Conservatory Chat

Buying a home in America is just too darned expensive, what with today’s rapidly rising home prices. Right?

You might be surprised to know that, according to a somewhat complicated calculation, U.S. homes, on average, are among the most affordable in the world.

To come to that conclusion, the Best Brokers organization calculated how many months of average income, in each country, it would take to buy a 1,076 square foot home—a modest residence by U.S. standards, but in some areas this is a bit luxurious. The average American would have to pay the equivalent of 76 months of total income to buy that house. In South Africa, that figure falls to 71 months.

Those were the lowest totals in the survey, by a fair amount. Canadians would pay an average of 179 months of income, while Mexican citizens, south of the border, would spend 211 months of income on the same size home. The UK: 202 months. Italy: 184 months. India (where the average wage is a lot lower): 578 months, topping Indonesia (563 months). China and Japan came in at 177 and 455 months, respectively. In Turkey, it would require 52 years and six months of average wages to buy a house of that size.

As mentioned, the calculations can be tricky, requiring an estimate of the average cost of a home (which, of course, varies depending on location) and the average wage of workers in each country. The ranking also took into account real mortgage rates, which means the interest rates in each country, and also the inflation rate.

So when we hear somebody complain about how unaffordable American homes have become, we might suggest that they check out the affordability of homes elsewhere in the world. Which puts a sort of damper on the idea of expatriating abroad to live more cheaply... 

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

What’s up with these huge swings in the markets?

Well, (obviously) it’s currently the tariffs. Lately, traders approved of the temporary lifting of the most onerous tariffs on everybody but China. Then, they disliked the tariffs on the delicate chips and the computer assembly sector of the Chinese economy. Next, they applauded when those were lifted. In direct and nearly immediate response, they drove the markets up, down, and up again.

In the longer run, both traders and investors depend upon certainty. It’s much easier for us investors to stick to our long-term plan when we have a vision of what lies down the road than when the future is uncertain, murky, and scary. That’s when emotions begin to override our long-term plan in favor of reacting to the latest market moves and news bites.

Winston Churchill once remarked that democracy is the worst form of government… except for all the other ones. Long-term investing may appear the worst way to navigate the markets as well… except for all the others.

Manufacturers are in the same position, reporting that all the uncertainty has frozen them in place, not knowing what their products will cost overseas to foreign buyers, not knowing what their internal costs will be (and, therefore, prices will be) if/when the tariffs are assessed.

And so, the bobbing and weaving of the markets in reaction to the Administration’s waffling on tariffs continues, with no clear end in sight. It’s an increasingly heated rat race with which most of us should prudently and simply steer clear.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

After two years of stellar returns, the U.S. investment markets have decided to give back some of their recent gains. The risk of a slowdown in consumer spending and the uncertainty over trade wars and tariffs have created some market jitters that are raining on the bull market parade.

What's going on? To begin with, it's fair to question whether U.S. companies, in aggregate, were truly 40% more valuable at the start of this year than they were just two short years ago. Sometimes markets get ahead of themselves, bidding the price-to-earnings ratio up to nearly 30—which is very high by historical standards. 

Overall earnings are still strong, but future earnings depend on willing spenders for goods and services. The traditional measure of consumer confidence has declined for the past few months, and this is starting to show up in a slowdown in consumer spending—up just 0.1% in February. Markets hate uncertainty, and rarely have we seen more of that than in the back-and-forth promises of tariffs imposed, revoked, discussed, and renegotiated by the largest trading partner in the world. Tariffs represent friction on global commerce, particularly for manufacturers who assemble products here in the U.S. from components made elsewhere in the world. Nobody knows yet how these tax surcharges will be imposed, but economists and the press are clearly anticipating higher costs, and therefore higher prices, and therefore lower sales volume—and potentially also lower profits as companies absorb some of the additional costs.

The tariff highway is a two-way street. Economies around the world are mulling reciprocal tariffs in what could become an escalating tit-for-tat trade war, without any clear end point to the tats until somebody blinks.

Market movements are driven by trader expectations of a company’s earning potential. When the earning potential comes into question, there can be a retreat to the sidelines.

Of course, uncertainty cuts both ways. If the actual impact of the tariffs turns out to be less than expected, sentiment can turn positive on a dime.

It's worth noting that the threat of a trade war seems to have benefited non-U.S. stocks, particularly in Europe, which is now in a bullish phase and whose markets are outpacing the American ones. The two markets were due for a reversal, but what we are experiencing is extraordinary—a sign that investors are less worried about the tariff impact on European companies than on American ones.

