Jason Hartman uses this Flash Back Friday episode to discuss Karl Denninger’s book, Leverage. They discuss his blog, “The Market Ticker,” and look at where we are in the economy. Karl introduces his writing and why he started blogging, as a way to help investors and warn them of potentially illegal activity like what happened during the tech boom and crash. The economic downturn hurt a lot of his friends financially.
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to find National freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:17
Welcome to the creating wealth show. This is your host, Jason Hartman. And this is episode number 285 talking to you on the day after the election as America is going to descend into a socialist utopia. And you know, I don’t really believe that, folks, I don’t believe socialism is utopia at all. But I’ve got Steve here with me. And we wanted to talk about the strategy to win with Obama and a second Obama term and what you can do what you should be doing what you should be thinking about in terms of your investments and your outlook about things. And just kind of some thoughts on on what the right strategy is. Steve, welcome. How are you?
Well, I’m hard at work the day after the election here. You know, you have to be You have to you can’t be on autopilot anymore. You have to be actively engaged and, and dealing with the policies that have been in place and the policies that are no doubt coming down the pipe here.
Jason Hartman 2:11
Yeah. Well, you know, Steve, you better be hard at work because as the saying goes, millions on welfare are depending on you. And Obama has been the biggest expander of the welfare state in American history. Millions more on welfare soon to be on welfare will be depending on you soon. One of the things on on the Facebook last night that I made a comment on which we’ll talk about is, isn’t it amazing? How many people are on disability in today’s world? I mean, here we are. We live in the information age where people aren’t working on assembly lines dealing with heavy machinery that often I mean, they are a little bit, but manufacturing has largely been gutted. And there’s all these disabled people. I just don’t understand how that happened. Whereas years ago, there were fewer of them, but just another ruse to get free handouts. From the state. So before we dive too deeply into that one, and we got we got a comment that ties into later, but tell me what some of your thoughts are.
Well, that’s true. And granted, there are a fair amount of legitimately disabled people, but it does seem that whatever the entitlement is, it just seems to be growing like crazy. You know, you look at the numbers, and what the unfunded entitlements are out there and and look at this fiscal cliff that’s hanging over us that President Obama and the republican congress get to fight about once again, and I don’t I personally don’t see any kind of agreement so that they, they could come to the only lonely path forward is to continue to print more money. I mean, does anybody really see the cuts coming to these kinds of programs that that need to be happened? I mean, nobody really wants to make the hard decisions here, whether it’s Republican or Democrat, because it’s just vastly unpopular with the electorate.
Jason Hartman 3:57
Yeah, no question about it. And you know, I’ll say probably the best thing that relates to that is just what I posted last night at about 930 when I heard that Obama won the electoral vote, and that’s this how I mean, a candidate can’t win on the concept of saying be more responsible, expect less from government, do more yourself. I mean, that’s not a winning strategy. The best political business plan ever, was to just give out free stuff. And that’s why politics always, over time leans to the left. And I’ll tell you, I’ve done lots and lots of charity work. You know, in my younger days, I don’t do as much now, but, you know, I have my private foundation and I do stuff there, but it’s related to my interest, which is investing and, and by the way, that’s Jason Hartman foundation.org. You can look it up and basically, what that foundation does is when I sold my last company, in 2005, I endowed it with about $100,000 of my own money, never taken a donation. I don’t take donations. So I’m not asking for one, I just put my own money into it. And then I use it to further the foundation’s mission, which is financial literacy for young adults. And I have a podcast related to it. So if you have a young adult, that’s maybe late high school early, you know, we’re in college or post college 20 something type young adult, have them listen to the young wealth show. It’s a free podcast. Okay. And you know, it’s just kind of the same stuff we talked about here a little bit, but geared toward a younger audience, and much more cool. But where was I going with that? Steve? i? Well, you know, I guess it was really the Facebook comment. And and I think this sums it up fairly well, because I’m surprised that people are surprised. Now, I have very liberal friends that you know, we’re rooting for Obama. I have conservative friends that were rooting for Romney. I have people that don’t claim to have a party affiliation that we’re rooting for one side or the other, but at a 920 Last night, I started hitting all these text messages and emails and instant messages on Facebook of people saying, Oh, this is terrible, complaining, complaining, complaining that Obama looks like they you know, he was the projected winner. And I just didn’t answer them all. And I just went to my Facebook page, and I wrote on it. And here’s what I wrote, I go, Hey, people, are you really surprised? it’s nearly impossible to compete with vote, buying parentheses, giving people free stuff in exchange for power, and the parentheses, telling people that government will do less, and they will get less isn’t a popular idea. This is why government always gets larger, goes broke, and countries degrade into socialist disasters, before an ugly revolution finally changes it back to a responsible society. Look at the bright side, my investment strategy works much better. Under a big spending, irresponsible government. It means lots more More inflation that makes us rich, and a poorer population, more renters. I don’t like it philosophically, but it’s very profitable. Remember that I stopped being an optimist years ago. I’m just an opportunist. Join me. It’s very liberating. And you know,
yeah, yeah, that’s a very good one. And there’s a very good post as well on there because I, of course, follow you on Facebook. But Alex, one of the commenters said, and I’ll read this really quickly, if you don’t mind. He says, Jason, I’m torn up over this. I disagree with the Obama policies and the welfare state that’s being created. But at the end of the day, I’m thinking it’s better for my 20 properties, and 230 properties under management. Almost any house we ran out below $850. The tenant is getting some sort of benefit. It was not like this. When I first got in the business. We had one girl who got on disability. The day she turned 18. And she was still in high school with a kid. So it goes back to what you said, opportunism. I mean, you can complain about it if you don’t like what happened yesterday, although apparently about 51% of the population is just fine with it. But if you’re 49 percenter, then it’s time to take advantage of it. Because there is Yeah, there’s no bones about it, the entitlements are growing and growing and growing. And if that tax check that you’re having to write every year keeps getting bigger as it has been in this, it will continue to do so. Not just in the actual figure, but in the value of the figure. I mean, the inflation that’s happening and you still have to write that check. But these entitlements are growing. So hey, a great way why not get some rental property where the tenants are on government assistance, think of it as a tax refund every month,
Jason Hartman 8:50
and that’s absolutely the way I view it. And you know, Steve, it’s interesting because our administration, the Obama administration has promised to be the great Union. And I’ve just never seen the country more divided. Well, I wasn’t here for the Civil War, I guess it was maybe more divided than but people are really divided. So on the one side of the things, you know, the poor say the rich are getting away with murder, they’re not paying enough tax. And I actually agree with that. I know a lot of you might be surprised thinking, you know, I’m some sort of like elitist. Obama detractor. Okay, that thinks that but I do think the rich are getting away with murder in a way, okay. I’m no supporter of the Wall Street elite. I grew up poor. Okay, I grew up poor with a single mother. Okay, I lived in crappy areas all my life. This is why people are sort of surprised at how I seem sort of urbane and kind of yuppie ish, but I’m pretty tough. Okay. I mean, I I remember, you know, in junior high school, I would get mugged in the hallways all the time. kid would stick a knife to me and say, Hey, give me your money. They hit your pockets and say hey, I need to bussed money and steal it from you. I mean, those are the kind of neighborhoods I grew up in. I mean, they were not good. or Vista, California, Venice, California. These were not good places. Okay. And I don’t mean Venice, the nice area along the beach that you see in the movies. I mean, Venice, I went to Venice high, which, you know, the movie Greece was filmed there. That was right, Dell high, but also the movie American History X about gangs was also filmed there. And that was more accurate, obviously. But I mean, I get it. I agree. The rich are kind of getting away with murder. It’s the middle class that’s disappearing. And then on the other side, people are saying it’s not fair that so many people are on disability on welfare, getting some sort of government entitlement. Look, folks, none of us are going to change the way this is. The country is losing its middle class, and I don’t like it any more than you do. The rich are getting incredibly rich, and as the middle class disappears, when it won’t completely disappear, but it’s getting smaller. No one would argue that as it gets smaller, the question each of us have to face is which direction are we going to go? Are we going to get sucked down the vortex into the poor? And you know, unfortunately, a lot of the middle class that’s happening to them. But the other question is, could we rise up? Not enough Riot type of sense but in a financial sense, could we exploit the the the things the way you might get mad that someone’s exploiting the system and cheating the system by saying they’re on disability because they got a pain in their neck? Well, I’ve got lots of pains in my neck, but I’m not getting disability. Okay, so what I said to Alex, my reply was on that Facebook thread, Alex, I hear you Obama is massively expanding the welfare state. Isn’t it amazing how many people are on quote disability unquote nowadays, we have more disabled people than ever, in obvious vote buying fraud slash scam, just exploited the way things are by following I plan and laugh all the way to the bank. And you know, I hate to say that I don’t want to be that way, folks, but I’m just telling you, that’s what you got to do. You can only work in the system in which you find yourself. And that’s, that’s the way it is. Okay. So I guess I’m kind of saying for people that don’t like the results of the election, you know, deal with it, and how you’re going to deal with it. You’re going to follow my plan, my plan actually works better. I’m not all upset about the election. You know, I mean, heck, I wanted romney to win. I don’t think that’s any secret here on the on the show, but I’m not bummed out at all. I mean, either way, I’m gonna profit from it. It’s just how you do it. So denominate your liabilities in dollars in fake currency, and it’ll devalue, it’ll devalue the amount of your liability, and then denominate your assets in things, rental properties, little income properties. Those are things those are commodities. Those don’t go down in value. They’re traded globally, and they’re not indexed. any single currency that plan works beautifully under Obama. So Am I mad? Not in the least Hey, you know, I got a little bit of a I don’t want to call it hate mail, but I got a bit of a mean. Well, it wasn’t that mean, but hey, Dion, you sent me this email the other day, okay. And you’re calling me on the carpet here. So Steve, why don’t you read that and then I’ll respond to
Yes, we’ve got mail and this one’s good enough to read aloud on the show. It’s from Dion. He says Jason, first 99.44% of the show. I’d be curious to see how he measured that of the show. And its guests are great. Your philosophy is helpful. However, you need to know this because if you continue down this path of quaint snark and cynicism, you’ll be doomed. And the ladies whom you’ve notably admitted you have a hard time with don’t like it at all. So I’m sitting here listening to you on your last podcast whining about why you don’t like Obama and it’s getting annoying you even have the audacity to say he’s somehow shrouded in secrecy. All of which you know full well is a load of crap. We conservatives are losing because we’ve lost our faith in what’s right, pun intended. If you’re for smaller government, then be about that and talk about that. If you’re for less regulation in certain areas, then do the same. But please, please, please stop with the crap from the loony bin. There’s nothing in Obama’s past or present that we the American people have not seen before. That does not amount to a hill of beans. The people elected this man like it or not, and we have to be opportunistically, or we have to opportunistically live our lives based on that reality. If the people elect Willard Mitt Romney, then we’ll do the same both will bring advantage and hardship in many forms. Again, I beseech you not to indulge in the fanatical shortcomings of the people that are destroying the conservative movement. I think you’re better than that. Or I could be wrong. I respect you as an American should. I admire your accomplishments in my Christian loves you sincerely, Dion. So, Jason, other than the fact that you apparently have no game with the ladies,
Jason Hartman 15:08
do you have to say about that? All right. Well, first of all, I have great game with the ladies. The problem is, I want to find the right lady. Okay. So there’s a huge difference between being able to get a date with any one of them versus the right one of them. You know, I look at marriage as a pretty high risk proposition. I gotta be honest with you. I wouldn’t go into a business deal that looked anything like a marriage because basically you don’t know what the deliverables are.
