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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
I believe our economy right now is mostly built on the house of cards. That's another political note to Kevin Spacey and what a great show that was. Right. No. Mean like the actual analogy house of cards.
Mike:Good. Yeah. Okay? So let let me just take you down a little bit of rabbit hole. LLMs, large language models, which is what AI is.
Mike:AI is not sentient. AI is a sophisticated compression mechanism that creates statistical probability. So a lot of people don't realize this, but it's not thinking for you. It's giving you the statistically most probable next word, and then the next word, and next word. That's how it works.
Mike:It's just probability. And each model gets better and more efficient and more accurate and so on and so forth. That's just a layer of technology. Well, what if they shift that technology? So it's not maybe using language, but using a different form and then puts out into our language the answer.
Mike:That compression makes the cost of AI, let's say half. Now just imagine, just for a moment. I'm using this as an example. What if they put, I'm using a ridiculous number, $2,000,000,000,000 into data centers across our country. And then a year from now, they realized they only needed 500,000,000,000 of data centers, and the rest is unneeded capacity for at least next five years.
David:And so these are tech companies that will be putting this money in?
Mike:Let's just say that were to happen. And I'm using fake numbers for easy math. Alright. $2,000,000,000,000 is going into data centers. Let's just say this is not a real number.
David:Alright.
Mike:And then AI advances, becomes more efficient to operate, or the demand shifts, or they something something changes, and you go from 2,000,000,000,000 to 500,000,000,000 of need. Alright. That means three fourths of all the data centers, so all that money went into through private lending, private credit, or whatever what went into these companies to build out these things are now nothing. They're not needed. Eventually they'll be used.
Mike:Yeah. But they won't really be needed.
David:So they overspend. Is that what we're saying?
Mike:They overspend on borrowed money. Okay. So David, let me use an example. You're gonna buy a $2,000,000 house. Oh.
Mike:In a year from now that house is gonna be worth 500,000.
David:Oh. That's not so good.
Mike:And the bank is gonna keep, you know, keep your mortgage going at $2,000,000 Yeah. Or call the loan. Yeah. Either way, you're in a crappy situation. Well, what if that happens?
Mike:Now I'm not being pie in the sky, you know, the the sky is falling. I should say that's the more appropriate analogy. This is what happened in 02/2002. We built out more infrastructure than was needed with the Internet. This is why Cisco fell.
Mike:It was the largest company in the world. Fell over 86%.
David:What
Mike:if we didn't need Nvidia chips for a couple of years? What if Microsoft, which is I believe 5% of Nvidia's entire revenue is to one company, says, we have enough. Thanks. Yeah. That alone sends shock waves into the market.
Mike:House of cards. Let me keep going.
David:Okay.
Mike:Is AI overestimated? And this is just so crazy because everyone's like, oh, AI was really great, and now it's it's slowly going down, and now it's the semiconductors and the hyperscalers and all these things. It's there's this new industry that's in vogue until when? At some point, there's no next lily pad to jump onto
David:Mhmm.
Mike:And you jump into the water and start to sink.
David:Okay.
Mike:We've seen this with the railroads. We've seen this with .com. We see this over and over again when there's a new invention. Now, it gets a little bit more tricky. This is a bit more complicated, but let's talk about SaaS.
Mike:So SaaS is Sales as a Service Tech Company. Okay?
David:I've seen that before. It's just all caps initials, s a a s. Yeah.
Mike:Yeah. So it means, it's basically a tech company that's offering a service. Okay. Whatever that service might be. Well, what if you don't need them anymore because you could vibe code.
Mike:That's where you're telling AI to build out your platform and small businesses now can vibe code and build most of their infrastructure on their own for like $25 a month, and they can get rid of these thousands of dollars of expenses every month, and get rid of the SaaS companies.
David:Mhmm.
Mike:That's major that's that's creative destruction. That sends shock waves into the businesses. Private credit. If private credit, which is the shadow banking industry, that's where you don't need to go through the typical banking process. But it's like, hey, you know, we're gonna put money in here.
Mike:You're gonna pay us. We'll loan you whatever. As long as you pay us back, which we've already seen cracks in that industry. That's kind of a problem. Yeah.
Mike:Software as a service. Did I say sales as a service? I'm sorry, Larry. Yeah. Software as a service.
David:Yes. Look.
Mike:I'm thinking about the financials and not the acronyms. Thank you, Larry.
