Introduction:
Jawad S. Mian is the Founder and Chief Investment Officer of TGSF (The Good Society Fund) Advisors. He’s also the Editor of the “Stray Reflections” monthly investment newsletter. Based in Dubai, Mian is an expert on Dubai, Qatar and Middle Eastern investments.
Mian discusses Dubai as a travel and living destination. He also shares the investment opportunities available in Dubai, Iran and Iraq.
Key Takeaways:
(4:40) Jason talks about dentists, doctors, and loans
(8:04) fMRI studies on success and failure
(15:12) Investing in discounted notes
(19:33) Introducing Jawad Mian
(20:47) Why people invest in Dubai
(25:41) Real estate in Dubai
(30:06) Oil prices
(35:30) Bitcoin and alternative currencies
(42:53) Investment & housing markets in general
Links:
Visit Stray Reflections at www.Stray-Reflections.com.
Bio:
Jawad Mian was born on a cloudless January night in 1984. He originally hails from Pakistan but was born and raised amid very high temperatures in United Arab Emirates. His initial plan was to become a doctor, then a lawyer, but fell in love with the global macro world instead. He survived seven cold winters in Canada during which he studied finance and economics at The University of Western Ontario and started his career as a bank teller.
To his surprise, he would go on to obtain the CFA and CMT charter after tireless effort. Most recently, he ran $250 million across global markets for a Middle East based quasi-sovereign entity. He left to start-up his own fund. He was last seen sporting a beard and getting ready for a journey no one knew anything about, not even him.
Every month, he sends us his thoughts from the road…
Audio Transcription:
ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show. This is Jason Hartman, your host, this is episode #413. Thank you so much for joining me today. And I’m coming to you from the big D. Yes, Dallas. I seem to find myself in this city quite a bit. Number one, because it’s obviously a hub, and it’s got a—you know, a very, very busy airport. But number two, a lot of conference here, and a lot of different meetings I’ve been at here lately, and I’ve been in meetings for two days here, and it’s pretty interesting, because I’m hanging out with a lot of dentists and doctors, hearing about their challenges and their business and their investing challenges and so forth, and these are a bunch of doctors and dentists that want to move from their practice, to some extent, even if they love their business and their practice, even though they are highly paid professionals, they’re still in the position where their income, in most cases, does not extend beyond their own efforts. So, when they go away, they go on vacation, the income stops. And that’s what we want to do. And that’s what this show is about. It’s about moving from active to passive income, as quickly as possible.
Remember, with income property, that income comes in so many different multidimensional ways. It’s not always apparent, because you might think, well, you know, if I buy ten properties, and they each produce $300 a month in cash flow, for example, that’s only $3000 a month. And that’s not enough to live on. Well, fair enough. You are right. But there’s a lot more going on, just like the iceberg that the Titanic hit; it’s mostly below the water, as they say, and if you’ve been listening to the show for any length of time, and you understand the principles of income property investing, you know that all of those multidimensional returns add up to big, big money, or at least they can potentially.
And our guest today is Jawad Mian, and he is founder and CIO of TGSF: The Good Society Fund. And one of the nice things about having an entire network of shows, is many times, one of my guest bookers will book the guest for another show, but after talking to the guest, I realize, gosh, they really need to be on this show. Or that show. Or maybe multiple shows, occasionally. We do that. And if you listen to shows throughout the network, the Hartman Media Network, we sometimes play guests on multiple shows. But that’s only maybe 25% of the time.
He’s pretty interesting, because he’s an advisor from Dubai. You know, Dubai is obviously like the incredible diamond in the Middle East. I mean, it is—you know, a really, really amazing place. And I have not been there yet. Having been to 71 countries so far, and in a few days, going to number 72, I’m going to Peru. It’s kind of amazing that I have missed Dubai and Brazil and there’s still some big holes in my travel here that I’ve gotta fill up. But Dubai is certainly an amazing place, and I want to go there, and he has some interesting insights into the global economy, Dubai, and investing, and so forth, and I think you’ll really enjoy the interview.
But before we get to our guest, of course, I have some comments, and I do have to make one comment about the guest interview. One more time, please forgive me, the sound is not up to my standards on this interview. I don’t know why; we just had some technical problem. I mean, it’s as good as most podcasts, I will tell you that, but it’s not good enough for me, by any means, so I do apologize, but there is some good content, and I know I’ve asked for your indulgence on a few episodes about sound quality, as we have had some technical problems lately. But I did purchase a brand new really swanky microphone, and I can’t wait, when I get back from Peru, and start recording new episodes, to start using that mic, because it is one of the best new microphones out there. So, I’m super excited about that, so look forward to extra awesome sound quality coming up on the show real soon.
