Jason Hartman plays a Flashback Friday episode where he hosts Karl Denninger, a technology expert, businessman, finance blogger, and political activist. He outlines his experience as a founding member of the Tea Party movement., detailing his contribution to the libertarian-oriented finance blog The Market Ticker, found at http://market-ticker.org. Jason and Karl explain current market trends and then discuss income property investing.
If you don’t have any investment, real thing investments, you will not have the opportunity to learn to make mistakes and learn from it. And then you will not be able to tell which one is a better investment. I think you just have to get it started somewhere. And with the help of your investment counselor, and then keep moving forward,
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 has 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 financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:24
Hey, welcome to the creating wealth show. This is episode number 339. This is your host, Jason Hartman. And thank you for joining me today. I’ve got Michael here with me to help during the intro portion of the show. And then we have a repeat guest this time, and that is Karl denninger, who’s the ticker guy. And he’s going to talk about some of his economic outlook in several ways. And I think you’ll find that interesting. But Michael and I are going to talk about equity and property tax liens, possibly getting ripped off investing in tax liens. And I think that may have happened to me Actually, we’re going to talk about two different properties. We’re going to talk about my favorite city in America, Detroit. Totally joking. And then we’ll get to our guests here. So Michael, welcome. How you doing?
Karl Denninger 2:07
Good. It’s a it’s good to be back on the show.
Jason Hartman 2:09
Yeah, it’s been a little while for you. You’ve been surfing a lot lately, haven’t you?
Karl Denninger 2:14
Yeah, I just enjoyed summer, maybe a little too much. And making the most out of my time in California, I may be headed to Texas in 60 days for a permanent move. So I got to enjoy the beach while I live a block away.
Jason Hartman 2:25
Good for you. Well, so. So you’re on the verge of moving to Dallas, the big deal it looks like and I got to tell you something. I don’t know if you actually saw this on Facebook this morning. But yesterday was the last day to file corporate taxes. And I just got to mention something by the way, some listeners attribute things to me that just aren’t accurate. One of them is this one that I’m so organized. Folks, I am making the disclaimer, I am not so organized. Okay. But thank you for giving me all this credit. I just don’t want to take credit where credit isn’t due. And that’s one of the places where it isn’t due. I’m moderately well organized. But sometimes I might sound better at teaching than actually practicing for myself. There’s that old parable of the shoemaker whose kids have no shoes, right? Sometimes I feel like that’s me. Hey, listen, I’m only human, but I’m trying to do so many things that it really gets overwhelming. Anyway, so yesterday was the last day to file corporate taxes and I talked to my CPA and wow, I don’t know if you saw this this morning when I
Karl Denninger 3:30
commented on it. Oh, you did? Okay. Yeah. 11 billion in new taxes for California.
Jason Hartman 3:34
Yeah, that’s right. You did but but what was what was my personal part of that? My personal experience? Well, it was this just by leaving the Socialist Republic of California and moving to Arizona two years ago, I saved enough on taxes from what it looks like here a rough estimate, of course, to pay for six around the world trips. And now if you move to Texas, I’m going to be really envious because you could probably pay for 12 around the world trips in this example. Because I mean, it is a me you know, no state income tax at all in Texas. It’s zero. And in Arizona, it’s a lot lower than California. But Wow, I mean, just what an amazing difference. What an amazing difference it is and that money it’s like you don’t really get anything for it. I don’t know California is overcrowded, overtaxed over regulated. I kind of don’t get it. I really, I mean, all my life. I’ve pretty much thought it was great. But now that I’ve moved, my eyes are open. And I see that there’s there’s just better stuff out there. And certainly when you pay a lot less in tax it just What a relief. Boy. I think Texas is my next move. I don’t know. But to see out there. Yeah, I might see you there. So why do we bring that up about the Dallas thing moving to Dallas. So just because we were just making small talk there. Yeah. But hey, good for you. Yeah, good. Good for you. So this first article that I shared and you you agreed we should talk about it on the show. What do you think?
Karl Denninger 5:10
Well, it goes along with your philosophy that our investors should not keep equity in their homes. And this is the article from Newser, and it seems just baffling. But a 76 year old retired Marine, lost the hundred and $97,000, Washington DC home, he had paid full and paid in full 20 years ago, because he had a property tax bill of $134.
Jason Hartman 5:36
Unbelievable. So look, folks, here’s what I always say to investors, real estate is not real estate necessarily, but good income property in the right locations, structured properly doing the deal, right. Okay, in the right place, is the best investment going. In my humble opinion. It’s like the thing on Saturday Night Live many years ago, the guy used to say, baseball, Ben, Betty, Betty good to me. Well, real estate and Betty Betty good to me. And it’s the best investment I think, but it’s it’s a mediocre bank. What do I mean by that? I mean, look, if you have to buy properties with cash, many people do, hey, that’s fine, it’s still a pretty darn good investment. But if you don’t have to buy them with cash, if you can leverage them highly, as long as you can get good long term investment grade financing at historically low rates, that is a great deal. Because whenever you have equity in the property equity is always in jeopardy. Okay. And this is a great example of it. And the same thing that’s happened here with this guy’s tax bill, that I guess he forgot to pay it, the same thing can happen with homeowners associations, putting liens, and then foreclosing on your property. I’ve read articles about that. And equity is always at risk. So what I like to say is that one of the great forms of insurance that you can get on your properties is a high loan balance, because that loan, basically makes that lender, a partner with you and an advocate for you. And it makes you much less likely to be foreclosed on. Because if, uh, if someone is out there, you know, like a homeowners association or a tax collector. And these tax liens are sold at auction, a lot of times not in their different in different locations, but they’re sold to investors and investors buy these tax liens. And what do they think they think, well, if this property has got a whole bunch of equity, if its own free and clear, if there’s no loan against it, hey, if I can foreclose on that tax lien, I’m going to foreclose. Now, on the other hand, if it has a big loan balance against it, they’re going to be less likely to foreclose, they’re going to be more likely to either pass on it completely, or give you a call and try and work with you in some way. Right. So equity is is always at risk. And that’s that’s the moral of this story.
