Lessons From Japan's Lost Decades | Signal or Noise Ep 21 | Charlie Bilello | Peter Mallouk

Summary

In 'Signal or Noise?' Episode 21, hosts Charlie Bilello and Peter Mallouk dive into the Great Retirement Wave phenomenon, triggered by COVID-19, leading to an unexpected surge in early retirements. They explore its financial and emotional impacts on retirees, alongside the broader economic consequences including labor shortages and shifts in wealth. The discussion also touches on the implications of technological advancements and automation on employment, the debates surrounding the federal minimum wage, and the evolving dynamics of the stock market, particularly the rise in car insurance rates and the historical significance of Amazon's inclusion in the Dow. The episode provides insightful analysis on how these trends are shaping the future of work, the economy, and investment strategies.

Takeaways

• 👥 The 'Great Retirement Wave' post-COVID has led to an unexpected increase in early retirements, with financial stability supported by a surge in net worth due to rising home and stock values.
• 💰 There's a significant emotional and mental adjustment for retirees, as many struggle with loss of identity, routine, and community after leaving the workforce.
• 🚗 The trend of rising car insurance costs, despite overall inflation slowing down, is influenced by increased repair costs, more accidents, and riskier driving behaviors post-COVID.
• 💵 The debate over the federal minimum wage increase, with some proposals suggesting a raise to $50 an hour, raises concerns about potential economic impacts and job market dynamics.
• 📈 Amazon's inclusion in the Dow Jones Industrial Average and Walgreens' exclusion reflects market performance and trends, with Amazon's late entry highlighting its substantial growth.
• 📊 The concentration of the S&P 500 in top tech companies has reached record levels, raising questions about market diversification and the potential implications for future market dynamics.
• 💻 The push towards automation in industries like fast food is accelerated by rising minimum wages, with potential long-term effects on employment and the nature of work.
• 👨‍💼 The discussion on the retirement crisis highlights the importance of social connections and activities outside of work to ensure a fulfilling retirement life.
• 🚫 The comparison between different countries' stock market concentrations illustrates the unique position of the U.S., which historically had a less concentrated market.
• 💿 The ongoing debate on the minimum wage reflects broader economic and social considerations, including the balance between government intervention and market forces.

Q & A

What is the Great Retirement Wave mentioned in the script?

The Great Retirement Wave refers to a significant trend of increased early retirements that started during COVID-19, with a notable number of people retiring earlier than predicted, contributing to a larger retired population.

How did net worth changes impact retirees' financial stability?

During the past few years, there was a substantial increase in net worth for many people due to rising home prices and stock portfolios, which has contributed to the financial stability of many new retirees.

What challenges do retirees face in terms of identity and community after retiring?

Retirees often struggle with a loss of identity, routine, and community, as many of their social connections and sense of self were tied to their work environment, making the transition to retirement challenging.

How has the trend of remote work and online trading affected the workforce?

During and post-COVID-19, the rise of remote work and online trading allowed people to earn income from home, reducing their need to return to traditional work environments, especially during periods of economic instability.

Why did Amazon's inclusion in the Dow Jones Industrial Average take so long?

Amazon's late inclusion in the Dow is likely due to the Dow's price-weighted index methodology, which could have been skewed by Amazon's high stock price until appropriate adjustments or a stock split occurred.

What implications does the change from Walgreens to Amazon in the Dow suggest about market trends?

The replacement of Walgreens by Amazon in the Dow signifies a market shift towards technology and e-commerce dominance, reflecting broader economic trends and consumer behaviors.

How do the concentration levels of top stocks in different countries compare to those in the U.S.?

The concentration levels of top stocks in the U.S. are lower compared to many other countries, indicating a more diversified market. However, there is a trend of increasing concentration within the U.S., particularly among tech giants.

What is the potential impact of a $50 minimum wage proposal on businesses and the economy?

A $50 minimum wage could lead to significant economic disruption, including business closures, increased unemployment, and higher prices, particularly affecting small businesses and entry-level job opportunities.

Why is diversification in investing highlighted as crucial in the context of Japan's historical stock market performance?

Diversification is emphasized because Japan's stock market experienced decades of stagnation after a bubble burst, illustrating the risks of concentrating investments in one market or sector and underscoring the importance of spreading out investment risks.

How does the increase in car insurance rates relate to overall economic trends and consumer behavior?

The surge in car insurance rates, despite other inflation measures cooling down, is linked to increased repair costs, more accidents, and riskier driving post-COVID, reflecting broader trends in consumer behavior and economic factors.

Outlines

00:00

🌊 The Great Retirement Wave

Episode 21 of 'Signal or Noise?' with hosts Charlie Bilello and Peter Mallouk delves into the phenomenon termed the 'Great Retirement Wave,' which saw a significant increase in early retirements post-COVID. Despite a temporary return to the workforce in 2022 due to economic pressures, the trend towards early retirement continued into 2023, with 2.7 million more retirees than anticipated. The discussion explores the financial and emotional impacts of this shift, including the surge in net worth from rising home and stock values, and the challenges of finding new identities and community post-retirement. The hosts also touch on the impact of COVID-19 relief funds and the shift in work preferences, highlighting personal anecdotes to underline the widespread nature of the retirement wave.

05:01

🔄 Adapting to Retirement: Social and Financial Aspects

This segment focuses on the social adjustments and financial implications of retirement. The conversation highlights the challenge of transitioning from work-based social networks to finding meaningful connections and activities outside the professional sphere. The hosts discuss how the dynamics of friendships change post-retirement, emphasizing the importance of having substantial social connections beyond the workplace for a fulfilling retirement. Financial aspects are also touched upon, with examples illustrating how some retirees expedited their retirement plans due to unexpected increases in net worth, mainly through real estate and investments. The dialogue underscores the nuanced impacts of retirement, extending beyond financial readiness to include psychological and social preparedness.