Jason talks about dentists doctors, and loans
A few things I wanted to mention. First of all, dentists and doctors. One of the things that I found interesting today and yesterday, in hanging out with a room full of, I don’t know, 40, 50 dentists and doctors, is, one of them I was talking to today, I couldn’t believe it. I mean, this is just amazing. You know, the amount of money that some professionals have to invest into their career, or their practice, compared to what we have to invest into our career, if it becomes our career, ultimately, or maybe it’s just a side career, or a side business, and that’s the one of real estate investing, is unbelievable the difference. And the difference in the upside is incredible too. Of course, with income property, we have huge, huge upside potential. Huge, huge freedom and financial freedom potential. And it really requires a very, very low investment. You’ve gotta spend a little bit of time and money on education, and of course, you need to invest a little bit of time and money and actually purchasing the properties, and managing them, and so forth. Compared to most things, it’s very, very low.
Here’s the number that amazed me today. A husband and wife, two dentists, they were telling me today that they have $600,000 in student loan debt. $600,000. And that’s from loans from their dental schooling, at the University of Michigan. That’s about $300,000 each. Now, if you invested $300,000 in your real estate career, or for your household, husband and wife, $600,000, raise your hand. You probably haven’t. Now, maybe you did that in actually buying properties. But you certainly didn’t do that in education. And I really doubt, even if you’ve listened to every episode of my podcast two or three times, which, by the way, I will tell you, many of you have, and I commend you for that, because I would be sick of me by then. The most I ever listened to one of my episodes is twice. One when I’m actually making the episode, and then I’ll go back and actually listen to it as well, to see if it’s any good. But sometimes I am amazed, disheartened, and upset at myself for what I actually say on there. So just know that.
It’s not just $600,000 in the cost of school. But it’s also the time, the time it took away from other productive activity. There’s a huge opportunity cost there in the money and the time. And so, how long does it take to become a dentist? I don’t exactly know, but I’m guessing it’s about 7 years of schooling. Maybe 8 or 9? I don’t know exactly. But it’s somewhere around there, for a doctor. That’s a pretty substantial investment in both time and money. So, keep that in mind.
One of the other things that I heard today that was really interesting—this has been a mix of investing and general kind of motivational, and marketing for dental practices, and doctors. Just some things on how to manage and run an office, and so forth. And you know, I found it very interesting. It’s always interesting to step away from your own profession or your own business. Now, certainly I spent a lot of time in real estate conferences and things like that. But it’s really interesting when you step away from your own profession, your own industry, and you look at the challenges and the opportunities that other industries and other professions are facing. You can bring some of that back. You know, through osmosis. It just kind of seeps in. And you can bring some of it back to your own practice and your own business.
MRI studies on success and failure
Well, this was just one of the general motivational speakers that I heard today, and this was fascinating to me. I’ve talked many times on the show on the past about MRIs—magnetic resonance imaging—and the most important, the newer version of MRIs, the fMRI, the functional magnetic resonance imaging instruments. And these are really amazing. Because what they allow scientists to do, is they allow them to see how the brain reacts in real time to certain stimuli. You know, they’ll flash marketing messages to the person in the MRI, the fMRI machine, and look at which areas of their brains become active, and what goes on in their mind. In fact, this is a
family show, but, this is just science, folks. There was a documentary or something I saw on television, about a woman who actually went into an MRI machine, and experienced an orgasm. In the machine. And they saw for the first time in history, how the brain reacts to that. And they’ve tested certain words and marketers are very fascinated by what areas of the brain light up with certain kinds of stimuli from the outside, or meditation, and all kinds of—there’s just gonna be fascinating, fascinating science that comes out of this in the future. It’s on the verge of mind reading. And that is really, really incredible.
One of the things that this speaker was talking about is how in the fMRI machine, they’ve taken samplings of how people in the machine react to failure, and how they react to success. I don’t know exactly how they did this. But you know, researchers, this is what they spend their lives on, and they figure out how to do this stuff. And what they found is interesting. They found that failure hits the brain with quadruple impact to an equivalent—and you know, I don’t know exactly what an equivalent is, but this is why we have researchers and scientists and people that figure all this stuff out, and know how to use the scientific method and test for it. Failure hurts, in other words, or impacts the brain, four times more than equivalent success.
So, what does that tell us? It’s really interesting what it tells us. And what does this have to do with real estate? Well, when we have a success in real estate—one of my friends that is actually at this conference, his name is Cory, he started something called the Grateful Project. And every day on his Facebook he writes a really cool message about something he’s grateful for, and he says, you know, Jason, you really should try this. You should do it. It’s a very enlightening exercise. And I have this little app on my phone that admittedly I’m not using. But it sends me push notifications every day, and I subscribed to it. I turned it on and downloaded this app a few months ago, and it’s like a journaling app. A little message comes up every day, and I do not do it, admittedly, I know I’m terrible, I do not do it, and it says, list three things that you’re grateful for today. And I don’t do it, okay?
