Hi All! Boy, have things been crazy. There have been huge changes in my life and that continues almost every day. Soon I’m going to post an update about all that, but in the mean time, here are a few quick items I’ve thought of or encountered recently.
Brightening up one’s world can make a big difference.
One of the big changes in my life is that I recently moved into a new apartment in a new place. And one change I made to that apartment almost immediately was to replace the sad yellow light bulbs with much better 5000K LED ones. It cost me about $40 to do the entire apartment, including the tube lights in my “before/after” picture above. LEDs not only last years, but save electricity – which doesn’t much matter since I’m currently paying $.06 per kwh (God bless Texas!). But in most places where there is a utility monopoly and prices are much higher, it can be a real money saver. However, the biggest difference in my opinion is the way it brightens things up. I think it makes an entire room feel about ten years younger. But the key is to buy 5000K bulbs. 2700K seems to be much more common and anything at that level or below will give off that sad yellow light you don’t want.
Ryan Reynolds seems like a pretty awesome dude even when he isn’t playing Deadpool.
In the past I’ve talked about how much I love paying a fraction of what most people do for cell phone service thanks to Mint Mobile. Apparently at some point, Ryan Reynolds bought the company. And last week, he left a voicemail for all his customers. It was fun and funny, but it also informed us that we’re getting free unlimited data until the virus hysteria is over. It’s not only a nice gesture, but it put a smile on my face and brightened up my day. Additionally, I understand Mr. Reynolds, unlike many celebrities who simply want YOU to donate while their mountains of money stay parked right where they are, donated a substantial amount of his own money to virus relief efforts. It’s nice to see someone famous doing some genuine good in the world rather than simply virtue signaling to the rest of us.
The stock market is absolutely fucking bonkers.
16 million people have filed for unemployment over the last three weeks (not counting the backlog, which has to be considerable), earnings season is just about to begin raining fresh acid on everyone’s parade, businesses are scrambling to get their share of the massive deficit spending effort while the SBA and the banks scramble to figure out which way is up amidst the chaos, the economy remains mostly shut down, and the stock market is going…up. What the fuck is going on here? The only plausible explanation I can think of is that the “smart money” realizes this entire virus nonsense was blown absurdly out of proportion from the beginning and that the economic suicide program almost has to end sooner than it appears it will at the moment in order to avoid financial ruin for all of us. They believe they have already priced in most of the economic damage and are now trying to buy up assets at a discount.
The problem? Nothing appears to be on sale. Roughly two thirds of the value dip has already been recovered in spite of the fact that almost none of these companies are going to emerge from this unscathed and that there is almost no possible way we’ve seen anything more than the tip of the iceberg that is the damage that has already been done – and we’re not even attempting to start the economy back up yet which means the iceberg is still growing. Plus, our national debt was over 100% of our GDP before this mess – an unsustainable level. With Congress spewing trillions around like it’s going out of style and the FED printing more money than has ever been printed before, we are almost certain to face both a debt crisis with devastating budget consequences and inflation issues at some point in the not too distant future. Either taxes are going to skyrocket, inflation is going to skyrocket, or both. Almost any road we could take from here leads to pain on a massive scale and even the United States can’t ignore that reality forever.
My take? As I’ve previously mentioned, I’ve been almost 100% out of equities for a year and I’m happily staying out for the time being. I believe almost everything is ridiculously overvalued right now, virus or no virus, and it seems almost inconceivable to me that as the full extent of the damage becomes impossible to ignore, pricing won’t come back down to earth. I would be shocked if we didn’t see both the DOW and the S&P 500 below their recent lows again before the year is over and I have zero interest in buying any assets until we do.
Either some members of the media are getting very high before these press conferences or they are just trying to see if anyone is paying any attention at all. Or they just genuinely do want us all to burn.
In reference to the title of this post, on Sunday, a reporter literally asked President Trump why we aren’t shutting down the grocery stores and restaurant drive throughs. Perhaps I’m just a “far right” bonehead (far right encompassing basically anyone who isn’t far left in the minds of the media and its trained mob), but I can’t fathom this having been a serious question. Frankly, I don’t see how suggesting we cut off the food supply to everyone involves politics anyway, although I’m sure the media would find a way to construe it that way as they do everything else. Trump brushed the question off much more calmly and smoothly than I would have, given that this man had just more or less suggested we complete the process of turning this into a third world country, complete with roving bands of armed looters.
I sincerely suggest we choose this as the moment we stop listening to these psychopaths who clearly do not have the best interests of our country in mind. I don’t think this reporter could have gone much further with his question unless he had asked point blank why we don’t just start executing anyone who is witnessed coughing on the spot. The part I don’t understand is why. How does anyone, far left or otherwise, benefit if this country collapses into chaos? How does anyone benefit if we lose tons of economic production and our standard of living goes down? How does anyone benefit if sorry, when corrupt politicians use this crisis as an opportunity to even further erode the foundation of freedom and liberty this country was built on as they have so many times before? I just don’t understand it. But I do know one thing. Unless we stop feeding the media monster, it is going to continue to tear us apart at the seams. Your move, America.
Remember all those surveys that came out back when things were normal? You know, the ones that concluded that about half the population in the most prosperous country in the history of mankind doesn’t have $400, $1000, or some other nowhere near adequate amount of savings for an emergency? Those were scary enough then. But today we’re living in a brand new reality where all bets are off. Assuming we survive this as a country, which is far from certain in my view, we the people will have an unprecedented and horrific new threat to always have to be prepared for from here on out. The greatest danger facing us today isn’t a physical virus; it is weaponized insanity being wielded against us by our own government. If there had been any shred of trust left in that institution, it is certainly gone now. So today, the only post I can think to write that would be remotely relevant is one about some of my observations related to this real life nightmare we’re going to be unable to wake up from for some time to come.
