At this point, every single country is trying to print trillions of dollars to solve the economic crisis caused by COVID-19. If we look at the solution from a “fix it now” perspective, it works. If we look at the situation from a long-term impact perspective, it does not. Paying off debt with new debt is exactly what happens when a company is entering bankruptcy/insolvency. If you give a person debt who cannot pay his own bills, this means his future bills just went up. He’s better off shuttering and moving on.
Example – a Restaurant: Since our readers have various backgrounds, a restaurant is a simple example to follow. If we take a middle of the road restaurant, call it “Italian Restaurant”, this location will cost ~$40 per person for a dinner. This is a reasonable price range for middle class people. Unfortunately when you sell to the middle class, margins are usually lower relative to someone operating an ultra high-end restaurant. How low are profit margins for regular restaurants? They run at around 5%. If you don’t believe this feel free to look around online and you’ll get to a range o 0-12% or so with most hitting 5%.
Now that we understand slim profit margins, we have to look at only two variables. Rent & Food/Drink Costs. Why? These businesses are being forced to run at 25% capacity at max. To keep it simple, we will even give them a boost to 30% of normal capacity. Remember, social distancing and other rules cause these numbers to be generically correct. Therefore we have to ask… How much is rent?
Well, rent/lease cost is usually 5-8% of total sales (this is during normal times). Food and drink costs (cost of goods sold line) is around around 28-32%. This gets us to a minimum cost range of 33% with a high-end of 40%.
Put it all together. If a Restaurant made $1M in a year, around $333,333 was spent on lease + supplies and you’re left with 60% “Other” expenses like insurance, employees etc. Even if we assume that there are no other costs, you have to pay out $333,333.
Jump to the conclusion at this point. If the revenue line is stuck at $300,000 because of the pandemic, and you must pay out $333,333 it means you’re losing $33,333. Also. This assumes you have no debt at all (running the business as 100% cash). This is incredibly unlikely as most restaurants are levered up just like a home (you borrow to buy).
How does this end? It ends with the person losing everything. Even if you give the person a free loan for $100,000+ with no interest rate attached to it, he’s still losing money every single month. This means you’re creating a payment for him that just gets bigger and bigger and bigger as he borrows more and more during a time when the business cannot operate. Pretty insane when you think about it. His business was shut down beyond his control and the person paying the price is the business owner? It’s quite a mess to watch. He’s better off closing the business instead of running at 25-30% capacity over the long-run.
Go to the Next Step – The Competition: The above should make intuitive sense to anyone. No need for a specialized degree in Economics or a degree in anything else they told you would help obtain a “good job”. If we look at the other side of the equation, competition is imply ramping up in two ways. You have two other options to eat: 1) you can cook by yourself and 2) you can have food delivered for you by Amazon.
Now you’re probably asking, why won’t people go back and live a normal life once we open up the flood gates? The answer is that a large chunk of the population is unemployed so you cannot simply flip a switch and force companies to hire everyone. In fact, many of these major companies learned that a huge number of their employees were not useful at all. They were simply collecting checks and going home without any productivity. The firms that said “we won’t fire anyone this year due to the pandemic” will be cutting heads by next year. The firms that did not make this offering? They have already started the cuts.
So now you have a “retail apocalypse”. The major retail areas have less foot traffic (even if everything opens up), the competition allows people to save money (cooking for themselves) and the longer term solution (delivery) is run by Amazon who’s interested in making costs go down long-term. It is safe to say that a structural shift has occurred and you’ll have a larger remote work force (continued pressure on foot traffic).
Put this together and the below chart is a good set up for what is to come.
Another Structural Shift: The second step is where degrees in economics and “Phillips Curve” discussions get thrown out the window. We’ve lived in a world where inflation has been part of our lives and we believe that this is going to continue with no rational explanation for why. There is a great book on this topic called “The Price of Tomorrow” by Jeff Booth.
In summary for those who haven’t taken economics, the Phillips Curve is simply the statement that “economic growth comes with inflation so inflation should line up with job growth”. That is great, until you look at the national debt and realize all the “growth” wasn’t economic growth. It was really just debt piling upon debt which was causing the “inflation”.
Take a step back (as the recommended book does) and ask yourself, in what future will we see job growth? Job growth in the physical realm is highly unlikely. All the products we are consuming are competing against robots. Factories are run by robots in many areas (hint think Alibaba and China), the number of jobs being replaced by lines of code is accelerating and on top of that, levered up companies that are facing potential bankruptcy are looking for ways to cut jobs that are unproductive. Job growth will not occur until we’re able to create a new virtual economy discussed in a prior post. Until then… job growth is going to go down.
