The Mathematics of Wealth

Biden Doesn’t Want You to Put It Together [The Rude Awakening] February 19, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Mathematics of Wealth [Sean Ring] SEAN RING Since we have today off, I thought I’d share my most popular post. Originally written for the Morning Reckoning, it outlines five simple math formulas to help you on the road to wealth. See you tomorrow! We’re Screwed If We Don’t Do the Math Most economists agree that there’s an inverse relationship between women’s literacy and birth rates. Economists concluded that the more women read (and are educated), the less they want children. I’ve always thought that conclusion didn’t match reality. I believe the more women can do the math, the fewer children they want (for lifestyle reasons). That is, numeracy, rather than literacy, drives decision-making. There are many examples of career women who can afford – and have – more children. Sara Blakely, Victoria Beckham, and Amy Coney Barrett come to mind. But this column isn’t about demographics. It’s about innumeracy, which we’ll define as incompetence with numbers. It’s what I think society’s big problem is. But instead of whining about the causes, symptoms, and cures of innumeracy, I will give you a few rules of thumb. You can use them to see if your decision-making changes. For my part, these simple equations and rules gave me a target. Specifically, I knew how far ahead or behind I was and how far I had to go to reach my goal. I won’t bombard you today, as the fewer and the simpler, the better. So let’s start with five simple rules to see if they change how you think. The Rule of 72 You have probably heard of the Rule of 72 and might wonder why I’d include such a rule. Let me first state the rule, and then we’ll discuss how to use it. For most people, the Rule of 72 tells them how long it will take to double their money if it’s invested at a constant rate of return. For example, if you’re earning 10% per year on your portfolio, it’ll take 72/10 or 7.2 years to double your portfolio. If you wanted to back out the math, assume you had a $100,000 portfolio. $100,000.00 x (1 + 0.10) ^ 7.2 = $198,622 The Rule of 72 isn’t perfect. But near enough is good enough in this case. If a superstar financial advisor earns you 20% per year, it’ll only take 3.6 years to double your portfolio. Let’s use this rule to look at inflation… something Sleepy Joe doesn’t want you to do. Historically, central banks have tried to keep interest rates around 2%. That meant a currency lost half its purchasing power in 72/2 or 36 years. You’d barely notice the loss in purchasing power, as it’d take so long to rear its ugly head. You’d probably go to the grocery store and wonder why eggs are “suddenly” double what they used to cost in 1983. We’ve all done something like that, haven’t we? But with inflation hitting 10% as it recently has, a currency loses half its value in only 72/10 or 7.2 years. Realistically speaking, Chairman Pow says, “We’d love rates to go back down to 2%, but that’s just not realistic. We’re now happy with a 4% target.” In that case, the dollar would lose half its purchasing power in 72/4 or 18 years. If you think eggs are expensive now, just wait until 2041! The Rule of 72 is a great way to look not only at returns but also at purchasing power erosion. Net Worth Indicator This is a great targeting mechanism, and I regret that I only just found it. It’s from The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Multiply your age by your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be. If you hit this number, you’re an AAW or average accumulator of wealth. According to the authors, to be considered a PAW (prodigious accumulator of wealth), you “should” have at least twice this number. What I like about this indicator is that it’s simple to calculate. And it gives you a target. Full disclosure: I’m a UAW, an under-accumulator of wealth. But I won’t use this number to feel bad. I choose to think bigger and achieve better results. If you’re unhappy with what this number tells you, I suggest you do the same. Julian H. wrote in with this great question about the formula: I'm familiar with The Millionaire Next Door book and always wondered what's the logic behind the formula age x income / 10. Do you have any knowledge about that? In the book, there are no specifications about that, and I can't find anything valuable on the Internet. Thanks in advance. Best. Julian H. Julian, as far as I can see, this formula is produced with linear regression. That is, the authors took net worth, age, and income and produced a line of best fit. [WARNING: Do NOT “Buy the Dip”]( Jim Rickards warned the public that equities were dangerously overpriced in 2023... Well, it’s been just about a week into the new year… And it’s already looking like 2024 could be a bloodbath. Stocks are down… indexes are down… and even large caps have declined by as much as 15%. Some folks probably think it may be a good time to “buy the dip”… But according to Jim, that may be a HUGE mistake. [Click Here To Learn Why]( [Click Here To Learn More]( The 50-30-20 Rule Tweaked This is a great way to allocate your monthly paycheck. And it’s super simple: - 50% of your income goes to paying your “needs.” These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payments, and utilities. - 30% of your income goes to paying down your debt. Once that’s done, this becomes discretionary entertainment expenses.