Jason Hartman 15:40
And you have no refunds, and you’re risking everything you’ve got. Okay, so you better believe I’m gonna make that decision carefully. Yeah, there’s no pro forma. Yeah, yeah, no, there’s no pro forma. There’s and they misrepresent everything. You know, I’ve heard the horror stories a million times. But that not said I’m not cynical about it. I mean, I really do want to get married and I really do want to have a family. I’ve certainly waited long enough, and I’m more than ready. I actually thought I’d get married in my late 20s. That way back when, anyway, things are the way they are. But I will agree with Dion, that women tend to skew towards Obama. There’s no question about that. They created this sort of fake war on women. And you know, I think that’s a red herring. But that notwithstanding, but when you say beyond about this, he’s not shrouded in secrecy. I mean, I don’t know You must read totally different stuff than I do. But I think he’s totally shrouded in secrecy. I mean, maybe you don’t know about this. And I know Trump’s sort of viewed as a little bit of a strange dude, Donald Trump, but you know, he offered Do you know about this, but he offered you not made Steve, do you know about this, he offered $5 million to Obama’s favorite charity a few weeks ago, and there’s a video it was very popular on YouTube, and around social media. You offered $5 million to Obama’s favorite charity in Obama’s name. If he was Provide his college records, and all of this stuff. And he’s like the most secret president that has ever happened in my lifetime. I mean, he is I think his past is very much shrouded in secrecy. I don’t know why you don’t. I mean, you gotta agree with me on that. Steve, any thoughts on that one before I move on to the next point?
Well, yeah, certainly that was a I think that’s true. They tried to deflect that into the campaign by making a big deal about mitt romney’s tax returns. Yet yet, at the same time, nobody has seen President Obama’s college transcripts or his admission papers or, or anything like that. And, you know, that’s the funny thing is that the logic of Well, every president starting with your every candidate, starting with your father, Mr. Romney has released their tax returns well, ironically enough, they have done the same with their college records and their transcripts. So it’s that that’s the funny thing is though, in politics, everybody uses these arguments and you can always back end it and find a way to where it applies to them. too but but in any case, if somebody doesn’t think that Obama has been shrouded in secrecy, I just don’t really know what else to say, hey, look, it speaks for itself.
Jason Hartman 18:08
Yeah, I think so too. I mean, I look at folks Obama is his whole past is so weird and his Polish very brief political career is so weird. You just got to know Obama’s a puppet for somebody for the New World Order or the Bilderberg Group. And I don’t know if you listen to my holistic survival show where I interview some of these more paranoid people, conspiracy theorists and so forth. But let me tell you something, folks, I don’t think these people are not. I mean, they’ve really got a lot of facts, the facts coincide when you go from one to the other, and they say a lot of things that make a lot of sense. I mean, there are certainly powerful elites like George Soros and, and the Rothschild family and the george bush dynasty, both Bush’s and the Bush family, you know, that really do kind of run the world. Beyond politics and Obama, just I mean, the guy’s got no resume, no experience, no nothing. You know, he was almost like an absent senator. And then he becomes president. I mean, he’s the least experienced guy in the room at any given time. You know, it’s just crazy, but so that that kind of person makes a very good puppet. But look, I just want to tell you, the honor and everybody else, I’m going to stop kind of talking about all this stuff, because the election is over. And I’m gonna get much more back on strategy. It’s the day after the election now, so that’s why we’re talking about it. So the show in the upcoming episodes is not gonna be all about this stuff. Okay. We had an election yesterday, we got to talk about it. And then you know, the next paragraph and the next point you make is about smaller government. Yes, I’m obviously for small, smaller government. And I don’t even want to say that I’m a Republican. I’m really a libertarian. I just think government should stop trying to legislate morality. I don’t think it works. I have my views on it, but I don’t think It’s really government’s business. Okay. I just don’t think the government can be good at that. I know what I believe. But is it up to government to do that? I don’t really think so. I don’t think it’s effective. I don’t think it works. Okay. And certainly government should be smaller because the smaller government is the more freedom people have, you know, the best way I saw this on a picket sign once Steve, is, you know, the larger government, the smaller citizen, and you know, that sums it up that says everything right there, when the state or the government becomes larger, you listening. And Steve, you and I, we are all smaller, you can’t both be big, either the individual is big, or the government is big. And this other than the Magna Carta, this was really the first the first organization of a society ever America, where it was all about the individual and it’s a completely new idea. 230 some odd years ago, so You want to have a smaller say in things, you want to have a smaller life, you want to give your power away, then vote for bigger government because that’s exactly what will happen. As for the handout culture and the vote buying culture, Doug, who’s been on the show before, he made a perfect comment on this Facebook thread. And by the way, folks, if you want to be friends with me on Facebook, of course, we’ve got several business pages, there’s Platinum properties, investor network page, which is we’re going to change the name of that to Jason hartman.com. Page. And then there’s Jason Hartman, author page, and you know, you could please go like all those on Facebook. There’s a lot of good information and slightly different on each page. So you’ll like those, but if you want to friend me on my personal page, a lot of you you go and you send me a friend request. I don’t know who you are, and I’m not going to accept you right now. I’m looking at I’ve got hundreds of friend requests that I haven’t accepted. So if we don’t have a lot of mutual friends, you better write me a note and tell me who you are. Okay, it’s a I love the show. or something and I want to you know, I want to follow you and we can get you in there. But But Doug said it perfectly. This is the fewest words I’ve ever heard it all makes sense. And he said this, Steve, he said, in a nation of children, Santa Claus wins.
Well Christmases early this year. Yeah,
Jason Hartman 22:20
that is so profound, because children want things children are needy. And you know, folks, to some extent, we’ve become children, because we just want government to do stuff for us. And the candidate who gives out the gifts who gives out the presents that Santa Claus, that’s who’s gonna win, so kind of enough on this aspect of things. Other thoughts, Steve?
Well, agreed, you know, and Dion, and in the letter that you got is, clearly he’s agreeing with much of the most of the philosophy of the show. He has a particular problem with writing on President Obama, but it really is it’s the it’s the policies and these tied directly into small government. I mean, point To me a time in history when government has ever voluntarily contracted itself and not grown. It just, it spreads and it spreads and it spreads. And you know, if we go back in history we look at, and this is my opinion granted, but the Constitution is definitely trying to limit it, you have to actively try to limit it, because it will grow and grow and grow if left unchecked. I mean, we recently had Mayor Bloomberg in New York, tell the citizens what size of soft drinks they can buy. Yesterday, on the ballot in California, the the voters decided that they were going to tell the adult film industry that what kinds of specific practices they had to use in their business, I will get into the details, but you can definitely find out about that. I mean, it’s telling everybody what they can do and that is a symptom of, of unchecked government and in here, here’s the moral hazard in that you say, you tell the government Well, I want people to not be Be able to do this or I want to force them to do that. Well, what happens when somebody you don’t agree with is in power?
