Transcript
Paula Pant (0:00)
Happy New Year's Eve. In today's episode, we're going to cover financial and economic lessons that we learned from 2024, as well as what's ahead for 2025. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off, and that's true not just for your money, but your time, focus, energy, any limited resource you need to manage. This show covers five financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double. I'm your host, Paula Pant. I trained in economic reporting at Columbia, and I help you craft decisions that build wealth. And speaking of wealth building decisions, what a year 2024 has been. The biggest takeaway from this year is that 2024 was a year all about the edges, those small shifts that end up making massive differences. We're talking about the edges that tip the balance over to the inflection point. Because think about it, we've got the S&P 500 up nearly 34% this year. Inflation has cooled back to a 2 handle. That's higher than 2%, less than 3%. And yet there's an intense undercurrent of caution from some of the biggest voices in finance who warn us that we're not out of the woods and that warning signs around potential black swans are present. So today we're going to unpack what happened in 2024, from the resilient US economy to some pretty dramatic developments in science and tech that frankly didn't get the attention that they deserved. And more importantly, we're going to talk about what this means for your money in 2025 and beyond. So let's dive in with what I think is one of the most compelling storylines of the year. It's the story of gloom amidst growth. Let's take a look at five factors. The gdp, stock market performance, inflation, unemployment, and government deficits. When we take a Look at those five, we see that the US led global GDP growth. We see that the S&P 500 is up nearly 34% year to date. That is its second strongest performance in recent years. In 2021, it rose 39.4%. Then it had a bummer of a 2022, but poof, 2024. Man, we're on fire yet again. If you compare the value of your 401k January 1 versus now, assuming you're in equities, you're sitting pretty. Unemployment remains near historic lows. Inflation, as I mentioned, is back to a two handle. But we're Going to talk more about that in just a second. And the other factor, government deficits. The picture there is absolutely dismal, terrible. If we look at those five factors, we have cause for optimism in four out of the five, and we have cause for concern, major concern in one of those five, which is the deficit side. And we're going to talk more about that in just a moment. But first, I want to remind you how we started this year. If you think back to the beginning of 2024, that first quarter, what conversations were we having at that time? Well, we were reeling from the global economic uncertainty of 2023, which gave us much higher energy prices and much higher food prices. It brought us huge inflation in volatile markets. And back in Q1 of 2024, we were still talking about whether or not we were going to have a soft landing. That was the dominant conversation at the start of the year. Are we going to have a hard landing or a soft landing? And we at the time, a lot of economists were saying the US Economy is resilient. So we're really hoping for a soft landing. But let's see what happens. Part of the uncertainty also came from geopolitics with escalating tragedies in Europe and in the Middle East. Part of the uncertainty also came from the fact that we knew we were due for quantitative tightening, which was going to be draining liquidity from our economy. And we also knew that although our economy was resilient, that was being fueled by huge amounts of government deficit spending and by past stimulus. So that's where we were at the start of 2024. So let's take a look at where we are. Now. I mentioned that inflation is in the twos, but I want to unpack that. There are several measures of inflation. So there's a measure called core inflation. This strips out the cost of food and fuel in order to take a look at the underlying price pressures. The reason it does that is because those two factors, food and fuel, groceries and gas, are often affected by factors unrelated to inflation itself. Wars, natural disasters, those types of events have a huge impact on food and fuel. And that's why core inflation, the measure called core inflation, strips those out. By contrast, there's another measure. It's called headline inflation, or sometimes it's simply called inflation. And that headline inflation number leaves those items in. So headline inflation includes food and fuel. So we have the stats on both. There's also a different indicator called the Personal Consumption Expenditure Price index, or the PCE index, and that also is divided into core and Headline and the Fed watches the PCE very, very closely. Then there's also. If we can throw in a fifth indicator. That fifth indicator is the Producer Price Index. The Producer Price Index measures the average change over time in the selling prices received by domestic producers. So if we take a look at all five of these indicators. Core inflation, headline inflation, core PCE, headline PCE, and the PPI. Take a look