* - 20% of your income goes to future investment. *In the original formulation, 30% go to your “wants.” That’s fine, but I think paying down your debt to zero takes priority. I couldn’t believe how fast my debt disappeared. It took about six to twelve months. But it was gone and gone for good. I’ve run a monthly credit card balance maybe once or twice in the last twenty years. And it’s thanks to this little system. 3x Rule for Buying a House Another one I love, and that would keep many rich people out of trouble, let alone those of lesser means. Never spend more than three times your gross annual income on a house. I’m in the process of buying a home right now, and I’m well within this rule. My down payment is ready and won’t empty my account, and my monthly payments are easily manageable. Far too many people only calculate their monthly payments based on their current mortgage rate. But if you have an adjustable-rate mortgage, this could easily lead to tears. There’s no need to overpay for a McMansion. The Normal Distribution (Bell Curve) Finally, we get to simple probabilities. [Bell curve] Again, this is just a rule of thumb. Nothing in finance is “normal.” But this can help you distinguish investing realism from fantasy. Let’s give an example. Let’s say Stock ABC has earned an average of 5% annually. That return is accomplished with a standard deviation around that 5% average of 2%. If we assume normal returns – a dangerous thing in finance, but we do it all the time – then ABC has a 68% chance of returning between 3% and 7%. It has a 95.6% chance of returning between 1% and 9%. And it has a 99.7% chance of returning between -1% and 11%. Here’s the thing, though: it can undoubtedly crash far below a -1% return, and it may moonshot 45% on the FDA approving its new drug. But the probability of either of those scenarios happening is very low. Knowing this distribution is essential for setting your expectations as an investor and gauging what the market thinks of your potential investment. If you can adjust your thinking to be more probabilistic, you’ll be shocked at how differently the world will appear. Wrap Up The absolute last thing I wanted to do was to patronize you. But I also don’t want to assume you know things you may not know. So I hope, at the very worst, this was just a refresher of things you may have put on the back burner. But if there is a lot of new material here, I can’t encourage you enough to deploy this new knowledge as early and as often as possible. Please let me know if you’d like to see more of this. And if you found this unhelpful in any way, do let me know that as well. I’ll see you tomorrow when it’s back to regularly scheduled programming! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… What’s Greedflation? [Sean Ring] SEAN RING In times of economic hardship, anxieties rise, and convenient scapegoats become tempting. Enter "greedflation," a recent buzzword gaining traction in public discourse. But before we join the chorus of outrage, let's pause and ask: Is greedflation real, or just another economic ghost story? Defining the Terms Before proceeding, I want to ensure we're starting from the same place. So let’s revisit each of the “-flation” terms. - Inflation: A sustained increase in the general price level of goods and services, leading to a decrease in the purchasing power of a currency. - Disinflation: A slowing down of the rate of inflation. - Deflation is a sustained decrease in the general price level, which increases a currency's purchasing power. - Agflation is a more significant increase in the price of food and crops compared to the general price rise in the non-agricultural sector. - Stagflation: A combination of high inflation and unemployment, usually seen in periods of economic shock. So what’s this “greedflation” nonsense? Greedflation suggests that businesses, motivated by insatiable greed, exploit inflationary circumstances to raise prices beyond costs, boosting profits at the expense of consumers. While the sentiment might resonate, particularly during periods of high inflation, the narrative lacks evidence and economic rigor. Why Greedflation Doesn't Hold Water Here are three reasons why “greedflation” really isn’t a thing. 1. Competition and Market Forces Imagine a grocery store excessively raising milk prices during an inflation spike. Customers would likely switch to competing stores offering lower prices, forcing the first store to re-evaluate its pricing strategy. Competition within and across industries is a constant pressure valve, pushing businesses to offer competitive prices while maintaining profitability. While isolated instances of price gouging might exist, sustained "greedflation" across an entire market is unlikely due to competitive dynamics. 