Karl Denninger 8:10
But I don’t I don’t know if you realize, Jason that like that you just made it like a little comment in there. That is a complete paradigm shift for people. You’re saying, a high mortgage balanced, potentially lessens your chance of foreclosure? I am absolutely
Jason Hartman 8:27
Karl Denninger 8:28
But but but I’m saying to 99% of people, if you go and ask them, what what’s a high the highest potential risk of foreclosure, the only thing they’re thinking about? I would say most of the time, it’s going to be a high loan balance
Jason Hartman 8:43
there. They’re going to be running out to their friends and saying, you know, I listened to this podcast with this guy, Jason Hartman, and he sounds like a quack. I am not a quack, I am inexperienced, I have experienced the school of hard knocks, and that’s just not good. Okay. So learning through these other people’s experience, and learning through my own experience, you just having equity in properties is is it’s better than nothing. Okay, it’s better than keeping your money in the stock market, where you have equity because when you buy stocks usually put 100% down. When you buy a mutual fund usually put 100% down when you buy a bond, you usually put 100% down. When you have a savings account in the bank, you’re putting 100% down, but God if you can put 20% down on a property or 25% don’t put more down, you’re crazy. Put his little down as you possibly can. I know that this is counter intuitive. I completely understand that. However, experience and all these unfortunate stories that you hear from other people like the one you’re talking about right now, of this poor guy who bought a property It was paid in full 20 years ago and he lost over $134 tax bill. Not not good and and it says this tax bill burn Bernie coal, or Benny Coleman was the guy’s name. He said, Let me see what does it say your mom and pop investors he said, okay, instances of foreclosure okay. The post found 509 such instances of foreclosure about 200 homes, the rest commercial real estate parking lots and vacant land in two since 2005. In Bernie Coleman’s case, his $134 tax bill grew into a 40 $999 debt. Okay, so $5,000 debt, as many of the victims are vulnerable. Coleman is battling dementia, a 95 year old woman in a nursing home with Alzheimer’s lost her home over a $44 and 79 cent debt. This is destroying lives in urban real estate professor, folks, tax liens, homeowners associations, these are your your two biggest worries when you have a lot of equity in a property. So don’t do it, engage in the practice of equity stripping strip the equity out of the properties, if you can, you can always do it, I understand that but if it’s available to you get the equity out of the property. Remember the property will go up in price are down in price, regardless of how much equity you have. It will produce whatever the market rent is, regardless of whether you have a higher low mortgage balance on the property. All of this happens regardless of the loan balance on the property. Okay, now, Michael, I wanted to just get because I alluded to it, I want to just mention and I’m gonna have more to come on this on a future show. But I did a show a long, long time ago on tax liens, and I have invested in tax liens over the years. And I am not positive but I think I just got ripped off. And I’m pretty stressed about it, but I haven’t fully investigated but I’m, I’m pretty sure I got ripped off by the people that I had on the show. Okay, so you know, you think this doesn’t happen to yours truly, it does believe me, I have my hard knocks okay. And I think this is one of them. Well, this company called p IP West Platinum properties, platinum investment properties West, a rather similar name to my companies, you know, one of my company’s names, okay, this is not Platinum properties investor network, which is the name of one of my companies, but this is Platinum investment properties west or P IP West and the guy had on the show seems like a really nice guy. His name’s Don foreman, and his partner Charles sells. Se lls, well, Charles sells lives back in like think Hilton Head, South Carolina area. And Don foreman lives I believe in Orange County, and like maybe Aliso Viejo, California. Well, they told me a couple of years ago, that there were 10 tax liens that I owned, similar to the story we’re talking about that I should consider foreclosing on, but they told me I had to send them 1700 and $50 per property to start the foreclosure. Well, I sent they pick 10 of them. And I told them, I was uncomfortable sending them all of the money. So they told me who the attorney was I needed to hire and the attorney fee was $1,000 per property. But their fee to oversee the process was another $750 per property, which I thought that was kind of high, but whatever I paid it. So I paid them. I believe the way it all worked out. And this is a couple years ago was I paid them set. I paid them 70 $500 750 times 10. And then I paid this attorney guy that they recommended, and forgive me his name escapes me right now. But I paid him $10,000 or $1,000 per property. Well listen to this little mess. So they said that they couldn’t reach me. Now, if there’s anyone who’s easy to find and reach, it would probably be yours truly. They’ve talked to me a zillion times. I answer my own phone. I don’t have a receptionist anymore. So the phone comes directly to me. My phone numbers, email addresses are listed all over the internet. All you got to do is search Jason Hartman. They know a lot of the people I work with because Don foreman was on the show. He spoke at one of our masters weekend events A long time ago. I’m pretty easy guy to find. Okay, I checked my own email. I check it multiple times a day. Well, they said they couldn’t find me and that I lost the right to finish the foreclosures on these properties. So I started asking a few question. And just by asking a few questions, they said, Well, I think you should talk to our lawyer. So I got suspicious. So now I got my liar lawyer talking to their lawyer. And it’s a big convoluted mess. We’ll see how it all goes
Karl Denninger 15:12
great overseeing that they provided
Jason Hartman 15:14
Yeah, yeah, they really, you know, I just think these guys rip me off. But the jury’s out. I don’t have conclusive evidence on this yet. But I will tell the listeners as soon as I know. So there’s my tale of Whoa, for the day. Okay. And the interesting thing about that is that it’s not just $17,500 down the drain, it’s the missed opportunity, because the tax lien amounts were ostensibly, per their recommendation, much lower than the value of the properties that I would have taken back in foreclosure. You say, just like this guy’s hundred and $34,000 deal? Well, $134 or 30, sorry, $134 deal to gain a $197,000 property so far on these tax liens, and I did make some money on some others over the years with the same people, by the way. So you know, I want to give a balanced opinion here as a respectable news reporter that I am, but I think I got ripped off. I’m pretty sure I did. And we’ll see we’ll see. In fact, Don foreman, Charles sells and VIP Platinum investment properties West, if you’re out there listening, and you want to come on the show, and debate this with me and have your equal time and share it with the listeners Be my guest, you are welcome to come on the show. And explain how I lost the opportunity here. And how you couldn’t reach me. Because I don’t know how they couldn’t reach they said they tried to reach me, but they could never really explain how they tried to reach me. So whatever carrier pigeon, enough of that. Yeah, you know, how about just going to Jason hartman.com and sending me a note right through the website.
