Sixth Edition - Harsh Reality Newsletter

Today is the sixth edition of the "Harsh Reality" newsletter! If you're new here, welcome to the fight. If you want to see previous editions of the newsletter they'll be available at the link below. And if you want to join us on our new Discord server or view our YouTube shorts click on the links below. Our intent is to always provide more value than we extract so thank you for being here and enjoy the show.

Weekly Dose of "Harsh Reality"

This week we're going to jump into strategic thinking on the topic of a career and life planning.

Harsh Reality - The U.S. has never been good at teaching new and upcoming generations about.. well, much of anything. The system is set up for worker bees by worker bees. Graduate high school, go to college, get married, have kids, grind for 30-40 years, & die. That sounds rather harsh; but that's what we're all about here. Instead of falling into some form of undesired existence on accident, we're going to go over how to methodically pursue and obtain a better outcome.

The absolute first thing you need to do is conceptualize how you want your life to play out. Do you want to retire on a foreign beach somewhere with millions of dollars at age 30? Or do you want to have a specific job, a modest home, a couple of kids and live a content life with just enough to get by? Regardless of your desired outcome, the most likely way for you to obtain it is to start with the end in mind. When you have a good grasp of that, you can begin to reverse engineer how to accomplish it.

One thing you need to understand is that your "end" will likely continue to develop quite a bit until you get older. "Older" is vague, and it varies from person to person. Keep in mind that a simple reality is that life experiences change you. Until you have some of those life experiences under your belt, you're continuing to develop as a person. Within this phase, we recommend that you stay nimble in everything you do. No huge (bad) debts, no long term relationships, no life-long commitments that you may end up regretting. This is the phase where you take risks and try to engineer experiences that will help shape you into the person you want to be. 

Now lets get into reverse engineering your desired outcome. Understand that you can and should practice this process with smaller desired outcomes first. You do not need to stress yourself out and assume you have all of the answers at age 18. Start with something like buying a car, or finding a job. The process is the same from the smallest of moves, to the largest.

The first thing you need to do is break down your desired outcome into manageable steps. We'll refer to these as milestones. Every outcome has some very clear milestones regardless of how complicated the overall goal. For instance, if you want to buy a house, here are some milestones you would need to accomplish:

• Increase your FICO score to an acceptable level for a lender to approve your mortgage.

• Establish a budget for your home purchase.

• Identify the area in which you want to live.

• Save for your down payment.

• Identify a realtor.

• Start hunting for your home.

Each one of those milestones can then be ranked based on importance. Each one also has implied tasks built into them. You can identify those underneath each one of the milestones and start working towards hitting each milestone.  

One thing that is extremely valuable is to put a timeline on each one of your milestones. That creates a sense of urgency in your actions and will help you stick to your process more effectively. 

Now that you understand the process of reverse engineering a desired outcome, you simply need to put it into action. Create some life milestones and begin to reverse engineer them. You can adjust them as your overall outlook changes; but make sure you're committed to the change. Here are some examples of basic milestones to get your mind working:

• Career

• Start a business

• Travel

• Experiences (Not a bucket list, do these now)

• Financial Health

• Physical Health

• Family

• Retirement Age

If you create effective milestones for what you want to do with your life, you have created a blueprint for everything that you hope to accomplish. Start breaking down the implied tasks for each one of the milestones and begin executing them with tenacity. If you can stick to your plan then you will have developed a level of discipline that most around you can only dream of.

Shit That Matters

Inflation Is Accelerating - The January inflation report was extremely high compared to expectations. Adding to the confusion, the February jobs report published on Friday showed that services inflation has increased, while the unemployment rate rose to 3.6%.

Harsh Reality - There will likely be no Federal Reserve pivot on interest rates in 2023. Although the Fed has increased the Fed Funds rate over 20x, inflation is not reacting the way they had hoped. The markets crashed this week given the reversal of inflation activity and the probability of a 50 basis point (1/2 of a %) increase at the 22 March 2023 meeting and beyond. You can track the probability of the rate increases using the CME FedWatch Tool. 