The so-called experts in the markets were extremely bullish just a month or two ago, and now, suddenly, they're sounding downright bearish. The consensus forecast at Goldman Sachs was for the S&P 500 to reach 6,500 by the end of the year. That was scaled back earlier this month to a still bullish 6,200. Now? The projection is 5,700, and we probably have another backtrack or two in store...

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

With the unprecedented restructuring wave going on across the federal government, unorthodox personnel management, appointment of candidates with controversial backgrounds in the departments they’re running and a wave of tariffs the like of which the world hasn’t seen since the 1930s, it’s easy to imagine that something might go wrong with the U.S. economy in the fairly near future. People are calling their financial advisors asking whether they should retreat to the safety of putting their money under the mattress—or, in the extreme, in a house in the woods with Krugerrands hidden in the floorboards…

The problem is that nobody knows what the outcome of all this is going to be with anything approaching certainty. Companies operate, at least nominally, independently of the government and are only tangentially affected by the chaos in Washington. The tariffs are going to disrupt delicate supply chains, but manufacturers have had months to figure out how to cope. The abrupt termination of the USAID program will reduce an important market for farmers, and the retaliatory tariffs from China will reinforce that impact. But this might lead to more food dumped on the U.S. market at fire-sale prices, lowering that aspect of the consumer price index.

The promised firing of tens of thousands of government workers will flood the job market, potentially raising unemployment levels and reducing consumer demand. But it might also lead to a new pool of qualified executives and staffers for local corporations.

Slashing Medicaid will undoubtedly cause economic pain for tens of millions of Americans, and the conversation about reducing Social Security benefits is hardly likely to reassure seniors. But those impacts are aimed at people, not companies.

The point here is that every election produces sounds of alarm from the party that was driven out of office, and in the end, the impact on the markets has been minimal. The sounds of alarm are louder now than in recent memory because the Trump Administration has introduced what might delicately be called “uncertainty” into government policies (meaning nobody knows what they will do next). The impacts are powerful politically and socially, but perhaps not tremendously so for publicly traded companies.

That doesn’t mean that there won’t be volatility, as people respond to uncertainty with the usual levels of alarm. But even if corporate earnings suffer and companies become less valuable because of the new policies, it is helpful to remember that the last time there was a crisis (remember COVID?), the government stepped in with a generous stimulus package that put a firm floor under the market and kicked off a bull market...

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

The catastrophic wildfires in Los Angeles represent a terrible human tragedy, and for many homeowners, it will become an awful financial tragedy too, as thousands will discover that there’s a big gap between what their homes are worth and what they’ll get from insurance companies to rebuild on top of the ash.

It’s also worth noting that they’re not alone. A recent article in Bloomberg News says that an estimated 17 million U.S. homes – roughly 19% of total housing – are significantly underinsured against damage from floods and wildfires alone. The total gap between their market value and their insurance coverage, in aggregate, comes to $1.7 trillion.

That number is rapidly growing, as the housing boom pushes home values higher.
Moreover, those who have so far managed to avoid the floods and hurricanes in Florida, the wildfires across the Pacific Northwest, or the thunderstorms in Oklahoma are facing huge increases in insurance costs that erode the value of their properties. From 2011 to 2021, the average U.S. home insurance premium rose 44%, and by some estimates, it has exploded since. That’s if coverage is available. Many insurers are pulling out of the hardest-hit areas, citing climate change-related increases in nature-related damage.

Adding fuel to the fire, so to speak, is the growing number of U.S. homes that have been built on what the U.S. Forest Service calls the wildland-urban interface (WUI), where wildfires are most likely. In 1990, the census showed roughly 30 million homes at risk; now the number is 44 million. The housing boom in Florida has put millions of additional homes at risk.

The article says there is no easy solution to the problem as climate-related disasters grow in number and intensity. It estimates that the gap between home values and coverage will soon reach $2.7 trillion, and more homeowners will have to pay the difference or lose everything.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

The U.S. investment scene, in aggregate, churned out another unusually positive investment experience this past year, with 20+ percent gains heaped on top of 2023's historically unusual gains.

