Afford Anything - Financial Lessons We Learned - and What’s Ahead for 2025

Episode Date: December 30, 2024

#569: Let’s take a look back on the biggest financial and economic stories of 2024 - and a look ahead to 2025! The Fed GDP The Bull Market The Deficit Inflation Bitcoin Basel III Endgame and Scientific Breakthroughs References and Resources: Michael Kitces interview https://AffordAnything.com/episode525 One Tweak a Week: https://AffordAnything.com/financialgoals For more information, visit the show notes at https://affordanything.com/episode569 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Happy New Year's Eve. In today's episode, we're going to cover financial and economic lessons that we learned from 2024 as well as what's ahead for 2025. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a tradeoff. And that's true, not just for your money, but your time, focus, energy, any limited resource you need to manage. This show covers five pillars, financial psychology, increasing your income, investing, real estate, and It's double eye fire. I'm your host, Paula Pant.

I trained in economic reporting at Columbia, and I help you craft decisions that build wealth. And speaking of wealth-building decisions, what a year, 2024 has been. The biggest takeaway from this year is that 2024 was a year all about the edges. Those small shifts that end up making massive differences. we're talking about the edges that tip the balance over to the inflection point. Because think about it, we've got the S&P 500 up nearly 34% this year. Inflation has cooled back to a two-handle. That's higher than 2%, less than 3%.

And yet, there's an intense undercurrent of caution from some of the biggest voices in finance who warn us that we're not out of the woods and that warning signs around potential black swans are present. So today, we're going to unpack what happened in 2024, from the resilient U.S. economy to some pretty dramatic developments in science and tech that, frankly, didn't get the attention that they deserved. And more importantly, we're going to talk about what this means for your money in 2025 and beyond. So let's dive in with what I think is one of the most compelling storylines of the year. It's the story of gloom amidst growth. Let's take a look at five factors. The GDP, stock market performance, inflation, unemployment, and

government deficits. When we take a look at those five, we see that the U.S.-led global GDP growth. We see that the S&P 500 is up nearly 34 percent year-to-date. That is its second strongest performance in recent years. In 2021, it rose 39.4%. Then it had a bummer of a 2022, but phew, 2024, man, we're on fire yet again. If you compare the value of your 401k January 1st versus now, assuming you're in equities, you're sitting pretty. Unemployment remains near historic lows. Inflation, as I mentioned, is back to a two-handle, but we're going to talk more about that in just a second. And the other factor, government deficits, the picture there is absolutely dismal, terrible.

If we look at those five factors, we have cause for optimist. in four out of the five, and we have cause for concern, major concern, in one of those five, which is the deficit side, and we're going to talk more about that in just a moment. But first I want to remind you how we started this year. If you think back to the beginning of 2024, that first quarter, what conversations were we having at that time? Well, we were reeling from the global economic uncertainty of 2023. which gave us much higher energy prices and much higher food prices. It brought us huge inflation in volatile markets.

And back in Q1 of 2024, we were still talking about whether or not we were going to have a soft landing. That was the dominant conversation at the start of the year. Are we going to have a hard landing or a soft landing? And at the time, a lot of economists were saying the U.S. economy is resilient, so we're really hoping for a soft landing. But let's see what happens. Part of the uncertainty also came from geopolitics with escalating tragedies in Europe and in the Middle East. Part of the uncertainty also came from the fact that we knew we were due for quantitative tightening, which was going to be draining liquidity from our economy.

And we also knew that although our economy was resilient, that was being fueled by huge amounts of government deficit spending and by past stimulus. So that's where we were at the start of 2024. So let's take a look at where we are now. I mentioned that inflation is in the twos, but I want to unpack that. There are several measures of inflation. So there's a measure called core inflation. This strips out the cost of food and fuel in order to take a look at the underlying price pressures. The reason it does that is because those two factors, food and fuel,

groceries and gas are often affected by factors unrelated to inflation itself, wars, natural disasters, those types of events have a huge impact on food and fuel. And that's why core inflation, the measure called core inflation, strips those out. By contrast, there's another measure it's called headline inflation, or sometimes it's simply called inflation. And that headline inflation number leaves those items in. So headline inflation includes food and fuel. So we have the stats on both. There's also a different indicator called the Personal Consumption Expenditure Price Index, or the PCE index. And that also is divided into core and headline. And the Fed watches the PCE very, very closely. Then there's also, if we can throw in a fifth indicator, that fifth indicator is the

producer price index. The producer price index measures the average change over time in the selling prices received by domestic producers. So if we take a look at all five of these indicators, core inflation, headline inflation, core PCE, headline PCE, and the PPI. Take a look at this basket of five, and we're seeing good news across the board. Headline CPI is 2.7% as of November. Annual core PCE inflation steadied at 2.8% in November. Now, when I say this, some people take Umbrage with it and they say, well, you can't tell me. I've gotten this comment so much on YouTube especially lately. People say, you can't tell me that inflation's only 2% because I take a look at my own grocery bill and I look at where it was in 2020 versus where it is today and

