Jan 20, 2025 Report + The Mexican Fisherman
NEWS
What Happened Last Week
US job growth showed 256,000 new non-farm payrolls in December, far above the estimates of around 165,000.
The unemployment rate dropped to 4.1% in December from 4.2% in November.
Average earnings, average hours worked, and therefore average purchasing power for workers as a whole have all increased in December.
Mortgage rates rose due to renewed expectations of 3%+ inflation for longer. The average 30-year mortgage surpassed 7% again.
Investor sentiment is fearful at the moment, and has trended fearful for the last month, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
Both the S&P 500 and the MSCI World are below their 50-day moving average, but the 50-day moving average remains above the 200-day moving average.
How I See It
There is a lot of uncertainty and fear in markets right now, mainly due to the fear of higher interest rates for longer.
But while there are tradeoffs, I believe the best course forward is exactly that: higher rates for longer.
While inflation has many drivers, the largest among them is money supply. If the Federal Reserve attempts to reduce interest rates too quickly through purchasing up US Treasuries this year, that risks increasing money supply (M2) fast enough to push inflation rates back up in 2026 and potentially beyond.
That’s a bit oversimplified, because not all money goes into circulation (what we call M1) or even potential circulation (M2), but an environment that favors lending certainly encourages it.
High inflation, if it becomes the norm, is extremely difficult to slow down.
So the Fed has to make a decision. They have a dual mandate: to keep inflation low and maintain full employment.
Right now, the employment side of things appears to be easily thriving in this high interest rate environment.
High interest rates can cause difficulty in the long-run for companies which rely heavily on loans. They can also affect expected earnings many years into the future, which affect growth stocks more than value stocks. But they aren’t the only contributor, so there is usually an initial overreaction in stocks when interest rate expectations change suddenly.
Interestingly, the long-term rates turned higher than short-term rates in the past month (as measured by US Treasury yields). This was the first time this has happened in two years.
These higher long rates incentivize bank loans now as opposed to later, because they can potentially get some of the highest return on investment during this window of time. The average interest paid on bank savings accounts is less than 0.5% annually. Think about how much the bank makes by borrowing at 0.5% and lending at 7%!
Bottom line: we can still experience reasonably good economic growth with high interest rates.
The fact is, we had a lot of economic news this past week that would be considered good news under other circumstances. But it was interpreted more like bad news. That’s usually a good sign for the likelihood of a positive 12 months ahead.
I think there is a healthy fear in the markets right now, and the markets are taking a breather.
As I mentioned on December 9, I think this year could be one in which we experience a correction (down 10%-20% over a few months before continuing upward). Right now, the S&P 500 is down close to 5% from its high back on December 6 , which would be considered a pullback.
That said, I think a likely scenario is that we’re looking at a single-digit return by the end of the year. But that return is still essential to capture when investing with long-term goals in mind. And that means riding through pullbacks and corrections if necessary.
Covered call option strategies can be particularly attractive in an environment that expects smaller, but still positive, returns. For those who are less inclined to take the risk, those covered call options could help pay for put options on the downside, which act as a type of insurance against market loss beyond a certain threshold.
Options strategies can be risky if one doesn’t have full knowledge of how to execute them. But there are also ETFs that allow access to professional managers who do this for you, particularly Defined Outcome ETFs.
PARADIGM SHIFT
Lesson of the Mexican Fisherman
A story is told of an American investment banker who stood upon a pier of a coastal Mexican village when a fisherman docked his boat with a beautiful catch of a few large yellowfin tuna fish.
The investment banker complimented him on the catch and asked how long he’d been out fishing.
“Only a little while,” the man replied.
“But what do you do with the rest of your time?” the banker asked.
“I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos. I have a full and busy life.”
The investment banker proceeds to offer some unsolicited advice.
He proposes that the fisherman should spend more time fishing in order to pay for a larger boat, hire a few others, and buy a fleet of fishing boats with those proceeds. By scaling his business, he could eventually negotiate better contracts and eventually control the whole process from product to distribution, from start to finish.
And the best part is that, after 15-20 years, he could sell shares of the company in an IPO, become a multi-millionaire, and retire to a small coastal fishing village where he could sleep late, fish a little, play with his kids and grandkids, take siestas, stroll the village in the evenings, sip wine and play his guitar.
