Jeff Nabers’ Self Directed IRA & Solo 401(k) Blog

A recent Onion News article has hit dead on what is wanted right now by the masses of the American public. As ridiculous as this article sounds, this type of mentality is exactly what’s been behind many “investment decisions” of the average American in recent past.

Read the article here, and then keep reading my blog if you’d like a more sound approach to investing.

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P.S. Just to be on the safe side, I’ll give you a heads up that The Onion is a satirical, “fake news” organization.

In Part 1 of this post, we examined the facts concluding that inflation is caused by monetary debasement. In this follow up, we’ll observe the reason behind why common belief is that inflation is at 3% - 5%. First, let’s recap what was already covered:

What is Inflation?

Inflation is the steady, continual rise in the price of goods. It is typically measured using a “basket of goods”. In this approach, the prices of many different goods are tracked and then integrated using some sort of logical weighting calculation.

What causes inflation?

In most developed countries, money is created by a central banking system. In the US, our central banking system is that of the Federal Reserve, a private bank. Money can be created by the Federal Reserve depositing newly created money into its member banks in exchange for US bonds. This increases the amount of money in existence. Additionally, every bank in the US has the ability to lend out 7 to 11 times as many dollars as it has in deposits. This also increases the amount of money in existence. With an increased money supply, prices rise. A continually increasing money supply, aka monetary debasement, causes inflation.

What is the current rate of inflation?

This is where there is a difference of opinion. For decades, inflation has been estimated using a “basket of goods” approach. In this method the price of each of a variety of goods is tracked, a logical weighting is applied, and the output is the rate of inflation, usually annualized. Under this method we can see inflation swinging up and down through economic cycles. In the early 1980’s, this data shows inflation at nearly 15% per annum. This is based on the published figures of the US Bureau of Labor Statistics.

In the early 1990’s the methodology of inflation reporting changed drastically, thus rendering the BLS “official” figures virtually useless. Unfortunately, these BLS figures continue to be used as if they were accurate.

A change in calculation method

Around 1993, Alan Greenspan argued that there was a flaw (more…)

Some of the most prominent explanations of the cause of inflation can be extremely confusing and often end up leading the reader/inquirer to conclude “Ahh, it’s just too complicated. We can’t really put our finger on it, and there are many different factors.” In this post, I aim to undo that surrender of understanding and replace it with a simple, accurate explanation.

What is inflation?

Inflation is the steady, continual rise in the price of goods. It is typically measured using a “basket of goods”. In this approach, the prices of many different goods are tracked and then integrated using some sort of logical weighting calculation.

The Cause… Theory #1 - Demand-Pull Inflation

“Too much money chasing too few goods”. This is the theory that says inflation is caused by demand out pacing supply. Believers of this theory pat themselves on the back about inflation as if it is evidence of a growing economy. This kind of fantastical belief is possible only through naivety. A global review of inflation teaches us that some of the most rapid inflation occurs in economies that aren’t growing at all. Conclusion: False.

The Cause… Theory #2 - Cost-Push Inflation

“When companies’ costs go up, they have to raise their prices to maintain a profit margin.” This may explain fragmented price fluctuations, but remember that inflation is the steady rise in price of goods (in general). If prices are stable across the board, but wheat spikes in price, it won’t single handedly result in substantial inflation. Even if wheat is in the “basket of goods” that we use to calculate inflation, its rise in price will minimally affect the overall computation for inflation. Another thing to note is this: What is causing the companies costs to go up? The Cost-Push Inflation theory is almost like saying “Rising prices are caused by rising prices”. Huh? Conclusion: False.

Supply & demand of goods have nothing to do with inflation. Let’s look at the rising price of oil, and examine (more…)

Has your saving really been a loss? Has your investing really been saving? Let’s find out. To start, here are my definitions…

Investing - the placing of assets to build wealth in a way where overall return can be maximized and risk minimized confidently, competently, and consistently.

Saving - the act of reducing spending in an effort to accumulate wealth.

Surrendering - the placing of money into a situation where you have little to no understanding of where your money actually went… and thus little or no control of what happens to it.

Building on that, my philosophy of wealth building contains 4 simple truths:

1. Investing primarily in the stock market is only possible on a large scale (like Warren Buffett) or with nonpublic information. The latter is illegal and can result in imprisonment.
2. In the current inflationary environment, saving US dollars results in a loss of wealth… even in a CD or money market fund.
3. The average person’s investable assets are inside retirement accounts, such as IRAs or 401(k) plans.
4. The average person cannot invest until they restructure their retirement accounts to have unrestricted investment options.

What you’ve called investing may have actually been saving and surrendering under my definitions.

