The real wealth in Family Wealth

Tuesday, 16 May 2023 — Gold Coast

[7 min read]

Dear Reader,

Mother’s Day provided the perfect excuse for two of our daughters and a son-in-law to fly up from Sydney to join us on the Gold Coast.

What is so special about that?

Well, adult children can decide whether or not you are worthy of their time and expense.

And, if they do visit, is it out of love or a sense of duty or, even sadder still, the ulterior motive of securing their inheritance?

As a parent, do I want my legacy to be a love of money above all else?
What a soulless way to live life.
If your value system is based purely on a bank balance and status, then you’re destined to live a life of envy and misery.
Why? Because someone will always have more and be higher up society’s pecking order than you.

For me, the most treasured gifts our children can inherit are good values, manners, self-respect, being appreciative, gratitude and personal responsibility.

These intangible qualities are genuine wealth.
They are the essence of a truly rich and rewarding life.

Don’t get me wrong, money is important.

But it is not the be all and end all.

Money can come and go, but character remains

We had many conversations over the weekend.
The vibrancy, energy and excitement of youth is tonic for the soul.

However, not all topics were upbeat.

Stories of hardship caused by rising interest rates and tighter business conditions were relayed to us by our daughters and son-in-law. Jobs lost. Hours reduced. Friends preferring home visits to meeting at a café. Homes being sold due to financial distress.

In not wanting to dampen the mood, thoughts of, ‘and, this is only the beginning’, were kept to myself.

The Mother’s Day weekend was not the time for ‘doom and gloom’.
We were together to celebrate the most important person in our lives.

However, the reality of the future we — in the Western World — face, cannot be ignored.

The greatest asset bubble in the history of money is in the very early stages of deflating.
Unfortunately for many families, money that was easy to ‘come’ by, is now going to ‘go’.

Relationships are going to be tested. Difficult times are when true character is revealed.

Will there be enough emotional glue to hold families together?

For some, yes.
For others with a value system based solely on money, it could be a real challenge.

How bad could things get?

If we use the United States as a proxy for the Rest of the West, then the history of bubbles past forewarns a ‘world of hurt’.

Traditionally, US household net worth — as a percentage of disposable income — has been in the 520% to 560% range.

Which, if you think about it, makes sense.

Absent significant inheritances or lotto wins, net worth (as an average for those in the first to final years of their working lives) is a multiple of income earned.

In the late 1990s, US Household Net Worth started to move beyond its 50-year range.
Why?

The Dot-com bubble.

For a moment in time, the bottom line of personal portfolios, 401K (superannuation) plans and pension funds, were looking good.

However, the wealth was not earned by honest methods — savings, sweat, toil and ingenuity.
It was a product of speculation.

The 2000-2002 bust took the air out of the bubble, and household net worth returned to the upper end of the long-term range.

The same process was repeated — only in a much bigger dose — between 2003-2007.
This time, US house prices and financial stocks were pumped up.

Again, for a moment in time, unearned wealth — created by speculation — made households feel a little more prosperous.

Then came the GFC…restoring the natural balance between net worth and Income.

These two bubbles were mere dress rehearsals for the grand finale…The Everything Bubble.

This is the mother of all bubbles.
It too will have its own special Mother’s Day…a day of reckoning.

The Everything Bubble is in the early stages of returning to the long-term (almost 80 years) range. But there is still a long way to go and a lot — and I mean, a LOT — of money is destined to get lost in the ether.

Ok, so how much is a LOT?

For a little context, when the US Housing Bubble busted — causing the GFC — US$11 trillion was wiped off the balance sheets of US households. At the time, this amount was equivalent to 75% of US GDP.

When, not if, The Everything Bubble deflates back into the long-term range, by my math, something like US$40 trillion to US$50 trillion in speculatively generated wealth is destined to be destroyed...that’s almost 200% of US GDP.

When a ‘boulder’ of this size is thrown into the global economic pond, it will send waves (not ripples) to all corners.

Therefore, I fully expect the US wealth destruction process will be repeated — to varying degrees — in Europe, UK, Japan, Canada, Australia and New Zealand.

Perhaps, this time might be different to every other asset bubble in history…they all busted.

Maybe, the Fed has found a way where households get to keep this unprecedented level of unearned wealth…generated from excess levels of leverage and speculation.

But somehow, that just does not accord with how I understand life works.

As any parent will tell you…actions have reactions.

The real wealth in family wealth

The past decade, in my opinion, has been a world of make-believe and has ill-prepared a generation (or, two) for the harsher realities of life…one where wealth has to be earned and not generated by fast-fingered fickleness on the Robinhood app.

In the coming years, as The Everything Bubble deflates, I’m sure our daughters (and others of their generation) are going to face challenges their (relatively) young adult lives have not prepared them for.

That’s when all aspects of family wealth are likely to be tested.

Wealth within a family can be accounted for in several ways.

Financial.
Knowledge.
Relationships.

Earned wealth in these areas is a product of genuine endeavour, patience, discipline and self-sacrifice.

In the coming years, as the toll from the busting of The Everything Bubble starts to mount up, I expect many parents are going to be called upon to offer guidance, emotional, and/or financial support.

