What Should I Do About My Purpose & Mission?

[Mike Schorah]

With the interest rates going up, we're basically starting to move into another bust cycle. And so we're coming out of a boom period where a lot of money has been printed, lent into the economy. Plus we had the lockdowns. You had the government interfering in the labor market by paying people more to stay at home and stay on unemployment. So you've got people who make $8-$10 an hour and the government is like "Hey, we'll give you $500-$600 a week for unemployment." And they're like "Well, I'll get paid more to do nothing. I think I'm just going to stay unemployed." So companies, restaurants especially, they wanted to open back up once the lockdowns started lifting, had a hard time finding people because people were being paid more to stay at home than work. So you get an artificial inflation in the labor market. So companies that want to hire people are having to pay more than they normally would. So if your labor costs go up, every business that had to pay more for labor... Guess what? They're going to have to pass that onto their customers.

On top of that, we've got all the policies of Dementia Joe. The first thing he did in office was shutting down the Keystone Pipeline. He started gumming up the works with when it came to leases and drilling for oil on government lands and just basically made it restricted to supply and the ability of the gas and the oil companies to extract the stuff out of the ground that... That's what they do. They want to restrict and get the countries in the West away from oil so they can force everybody to move into electric or renewables, wind, solar, things of that nature. And so you've got the cost of oil and gas doubling basically in the past year or so. And so everything runs on oil and gas... our economy, our energy... everything runs on that. So everything you buy is shipped or flown around by oil or gas. Jet fuels, kerosene are all made from petroleum products.

So you've got the government interfering in the labor market with the lockdowns. You've got all the money that they printed and when you look at where the money went, a lot of it goes overseas. It didn't stay in our economy. It left and went overseas.

So you've got a lot of conditions economically that we had in the 1970s where we had stagflation which is basically you've got inflation but the economy is kind-of stagnating. So you've got the money supply contracting but the cost of everything is still really high. Obviously that's when Jimmy Carter was in office. The economy crashed and then Reagan came in. You had Paul Volker who was in charge of the embargo back in the 1970s. So we had all these big gas guzzling cars that got 2-3 miles a gallon in gas and that's when Toyota and Nissan and all of those smaller companies had these 4 cylinder engines. They had a lot of better gas mileage. So they started doing real well. We had all of those things happening. And then Reagan came in saying he was going to turn things around. And then eventually because inflation came down with the cost of gas going so high. People cut back. People stopped using as much.

It's all supply and demand. When your supply exceeds your demand for something, the cost of that goods or services drop. When your demand exceeds supply, the cost of those goods or services rise.

So you've got tons of money chasing real estate with the low interest rates. I know in the area I live. In the last year and a half, the cost of real estate has doubled. It's ridiculous.

I typically go on the Realtor.com app every day and I look at the rentals and I look at the sales. A month ago, everything was flying off the market and now stuff is starting to sit and you're seeing price decreases and so this is important for everybody to understand... how the economy works.

Ray Dalio did a video years ago. I think it was called "How the economic engine really works" which is another good documentary to watch. I think it's about 30 minutes long... because these boom and bust cycles, they last every 10-12 years.

When you're younger and you graduate. You're in your mid 20s. You start doing well. The economy is doing well and then it starts to peak when you're 30-31-32 and then starts to go the other way. Well, because you were young when that happened, you don't really have any experience of that. Now me being 37, having seen the boom-bust cycle numerous times now, about 3-1/2 times in my life and having gone through it when I got out of construction and so when you think about what caused the last bust cycle... remember 2007-2008-2009... you had Lehmen Brothers failing. You had "They're too big to fail." You had the bailouts of the "Too big to fails". What started that was the real estate market got overheated. So around 2005-2006, the Feds started jacking the rates up just like they're doing now. So what happens is it starts a series of dominos. Once the dominos start falling, even when the Fed lowers the rate, it doesn't matter. The dominos are falling.

This is important because everybody that's reading this is going to be affected by it. To me, I'm actually excited because I'm going to be accumulating cash over the next several years because the real estate market is going to crash. The stock market is going to go down. It's already going down. The crypto market is just getting pummeled.

So what happens is that when you take a look at the real estate industry. So in the past month, month and a half, a lot of the big lenders that were doing a lot of refinances just laid off a lot of their loan processors and loan officers that were mostly doing refinances because now with the interest rates going up unless you're going to save at least one percent in your interest rate, it's not worth it to refinance your house. So with the rates jumping up like they are, now the refinance market is drying up because everybody that is going to refinance their properties at lower rates pretty much already done that by now. So now you've got all this capacity to handle refinances and there are no more refinances for the most part. So all of those people are losing their jobs. They're getting laid off. Then what happens is it starts to slow the real estate market. I'm already seeing it. My friends in real estate are starting to see it as well.