it's way higher. That's true. That does not mean that the inflation rate is different. than what is stated. There's a distinction between the cumulative rise in prices over a given period of time versus the rate of inflation. And the easiest way to understand this is to think of a car driving down the highway. If a car drives from point A to point B, the total distance that that car has driven, that's the cumulative distance. And point A and point B might be really far away from each other. Point A might be in Maine and point B isn't Florida. So you look at that cumulative distance and you're like, whoa, I'm really far away from where I used to be. Yeah, the distance traveled is huge. That's the distance between how much you paid for your lifestyle in 2020 versus how much

you're paying for that same lifestyle in 2024. That's the distance that the car has traveled. but the current speed of that car is the inflation rate. Right now, that car might be traveling at 20 miles per hour. That's the rate at which that car is traveling. Now, that doesn't mean that the car drove 20 miles per hour for that entire distance. Heck, we know that that car was flooring it at 80 miles per hour for a portion of that drive. And then eventually that car slowed to 60 miles per hour and then to 40 miles per hour and now it's down to 20 miles per hour. So great, the car has slowed down.

But we're still in Florida. And we started in Maine. And that's why even though the rate of inflation is in the 2% to 3% range, it's also equally true that yes, your cost of living has gone up significantly. those two ideas don't contradict one another. One is distance and the other is rate. So to all the people who have left comments on YouTube saying, my grocery bill is so much higher than it was three years ago,

how can you say that we're at 2%? Remember, total distance traveled is different from speed. Now, both are important, but they're not the same. And that's another way of saying, let's acknowledge that things got bad over the last few years. Things were really bad, but assuming that we stay at our current speed or slow down even further, assuming that we don't start flooring that accelerator and driving any faster, things are unlikely to get worse. We've already driven the car to northern Florida, and we're not going in reverse. Prices are not

going to go lower. We're not reversing back to North Carolina. We're in Florida and we're going to stay there. But right now, we're going 27 miles per hour on that drive from the Florida Panhandle down to Miami. And that brings us back to our 2024 theme of edges drive everything. So let's discuss the 1% edge. And specifically, we're talking about 1% point, which in finance is also known as 100 basis points. The latest news is that the Fed cut rates by a quarter point, which is 25 basis points, at their December 18th meeting. Widening this out to all of 2024, the 2024 overview is that the Fed cut rates this year

by a total of one percentage point. So the Fed dropped interest rates from 5.5% down to 4.5%. But here's something really unusual that. happened, which is that the 10-year treasury yield actually rose one percentage point since September. What? What do you say? Yeah, it's true. So around mid-September, the 10-year treasury yield was about 3.6 percent, and as of late December, it's now risen up to 4.6%. This was not on anyone's 24 bingo card. You remember it was in September that the Fed made its first rate cut of 24 in September the Fed cut rates by 50 basis points, which was a dramatic first cut.

If you go back and listen to our previous first Friday episodes, you'll hear that a lot of analysts were expecting there was actually a debate going on, like, is it going to be 25, is it going to be 50? But I think a lot of us were really shocked when it was 50. So September was the first rate cut. It was half a percentage point, which is like, All right, you're going strong out of the gate there, buddy. And yet it was at that same time in September when longer-term bond yields, like the 10-year treasury, began trending higher. And what that signals is that investors are still really worried about inflation. So here's how these two things relate.

If the Fed thinks that we're doing well on the inflation front, they will cut the federal funds rate. they will cut interest rates in order to let more money flow into the system. But by contrast, if investors are worried about the risk of inflation, then they're going to demand higher yields on long-term bonds in order to compensate themselves for the risk that inflation is going to destroy the value of those long-term investments. Think about it. If you knew that you were going to tie up money for 10 years and you were worried about high inflation over the span of those next 10 years, you would want a higher interest rate

to offset that risk, right? And so that's why it's so unusual that the 10-year treasury yield rose, even as the federal funds rate was getting cut. What it means is that the Fed has a different perspective than the investors. The Fed is feeling good and investors are still feeling nervous. And what we saw in 2024 is that the yield curve, which represents the relationship between interest rates and the time duration of bonds, the time to the maturity of bonds, that yield curve shifted, uninverted, and now it's getting steeper. And what that means is that either short-term yields could fall or long-term yields could rise or both. Now, if you're wondering, Paula, I don't buy 10-year treasuries. Why should I care? Well, you probably either own a home or, at a minimum, you know someone who does. And the yield on 10-year treasuries has a massive impact on mortgage rates. So since the Fed's interest rate cut in September, the average 30-year fixed-rate mortgage has risen. by one percentage point. It was 6.11% at the time that the Fed began its rate cutting in September. And as of last week, it was 7.11%. That's according to Mortgage News Daily. And so that's how you have this weird situation in which the Fed cuts interest rates and yet mortgage rates go up. And everyone's kind of going, what the heck? I thought that when the Fed started cutting interest rates, that meant mortgage rates. That meant mortgage rates. would come down. Yeah, that's typically what happens. Because usually the Fed cutting interest rates

is a proxy for everybody feeling good about inflation, but that's not what happened this time around. Investors are still worried about inflation, therefore the 10-year treasure yield rose, therefore your mortgage rates rose. The irony is that if you are worried about inflation, the best thing to own is real estate. The best thing to own in an inflationary environment are tangible assets. That means real estate, gold, art. If you're worried about the devaluation of a currency, then tangible assets, like brick and mortar house, is the thing you buy. And that ties us back into the themes of 2024. So as I said, the dominant theme, the dominant lesson from 2024 is that this was the year of the edges.

