October 8, 2024
It occurred to me that there are three useful questions to ask prior to making important financial decisions in our lives. The inspiration came from a combination of two conversations I had in the past month (thank you to Jeff Concepcion of Stratos and KM and BM).
Here it goes:
Will this decision (change) bring more joy to your life?
Will this change simplify your life?
Does the decision benefit you financially?
If you can answer 2 out of 3 with a yes, it probably makes sense to move forward. There is never a black and white answer, but I will try to provide food for thought. It’s probably best to illustrate with an example.
Many young people want to buy a home, and many of them have been conditioned to believe that if you are renting your home, you are “throwing money away”. However, that is not necessarily true. Although real estate has been a good asset class to own in the USA over long periods of time, there are times when it can certainly make sense to rent. Let’s go through the questions for a hypothetical young married couple with limited savings and they’re wondering whether to buy a home:
1) Will this decision bring joy to your life?
At present, in most locations of the USA, for a given budget they will likely be able to rent nicer accommodations than if they were to buy a home. They may also have the option and flexibility to move to something nicer as they earn more or as their personal situation changes, such as children. So, the answer to question (1) is probably NO.
2) Will this change simplify your life?
Maintenance, taxes, anxiety when things break, owning a home is almost always more complicated than renting. However, that might not be the case if there were a shortage of rental options in the location where the couple needs to be. However, the answer is probably NO, it does not simplify your life.
3) Does the decision benefit you financially?
Without going into details on the current state of the real estate market, in many parts of the country it is much cheaper to rent an equivalent home. The answer here is likely NO. However, it is important they take advantage of their savings by investing to ensure that if asset prices go up (real estate and stocks), that they protect themselves by owning investments that are also likely to go up in price.
In summary, for the hypothetical couple above, it is likely they should rent instead of buy.
However, let’s fast forward 7 years, and that same couple has a 5-year-old and a 3-year-old. The answers to their questions may be different. Hopefully they have a considerable amount of savings at this point, they have invested, and their wealth has grown. How would they answer these same questions as they consider buying a home?
1) Will this decision bring joy to their life?
The family needs stability. They want to stay in the same town and in the same house. They want safety, good schools, they want to become engrained in the local community. The answer now to the same question is likely YES.
2) Will this decision simplify their life?
Despite the same issues around maintenance, taxes, and home ownership issues, because of the stability gained, the answer is likely YES. Having to move houses with 2 young children every year is a headache.
3) Does the decision benefit you financially?
The answer to this may still be NO. They still may be able to rent something far nicer than if they were to buy, but the financial consideration is trumped by more important factors.
There is no right or wrong answer to these questions, but if you answer honestly, if you have a plan, if you stay disciplined with savings and investment, you are likely to give yourself a higher probability of achieving what you want with less stress. You are also likely to decrease the probability of making significant mistakes. Such as: overpaying for a house that doesn’t meet many of your needs, may not be in the neighborhood you desire, and limiting your future options as your life develops. When you are young, you have less constraints and obligations generally. Life usually gets more complicated and less flexible once children and careers develop.
Markets and Portfolio Shifts:
Over the past few weeks, we have increased two asset classes across many of our portfolios, specifically:
Global mining companies
Energy companies
The rational for the increase to these sectors were the following developed opinions:
These assets classes have been out of favor with many investors in 2024.
According to our valuation measures, current prices were offering an opportunity.
The world continues to need the metals and energy these firms produce.
China was likely to stimulate their economy at some point, and there would be anticipation of increased metal and energy demand.
Once Israel began to shift focus to Hezbollah, the probability of escalation went up, and this would be a catalyst for higher oil prices.
So far, this view seems to be working, and I suspect there could be more reasons coming to support these asset classes.
“Probability theory is nothing but common sense reduced to calculation”
Pierre-Simon Laplace
The below is my personal view of what might happen. I am not making any moral judgements. These are areas where I see possibilities, and some of them can seem outlandish. I am not an expert on any of the below topics, but I do think it is worth considering:
Global stimulation through both fiscal and monetary policy will continue to increase. This will be led by China. On balance this will be positive for global demand.
Higher demand should be good for producers of metals and energy.
Demand for energy will continue to grow at a much faster pace than the recent past. See the below excerpt from the Financial Times on October 4:
“We need to realise this infrastructure is also increasingly under strain. In recent years the energy consumption of data centres has been fairly stable, because rising levels of internet usage were offset by rising energy efficiency. However, this is now changing fast: AI queries use around 10 times more energy than existing search engines. Thus the electricity consumption of data centres will at least double by 2026, according to International Energy Agency – and in the US they are expected to consume nine per cent of all electricity by 2030. In Ireland, the usage has already exploded to over a fifth of the grid-more than households”.
China will continue to face significant and long-term challenges in its economy and its politics. The foundation of the economy is real estate. There is already too much housing for a declining population. Instead of opening its economy to the west, they will continue to retrench as the government’s priority is control of power over its population (social stability).
Keep pumping out exports in solar panels, wind turbines, batteries, electric cars. It will be very hard (even with tariffs in the USA and Europe) to compete with Chinese manufactures. This should keep prices low in these industries.
China will fall behind on advanced technologies as access to advanced chips will only get more difficult.
The west (led by the USA) will work hard to contain China’s development if they are unwilling to adopt western rule of law and protections of individual and human rights.
China can continue to be self-sufficient for a very long time. They may become less influential globally over the next 10 years.
Israel will continue to press its advantages in the middle east. They have clearly increased their leverage over those actors seeking to eliminate the country. This is likely to significantly change the balance of power in the middle east.
Many middle eastern countries desire to open their economies to western business and tourism. There is a realization that they must diversify from their oil resources, and there is also a pragmatism that the only way to do this is to move more towards a more open approach to western liberal democracy. Israel will be a part of this system, and middle eastern countries will pragmatically normalize relations with the country.
Israel goes for full regime change in Iran, and the Iranian government does not have a path to stop it. Israel will continue to work to eradicate Hamas, Hezbollah, and the Houthis. If successful, the Iranian government is much more likely to fall. The domestic population and overseas Iranians are likely to provide a path to a much more pro-western government, but I have no idea how messy this process will be.
The USA, despite calls for a “cease fire” clearly want the government in Tehran to fall. US Administration calls for a cease fire are for a domestic political audience; I question how genuine these calls are. They will most likely back Israel in their efforts.
At some point, the USA will pressure Israel at that point to move toward a solution that provides opportunity for its neighbors.
Russia in the past two years has been seriously weakened by the Ukraine war. A peace deal is becoming more likely that provides an eventual off ramp for Putin with conditions like:
Ceding some of Ukraine territory that is important to Putin.
No NATO for Ukraine but significant security guarantees.
Ensuring that the impact on other countries due to a power shift in Iran is allowed to take place without Russian interference. I suspect this will be part of a broader geopolitical strategy by the USA.
USA influence on the global economy becomes more pronounced. US dollar hegemony is reinforced.
The US Election will be messy and chaotic, but life will move on with a new president in 2025. We are unlikely to know whom the president will be the day after the election. It is unlikely that one party will sweep the White House, House, and Senate.
There will be legal challenges on both sides in any tight races in key US States. Voting eligibility will become a legal fight.
Life will move forward, and the USA will continue to provide the ideal place for business formation, innovation, and education. See the below article from the NY Times on startups of small businesses since Covid.
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