Riding the Wave

30 thoughts on “Riding the Wave”

  1. So long as the population and income of a metro keep growing, shouldn’t land values keep growing as well? Real Estate ownership is essentially a bet on the future population and income of a particular jobshed.

  2. “Never own more than you can carry in both hands at a dead run.” ― Robert A. Heinlein

    While I wouldn’t go that far, the safest hands are still usually your own. After avoiding debt, I see investments (used in the general sense of things that save you money or otherwise improve your life, not just earnings) going in concentric circles. First, your personal body (health) and mind (skills). Then high quality personal possessions (clothes, boots… smartphones), then chattel property that you own (furniture, appliances, tools, maybe books etc – definitely food). After that, your house itself (insulation, a garden, perhaps a rental annex? Oh, and location.). *Then* it’s time for the index funds and the like, which if you’re financially independent will probably be where most of your money is.

    If the economy crashes and you lose your investment income, you’ve still got a high quality house and plenty of food, and no need to worry about your cheap and flimsy furniture breaking. If worst comes to worst and you have to flee, you should still have clothes that don’t wear out and items that will keep working. Even if you lose those, the skills will help you get back on your feet. Semper paratus.

  3. I was a teenager in San Francisco during the dot com crash and I now realize that seeing how certain relatives fared really left an impression on me. My mom explained to me that because my cousin sold his tech stock and paid off his mortgage, he didn’t have to worry about losing his home, his job, and his savings all at the same time – unlike his coworkers who held their stock in hopes of further appreciation. I thought about that a lot recently when I sold my RSUs to pay off the mortgage on my home in San Francisco. Among my millennial peers who are upgrading into more expensive homes, it’s very very strange to be mortgage free.

    1. Congratulations on paying attention and listening to your mom’s sage advice. Being mortgage and rent free gives you options in the future regardless of the next cycle of boom and bust.

      Now make sure you insure the heck out of your home, spend the money (cash, not a loan) on a proper earthquake retrofit, and have a Plan B lined up for where you might live in the event of The Big One. Perhaps use all that money you’re not spending on a mortgage on a modest country cottage or a simpler home in another city.

  4. My view is that the debt boom is what has created all our inequality. How else could businesses pay workers less but still sell them more at a different time of the day, when they become consumers.

    And our trade problems. The theory of comparative advantage is based on imports being paid for with exports, not promises that your children and grandchildren (and if you are under 60 yourself) will be poor some day in the future.

    The data lines up, as I showed here.


    The best that can be said of some of what happened in the economy for the past 40 years is that it is unsustainable. The federal government sold off some of our collective future back in 2008, just to kick the can.

  5. On the stock market chart, project it out another 50 years and it will probably look much the same. Long term trend up, but with some significant ups and downs in between. As an interesting aside, something like 95% of Warren Buffet’s wealth has come since he was 50 and 95% since he turned 60.

    Many businesses borrow to stock up on inventory and repay their loans once it is sold. Farmers borrow to fund their operations and repay after harvest. Retail stores have to order and make payments in summer so as to be ready for Christmas. The principle purpose of finance is to bridge the gap between selling an item and being paid for it. Boats, of course, are a luxury item, and people cut back on luxury items in tough times. Possibly exacerbating boat sellers’ problems, some time back then a luxury tax was slapped on boats which put a lot of boat makers and their skilled craftsmen out of work.

    Your bread truck driving friend borrowed to buy his first house. To his credit, he made a lot of sweat equity doing his own improvements, and he paid down his mortgage. However, as you note, he continued to use debt to purchase more houses, which again to his credit he paid off as quickly as he could. While there are many examples of people getting in debt over their heads, your friend’s little real estate empire was built upon the availability and judicious use of debt.

    1. Perhaps one of my points is that being judicious about debt as a short term bridge used to be fairly normal. Now it’s an atavistic trait.

  6. So, what’s everyone’s thoughts, though, on this current wisdom that buying houses and renting them out is the path to financial security? Isn’t that zero-sum? Yeah it could work for the individual, but if you as a community are in a situation where this is like the one best way for everyone to succeed, then aren’t you in trouble? Is this then a good example of how things *should* be done? Or is it just telling people how to get on the lifeboat while they still can?