And in this conversation that we just had around the federal funds rate and treasury yields, we're talking about deviations of one percentage point in both directions. The federal funds rate lowering by one percentage point and the 10-year treasury yield and mortgage interest rates since September rising by one percentage point. But that divergence, that sends a very clear signal. And it actually reminds me of yet another theme across 2024 that we've talked about on many of the previous first Friday episodes, which is really the gap that we've seen between data and sentiment. And historically, across 2024, when we've talked about this concept, we've talked about it in the context of consumer sentiment. The economic data has been robust and yet consumers have been quite worried.

the unemployment data has been robust, and yet internet searches around how to prepare for layoffs is also trending higher. So throughout this year, during our first Friday episodes, we've talked about the divergence between the lived reality on the ground versus the data. Really, this is the divergence between quantitative and qualitative. We've never seen this type of divergence before. And as I've said, throughout the year on the first Friday episodes, we've talked about this in the context of how it impacts average ordinary consumers. But what we have seen since September in the difference between the Fed's actions versus the investors' actions is that there's now a divergence between the Fed and Wall Street. So if there's another broad thematic tie-in for 2024, it's that different groups, are occupying their own realities.

You've got ordinary investors, you've got Wall Street, you've got the Fed, and all of us are making slightly different decisions based on the fact that we're living in these different worlds and we have different fears and concerns.

You know, the other element to this, right, we've talked about the distinction between data and sentiment, quantitative and qualitative, but the other element that mirrors this that I don't hear much discussion about is the difference between assets and cash flow. I started this episode by talking about the fact that the S&P 500 is up nearly

34% year to date. And that's something that benefits the majority of Americans. Gallup polls show that 62% of Americans own stock, either directly through individual stocks or indirectly through mutual funds, index funds, ETFs, and other related types of investments that are held inside of investment accounts. So that 62% of Americans, that's 158 million people who own stocks. And our portfolio balances, assuming you have equities exposure, especially if you have broad market equities exposure, is high. The S&P 500 had an absolute gangbuster year. The balance in your 401k, your 403B, your IRA, your HSA, if that money is invested, those balances have grown between January 1st and today. But people don't feel the day-to-day reality

of their portfolio in the same way that they feel the day-to-day reality of their cash flow. And that's another story from 2024 that I don't hear discussed often enough. The qualitative difference, the life-satisfaction difference between having a high asset balance, versus having healthy cash flow. Because what we are seeing right now is that even when our portfolio balances are high, if our cash flow is tight because of inflation, then the dominant mood is pessimistic. 2024 may be a study in edges, but it's also in that regard a study in contrasts. And here's another contrast.

This was also a year in which people, from both sides of the political, aisle showed a greater distrust in institutions ranging from government institutions to major media institutions. This was certainly a year with a huge rise in independent media, with many commentators dubbing this the podcast election. This is a year that proved that an appearance on a major podcast can garner both more views and more votes than an appearance on a major television news program. And if I may add my own two cents, speaking as someone who was trained as a traditional journalist, I have a master's in economic journalism, I worked for legacy media, I was a newspaper reporter for many years, and then I made the switch over to becoming a podcaster myself.

I love the democratization of media. I love that the gatekeepers are gone. I think that is overall a huge net positive for society. That said, there ought to be the same high standards of fact-checking and intellectual rigor, as well as the same high standards of a code of ethics. That ought to be present in independent media. But to be fair, a lot of people would argue that also isn't really present in a lot of legacy media. And the people who argue that are not wrong. So there is a pervasive distrust in institutions coming from both sides. There's a bipartisan distrust in institutions.

And there seems to be a thirst not for incremental reform, but rather for a paradigm rethink, a very fundamental ground up reimagining of what these structures could look like. Media, of course, being the most obvious example. There's also in 24 a much greater appetite for risk. This was the year in which gambling, or as it's euphemistically known,

gaming, became a much larger share of our economy than it ever has been before. Largely, this is due to the loosening of legal restrictions. Gambling, including online gambling, is legal in more states than it ever has been.

