VALUE: After Hours (S07 E25): Nick Maggiulli @dollarsanddata on the new economic classes in the US and The Wealth Ladder

Transcript

Tobias: I think we’re live. It’s always hard to tell. What a great.

What a great intro.

Jake: Strong start.

Tobias: Toby, it’s after hours.

Nick: That’s what you said on the other pod. You said, I think we’re live. Every podcast starts the same.

Jake: I’m Ron Burgundy.

Tobias: All right, fellas. I’m Tobias Carlisle. This is Value After Hours, joined as always by Jake Taylor.

Special guest today is Nick

Maggiulli. Nikki Numbers. What’s up?

—

The Wealth Ladder Framework

Nick: What’s up? Thanks for having me on, guys. Appreciate it.

Tobias: Pleasure. Long time no see. Where Nick’s got a new book out, it’s the Wealth Effect.

And my copy, which came from nick, had a $2 note in the front.

Jake: Oh, I love it.

Tobias: Which I love, too.

Jake: Great touch.

Tobias: Yes.

Nick: The Wealth Ladder. We all have them, and I’ve sent out the $2 bills and everything, so.

Tobias: I thought it was going to be like that you know that scene from Not Training Day. What’s the Draft Day?

Nick: Oh, I haven’t seen that. Oh, where they tape the money back.

Tobias: The money to the back. See what they read it. Yeah.

Only one guy sent the money back.

Nick: That’s funny.

Tobias: Tell us a little bit about The Wealth Ladder. Tell us a little bit about how it’s what you had left unsaid after. Just keep buying.

Nick: So just keep buying. Which is a very investment heavy book. I kind of put it forth as, like, hey, if I don’t know anything about you, here’s my answer on how to build wealth.

Right. Just keep buying a diverse set of income producing assets. And it’s a good answer.

It’s good for most people, especially in the States. Right. You know, but I realized it was a little bit flawed in the sense of it doesn’t cover everyone.

For someone who’s, like, deeply in debt, it’s not the right solution. For someone who’s trying to get to you know, 10 million plus in wealth or something like that, just buying the s and P500 and having a good job, you’re just not going to get there without some extreme circumstance like you invested for 60 years or something like, you’re just not going to get there. The compounding won’t move quickly enough.

So I realized that it was flawed. And so I said, what if I could zoom out a little bit and find a larger overarching framework that kind of answers all these wealth building questions? And I came up with the Wealth Ladder, which takes net worth and it breaks it into six distinct levels, and based on which level you’re in the strategy to get to the next level and like the things to avoid change.

And so it’s just like a very high arching, you know, money book and wealth building book. And so my, my goal with this was instead of providing a one size fits all solution, like just keep buying, which I’m still very proud of. There’s nothing wrong with that.

Just keep buying is just one of the strategies on the wealth ladder. And so you can take any financial book, you know, and it’s going to sit somewhere on the wealth ladder. All of them sit there and they’re all talking to a certain type of person or a certain kind of level on the wealth ladder.

I don’t say rung because I don’t think rung sounds as good. So I’ve abandoned the word rung on the ladder. But yeah, and so I’ll go through the six levels very briefly and then we can kind of dig into that.

Tobias: Before you do it, I saw that there was a, the I think that your levels got tweeted around yesterday with people debating those levels. So I think it’s kind of interesting. Like, let’s, let’s split.

Nick: Yeah, yeah, yeah. So I I, I tweeted a screenshot from the book and I said, these are the new economic classes in the United States. And it like, a lot of people liked it, but a lot of people said it’s crazy.

And they’re both kind of right. And I can get into that. So let’s, let’s go through the levels.

Yeah, it’s, that’s kind of I, I knew it was gonna kind of do well. I didn’t think it was gonna do that well. I got like 2 million impressions, so it even did better than I thought.

So the six levels are once again, this is net worth. So all your assets minus all your liabilities. Level one is less than $10,000.

Level two is 10,000 to $100,000. Level three is 100,000 to a million dollars. Level four is 1 million to 10 million.

Level five is 10 million to 100 million. And lastly level six is over $100 million. Now just to tell you how that breaks out in the U.S.

in terms of U.S. household wealth, there’s about 20% of people in level one, that’s less than 10,000. 20% are in level two.

That’s 10,000 to 100,000. About 40% are in level three. That’s 100,000 to a million.

18 roughly are in level four. That’s about 1 to 10 million. And then the last 2% are in level five and six.

With most of those being in level five. There’s less than, like, I think there’s like 11,000 households in the level six, which is 100 million plus. There’s a very long tail here.

But the tweet that got me in a lot of trouble was I said, okay, all these levels map to economic classes. So it was like lower classes. Level one, working class is level two, level three, which is 100,000 to a million.

I said it was middle class. And then I said, 1 million to 10 million is upper middle class. And then I said, you know, 10 million to 100 million is upper class.

And so obviously, you know, there are some fair pushback. Like you’re saying $8 million in Alabama’s upper middle class. Like, no, of course not.

Right. But I wanted to make it location agnostic in the sense of, like, if you have $8 million and you’re in New York City, you have a fantastic life, but you still don’t have that life that I think the upper class has in the sense of you probably aren’t flying private. And if you are, maybe you do it like once every few years, if that.

Right. You’re probably, you know, you probably don’t have a driver maybe. I mean, there’s a bunch of things that you’re probably not doing that someone that with 10 million-plus could do.

And so I think just realizing that the consumption patterns are a little bit different. And of course, someone with 8 million is very different than someone with $2 million. But, like, they’re more similar than you would think.

And so I think someone with 2 million can look at someone with 8 millions life and recognize the lifestyle, I think, past, you know, as you start to get deeper and deeper into level 5, 10 million, 12 plus. I don’t think they recognize the lifestyle as much anymore. And so that’s where I tried to divide these.

And of course, it’s not perfect. Like, we can make debates. I mean, with home equity prices being higher, there are people that are, quote, upper middle class who are like 65 years old with, you know, $400,000 in home equity and maybe $700,000 in a portfolio.

And that’s like, yeah, is that upper middle class? I’d still say so, but we can. We can get in debates about the particulars.

I’m just trying to come up with a framework that fits the data pretty well. It’s easy to memorize. It does all these things.

And I just happen to come up with something that I think works quite well and people seem to like it so far. But of course there’s. There’s going to be pushback for that stuff.

Tobias: It seems like a pretty good. I mean, just by the percentage it’s got in, it sounds pretty reasonable. I got a question for you.

The. Charlie Munger used to say the first hundred thousand is the hardest or the first hundred thousand is a bitch. And then I guess that most people think it’s like the first million is the hardest.

I don’t know if anybody particularly has said that. And then Boone Pickens, of course, said the first billion is the hardest.

Nick: That was probably right, but Boone is. Yeah, Boone’s the most accurate, I think. I don’t know.

When Charlie Munger said the first hundred thousand is the hardest, it was probably 20 years, I’m guessing, in like. Oh, he’s only 20 years ago.

Tobias: I would guess like, maybe it’s not that long ago. It was more recently. He’s always.

Nick: But when he’s. When he said it. So let’s say he said it in, let’s say 2000, right.

Or 2005. So, you know, inflation’s basically doubled that. So 100,000, that would be about 200,000.