10:04

💰 Economic Ramifications of the Retirement Wave

The discussion shifts to the broader economic consequences of the retirement wave, particularly in the context of the insurance sector and consumer prices. The hosts examine the surge in car insurance rates, attributing it to a combination of factors such as increased repair costs, more frequent accidents post-COVID, and the resultant rise in insurance premiums. This section also explores the dramatic growth in the valuation of insurance companies like Progressive. The narrative extends to home insurance and the challenges faced by homeowners and insurers alike in adjusting to rapidly changing property values. The segment encapsulates the multifaceted impact of the retirement wave on various economic sectors, highlighting the interconnectedness of retirement trends, consumer prices, and insurance dynamics.

15:07

🚗 Innovations and Challenges in the Auto Industry

This part of the conversation delves into the auto industry's response to escalating costs and the potential for innovation to mitigate these challenges. The hosts discuss the impact of inflation and high vehicle prices on the insurance industry and speculate on the possibility of developing affordable, reliable cars as a solution to the market's current woes. The segment reflects on the broader implications of economic trends on the auto industry, including market consolidation and the effects of national disasters on insurance providers. The dialogue underscores the complexity of the auto market's current state, driven by a confluence of economic factors and the urgent need for innovative solutions.

20:10

💸 The Debate on Minimum Wage Increases

The conversation transitions to the contentious topic of minimum wage increases, with a focus on a proposal to raise the federal minimum wage to $50 an hour. The hosts critically examine the potential consequences of such a drastic increase, predicting significant economic disruption and job losses. They explore the balance between establishing a fair minimum wage and avoiding economic harm, using examples like the fast food industry in California to illustrate the real-world impacts of wage hikes. This segment offers a nuanced view of the minimum wage debate, highlighting the complexities of implementing wage policies that support workers without undermining economic stability.

25:12

🤖 Technological Advancements and Labor Market Dynamics

This segment explores the interplay between technological advancements and labor market dynamics, particularly in the context of fast food automation. The hosts discuss the potential for automation to address labor shortages and increase efficiency, while also considering the implications for employment. They reflect on historical shifts in labor due to technological progress, such as the transition from manufacturing to tech-oriented jobs, emphasizing the adaptability of the labor market. The dialogue acknowledges the challenges of automation but suggests that technological progress generally leads to a better standard of living and new job opportunities, despite temporary disruptions.

30:12

📈 Market Concentration and Investment Strategies

In this concluding segment, the hosts discuss the implications of market concentration, particularly the dominance of top companies in stock indexes like the S&P 500. They consider whether the increasing concentration is a signal or noise in the investment landscape, examining historical trends and international comparisons. The discussion covers the potential for this concentration to lead to less competitive markets and the importance of diversification in investment strategies. The dialogue closes with reflections on the methodology of stock indexes like the Dow Jones and the unpredictable nature of market movements, underscoring the complexity of making investment decisions based on market concentration trends.

Keywords

💡Great Retirement Wave

The 'Great Retirement Wave' refers to the significant increase in the number of retirees, particularly noted to have begun during the COVID-19 pandemic. This trend is highlighted in the video as a major demographic shift with implications for the labor market and economy. The script mentions an excess of 2.7 million retirees beyond predictions, emphasizing the scale of early retirements and its potential long-term impacts on workforce composition and the availability of experienced labor.

💡Financial Security

Financial Security in the context of the video pertains to the economic stability and well-being of individuals, especially retirees, who have seen a surge in net worth due to increases in home prices and stock portfolios. The discussion revolves around whether these retirees will be financially secure due to these unexpected gains, highlighting the importance of financial planning and the role of assets in ensuring a comfortable retirement.

💡Identity and Routine

Identity and Routine are discussed as significant concerns for retirees, addressing the emotional and psychological challenges of transitioning from work to retirement. The script explores how work provides a sense of purpose and a structured routine for many individuals, and retirement can lead to a loss of identity and community. This theme underscores the importance of finding new ways to create meaning and maintain social connections post-retirement.

💡Inflation

Inflation is mentioned in the context of its effects on economic conditions in 2022, influencing some retirees to re-enter the workforce. The video uses inflation as a backdrop to discuss the economic factors affecting retirement decisions and the overall financial landscape, highlighting how rising costs can impact savings and the cost of living for retirees.

💡Net Worth Surge

The 'Net Worth Surge' refers to the significant increase in individuals' net worth, driven by rising home prices and stock market gains. The video discusses how this unexpected wealth accumulation has contributed to financial security for many retirees, enabling them to retire comfortably earlier than anticipated.

💡Minimum Wage Debate

The Minimum Wage Debate is covered in the context of proposals to significantly raise the federal minimum wage, with a specific example of a suggestion to increase it to $50 per hour. This segment of the video examines the potential economic and social implications of such a policy, including its impact on employment, business operations, and living standards. It highlights the complexity of finding a balance between ensuring a livable wage and avoiding negative economic consequences.

💡Dow Jones Industrial Average

The Dow Jones Industrial Average (Dow) is discussed in relation to its methodology and the inclusion of new companies like Amazon, replacing others like Walgreens. This part of the video delves into the significance of the Dow as an economic indicator, its unique price-weighted methodology, and what changes in its composition can signal about broader market trends and the health of the economy.

