Hello everybody, it's Sam from Financial Samurai, and in this episode I want to talk about safe havens after the August CPI data came out. So unfortunately, the August CPI data came out disappointing. It did not decline as much as expected. As a result, treasury bond yields increased and stocks collapsed.

The overall CPI rose 0.1% in the month versus an expectation of a drop of 0.1%, and the year-over-year CPI was up 8.3%, which was higher than the 8% expectation. Gasoline prices were down 10.6% month-over-month, and that's to be expected. Anybody who drives has seen the price of gas decline, and I think we all felt pretty good about that.

However, excluding food and energy, prices were actually up 0.6% in August, and over the last three months, all items except energy rose at a 7.4% annual rate, and that was faster than during the spring. And to me, the biggest surprise was shelter cost, which rose 0.7% and 0.8%, the highest increase in a single month since 1991.

So in 31 years, medical care costs were up also 0.7%, but that's not a surprise since our system is so poorly managed. It's a good reminder to eat better, work out more, exercise more, take care of your mental health, because you don't want to be trapped in this very cumbersome and expensive medical system.

So the bottom line from this report is that the Fed will likely not relent on its rate hike mission until the Fed funds rate is at about 4%. 4%, and that means the yield curve is going to be inverted. It is inverted right now, actually, the one year and two year bond yields are higher than the 10 year bond yields.

And if the Fed funds rate goes to 4%, so that's the shortest end of the yield curve, 4% is way higher than the current 10 year Treasury bond yield of about 3.43%. So in terms of stocks, unfortunately, stocks are probably not going anywhere for the rest of 2022. I wouldn't be surprised to see the S&P 500 back down to $36, $3700.

And it's pretty sad, because monetary policy is a determinant, 80 to 90% determinant of where stocks are moving, the fundamentals of a company, margin expansion, market share increase, all that stuff doesn't seem to matter when the Fed is hiking rates. So it's a good reminder also to focus on your personal cash flow, your job income, your investment income, and your side hustles.

It's the cash flow that's real, not so much your net worth, not so much the value of a company, as indicated by the stock market market and the stock price. These valuations are subjective, but what's not is the cash flow that's coming in every single week, every single month, every single quarter, given the stock market is probably not going to go anywhere for the remainder of 2022.

We don't have to rush to invest in the stock market, but you should continue to dollar cost average into the stock market according to the appropriate net worth asset allocation model that I've discussed in my posts and that I've discussed in Buy This, Not That. You don't know when the stock market will turn exactly, but so long as you follow a proper model according to your goals and risk tolerance, you're going to be okay over the long term.

Now in the short term, things are more uncertain now. So focusing on safe havens is a good idea for your capital, capital preservation. One of the things you can do is obviously look for higher savings rates online. Thanks to the Fed hiking rates, online savings rates are going up.

And one of the highest APYs I've seen is actually by Personal Capital Cash. They're offering a 2.02% APY for non-customers and a 2.15% APY for customers. There's no minimum and there's unlimited withdrawals. And you can check it out at financialsamurai.com/pcc. Now, you're not going to get rich, obviously making 2%, but you're sure going to outperform if a risk asset is going down.

So all the money that we invested in IBONZ at the end of last year and the beginning of this year, right, 10,000 each, is outperforming the S&P 500 by over 20%. It's probably going to outperform by 25% when the year is done. And that is fantastic. And I realized while driving my son to kindergarten this morning that there's another great safe haven to preserve your capital.

And that's the three-month Treasury bill. Given the yield curve is inverted, that means rates on the short end are higher than rates on the longer end. And the three-month bill, Treasury bill, is the short end of the curve. So you get over 3% right now for a three-month Treasury bill and you get all your capital back every three months.

So you can leg into three-month Treasury bills if you have liquidity concerns. There are obviously no liquidity concerns for online savings accounts or high-yield cash accounts. But hopefully, three months is not that long of a period to wait. So three-month Treasury bills, pretty attractive. And you can buy them through Treasury Direct.

If you've opened up an account last year or this year because you bought IBONZ, that's where you go. Or you should be able to buy it from your online brokerage account such as Fidelity, Vanguard, Charles Schwab. Just call them if you have difficulty. Each platform is a little bit different.

But there should be pretty direct access as well. Now the other safe haven is really not a safe haven since risk is involved. However, based on the August CPI data, it has proven to be a safe haven so far. A couple of months ago, I touched base with Ben Miller, CEO of Fundrise.

He mentioned rents for single-family and multifamily homes in the heartland were up in the teens percentages. So 11%, 12%, 13%, 14%, 15%. And one of the reasons why is that higher mortgage rates pushed more people to rent instead of buy because it became too expensive to buy. Now that reasoning made a ton of sense.

But to me, I was a little bit incredulous to hear 10% to 15% rent price year-over-year increases given we are not experiencing this here in San Francisco. Instead, we're like, you know, flat to up 5%. So just kind of in the range of normalcy. The only reason why I was able to increase one of my rental properties' rent was because I remodeled and added more space.

So that's fair. And then this other rental property, actually one tenant is leaving. So I had two tenants in the two-bedroom condo. One is leaving and she asked if she could keep the rent flat. It's already been flat for years now. And I said, okay, because she's going to be the only one living in it.

So she's going to use the other bedroom as a work-from-home office. And so I said, well, okay, no rent increase. That's fine. You guys have been pretty good, but I still have to fix some things. So the costs are going up. HOA fees have gone up over the years.

Property taxes have gone up over the years. But less wear and tear. That's fine. You know, let's just keep it simple. So when I heard about 10% to 15% rent price increases, I was like, wow, really? Is that really happening right now? But like always, let's review the data.