And it's also become more culturally, accepted. I think of the Mike Tyson, Jake Paul fight, or heck, even the presidential election, it was not unusual to wager some money on that. That didn't used to happen. You didn't use to hear about betting markets where bookies were placing odds on Obama versus Romney. But that embrace of gaming is another cultural shift that we saw happening in 2024. And it's also one that you don't hear much coverage about. It's this very slow cultural shift that happens that no one seems to really be talking about. But it ties into the theme that this was the year where the edges drove everything. And people were willing to bet on that edge, to take the odds on

that edge, right? This was the year in which the difference between history forking in one direction versus another was the difference of a slight edge. And this has always been a true determinant of history, right? We see this across multiple domains, and we always have. Sports is the most obvious example. In sports, a fraction of a second or an inch of distance can be the difference between victory and defeat. Sports is a domain where the slightest of edges wins or loses the championship. And we see the same thing play out in big risky bets taken on by major companies. A huge number of things need to go right in the right order to mark the difference between a catastrophic collapse or enormous riches. We see this play out in natural disasters where small shifts in atmospheric conditions can trigger devastating consequences.

And this year, the 2024 Atlantic hurricane season was one of the most destructive seasons on record, second only to 2017. Those tiny ships and atmospheric conditions, those were the edges that tipped the balance, leading this year to $232 billion in damages and 401 deaths. and on the theme of edges, it was even the slightest edge of companies, the seven largest stocks in the S&P 500, known collectively as the Magnificent Seven, that drove the overwhelming bulk of stock market gains this year. 2024 was the year when the edges, the slightest of edges, made all the difference.

Up next, we're going to talk more. about what it means when the S&P 500 is so over-concentrated in just a few stocks. What kind of concentration risk are we all facing? We're also going to talk about cryptocurrency and Bitcoin, which had an even better year than the S&P 500. Is it just another history repeating itself, just another crypto cycle? Or is it a harbinger of bigger things to come? We're going to talk about scientific innovation, big science breakthroughs that in the mainstream media got swept under the rug under all of the cacophony of noise. And we're going to look ahead to 2025. What can we expect? And how do we prepare? All of that is coming up next.

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Donate today at camh.ca.ca slash giving Tuesday. The S&P 500 is up nearly 34% this year, but the 10 largest stocks in the S&P 500 now represent nearly 40% of the indexes market cap, 39.9% to be exact. Those 10 largest stocks, Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, these are among the 10 companies that are 40% of the S&P 500.

Now, there are some people who are saying, wait a second, this is going to end in disaster. The reason people buy an S&P 500 index fund is because they want diversification. But in fact, this is starting to look like a fund with an enormous amount of concentration risk. Shouldn't that be a cause for concern? But the rebuttal to that is, welcome to the history of the stock market, the past, of a small number of stocks driving a huge percentage of gains is a pattern that has played out over time. The players have switched up, but the pattern remains. It's the 80-20 rule in action. The edges have always driven the gains. In addition, the alternative to this risk would be an

equally weighted fund. Equally weighted funds have existed for decades. We have the data that shows the equally weighted funds historically tend to underperform. The S&P 500 is cap-weighted by design, not by accident, but by design. Because we want the more valuable companies to occupy more space within that index. And when we artificially remove that, which is what an equally weighted fund does, yeah, we have better diversification, but those funds just don't tend to perform as well. because by definition, you're reducing your exposure to the companies that are doing the best. The top companies have outsized influence because they have earned that influence through

strong business performance through strong earnings and high expectations of future earnings. So I think in a discussion around concentration risk of the S&P 500, there are two questions to address. One is, what's the alternative to the S&P 500? and the other question is how do we defray the risk within our own portfolios? And these, I think, are separate questions. So in terms of what's the alternative to the S&P 500, I think the rebuttal that says, look, there is no better alternative for the purposes of broad market exposure. I think that rebuttal is correct.

We know that a cap-weighted index, like the S&P 500, tends to outperform equally-weighted indexes. We also know that attempts to sidestep this through sector rotation, tend to also underperform. So despite the concentration, a broad market index fund is still a healthy thing to have in your portfolio, and that concentration of 10 stocks comprising 40% of that index is, in some ways, it's a feature, not a bug. On the other hand, the way that you defray some of this risk

is by not putting your entire portfolio into just one, single broad market index fund. You don't put your whole portfolio into the S&P 500 or into VTSAX. You offset it with some small cap exposure, with some international equities exposure. You know, small cap and international equities are both asset classes that in 2024 underperformed, but in the bird's eye view of history, have done quite well. And so having an allocation into both of those asset classes, that is how you defray some of the concentration risk in your broad market index. If you want to hear a really detailed breakdown of this, listen to my interview with Michael Kitsis, a very famous financial advisor. So over the summer, I flew to

Chicago to the Morningstar Conference and sat down on a couch with a camera crew with Michael Kitsas for two hours. And we discussed this topic at length. You can listen to that episode at afford anything.com slash episode 525, episode 525. You can also find it on our YouTube channel, YouTube.com slash afford anything. But that interview with Michael Kitsis was very much dedicated to this exact question. How do we deal with the fact that our futures, our retirement, our kids college, our futures hinge on the performance of a really tiny number of companies. Seven to ten companies, right? The nerdy way of saying that is mega-cap concentration risk.