Now, there’s one thing that he said it then, but maybe he’s saying it as like a memory, like when he got his first hundred thousand. So maybe that’s like a million today. Right.

If you go back far enough, you can think with all the inflation adjustments, I think it’s very likely that inflation, if you inflation adjust that statement, it’s the first million is the hardest. That’s what I would say. Of course, I don’t actually know what he thinks about that.

And it’s just fun. Millionaire stats. So, you know, Millionaire became very popular on the turn of the Century, 2000, because the show who Wants to Be a Millionaire Came on right around that time.

That was like a big thing. On becoming a millionaire today, you need about $2 million to have to have purchasing power as a millionaire. But here’s actually the bigger.

The bigger change because this level four, which is 1 to 10 million, that cohort, inflation adjusted, is now roughly said 18% of the U.S. back in 1989. And once again, inflation adjusted, it was about 7% of the U.S.

so it’s a much bigger group now. And so to have the. In 2000, if you had a million dollars, you were in like the top 7% net worth.

You’re in the top 7% of U.S. households today. For you to be in the top 7% or at least in 2022, 2023, it was about $4 million.

So even though like purchasing power is doubled, there’s also so much more wealth at the top end that like, for you to be, to have the same relative, you know, strength or relative purchasing power, you’d have to have $4 million. So I think that’s also contributing to some of the angst around the middle class and upper middle class especially because it’s like, oh, you know, I have $4 million and like that’s great. I think those people are doing fine, you know, but you know, where you really start to see big consumption changes I think happen a little bit after that.

Jake: You’re saying we need to raise rates.

Nick: I don’t. This is a great question about like, is there too much wealth? Even like this, this other tweets going around or this like data that’s like, oh, in 2001, like the people over 55 years old used to own 50% of the wealth and now they own 70% of the wealth is getting very popular.

My counter to that, like, yes, that is, I don’t debate that. That’s true. I think there’s two things that are kind of inflating it a little bit.

It’s like paper gains. One is housing. Like the housing market is not healthy right now because houses aren’t moving right rates where they are, that all that stock, that’s a bunch of wealth, you know, on paper that looks really good.

But if all those houses were actually moving like in the prices were really kind of equilibrating that would drop a lot. And I bet that 70% figure is quite a bit lower. I bet, I don’t think it’s like 60%, but I bet it’s like closer to 65 or it’s a bit lower.

So it obviously has increased. But I don’t think it’s as bad as people think because there’s paper gains in equity, I’m sorry, in home equity and then also in stocks as well. I think people are arguing, I mean this is the value podcast.

You guys are like, what the hell’s going on? This stuff seems crazy. I’m looking at all this stuff.

I was just on the podcast TCAF with with Josh and Michael and we were talking about, you know, is, is the meme stock era back, the open door stuff, all this, you know, non profitable tech companies, more retail investors are buying. There’s a lot of this stuff going around that I think is Contributing to these this paper.

Tobias: Wealth.

Jake: Yeah. So what’s, how much, what’s the real wealth? If you take s and P500 from 22 or 23 back to 15.

Long term, is everyone as rich as they thought they were?

Tobias: Yeah. Plus housing seems to be. Median house price relative to median income is about as stretched as it’s ever been.

Nick: Yeah, I don’t know how it makes sense. How does it has to break at some point or. I don’t know.

Or does it just not keep going up and it just kind of fizzles out through inflation over time? Maybe it’s a long kind of sizzle instead of a, a massive, you know, crash or something.

Tobias: It seems to be like. I think it’s already starting to move back towards closer to the mean. I think it’s.

It was, the peak was a few months ago and it seems to be coming back. But a few months is like still. There’s some seasonal effects and other things going on in there.

Jake: How many, how many head fakes have you had at this point though, Toby?

Nick: I know.

Tobias: In terms of like this is, this is just house prices relative to incomes. I mean on the other side, value relative to the index, about as bad as it’s ever been. Yeah, I like there’s a good comment here from Brian.

There’s only two levels. One, own a home or have a 3% mortgage to everybody else.

Nick: Yeah, that’s so funny.

Tobias: I got a question here from the from Tyler Farris, who’s our unofficial producer. Does Nick have any data around whether it’s easier or harder to move between the levels now when compared to the past?

Jake: That’s A good question. Social mobility.

Nick: That’s a great question. So the, so the data I use for that there’s something called the Panel Study of Income Dynamics comes from the University of Michigan. And so most of the wealth data we use and people talk about publicly is the Survey of Consumer Finances, which is by the Fed.

And what they do is they take a snapshot every three years and so they’re looking at different households and they’re getting a good idea of aggregate wealth. But they’re not following households over time, unfortunately. So with the PSID from Michigan, I was able to follow households over time.

And I do have, in chapter 10 in the book I have all these matrices of like, if you’re in level one today, what. The probability you’re going to be in Level 1 ten years from now or the probability you’re going to be in. And of course that’s historical data.

I, I can’t say anything about you specifically. This is just saying, you know, X percent of people that were in level one or level three, you know, and this year, 20 years later, when we looked again, they were in this level.

Right.

Nick: So it just gives you an idea about mobility and how likely are to move up the ladder to fall down, etc, which is very interesting. I haven’t broken that out by time. Like let’s look at from 1984 because that’s where the data starts from 1984 to 2021, basically.

I haven’t said let’s look from 1984 to 1994 and then compare that to the 10 years from, you know, 2011 to 2021. I mean we could do that. That’s actually an interesting idea.

But I haven’t done that to see if mobility is better or worse. I think people would argue it’s worse. I mean even though real inflation adjusted incomes are slightly higher, I think prices have moved a lot in a way that have also kind of created mobility.

But maybe it’s just on paper. So it’s very interesting to. It’s a great question.

I unfortunately don’t have the answer. I have a partial answer though.

Tobias: There’s more mobility in the States than there is anywhere else in the world. Certainly more than in Europe.

Jake: That was something that argued as as a pushback on inheritance taxes was. He felt like kind of the, the natural order of things was such that, you know, it would be taken care of by by civilization. Like and I think thinking of the Vanderbilts probably is one of the prime examples of, you know, you know, within a couple generations just squandered in an immense fortune and moved back down the ladder.

Nick: Yeah, I also think, I mean if you really just think about the, the growth rate of your wealth and compare it to the growth rate of your family. Like if you just assume like, okay, we’re doubling every 25 years and compare that to like what’s the growth rate of wealth? It’s very hard for that to keep it can do it for some period of time, but to keep that up indefinitely, it’s just not possible.

And then once, okay, so I, let’s say you have two kids and then they each have a spouse and they have two kids and those have spouses. Like by the time you do the math, like your family is so large that if you try to divide the wealth, it just couldn’t be done. So I think that’s another piece of it is, you know, your family’s going to grow faster than your wealth could at some peak level.

And then in addition to that, you’re right, like the market should should impact these things. I think the only counter I have for why, you know, why would there be an inheritance tax or something like that is that sometimes, you know, once you have a certain level of wealth, you can have regulatory capture and things like that that can prevent that. I mean, I don’t think it’s going to stop it forever.

Like, I think everything will eventually fade, but there are ways where you can have a sort of monopoly and your family can benefit from that for a long time. Like, I think I wouldn’t be surprised if 100 years from now, the Gates family and the Buffett family are still one of the richest families. I know they’re giving it away, but they’re giving it away to a charity that they control, etc.

