Bank Runs

A few years ago, friends of ours relocated from Los Angeles to London. The couple met in LA in their twenties, got married, and founded an HVAC company from scratch. Through sheer will, determination, and with the lucky break of the biggest real estate bubble in American history in the 2000s, they were smart enough to sell the business in 2007 for just north of $10M.

If they’d milked that cow for just a few months longer, she’d be dead, and they’d be left with no milk and no cow. Lesson No. 1 for today is that bubbles are abnormal, and when you catch one and capitalize on it, you’re on the receiving end of a temporary disproportionate valuation boom and might as well take advantage.

On the flip side, if you’re caught on the other end of it, the feeling is like standing next to a military helicopter when it takes off – there’s lots of wind, sand in your face, and nothing to show for it.

When they came to England in 2008, they immediately bought a home since the recession was in full effect but they were cash-rich.

Just four years later, the husband grew tired of the UK and missed his life in Los Angeles. They sold the house they bought for a 20% profit (bought for $5M, sold at $6M), making 66% on the down payment they initially made ($1.5M), and moved back to the States.

In 2012, at 43 years old and just having sold his business for $10M and making another $1M just by living in his home for four years, he was searching for his next chapter in life.

The bizarre lesson from this was that he was rich but bored. The takeaway is that while you build your financial fortress and asset machine, you must not let go of the lifestyle and hobbies that you absolutely love. Live life at all times!

He spent one year in Los Angeles, saw that the HVAC business had changed in the five years he was gone, and he wasn’t interested in reviving it again. Because his children missed London, the family decided that they wanted to return to England.

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    This guy was clearly in the middle of a personal reset… He wanted to start his life after the business exit but was struggling to figure out what he really wanted to do.

    He was soul-searching, and it looked messy and erratic.

    Moving the family back and forth had taken a mental toll on the family, so the lesson is that uncertainty has a huge price tag.

    The wife got really mad and finally put some sense into her husband by saying she couldn’t live in that unstable environment, dragging the children away from friends three times during their teens. She asked him to make up his mind and stick with it.

    This story is no different from the tale of the bubble of 2020 and its aftermath. First, there was a bubble with big winners and big losers. Next, the bubble collapsed (February 2021) and accelerated (November 2021). Then, things got really ugly as everyone realized the bubble ended and a reset had begun (Putin invaded Ukraine, the zero interest-rate era ended, the West suffered from labor shortages, and China refused to move on from draconian COVID-19 policies) with chaos ensuing.

    How does chaos end? In the story of my friends, the wife lashed out and said she had enough of it (PAIN). In the real world, banks collapse, credit gets frozen, companies fire employees, and housing prices dramatically fall (PAIN).

    In essence, human behavior is about the balance between the discipline of doing the right thing and the pain of the difference between one’s capabilities/shortcomings and reality/results. We’re now reaching the point at which the FED has to consider that the discipline it has been exhibiting with rate hikes is causing the economy too much pain, and then comes the compromise.

    If a husband and wife mismanage the delicacy of their situation, it can end in divorce. If the FED fails at doing it, we end up with a recession.

    During times of global resets, the main goal is the preservation of wealth because it’s hard to know how it all ends. The most important trait in times of chaos is COMPOSURE, and if Jerome Powell possesses it, he will think twice about raising rates by another 50bps this week.

    The system is clearly reaching its limit.

    Best Regards,

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