That's the jargon way of saying it. But the actual real people way of saying it is our retirements are riding on those seven to ten companies. How worried should we be? And how do we manage that risk? And the answer is some small-cap exposure, some international equities exposure. The answer is good asset allocation. Speaking of asset allocation, Let's talk about cryptocurrency.

Cryptocurrency, of all types, now have in total a $4 trillion market cap, making it worth more than the London Stock Exchange. And Bitcoin specifically is up 138% since the start of the year. That figure is as of mid-December. Now, if you're someone who does not want to directly hold crypto, but you want exposure to it through the public markets, because public markets are more regulated and have more safeguards, Well, if you've chosen that route, then you're also doing well. BlackRock's I shares Bitcoin trust ETF is up 92% year to date. And there's a particular company called Micro Strategy. This company's securities are widely considered to be a proxy for Bitcoin because Micro Strategy has heavy Bitcoin holdings. Well, Micro Strategy is up 381% year to date. it also just joined the NASDAQ 100.

I mentioned earlier that there is a bit of a distrust in institutions. And much of the enthusiasm around cryptocurrency broadly is a reflection of some of that. There's a lot of doubt around the Federal Reserve and around fiat currency that can so easily be printed and that can be printed at the behest of a government that has out-of-control spending. You recall that we began this episode by talking about five major factors. GDP, stock market performance, unemployment, inflation, and government deficits. On four out of those five were doing very, very well. But on the fifth, deficits were not.

And the enthusiasm around cryptocurrency, which has existed since it was formed, but which really reached another fever pitch in 2024, is a reflection of that. Yesterday, I took a tour of a Bitcoin mining facility on the suburban outskirts of Atlanta, Georgia. I met with a guy who works in R&D at the facility, and he spent an hour giving me just a one-on-one tour. The size and the scope of the place were incredibly impressive, and the rate at which they've grown. Oh, my goodness, just in the last three years, their growth rate is challenging to comprehend. During the tour, I was able to ask a huge number of questions around Bitcoin, such as, for example, particularly from the perspective of a company that has a lot of a heavy CAP-X investment, brick-and-mortar CAP-X investment, you know, what is the impact of a halving event?

And what's the impact of the rate of technological innovation as these heavy CAP-X investments into facilities to appreciate quickly and become obsolete quickly? and much of the manufacturing is done in China. So what impact our tariffs going to have on these Bitcoin mining facilities that are based here in the U.S.? And given that this tour was in Georgia, what about the hurricanes? What about a severe weather event? How could those adversely impact this very capital-intensive and very energy-intensive mining operation? So I was able to ask them all of those questions and more. and the broad theme that I kept hearing in the answers,

again comes back to how much of the future hinges on an edge. One bad hurricane truly could be a tipping point, at least for not for the industry as a whole, but for a specific individual company. And of course there are things that, you know, not just crypto, but any cap-x-heavy industry in a disaster-prone area would do in order to mitigate risk, but at the end of the day, a lot of our fates are left to a storm pointing five degrees in one

direction versus five degrees in another direction. And so as we take stock of what's happened in 2024 as well as look ahead, that recurring theme, that one degree of difference, that one percent of change, that one tweak, that slight edge is often the determining factor. And so that is my analysis of 2024. I'd like to talk next about some scientific breakthroughs, just to shine some light of hope and optimism. We had some incredible scientific breakthroughs that I think were swept under the rug or really not just not discussed.

And I want to shine a light on some of those. But before I do, on the subject of small edges, small tweaks, 1% changes, you know, if you're a long-time listener, back in 2019 and 2020, both of those two years, we had this offering that was called one tweak a week. It was a series, it was this giveaway that we gave away, and it included a series of these small tweaks that you could make in your financial life. Each one, fairly minor on its own, each one taking less than an hour, but a few taking just a couple a minute. You know, some of those tweaks are very basic, like check your tire pressure, because that's

going to improve your mileage, which means that you'll be buying less gas. And some of them are quite a bit bigger, like, okay, let's take the first step in starting an estate plan. But most of them are relatively small tweaks that are designed for the accumulation of marginal gains. With the idea that if you make your life just a little bit more efficient, one step at a time, one tweak at a time, You do one thing a week, then over the span of a year, that's going to add up. And by the end of the year, you will be so much further ahead than you were on New Year's Day. So back in both 2019 and 2020, we released this free PDF, free giveaway. And we had a whole community surrounding it, the one-week-a-week community, and people loved it.