Biden will likely declare victory over the jobs report; however, the vast vast majority of jobs added were service industry jobs. In other words, they're jobs that most people take as a second income because of inflation, or because they were laid off. This is likely why you're seeing an increase in jobs along with unemployment at the same time. 

Banks Are Collapsing - Two very prominent banks collapsed this week. Silvergate Bank announced their insolvency on 8 March while Silicon Valley Bank was seized by regulators yesterday (10 March).  

Harsh Reality - This is a huge issue if it proves to be the first domino in several to come. For some perspective, Silicon Valley Bank had over $200B in assets under management at the time of its collapse. Compare that to FTX who only had $10B in assets. FTX got all the air time and attention; but the reality is that Silicon Valley Bank alone has 20x impact on the market as FTX. We do NOT give investment advice here at Harsh Reality; but our plan is to keep some powder dry for the next six months just in case. For those that don't get that reference, we mean money on the sideline.

Americans Kidnapped & Killed In Mexico - Four Americans were kidnapped in Matamoros, Mexico earlier this week. Two have since been killed and two others were returned to the U.S. and are recovering at a hospital in Brownsville, TX.

Harsh Reality - The Americans who were kidnapped were likely in the drug trade; which is why they were targeted by low-level enforcers of the Gulf Cartel. Not long after the bodies and survivors were returned to the U.S., several politicians called for the cartels in Mexico to be labeled as terrorist organizations. This is politician speak for "Let's allow military strikes on cartels in Mexico." 

Less than 48 hours later, the Gulf Cartel delivered five people to the Mexican government that they claim were responsible for the kidnappings and murders. One of them also carried an apology note stating that it was an unsanctioned action from the Gulf Cartel.  The reality is that those five people probably had nothing to do with the attack but the cartel is smart enough to know that they don't want to go head to head with the U.S. military. We here at Harsh Reality expect little or no response from this administration and the story will die as the news cycle continues.

Russo-Ukrainian War - Russia executed a huge wave of missile strikes all over Ukraine this week. The Ukrainians have reinforced Bakhmut after taking actions that implied a withdrawal was imminent earlier in the week.

Harsh Reality - According to open source intelligence reports, the Russian strikes throughout Ukraine had serious affects on the Ukrainian military infrastructure. The Ukrainians will not confirm or deny this information; but the impact will become clear in the coming weeks/months.

It appears that the Ukrainian military commander overseeing operations in Bakhmut gave the order to withdrawal without input from "higher." Since several videos showing troop withdrawals and bridges being blown up were captured, President Zelensky has ordered the reinforcement of Bakhmut. Some military analysts have opined that if widespread destruction of the area is going to occur, the Ukrainians would prefer that it to occur in a more Russian sympathetic area. Villages to the west of Bakhmut tend to sympathize more to the plight of the Ukrainians.

Student Loan Moratorium - The student loan moratorium is expected to expire in June of 2023. 

Harsh Reality - This is a few months away, but we're including it now because the smart money would take advantage of this opportunity to pay off/pay down their student loans while there is no interest penalty. Do NOT be that guy.. ☝️

Honorable Mentions - A Norfolk Southern train derailment occurred in Alabama just hours before the Norfolk Southern CEO was scheduled to appear before congress. There were no reports of hazardous material in this derailment; however, more is to come. Norfolk Southern reported 197 derailments in 2022 alone.

Weekly Market Recap

Shit That Doesn't Matter

Biden Publishes Budget - The administration has shared its $6.8T federal budget; along with $3T in tax increases.

