What a crazy time to be alive, we’re seeing interest rates go down, unemployment levels drop dramatically and the top 10% of earners are actually seeing wage *compression*. That last part is quite shocking as it implies a bigger shift to “two economies” predicted quite a while ago on this blog. Either way we’re sticking with the same old 2021 likely a down turn unless something drastic happens. In case people attempt to “troll us” in the comments we’ve done exactly what we said we’d do. Dollar cost average into index funds since 2011… Bought Real Estate… Bought Crypto… and ended with some fun individual bets on stocks. For the entirety of 2019 we’ve only put money into two things: 1) crypto and 2) cash. That’s it. So to emphasize, no we did not “sell” as there is no point to selling unless we see a significant down day. If we sell stocks we’ll let everyone know. This means our stock positive as a “dollar basis” is higher, but as a percent of net worth is much lower as all money earned this year went into cash/crypto. Now onto the post.
When Breaking Records Isn’t Good: When everyone is bullish you should be bearish and when everyone is bearish you should be bullish. This is the same old theory thrown out by Warren Buffet who suggests buying when there is “blood in the streets”. A good indicator of overly bullish scenarios is the unemployment rate. This rate is currently set at just ~3.7%. That’s an insane number from any perspective. In the year 2000 it was just under 4%…. (followed by dot-com bust)…. In the year 2007 it was around 4.6% (followed by the real estate bust) and now it is 3.7%…. lower than both of those previous lows.
Seems like an obvious sell? Not quite, you have to also look at the rate of decline of the unemployment rate which is still severe. When it flattens out, that’s the time to get out. If we look at the numbers when the rate of declines slows it means that unemployment can’t really move much lower. Then the bottom falls out and we go into unemployment hiking territory. Don’t get us wrong, recessions are awful and ideally we never see one. That said, the chances of “never seeing one” is basically zero especially if it has been over a decade since a downturn.
Wage Compression: This is an unbelievable trend that we thought would not occur for some time period. To be in the top 10% you have to earn *less* than you did a year ago. Which is absolutely insane to think about. It means that we’re seeing wage compression for high earning white collar jobs in addition to regular pressure across the middle class. We have no problem saying we got this totally wrong. We thought for sure the top 10% would at least be fine, but it appears that you need to be in the top 5% to really make it! This is such an interesting stat we’re still having a hard time thinking through the long-term consequences. The one clear one is that people will become extremely class aware going forward. When people are seeing buying power go down they wear it physically on their faces and body language while those who are not will have a hard time “hiding “.
Taking a look at the chart above, we see that buying power went down for every single segment excluding the top 1%. Now sure we can argue that $20.5K to $22.0K was a big jump… But it’s more likely a rounding error similar to the move in the bottom 10% (the bottom brackets always move around more due to the gig economy, minimum wage changes etc.) When we look at the 50% to 95% range… Nothing really changed from 2018 to 2019. That’s quite an interesting trend as the cost of goods is certainly going up over time. Sure. People can come into the comments and say there is “no inflation” but simply ask yourself “Am I paying the same price for everything from 5-years ago?” We all know the answer is that things got more expensive. Meanwhile the top 1% saw a notable increase of ~7% to $328K.
Before moving on, we realize these are national numbers. If you live in high cost of living areas such as New York, Los Angeles and San Francisco, the Top 1% number moves up to $500,000+ and the median moves up closer to $70,000-90,000 or so. That said, the trend is actually similar in high cost of living areas. After an initial increase in income (5-7 years after entering work force) the numbers flatten out and you either make it big or you’re stuck in the center. This is why you see a lot of people in the $150,000 – $200,000 range with a huge age band of 25 – 40 years of age.
Declining Rates: Unsurprisingly the fed has started to cut interest rates by a pretty large amount. People will look at the numbers and say “1.875% is not that much different from 2.40%”… But. It is a huge change. The reason why it looks small? The average person looks at it from a small numbers perspective. If you’ve got a $100,000 loan and it has interest payments of $2,400 a year versus $1,875 a year, this unlikely breaks the bank for most people.
So why is it a big deal? It’s a big deal when you look at the percent change and use large numbers. If you’ve gone from 2.4% to 1.875% that is a rough 22% decline in the interest rate. Now… run these numbers on a very large sum of money. Say $10 trillion dollars? This means the total interest payment would be $240 billion versus $187.5 billion dollars or a whopping $52.5 billion.
Yes we have simplified the concept quite a bit, that said, if a 25% decrease doesn’t sound like much just look at all of the prior recessions. Generally speaking, the Fed has attempted to begin cutting rates in advance of an official recession. This occurred before the dot com bust and before the global housing crisis. Some historical facts, in the late 2000s the rate was at 6.5% or so and went down to around 5.4% before we entered an official recession (-17% decline in the rate). In July of 2007, the rate was around 5.25% and declined to about 4.0% before we were officially in a recession (-24%).
Now onto the more important item, since we know the fed is attempting to cut before recessions it’s a good idea to time this out. Between the first rate cut and official recession in 2001 was about 15 months. Between the first rate cut and official recession in 2008, it was about 6-7 months. For fun we can look at the early 90s as well where it was around 14-15 months. With this rough math it implies we’ve got around 8-16 months from October of 2019… This puts us into June of 2020 to February of 2021. (Now you know why we expect a downturn by 2021 or so). Funny enough, this is more anecdotal, however this blog now gets more page views on the posts about spending money (clothing etc.) vs. earning money at this point. A significant shift from just 3 years ago (generally not a good sign as it means people think their wages now are “normal” versus significantly inflated when compared to mid-economic cycle wages).
