Turn on the tv, radio, or internet news, or check out a few Facebook/Twitter status updates – I read and hear near constant complaining about Wall St., the 1%, the rich getting richer, tax cuts for the wealthy, people paying their fair share, blah, blah, blah – but much of what I see is folks contributing to the economic system that generates their very complaints…
Normal today is a $30,000 student loan, a $300,000 mortgage, a $25,000 car loan, a $15,000 credit card balance (all average loan amounts), and a plan to work 40 hours per week (or more) for 50 years, from age 22 to 72, to pay for it all – at which point folks expect the government to take care of their basic needs via Social Security & Medicare. Good grief – when did this become “normal”? Normal sucks.
The True Cost of Normal:
I will let you in on a little secret – If you take out a 30-year mortgage to buy a home and borrow $300,000 at 4% interest, you’ll pay $243,000 in mortgage interest in the 30 years it takes you to pay off that $300,000 loan – that’s essentially a 1/4 million dollars you’ll send from your bank account up to Wall St. In fact, it’s not until year 22 of the 30 year note when your payments toward the principle of your home will exceed your payments toward the interest. And you wonder why the rich get richer?
What’s in it for the investors? A safe return of 4% APR collateralize against your home. If you don’t pay them, they will simply come take your house, kick you out, and sell it. It’s a predisposed outcome you explicitly agree to when you sign your name on the dotted line of the loan document and then shake the hand of the smiling man who just became your new master. You simply can’t engage in the economic model of the lender/debtor (master/slave) relationship and then turn around and complain about the economic prosperity you are fueling for those above you. The rich do indeed get richer. This is normal.
Do You Victim Much?
Why is this happening? We’re trying to keep up with the Kardashians – And God help us! There is a perverse notion that has crept into modern thinking that you somehow “deserve” to be wealthy and live an opulent lifestyle just because you get up and go work 8 hours everyday for “The Man”. The thinking goes that if “The Man” drives a fancy car and vacations on a white sand beach, you deserve the same – just like you deserved a trophy every year as a kid no matter where your soccer team placed in the standings.
Problem is, you can’t afford to vacation in Cabo; therefore, most major purchases today are financed and leveraged against wages to be made in the future. The cost of this leverage is the interest you must pay plus the time you must spend working to pay for the trip. “The Man” thanks you for this, by the way, as he continues building his wealth from your interest payments and from your loyal workforce devotion. But somehow, in Bizarro World, as you make the choice to finance your lifestyle, he becomes the bad guy.
With A Little Help From My Government Friends:
Those without debt and a massive monthly overhead can afford to take money over and above their baseline budget (food, water, shelter) and instead of sending it off in envelopes addressed to interest-collecting lenders, they can buy stocks and bonds instead. And what happens there? With stocks you enjoy the profit when other workers produce good or services, and with bonds you get paid when other people use (borrow) your money.
Since the crash of 2008, market recovery in the form of Quantitative Easing has fueled one of the greatest decades of investing in history; however, a majority of Americans don’t even invest in the market – it’s mainly an activity reserved for… you guessed it… the wealthy. Banks used QE money to fund company mergers, corporate bond offerings, and stock buybacks. With free money to invest, there was no way to lose. Who did this help? The wealthy, and pretty much only the wealthy. From a presidential administration that ostensibly despised the 1% and wanted to “spread the wealth” to Joe the Plumber and the rest of the working class comes an economic policy that did absolutely nothing for them. It was, however, a life-changing decade for the lender, saver, and investor. As US household debt currently sits at a record high, the number of Americans currently investing in the stock market is at a record low. This is no coincidence – that correlation is the new normal.
Quantitative Easing has also been life-changing for the consumer creditor, though not nearly as advantageous. In the not so distant past, it would have been unheard of to see someone hold the equivalent of $15,000 (or more) in credit card debt. Today, in an environment of the low interest rates created by QE, that kind of debt has crept into our culture as simply something one does. Debt has become normal as it has become way too easy to re-finance credit card debt into lower interest loans, free up the credit limits, and then take another run at greatness in the form of buying more things to make you look more successful and/or wealthy than you truly are.
The top 10 percent in America (those with income exceeding $114,000/yr and a net worth over $1.1 million) capture almost 50% of the total earnings in America, via wages, dividends, and capital gains from the sale of stocks and other assets. Think about that for a second – what an amazing statistic! This record-setting capture rate began in 2013 when our government’s QE program hit full stride and it continues today as household & consumer debt of the “bottom 90%” reaches record highs. What fuels this madness? Those who complain about it – oh the irony!