Right. So I would not be surprised if those two are still around because they’re actually. Of all the forbes, you know, 100 billionaires, they’re the only ones that are diversified.

Right.

Nick: Like, Musk could get taken out, something comes out, and I’m not sure what.

Jake: His actual net worth is.

Nick: Yeah, I mean, it’s always, it fluctuates so much no one knows. But I’m saying, God forbid something happens to Tesla. Like, you could, you would see a lot of his wealth dry up very quickly for Buffett and Gates Like, I don’t see how.

Like, like Gates is the largest private landowner in the United States. Like, how do you, how, how does he take a 50% drawdown? Like, something disastrous on a civilization level has to happen for Bill Gates or his future generations to be poor.

Right?

Nick: Like, it just can’t, I can’t imagine it.

Tobias: You know, I think that the the calls, like the inequality calls get loudest when we’re close to the top of the market like this. I mean, I’m not, I’m not calling this the peak. I’m just saying that we’re closer to.

Nick: The top than we are July 29th. Okay, just, just, I’m just noted for myself.

Jake: Area man calls. Another peak.

Nick: No, because we could just, we’ll clip this later, 10 years from now, when the market is like, struggling from this peak.

Tobias: Yeah, that’s it. I think, I think I hedged it up enough that it doesn’t count. But, you know, I think Piketty’s book came out in like, I forget now, exactly, but like, somewhere.

Jake: No one read that, Toby.

Tobias: Well, a lot of people bought it, which is the most important part.

Nick: I will say that as an author, it’s the most important part.

Tobias: Yeah, yeah. I think that I saw some statistics that it was like one of the least read books. Like Kindle can track how far people get through a book.

And it was like people got to the.

Jake: It was that and Hillary’s biography, I think, of the two.

Tobias: It used to be Proofs in Search of Lost Time, where people would take that to the beach and take one look at it and go, no way. It’s just too hard. But I think that we’re in one of those points now where asset prices are very high.

S and P 500 is very high. Real estate obviously is very high relative to incomes which seem to have not kept up certainly since the pandemic. And that might be a big part of the people being upset.

That looks like, hey, these other guys are having a real party while we’re, we’re struggling here. We’re not doing very well. That’s sort of a question, I guess, is directed more to the two buckets.

The 1 to 10, the 10 to 100. How do you help those guys get out of those buckets?

Nick: Yeah, so the level one, which is less than 10,000. I think the most important thing there is getting to some sort of financial safety or even what I call non financial safety, which is like, do you have a network or support group or people you could rely on? Because there’s other types of wealth besides financial.

Of course we tell people to save for an emergency fund. That’s very obvious. But like, I want people.

When you’re in a dire situation, you have to come up with inventive ways to get out of that, because you need, like, I just think of everything, every level on the ladder. Something’s being amplified. We can talk about every.

You can give me a level. I can tell you. So level one, the thing that’s being amplified is bad luck.

Like a simple. And I, the, the analogy I keep giving is like, let’s say, you know, you’re, you’re driving to work and get a flat tire. Someone in level three or level four, oh, it’s an annoyance.

They gotta call aaa, they gotta get it taken to the shop, whatever, their life goes on. Right. Someone in level one, if they get a flat tire and they can’t afford to fix it, they could lose their job, they go into credit card debt.

You could just see how a financial spiral starts to happen. And the data on this is pretty clear. Like 50% of the financial distress events, so like delinquencies, bankruptcies, etcetera, are experienced by 10% of the population.

So it’s a very small percentage of the population that kind of gets caught in all these events and they keep getting caught in them and they can’t get out. And I’m not saying that’s all just from bad luck. Some of that is personality and people don’t manage their money.

Right.

Nick: And so that’s a piece of it, of course. But there are certain people that just got unlucky and they just sent them down the wrong path, unfortunately. So that’s what I talk about in kind of level one.

I think as you go further up the ladder, I think things change. I think level two is where skills education can make a difference in terms of, if you actually look at the incomes in level two, I think the median income, if I remember correctly, for households, about $47,000. And so like, that’s an area where like, they probably just need to have more skills, they need to have, you know, more income so they can really help, you know, save more money, invest, etc.

And then, you know, you can go from there. What about.

Tobias: There must be a lot of folks in that cohort who have enormous college debt and probably pretty well paying jobs. But like, got to swallow that debt first.

Jake: Terrible balance sheet, but income statement.

Nick: Yeah, this is. So I got some pushback online. Like, oh, a surgeon’s not in level one because they have $100,000 in debt and they’re making 4,400k a year, whatever it is, right?

Or you can, it doesn’t really matter the numbers, but I see the point and I agree. I actually like, for example, I, I grew up, I would say lower middle class, level two. Even though my parents declared bankruptcy twice during my childhood, I would not say we were in level one.

By definition we were in level one, but like we had support networks, we owned a home at one time or owned a condo. Right. Like I, even when I graduated college, yes, I didn’t have over $10,000 in wealth, but I had an amazing education.

Like that’s worth something. I don’t know how we value it exactly, but if I’m being honest, I’ve never lived in level one. I don’t know what it’s truly like to be like, you know, abject poverty.

Right.

Nick: I know what it’s like to, you know, not have a ton of money and you can’t go on fancy vacations. I can’t, you know, eat out at nice restaurants. I know what that’s like, but I don’t know what it’s like to like be an abject poverty.

So realizing that, okay, maybe I, maybe that surgeon is probably in level two or level three, you know, if you really, if you’re being realistic about it, even though they don’t have the net worth, they just need a little bit of time to get there. So I know how age plays into all of this and I talk about that once again in chapter 10, which is the mobility chapter. I kind of show how this breaks out by age.

So some people in level one or two, like they just need time. Like you’re 23 years old, like wait, I’m only in level one or I’m only level two? Oh no, it’s like you just need time.

Like I needed time to. Everyone just need some time to work, save, invest, etc. So that’s a big portion of this if I’m being honest.

But at the same time I do think as you start to get into middle age and kind of, you know, later age, these, you know, differences are revealed and people will, you know, there are going to be people in level two in their 40s and those people probably have income issues. That’s my guess.

Right.

Nick: That’s the thing they need to focus on.

Tobias: So the levels 1 to 10 and 1 to 10 is probably someone who’s worked pretty consistently through their whole life, bought a house, invested sensibly, they’ve got.

Nick: Oh, is this level, you mean level four, one to ten million?

Tobias: Yeah, one to ten. Whats the, they seem to have done pretty well. What’s the advice for somebody in that group?

Nick: Yeah, so someone in level four. And once again this is going to be change based on age and things like that. But for the most part people that get into level four, they had a decently high income.

The median household income for a household on level four is about $200,000. So you could have like two six figure income earners, you could have one, you know, much higher six figure income earner, etc, people that get in there, they usually just had good income, they saved money, they invested it and time like those kind of couple of ingredients and just give it enough time and they get in there.

Right.

Nick: The median age in level four is 62. So, so if you took all the people in one to 10 million and you put them in A room and you pick the middle person. 62 years old.

So that’s what’s going on there. Whats the advice for someone who’s maybe slightly younger than that? Maybe they’re in their 40s or 50s and they’re in there and they’re doing well.

