Former FDIC Chair Sheila Bair Helps Students Get Smarter About Debt

In this podcast, Motley Fool senior analyst Asit Sharma discusses:

• Pepsi's strong quarterly results in the face of inflation and other headwinds.
• Gatorade and Doritos helping to fuel better-than-expected profits.
• Why he's keeping a close eye on Etsy's upcoming earnings report.

Motley Fool retirement expert Robert Brokamp talks with former FDIC chair Sheila Bair about how students can get smarter about debt and one stressful economic problem catching her attention.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on July 12, 2022.

Chris Hill: We've got a Dividend King raising guidance, and the former head of the FDIC raising the caution flag. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool Senior Analyst Asit Sharma. Thanks for being here.

Asit Sharma: Chris, thank you for having me.

Chris Hill: Happy Prime Day.

Asit Sharma: Don't remind me I have to get some work done today. [laughs] I can't be scrolling to see what deals are out there.

Chris Hill: I think there are some flat-screen TVs on deep discount on Amazon, but let's talk about Pepsi. The suddenly interesting Pepsi, second-quarter profits and revenue came in higher-than-expected. For the second quarter in a row, Pepsi raised guidance. I see suddenly interesting because in a year where many stocks are down, Pepsi is holding steady, it is basically flat for the year, but that is well ahead of the S&P 500.

Asit Sharma: Yeah, I mean, flat for the year. You don't want your beverages to be flat. But in a year like this, if your stock is flat, that is spanking the market. PepsiCo here doing just what it's supposed to do. When markets are running hot, we forget about these big consumer goods conglomerates that promised to stay ahead of inflation by a couple of percentage points if they can do it. Usually, inflation is running two percentage points a year. So, if PepsiCo can grow its revenues by 4-5 percent, investors are happy. Here we have organic growth which grew 13 percent in the second quarter. The company is promising that organic growth will be 10 percent for the full year, year over year. That is going to likely outpace inflation. I hope, we've seen the worst of this inflationary spike. This company is really performing according to plan even though it's an extremely difficult environment for any multinational that is running soft drinks, snacks, both the healthy and the indulgent variety across the globe.

Chris Hill: You have got to give the management team credit because you dig into these results, and what you realize is that they are doing a very effective job of, in some cases, taking a little bit of hit on the margin line, a little bit of margin compression. But they are also effectively dealing with inflation by raising the cost of some of their big winners like Gatorade and Doritos. I think they've pulled off this balancing act quite nicely. If you think that can continue, this seems like one of those ballast type of stocks that could pay off in the long run.

Asit Sharma: Yeah, I mean, credit to CEO Ramon Laguarta who came in with this theme of faster, stronger, better which sounds like a piece of Electronica from the mid odds. However, it's been a good mantra to spread through the organization. He's focused on their direct store delivery model, which is in itself a supply chain exercise to improve, did that well in advance of the world becoming so out of whack with geopolitical risks, climate change, COVID, I can't even, I mean, the list is so long. But on the flip side, you have a consumer who really wants his or her snacks as they're used to seeing them in the grocery store, in the convenience store, we're going to the pump getting numbed by the price of gasoline, but still walking into that integrated display of PepsiCo products along with Frito-Lay products. So you've got your Mountain Dew and Doritos in there in front of you. What we're finding out is that consumers are still picking up those snacks and you're absolutely right, Chris, it's a combination of some very efficient bottom-line movement automation. The use of analytics, the use of just extremely efficient routes in delivering to stores. They save on fuel plus the ability to price in a little bit to raise prices enough so we're still willing to shell it out because in all honesty, who is going to give up their healthy or indulgent snacks? That's what makes you get through a period like this. That's your comfort food.

Chris Hill: Well, this is not one of those businesses that we think of when we think of businesses that have pricing power. We think of Apple and their ability to continually charge over a $1,000 for a phone. We've talked on this show earlier in the year about Chipotle and their ability to pass on prices. I never think of Pepsi in that category. But once again, they've proven that they actually, not only do they have pricing power, they're smart about how they use it.