But it makes me think about three things that I’m grateful for today. And so, when it comes to income property investing, you know, think about it. Are we ever grateful when we get the rent on time? No. Probably not. We just expect it. Right? Are we ever grateful when we go six months or a year without any repairs or any maintenance issues? No, probably not. We probably don’t notice it. But when one little thing happens—when the tenant is a week late on the rent, or say we have an even worse case, where we have a tenant that doesn’t pay at all, and we gotta evict them, or say we have a repair item that costs us $300, or $1000. You know? How does that impact us? Well, the scientific research is, because we are naturally set up to think out of scarcity versus abundance.
And you know, why is that? Well, my hypothesis on it is that, in all of human history, and even to some extent now, we’ve lived in a scarcity environment, okay? Really, not now, although in some things it’s even true now. And I would say now, we live in a connection scarcity environment. A human connection scarcity environment. With all this technology, it actually disconnects us, in many ways, as much as it connects us. And there’s a great video about that, about social media, by the way. Find it on YouTube. I think it’s called Look Up. Really fascinating. For all the connection modern communication has brought us, it also has, in some ways, separated us. Now I’m on a tangent, I realize that.
When it comes to scarcity and abundance thinking—scarcity, when we lose something—when something doesn’t go right—we get four times the impact on our brain than when something does go right. That’s equivalent. So, what do we have to do? Well, just like any smart, prudent person, and just like any scientist, we need to know this, number one. Now that we’re aware of this fact, we need to compensate for it. We have learned to overcome our urges in many ways. If we haven’t learned to overcome our natural urges, we’re probably in jail, or in an insane asylum, right? Because every little urge, we don’t get to act on. You get really upset with someone—no, you don’t get to punch them in the face, okay? You’ve gotta control your natural, knee-jerk reaction, right? We’ve gotta overcome that, right? That’s part of being an adult, and living in the civilized world.
We’ve got to adjust for this. So, when something goes wrong, what do we need to do? Well, we need to realize, first of all, that our mind is going to react in a four times factor of 4x factor to that. So, we need to adjust for it, and we need to realize, hey, look, in the big picture, step back from the canvas, don’t just look at the little brushstroke. Look at the whole painting, and keep the long term distant goal in mind, and remember that, to keep us on track, and on focus. So, I thought that was really, really quite interesting.
And it kind of goes along with the book I mentioned recently, which I recently read. That’s Daniel Ariely’s book, The Upside of Irrationality, and it tells us all these ways in which we act irrationally, but how they’re actually good, and they make sense in some ways. That was kind of an interesting thing. $600,000 in student loan debt—that is, well, amazing.
And remember, you know what I’ve told you before about the scamminess of the college, government industrial complex. I don’t know exactly what to call that. But these student loans are the only debt not dischargeable in bankruptcy. Now, why do I keep saying that? It’s not because, you know, I would ever want to go into bankruptcy personally, or I would ever want to think about bankruptcy. But it just means that when you take on a student loan, you are really, really a slave. That is indentured servitude, and that’s the only type of loan that’s that way. The other type of debt that’s not dischargeable, from my understanding, is tax debt. You know, if you owe the IRS money, they’re gonna get their money, okay? But that’s not a loan. You didn’t borrow that money. It’s just tax that you had on income that you didn’t pay, right? And so, the IRS is not gonna let you off the hook either. No surprise there.
Investing in discounted notes
I had a question recently about—you know, someone asked me, Jason, a few episodes ago, you talked about investing in discounted notes, discounted mortgages, and trust deeds. When are you gonna do that? When are you really gonna launch that program, and talk about it on the show? Here’s the answer. I’m working on it. We are working on it, as a company. We will sell no investment before its time, as Ernest and Julio Gallo used to say about wine, right? In looking into this business deeply, more deeply than probably most promoters out there, first of all, of course there’s the requisite share of scam artists and fraudsters. No surprise there. Those happen in every industry. When you look around and you, you know, network with people, and hear about people, and hear about deals—of course, you’ve always gotta adjust, just like we’ve gotta adjust for failure versus success in that four times example I mentioned, you gotta adjust for, is this person a competitor, are they jealous, you know, you have to always take everything with a grain of salt, so to speak, when you’re talking to people. That’s one thing.
But, then, you look on the internet, and you gotta take everything there with a grain of salt too. Are they jealous? Are they a competitor? When you see bad things written about people online, a lot of those bad things are written by their competitors, okay? Hopefully most people understand that. In looking at some of the contracts of these sources where you can buy notes—wow! Beyond ridiculous, frankly, some of them. But about two years ago, I was talking about a vendor that we were looking at bringing on board as a local market specialist, and this particular vendor, they took our contract, our referral agreement, that protects you, our client, okay, that has all sorts of protection features in it that, you know, believe me—it took many, many years for me to figure that out. And I tell you, you cannot rely on an attorney for a lot of this stuff. I mean, unless you have a very good business-minded attorney who really is going to take the time to deeply understand your business.