💡Technology and Automation

Technology and Automation are explored in the context of their impact on the labor market and industries such as fast food. The video discusses how advancements in technology and the adoption of automation can lead to job displacement but also efficiency gains. It raises important questions about the future of work, the balance between human labor and automation, and how society adapts to these changes.

💡Market Concentration

Market Concentration is examined with regard to the S&P 500 and the dominance of the top 10 holdings, which has reached a record high. The video considers whether this concentration signals a bullish or bearish trend for the stock market and discusses the implications for investment strategy, diversification, and the potential for new market leaders to emerge.

💡Car Insurance Prices

Car Insurance Prices are highlighted in the context of their significant increase over the past year, despite overall inflation slowing down. The video addresses the factors driving up car insurance costs, such as the increased cost of repairs and maintenance, and more accidents. It also discusses how these trends affect consumers and the profitability of insurance companies, reflecting broader economic dynamics and challenges in the insurance sector.

Highlights

Discussion on the Great Retirement Wave and its impact on the workforce and economy, with 2.7 million more retirees than predicted.

Exploration of the financial stability and emotional, mental challenges faced by retirees.

Analysis of COVID-19's impact on the job market and the subsequent rise in unconventional investments like cryptocurrencies and meme stocks.

Personal stories illustrating the trend of early retirement and its effects on the job market.

Discussion on the surge in net worth for retirees due to rising home prices and stock portfolios.

Insights on the importance of social connections and relationships outside of work for a successful retirement.

Examination of the changing nature of work and its impact on retirement plans.

Discussion on the record highs of Japan's Nikkei Index and lessons from its historical financial bubble.

Analysis of skyrocketing car insurance rates and their impact on consumers and insurance companies.

Debate on the proposed $50 federal minimum wage and its economic implications.

Insights into the changing dynamics of the Dow Jones Industrial Average with Amazon's inclusion.

Discussion on the increasing concentration of the top 10 holdings in the S&P 500 and its implications.

Comparison of stock market concentration levels in different countries and their economic significance.

Analysis of the relationship between market concentration, competition, and monopoly dynamics.

Reflections on the implications of large and small cap stock performance in the US market.

Summary of the episode's key points and topics discussed.

Transcripts

(uplifting music)

- Hello, everyone, welcome back

to "Signal or Noise?" Episode 21.

Charlie Bilello here and with me, as always, Peter Mallouk.

Peter, I'm sure you've noticed this,

but it's been a big trend of late,

they're calling it the Great Retirement Wave.

And it started during COVID,

you saw a big spike in retirees.

They expected these workers to come back

and they did a little bit in 2022 when inflation was high

and the stock market was going down.

But in 2023, right back to more retirees retiring early,

they're saying there's an excess now

of 2.7 million more retirees than they predicted

using a model of just based on age.

And this spread is looking at now 20% in terms

of the population that's retired.

They expected it to be a percent or more lower.

And the interesting question here,

there's a number of interesting questions is,

are these people ever coming back?

And if you look at, I just looked at a recent poll,

and only 10% of them said they plan on maybe coming back

to work and it doesn't seem like it.

And so there's a few interesting questions.

Number one is, financially speaking,

are these people gonna be okay?

It seems to be the case that they will be

because the increase in net worth,

this was another unexpected thing, as in the past few years,

huge surge in net worth in terms of home prices,

in terms of stock portfolio.

So a lot of 'em financially seem to be okay,

and I'll let you opine on that.

But I think also the bigger question is emotionally,

mentally, are they going to be spending their time

and finding a way to replace that identity,

which, for many people, resides in what they do for work?

- You know, it's interesting, when we came out of COVID,

there was a huge shortage.

So you had massive pent up demand,

so more demand for everything.

And at the same time, you had two really big factors.

You had one group of people that were like, "Hey,

I got bailed out or I got stimulus checks" or whatever.

It didn't matter if you're a big corporation

or somebody getting by,

you usually got some kind of payment or buyout.

And so a lot of people hadn't burned through that.

They'd been trapped in their houses,

so they weren't going back to work.

Some people were trading online

and all these cryptocurrencies

and all these different speculative investments,

meme stocks, and so on, were just going through the roof.

Why go to work when you're making, you know,

hundreds or thousands of dollars every week?

That subsided, and those folks, you know,

went back into the workforce.

But there was a group of folks that were planning

to retire over the next few years

that decided just not to go back to work.

My dad was a great example of this.

He was, you know, 86 or 87,

and he was a practicing internist.

He was gonna work two more years and he said,

"You know what?

I'm just not gonna go back."

Well, that was about two million people that were,

that accelerated a permanent exit.

And that created that gap

where we just couldn't meet the needs.

So even after all the people trading came back to work,

we still couldn't meet the demand.

We finally worked through that slack

and now we see this surprising wave of retirements.

Now I don't know what the answer is,

but I think you just touched on it,

which is the amount

of wealth really surged over the last couple years.

Now in terms of real world wealth, not so much,

but on paper,

people's investments accounts have gone up since COVID.

Their home values have soared since COVID.

And so if they had a goal of, hey,

I need to get to this certain level to retire,

they might have thought that was gonna take, you know,

five years and it took three years.

Which is why I think we're seeing this next wave

of permanent retirements

as people have more home equity than they expected,

some of them are gonna go sell their home, downsize,

and retire for good.

- So financially speaking,

it seems like from running the numbers,

these people are gonna be fine.

I guess the bigger question is

what you outlined in this tweet here,

that these are the biggest concerns among retirees:

a loss of identity, a lack of routine, lack of friends,

lack of community, too much tv, financial difficulties,

which is way down on the list.

And so I guess the question is

are they prepared for this big shift?

