NWP Monthly Digest | October 2022
This fall, we took my oldest son to college and dropped him off. As I’ve told everyone who asks, it was the hardest thing that I’ve ever had to do as a parent. He may be 18 years old, but leaving him somewhere to fend for himself feels…unnatural. On the outside, I told people how excited I was for him to be starting this new adventure in his life, and I still am excited about that, but there was an instinct or a nerve that was being rubbed the wrong way deep down inside of me. It felt like I was getting rid of him, and it hurt.
Selfishly, I want him close to us. Selfishly, I want to help him solve all of his problems. Selfishly, I want to make sure that he doesn’t make the same incredibly stupid mistakes that I made at that age. And that’s all that is. Me, selfishly wanting something not to change when the most important thing that can happen is just that - that it changes.
Slowly, my wife and I (and his brother and sister that are still at home) have started to feel better. We’ve adapted, and we’ll continue to adapt. You can read and listen to countless pieces of parenting advice, but the one I love about your children spreading their wings and going off to college that hits close to home right now revolves around them coming home for Thanksgiving their first year. We, no doubt, will be incredibly excited to see him. And by the end of that week, completely ready to ship him back to school. You see, giving an 18-year-old a small taste of freedom will do wonders to change their precious attitude around the house when they come back to visit, and it’s not always pleasant.
I’ve been reading a lot lately about a few simple words that have a lot of meaning to me right now and hopefully to you, too.
“So what? Now what?”
That phrase is so simple and so empowering. Originally, this was a process framework developed by Dorothy Scratchan to help teams reflect on things more deeply as they happened.
To me, however, it’s just a wonderful statement that reminds me that I’m not in control of most things, and I can’t change what just happened to me, anyway.
So what? Now what?
MORTGAGES AND HOME AFFORDABILITY
Mortgages at the beginning of the year had a 2 handle. You could still re-finance your house for 2.875% on a 30-year mortgage. Today, we’re staring down a 7 handle just nine months later.
There are a lot of ways of looking at the impacts of this, but I like what Charlie Bilello of Compound Capital Advisors laid out:
2 years ago: 30-yr mortgage rate was 2.88% & average new home price in the US was $405k.
Today: 30-yr mortgage rate is 6.7% & average new home price is $522k.
Result: $23k increase in down payment (assuming 20% down) and 100% increase in monthly payment (from $1,345 to $2,694). ~Charlie Bilello
A lot of our younger clients have been searching for a home. Some were lucky and found something that they could afford before the Fed took action and mortgage rates skyrocketed. But what if you didn’t?
So what? Now what?
What the Fed is doing is out of your control. The policy mistake was already made years ago as they pushed mortgage rates artificially low, causing the price of homes to push artificially high. Today, I believe that they’re moving too fast in the other direction. Homes, ultimately, will find an equilibrium. Home prices should be driven by incomes and population increases, not by artificially low interest rates.
But it doesn’t matter what I think or what you think. The reality of the situation is the “So what?”. The “Now what?” is how you handle this. And the only rational thing you can do is stick to the fundamentals. If a home seems too expensive and the burden of the monthly payment seems too high for your cash flows, then you don’t buy that home. You remain patient. You stay in your current home, or you keep renting. Let the market come to you, no matter how desperate you are.
A HISTORICALLY BAD YEAR FOR BONDS…AND STOCKS
No doubt, you’ve either seen the news on CNBC or you have opened up a brokerage statement recently. The market is not doing well this year.
As of this writing, the S&P 500 is squarely in bear market territory, down 25% from the highs, and we’re eight months into it.
On average, stock markets in a bear market without a recession decline 29% over the course of 12 months. With a recession? 42% over the course of 16 months.
This isn’t unusual. What is unusual, though, is that bonds have provided nothing in the form of protection this year and, arguably, have performed worse on a relative basis to the stock market.