at this basket of five, and we're seeing good news across the board. Headline CPI is 2.7% as of November. Annual core PCE inflation steadied at 2.8% in November. Now, when I say this, some people take umbrage with it and they say, well, you can't tell me. I've gotten this comment so much on YouTube, especially lately. People say, you can't tell me that inflation's only 2%. Because I take a look at my own grocery bill and I look at where it was in 2020 versus where it is today, and it's way higher. That's true. That does not mean that the inflation rate is different than what is stated. There's a distinction between the cumulative rise in prices over a given period of time versus the rate of inflation. And the easiest way to understand this is to think of a car driving down the highway. If a car drives from point A to point B, the total distance that that car has driven, that's. That's the cumulative distance. And point A and point B might be really far away from each other. Point A might be in Maine and point B is in Florida. So you look at that cumulative distance and you're like, whoa, I'm really far away from where I used to be. Yeah, the distance traveled is huge. That's the distance between how much you paid for your lifestyle in 2020 versus how much you're paying for that same lifestyle in 2024. That's the distance that the car has traveled. But the current speed of that car is the inflation rate. Right now, that car might be traveling at 20 miles per hour. That's the rate at which that car is traveling. Now, that doesn't mean that the car drove 20 miles per hour for that entire distance. Heck, we know that that car was flooring it at 80 miles per hour for a portion of that drive. And then eventually that car slowed to 60 miles per hour and then did 30, 40 miles per hour, and now it's down to 20 miles per hour. So great. The car has slowed down, but we're still in Florida and we started in Maine. And that's why even Though the rate of inflation is in the 2% to 3% range, it's also equally true that, yes, your cost of living has gone up significantly. Those two ideas don't contradict one another. One is distance and the other is rate. So to all the people who have left comments on YouTube saying, My grocery bill is so much higher than it was three years ago, how can you say that we're at 2%? Remember, total distance traveled is different from speed. Now, both are important, but they're not the same. And that's another way of saying let's acknowledge that things got bad over the last few years. Things were really bad. But assuming that we stay at our current speed or slow down even further, assuming that we don't start flooring that accelerator and driving any faster, things are unlikely to get worse. We've already driven the car to northern Florida and we're not going in reverse. Prices are not going to go lower. We're not reversing back to North Carolina. We're in Florida and we're going to stay there. But right now, we're going 27 miles per hour on that drive from the Florida panhandle down to Miami. And that brings us back to our 2024 theme of edges, drive everything. So let's discuss the 1% edge, and specifically we're talking about 1 percentage point, which in finance is also known as 100 basis points. The latest news is that the Fed cut rates by a quarter point, which is 25 basis points, at their December 18th meeting, widening this out to all of 2024. The 2024 overview is that the Fed cut rates this year by a total of 1 percentage point. So the Fed dropped interest rates from 5.5% to down to 4.5%. But here's something really unusual that happened, which is that the 10 year treasury yield actually rose 1 percentage point since September. What? What do you say? Yeah, it's true. So around mid September, the 10 year treasury yield was about 3.6%. And as of late December, it's now risen up to 4.6%. This was not on anyone's 2024 bingo card. You remember it was in September that the Fed made its first rate cut of 2024. In September, the Fed cut rates by 50 basis points, which was a dramatic first cut. If you go back and listen to our previous First Friday episodes, you'll hear that a lot of analysts were expecting there was actually a debate going on like, is it going to be 25, is it going to be 50? But I think A lot of us were really shocked when it was 50. So September was the first rate cut. It was half a percentage point, which is like, all right here, you're going strong out of the gate there, buddy. And yet it was at that same time in September when longer term bond yields like the 10 year treasury began trending higher. And what that signals is that investors are still really worried about inflation. So here's how these two things relate. If the Fed thinks that we're doing well on the inflation front, they will cut the federal funds rate, they will cut interest rates in order to let more money flow into the system. But by contrast, if investors are worried about the risk of inflation, then they're going to demand higher yields on long term bonds in order to compensate themselves for the risk that inflation is going to destroy the value of those long term investments. Think about it. If you knew that you were going to tie up money for 10 years and you were