Survival has just become the one and only priority. Thousands dying from a flu like virus will probably be merciful when compared to millions facing economic ruin and even possibly starving. I wish I could say I’m being hyperbolic, but that almost isn’t even possible anymore. If you were living paycheck to paycheck (and remember, roughly half the country was) and the government one day decided that although you were willing and able to work, you would no longer be allowed to, the shit would hit the fan very quickly. Remember, paycheck to paycheck literally means that if you don’t work, your basic bills don’t get paid. That includes everything down to food and shelter. And you can’t very well count on help from Washington. After making the snap decision to take away millions of people’s incomes, they are now squabbling over the details of eventually sending people some pittance that may get the average household through a week or two. Of course, there is a good chance they will tax it back in the end anyway. And meanwhile, the bills are due and that food habit isn’t going away.
That is the exact situation tens of millions of people are in, with tens of millions more about to join them. I’m sad to say it but at this point, if you have some excess cash available and are wondering what to do with it now that your savings account pays zero, ammunition is one of the most important investments you can be making. When people get desperate, things get ugly. And I wouldn’t count on a rapid police response at a time like this. Hell, you couldn’t even count on that when things were normal. I recommend putting some of your cash into something that quite possibly might save your life.
What about the market? I sincerely hope you listened to me or one of the other finance people in your life and dramatically reduced or eliminated your equity exposure some time before the last few weeks. If you didn’t, your only real hope now is to stay the course. Assuming we go back to something resembling normal at some point, you may eventually recover. I wish I could say something more reassuring, but we’re literally in a scenario where the only plausible solution, aside from cutting our losses and abandoning the economic suicide plan immediately, is for an already bankrupt federal government to crank the printing presses up to eleven and start spewing out checks to keep people alive. The country’s survival is far from guaranteed and even if it does happen, all bets are off in terms of what life will look like going forward.
If you are out of equities, congratulations on having at least one silver lining. However, I’m not sure what to tell you now. While all of my retirement money is in either cash or cash equivalents and every major index is down over 30%, I’m not necessarily about to push any of my chips back into play. On Sunday, the FED announced that in lieu of making even some astronomical specific commitment, they’re already down to the “whatever it takes” route. In other words, they have absolutely no clue what to do at this point, but they know that whatever they end up having to, it’s going to have neither upper limit, nor historical precedent. And the market’s response? A bounce in futures but a roughly 3% drop in all major indexes the next day. Even an unlimited commitment of free and easy cash wasn’t enough to do any more than momentarily slow the bleeding. We are likely to see a bounce whenever the federal government quits bickering and starts sending out lifeline money, but that could easily be neutralized by earnings reports, some of which are coming this week, and are obviously going to be atrocious.
The conventional wisdom would tell you that everything is on sale right now and it’s time to buy. But the conventional wisdom doesn’t come from a world where the most powerful country in history just committed economic suicide over a trumped up flu virus. And I’m not sure it’s relevant now that we’re living in that world. Here is the problem. On sale from what? If we survive this, the old economic normal is gone. At a minimum, we’re looking at thousands of bankruptcies, both personal and business. There is a ton of economic production that isn’t just going to turn back on as if controlled by a light switch and a ton of financial pain that will take time to filter through the system. Either a liquidity crisis or runaway inflation is also all but certain. I’d say the total market valuations we had been at a month ago are out of the question for a few years at the absolute minimum.
And even after the economy has had enough time to recover, who is going to forget this? Our government has voluntarily created an economic doomsday scenario that has already made 2008 look like a blip on the radar and is likely to do the same to 1929 before all is said and done. At one time, there were multiple generations of people who were frugal to a degree that only made sense because they had lived through the Great Depression. And many of them were that way for the remainder of their lives. A 30k DOW requires people to spend money like it’s their job to get rid of it as fast as possible. It also requires a high degree of business investment. How courageous is any business owner going to be with the knowledge that the government could effectively declare bankruptcy on their behalf at any moment?
I think the only way to conceptualize this is to try to imagine a different world. For example, if we survive this and don’t subsequently make a massive effort to start manufacturing in this country again, we’ve learned absolutely nothing from this experience. And I highly doubt we will go back to a world where people eat half their meals at restaurants or blow a hundred bucks on a casual night out. The retail and entertainment sectors will still exist, but at nowhere near the scale they did. Hopefully many of the people who previously worked in those industries will go into either newly created manufacturing jobs or the trades, where they were already sorely needed. Either would be a better alternative to a job that pays essentially minimum wage and doesn’t offer consistent hours.
And if we survive as a country, we’re going to have a desperate need for those people. Our infrastructure is crumbling and has been for years. It seems to me that overhauling it would be a great way to recover economically and improve life for everyone in the process. Mind you this won’t be cheap. Nothing will be now that we’ve destroyed the economy that made this country what it is. But if one good thing comes out of this, I’m hoping it will be that we as a society learn the difference between cheap and a good value. Maybe instead of the Kardashians making a billion dollars and pro athletes constantly bitching that their ten million dollar salaries aren’t enough now that someone else is making eleven, we could pay decent wages to people who do something other than sit in front of computers. Maybe they could make us some decent stuff that we don’t have to throw away and replace all the time.
