Today on The Wallet, Emilie Bellet is joined by Kyla Scanlon, recognised by Fast Company as ‘the internet’s favourite econ nerd.’ Kyla’s new book, "In This Economy?" equips readers with the tools to understand the economy and its impact on their finances. We discuss misconceptions about the economy, the concept of "vibecessions," and how personal financial decisions fit into the broader economic context. Kyla also shares insights on improving financial literacy and practical tips for making smarter financial decisions.

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kYLA’S JOURNEY

Kyla Scanlon's journey into economics began unexpectedly during her upbringing in Kentucky, USA. Intrigued by her father's venture into options trading, she ventured into finance and economics during college. Her passion further blossomed through activities such as blogging about stocks and serving as an economics tutor and research fellow. This path eventually led her to Los Angeles, where she worked with Capital Group before becoming a prominent voice in the economic discourse online.

Reflecting on the challenges of making economics more engaging, Kyla highlights accessibility as a key barrier. The field often feels exclusive and complex, discouraging young people from exploring its potential. However, she credits economists like Claudia Somm and Isabella Weber for breaking down these barriers and making economic theory more approachable for the general public.

When asked about the importance of being well-informed today, she said that it's a civic duty. Understanding the economy helps citizens make informed decisions as voters and active economic participants. She argued that lacking this understanding can lead to stress and poor decision-making.

The conversation then turned to everyday economic impacts, such as mortgage rates affecting housing markets globally, not just in the US and UK. She noted that everyone is influenced by currency fluctuations, highlighting the importance of comprehending these dynamics for making wise future decisions.

dAY-TO-DAY ECONOMICS

Kyla appreciates practical insights into economics. Understanding economics involves understanding where products and services come from and how our spending habits affect the economy. She acknowledges the challenge of staying informed amidst rapid changes like COVID-19 and constant news updates. She noted how overwhelming it can be for many people to start understanding economics with so much information available.

The media often uses negative headlines to attract attention and increase clicks. It is incredibly important to look beyond sensationalism and use media literacy to find accurate information.

She also talked about the value of our attention in today's media landscape, where news is influenced by advertising revenue. Kyla recommended checking information from different sources to get a balanced view on complex topics.

Kyla explained that her book aims to clear up common misunderstandings about the economy. The first part, 'Economic Kingdom', explains fiscal policies, inflation, and the job market. Later chapters cover money's history, explain economic terms, and correct popular misconceptions.

She also talked the concept of inflation, noting that it refers to the rate at which prices for goods and services increase. When inflation is going down, it doesn't mean prices are getting cheaper; it means prices are rising less quickly.

GDP is a measure of the economy's size and health, though there is ongoing debate about whether it is a good measure of economic well-being. The labour market involves the supply and demand for workers, with metrics like employment rates and job vacancies used to assess its strength. The effectiveness of these metrics is often questioned.

Commodities, basic goods used in commerce such as oil or gold, are essential to the economy. The possibility of transitioning to clean energy and its implications was highlighted. A recession is defined as a period of economic decline, typically marked by two consecutive quarters of negative GDP growth.

The stock market is where shares of publicly held companies are traded, while the bond market involves issuing new debt or buying and selling debt securities.

Fiscal policy, monetary policy, and the role of the Federal Reserve, the main central bank in the US, play crucial roles in the economy. Many old economic theories no longer apply in the post-pandemic economy, presenting both challenges and opportunities. Misconceptions are addressed from two angles: the meanings of economic terms like inflation and GDP, and the relevance of traditional economic theories.

Understanding these definitions is important. Even when inflation decreases, prices continue to rise, albeit more slowly. Recent announcements in the UK indicate that inflation is down and nearing the Bank of England's target of 2%.

eCONOMIC OVERVIEW

Kyla discussed the current economic climate, highlighting that inflation is a significant issue impacting people's lives. Despite most economies, including the US, being relatively stable, the cumulative effect of inflation and rising prices frustrates many. Although prices are not increasing as rapidly as before, they continue to rise, contributing to a sense of financial strain.

Developed economies generally expect continuous growth and improvement over generations. However, the pandemic introduced a bout of inflation that seems difficult to overcome, leaving many feeling left behind. Both the UK and the US are experiencing housing crises, with homes becoming increasingly expensive due to inflation and a lack of investment and supply, creating an exhausting environment for many.

The economy, according to GDP, is growing, and inflation is improving, with the market remaining relatively steady. Despite these positive indicators, people still feel left behind because reduced inflation doesn't mean prices are dropping quickly. This disparity contributes to negative perceptions about the economy, as daily expenses remain high.