2. Profit Margins vs. Inflation Consider the recent semiconductor shortage impacting various industries. While chipmakers saw initial profit surges due to limited supply and high demand, their margins have yet to skyrocket in the long run. Increased input costs (e.g., raw materials, equipment) and investments in expanding production capacity have eaten into those initial gains. Similarly, major oil companies might see temporary profit boosts during energy price spikes, but long-term margins are affected by volatile markets, exploration costs, and geopolitical factors. 3. Supply and Demand The recent surge in used car prices exemplifies the complex interplay of demand and supply. Pandemic-induced supply chain disruptions limited new car production, while consumer demand pushed prices up for used vehicles. Blaming this solely on dealerships ignores the wider context of limited supply and strong demand. Attributing inflation solely to corporate greed paints an incomplete picture, neglecting the broader economic forces. [James Altucher: THIS is my top AI investment pick]( I’ve been called a “genius investor” by my fans… And an “eccentric millionaire” by some others. I think it’s because I make big predictions that [tend to come true.]( Today, I’m making my boldest prediction ever. Revealing the AI stocks I believe… Could turn as little as $10,000… Into $1 MILLION over the next few years. To show you I’m serious about helping you get in on this opportunity, I’m giving away one of my top 5 AI 2.0 stock picks – free. [See my top 5 pick here now.]( [Click Here To Learn More]( Alternative Explanations for Greedflation Monetary Policy The recent era of quantitative easing, in which central banks injected large amounts of money into the economy to stimulate growth, is often cited as a significant contributor to inflation. In fact, that’s what monetary inflation is. When that inflation seeps into the real economy, we get asset and consumer price inflation. During the 2009-2021 bull market, asset prices rose far earlier and faster than consumer prices. In 2022, consumer prices finally caught up, causing the highest inflation rate in 40 years. Supply Chain Disruptions The government-mandated private sector shutdown during the COVID-19 pandemic exposed the vulnerabilities of globalized supply chains. Shortages of key materials, transportation bottlenecks, and geopolitical tensions caused - and are still causing - disruptions and pushing prices up across various sectors. Addressing these challenges is crucial for mitigating inflationary pressures. Recently, the Houthi shutdown of the Bab al-Mandeb Strait, effectively closing the Suez Canal to any Israeli-allied vessels, created the same effect. Energy Prices Energy costs are fundamental inputs for goods and services. Fluctuations in oil and gas prices have ripple effects on inflation, as seen in the recent surge due to the Russia-Ukraine conflict. Diversifying energy sources and promoting renewable energy adoption helps mitigate the impact of volatile energy markets. We saw this affect Europe much more than the United States. Fiscal Policy Government spending and taxation policies significantly impact aggregate demand, fueling inflation if not managed carefully. Striking a balance between supporting economic growth and maintaining fiscal responsibility is key. My friend and colleague Ray Blanco reminded me that Joe Biden sent out a third and biggest round of fiscal stimulus when the economy was already recovering. It was an act of lunacy. And Biden still hasn’t stopped spending, with the 2024 deficit looking to top $2 trillion. Moving Beyond The Greedflation Narrative Understanding the valid drivers of inflation is crucial for crafting effective solutions. Here are some potential policy directions beyond the simpleton’s narrative of greedflation. Targeted Monetary Policy Instead of blunt interest rate hikes, central banks could explore quantitative tightening measures that target specific sectors contributing to inflationary pressures. This could help control prices without stifling overall economic growth. Investing in Infrastructure Addressing America’s third-world infrastructure and inefficiencies in transportation, logistics, and energy infrastructure improves supply chain efficiency and reduces costs, ultimately contributing to price stability. Promoting Competition Antitrust policies that foster competition within and across industries incentivize businesses to offer lower prices and innovate, benefiting consumers by driving down prices. Wrap Up While economic anxieties are understandable, scapegoating businesses with unsubstantiated claims of "greedflation" doesn't serve the country well. People don’t want to believe their government or central bank is actively hurting them. But they are. It’s much easier and lazier to believe businesses are ripping them off. Sure, businesses raise prices as their input costs rise. But they can only pass on the costs to a certain point. After that point, people stop buying, and eventually, that company goes out of business. But the government has no worries. You can’t escape them unless you pick up your entire life and move it. Most don’t. As Rothbard once said, “The State is a gang of thieves, writ large.” Place the blame where it belongs. Then, make your next move. Have a lovely weekend! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. 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