What’s in the contract—the legalese is way too elementary. A lot of these contracts, I really gotta look them over myself, and you know, tell the attorney no, I need this provision in there to protect my clients, because, you know, they just don’t understand. They don’t know how the business model works, and they don’t understand the challenges. They haven’t lived through it. The person who understands it is the business person. And this particular local market specialist that we never on boarded, but we wanted to, because we liked their properties—they took those protection clauses, and I mentioned this on the show. I should find that episode and just replay that little clip. You know, they crossed out this, they crossed out that, and I’m like, there’s no way I’m going to expose my clients to the possible disaster of them not agreeing to our contract.
Well, now that I’m looking around the note business, and I’m seeing some of these providers of notes and discounted mortgages, discounted trust deeds, that I might bring to you, our investors, and talk to you about them—I’m looking at their contracts. And it’s ridiculous! I mean, some of them say—they basically—and I don’t even know if this would stand up in court. The guy selling you the note is basically trying to completely absolve himself of any responsibility whatsoever, even though he took your money, right? And that’s why I’m not even sure a judge would go for that, because, you know, you take someone’s money, I just think intrinsically, maybe by public policy, regardless of what the contract says, you have some obligation to them. I would hope, okay? Wow. It’s just quite shocking, what I’ve seen so far.
So, not ready yet. Because I want to make sure you, our clients, are protected, to as much of an extent as my experience, and our attorneys, will help you be protected, okay? So, we’re working on it. So, more to come on that later. That’s all I’ve got for you right now. As usual, I’ve gone fairly long on what I thought would be a little five minute intro, but, that’s the Jason Hartman way. I’ve never been accused of being short winded, right?
Let’s get to our guest, and again, I apologize, the sound quality is not really up to par, but you know, it’s good enough for government work, it will certainly not be like this for future episodes. So, let’s get to our guest, and let’s talk about some international economics, let’s talk about the Middle East, let’s talk about Dubai, and hear what he has to say; he’s a pretty interesting guy. And that’s Jawad Mian with The Good Society Fund. Here he is.
[MUSIC]
Introducing Jawad Mian
JASON HARTMAN: It’s my pleasure to welcome Jawad Mian to the show! He is the founder and editor of Stray Reflections, a monthly investment newsletter, and he’s coming to us from Dubai, today. Amazing place that it is, I can’t wait to hear more about it. We’re gonna talk about that. We’ll talk about investing, we’ll talk a little bit about Bitcoin, some other stuff that may come up. Jawad, welcome. How are you?
JAWAD MIAN: I’m great, Jason. Thanks for having me on your show.
JASON HARTMAN: What is the temperature in Dubai today?
JAWAD MIAN: Well, I mean, the summer is just getting started here, and it’s about 35 degrees, so, pretty humid and sunny in the day. Evening is a little better, but it’s still pretty hot.
JASON HARTMAN: Yeah, I don’t have my converter out, so I don’t know what that is in Fahrenheit off the top of my head, but it seems a little hot. Well, you can still go skiing and surfing indoors in Dubai, so you’re always taken care of there. What an amazing place. You were mentioning your background a little bit; I guess you were born in Pakistan, and then lived in Canada and Dubai?
JAWAD MIAN: Yeah, so actually I’m from Pakistan, but I was actually born and raised in Dubai. So, my family moved here in 1971, so we’ve been there from the very beginning. Seeing the beginning of the country, how it’s evolved, and how it’s come up to being what it is today as a popular tourist destination, and an investment climate. So, we’ve seen the whole movement.
Why people invest in Dubai
JASON HARTMAN: Why Dubai? Of all places to pour money into, and to build some of the most incredible pieces of architecture in the world, and the most amazing attractions on a scale that has just really never been known before. You’ve got the tallest building in the world now. What was the impetus? A lot of people say, people in the Middle East know that oil isn’t going to last forever, so they’ve gotta have a new business plan. Tell me what’s behind Dubai.
JAWAD MIAN: To understand the rise of Dubai, you also need to understand the wider Middle East, and I think the wider Middle East has been through a lot of conflict with multiple wars throughout the region. I think there needed to be a city, or a haven, where people could come to, and I think that’s what Dubai modeled itself against. It looked at Singapore, it looked at Switzerland, so, the leadership in Dubai—I mean, they’re very enterprising individuals and families, so they wanted to leverage whatever they could based on their strengths within the region, to be able to come up with a solution, and an environment where everybody would be welcome. And based on that, you’ve seen them evolve from being a port city with a generally free port, which is the first and largest port within the region for them to be able to attract investment to, and they started building up their airline, they started building hotels, and restaurants, and theme parks, to try to get as many people over here as they could. With fighting going on in Iraq, Lebanon, Libya, across the Middle East, you’re seeing a lot of people moving here, as well as bringing their capital here, so you’re seeing the real estate market pretty buoyant, but in some cases even overheating. You’re seeing rents pretty high. So, it’s the one place within the Middle East where you’ve got the ability to be very flexible in the way, the kind of lifestyle you want to lead.
JASON HARTMAN: Tell us about that. I mean, I hear Dubai is—considering that it really is a Muslim place. But it’s very tolerant, and open, from what I hear, right?