Karl Denninger 17:00
Maybe Coco, Coco ate the pigeon. Yeah, you know, you could
Jason Hartman 17:03
have found me on Facebook, Twitter, my own website, I got like, 16 different websites. Not a legitimate excuse, in my opinion. But uh, hey, let’s move on. Michael, a property we got we got two properties we want to talk about. So give us the first one,
Karl Denninger 17:21
a Little Rock, Arkansas, one of our newer markets working in, and I drove through real briefly. Three weeks ago or so I was driving. I drove a good portion of the country south through Memphis and drove through Little Rock and really liked what I saw. So this one is 1800 square feet.
Jason Hartman 17:41
Just out of curiosity, what were you doing on that trip? When you drove through Little Rock in Memphis,
Karl Denninger 17:45
I was going from Virginia to Dallas with my little brother so that he could take his car back to to SMU where he’s going to school. So just nice to hang out with my brother. And you know, it was a 1300 miles. So it was good for him to have somebody to hang
Jason Hartman 18:02
out with. That’s all that’s a long drive. But But yeah, so you saw some of the places and good stuff. So tell us about this property.
Karl Denninger 18:09
So it’s 1800 and eight square feet, Little Rock purchase price is 121,900 puts the cost per square foot at 67, which is pretty darn cheap, considering it’s got a lot of brick on it.
Jason Hartman 18:23
Yep, yep, that’s pretty cheap. And now let’s look at some of the projections. It’s projected to rent for 1200 per month.
Karl Denninger 18:30
Yep. So that’s right about a 1% Rv ratio, and that’s cash flows 276 a month, which is I like these numbers on this property. total return on investment is projected at 33%, which is fantastic. Yeah.
Jason Hartman 18:45
And and that’s what very conservative assumptions there, you know, 6% annual appreciation, linear market. That’s been depending on what time period, you look, the national average, it’s pretty much thought of to be the national average. But there’s ups and downs in the market. This is not a very volatile market, like California or any of the cyclical markets would be these little linear markets that don’t make the headlines. Those are the ones we like, and you’ve got your vacancy rate in there imputed at one month per year or 8%. management fee at 9%. Of course, if you’re self managed, you could save that maintenance percentage projected at 5%. So yeah, great. That’s an that’s a nice little deal. Nice little deal. Nothing bad about that. 11% projected as the Well no, it’s funny, he says 11% cash on cash projected. But then in the Performa it says 9%. I think he put that as like a headline, and then probably tightened up the assumptions knowing that we would have gotten on their case, because we’re we’re all by the way, this is one of the epic battles that goes on inside our company, folks. You should know this. And Michael, this is pretty much not I don’t want to say it’s an everyday occurrence but it’s a it’s a few times a week occurrence where the local market specialists we’ll upload properties to the website, they will put in all the numbers they want. And then we’ll go and get back to them and say, No, no, no, we think we don’t think this rent estimate of 1200 per month is reasonable. We think you should lower to 1150, or whatever it is like that. And, and they all have to, like, reduce the assumptions. So this is probably exactly what happened here. He he typed the headline in at 11% cash on cash. But then when he changed the assumptions, probably at the request of whatever investment counselors, it got a little bit worse than that, right?
Karl Denninger 20:36
Yeah, this is a 75% loan to value ratio. So I bet if you bumped it to 80, it might get one more point
Jason Hartman 20:43
on the cash on cash
Karl Denninger 20:44
on the cash on cash. And then there may be some other number in there change.
Jason Hartman 20:47
Yeah, that’s a good point. Okay. Well, hey, I think we still have time to talk about Detroit, my favorite city, right? Because we said we would Well, I want to play a little video for the listeners. And this is one that you found Michael, and it’s a great video. It’s really good. And it’s it’s five minutes long. And we’ll pause it at least one time to do some commentary on this before we get to our guests. But this is mind blowing, isn’t it, Michael? I mean?