What we decided to do this year is revamp it and update it. And back then, four years ago, we had only 26 tweaks, so it was meant to guide you through the first six months of the year. Now we have expanded it to 52 tweaks. Friday's episode is going to be dedicated to this, but to give you a sneak peek, we cover everything from reviewing your tax withholdings, to creating an emergency medical expense plan, to figuring out whether or not your side hustle is really worth your time. We talk about cleaning up your digital financial footprint, preparing for changes in your industry. You know, those are sort of big picture things. We also talk about replacing a disposable product with a reusable one, not just for the ecological benefits, but also because that's a recurring expense that you now no longer have to pay. We talk about building a price shock fund for variable necessities.

So when certain price has spike, like seasonally, when the heating bill spikes, boom, you've got money in the money. that price shock fund. So we have a giveaway guide. It's called one tweak a week, updated for 2025 with 52 small tweaks that can help give you little edges here and there. It's completely free. It's our gift to you for the new year. And you can download it by going to afford anything.com slash financial goals. That's afford anything.com slash financial goals. totally free. Let's turn our attention now to some of the scientific breakthroughs of 2024, and after that we'll talk about what's ahead for 2025.

Most people are talking about AI and machine learning. Many major companies have been using AI since pre-pandemic. If you read, for example, the J.P. Morgan Chase's annual letter to shareholders, they talk about how they've actively been using predictive AI and machine learning since 2017. It was first mentioned in their 2017 letter to shareholders, and they've applied it to hundreds of use cases across a wide variety of domains, marketing, fraud, risk. The use of predictive AI is not new to 2024,

but the unlocking of the potential of generative AI, that's where we see the story start to change. But I won't talk too much about that because everybody talks about AI. You've heard it before. I want to focus on the stories that you haven't heard. Science.org, which is published by the American Association for the Advancement of Science, named as its 2024 breakthrough of the year, an injectable drug that protects people from HIV for up to six months.

Now, currently around 1 million people per year are newly infected with HIV. But in the first large-scale efficacy trial, which took place in Africa, in June, that trial reported that these shots, reduced HIV infections to zero. So they reported a 100% efficacy rate, which sounds too good to be true. But then another similar trial was conducted, and then findings were reported three months later. That trial was conducted across four continents,

and it reported a 99.9.9% efficacy rate. So that shot that protects people from HIV for six months at a stretch, That was hailed as 2024's breakthrough of the year. And shockingly, at least in mainstream publications, we never heard about it. But it's caused for great optimism in the field of HIV prevention. Now, there's also switching gears, a company called Greenlight Biosciences. They've received EPA approval for the first ever RNA pesticide.

This is a new approach that uses a precise RNA-based spray that targets a specific gene within the intended pest, and they're using it on the Colorado potato beetle, which is an insect that has caused half a billion dollars in global crop losses annually. Proponents think that this newer and more precise approach will be safer than current methods of pest control. And when you think about, you know, so the reason that I care about this is you think about the global crop losses, right?

And then you think about what's happening in South Sudan right now. And of course, the famine there is largely due to problems related to, access and distribution of food. But globally speaking, the more we can improve the efficiency of agriculture, the better of a shot we have at addressing famines that are currently happening. It is abhorrent that on the brink of 2025, there are still people, huge, huge populations of people who are facing famine and starvation. And for that reason, Any efficiencies that we can make to global food production are hugely consequential. So those two stories, the HIV infection and global efficiencies in global food production,

those were the two out of the three scientific stories, big breakthroughs of 2024 that I wanted to highlight. And they're both causes for great optimism. And then the third story I want to highlight is one that you probably have heard in the headline news. You probably heard about it because it's so visually compelling. and it's Starship. Starship is the world's largest and most powerful rocket. It's 120 meters tall. It's powered by 33 engines.

The SpaceX Starship's lower booster rocket flew back to its launch tower instead of falling into the sea. And it was caught in this giant pair of mechanical arms. So it returned to its own launch pad and got captured by the same tower from which it had just launched seven minutes. minutes earlier. Why does that matter? I mean, first of all, this thing was falling out of the sky faster than the speed of sound. And then, from falling faster than the speed of sound, it relit some of its own engines and slowed itself down enough that it could be recaptured and then reused, right? So part of the reason that going to space is so expensive is because major parts of the rocket can't get reused. It would be like, imagine if every time you flew from

New York to L.A., you had to throw away the airplane at the end. Air travel would be prohibitively expensive if you could only use an airplane for one flight, and then you threw the airplane away after every flight. And SpaceX made a huge step in making space travel cheaper, specifically in getting cargo into orbit more cheaply by making the Falcon 9 and Falcon Heavy rockets partially reusable. That single innovation cut the price of getting cargo into orbit

by an order of magnitude. So this latest thing that just happened this year, 2024, that could cut the cost by another order of magnitude, which means putting people on Mars, is becoming more and more realistic. It's more and more cost-effective. And so future generations, I believe,

will look back on 2024 as the year in which we made a crucial innovation, a crucial step in making space travel accessible. So that's what happened in 2024. Next, let's discuss what's ahead for 2020. In 2025, specifically, there are the topics that everybody's already talking about. Tariffs, protectionism, expansionism, you've heard it before. You can hear it on any podcast, on any new show. Everyone's talking about that.