This creates an extremely difficult set up. If you print a ton of money and cause asset prices to go up, you’re putting the clamps down on 90% of society. If you don’t allow assets to go up, large numbers of people/companies go bankrupt. The solution is to re-do the entire monetary system and that requires far too much coordination (if you obsess over this stuff like we do, you know the IMF is already dropping hints of a new Bretton Woods agreement).
It is quite interesting to watch. The best solution is to issue checks to everyone and tax it back based on their income this year. And. That’s not going to happen as the government had a chance to do this and went with mass printing instead (hence asset prices went way up while people who do not own assets got significantly poorer). Focusing on asset prices prevented any sort of market reduction and now we’re living in a twilight age where big companies believe they will always be bailed out even if they lever up to the gills.
Solution for You: The answer is quite simple, you must produce something (anything) immediately. There is just no way around it. Unless your net worth is increasing by 20-25% a year, you’re going to be falling behind. Why do we think the number is this high? Look at the prices of tech stocks. Since we know that tech is going to drive all the value going forward (or at least the vast majority) it’s the new standard for relativity. Buying something like the Qs (NASDAQ) is a lot more reasonable with a 10-year time frame than a diversified basket of stocks in dying industries (as usual, not to be deemed as legal or financial advice of any kind, just an opinion)
If you don’t have money, we would go ahead and trade your time for money and work those 60-80 hour weeks. There is just no other way to gain ground. If you have $50,000 to your name, producing even $5,000 of extra income is a 10% move for you. This gives you a shot (at least). Go ahead and start fixing iPhones, repairing watches, doing yard work for money etc. Anything and everything is on the table since the value of assets are going up rapidly.
Meanwhile, do not sell any internet producing assets. For those that have followed our recommendations over the years, we’ve historically talked about times to sell and times to avoid selling your company. At the current rate, unless your business is going down and you’re certain, you do not want to sell it. The number of ways to generate *income* from an asset is declining. Tech stocks are great for investing (healthcare as well), but, the majority of them don’t have big dividend payments. So you need that cash flow to invest into the future which is heavily technology centric.
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1x a month for purchasers only.
If printing a bajillion dollars in the last 10 years didn’t cause massive inflation, then maybe the whole idea that the US government’s finances are like that of a household does not hold true. The last time we had huge inflation was when the whole world needed oil at the same time to modernize their economy and the gulf states were the only one with oil. I agree holding income producing assets is really important but the US wont become Weimar any time soon.
That’s because you go by CPI inflation. How much does it cost to retire? It not longer costs $1 million dollars that is for sure. That is the real inflation rate, which has been incredibly high the last decade.
And even CPI is a joke. Chapwood Index much better tracker if you care about consumer prices, but asset inflation is definitely what matters for wealth.
Exactly right. We need to look at the big items in order to understand the real inflation. As an example, we had a chance to buy an attached, two unit house in South Brooklyn back in ‘97-‘98 for $200k. Today they go for over $1mil. The area still houses the same type of people, working class and so on whose incomes have not gone up much in real and inflation adjusted terms. Same can be said for cars and so on.
Your restaurant example was spot on. I used to work as a controller for a group of high end French restaurant in Manhattan years ago and I also bought and ran an Italian restaurant in CC Philadelphia (a typical one just as you described above). After all the ever rising costs necessary to keep the place open, we would be lucky to have made 5%. I was fortunate to have sold it in summer 2019- unfortunately to my brother in law who is now barely keeping it going. Once winter arrives all bets are off
How much does it cost to retire sounds like a very loaded question. People in the FIRE movement are retiring in their 30-40s…Can you make the same argument that inflation is so bad that people can afford to retire so early? $1 million nest egg in California and Nevada is extremely different.
And also can you say that instead in the last decade Americans have become much wealthier for those who own their homes and have 401ks (home ownership is still around 60+% no?)? Interest rates went down to tubes so mortgages got much cheaper. Gas might be more expensive but our MPG got better. Ipads and Iphones are ridiculous computer machines. You can get tremendous amount of entertainment for less than 10 bucks a month. You can even get health insurance now with preexisting conditions. Can buy a t-shirt for 8 bucks. Dollar menu still exists. I’d argue that premium/luxury goods have attracted higher demand from the wealthier Americans so readers on this website think we have crazy inflation but maybe it is just that we are willing to pay more for better stuff.
