Yesterday, I described the forces creating rapid lifestyle, luxury good and financial asset inflation.
What to do?
Aspire to skills, ignore asset-driven status.
Near-zero yields have created a very different world than I grew up in.
- The skillful can easily lease their needs, at a tiny fraction of the cost to acquire.
- Businesses, like property management, that charge based on a %age of revenue are bargains, for both sides of the relationship. Managers can scale valuations at PE ratios over 50x net earnings. Owners pay 0.1-0.25% p.a. (of capital) for expert services. Both sides of this equation were unimaginable 30 years ago. Another way to look at this => “Vanguard” pricing is moving across asset classes.
- In a world with tiny cap-rates and huge PE ratios, Human Capital is very, very valuable.
Let’s look at an example.
I like to follow real estate, particularly Luxury and Vacation markets. In these markets, there are many people who own $1-10 million places.
Annually, these places cost $15,000 – $100,000 p.a. (cash) to own and, often, sit empty. The cost to hold is not a big deal for these owners because they can afford it.
I’ve always wanted to visit Jackson, WY so I jumped on Airbnb and had a look around. I can lease a Jackson Hole penthouse, roughly equivalent to my net worth, for a few days.
My cost is…
- 1/20th of the annual cost to own,
- 1/1000th of the capital cost, and
- maintenance is someone else’s problem.
Thanks to Airbnb, there’s real value here, especially as I am the one who keeps his freedom.
- freedom to leave
- freedom to change my mind
- freedom to allocate time, share of mind and capital elsewhere
This will be rolled across every under-utilized (negative-yielding and/or depreciating) asset class within our economy. Airbnb’s $100 BILLION market cap, Free Money and the 1000-fold increase in VC gains will make it happen.
Don’t get caught up in the ridiculous valuations we are seeing – what’s important is understanding the process of change.
In a micro-yield world, it costs me 1/1000th of the capital value to get all the annual consumption I desire.
The only reason to buy is to show off, and that’s what humans do. Actually, there is another reason to buy and I’ll touch on that in a couple days.
Given we will stay human, I do not see these changes as a bearish case for asset values, which are driven by the price of money, mood and scarcity.
However, I do think it changes the mental calculus for a young person. In a highly mobile, rapidly changing environment, the assets your (grand)parents aspired to own are a lousy place to put your financial capital.
Tomorrow, some nitty gritty for 16-21 year olds.
PS – I didn’t book the penthouse. I went for a (refundable) 3-bed condo across the street from a playground. I make most decisions assuming they will be multiplied (x3) by my children when they grow up. I like to leave my kids room to (hedonistically) improve on my choices.