Jason Hartman 24:05
Yeah, exactly, exactly. It’s like the legal system, you may be involved with someone who, you know, is on the opposing side. And the the judge strikes down one of their motions or gives them a bad deal. Hey, the next time that’s you, that gets the bad deal. There’s a quote about that sort of, and it says, something like this, and I can’t remember who said it, but I may disagree with what you say. But I will defend to the death, your right to say it, because the next time there’ll be coming for you. That’s the dangerous thing about you know, like racism, for example, the reason you can’t allow it to exist, is because the next time you might be the target of it, your group might be the target of it. So these are very dangerous things. You know, when government gets big gets, it’s a cancer, you know, you got to constantly keep it in check. So, again, folks, we’re not gonna make This is not a political show, but politics totally influenced investment strategy. And if you’re bugged that I talk about this stuff, and I know I’ve been talking about it more because of the election, and I’m going to talk about it a lot less because the election is over. But it’s the whole context in which we live. It’s like how a fish lives in water. We live in a sea and the but the fish can’t see the water. We live in a sea of laws and customs and these laws, and those are political. And the tax code is the law and that’s political, and what you can do to your investments and how much you can raise the rent every year and how quickly you can evict a tenant. And you know whether you can add an addition on to your investment property, and what kind of permitting process you have to go through all of this stuff is politics. And what kind of mortgage is available for your property, unfortunately, is also Paula Tech’s and whether or not you can buy the property for less, because the vendor that sells it to you is dictated by law because the government controls Fannie Mae and Freddie Mac, basically, these pseudo governmental agencies, whether they can sell that property to you The day after they buy it, or they have to wait 90 or 180 days affects their holding costs. And that holding cost affects the price which you pay as the investor. That’s politics. If there’s a environmental law that says you have to put low flow faucets and low consumption toilets and ALL your rental properties, that’s politics. This is all political folks. I’ve had people write me emails about stop talking about politics and stick to real estate. Are you kidding? It’s the same thing. I mean, give me a break. So anyway, I don’t know. Is that enough of a rant?
Yeah, I think That’s right, I’m gonna show you around as we’re going to do for a while the elections over, we all have a good idea for what kinds of policies and things are coming down the pipe and we can structure our investments accordingly. Now this is going to come up from time to time, but definitely the heat in the frothiness of the of the election is over. And it’s time to get to work.
Jason Hartman 27:19
Yeah. So the time to get to work. Now, what do you do as an investor? Well, you do, pretty much my strategy hasn’t changed. It didn’t change at all, I just say, double down. In fact, one of the comments on that Facebook thread was it’s time to double down. And I couldn’t agree more. So one of my followers wrote that, because now, you know, that probably in a second term, I mean, you know, there’s no fear of I have to get reelected. It’s only about legacy. And it’s pretty clear that our president likes the European style, socialism. So what that means is a poorer population, and that’s means more renters. And it means more government aid. And the way using investor work in that environment is you’ll probably see more section eight. And you know, if you if you’re bothered that you pay too much in taxes, hey, this is how you get some of your taxes back. And by the way, Hey, Steve, I got to tell everybody this. I love our ridiculously, disgustingly complicated tax code. I think it’s completely unfair. Yet I am totally benefiting from it just like an opportunist. You want to know how much tax I paid? I filed my tax return. I don’t think I mentioned this on the show yet, but I filed my tax return my personal return on the last day of the extension, which I believe was October 17. Or maybe it was the 18th this year, but it was the very last day, you know, got to get to the post office before 5pm. To get that postmark guess how much tax I paid. You’re not gonna believe this.
I don’t know how much
Jason Hartman 28:50
I filed tax returns in a few different states where I have properties. Some states don’t require that you file some do. I don’t really understand that but and certainly in California I filed my federal return and I filed for the first time in Arizona, okay, or at least the first time as a resident here, I paid the state of Arizona $92. And I get a rebate from the federal government of about 80 $400, which is coming to me in the mail. And I just like a month ago, got a rebate of a lot, lot lot more than that. I don’t know if I want to say the amount on the show. But I tell you with these properties, and it’s not just the properties, it’s businesses. So those are the two things that rich dad explained. So well, Robert Kiyosaki is that when you own a business, you own your money, and you spend your money and you get to spend a lot of it before you pay the tax man, because a lot of your expenses for life can be run through your business. I mean, that’s no secret. That’s nothing illegal. You got to make sure they’re valid expenses. But you know, can your business pay for your cell phone? Can it pay for a lot of your automobile? For a lot of yourself, your gas, you know, of course it can, okay, a lot of these things, a lot of meals and entertainment can be business expenses. So you pay the tax man last when you own a business and properties or a business too, because you know a lot of your properties you can write off a lot of these expenses before you so you can spend your money pre tax me mean you have more money to spend, whereas employees, they get burned because they they earn their money, then they pay their taxes. And then they get to spend what’s leftover entrepreneurs get to spend before they see the tax, and with owning businesses, and with depreciating your properties, the best write off on the planet is depreciation. And if you can do it, my sincere advice is to become a real estate professional, the greatest gift from God that has ever existed in the tax code as fast as you can, meaning you got to acquire some properties to do that you got to have there’s no one By the way, but in order to qualify for those hours of 500 material participation, and 750 total hours per year and all the other things you got to qualify for, we’ve interviewed experts on the show, we’ll have them at the meet the Masters event, which by the way is almost sold out. Can you believe it? Yeah, it’s not till January 18. And it’s almost sold out. So if you want to come to that event, if you want to attend, go to Jason Hartman comm click on events and register quickly. It’s almost over I bet that’ll be sold out here over the next episode, not
too much time. So
Jason Hartman 31:32
I think there’s, I think we’ve got probably about 16 seats left. I mean, and I even emailed the hotel yesterday, the Hyatt Regency in Irvine asking if we could get a larger room and they said we don’t have any larger rooms, all of our spaces booked that weekend. This is it. And that beautiful conference center with the stadium seating and the big plush leather chairs that are on wheels, so you’re super comfortable. It maxes out and we I think we got about 16 seats. For masters, so register quickly, Jason Harmon calm What was I saying before that? Gosh, this is awful. I’m getting I’m having senior moments too often, Steve.
Yeah, you’re having a senior moment. But definitely we were talking about the taking advantage and minimizing the taxes and how as an entrepreneur, you spend before the tax man. Yeah,
Jason Hartman 32:17
yeah. And depreciation on your real estate. So to qualify for those number of hours, you probably need to get at least 10 properties or so under your belt, because the IRS is never going to believe 500 and 750 hours, there are two, two hoops there. Okay. So if you don’t have 10 properties yet, and you’re listening to this, get yourself to that 10 property point, folks. We’ve had a lot of people that have started out with us, and they had zero properties. They didn’t even own their own house, which might have been better for them. Actually, you’ve heard me talk about that. But it all depends on you and your financial situation. But in a couple of months, you can have 10 properties. In a couple of years. You have 10 properties, just get started. And over the course of Few years, you know, you can get 100 properties. I mean, we’ve got clients now buying dozens and dozens and dozens of properties from us. Every month, they’re getting more properties. I mean for what is going on politically right now. I really think that is the best thing to do. Because when you denominate when you get a bunch of those mortgages, you’re denominating your liabilities in dollars, and inflation is destroying the amount of money you owe. It’s destroying your debt. It’s paying off your debt for you. And you control commodities that have universal need, and you get huge tax benefits and the debt that you accumulate with those commodities you outsource to a tenant, this is the ultimate investing equation. Definitely, definitely. Stock up on properties double down the election last night confirmed that that is what you need to do. Anyway, let’s wrap it up, Steve, anything else to say on those points or any other points?
couldn’t have said it better? Yeah, this is this is time. You will Believe the interest that I have received today in acquiring properties, it’s almost like we got some big news last night or something.
Jason Hartman 34:08
Yeah, yeah. Well, that’s interesting. See, I haven’t heard that from any of the investment counselors but you because I haven’t talked to any of the other ones today. So I got to see what you know what the rest of our team is saying. But yeah, business is strong. And this is this is a great time to be be be buying up properties like crazy. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. Let’s go to our guests here. We will be back with today’s guest and I don’t know what guests we have coming up because we pre record all the guests, but whatever guest it is, we’ll be back with our very interesting guest in just about 60 seconds.
Here’s your chance to catch up on all of those creating wealth shows that you’ve missed. There’s a three book set which shows one through 60 all digital download, you save 95 dollars by buying this three books set. Go ahead and get these advanced strategies for wealth creation. For more details go to Jason hartman.com.
Jason Hartman 35:14
My pleasure, welcome Karl Denniger bettinger. To the show. He is the author of a book called leverage and also a well known blog called the market ticker. He’s also known as the ticker guy. And it’s a great pleasure to have him coming to stay from I believe, Florida. Right, Karl Denniger? How are you? I’m doing great. That’s niceville, Florida. And there really is a town called niceville. Believe it or not, well, that must be a very nice place. But hey, the financial collapse and the gamesmanship on Wall Street wasn’t so nice. Tell us a little bit about the book leverage and your background and how you came to write it.
