AMA 92 – Editor of Stray Reflections – Jawad Mian

Today’s American Monetary Association program features the founder and editor of Stray Reflections, Jawad Mian, as a guest. He and host, Jason Hartman discuss the current and potential state of Dubai and the rest of the United Arab Emirates before moving on to consider some of the biggest consumer investment issues facing today’s society and looking at the future of bitcoin.

 

Key Takeaways

05.00 – A lot of the developments and changes happening to Dubai are to provide the desired lifestyle for the growing expatriate community there.
08.00 – Each of the Emirates in the UAE has different societal structures which lead to a different overall feeling of the country.
15.00 – Tourism remains one of the largest and most profitable industries in the Middle East.
17.20 – Transportation and particularly transportation of goods or consumer items is one of the biggest draws in oil reserves.
18.30 – In some ways, bit-coin seems attractive as an alternative currency, but the FBI and the IRS’s insistence that it is taxable property definitely alters some people’s view of it.
22.00 – The volatility of bitcoin as a prospective currency makes it particularly unattractive to merchants.
25.30 – The alleged main aim of bitcoin is to have an economy free from the government, but in the event of any incidents occurring, the only way they could get out from it is with government assistance.
27.10 – For more information about investing strategies and themes, head to www.stray-reflections.com

 

Tweetables
With an expected 10 million visitors to Dubai every year, the tourism sector provides huge opportunities for business.
As gas and oil prices are constantly increasing, consumers are becoming more prepared to tolerate and accept these.

 

Transcription

Introduction:
Welcome to the American Monetary Association’s podcast, where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason:
Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it, and comment on our website or our blog post. We have a lot of resources there for you and you can find that at www.AmericanMonetaryAssociation.org, or the website for the Foundation, which is www.JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.
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 going to talk about that, we’ll talk about investing, we’ll talk a little bit about bit-coin and some other stuff that may come up. Jawad, welcome, how are you?

Jawad:
I’m great, Jason, thanks for having me on your show.

Jason:
Yeah, it’s good to have you. First of all, what is the temperature in Dubai today?

Jawad:
I mean the summer is just getting started here, and it’s about 35 degrees Celsius, so pretty humid and sunny in the daytime. Evening is a little bit better, but still pretty hot.

Jason:
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?

Jawad:
Yes, I’m actually from Pakistan, but I was born and raised in Dubai. My family moved here in 1971 so we’ve been there from the very beginning. I’ve seen 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. We’ve seen the whole movement.

Jason:
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? It’s got the tallest building in the world now. What was the impetus? A lot of people say that people in the Middle East know that oil isn’t going to last forever so they’ve got to have a new business plan. Tell me what’s behind Dubai.

Jawad:
I think to understand the rise of Dubai, you also need to understand the wider Middle East. I think the wider Middle East has been through a lot of conflict with multiple wars throughout the region and 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 and Switzerland, and so the leadership in Dubai consists of very enterprising individuals and families, so they wanted to leverage wherever 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. Based on that, you’ve seen them evolve from being a port city with a generally free port which was the first and largest port within the region for them to be able to attract investment too. They started building up their airlines, they started building hotels, 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. We’re seeing the real estate market looking pretty buoyant and we’re seeing pretty high rents. It’s the one place within the Middle East where you’ve got the ability to be very flexible in the kind of lifestyle you want to lead.

Jason:
Considering that it really is a Muslim place, it’s very tolerant and open from what I hear, right?

Jawad:
Yes, absolutely. I think the leadership here realized that they want to build an open society, so while their culture is extremely important, as are their religious values, they’re also a very tolerant society. They’re trying to bring about an environment, like I said, which can attract the top business people, the top individuals and talent that want to come here and work and live. That would mean having top-notch residences, top-notch hotels, restaurants. We’ve got a pretty amazing nightlife as well with lounges and bars, and again, we’ve got fun activities for families, for their children, top quality schools. It was a matter of providing an environment for the expatriate community because if you look at the population of the UAE, there are about 9-10 million people in the country, and off that the indigenous Emirati population is probably around 20%. Around 70-80% of expatriates were working within the country and 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 here, as well as continuing to invest, and that’s what they’ve done. They’ve been very successful – they’ve been the first movers in a lot of different initiatives, which has also cemented their leadership. It’s actually been a pretty wonderful success story.