    1. Not everyone should own a home. Not everyone wants to own a home. And not everyone can own a home. The average post WWII rate of home ownership has been around 62% – as was the case in 1967, the year I was born.

      Even at the absolute zenith of American home ownership in 2005 the rate was 69%. That was arguably too high since so many people bought homes they shouldn’t have with money they didn’t actually have.

      Rentals are for the young who are not yet established, the old who no longer want to mow a lawn or clean rain gutters, and people in between life’s various transitions. They’re also for folks who aren’t up for the responsibilities associated with owning property. Rentals are an essential part of the housing picture.

      And by the way, a “house” is a depreciating asset no different from a car or washing machine. The older it gets the more maintenance it requires. The thing that gains value is the land under the house based on access to jobs, culture, amenities, and popular demand.

      But even land can decrease in value just as easily as increase as the economy and culture shift. How much does dirt cost in big chunks of Cleveland or Detroit? In some cases buying property that can hardly be resold for the initial purchase price makes no sense.

      1. In Europe, the wealthiest country, Germany, has the lowest home ownership rate of about 50%. Some of the poorest countries like Romania have the highest home ownership rates. In fact, home ownership and per-capita GDP are almost perfectly inversely correlated. https://www.statista.com/statistics/246355/home-ownership-rate-in-europe/

        So the American notion that home ownership builds wealth is contradicted by the European experience. German tax and regulatory structure favors renting, pretty much the opposite of the US. https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/

        1. “So the American notion that home ownership builds wealth is contradicted by the European experience…”

          Noting is “contradicted.” You’re comparing apples as oranges. As you mentioned, countries like Germany have a different tax structure. For Americans, especially the middle class, home ownership IS the best way to build wealth. Owning your home is a hedge against inflation, and rising rents are never an issue. Having a rent-free place to live in retirement is essential to many in avoiding poverty.

          Of course, what Johnny mentioned holds true. It’s never a good idea to buy more than you can afford, be it a home, car, boat…

          1. If boats are important to you, it’s important to have friends with boats, so it’s THEIR hole in the water into which they pour money.

            Pleasure boats are of limited utility…you can’t live in one unless it’s as expensive as a house; they are high-maintenance; you can only go to other coastal or inland water locations; you’re at the mercy of the marina gas supply; there aren’t usually grocery stores in waterfront locations…

      2. I agree somewhat with your “a “house” is a depreciating asset no different from a car or washing machine” thought but would disagree on one thing: location is paramount. The actual structure will always require upkeep; that is a no-brainer. But the upkeep is worth the cost as the home value will increase based on location.

        I mentioned previously that I remortgaged to use the equity in my home to remove a significant amount of debt. I was surprised to find that my home’s value increased from $80k to $130k in the 10 years I have owned it. Have I had to do some upkeep? Of course. But not anywhere near $50k worth. Home ownership requires a bit of work but it’s a financial boon, generally speaking.

    2. I think I get the gist of your comment. Like, isn’t some aspect of the FIRE movement (largely based on rental income and index investing) just learning to be a street hustler in the mold of the big pimps of the global economy? The answer is yes, unfortunately.

      But Johnny’s right on the big picture, historically. Renting or being a landlord isn’t morally wrong and can be mutually beneficial. Rent vs own ratios are culturally determined: https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/. Like a lot of things in life, it’s a trade-off.

      Disclosure: I rented for nearly 20 years in situations both wonderful and terrible and am now a homeowner and part-time landlord. Rentals are not my primary income source.

      1. As they say. The devil is in the details. If 30% of the population is going to rent do we want them to rent miserable accommodations owned but extractive abscentee investors who concentrate wealth and influence? Or do we want a broad diversified distributed arrangement of small scale mom and pop landlords – some great, some mediocre?

        1. One thing about the residential real estate industry — it is about as far from monopoly as anything the in the economy.

          You have homeowners, who essentially rent their investment to one customer, themselves.

          Rental units in multifamily homes.

          Lots of Mom and Pop and family real estate investors who own and rent units in small and mid-sized buildings.

          And the big players.