Imagine if we rebuilt our country, our economy, and our middle class, all at once. If that were to happen, I could see this whole thing having been a huge blessing in disguise. Don’t get me wrong, economic suicide is not something we should have ever considered and every politician that had a say in it should be voted out yesterday. In fact, I think now would be a great time for across the board term limits and some other badly needed reforms. Anyway, the new world, whatever it looks like, will be a much more sober, grounded one. We definitely aren’t going back to where we were for a generation or two at minimum. But I don’t see that as a negative. Maybe it’s an opportunity for us to go back to focusing on the important things. Maybe it will even reunite a badly divided country. Who knows? We can’t always control our circumstances in life. Sometimes, the best we can do is to create strength out of struggles – even if those struggles are self inflicted wounds. I hope and pray that something good comes out of this. But for right now, buckle up. This is not going to be an easy time for anyone.
This blog has been in existence for just over a year now. But in that time, I have never addressed the most important reason of all for saving money and building wealth. This is the elephant in the room that no one seems to want to talk about. It is the biggest reason I cringe when I hear people saying things like “I can’t afford to save for retirement, so I’ll just work till I’m dead.” I’m not trying to be alarmist, but it’s time for a dose of reality. Most people think of 65 as a typical retirement age, but the median age is actually 62 and the average is 60. And that’s for current retirees. It is almost certain that those numbers are going to be much lower for my generation.
Why? Automation. Have you toured a factory recently? Hundreds, if not thousands of people probably worked there at one time. Today, you might see ten or twenty people out on the floor, mostly either sitting at computers or maintaining machinery. Yes, some of our manufacturing jobs went to China or other countries where labor is cheaper. But most of them didn’t. Most of them simply don’t exist anymore. And manufacturing was only the very beginning.
In spite of an economy that appears to be stronger than it has been in some time, today’s labor force participation rate is only 63%. In other words, 37% of people who could potentially be working, are not. Mind you, the rate peaked at 67% in 2000 so it’s not quite as dramatic as it sounds…yet. But in a country of 300 million people, that 4% difference amounts to over 10 million. And the trend isn’t likely to reverse, but to accelarate.
For example, tens of millions of people work in retail. Not only do the vast majority of those jobs pay poorly to begin with, but most of them are not going to be around for long. Remember when automated checkout lanes started popping up? At first, they were a novelty. Today, they are in as many stores as not and taking up more and more lanes. Instead of four or more cashiers, there is now one employee supervising all those checkouts. And it won’t stop there. Walmart is already piloting robot janitors that clean the floors and others that keep aisles stocked. Once they start replacing employees with these robots en masse, the economy of scale factor kicks in, the robots become much cheaper to buy, and other stores will quickly start following suit. They will have to. If they don’t, Walmart’s costs will be lower, allowing them to cut prices and take market share.
Suddenly, tens of millions of not so great jobs don’t even look very safe. The technology already exists to replace many of the jobs in fast food restaurants. Those people who have made the news over recent years demanding $15 an hour may not realize it, but by the time anyone makes that much money to work in fast food, the job will likely involve maintaining robots and computers. And there will be far fewer people doing it than there are now.
Millions of people drive for a living. What happens when the autonomous driving technology every auto manufacturer on the planet is working on cramming down our throats as quickly as possible becomes viable? Even more people sitting at home with no way to earn a living. This technology is no more than a decade or two from reaching that point. And technological progress tends to move faster than anyone expects it will.
By the way, if you think this will stop once most jobs lower skilled have been eliminated, you haven’t been paying much attention. Every day, companies are asking employees to do more with less. And even still, no job seems to be safe. It is never enough. That’s because eventually, technology will replace almost all of us. In some cases, it isn’t capable of doing it yet. In others, it’s just a matter of increased production bringing the cost down before it’s goodbye human employees. There are literally computers out there that can compose music. As in nothing was there before and suddenly, now there is a totally original set of notes. I have friends who work pretty high up in the technology world and every now and again I hear about these things from them. And if computers can create music, they can do a lot of other things that may not seem possible right now as well.
We as a society have some serious thinking to do. For as long as technology has existed, the question has only been “can we do it?” I believe we have long since passed the point where we should have started asking “should we?” We’ve already seen what happens when human labor becomes less and less in demand with each passing day – ugliness. More and more people have found themselves on the losing end of things and are living the consequences. It’s not just a lack of money. It’s a loss of purpose. We’ve seen mental health issues skyrocket and this is one of the biggest contributors, if not THE biggest. What is it going to look like when the majority of people are literally economically obsolete because there is a robot or computer that can do the same things they can, but more efficiently and effectively? We are a lot closer to that day than most people are willing to admit. In fact, the technology already exists right now. I’d say a decade or two is an optimistic estimate of how much time we have.
I don’t have the answers. I don’t know if some sort of universal basic income scenario is going to work. From what I’ve read, the experiments that have been done thus far have not yielded encouraging results. What I do know is this. Whatever the not so distant, mostly automated future looks like, I would rather face it with assets at my disposal than without. A lot of people talk about early retirement like it’s an optional luxury. For many people, I expect it will be totally the opposite. So to those who are taking a “let tomorrow take care of itself” approach to preparing for the future, please, let this be a wake up call. Fail to plan, plan to fail. And there is at least some chance that in our lifetimes, failure will have much starker consequences than it has ever had before.
Happy Friday everyone! Here is the conclusion of Wednesday’s post.
Now let’s look at the high end. A six figure salary is yesterday’s news since everyone has one now, right? Wrong. An annual income of $100k puts you in about the 90th percentile as an individual or the 75th as a household. Keep in mind, we are back to US only numbers now. And I want you to see how steep things get from there. Want to be in the top 5% of earners? That’s about $150k. And that top 1% that is always being demonized by the media? Roughly $300k. Not nearly as much as you thought, I’ll wager. And that means everyone making any amount larger than $300k is in an increasingly smaller fraction of the top 1%. There really aren’t that many of these people.