Just since 3-4 weeks ago, the real estate market has just completely turned on a dime. It was booming. Everything was flying off the market. Now stuff is sitting and they're getting price reductions. So what happens is, think about it, if somebody can afford to buy a $300,000 house at 3% interest rate... Now that interest rate is basically double that. So you went from being able to afford a $300,000 house with those interest rates, now you can only afford a $150k.

So it's the same thing across the board. So now you're reduced the buying power of pretty much everybody that's in the real estate market. So you're going to have less real estate sales. So every time somebody buys a house, what happens? They go to Home Depot. They buy garden hoses. They might buy a lawnmower. They buy stuff for the pool They might buy tile. They might decide they want to replace the kitchen in there. So what happens is those industries start seeing cutbacks. 

New home builders in 2004-2005 would have these home communities that would have 300 lots and they would have lotteries. They would have like 2,000 buyers for 300 lots.

So what happens is, the builders start cutting back. The contractors that were doing work start cutting back. You see Home Depot, Lowes, other places like that... their sales start dropping. You've got inflation going up so people are cutting back in their discretionary spending. You've got gas going up and people are basically driving less now because it's expensive. It's too expensive to do things. So across the board, people are cutting out discretionary spending. So what's happening is the demand for goods and services is starting to plummet. So then what happens is people start losing their jobs.

All that business is not there anymore because those properties aren't changing hands. Your loan processors or the administrative assistants that are processing the listings and the sales. The title agents. The attorneys that are involved. These things as well. It's like, they've got less work. They start laying people off, cutting people's hours back. People start losing their jobs. They go on unemployment.

I was reading about a guy the other day who was making multiple six figures a month this time last year. Now he's making $60,000 a month where just a year ago, he was making quadruple that and that's how that's affecting his business. He's cutting back. He's spending less money.

What happens is now all of these people that are now out of work are making less money because everything is expensive. What happens? They start dipping into their savings. They start liquidating their 401k cause now they're trying to make their mortgage payment that they can no longer afford because gas is expensive. Food is expensive.

What happens is, over the next year or so, people will then run through their savings and then they run through their retirement account because they don't want to give up their house. They don't want to default on their car loan or their home loan or their credit card bills, whatever happens to be cause they'd get too into debt. And then what happens is, once they run out of money, then they start missing mortgage payments. When they start missing mortgage payments, typically it's about 6 months on average before the banks starts foreclosing on the property and by the time the bank gets the property back and then list it with a realtor, then puts it on the market and kicks the person out of the property, you're a year to a year and a half for that to happen.

And so the consequences of these rate increases... You're really about a 1 to 1-1/2 to 3 years before you really start to see it and feel it. Then what happens is you get financial institutions start to blow up like Lehman Brothers when they blew up in 2007-2008 I think it was. The dominos started falling in 2004-2005. So you're about 3 years before the consequences of that happen. Then once the economy is contracting, the Fed lowers the rates again but by then, the dominos are already falling. Those people are defaulted on their loans. Those people have lost their jobs. They have ripped through their savings.

I was just reading an article last night that, from the beginning of this year until now, there has been a significant drop in the amount of money people have in the bank, their savings, because what is happening is everything is going up in cost. What's happening is everyone is starting to go through their savings. The consequences of what's going on now, you're probably not going to see the worst of it for 2-3 years.

I think the company is Celsius, which is one of those companies where you give them your crypto and they pay you like 8-9% interest on it and they lend those loans out. Well they just stopped people from taking any money out or moving their crypto around in that. Those are some of the indicators that those exchanges are going to blow up. You're going to see things like that. There are probably banks that will blow up. So you've got everybody that's over-levered.

I was eating lunch with a good friend of mine the other day. Say the restaurant we're in wants to put all new equipment in and it's $100,000. Maybe it's $200,000. Say we want to upgrade our equipment, but because the cost of financing just shot up... they look at how much their payment would be, the monthly payment on that versus the fact that the restaurants are starting to slow down more. They're a lot slower now than they were last summer. People are eating out less and so that company that was going to go out and buy all that new kitchen equipment just decided "Well, we're going to wait. We're not going to spend that money because you can't really afford the payment because the interest is too expensive. And so the company that makes all of that kitchen equipment, their orders drop and so it's a domino effect and it takes months and years for the consequences to be seen.