Karl Denninger 21:13
Well, it’s just it was really it’s been prompted by every month, I still run into people that still think, Oh, well, there’s houses for Detroit for 5000 these people still think there’s this great opportunity. It 5000 it’s probably worth 200. And if you pay 200. Now, you’re going to be sorry, yeah. And
Jason Hartman 21:30
that’s $200. In in places as as embattled and as treacherously bad as Detroit. They’re, they’re giving houses away, like the city will just give them to you for virtually nothing. If you’ll just agree to pay the property taxes and maintain the property so they don’t have to bulldoze it. That’s all there they want in some of these areas. And it is it’s just mind boggling to me how our, quote competitors, unquote, are promoting Detroit properties. I mean, it’s beyond me. I and look, folks, I always reserve the right to change my mind. Okay. Like if, if three years from now, something changes, which with Detroit? I can’t imagine it will. But maybe there’s that Who the heck knows. Right? Maybe I’ll change my mind. But for the foreseeable past. I don’t think Detroit has really been a good deal for a couple of decades.
Karl Denninger 22:31
Well, it’s just gambling. I mean, if your whole investment argument in Detroit is, well, it can only go up. That’s not a sound decision. What about right now? I mean, and you should be basing your judgment based on what’s the one your perform again, look like? You got to
Jason Hartman 22:45
have cash flow, folks. Look, this is the this is the bargain hunters mentality. In the stock market. It’s the mentality of people who hunt for penny stocks, who hunt for those, those super cheap stocks thinking, well, they can only go up. And if you talk to people in that world, the fact is, Penny stocks can go down, they can go the companies can go under completely bankrupt, and they don’t perform. But it’s like this mentality of the bargain Hunter, the cold sort of the collector, bargain hunter mentality. And it doesn’t, it doesn’t work, I haven’t found it to work, you want to buy good quality stuff that has a market for that stuff, in this case rental properties. And just sit tight and be a good manager or a manager of your managers and buy for cash flow. That’s the key to having a long sustainable career in investment. And I mean, I’d ask you this, if it was all about price, what would the bigger company be? Would it be Big Lots formerly called pick and save or Apple Computer?
Karl Denninger 23:54
I mean, look at let’s look at Berkshire Hathaway. Yeah. When it was what? I don’t know what it is. $100,000 a share.
Jason Hartman 24:00
Yeah. That mean? What is Burke nowadays? By the way?
Karl Denninger 24:03
I don’t know.
Jason Hartman 24:05
Yeah, go look it up what we’re doing the video. But yeah, Warren Buffett’s become a little bit strange in the past five years or so? In some ways, he most people think he’s become a sellout to the establishment. And that’s probably true. But But yeah, I don’t know. It’s an interesting thing. So let’s start playing this video. You look up a shares of Burke and remember there’s two classes of shares for Burke’s. I don’t know hundred
Karl Denninger 24:28
and $73,300. Today.
Jason Hartman 24:32
Wow, that’s pretty. I’m kind of surprised is that high. Last time I checked, it was like, I don’t know, in the 120s. I think.
Karl Denninger 24:39
Yep. That was in December of last year. It was still in even midway through last year. So it’s it’s up a lot in the last year.
Jason Hartman 24:48
But hey, if you buy one share, and now you could buy a house instead. But if you buy it but if you buy one share of Burke, you get to go to the meeting, right? Literally that’s the reason some people buy the shares. So they can go to that stupid meeting in Omaha.
Karl Denninger 25:03
315 shares traded hands to
Jason Hartman 25:06
Yeah, there you go. Okay, so let’s go to this video about Detroit. It’s five minutes, we’ll pause it at least once for commentary. And this is about what they call operation compliance. And it shows how Detroit is attacking small businesses as if they don’t have bigger problems. Here we go.
Karl Denninger 25:26
Operation compliance has to be one of the most troubling things that I’ve ever heard of in the city
Karl Denninger 25:30
police officer, they got robbed with this appliance.
Karl Denninger 25:33
Maybe I’m stopping up people just not gonna be you know how to run a legit business
Karl Denninger 25:38
entrepreneurs have said, Well, look, let them catch me if they can. Right now the city has decided we’re going to try to catch you and we’re going to put together a special unit to do so.
Karl Denninger 25:50
We all know Detroit’s in trouble. A bankrupt city full of crumbling houses abandoned factory buildings and a fast dwindling population. Yet in the midst of all this collapse and decay, former Detroit Mayor David being announced a new regulatory crackdown on code violating businesses a crackdown he expected to shut down 20 new small businesses a week. Its operation compliance. What are they about Operation compliances I think that they could be doing something better to be cleared up somebody’s fake unless I hand cut some grass throughout the city. And boy, if somebody’s out on the streets, taking out tax dollars cleaning up, these two business owners have managed to keep their businesses open on liver pnoy Avenue, though many other businesses along the road have been targeted and shut down by operation compliance in the preceding months. You know, we call for a services as far as someone breaks in and never show up. But you had to do they want to come in, you know, blackball you and close your business because you might be a little late paying fees or something like that unnecessary harassment. You know, the city complain about our signs out in front of the fields and all
Karl Denninger 27:03
this other people downtown with the money but a Mexican with the black communities in a park. It is hard to run a business in Detroit. It’s taken me three years to get approval for outside patio.
