Jason Hartman brings on in-house economist Thomas as they look back on the last year, 2019 and look forward into 2020. THey discuss the yield curve and how a negative yield curve signals recessions.

Investor Testimony 0:00
So I got in interested in real estate investing, you know, I’m actually my backgrounds in finance and I. So I have a pretty strong background but more so in what’s been traditional investing. And it’s funny that we’ve been touting diversification for so long and it’s been like that mix of stocks and bonds and I really felt like after all this time preaching to others that you know, this should work for them. It wasn’t even working for myself and thought that I really need to venture out and you know, real estate investing just it, it definitely interested in me, it wasn’t something that I struggle with, but it was, you know, something that I don’t know I got excited about right away, it made sense to me. And so it’s more so of creating that team and you know, knowing how to go about it was my biggest challenge and figuring out because with traditional investing, you can figure out an ETF or mutual fund you do online Research. This took a lot more effort. And I know that I can do it solo I need to, to come up with a good team and a good approach. So I found Jason, I was listening to not his podcast, but one that he spoke on. And it was just at that time I was just trying to learn. I’m like, well, you sounded pretty smart. So I’m going to listen to his podcast. So, you know, I actually listened to his podcast well over a year. And then I would say, you know, I don’t know it was more so just thinking. I don’t know. It just seemed like it was interesting, not necessarily something that would be right for me. And then all of a sudden, everything clicked. And it was right for me to take the steps and really figure out what Jason’s all about and, and the more the program and the see if it worked for me. Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class. That will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and bed involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 2:38
Welcome to Episode 1362 1362. And again, Happy New Year. Thank you for joining us. We’re looking back and looking forward. And that is the traditional thing to do around the beginning of each year. This time, I guess we should be saying Happy new decade because we are in a new decade and hopefully we can Hope you have 2020 vision so that you can see down the road and see what’s going to happen next, with the economy with the real estate market, and how you should invest to be more successful and more financially independent. And with looking forward, we always need to look back in order to gain a context as to what’s going to happen next. Of course, last year, you heard a lot of discussion about the yield curve. fact, some would say that it exploded. And we’ll go into what that means in the summer of last year, and then kind of died down. This, they say is the predictor of a recession. In fact, it is such a good prediction tool for a recession, that it’s predicted every recession over the last five decades. Now, I don’t think you have to be a genius to predict the recession, because it’s definitely coming like I always say the only question is when what flavor Will it be? How deep and severe will it be? And of course, what should we do to prepare as good investors? I’ve got our in house economist Thomas here with me to talk about this. Thomas, when they say the yield curve exploded. What do they mean exploded?

Thomas 4:17
What does that mean? All they mean that higher maturity, financial instruments have a lower yield than short term instruments. What that means in practice is that you go to the bank, and in this case, it’s the two year and the 10 year Treasury notes. Okay.

Jason Hartman 4:32
So they look at these Treasury notes. And what normally should happen is that when a lender loans money for a longer time, they need to get a higher interest rate to cover the inflationary risk, and also just the good old time value of money, right? But the inflationary risk is much more uncertain as you go out longer in that loan, right. So if you make a loan for 10 years That’s a more risky loan than a loan for two years, right? Yep. Okay. And to do that, to be able to make that longer loan, as the investor as the lender, you need to be compensated more highly. That’s normal. But when the yield curve inverts the opposite happens, right?

Thomas 5:18
Yeah. When the yield curve inverts, that means that either the short term interest rates are too high because the Fed is raise rates too quickly, or because investors are nervous, and they’d want to have assets that have a shorter yield, they have less risk associated with them.

Jason Hartman 5:35
Okay. So the shorter term asset has lower risk, as we’ve discussed. So who controls the yield curve? Well, the bond market controls the yield curve, right?