Not quite the common perception, is it? The distortion is
caused by free and easy credit. Fifty years ago, if you were driving a Corvette,
it meant something. Today, you see them everywhere because any idiot with some
combination of a halfway decent income and a halfway decent credit score can
buy one brand new. You don’t necessarily even need both of those to qualify
anymore. Subprime auto loans are starting to blow up now that the recession is
most likely in progress, but they’ve been handing the damn things out like
candy on Halloween over the last several years.
The point is this: appearances mean nothing. Zilch. Most
people have been so busy maxing out their credit to show off how successful and
important they are for so long that they didn’t even notice when what they were
doing ceased to mean ANYTHING. Women, here’s a special PSA for you. That guy
driving the fancy car might be the hyper successful whatever that he claims to
be. But more likely than not, the story is a lot more ordinary than that and
he’s either borrowing Daddy’s car or he’s just maxed out his credit to sell you
something a little different. It’s called peacocking and it’s extremely common
– and a fairly logical response to a phenomenon called hypergamy. Women don’t
usually do it because most men don’t care about the finances/career success of
the women they date. They put on makeup and get breast implants to make
themselves more marketable. But that is a whole different topic for another
When I was growing up, there was a very exclusive
subdivision in our area where every single house was a million plus and living
there almost seemed to make you a celebrity. And in fact, there were some
living in there, even in lowly Wisconsin. A certain Green Bay Packer who once
got in the wrong hot tub and suffered some pretty serious consequences for it
was among them. Anyway, this was one small suburb of Milwaukee, Wisconsin.
Today I realize there aren’t enough jobs within fifty miles of that subdivision
that pay $300k or more for someone holding one to have been living in every one
of those houses, let alone every similar house in all the other similar “rich
people” enclaves in the metro area. Most of these people that I thought were
living fairy tale lives were in fact living in financial prisons they
themselves had built. I don’t need to know every one of their personal
stories. The statistics make what I just said an undeniable fact.
There is a wonderful book called The Millionaire Next Door
that I highly recommend to everyone. It goes into detail on this very thing and
I still remember specific parts of it to this day that just blew me away. The
summarizing message is that now that almost anyone can appear to be wealthy, it
has obscured the fact that most people who are actually wealthy don’t care very
much about appearances. The lesson? If you want to actually BE wealthy, you’re
pretty unlikely to get there by trying to LOOK wealthy. In fact, spending
everything you have on trying to keep up appearances will almost guarantee that
you will never actually have much of anything.
This is a seemingly obvious concept. But everywhere you
look, style is being valued more highly than the actual substance it supposedly
represents. Most of what you see is fool’s gold. And bringing it back full
circle, don’t let these peacockers fool you. Live your life reasonably and be
happy. Remember that a very tiny percentage of the people who have ever lived
on this earth have had things as good as you do. This is whether you make $30k
a year or a million or anywhere in between. Perspective is incredibly valuable.
It’s easy to lose it in a culture like ours where results are often valued more
than the principles and the processes that produced them. But fight back
against that. It’s only a feeling. The facts are much more relevant to your
success or failure in life. And I want every one of my readers to have the
In this crazy world we live in, everywhere you look, someone is showing off their wealth. Million dollar houses, hundred thousand dollar cars, exotic vacations, you name it – these things are all so commonplace that we barely even notice them anymore. Social media has only amplified this trend, with millions of people taking to the internet to post snapshots of their lives that have been carefully curated to show them only in the best light possible. Especially if you live a pretty typical life, and even if you don’t, you can be forgiven for getting the sinking feeling that you’re being left in the dust – especially financially. And that’s exactly the feeling I want to challenge today.
I’m going to use cold, hard facts – statistics in this case
– to do it. When you’re looking at statistics, it’s important to make sure you
understand the context. In the case of income statistics, you can start by
ignoring average (or mean) and going straight to median. Why? Average income
numbers are pulled way up by the highest earners. Median income is a much more
accurate concept of what is “normal.” For example, the average household income
in the United States is over $70k a year, while the median is roughly $60k. And
that brings me to my next point. Household income seems to be the most commonly
reported. And that’s fine. But if you’re a single person household like me, an
individual income number is a better means of making an “apples to apples”
comparison. And in this case, the median individual income is only a little
north of $30k a year, while the median household is nearly double that at $60k.
You can also drill down deeper using all sorts of other factors. The Bureau of
Labor and Statistics (BLS) collects tons of data and it is freely available to
Now that we’re starting from a realistic point, we can begin doing some comparisons. if you live in the United States, or any of numerous other countries with modern economies, you are already better off than a stunning percentage of people in the world. There is a really interesting website called Global Rich List that aims to bring awareness to poverty around the world. If you enter the $30k figure from above (again, this is someone dead in the middle here in the US), you find that this seemingly small income would put you in the top 1.23% of people worldwide. The federal poverty level in the US is roughly $12k a year for one person. But even a person making that little is in the top 14.5% worldwide. And roughly that same percent (14) of the US population lives at or below the poverty line. So if you live here, the odds are overwhelmingly likely that you have more to be thankful for than you might think. You could do the same type of analysis with net worth numbers instead of income and get similar results.
This is without even getting into a historical discussion.