Karl Denninger 27:17
Larry mango runs cafe de mungo, a remarkably successful restaurant and bar
Karl Denninger 27:22
in downtown Detroit. You truly trying to serve the public interest. You was simplified. But simplifying things in Detroit means lost the jobs. So politicians,
Karl Denninger 27:36
rather try to tax me to delve charge me to do to keep their vote same keep their relatives and I’m gonna say it like it is keep several friends all on a payroll. Accidentally, the city has created sort of an anarchistic culture in the city where many entrepreneurs, especially the smaller retailers, and restaurant tours, simply forego getting the required permits that the city is demanding of them, because it’s too expensive. And because it often takes too long. And sometimes the inspections that are done are of low quality. So entrepreneurs have said, Well, look, let them catch me if they can. Right now the city has decided we’re going to try to catch you. And we’re going to put together a special unit to do so for people who would want to start a business today in the city of Detroit.
Karl Denninger 28:21
I really don’t know how they would go about even starting because the amount of hurdles that the city has set up to prevent them from going into business is just overwhelming.
Jason Hartman 28:31
Sounds a lot like California. Unbelievable. I mean, these politicians are such idiots. Actually, I don’t know if they’re idiots. They’re greedy and power hungry. Because what’s always happening is in one, one of the people interviewed in this little clip so far, alluded to that that all the friends downtown are making all the money, you know who’s on the compliance team? Well, it’s probably people that are owed political favors. And it’s just I mean, Detroit, from its model Cities program years ago. It’s just a disaster. One corrupt Mayor after another one corrupt city council after another inefficient, crime ridden. The police don’t respond. I mean, weeds abandoned buildings. And and now all they’re doing is attacking what is left of the productive class. And you know, Michael, that’s like, that’s what California has been doing for years. Now. Of course, California has, you know, a more diverse economy. It has nicer weather. It has a beautiful coastline. And it has a brand. It has some definite advantages over Detroit, no question about it. But Detroit used to be one of the premier cities of the world, Motown. That’s where all that music came from. It’s where It was like, I think the number six city in the US The population was was more than double what it is today. This can happen to places like California, you see all of them the middle, not all of it. But you see so many in the middle class leaving California and you see higher end people leaving California, there’s some that are just so rich, they kind of don’t care. They’re just gonna willing to pay the premium to live in California. But the parallels are stunning between Michigan and California. And that has led me to coined that phrase, California is the new Michigan. Of course, it’s not the same. I may be overly dramatic. I’ll be the first to admit it. But it’s hard to deny that there’s some parallels and there’s some real truth to that. Right.
Karl Denninger 30:46
Yeah, thanks. So we just, you know, the, I guess we’ve picked up some other industries in California, but I know, due to the taxation, you know, that had a huge effect on on the movie industry. And that, you know, that’s a lot of studios would build stuff in Mexico, and they were going to Canada to shoot things. Florida is so expensive. California,
Jason Hartman 31:06
Dawson’s Creek in North Carolina,
Karl Denninger 31:08
even LA I mean, just the the business taxes in LA prompt a lot of people to move just outside of the city tax. Yeah.
Jason Hartman 31:13
Because just there’s just too many taxes. Hey, history has proven that wherever democrats go, Misery will soon follow. Sorry about that democrat friends, I apologize. Anyway, let’s listen to the rest of this. It’s almost over. Okay.
Karl Denninger 31:30
Thomas owns Detroit athletic company, and has been doing business in the city since age 11. When he started selling peanuts and packs outside of Tiger Stadium, even then, dealing with the city government was not easy.
Karl Denninger 31:45
They would look for violations. So it might be the fire department and they would come and they would say Hey, your setup too close to the fire hydrant. They would claim that there was some rule we were in violation. They would suggest to us that maybe we should give them a hat or give them something in return. And then that was kind of
Jason Hartman 31:58
how it would be glossed over a little crony capitalism as well. Yeah. Yeah, give us a had gone away. What a bunch of idiot government worker, you know, can you I this is just so distasteful. It’s like, it’s like doing business in a third world country. It’s just ridiculous.
Karl Denninger 32:16
I don’t know. It’s pretty dangerous. That guy was trying to set up a patio outside his restaurant.
Jason Hartman 32:21
Hey, I’ll tell you the same thing happened in Corona Del Mar when I lived in Newport Beach. Okay, there’s this little cafe in Corona Del Mar. I’m sure you’ve been to Michael because you live in Newport Beach, still for 60 more days. And it’s called roses bakery or roses donuts, I think. And it’s right there on Pacific Coast Highway. And there are so few places to eat. Because it’s so hard to open a restaurant. There’s so many regulations. And in Arizona, the restaurants open left and right. There’s lots of choices. There’s great places to go. But in California, it’s really hard. Well, roses, you go there on a Saturday or Sunday, even on a weekday. You can’t get a chair there, there’s no there’s so few places to eat. This is one of the few right, so you go to this little place. And it’s packed, there’s no chairs, and Sean the owner, who I personally know he’s been to some of our seminars. And you know, I don’t know if he ever got started in investing, or if he ever had the capital do but you know, he’s the owners really nice, conscientious guy. And he would constantly talk about how he’s fighting with the city to let him expand his patio by literally one parking space because the the patio is like right in the parking lot. And when you just let me go over one parking space, and they would come in and they would regulate the number of chairs, the number of tables that are kind of expanding into the parking lot. And finally he got some latitude. I noticed last couple times I was there in California and went to roses. He was able to expand his patio a little bit, but it’s still too crowded. You still can’t get a chair, you know,
