The debate over passive vs active income
Although many would attest to a debate over active vs passive income, we believe there is no debate - Passive always wins. Let's explain why.
In this episode, I’m going to take you on a little journey with me as you watch how a contrarian sees the future, and acts in order to position for what could be the best ride of the 21st century so far. Strap in and enjoy the ride.
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One new iTunes review came in recently that I wanted to read out:
Myles is laying out a framework that will definitely not be adopted by most in the US , which is by design as he is promoting contrarian thinking. His core premise is that you you actually don't want to be like everyone else. Why? You'll get the same results as everyone else--and if you've looked around lately, people are miserable. We all feel in our day to day 9-5 jobs, we sense that the system that we are participating is not working any longer FOR us. It serves those at the top. It is not setting us up to experience the fullness of life in the long run. In other words we have become slaves to our 9-5 with no end in sight. Myles treats his show like a case study of America today and into the future and is quick to point out the flaws with well worn path to 'American Success' and retirement, but he also even quicker to provide a way out for his listeners. This is the focus of his show. If you are not interested in making change in your life, you will not like this show. If you are not willing to step out on a limb, this is not the show for you. But if you are willing to take ownership of your life and forge a new path--this is the best show for you. Keep up the good work Myles.”
Also don’t forget that we need Patreon supporters. If you want to show your support for what I do with the podcast and the website at beunconstrained.com, consider contributing as little as $1 an episode over at Patreon. There’s a link on the home page at beunconstrained.com where you can go to sign up. I really appreciate your suport.
Now onto the core content.
You have probably heard my analogy about investing and how it compares with what I learned in my teenage years, learning to surf in Australia. You don’t get the ride of your life if you don’t get wet, and most importantly you surveil the landscape, pick the right beach, look to the predictable patterns in the waves, paddle out to the right set, and wait. You won’t catch a wave if it is upon you, nor will you catch it if it passes by, and you can be destroyed if you don’t position to avoid it crashing on you either.
With that analogy, I’m seeing some waves building out on the horizon.
I believe that in the universe, things have a way of balance. We see this in so many parts of nature and science. Phases of the moon, weather patterns, etc. and in electricity we have positive and negative poles. Same is true of the magnetic poles of the earth. With a swing in one direction, it will eventually return back the other way. Like sine waves. Sound is like that. We hear sound because of the sine waves of resonance.
The same is true in economics. You get up and down cycles. All markets have these. The period between up and down varies, but normally in the real estate market for example, we see 6-8 year cycles from up and down markets. The reality in that business is that it is driven by the very simple philosophy that people need a roof over their heads. Demand for those roofs are determined by the quantity of people and where the people want to be. With population on a constant and exponential rise, you can pretty much guarantee that although there will be cycles in real estate, it will continue to be on an upwards trend while more babies are being born on planet earth.
At any moment in time, you can look at different markets and determine at what phase they are in a cycle. There are many markets - stocks, bonds, crypto, real estate, commodities, oil, etc. You can invest in a market at one point and liquidate your investments at another. Some markets are good for buy/sell transactions, and others are better to acquire and hold. You know my position regarding real estate as an investment - don’t kill the goose that is laying the golden egg. But what about others?
If you want to see a picture in the dictionary under the term “investor” it is probably some person looking at a computer screen with a chart on it. Charts simply show the sine wave of investment. People think that when a chart is going up, everyone is happy. And when it is going down, every one is sad. Let me burst that bubble for you right now.
The simple rule of investing is to buy low and sell high. You make your money on the spread between the two end points. That means if you believe a market is going to be going up over time, the question is how long and where are we in the cycle. If you are only looking at a chart for a short period of time (let’s say a year or two), then you are wasting your time because we all know that market cycles are 6-8 years on average. You need to be looking at charts over a 10 year cycle (or longer) and you need to be patient that what you buy today has to be able to be left alone for a market cycle to complete out.