Asit Sharma: Yes, they have worked with us for years under the cover of darkness to decrease the size of packaging. [laughs] So PepsiCo, Coca-Cola, and peers, I would throw Keurig Dr Pepper in there as well, have trained us to go for smaller packaging sizes. Smaller bottles of soft drinks, mini bottles, 7.5 ounces, or maybe those are milliliters. Well, the 7.5 size, I'll have to be honest here. Today I am measurement challenged. [laughs] The message of that story though is they pulled a lot of margin out of that exercise. Now when you bump up the price marginally on a smaller packaging, it's an even stronger exercise in pricing power, invisible to us. The ingeniousness of how these major conglomerates have exercised their pricing power. I'm sure people will study for a long time because it's so much more subtle than just the brute increases we're used to seeing on our Apple products and we shell up for those as well.

Chris Hill: Earning season kicks off later this week, I'm going to ask you the same question I asked Jason Moser yesterday. Is there a company and I know you follow a lot of companies, but is there one or two companies in particular that you're especially curious about this earnings season?

Asit Sharma: Well, this is an embarrassment of riches in that category, Chris, because I'm curious about every last company I follow. It's such a weird time in the market and in the world. But we have to choose because we've got to make a call here. I'm going to say Etsy is one that's at the top of my list. The reason is this is both a bellwether for platform businesses if you're a fan or a student of those. It's also something of a bellwether for the economy. Now you and I love to look at companies that are in the manufacturing industry as these quiet indicators of where the economy is going. Here's something from the other side of the coin. This is a company which really tracks discretionary income. It tracks our ability, our need, our desire to pick up artisan goods in many cases. Etsy's ability to really stay, let's pick up from a metaphor we talked about in this first segment on Pepsi, to stay flat. In that, I'm talking about their gross merchandise sales to keep that volume flat and not have it shrink to keep new sellers coming into the marketplace, new buyers, is going to be a feat to pull off. I'm very curious to see how well they'll be able to at least track along this flat baseline this year. I don't expect Etsy to surprise the market and say, guess what? We know, inflation's high. But people are finding comfort in paying up for a rather higher-end goods. I don't if you expect that to happen, but I believe there is some momentum the marketplace has in its brand power. In the trends we've seen, even last quarter where it was able to hang on to a lot of pandemic gains in a quarter you would have thought it would have slipped significantly. So I'm so curious about this one.

Chris Hill: As an Etsy shareholder, I'm also looking forward to their report in early August. Hopefully, the stock which is down nearly 60 percent year-to-date respond to some good news and hopefully some good guidance as well. Asit Sharma, always great talking to you. Thanks for being here.

Asit Sharma: Thanks so much, Chris.

Chris Hill: We're about to help you get smarter about student debt. ...

Chris Hill: Sheila Bair ran the FDIC during the great recession. On two occasions, Forbes magazine named her as one of the most powerful women in the world. Robert Brokamp caught up with her to talk about how students can get smarter about debt, and one economic problem that's caught her attention.

Robert Brokamp: The problem, of course, is that the cost of college has gone up at a rate that's around twice the rate of inflation. A lot of theories for why that is, one is maybe the easy availability of debt. Given your experience, are there any other reasons that strike you as a cause for a higher prices?

Sheila Bair: Well, there's not a lot of cost discipline. You think if people think it's faculty salaries are truly that there's too many buildings, administrative bloat. But I think that all stems from the lack of price discipline, which in turn stems from the lack of price transparency in competition and accountability for actually having a degree that's worth the money. It's very hard for students to get their arms around that. The department education has improved with much better disclosures about postgraduate income. There has been a greater public awareness about having a college degree isn't magically going to lead to all this extra money. It really depends a lot on where you go to school, especially what kind of degree you get, and the job market. That's really helping guide students to those kinds of decisions to make sure that they're going to be able to afford their debt is really what Student Debt Smarter is about. I do think there are these other factors, but really almost all of them stem from the lack of cost discipline, which in turn stems from the lack of transparency around pricing, which you're actually getting big when you get a college degree.

Robert Brokamp: I'll just say as someone who's married to a college professor, it's definitely not the professors' salaries that are causing.

Sheila Bair: No, it's not. I wish people would stop blaming [laughs] professors. We should be spending more on them unless on all these administrating people.

Robert Brokamp: Yes.

Sheila Bair: Absolutely.