JAWAD MIAN: Yes, absolutely. I mean, I think that the leadership here realized that they want to build an open society, so while their culture is extremely important, and the religious values are also very important, they’re also a very tolerant society. So, they’re trying to bring about an environment, like I said, which will attract the top business people, the top individuals and talent that would want to come here and work, and live. So that would mean having top notch residences, top notch hotels, restaurants, you’ve got pretty amazing nightlife as well, and lounges and bars, and you know, again, fun activities for the families, for the children, top quality schools. So it was a matter of providing the environment for the expatriate community. Because if you look at the population of the UAE, the country, there are about 9-10 million people. And of that, the indigenous Emirati population is probably around 20%. So you’ve got, you know, around 70-80% of expatriates working within the country, working, living here. So, they wanted to develop an environment where they would feel comfortable, and want to continue to come and live and build companies and continue to invest. And that’s what they’ve done. And they’ve been very, very successful. They’ve been the first movers in a lot of different initiatives, which has also cemented their leadership. So, it’s actually been a pretty wonderful success story.
JASON HARTMAN: Does Dubai have the effect of modernizing the broader Middle East, or is it just really a—you know, a very different place? Or is that—is sort of the Dubai, that mentality, is it spreading?
JAWAD MIAN: It’s tough to say, because each, you know, each country has its own cultural heritage, and they are internally debating how they want to progress, and how they want to balance openness with preservation of their culture, and how they want to continue doing business. Even within the UAE, for example, you have seven city states. So, Dubai is the second largest. Abu Dhabi is the capital, so, even within the UAE, you’ve got Dubai, which perhaps could be labeled the most liberal, and you’ve got some other city states that are much more conservative, right? So, it’s difficult to say that what Dubai’s doing is having an influence on the wider Middle East. I think Dubai in itself is a haven, and UAE itself, actually, is a haven.
JASON HARTMAN: But it sounds like even within the UAE, Dubai is, you know, rather different.
JAWAD MIAN: Exactly, that’s what I said. So, you’ve got different characteristics between the different emirates. So, Sharjah is structured very differently. It’s much more culturally conservative. For example, you don’t have alcohol being served in Sharjah. So you’ve got within the same country, city states holding different values, depending on the kind of populations. There’s also a lot of—Sharjah and Dubai are like 30 minutes away by road, so there’s a lot of people living in Sharjah and driving to Dubai. Abu Dhabi is a mix. So, the country is diverse, in that. And Dubai is perhaps the most open society within the Middle East, from that perspective.
Real estate in Dubai
JASON HARTMAN: Speaking of—you mentioned the real estate market earlier, and I remember talking to someone back in, oh, it was probably 2007, I’m going to say. So, seven years ago. He was from Dubai, and he said, the real estate market there, you know, is just going to appreciate forever. You know, sort of that typical thing that you hear in the middle of any bubble, that it’s going to go on forever, and it’s never going to end, and you know, you did have a crash there with the rest of the world, didn’t you?
JAWAD MIAN: Of course. I think—I moved here in ’07, from my time in Canada, and I was making the opposite case. I was looking at some of the excess, and I was saying that we’re gonna see a pretty significant decline in housing prices. And we saw that, so we saw a peak to trough decline of around 60%. Now, if you look at a real estate cycle, a typical real estate cycle from peak to trough would last six years. So if you look at the US housing market, for example, you saw it peak out around late ’05, early ’06, and bottomed in 2011. That’s typically how long it takes for the psychology to change, for the inventory and overhang to be replaced, for the write downs to occur. In UAE and Dubai, you saw a 60% decline. But instead of a six year cycle, it took only four years to reach the bottom. And the reason for that was the Arab Spring. So, you should have seen the real estate market bottoming out around now; instead you saw it bottoming out in 2011, just as the Egyptian riots were taking place. And then Libya happened, and you’re seeing chaos in most of the surrounding countries. Because of that, a lot of capital fled, and came to Dubai. Because like I said, it is truly a safe haven in the wider Middle East, and as well you saw a lot of people moving here to escape the violence, and escape the chaos. Because of that, again, you saw more demand coming in. So, from the bottom, actually, in 2011, we’ve seen a rise of around 40%, 50%, so far. And you know, central banks, only about a month ago, was seeing signs of overheating again, with new launches of real estate projects, and higher rents being charged. So, you’re seeing a pretty boring market again. And I think, given the catalyst of the 2020 expo, world trade expo that Dubai won—so I think, it’s difficult to see anything interrupt before that. So, I think steady uptrend in price is very likely, going forward.
JASON HARTMAN: Where’s the income coming from? Or is it just all Middle Eastern oil wealth? What—you know, the prices—I mean, everything is extremely expensive in Dubai. I just got back from Singapore two weeks ago, and, you know, very expensive there as well. It was an interesting contrast, because on the same trip I also went to Thailand, which is the opposite of Singapore. So, it was kind of a relief, to not pay $53 for breakfast at Marina Bay Sands, you know. But, you know, where is the—do people have incomes there, to support that, or is it just this massive amount of oil money?