This is all really basic stuff. But we live in this fiction with fancy terms like “modern monetary theory” that are pure BS. The reality is that smarty pants math wonks can’t change the laws of the universe and nature. As much as they might want to create an artificial reality on their spreadsheets, the truth is that people are just one form of biological organism that exists in the universe and we don’t control anything. We are subject to the very same universal cycles that have existed since eternity. The day that comes when a solar burst destroys all of our toys and life, or a meteor hits our planet and wipes us out, or some virus comes along because planet earth doesn’t like the fact that we’ve become an apex predator and killed off all the sub-standard life forms for our own consumption, then we will come face to face with how insignificant we really are. But that’s for another show when I get to depress you a bit.
For now, know that we can’t control cycles.
And that brings me to looking at markets. I’m always out there looking for markets that are at low points. My general sense is that when a market (over a 10 year period) shows on a chart to be at the lowest point it has been over that time frame, then I put it on my radar for investment. If it continues to go lower then that tells me it hasn’t bottomed out yet and I’m cautious. If I see that it has started to turn upwards, and has done that for at least 6 months over the 10 year cycle, then I start to get excited about buying in.
I did this back in 2010 with real estate. The 2008 collapse wiped out a lot of people and with that, started the process of foreclosures as sub-prime loans started to mature and people were forced to pay principal & interest at higher levels than they expected. With a general economic market that had high unemployment, it was a recipe for disaster. People just gave the keys back to the banks, declared bankruptcies and went from property owners to renters. In Phoenix, there were robo-auctions for foreclosures. I visited many. They definitely were an experience. It looked like we had gone back to the 1800s as they were done in town squares, open auctions on property in volumes. You could pick up properties at pennies on the dollar back then, as banks just wanted the toxic assets off their books.
We bought a lot of real estate back then. But you needed cash. Well if you are a contrarian, you would have had cash. Because when times were great for real estate, the contrarian is selling. That’s what we did in Australia. We sold 3 properties there and literally trippled our money. Once the cash because available (after taxes were paid), we then used that to acquire foreclosures. We did that in 2010. That was the right time, according to the charts. The volume of foreclosures were so high that it forced prices to their lowest points, so we were all in. Today those properties are worth multiple millions of dollars in value. But at the time, you couldn’t give them away.
That’s a perfect illustration of market cycles and like great comedy, the secret of success is timing.
Again, the surfer analogy. You prepare, get out there, wait and pick your ride. You don’t do what everyone else is doing because they are not catching the rides. There are times you don’t even venture into the water.
Let’s say you have a bit of cash you have accumulated and you want to invest it. I mean the economy has been good, if you believe what you read in the news. So you may have amassed some extra money. What do you do with it?
Look I don’t know your personal financial situation, so this isn’t personal financial advice. Plus I’m not a financial planner, so I won’t pretend to be one here. But in general, here’s what I would suggest:
Get an emergency savings plan together
You need to have at least 3 months of burn rate covered in liquid cash somewhere. Put it in a savings account somewhere that is low risk, and yet takes at least 24 hours to get to. Probably a bank. I personal like credit unions over banks, because I’m not a fan of banks. But again, that’s another story. If you can do 6 months of burn rate, that’s even better.
Stop putting your money into long term commitments
I’m sick of hearing from so called financial advisors about maxing out your 401K or IRAs or HSAs. Sure, that’s great for taxes, but now you can’t touch your money. Basically you have sold your surfboard and now you can’t surf. If you want to give that to someone else to invest, then fine - but are they looking at markets like you are, and do they have the flexibility to invest across ALL markets? If they do, then maybe that might work but know that you can’t touch the proceeds until 59 or whenever the fund matures, so you have locked that money up.
If you are a control freak like me, that’s like finger nails on a chalkboard.
Stop listening to CNBC
I previously said that market cycles are 6-8 years. So the antithesis of this is a 24 hour news cycle. Know that TV news cycles in the 21st century are designed to do one thing - sell advertising. They don’t monetize unless some pharmaceutical company is spending millions to push their latest magic pill on you, so forget that anything on CNBC is helping you. It isn’t. A bunch of assholes in suits are going to tell you that they are right and others are wrong. Big deal. This is not the WWE and it isn’t going to affect your life.
