Human life is full of unforeseen risks every day. Unexpected events are the norm, not the exception. There’s no such thing as certainty. Only daily choices and habits are within our control. But that gives the disciplined a big advantage over the masses, who tend to careen helplessly from one crisis to another.
Contrary to the popular belief that ‘rich people’ pay cash, those with higher-than-average incomes tend to borrow more than average to fund their spending and acquire other assets. Leverage magnifies boom and bust cycles and makes households, lenders, and the entire economy more fragile and vulnerable in a daisy chain of inevitable shocks.
It also creates opportunities for those who understand and anticipate these dynamics with sobriety, patience, low overhead, and cash–a tale as old as time.
For a glimpse under the hood, see After LA Fires Destroyed Mansions, Banks Reckon With Jumbo Loans:
In the affluent Los Angeles neighborhoods scorched by wildfires, jumbo mortgages on multimillion-dollar homes are commonplace, making the loans a potential pain point for the banks left holding them.
More than 72% of mortgage debt fell into the category of nonconforming — also known as jumbo loans — in the parts of Los Angeles devastated by the fires. That’s nearly five times the nationwide average, and almost triple California’s 26% rate, according to a Bloomberg News analysis of Consumer Financial Protection Bureau data. More than $11 billion of jumbo loans were issued in the affected areas and kept on bank books from 2018 through 2023.
…The banks could face a slew of financial and reputational issues — foreclosing on distressed borrowers, trying to recoup losses from insurance companies should homeowners abandon their obligations, selling off the land to investors and eating any losses if they fail to collect the full value of the real estate.
For more timeless insight, see Robert Frank’s 2011 book The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust.
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