Like maybe they’re kind of, you know, they’re in somewhere mid level four. The question you have to ask yourself if you’re in level four is do I keep grinding to try and get to level 5? How much more does that impact my life or do I just kind of take my foot off the gas and I.

So what would be called coast fire or something like that where you’re like, hey, I have enough, where I’ll be okay, I don’t need to work as much. And so I think that’s the big question, especially in the United States. I think you can kind of do that at lower levels Internationally you probably do this on level three in most of the world where you’re like, hey, I have enough money where I don’t have to work anymore.

You can do that in level four in the US I just think it depends where you are and your costs, among other things. But I think that’s the big decision points like do I want to go and keep grinding, keep trying to do this, do I go and start a business or something where that’s the only chance I have at getting to level five? Get you back at one?

Yeah. It’s also, I mean, it depends how much you invest into the business. Yes.

I don’t think people put like, you know, their whole net worth into their business. I hope not.

Right.

Nick: Especially if you’re in level four. But that’s the question is like, do I want to go and try and start a business that could sell for tens of millions of dollars where I net, you know, let’s say plus 10. Do I want to stay on my current path and just be okay with it or do I want to take a step back?

Those are really the three options you have in level four. And, and I think a lot of people realize this and the math on this is pretty straightforward. Like if you’re saving, let’s say $100,000 a year after tax and you have a million dollar portfolio, you’re, you’re impacting your wealth by 10% a year.

Right.

Nick: 100,000 over a million to 10%. By the time your portfolio is worth, let’s say $5 million, your net worth is $5 million. You’re only impacting your wealth by 2% a year, right?

So it’s like your job is just not moving the needle. And that’s why I think in succession, when he says, you know, oh, I mean, he’s like, I’m five million. He’s like, five is a nightmare.

Five is a nightmare because it doesn’t move the needle. It’s like, it’s not worth it to work. You can’t retire.

It’s like, I completely see that. I know that was just said in jest, but the math on that is actually very strong, right? So once you actually think through the mathematics of it, you’re like, wow.

Actually, yeah, that’s actually very true. And it’s not a bad place. I’m not saying, oh, boo hoo, someone with $5 million, that’s not it.

But I do think it impacts motivation. It could be an existential crisis. There’s a lot of things.

And there’s people listening to this right now and they’re like, oh, wait, I am in this bucket, right? And I think the joke I saw on Twitter was like, if your investment portfolio returns more than you. You, is your job a side hustle?

Right. Like, if your investment before generates 200k in income for you or at least in one year annual return and you only generate 100,000, you’re like, what am I doing? Like, why am I, you know, you know, grinding my life away while my portfolio is sitting here moving multiples of, of what I can do?

I think it’s natural. It’s supposed to. If you, if you’ve done investing, right, like that’s supposed to happen, that is the natural transition.

When you’re young and poor, your portfolio is, doesn’t do anything and it doesn’t matter. And as you kind of get older and hopefully you’re wealthier, like you can’t even impact your portfolio that much anymore. And that’s how it should be.

Tobias: So I think that the. I might have skipped over the third one, which is 100 to a million. So let’s do those guys and then let’s talk about how you really mess up the one to $10 billion.

Nick: Yeah, yeah. So 100k to a million, that’s, you know, I say it’s middle class and of course that’s going to be all over the place. You’re going to have retirees in there who, you know, have some home equity.

They have maybe $100,000 nested away in a 401k, something like that. You’re also going to have people who are just, you know, have higher incomes and they’re kind of on their way to level four. So you’re going to have those in there as well.

I think the one thing I noticed, and once again, this is in the mobility chapter, if you compare households that start in level three and get to level four over a course of, let’s say a decade versus those that start in level three and stay in level three over a decade, you can still build wealth while you’re in there. So over that 10 years, you’re still building wealth, but you’re not getting like a 10x type jump. What we generally see is that the households that made it to level four from level three tend to have a higher starting income than those that just stayed in level three.

That might be pretty obvious. Oh, yes. The people that make more end up saving more, invest more.

It’s like, yes, that’s one piece of it. But the other thing we saw, which wasn’t as obvious, was that their spending behaviors weren’t that different. So the people that got to level four from three and the people that stayed in level three stay spent almost the Same per year.

Even though, I mean the people that stayed in level three spent a little bit less, but not way less like considering their income. So I do think there’s some sort of keeping up with the Joneses going on in the data and I kind of talk about that a little bit. So I think that’s the only real thing to worry about.

And what’s the biggest expense for those in level three? It’s their house. It’s housing.

Right. And so think about how much you spend on your house. Are you buying too much more house than you can afford?

That is probably the thing which could, you know, prevent you from building more wealth.

Tobias: And that leaves us to 1 to $10 million, guys. They, they or was it 10 to 1? Do we do 1 to 10?

Nick: We talked about 1 to 10. That’s level four. Right.

And then level five is 10 to 100. Or we, I do five and six together because it’s so much money that most people can’t even conceptualize it. But yeah, the 10 to 100 people everything.

Once again, we talked about amplification across the wealth ladder. Like every single level has something being amplified. I think in level five, the big amplification is all the non financial aspects of your life.

It’s all the non monetary things. And the logic is very simple. When you’re in level one or level two, let’s say most of your problems are likely money problems.

Like money could literally solve like a lot of the issues in your life. By the time you get to level five and six, that’s usually not the case. Right.

Of course there’s examples of my company’s in the hole, I need money. Like there’s examples like that. But that is, you know, the rare case.

I’m talking about your personal life and your personal consumption. Most of the people in Level 5 and 6, most of their problems are like relationships, their health, et cetera. And you can’t write a check to your spouse and say, love me, it’s not going to work.

You can’t buy yourself a new cardiovascular system. Right. And once you realize that, then you say, oh wait, like I really need to be focusing on these other things because I can’t buy them.

Right? That’s the one thing you can’t buy. And so my warning, and this is that’s true across the wealth flower, no matter which level you’re in.

But I really emphasize it in levels five and six because I think these people obviously are doing well in their lives. They have a lot of wealth but they’re probably overlooking all the things that would impact their life that they cannot purchase. And that’s where I’m like, you’re not spending like if I meet someone that tell me they’re level five, I’m like, I guarantee you’re probably not spending enough time on health.

I guarantee you’re not spending enough time on your relationships. As successful as you are, I could guarantee you’re not. And there probably are some that are, but I Bet you know, 90% of them are not.

And they will only realize that later when they’re like, oh wow, an extra 10 million is not going to really change my life. But you know, having a, a much better VO2 Max would, or something, you know.

Jake: So you’d say perhaps like you’d almost be better off staying at 4, but a more well rounded life 4 than trying to like grind your way to 5 and sacrifice all these other things.

Nick: Yeah, yeah, no, I agree. But I’m saying if you’ve, if you’re already in five, you already made some of those sacrifices, you can’t go back. But like the thing you can do now is like, oh, what can I do now?

And maybe I should reorient, maybe I should take a step back. Like you don’t need to build generational wealth for the next six generations. I promise you, you know, your family’s going to grow so much.

It’s going to get all divided. You’re not going to, they’re not going to all be billionaires forever. I promise you are millionaires forever.