Take an inventory of markets you might want to participate in
There are many - stocks, bonds, real estate, commodities, forex, oil, precious metals, tax liens, etc.
For each one that you want to participate in, study it
You are going to be an investor in something. You better know how it works. Know what are good features and what are bad. Know what are risks and look to history of how it works. History should be at least 30 years back. Look at what external factors impact the market - if you want to invest in oil, understand how OPEC works and how regional conflict impacts oil prices, for example.
Determine at what stage each market is in a cycle
Historical charts and research will tell you how long each market typically has in a cycle. I like to think in terms of 6-8 years. For example, in the late 1990s and 2000 period, the stock market was at all time highs, driven mainly by Internet stocks. Traditional investment in US Steel, Boeing, GE, etc. migrated over to Yahoo, Google, Amazon, etc. after a few years following mainstream introduction to this new thing called the Internet. But like starting an engine, sometimes it might startup and then stall before you have to kick it over again. That’s kinda what happened. In 2001, the engine stalled and stopped. And a lot of people who bet on the future lots a lot of money. I mean a REAL lot of money. They got, to use a technical term, butt hurt over it.
A lot of the money that was rescued out of the stock market’s sinking ship in 2001 got moved to other markets, and the #1 market was real estate. Hence over the next cycle (about 6 years), the stock markets were poor performers, and the real estate market entered a boom cycle. But with the greed that had come from the eurphoria that came into being in the Dot Com boom times, and that the US Federal Reserve started to intervene and “tweak” markets, people started to get access to money that had otherwise elluded them before. And with that, people bought assets with debt that they should never have done. Particularly during a time when the US government was telling people to buy a home because they “deserved it” or implemented programs like “cash for clunkers” to get people to buy a new car. These things were supposed to spur the economy, but in reality it just swindled more and more uninformed US people.
The result was in 2007, the real estate markets crashed. With that, it brought down banks. And with that, it brought down industries that relied on banks - the automotive industry, the insurance industry, etc. And with that, unemployment went crazy. “The great recession” as they called it.
But this was just a market cycle playing out. Whatever we think caused it, whether that be fancy terms like sub-prime loans, collateralized debt obligations, etc. the reality is that cycles in the universe exist outside of us humans. Yeh, I hate to tell you this - we are not that smart after all.
If you see that from a 1,000 foot view, then it is easy to make a lot of money on it. If you buy into a low market cycle knowing it will go up, then you can make 10, 100 or even 1,000 times on your investment. Kinda beats the fancy guy in the suit on Wall Street who spent all their waking hours trying to tell the world that Bitcoin was a scam, while I bought it in 2011 and made 1,000x on my investment. Some scam, Mr. Goldman Sachs.
This is important. There are meta level factors that surround investment markets that may push it from one cycle to another. And I see a lot of those right now. The most obvious one is the US Federal Reserve.
The one fuel source that a market needs are buyers & sellers, and they do that with one thing - cash. If you are a good saver and you have a safe full of treasure, then you get to play with your own money. But if you are not so prepared, then you are going to need money to play, and that typically means borrowing it from someone else.
The danger here is that we humans control access to capital. And we believe that we control markets. The first is true, the second is absolutely false. With the Internet and easy connectivity between countries, people with capital that was saved in one place can lend it to people without capital in other places. This is a good thing - it means that those that worked hard, saved and were conservative can finally get a payback for that good behavior by getting an interest rate on their money that allows them to live off it.
But we’ve done a lot to destroy that, making those that are not working hard, playing it safe and doing the right thing to be able to get a free ride on the tails of those that are. And that’s a big problem.
The $USD is the world’s backing currency. This is due to agreements made post WWII in Bretton Woods that determined “to the victor, goes the spoils”. By becoming the backers of the world’s economy, the USA created the “western world” and with that a bouyant and growing future. But back in those days there was one big difference and reason why the USA was able to sell this to the rest of the world.
Gold. Gold backed the $USD. It was a scarce resource and it was mined and stored in Forts and vaults. If anything went wrong, everyone could at least rely on gold. But in 1971, that all changed.