If you started making comparisons with all the people who have ever lived on
earth, you’d be looking at almost infinitesimally tiny fractions of a percent
of people who have lived as well as even the poorest among us today. And that’s
without even factoring in all the technological advances humanity has made. For
example, air conditioning was invented in 1902, which means that before then,
even royalty didn’t have it. Airplanes were invented the very next year, so the
nobility of the past couldn’t travel anywhere nearly as fast as we can. And
don’t even get me started on being able to hold the knowledge of the entire
world in one’s hand. Before the printing press was invented in 1455, books
themselves were very rare because they had to be copied by hand. But today you
can carry thousands of them in your pocket – and they’re updated automatically
as knowledge progresses!
I want to do something a little different today. This is going to be a vindicating post, given another post I wrote not long ago, but there is a much more important purpose than my own vanity. I’m not just writing this stuff for the fun of it. There are real people out there getting hurt because they don’t know what they’re doing and I want to help reduce such scenarios. I get my news almost exclusively in written format and in particular, I read a lot of articles about business, finance, and economics. Yesterday I saw one that is relevant to something I think about often and I want to discuss it here.
In this astute, sobering article on CNBC, author Megan Leonhardt illustrates the regrets a healthy majority of millennial home buyers have with their purchases. She theorizes that the common thread in these regrets is the lack of financial understanding far too many people go into these transactions with and then goes into detail on some of the different varieties of disappointment that result. And of course, she’s correct. However, I’d like to take this topic a step further. History is absolutely littered with stories of uniformed marks being misled en masse into major financial transactions that aren’t in their best interests and ultimately paying the price. It’s a story as old as the barter system or the word “speculation.”
I believe this is one major example of the greatest threat
facing my generation: the menace of blindly following conventional wisdom that
developed under very different circumstances than those we live in today. In
this case, following the assurances of well meaning family members or desperate
real estate agents with everything to gain and nothing to lose, people are
buying incredibly overbuilt, overpriced houses they can’t afford in any
remotely practical definition of the word, since “renting is throwing your
money away.” When decent houses that reasonably met people’s needs were widely
available and cost one, or maybe two times a typical annual salary, I would
have been solidly in agreement. Today, the median house sells for roughly $250k
while the median household income has only recently risen to around $60k. As a
finance guy, I can tell you with the utmost confidence that the relationship
between these numbers is neither workable today, nor sustainable in the long
term, and that therefore, renting is not throwing money away, but paying more
than one would prefer in order to avoid a very likely financial catastrophe.
We are looking at a structural problem and mark my words,
something is going to give. It has to. Either the incomes of typical people
will rise or real estate prices will fall; and either change needs to be a
dramatic one if it’s going to bring the situation into a reasonable balance.
Adjusted for inflation, incomes have barely risen at all over the last few
decades. And given that the chief cause, technology/automation, is only going
to continue to progress exponentially, with the graph turning nearly completely
vertical very soon if it hasn’t done so already, I don’t see that trend
changing in any positive way. Another 2008 style housing apocalypse seems far
more likely, but I’m not even sure that would be enough to correct the
imbalance. When it happens, and I genuinely believe it will, the government
will have little choice but to step in and continue to paper over the problems
that have been festering just below the surface of the American dream narrative
for about as long as that dream has been viewed as a widely viable reality. It
has done so many times before and it will certainly do so again. But sadly, if
it is successful, it will probably only continue to propagate our current norm,
in which far too many people live on the very brink of ruin and deal with the
stress of that knowledge every minute of every day. Millions of people are (barely, in many cases)
holding wildly overvalued, impractical assets and precious few of them are sufficiently
capitalized to remain solvent when that overvaluation becomes readily apparent.
Even if you accept the values of these houses for what they
are, the amount of living space per person has ballooned to absurd proportions.
The average household of 2.5 people does not need a house anywhere close to the
2600 square foot average size of the behemoths that were built last year, nor
even half that. We’re talking about numbers that have not been observed on a
large scale at any point in human history. So we’re either looking at mass
overvaluation or the mass existence of ridiculous overproduction that would be
virtually impossible to divide up in order to “right size” it. After all, they
can’t exactly start dividing these monster houses into two or three units each.
Either way, my money is on some serious, widespread attrition.
The good news is that clearly I’m not the only one seeing
this. The article I cited above starts out talking about how millennials are
buying fewer houses than previous generations were at the same ages. Whether
it’s because they see what I see, they’re being held back by financial
constraints, or perhaps they just have an uneasy feeling they can’t quite place,
many members of my generation are making the right choice and staying on the
sidelines until further notice. What about you? If you’ve already bought
something and feel overextended, which is what many of the regrets in the
article boil down to, your options are to sell quickly while you can still get
good value out, assuming you are in a position to, or to buckle up and attempt
to hold on through whatever form the ugliness on the horizon takes when it gets
here. If you’re taken down by another mass foreclosure event, the silver lining
is that assuming you become insolvent, you will at least be free of that brick
and mortar anchor you are currently chained to and you will be in good company
as you work to rebuild your financial life. But if you haven’t bought anything
yet, be thankful. Whatever has led you to the position you’re in today, I
believe it has saved you from one hell of an ass kicking.
I would argue that another example of this unsustainable,
blind following of conventional wisdom that is no longer relevant to current
circumstances trend, is the constant pressure (often from the aspirational
grandmothers, bless their hearts) to have kids very few people can reasonably
afford. We’re talking about a quarter of a million dollars for one – likely a
low end estimate once a couple decades’ worth of inflation are factored in –
paid for by people who can barely keep their heads above water as it is in
literally the majority of cases. And how many people have just one?!? But that
is another post for another day. As a quick spoiler alert, however, if you are
not a member of a stable, long term household with a sustainable income of $70k,
or preferably considerably more, and you have not had comprehensive, realistic
discussions about how you will handle this drastic, life altering change of
circumstances, you’re making a dire error. For now, just remember this: if
something feels off, it very well might be. In spite of what your family, the
media, salespeople, or anyone else might tell you, there are very few times in
life when you will lose out by taking a little more time to make sure you’ve
done your diligence and feel comfortable before making a major decision. Do not
let someone else, who will not be paying the consequences, put you in a
position you don’t understand or are not fully, diligently prepared to take.