Kyla coined the term "vibesession" to describe the disconnect between consumer sentiment and economic data. Consumer sentiment metrics are low, despite economic data indicating that many countries are doing okay. Structural affordability problems and media headlines emphasizing high costs contribute to this negative sentiment, making people feel worse about the economy than the data might suggest.

tHE ECONOMY AND INVESTING

The economy is not the same as the stock market, a common misconception. The U.S. stock market has been performing well, but this doesn't reflect the broader economic reality. Only 62% of Americans own stocks, meaning a significant portion of the population misses out on this wealth-building opportunity. This disparity can be seen in other countries as well.

The stock market often disconnects from economic fundamentals. Companies have benefited from low-interest rates by taking on cheap debt before central banks started raising rates to combat inflation. Consequently, many companies are in a good financial position, raising prices on consumers and contributing to economic dissatisfaction despite market performance. For example, the semiconductor industry, particularly NVIDIA, has thrived due to significant government investment.

A practical approach to the stock market involves investing in companies used personally, buying ETFs to track trends, and maintaining a long-term buy-and-hold strategy. Kyla talks about the importance of having a diversified portfolio and not trying to outsmart the market. Starting early, diversifying investments, and consistently investing a set amount each month are crucial strategies.

Kyla recommends a diversified portfolio, including U.S. treasuries due to increased rates from the Federal Reserve. Dollar-cost averaging, which involves automatically transferring money from a checking account to an investment account monthly, is a sound strategy. Long-term investors shouldn't worry about short-term market fluctuations, as the focus should be on holding investments for decades.

Including crypto in a diversified portfolio adds exposure to different assets, even if one isn't fully convinced of its potential. A balanced portfolio might be 60% stocks and 40% bonds, reflecting the current market environment where bonds can be more profitable.

Young people are primarily concerned about student loan debt, high healthcare costs, and increasing childcare expenses. The rising costs of housing make homeownership unattainable for many. The bottom rung of the economic ladder is perceived to be disappearing, making it difficult for young people to start their careers and build wealth.

Social media and hybrid work models significantly impact the economy and personal lives. In the U.S., the shift from pensions to self-funded retirements like 401(k) plans adds to financial pressure. Job security has diminished, with fewer long-term benefits and stability compared to previous generations. These changes, coupled with the challenges of entering the labour market, create a tough environment for young people, contributing to a sense of economic instability.

cAREER PATHS

Choosing to become an entrepreneur instead of working for a corporation can be daunting but increasingly appealing to the younger generation. Many are willing to take on the risks associated with forging their own paths. Starting this journey can be terrifying, with the fear of failure and the lack of a safety net. However, more people today prefer entrepreneurship over the corporate rat race.

For those feeling stuck in the workforce and considering alternative paths, understanding one's skills outside a standard job can be challenging. Changing companies for the same job feels easier than starting something new. Building something from scratch requires significant effort and can be scary. Support from others who believe in one's potential is crucial. Seeking advice and help from admired individuals can provide valuable insights and encouragement.

Engaging in conversations with experienced people is essential when unsure about personal skills or the next steps. These interactions often prove more beneficial than solitary contemplation. Discussing ideas and learning from others' experiences can provide clarity and direction. Despite the difficulties, asking for help is a powerful tool. Most people are willing to offer support and share their knowledge, making the journey less daunting.

THE POWER OF LONG-TERM INVESTING

Predicting the economy's short-term movements is not advisable. Instead, long-term investing is the preferred strategy. Investing in large mega caps while avoiding volatile small caps and industries like biotech helps minimise risks. The focus should be on consolidating information rather than trying to predict daily market changes.

Learning from company failures highlights the importance of diversification. High-profile collapses, such as Lehman Brothers and Silicon Valley Bank, serve as reminders of the risks. For instance, Silicon Valley Bank's failure impacted those with over $250,000, which isn't FDIC insured. Diversifying investments across industries and platforms can mitigate such risks. The FTX collapse, despite its initial strong reputation, underscores the necessity of diversification to safeguard against unforeseen failures.

Companies like McDonald's, which raised prices significantly, deviate from their core values, signalling potential red flags. Paying attention to a company's alignment with its values can help avoid poor investments. The focus should be on the company's messaging and whether it aligns with investor values.

Looking ahead, predicting the exact future of the economy and stock market is challenging, especially with significant political events on the horizon. In the US and UK, upcoming elections will significantly influence the economic landscape. Current societal polarisation and bifurcation are critical issues, and the hope is for a societal pullback toward unity.

PARTNER

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RESOURCES

Kyla’s book: In This Economy

Kyla’s newsletter: https://kyla.substack.com/

And website for all her socials: https://kylascanlon.com/ 

Listen to PensionBee’s monthly podcast, The Pension Confident Podcast to better understand the world of personal finance and pensions: https://podfollow.com/the-pension-confident-podcast