Michael Kitces: Is the Economy Worse Than We Think?

25:28And yes, I think there's certainly a lot to be said for AI around that with the caveat that there are still companies that are going to come up with very niche-focused uses for AI. Maybe it's in a particular industry in a particular segment. If I look in our financial advisor world right now, the big hot thing is AI tools to do meeting notes. Because we happen to be a high compliance industry where we need to capture what happens in every client meeting. So that if there's ever a compliance concern, we can go back and say, well, here's what was discussed and here's what was shared. And then if you're going to be a good advisor, you really kind of want to give a summary to the client at the end to make sure that we're all on the same page.

26:05And then there's usually some action items takeaway, which have to tie into some kind of workflow management system. And the average financial advisor spends one hour in prep and follow-up for every one hour that we meet with clients, which is actually a lot of time. That's a lot of time. Yeah, that's a huge amount of time. So there are a whole bunch of AI tools that are like focused and obsessed on how financial advisors in particular need meeting notes. And it's even specific for us because we have to capture certain parts of the conversation for compliance purposes and certain parts that have to be documented.

26:36and most of us use only one of three CRM client relation management systems. So it's got to tie into that. And so someone's going to have a wonderfully successful company making a great meeting notes tool that's very specific to the needs of financial advisors. There are only a couple hundred thousand of us. That will never be a billion dollar company. That will never IPO into the public markets. In fact, the most successful company that does that will struggle to ever even be a small cap company by public market standards where you already are worth hundreds of millions or a few billion dollars.

27:09Someone is going to do that and merely make tens of millions of dollars building that company and creating it into the marketplace. So there's always an immense range of what companies can be created at various points in the spectrum from large to small. So yes, if I'm trying to find the next$10 billion company, it's hard to become a$10 billion company if you're not first a$1 billion company and you need a certain kind of size and scale to have a shot at doing that. That tilts towards a certain large cap segment of AI. But it doesn't mean there aren't a whole bunch of small and mid-sized companies that can be created for that, for particular use cases, for particular industries, for particular segments.

27:49And then guess what? If it turns out that there's a meeting notes thing for advisors, because we have that challenge. There's probably going to be meeting notes things for doctors. They also have a lot of patient notes that they have to do, but a whole bunch of different needs because you got to make like an AI tool that can do meeting notes for doctors that translate the drug names correctly. Good luck with that. And then generate the prescriptions properly because otherwise the doctors are writing the scripts by hand. That's a handwriting challenge. So there'll be a doctor version. There might be a lawyer version.

28:17There'll be a whole bunch of other professions. And then maybe someday someone will roll all of those up into an aggregate meeting notes conglomerate that covers 17 different industries and they'll IPO in the public markets and they'll be the next successful small cap AI company because these still can roll up to various sizes throughout. So yes, there's some segment of the biggest of the big AI that definitely has a size advantage because of how the models work and you need your LLM to ingest more things than anybody else's LLM to do what you're trying to do in at least the current version of AI.

28:49But that doesn't mean a zillion other companies can't be made off of it, right? There's probably a startup every minute right now that's trying to do something with ChatGPT or another system off of their chassis, but building their own version. And then they're all picking power off of NVIDIA cards to power all the AI for the work they're doing. And so NVIDIA gets huge and some AI companies get huge and a bunch of focus players can still be successful at small and mid-cap range. And then that's before you get into every other industry in our economy besides AI that also is still out there, right?

29:24We said 25 years ago,.com and the internet was going to take over the world. And to be fair, Amazon delivers to everybody's house. Like 80 % of the country is prime. And we can all order things and live off of our smartphones. But we also still manufacture equipment. And we also still buy cars. And we also still make furniture. And we also still have a huge services economy. and the overwhelming majority of the economy is not Amazon and dot coms. It happens to be one of the biggest companies in the country, but the overwhelming majority of our economy is not Amazon and not the internet because there's still a lot of other things that happen, right?

29:56Like someone's got to put food on the shelves and we still need farms and everything in between. So yes, we'll do a version of this with AI the way we did a version of it with the internet, just the way we did a version with computers, right? It's kind of bizarre to think that, okay, 50 years ago, there were no computers yet. And now they're everywhere, but the overwhelming majority of the economy is still not tech. It's a very big segment, but the majority of the economy is still not tech. And so there will be plenty of room for other companies that are not the few largest AI companies to survive and be successful and to participate in as an investor.

30:36Going off of small caps and back onto international again, we talked in broad strokes about Europe and Asia, but we haven't talked about some of the more emerging areas. Saudi Arabia in particular, the development of Riyadh and Jeddah and moving over to Dubai. Across the Middle East, we're seeing a lot of progress happening. And in Africa, we're seeing quite a bit of progress. What's your view on some of the more emerging economies? So from the traditional investor end, I would say like, this is why we have a slice of portfolios in emerging markets so that we get to participate in those if they grow as they grow, when they grow, to the extent they grow as they become larger.

31:20Eventually, they're not even emerging markets anymore and we call them developed markets and then we tend to give them bigger allocations. Yes, diversification principles to me just hold inherently here. I think there's some interesting tailwinds for a lot of those countries in particular. It's part of what makes emerging markets an interesting place to invest. At the most fundamental level, many of them get a demographics boom. At the most fundamental level, the real economy gets lifted when the population grows and productivity grows. Productivity is a hard thing to move, but we do it with the ongoing expansion of technology.

31:58But countries that have birth rate challenges have some very significant structural headwinds in how you expand your economy when there's just literally fewer people doing things in your economy. And a lot of emerging markets tend to have much, much higher birth rates. And there's a non-trivial structural tailwind that comes from that. Now, you'll be able to see that like 30 years from now. Looking back, that does not get expressed into the markets next Tuesday. Look at the birth rate news. We're going to buy more companies in this country. That plays out literally over the span of a generation, but it provides a very healthy tailwind for a lot of emerging countries.

32:33Your challenge on the flip side is not always the most stable political structures, not always the most stable trading partners. You've got real challenges when there's a possibility that your country could end out in war or in challenge with someone that used to be a trading partner. And now all of a sudden, all the money that you were getting from them and trading with them just kind of vanishes in your economy overnight. Historically, there have been countries that have been very devastated, not just by war and competing interests with neighboring countries or trading partners, but just literally the economic impact when all of a sudden your trading partners go away.

33:11And now all of a sudden your companies don't make money, which is rather catastrophic for the stock market in said countries, which is a long way of saying there's still a lot of risk that emerges in those countries about how their political environment plays out, how their geopolitical environment plays out, right? It's not a coincidence that we're here at the Morningstar conference and I delivered a session about industry trends and the impact of technology. And the immediate following speaker was a geopolitical speaker. Right, Ian Bremmer. Ian Bremmer of GZERO, who's absolutely brilliant. Because geopolitics is a very, very significant factor in investing, particularly in emerging countries.

33:51Right. And so part of it to me, again, of saying, is that a good place to have some of our dollars? Yes, because I want to participate in that growth. Is that a place that I want to place bets about my life savings and hoping I make correct geopolitical calls about what the geopolitical environment is going to be in three, five, or 10 years? Very challenging. But should we then, at least for the small portion of our portfolio, make country-specific bets? Because you look at a country like Pakistan, all right, there are some geopolitical problems there, to put it mildly. Then you look at some other emerging economies that are very stable, right?