Investing into a stock may be (more…)

If there is one conversation central to society right now… it’s energy. More specifically oil. With gasoline passing the $4 per gallon mark in many parts of the country, it’s hard not to wonder what are our alternatives to the internal combustion engine automobile.

In the mid 90s, GM came out with quite a successful electric vehicle (EV), but mysteriously repossessed and destroyed all of them. While there are many theories as to their GM’s motives, perhaps it is more useful to focus on the car companies who are producing efficient, working, zero-emmissions vehicles that require no gasoline, oil, or internal explosions to operate:

Telsa Motors

Elon Musk, cofounder of leading online payment processor Paypal, has spearheaded the development and productions of the Tesla Roadster…

Driving Range: 221 miles
0 - 60 mpg in under 4 seconds
To Speed: 125 mph
Energy cost: $0.02 per mile (about 10 times cheaper than a gasoline car)
Retail Price: $110,000
Full charge: about 3 hours

This isn’t a “we hope to offer it in the future” car. It’s already been produced. Over 600 have been sold or reserved, and there are an additional 400 on the waiting list. The roadster is a car that will hang with Ferraris and other exotic, high performance sports cars.

More importantly, Tesla plans to introduce a $60,000 luxury sedan in 2009, and a $30,000 model soon thereafter.

EV’s Longer car life

If you think $110k or $60k for an electric vehicle is expensive, think again. While the (more…)

One investment philosophy that has grown in popularity is “Because most mutual funds can’t even outperform stock indices, just invest in index funds.” This idea builds on the assumption that “over the long haul, the stock market goes up 10% each year.” Guess what…

The stock market does not go up 10% per year in the long run

• The math is just plain wrong. Lying averages tell us if you average the annual returns of the stock market it will equal its performance… but, as the name implies, it is not true. Lying averages tell you that if you are aiming for a 10% average return, and you have a 20% loss one year, it will take a 30% gain the next year to get back on track. Truthful math will tell you it will take a 50% gain just to get back on track for a 10% average annual return. Think about that in light of the stock market activity in 2000, 2002, and 2007.
• Any returns less than inflation is truly a loss. With inflation currently at 11.58%, you’ll need a 21.58% annual return to grow your wealth at 10% per year.

Just look at the last 10 years of data…

On the chart above, the red line reflects (more…)

I just got done interviewing John Rubino, co-author of The Collapse of the Dollar - Make a Fortune by Investing in Gold & Other Hard Assets, and it was quite interesting. Rubino stated that:

Over the last 7 years the stock market has dropped [as significantly] as it did during the Great Depression.

“WHAAAT?!!” you say. He explains that our perception of this strong bear market has been softened by the declining value of the dollar. In the spirit of comparing apples to apples, we must first consider that in the late 1920’s and early 1930’s the dollar was fixed to gold. So, in essence, the stock market’s decline was measured in gold. According to Rubino, you would see a depression-like chart if you were to measure the past few years of the stock market in gold.

The most convincing thing about his perspective is that he accurately predicted the burst of the housing bubble… in 2003. He forecasted that those who would suffer the most from the popping bubble would be homebuilders’ stocks, Fannie Mae & Freddie Mac, and real estate prices in “hot” (at the time) areas. He even went on to explain that the contributing factions would spill over into other parts of the economy including financial services companies, and banks themselves. At that time, the idea of one of the country’s largest investment banks (Bear Sterns) becoming insolvent sounds crazy, but Rubino warned us all with How to Profit from the Coming Housing Bust: Money-Making Strategies for the End of the Housing Bubble. In fact, if you would have followed his advice to the “T”, you would have profited immensely , provided that (more…)

With gas prices and virtually every other cost of living rising, responding to the declining dollar is something we all have probably thought about by now. One option available to us all is precious metals: namely gold, silver, and platinum.

The trick with getting metals into a retirement plan is in the Internal Revenue Code section that deals with collectibles. Strangely enough, it’s not in section 4975 (which deals with prohibited transactions); it’s in 408 which deals with IRAs. Even more odd is the fact that one part of this section is applicable to self directed qualified plans (like a Solo 401k) with no reference to its applicability within the code sections for qualified plans. This is why tax attorneys have work to do.

In 408(m)(2), they prohibit investment into collectibles and further define collectibles to include any metals or coins. 408(m)(3) goes on to exclude certain coins and bullion from being defined as “collectibles” for the purposes of disallowed investments. It breaks these “certain coins and bullion” down into two categories. (A) is essentially American Eagle coins minted by the United States. (B) is bullion that that meets or exceeds the fineness required by regulated futures contracts if such bullion is in possession of a custodial account at a bank or trust company.

So when it comes to Self Directed IRAs and Solo 401(k)s, it appears that American Eagle coins are allowable for (more…)