💰 5 Fact Friday: The $75K Myth Debunked

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Hey Money Maniacs,

Welcome back! Last week, readers voted on whether the battle against inflation was over.

The results were definitive and depressing. Nearly 50% of respondents said: No, there’s still a long way to go. 😟

Ouch! Well, here’s to hoping the Fed cracks the case sooner than later.

Now, let’s get into this week’s biggest stories in the world of money. Today’s issue covers:

1. Money Buys Happiness: The $75K Myth Debunked 💸

2. Americans Believe We're In A Recession 📉

3. Meme Stocks Dump On Meme Stock Investors 🤕

4. Real Estate Prices Continue To Climb 👀

5. Inflation: A Tale Of Two Parties 🏛️

1. Money Buys Happiness: The $75K Myth Debunked 💸

Let’s talk about one of the biggest myths in personal finance—that money can’t buy happiness beyond a certain point.

You’ve probably heard the magic number thrown around: $75,000 a year.

The famous $75,000 figure, now ~$110,000 in today’s dollars, came from a 2010 study by Nobel laureates. They found that beyond this income, happiness didn’t increase. But newer research is telling a different story.

Researchers from Wharton and Princeton conducted a study using more detailed happiness measurements. The findings? Happiness continues to rise with income, well beyond $75,000.

Teaming up with Daniel Kahneman, one of the original study's authors, the researchers confirmed that more money generally means more happiness. While there are diminishing returns, higher incomes do broadly translate to higher reported levels of happiness.

However, there is one important exception: for those who are already unhappy, more money doesn’t help much once they hit around $100,000 a year.

In summary:

• Money does make happy people happier

• Money does not make unhappy people happy

Why does this matter?

Because it suggests that financial success can continue to enhance your well-being. It’s not just about having more stuff, but about the choices and freedom that money can provide.

More money means more options—whether it's spending on experiences, securing your future, or simply reducing financial stress.

So let’s keep learning, earning, and investing, maniacs! Happiness might not be for sale, but the financial freedom to pursue it certainly is.

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2. Americans Believe We're In A Recession 📉

Despite positive economic data, a significant number of Americans “wrongly” believe we're in a recession.

A recent poll revealed that:

• 72% of respondents think inflation is increasing.

• 55% of respondents think the economy is shrinking.

• 49% of respondents think the S&P 500 is down for the year.

• 49% of respondents think that unemployment is at a 50-year high.

To be clear, these 2,000+ Americans went 0 for 4.

• Inflation is stable.

• The economy is growing (even when accounting for inflation).

• The S&P 500 is up ~10% year to date.

• Unemployment is near a 50-year low.

However, this poll should be used to gather data, not administer a test.

So, the glaring question is, why is there such a significant disconnect between economic indicators and American sentiment?

I see two potential reasons:

1) Misleading Indicators

For one, these indicators don’t always tell the whole story.

For example, inflation measures like CPI and PCE do not include borrowing costs, even though higher interest rates directly affect household budgets in the form of mortgage and car payments.

So over the last 24 months, the inflation rate has understated the increase in the cost of living.

Similarly, the widely touted unemployment rate only considers those who are actively seeking employment. It does not capture discouraged workers who have retired early, gone back to school, or given up looking for work after unsuccessful job searches.

Today, the labor force participation rate is still 0.6% (~1M workers) shy of pre-pandemic employment levels.

2) The Economy ≠ My Economy

Respondents likely believe the economy is struggling because they are struggling.

After all, macroeconomic indicators like GDP and stock market performance aren’t representative of most citizens’ everyday experiences. Just because Wall Street is cheering on Nvidia’s big earnings beat doesn’t mean most Americans are thriving.

In fact, by nearly all measures, many Americans are struggling:

• Personal savings rates plummeted to 3.2% in March, the lowest since October 2022.

• Pandemic-era “excess savings” peaked at $2.1 trillion in August 2021 and are now fully depleted.

• Credit card debt has soared to a record-breaking $1.1 trillion.

• Delinquencies have doubled since 2021, reaching 8.9% in Q1 2024.

In other words, people are using debt to make ends meet, much like the U.S. government. Fortunately, respondents are wise enough to realize that this is not a sustainable solution.

