1/ An important point made here that I am just beginning to understand:
Most investors are much more exposed to the business cycle and risk assets such as stocks and bonds and real estate than they realize.
A short thread
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Most investors are much more exposed to the business cycle and risk assets such as stocks and bonds and real estate than they realize.
A short thread
👇
2/ Most individuals have a retirement portfolio full of stocks and bonds.
Their incomes and home values are also correlated to the same economic growth as stocks and bonds, compounding the risk.
Their incomes and home values are also correlated to the same economic growth as stocks and bonds, compounding the risk.
3/ Home values are tightly linked with the local labor market. What determines rents is the availability and median wage of jobs (Exhibit A: the Bay Area. Exhibit B: Detroit.).
4/ The local labor market is linked to some extent the overall business cycle.
When markets go down, people get laid off and home prices decline.
When markets go down, people get laid off and home prices decline.
5/ This means that an American buying a home with 20% down is effectively making a 5x leveraged bet on the business cycle.
6/ If you consider the typical individual, the single biggest item on their theoretical balance sheet is the net present value of their future wages: how much money they will make in their careers.
7/ This too is generally linked to the business cycle. When markets go down, you may be the person getting laid off or reduced work.
As a result, this is effectively additional leverage to the business cycle.
As a result, this is effectively additional leverage to the business cycle.
8/Someone with a home where they put 20% down on a mortgage with a career in a cyclical industry (**cough** finance and tech **cough**) and holding a portfolio of stocks and bonds is effectively making a 10x (or more) leveraged bet on the business cycle.
9/ While it’s anyone’s choice to do that, almost no one in that position understands that they are making that bet.
10/ Of course, there are shades of grey.
Not everyone's wages are reduced and home prices don't go down equally in all places, but the general principle is still not well understood in my experience.
Not everyone's wages are reduced and home prices don't go down equally in all places, but the general principle is still not well understood in my experience.