It’s just not going to happen. Like your family is going to go through some sort of wealth decline due to division and like because there’s more people or you know, bad things happen. Like, you know, you can’t predict the future.

I think it’s really tough to, to try otherwise.

Jake: Can you name your three great grandfather, what his name was?

Nick: Nope. I can do grandfather. I don’t, I mean I don’t know my great grandfather’s name, but I kind of know about like I knew he was a janitor, I knew he, he was in New York.

I can kind of do that. I can’t go beyond great grandfather though. Right?

Jake: Yeah. So we’re all, we’re all going to be forgotten. And yeah, three generations I think is.

Tobias: The, there’s some indication too that if you inherit money, it doesn’t, it, it doesn’t improve your life. Like you have, if you, if you inherit enough money so you don’t have to work, you tend not to have A great life because they, like, lack a little bit of purpose. Right?

Nick: Yeah.

Tobias: I think myself.

Nick: I think there’s something there with, like, earned money is, like, the. The fact that you work towards something and built it. I think there’s something in that.

Like, it’s almost like. I’m trying to come up with a good analogy here. I’m.

I’m kind of failing at it when I’m thinking. Thinking about it. But, like, you can’t just, like, have, like, plastic surgery and you have muscles that look good, but they’re not actually real muscle.

It’s not the same thing as, like, actually being able to have the strength and do the work and all that. Right. So I think there’s something to that as well.

Jake: The analogy I’ve heard is that there’s, like, a butterfly that if you open the chrysalis for it, it doesn’t actually get strong enough to be able to fly, and it ends up dying. And it has to. It’s the.

The effort it had to put in to break free that allows it to be able to fly.

Nick: Yeah, I think there’s some of that, too. I think at the end of the day, like, you have to just try your best with, you know, your kids, raising them, etc. And then just let.

Let the chips fall where they may. Right. At some point.

You can’t do everything forever.

Tobias: Let me give a quick shout out and then let’s do veggies. Whats up, Danny? Santo Domingo, Dominican Republic.

San Francisco. Just keep watching. Toronto.

Tomball, Texas. San Diego. Tallahassee.

Jared’s Cross, Cincinnati. Hurricane. Hurricane.

Thanks for the pronunciation, Tip. Lawrence, Kansas. Jupiter, Florida.

Breckenridge, Colorado. Petitva. Israel Mysore, India.

Lausanne, Switzerland. Cincinnati, Ohio. Charlotte, North Carolina.

Thanks for tuning in. Vegetables I don’t know if you know this, Nick. We do these learnings from Nick to help us all improve our thinking processes and so on.

Exeter’s Pyramid and Financial Safety

Jake: Yeah, just more of a dalliance. So with Nick coming on and the ladder and the shapes and climbing, I thought that this. I try to often match content somewhat with the guests that we have coming on.

So this is what’s called Exeter’s Pyramid. And so first we can start with, like, who was John Exeter? He was an American economist, central banker, lived from 1910 to 2006.

Educated during the Great Depression, which actually embedded a deep concern about systemic collapse and financial instability. And in his early career he was teaching economics at Harvard, but he got motivated to join, like, Central Banking and he played an instrumental role in founding the Central bank of Ceylon, which is now Sri lanka in 1950. And it was like he was its first governor.

And then he worked on the board of governors for the Federal Reserve System and was the president of the Financial or the Federal Reserve bank of New York, which is obviously a very influential position. But his legacy really wasn’t these institutions. It was this skepticism that he developed about the very system that he was helping manage.

And he has this inverted pyramid that he came up with. And it’s this conceptual framework that uses this very simple visualization to see this upside down triangle that’s kind of the architecture of the global financial system. And what makes it compelling is that it shows like, how kind of money flows during booms and busts and the underpinnings of trust and how easily the whole system can kind of be destabilized from the top down.

So we will go through a little bit. And he really, he came up with this in the early 1970s as the gold standard was kind of unraveling. And he saw central banks gaining unprecedented power over money creation.

And he was voicing concerns at the time about some of these imbalances. So the core idea is really that not all assets are created equal. Some are very trusted and kind of universally accepted.

Others are maybe risky and more illiquid and based sometimes more on speculative assumptions. And he organized these into this hierarchy. And we’ll.

And because it’s inverted, like the pyramid gets kind of bigger and more wobbly, could kind of represent the size as you get bigger and move up it. So Jim Grant did an update of Exeter’s pyramid, which is what we’ll walk through together right now. So at the base of this pyramid sits gold.

And you know, of course, everybody’s kind of has their own opinions on gold. And you know, I’m not making a case for anything, but but what it does, what gold does have is that it’s of kind, you know, this, this kind of unyielding, you know, unimpressed by the fashions of financial engineering it, you know, it’s not a liability of anyone else’s. It just is what it is.

And in a world where trust can vanish overnight, this little shiny metal that’s formed in the core of stars, you know, and it has 5,000 years of, of track record in kind of a lindy way that, that it’s subjective. It has subjective value to hairless apes. You know, there’s 5,000 years of supporting that.

Now sitting above the gold is the US dollar, and that’s still the world’s liquidity king. Its strength is a matter of all of our collective belief that this piece of paper represents something backed by Uncle Sam and it’s trusted deeply in crises, but structurally, it’s still vulnerable to the erosions of inflation and reckless monetary policy. Above that sits Treasuries very deep markets, kind of universal acceptance still backed again by Uncle Sam and the full faith of sovereign taxing authority and also a bunch of nukes and aircraft carriers for good measure behind that if you don’t want to take it.

Not perfect, though. Rates still impact. Theres still rate risk that you have to worry about.

But in the middle of a panic, Treasuries tend to get scooped up maybe, maybe like bottled water before a hurricane. Next up then, you have publicly traded investment grade fixed income offering stability, modest yield well, rated corporations typically. But in a crunch bid ask spreads still can widen.

An investment grade can feel more aspirational than factual, sometimes. Above that, then you have publicly traded high yield debt, AKA junk bonds higher coupon payments, yes, but when the tide ebbs, the spreads blow out and default fears make them less of a bond and bit more of a hot potato. Then above that are other public securities.

So this is kind of traditional public equities, preferreds, munis, GSE debt and things like that. Generally attractive in calm seas. But the exit doors are clearly not wide enough for everyone if the fire alarm goes off.

And then above that sits derivatives of publicly traded securities. Efficient under normal conditions but again loaded with leverage and contingent risk. In a sell off that a lot of times triggered covenants can really amplify the damage that can happen.

Like adding dry brush to a wildfire. Then above that we have private credit investments. That’s the hot new thing of late.

They offer higher yields and kind of tailor made terms but the illiquidity and opaque pricing make exits quite tricky. And if borrowers were to default in mass, these assets are going to really become endurance tests as to figure out how do we users resolve a lot of these things. And we’ve seen that already like things that aren’t working.

There’s a lot of picks that are done there which is basically like hey we know that we owe you this money but here’s some more paper. Instead then above that you have private equity investments, non public companies levered up, promising chunky returns but really hard to hit the sell button. And in a downturn of course the gates close, markdowns always arrive late.

Everyone pretends valuations haven’t budged. Great for laundering volatility if you need to protect your career. Im editorializing a little bit there.