Karl Denninger 33:51
I I on something like this in particular, though, like in areas like Corona Del Mar Manhattan Beach, I was just up in Manhattan Beach. This there are citizens that are contributing to this though, because I know their citizens that complain about parking. It’s the NIMBYs
Karl Denninger 34:08
Karl Denninger 34:08
trying Omar. And when I was in Manhattan Beach, I mean, I live on the Balboa peninsula parking, it’s horrendous. When I go to Manhattan Beach, it’s 1000 times harder and clearly, wealthy residents have added a hand in removing as many parking spaces as possible to keep people out of there. I don’t
Jason Hartman 34:24
doubt it look like Laguna Beach. Okay. Yeah, it’s the NIMBY syndrome. And I am not in my backyard. You know, everybody wants there to be enough prisons. Which that’s a whole nother discussion the highest incarceration rate in the civilized world the United States of all the prison industries gotten out of hand. That’s a business to unfortunately, but they all want all this stuff, right? They want to land filled with throw their trash but they don’t want to near them. Right. So Laguna Beach, they don’t want anybody coming in yet. They make a lot of money off that and the same, you’re you’re you’re absolutely Write that there’s no question. That’s true. But,
Karl Denninger 35:04
but we do know how it goes. Yeah, we
Jason Hartman 35:05
definitely know. NIMBY, not in my backyard. Just remember that one. Okay, final, final part of the video here,
Karl Denninger 35:12
you just learn to comply, I think it’s really a shameful thing that people who were entrusted with our would, would become that corrupt where they would even shake down a little
Karl Denninger 35:23
Karl Denninger 35:24
Representatives from the city of Detroit declined multiple requests to be interviewed for this video, how convenient government website says that we are sending a message that if you were doing business in the city, you need to follow the law. Imagine that
Karl Denninger 35:39
in light of bankruptcy, where businesses and people have fled the city and droves. They’re shutting down businesses that have succeeded, they may not have the requisite permits the city wants, but that hasn’t stopped patrons from patronizing them, and sharing their resources in exchange for whatever service the business is providing. That cries out for a different model. Once I paid for the compliance certificate, then I have to go to all these different electrical this set set up appointments. This person might say I’m Okay, the next one said,
Karl Denninger 36:12
Well, he should know Kate, you. I look at the bill, I have to pay it sometime. I just really and I have said it to him. Why don’t I just come to you? Because it seemed like what you want his money. And just give you one check. Luckily, I could afford Oh, by the by the person who just starting out, and the reputation that they give their cousins or relatives or friends who might think about doing it and they said, Hey, don’t they rock.
Jason Hartman 36:41
And then on the video, in the end, it says in less than nine months operation compliance has resulted in the closure of 383, quote, illegal businesses unquote, according to the city. Well, didn’t those champions and government do their thing? They shut down almost 400 businesses. Gosh, I wonder if Karl Marx would be probably proud of that. Those evil businesses those evil capitalist?
Karl Denninger 37:10
I don’t know. It still sounds like a good place to invest.
Jason Hartman 37:12
Yeah, yeah. It’s just run out and buy some more houses in Detroit. Why don’t we? Yeah. What a what a bunch of what a crock. Unbelievable. So there’s our opinion on Detroit. Enough of that. Hey, let’s talk about a real market a real place to invest. You got one more property, Michael?
Karl Denninger 37:29
Yep. Since we have the Austin tour coming up. We picked a home outside Austin. And it’s really a beautiful home.
Jason Hartman 37:36
That isn’t that as I’m looking at the picture now.
Karl Denninger 37:38
That’s a good looking house. Yeah. 20 260 square feet pretty big house for $136,861 per square foot seems like a great deal. It’s a wreck.
Jason Hartman 37:51
What are the projections say 1400 a
Karl Denninger 37:53
month in rent. And that is
Jason Hartman 37:56
cash flowing more than 1%. RV or rent to value ratio? Good.
Karl Denninger 38:00
Yeah. cash flowing about 20 $300 a year at 35%. financing. And total return on investment. 25%.
Jason Hartman 38:09
Wow, that’s fantastic. So, so cash flowing about 20 $400 a year on 48,000 49,000 cash invested. And the reason you’ve got more cash invested here is because you’re paying for your fixed up cost or rehab cost outside of your loan. So that reduces your cap rate and reduces your cash on cash return. But still, your overall return on investment is very good. And that’s a beautiful property and it rents for slightly over a 1% Rv ratio. less than the cost of construction for a home built in 2003 is pretty darn good. And only $61 per square foot. So awesome deal. And be sure to join us for our Austin property tour. It’s really your last chance the hotel just called me today. They called me this morning. First thing. I think it was McKenzie there at the Hyatt Regency in Austin who said, Jason, the room block ends today. We agreed it would end on the 17th. And we extended it for you once. But you’ve technically if someone registers we won’t deny them that room price so long as we’re not sold out. And I gotta tell you, folks, Austin in the fall is it’s it’s tough. I mean, the city is just books up the hotel prices are somewhat high. So I understand and you need to understand that too. But last chance pretty much to book for the Austin property tour. So go to Jason hartman.com click on events and do that and reserve your room immediately. And they’re still gonna let a couple people squeak by in that room block deal which which is a good deal saves you about 30 bucks a night. So Michael, thank you for joining me today and listening to these rants about getting ripped off investing in tax liens. Detroit is a disaster. Gosh, I hope people found some good stuff in here. But we’re gonna talk to Carl Dan injure the ticker guy here, and in about 30 seconds. So thanks, Michael. Thank you.
Karl Denninger 40:11
Jason provides an extremely unique service deal evaluator, are you interested in a property outside of our network? Need a second opinion, no problem, let our experts evaluate the deal. Find out more about it at Jason hartman.com.