Karl Denniger 35:46
Well, I’m a former internet entrepreneur, I ran one of the first public internet companies in the city of Chicago in the 1990s. In fact, we were second by a day so it’s probably fair to say we were first because the other guy went bankrupt. And at one point there were 100 competitors. So it wasn’t like we had the market to ourselves by any stretch of the imagination. But during the 1990s, I saw the same sort of fraud that happened with the housing market in the banking system occur in the tech sector. And it was essentially the same sort of magnitude the same basic design. In other words, we will sell, you know, so many billions of dollars worth of widgets or pet food or whatever the fad was at the moment. And then companies will go into the market and they would sell these securities to investors. Collect all of these these funds and essentially spend it on bonuses and handouts and things like this. And then when they got in trouble, oops, sorry, all the money’s gone. Well, when the tech market crashed, it was a couple of years after I’d gotten out. I sold the company and actually gave a couple of interviews, you can still find one that Ziff Davis published that basically said, you know, here it comes. And we we got into the, you know, the whole situation there in the 2000s. Greenspan made a concerted attempt to try reflate the bubble. And of course you can’t control where the money goes, what went into housing. So in the early part of oh seven, we had this dislocation in the stock market that initiated in Asia. I don’t know how many listeners remember it. But it was the first kind of rupture in the stock market over the previous four years. And when that happened, I started looking it for the why because anytime you see a market sell off by five 6% in an evening without any particular apparent cause, there’s got to be something going on that you’re not you’re just not paying attention to. And what I found was very disturbing things in the financial system. Not long after that Washington Mutual reported its first quarter earnings for 2007. And it was paying out dividends for money that they didn’t actually have. They were basically taking the negative amortization interest that had built up on people’s loans, counting that as income, which is illegal, but then they were paying that out in dividends. So not only was it on the balance sheet, it was actually walking out the door and this exceeded the amount of cash that the company was taking in. Well, that’s sort of a thing can’t go on for very long. It’s the same kind of deal that was being done during the tech bubble, it was going to lead to the same the same kind of outcome. So I decided after seeing several of my friends bankrupted during the 2000 crash that I wasn’t gonna let that happen without there being some kind of warning put out there and I started the market ticker as a as my means of communicating what I saw going on the market, and things just kind of snowballed from there. We got, you know, we got through 2007. We had to peak in the stock market in the latter part of the year. And then of course, in 2008, we led off with Bear Stearns, and then Lehman Brothers and Fannie and Freddie and all the other funds in since then I’ve been chronicling the supposedly allegedly recovery and what’s really going on within both the capital markets and within the broader economic system, along with the political implications, and it’s turned into a pretty much a full time job. Leverage was an attempt to condense all of that some 6000 plus articles that have been written on the ticker in the last five years into something that is A person without a lot of financial background, can pick up off the street, read as a nice, easy read over a couple of evenings and understand how we got where we are today. But more importantly, put, we put forward a plan there to actually address these structural imbalances and fix it because you’re jumping up and down with your arms in the air screaming that the world is about to end is all fine. And well, and you see a lot of the chronology kind of books that are out there in the marketplace. But what you don’t see is books that put together a plan for actually getting the system back into into shape where it can serve the people on a long term sustainable basis, in return us to something that approaches prosperity, which is, which is really the goal is to have an economic system that works for everybody.
Jason Hartman 39:43
Yeah, well, absolutely. So first of all, let’s talk a little bit about the problem. I mean, of course, it’s been discussed chronicled everywhere, but I just don’t want to miss the opportunity to just chat about a few things of the problem. So you call the book leverage, and what specifically does leverage refer to? Does it refer to reselling one loan in 30 different pools? Does it refer to the 30 something to one leverage ratios that these investment banks had
Karl Denniger 40:11
talked a little bit about the problem side, if you weren’t? Sure, the basic premise of the book is that we have not had real economic growth. That is organic economic growth for the last 30 years. And that’s probably going to shock a lot of your listeners. But this is the functional reality of what’s been going on in the economy pretty much since 1980. forward. And what I mean by that is that we are simply borrowing more and more money to continue to add leverage that is depth to the system. And so it appears that we are having strong economic growth during certain parts of the cycle. But in fact, what’s actually occurring is you’re debasing the capital that is present in the system during that entire process. This is how we’ve managed to run trade deficits the way that we have over the last 30 years with various countries, Mexico, China, etc. It’s how we’ve managed to offshore our jobs and not have these these problems immediately correct themselves. And essentially, it’s also the reason that our federal government has been able to run huge deficits during the Bush years, it was about $600 billion a year, during Obama’s presidency, it’s been over a trillion, and in excess of all but this last year of 10%, of gross domestic product, what’s really happening when you do this sort of thing is you’re adding additional credit into the system but not capital. And so it essentially becomes a geometric series. And this is one of the underlying themes of the book is that all geometric series are unsustainable in the intermediate and longer term. You can use them in the short term, but they are they are absolutely unsustainable. And in fact, when they are put forward as public policy, they’re frauds. And so when you have somebody say, I am going to maintain Medicare, for example, and medical spending by the federal government from 1982 last year has grown at an average compounded rate of 9.3%. What you are saying is that you are going to be able to continue to do that on a on a forward basis forever. Baker’s have this very simple rules called a rule 72 that approximates the doubling time, given a particular growth rate. So if you take that you divide into 72, you find that about every seven years and change, you double the actual amount of money that is spent. Well, if we spent and by the way, we were $53 billion in 1980, by by the federal government on medical spending to 850 billion dollars last year, okay, that’s how that number comes out. So if you look at that, you say, Well, you know, that’s what it is. And that’s what’s going to be, then we will spend more than $3 trillion 15 years from now at the federal level alone on medical care, while the entire federal budget is 3.8. So that is clearly not going to happen. All those people who are out there politicians telling you that if you’re 50 years old, You’re not going to see your medicare medicaid be tampered with. They’re lying. And the reason is, your life expectancy if you’re 50. Today is about 35 years, roughly to 85. Assuming you live to be at the federal government, we have to spend $14 trillion a year on medical care before you die.
Jason Hartman 43:17
And that’s more than the GDP. So it’s like,
Karl Denniger 43:20
it’s approximately GDP. Right? But it is it is three times the current size of the federal budget.
Jason Hartman 43:26
Yeah, right. Right. But it but it’s a it’s a, it’s about a trillion more than GDP. So you know, what’s a trillion here or there? Right?
Karl Denniger 43:33
Well, that’s the point, of course, is that you can never spend more hundred percent anything, right, right. Yeah.
Jason Hartman 43:39
Unless Unless you print the money and have the reserve currency.
Karl Denniger 43:42
But that doesn’t work either. And this is one of the other things that that I try to focus on, both in my writings on the blog and also in the book is that take a look at what’s been going on here. For the last four years we’ve spent approximately 10% between eight and 12. Okay, for the last four In deficit by the government, let us take the economy and abstract it just a moment, let us say that there are 10,000 units of GDP being produced. And we’ll we’ll take the word dollars out of this. And a unit of GDP could be a certain number of gallons of gasoline or bushels of wheat or wheat, it doesn’t matter what it is. But it’s a it’s a constant of some sort. And then there are also 10,000 units of currency and credit in the system. So one buys one, you have one unit currency credit, you buy one unit of output. Okay, everything’s in balance here. And this is just for the purposes of illustration, but I think your listeners will understand it once I explained it this way. So now the government comes along and says, I’m going to emit another thousand 10% units of credit that I’m going to borrow into the system. And this will help people because they don’t have enough money. They’re unemployed. They are, you know, they’re disabled, whatever the justification is, from a political perspective. So what’s actually happened here? Well, what’s happened is that the cost of the unit of output is just going up by 10%. Right? So now you need 1.1 units of currency or credit to buy the same unit of output that you needed to buy before and we would say well that’s inflation. Well in reality for more simple than that it’s a tax. Functionally it’s exactly identical to the IRS guy showing up at your door and saying give me 10% of everything you have
Jason Hartman 45:17
well they inflation is the insidious hidden tax of course it says that it steals money right out of your wallet without you sending anybody a check.