I think we're going to see the same types of issues you had when the real estate market was completely stagnant in 2009-2010-2011 where... I'll give you an example. One of my friends... I know there was a new condo that was built. These condos were selling for like $120,000-$150,000 on average. He had a bunch of Saudi Arabian investors. They had $500 million dollars to invest and they come from wealthy families. So they know the cycle. They know the boom-bust cycle. So these guys came in and they bought all these condos for like $20,000-$30,000 apiece and they paid cash for them. And so at the time, he was happy to have the business. $20,000-$30,000 sale is not a lot but when you're doing lots of them, these guys are buying dozens of them in the same building. And so when the market peaked in the last year or so, they ended up liquidating these things for $200,000-$250,000. So they paid like $20-$25 grand for these condos. They rented them out. They were all positive cash flow. So they're making positive cash flow every month. It gets to the top of the market and they liquidate everything. Now they sit back and wait for the next 2-5 years, however long it takes for the real estate market to crater.

You're going to have the same thing. You're going to have short sales. You're going to have people that bought at the top of the market and now it's worth less than what they paid for it. Then you're going to have banks that are going to fail. Same thing is going to happen all over again. So if you know what you're doing, you can prepare to take advantage of that.

If you wanted to sell your property at the top of the market, you're probably going to be sitting in it for a lot of years. I know someone who just unloaded a property he had about 3 months ago that he bought in 2002. He literally had this thing for 20 years but he bought it at the top of the market back then and then when things went down, he was totally underwater and he was just able to sell it a few months ago cause that's how long it took to go back up to the value that he paid for it in 2002-2003 because, again, when everything crashed in 2007-8-9, he was underwater. He owed more on it than it was worth. So it became a rental property because he moved to a bigger property but it took him 10 years to wait for the value to come back.

So now the same thing is happening all over again. This is the boom-bust cycle and this is how it works and everybody is affected by it. It doesn't matter where you are because there are central banks all over the world in the West. They're all raising their rates because everybody has got the same problem. And so by reducing or withdrawing liquidity in the system, they're withdrawing or lowering the demand for goods and services and that's what's going to cause everything to drop. That's what causes oil to go back down in price. That's what will cause labor to go back down in price because there will be high unemployment. That's what going to cause real estate to go back down in price because the leverage is just not going to be there and the money is just not going to be there. People just can't afford those properties. On top of that, a lot of people are going to be out of work and are going to be taking jobs for lesser than they were making once they go and find a job when they get laid off or whatever.

The Fed just this past week raised the rates 75 basis points. 3/4 of a percent. Last month, it was half a percent, 50 basis points. 

That's how it happens. People at the Fed, it never really seems to click. There's not an immediate change. They're just trying to get inflation to come down but they don't really see the dominos that are falling. You can watch video of Alan Greenspan when he was testifying back in the day. He was like "We didn't realize how much subprime money was out there." So they didn't realize how big the risk was of the financial system because of all those adjustable rate mortgages. When those things skyrocketed in payments because the interest rate increases they were doing trying to slow down the economy, trying to slow inflation... what happened was those people couldn't afford their mortgage anymore. They just defaulted on them and then once you get enough people defaulting, the bank becomes insolvent that made or is holding those loans and then the bank blows up.

At this point, you don't want to take less than you're expecting and you're not going to be able to get top equity for it so you're probably going to be sitting in the house for 8 or 10 years.

Warren Buffet says this a lot, but I don't know if it was JP Morgan or old man Rockefeller who originally said this... They said "You buy when there is blood in the streets." You buy when nobody wants these things. You buy when nobody is buying the stocks. You buy the real estate when nobody wants the real estate. You buy the crypto when nobody wants the crypto because it's going to be the cheapest price... just like these Shiites from Saudi Arabia. They had $500 million to invest.

At some point, stock market is going to hit bottom. People that have got their money in the market. Usually, unfortunately, it's the middle class people. They just don't know any better, don't understand the boom-bust cycle. They're trying to keep their house. They're trying to keep their car payment. What are they doing? They're selling their stocks. They're selling their crypto at a loss as the market goes down because they're trying to pay their bills and then this stuff craters and then all those people are out of the market and all of those people with money (the "rich" people if you will that the leftists and the socialists always demonize) because they understand this and this wisdom gets passed down onto their families just like the Saudis that I mentioned. Their family has been through this many times in the decade.

So you wait for it to crash and then you get it for pennies on the dollar and then you sit and you wait and then the Fed will lower the rates and then slowly over the many years, the economy will start going back up and it will blow another bubble up and they'll go "We've got inflation again. We've got too much inflation." And what happens? Just what's going on right now.

And this cycle takes about 10-12 years. In the early 90s, you had the SNL crisis which was things that happened from when Reagan was in office and then Clinton came into office. Things started recovering slowly and then eventually you had Bush and they continued blowing the bubble and they started pulling back 2004-5-6 which started the dominos falling once again. And then you had the "too big to fails" and you had all of the short sales and all of those things. 3-5 years is where the real estate market will finally crater and nobody is going to want most of the properties and you can pick it up for pennies on the dollar. I'm excited about it. I'm excited about the opportunity that's coming down the road and you guys can profit from it too but you gotta be smart.