JAWAD MIAN: If you look at the country as a whole, you’ve got the budget being primarily sponsored by oil revenue. So, it’s pretty heavy in terms of reliance and dependency on oil. That’s quite natural for any country in the region, like the Saudis, the Qataris as well. And similarly in UAE, and Kuwaitis as well. So, they’re pretty heavily dominated in the oil and gas sector, and that’s where most of the revenues are coming from. In Dubai in particular, and most of the oil in the UAE is situated in Abu Dhabi which is the capital city. Much less so in Dubai. And Dubai, this is why it’s tried to build a more service oriented economy, and trying to diversify as much as they can. Obviously it’s very, very difficult, but they’re trying as much as they can. Tourism is huge for them. That’s, again, some of the revenue, that’s where they get it from. Around 10 million visitors are expected to come through Dubai every year, so, that’s where they get some of their money from. You’ve got also a port where they generate a lot of revenue from. And, like I said, the government also has a lot of state assets within the country, like, within banking, within real estate, within hotels. So, there are different means for them to continue to generate revenue. But by and large, you’ve got oil, which is the most heavily reliant. Given our outlook at least on oil prices, and the demand and supply situation, I don’t think that’s going to be unhinged anytime soon.
Oil
JASON HARTMAN: That’s an interesting segue into the oil topic. Do you think that with all of the North American oil that’s, you know, recently been discovered through new exploration technologies and fracking, you know, and natural gas—it’s all energy, so it all goes into the same pot, in a way. You know? I know that’s a little bit of a leap. I completely understand. Do you think that will cause—and with greater efficiencies, and alternative energy choices—do you really think oil in real dollar terms is still going to have upward pricing pressure? You know, I’m kind of looking for real oil prices, not nominal, at around, you know, $80 a barrel. I kind of think we’re gonna see it soften a little bit. But I could be wrong.
JAWAD MIAN: So you’ve seen oil prices more than tripling over the last decade. Despite that, you’re seeing oil production pretty much flat, in that entire time frame. So, you’re seeing oil companies around the world really struggling to boost production levels. Having to deal with pretty sharp decline rates and depletion rates, and despite all the technological advancements to enhance oil recovery and whatnot, they’re still struggling. So, the likes of BP, Shell, you know, Petrobras in Brazil even, for that matter—they’re all struggling to boost reserves, and you’re seeing conventional oil production really not meet expectations. And that’s where the lower cost of production is, right? So, for your oil sands, and for your unconventional oil that you’ve discovered in America as well, you’ve got much higher margin costs of production. So, that’s one side. The other side is the fact that from the demand perspective, you actually haven’t seen annual oil demand fall over the last 15 years.
Despite the number of recessions we’ve had in the interim. So, going forward, despite whatever troubles the emerging market countries are facing today, given the rise in per capita income, and given how we personally feel, we’re very positive on the automotive sector, and how we see the demand for cars rising, and the transportation fuel industry being one of the largest drivers of higher oil prices. It’s difficult to see how demand and consumption of oil will be offset by any production increase in the US. Just look at it, for example, over the last 18 months. Any production increase in the US has primarily been offset by declines and shutdowns in the Middle East. Any net gains that you may have from unconventional sources, you will most likely see it being offset by depletion rates in existing fields, or through violence and chaos. So, net, I think currently, we are of the opinion that despite what’s happening in Iraq, the risk [indiscernible] in oil prices is not sufficiently embedded. So we actually think the risk is for higher oil prices. From an economic perspective, as the economic recovery begins to gather steam, as well as from a supply disruption perspective. So I think there’s a lot of complacency around the discovery of oil in America, and the rising productions levels, and they’re used to reliance on imports.
I think over a 5 or 10 year horizon, I still would argue that the odds favor much higher prices. And the other point I would make is that as oil prices have hovered around $100, for example, for the last 18 months, the tolerance for higher oil prices is also increasing, right? So, you’re seeing consumer confidence in America rise, as well as in line with gasoline prices. So I think consumers are becoming psychologically more prepared for higher prices, so their behavior is adapting to it. So I think the floor for oil prices going forward has probably been risen to around $80 or so, as you mentioned earlier. But I think the risk is for higher prices.
JASON HARTMAN: Do you have a number on that? You know, a number and a timeframe? And you know, of course—I don’t deny that we may have higher nominal prices, but I’m talking real dollars. I always want to talk in real dollars, because you know, I think inflation is largely understated, and will continue to be. I think we can count on that.
JAWAD MIAN: Look, I’ll say this. If you see a disruption over the next few months, you could easily see oil spike another $20 or $30. So you’re looking at $100, rent could easily be around $140, $150.
JASON HARTMAN: And I certainly don’t doubt, by the way, that there will be small ups and downs on the way to it. But I’m just sort of saying, an overall trend.