worried about high inflation over the span of those next 10 years, you would want a higher interest rate to offset that risk. Right. And so that's why it's so unusual that the 10 year treasury yield rose even as the federal funds rate was getting cut. What it means is that the Fed has a different perspective than the investors. The Fed is feeling good and investors are still feeling nervous. And what we saw in 2024 is that the yield curve, which represents the relationship between interest rates and the time duration of bonds, the time to the maturity of bonds, that yield curve shifted it uninverted and now it's getting steeper. And what that means is that either short term yields could fall or long term yields could rise, or both. Now if you're wondering, Paula, I don't buy 10 year treasuries, why should I care? Well, you probably either own a home or at a minimum, you know someone who does. And the yield on 10 year treasuries has a massive impact on mortgage rates. So since the Fed's interest rate cut in September, the average 30 year fixed rate mortgage has risen by 1 percentage point. It was 6.11% at the time that the Fed began its rate cutting in September. And as of last week, it was 7.11%. That's according to Mortgage News Daily. And so that's how you have this weird situation in which the Fed cuts interest rates and yet mortgage rates go up and everyone's kind of going, what the heck? I thought that when the Fed started cutting interest rates, that meant mortgage rates would come down. Yeah, that's typically what happens. Because usually the Fed cutting interest rates is a proxy for everybody feeling good about inflation. But that's not what happened this time around. Investors are still worried about inflation. Therefore the 10 year treasury yield rose, therefore your mortgage rates rose. The irony is that if you are worried about inflation, the best thing to own is real estate. The best thing to own in an inflationary environment are tangible assets. That means real estate, gold, art. If you're worried about the devaluation of a currency, then tangible assets like brick and mortar house is the thing you buy. And that ties us back into the themes of 2024. So as I said, the dominant theme, the dominant lesson from 2024 is that this was the year of the edges. And in this conversation that we just had around the federal funds rate and treasury yields, we're talking about deviations of 1 percentage point in both directions. The federal funds rate lowering by 1 percentage point, and the 10 year treasury yield and mortgage interest rates since September rising by 1 percentage point. But that divergence, that sends a very clear signal. And it actually reminds me of yet another theme across 2024 that we've talked about on many of the previous First Friday episodes, which is really the gap that we've seen between data and sentiment. And historically, across 2024, when we've talked about this concept, we've talked about it in the context of consumer sentiment. The economic data has been robust and yet consumers have been quite worried. The unemployment data has been robust and yet Internet searches around how to prepare for layoffs is also trending higher. So throughout this year, during our first Friday episodes, we've talked about the divergence between the lived reality on the ground versus the data. Really, this is the divergence between quantitative and qualitative. We've never seen this type of divergence before. And as I've said throughout the year, on the first Friday episodes, we've talked about this in the context of how it impacts average ordinary consumers. But what we have seen since September in the difference between the Fed's actions versus the investors actions is that there's now a divergence between the Fed and Wall Street. So if there's another broad thematic tie in for 2024, it's that different groups are occupying their own realities. You've got ordinary investors, you've got Wall street, you've got the Fed, and all of us are making slightly different decisions based on the fact that we're living in these different worlds and we have different fears and concerns. You know the other element to this, right, we've talked about the distinction between data and sentiment, quantitative and qualitative. But the other element that mirrors this, that I don't hear much discussion about, is the difference between assets and cash flow. I started this episode by talking about the fact that The S&P 500 is up nearly 34% year to date, and that's something that benefits the majority of Americans. Gallup polls show that 62% of Americans own stock either directly through individual stocks or indirectly through mutual funds, index funds, ETFs, and other related types of investments that are held inside of investment accounts. So that 62% of Americans, that's 158 million people who own stocks and our portfolio balances, assuming you have equities exposure, especially if you have broad market equities exposure, is high. The S&P 500 had an absolute gangbuster year. The balance in your 401k, your 403b, your IRA, your HSA, if that money is invested, those balances have grown between January 1st and today. But. But people don't feel the day to day reality of their portfolio in the same way that they feel the day to day reality of their cash flow. And that's another story from 2024 that I don't hear discussed often enough. The qualitative difference, the life satisfaction difference between having a high asset balance versus having healthy cash flow. Because what we are seeing right now is that even when our portfolio balances are high, if our cash flow is tight because of inflation, then the dominant mood is pessimistic. 