And, I guess, are there certain steps

that people should take before

if they're considering retiring

to kind of make these less of an issue for people?

Because I guess they could always come back to work,

but I think changing that routine,

changing that identity that quickly

or earlier could have negative ramifications as well.

- Well, you know, I remember when I saw the research

around this and I tweeted about it, I was fascinated by it,

that, you know, the most concern once they're retired

is lack of identity, lack of routine, lack of friends.

And it makes me think,

like I had kids when they were leaving eighth grade

and there were, I saw some, you know,

friends that I hadn't seen in a long time.

They were people that we'd see at our kids' soccer games

and all this stuff that they did with their grade school.

And they said, oh, God,

I had to develop a whole new friend group.

You know, if your kids leave high school,

they feel like they need to develop a new friend group.

And it's really 'cause they are really good friends, right?

They're people that you are just happen

to be at the same sporting event with a lot, right?

So you get to know them a little bit.

And it's the same thing with work.

We go to work and we go, okay, well I've got my job.

I've got what whatever feelings that are positive

for my job.

I've got maybe coworkers I really enjoy

and I consider them friends,

but how many of them are really friends

that will transcend the workplace when you're gone?

So a lot of people get their brains around,

I'm gonna leave this work,

but they don't get their brains around,

but wait a second, all this connection I have,

the people I talk to in the morning

and have lunch with, at the end of the day,

how many of those relationships

really carry outside of the workforce?

And for a lot of people, the answer is not a lot.

You almost get into Aristotle's whole thing

about friendships, right?

The different levels of friendships

and the people that do well in retirement,

and there's all kinds of research around this,

are people that have social connections

of substance outside of work.

So you've got great family relationships,

great relationship with your spouse

or significant other, great relationship with your kids.

You have your own friends outta there,

the transition's very easy.

If everything, if everything about you, your friendships,

your identity, all of that is tied to work,

you're gonna be missing a lot more than your job.

And that's the thing, I think,

catches a lot of people off guard.

- Yeah, sure, so in speaking to people the last few years,

have you heard anyone say

that they were missing work?

They're coming back.

You know, they,

just the routine change

and their loss of identity,

and doing something meaningful,

which for a lot of people,

they find meaning in their work.

You can certainly find it outside of work,

but have you seen anyone say, well,

like for me, forgetting the financial part,

but for me, I need to get back and do something,

maybe not full-time, but part-time?

- Oh, I've seen, I can't tell you how many.

Maybe it's 20% of clients, you know,

that go back to work or,

and their retirement is not

what they thought it was gonna be, and they pivot big time.

So I would say it's very, very, very common.

Now it's still a huge, a, a very big majority that's,

you know, perfectly happy being retired.

They get through whatever they need to get through

and then they live very happy lives in retirement,

but that shift is very, very, very tough shift.

It can be like a death, right?

It's just a radical shift in your day to day.

- Yeah, like personally, I love what I do.

I can't imagine ever retiring,

but for yourself, do you ever think about

what would you do outside, let's say?

- Oh, I would never, I mean, no,

I will always in some capacity,

I just enjoy it way too much.

Always in some capacity be involved with, you know,

financial advice, always.

- Right, and you could shift,

I guess, the day-to-day in terms of

what you're doing, but yeah.

- But we're blessed to be in a profession

where you can do that.

Like remember my father-in-law was a urologist.

He loved practicing medicine.

But urology, you can't just decide

to do it three days a week, right?

You can't just decide to do the certain things you like.

The cost of insurance and running it out,

the baseline overhead is so significant.

You have to be, you're all in or you're out, right?

And a lot of professions are like that,

where you can't really just ease your way

and do things the way you like.

- Yeah, and not to mention there's physical aspects as well.

I know you're using a standing desk,

so that's somewhat physical but

(Charlie laughing) (Peter laughing)

compared to a lot of jobs out there-

- Yeah, that's right.

- We have it pretty easy.

Okay, let's talk about Japan back at an all-time high.

First time since 1989, so over 34 years.

Pretty incredible, Nikkei peaked December, 1989,

one of the biggest bubbles in financial history.

It thereafter declined 82%.

Didn't bottom until October, 2008.

It was pretty remarkable.

Forget about lost decade,

you're talking about lost decades in Japan

in terms of in investing.

Now has rallied 459%,

the Nikkei back to a new all time high.

A lot of lessons here and I'll give you my biggest takeaway

because this is,

whenever I post some chart about long-term performance

in investing and portfolios, the number one comment,

and without fail, I can predict it.

And this is the only time I ever really look at comments,

because I love to see it, they say,

now show Japan, or what about Japan?

And what they're essentially saying

by commenting that way is saying investing,

you shouldn't invest,

because there might be a scenario like Japan

where you go decades without hitting a new all-time high.

And I obviously don't respond to those comments,

but if I were, what I would say is the answer in terms

of Japan, the answer for investors

if they're facing something similar in terms

of an enormous bubble,

is definitely not don't invest.

It's to diversify

and to diversify away from that unique bubble that we saw.

And if we look at the,

I just compared the CAPE ratios here

between Japan and the US back at that 1989 peak,

'78 was the CAPE ratio for Japan.

Just an enormous, enormous valuation.

US was trading at a CAPE ratio of 18 at the same time.

During the dot-com bubble peak,

we hit 47 in terms of the US.

Today actually, Japan is cheaper than the US

in terms of this CAPE ratio.

But for me, that's the number one takeaway

that had investors in Japan

not succumb to home bias and not said,

this is the best performing market.

I want everything here and just invested internationally.

Look at the US performance since December, 1989,

up 10.4% per year, 2,800% return.