Jason:
Has Dubai had the effect of modernizing the broader Middle East or is it just really a very different place? Is the Dubai mentality spreading?

Jawad:
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. Within the UE, for example, you have seven city states, so Dubai is the second largest. Abu Dhabi is the capital, so even within the UE you’ve got Dubai which perhaps would be labelled the most liberal, and then you’ve got some other city states that are much more conservative. It’s difficult to say that what Dubai is 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:
It sounds like even within the UAE, Dubai is rather different.

Jawad:
Exactly, that’s what I said. So you’ve got different characteristics between the different Emirates. Sharjah is structured very differently, it’s much more conservative. For example, you don’t have alcohol being served in Sharjah, so within the same country you’ve got different city states holding different values depending on the kind of population that you’re willing to attract. Sharjah and Dubai are about 30 minutes away by road, so a lot of people living in Sharjah drive to Dubai. Abu Dhabi is more of a mix. So the country is diverse in that, and Dubai is perhaps the most open society within the Middle East from that perspective.

Jason:
You mentioned the real estate market earlier. I remember talking to someone back in probably 2007, so 7 years ago, and he was from Dubai. He said the real estate market there is just going to appreciate forever. It’s 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 did have a crash there with the rest of the world, didn’t you?

Jawad:
Of course. I moved here in 2007 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 going to see a pretty significant decline in housing prices, and we saw peak-to-trough decline of around 60%. If you look at a real estate cycle, a typical real estate cycle from peak to trough would last 6 years, so if you look at the US housing market cycle for example, you saw it peak out in around late 2005, early 2006 and then it bottomed in around 2011.That’s typically how long it takes for the psychology to change and for the inventory to be replaced. In UAE and in Dubai, we saw a 60% decline, but instead of a 6-year cycle, it took only four years to reach the bottom, and the reason for that was the Arab Spring. Typically, we should have seen the real estate market bottoming out around now. Instead, you saw it bottom out in 2011, just as the Egyptian riots were taking place, and the Libya happened and we saw chaos in most of the surrounding countries. Because of that, a lot of the capital fled and came to Dubai because like I said, it is truly a safe haven in the wider Middle East. 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 about 40-50% so far, and Central Bank was seeing signs of overheating again only a month ago, with new launches of real estate projects and higher rents being charged. You’re seeing a pretty buoyant market again, and I think given the catalyst of the 2020 World Trade Expo that Dubai won, it’s difficult to see anything interrupt it all before that. I think a steady upward rise is very likely, going forward.

Jason:
Where is the income coming from? Is it all just Middle Eastern oil wealth? Everything is extremely expensive in Dubai. I just got back from Singapore two weeks ago, and it was an interesting contrast because on the same trip, I also went to Thailand, which is the opposite of that! It was kind of a relief to not pay $53 for breakfast at Marina Bay Sands. Do people have incomes there to support that? Or is it just this massive amount of oil money?

Jawad:
OKay, so if you look at the country as a whole, you’ve got the budgets being sponsored by all 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 as well. Similarly, we’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 the capital, Abu Dhabi, much less so in Dubai, which is why in Dubai they’ve tried to build a much more service-oriented economy, and try to do as much as they can. Obviously it’s very very difficult, but they’re trying. Tourism is huge for them; that’s where they get some of their revenue 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 also got 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 – we’ve got arms within banking, we’ve got real estate within hotels; so there are different means for them to generate revenue. By and large, though you do have oil, which is the most heavily reliant, and I think given our outlook and our prices with the supply and demand situation, I don’t think that’s going to be unhinged any time soon.

Jason:
That’s an interesting segway into the oil topic. What do you think about all of the North American oil that’s recently been discovered through new technologies and fracking and the natural gas – it’s all energy so it all goes into the same pot in a way. I know that’s a bit of a leap and I completely understand, but it is energy. Do you think that will cause, and with greater efficiencies and greater energy choices, do you really think oil in real dollar terms is still going to have upward pricing pressure? I’m kind of looking for real oil prices, not nominal. I kind of think we’re going to see it softening a little bit, but I could be wrong.