The experts who follow these matters say that ebullient investor expectations rest on the idea that artificial intelligence will improve the economy, help companies achieve unusual productivity gains, and ultimately lead to higher values across the board. This, of course, is unproven speculation, but there are other reasons to be optimistic. The inflation rate has retreated to historical norms, and the Federal Reserve Board seems inclined to cut interest rates by another half a percent. All the predictions of a global recession failed to come true and are now being discredited. The new Congress is more likely to lower tax rates than raise them.

A recent compendium that followed the annual ritual of predicting the year's market returns in advance (always around January 1) found an average forecast of an 8.2% return for the S&P 500 in 2025. The crystal ball watchers are more convinced by the positives than the potential negatives; indeed, not one of the prognosticators forecast a loss in 2025. This is unusual in the face of so many uncertainties: policies initiated by the incoming presidential administration, growing federal debt, wars in Ukraine and Israel, and mounting cyber threats.

The best course has always been to ignore the predictions, positive or negative, and manage your sentiment through what might become, in the months ahead, a choppy investing experience. The alternative is to pull out of the markets into safe assets that pay no interest, which are guaranteed to lose value due to inflation. The threats are real, the uncertainties are always with us, and through it all, patient investors have always been rewarded in time.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

Legendary investor Warren Buffet, chairman of Berkshire Hathaway, was asked about investing in gold, and he was perplexed by the question. His response was that gold (unlike investments in stocks and bonds) doesn’t build value in the economy, doesn’t generate annual dividends or interest, and generally relies on finicky investor sentiment to move its price (and value) up or down. He wondered what one would do with a nest egg in gold other than admire the sheen and periodically polish it.

But gold investors today are pretty happy with their returns – 29% in the first three quarters of 2024 – which has pushed the annual return since 2010 up above 10%. The reasons for gold’s advance are not clear, but gold’s popularity tends to rise during periods when people are worried about the government’s ability to pay back its debts – and over the last eight years, total U.S. government debt has risen above $35 trillion, or about 122% of the current GDP. The train of logic suggests that the government would, in desperation, devalue the dollar so it could pay back its debts off of the printing press.

Alternatively, people who believe in a catastrophic future will focus on a diversified portfolio of gold, canned food and water, and a cabin off the grid deep in the woods. This appears to be a growing percentage of the population.

There’s nothing wrong with owning gold in a diversified portfolio, but the precious metal does tend to be an inefficient holding. As mentioned above, it won’t generate any dividends or interest, and the taxation of gold’s returns, unlike traditional investments, is somewhat punitive: investors are taxed at ordinary income rates rather than (lower) capital gains rates if the traditional investments are held for more than a year. Moreover, gold provides a somewhat wilder ride than traditional investments; its standard deviation is 18.07%, which means that two-thirds of the time, the price will bounce from +36% to -36%.  

The downside volatility tends to be emphasized after a significant runup like the markets have recently experienced. Absent a global flare-up of inflation or warfare, the downside is probably more likely than a great deal more upside.

Is there room on the downside? It’s perhaps worth noting that, despite the high gold prices today, the cost of producing an ounce of gold – which might be a clue to gold’s natural or intrinsic price – averages around $1,345, which is considerably lower than the $2,700 per ounce that gold is currently trading at.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

When it comes to the economy, the Fed Funds Rate is one of its most closely watched and talked about factors driving the conversation. Pundits endlessly opine, while economists pour over the tea leaves that are the Federal Reserve’s minutes and press conferences. From all this, it would be natural to assume that this is the only lever that the Fed is pulling when it wants to raise or lower the temperature of economic activity.

But there is another equally important handle: the Fed balance sheet. Whenever the Fed wants to give the economy a kick in the pants (think about the Great Recession of 2008-9 and the COVID-related decline) it makes money out of thin air and buys Treasury securities and mortgage-backed securities.  

Buying mortgage-backed securities helps lower longer-term interest rates that are generally not influenced by the Fed funds rate. The manufactured money used to buy these securities increases the money supply and lowers yields. When the Fed starts selling off the mortgage bonds, it does the opposite: it tends to reduce the money supply and cause longer-term interest rates to go up.  

The same general principle holds for Treasury securities. When the Fed wades into the Treasury market, it tends to bid at lower yields, lowering what the government must pay on the bonds (and taking pressure off the federal debt) and lowering bond rates generally. The money supply is increased, and banks generally wind up with more money to lend at more attractive rates. More lending tends to equal more economic activity.