This is your life. Take it seriously and your results will be much easier to
I recently posted about how to beat the ISPs (some people refer to them as cable companies but I don’t since in my eyes, providing internet service is the only relevant thing they do) at their own game. Recently, I got the opportunity to do it for myself – admittedly the easy version since there are two options in the mighty city of Houston. AT&T bargained but didn’t get down to the $30 Xfinity is offering 60mbps internet for. And yes, I know that Xfinity is just the name Comcast created to hid behind as a result of its customer service being legendarily awful. For cheap internet, I’m willing to take the risk. What’s the worst that can happen in the year until I switch back to AT&T? For the record, Comcast is already working on answering that question, having already managed to screw things up in a couple of ways with my installation still over two weeks away. So I may be eating those words sooner rather than later. But that’s not what this post is about.
I’ve noticed something interesting in the process of already
going back and forth with my new ISP more than I would have hoped to in an
entire year. The game has gone beyond simply begging people to sign up for
cable. Now Comcast is literally offering to give it away – AND begging. Even on
the company website, the same internet speed I’m getting is being offered with
a cable package for an additional $5. But since I obviously overlooked that option,
Comcast has taken it upon itself to make sure my careless mistake doesn’t cause
me to miss out. I’ve gotten multiple emails and phone calls now in just the
span of a few days, all following the same pattern. They start out trying to
make it seem like they’re calling to address an issue with my new account,
which makes sense as a tactic since that suspicion is the only reason I’ve
answered the calls in the first place. Then they “check something out” and
suddenly announce they have good news for me. I can add cable to my new package
for only an additional $5 per month! I then respond with a polite “no thanks.”
The first rep simply let it go but not this second one.
First she acted shocked that I don’t want to pay $5 for something I’ll never
use. Surely I must just not understand the value proposition. But after her
attempts to explain it to me failed, her tone did a sudden 180. Instead of a
Comcast rep, I found myself more or less listening to a girl scout begging me
to take her unwanted product. She even offered to give it to me for free. That’s
right, folks. The market has spoken so loudly and clearly that cable has been
reduced to a throw in. Of course, Comcast makes more money on advertising when
its subscriber numbers are higher so it makes sense that this would happen,
much like magazines that threaten you with “last issue if you don’t subscribe”
and then just keep showing up anyway when they were never requested, nor paid
for, at any point. That’s the inevitable conclusion when your “product” is
nothing but a big, steaming pile of regurgitated garbage and propaganda, packed
tightly between pages upon pages of advertising copy. And that’s exactly what
I must admit, this has me smiling from ear to ear. The
market has acted in a rational manner by opting out of paying for something
that has no value and the price now reflects that. The market is nothing but
the collective actions of all of us and thus, it follows that apparently we as
a society aren’t quite as stupid as I had feared. Now I don’t harbor any
illusions that this has happened because people aren’t spending hours a day with
their eyes glued to tv screens. On the contrary, I recently read that the
average person spends FIVE FUCKING HOURS A DAY doing so. I don’t know about
you, but if I were on my deathbed reviewing the way I spent my time on this
earth and I realized I had spent a third of my waking hours doing nothing but
having my mind driven by other people – people who mostly just want use my
emotions to manipulate me into buying crap I don’t need or voting for someone
who doesn’t actually give a damn about me – I can’t imagine the agony I would
Alas, people most certainly are not rejecting wasting a huge
portion of their lives or allowing themselves to be manipulated by those least
qualified to do so (assuming anyone were at all). But at least they are wasting
their lives in the most efficient way possible. And if I can’t have people
doing the right things to move themselves forward in life, I’ll settle for them
doing the wrong things without paying for the privilege. Who knows? Maybe
streaming won’t be profitable enough to support the creation of so much garbage
in the long run and more people will turn off their tvs and, I don’t know, look
at each other and attempt to speak. Or go outside. I know, I’m the crazy one. I’ll
go back to being quiet now. But in the words of one Abraham J Simpson, “I’ve
had my moment.”
Time for a fun post. This one is going to be long, opinionated, and speculative. But bear with me because I think I’m onto something here. The media won’t let us forget it; millennials are not buying houses at the rate members of other generations have. They have a hundred theories about why – most of which involve student loans, rising real estate prices, stagnant incomes, structural economic shifts, or simple lack of “good old fashioned American gumption.” Of course I don’t know everyone or everything, but as a millennial with an at least above average understanding of business, finance, and economics, I believe I’m as qualified as your average pundit to do some positing of my own on the subject. From my perspective, while each of the issues I mentioned plays a role, they aren’t contributing to a crisis at all. To the contrary, the nonstop hand wringing isn’t necessary and in fact, things are actually moving in a very positive direction.
Who am I? I’m a millennial who went to a consistently highly
ranked public university and graduated right into the heart of the worst
economic crisis the country has seen since the Great Depression – and into a
local economy that was struggling more than most for that matter. Between my
college girlfriend and I, we had a pair of decorated academic records, close to
$100k in debt, and zero jobs to speak of when we walked across the stage in our
gowns and funny hats. Our graduation speaker’s summarizing message was “we’ve
destroyed this once great country, you’re screwed, good luck.” It was about the
most depressing speech I could have imagined and also rather redundant since
our reality more or less already matched it. A little optimism would have been appreciated
and appropriate as well.