Then above that you have stablecoins and these are digital dollars. In theory they’re pegged and programmable, but the trust really depends on the issuer’s reserves and their reputation. You’re also dependent on regulatory goodwill and really just kind of the absence of a good old fashioned bank run.

So I think there’s a little bit of Lindy effect argument there where it’s still kind of early to say like how much trust could you put into something if it’s five years old, that it’s still going to be valuable five years from now. And then above that you have the tokenized private assets which are attempts to basically fractionalize the illiquid cool idea. But when stress hits I don’t know if these tech wrappers are going to save you from a no bid market.

And then above that we have other cryptocurrencies kind of outside of the Bitcoin Ethereum duopoly thousands of tokens. Seems like you can print them as much as you want. And obviously these are great trading sardines.

They ride momentum. Well, crash on the rug pole, though, and seem to evaporate anytime liquidity dries up. I don’t know if it’s a bet on.

Seems to have a pretty strong correlation with stimmy checks. And then above that, we have the equity of crypto treasury companies, which is a bet on the bet. And these firms are leverage plays on digital assets that offer a lot of beta and you know, added spice of corporate drama on top of that.

So if we wanted to be harsh, you know, we could say that these are really machines that are. They’re built to convert thin air into digital nothingness. But I’m being a bit of a dick there, but and then finally at the very top, we have commercial real estate.

And this is the king of lumpy, debt laden, illiquid assets. You know, looks solid, feel secure. Like, hey, I can touch the building.

It’s really there. That is, until tenants vanish, rates spike or capital markets seize up. Just when you need to refinance that building then it’s just a long wait, often for price discovery and looming possibility of jingle mail.

Everybody sending in the keys instead of making payments because of the leverage. Nothing has really killed more investors than real estate. That’s gone wrong throughout the ages.

Just wrapping all this stuff up. Exeter’s original insight is that the system is quite top heavy. Each layer up the pyramid, the liquidity thins out and trust becomes more conditional as you move up the pyramid.

So during boom times, who cares? We climb the ladder in search of yield. We’re trying to get better returns as we move up it, but when the confidence cracks.

People have historically raced back down to the bottom of the ladder as quickly as they can. Or the pyramid, sorry. At the worst of times, at least historically, gold has tended to wait down there.

So that’s Exeter’s pyramid.

Nick: So where is Bitcoin on this? Because I know you said you kind of pulled Bitcoin and Ethereum outside of that. Where would that it would be fall with public equities, or is it slightly higher than that?

Jake: Yeah it’s above public equities. It sits like in between.

Nick: Is it above stable coins?

Jake: No it’s below stable coins. Below stable coins, but above tokenized private assets.

Tobias: Yeah.

Nick: So it’s funny because there’s a group of people that think Bitcoin’s at the bottom of the pyramid. And there’s a group of people think bitcoin’s at the top of the pyramid.

Jake: Yeah, that’s a great observation.

Nick: And they still believe those things, right? Still, even with all the stuff that’s happened, which is very interesting.

Jake: I do find it weird though that. It seems to move up or down with the stock market much more than gold might or bonds might or something. The correlations feel much more equity, like.

Tobias: When they do tick more than anything.

Nick: Right? Yeah. Based on everything you said, they feel higher up the pyramid than lower.

Right. They don’t feel like they’re gold to me. They feel like they’re like a derivative or something of an equity.

Tobias: I mean, thesis for gold would be that if you’re a Britain trying to escape the Roman horde, or Roman trying to escape the. Whoever was invading Britain at that time, and you bury your gold in a thousand years time, someone can dig it up. And it’s not clear to me that you can dig up a little hard drive with bitcoin on it and know what to do with that or be able to trade that for anything in a thousand years time.

So I don’t know if. I don’t know if bitcoin quite qualifies as gold just yet.

Nick: It’s so funny because with precious metals, how much it’s like changed over time. So I don’t know if a lot of people know this, but the top of the Washington Monument, you know, used to actually be capped with aluminum because at the time aluminum was incredibly rare. But obviously, like, you know, processes got better.

We found ways to make it much more cheaply. And so then it’s like, yeah, an aluminum can, something, we throw it every day. If we had told them, oh yeah, this is just going to be like a regular everyday use thing, people would be shocked.

And so obviously we haven’t found anything that can do that with gold. And maybe that’s what makes it so you know, valuable. Because all the alchemy in the world, everyone’s tried looking, no one can do it.

And so maybe there is something about gold that makes it particularly valuable at the base of the pyramid.

Tobias: It’s not so much the, it’s not going to be alchemy. Right. They figured out that you can recreate it with some sort of atomic.

But I don’t know if that’s going to be. I mean, that might be.

Nick: It’s not economical. Yeah, yeah, exactly.

Tobias: But then neither was aluminum to the point that you were making before. Like, aluminum is just congealed electricity and They’ve got better at making aluminum. So now that’s.

Now it’s a throwaway tin can. Maybe that happens to gold too.

Nick: Yeah, it’s all. Everything’s pricing right, people. I saw this tweet the other day.

It was like, it’s going to be so funny if AI can do everything a human can do, but because of the economics, it costs just as much. So it’s like, it’s like, okay, you can. So basically we do the AI.

The AI runs at night and the people work during the day because the price is the same. So you really can just be working 24 7. That would be the benefit of an AI.

But if it ends up costing as much energy as, you know, a person, then, you know, then we’re back to square one. Kind of. I mean, still helpful, it’s still a useful technology.

But there are pieces, there are costs to that.

Jake: We can’t run AI from 4pm to 8pm because we need the air conditioners on.

Nick: Yeah, exactly.

Private Credit and High Net Worth Investing

Tobias: Nick, do you get, do you get inquiries about private credit? Like, is that a, is that a 1 million to $10 million bucket to those guys? Like, where’s the opportunity?

What is private credit and why is it like, controversial A little bit at the moment.

Nick: So I don’t get too much about this and it’s not my area of expertise, to be honest with you, but where does that start to happen? It definitely starts to happen in the high net worth space. You’re someone in, you know let’s say level four.

And definitely by the time you’re in level five, you’re going to be getting pitched this stuff. And I think just the idea is like, you can get better yields than what Treasuries are offering and maybe, yes, there’s a little bit more risk, but you know, on a risk adjust, you know, risk adjusted basis, it’s better. But you know, that’s for other people to decide.

I. You have to really look. Everything’s in the details, right?

The devil is in the details on a lot of these things. We start looking at these deals and know what, what’s in this, what’s not? You know, just same with, with real estate, right?

You get real estate deals, private real estate deals, private equity deals. It’s all the same thing. The devil’s always in the details on these things.

Tobias: What about equity tokens? Was it Robin Hood has offered an OpenAI equity token that has no connection to OpenAI. How do they do that?

Nick: I don’t know. This is Definitely outside my area of expertise. I have no clue.

I wouldn’t be buying equity tokens, at least not for the time being until we have some.

Tobias: I see Robinhood’s planning to roll out quite a few. Or somebody is planning to roll out quite a few of these things.

Nick: Yeah.

Tobias: The relationship of equity to the underlying is tenuous enough. I don’t know that you want to sever that.

Nick: I don’t think you need all that. Yeah, I hear that.

Jake: Yeah. Your shareholder rights are already flimsy enough as it is. You want to just completely get rid of it.

Tobias: I mean, there’s not a lot of residue if you wind up a lot of these companies.