Thomas 5:47
Yeah. The trillions of dollars out there trading. Okay. That’s what controls it

Jason Hartman 5:51
in. So tell us more about this and let us know when you want to go to a we have a clip to share about this, but what do you want to do to kind of set this up Thomas,

Thomas 6:00
back at the late summer last year, there was a lot of chatter about the yield curve, inverting and it had stayed inverted for a little while. And that would have predicted a recession, you had a majority of analysts out there saying that a recession was on the short term horizon because of the inverted yield curve. But it didn’t happen. And there’s no evidence that there’s a recession on the horizon in 2020.

Jason Hartman 6:27
Well, some would disagree with you about that, but okay.

Thomas 6:30
Okay. They’re still shot, then it’s on the horizon. And that’s one of my points here is that if a recession does happen in 2020, an investor is much better off holding rental property than they are holding stocks. The bottom line is if you have 300,000 to invest, is it better to invest in stocks in 2020, or into rental real estate? Well, everybody knows what I’m gonna say I’m always say the real estate because and the reason I say always I can’t imagine ever saying differently. But maybe. And that’s because the income property has the multi dimensional characteristics the stock market does not. It’s just a very unique asset class. But why would you say that? Why would you say that the real estate is less risky than the stocks? Oh, because the income received off of the real estate investment is much safer, it’s probably going to be a higher income stream. And there is there’s much less downside risk in the price of the asset. So for instance, if you had a bad 300,000 bucks in 2019, if you had invested that in stocks, you would have been better off holding stocks versus real estate if you just look at 2019

Jason Hartman 7:50
right but but but wait, wait a sec. Wait a second. Thomas, come on. You’re being one dimensional are you I mean That’s not as a multi dimensional asset class. I mean, the stocks don’t give you any tax benefits. They don’t give you Well, usually they don’t give you any leverage. So the income property all in, you know, considering all the dimensions is going to be much better. I mean, the stocks don’t give you inflation and do stet destruction. They don’t give you a lot of things. So when you say that, are you just talking about capital appreciation? Only? Were you talking about capital appreciation plus dividends? Or, you know, cash flow? Cash Flow is what we call it in real estate and stocks we call a dividend. Go ahead.

Thomas 8:38
Yeah, I’m just talking nominal dollars, so that 300,000 stocks are up about 20 It’s been one of the best years ever for stocks. Oh, yeah. Yeah, so 25% on 300,000 You’re doing well. You’re up 75,000. And if you held real estate, you probably made at least 36,000 on interest. income, or, you know, real estate rental income. And then you also have the, if you bought low, you probably made 10% on prices. So you made another 30,000. There. If you bought maybe at a moderate price, maybe you only make 5% this year, so you’re up 15,000 to 30,000 on the price, and then you got 36,000 on the rental income, so you’re up maybe 65,000 70,000 for real estate, and you’re up 75,000 for stocks. So stocks, just on this nominal basis, not accounting for taxes or any other factors, stocks one, but that’s in the year when stocks had one of their best years ever. And, you know, it wasn’t a great year for price appreciation, you know, for real estate. So you can imagine if it if a great year for stocks only provides a little bit better return Then what about all the other years and 2020? It’s not gonna happen And that stocks are up another 25% in 2020.

Jason Hartman 10:02
Right? That’s very unlikely, but but let’s just dissect what you said about, it wasn’t a great year for real estate appreciation. problem with that statement is huge. And it’s that you’re probably going by the Case Shiller index, which is maybe the most commonly used in terms of evaluating real estate appreciation. And 75% of that index is cyclical markets, and cyclical markets softened substantially last year. Now, they did kind of come back. After that one of those rate cuts we saw toward the end of the year, those markets start to pick up. But again, you know, we have to wait for those deals to close and so there’s a lag time that’s the other problem with real estate is you get this lag time in reporting, whereas in stocks, it’s day by day, it’s installed hour by hour, minute by minute, it’s instant, right? You know exactly what the markets doing. Right minute by minute. But with the real estate, you know, you have a lag time of at least a good 90 days or so more than that, really because the deal has to occur, meaning someone buys the house, and then someone closes on the house, that’s probably 45 days if it’s a resale, if it’s a new home construction, it’s even longer than that could be many months. And then that closing gets recorded, and that recording data gets tabulated. And then it gets reported on. Do you see how long that lifetime is? It’s huge. And that’s always been one of the problems and opportunities with real estate, right? It’s good and bad. Because if you’re more aware of what’s going on, and you’re watching the index that the National Association of Realtors launched several years ago, it’s a newer index, which is the pending home sales index. But again with pendings they don’t report the price. It’s only a reporting of activity, not price. Okay, so you have to make certain assumptions with that as well. But the stock market is immediate. It’s a very what you call a perfect market, right? It’s all generated very quickly. But the real estate, it’s much more old fashioned. It has a much longer lifetime to it

