: Oh, no.
Reeth: And set up -- yeah, that was the other story. Somebody actually did set up a fake bank with fake tellers, fake ATMs...
Lapera: And you could deposit money, but the trick was withdrawing it.
Reeth: Yeah. This is a whole new level. It's a whole new world of counterfeiting. I can't wait to see what we come up with next. It's going to be great.
Lapera: Human innovation at its finest. Speaking of innovation, Goldman Sachs has hit upon a brilliant idea for hiring new employees. They're trying to go after the best and the brightest and they're doing that by using Snapchat stories. For those of you who are not familiar with Snapchat...
Reeth: Explain it to me.
Lapera: It's an app developed that lets you send pictures and videos, which will then be erased unless you know how to not erase them. Just go online and Google it. It's very popular among the young folks.
Reeth: Stag-heeled cottiers like us in our mid-20s really don't understand this.
Lapera: I've never used Snapchat.
Reeth: You've never used Snapchat?
Lapera: That's not true. I have.
Reeth: OK.
Lapera: I Snapchatted a cat to someone once.
Reeth: Always back to the cats.
Lapera: Also, there was a parrot on a motorcycle on U Street the other day. It was a green, African parrot and I felt the deep urge to share that with all my friends in a format that would not be preserved forever.
Reeth: That is worth a snap any day of the week and twice on Sunday. Yes. So, Snapchat, you can send a video or a picture, it's only there for 10 seconds, and then it's gone forever. Goldman Sachs hears that business model and says, "Oh, yeah! Let's advertise to kids, like, that way." We heard that and roll our eyes and we're making jokes, but in all seriousness, Snapchat's numbers, according to Pew Research, 75% of teens have access to a smartphone. 91% of teens go online from mobile devices occasionally.
Among those 91%, 94% of those go online daily, or more often. Snapchat is perfectly positioned to appeal to those people. Back in 2014, 700 million photos were sent per day on Snapchat, 500 million Snapchat stories, and Goldman Sachs looks at that and says, "That's our market. That's our target demographic -- getting kids as they're coming out of college."
Lapera: Especially because there's been research showing that a lot of younger people aren't very interested in going into financial professions. It's staunchly, you make a hell of a lot of money, but it's not...
Reeth: It's brutal. Back in June, Goldman Sachs actually had to release a memo to the company -- it got leaked -- that interns can't be at the Goldman Sachs offices between the hours of midnight and 7:00 A.M. because so many interns were working themselves into exhaustion. You hear that and think, "Why would I ever work at Goldman Sachs?" And Goldman Sachs knows you're saying that as a recent or soon-to-be college graduate.
They need to appeal somehow. Why not go to the biggest mobile platform in America right now, Snapchat. So it kind of makes sense. I don't know how much of a job description you can really get across in 10 seconds or less.
Lapera: They're asking for crowd sourcing extraordinaires or people who are supposed to be dynamic and young and interesting and exciting.
Reeth: Very warm and fuzzy.
Lapera: Exactly. But it's an investment bank. Let's be real.
Reeth: Sure. If you're Snapchat, you've got to be pleased as punch about this, though. You're raking in the big bucks, getting a big name like Goldman Sachs, it's only going to draw other big names to your brand. I was reading about how Snapchat is going to start pushing sponsored lenses.
That's basically when you're taking a video -- it's got a little frame around it and it can be sponsored by a company. Those are going for $450,000 a day to $750,000 on peak days like holidays.
Lapera: That's crazy.
Reeth: Those are Superbowl half-time ad prices. This is 10 seconds that you're paying three-quarter of $1 million on it. That's insane to me. Again, if you're Snapchat, you've got to be pleased as punch.
Lapera: Yeah. I wonder if they have the numbers on how many snaps get opened instead of just sitting.
Reeth: I open all of my snaps. I always make it a point to check my snaps. Every morning, before breakfast I'll wake up...
Lapera: You read the financial news.
Reeth: Nope. I snap. I check my snap stories. If I want financial news, I go straight to Buzzfeed and then I start my day and then I give people financial advice. Trust me, I'm really good at my job.
Lapera: OK. Fair enough. On that note, thank you for joining us. I hope you liked this week's episode. Whether you did or didn't like it, especially if you did, write us at [email protected] to let us know what you think. Next week, we'll return to real banking news with earnings analysis and John Maxfield. As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So, don't buy or sell stocks based solely on what you hear.