Jason Hartman 40:29
It’s my pleasure to welcome Karl denninger. Back to the show. He is an American technology businessman, a finance blogger and political activist who is sometimes referred to as the founding member of the Tea Party movement. He also has a book out about leverage how cheap money will destroy the world. And I think that’ll be very interesting to talk to him about. And he was actually on my show on the creating wealth show. He was guest number 285, just several months ago. So let’s welcome him back. Carl, how are you? I’m doing fantastic. Thank you. Well, it’s good to have you tell us what concerns you most out there nowadays in the markets,
Karl Denninger 41:05
the the most concerning element of today’s marketplace is what’s going on in the emerging markets. And this, this has turned into a huge issue that not very many people are talking about. We’ve we’ve seen generally rising asset prices in the United States now for the last three, four years. And over the last six months are rising rather steeply. But if you look at, for example, India, their market is utterly collapsing their interest rate environment is going haywire, their stock market is crashing, no, it’s down some 12% over the last couple of weeks. And the stability of their of their credit markets is in severe question. This is being replicated to a greater or lesser degree, all throughout the emerging world at the present time. And then of course, you have the situation with the the peripheral countries in Europe, Greece, for example, which is not over, despite what people will tell you. I would agree with all of it. Yeah, and all of this is in an environment, which from a from a US market perspective looks very benign. Well, this is exactly the same sort of environment that we saw in, in the just before the Asian debt crisis broke out the 1990s. It’s it’s somewhat similar, although displaced geographically from the environment that we saw in 1987, before our market can apart 97 and fall. And it is there are some echoes of what we saw on the 2007 2008 timeframe, in terms of credit, overheat, but again, in the overseas environment, as opposed to here. And so what we are seeing is the rotational trade that that showed up in our markets, prior to each of those dislocations at the same time, we’re seeing the same kind of warning signals that because not happening here in the US, and people are ignoring them. And I think this is extremely dangerous.
Jason Hartman 42:54
So why are people ignoring them? I mean, this isn’t getting a lot of attention, is it?
Karl Denninger 42:58
No. And a lot of the reason for it, I believe is that you have you have a market that has become drunk on the Federal Reserve’s credit emissions, the the quantitative easing games, and what is what they call the Pall Mall with the permanent open market organization operations where they essentially flood the system with free cash on a daily basis, taking treasuries out of the marketplace. This is nothing other than playing wimpy with a hamburger, but on a grander scale. And so the liquidity goes to work somewhere and it seeks a return, as you know, anybody that has money always does. And lately it has been flooding in the stock market. So anytime that you’ve seen any sort of a sell off, get going, then income to people to buy this because you’re buying opportunity. Well, this is the same kind of thing that we saw in 2007 2007. You had Cramer on TV every night telling you about the Four Horsemen of the Apocalypse, that we’re going to save the world. They had, of course, that worked right up until it didn’t. But in 1999, we had the same thing. In the late 1990s and early 2000s. There were the 10 stocks in the new millennium that everybody was touting. And then of course, of those, I think there are three that are still in business. So this is the same kind of Nia that we’ve seen time and time again, it is the usual usual suspension of disbelief, if you will, idea that a company like Amazon can make a couple of cents a share and that sell for $290 you know, a crack. And that that, well, we don’t need to make a profit today. We’re investing for tomorrow. And someday we’ll get done doing this. And after we get done making these investments, and all of this money that we’re spending here will end up being returned in some form or fashion to shareholders. The problem is, is that you’re making the assumption that that day ever comes.
Jason Hartman 44:46
Yeah, well with some internet companies and big brands, they seem like they can keep kicking the can down the road for a long, long time. And the US keeps kicking the can down the road. We just print more fake money out of thin air and you don’t even have to Printed anymore it’s electronically created, which is even worse. And it’s some point. I mean, the chickens have to come home to roost, right?
Karl Denninger 45:09
Yes, they do. And, and the problem that most people have some trouble getting, although they see it in the daily lives, they just don’t connect it events together. And that is that the difficulty in making ends meet, and the pricing of things, the financialization of everything in your life gets to the point where you’re, you’re essentially charging groceries. And at that point, the end is near, because, of course, what do you charge after your grocery store? That’s the last thing that you know, that’s in your budget that that you could actually afford with cash. We don’t shop for the price of cars anymore, we shop up to 99 for the payment, right? That’s the what it costs money. Nobody talks about how much the car costs, we don’t talk about how much the house costs, it’s how much is the payment. We don’t talk about how much our cell phone costs, you know, your cell phone is 5060 $70 a month, $100 a month? Same thing with your cable television, how much is a month? How much is your what is the payment? It is not how much is it anymore, it is how much is the payment. And what this reflects is a 30 year long secular decline in the rate of interest, the cost of borrowing money. And so at the at the personal level, this is bad. But at the corporate government level, it is extremely destructive because corporations and governments as a general rule, never actually pay off their debts, they just roll them over. So from one one day to the next, we just roll over, you know, whatever comes due today, we just reissue tomorrow. And as long as the interest rate tomorrow, when we will let that over is lower than it is today. The illusion continues that we are spending last as a percentage of revenue in order to service this debt. The problem is the principal amount continues to increase. And so it as long as that trend is able to be maintained, everything’s fine use, you seem to be solid, you’re able to make your debt payments, and nobody seems to have any problems, then we get to the point that interest rates get to zero. And one of two things mathematically has to happen. Either rates have to flatline at a very low rate, at which point there is no more financialization, there’s no more turning of the crank that helps you or the more likely scenario is people perceive the credit risk now comes back into the game rates back up and go the other direction, the secular trend shifts from declining rates to rising rates. And now all of a sudden, everybody that’s out there and over levered and over the front of their skis goes under. If you look at a chart of long term interest rates tend to take a 10 year Treasury for example, or you can take the 30 year mortgage as if you want, it doesn’t matter, they look pretty much the same. And you graphed them out, you will find that every major dislocation that we’ve had in the market over the last 30 years 1987, the 90s Asian crisis, the the 1999 2000 crash in the NASDAQ the 2007 2008 blow up in our markets in the housing market, every one of those was preceded by a shift a cyclical shift in interest rates from lower to higher, you look at the tenure curve, you will see that that the tenure curve turned up in front of every one of those events. And the reason that that precipitated those crashes is that those people that had too much leverage on when the cost of rolling out debt refinancing went up, they couldn’t make the payments and they went out of business. Now what you have is a situation where the secular trend is going to be the opposite. It’s going to be rising rates with periodic times that you have cyclical downturns. Alright, so the problem here is that the in a secular upward moving environment, if you take on debt, you’re in trouble. The more debt you take on, the more trouble you’re in, instead of the other way around. So we’re going from a from a market and an economy, where financialization is profitable to one where it’s suicidal. And this is a shift that nobody is understanding, but it is going to come and sit you square between the eyes if you’re not prepared for it.