Jawad:
This is how I see it, right. 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. You’re seeing oil companies around the world really struggling to boost production levels. They’re having to deal with pretty sharp decline and depletion rates. Despite all the technological advancements to enhance oil recovery and whatnot, they’re still struggling. The likes of BP and Shell, and even Petrobras in Brazil for that matter – they’re all struggling to boost reserves, and we’re seeing conventional oil production really not meet the expectations. That’s where the lowest cost production is. For your oil sand and your unconventional oil that you discover in America as well, you’ve got a much higher margin of cost production. That’s one side of it. The other side is about the demand perspective. We 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 merging market countries are facing today, given the rise in per capita income and given how we personally feel we’re very focused on the automotive sector and how we see the demand for cars rising and the transportation field of 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 shut downs in the Middle East. Any net gains that you may have from unconventional sources, you’ll most likely see it being offset by depletion in existing fields or by violence and chaos. I think currently, we are of the opinion that despite what’s happening in Iraq, the risk in our prices is not sufficiently embedded. We actually think the risk is for higher oil prices from an economic perspective, as that begins to gather steam, as well as from a supplier perspective. I think there’s a lot of complacency around the discovery of oil in America and the rise of production levels and the reduced reliance on imports. I think we’re looking at a 5-10 year rise. I would still 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, over the last 18 months, the tolerance for higher oil prices is also increasing. 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. I think the flaw for oil prices is going forward has probably been risen to around $80, but I think the risk is for higher prices.

Jason:
Okay, so do you have a number on that? A number and a time-frame? And 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. I think inflation is largely understated and will continue to be – I think we can count on that.

Jawad:
Of course. Look, I’ll say this. If you see a disruption over the next few months, you could easily see oil spike by another $20-30, so you’re looking at easily $140-150.

Jason:
I certainly don’t doubt, by the way, that there will be small ups and downs on the way to it. I’m just setting an overall trend.

Jawad:
I agree with you. I think we’re very bullish about renewable energy. We earn solar stocks, and I think there’s a lot of potential in renewable energy. We’re positive on solar, we’re positive on wind, we’re actually even positive on nuclear for a political reason based on the happenings in Japan, but we would say that despite the breakthrough in technology and in how solar costs have been lowered, it’ll take quite a while for it to make a real dent in conventional energy markets. 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 – the demand pulled from that sector alone will be enough to keep all prices well met.

Jason:
We see a rising middle class around the world, of course, and that ties in with your transportation concept as well, so we shall see what will happen there. When we’re talking about real and nominal dollars, it just begs the question – we’ve talked about it a lot on the show, I had the founder and CEO of Overstock on the show, Patrick Byrne who was the first major etailer to accept bit-coin – 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:
It’s interesting with the developments surrounding the currencies, and particularly bitcoin because bitcoin’s been the most famous one of the lot and the most successful one so far. I view bit-coin as more of a technological achievement, as opposed to a currency, and I think it requires an explaining of the current ecosystem. So for me to explain that – you’ve got four sides to the bit-coin 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 saying 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 as an alternative currency.  At the same time, another more important point, perhaps, is the fact the bitcoin is unconditional money. This means that you don’t really have any recourse in case you lose your coins, or an exchange fails, for example. Even before the Mt. Gox incident happened there were reports that about 45% of the exchanges failed, and in most cases with the investor’s money. The 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 is very difficult in an era where cyber attack is much more common. So there are some drawbacks for the consumer. Let’s say you move on to the merchant. If you’re a merchant, bitcoin transactions are convenient and they cost must 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. Whereas a typical currency would have volatility for around 5-6%, bitcoin volatility is upwards of 100%. Let’s say if you were a merchant who was super bullish on bitcoin and only accepted bitcoin as payment, well over the last 6 months you’d have seen your cash balances go down 50%. 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 onto the miners, which is the third part of the ecosystem. They’re the ones that get paid in bitcoin through their record-keeping services. You’ve seen the business of mining bitcoins going down quite a bit to date, and these revenues are down 40-50%. We’re seeing mining equipment sellers actually mention how the sales of bitcoin encrypting are down because again, the upkeep and the maintenance for these super computers is quite expensive, and with the decline in prices, it’s no longer as attractive. You’re seeing alternative currency and mining machines getting more popular compared to bitcoin because they feel it’s cheaper, so the mining business itself, I think, is being crowded out for only the big firms to play, and the individual miners are getting out of it. I do think it doesn’t sound or seem to be all rosy. The last bit of the ecosystem is the intellectual force behind it, and that’s the Silicon Valley and the tech entrepreneurs. They’re the ones that have made the breakthrough. It’s a technological achievement, and I think what they’ve achieved is they’ve triggered a surge in innovation and in digital money, so we’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 it. I think that’s alright if you try to revolutionize print and 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 and the history of money in society. 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 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 – it’s a speculative national 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 what we’re most likely going to see is extremely exciting developments in this sphere over the next many years.