And there's other takeaways as well.

But for me, number one for investors

is when you see a bubble,

don't view that as a reason not to invest at all.

View it as a reason to spread your bets.

- 100%, I think it's a case study of home bias,

because the way you have to look at it is

there's basically the category

of owning things and lending things.

And you look at the category of owning,

the number one way to do that is public equities.

There's equities in different industries.

You shouldn't all be in one industry.

There's in different market caps, small and large,

you shouldn't be all in one segment.

And there's companies in different countries

and you shouldn't be all in one country.

And there are many examples, not just Japan,

many examples of for decades,

a country or an industry

or a size segment underperforming

for a incredibly long period of time,

but the global portfolio, that's always worked out, right?

So it's, to your point,

it's the argument for diversification and being an owner.

- Right, you're spreading your bet to instead

of betting on one sector or one country or one industry

or one person, you're just betting on

the world being better 20 years from now.

And I think that was a pretty good bet back in 1989

and it's still a pretty good bet today.

All right, let's talk about skyrocketing car insurance.

You probably noticed anyone who's watching this

or listening has probably noticed,

I noticed, I got my GEICO renewal, jumped significantly.

I said, "Is this for real?"

I called them, it's for real.

It's happening everywhere.

Even though inflation has come down,

we're looking at CPI now of 3.1%.

So getting closer and closer to that 2% Fed target,

core CPI's down to 3.9%

and they're expected to continue to go down,

even though many areas have calmed down in terms

of inflation, car insurance not one of them,

up 20.6% over the past year.

That's the biggest increase, Peter,

we've seen since the 1970s in terms of year over year.

Number of reasons driving that.

Obviously increased cost

in terms of repairs and maintenance.

There's actually been more accidents

over the past few years.

People are driving riskier since COVID.

That's a whole fascinating thing in and of itself.

But put these all together,

it's leading to increasing repairs,

increasing auto insurance prices.

And I just pulled this, over the last 10 years,

85% increase in auto insurance prices versus 31%

for overall consumer prices.

And if you look at repairs

and maintenance, obviously if you've taken your car in

for repairs, you've probably noticed that, you know,

anything from getting your brakes done

or even minimal things has really skyrocketed in price.

Who's benefiting from this?

We showed this with health insurance recently,

but same trend in terms of car insurer.

Progressive, largest publicly traded car insurer in the US,

up 881% over the last 10 years versus 227%

for the S&P 500.

What do you make of all this, Peter?

And I know at Creative planning, we do a lot with insurance.

It's not just about asset management,

especially if you have a lot of different assets,

you have a couple of cars, you have homes,

insurance is a big part of that.

And we've seen insurance on homes, on autos, on healthcare,

everything really skyrocketed.

And so how do you deal with that?

How do you find time?

It's actually become a way to add,

I say, insurance alpha as opposed to investment alpha just

by shopping this around.

- Yeah, I mean, it's incredible what's happening

in the insurance space.

It probably more now than any time in my career,

I'm hearing clients go, "What is going on,

you know, with all of these things?

And part of it's just this huge boon of inflation

that really hit houses and cars in a big way.

Also cars, like if even if you're driving a $10,000 car,

if you get in a wreck, the odds you're hitting a $50,000 car

are higher than ever today.

Just cars have gotten so ridiculously expensive.

I keep waiting for somebody to invent a reliable,

safe, inexpensive car.

This feels like something that can be invented

and that would just overtake the market.

I don't know what the deal is there,

but that perfect confluence

of factors has really just shaken up the market.

We also are seeing fewer players too,

as more and more carriers are consolidating

and some are leaving the market, national catastrophes,

you know, all over,

hurricanes, deep freezes,

fires, all of these things have really driven a lot of,

have gotten rid of a lot of competitors

and a lot of consolidation.

And so you're seeing, you know,

an oligarchy develop with more expensive cars than homes

and you put all these things together

and it's created a perfect storm

where rates have just really rocketed.

- Yeah, and I remember during 2020,

they sent you like a little rebate,

like car insurance company,

because you weren't driving your car and, all right,

that was nice.

I appreciated that.

But it seems like the increases since then

have more than made up for that.

And a lot of this is cyclical, right?

You know, you see when there's a big loss in terms

of insurance companies,

then the insurers get out of the market,

get out of the business,

that drives up premiums.

And then if the opposite we're seeing today

with these big increases is probably going

to be more competition come in and drive it down.

It's a unique area,

because it's obviously regulated by states.

They have to ask the states to approve price increases.

And I guess they're proving that they need to.

I guess the big question in terms of homes,

in terms of prices, car prices, as you said,

if they're not coming back down,

the insurance costs have to go up.

If you wanna insure that house that was a million dollars

and now it's $2 million just a few years later,

well, if you wanna replace that home,

God forbid there's a fire or something else, well,

you're gonna have to pay more, right?

For that, and that part might not change, right?

- Yeah. Yep, that's exactly right.

It's just become a lot tougher.

- Yeah, so if you're thinking about insurance,

Creative Planning here to help.

Now over 300 billion now, Peter,

we crossed the 300 billion mark in assets under management

and advisement, reach out.

I'll have a link in the show notes.

We're here to help with, not just investments,

but insurance, tax, estate planning,

everything else as well.

So minimum wage, Peter, this is a big topic

and we gotta have a good discussion about this,

but federal minimum wage, I think, it's 7.25.

Different states have higher levels.

California got a lot

of attention last year raising the minimum wage

for certain groups, just fast food workers,

and I think some healthcare workers.

I think fast food was to $20 an hour.