Normal today is living a fantasy lifestyle one cannot afford – from education, to car, to house, furnishings, clothing, vacations, and even the food and coffee we consume. Our society has become one of borrowing and spending for instant gratification and appearance, yet we continually promote this victim mentality that advances a perverse notion that all of our financial problems could be solved if the wealthy in our nation would simply “pay their fair share”. It’s as if we expect the government to give us a rebate on our spending – just like our Discover Card does – and we want it to come from the pockets of the folks who write the contracts we agree to and sign our names to when we take on the debt in the first place. The irony is painful.
Normal is racking up credit card debt at 15% interest while extolling the virtues of your airline reward miles that hold an actual value of around around 1 cent per mile. Normal is signing an adjustable-rate mortgage and then expressing outrage at the system when your rate resets and your house payment goes up $200/month. Normal is financing a $20,000 car, thus ensuring you’ll pay a total of $25,000 for a car that will be worth $8,000 by the time it’s paid for, at which point you’ll be embarrassed to be driving an old car worth only $8,000. Normal is watching your son or daughter sign up for a student loan without walking them through a simple ROI (that’s a Return on Investment) calculation that would show them the 15 to 25 years they will be repaying the loan. Normal is an average credit card balance today of $4,717 with an average interest rate of 15%. Paying the minimum payment of $189/month leads to 10 years of payments with $18,455 paid in interest on a “loan” of less than $5,000 – simply devastating consequences in terms of wealth building.
Where does all of this madness lead? It leads to the rich getting richer because the persistent lenders are going to amass great riches and the constant borrowers will always be under their heel. This is normal.
Does Normal Turn A Profit?
I like to invest in what I call “capture trades”. In my last blog we looked at capturing the consumer debt market by investing in V, FICO, and mortgage-back securities (I have recommended TOTL in the past). Another great capture trade is the consumer drug market – Starbucks (caffeine) & Eli Lilly (Prozac). Here’s a 5-year chart of their stock price, and the fact that they run in tandem is no small coincidence in my book.
Caffeine is a stimulant. What happens when you come down off a stimulant? You feel lethargic and depressed. Starbucks serves over 4 million caffeinated drinks per day and doctors write over 50 million prescriptions for Prozac per year. Correlation? Fuel up, work, spend, eat, fuel up, work, spend, eat, fuel up, come home, see bills, write checks, reality hits, stimulants wear off, a glass of wine, a mind-crash, pill, water, bed, goodnight, rinse & repeat daily. As seen by the chart above, there is a way for the investor to profit from this madness in the form of 2 double-ups in the past 5 years…
Abnormal Activity in Real Life:
We live in a world where you can finance a Big Mac by swiping a credit card in the drive-thru. Doing so ensures you owe interest on the cheeseburger before it comes out the other end. While this seems highly unusual to me, this activity would be considered very normal today.
I would advocate some abnormal thinking and some abnormal activity in this world and I would advocate it beginning very soon. What is it? Some ideas…
Do not finance drive-thru cheeseburgers. Layoff the Starbucks and increase the SBUX. Don’t fall prey to the system, be a hunter-gatherer and work the economic system to your advantage – this can be done without being evil or unethical, despite what you will read in the press. Worry less about the 1% and more about your day to day. Don’t be a victim, be a conquerer. Conquer your debt and then consider the consequences of your actions and behaviors going forward. Don’t finance a $20,000 car, drive a $2,000 car if it’s the car you can afford. Cut your wardrobe down to 30 items, shoes included, and then don’t buy clothes for a year. Save $5 a day, and when that becomes easy save $15. Mow your own lawn, and don’t pour expensive drinking water on it. When your washing machine breaks, don’t buy a new one but learn how to fix it. Work at life from the “outside angles”, not the way the advertisers tell you to do it. Value experiences over stuff, and then get rid of the stuff so you have more time for the experiences.
I’ll close with a thought from Seth Godin – don’t worry about when your next vacation might be but instead make your life one that you don’t need to seek escape from. Be abnormal – live a debt-free + care-free life below your means where every day is a vacation. Remember, someone who loves their work never works a day in their life…
Cheers, and thanks for reading – now get on the move!
disclosure – I am long SBUX and LLY