          As for the absentees, there are people who choose to own and rent houses in metropolitan areas other than the ones they live it. This I do not get. The management company eats what would have been their profit, they have to get on an airplane if there is a problem

  7. Pleasure boat family, 2019 California version:

    * Income totally dependent on VC funding
    * Million dollar shack
    * 120k kitchen remodel of said shack
    * Leased Teslas & Porsches
    * Trips to France, Tahiti, Tahoe…
    * Single child in private Chinese immersion school
    * Said child has unfortunate Gen Z name (e.g., “Ayden”, “Jasper”..)

    Joking of course but the above description is a melange of true facts based on some people I know casually. They’re leveraged to the hilt and although they make good money, given the cost of living and their habits… math is a cruel mistress.

    I admit I’d feel some schadenfreude if the economy tanked and took them down a peg. Probably because they made me feel like a redneck for things like using cash, riding public transportation & thinking that “locals” culture had some value. Silly me.

      1. The efficient market hypothesis says we can’t predict it.

        Keeping in mind the variable impacts of policy changes and random chance, common sense says the same. Historically we seem over due for a correction, and the trends I watch seem ominous, but as Keynes said, the market can remain irrational longer than you can remain solvent.

        Best bet seems to be to hedge – 401(k) but also low debt, flexible skills, liquid assets, solid relationships, tangible assets useful in times of need… The standard Granola Shotgun / JM Greer answer. I suspect Taleb would agree.

        1. Yes, I would like to see that chart over more than a full Kondratiev wave (90 years, conveniently just longer a human lifetime). A current one would run from the Roaring 20s through the Great Depression, WW2, the postwar boom, Vietnam/Nixon, the Carter/Ford Malaise, the Reagan/Bush/Clinton boom, and into the first two decades of this century (whatever we would call them). Or, conveniently, Charlie Munger’s lifetime (Warren Buffet’s partner in Berkshire Hathaway).

    1. What’s the Y-axis?

      I think the latest run up has been another massive credit bubble, but returns have historically been great in the stock market. “A Random Walk Down Wallstreet” explains indexed investing in stocks and bonds perfectly. Like the graph above shows, there has been a 100-year run up in stocks, ironically during the American century. Returns in the Chinese stock market are far worse for a variety of reasons. US equity markets have been special. Don’t put all your eggs in one basket. Real estate’s probably a good idea as is making your household productive and getting out of debt. I see the behavior Brian describes all the time and eschew it which is part of the reason I’m an outsider in polite society.

      1. The Federal Reserve helped blow several credit bubbles the last 25 years, by holding interest rates too low for too long, feeding asset inflation, encouraging malinvestment and spawning zombie companies. There will be a lot of pain when this one pops. Contrary to popular belief, excessively low interest rates hamper growth by encouraging too much debt, while permitting uneconomic activities to flourish.

        Encountering turmoil in my early career, and a sense of business cycles, taught me to never take anything for granted. Living thru a couple of severe regional recessions (where real estate prices dipped 30-50%) made a deep impression too. Casual linear extrapolation is a recipe for disaster.

      2. Here’s an inflation-adjusted chart with a Y-axis in March 2018 dollars:

        They answer, as many other people have suggested, is diversification. Domestic and international equities, nominal and inflation-adjusted bonds, real estate, cash, and maybe even a 5% stake in precious metals.

  8. Unfortunately, your link on the actual website is down for some reason…. Just an FYI in case you didn’t know.  God bless,  Byr

    1. I just tried the link and it works fine for me. I refreshed the link. Not sure what the deal is. Thanks for pointed out your trouble, but I’m not sure what the situation might be.

      1. As a long observer of human monetary behavior i would like to point out that if you put the bread truck driver’s economic behavior onto the pleasure boat family, they would probably have weathered any downturn, simply because in good times they would have rapidly paid down debt and lived a substantially more realistic financial lifestyle. But i guess that’s the point you wanted to make all along?

        1. My point?

          The family that sold pleasure boats were young and experienced a few good years in a row early on. Based on that short term data set they assumed, erroneously, that this was a permanent condition. They projected out into the future with an endless upward growth curve that allowed them to take on a great deal of leverage “safely.” They were wrong.

          That’s my point.

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