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In May, I wrote about pain, capital destruction and cheap assets. That post covered the delay between rates moving and asset prices adjusting.

It’s been 60 days and we’re starting to see the beginning of the adjustment from higher rates. Average 30-year mortgage chart below.

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Inventory is back at pre-COVID levels and prices are moving sideways. My feeling is the market is going to get cheaper.

This is a yield-based feeling.

Let’s look at the current yield curve.

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A simple metric I use for vacation markets.

What is “one week rental” relative to capital value?

I priced two markets this past week. These are not Christmas or Holiday Weekend rates, but they are December to February high season weeks.

• Jackson – $10,000 a week relative to $4-6 million capital value
• Vail – $5,000 a week relative to $2-4 million capital value

This is where the Yield Curve is useful – the 6 mth (to 30-year) rate is ~3%

3% of $5 million is $150,000 per annum vs $10K a week to rent

For nearly all users, the secondary market has swung strongly in favor of rent vs buy.

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Other impacts… the stock market ~19% off its peak, crypto down, commodities down, China property market under stress, hot war in Europe, US Fed in a tightening cycle…

These changes, combined, are making marginal buyers less wealthy.

All prices move at the margin.

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What does this mean?

My #1 investment principle is to construct a life where I don’t need to be right.

If the Central Banks are done bailing out financial assets then it makes sense for the price of financial assets to fall. The free-money era pulled returns forward and some of that will need to go back into the future.

That said, the recent past shows a clear bias towards continuous financial bail outs.

Impossible to know what will happen.

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A note on inflation, as I see it.

If you own financial assets then you’ve been “paid” in asset appreciation over the last few years – SP500 is up ~50% over last 5 years.

Going back further, say 2010, the owners of financial assets have grown accustomed to unearned wealth.

So the best hedge against the market (& inflation) was letting personal spending decline, as a percentage of family assets, across the run up.

If you didn’t own assets then, hopefully, you’re in a skilled profession where you’ve been able to increase your income faster than inflation. If not then your best investment is up-skilling yourself.

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The recent past, and media, are skewing your perception of inflation.

What’s your best guess for the 10-year breakeven inflation rate?

It peaked at 3% in the spring, currently 2.4%

1.03 ^ 10 = 1.34, 34% price increase over last 10 years

If, like me, you were building a family then your core cost of living is up WAY more than 34%.

When I look at our family budget, I can see a big part of our increase is lifestyle inflation.

For many of us: the long bull market has driven lifestyle inflation well ahead of the price inflation we’ve experienced.

Again, the best hedge is either: (a) not ramping spending, or (b) staying variable so the family can cut spending quickly, if required.

For perspective compare 34% 10-year inflation to…

• SP500 10-year total return => 175% increase
• The 10-year price of wherever you happen to be living

Short-term price inflation is nothing compared to long-term asset value inflation.

Given the future is unknowable (bailouts, ZIRP and money creation):

• Stay invested
• Stay variable
• Spend time with friends and family
• Build human capital within your team