The Ascend Letter

The Macro Environment

Let's forget the stock market for a second. The story last week was the bond market, and it was waving a red flag.

The Fed held rates on Wednesday with three of its members dissenting (voting to hike), and the bond market clearly wanted more than talk. By Friday the 30 year Treasury yield had climbed to its highest level since 2007. The 10 year spiked right along with it. Gas is back near $4.10 a gallon. And mortgage rates are creeping toward 7% again, the same wall that froze the housing market in 2024.

When long term rates run this hot, sooner or later something gives.

And with midterms around the corner, the timing is terrible for whoever is in charge. So I expected a response and sure enough over the weekend, like clockwork, another peace arrangement with Iran was announced, complete with reopening the Strait of Hormuz. We have seen this exact movie plenty of times this year, so I do not expect it to change much. Futures opening tonight will tell us how much the market is willing to believe it.

Now put the stock market next to all that, and it feels like a different planet. Whole indices are trading like meme stocks. Korea's KOSPI, their version of the S&P 500, fell more than 40% in a month and then ripped almost 18% in a single session, a record. Micron dipped to $705 in after hours trading and was up more than 35% within a day. Those are not the moves of a calm market. They are the moves of a market where forced sellers and frantic buyers are shoving each other around.

Trying to time entries in this kind of volatility is suicide. You feel like a genius for an hour and a fool by lunch. This is what dollar cost averaging is built for. Otherwise, get out of the way, wait for things to settle down, all while accepting that you might miss the train.

Planning Corner: For the Love of Real Estate

Americans love real estate. It is the one investment everybody feels they understand. You can see it, touch it, live inside it. On the surface, it has been a beautiful ride. Buy a home back in 2011 and you are sitting on a gain of around 151%.

Except that number flatters you.

If we take that same gain and ratio against the growth in the money supply, the M2 measure of how many dollars exist, you are actually down about 4.7% in real terms. The house did not really become more valuable. The dollar became weaker, and the price tag just followed it up. I always say, everyone needs a castle, and there is nothing wrong with owning one. But if you are weighing a home or a rental against other places to put your money, the cash flow has to make sense, and you have to understand that a good chunk of what looks like a gain is really just fiat debasement.

Now here is where real estate or any type of investing gets truly expensive. Not in the buying. In the selling, and the tax bill nobody warned you about.

I was talking with someone recently who had thought about selling their home. A friend told them not to worry about taxes, that because it was their primary residence, the whole sale would be tax free.

Wrong.

This is exactly why leaning on a friend for your financial decisions can be risky. They do not know your goals, your situation, or your actual numbers. If you are comfortable doing the research and handling it yourself, all the power to you. Otherwise, talk to a professional before you make a move that can haunt you for years.

In this case the friend was a real estate investor, and he had likely heard that if you convert a rental into your primary residence for two years, you can sell it tax free. Two problems. First, if you claim a property as your primary residence without actually living there, you had better hope the IRS never looks, because they do not treat fraud very kindly. Second, even when it is legitimate, you do not dodge all the tax. A primary residence gets an exclusion up to a certain amount of profit. If your gain lands under that limit and it truly was your primary home, you can walk away owing nothing. A rental property gets no such exclusion, and you pay tax on the whole gain equal to short or long term capital gains rates.

And notice the word that matters there. Profit. Not the sale price, the gain. Sell your primary residence for $1.3 million and, depending on what you originally paid for it, you may well have a tax bill waiting the following April. The person I mentioned would have sold, felt fantastic, and then gotten blindsided by a $45,000 bill come tax season. A single conversation with me beforehand just saved him from a $45,000 surprise. I'd say that's worth every penny. And I think I speak for most of us when I say Uncle Sam does not need any more of our money than he is already taking.