Of course, this proposal sounds preposterous when we see it in the form of a short story.
But it illustrates vividly the exact truth which Henry David Thoreau presented when he said:
“There is no more fatal blunderer than he who consumes the greater part of his life getting his living.” –Life Without Principle (1863)
Stories like these remind us that true and comprehensive wealth is a combination of time, flexibility, purpose and money.
Seasons of life come and go, wherein one or more of these four wealth pillars necessarily fall out of balance temporarily. But accumulation of money alone is not worth the ultimate sacrifice of the other three elements as a perpetual habit. It’s like having one part of wealth, but with the limited ability to actually enjoy it.
When one of these four elements is thrown off balance, it behooves someone to put down in writing the precise date and plan by which they will return to balance. This might be only months, or it may be three to five years. But in the end, this imbalance should not be perpetual with no end in sight.
The sacrifice of life upon the altar of getting a living is not true wealth.
This is why I propose setting major life milestones that can be achieved in three years or less. This not only offers the real experience of progress, but it also maintains motivation to conquer the next and higher mountain.
Setting yourself free into a life of balance, of synergy among all aspects of your life, is a process. But it’s one that can be accomplished by anyone at any stage of their career.
These are the principles and strategies which I share in detail through the online courses so that those who want to create radical change in their near future can learn a step-by-step process to achieve that lifestyle in which they can grow wealth and enjoy it all along the way.
FINANCIAL TOOL
Bonds and Risk Management
Bonds are often touted as lower risk than stocks.
When markets get a bit choppy, bonds often outperform stocks during these shorter periods of time. Not always, but in most circumstances.
But what isn’t often discussed are the types of risks that are inherent in bonds as compared with stocks.
Bond exposure as part of a total portfolio is meant as a way of achieving slightly better returns than cash while reducing the magnitude of downward (and upward) swings in the portfolio’s value.
Bonds are not meant as a way to achieve meaningful long-term returns. Historically, they have surpassed the rate of inflation on average by only about 1.5%.
So the risk of these “safe havens” is this: an investor may end up with fewer assets in retirement than they need, simply because they wanted the comfort of seeing a less volatile portfolio from week to week and month to month.
The risk of not having enough, or of running a retirement account dry, is a real risk!
And unless someone is already a multimillionaire and can live off the interest alone, then they probably are going to need at least some market-like growth in order to achieve their long-term goals.
Interestingly, it doesn’t take long to see stocks start outperforming bonds on average.
Historically, stocks on average have been negative for shorter periods of time than bonds. And when returns are positive, stocks on average have dramatically outperformed bonds.
Now, bonds have their place. If someone is saving for a large purchase or otherwise near-term need, bonds are going to offer predictable returns assuming two things:
- The company or government doesn’t default, call or restructure the loan.
- The bond matures prior to when the investor needs the money.
And, as mentioned earlier, it can be used as part of a larger strategy that reduces average standard deviation (volatility) of a portfolio, if that portfolio requires reduced volatility due to investor preferences or needs.
In summary, bonds are more predictable than stocks in the very short-term, and over the life of the bond. But they are not “safe” in the sense that they can offer meaningful growth to someone who needs close to market-like returns over longer periods of time.
The risk of failing to achieve the needed long-term portfolio return must be balanced with the risk of downside that could happen over a 1-3 year period.
HERE’S HOW I CAN HELP
COURSE 2 OF 3 IS AVAILABLE!
I am in the process of creating the third and final in-depth digital course that, together with the other two, will comprehensively make you a master of your financial destiny.
The second of three courses is now available:
Budget, Build, Bridge: The Roadmap to Financial Independence
This course will lead you step-by-step toward developing your escape plan into a life of comprehensive wealth: time, flexibility, purpose and money.
Walk through the lessons and accompanying action steps to create an extraordinary life change today which culminates in a bridge to financial independence in the near future.
Each lesson builds upon the last, covering these main topics:
- Master high-impact budgeting techniques to create a surplus today
- Develop a plan to become debt-free in record time
- Raise your salary this year
- Use tax strategy to fast-track your goals
- Bridge your way to entrepreneurship
This is a learn-at-your-own-pace course with 7+ hours of content that will set you on course to achieve your dream life well in advance of retirement age using simple but powerful habits of finance.
Budget, Build, Bridge: The Roadmap to Financial Independence