And as mentioned in the beginning, shelter costs accelerated to 0.7% month over month. And that's the highest single month, month over month rent increase in 31 years. And so what Ben Miller told me a couple of months ago rings true, and it's coming through to the data. So I continue to believe in the long-term trend of investing in Heartland real estate.

You can also call it the Sunbelt or the Smile States. I just wish I had invested even more of my real estate exposure to the Heartland Sunbelt to better ride the inflation wave. Heck, if I could snap my fingers, I wish I had, you know, 90% of my net worth exposed to this asset class.

But obviously, making large wholesale changes to one's net worth composition would incur a lot of taxes. I'd have to sell, repurpose, and then there'd obviously be concentration risk. Finally, I'm looking in the rear view mirror, which is easy to say, "Oh, I should have done this," but we don't know the future.

However, long-term, I think the trend of investing in Heartland real estate is the right one. Some of my private real estate funds are outperforming the S&P 500 by over 25% year to date, and it's only September. So let's see whatever happens over the next three months. It's going to be pretty interesting.

It's also good to point out that just like headline inflation, Heartland rent growth will eventually moderate. It's already moderating if you look at the comparisons between 2021, which was the biggest. Like the national median rent, according to Apartment List, was up 17.6% in 2021. In 2022, 7.2% national. 2020, negative 1.5%.

2019, up 2.3%. And 2018, up 3.4%. So I think there's going to be a moderation to the 2% to 3% to 4% range. That's just the way things are. Things tend to revert to the mean, but outperformance is probably going to continue. Just watch out for those boom cities like Austin, where prices went up 50% in a couple years.

That also means they're going to revert to the mean. And for more expensive coastal city real estate, well, prices didn't get as crazy. So they're probably not going to decline as crazy. It's just going to be less volatile. So this leads me to my concluding point, which I did write a detailed post about it.

And it's regarding the best time to upgrade to your move up home. Historically, the real estate cycle moves up in the seven to 10 year cycles. And then it moves down over a one to three year period. That's kind of like the average. We've had good times since about 2012.

So that's a 10 year bull run. And now that it's ended, so we're in a down cycle now. And we can really only predict when the previous peaks and troughs were until about six months after. So if you look at the data, it sure looks like the most recent peak for home prices occurred in around March 2020.

And so I think the perfect time to upgrade your home may be about 18 months after the peak. So basically, you recognize when the peak was. So that takes six months to really know. And then you wait another 12 months. So that means for us right now, if you were to ask me to predict when is the best time to upgrade your home, that period is probably going to be sometime between June 2023 through February 2024.

summers and winters are the slowest months of the year, which also make them the best times of the year to buy a home if you can find one that you really really like. So during a real estate down cycle, higher priced homes will usually decline more in absolute dollar terms, and often in percentage terms as well.

The same thing goes with vacation properties. During a recession, nobody needs to own a vacation property, or a house with two or three more bedrooms than you need. Hence, they tend to be the properties that decline the most since they are the first to flood the market. So if you are looking to upgrade your property, you've got a large cash balance, you got strong cash flow, and you're bullish about your job prospects and your company's prospects, then you're pretty happy to see more higher end homes with price cuts.

Even if your own home is losing value, which it is, you're still gaining on a relative basis. So for example, let's say you own a home that's worth $500,000, and it declines by 10%. So you lose 50,000. But you want to upgrade to a million dollar home that loses 10%.

So that loses 100,000 to 900,000. You're still net up 50,000. So you can go buy that home for 10% off. And you're probably going to go through less bidding wars because the bidding wars will disappear. And you're also going to be able to pay less in property taxes compared to the original price of the move up home.

So what's interesting now is prices are fading because mortgage rates have gone up. But rent growth is strong, but that's also fading a little bit. So if we can wait 12 months from now, so around this time next year, I think we'll be able to get better deals. Maybe we can get move up homes that are going to be priced about 10% below what they are or what they were in the first quarter of 2022, March 2022, to be exact.

The only quote, risk to my thesis of declining home prices for move up homes is that the Fed might relent and stop their aggressive price hikes, or at least their moral suasion hawkish tone by the end of 2022. And so if that occurs, we'll probably have like a three month window where we can buy our upgrade homes at a discounted price before demand comes into the market and buoys prices once more.

So just pay attention to the Fed's tone. And I will be updating newsletter subscribers at financialsamurai.com/news. So even though things are not the way we want them to be right now, if you're a long only investor, you can look on the bright side of lower prices for things that you would like.

And that's what I'm going to do. I am focused on building my cash hoard over the next 12 months. I love saving money. You know, I talk about accumulation and spending more now that I'm 45. But I love saving for a purpose. Really, it's for the purpose. And if that purpose is to buy a move up home in one year or two years time, that feels pretty good.

It feels like ah, something to live for something to work for. It just gets me more motivated. I've lived in our quote forever home for the past two years and two months. And leaving now would have been such it would just feel stupid after two years. So if I can enjoy our current home for another one or two years, and then buy a nicer home, I think that would be great.

Because at the end of the day, I think the best time to own the nicest home you can afford is when you have the most number of heartbeats at home. So everyone, hang in there. I'd love to hear your thoughts on what you think about what the Fed is doing where the housing market is going.

Other safe havens. Leave a comment. And if you want to invest in single family homes in the heartland of America, you can go to financial samurai.com forward slash fund rise f u n d r i s e. It's my favorite platform. They're vertically integrated, and they've got their mission and their strategy down pat.

Finally, if you enjoy this episode and this podcast, I'd love a positive review, because it helps keep me going. Hearing your feedback, thoughts and perspectives is how we can all learn and how I can learn and help share more insightful information in the future. Thanks so much, everyone.