But in the Senate race that's going on there,

Representative Barbara Lee is pushing to increase that,

not just within California.

She's saying the federal minimum wage should be lifted

from 7.25 to $50 an hour.

And I just read a couple of her comments.

She said she used to be a business owner

and she understands that this might be difficult,

but the costs are so high to live in California

that they need to raise the minimum wage

so people can afford to live there.

And $50 in her mind,

which equates to a little over 100,000 a year

in terms of (chuckles) entry-level salary,

I guess would be, in my mind,

a lot of different ramifications from this.

Before I dig into my opinion on this,

what do you make of a $50 minimum wage federally

for every state being required to pay entry-level employees,

everyone from a high school worker all the way

on up to $50 at a minimum?

- I mean, the minimum wage debate's a very legitimate debate

and I'm a personal believer there should be a floor, right?

There should be, I mean,

but, I mean, $50 an hour, this is like,

it's not even economics 101.

It's before you get to economics 101.

I mean, an eighth grader would know

that if you had a $50 minimum wage,

that a lot of businesses would be closed instantly.

I mean, they wouldn't even have to run the math

on whether they should close or not.

And so that would ultimately be terrible

for the type of people we're trying,

that this would theoretically be helping, right?

And so the key is to have

a minimum wage that makes sense,

but not one that creates massive economic harm.

You know, anytime you raise the minimum wage,

there will be businesses that have to make changes

and some business will have to close.

And we can have, you know, a legitimate debate about

where that line is, where should the minimum wage be?

How much help are we helping one group

at the expense of another?

And you make, you know,

the best decision of where it should be.

This is a line where it would just create

an enormous amount of catastrophe with probably zero help,

you know, when you really got done

with how it would all shake out.

What's your take?

- Yeah, so we've seen a little bit of,

in terms of what would happen.

You know, so theoretically,

you and I learned, right, in economics 101,

you raise the minimum wage, well,

demand for that job's gonna go up, supply's gonna go down,

and that gap's gonna lead to higher level unemployment.

Now a little bit of an increase of $1 increase,

you might not notice anything, right?

And we could debate that,

but to jump it from,

you know, where it is today to $50, without a question,

you would see an increase in unemployment.

The argument that minimum wage proponents make often

is that, well, yes,

you might see a little bit,

but for the people who still have their jobs,

that's gonna be great.

The problem is that (chuckles)

all of the people that are benefiting

from getting that entry-level job,

you're eliminating that, right?

You're assuming that everyone is stuck

at that minimum wage forever,

which we know isn't the case.

Everyone starts out at the bottom

and most people move their way up from there.

It's not meant to be,

the minimum wage isn't meant to be permanent,

isn't meant to be something

where you're supporting a family on.

It's supposed to be something where

the employer can train you at that level, right?

And still get a return for that.

And it's supposed to be a reflection of your skill level.

So if you have no skills and you're high school student,

you want a part-time job

and you wanna get into the labor force

and learn, well, what do you expect them to pay you?

They should be paying you what that value is.

And as you learn and as you increase your productivity,

well, then you should be paid more.

To me that's common sense.

And so we've seen what

it's done so far in terms

of moving to $20 an hour for fast food workers.

And to me,

the idea that they should just pick certain industries

and set the minimum there, that doesn't make any sense.

Why is the fast food industry more important

than other industries?

To me that doesn't make any sense.

But they increased it to $20 an hour in California

for fast food companies.

And what did Pizza Hut do?

They laid off all of their delivery drivers, right?

They said, well,

we can't run a business model paying this much

for these drivers, so we're just gonna eliminate that.

And some people would say, okay, that's great.

You know, the other people

that are still at Pizza Hut are making $20 an hour.

But so those people who lost their job, you know,

that's a difficult position to be in.

And now the subsidy ends up coming

from the federal government, right?

Or the state government to pay for that person

who doesn't have a job.

They have to pay for either welfare

or, you know, obviously unemployment.

You're paying in many other different ways.

So to me, the $50 an hour thing

is obviously ridiculous.

She's defending it.

Actually they pushed her on it.

Do you really mean 50? Yes, she does.

But the other crazy thing, Peter,

is that you're saying

that you're helping the lowest income consumers,

but guess what you're doing in terms

of if, let's say a business is forced

to pay this higher than market wage,

well, they're gonna at least try to,

they may not be successful,

but they'll at least try to pass that on to the consumer.

So a big part of food, especially eating food away

from home and restaurants,

the big part of the increases in the past few years

has been due to that wage increase.

And California's not alone.

New York and other states have done big increases as well.

And that's driven up the cost of things.

I don't know if you saw this.

This was in the McDonald's earnings call a couple weeks ago.

The CEO said that they're losing their low-income customers.

They're saying they essentially have stopped ordering there

because it's becoming too expensive for them,

where Big Mac, fries, and a drink has risen to $18

at a handful of locations,

which is absolutely insane.

It used to be a place you could get

a quick cheap meal, no longer.

Now to me, like $18,

I can get that at some restaurants, right?

And you have servers and have, to me,

a much better burger, so,

(Peter laughing) (Charlie laughing)

I don't know if you're a McDonald's guy,

but isn't this part of the problem

with setting these higher,

like the government essentially deciding,

this is what the wage should be regardless of market forces?

- I still think there needs to be some minimum wage

and there's a lot of other things coming

into this McDonald's math, like the higher cost of fuel,

the higher cost, primarily, of food,

and everything that goes into that meal on top of labor.

I do think that some of this solves itself.

Like at McDonald's, you go to McDonald's,

there's people that do everything from take your order

to make your meals, put it in the drive-through,

take your order in the drive-through.