Bonds in the aggregate are down ~15% this year. To say the least, that number is beyond eye popping. Prior to this year, the worst year of performance for the bond market was -2.9%, and that happened during the Fed’s rate hiking cycle in 1994. Typically, in times of extreme stress in the stock market, bonds provide a sanctuary and at least some level of positive performance - bonds tend to be negatively correlated to stocks during these times (they go up when stocks go down).
Except…in times of monetary policy change. In a crisis when interest rates are falling dramatically because of a loose monetary policy stance, stocks and bonds will eventually both go up at the same time. Great!
When interest rates start rising rapidly, however, due to monetary tightening (like what’s happening now) - they will go down, eventually, at the same time.
So what? Now what?
The best news that will come of this mess is that future expected returns are much higher today than they were before. The best way to evaluate the return of bonds in the future is by looking at the current yield, and with stocks, its valuation. Bonds now have a solid starting yield with interest rates much higher and those bonds, in general, look attractive. Stock valuations have fallen, although not as much as you’d think. Still, they look better today for expected future returns than they did before.
We can’t control what happens next, but we can control our savings rate if we’re young. Save more. And we can control our spending rate if we’re retired. Spend less.
INFLATION AND ITS IMPACT
We’ve written a lot about inflation over the last few years. People really hate inflation. I would argue that people hate inflation a lot more than they hate government debt, another favorite punching bag. But there is reason to be optimistic.
Commodity prices have cratered in the past few months. Oil, gold, timber…you name it. The price is coming down. A combination of supply chain repair, a strong dollar, and reduced demand will do that.
Noble Wealth Pro Tip of the Month
October is my favorite month of the year. This is my season, folks. Birthday - Halloween - Thanksgiving - Christmas. It simply doesn’t get any better than this.
October also brings a few very important items that should be a priority for your personal finances.
First - if you have kids in college or getting ready to go to college next fall, you need to fill out the FAFSA. If you did it last year, you need to do it again. The FAFSA is open for business starting today, and you have until June 1st next year to complete it. Don’t delay, as some schools deliver financial aid on a “first come, first served” basis.
Second - student loan forgiveness. In a landmark ruling earlier this year, as I’m sure most are aware, the Biden administration will allow student loan borrowers the opportunity to apply to have $10,000 of their loans forgiven, and an additional $10,000 ($20,000 total) for those that received Pell Grants.
You should expect to see information on that application process “soon”, as the Department of Education announced it will be ready in “early October”. You should also mark your calendars with the date of November 15th, the date you should have your application for forgiveness complete.
Things We’re Reading and Enjoying
Factfulness: Ten Reasons We're Wrong About the World--and Why Things Are Better Than You Think | by Hans Rosling
Perspective is something in short supply right now. We all need a little to remember how fragile life is and how much progress we’ve made.
When asked simple questions about global trends―what percentage of the world’s population live in poverty; why the world’s population is increasing; how many girls finish school―we systematically get the answers wrong. So wrong that a chimpanzee choosing answers at random will consistently outguess teachers, journalists, Nobel laureates, and investment bankers.
In Factfulness, Professor of International Health and global TED phenomenon Hans Rosling, together with his two long-time collaborators, Anna and Ola, offers a radical new explanation of why this happens. They reveal the ten instincts that distort our perspective―from our tendency to divide the world into two camps (usually some version of us and them) to the way we consume media (where fear rules) to how we perceive progress (believing that most things are getting worse).
Our problem is that we don’t know what we don’t know, and even our guesses are informed by unconscious and predictable biases.
Just Keep Buying: Proven ways to save money and build your wealth | by Nick Maggiulli
Simple. Elegantly written. Easy to digest. This is a book I’m going to give to my kids (if I can get them to read it).
Everyone faces big questions when it comes to money: questions about saving, investing, and whether you’re getting it right with your finances.
Unfortunately, many of the answers provided by the financial industry have been based on belief and conjecture rather than data and evidence―until now.
In Just Keep Buying, hugely popular finance blogger Nick Maggiulli crunches the numbers to answer the biggest questions in personal finance and investing, while providing you with proven ways to build your wealth right away.
-Your team at Noble Wealth Partners
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway