Wealth Formula Podcast

In this Episode, Buck and Zulfi discuss various topics related to the financial market and investment strategies. They touch on the yen carry trade, the impact of the unemployment report on the market, and the potential for a recession. They also discuss the Consumer Price Index (CPI) and its impact on inflation, as well as the SOM rule as an indicator of a potential recession. The conversation then shifts to a discussion on zero-cost premium financing as an estate planning strategy for high net worth individuals. Ryan Haley and Jonathan Wield join the conversation to provide more details on this strategy and its benefits.

Real estate investors need to be paying attention. Campbell Harvey, a previous guest on Wealth Formula Podcast (episode 423) and a leading economist who first described the predictive value of the "inverted yield curve" posted on LinkedIn: "It has begun. Over the last year, I have made the strongest possible case for the Fed to be proactive. Rates should have been cut this week – indeed, the rates should have been cut in January. We have seen this movie before. The Fed was very late to take inflation seriously in 2021. They brushed it off as "transitory". However, it seemed obvious that inflation was surging. Real-time shelter inflation was increasing at a double-digit rate. Shelter has the largest weight in the CPI. Shelter operates with a lag. Hence, it was easy to forecast the surge. The Fed was forced to react after the damage was done. The same mistake has been repeated – despite many warnings. The recent CPI print was 3% year-over-year (YOY). Nearly two-thirds of this print was driven by one component – shelter. Shelter inflation is reported at 5.2% YOY. This number is far from reality. For example, Apartmentlist.com rents are running -0.8% YOY - a full 6% below the official CPI number. Suppose we believe the real-time shelter inflation is 2%, not 5.2%. This means the real-time CPI would be 1.8%. If you believe shelter is 3%, then real-time CPI would be 2.2%. These numbers are well within the Fed's target. The Fed prides itself on making data-driven decisions. However, it is unwise to make decisions based on stale data. Shelter inflation happened in the past. Keeping rates high will not impact what happened last year. It is always best to look at forward-looking indicators for policy decisions. · My yield curve indicator has been inverted for 20 months. It is 8 of 8 with no false signals since the 1960s. The maximum historic lead time has been 23 months (before the great recession). Ignore it at your own risk. · The Sahm Rule has been triggered. This indicator is not necessarily predictive because employment moves with the business cycle – but it is useful in telling us whether we are in a recession or not. We know that hiring has slowed and unemployment has risen – though the absolute rate is still relatively low. · Retail sales are highly correlated with personal consumption expenditures. Retail Sales are flat. Many do not realize that Retail Sales are not inflation-adjusted. Taking inflation into account recent sales growth as well as YOY sales are negative. · There is considerable evidence that COVID-era savings have been drawn down. A recent release from the Philadelphia Fed carried the headline: "Share of Delinquent Credit Card Balances Reaches Series High". (The same report shows an alarming plunge in mortgage originations.) People are paying 20%+ interest on a card because their savings have run out. Indeed, if people are cutting back on fast-food expenditures, you know this is serious. Drawing down the savings has fueled consumption expenditures over the past two years. That source of growth has ended. Now the Fed will have to play catch-up and cut by at least 50bp in September. Any recession is a self-inflicted wound." For real estate investors, this scenario presents a compelling call to action. The Secured Overnight Financing Rate (SOFR), a benchmark rate used in many adjustable-rate mortgages, is intrinsically linked to the federal funds rate. As Harvey predicts imminent rate cuts by the Fed, we're likely to see a corresponding decrease in SOFR. This creates a unique window of opportunity in apartment buildings where debt is linked to SOFR. Consider this: if a real estate investment makes financial sense in today's high-interest environment, imagine its potential in a future with lower rates. As the Fed lowers rates, we can expect to see reduced borrowing costs for adjustable-rate mortgages tied to SOFR. Moreover, declining interest rates typically lead to increased asset values, including real estate. This situation bears a striking resemblance to periods preceding previous rate-cutting cycles. Historically, those who moved early in such environments often reaped significant rewards. The current climate offers a similar opportunity for forward-thinking investors. In essence, we're looking at a scenario where those who act now, while rates are still high, stand to benefit twice over. First, from the immediate cash flow if the investment numbers work in the current environment. Second, from the potential future appreciation as rates decline and property values rise. It's worth emphasizing that this is a rare confluence of circumstances. The Fed rate is all but guaranteed to decrease in the coming months, and with it, SOFR will likely follow suit. This means that investors who enter the market now are positioning themselves at the starting line of what could be a significant upswing in real estate values. Harvey's insights suggest that as rates decrease, we might see a surge in housing inventory as the "prisoner's dilemma" resolves. This could lead to a more balanced market, but also potentially higher competition for prime properties. By acting now, investors can get ahead of this curve. Of course, as with any investment decision, thorough due diligence and careful consideration of individual financial circumstances are paramount. However, for those with the means and the foresight, the current real estate market presents an opportunity that doesn't come along often. In conclusion, while the high interest rates of today might give some pause, they also create a unique entry point for savvy investors. As we stand on the cusp of what appears to be an impending rate-cutting cycle, the potential for profit from real estate acquisitions made now is substantial. This truly is a very unique window in time - one that astute investors would be wise not to let slip by. The housing market's current dynamics, as illuminated by Harvey's analysis, only serve to underscore the potential of this moment. So for those of you who have not yet joined our accredited investor club, you should consider doing so now. For those of you who are already members, make sure to take a look at the current offering which meets all the criteria above. Speaking of inflation and interest rates, this week's episode of Wealth Formula podcast features a guest who says that inflation actually shapes democracy. 09:50 Thoughts on Inflation 12:24 Shock Values: Prices and Inflation in American Democracy 16:01 Historical Control of Prices by the US Government 17:51 The Impact of Price Controls on the Economy 20:08 Rent Control and its Effects 23:12 How Independent is the Fed? 25:26 Inflation's Effect on Government Debt

Buck takes a detour from his usual topics to dive into self-help, focusing on the "pain-pleasure principle" as a key driver of human behavior. He explores how our actions are often motivated by the desire to avoid pain or seek pleasure and shares practical strategies for rewiring these associations to break bad habits and adopt positive ones.