34:26Should we be making these country-specific bets? Saudi Arabia, you know, very stable. For folks that really want to spend their time doing the investment research to try to drill down to say, I think I can figure out which of the countries are going to be relative winners over the others. Sure. I mean, the amazing thing in our modern ETF world is basically an ETF for anything. You tell me the building block you want, someone has probably made an ETF that will allow you to invest it that way. The caveat from the market's end is the valuations, how much cash and earnings power you get from a company when you buy a share of their stock.

35:04Valuations already tend to be stronger, even amongst emerging market countries with more stable environments versus less stable environments, which is a nice way of saying if you drill down to the underlying economics, the emerging market you're interested in because it seems more stable might actually have stocks that already cost twice the price of the ones in the less stable economy. economies because other investors have realized this as well and have already bid up the prices of the stocks in those countries. So yes, more stable, no, not necessarily a better deal because you're already going to pay for the better deal in the fact that those stocks might be 50 or 100 % more expensive than stocks in less expensive countries.

35:40Markets tend to be remarkably good at pricing this in the aggregate, at least for I'll call it the obvious opportunities. then you get the less obvious ones and whoever's the better analyst prevails. That's kind of how markets get made right now. Anytime I buy something, someone on the other side thought it was a good time to sell it. The only way I can buy it is someone thought it was a good deal to sell at the same price that I bought it at. That's how a match happens in the market. So every buyer has a seller kind of by definition. So I'm only winning that bet if I was right and the seller was wrong.

36:13I might be, but that takes a lot of investment research and time to do. So some of us may want to spend the time and do that. And we go after our country specific bets. Some of us say like, all right, I think there's an opportunity to do that, but I don't want to do that personally. So you get mutual funds that are managed by professional managers who do emerging markets for a living. So they travel all the countries and go out there and do site visits. I knew an emerging markets manager that had a lot of success in the early 2000s when a A lot of the globalization was happening and shipping a lot of offshoring out to China because he bought plane tickets and went to China to do due diligence on the actual companies and made a great deal of money when he found out that one of the companies, their actual factory was a rice paddy.

36:58There was no factory there. Wow. The whole company was fraudulent. Wow. And lots of other people had bought it because globalization and China was the future. And then they were the emerging, roaring economy of the time. So you had to make all your money there. And no one was actually bothering to find out whether the companies were really doing what they said they were doing. And he found one that was entirely fraudulent and shorted it and was very financially successful with it. But that's because the dude went to Asia every other week to do due diligence on all the companies that he was buying.

37:29I have no interest in traveling to China to do that on a biweekly basis. He wanted to. And so he invested our client's money for a period of time, or his fund company did, because that was the kind of due diligence work that they were doing. So some of us will want to spend the time doing the investment research. Some of us may say, I believe there's enough opportunity there that I'm willing to pay a professional manager who does that, right? In the aggregate, that's what a mutual fund is. It's a professional manager that ideally is doing that level of research and due diligence about their companies.

38:02Or I may just say, okay, I just want to own emerging markets, international stocks in the aggregate. Therefore, I'll have exposure. And by definition, the ones that get bigger will have a greater weighting because that's how indexes work. And I'll just buy some international indices and know that I'm going to participate and move on to other things in my life. And you kind of get the spectrum. The only piece I sort of generically caution about, just because as advisors, we see it over and over again with new clients that come on board, is I want to invest in these countries individually, but I don't really want to spend the time that it takes to really analyze and figure out something about the way that this country is going to do better that apparently no one else on the earth has figured out that I'm getting this company's at a deal because no one else has figured this out and already bought shares themselves, which is essentially what has to happen for that to be more successful than just owning the market and the aggregate.

38:56And that's a really hard thing to do that at the least takes a lot of time, energy, and focus. Just saying like, this sounds neat and seems like an opportunity, I'm going to do it. Like, you may be entirely right about the opportunity. Unfortunately, it already went up 117 % in the past three years because everybody else saw that one, two, three years ago. And by the time you're buying it, you're completely right. It's a growth thing. And you're going to get a terrible deal because everybody bid up the price over the past three years. So it goes back to markets being efficient. Yes. It goes back to markets being efficient.

39:25It doesn't mean they're always right. Right. Because sometimes they're irrational also. Because sometimes they're irrational and there's just a lot of uncertainty, right? I can very efficiently, rationally believe there's a 70 % chance that this company is going to be wildly successful. And that does mean there's a 30 % chance I will just be catastrophically wrong. And you can't even tell whether I'm good at it until you look at 10 bets I've made and figure out if I was actually seven went up and three went down. Because it's supposed to be three that go down if I'm 70 % accurate. And at any individual level, you can't even tell which one's going to be successful.

40:01And it does mean by definition, three of these are going to fail. And that means I was good at what I do. So even if markets are efficient and right, that doesn't mean all the things go up. You can efficiently, rationally believe there's a 70-30 chance on this, and that means 30 % of time it's supposed to fail. Fortunately, I diversify. And so if seven go up and three go down, I'm still doing okay. But individual stocks can still go up and down even when markets are relatively efficient and rational. Individual segments of the economy, individual whole countries can do that. And that's before you put in the, and in the short term, we're kind of engaged in herd behavior and can be a little bit irrational before we get around to being rational again.

40:42And it's really hard to tell when the herd is going to turn. Right. I want to circle back. Earlier, we had that conversation about markets being both efficient and irrational. There was another topic that you mentioned within the context of that conversation. And it is the notion that markets are cyclical. Now, one of the comments that I often heard from this audience, particularly pre-pandemic, so in 2017, 2018, 2019, a lot of people said, hey, we haven't had a recession in a decade. Aren't we due for one? You know, markets are cyclical. It's been 10 years since the last recession. And so there was this pervasive idea that I would often hear from the audience that people started conflating cyclical markets almost with a timer-like effect.

41:34Correct. And people started having a bit of a fear of heights. The market has gone up so much, isn't it due to come down? As though markets die of old age or as though markets fall because they rise. Can you address that? I mean, how do we square the notion that markets are cyclical, but also they don't die of old age. I kind of come back to Keynes' markets can remain irrational longer than you can remain solvent phenomenon. It doesn't mean they remain irrational indefinitely. It just means it's really hard to figure out when they're going to finally come back to earth. So we get this fundamental challenge that, okay, markets have been running for a long time, but like, is now the point that the recession is supposed to come?

42:15We had the crash in 08, 09. It's like, is 2017 the year? Because nine years is too long. Or is 2018 the year? Because it's been 10. Or is 2019 the year? Because it's 11. Or like, no, no, 2012 has got to be it because it's even dozen. Like, does it matter if we're also on the 100-year global pandemic cycle? Because we got the pandemic cycle in 2020 at the same time as the recession in 2020. So apparently that was finally the year we were due. Oh, and you finished up at the end of the year. Right. You could be right about the recession being 12 years overdue and successfully predict the global pandemic because you saw something in medical data in January of 2020 before anybody else did and realized there's going to be a global catastrophe and gotten out of the markets in January of 2020.

42:52And that would have been the wrong decision for the year. Because if you just opened your statement on December 31st of 2020, you would have had more money in than at the beginning of the year if you just left it all alone and completely ignored the 12-year overdue recession and the 100-year pandemic cycle. And I mean, that's all of what comes back to this stuff gets brutally difficult in the aggregate because you have to be right about what's going to happen. You have to be right about the timing of what's going to happen. And you have to be right about what everybody else is going to think about what's happening as well, because they're all making their own investment decisions about whether to get in or be out, or this is too scary, or this is a buying opportunity.