Jason:
Are you bullish or bearish on bitcoin?

Jawad:
I will be bearish.

Jason:
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 what I think. 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. 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, it’s certainly got a huge history behind it, but better than any of those are things people can actually use that have utility: housing, bullets, food, water – all of that stuff has actual utility. Gold doesn’t even really have utility, unfortunately. So I’m not a goldbug either, but yeah, I just think that people like to say about bitcoin proponents that the government can’t control it, that they can’t stop it. Are you kidding? They can just make it illegal! They did it in China. It’s not legal to trade in heroin. We can’t legally engage in commerce with illegal substances. They can just destroy it.

Jawad:
And at the same time, I would also argue that what’s stopping governments themselves coming up with any money equivalent? What happens to bitcoin then? Let’s say you have an alternative to bitcoin – there are dozens of them out there. Let’s say you have an economy, and this is the most interesting bit, because if you have an economy where you’ve got bitcoin, altcoin, zerocoin, 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:
It’s just a big mess, really. And the last point I would make about this is actually that – and again, this is where I have problems with the current thinking behind bitcoin – they argue that they want to be free from government, but I would argue that 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. The system wouldn’t work. It’s not designed to work in the way it’s currently structured. This is why I said that they need to bring the government into the fold, otherwise it won’t really survive.

Jason:
That’s very interesting. Well good. What do you see in the investment markets or housing markets, just in general as we wrap up here?

Jawad:
So the way we work at Stray Reflections is we focus on developing investment themes that we see happening around the world, and we try our 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 – energy is one of them; like you mentioned, the growth of oil production in America and what that means; the growth and wider uptake of renewable energy we’re looking at quite a bit. Real estate is also attractive – in Europe particularly, real estate assets are looking attractive. We also are very positive on adjustment that we see happening in Asia, particularly with the likes of Japan. So that’s a bunch of investment themes we’re currently looking at. We’re positive in Japan as well, based on ergonomics and what that means for the country, so equity prices, I think, are going to head much higher over the long-term in Japan. I think it’ll most likely outpace the gains that you may see in Europe or in the US. And then you 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 we should put our money, and we share that with our subscribers.

Jason:
Very interesting. Well, Jawad, give out your website and tell people where they can find your newsletter.

Jawad:
They can visit us on our website, which is www.stray-reflections.com.

Jason:
What’s behind the name? I’m kind of curious.

Jawad:
So one of my favorite writers is a Muslim poet by the name of Allama Iqbal. He used to keep a private journal where he used to jot down his thoughts and his random musings, his observations, his feelings, a random thought etc. and he called that private notebook Stray Reflections. So 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 and how to pursue happiness.

Jason:
Well, Jawad Mian, thank you so much for joining us today and happy investing to you and all our listeners.

Jawad:
Absolute pleasure, Jason, thank you so much.

Outro:
The American Monetary Association is a non-profit venture, funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions in inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by the Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own, and the host is acting on behalf of the Jason Hartman Foundation exclusively.

 

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