After the USA didn’t do so well with future wars, particularly the big one in Vietnam that was costing an arm & a leg in money and hundreds of thousands of human lives, there had to be a way out. And there was going to be an economic price to pay. No longer could the USA be the “to the victor goes the spoils” because in this case, it wasn’t the victor. But decades of time had past and generations were being raised with the idea that they were “exceptional” because of history, so we couldn’t burst that bubble.
One trick was done that allowed artificial money to be pumped into the US economy - break free of the Gold standard and just start printing money out of thin air. The power of central bankers who could control that was enacted and the results were that although the 1970s were not a great time economically for the USA, and interest rates hit all time highs nearing 20%, oil prices and oil availability was really bad and a sitting US president resigned under impeachment pressure, we got through it.
By the time 10 years had passed, we’d forgotten that past and we were able to get back to the “good times”, and this was noticeable in the mid 1980s when money was sloshing around and everyone had a Porsche and RayBan sunglasses. Of course that wasn’t going to last long because, you know - *market cycles*.
But the USA kept borrowing money from the central bankers to try and stimulate the economy and political leaders could get into office, remain in office, etc. if they learned to pull the right levers at the right time, and use artificial stimulus to make them look like economically good stewards of a nation. Remember the famous Bill Clinton statement regarding how he won the election in 1992 and George Bush Sr lost? “It’s the economy, stupid”.
Fast forward to 2020. The USA has $23 trillion in debt load. Another $100T in future liability commitments. We are 12 years following 2008. The stock market is at all time highs. And the US federal reserve, under pressure from political leaders, has interest rates pegged so low that on conservative, responsible saver, etc. can make any money in a bank with their savings. Retirees can only make money by putting their life savings into risky markets - mainly equities. But as we contrarians know, markets have cycles.
I, personally, can spot a scam here. We have a Ponzi scheme at play - the US government borrowed itself out of previous disasters rather than letting the natural market cycles work. We detached from anything that was an undeniable currency backing (ie. gold) and we started to make shit up. We told generations of new entrants into markets that they deserved to be exceptional. That they lived in the best country in the world and that they were rich. They all deserved Lambos.
Sounds like a 3AM infomercial to me. “You too can make millions investing in ....”. That’s the scam right there. But behind the scenes, they have fewer and fewer levers to pull. Interest rates are so low, I’ve never seen debt be considered a currency on its own. But it is. The US federal reserve are printing more and more money, but diluting the value of a single $USD like putting more water into the Kool-aid and expecting it to still taste decent.
So you have what would normally be a 6-8 year market cycle in the stock market, at all time highs, at 12 years since the last collapse.
It tells me to get the hell out of equities. It tells me to stop listening to parrots that keep saying “Buy Vanguard Index fund investments” or “Max our your 401k or IRA”. It tells me that any idiot that is patting themselves on the back for becoming “FI” because they drank that Kook-aid and have a net worth of millions from the stock market, did so because they got in when the cycles were low (ie. post 2008) but if they can’t get out, then that roller coaster is going down big time.
It also tells me that when the market cycles (eventually) and I suspect that if you take out the human stimulus because of political pressure, that will accelerate that process, then it has a HUGE way to go down. This is not a normal cycle, where markets correct. This makes the 2008 crash look pretty lame. In 2008, we saw DJIA at 16,000 or so, and halved to around 8,000. But now we have markets over 29,000. If they halve the amount of wealth that will be wiped out of existence, will be extraordinary.
And unfortunately as the universe tells us, it will cycle.
Now I’ve laid out the case to get the hell out of the stock market, where can you take your winnings?
Recent history (at least in 2001) showed that money left equities after the Dot Com crash and entered real estate. There’s still a bit of a bad taste in what happened to the real estate market in 2008, yet I do see that as normal market cycles.
But where will it likely go as “safe haven” investments in 2020?