Buck and Zulfe discuss various topics including the concept of hypernomics, the recent market volatility, the impact of Fed rate cuts on SOFR and the 10-year treasury, and the potential opportunities in real estate investing. Takeaways Despite market uncertainty, there are opportunities for investors, especially in real estate. The correlation between Fed rate cuts, SOFR, and the 10-year treasury is important for understanding mortgage rates and real estate acquisitions. Declining interest rates can lead to cap rate compression and increased asset values in real estate. There is a potential for increased liquidity in the market as money is redeployed from bonds and money markets.

Buck and Zulfe discuss various topics including the concept of hypernomics, the recent market volatility, the impact of Fed rate cuts on SOFR and the 10-year treasury, and the potential opportunities in real estate investing. Takeaways Despite market uncertainty, there are opportunities for investors, especially in real estate. The correlation between Fed rate cuts, SOFR, and the 10-year treasury is important for understanding mortgage rates and real estate acquisitions. Declining interest rates can lead to cap rate compression and increased asset values in real estate. There is a potential for increased liquidity in the market as money is redeployed from bonds and money markets.

Every time we underwrite a new asset, we build models. But modeling an apartment building isn't like modeling a house. The price isn't just what someone thinks it's worth; it's determined by net operating income and cap rates, which are heavily influenced by interest rates. Modeling for apartment investing also includes measures of job and population growth in a given area and the impact of new construction. Suffice it to say, underwriting major real estate assets is pretty complicated. The funny thing is that even the inputs we use in our models are based on other models. So, essentially, you have models based on models. For instance, central banks use models to manage inflation, predicting the effects of monetary policies. In the corporate world, businesses use models to forecast demand, optimize pricing strategies, and manage supply chains. These variables directly influence our underwriting models. Herein lies the limitation of modeling: it depends on the accuracy of the input data. Models are only as good as the data fed into them; inaccurate or incomplete data can lead to misleading results. So, if the models generating the numbers for your models are off, then your model is off as well. So why do we do it anyway? Well, it's the best we can do, and most of the time, in my experience, the modeling points us in the right direction. On this week's episode of Wealth Formula Podcast, I interview Doug Howarth. He's developed a unique approach to economic modeling called Hypernomics. He shares his insights on how Hypernomics can uncover hidden dimensions in markets and provide deeper understandings and strategic advantages. 04:40 What is Hypernomics? 11:21 Application Towards Real Estate Investing

Buck reflects on the concept of true wealth and the things that bring genuine happiness.

In today's Wealth Formula podcast, Buck and Zulfe dive into franchise ownership as a business strategy, emphasizing its appeal for those who excel at execution. They highlight the visibility of capital requirements, expected revenues, and profitability that franchises offer, while also noting the significant time and resources required, making it less of a passive investment. For this week's economy and markets update, with the Federal Reserve's FOMC meetings underway, they discuss the market's anticipation of a potential rate cut by September and recent market movements, such as the S&P 500's dip and the rotation out of big tech stocks. They also note stable bond yields, high gold prices, and Bitcoin's resurgence. Lastly, Buck and Zulfe analyze asset class performance in a slowing economy, comparing real estate, infrastructure, private equity, and more against a backdrop of declining business activity and consumer confidence.

When I talk about the mathematical Wealth Formula, I describe it as Wealth = Leverage (Mass X Velocity). For you physics geeks out there, you can see that I'm ripping off Newton a little bit. In this equation, velocity is your rate of return and leverage is debt such as a mortgage that amplifies positive returns. Mass is simply the amount of money you actually invest. Mass is critically important. After all, if you don't invest any of your money, it doesn't matter how good the other variables are. Now luckily most in the Wealth Formula community have plenty of mass. Our community is made up of a lot of high paid professionals. Income is not typically our main problem—it's the other variables that help turn that income into wealth that provide us with our biggest challenges. I tend to think of my businesses as the fuel that ignites my investments that then turn into wealth. The more fuel I've got, the more ability I have to grow my wealth. Imagine me shoveling cash from my businesses into a bunch of real estate to keep the wealth churning—that's literally how I think about it. Now you may be quite happy with the amount of money you are able to put into your investments, but if you're not, one option is to consider is start or buy a business. There's no doubt that businesses require more work. Anyone who tells you otherwise is lying. However, that's also the reason they tend to cash flow more. There are a lot more variables in businesses making them more risky then a piece of brick and mortar. And because there is more risk, there is more reward. Nevertheless, it might be a risk worth taking. And if you are not a start-up type or need a little bit more structure, franchising might be worth looking into. This week's guest on Wealth Formula Podcast is an expert on franchises and gives us all the ins and outs you need to know to determine whether you should consider it for yourself. 08:10 Franchising in Uncertain Times 12:53 Return Profile on Franchises 16:59 Advantages of Franchising Compared to Buying a Business 20:42 Partnerships and Hiring in Franchising 24:33 Initial Capital Investment in Franchising