And we're already seeing in a lot of McDonald's,

you walk in and you're at a kiosk instead

of someone taking your order.

If you go to the drive-through,

it might be AI or someone from another country, you know,

taking your order at some fast food places.

I think we're gonna see some of the food, not all of it.

I think we're a lot further out than people think.

In fact, talking to some clients that run places,

like McDonald's and others,

that some of it will be automated, but not all.

Taco Bell's coming out with a fully automated store.

I'm not sure how that's going to work,

but that's coming out, right?

So I think some of that's gonna solve itself.

You'll have less people

and those people that are working

will be making more.

But there is that cutoff-

- Isn't that the argument though,

that it's gonna increase automation

and increase like unemployment

and speed up that difficult transition, you know,

by creating this higher wage?

- Well, I think we always hear that.

You know, like if you think about all the advances

with technology, whether it's all the automation,

you know, one in two of us was in manufacturing in the 1950s

and now it's 1 in 10, but we manufacture more,

and the unemployment's lower now than it was then, right?

There used to be 50% of us were,

or 90% of us were in farming about 130 years ago.

You know, now it's just a couple percent.

They have more production

and the unemployment rate's lower than it's ever been.

So we tend to advance and people wind up with better jobs

and the unemployment rate miraculously stays low.

Although there are short periods of time.

You see that in Michigan, Ohio, places like that,

where industrial really got hit.

The overall unemployment rates stayed low,

the jobs went to the tech sector,

but you have kind of a mini depression

in one part of the country.

Another part of the country's doing well

and that has all kinds of implications

that are not positive,

but in general, it tends to work,

technological advances, they tend to work out for everybody.

They tend to lower the cost of goods

and people have a better lifestyle.

- Yeah, no question, but for now, it seems like, yeah,

when you go into a McDonald's today,

there's very few people to take your order.

You gotta use those machines, which I'm not a big fan of,

but McDonald's hasn't lowered the prices.

They've increased the prices.

They've maintained pretty fat profit margins from it.

And the crazy thing to me

is that McDonald's trades at a price-to-sales ratio

of more than three times the S&P 500.

So I guess investors, to me, this is somewhat irrational,

but they seem to be betting

that this isn't gonna hurt McDonald's.

These higher prices are either here to stay

or consumers are going to

have continued demand or automation is going

to drive an increase in sales and profits.

But to me, that was the most fascinating thing,

just seeing the fact that McDonald's has not only been able

to keep its market multiple,

it's been able to exceed it by 3x.

And in the past few years with the increases in prices,

they've increased their multiple hugely, hugely.

But I think coming back to the minimum wage thing,

I think the other question that really has

to be answered is you're,

like in terms of the balance

between government and business, right?

There has to be some relationship reflected in that price

because let's say there was no minimum wage at all

and the company was able to pay whatever they want.

When you have government services that depend on income

for those services, like healthcare,

well, now you could have a situation where the government

is subsidizing that corporate employer, right?

So it is very complicated.

Like my personal belief is

that the market should determine the wage,

because who would be better than a business to say

what the value of that is?

And if people were being underpaid

or exploited, they would move to that other business,

so it wouldn't be profitable for very long for a company

to underpay versus the market in terms of the wage

because the people would leave,

they wouldn't get very good employees.

So it would all work itself out,

but I understand the argument in the sense

that if there was no minimum,

perhaps the employers are gonna be piggybacking off

of the government, essentially not offering them healthcare

would be one example,

and then the government, they're making such a low wage

that the government would then be paying for it.

- Yeah, this is one we have a slight disagreement on,

but, you know,

this is a debate that we would have all the time

after a few drinks around the kitchen table.

I mean, the whole idea around

should it be a totally free market or not?

You and I probably disagree, that probably carries over

in a few different areas too.

But I think having some floor, some floor,

some standard that you could have more benefits than-

- But we could agree, the floor should be based on reality,

not just picking that- - Yeah. Not 50.

Yeah, not, yeah. - $50, right.

And there might be unintended consequences.

Like I love the idea

that everyone can make more money,

but if you're pushing out entry-level workers

and their ability to get training

and to get started, that might not be a good thing.

And like we've seen what China's problems

with youth unemployment there,

we definitely don't wanna have that situation here.

And in terms of putting in these price controls,

that is a risk, that is an unintended consequence.

It's not a risk if you're increasing it

from 7 to $8, let's be clear.

But to go from $20, which is already high

for a lot of these entry-level jobs to 50,

I think that would be crazy,

especially for small businesses, right?

And she claims that she was a small business owner.

I don't know how any small business owner

could operate under that model.

Okay, so let's talk about the Dow here, Peter.

Big news, Amazon is in, Walgreens is out.

It's kind of surprising it took Amazon

to get in there this long.

It only increased 178,000%

since its IPO in May, 1997 before the committee

who picks the companies in the Dow said, all right,

I think it's time.

Let's let Amazon in and Walgreens, of course,

being pushed out.

Why is it being pushed out?

Well, they're always being pushed out,

because they're not performing.

Walgreens, since it was put into the Dow,

down 58%, was put in in 2018.

It replaced GE and somewhat not surprising,

'cause this tends to happen,

GE actually did much better than Walgreens

over this period of time and actually outperformed

the Dow's up 86% over that period of time.

What do you make of this change

and then we'll dig into the Dow

and the crazy methodology that it uses.

- I mean, it is interesting.

GE did really terrible, got kicked out, did well,

Walgreens did well, got put in, did terrible,

and Amazon's done great.

Now it's put in, we'll see how it does going forward.

But at the end of the day,

the Dow, you wind up with 30 of the biggest stocks

in the United States.

