Mid Year Financial Round Up

Family tradition… summit selfie with Grays Peak, and dropped husband, in the background

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.


Looking back One Year

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.


Black 2022 vs Blue 2021

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.


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.


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.


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.


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

Four Questions About Growing Financial Wealth

Do you ever feel you are behind? That you don’t have enough? That you might run out?

What to do?

Make vague feelings real by writing down some specifics.

Then get to work.


ONE => Is this a Reference Set issue?

If I spend time in Aspen then my “needs” escalate, and my self-assessment “declines.”

Same deal in Boulder, but it’s from a fitness point of view.

Others might have vanity triggers in places like LA, or on Instagram!

Feelings are sensitive to environment. The same life, done somewhere else, will be different.

Feelings of envy, fear and anxiety are sensitive to images – careful with environment, turn off cable news, get off Facebook/Instagram.

++

TWO => Is this a Skills issue?

A 35 yo surgeon with $250,000 of education debt, is in a different position than most. The surgeon is likely to earn themselves into financial security.

  • Where does my current job track lead?
  • Do I need retraining?
  • Armed with additional skills, it is easier to move up the income ladder?
  • Do I need to do the same job for a higher bidder?
  • What is the market rate for my skill set?

++

THREE => Is this a Spending issue?

It’s not always spending… but sometimes it is, particularly when spending isn’t generating satisfaction.

If you have the skills & the salary, but are left feeling uneasy, then a family financial review can make sense.

These discussions are HIGHLY emotional. I recommend a skilled facilitator.

++

FOUR => Is this a Time Horizon issue?

Back to the surgeon… highly skilled, employed, spending under control… the situation is going to play out just fine.

  • Pay down debt
  • Keep spending in check
  • Conservative monthly investment program

15 years along, the family is in a strong position. They had doubts, I did not.


I was asked, what would I have done?

Starting over at 40 yo

Core Job matches my highest paying skill set. Medicine, tech, finance, aviation… track into something that pays well.

The Core Job enables me to borrow long for a Core Investment. Buy real estate in a zip code with great public schools and a diverse local economy.

Secondary Job in an area of personal interest. It’s what many do with coaching/consulting.

Side Projects with Equity Upside. I would be looking for opportunities to invest (primarily time) in situations with financial upside. Do enough of these and something is likely to hit.

One new skill each year – coding, online marketing, blogging, video content, copywriting, language, ministry, education, graphic design, photography… stacked across a decade… powerful.

  1. Core Job
  2. Secondary Job
  3. Equity Upside
  4. Continuous Learning and Skill Acquisition

I have a friend, who did all of the above.

  • Around 40 yo, they were divorced
  • Then their employer went bust
  • Then they found our their pension had invested in the employer
  • So the pension went bust…

Long story short, a rapid journey from “set” to “f*%^ed”.

They could see “effective net worth” was negative due to financial obligations related to the divorce.

What I saw for a decade…

Three jobs: two of the jobs had flexible scheduling. Time off was used to work continuously (7/52/365). The third job was consulting, which was done inside the daily gaps.

Modest spending: given the income rolling in, not much went out.

Heavy investment: every single month, buy financial assets. Take overtime, buy more. Bonuses and financial windfalls, buy more. Buy, buy, buy.

This path isn’t for everyone – it comes with a cost in terms of family life. You need a spouse, who is completely on board. It’s a team effort.

A decade of grinding and the family is in a strong position. Now, the challenge may be to shift away from financial assets and build multigenerational Human Capital.


Final Word

Think deeply about Reference Set

  • There is a weak link between financial assets and life satisfaction
  • We never get time back
  • Too often wants are driven by external influences
  • Know what feeds your soul – write it down, take your shot

Make the target clear to yourself – for me => an active, outdoor life sharing experiences with friends and family

Stay on target.

Sunday Summary 12 June 2022

Top Threads

  1. I Allocate Money to Create the Wife & Life I Want
  2. Late-Season Peaking
  3. Swimming better & my return
  4. Buddy Runs for ultras & heat
  5. Fast Amateur SwimRun Training

High Performance

Workouts & Working Out

Sunday Summary 5 June 2022

Top 5 Threads

  1. Howard’s new book on Longevity/Healthspan
  2. Even Super Humans have a lot of time as regular folks
  3. COVID return to play for adults & kids
  4. Don’t adopt a baseline of beatdown!
  5. A simple reminder of consistency as protocol, connected

Workouts & Working Out

High Performance

Wealth and Consumption Part Two

Part One Here

Group your spending into buckets:

  • Essential
  • Discretionary
  • Luxury

The most “costly” part of the pie is whatever you happen to believe is “essential.” It usually doesn’t feel this way => you truly believe you need this stuff. I feel the same!