43:29And it's really hard to outsmart all the people all the time with the exact right timing with things that are fundamentally uncertain. Right. Which, to me, it just comes back to, okay, if you really want to do that, spend all your time, do that, knock yourself out. I know folks that they love that and they revel in that. And that's fun to be spending all their time nerding on and analyzing that. Frankly, some of those folks come into our financial advisor industry and do that not only with their own money, but make it a living doing that because they so enjoy it. But most people really, really don't.

44:01it's not what we want to spend our spare time with, which to me then comes back to just how much time do you really want to spend on this? It's one of the reasons why I very much appreciate your show. It's sort of the underlying principle of spending all your time doing this investment stuff has an opportunity cost as well. Is this what you want to be spending your time doing compared to something else in your life? Or is this just even what you want to spend your time doing compared to other ways you could have a side hustle and make more money than trying to get the next 1 % out of your portfolio.

44:31If you look over any long multi-decade period of time, stock markets typically average somewhere between about 8 % and 10 % a year compounded out, which means your money doubles every seven to nine years, just kind of math of compounding. If you even look at some of the greatest, most successful long-term investment management track record folks, they maybe added a percent or two over the long term. They might have had a really a big year, but then they have an off year and you kind of average them out. Like, okay. So instead of getting a 9 % for the long run, you got 10 % for the long run. Like, is that what you want to do that changes your life?

45:10Or does that meaningfully change the trajectory of your life that you're on? So for folks in our industry, well, if I do that with dozens or hundreds or thousands or tens of thousands of clients at a time with all the dollars aggregated together, I can actually have quite a magnified impact, which is why a lot of people in our industry do this for a living. When you're doing it individually for yourself, it takes a lot of time for relatively limited incremental rewards. If that's what you love doing, do your thing. But hopefully at least go in eyes wide open. There's a lot of other people with a lot of money that spend literally all day, every day trying to do this and be on the other side of whatever it is that you're trading as well.

45:51And you have to outsmart the majority of them kind of by definition to do the sales when they're buying and do the buys when they're selling and end out ahead. Right. That reminds me of something that former guest on the podcast, Nick Majuli talked about, where he said when he was in his early 20s, he spent all of this effort trying to squeeze little incremental gains out of his portfolio, never considering the fact that his portfolio balance was small enough such that if he had just skipped a night of drinking, it would have been the same thing. I got to a point early in my career, I live the investment side literally as like a career in a chosen profession.

46:28So like very familiar and comfortable with it. And literally got to a point in my own career by my mid to late 20s of saying, just like spending more time focusing on my career and getting a raise, like getting a promotion will actually be more meaningful than trying to improve the returns on my own money. Like I'd rather just buy a bunch of index funds and participate in the bulk of the markets return that I'm going to be able to get and just grow my earnings capability because I will add more dollars from a higher salary than I'm going to generate in incremental returns, getting 1 % higher return on my account balance at the time, which was not the most sizable yet because I was in my 20s and there wasn't a lot of dollars there left.

47:12Ding, ding, ding, ding, ding. Yeah, yeah. You and I were talking before we started shooting, where Afford Anything is building a second course And the big focus of that course is going to be teaching people how to get a raise, how to make more money at their day job, because that's where the returns are. Yeah. If you think of your life, your working career, as like an asset unto itself, the present value of your future earnings is like an asset on your balance sheet. Yeah, absolutely. Because I have to adjust it for time value of money, so we have to do present value. Your earnings power, your ability to work in the marketplace and generate earnings is essentially an untapped asset on our personal balance sheets.

47:50And there's a whole economic school of thought that essentially says the function of our working careers is to turn our untapped earning potential into actual cash on our balance sheet. That translation function is you work in the marketplace, spend a portion of it, save the rest, and depending on how efficiently you do that function determines how 12th you finish with. But the major X factor to that is you can control how big that bucket is by the profession you choose, the way you reinvest into your career, your willingness to change companies for better opportunity, your capability to negotiate for raises or promotions, your ability to invest in your own career to do better work, to get noticed for your raises and promotions.

48:35And when you're early in your career, when you're in your 20s and 30s, frankly, even pretty well into your 40s, you've still got multiple decades of that earning power potential left. And it's just enormous, right? If I'm a 20-something and I go get a$1 ,000 raise, I get that over the next 40 years, plus salary cost of living growth, plus I can bank that and then grow that in my portfolio. And you do the math out. A$1 ,000 raise in my 20s could literally be worth six figures on my retirement wealth. It's really hard to do that with another 1 % return on my IRA balance. I can move that needle much, much faster by making investments in my career.

49:24Now, there comes a point when you get far enough in your career that the number of years remaining is smaller. If I'm doing a pretty good job saving, the account balance is bigger. And so that relative dynamic does shift. So by the time you're in your 50s, it really is probably a bit less about what you're doing with your career and you're earning power side from continuing to work however many years you can and are able to work and much more about what's happening with this pot of money that may have grown to a sizable point here. But I do see a lot of folks in their 20s, 30s, and 40s, just we avoid a lot of those career decisions because they're hard and potentially awkward and can be scary and dangerous.

50:02And career changes have a lot of other ramifications in our world around where I'm living and my health insurance. There's a lot of stuff that's packed on top of thinking about a new or different job or asking for a raise at my job is scary, but it has so much more economic impact than a lot of investment decisions that we make in our retirement savings. On the subject of earning more income, a lot of people feel as though their wages have not kept up with inflation, and that's a major source of stress for a lot of people. So in just a moment, I'm going to ask you about inflation and about keeping up with inflation.

50:42But before we get to that, we're going to take a break to hear from the sponsors who allow us to bring you this show at no cost to you. The holidays are such a busy time of year, and I want to give my family one last relaxing weekend away before the new year. We can't wait to get out and experience life in the wide open spaces of Lancaster County, Pennsylvania, filled with locally owned shops, fantastic farm-to-table dining, and one-of-a-kind experiences. I've been wanting to experience the Amish culture for a while now because their way of life is so interesting and truly beautiful. When I travel, I want to get a local's perspective.

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52:42Welcome back. Many people feel as though their wages have not kept up with inflation. Let's talk about how to address that. But first, I'd like to hear what your predictions or assessments are in terms of how long will inflation in the US continue to persist? As of the time that we're recording, the trailing 12-month inflation rate is, I believe, somewhere around 3.4%. When will we get down to the Fed's target 2 %? And incumbent with that, when will interest rates start to decrease? Oh, the unfortunate answer is that those are sort of related in that the longer it takes for inflation to come down, the longer it's going to be before the Fed gets around to cutting rates, right?

53:25In the purest sense, they keep rates higher because the goal is slowing the economy down. When the economy functions a little slower and people are buying a little bit less, it's a lot harder to keep pricing up your goods. Right. And that's what starts to peel inflation down. So in the investment realm, we often talk about that from the context of, okay, let's hope the Fed gently slows the economy. It's like inflation cools off and we don't have like mass unemployment and layoffs. The bad version is like, oh, I can slow the economy down. Like, just give me a sledgehammer for a moment and we'll take inflation right out of the system.