That's enough to be diversified.

And despite having

a very different methodology than the S&P 500,

essentially gets to pretty close

to the same place over time,

- Which is kind of amazing, isn't it?

That it's just using the price, which is 101,

investing 101, the price doesn't mean anything, right?

It depends on the number of shares, right?

And a company can split,

which Walmart is actually splitting.

I think this week, it's 3% weight is be reduced

because of that in the Dow.

And that seems asinine, it seems crazy.

Like UnitedHealth is the biggest company

in the Dow at 9%.

Much bigger than Apple's weighting at 3%.

That doesn't make a lot of economic sense.

But when you look at the actual return of the Dow compared

to the S&P 500, highly, highly correlated,

well over 90% correlation.

And the Dow ETF started in January, 1998,

and it's actually outperformed the S&P 500

over that period of time.

I would not have guessed this, kind of remarkable,

kind of proves that kind of monkey throwing darts

and if you've picked 30 stocks,

you might be able to do just

as well as the index and especially

if they're the 30 largest.

- Yeah, and these are both, I mean,

just for some of our listeners, these are both US indexes,

large cap stocks, right?

So when you own the Dow,

you're getting 30 of the biggest stocks

in the United States,

S&P 500, 500 of the biggest.

But that shows how correlated

the overall large cap US market is over time

if you owned a basket of securities.

- Right, yeah, just remarkable to me the price thing,

because you could think

of almost anything else looking at revenues or net income,

anything else that you probably

could weight these companies based on

other than price, that would make sense,

but yet they're sticking to the share price.

I mean, I guess one day,

maybe they'll consider putting

Berkshire Hathaway Class A shares

and then that'll just become the entire Dow

in terms of its price.

(Charlie chuckling)

Okay, speaking of big cap and speaking of tech,

signal or noise here, Peter?

Is it a story that just continues,

because the magnificent seven,

dominated this year by NVIDIA and Meta,

but continues to drive

these top 10 holdings' percentage higher.

We're now at 32.5%

for the top 10 holdings in the S&P 500.

That's a record high. We've got data going back to 1980.

What do you make of this? Is this a signal or just noise?

- I have no idea.

I think it doesn't matter at all.

I'll be curious to see what your data says on this, Charlie.

- So the data doesn't suggest

that this is necessarily a bearish signal.

Now we have not a huge sample here,

we're only going back to 1980,

but we've had a few interesting time periods, right?

So you could see in the early 1980s,

this was very high and there was a little bear market,

but very quickly it recovered

and you had enormous returns during the 1980s.

And if you look at the second peak there in 1999,

25.5%, well, then people would point to that and say,

well, maybe that was a signal there,

because we had a decade of no returns

for the S&P 500 following that.

But recently we've exceeded those by a wide margin, right?

Which is A, to show you that there's no threshold,

there's no peak to this.

It could get more and more concentrated

and we're now well over 30%.

So the way I look at it,

in terms of predicting how the overall stock market will do,

let's say going forward, probably not a great predictor,

but I think it's another reflection of that relationship

between large caps

and small caps that we've been talking about that is very,

very stretched, right?

So I would not be surprised if we saw something similar.

We saw in the 1980s,

small cap outperformance following this peak.

1999 peak, we saw a small cap outperformance.

And perhaps we keep saying it, perhaps it's coming,

we're going to see the average stock start to outperform

over the next decade.

And we don't know what the threshold is

and there may not be a threshold

if we look at international,

and this is something interesting that I pulled, Peter,

here, this is the 15 largest stock markets around the world.

Well, the US compared to pretty much every other one,

except for Japan,

is less concentrated than these other markets.

You look at Ireland, the top 10 stocks there,

80% of the MCI Index.

Switzerland, 67%, UK's at 49%.

So there's nothing to suggest this can't go higher.

I think just historically,

we always had the US as the least concentrated,

most diversified economy, makes sense,

most diversified in terms of sectors and businesses.

So it makes sense that it would be lower,

but could this go to 40% perhaps at some point in time?

I guess it comes back to, you know,

that same question that we have in terms

of the valuations of big tech that's driving this,

are they gonna be sustainable

or are there gonna be new leaders

that we're not thinking of?

- Yeah, I mean, looking at some of these too,

I mean, there's a story behind the story of the graph,

which like Ireland, I mean,

comparing Ireland to the US,

Ireland would be comparable to like Cincinnati, right?

- Yeah. - and Switzerland to Boston

and, you know, these are pretty small economies

and so it's not surprising.

It's like saying, hey, there's, you know,

10 stocks dominate Cleveland, Ohio,

or 10 stocks dominate Orlando, Florida.

And that's not surprising.

I think in the United States,

some of these are very comparable:

India, China, and so on.

And so I think it could go higher,

but if it got anywhere near some of these countries,

it'd be very, very alarming.

- Yeah, no question.

Well, it would just mean

that competition isn't there.

It's coming back, right?

So that the same question, right?

If there's a business that's doing that well,

either it's A, becoming a monopoly, or B,

there's some type of barrier to entry

that's preventing competitive forces from coming in.

So I think all else equal, if you had to choose,

you would say it's better for this to be lower.

You would want a more diversified market,

but certainly not a signal, outright sell signal saying, oh,

if it hits 30%, oh, that means the market's going to crash.

I think it'll be interesting looking back 10 years from now

if this is a signal in terms of large

and small cap US stocks.

All right, we'll leave it there.

I covered a lot of ground today.

Thanks, everyone, for joining us.

If you're watching this on YouTube,

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And we'll see you next time on "Signal or Noise?"

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