Robert Brokamp: You've mentioned the Student Debt Smarter tool. It's at studentdebtsmarter.org. Something you've helped develop with the Peter G. Peterson Foundation. It's pretty easy to use. Tell us how it works.

Sheila Bair: It's basically put inputs. It's where you think you want to go to school, what you think you want to major in, when you're going to start school, and where you think you're going to live when you graduate. Those four factors really have the lion's share of impact in terms of how much debt you can afford to repay once you graduate. You can put in any combination, it's very easy. There's no data harvesting. Nobody's looking at your information, sharing your information. It's just for you, the student borrower and their families, to put in these different inputs. I think it encourages students to understand, is there financial education component to it. Because it helps students understand that the decisions they make will impact their capacity to repay debt when they graduate. Nobody's really telling them that right now, but these are important decisions that they need to factor into account. It also encourages students and their families to think holistically. So much of college financial aid now is like year-by-year, so really, what's the total amount of debt? It is also if you're going to have to borrow with private loans, Parent PLUS, those that have a higher market rates and subsidized debt, if factors add into it the higher rate. What is the all-in-cost going to be that's going to be affordable to you in terms of what you're going to be able to comfortably repay when you graduate. Again, I don't think anybody these days is encouraging students and their families should think in that way. But this is another really valuable piece of information that students don't have now that I think they will find very valuable.

Robert Brokamp: It's a very dynamic tool. I mean. I used my information. I went to Catholic University here in Washington DC. I was a English major. I was a teacher in Washington after I graduated. You put it in information, it tells your salary, which comes from the school via the Department of Education, because I provide that information of how much a median person who had that major from that school's making, has cost of living, even estimates taxes. The salary was probably lower than what a teacher makes, so I went back in and I put it in educator and I thought, OK. It adjusted, it moved up how much I can borrow from 32,000 to 36,000. But because I was in DC, I was like, well, what if I moved back home to Tampa where the cost of living is lower? Then it said I could borrow a little bit more. I thought just that in itself is a handy way because this is geared toward high school students to understand how all these moving parts come together where you pay this much to get this major and you want to live here, these are all the costs that are associated with that.

Sheila Bair: That's right. You can put in any combination of factors. Some of these other tools that are available now, they ask for all this personal financial information. You have put anything, you've got to have streams of records and spreadsheets to use these tools. It's just what's in your head, what's in the student's head, where do you think you might want to go to college? What do you think you might want to graduate in? Where do you think might want to live? That's all you need. You can put as many, initiate one and see how they compare and how those decisions impact the affordability of your debt. Again, this is a unique tool. Nobody really out there is encouraging students and their families to think this way. I think it's going to be hugely helpful to them.

Robert Brokamp: Nowadays there's a lot of talk about student debt. The amount of student debt has more than tripled since 2005 to where it's now 1.7 trillion. Then there's all this talk about student loan forgiveness. Do you have any opinion about what should be done about that?

Sheila Bair: Yeah. Well, this is a personal view. I am sympathetic to $10,000 of debt cancellation, at least for undergraduates. I think if you look at the analysis of who that benefits, that is the most progressive of the options, you're really helping. A good chunk of those students were in default, a good chunk of those students graduated but debt and no degree. They went to school, went to a bad school, just weren't prepared, the borrower didn't get the degree or they went to a poor quality school that didn't really give them income enhancing prospects. It's a progressive impact. I think it would be irresponsible to do that and not have some reforms of the system too. I mean, you don't want to just get right back into the soup again. You're going to encourage moral hazard by forgiving debt and creating potential expectation that's going to happen again. I must say, Student Debt Smarter, look, I think everybody there's a lot of robust disagreement about the wisdom of student debt cancellation. But I think one thing we all agree with is for new borrowers coming into the system, let's make sure they don't undertake unaffordable debt loans, which is really what Student Debt Smarter is about. Prospectively, I think this is a good piece of trying to solve this problem for those who have already taken on an affordable debt level, I am sympathetic to $10,000 of debt cancellation.

Robert Brokamp: Since this often becomes a political discussion, I think it's interesting to point out that you came to Washington to work on Bob Dole staff and you consider yourself a pretty traditional conservative.