Thomas 12:16
before you mentioned that I hadn’t been thinking about the linear, cyclical and hybrid market,

Jason Hartman 12:22
right? You really gotta divide them up. All real estate is local, obviously. And we’ve talked about that before, but go ahead.

Thomas 12:27
Yeah, when you’re in high hybrid markets, probably most of them probably one in 2019. Yeah. And there’s a higher likelihood that they’ll win in 2020, as well.

Jason Hartman 12:37
Yeah, they did really well. But remember all of the return, you get on that appreciation. Hopefully, you’ve got your properties leverage. So it’s a leveraged return, you know, it’s a four to one or a five to one ratio in terms of return. So even when you only see 5% appreciation, which is you know, nothing to write home about, if you’ve leveraged it. That really turns into 20 or 25%. appreciation, leveraged basis. So it’s a lot better than it looks. Thomas, should we play the clip, you’ve got a CNBC clip here on the yield curve. That’s pretty interesting. And I want to just share that with our listeners. It’ll give them a little break and some extra stuff to think about. Let’s just play a little bit of this. And this is from CNBC. They have an awesome YouTube channel. By the way, check that out 1.3 million subscribers almost. They’ve got some great educational video content there. Here’s a little clip from part of it. We’re going to be talking about the yield curve here

Thomas 13:38
will traffic. It’s important to note that the recession’s don’t happen immediately after the inversion. But it does mean the clock is ticking, especially when it comes to the three month 10 year curves that Australia has done

Jason Hartman 13:49
so much work. And of course, when they say inversion, he means inversion of the yield curve. The recession isn’t immediate after that, that’s what they’re talking about.

Thomas 14:00
is for

Jason Hartman 14:01
about a year ahead, you know, maybe a year to year and a half. Another caveat is that quick little inversions in the yield curve lashing for a day a week or even up to a month are considered exceptions to the rule. Instead, it’s prolonged month a month and versions that suggest a recession is actually coming. And so they’re saying that recession would be a year out if you’ve got a prolonged yield curve inversion, then, in about a year, expect a recession. Thomas, how long was the inversion this time? Of course, it can move in and out of that very suddenly. But overall, do you have an answer for that? It was less than a month, if that was predicted. And that would mean July 2020, is when the recession would hit?

Thomas 14:44
Right, right, July, August 2020.

Jason Hartman 14:47
And the other big part that’s going to be interesting is of course, that is a presidential election year. So you know, what does that mean? There’s there’s a whole bunch of other stuff there which is probably the topic of an Our show, let’s keep listening.

Thomas 15:02
It’s also important to keep in mind that even a brief yield curve inversion can split the markets. The fact of the matter is that we don’t have the kind of markets

Thomas 15:10
that we used to have. We don’t have markets where it’s a personal touch to it that we have individual investors out there doing things. Sometimes there’s just yield curve inversion can get fed into the electronic trading systems. And it can just trigger really fast knee jerk reactions. A lot of this is programmed trading, just computerized trading, especially when you have markets to trade on thin volume, it doesn’t take a whole lot to move them. And when something that has the predictive power of an inverted yield curve coming along, it can be very influential in a highly sensitive market.