So, instead of insisting that the U.S. economy is fine, perhaps it’s time we realize that the average consumer doesn't care about the economy at large. They care about how they experience the economy.

3. Meme Stocks Dump On Meme Stock Investors 🤕

Well, well, well, look who wised up. After their latest irrational rally, the meme stocks themselves decided to cash in on the frenzy.

GameStop and AMC recently took advantage of their elevated stock prices to issue new shares and raise capital. GameStop sold 45 million shares, raising $933 million, while AMC sold 72.5 million shares, bringing in $250 million.

Why would they do this? Simple: cash for business operations.

But here's the catch—dilution.

When a company issues more shares, it's like slicing a pie into more pieces. Each shareholder now owns a smaller piece of the same pie. In theory, this dilution should cause the stock price to drop (to account for that smaller slice).

Surprisingly, or maybe not, the meme stock rally actually continued after these announcements, with AMC up 32% and GameStop up 25% the following day. Since then, however, we have seen some correction, with AMC now sitting 18% below pre-announcement levels and GameStop still up 19%.

Of course, theory does not always materialize in the markets. If it did, there would be no room for traders.

Market perception, information asymmetry, and broader market conditions can all divert the share price reaction from expectations.

But in this case, the only reason a stock should be up after diluting its shareholders would be if the raised capital could be seen as a boost for future profitable investments. Color me skeptical.

In my view, this price action underscores that meme stocks are not trading on fundamentals, which is why serious investors should avoid them entirely.

Let’s stick to disciplined, fundamental-based investing and avoid getting caught in hype cycles.

4. Real Estate Prices Continue To Climb 👀

The housing market is on fire! The S&P CoreLogic Case-Shiller Home Price Index, our trusty gauge for U.S. residential real estate, hit another all-time high in March.

Nationwide, home prices jumped 6.5% year-over-year, with the 20 biggest U.S. metro areas seeing a 7.4% rise.

So, what’s driving this surge?

Undersupply and high interest rates.

Housing inventory in the U.S. remains near record lows and about 35% lower than pre-pandemic levels.

Plus, owners are hesitant to let go of their 2% to 4% mortgage rates. Moving would mean getting less house, so fewer homes are hitting the market.

Despite high borrowing costs, demand for homes in urban centers like New York, Los Angeles, and Cleveland remains robust. Buyers are likely expecting to refinance in 1-2 years and are willing to endure 7% mortgage rates in the meantime.

However, it’s important to note that the Case-Shiller Index measures repeat-sales data and reports on a two-month delay, reflecting a three-month moving average. Essentially, the March data is based on deals struck in Q1 of this year.

What does this mean for you?

Until we see a significant increase in housing supply, expect prices to keep climbing. It’s a classic case of supply and demand, and for now, we have too many buyers chasing too few homes.

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5. Inflation: A Tale Of Two Parties 🏛️

Like all things, even the interpretation of economic data has become political (sigh). So it’s no surprise that inflation is an especially hot topic leading up to the 2024 election.

According to new localized research, Republicans and Democrats don’t just argue about inflation—they experience it differently too.

As it turns out, areas with more Republican and independent voters faced higher inflation in 2022 than Democrat-dominated regions.

Why the disparity?

Part of it is geographical. Republican areas, like the South and Mountain West, saw more significant housing and gas price increases, driven by migration patterns and spending habits.

For example, South Carolina, a Republican stronghold, saw consumer prices rise at a 4.88% annual rate, the highest in the nation. Meanwhile, New Hampshire, leaning Democratic, had the lowest inflation at 3.75%.

This difference isn't just about numbers—it's also about expectations and experiences. Republicans tend to expect higher inflation and react more strongly to inflation news.

In October 2022, when inflation was running hot, Republicans predicted prices would increase by 7.6% over the next year, while Democrats forecasted a more modest 3.1%. And interestingly, in some ways, high inflation expectations can actually manifest higher inflation.

So the next time you hear a hot take on inflation, remember: their experience might be very different from yours.

In an increasingly polarized world, understanding these differences might just foster better conversations and a bit more tolerance across the political divide.

That’s all for today! For more insights, follow me on Instagram, Twitter, and at TheMoneyManiac.com.

Also, I’d love to hear your feedback. So please reply with comments – I read everything.

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.