We're not going to rehash that. We're going to talk about the things that no one else is talking about. Basel 3 Endgame and the one-two punch of the end of Chevron deference alongside the potential weakening of regulation. agencies. That's up next. We know you love the thought of a vacation to Europe, but this time, why not look a little further? To Dubai, a city that everyone talks about and has absolutely everything you could want from a vacation destination, from world-class hotels, record-breaking skyscrapers, and epic desert adventures, to museums that showcase the future, not just the past.

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But don't wait. Like leftovers at midnight, our Black Friday offers won't last. Shop now at IKEA. CA slash Black Friday. Ikea. Bring home to life. So what's ahead for 2025? One thing to watch closely is the geopolitical landscape. There are conflicts going on in Europe, in the Middle East, in Africa. There's a potential for major global conflict that involves nuclear powers. China is threatening the sovereignty of Taiwan. In fact, on the geopolitical stage, when it comes to global conflict, the story that I think in the U.S. is not getting as much attention as it deserves is China and Taiwan. When it comes to what we can expect in 2025 and beyond, that is going to be a major potential Black Swan event, and it's something that any investor should be watching closely.

China's crackdown in Hong Kong is perhaps only the beginning. So keep a close eye on China in 2025. And also note, there is this cooperation going on right now between China, Russia, Iran, North Korea. That cooperation between those nations could destabilize the West. So what would happen if we were to go into war? The value of money would likely decline. broadly, historically speaking, there generally tends to be currency devaluation during times of war. And now this is because of disrupted supply chains, it's because of increased government spending,

it's because of the erosion of confidence in a nation's economy and in its currency during times of war. As long as the U.S. dollar remains the World Reserve currency, we do have that going for us, but there still, generally, tends to be currency devaluation due to you. to the supply chain disruption and the overall economic disruption that comes with war. And so if something were to happen, we would be facing a lot of volatility, a lot of financial instability, and we would also be facing higher inflation. How do we protect ourselves from that? And again, I'm not saying that we're going to war, but how do we manage that risk? As I mentioned earlier, any time that you are facing inflationary pressures, tangible assets are a good store of value. Real estate holds its

value, historically speaking, real estate holds its value in times of high inflation. Real estate is a hedge against inflation, which is one of many reasons why I am so enthusiastic about real estate investing. other tangible assets also tend to be good stores of value in inflationary periods. So you'll see other people investing in gold, in art, in anything that you can touch and hold. Now, all of that said, the other source of relative safety, particularly in times of economic disruption caused by conflict, are assets that provide an income stream. that could be rental properties, of course, that provide an income stream, but it could also be any business that you own that derives its value not from expectations of growth, but rather from the actual net operating income that it brings in. And if it's a business that brings in its

revenue from something that is a staple rather than something that's discretionary, that's even better. But overall, as investors, if you're trying to protect against the downside as we look ahead to 2025, the risk that some type of global conflict might disrupt global trade and disrupt supply chains, which leads to shortages, which drives up prices, that is a risk that I think we all should be taking into account. I don't want to keep beating the real estate drum, but part of the reason that I like that particular asset class so much is because when I, you know, I mentioned and owning something that's a necessity rather than something that's discretionary. And no matter what's happening in the overall economy, people need a place to live.

They won't necessarily buy moisturizer if things are tight. They won't necessarily buy luxury goods, but they always need a place to live. Now, that being said, the risk is that people might flee a specific geographic area. So there's a chance that a given city or town might lose population if the jobs decline. and jobs go elsewhere. There's also, on the flip side, the risk of overspeculation and overbuilding in the area, which increases supply so much that it causes rental prices to decline. I don't see that happening in most places, with the exception of some areas of the sunbelt.

But certainly I don't see that happening in the Midwest or in the Northeast, but it is a risk. So with real estate, the risks are localized, which is why your competitive advantage comes from deep local due diligence, deep localized knowledge, which is also one of the things that I love about it because it gives you a moat, gives you an edge, because you don't have to be an expert in the national real estate market. You simply need to develop a strong expertise in a hyper-local market. And that doesn't have to be a place where you live. It just needs to be a place that you know about deeply. In other words, it doesn't have to be the location you live in. needs to be a location that you have deeply studied. All right, that's the end of my Why I Love

Real Estate explainer for today. To get back to the original topic, which is what's in store for 2025, here are the things that we should be looking for. We should be looking for ongoing inflationary pressures. Not just, we were just talking about that in the context of global conflict, but even outside of global conflict, what are the other inflationary pressures that we may be seeing. We should note that the Fed raised its PCE inflation forecast. Remember the personal consumption expenditure price index, which we talked about at the top of the show. The Fed raised its PCE inflation forecast to 2.5% in 2025. So previously, the Fed thought, back in September, the Fed thought that 2025's PCE number was going to be 2.1%. They have revised that forecast to