For me, the most important area of family wealth is in the ‘relationships’.

If the relationship is strong, then minds are more open to the knowledge shared and advice offered.
Any financial assistance given is done from a place of love and trust.

If the relationship is weak or lacking in trust and respect, then it’s an uphill battle on both fronts.

Please take the time to sit down and chat with your family and see how they are going.
Are they concerned about what’s happening in the broader economy?
Have they built a sufficient cash buffer to weather (and/or capitalise on) another GFC-type event?

Do your utmost to maintain the connection with them…I have a feeling it is going to be critical in the coming months and years.

And, if I’m wrong, what’s the downside in chatting with your family, building the relationship and them having a more conservative approach to financial management?

And, finally, a belated Happy Mother’s Day to the most incredible people in our lives…the mums.

Until next week

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

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Dear Reader,

The other day we got a call from Robert F. Kennedy, Jr., who is running for president.

He is curious…a rare quality for a politician. He wanted to know — what do we think? Why do we think that way? Herewith, we try to condense 25 years of on-the-go observations and guesswork into a carry-on bag.

Dear Robert,

Two little charts are all you need.

It took us 25 years to shuck off the nonsense and delusions of contemporary macroeconomics. Here, in less than 1,000 words, is the ‘executive summary.’

You lament, as we do, the decline of America’s decent, middle-class Republic. Basically, we’re talking about the kind of country we had in the ‘50s and early ‘60s. It was not perfect by any means, but by almost all measures the US was on top of the world…and pulling ahead. Real wages were rising, inflation was low, and consumers bought ‘Made in America’ not because it was a political slogan, but because American-made goods were the cheapest and best on the market.

It seemed inevitable, back then, that we would all be rich, happy, free and healthy by now. But something went wrong. Growth rates in the 21st century are less than half those of the 50s, 60s, and 70s. Real wages have been going down for the last two years and, measured correctly, the typical working stiff is worse off today than he was 50 years ago. Today, it takes him twice as long to buy an average car or an average house.

It would be reckless to try to pin the blame on a single person or a single thing. And many things are beyond our human control. But there was one major policy change that enabled the decline of America’s Main Street economy.

First, between 1968 and 1971, gold was removed from the US currency. For the first time, dollars could multiply much faster than the things they could buy. Second, in the 1990s, the Fed began manipulating interest rates to boost asset prices. These two moves destroyed America’s prosperity.

Gold — or something like it — is essential to a capitalist economy. It links our ‘money’ to the real world of time, work, and resources. Before 1971, if you wanted more money, you had to earn it by producing more goods or services (GDP). Then, you had ‘capital’ that you could invest to build new shops and factories to produce even more goods and services. That was how the US became the richest nation on earth.

But the post-1971 dollar led to a new form of wealth — financial wealth. It was capitalism without real capital. Instead, it was based on credit provided by the Fed and the banks. (Note: when you borrow from a bank, it doesn’t take the money out of its vault. It just creates the money, as credit, in an electronic ledger entry. The more you borrow, the more debt…and the more the ‘money supply’ goes up too.)

Atal financialization

This is what became known as the ‘financialization’ of the economy. People found that money could be made without adding to goods and services. Investing, speculating, leverage, Mergers & Acquisitions, IPOs, buybacks — all were ways to get rich, without adding a penny to the world’s real wealth. Emblematic of this era was Jack Welch. As chairman of GE, Welch turned the company — an old, industrial powerhouse — into a new financial wunderkind. He bought one new company every week, putting GE deeper and deeper into debt. Welch himself became famous for his hard-driving success. By 2000, GE stock was over $350 a share. And by 2005, Welch’s book, Winning, was, of course, a bestseller.

Deals, deals, deals…Wall Street brokered the deals and earned its cut. But what real wealth was added? It was hard to say. Here, we see what happened. The real economy stumbled along, while the ‘financial economy’ — powered by trillions of new dollars that no one ever earned or saved — soared.

We see here, in Chart #1, the two economies parting company:

Penthouses and outhouses

‘Financial wealth’ is very different from real wealth. Real wealth must be earned. Until the 1980s, both rich and poor earned money and gained ground equally. Then, the new financial system tilted the playing field in favor of the elite. Those with good connections, good credit, business school diplomas, brokerage accounts, and business-class seats benefited the most.

The rich got much richer…while real wages stagnated. Here’s Chart #2.

More and more, money was made by manipulating credit, not by learning a trade or building a business. ‘We think; they sweat’ was the delusional motto. Things of real value could be made cheaper and better by the Chinese, Koreans, Mexicans or Japanese. Let them do the hard work! All Americans had to do was borrow the money to buy their products. It worked well, for a while. Dollars were sent overseas to purchase real goods and services. Then, rather than come back to the US, where they would have driven up domestic prices, they were often locked away overseas as ‘reserves.’

Ambitious mommas wanted their sons to get in on it; they should grow to be hedge fund managers on Wall Street, not engineers in Detroit. But while the automotive engineer helped produce a better, safer car…what did financial engineering produce?

Regards,

Bill Bonner,
For The Daily Reckoning Australia