Over the next few months, both of us scratched, clawed, and
begged our way into the workforce. We each started out as underemployed temps
(so no guarantee of tomorrow much less benefits or work that was in any way
challenging or meaningful) serving in office drone functions making roughly
$30k a year each and well aware that we were lucky to be that well off. It
wasn’t an easy time but we were determined to get through it. Mortified by our
pile of debt, we made a plan to pay it off in a maximum of five years and stuck
to it, no matter how lean our life together had to be. We lived in a small one
bedroom apartment and drove one car together to work since our jobs happened to
be in the same direction. Luxuries like eating at restaurants were kept to a
minimum. Over the next few years, things gradually got better. We each
differentiated ourselves at work and got hired full time with small raises. My
girlfriend became my fiancé and my fiancé became my wife. And yes, it was a
relatively modest wedding – although a wonderful one as well. We both upgraded
jobs a couple of times and suddenly things looked much different. We bought a
pair of new cars – no luxury hood ornaments, but all the nicer features like
leather, fancy rims, touch screens, etc. We upgraded our living arrangements from
small one bedroom apartment to two bedroom condo style apartment to three
bedroom duplex. We did all of this while remaining on schedule with our five
year student loan repayment plan. A house might have been the next big step but
we were not about to consider that until our student loans were 100% eradicated.
But that never quite transpired. We had married too young
and while we had accomplished some impressive things together and grown
immensely as people, that growth had taken us in separate directions. We
divorced fairly abruptly, parted ways, and have never spoken again. Almost
simultaneously, I got my current job and my income doubled overnight and
continued from there. I worked hard and learned a lot and after a couple of
years, a significantly more desirable territory opened up. I lobbied for it
with all my might and got it and today I’m in Houston – over a thousand miles
away from the part of the world that never managed to feel like home in over
two decades of my living there. It has taken some time to develop this new
territory and that is still a work in progress but my income has increased
significantly since coming here. Plus my investments have continued to grow and
I’ve started a profitable side business as well.
While my post college life (and pre as well) started out
relatively bleak when compared to previous generations, I consider that an
advantage as I look back on it. I learned to separate wants from needs early on
– and significantly, I learned that before I had developed a taste for a more
expensive lifestyle than the bare bones existence of a student from a low
socioeconomic background. Gradually, in spite of the dismal economic
conditions, I was able to grind my way into a successful career path. And today,
well under a decade after setting out on that journey, my income has cleared
the 90th percentile. I’ve developed a taste for the finer things in
life but it has happened gradually and with the lessons of the past ever
present in the back of my mind, I am unwilling to spend more than half of what
I earn regardless of the circumstances.
Why the mini financial biography? I think the background of
my basic experience helps to illustrate the point I’m going to make. By my age,
most people in previous generations had a house and kids. I have neither.
However, my net worth is substantially higher than that of almost anyone of
previous generations at this point in their lives – adjusted for inflation, of
course. Barring a total disaster, it will be in the seven figures less than ten
years from now. At that point, I may or may not own a residence. But once again
barring a total disaster, there will be no kids. I think extremely logically
and have almost completely divorced myself from emotion when it comes to making
financial decisions. Kids made sense when each one repaid the parental
investment in full and then some, often in the form of free labor on a farm or
in the family business. Today, a kid will cost roughly a quarter million
dollars if you are a capable enough parent to prepare him or her to leave the
nest by eighteen – otherwise more. This is one of the most important financial
decisions anyone can make. Any argument in favor of having kids is 100% emotion
based and thus, irrelevant to me. No, I am not a robot. But I am willing and
able to override my feelings in order to put not just surviving, but thriving,
squarely in the number one spot.
Obviously I am not a typical millennial. But I believe that
more than members of any other generation, millennials reflect my way of
thinking on at least some level. For example, the rate of reproduction has
plummeted – in almost a perfectly inverse correlation with education level
attained. Millennials aren’t ruining everything; in many cases we’re ruining
bad things and making room for better ones. Motorcycles are about the most
dangerous form of transportation imaginable and guess what – very few of us are
buying them. Harley Davidson motorcycles are easily the worst possible variety
of motorcycles. They are big, ugly, egregiously loud, and they have zero of the
motorcycle’s three actual advantages – ridiculous speed, low cost, and great
gas mileage. Here again, millennials seem to have it right; Harley is on track
to be bankrupt in less than a decade because we simply do not buy their products.
How about beer? Entire generations drank nothing but piss water and apparently
it never occurred to them to ask for anything better. Millennials didn’t ask.
We demanded. And today, quality beer is widely available while the mass
producers of swill fight for dwindling market share with sort of clever
commercials as they quietly buy up every craft beer brand they can.
On to home ownership – the foundation of the mighty American
economic legacy. It’s true. We aren’t buying them in very high numbers. And
yes, all of the problems I mentioned are playing a role. But I fought through
all of them and could now buy a house without financing if I wanted to. Most
millennials aren’t quite there, but plenty are succeeding in fighting their way
through. The American economic engine has been finding creative ways to make
things affordable for people who can’t actually afford them for a very long
time – since before the Great Depression, in fact. I really don’t buy the
general argument that millennials have just gotten such a raw economic deal
that it can’t be done yet again. I think the biggest issue at play here is
choice. Just like crappy, obnoxious, overpriced death machines (yes, I hate
Harley and can’t wait to see everything related to the company relegated to
Pawn Stars and similar shows) or piss water at any price, we are not buying
houses because we do not want what is available.