Jake: No, that’s right.

Tobias: Have you followed that microstrategy or strategy? I think it’s now called Big Strategy now.

Jake: It’s not small.

Nick: Oh, he changed the name of it. I didn’t realize that. I don’t fully understand it.

I know it’s some sort of arbitrage financing between Bitcoin and the equity is offering, and I don’t fully understand it, to be honest with you. I just know it’s like it feels to me, and of course I’m going to say this now, but it feels to me like something that can go incredibly, incredibly wrong. But that’s.

That’s who he is. He’s a very all in type of person. I think this actually is kind of related to the wealth ladder because the people that get to 100 million plus are very big risk takers.

And there’s this famous story about Elon Musk. One of my good buddies is like a professional poker player. He used to work at Uber and he quit and now he just does professional poker.

But he sent me this article and it was like, apparently Elon Musk, like went to a poker game one time or something and what he did, he went all in on every hand and he kept losing and then finally, you know, kept buying back in, losing, kept buying back in. Finally, like someone matches, okay, this guy’s got nothing. I’m going to match, you know, and then he actually wins the hand, doubles money, then he leaves or something.

Like it was like the worst strategy you could imagine for, like poker. It’s basically the worst strategy to go all in on every hand. But that’s how certain people are and that’s how definitely he’s wired.

I think sailors probably wired a lot in the same way. And I. You would never catch me doing something like that.

But that’s why I will never be level 6 and some people will be.

Tobias: Oh this new book might, might go really well. Yeah.

The Realities of Book Economics

Nick: Even if I, even if I sold as many like I don’t. James Clear is probably sold for Atomic Habits. Like the bestselling non fiction book.

Even if you sell let’s say 50 million copies, you know, but you know, across the world, everything. You know, after you take into account the different splits across the different regions and everything. Let’s say you make 50 million bucks after tax, you’re talking 25 million.

Don’t get me wrong, that’s not nothing but like I still wouldn’t be in level six even if I was had the best selling book in bestselling nonfiction book in the world. Isn’t that crazy to think about that like you could be like the best. Because the economics on on books is just really bad.

Unless I self pubbed then maybe. But the economics on books are not great.

Tobias: I think that the micro strategy has, has possibilities both ways. Like you can get. You get Bitcoin, then you get an uplift on the micro strategy.

And then you get the three times levered strategy ETF. Take your 25 million, stick it into that 6x.

Nick: Oh yeah. If I just did that. Yeah, then it would be great.

Jake: Martingale to the moon baby.

NFTs, IPOs, and Speculative Markets

Tobias: I see that. Anyway Nfts have made a comeback. No, really, you know, I track.

I tracked the Google trends for NFT for the search NFT and the peak was like 22, 21. 22. At 100 on the Google Trends, it had fallen to 2 at the start of this year.

And I was like, trying to get it to one before I could tweet it out again. But it’s come back to Life. It’s at 4.

Okay, so it’s 100% gain over the course of this year, but it’s still.

Nick: Down, what, 96% from.

Tobias: It’s still down, but there’s a lot of those around. There’s that open door. Open door.

Nick: Yeah, yeah, that just happened. We just discussed that on Krispy Kreme Donuts.

Jake: Like, some of these things are random at.

Tobias: Duncan Duncan’s had a little run and it’s fun. It’s funny to see the number of those little companies that have had a little run.

Nick: I mean.

Tobias: And then on the other side, I read all of these quite big companies that I, you know, in my mind are quite good companies that are having their biggest drawdowns ever.

Jake: Yeah. Novo Nordisk’s gotten killed today. It is quite strange, huh?

I think the only box that we haven’t checked yet for all the bubble stuff is just frothy, spicy IPO market. Everything coming and then ripping on days. One day in an IPO.

Tobias: We’ve had a few IPOs this year that have done that.

Nick: Yeah 20, 21, it was crazy. Now it’s just. Yeah, I think the market’s not where.

Tobias: It was before the windows closed a little bit. There’s some Stimmy checks coming out. $600 stimmy checks.

So everybody can get to the. Get to gambling, get back into punting the NFTs again.

Nick: Is that approved? I thought that was just on the proposal.

Tobias: Oh, okay. Yeah, I just read a Twitter.

Jake: I can tell the difference today.

Nick: These days, I mean, we’ll see. That’s going to. People don’t want inflation, but they love their checks.

So which one is it? Right. You can’t have both.

Do you want your $600 check or do you want low inflation?

Tobias: It looks to me like I’ve been following that data series. It looks like it’s been falling pretty consistently. I don’t know.

Jake: What’s that? The money.

Tobias: The inflation series. The cpr series has been falling.

Jake: You never get it all. You’ll never get the cumulative back, though. It’s always just the rate is slowed.

Tobias: Yeah.

Nick: Which is still good. I mean, you kind of want that, right? At some point.

You don’t want it going up forever.

Tobias: It hasn’t been below 2% though for five plus years at this point.

Jake: Can I ask, is there. And people have different opinions about Cape ratio, so you can reject that and substitute whatever valuation of macro metric you.

Nick: Want, but Cape’s fine.

Valuation, CAPE Ratio, and Market Timing

Jake: Is there any Cape ratio where you say don’t keep buying?

Nick: Thats a great question. I think regardless of Cape ratio, you, you have to keep purchasing. The question is how much in which accounts you’re purchasing, etc.

For example, in my 401k, I will always continue buying US stocks. Like that’s going to keep happening regardless. Now if I have extra money outside, that’s where you can make more like, okay, I have this extra money.

Do I want to put it into this? Do I not? I don’t know.

I think that’s where you start making those adjustments. And that’s what I call, that’s what Cliff Hassness calls sinning a little. Right.

So if I, if I’m really making the valuation arguments, I’m going to say, okay, this does look elevated. Even in 2021. I said US stocks looked a little crazy.

I said it, you know, did I stop buying? No. But did I say, hey, if I’ve.

In my 401k, did I stop buying? No, but for other money outside, like my brokerage account. Yeah.

I was not putting money into US Stocks. I was putting money into other things. So I do this a bit, but once again, it’s only my new contributions.

I’m not selling out of anything. Right. I’m always just, I mean, it’s going to sound very cliche, but I literally am just buying.

I’ve literally. Besides rebalancing, I’ve. And you know, I’ve never sold an index fund.

I’ve only sold individual investments. Like I bought an individual stock and I, you know, many years ago, I said, oh, I’m never doing this again. All that type of stuff.

Outside of those individual calls, I’ve never sold an individual investment. Just rebalances, that’s it. And so that’s been my goal.

And so I mean, is there some scenario where I’m like, this is the most insane thing I’ve ever seen. I sell all my stocks and I, I don’t know, unless there’s like a reason. Like if I’m like, hey, I can predict all my future liabilities.

I can put this in Treasury. I don’t. I’m trying to imagine the scenario where that’s true.

Or if it’s like, oh, I can buy a house and I know I’m never gonna have to worry about all these things again. Yeah, maybe there is. I just can’t imagine that.

It would have to be like something insane. Like valuations would be like probably twice Japan now 99.

Jake: 99 times. Yeah maybe.