Karl Denniger 45:26
Exactly. But see, here’s here’s where people miss the miss the understanding of how this works. We live in a world which is which which we do not have hard back money anymore. Okay, that’s been true for a long time. Okay, so here’s the the fundamental problem that goes along with a fiat currency world where you do not have hard back money. And that is that every single time that you remit credit into the system because the remember the Visa card, your walls done exactly the same way as those $100 bill as those the roll of quarters are Those only one is not that bad. And that’s a roll of quarters, the rest of them are represented by a credit on the other side of somebody’s balance sheet. So, if we look at the Fed z one, which tells us where all the credit is in the economy, who holds it and what what it is, that is the monetary base, not the amount of credit that is or currency that is being held. So, you know, m one m two M three m prime, what any of these M’s Forget it, that’s a lie. The currency base is all of the credit in currency that’s in the system. And since all currency must be backed by $1 of debt somewhere, you can just ignore that that’s a wash. Therefore, all we got to do is take a look at the Z one and sum everything up. When you do that, and look at the growth there and the growth of incomes in in nominal dollar terms. And you bet you base one chart off the other you take those two numbers and you run a subtraction on them. You find something very interesting I took I took one thing out of that, that number and that is the financial credit between financial firms and the reason is that that never gets into the economy. Okay? That is just banks handing money back and forth between each other to claim they have collateral against whatever they’re doing credit default swaps, whatever games are playing. But everything else ends up in the economy and mortgage ends up in the economy. A CNI loan commercial industrial loans ends up in the economy, consumer credit ends up in the economy, student loans, of course, go to college, your car loans, everything else. Okay? When you look at this, what you’ll see is that from 1953, until approximately 1980, we had real income growth that went up and down, we have recessions, we have bad times, but in general, real income growth in the economy was somewhere between four and 10% annually, with some periods lower or some periods higher, but averaged in though then right around five ish, okay, over that entire period. Now that’s real income growth. That’s a real purchasing power terms. That’s an incredibly sound, vibrant economy. And that’s what we had the 1960s and 19 and 1970s all up until 1980. Then we had the worst shocks. Followed by the deep recession in 1984 1985. And during that time real incomes were decreasing at approximately 10% annualized, from that point forward replayed Ponzi nobody has made any real income progress in terms of debt on an on an adjusted basis from about 1986, on forward. And in the 2000s. After the tech crash, we simply goaded people into borrowing more and more against houses against this against foreign keys because everything they could get their hands on. And just before the world fell apart, in 2007, and into 2008, we actually had during the depths of the crash, we actually had a negative 20% annualized income number that was put up one quarter.
Jason Hartman 48:43
Unbelievable. Like that’s, that’s unreal. Now, here’s the really bad news. It has never gone positive since the third quarter 2000 including today. And the worst news is that as of the last one update that was just out a few days ago. We’re now in the area in the last quarter, where at an annualized rate of about negative three. Okay, so if you’re wondering why the middle class is getting destroyed, and has been over the last 10 years, there’s your answers right there in one chart. Sure, sure. And then you take in to make matters worse, look at the entitlement obligations coming up over the next 1020 years. Look at the massive student loan debt crisis, it should be called a crisis because the only debt that’s not dischargeable in bankruptcy is student loans. And that just topped a trillion dollars with a tea. I mean, this is insanity. But here’s the thing. This is to some extent, hard to see. And let me just tell you that I had bill wattle on the show. I don’t know if you’re familiar with his work, but, you know, he did an excellent video that was very viral on the internet. Last year, it was about how the poor are really much better off than they’ve ever been. And the poor are actually you know, kind of rich in a way and you look around and you just experience things in your own way. And we all do. And even though, you know, Americans haven’t had a raise in decades, it seems like they’re living better in so many ways. Now, of course, these are this is really what hedonic adjustments are all about. Certainly, you know, we’ve all got iPhones nowadays, and we’ve imported deflation from China and other foreign countries and Mexico for the actual, the on site labor component of it. You know, and I think this is hidden, a lot of the real inflation that has occurred, and it’s also created a lot of unemployment, obviously. But you know, it’s just hard to like, come to grips with what is really going on, because we’ve got all these outside forces acting upon us, if it were the 1950s. And, you know, we were a much more isolationist country before globalization, it would be easy to see that people are worse off, you know, and then if we didn’t have all this technological advancement at the same time, it would also be easy to see that but it’s a little it’s just a little more deceptive. nowadays are a lot more deceptive.
Karl Denniger 51:02
Oh, I don’t know. I don’t know that that’s necessarily the case. Okay. It’s very much in your face. It’s just a nobody wants to wants to act. Well, basically. Yeah, yeah, here’s, here’s where they’re where some of the problems come from. Let’s talk for a moment about the whole labor parody issue in the in the problems with China, Mexico, we have covered up what we’ve done there. Here’s if you take two countries, and one runs a trade deficit with the other, and neither is tampering with the currency that both free floating currencies, okay, so we have a free floating currency regime. So we have fiat money like we have now. But both nations, you know, the trade balance floats based upon what things buy in two different countries. Now, I run a trade deficit with this other country here in the United States. What happens, my capital goes out of my country to the other country to pay for the goods that I import, right? Because I got paid for them. So the money goes out of my country into the other. This makes their currency much stronger than ours. And as that currency becomes stronger, the price of the products and services that they export back to us goes up, well, that chokes off this imbalance rather quickly. And it happens completely automatically don’t do anything to stop it. It’s just an it’s just the way it is because of the flow of capital that goes over into this as you drain capital on one place, you get weaker. Okay, there’s nothing magical about this. So why did it happen? And why does it continue? And the answer is, because what the federal government did, and the Federal Reserve is involved in this as well, because without them It can’t happen with the federal government did was issue credit into the economy to make up the hole in capital. So what you’ve done is debase the capital of your nation in order to maintain the illusion that you have cheaper things at Walmart. Okay, no, that’s true. Yeah, I agree. Great. The truth though, is that you haven’t done anything of the kind. What you’ve done is destroy the purchasing power and the productive power of your society by taking all the capital and giving it to someone else.
Jason Hartman 52:58
Listen, you you are already I agree with you, however, is show us that real destruction and purchasing power I say all the time on the show when they cite these statistics about how since World War Two the average home in America has has more than doubled in size and, and they try to make it seem like people are living better. But post World War Two people didn’t have the kind of debt they do now, obviously, but you know, let’s even forget the debt. They’re living in much more densely packed environments. I mean, maybe the home was 900 and something square feet when a young baby boomer bought it, post World War Two, but the lot size was a quarter acre. Now you’re living in a stacked condo, it may be larger inside but certainly we’re, you know, we’re crammed together a lot more. Everybody’s car is better than it was before everybody’s computer is better. Everybody’s phone is better. And listen, I don’t think although hedonic adjustments are way logical. I mean, I can see how they can argue them but I think what hedonic ‘s do is they tell us that we are not entitled to progress, the consumer price index gets the benefit of progress rather than the actual people. things should get better. Isn’t that what progresses is called, you know?
Karl Denniger 54:15
Yeah, but let’s but let’s see, here’s one of the things that I think a lot of people miss. And this is one of the other central points that I try to hit on in the book and and also having my column A number of times and it seems to go over people’s head. It doesn’t matter how many times I say it, it doesn’t seem to make any sense until you think about it from a standpoint of where we’ve come from where we are today. Okay, we all know about all you know, the explosion of technology, right? You can carry around in your hand and you probably do. A computer that is more powerful than a mainframe was 35 years ago
Jason Hartman 54:47
and more powerful than all of what NASA used in 1969 to put us on the moon.
Karl Denniger 54:52
What went on, they actually had to design a specialized computer to go into that capsule because they had to meet the the weight limits in order to get it up there. Okay to today a $3 calculator from Walmart has more computational capability in that computer did incredible. Yeah, it really is. But now here’s the thing consider this, the natural state of all economies over time is deflation. And the reason is exactly what you just cited in what I just cited. We have this thing called productivity, humans are intelligent. We therefore come up with ways to get more by doing less. So we originally went out we planted seeds in the crowd or we gathered and hunted Okay, we went out shot animals with with makeshift bows. And we figured out how to build this thing called a gun, and all of a sudden, it got easier to take that deer that you wanted to eat. Then we came up with plows, and we hitched mules and other animals to it and all of a sudden we multiplied our force again. Eventually, we built the Steam Machines to be able to do some of this and then internal combustion engines and tractors and automobiles and trucks, various sorts of machines. Now we branched out electronics used to be that if you wanted to get a message across the country, you had to write it on a piece of paper, give it to a rider on horseback. Okay? Now it happens in literal milliseconds across the nation.
Jason Hartman 56:12
Karl Denniger, what you just said was extremely interesting. And I just want to point this out because I’ve got a pretty, pretty smart group of listeners here. Okay, because we talk about these issues all the time on on our episodes. And what you said is, you said the natural state of every I think society or maybe economy is deflation, and you are right. Now, isn’t it interesting that that is true because things get better because of progress. Progress is deflationary. I think that would be a fair statement we both agree on progress is deflationary. But isn’t it interesting that at the very same time, if you look throughout history, every paper currency has ultimately diminished in value to its intrinsic value paper? Nothing.