2024 may be a study in edges, but it's also in that regard, a study in contrasts. And here's another contrast. This was also a year in which people from both sides of the political aisle showed a greater distrust in institutions ranging from government institutions to major media institutions. This was certainly a year with a huge rise in independent media, with many commentators dubbing this the the podcast election. This is a year that proved that an appearance on a major podcast can garner both more views and more votes than an appearance on a major television news program. And if I may add my own two cents, speaking as someone who was trained as a traditional journalist, I have a Master's in Economic journalism. I worked for Legacy Media. I was a newspaper reporter for many years, and then I made the switch over to becoming a podcaster myself. I love the democratization of media. I love that the gatekeepers are gone. I think that is overall a huge net positive for society. That said, there ought to be the same high standards of fact checking and intellectual rigor as well as the same high standards of a code of ethics that ought to be present in independent media. But to be fair, a lot of people would argue that also isn't really present in a lot of legacy media. And the people who argue that are not wrong. So there is a pervasive distrust in institutions coming from both sides, there's a bipartisan distrust in institutions, and there seems to be a thirst not for incremental reform, but rather for a paradigm rethink, a very fundamental ground up reimagining of what these structures could look like. Media, of course, being the most obvious example. There's also in 2024, a much greater appetite for risk. This was the year in which gambling, or as it's euphemistically known, gaming, became a much larger share of our economy than it ever has been before. Largely. Is this due to the loosening of legal restrictions? Gambling, including online gambling, is legal in more states than it ever has been. And it's also become more culturally accepted. Think of the Mike Tyson Jake Paul fight, or heck, even the presidential election. It was not unusual to wager some money on that. That didn't used to happen. You didn't used to hear about betting markets where bookies were placing odds on Obama versus Romney. But that embrace of gaming is another cultural shift that we saw happening in 2024, and it's also one that you don't hear much coverage about. It's this very slow cultural shift that happens that no one seems to really be talking about. But it ties into the theme that this was the year where the edges drove everything and people were willing to bet on that edge to take the odds on that edge. Right? This was the year in which the difference between history forking in one direction versus another was the difference of a slight edge. And this has always been a true determinant of history. Right? We see this across multiple domains and we always have. Sports is the most obvious example. In sports, a fraction of a second or an inch of distance can be the difference between victory and defeat. Sports is a domain where the slightest of edges wins or loses the championship. And we see the same thing play out in big risky bets taken on by major companies. A huge number of things need to go right in the right order to mark the difference between a catastrophic collapse or enormous riches. We see this play out in natural disasters where small shifts in atmospheric conditions can trigger devastating consequences. And this year, the 2024 Atlantic hurricane season was one of the most destructive seasons on record, second only to 2017. Those tiny shifts in atmospheric conditions. Those were the edges that tipped the balance, leading this year to $232 billion in damages and 401 deaths. And on the theme of edges, it was even the slightest edge of companies. The seven largest stocks in the S&P 500, known collectively as the Magnificent Seven, that drove the overwhelming bulk of stock market gains this year. 2024 was the year when the edges, the slightest of edges, made all the difference. Up next, we're going to talk more about what it means when The S&P 500 is so over concentrated in just a few stocks. What kind of concentration risk are we all facing? We're also going to talk about cryptocurrency and bitcoin, which had an even better year than the S&P 500. Is it just another history repeating itself, Just another crypto cycle? Or is it a harbinger of bigger things to come? We're going to talk about scientific innovation, big science breakthroughs that in the mainstream media got swept under the rug under all of the cacophony of noise. And we're going to look ahead to 2025. What can we expect and how do we prepare? All of that is coming up next.