Nick: And even then, if, even if I were to do something, I would just kind of just rebalance out of it a little bit. Like I wouldn’t go from like, okay, if I have a, you know, let’s say my overall allocation is like, you know, 30% US or let’s say my equity allocation is 50 US, 50 non US by that point I should be rebalancing over time to bring it back to that. So it’s like it’s going to keep happening to rebalance, but let’s say it keeps going up and now it’s like 60% again.

And I’m just like, would I possibly move it down to 40? Maybe. But that’s probably the lowest I would go.

I would make a 10% shift there. I wouldn’t go to zero. Under no circumstance.

Tobias: Basically the problem with those absolute levels of value is you get events like 1996, we’d never seen a valuation as high as that. And you would have got out then. And then basically since 1996 it’s been a completely different regime where equity markets have traded way, way higher than they had previously.

And so you’re waiting a very long time to do anything and you could have been investing and going ahead through this period.

Nick: Yeah, and I think there’s a fundamental argument to make here which is like tech companies are more profitable, they have higher margins and so maybe things should be bid up accordingly. And so I think that’s what we’re seeing. So I think the 15 cape is like dead.

I don’t think that is the new average. I don’t think we should anchor to it. I know we have historically, but it’s got to be higher.

How much higher? I don’t know the answer to that either, but maybe it’s 20, maybe it’s 25. I don’t know, I don’t know what it is, but I think I’m going.

Jake: To make the counter argument to that that well, not, I’ll just play devil’s advocate, I should say that Capex and the fact that this big tech companies were they really kind of let each other have their own little space, that they dominated and they made obscene amounts of money. But where they’re headed now is a much more overlapping competitive environment with AI and they’re all spending so much money. I am skeptical that there’s going to be enough revenue to earn a decent return on invested capital on all of that Capex and even, I mean I think the depreciation is going to come bite pretty hard at some point and I think then the valuations won’t keep up either when the earnings have dried up.

Nick: So you’re saying margins will compress because of the competition, which is a fair, and that’s a fair argument. And next it is forward looking. Right?

You have to think about that stuff.

Jake: Amazon said they already have 10% margin compression in AWS baked into the cake from depreciation of money they already spent before. So that’s for 2026. So it’s coming.

I think we’ll see what the revenue looks like but we know the expenses are real and the depreciation is going to show up.

How Family and Marriage Affect Wealth

Tobias: Yeah, I got a comment from the crowd along with a question and I think they sit nicely together. First one’s from Brian. Family growth rates are way down and index returns way up.

10% equity returns plus one child per couple equals perpetual wealth. Question mark. And then this is the question, does Nick have any thoughts or data on how children and marriages affect movement up the ladder?

Nick: I do not, unfortunately. I didn’t look at like family size family planning. It’s actually the first time I’ve been doing these pods for a little while now and that’s the first time someone’s asked that.

And so I’m wondering what, what angle do you think this question is coming from? Is it like, oh, don’t get married because you’ll get richer without it? I think that, I don’t think that’s true.

I think generally two income earners, you’re going to earn more and have more wealth than one income earner, all else equal.

Tobias: So that that debate has been happening a little bit on Twitter and, and social media over the last week or so that like there’s a few girls who post a picture of themselves at the beach and they say, you know, enjoying my life because I don’t have any kids at, at 31, you know, it’s become like a little bit of a meme.

Nick: And I also think is this like some people say this is like a Chinese psyop to like get, you know, to lower fertility rates. I mean, yeah, it’s possible I don’t know. Are you seeing those videos where there’s, like, these women and they have a ring and they put it.

And as soon as the ring goes on their finger, they, like, see this terrible life, you know, caring for kids and cleaning things. And as soon as they take it off, they’re at the beach having fun and all that. And so Is that a psyop?

Is that. Or people do that also to like. Because they know it’s.

It’s polarizing. Right. Like, that’s a.

Online Incentives and Division

What. What’s really being sold here? The thing that’s being sold is the person who’s getting your views, your attention, your engagement off of the algorithm.

And then they make money on especially. Especially true on Twitter now, where people get paid based on what they say. It’s actually, you know, Elon Musk is Incent has created literal monetary incentives for division that didn’t used to exist three or four years ago.

Yes. That still got engagement and stuff. You didn’t literally get paid on that.

Right. And I think that’s something that fundamentally changes the environment and changes how people use the product.

Jake: All of our division on Twitter used to be it came from a pure place of just, like, being dicks.

Nick: And now it’s like, now it’s, oh, I’m not an asshole. I just want money. Like, that’s basically the thing.

Jake: Yeah.

Tobias: I found my calling. Yeah.

Nick: I think that’s a piece of it. So I would push back a little on that. And like.

Yes. Are people posting that stuff? Yes.

Do I really think that that’s a huge belief in the community? I think it’s probably not as extreme as people think.

Tobias: But yeah.

Nick: So in terms of how does family planning affect it? I think in general, getting married probably helps you move up the wealth ladder on average, because you have another. Assuming the other person’s working.

If they’re not working, then obviously that changes things.

Tobias: Plus some stability. Stability.

Nick: Yeah. Huge. Now you have someone else to rely.

If you get sick or something, someone else can take care of. Like, there’s all sorts of things that I think, you know, family formation and having a community of people. Once again, this kind of goes back to that level.

1 who can you rely on? It’s the same thing. You’re creating that formation.

The Importance of Stability and Support

So I guess that’s probably the best answer I could give to this is like, my guess is, like, having more support, whether that’s a partner or you have family or friends that you can rely on, that’s going to help you move up the wealth ladder, period. Like, regardless of how it’s done or how it’s implemented or you’re in a throuple, it doesn’t really matter. Your family planning situation.

That’s probably going to help you financially, though, to have other people you can rely on.

Jake: I think that having certain primordial boxes checked frees you up to think about a lot of other things in life that aren’t related to that that might be. Help you on a career and a.

Nick: Business and yeah, less time dating on dating apps and more time, you know, doing other stuff, thinking about real.

Jake: Problems instead of swiping. Right. I mean, that’s like a.

I think that’s got to be. And I would also put in the pitch that having kids is the best. And it’s the best job in the world being a dad, so don’t.

Don’t sleep on that one.

Tobias: And Nikki’s just got married, so congrats, Nick.

Nick: Yeah, I’m on the journey. I’m in level one of the family well platter.

Tobias: Youre a little better along level one. Level two, then.

Jake: At least you have a map.

Tobias: Yeah. The new book is hard to hold up. Why don’t you hold yours up?

Nick: Because mine’s now virtual. Yeah.

Tobias: So, Nick, thank you.

Nick: Thank you for having me on this.

Tobias: Pleasure. Thanks so much for coming on. If folks want to follow along with what you’re doing, get in touch.

Buy the book. What do they do?

Nick: On X, it’s at Dollars and Data. On Instagram, Nick Maggi. LinkedIn, Nick Maggiulli.

You find me there. And I also have a blog ofdollars and data.com where I write once a week, and I’ve been doing for almost nine years now, so thank you.

Tobias: Good for you. That’s hard work, jt. Any final words?

Jake: No, I already got my words of wisdom in there with having kids.

Tobias: Thanks, jt. All right, folks good chatting, everybody. Same bet.

Times.

VALUE: After Hours (S07 E25): Nick Maggiulli @dollarsanddata on the new economic classes in the US and The Wealth Ladder

Read next