Why the Biggest Crash is Still Coming
Everyone loves to buy nice things. Those that say they don’t…well, they’re liars who can’t afford nice things.
From before we can even talk, we’re wired to follow after the next shiny things. We’re also wired to consume as much as we can. It’s the principle of scarcity that we’ve inherited from our hunter-gatherer days. You never know when you don’t have what you need, so you better consume as much as you can today.
This explains why so many people have a hard time controlling their spending. And it explains why consumer debt is dangerously close to what it was prior to the 2008 Great Recession. According to CNN Money, in 2016, “household debt ballooned by $460 billion-the largest increase in almost a decade.” According to the article, total household debt is now $12.58 trillion-yes, trillion-as of the end of 2016.
It seems that we never learn…and that we’re doomed to repeat our mistakes.
Unless You’re Rich
According to Barron’s, “Buying auto stocks in a downturn seems counterintuitive, but it works if it’s Ferrari. But Ferrari, of course, isn’t just a car company. It is a luxury good.”
“We don’t view any auto stock as truly defensive, yet we believe Ferrari is defensive on a relative basis,” Analyst George Gallierssaid in a Wednesday research report. “Ferrari has wait lists for its products. Unlike Aston Martin (AML.London), Ferrari isn’t seeing weakness in demand for its product or order backlog.” The strong backlog is unique, according to the analyst.
It is good to be a luxury-car seller. Ferrari trades for about 34 times estimated 2020 earnings. Cadillac maker General Motors (GM) trades for just 5.8 times estimated earnings.
In a Wall Street Journal article, What Do You Buy When Trump Wins? A Bentley, writer Chester Dawson explains this bump in luxury car sales, “Dubbed the ‘wealth effect’ by economists, perceived gains in portfolio values can prompt ultrahigh net worth buyers to splurge on hard assets such as fine art, real estate and luxury cars.
High Net Worth Does Not Equal High Financial Intelligence
This goes to prove that “ultrahigh net worth” does not equal ultra-high financial intelligence. Buying luxury goods because the market is overheating is the very definition of counting your eggs before they hatch.
In most cases, the folks who are buying these luxury goods aren’t doing so because they are actually wealthier. They are doing so because they look wealthier on paper. They have not sold their stocks. They simply hold stocks that, for now, have higher value. But one only has to look at the dot com bubble burst of the early 2000’s and the real estate crash of the late 2000’s to realize that wealth on paper and true wealth are two different things.
The article in the Wall Street Journal about luxury cars caught my attention because it is a good parallel to another story I like to tell about when I wanted a Bentley (whose sales are up 10.8% according to the WSJ since Trump, coincidentally).
How to Buy That Bentley
Some years ago, I talked with my wife, Kim, about my desire to purchase a new Bentley. We both agreed that it would be easy for me to pay for the car in cash. We had the money. But having the money wasn’t the issue. As big believers in mindset-and delayed gratification-we both agreed there was a better way for me to get in the driver’s seat of this new dream.
Both Kim and I sat down and determined what it would cost for the new car on a monthly basis-what our cash outflow would be. We then, together-and this was fun, went shopping not for a new Bentley but instead for a new asset that would pay for the Bentley.
Kim and I found a great asset, and after six months we had enough cash flow from the asset to pay for the monthly costs of my new car-and some. The best part of the whole exercise is not only did I have my new Bentley but I also had a cash-flowing asset that actually increased my wealth, that didn’t just make me look richer on paper.
Two Ways To View Wealth
This is a simple story, but an important one. There are two ways to view wealth. One is on paper. That is how most news outlets, and frankly, most CPAs view it. The traditional balance sheet is smoke and mirrors, accounting tricks to look wealthier than you are.
The other way to view wealth is the Rich Dad way. It is much simpler. It’s based on this one important truth. An asset is anything that puts money in your pocket. A liability is anything that takes money out.
Given this definition of wealth, paper assets that grow in value while providing no cash flow are not assets. They are actually liabilities since you had to pay out of pocket for them. They only become assets when you sell them. But that isn’t advantageous because then you only have the cash on hand. And cash, like electricity, is a currency. It must move somewhere else to have value. Otherwise it dies. In the case of electricity, it dies quickly. In the case of cash, it dies slowly, eroded over time by inflation.
The ultra-rich who are buying new Porches, Maserati, and Bentleys in this market bull run are those who are spending wealth they don’t truly have. I hope it works out for them. But if history is any indicator, it won’t. But they have good attorneys to bail them out.
What’s scarier is when the middle class starts following suit. They are the ones that always get wiped out. And when the middle class starts spending like the rich-running up consumer debt like 2008 levels-it’s time to watch out. The markets are ready to crash.
The Best Things In Life Are Free
Years ago, my rich dad said, “Some people believe that God wants us to live frugally and avoid the temptations of the finer things in life. There are other people who believe that God created these wonderful things for us to enjoy. It is up to you to choose which view of God you want to believe in.”
I share the story of my Bentley because I want you to have the wonderful material things this world has to offer—without sacrificing your financial well-being and winding up in financial hell. And I tell the story for the lessons that follow about abundance.