Financial Samurai Newsletter For July 14, 2024: Disinflation Now

This week's newsletter is brought to you by Fundrise, an investment platform than enables you to invest in private real estate and private growth companies. If you're looking to invest in real estate before mortgage rates go down or participate in the AI boom, Fundrise is the place to be. Financial Samurai is a six-figure investor in Fundrise.

In other news, the Consumer Price Index (CPI) for June showed a -0.1% month-over-month change, contrary to the expected +0.1% month-over-month increase.

Monthly headline inflation June ticking down, now deflation in June 2024 is here - Financial Samurai newsletter for July 14, 2024

Yearly headline inflation has now fallen to 3% and is likely to decrease further due to a lag in rent and auto insurance prices. We now have deflation. Hooray!?

Twelve-month headline and core inflation - Financial Samurai newsletter for July 14, 2024

On the day of the June CPI announcement on July 11, there was approximately a 1% sell-off in the S&P 500, a 1.5% sell-off in the NASDAQ, and over a 3% sell-off in the leading big tech names.

In contrast, the Russell 2000 index, which consists of small-cap companies, saw a significant 5% rise. Most real estate stocks also experienced a notable increase as money rotated into lagging sectors and companies.

A Rotation Into Laggards

This rotation into small caps and real estate is one of the reasons I was buying IWM (Russell 2000 ETF), as mentioned in my post, Having Cash Could Make You Poorer. It's also why I believe it's suboptimal to sell your rental properties today if you don't have to.

The decoupling of performance can only last for so long. Sooner or later, the spread in performance (red line and black line in the chart above) will narrow. Stocks could correct to narrow the spread, or real estate could catch up, given its lag since 2022 when the Fed started aggressively hiking rates.

My bet is that stocks will cool off and real estate will heat back up in Spring 2025 after a traditionally slow second half of the year. There is now approximately a 94% expectation for a rate cut in September 2024.

Based on my experience, the majority of investors and homebuyers wait until they see a green light before they cross the street. This is the safe move, as you don't want to get hit by a car.

The problem is, if you take no risks crossing the street when there are little-to-no cars, you might miss out on the giveaway across the street. Ah, risk and reward in action.

Here's more of my logic about holding onto your real estate for as long as possible in, Don't Sell Your Rental Properties If You Don't Have To.

In addition, I came up with a mental shift that may help you hold on for longer too in, View Your Tenants As Guardians Of Your Rental Property.

Getting Richer Than Average By Planning More Than Average

If you want to grow your wealth faster than the average person, I suggest trying to think in TWO timelines that move together in unison.

The first timeline is analyzing what's going on right now. The second timeline is analyzing what could happen in the future, with a consistent spread. It's like having a dual computer processor always running in your brain.

The classic example to explain my suggestion is to people who are currently working.

  • How do you feel about your job now?
  • How do you THINK you will feel in five years if you are still doing your same job today?

Most people I talk to never think about question two when they first start their job. They are thrilled to be there and full of optimism. But I want you to think about question #2 because I'm trying to get you to forecast your misery.

If you can approximate when you'll be miserable at your job, you can take steps to prepare for when that misery comes. But if you don't think about question #2 consistently in two timelines, by the time you are miserable, you are screwed. You have little-to-no options for getting out of a suboptimal situation.

Using Two Timelines To Become A Better Investor

Now use my two timelines process and think about investing. Here's the example I'm thinking about today:

1) Investors have gotten rich investing in stocks since 2022, especially big tech investors. The July 11 rotation out of big tech and into small caps and real estate means investors are hunting for laggards. We saw a similar move into real estate from internet stocks in 2000.

2) Public equities move quickly; physical real estate does not. Investors also want to preserve stock market gains. Therefore, hold onto your real estate now or buy before the rotation of capital pushes up prices. By July 14, 2025, the Fed Funds rate and mortgage rates could be down by 1%, thereby driving even more demand.

Of course, you or I could be wrong in our two-timeline thinking. But at least it forces us to try and continuously forecast the future. If a significant variable changes, we also change our forecasts.

Investing $500,000 In Artificial Intelligence

I also use my two-timeline way of thinking with my investments and my children's investments. I imagine a time in 15-20 years where we can have an intelligent conversation about investing and the complexities of life. When you think about investing for your children, it gets easier to invest for the long term.

Since 2017, I've been struggling to get my head around having to pay for college tuition starting in 2036. Realistically, we're talking about $450,000 for public and $750,000 for private university costs for four years. That's nuts since everything can be learned online for free today.

One solution is to encourage them to attend community college and then transfer to an in-state university for the remaining two years. Another solution is to teach them everything we know so that they don't have to spend a lot of money to party.

Yet another solution is to simply invest in the technology that may disrupt traditional education the most: artificial intelligence. I came up with a $500,000 target to invest in private AI companies a couple of years ago.

The number may sound like a lot, or it might sound arbitrary. But I realized this week WHY I came up with $500,000. The logic goes, if I'm willing to pay $500,000 for college in 2036, then I most definitely should be willing to invest $500,000 in companies that will make our children's education obsolete!

So not only should you think in two timelines, but you should also act consistently with your beliefs. If you don't, what's the point? You'll just end up full of regret or shouting on the internet about how life isn't fair.

If you're looking to invest in private AI companies, check out the Fundrise venture capital product. The minimum investment is only $10 and you can view what Fundrise is holding first before making an investment and by how much.

To Your Financial Freedom,

Sam

Below The Fold

I conducted a fun 30-minute interview on the dangers of Coast FIRE. You can check out my video interview by clicking here, reading the post, and scrolling down towards the bottom. 

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