54:01Unfortunately, a quarter of the population may be unemployed, which would be very unpleasant. So the Fed tries to do this slowly because they want to take the heat off without really destabilizing and causing a lot of unemployment. Because that's what happens if people really slow down their buying because rates got too, too high and companies slowed down too, too much. But the fact that inflation has been so persistent, which to me implies we're probably in higher rates longer than shorter because there's clearly some heat still to pull out of the system. And the fact that getting rates up here and having them hang out as long as they have hasn't done it already means there's apparently a good amount of momentum to buying power and inflation.

54:48Right. So the Fed ain't done yet. Right. Right. So two follow-ups to that. First, the Bank of England has put out a statement predicting that England will get down to the target 2 % rate in about two years. Does what happens there happen here across the pond? Will the US follow a similar path to what England is expecting? Not necessarily. There comes a point where a lot of this is what happens locally. England's real state market does not look like the US's market. The US is particularly services intensive as an economy, which ironically, unfortunately, is a little bit less sensitive to interest rates in the first place.

55:27When you have an economy that's heavily built around construction and manufacturing, as we all experience for anybody who's shopping for a house these days, every point higher on rates sure slows down the buyability of real estate, which eventually slows down real estate construction, which slows down demand, which kind of ripples through the economy. But not a huge portion of our economy is actually construction. It's a non-trivial piece, but a huge portion of our economy is services. I don't make the decision about whether to go to the doctor or whether to hire a lawyer or whether to work with a psychologist based on interest rates, except in the most indirect of ways of like, well, I guess if my rent gets really expensive because rates are high, then apparently I can't afford to do a couple of other service providers because I'm running out of money because of my rent, because of my high interest rates.

56:16Yeah. Rent is too high, I can't go to therapy. Yes, it ripples down the line. But the nature of our services economy in particular gives us some really, really nice stability in some ways. The U.S. has ridden through a lot of the turmoil in recent years with less volatility than a lot of other countries have. But it also means it's a little bit harder to get us to move with interest rates. and the system just fundamentally is so large and so complex that even the Fed at the end of the day struggles a little bit to figure out exactly how much do we need to turn this lever to get it down to where we want, to get inflation down to where we want to be, which is why they tend to move a quarter or half point at a time.

56:54And then they look around for six weeks and see what's going on. And then they move another quarter or half a point. Then they look around in another six weeks. Then I'm like, okay, we're going to hang out here, but we're still watching for the next six weeks because it's such a complex dynamic system that even for the smartest economists, this is a really hard thing to figure out where you have to watch real time and see what's happening. Inflation in other parts of the world is quite a bit worse than it is in both the US and the UK. Feels depressing by comparison because it doesn't feel very good here.

57:27Yeah, exactly. Exactly. In this very globally connected economy, how concerned should we be about that? So it shows up indirectly in that, per our earlier conversation, the nature of our global economy in the purest sense is lots of trading, right? Countries have the things that they're good at producing and manufacturing, and they trade with other countries. And eventually, we all get the computer chips and the cars and the food and the rest of the stuff that we need to live our lives. That does mean there is a phenomenon that when other countries are experienced a lot of inflation that's lifting up the cost to make things in their countries.

58:04The portion of the inflation effectively is imported to us because we're buying their stuff. And if their stuff's getting a lot more expensive, then it comes downstream to us as well. In the long term, eventually economies and companies react to that. It's getting so expensive to import some of our parts from that country. We're going to open up a factory here and we're going to make it here because we can now make it cheaper. Right. But that's CapEx, which there's a long lead time to that. That's a very long lead time. Now, some of that began happening already because of inflation that we've seen for the past few years, particularly because of the supply chain disruptions that happened in and shortly after the pandemic, where a lot of companies said, wow, that destabilized us way more than we'd expected.

58:49We're going to start bringing some stuff back to the US just because we don't want the supply chain risk. Oh, now it turns out things are actually inflating more in other countries than here. We're going to double down on the thing. But they actually started the CapEx investment for some of those a few years ago. And so that may help us a little bit at the margins. But this is why at the most fundamental level, like why the Fed and other global bankers around the world spend so much time looking at and focusing on inflation is because it's really scary for them when it starts rearing up because it gets really hard to tamp down once it's there.

59:25The flip side is, I think there's also a lot of work that the global bankers are trying to figure out because the irony is most of the past 20 years, globalization was this phenomenally deflationary phenomenon, right? I mean, for anyone that remembers, the Fed's response to the financial crisis and the money they injected in the economy was supposed to cause the worst hyperinflation in 100 years. And inflation sat at like one for a decade. And it had been that for the preceding decade through the 2000s. And now as we, some were calling this at the time, but now in particular, as we look back, globalization ended up being a very deflationary force because countries and companies around the world started looking and saying, we're producing this thing that's getting 3 % to 5 % more expensive.

1:00:18But if we ship it to the country over there, it'll be 20 % less expensive. And if we rearrange enough things, we can offset all the inflation we're experiencing locally by shipping select pieces out to areas that are less expensive, and it keeps the net change pretty darn close to zero. So the weird challenge we had for a lot of the 2000s and 2010s was fear that we were on the cusp of a deflationary trend. And as bad as inflation is, deflation gets much worse. It's much harder to break out of a deflationary spiral once you get into one because at the most basic level, deflation means things are getting cheaper.

1:00:52So there's never any reason to buy anything sooner rather than later because it only gets cheaper when you wait. So everybody stops buying because it keeps getting cheaper. And if everybody stops buying, your economy crashes. Then the economy crashes and everything gets even cheaper faster. And it's like, you know what I'm really not going to do now is start buying anything. Because the longer I wait, the faster it gets cheaper. Except the faster it gets cheaper, the more my economy is crashing. And I mean, that's essentially how oversimplified, like that's essentially how you get to the Great Depression.

1:01:21Right. As painful as inflation is, global bankers are even more terrified of deflation than they are inflation. And so the fear for 20 years was, are we on the cusp of this giant deflationary spiral that's about to unfold because it's darn near zero and we keep doing these monetary policy things that are supposed to make inflation and it's still staying near zero? And now all of a sudden it's not near zero. We're like, oh my gosh, now inflation's here. I was like, well, that's what we were shooting for. Not quite this much. So oops, might have overshot a little bit. But again, these are really large, complex, dynamic systems.

1:01:58And so the unfortunate reality is they don't turn on a dime. And because economies are so complex and so adaptive as they go, things that used to work or work a certain way don't quite work the same way anymore because the underlying economy and behavior shifts. and that's part of why global bankers have a job trying to tune this in and figure out what to do. And it's why you see the fundamental nature of how interest rates are managed from central banks around the globe is very much this like, we're going to do this little thing and then we're going to see and then we're going to do this little thing and then we're going to see.

1:02:32And we think if we stay on this trajectory, this is where we land over this time period. But the truth is when any of them make that prediction, there's like this giant, and we'll be looking at the data every single six weeks over the next two years to figure out whether it's actually playing out that way. And if not, we're going to make changes because the system responds as we go, right? You see it in areas like rates are up. So commercial real estate is getting slammed. But now we're talking about turning a bunch of old commercial real estate office buildings into new kinds of condos and apartment buildings, which could actually change our housing stock and then provide some relief in housing prices from the interest rates that are breaking housing prices because they're breaking commercial real estate worse than housing prices.

1:03:11So maybe the commercial buildings turn into houses and then we actually get better after all. And good luck building that into a three to five year model. Smart economists will try, but it's really hard to figure out exactly how this is going to turn out. So again, just the reality is it is going to be a lot of incremental, we did something, let's see how it's going. We did something, let's see how it's going. We did something, let's see how it's going. As the Fed tries to figure out how do we navigate to, we don't want deflation, but this inflation is a little hotter than we wanted. And they're trying to get it down into that zone.