The Positive News: As always, crisis is just another word for opportunity. We’ve said that for years and are excited for the next downturn (if it comes) since it’s the easiest time to make it into the top 1% or top 5%. Think about it like this, if everything is crashing down, it means assets are not priced correctly. Look at stocks and real estate for the most ludicrous mispricing back in 2008-2009.
The bigger positive news? If you’re worried about making money, this is your time to strike. It is undeniably the easiest time to secure funding and to find a niche market. We’re not saying that the market will last. But. If there is an obscure niche market like the fidget spinner craze, you can make out like a bandit in a single good year. No one really does the math and all you really need is one or two good years for your life to change. If you were to save $500,000 after taxes (one event income) due to a clean strike when the iron is hot, it would lead to $2 million dollars in value in around 14-years assuming you simply earn money to pay the bills during that time frame.
The other important item is that “talent goes on sale”. Since large companies are littered with politics and other riff raff, when a downturn takes place it is quite easy to find talented people at a reasonable cost. In raging bull markets (like the one we’re in), you have many people overearning or quite literally doing nothing as headcount ballooned and management lost sight of the department.
This Money Making Game Shouldn’t End: Another fun math exercise we ran through is how quickly people can fall out of the 1%. This is an important thing to recognize. If you take your foot off the gas you will fall behind QUICKLY. Not slowly. QUICKLY. So lets take a look at these rough numbers. We include home value in all calculations of net worth to keep it simple.
In the Age 30-34 band, to be in the top 1% you need a net worth of $925,000
In the Age 35-39 band, to be in the top 1% you need a net worth of $2,307,000
In the Age 40-44 band, to be in the top 1% you need a net worth of $2,865,000
In the Age 45-49 band, to be in the top 1% you need a net worth of $9,666,000
In the Age 50-54 band, to be in the top 1% you need a net worth of $14,745,000
Take a look at those numbers. The only time the numbers seem to decelerate is around the late thirties to early 40s band as the cost of having a family likely weighs in on results. That said, the numbers are extremely clear. Even if you’re in the top 1% at age 30, there is no guarantee you’ll be even close by age 45-49. Assuming that money doubles every 7 years, if you had a million by the time you were in the 45-49 band… it means that you only really have $4,000,000 so you have to come up with a $6,000,000 spread. If this doesn’t prove the point that winners continue to work after becoming rich… we don’t know what will.
We’ll have our usual monthly Q&A on Friday of this week November 8.
What’s with the 18-24 1% net worth threshold being higher than 25-29?
Probably, 18-24 is inherited wealth or some other kind of infusion from family, and most young adults in that age category with lots of money blow it on senseless BS.
Trust fund kids having some fun until everyone else catches up
Spending their inheritance faster than it’s coming
Young, Hit it big internet guys.
Then early twenties/mid twenties grinders come to 1% in their 30s.
I don’t buy the much deeper skewed numbers.
99% of those top 1% in the 40s+ are upper brass doctors, lawyers, corporates who have been staking paper for a decade. All of them married or owned by divorce/mortgage
They’re not competition.
On the internet it’s easy to find super successful self made 20 year old dropshippers and crypto gurus. In real life, these types of people might as well be non- existant.
They are probably less than 0.01% of 18-24 age group and that is assuming none of them are liars.
Ha! true, you never see them at high end places
I am also curious. On one hand the 18-24 generation has more opportunity than the millennials could ever have due to the internet. That being said the numbers just don’t make sense to me.
Despite 2008, One would still expect millennials to be much more established compared to people just starting out.
Probably people burn money they get access to turning 18
Very insightful and thorough post, thanks for sharing it all
If you are good at something, you enjoy it. Why stop?
There is a great sequence from Office space (am 40, look it up), asking the question what would you do if you had a million dollars?
-‘Nothing’
– ‘You don’t need a million bucks to do nothing’
The point is, what do you do with your time? Why do Warren B., George Soros, and Carl Icahn still work? The marginal utility of another billion?
What this article is saying, is once you are good (=results), you will like what you do. If whatever you’re doing happens to pay well, then that is a derivative that can motivate you to carry on in the same way as getting a high score on a video game can motivate you.
On macro: the simplest trade in 2019 has been long bonds. Note that the Fed have cut 3x already – that trend is likely to continue. Treasuries also happen to be liquid, meaning you can sell and allocate to other assets when they are beaten down.
Remember an asset has to be to held by someone at all times – providing liquidity in a stressful situation naturally carries a premium. Be on the right side of that trade.
Do you guys plan on making a post about capitalizing on a recession?
I know it would be super relevant to people in the 20-25 age range who are just now starting careers and havent had the time to build up enough before the recession hits.
Already did
The top X% discussion is unnecessary. You were correct in implying that the rate of income (and wealth) growth is higher for individuals in higher percentiles of income and wealth. The arbitrary cut off point of 10% might have made sense then, but if higher incomes grow at higher rates, then the cut off point will also keep increasing.
This cannot continue and should be addressed sooner rather than later, as the longer it is left unaddressed the more likely are disastrous populist “solutions” to be implemented.