So, what is the Fed doing today in this obscure corner of its policy machinations? The Federal Reserve System increased its balance sheet to a record $9 trillion (with a “T”) in the aftermath of the 2008 Great Recession crisis, and these so-called Quantitative Easing programs did, indeed, shock the economy back to life. Beginning in April of 2022, the Fed began cautiously allowing the bonds on its books to mature, which reduced its holdings up until the COVID crisis, at which point it entered another (albeit short-term) purchase policy. The Fed has gone back to net selling so that today, it holds just over $7 trillion on the balance sheet.

What’s the goal? Nobody knows. It’s possible that the so-called “Quantitative Tightening” will take assets down to roughly the $4 trillion level that existed before the Great Recession. It’s also possible that a recession is just around the corner, and depending on the depth of it, the Fed might decide to start buying again – or at least stop selling assets.  

If that happens, all eyes will be on the Fed Funds rate. But ultimately, the changes in the balance sheet might have more real-world impact on the economy.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

We’ve been hearing about how America has underinvested in its infrastructure for decades, and how the new Infrastructure Investment & Jobs Act is supposed to turn that around. Some of us have looked with envy at the amazing rapid-rail system that connects every part of the Chinese countryside, and Los Angeles residents are (or should be) envious of New York City’s subway system.  

But many taxpayers might be wondering: where would that infrastructure money best be spent?

According to Justin Marlowe, a research professor at the University of Chicago, three types of infrastructure investment deliver the most pronounced economic benefits over the long run. The first is what has been defined as “core public capital,” or “core infrastructure.” That includes fixing crumbling roads and bridges.  It also means expanding airports, and particularly putting money into telecommunications infrastructure, much of it aimed at increasing access to broadband internet communications. Broadband makes it possible for rural businesses to improve their marketing and management and brings more capacity to local hospitals and governments. Marlowe estimates that every dollar invested in these core infrastructure projects returns between $3 and $8 over the next 20 to 30 years.

Those are relatively certain returns on investment. Less certain, says Marlowe, are public transit projects like urban rail lines or subway systems. The reason these are somewhat speculative is that the project must purchase the land along the route, which might mean the extremely costly prospect of blasting the rail line through urban (high-property-cost) neighborhoods. Marlowe adds that these projects often take longer to build.

Happily, policymakers do appear to have focused the initial infrastructure money to repair bridges and roads and to bring broadband to rural parts of the country.  Rapid rail projects crisscrossing the country, or a subway system in Los Angeles, may have to wait for private investment – if such a thing can make sense in the profit-driven private investment world.

Let’s all stay tuned for that.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you. 

The rarest of economic events is the so-called “soft landing,” where a robust economy (and long-time bullish markets) are gradually cooled without triggering a recession and bear market. We might be witnessing such a phenomenon today, though nobody will quite say we're out of the woods yet.

As has been the case for most of 2024, the U.S. markets seem to be testing new highs every week or so, in a smooth ride with little volatility. That is not normal, but there aren't any clear signs of a storm on the horizon. Manufacturing activity continues to be strong, construction spending is relatively robust, and the unemployment rate, which seemed to be rising, has leveled off at a level that most previous economies would consider extremely bullish. Hourly wages for American workers continue to rise faster than inflation, currently at a 3.8% annual rate, compared with 2.5% inflation. That aforementioned inflation rate is very close to the Federal Reserve's 2% target, which might mean that the Fed has room to lower rates going into 2025.

Meanwhile, GDP growth is running at 3.4%, personal income and disposable personal income among consumers keeps rising (albeit incrementally) and consumption (a key component of economic growth) remains strong. As a direct result, corporate profits have continued to rise.

The chief worry now is oil supply disruptions as the conflict in the Middle East heats up. If the conflict escalates, the world will experience higher oil prices. The impact would be moderated in the U.S., which is energy-independent currently and exports fossil fuels, but global supply and demand have rippled into American gas stations (and production costs) in the past. Of course, there are bigger worries when two major conflicts seem to be escalating, especially when they involve countries with nuclear capabilities.  

Oh, and you might have noticed that there's a presidential election going on in the U.S. The interesting thing about elections is that there's never any clear connection between who wins in November and what the markets will do in the immediate aftermath. Policies can affect the economy, but until we know what those policies will be, it's hard to judge what kind of impact to expect.

It's helpful to remember that the markets have continued to rise through both parties temporarily occupying the White House and holding majorities in Congress. There's no good reason to imagine that this long-term trend will suddenly change, though history does tell us to expect more volatility in the future (up and down) than we've experienced in the recent past. It's always helpful to have your seatbelt buckled...

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you.