1:03:45Right. There are certain elements of our economy that are deflationary though. Not the economy as a whole, but you look at the cost of computing. Right. Our computers are a bajillion percent more powerful than they were 30 years ago. A bajillion percent more powerful and they consistently get cheaper, right? Just the cost of having a personal home computer has only gotten cheaper over time. And you see this in specific sectors of the economy. There are deflationary sectors. Now there's talk that AI will make certain things deflationary. Some parts probably. Yeah. AI will have a deflationary effect in specific sectors as the cost of doing certain things will get much cheaper.

1:04:26So how do we bake that into our understanding, not just of broader macro forces, but at a personal level, again, this goes back to people feeling as though their wages aren't keeping up with inflation. On one hand, you go to the grocery store, and your grocery bill is just a lot higher than it was before. On the other hand, you can now take a picture of your pantry, load it into chat GPT and say, hey, based on the ingredients that are in my pantry, help me come up with a meal plan that means that I don't actually have to go buy anything at the grocery store anymore. And ChatGPT will write you a freaking menu for every day for the week and say, all right, here's exactly how to make the most efficient use of everything that's currently in your pantry and you don't have to spend any more money.

1:05:16Go. So on one hand, you've got inflation at the grocery store. On the other hand, you've got personal savings that arise from the use of AI. How do we square all of that? So the economists try to do a version of this when they're modeling out inflationary trends in the first place. So in the economy world, these are substitution effects. So in the purest sense, if beef gets really, really expensive, we start buying more chicken. And so food inflation doesn't quite move at the pace of just what the beef's inflating at, the chicken's inflating at, because the beef gets too expensive too fast, we start buying chicken, the chicken gets too expensive too fast, we go back to beef again.

1:05:55And so they start equalizing themselves, right? We rein in the getting really expensive thing with shifting behavior. Now that gets challenging in some areas, like most states, you are legally obligated to have car insurance in order to drive. So I can't opt out of the car insurance that's getting really, really expensive lately. In many areas we can, and AI at least hopefully makes that incrementally more efficient, right? I don't just have to figure out whether the beef is cheaper than the chicken, either I take a picture of my pantry and get a meal plan where I don't need to shop, or I tell the AI what I like to eat, and then it's going to shop for me and find the best, cheapest places to do those in particular.

1:06:36Have you considered making this dish with lentils instead? Because it would bring down the cost significantly, because apparently they're cheaper than whatever else I was going to put in the dish. I say as someone who has no cooking competencies to know what goes into dishes. The tools and technology can make it easier for us to find some of the substitutions. That does help at the micro level, right? It helps us get through the day and manage our budgets a little bit, and it can potentially turn the cost of some select items. We're buying a little bit less of the chicken, we're buying a little bit more of the beef.

1:07:05We do that in the aggregate and the prices normalize. It doesn't necessarily solve our macro problems of inflation, which I, in the purest sense, kind of boil down to too many dollars chasing too few items in some select areas that's driving it up. And some of those are much, much bigger societal level imbalances that don't resolve very quickly from interest rate policy or anything else. Which actually brings me to the question, there are some people who argue that we are already currently in stagflation, and they point to the high levels of government spending that really are propping up big portions of the economy.

1:07:44For the sake of everyone who's listening, Can you describe why some people believe that we are in stagflation and then give us your take on whether or not you think we are? So the essence of stagflation, why it has like its own special bad name, the fundamental principle that essentially interest rates in the economy operate on is if interest rates get higher, lots of stuff gets more expensive because interest rates are indirectly or directly priced into things, right? It makes housing more expensive immediately. It makes factories more expensive because companies borrow debt to build factories.

1:08:19And if the factories are more expensive, we don't make as many of them and it slows down production. Higher interest rates are in the aggregate, bring down activity and demand. If it brings down activity and demand, then companies have to start pricing down because otherwise literally no one will buy it. And so you get this slow, indirect, but fairly well-established mechanism of the rates get higher and the prices start to come down and it solves the inflation challenge. The stagflation phenomenon is interest rates get higher and the inflation doesn't cool off, which was a version of what happened in the 1970s.

1:08:59And there's a bunch of very smart econ research about why that happens and how that happens and some debate about the various ways that that can happen. Sometimes that happens because everything got expensive because there was some external event that disrupted prices and made it happen. So in the 1970s, things didn't get expensive because of interest rates. Things got expensive because there was an oil crisis, and it made oil and gas really expensive. And then it made basically everything else that relies on oil and gas expensive, which is pretty much everything because you can't even move stuff on roads around the country or on trains or on trucks if gas and oil gets really expensive.

1:09:36So an external shock picked everything up, which means just bumping up interest rates doesn't really correct the mechanism because that's not the mechanism that made it expensive in the first place. Right. The secondary challenge that can happen is if wage inflation starts picking up, right? We get to the point of saying in the aggregate across the whole economy, well, things are getting so expensive, all companies have to give raises to make it more affordable. The good news is you can now afford everything. The bad news is, well, now when everyone can afford everything, they buy everything off the shelves and the company is like, look, buying power is back.

1:10:11We can raise prices again. And then the wages pick up and it makes the prices pick up more. And then we go back and say, well, we need more and more wages, which makes the prices pick up more. And you can get trapped in a spiral now where the higher wages are pushing the prices of everything higher and it spirals upwards, which was kind of a version of what we were getting into by the late 1970s. It wasn't the original cause, but it was what it started to spiral into. where you eventually get for that or the solution that economist Paul Volcker infamously found was, well, eventually you can break that.

1:10:43You just jack up interest rates to the moon. Right, which is what they did in the 70s. Which is what they did in the 70s and very early 1980s where we got to the point where like, you got 15 % in a money market and had to pay 18 % for a mortgage. For a mortgage, yeah. And then things stopped inflating. Right. And we basically spent 20 years of interest rates then slowly ratcheting back down from how dramatically they'd been scaled up. So we did eventually get there. If you just sort of think about how that plays out, yeah, you get 18 % interest rates. Houses just can't be this expensive. Literally no one will be able to buy one if you get there.

1:11:25And it forces the prices to come down, which brings real estate prices down, which brings rents down, which starts to take the inflation edge off and propagates through the economy. So we kind of know how to solve it, but that is clearly very painful for all involved, right? In the purest sense, when inflation gets rampant and you're trying to break it, you're basically trying to break people's affordability to buy stuff to force the prices down. Because unfortunately, if you try to put more money in to just make it more affordable at current prices, it just makes the prices go up more. And practically speaking, if you're trying to destroy demand and force prices down that way, it has unfortunate side effects like a lot of unemployment and job losses because kind of by definition, like everything got so expensive, no one buys anything there anymore.

1:12:18So all the people who work there got laid off. Good news is we solved inflation and got cheaper. Bad news is a lot of people don't have jobs making the things and selling the things that we used to buy until they got so expensive when we jacked up interest rates to solve it. At the meta level, this is why Federal Reserve spent a lot of time trying to make sure we have enough inflation that we don't get into the deflationary spiral and not so much that we get caught in the inflationary or stagflationary spiral. Because the systems feed on themselves, because we're wonderfully adaptive human beings and do that, both can create very problematic spirals.