Karl Denniger 56:58
Well, the reason Yeah, but the reason is because what What ultimately happens is that you get people in the financial realm. Okay? Remember that the con, of creating a legit value that really doesn’t exist out of thin air, goes all the way back to the days of Hammurabi. Okay, we didn’t know our banksters didn’t just invent this themselves. They’re not the smartest people on the planet. This con goes back, this con goes back to the days of fractional receipts for gold during the time of the money chambers and a hammer Abi. And it’s, it’s the same scam. But what happens invariably, is that and this happened in Rome, it’s happening here today is that governments get this idea in their head, that they can, you know, just just a little bit of inflation, it’ll be okay. But what they don’t realize is that even if they were to maintain stable prices, that they would still be robbing the public because the productivity supposed to belong to you. You’re the one who became more productive. You’re the one who came up with a better design for the machine. You know, the thresher or the combine or whatever it was? You’re the one that created that the government decree that you made it. Are you unlike brock obama? You know, you didn’t know you didn’t make this? Oh, yes, I did. Yeah, you didn’t build that? Oh, yes, I did. But what the government does incessantly is with the help of a certain group of people, who we nowadays call bankers, they turn around and they sell you on this idea that this slow natural increase in prices is the way of the world and that’s the way things are supposed to be. It has been a lie since the first man walked up right on two feet and it’s still a lie in by the way, it is also illegal. It is black letter law in the Federal Reserve Act, that the Federal Reserve shall regulate currency and credit they get it right they understood the actual law says that the monetary credit instruments, okay, so they recognize that the two are equivalent. So as to produce maximum sustainable employment, stable prices and moderate long term interest rates.
Jason Hartman 59:06
they invent things for this called the Phillips curves.
Karl Denniger 59:09
Yeah, but the actual but the actual statute says stable prices. Okay. Now, it Brunetti just gave a speech a couple of days ago, where he used that infamous, you know, low and stable inflation is what he claims his mandate is. That’s not what the law says. The problem with the law is there is no or else in there. Consider what would happen. If you had a law that said, Thou shalt not rob banks, period. Okay. No, else go to jail for 20 years. There’ll be a line of masked men out the door of every bank in town. Well, this is why it’s happening. It is our responsibility as citizens our responsibility to sit down and tell our politicians, the natural state of all economies, is that productivity improvement means that you can buy more with less, that improvement in productivity is ours. It’s not yours to steal, it’s ours. But Furthermore, not only can you not steal that anymore, you can’t steal even more than that, by continuing the charade, and you may not spend that which you cannot tax that which we won’t pay for you can’t spend period, because that’s that backdoor into your wallet. And the thing is that when you get down to it, between that in the violation of what I call $1 of capital, if we were to impose that on the on the financial system and on banks, the entire problem will go away overnight. Now, of course, all the excess leverage Come on the system overnight too, which would have a really interesting effect on asset prices and things like this. But after that adjustment was taken,
Jason Hartman 1:00:48
it would be we’d live in a real sound money world.
Karl Denniger 1:00:51
We recover. See the thing is people want to talk about things like Medicare and Medicaid, okay are the huge budgetary gotchas, right? You can’t fix that. Care and Medicaid, you have to fix the underlying medical system since the 1980s when ronald reagan passed them tala, which is a law that says that if you’re having a heart attack, they have to treat you at the closest hospital anyway money or not. Since that time, we’ve put into the into the law, monopoly level protections for every area of the medical system. You cannot go into Canada with your car, buy a trunk full of Viagra $2 a pill come back into the United States and sell it for two and a quarter when it sells at the corner drugstore for 20 bucks. If you try it, it’s a felony, you go to prison. That is a monopoly law protection that is specific to the medical industry. If I tried to collude with other people to do that, as an internet company, when I ran my ISP, I’d still be in jail. Right? So but this is and that’s not the only place that happens in 30. Some states there are laws called con laws, believe it or not, they actually call them con laws and boy they will need the actual acronym stands for certificate of need, which means in order to order For the hospital and MRI center, anything like this, you have to have a license that shows that there is a need in that in that particular community. And guess who sits on the licensing board, all the people that own the current MRI, how convenient. How convenient. So we have considered consider what really goes on here. Okay. I have a flat screen panel in my bedroom, nice, nice LCD TV. And I have four monitors on my computer. All of them LCD flat panels. I paid about $250 a piece for the ones that I have on my computer. Five years ago, those things were $2,000 apiece, five years ago, his cell phone that could do what mine does was was unobtainium at any price.
Jason Hartman 1:02:41
We always we all agree with that. But why isn’t the cost of an MRI scan two bucks because there’s a monopoly? Yeah, that’s right. But see, this is where the problem there’s a government sanctioned maybe not government induced but a government sanctioned shortage
Karl Denniger 1:02:54
in there is a monopoly and not only that, they’re able to hide the cost of these things. Through all the cost shifting that goes on, when needed, the illegal Mexican immigrant can come into this country seven months pregnant has never had a medical testing and life has never had any prenatal care. She’s drug addicted, and alcohol dependent. She goes into labor. Five minutes after she walks across the border, she gives birth. Her child requires $2 million worth of nichy treatment because otherwise it will die. Guess who gets to pay that bill? You do by force when your appendix needs to come out? No other country in the world allows this. Let me take a brief pause. We’ll be back in just a minute.
Jason Hartman 1:03:34
Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday.
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Jason Hartman 1:04:31
Well, there are actually stories of Mexican women waiting, literally waiting for their water to break and then running across the border, to have the anchor baby. It’s well documented. You can read about them in major magazines. I’ve read them before myself. It’s incredible. I mean, this is just incredible. You know, it says you couldn’t write fiction like this, what goes on in our world today, but the government has sold out to a bunch of special interests. And that’s what we’re going to have. We’re going to have a All these perverted motivations, and we’re going to have all this pandering and that’s just the way it is. What do we do about it though? That’s the question.
Karl Denniger 1:05:08
Well, we the people of this country have to decide between two outcomes. And we need to make a decision fairly soon because we’re going to get the second outcome if we don’t heal, there’s a there’s a, if you listen to rush, old rock and roll, there’s a famous lyric, if you choose not to decide, you still have
Jason Hartman 1:05:26
no choice. Yeah, from the song freewill great songs, right.
Karl Denniger 1:05:29
And that’s one of my favorite sayings. The the options that we have, are to either force the financial industry to stop writing hot checks, basically impose what I call $1 of capital, which is essentially a standard that says for each dollar loan that you make, you must have $1 of actual capital behind you not to be in the form of a mark to market daily asset. Okay? In other words, it’s there’s nothing illegitimate about taking an asset and impounding it in exchange for current liquidity. There’s nothing wrong with doing this, you don’t pay the asset gets seized. It’s not there anymore. But there is something criminally wrong with creating credit and in the system driving inflation, driving asset bubbles, when there is nothing behind it whatsoever. So what you do is you say to financial institutions, you either have to have an asset that’s imposed during the entire time it’s open. And by the way, we’re going to mark those things to market nightly. Or the alternative is you have to raise capital either from equity holders, bondholders or retained earnings, you have to have actual capital behind every single one you write. This stops all games with margin and not you know, all the other nonsense that goes on the financial system, it stops in a day. This This would take the Z one by the way and take the green bar for my chart, which is her financial credit class at essentially zero in an afternoon I would do the ripples through the financial system would be cataclysmic but short lived. You have to break the monopoly protections. Essentially, what we have to accept is and then at the same time, we have to talk To a government. So what we want provided in services today, we must pay in current taxes, which means an awful lot of what the government has does today has to go away. Now the economy would contract dramatically back in 2000. I ran a calculation on this at the time of the crash in the stock market, and said, What would be the actual you know, the actual contraction if we just let this thing burn itself out? In the number I came up with about seven 8% of GDP, which would have been a horrific recession, but not a depression. In 2007, I ran the same calculations using the same set assumptions and the same numbers but pulled forward back though seven more years of data, and it was done 10% and then as we got into 2007 2008, suddenly went to 20%. Well, if we extrapolate that out with a $5 trillion, the federal government’s put on the sheet since then, we now find that it’s somewhere between 35 and 40, which sounds impossible to sustain. But in point of fact, it’s not. If you look at 19 2021 We had an insanely sharp deflationary collapse that lasted. So it’s such a short period of time that they don’t even call it a depression. But in terms of time adjusted rate of change in the producer price index, it’s the largest move downward that’s ever been recorded in the history of the United States. 18 months later, the economy was back to full employment, everybody who should have gone bankrupt did and as a result, the economy cleared itself out. Now, there was a huge adjustment downward asset prices you could imagine. Right? But then following that, we put up a 60% plus increase in industrial production over 12 months. So once these these problems come out of the economy once, once all these crazy things that we currently do that make absolutely no sense once they go away, there’s always cabling around people will deploy because guess what? One person’s distress in disaster is another man’s fire sale. Okay, and I did this during the 1990s when I set up my internet company, I took advantage of the opportunity to buy hardware at ridiculous discounts when people who are going broke. I got 8300 square feet of office space in downtown Chicago for $8 a square foot
Jason Hartman 1:09:15
that we should say annualized. Depends what state you’re in as to how that’s calculated. But yeah, so it was less than a buck a square foot per month. That’s a phenomenal deal, especially in downtown Chicago. They normally probably be $4 a month. So
Karl Denniger 1:09:27
the going rate downtown Chicago time was 40 per year, per year. Right, right. But the reason I got that price was because Prudential Plaza needed to fill the space now due to a potential violation of their lending covenants. And I happen to have cash, it was willing to put it on the table and secure the space not only rent it, but prove that I could pay. So I slapped a big check down on the table and we caught a deal that nobody else could get. Right. Well, the same thing happens here you get these kinds of dislocations. Look, the guy with the term CNC machines he paid half a million dollars for he goes out of business, those things get sold for $5,000. Well now what’s your cost of producing high quality auto aircraft parts when you only have to pay five grand for the machines?