David:We have good listeners.
Mike:Alright. Then you go into the next part of it with private credit, which is that's leverage. So if the this is called mark to market accounting. And if the assets values change, that creates an issue for the lending. So here we have potentially overvalued or building out more than we need because everyone wants in on the build.
Mike:Then we have also an issue of just leverage and money that might might crack or blow up. Then you have this thing called circular finance. Oh. So circular finance, I'll put it in simple terms.
David:Alright.
Mike:If company A pays from a service from company B, and then company b takes those profits and then buys from company c. Company c then takes those profits and buys from company a, and it's a circular system of money going through. It looks like they've got revenue. No. It's just money going very very fast between all the different companies.
David:Okay.
Mike:And so if money is going very fast through all the companies and they're like, oh, revenue is really good. Then the stock price increases. And if the stock price increases, then more money goes into this circular financing situation. And if more money goes in there, it's the snake that's eating itself. When that momentum starts to slow down, that's when you start to see panic.
Mike:It's again, one of those reasons why Cisco might have suffered and many of the other not.com, it's not pets.com, it's not the .com crash. It was the infrastructure crash that put on the facade of it or blaming the .com companies. It wasn't the .com companies, though a lot of them did go bankrupt.
David:Yeah. Have we seen that before in history like the circular finance deal? Oh yeah.
Mike:Oh. Oh yeah. It happens. Yeah. It's just it's one of those signs.
Mike:And then today you've got corporate FOMO.
David:Mhmm.
Mike:So it's we're gonna spend money on AI. Okay. How are we gonna do it? I mean, Airbirds. Do remember the the shoe company?
Mike:Yeah. Allbirds. Or Allbirds. Right. Thank you.
Mike:Yeah. I'm getting all sort of references wrong. Keep me keep me honest.
David:Sure.
Mike:So Allbirds, they made shoes.
David:Yeah. I remember seeing ads for them a lot like on Instagram and other places.
Mike:They're now an AI company. Isn't that wild? Sold all of their their assets and proprietary, you know, this that and the other. They use their warehouses and now they're like data centers or something. I didn't know that being a what's a haberdasher or a cobbler?
Mike:What's is it a cobbler?
David:Yeah. Yes. Haberdasher I think does hats and cobbler. Yeah. Would would like resole your shoes
Mike:or Yeah. So cobbler's apparently are very good about AI infrastructure or something. I mean, at some point you have to ask yourself, okay. How it's been good.
David:How
Mike:long will the good last? So corporate FOMO is a very big thing. And I think AI is gonna be around forever. I don't think it's ever gonna go away.
David:Right.
Mike:I think AI is the first time that small businesses are gonna have a competitive advantage. Because they can build the service industry specifically, they can build things way faster and way more effectively to make them more efficient and serve their local community than ever before. Like there are so many cool things that can come from it. But we see this momentum of excitement as it continues to come to the same place. I think it's kind of a house of cards.
Mike:And there's other things that we see like AI is still hallucinating. You can't replace your dev team with a system that hallucinates. Yeah. I mean, this is probably not a PC way, but let's say you've got a dev team of 50 people who are in charge of your servers, and they're always high on mushrooms. Would you trust them?
David:No. I I would wanna double check them.
Mike:Yeah. So we need humans to work with AI in some capacity. That's probably a terrible analogy, but whatever. Yeah. We're having a good time here.
Mike:And then the last thing is, do you remember in the pandemic when toilet paper was like worth more than gold?
David:Yeah, that space in the aisle in the store was always empty for weeks or months.
Mike:That's what's happening with GPUs. So it's the chip that funds a lot of the AI. So GPUs, really cool technology because it can multitask. That's my oversimplified explanation of a very complex system. But companies are buying more than they need, and they're hoarding it for fear of missing out.
Mike:Well, what if they stopped buying more than they need? What if maybe people just didn't need it as much anymore? Maybe the sales slow down. Would that create panic? I mean, if you look at Netflix, for example, the first time they reported that they were started to lose subscribers, their stock tanked.
Mike:What do you think is gonna happen when the video, hypothetically, says it's the first time we did meet revenue expectations or the revenue starting to decline or sales aren't coming through as projected? When the tide starts to noticeably turn, what do think is gonna happen?
David:That stock price probably gonna slide. And there'll be a rush to get out. And maybe is would that Is that justified of people wanting to get out or are they overreacting?