1:12:52The wages make the prices higher, the price higher, make the wages higher, the wages higher, make the prices higher. and you get a spiral that direction, which takes very significant price or interest rate increases to solve. Or you get the deflationary version where no one buys anything and it gets cheaper, so then they really don't buy anything. And then it gets a lot cheaper and they really don't buy anything. And now there's vast unemployment because factories shut down because no one's buying anything. And the Federal Reserve tries to keep it in the golden zone in between with a relatively blunt instrument like interest rates and hope that that changes our behavior at the counter.

1:13:24Right, right. Well, interest rates are a blunt instrument, but then again, you have technological advances that also influence the cost of things, right? As we talked about earlier. Yes, but again, with the caveat that as much attention and credit as technology gets, it's not the majority of our economy. And it only has so much effect. Just most of us underestimate. In most small towns, you're most successful business owner. In most small towns is the person that installs the HVAC equipment and usually has the largest business because every building needs one. And if you're the only one in town that does that incredibly manually labor work with large equipment and machinery, that's actually a wildly successful business and is not really probably going to change in any material way from the advent of AI.

1:14:17Like someone's got to get on the roof and put the thing in and run the piping through the building. Maybe it'll be a fancy AI-driven system that turns on and off at optimal times and is super energy efficient because of all the neato technology. But some service business has to go and put the thing into the building. That kind of work is actually a huge portion of our economy in the aggregate, all of these different services layers that exist in the economy. And AI shows up in a lot of indirect ways, but they're less impacted by AI and even just technology advances in the aggregate. And so, yes, they show up.

1:14:56I mean, there's a reason why NVIDIA is the largest company out there, but most of your local town's successful business people are installing the HVAC systems. Right. We know from the millionaire next door that the majority of American self-made millionaires are people who own HVAC, plumbing, pest control, janitorial services. Just like the pure services that people in the neighborhood need to live their lives. And then every few years I buy a new fancy television maybe. Right, right. Exactly. That gets exponentially better for cheaper. But then I still just need all of these core services about living my life, managing my house, the neighborhood, the office buildings, my place of work, everything that builds around that.

1:15:42And it's a less visible layer for most of us, unless that's an industry that you work in. And almost by their nature, these are all small local businesses. So the stock market gives them zero credibility because they're not publicly traded companies, because they don't operate at that kind of size and scale. That's literally the bulk of our economy that's out there chugging along doing what it's doing. Yeah. And there's an uptick in Gen Z going into those professions, which is great to see because no student loan debt or low student loan debt, plus high wages, plus in addition to high wages, you then, you spend your 20s working those jobs, you spend your 30s creating the company, right?

1:16:23And so then millionaire by the time you're 40. And with all that power of the earlier I can get my earnings going, the more I kind of lift that lifetime earnings opportunity and all the different ways I can translate that into savings and investments and growth and kind of building my personal net worth for whatever I want financial independence to look like in the future. Absolutely. Absolutely. Yeah. Start the pest control company. Start the HVAC company. That's a brilliant entrepreneurial route. Yeah. And frankly, I don't care how good AI gets. They're not likely coming into my house to remove the pests anytime soon.

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1:18:06Going back to the original question, are we currently living in stagflation? I don't think we're living in a stagflationary environment. A lot of smarter economists than me out there analyzing it. If you really go back and look at what inflation, both in jobs and cost of goods looked like in the 1970s, it does not look like it does today. I mean, just 7 % to 10 % raises were normal year after year after year. And it didn't help because everything was getting 10 % to 15 % more expensive. But that kind of stagflationary cycle, wage increases tend to be much higher. The frustrating part is you're getting them and you don't feel like you're getting a hex.

1:18:51Like, yay, I got a 7 % raise because cost of living raises are up so much. Crap, milk costs 12 % more than make any headway. So the whole nature of stagflash sharing environment is like the wages really start picking up. And I'm not making any headway on how expensive things are. That's like the scary part of it. But unfortunately, we're not even really getting the wage inflation, the bigger cost of raises part yet. That's not showing up yet. And so different people are defined a little bit differently about exactly what fully defines when you're in like wage inflation stagflation cycles but i think when most of us are talking about stagflation fears like we're talking about are we going back to the 70s yeah and just this is not showing up the way that the 1970s did that was a world where we're getting the raises and it's not enough the phenomenon of it keeps getting more expensive and we're not feeling the raises, that's also a very significant problem.

1:19:52That's a different problem. Well, and that goes back to what we were talking about earlier, the need to increase wages, right? And then the course that we're building, which is all about teaching people how they can ask for a raise, how they can negotiate for a raise, because a lot of people feel as though prices have gone up and they need to get paid more as a result. Yeah, I have to look at this relative to my own career journey and experience. I still remember the first job I had and first job I lost. And how terrifying it was to get fired and be like, so how am I making rents in a few weeks?

1:20:43It gets really, real, real fast when income disappears. What was that job? Insurance salesman. So I started in the insurance sales side of the industry and it turns out I'm pretty good at the nerdy financial planning stuff. Not so good at the sales stuff. Don't tell me it was whole life. No, this was 2000. So it was variable universal life. Because why buy whole life? You could put stocks into your life insurance. That was the thing at the time. So lost that job. Had the incredibly good luck fortune that literally the day I got fired, I went down to the cafeteria, grabbed the job section of the newspaper because this was 20 something years ago.

1:21:28So you still actually mostly found your jobs from the newspaper. It wasn't quite all Craigslist yet. And open up the want ads and literally found a want ad that day for what turned out to be the next job. Sheer dumb luck. But it terrified me to realize, like, if that had happened and that wasn't a good job, I was going to have to take basically anything that I could get. Right. It turned out actually to be a job with a decent wage, but I was going to have to take anything that I was going to be able to get in fairly short order, which meant if I didn't luck into finding a one-out that was actually a good fit at the time, I would have been trapped into something that was going to pay me a lot less.

1:22:10and then be stuck in that because I can't afford to not work to find a better job because I can't bridge the rent. And so it made me really focused early on to say, I need enough dollars saved up that if I'm ever at a point where I'm in a crappy job, I can go find another one. Either I can go find another one and say, goodbye, see ya, and be able to last a little while until I find the next one, or that I can have enough that I can go into my boss and ask for a raise. And if he says no, and you're fired for asking for that, which doesn't really happen much. But it's, I think, all of our natural fears anytime I'm going in that, like, I don't care.

1:22:47I've got enough to bridge until I find the next job. And I basically thought of it as, like, it was my, I guess, class of people call it emergency savings. I always thought of it as this is my, like, opportunity fund that if I get stuck in something that's not working, this is how I bridge to get to the next job. And in practice for me, it bridged two jobs and then actually became the bridge to launch my own business on the same thing. I was like, okay, I built up the opportunity fund enough that I can actually go launch a business of my own. And if it takes quite a while for it to get going, I've got enough saved up to manage my expenses.

1:23:23And I kept my living expenses really low because I split an apartment with multiple friends for the entire decade of my 20s while I had a ridiculously cheap car I bought off of eBay, which I actually still have. So kept my fixed expenses very low, built up opportunity funds so that I would be able to make job changes. And that's what let me navigate through multiple jobs and then eventually starting a business of my own. And to the point where I was not maxing out my 401k, I was barely contributing to my 401k for many of those early years because like it was much more important to me that i could swap jobs something that would pay better right like back then you know i i left a job that was paying 46 000 and got a job that was paying 55 000 and thought i like died and gone to heaven because it was so much more money than i was getting before but i could only do that because i knew i was able to weather being out of work for a month because that's actually what ended up happening was like, I had to wind down the old job because some stuff was changing.