Just as you have to look at charts over time, you have a long history of Gold charts and a short history of Crypto. That tells me that it will be hard to make future predictions on crypto because of the lack of historical data. But even with only 9 years of data, it may be enough to see a future there. The one thing about crypto that is appealing to me is that math defines the total supply of the currency and unlike the $USD, there is backing. Bitcoin has a limited supply of 21 million BTC and with that, it means the value of each BTC has to go high as the supply is reduced. But the assumption here, is that demand is there for the supply. That’s where it may be debatable. If BTC (and other alt-coins that seem to have their prices tied to BTC valuations) are determined to be popular and in demand, then prices could go to the moon. But that is still a variable.
The one thing I think that can’t be denied is Gold. When people in the markets want some safety, they typically go to Gold. We have seen massive gold price (per ounce) increasing over time based on this behavior. In 2012, we saw Gold almost hit $2,000 an ounce. If you believe that when the current equity market cycles, it will be a far more adverse event than 2008, then one could predict a far higher upward price for Gold.
And that’s where I’m at.
I started to buy Gold in 2017, at around $1,180 per ounce. As more people seem to be seeing the current market risks, they drove the price to $1,570 (at the time of recording this). That’s a good start for me. But it isn’t the end point. I have no idea what the eventual price target will be, but it certainly wouldn’t surprise me to see $2,000 as a minimal price. Maybe $3,000.
So I’m now moving what little money I have in IRA investments out of equities and into Gold. I began the process of talking with my accountant this week about the logistics of doing that. I’ve started a new self-directed IRA with a Gold market fund that is 100% IRS compliant, and I’m buying physical gold - not some GLD ticker symbol on Wall Street for this, but rather than taking ownership of it (since that wouldn’t comply with the IRS rulings here), I’m using the Self-directed IRA to work with acquiring physical gold from a local vendor here in Phoenix that I’ve worked with before, and they will deliver my gold to a vault repository that complies with the IRA rulings and is under management by my precious metals IRA provider.
It is early 2020 as I do this. History will determine if this was the right or wrong thing to do. I’m no expert in this. I’m just a guy looking at market cycles. I’m a contrarian that knows I’ve never made any decent money following the herd, and I see a herd about to go over a cliff with a massive fall before them.
I also see a US president who is trying to manipulate the markets as high as possible prior to November 2020 to help his re-election prospects. But after November, I see that regardless of whether he is re-elected or not, the markets will not be considered to be important and the stimulus will be removed. It has to. The US Federal Reserve is losing control here and has fewer levers to pull. They have to raise interest rates to have any power here. That means less liquid cash (if you believe debt is a currency, that’s a devaluation of that currency) and that could be enough to topple the markets. Or if a political party come into power that have less interest in economics, and more interest in austerity or social program investments. One way or another, it isn’t looking rosy for the stock markets.
Will the markets react prior to November? I don’t know, but I do see pullbacks beginning. And so I’m acting now.
Hell, I could be completely wrong here. Sure, there is a minimal chance of that. But I’m a long term player. I know how cycles work and I can smell a scam a mile away. I’ll continue to buy into crypto as well, because that could be a future worth embracing. But it comes down to government willingness to embrace it, and popular demand for it, and both are undefined at this point. I see that has highly speculative, but as they say “No risk, no reward”.
However Gold is pretty solid to me. I’ve been a gold-bug for a while now and I see no reason to change position based on the turbulent waters we find ourselves in today.
As for real estate, the prices are too high to buy in right now. They certainly could go way higher and probably will if the stock markets collapse. But as I’m buying to rent them, the cost of funds vs. rents doesn’t have too many options to get ahead of the math there. There are always deals of course. Someone, somewhere wants out and what they are willing to accept as their exit price is really up to them. But with so many vultures circling with the robo telemarketer calls coming in all the time with “We see you own property at X address. Would you be interested in a cash offer to sell it today?”, that reminds me of the markets of 2005.
I would love to see a market crash, Gold goes to $3,000, sell it out and triple my money, then buy a crap ton of real estate and repeat 2010 all over again. That would be the ultimate best end result I could expect. But even if I only get 50% of that hope, I’m a pretty happy camper with that.
I leave you to speculate on what you want to do with your own money. Again, this isn’t financial advice to you because I don’t know your personal position. I’m just telling you what this contrarian is doing. I hope I’ll enjoy the ride.