Jason Hartman 1:10:12
Sure it’s lower. So you it creates a whole slew of startups. That’s why in every big economic downturn, there’s you know, it’s just a big transfer of wealth that occurs. Those who see the opportunity, have confidence to take it and are prepared for it, but can seize opportunities and those who aren’t prepared and have frittered their future away they can’t seize those opportunities. And maybe that’s the reason the rich get richer. I think it’s certainly a plausible reason for it. But yeah, no question about it. So it’s, it’s very beneficial to consumers in many ways to have those bankruptcies and then new providers can pop up and provide things at lower cost and it’s it’s the way it’s the way of the world it’s the way it should be no more bailouts
Karl Denniger 1:10:54
couldn’t agree. Yeah, well, people well, that’s the thing people say, you know, well, this would be terrible and put all kinds of people out. And my answer to that is
Jason Hartman 1:11:01
no, you don’t
Karl Denniger 1:11:02
bring new people into work. That’s why it doesn’t work that way. Because what happens is those people who got out over their skis, they go bankrupt, they should go bankrupt all of them. And from that, however, comes opportunity comes new employment opportunities comes new businesses, good. You know, if every bank in your town would bust tomorrow, the next morning somebody would open a new bank, of course they would.
Jason Hartman 1:11:24
Well, absolutely, you know, our government’s attitude is always kick the can down the road fight fire by putting gasoline on it, which means debase the currency. They do it everywhere around the world, when when the G 20 leaders meet, it’s always about creating more fake money out of thin air, and oh, the feds gonna stand behind us other central banks are gonna stand behind the problem and solve the problem by you know, taxation and money printing, that’s all they can do. They have no they have no real ideas. So it’s always the answer.
Karl Denniger 1:11:55
Yeah. The problem really is that we have so many people who are impacted With privilege that they have bought and paid for from our politicians, and then you have, you have people that are demagoguing, things that are just completely ridiculous. Look at the look at the pension situation in Chicago, for example, Illinois in general, and in your public sector unions, which which by the way, even FDR said, were absolutely a terrible idea and should never be permitted. Because you’re essentially bargaining against yourself, which is the dumbest thing in the world that you would ever let us do. However, they have managed to obtain promises to pay money that can’t possibly be collected. The only way that Illinois can manage to fund those would be to triple property taxes. Well, if you actually triple property taxes by the way, I used to own a house in the in the Chicago area because I lived there. I lived there for 13 years while I was running my internet firm, and I looked up the property taxes on that house. I’ve now been here in Florida for about a decade. And I know exactly what I paid before I left because I used to have to stroke the check every year. They have more than doubled in the 10 years, even though the cost of the house course it went up dramatically during the bubble, and then it came back down. It’s not a whole lot higher now than it was when I bought it. But the property taxes have doubled. So you’re going to triple them again. off of this level, nobody’s going to pay those they can’t. So what’s going to happen? Half the people are going to leave
Jason Hartman 1:13:21
Yeah, there will be there will be a big asset sale, and prices will drop. And, you know, that’s the one thing is you look at how incredibly mismanaged and basically criminal the government of California is, I always call California, the new Michigan. I mean, it’s just disgusting. What has happened to my old home state. And the one thing that has kept the real estate market there somewhat intact, is prop 13. Good old Howard Jarvis. If he hadn’t done that back in, I don’t know what was it like 78 It was a long time ago. California I bet would have five or 6% property taxes by now because they would have looked at anywhere they could, you know, support the public employee unions and grow the size of its massively inefficient government. It’s just absurdity. But Well listen, let’s end on a somewhat positive note here if we can, any advice on what people can do, I think one of the best strategies is just exploit the opportunity, because, you know, there are opportunities and ways to exploit this, this massive irresponsibility that’s going on in our world and one of them is to own commodities and own them with long term fixed rate debt, because the debts debased by inflation just like you know, your savings account,
Karl Denniger 1:14:33
I would disagree on having any debt if possible at all what I what I like to say to people when they ask, you know, well, how do you invest in a world like this, okay, how do you how you do that, and the first thing I will say to people is that duration risk is death. In a world like this, you want no duration risk at all. So anything that you have that cannot be immediately turned into liquid capital is is a fool’s errand.
Jason Hartman 1:14:58
Let me explain my position there. When I say long term fixed rate debt against commodities, I’m talking about buying rental properties. So the debt is outsourced to the tenant. Now granted, rents fluctuate and so forth. Well, you’re making, you’re making a terrible assumption there. If there’s a collapse in employment, you’re going to be collecting zero rent on those properties. These are low, actually, I’m not making a terrible assumption. And there will be more of a collapse in employment, I think, I think on employments going to get worse, not better. So two things happen, you know, when that occurs, number one, these are low end properties and necessity oriented housing. And so people above that will move down and they will need the lower end properties. And then also, you know, when you see collapses like this, I’m not saying I’m for it. We agree politically, I’m sure. But you see more section eight expansion, you see more government programs, and this incredibly insane mantra of the government. Keep people in their houses. Well, the reason they say that is this just pandering, keep them in their houses so they will vote for me. So I’m not saying that that people will live as well. I’m saying you’ll catch people moving down the ladder.
Karl Denniger 1:16:04
Oh, I think Yeah, but I think the assumption you’re making here is that it doesn’t get terribly bad to the point the government’s cut that off. And that’s, that’s where I believe the danger is and see, because you’re, you’re still counting on the government being able to gear up. And and so what I look at is, I don’t want duration risk in what I hold. What I want to do in a situation like this is look at the potential opportunities that will come my way, provided I have capital available to me when they present themselves. And that means that essentially what I’m doing is in the capital markets, I’m a short term trader, my swing gets very short. I’m looking for base hits. I’m looking for things that have durations measured in days, weeks or months at the outside, but always things that can be liquidated immediately if things turn in an ugly way that I don’t like and that way, I’m never out over my skis. Beyond the level of loss that I’m reasonably comfortable with. Yeah, that’s an interesting point. But here’s it well, but but here’s the other side of that. Okay? What I’m waiting for in this interim period, what I’m trying to do is earn a positive alpha. Okay, which is I mean, that’s the goal, right? So I’m trying to earn a positive absolute return. And what I am expecting to have happen is that when when this game ends, and inevitably will and must, because the mathematics say it will, I just can’t tell you exactly when it’s going to happen. The dislocation is going to bring opportunities that you’ve never seen in your lifetime before. The last time we saw this kind of opportunity was in the 1930s. And if you have capital available and are able to deploy it, the rule that you use is you figure out what you think the appropriate valuation is or whatever it is that you’re looking at and planning to bid on. And you’ll offer the guy who’s trying to sell at half of that, and if he’s really desperate, you’ll tip your bid. And if he’s not, you go to the next and you keep doing this. This was done during the day. 1930s by some people who had save capital, they didn’t get rich quickly. But over the next 20 to 30 years, they became fabulously wealthy because they were able to buy assets at a nickel on the dollar.
Jason Hartman 1:18:10
Sure. But the question is, nobody knows what the nickel on the dollar is because value is a moving target. We don’t know that that time has already passed. I mean, look, my clients are buying properties all over the country below the cost of replacement below the cost of construction. And they’re buying them with 30 year fixed rate debt at the lowest rates that have ever existed. Since they’ve been counting. I say that the duration risk and I love that term. By the way, I love your term duration risk. I say that the duration risk does not belong to the borrower, it belongs to the lender. That’s who’s taking the risk. When I go with a real estate deal, I only invest 10 510 20% of the cost of the property, you know, Now granted, the property could be taken away, but let’s just look at history for a moment since the 30s. Okay, and since the last has changed about the way property works and lending works and so forth. Every downturn since then in real estate, has been a downturn that has benefited people in debt, the highly leveraged people, it’s counterintuitive. I know this have actually won the game. And they have been the ones to get all the loan modifications to get the short sales to get the workouts to get the freebies to sit there and collect the rent on their properties for one to three years while the bank figures out if they’re going to foreclose or not. And then finally, do a short sale at the end of that long period where they’ve been getting massive positive cash flow because they haven’t been paying the mortgage. And and I’m not saying this is right, I’m just saying it’s what it is okay, because I know what’s going on out there. And then not only that, they’ll get a check from the Bank of America or some other big bank for anywhere between 20 $530,000 as a country Cooperation fee for doing the short sale. This is insane. And they’ll get it on recourse agreement saying that the short sale is non recourse. I mean, it This is our society is totally perverted. I mean, we’re rewarding all the wrong behaviors. I’m not saying the right, I’m just saying this is the way it is.