When you suffer your first serious setback, you’ll be surprised how little is essential. In 2009, I cut my “essential” in half, overnight.

Similarly, as we age, we may find we were giving time, money and attention to things that don’t seem to matter anymore.

Know your buckets – they will help you think more clearly.


Remember => I think of wealth in time

Specifically, Net Worth expressed in “years spending.”

$1,000,000 / $125,000 = 8 years

As we change the spending, we change the years.

Risk, and INFLATION, are easily mitigated when you understand how easily you can change spending.


Risk Concept => not all spending, or financial obligations, are created equal

Be most aware of:

Debt, including contingent – an obligation where non-payment can force the sale of an asset

Spending that comes with spending – large HOA/Club fees come to mind here – put plainly, a hotel visits feel just the same on an ego, yet, don’t require an annual membership fee

Going further => Don’t Capitalize Luxury Spending => the “luxury bucket” from above, if you turn it into a capital obligation then it can bite you, especially when combined with debt.

We don’t need to own the hotel to receive the services offered to a guest.

Same with… plane, waterfront, ski chalet… whatever you find inside your “luxury” bucket.

Staying flexible with the ability to stop spending can feel like a “waste” – even more so when highly-leveraged peers appear to be making easy money.

This feeling is false!

  • We over-estimate the value of current spending
  • We adapt very quickly to any level of spending
  • We notice changes, not absolutes

You are paying for the flexibility to: (a) stop paying; (b) change your mind; and (c) keep your capital invested productively.

Also remember, the generation that follows will build upon your spending.

The choices of family leaders scale.

++

This concept is important as we age:

  1. We will want to spend on different things
  2. We will want to “do” different things
  3. The generation that follows us:
    1. they will INDIVIDUALLY want to spend differently
    2. they will certainly want to do different things
    3. they will have a thirst for more

For your future self, and your legacy, give maximum flexibility to change.

You will most certainly change your mind later.

Supply of Money and Interest Rate Transmission Mechanisms

BoCo in May

Feels like I’m getting to the end of my Thursday finance series!

Things I’ve noticed in May 2022:

  • Stablecoin instability
  • Pain at the retail level
  • Step-down price adjustments of stable businesses with mkt cap >$1 billion (disappearance of margin trade on reliable dividends, perhaps)
  • Buyer of my sale was 95% debt financed with a payment of 3x the gross rent I was receiving
  • Market down 19%, as I write

What I haven’t seen:

  • Widespread pain
  • Institutional capital destruction
  • Anything, anywhere, that looks cheap

Given the money creation of this cycle, those are key words to watch:

  • Pain
  • Capital Destruction
  • Cheap

Until those arrive, I’m going to be patient and live my life.


A reminder.

The Great Recession of 2008/2009 first got my attention with trouble in the interbank lending market (Early Summer 2008), this was after ~20% market decline.

There was a long way for the bear market to go, and its effect on real asset prices had years to run.

Great deals were available 2010-2012 => the equivalent of 2-4 years from “now”

Same thing in the UK Recession of 1990, my first out of school.

  • If we’re in a blip then rebalancing will be just fine
  • If we’re in for something more serious then it takes time to develop AND it takes years for price expectations to adjust

Live a life where you don’t need to be right.

Sunday Summary 15 May 2022

Tweets of the Week (by engagement)

  1. Better to REMOVE one thing than chase the latest thing
  2. Our Pelotons read power -29% to +15% (nested threads)
  3. There is no hurry in Early Base (or anytime, really)
  4. What I did to get Ironman Marathon under 3-hrs
  5. Recap of my 2nd round of Swedish 5:2

Data comes from my Public Dashboard on BlackMagic.So

Family

Workouts & Working Out

High Performance Living

A public forum a lousy place for topics that require 1:1 trust

Strategic Family Capital

Couples trip to Vail last week – we skinned to the top of Ptarmigan, two days after closing.

Back in Feb, I laid out ideas for Multigenerational Capital, it included my strategy of Sell, Buy & Hold.

Last week, I completed the Sell Goal for 2022. There are two numbers I’d like to revisit:

  • Gross Yield of 43 years, 2.3%
  • Net Yield of 64 Years, 1.6%

I gave up ~2% yield on capital to add to my Strategic Reserve.


From wsj.com 5/5/2022

Snapshot from last week:

  • 2Y to 30Y yield ~3%
  • 30-year mortgage 5.25%
  • VTSAX Dividend Yield ~1.5%

By the end of 2022, short-term margin debt is expected to cost more than index equity yields. Medium-term debt is already more expensive.