1:24:25I didn't want to continue and use that as an opportunity to find a new job. But the new job, the position wasn't starting until like two months out because it was tied to some budget cycle. And so I had to have a gap month. And so I got like a 20 % raise that kicked off an entire change in my career trajectory that only was possible because I could float the month. And I could only float the month because I had my first experience of almost not being able to float a month and saying like, That is more important, even the building of my retirement account out of the gates. I have to be able to be flexible for taking another job, move if I need to take a job, be able to float a month or few if something bad happens and I'm trying to find a new job and not have to capitulate to the first person that gives me an offer, even if it's an equal or worse salary, be able to hold out at least a little bit for something better.

1:25:13I still see that as a challenge for a lot of young people that I talked to today where they would like to find something new. They might even have a shot at getting something better, but if it required them to move or be out of work for a few weeks to get from A to B, they literally couldn't float that time window, or at least they couldn't float that time window without trying to pull money out of retirement plans where you get the early withdrawal penalties and the taxes and all the other stuff that comes with it, which you can do, but that feels very punitive because it kind of is, that at least for me led me in the direction of, well, I need an opportunity fund that I can navigate career changes or just at least be confident enough to ask for the raise or the promotion and not have to be terrified about the consequences if that conversation doesn't go well.

1:25:59So then I had the confidence to do that, and then actually turned out things went relatively well. Sometimes having that flexibility is more important than having that tax advantage. Yes, yes. Because again, when we're early enough, the ability to have successful job changes or career changes or promotions or switch industries or raises or whatever it is, like multiplied across decades of my working career ahead is so radically more impactful than getting a little bit more dollars into my IRA early on. Even as cool as like, I'm all for my tax-free Roth compounding to the sky thing and do that as much as anyone.

1:26:41I appreciate that as much as anyone. But like career trajectory has so much more impact in our 20s and 30s. And so if leaving the dollars flexible, granted Roths, you can like pull your contributions out tax-free. They get a little more flexibility. But having that flexibility and being able to know deep down, like I can make a job change or relocate or be able to float a little while if I push for that promotion and it doesn't go well, the confidence that gives you to then actually find the next thing is a huge move. It doesn't work for everyone all the time, but it works way often than being financially constrained and never being able to give that a shot.

1:27:18Right. We're approaching the end of our time, but the very last question that I want to ask, You mentioned that you bought a car on eBay. Yes. And you still have that car. Yes. And I know, because you've written about this recently, the math today around do you hang on to a clunker or do you replace it, the math today is different than what it was five years ago. We're living in an era where the math around what it costs to buy a car is different and the math around car insurance is different. You touched on that a little bit earlier. and car insurance is legally mandated. So we can't cut that bill.

1:27:56How has the math changed? I feel like the car industry is kind of trapping itself in a strange place right now. There's sort of a double whammy around the new car environment these days. Just sort of the general price spread of new is expensive relative to use. We've always had that to some extent, but if you buy new and drive it till it dies, at least still amortizes relatively well. if you do it long enough. But cars have added so much in electronics now that are just getting surprisingly expensive to fix and repair, which is part of what's lifting up car insurance because auto claims are more expensive and I don't just fix the part.

1:28:35I fixed the part and like$1 ,000 worth of electronics that was attached to the part that also have to be ripped out and changed and needs a more sophisticated trained person to be able to insert the electronics on top of the rest of the car parts, that it's making this interesting math of not only is there some affordability effect for used cars, but there's a lower cost of maintenance effect to fix cars from five to 10 years ago that just have normal car parts and not the cars that have the cool electronic stuff that is some really cool electronics in cars these days, but it's making them really expensive to repair.

1:29:11And so, look, from my end, financial spending is choices and trade-offs. Like, the car works. Yes, in point of fact, I actually had to replace a bunch of brakes and pads and calipers and whatever all the parts are. I know very little about cars or cooking. I stick to investments and financial planning. I put a bunch of money into that car, but the thing works. It's worked for going on 20 years now. It's a 2006 Kia. the things working going on 20 years, I was actually looking like that car can still sell on the secondary market for like$35 ,000 to$4 ,000. I bought it for five. Wow. 18 years ago.

1:29:55And I mean, it was used then. Actually, I bought it 16 or 17 years ago. It was a few years used when I bought it originally. But the things basically held its value because I I bought a cheap, inexpensive car then and just driving it into the ground. And actually, I don't do a ton of driving these days because I've got some remote work options as well. So I'm not even putting a huge number of miles on. It's like the thing could go another five or 10 years easily with just some incremental repairs. I'm so much happier to put another whatever it was, like$700 into rebuilding all the brake system than going and buying a brand new car where a sensor breaks that cost me $700.

1:30:33At least I got a whole new brake system for my$700 repair a couple of months ago. That's a trade-off of what I don't spend on cars. Our family went to Disney World and had a lovely trip. My kids are 12, 10, and 8. So we're like at the age that Disney World's a good thing to do. We're not in the teenage years where they want to be far from us. And we're out of the strollers, which made Disney easier. And it's like what I don't spend on cars. We put into extra upgrades on the Disney vacation because I don't really care what I drive at the end of the day. but we'll always have our family Disney vacation memories.

1:31:05And so part of it to me is the practical challenges in our world are like cars aren't just transportation. Cars are transportation and status symbols. And like there's a whole bunch of other stuff that a lot of us wrap into our cars and why we sometimes choose certain cars or brands over others. You know, for me, like it's just a utilitarian. It gets me from A to B and I need it to work when I turn the key. and it's old enough that has a key that you have to turn. Thank you. I love that. Yeah. Still remember my kids got old enough to realize like mommy's car has a button because we had to buy the minivan when we had the kids and it's more electronic.

1:31:44So like daddy's car has a key and you have to actually turn the key. And then I explained to them that it has three pedals and not two because it's a manual. Their minds are blown. Like the thing works. It solves my utilitarian need to get from A to B and back again. And as long as it keeps working, I would just rather put my dollars towards other stuff that I enjoy more. Ironically, older cars are surprisingly more cost-effective to maintain than some of the new ones because the electronic parts are making it expensive. Right. So the technological advances in cars have made them more expensive.

1:32:21Yes, more expensive to buy and more expensive to repair. Which makes clunkers an even better deal. Yes. But the electronics are cool. I can't totally diss the other electronics. There's some neat stuff that you get. But it still gets me from A to B. And it turns out it's a lot cheaper to just replace an old-fashioned brake system when it wears out. Nice. Well, thank you for spending this time with us. We've talked about everything from global inflation to small cap stocks to large cap value to cars. Invest in your career opportunity funds and buying clunkers. Exactly. Is there anything I haven't asked about that you want to emphasize as you look ahead at the markets, at economics, at careers, at social capital?

1:33:05Yeah, I think the only thing I would bring it back to again, I like I appreciate the irony given like our whole first half of the discussion was all around investing in markets and growing your dollars that you've saved. But if you're in your 20s, 30s, maybe even into your early 40s, just don't underestimate how powerful it is to be able to change the wages that you earn. whether that's asking for raises, asking for promotions, changing companies, changing industries, investing in your professional development if you're in a career where that's a thing. The ROI, the impact of that, of even just like a$1 ,000 or$2 ,000 change in composition multiplied over decades of earnings, and then you get to save that and grow that, is immense.