Karl Denniger 1:20:18
I think there is I think there is a You are correct. And that since the 1930s, this strategy has worked on a repetitive basis. And and that it is, you know, just proved to be quite useful. I will simply note that there are a number of assumptions in there that I think you need to be very careful with. And they’re dangerous, because this is the same set of assumptions, essentially, that were being played out during the 2000s by the guys that were flipping condos down here in Florida. And the people got caught on the wrong end of that with the music stopped, not only lost the deposits, they got sued for the balances and many of them were completely wiped out. Now, you can’t take what somebody doesn’t have. Okay,
Jason Hartman 1:20:57
sure, fair enough, fair enough. And I Hate condos, by the way,
Karl Denniger 1:21:02
but the thing is, is that the basic model was was essentially that was that, you know, I can turn the cash flow and then I can flip these before, you know, before things go bad. The they were basically doing they were doing options they were trading along with real estate and they weren’t crazy. Those are speculators those are gamblers, I understand but what you’re doing is you’re you’re looking at the cap rate and saying that from the from a capitalist perspective, this in cash flows, and therefore I’m clean. And if everything goes totally down the toilet, then I just walk away on the thing. All right. And, and that is you need you just need to be very careful that if everything goes down the toilet you actually can and that you don’t end up out of the street in your underwear by the time they get done with you. And yes, up until this point, this strategy has worked out fairly well. I’m just not convinced that I’ve no problem, for example, with buying distressed properties for cash, not using any leverage whatsoever. And there was Some opportunities about a year and a half, two years ago, down the southern southwest part of Florida, that that I had some people contact me on, I didn’t get involved in it primarily because I don’t live there too far away. But you were able to pick up some single family homes down there that had sold for three and $400,000 a couple of years prior, literally for 2030 grand. Now, that is a crazy discount. And those things will cash flow all day long, even in a terribly distressed economic situation. The problem was that only one out of 10 of them was viable because the people on the way out the door dump things like poured a bag of cement down the toilet. Okay. It’s great on its slab on grade. Your dad. Yeah, that’s the value of that. Yeah, the value of property is zero. Okay. So you have to, you know, you had to be there to go down and inspect everything, you could not do anything.
Jason Hartman 1:22:51
You know, I mean, listen, obviously any investment you got to know what you’re doing. You can’t you know, any idiot is going to get destroyed in anything. I’m just saying that The concept of owning commodities because commodities have intrinsic value, fiat money does not. People need things things matter, resources matter. And if you can control resources, were at least initially going into the deal. The debt is outsourced to a tenant where you have positive cash flow instantly. Okay, you know what you’re buying, you’re a prudent smart buyer. Okay, you have the right team helping you with it. And then you have this long term fixed rate debt that is just going to be massively debased by inflation. I mean, look, this is how people got rich in the last few decades, they thought they created wealth because their real estate went up in value. I say the way they really created wealth, the secret wealth creator was that their debt went down in value. I mean, if you borrowed if you borrowed money on the medium size on the medium price home in 1972, and you got an 80% loan to value ratio, and then you turned around and kept that loan for three decades and it was about 7.3%. Then you you actually even on a home that wasn’t a rental property, okay? Where you didn’t outsource the debt, you paid it yourself, just with the the average rate of inflation, the official rate, which of course is understated over those three decades was 5.1%. You got paid 1.16% to borrow that money for three decades. I mean, that’s, that’s an unbelievable,
Karl Denniger 1:24:26
you’re right. But here’s but here’s the problem with doing that. Okay. And this is why I, this is why I bring this up, right. And why I say this is, you know, essentially you’re taking duration risk, and you need to understand the danger in doing it. If you look at the Z one graph, and this is one of my favorites, it’s I have it up on the forum all the time on the ticker, it’s it’s all over the place, you will see that during that period from 1980 to 2010. You had an extraordinary ramp in the total amount of systemic debt, and that’s what supported what you were doing and the increase in value that you saw the electric value anyway. Have that home, because that’s where that where that extra inflationary pressure went. Now, here’s the premise that you are basically wagering on when you do this. And that is that in the future, going out for the next 20 years, you’re going to be able to actually that the periodicity on this thing is about eight and a half years. So you’re saying that over the next 10 years, let’s just use that as an example, that we’re going to find a way throughout the economy to take another $54 trillion in aggregate debt, and somebody is going to accept that on their balance sheet. If you are wrong about that, then what you’re trying to do is gonna fall back on you and collapse. And that’s the problem is that I don’t believe that in this is what the government’s been telling you. What
Jason Hartman 1:25:46
you’re arguing is that the government is that they’re the chickens are gonna come home to roost, and we can’t keep kicking the can down the road. That’s what you’re saying there. But I say that if that happens, and you may well Right, I kind of think that, you know, we can kick it down the road for a lot longer. It’s disgusting, but it’s just the way the world I mean, as long as we have that reserve currency status, and as long as we’ve got the military to push people or other countries around and back it up true, so but the risk really belongs to the lender. By the time any of that happens, people will have yanked their 510 or 20% down payment on that property out of it just through cash flow. Okay, by the time the chickens do come home to roost if they ever do, I mean, who knows, we might kick this can down the road for another five decades. I don’t know when will it end?
Karl Denniger 1:26:37
Well, actually, well, actually, I have a very, very good answer to that question. When will it end? And that is that is that mathematically, within the next 10 to 15 years, it will end whether we want it to or not. And there and and that is assuming the market doesn’t call us on at first in history says the market always does. Which means that you don’t have 10 years. Okay, now, this is the same thing that has happened. In Europe, it is happening right now in Europe. It’s the same situation that they have in Greece they have in Spain. We’re now starting to see this just metastasize its way into Italy and France. Medical relationships are not you know, I thinks they’re they wills. And so what you have now is what we’re really looking at is how long do we go from zero meaning tomorrow, okay, to this hard wall that is 10 to 15 years out and and it moves slightly depending on some assumptions that you make in growth rates, but between 10 and 15 years, it becomes immutable.
Jason Hartman 1:27:38
Logically, you’re absolutely right. The problem is that at the end of the day, it comes down to who’s got the bully pulpit, and if we still haven’t, if we still have the biggest military Can Can it really be taken away from us is there is the jig really up I mean, we can bully China and Japan to buy our bonds forever. Is is lame to be
Karl Denniger 1:27:59
But I disagree. It doesn’t matter. It doesn’t matter. Because when what you’re seeing happen now, if you look at the trends and what has happened over the last four years, we’ve had all this alleged support. Okay, from China, Japan, everybody else, right, we’ve been using a bully pulpit, and we’ve been using it aggressively. And so far, we’ve been apparently successful. But look at the shift that has occurred onto the backs of the people in the lower middle economic strata, and the fact that they are now at an accelerating rate ending up on the dole, which is why the labor participation rate has not moved off the bottom in the last three years. Without the labor participation rate coming off the bottom, there is no way for the government to ever get out of this hole, because only employed people pay taxes. So, this is where the wall comes from, ultimately, is that when you take all these interrelated parts and you put them together, and you start running regression analysis on this, you find that there is a hard wall that’s out 10 to 15 years hence, much of it is demographic But much of it is also from the things that we’ve done over the last 10 to 15 years, really from 2000. forward. And so the question mark, is, at what point do people in the markets, irrespective of the bully pulpit, turn around and say, Okay, we’re not gonna let you go all the way to the wall and hit it at 100 miles an hour, we want our money first give it to me now. And I don’t know the answer to that. Neither does anybody else. And anyone that gives you a hard date in further 10 to 15 year timeframe is guessing because they can’t know it’s about psychology. It’s not about you know, it’s not about hard numbers.
Jason Hartman 1:29:35
It’s about the history of war.
Karl Denniger 1:29:37
Right? But once you get to that, once you get to that point, we’re not talking about psychology anymore. We’re not talking about kicking the can we’re talking about any kinds of things. We’re talking about arithmetic in two plus two still four.
Jason Hartman 1:29:48
Yeah, it is. I know in a logical world, you couldn’t be more right but there are other forces beyond money and investment and markets play here, but did a very interesting discussion. I want to have you on the show. Again, we’ve gotten very long here, and we got to wrap up but really a great talk. I mean, I just I just love it. And by the way, I got to tell you something. You are obviously a rush fan. I’ve been a rush fan for many years. And I love their lyrics Neil Peart, the drummer was highly influenced by iron Rand. And I agree to say that in an interview it’s it’s without a doubt the most intellectual rock band in history
Karl Denniger 1:30:25
that’s rush the band, not rush the limbo
Jason Hartman 1:30:27
Yeah, not rush limbaugh’s rush the band. Folks, if you don’t know what we’re talking about, look it up. And you are in for a treat. You learn for lyrical excursions into philosophy, mythology, just incredible stuff. So good stuff. Well, hey, Karl Denniger, give out your website if you would, and just tell people where they can learn more about your work.
Karl Denniger 1:30:46
Yep, you can follow me on a daily basis at market hyphen ticker.org. You can follow my tweets, ticker guy on Twitter. All of the new articles I post are announced on there so if you want a quick and easy way to keep track of them that That’s a good place to do it because I usually put four or five hours a day. And then ticker form is connected to the market ticker and there is some some slightly more actionable in real time trading stuff that I talked about. And that is on a donation basis for access to those areas but the base to be able to follow it doesn’t cost anything, you just sign up, get yourself an account. You’re in
Jason Hartman 1:31:20
good stuff. Well, Karl Denniger, thanks for joining us today.
Karl Denniger 1:31:22
Thank you very much, have a good day.
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