Mike:I think it's justified. It depends on your timeline. But I I personally like buying clothes on sale. Yes. Don't like buying clothes.
Mike:Like let's say, let's say a jacket, a really nice jacket's $200. Yeah. If you wait a couple of months it's a $100. But you could buy today for $300. I'd rather just wait a little bit.
Mike:Yeah. But people want in because they think the $300 jacket they could sell tomorrow on eBay for $3.50. Right. That's the greed that concerns me. And like the first lady I talked about, she thinks this company which is heavily influenced with AI has incredible men momentum.
Mike:She has no idea, for example, that if a stock is trading 20 above the two hundred day moving average of its own price, that is considered hot and might have a violent revision or or drop before it then continues on. And maybe it continues on and maybe it doesn't.
David:Right.
Mike:Because in finance it works until it doesn't. Yeah. And so these are concerns I have for anyone that's retired or within five years of retirement because it's one thing to be a long term investor. It's one thing to be retired and say, this money is for legacy purposes. I won't touch it for twenty years.
Mike:It's another to say, well I need to generate income somehow from somewhere tomorrow. Or next year or the year after. You might not have three to five years to wait for that recovery.
David:Right.
Mike:That's my concern. That's what kind of keeps me up at night. That's like, that's why we're doing these classes. That's why we have this show. That's why we open up our show to to people just to submit any question they want.
Mike:Literally anything you want about retirement or finance. Mhmm. So we can have dialogue about it because it's okay to be invested in equities. It's okay to be in the stock market. But to be all in, that's that's where I think things start to get a bit riskier than than is needed.
Mike:Risk in my mind is a calculated position based on conditions. Okay? Let me give you an example. If you were walking, I don't know, let's say Western Washington. Very dry.
Mike:Okay? Alright. Lot of fire risk. Can you wanna go for a hike? Now, would you rather go for a hike just after it rained there?
Mike:Or would you rather go for a hike when there's a wildfire 500 yards away. Like, it's the same hike, anything could happen, but there's a moment where risk is lower on the same hike. Uh-huh. And there's a moment where risk is higher on the same hike. When price is lower, it's a good time to go on that hike.
Mike:It rained, a lot of upside potential. There's, you know, you could buy things on sale. But when there's a fire going on, do you really wanna go on that hike in that moment? Like that's just where my mind goes.
David:Alright. That makes sense.
Mike:This is why we use buffered ETFs and plans that we put put together. Those help you lower your downside risk. This is why we might ladder out CDs, treasuries, MYGAs for the first couple of years in retirement because if markets go down, they're going at a fixed rate. This is why we might use some baseline income. That's lifetime guaranteed income for just your essential expenses or maybe half of your essential essential expenses.
Mike:Mhmm. Just to shore up risk because we don't know. No one can predict the market. But there are signs. Yeah.
Mike:Whether it happens or not. What do you think, David?
David:Yeah. I mean, we're you're pointing out some of the signs that we're seeing and and you've you've mentioned a few of our strategies or our products or investments that we go into. Do do people know what buffer ETFs are? What MYGAs are? I don't know.
Mike:Buffered ETF, think of it as you bought for one example. You've got act you're exposed to the S and P 500 for example.
David:Okay.
Mike:You're gonna get around half of the upside and very little of the downside.
David:So if if the if I buy into this and the and the market overall goes up a lot, I don't get the full up, but I get
Mike:You get a reasonable amount. Yeah. But if the markets go down, you don't really lose as much.
David:So that's the trade off with those. Yeah. Not as much up, but way in way less down.
Mike:And there are so many different variations of that, and those price points can change. Maybe it's 30 or 40% of the upside for very little down. Maybe it's 60% of upside. It's it's dynamic in nature.
David:Yep.
Mike:But if you're if you're managing long term assets, you might use those. Some people will use fixed indexed annuities because a little bit more structure on those if you don't do them with fees for upside potential. There's so many different things that you could do with it. But an interesting thing that traders know, a lot of people don't realize, it's not about getting all of the wins right. It's about knowing how to protect yourself for when things go wrong.
Mike:Yeah. Most people don't understand that side of it. Some of the best traders, they know their what we call a bear market protocol. Bear markets are when markets go down. They know what to do when that starts to happen.
Mike:It's not buying hope. It's not just ride it out. In retirement, you can't just ride it out because you've got bills that are not gonna ride it out with you.