These changes mark an end to the free-money policies of the last few years. This is a big change – it is unknowable if the change will prove sticky.

So… wait and see. I did a minor rebalance this week.

The rebalance was a repeat of the “buy less” strategy I shared in Feb.

In March 2020 I increased equity allocations to 72% of my Vanguard portfolio. 

Allocating additional capital in 2022, I made a reserve for “an investment that benefits the present”…

…then rebalanced to 60% equity allocation. 

This reduced the size of the new investment and got me past decision paralysis, driven by a fear of near-term loss.

The reserve now sits at ~15 years Core Cost of Living.


Looking pro

We’ve been looking around for a place in the mountains.

Coming off a year of AirBnB skiing, I know our cost to rent implies a gross yield of 0.75 – 1.75%.

Alternatives to buying:

  1. Stick the Strategic Reserve into VTSAX, rent through AirBnB and let dividend growth hedge rental inflation
  2. Stick the Strategic Reserve into a medium term bond product (VBTLX @ 3%) and earn a margin over my cost to rent
  3. Pursue either of the above, double my discretionary spending and run the capital down between now and my wife’s 85th birthday

For now, I’m taking Door #4

  • Rebalance after large (down) moves
  • Watch the Federal Reserve increase rates
  • See what happens

A 35% market decline implies a dividend yield over 2.25%, which would let me lock in the equivalent of three-months cost of living (after tax, forever).

I tossed my idea of buying a Sprinter Van for camping. The shift towards “assets for fun” doesn’t come naturally.

Real Estate Outlook 2022

How I think about the pricing history of financial assets – note bottom right blip

I sold a large real estate asset this week, a residential rental.

There’s an argument that the buyer got the building for free (Twitter thread on backing out land value).

At the closing, my agent (50-ish) shared that the only recession he’d really experienced was 2008/2009. So the next chart is his personal experience with asset pricing.


Right hand corner blip looks a little bigger

The above chart is ~20-years of mortgage rate history. If you’re 40-something this is what you lived.

Mostly a one-way bet => falling long rates inflate financial assets.


Back to my sale.

I sold for a three reasons:

  1. At 53, my life is changing. The window of what I need to finance is less and less. I have begun a strategic shift towards creating the life I want to live in my 60s.
  2. Real Estate is lumpy, we don’t have the ability to incrementally rebalance. I wanted to reduce exposure before making any additional purchases.
  3. The sale was valued at 43 years gross rental income (2.3%). Cash proceeds, after tax, were 64 years net rental income (1.6%).

Institutional Memory is 1,000 days, max.
Here’s the last 1,000 days in the mortgage market.

The real estate market is like a super tanker, it takes a long time for momentum to shift. After the 2008/2009 recession, non-foreclosure prices didn’t adjust until the middle of 2010.

  • Prices move at the margin => the marginal buyer had a strong tailwind through the pandemic, that has changed in 2022.
  • There will be an impact of the near-vertical move in rates this year => initially, we will see this in markets that require loans to complete.
  • The scale of “the impact” is unknowable and complicated by supply shortages of re-sale houses and for new build.
  • Prices are being supported by rapidly rising cost-to-build and cost to renovate/remodel.

Lots going on – I can make a case for +25% and -25%.


At 53, taking 64 years-equivalent cash-flow off the table, in a rising rate environment, is a decision I’ll be able to live with regardless of future outcome.

Live Like A Billionaire – Risk Preference and Life Lessons

This series has been about learning from those without financial limits:

  • Who do they share their best moments with?
  • What are those moments?
  • Are we missing out?

Once I’m on the inside of the team, I notice that my risk preference is the lowest in the group. Frankly, not surprising when you are rolling alongside extreme skiers and mountaineers.

Here’s something about risk. Group risk rises to the level of the MOST risk tolerant member.

It’s why my investment committee has the rule “most conservative carries the decision.”

Anyhow, with two young kids and a pregnant wife, I had learned what I could and wanted to put more time into my young family.

So I opted out.

My boss…

>You firing me?

>>No, most definitely not. There is no way I will be able to repay you for what you taught me.

…and off I went for a decade.

Once again on the road less travelled.

Not over, yet – most of them took up Skimo.

😉


Let’s recap:

Best Days are defined by shared outdoor experiences with a small number of close friends – building memories that last

Peers & Teachers have a mix of kindness and competitiveness => notice this combination when you see it. These are people who tell us the truth, push us to do better and keep us grounded.

There’s nowhere to get to => I realized that between my wife, and my kids, I could create my own inner circle. A circle where we share Best Days and reduce our collective risk of ruin.

I remain grateful for the opportunity for a look behind the curtain.