JAWAD MIAN: No, I agree with you. I think we’re very bullish on renewable energy. I mean, we own solar stocks. I think there’s a lot of potential in renewable energy. We’re positive on all—we’re positive on solar, we’re positive on wind. We actually even are positive on nuclear, for a political reason, based on the happenings in Japan. We would say that despite the breakthrough in technology, and how solar costs have been lowered, it’ll take quite a while for it to make a real dent in conventional energy markets. Because like I said, the biggest driver for oil really has been through transportation. So unless we can come up with some technology that will alter the energy mix used in transportation and vehicles that demand pull from that sector alone, will be enough to keep oil prices well bid.
Bitcoin and alternative currencies
JASON HARTMAN: We see a rising middle class around the world, and of course, like you—that ties in with your transportation concept as well. So, we shall see, we shall see what will happen there. But you know, when we’re talking about real and nominal dollars, it just begs the question, and we’ve talked about it a lot on the show—I had the founder and CEO of Overstock on the show, Patrick Byrne—he was the first major eTailer to accept Bitcoin. I want to ask you, what do you think of alternative currencies, and especially Bitcoin, since that’s the most famous of the bunch?
JAWAD MIAN: It’s interesting. I mean, the developments surrounding digital currencies, and particularly Bitcoin, because Bitcoin’s been the most famous one of the lot, and the most successful one so far. I view Bitcoin as more of a technological achievement, as opposed to a currency, and I think it requires an explaining of the current ecosystem, right? So, for me to explain that, you’ve got four sides to the Bitcoin network. You’ve got the consumers, who are actually the ones buying and selling Bitcoins, and using it to make payments, for example. Some are perhaps even saving in Bitcoin. Now, is Bitcoin really an effective store of value? If you bought Bitcoin at $10, absolutely. But if you bought it at $1000, not so much. At the same time, you’ve got the FBI and the IRS ruling that it’s not actually money, it’s property, so you’ve got a capital gains tax to deal with. So it sort of reduces the attractiveness of Bitcoin as an alternative currency. At the same time, another more important point perhaps is the fact that Bitcoin is unconditional money, which means you don’t really have any recourse in case you lose your coins, or an exchange fails, for example. So like, even before the Mt. Gox incident happened, there were about 45% of the exchanges failed. And most cases with the investor’s money.
So, the fiduciary responsibility of exchanges is not that great. So, if you, for example, have money in a bank, and the bank fails, you’ve still got recourse through insurance, or through the courts, to get your money back. In Bitcoin, you alone are responsible to protect your coins, which are very difficult in an era where cyberattacks are much more common. So, there are some drawbacks for the consumer. Now, let’s say you move on to the merchant. If you’re a merchant, Bitcoin transactions are convenient, and they cost much less than traditional finance. But I would argue that merchants aren’t really in the business of taking currency risks, and Bitcoin has been extremely volatile, so whereas a typical currency would have, you know, analyzed volatility around 5 or 6%, Bitcoin volatility is like upwards of 100%, and let’s say if you were a merchant who was super bullish on Bitcoin and only accepted Bitcoin as payment—well, over the last six months you’ve seen your cash balances go down 50%. So, like I said, merchants really aren’t in the business of taking currency risks. And again, let’s say you’ve taken Bitcoin as payment. When you go and convert it back into cash, for example, you’ve got capital gains to deal with. So that’s another issue.
Let’s say you move on to the miners, which is the third part of the ecosystem, and they are the ones that get paid in Bitcoin, through their recordkeeping services. Now, you’ve seen the business of mining Bitcoins as going down quite a bit, year to date, and miners’ revenues are down again like 40, 50%. And you’re seeing mining of equipment sellers actually mention how the sales of Bitcoin mining equipment are down, because again, the upkeep and the maintenance for these supercomputers has been quite expensive, and with the decline in prices, it’s no longer as attractive. And you’re seeing alternative currency mining machines getting more popular compared to Bitcoin, because they feel it’s cheaper. So, the mining business itself, I think, you know, is being crowded out, for only the big firms to play, and the individual miners are getting out of it. But I think it doesn’t seem to be all rosy. Now, the last bit of the ecosystem are the intellectual force behind it, and that’s the Silicon Valley, and the tech entrepreneurs, and they’re the ones that have made the breakthrough, right? So, it’s the technological achievement—I think what they achieved is that they triggered a surge in innovation in digital money.
So you’re probably going to see a series of innovations, and I think Bitcoin is the first step. I think it’s not the ultimate solution. Because if you look at the current Bitcoin establishment, they’re looking to fight the government, and they’re working against the government. That’s alright if you try to revolutionize print, music, but I think when it comes to money, you’re entering into an arena which is very sensitive, and I think the traditional Bitcoin community underappreciates the role of money, and the history of money in society, and I think they will most likely face drawbacks, unless they work with the government to make it a more acceptable means of payment. So, until then, Bitcoin will most likely be relegated to a community currency, or you know, serve as a payment within a niche market. It won’t be the monetary revolution that it’s being hailed as. It’s a technological achievement in terms of its price as a speculative financial asset that can be used as a medium of exchange, but it’s not the monetary revolution, or it’s not the solution to traditional paper money, in my opinion. But we’re most likely going to see extremely exciting developments in this field over the next, you know, many years.
