The law of large numbers and the free market
It was one of those rare and fun moments when we had three generations of my family sitting on the same deck, drinking the same bourbon, just chatting and enjoying the nice evening.
On my right was my father-in-law Ben, an energetic and active octogenarian who spends more time traveling than someone 20 years his junior. On my left was my son Sam. Twenty-three years old, just married, and a year into his career in the mutual fund industry.
My father-in-law, who spent his career as a CPA, enjoys reminiscing about raising a family over the past 55 years. Sam, a Gen-Z, was lamenting how, because of the current prices of things, it's harder to get started nowadays than it was for us "elders."
The math brain in my father-in-law lit up. "My first home after I got out of the Army in 1976 cost $48,000," he said. "But I was only making $9,000 a year with three kids and one on the way. How is that harder than what you're dealing with, Sam?"
"I wonder what that is in today's dollars?" I chimed in. "Let's ask my AI." I opened Grok and prompted the question. After about 15 seconds the AI announced the inflation-adjusted value would be $281,700 in today's dollars.
"See," Sam said, "try finding a house for that nowadays." I opened Realtor.com and checked homes in Cincinnati where Sam lives. He was right — most of the starter homes in decent neighborhoods were priced around $330,000.
I showed my father-in-law the app. "Ok," he replied, "but all those houses are like 1,500 square feet with a two-car garage. Our first house was 1,000 square feet, with a small detached one-car garage, and we didn't even have air conditioning. And I crammed a pregnant wife and three little girls in there."
"Well, what about gas?" Sam retorted. "In your day gas was like a quarter. Now it's $3.50."
"No, I remember when I got out of the Army in 1974, gas was 40 cents a gallon. Ask your AI what that is nowadays." I asked the AI. $2.81 was the answer.
"See," said Sam, "it's way more." Ben was ready for this one. "Yeah, gas costs more, but my car back then got like 15 miles to the gallon. Now the cars get 25 miles to the gallon. So you use a lot less of it."
Ben decided to go on the offense. "I know how much money you make, Sammy. I didn't make the kind of money you make until I was in my 40s. All my grandkids make a lot more money than I ever dreamed of making at their age. I don't know why you guys think you have it so hard."
This exchange got me thinking. Both were right in their own way. In a relative sense, things are indeed more expensive for today's young adults. Some of the cost increase, however, is in fact due to general improvements in the products delivered for these modern higher prices.
The homes we live in today tend to be bigger. Nearly all have central air and many other amenities that would have been inconceivable to prior generations. I remembered the house I grew up in — it seemed like we were all over each other all the time. Later, when I had teenagers, we had to go around and find them in the house just to drag them into the family areas. And don't even get me started on the cars. Sure, they cost more now, but today's cars would have seemed like starships in 1975, and some don't even use gas at all.
Thinking more — and using investing as a frame of reference — I suspect some of the stress felt by today's young adults is simply the law of large numbers. Investors will happily buy a stock at $100 a share that they would have avoided at $1,000 before a 10-for-1 split. In the same way, a $300,000 mortgage or a $50,000 car feels more intimidating than the nominal dollars of earlier generations, even when early-career wages are markedly higher. Perception can become reality.
Politicians, particularly those on the far left, will try to exploit that perception, blaming it on flaws in the market system. They are partly right that something is wrong. But the flaw is not the market forces they malign. Markets delivered the bigger homes and dramatically better cars. The real problem is the steady degradation in the purchasing power of the dollar itself. Some now call it "affordability." The proper name is inflation. And inflation, throughout history and this time as well, is always the result of mismanagement of the money supply and the accumulation of public debt — both squarely the domain of the State, not the market.
So, when these conversations arise with our young adults, we should make sure they understand that politicians promising to solve inflation with new government programs are a lot like candy companies offering weight-loss solutions. Thanks, but no thanks.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com.
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