Sheila Bair: I'm very traditional fiscal conservative. With my family finances too. My parents were depression era children and it really instilled fiscal prudence. I think I passed that on to my children too, and we save money. I understand not all parents can do that. But for parents who do have the capability, that is another way to minimize debt loads is when they're born, start saving, put it in FY29 or an education account. That's another good way to reduce the need to borrow.

Robert Brokamp: By education account, I assume you mean the Coverdell, which I don't think gets enough attention these days.

Sheila Bair: No, it doesn't. That's true. Banks will set them up too, it doesn't have to be a [inaudible 00:17:48] there are different options.

Robert Brokamp: Moving on from student debt and harkening back to your time as FDIC chair, you were early to see that there were problems in the housing and mortgage markets. You're now a senior advisor to the systemic risk counsel. Is there anything out there in the broader economy that's causing you any concerns?

Sheila Bair: The great financial crisis, this was The Bank and Credit Suisse of the '80s. Those are all catalyzed by a rising interest rate environment. People usually they quote and interest rates goes up, BancServ, that's a big benefit for them. They can charge more for their loans, but actually, it comes back to banks and a couple of ways. One, banks with large market exposures, you'd like Morgan Stanley, Goldman Sachs. Those big banks, the big money center banks. They have significant market exposures. They have clients to their prime brokerage. They have big market exposures. It's like Warren Buffett says, when the tide starts going out, you find out who's swimming naked and we've seen a few naked swimmers already. I do worry that the Fed, in particular through their stress testing, is not adequate focused on this. Their most recent stress tests assumed the deep recession. They stressed bank balance sheets to that, but they also assume input inflation when magically drop. Interest rates will go back to zero. Paul Volcker had to keep rates, keep money tight for two recession's before we finally got it under control. This idea that we could go into recession somehow, all these other problems are going to get magically fixed, just isn't correct. I do think it's called stagflation. We need to stress bags, these big banks, especially with market exposures through a stagflation environment, where you can have double-digit employment, double-digit interest rates, double-digit inflation. It could all coexist for a time before it starts to correct. I am worried about that. I think edge pharma systemic level, I think that's at the top of my list.

From my individual investor level, I worry about crypto. We've seen a couple of trillion dollars of wealth wiped out already. Some of their speculators, a lot of it being so are young people. The crypto industry really Mark is too young people, I hate it. It's volatile, it's not regular savings, put it in a broad-based index fund and leave it, set it, forget it. Those are the ways to build well, and I write money books for kids too. One of the things I try to do with my money books, there's so much literature out there about, here's how to get rich, here's how to invest in the stock market. Here's that to take it alone. Here's how to get a credit card, all that stuff. I tried to write books about how not to lose your money. You can buy these, get rich quick books, but most people, they just want financial security, they won't [...]. There may be smart enough to listen to Motley Fool if they are in their investing game and good for them, they should be doing the research, I mean, thoughtful about what they invest in. But most people just want to have some financial stability and get on with their life. But any lose money by investing in highly speculative things, investing in too good to be true schemes or just stupid stuff like hearing credit card balances and paying late fees are using overdraft protection. Those are the kinds of books that I try to educate young people starting in early age. But I do feel there's crypto thing. It's just another way to take money away from people who don't have the money to lose. I wish I've written about this. Please regulate this market. SEC, FED, CFTC, I don't care if somebody come in and regulate it because consumers need protections and they're not getting.

Robert Brokamp: I will point out, but I think it was in February of 2021 that you suggest that investors should avoid Bitcoin and you call the topic. Very good for you.

Sheila Bair: Yeah, I was about to Destin short, but it was [...] 20,000 now. I got a lot of flak from that. I don't care if I prevented some people, especially young people from buying it, speculating and I'm very glad. It is, what is the market is providing discipline now, but it's heart breaking stories of people whose been in there.

Robert Brokamp: My dear listeners, our guest has been Sheila Bair, children's book author, former FDIC chair and contributor to the development of the student debt smarter calculator available at student debt smarter.org. Sheila, thanks so much for joining us.

Sheila Bair: Thanks for bringing me, Robert. I really enjoyed it.

Chris Hill: As always, people on the program may have interest 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. I'm Chris Hill, thanks for listening. We'll see you tomorrow.