Back to the example of my life since it’s what I know best. Yes, I am “throwing my money away” on rent from the conventional perspective. But am I really? I spend just shy of $1200 a month on a very luxurious arrangement. Sure, it’s only a 700 square foot, one bedroom apartment. But that is plenty of space for me, the few possessions I chose to keep when I came here, and the even fewer I have acquired since. It was built in 2013 and has granite countertops, hardwood floors, ten foot ceilings, beautiful track lighting, and a balcony overlooking a resort style pool complete with gas grills all around (the view from my balcony tonight is the featured picture for this post). In addition to the pool areas (yes, there are more than one), the complex has gated entrances, security guards on patrol, a serviceable gym (and I’m pretty picky about them), a clubhouse with a very nice pool table, coffee, and light refreshments, a computer room, several lounges that can be used whenever or even reserved for private events, a yoga studio, trash pickup at your door, about a hundred huge tvs everywhere you go that anyone can turn to any channel they like, and I’m probably leaving a bunch of stuff out. And by the way, I left out the best feature of all – portability. This area hasn’t turned out to be for me so in a little over a month, I’m moving to an even newer complex with even better amenities and in an area I think will be a better fit. And it will cost me roughly the same. If I were offered a better job in a different city, I could make a similar choice without having to worry about selling a house. Anyway, my current complex also happens to be located in an area where you’d be hard pressed to find a piece of real estate priced below half a million dollars. My new one will be in a somewhat more affordable market – if you consider $300k+ affordable when the median household income is around $60k a year. For the record, I do not.
And even if you were willing to spend that kind of money,
you literally couldn’t buy what I’m renting because it doesn’t exist. The
average American house has been growing consistently and today, it is around
2600 square feet. That would have been excessive when the average family was
twice the size it is today. Every one of those square feet has a cost –
mortgage interest, property taxes, time spent cleaning and maintaining,
utilities to heat/cool, more money spent on accumulating and maintaining
clutter, and more. The palaces people think they own are actually financial
prisons and worse, they take up tons of their time as well. This is
unsustainable. It was unsustainable in 2006 and society had a great opportunity
to learn that. But somehow that didn’t happen, just like it hasn’t in so many
other past opportunities, and the average house has only continued to grow.
I want exactly what I have – an appropriate sized residence
with premium, modern features and amenities and as little maintenance as
possible required – or preferably none. Sure, I could find a house or condo
with less than 1000 square feet. But it would probably be old and either
falling apart or shoddily renovated to attract buyers with as minimal an
investment as possible. And that’s because for a long time, we’ve been building
mostly modern mini mansions the average household can’t actually afford and
almost no appropriate sized homes. As a millennial, it certainly seems like far
more of my peers live in households of one or two than in households larger
than that. Even among those who have kids, very, very few have more than one or
two. And like it or not, millennials are now the largest generation in this
country, which is why all of this is so significant. So why do we continue to
build houses that could shelter small armies when almost no one needs more than
2000 square feet and most could get by with considerably less?
In theory, you should be paying more for rent than it would
cost you to own something comparable. That’s the premium you pay for bearing almost
no responsibility. But there are numerous, widespread scenarios where that isn’t
the case and that’s if appropriate properties are even available to buy in a
given area. My situation certainly falls into that category. Find me a property
in my area reasonably close to the size of my apartment that offers even
remotely similar amenities for $1200 or less and I will buy it and pay you
every dollar of equity I build in the first year as a finder’s fee. That’s how
confident I am that it’s not possible here. And I’m serious about that offer by
the way. I could go into an in depth analysis of the numbers and maybe I will
write a post on that one day but for now, suffice it to say that I’m a finance guy,
I look around and run the numbers regularly, and this isn’t even debatable in
I think we’re going to see housing change over time and I
believe the process has already started. We’re already seeing it on the margins
in the form of some extreme concepts like tiny houses, which started off as
media curiosities and today are growing common enough that most people have
heard of them. There is actually a market for those things and my guess is that
if builders were to start building new, modern houses of a slightly more
practical size, they would find that there is a huge market for those. Let me
rephrase that. When they start doing that, they will find that. I think we will
see a dramatic increase in premium featured houses being built in the 1000-1500
square foot range. In fact, if I see a builder doing this, I will seriously
consider investing. In time, I think the average size will drop to 2000, and
maybe even below, while the average age will decrease dramatically as tons of
houses are built to accommodate smaller household sizes and the weight of those
numbers pulls in that direction.
And we will all be better off. We as a country do not
benefit when such a high percentage of people are “house poor” to the point
where they are a few unexpected expenses or a moderate injury or illness away
from foreclosure. I don’t believe it benefits the economy when all factors are
considered and it certainly doesn’t benefit us as a society to have a bunch of
people living in such a terribly stressful situation. It certainly doesn’t
benefit us to have so much of our economy resting on the house of cards that is
the mortgage backed security system. And no, that has not been fixed since the
Great Recession. Just like the several previous times it has collapsed on
itself, some politicians slapped some wrists and introduced some new, “this
time we’re actually serious” sounding legislation that really just towed the
wreck of the Titanic in to port, threw a tarp (no pun intended here) over the
gaping hole in the hull, rearranged a few deck chairs, and sent it right back
out to sea. The problem won’t actually be fixed until we address the real, underlying
cause. But naïve optimist as it may make me sound like, I believe we will do it
– at least to an extent that will make a substantial improvement. I believe we
will “right size” houses and when the dust settles, it is going to be a very
good thing for everyone. The media and society at large loves to rip on my
generation and certainly plenty of it is warranted. However, I believe we have
been brought up in just the set of circumstances necessary to have made us
exactly the people to do what several previous generations have failed to.
Disagree? I would love to hear your reasoning.