The “FIRE” movement back then could buy government bonds yielding 12%+ look at the original “FIRE” book called “Your money or your life”
Inflation has been insane recently, look at ALL asset classes, Real estate, Equities, BTC, etc are through the roof, THAT IS INFLATION. Look at cars, healthcare, etc. also insanely expensive for the average individual.
I also don’t see inflation. I don’t go by the CPI or anybody’s stats.
I go by my own cash flow spreadsheets — beginning of year account balances minus end of year balances. It’s a simple 10 minute job that shows me if I’ve left anything out of my retirement assumptions.
Retail sales are near record highs. Houses and cars are selling briskly. That means the middle class has down payments and a w-2 statement that covers the payments. The middle class is doing fine.
Sure, there are winners and losers. The bottom 20% have been competing with asian workers for a long time. There’s plenty of work for those who want to get ahead. I see stores crying for workers, while those workers would rather smoke weed on unemployment. Bad choices will doom them to the underclass for the rest of their lives.
“Middle class is doing fine”
It previously required one income to maintain a larger household (more children). It now requires two incomes to maintain a smaller household. You comment is not reflective of the reality on the ground. WSJ nailed this.
One interesting thing is that Australia went down the route of sending checks directly to people and it worked fairly well as it was a subsidy for both the business and the employee.
We have here a “JobKeeper” payment, which basically subsidized wages in affected industries which HAD to be passed on to the individual employees, and resulted in payments of around A$19000 over 6 months to those who probably would’ve been unemployed otherwise. And the company benefited by not having to pay this amount in wages.
It basically meant that places like restaurants etc probably were breakeven even at 40% capacity if they were careful as they had no wage costs.
It still counted as taxable income so if you go on to do well in the rest of the year, a decent amount of it will be taxed back.
I’m a senior machine learning eng at FANG.
Software ate the world 1990-2020 but now we aren’t writing more software, we’re just making the existing software cheaper. This means less hiring for developers into the far future. Also, the new lines of software – AI and VR especially – will take less people than the old lines not more.
You don’t care for the technical side so that’s the business side. As owners you guys should profit a lot from this.
Also the new top software jobs require more talent. 10 years ago if you needed only ruby on rails or some javascript knowledge to get a job designing websites. Now you actually need to know math and like it to design 3d games, work on AI, or VR.
Anybody who takes a serious look at CPI knows it’s a garbage statistic. The ratio of median income to median home price or median income to S&P 500 is where you see the issues.
Prices have been skyrocketing if you look at the public’s ability to buy and hold assets. This is mainly because new money is issued in a top-down manner through central banks. Only an economist would be blind enough to not understand this.
Paragraph 5, restaurant would be losing $33,000, not $3,000. Great article!!
Typo: “$333,333 it means you’re losing $3,333.” => should be $33,333
Agree that we already started MMT. Considering the possibility that USD may no longer be the reserve currency with the new Bretton Woods; we are in for interesting times.
It will be interesting indeed. It is undeniable that the financial center of gravity is going to China for some time now. Since they are also ahead of the other countries on tokenizing/digitalizing their currency, it wouldn’t be impossible for the USD to lose a lot of power very soon.
I’m reading this as the new recommendation is to DCA into NASDAQ rather than S&P500 as timeframe to $1 million is 10yrs. Others agree?
What is difference? NASDAQ has more Tech stocks I assume?
What is difference? NASDAQ has more Tech stocks I assume?
Looking longer out of VOO too probably
A lot of people here are arguing WSPs is wrong about future inflation because they dont see any inflation in their day-to-day right now.
Put your money where your mouth is and start selling assets. lmk what you want to liquidate, I’ll take it off your hands.
Developing market commentator here. All your rich countries printing all that cash has really **** the economics in developing markets. Actually youve blasted a complete hole into your pension and banking systems with these 0 rates. The only difference is that we dont have as far to fall since pur economies weren’t that big yet anyway. I suspect this may be that trigger for a reset afterall?
Oh and, we have bonds at 8% and property on the beach at less than $100k. If you want yield get the hell out of developed markets. Remote work is a great deal paying low cost, living on the beach and earning high income.
Which countries would an American look to buy such property?
One good individual stock to know about is Atlassian(TEAM).
Anybody know of solid tech ETFs? I’ve been buying Dropbox stock, Shopify, etc.
But I’ve been mostly in VOO lately which is just an SP500 ETF obviously(not tech).
I want to get out of it and in to tech but not sure how to make portfolio stable and diversified across tech companies in a reliable way.
You guys are terribly spot on…