Thomas 15:42
So let’s say the yield curve has actually inverted what happens between that moment and the theoretical recession that the inversion is predicting. Well, a back and forth tends to emerge from Market watchers and the immersion in 2019 offered a good example, with one camp, essentially saying This time it’s different. It’s always kind of a scary thing to say this time is different, but I’m gonna say it

Jason Hartman 16:05
famous last words, if any investor This time, it’s different, right, Thomas? Oh, I love to say that. Yeah, I know, it does seem different this time. But you know, they’ve said that a lot throughout history. So maybe we should be careful with that statement to

Thomas 16:19
the younger version I would not read too much into

Thomas 16:23
there’s no likelihood that the inversion of the yield curve that’s occurring in this period a is similar to the ones that occurred in the prior period, or be that it will lead to a recession, and another camp heating the curves warnings, I’ve been getting this pushback that essentially you go is inverted because global yields are low. So you know, it’s it’s not that good an indicator, I would actually argue it is a very good indicator, because we just find it very hard to see how global growth can be this week, and the US can be this one island of, of essentially prosperity. I think we’re up towards 40% of recession risk within the next 12 months. And that’s a large part in reflecting what the yield turpis amongst the curse detractors, some wonder if the very act of watching the curve so closely at undermined, it’s worth as an economic indicator. Historically we

Jason Hartman 17:10
it’s almost like what was that called Thomas we learned about the Hawthorne experiment, remember where they everybody you know remembers this from college maybe or even high school I think they talk about how the employee behavior changed just because they were being watched. Right. And then of course there’s the double slit experiment in physics, which is the same thing too. Right? Very, very interesting stuff. It almost relates to that

Thomas 17:37
at not been following the yield curve as closely as we follow it now. There’s something called the Heisenberg uncertainty principle, something that’s being observed. Yeah,

Jason Hartman 17:44
Heisenberg to know

Thomas 17:46
is going to act differently than when it’s not being observed. Others pointed to negative sovereign interest rates abroad, you have 20%, more sovereigns, yielding negatively then you add just a few months ago. So there’s the Drive for you, attributing the inversion to a spike in demand for long term US Treasuries as money fled those negative rates in other countries trade advisor Peter Navarro

Jason Hartman 18:10
interesting stuff, Thomas thoughts? You know,

Thomas 18:13
there’s a lot of ways of reading what those commentators said I, I think there’s one thing in there that’s changed in the recent decade. So the Federal Reserve has this dual mandate of moderate to low inflation and maximum employment. But they I think they are thinking about their role as more than just a dual mandate. Now, they consider financial stability as one of their mandates. I don’t know whether you think that’s good or bad. I definitely encourages risk taking the Federal Reserve, I think is responsible for most of the stock markets return in 2019. Whereas the real estate market, the Fed can influence it, but it’s by and large You know, it stands on its own. Right. But the stock market is no longer. I don’t know, it seems to me like it’s no longer independent of the Fed.

Jason Hartman 19:10
Right? Yeah, it’s a proxy. It is a proxy. Good stuff. Good stuff. Thomas. Um, let’s wrap it up on this topic. Anything else you want to share? I you you had prepared some stuff. Do you want to talk about any of those graphs or anything,

Thomas 19:24
just my bottom line. Note that looking forward to 2020, the expected return on a $300,000 investment. For real estate, it’s at least 60 $70,000. And for the stock market, just doing some probabilities, the expected return is probably negative 45,000. So there’s, there’s a $100,000 swing there for investors looking to put money in different asset classes.

Jason Hartman 19:52
The only thing I’ll say about that is number one, I hope you’re right. But number two, in the interest of making a disclaimer, this prediction is worth exactly what it cost and how much do you pay? Listen to this. Okay. You know it is a it is a crystal ball prediction for sure. But when you say the stock market I’m curious. You talked about the s&p 500

Thomas 20:13
I yeah, I’m talking about the s&p 500.

Jason Hartman 20:15
Got it. Got it. Good, good stuff. All right, Thomas. Thanks for joining us today.

Thomas 20:20
Good talking to you.

Jason Hartman 20:22
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