Harsh Reality - If you were ever on the fence regarding Joe Biden's incompetence regarding the U.S. economy, look no further than this budget. Unfortunately, he's a fairly good politician who hides his true intentions behind D.C. speak that most Americans don't understand. This is budget would have a huge impact to the U.S. as a whole; but it has no chance in h*ll of getting passed; so it's on the "Shit That Doesn't Matter" list. Key takeaways:

• Reduction in military spending when accounting for inflation (This is a great idea when were flirting with a war against Russia and China)

• Massive Tax Increases on the lower and middle class

  • Medicare Tax ⇧ 31% (Tax on Senior's Healthcare)

  • Capital Gains Tax ⇧ 100% (Tax on your 401ks)

  • Dividend Tax ⇧ 100% (Tax on your stock dividends)

  • Corporate Tax ⇧ 33% (Tax on small business)

  • Defacto Death Tax by ending the "Step-up Basis" (If you receive an inheritance from a parent/family member upon their death, it will be taxed at 39%. If you cannot afford the tax then you will have to sell the asset to pay the taxes)

  • Reduction of fossil fuels subsidies (higher gas prices)

• Massive Tax Increases on the upper class

  • Share Buy-Back Tax ⇧ 400% (Not a fan of share buy-backs but it will cause exponential slowing in stock growth; in other words, your 401k)

  • Foreign Earnings Tax ⇧ 100% (This applies more to people who retire overseas to get a lower cost of living)

  • New Billionaire (Wealth) Tax on Income and Unrealized Capital Gains (If you are ever worth over $100M, you owe 25% taxes on everything you own whether you sell it or not)

Two items at play here are the most concerning of all. The first is removing the "Step-up Basis" on inheritance. The step-up basis used to mean that if you inherited an asset, then the capital gains basis would be re-established at the current market rate. That's all nerd talk meaning that you pay no taxes on the asset now; but you will pay the capital gains tax rate for any future gains upon the sale of the asset. This new rule requires you to pay the taxes now. If you don't you have the money to cover the taxes then you have to sell it off just to cover the tax bill. This is exactly what led to the destruction of the chateaus in France and family homes in the UK. The head of the household would die, and the next generation would have to sell off some or all of the land to pay the inheritance taxes. Pretty soon the land was gone and it was time to sell the house itself. Now instead of imagining Downton Abbey in the UK, imagine family farm in the U.S.

Second, "The Billionaire Tax," sets a dangerous legal precedent to seize the value of an asset while you still own it. This is similar to the inheritance tax but instead of it occurring upon death, it occurs every tax year. This was a Bernie Sanders policy during the last election cycle.

Imagine your house increasing in value by 50% in a year, like most have done recently. This new tax precedent would require you to pay a 25% tax on that 50% increase in value even if you still own it. Some reductionists will say that it only applies to people with a net worth over $100M. That is true.. for now. As we all know from the social security system, as the demand for money increases, the easiest way to cover deficits is to lower the threshold and increase the number of those impacted. "So it goes."

China and North Korea Threaten The U.S. - The Chinese and North Koreans have both threatened the U.S. The Chinese regarding sanctions over their involvement with Russia; and North Korea over targeting their provocative missile tests.

Harsh Reality - This is mostly bullshit. China was always going to pick the side of Russia and we all know that North Korea is a paper tiger. They always claim massive retaliations over benign actions from the U.S., Japan and South Korea.

Iranians Discover Massive Lithium Deposit - The Iranians announced that they discovered what could be the second largest deposit of lithium within their borders.

Harsh Reality - Unfortunately for the Iranians, they're on the wrong side of a mountain range and have little technical expertise to really do anything about it. Also, it's highly unlikely that the Iranians are being truthful about the size of the discovery. The Iranian Rial trades at a rate of over 42,000 Rial to $1.00. To put that into perspective, that's 28x worse than the Iraqi Dinar. Talk about a destroyed economy that needs a boost from a "huge discovery.." Regardless, they're about 10 years away from bringing the product to market. I definitely would NOT lose any sleep over this. 

That's A Wrap!

Thank you for taking the time to read this edition of "Harsh Reality." Each edition will only get better going forward so if you got value from this content please consider inviting your friends and family to subscribe using the link below. Once we make it to 10,000 subscribers this will transition from a weekly to a daily newsletter and we need your help to get there! Also, hit us on our Facebook page, YouTube channel or Discord server to keep the conversation going! We welcome your feedback and discussion!