2.5%, meaning the Fed thinks that things are going to be more expensive next year than they had previously thought. Between September and now, the Fed revised its 2025 projections to predict that things are going to be a bit pricier. They also revised their expectation of when they think they'll hit their 2% target. Originally, they thought that they were going to do it by 2026. They've now revise that to 2027. So watching for those ongoing inflationary pressures, that that should be one of the major things that we're watching in 2025 in addition to watching China, Taiwan, and watching the rest of the global world stage. We should also be watching the deficit. It's unusual to be running such high deficits at a time of economic prosperity. Historically speaking, it's unusual. And this

will be a major source of conversation that I predict you will be hearing about quite a lot in the year ahead. And here's the reason, because you're probably wondering, all right, deficits are concerning, but how does that actually impact me? So here's the thing. There's a lot of collective interest right now around monthly economic data. That's how the BLS issues its reports. That's how the news report. I mean, that's how we, the structure under which we understand inflation is by looking at monthly data because we want to see month over month trends. But there are also big macro things that impact inflation. Huge fiscal spending and the restructuring of global trade, those things impact inflation. They are inflationary, but they may not

reflect in monthly data. And that might be part of the reason why there's a divergence right now between the actions of the Fed in lowering the federal funds rate versus the actions of investors who are demanding more for long-term bond yields. There are two other topics that I think we are going to hear about in 2025 that nobody is talking about yet. One is Basel 3 endgame. Basel 3 is a final set of reforms that impacts banking. It ups the capital requirements at many banks. And the implementation of this final phase of Basel, so it's called endgame because it's been rolled out in phases.

And so the implementation of this final phase is supposed to start this summer, summer 2025. That would be the beginning of it, and then there would be a three-year period in which these new rules are phased in. Well, Basel 3 is hugely controversial. It would have an enormous impact on our banking system, the U.S. banking system. It would arguably make U.S. banking less competitive. It could tie up liquidity in a way that actually is contrary to its stated objectives and might make the system more fragile. And it's possible that it would end up ultimately raising prices for

everyday consumers while forcing banks to get entangled in this big regulatory framework that results in them taking their eyes off the ball when it comes to real threats like cybersecurity. So when we talk about things in 2025 that could create inflationary pressure, I mean, if there's an increased regulatory burden that hampers banks that could ultimately have an effect on businesses that create and manufacture and distribute everyday household products. It could impact their access to capital. It could make everyday items more expensive. It could theoretically make mortgages more expensive.

Small business loans could become more expensive. So when we talk about things that would have inflationary pressures in the upcoming year, This is something to watch closely. And it's shocking that, to me, that no one outside of occasionally Bloomberg, but no one really seems to be in the mainstream media talking about Basel 3, I suspect that when we get to the summer, you're going to hear about it quite a bit more. The other thing that I think will play a significant role in 2025 is the overturn of the Chevron doctrine, which we discussed on a previous person. Friday episode, coupled with this effort to weaken federal agencies, those two go hand in hand with each other. Basically, we now have the judiciary, the Supreme Court, ending Chevron deference, which means they're weakening the power of regulatory agencies. And we also have that

coming from the executive branch. So two out of our three branches, we have efforts to weaken the power of regulatory agencies. And as I said on a previous first Friday episode, what is one of the biggest agencies in the U.S.? It's the Social Security Administration. And so this one-two punch between the overturn of the Chevron doctrine and between what's happening in the executive branch right now will have an impact on the Social Security Administration. Now, what impact? I don't know. No one knows. but will it be positive? Will it be done? I don't know. Absolutely nobody knows. I'm sure the many people who work at the Social Security Administration would also love to know the answer to that question. To say nothing of the millions of people who receive their checks every month. But when we look ahead to 2025, what are the unanswered questions? I think one of the major, from the financial perspective, one of the major unanswered questions is how will the social Social Security Administration be impacted by these forces that are taking shape around it. So what will be the impact?

What will be the severity of the impact? What will be the pros and cons of the impact? No one knows. It's too early to say. I think the only thing that we can say with any degree of near certainty is that there will be some impact. But there is really insufficient data. to draw any conclusions beyond that.

So that is what's in store for 2025. Again, the major theme, if this episode has a given theme, it is the impact of the edge. History turns on slight edges, and we saw that to a huge degree in 2024. And now, remember, to give yourself a little edge, to give yourself minor tweaks here and there, download our free guide, one week a week, absolutely zero cost, by going to afford anything.com

slash financial goals. That's afford anything.com slash financial goals. Thank you so much for being part of this community. If you enjoyed today's episode, please share it with the people in your life. And again, join us in the one tweak a week challenge as we head into 2025. Make small improvements to your financial life every week so that one year from now, you can look back and see that aggregation of tiny incremental gains. One step at a time, one week at a time, one tweak at a time. So afford anything.com slash financial goals. Take the one tweak a week challenge.

Make sure you're following this podcast in your favorite podcast player. Thank you for being part of the community. My name is Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode. and have a happy new year.