1:33:53And sometimes the dollar opportunities are bigger than that for people. and the biggest constraint I find for a lot of folks is that they don't have enough dollars saved to be able to weather a career change opportunity. And so putting that kind of opportunity and fund in place that you can make good career decisions is what ultimately powers forth a lot of the other opportunities that come later around how do we grow our dollars and grow our dollars more efficiently. I always chuckle over all these articles that are like, how I managed to save a million dollars by 32 years old and you start going through and it's like, well, you know, I live really frugally.

1:34:30I make these good decisions. I cut out the extra coffee and I make$220 ,000 a year and I'm like, I think I found the thing. I think I found the thing. Not everyone's going to get their opportunity fund and go get their$220 ,000 salary unless that's your thing and bless you. But so much of that wealth creation trajectory is not the ways you do super cool frugal things and get another 1 % on your returns. It's how you change your wage earning ability or your employment income or your self-employment income, if that's your proclivity. It's changing what you earn that is usually the underlying factor in most of those stories.

1:35:10At some point, the dollars get large enough that incrementally how you invest, the math impact is bigger. But so much of it comes down to figuring out how you get on a good earnings track. And so, I mean, you talked about that even in the context of trade schools over traditional college, because you get out of that earnings trajectory with often higher dollars and lower wages than a lot of other - Higher dollars and lower - Oh, sorry, higher wages and lower debt. Thank you. So focusing on how you lift your earning power is really actually the thing that drives the most all the way through our 20s, 30s, and well into our 40s.

1:35:43So just make sure you're focusing there and giving that its due attention. It's hard and scary, but it actually usually has more of an impact. Perfect. What a beautiful way to end. Thank you so much, Michael. My pleasure. Thank you. Thank you to financial advisor, Michael Kitsis. And thank you to Morningstar, the investing conference and the investing education platform for inviting me to come to Chicago, out on beautiful Navy Pier to spend the week with some of the nation's best financial advisors and investment minds as we talked about what's ahead. One of the highlights of my time in Chicago was this interview with Michael Kitsis.

1:36:25So what are three takeaways that we can derive from this? Key takeaway number one, diversify your investment portfolio. Now I realize that sounds like it's straight from the school of duh. But in today's market, when the Magnificent Seven, a small cohort of stocks, are runaway winners, it is tempting, tempting to under-diversify. But as Kitsis says, relying on a few top-performing stocks can be risky because the market is inherently unpredictable. And diversification helps mitigate this risk. By spreading your investments across different sectors and different asset classes. The problem isn't that it comes down to seven right now.

1:37:13The problem is you never really know which seven is going to be. And it was four or five a few years ago. And I can't tell you next if it's going to go back to four or five or it's going to go up to 10 or 12 or where it's going to shift because that is kind of the dynamic nature of markets and investing. That is key takeaway number one. Key takeaway number two, focus on long-term growth rather than trying to time the market. Yes, there are some stocks that will perform exceptionally in the short term. Hello, NVIDIA. But it's tough to predict which ones are going to sustain their performance over time.

1:37:54NVIDIA is everybody's darling right now. But what will the story be in the year 2030? Remember the beginning of the internet? Remember Netscape? If you don't remember it, ask Jeeves. It can email the answer to your earthlink.net account. And by the way, if you're enjoying this podcast, don't forget to list me in your MySpace top eight, right? So we don't know what's going to happen to today's winners. Some of them do stand the test of time. Look at Amazon. Let's take this conversation off of individual companies and let's go to broader asset classes, sometimes there are entire asset classes that do incredibly well in the long term, but suffer or struggle in the short term, which is why contrarian investing, buying when the chips are down can be a great long term bet.

1:38:47So think long term, because if you chase short term trends, then there's a chance you're chasing irrationality. The markets can remain irrational longer than you can remain solvent. Solvent, yeah. And he said that because he was one of the fundamental formative minds about how economies and markets work that everyone has built off of for 100 years. And the guy went bankrupt several times because he kept making market bets and they would keep going longer than he expected while he bought them with leverage. And he kept losing all of his money. Like the most brilliant economic mind kept losing his money over and over and over again because he mastered how to measure these metrics, but he couldn't anticipate when markets would actually respond to them because markets can remain irrational longer than you can remain solvent.

1:39:39And so whether that's tech stocks in the late 1990s or real estate for a run in the 2000s where everyone kind of said, seems like the market's a little frothy. And then we kept buying it. Real estate kept going up. And if you made that call in 2006, you were right in the long run and broke in the short run, or at least missed a lot of opportunity in the short run. That is the second key takeaway. Finally, key takeaway number three, if you're young and you don't even have to be that young, if you anticipate that you're going to have 20 or more years left in your career, if you're thinking of your future career in the order of decades rather than years, then focus on career growth and focus on increasing your earning potential because this can be far more beneficial than trying to maximize investment returns.

1:40:27Higher income from career advancement can more significantly impact your financial health than some small percentage gain, some eking out a couple of extra basis points in your investments. Spending more time focusing on my career and getting a raise, like getting a promotion, will actually be more meaningful than trying to improve the returns on my own money. Like I'd rather just buy a bunch of index funds and participate in the bulk of the markets return that I'm going to be able to get and just grow my earnings capability because I will add more dollars from a higher salary than I'm going to generate in incremental returns, getting 1 % higher return on my account balance at the time.

1:41:12Those are three key takeaways from this conversation with Michael Kitsis, which we had face-to-face in Chicago during the Morningstar Investor Conference. This interview, by the way, I don't know exactly when this interview is going to be published on YouTube, but keep checking our YouTube page, youtube.com slash afford anything for the video version of this interview, because this was an amazing setup. We had three camera angles. We had professional lighting. I mean, of the shoots that we've done, this is one of my proudest so far. The editing takes a while, so I'm not quite sure when it's going to hit our YouTube channel, but subscribe to our YouTube channel for notifications.

1:41:52That's all the more reason to subscribe to YouTube, youtube.com slash afford anything. Come find us, subscribe to us, hit the bell for notifications, say hello in the comments. we are so thrilled to be building out our YouTube channel and really making it a focus. And this interview with Michael Kitsis is, in terms of production quality, one of our best yet. Thank you so much for tuning in. This is the Afford Anything podcast. If you enjoyed it, please share it with a friend, a family member, a neighbor, a colleague, a son, a daughter, a niece, a nephew, a mom, a dad, an uncle, an aunt. You get the picture.

1:42:31Share it with the people in your life, because that's how you spread the message of smart financial choices. This show is here to help you do two things. This show is here to help you make more money through your day job, through your business, through your investments. Today's conversation, of course, focused on, well, really, day job and investments. As we talked about in the key takeaways, your career and your investments are two of the biggest drivers of how much comes in the door. So this show is here to do two things. One is to help you make more money through your career, your business, your investments.

1:43:09And the other is to help you make smart financial choices. So make more money and be smart about what you do with that money. That's what we do here. And if you get value from it, the number one thing that you can do is tell someone. Tell a friend, tell a family member, tell somebody in your life about this show, send them this episode or send them one of your favorite episodes. Tell them why it's one of your favorites. And find us on YouTube. Thank you so much for being part of this community. My name is Paula Pant. This is the Afford Anything Podcast, and I'll meet you in the next episode.