JASON HARTMAN: If I just asked you, are you bullish or bearish on Bitcoin, how would you answer that question?
JAWAD MIAN: I would be bearish.
JASON HARTMAN: So I agree with you. Because I think that anything that the central banks and the government cartel do not control, they’re going to find a way to squash. That’s just where I go. I don’t care about what a great technological
achievement it is. It’s totally fascinating. But that would not be enough of a reason to invest in it. It’s literally—I mean, if you think about it, digital currencies are the ultimate fiat currency. At least with paper you can do what they did in the Weimar Republic; you can burn it in a fireplace and extract heat from it. With gold, certainly it’s got a huge history behind it, but better than any of those are things people can actually use that have utility value. So, housing, bullets, food, water, you know, all of that stuff has actual utility. Gold doesn’t even really have utility, unfortunately. I’m not a gold bug either. But yeah, I just think that people like to say—the Bitcoin proponents like to say—the government can’t control it, they can’t stop it. Are you kidding? They can just make it illegal. They did it in China. I mean—
JAWAD MIAN: Exactly.
JASON HARTMAN: It’s not legal to trade in heroin, okay? You know, we can’t legally engage in commerce with illegal substances. So, you know, they can just destroy it.
JAWAD MIAN: At the same time, I would also argue though, what’s stopping, firstly, from governments themselves who come up with an eMoney equivalent? What happens to Bitcoin then? And then let’s say you have an alternative to Bitcoin, like, there are dozens of them out there. Let’s say you have an economy. And this is the most interesting part, because if you’ve got an economy where you’ve got Bitcoin, Altcoins, Eurocoin, all these different coins—how do you actually determine value between each of these individual virtual currencies that don’t really have intrinsic value?
JASON HARTMAN: It’s just a big mess, really.
JAWAD MIAN: The last point I would make about this is actually that this is where I have problems with the current thinking behind Bitcoin, right? So, they argue that they want to be free from government. But I would argue that actually, if you had a Bitcoin economy, and you had an incident like Mt. Gox, the same Bitcoin proponents that are arguing for freedom from government would actually have to run to the government to bail themselves out. So the system wouldn’t work. It’s not designed to, the way it’s currently structured. Which is why I said they need to bring the government into the fold, otherwise it won’t really survive.
Investment & housing markets in general
JASON HARTMAN: But then the whole idea, independence and libertarian idea of Bitcoin, which I think is great philosophically, flies out the window, as soon as the government enters the picture. So, it’s just a non-starter, if you ask me. What do you see in the investment markets or the housing markets just in general, as we wrap up here?
JAWAD MIAN: The way we work Stray Reflections is we focus on developing investment themes; that we see it happening around the world, and then we try out best to distill them into actual trade ideas for our investors, which include hedge funds and family offices and individual investors. So there are a number of different investment themes that we’re looking at right now. so, energy renaissance is one of them. Like you mentioned, the growth in oil production in America, and what that means, the growth and wider uptake of renewable energy. So we’re looking at that quite a bit. Real estate is also attractive, so, in Europe, particularly I think real estate assets are looking attractive. We also are very positive on the adjustment that we see happening in Asia, particularly with the likes of Japan. So, there’s a bunch of investment themes that we’re looking at, so we’re positive on Japan as well, based on economics, and what that means for the country. Equity prices I think are gonna head much, much higher over the long term in Japan. I think they’ll most likely outpace the gains that you may see in Europe, or US. And then we also have some unconventional investment themes, like investing in Iraqi stocks, for example. So, we pretty much scope the entire world to figure out where to put our money, and we share that with our subscribers.
JASON HARTMAN: Very interesting. Well, Jawad, give out your website, and tell people where they can find your newsletter.
JAWAD MIAN: They can visit us on our website, it’s www.stray-reflections.com.
JASON HARTMAN: What’s behind the name? I’m kind of curious.
JAWAD MIAN: One of my favorite writers is this poet, a Muslim poet by the name of Allama Iqbal. So, he used to keep a private journal where he used to jot down his thoughts, his random musings based on his observations, his feelings, a random thought, and he called that private notebook Stray Reflections. That’s where I took it from, and I believe that’s what we’re doing, actually. We’re just looking around the world, trying to come up with ideas, as random as Iraqi stocks, to musings about life, how to pursue happiness, and while we’re also pursuing investment gains as well.
JASON HARTMAN: I like it, that’s fantastic. Well, Jawad Mian, thank you so much for joining us today, and happy investing to you, and all our listeners!
JAWAD MIAN: Absolute pleasure, Jason. Thank you so much.
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