Jason Hartman 48:59
Okay, so let me ask you to just in a nutshell, explain how I mean, we’re talking about it a national level about the country about America or the US and how the this debt has to come home to roost because the for the consumer in the nation, when we roll that debt, as you talked about, it’s going to be more expensive. The next time around. Yeah. Am I summing that up
Karl Denninger 49:25
correctly? That’s exactly right. What what happens is that, let’s say for example, that today, you can go out and float a one year revenue bond for your schools, that 2% Okay. And that’s because today, the short term interest rates are very well and the risk of your school system not being able to pay because it doesn’t collect its taxes from your house, you know, from your property taxes is pretty low, and so that the interest rates pretty reasonable. Well, next year when you go to do this, there will probably be two and a half percent, then it’ll be three and it’ll be three and a half. There will be four and stuff going the other way. So what this means is that if you don’t actually pay it off, if what you try to do is just pay the interest, the carrying cost goes up instead of down. And what we have lived on for the last 30 years is the opposite, where you’ve always been able to roll the debt, and the carrying cost has always decreased. So you could take more debt on without actually increasing the number of dollars numerically that you had to lay out, that is no longer going to be the case. Right. So here’s an end.
Jason Hartman 50:28
sensibly, economically, mathematically, I couldn’t agree with you more, however, and this is what I want to run by you at the national level. Carl, does the US even have to play by those rules? I mean, it would seem that they do. But I have a bit of a theory as to why the US is almost immune to rationality, as a country,
Karl Denninger 50:52
no, the US can’t get away from this mechanic, any I mean, they certainly think they can. And for a period of time, it appears that you can do so. But that’s the same sort of situation that you’re that ally financial, formerly called gmec thought that they could get away with for a period of time as well to what Lehman Brothers thought they could get away with for a period of time. So what everybody thinks they can get away with for a period of time. And it appears to work for a while. But remember, what happened to Lehman Brothers? Lehman Brothers was running along just fine. Until one fine day about a month before they went out of business, actually, and this was this was in the Valukas report, it was in the formal friends like right up with the bankruptcy, very dry reading, but very well written by the way another gentleman who did it is someone that I am somewhat acquainted with it he’s extremely sharp layman went to Citibank to do a tri party repo transaction or absolutely ordinary overnight financing transaction. It took them some collateral said we want, you know, we want cash to just, you know, because they banks have a subtler concept with their customers, right? You know, somebody comes in, they want cash, this investment, they want to invest this there’s, there’s there’s always cash floating, floating back and forth between these firms. And Citibank took a look at their collateral. So that’s trash. What else do you have? And layman’s answer was nothing.
Jason Hartman 52:13
Fair enough. So everything you said is about functioning in a normal Well, not normal day, but a rational market where you have counterparties and regular motivations and so forth. So what I was getting the hang on for just a sec, let me just run this by Okay, you might, you might find this kind of interesting. So what I’m getting at is, is I completely agree, I mean, the US, you know, maybe not on the balance sheet, but certainly on the p&l is insolvent. Okay. I mean, this is absurdity and what we’ve had going on for the last couple of decades, and especially the last five years, I mean, it’s beyond absurd, okay, we are spending ourselves into oblivion. However, when you go beyond the economics of it, and you look at the the military, the position of the US in the world, the reserve currency status, which granted there are many countries that don’t think we deserve that anymore. And they are right. But the question is, will we ever give it up? I mean, look at at the end of the day, when push comes to shove, the guy with the biggest military, and the biggest economy, even if it’s built on a house of cards, is probably still gonna get their way. And that’s why I’m saying that this isn’t a This isn’t a real game. It’s a it’s again, there’s there’s more to it than just the the numbers.
Karl Denninger 53:36
Of course there is. But you need to, you know, at the end of the day, two plus two still equals four. And what we have in history is essentially a confidence game, just like all economies, and all currencies got to be built on confidence. Yeah, like the entire markets or stock market. All of this is built on a confidence game. Why did not the market crash? When the NASDAQ went dark? for three hours? The answer is because competence was not lost. There was a belief that the only you know that it was a technical glitch, and it was not the end of the world and things would be fine. And it turned out that this time, things were okay, as long as conferences maintained, everything’s okay. But we will around the edges of this every day that we continue this charade. Because we continue to drive up the cost of living for ordinary people the cost of going to college, the cost of going to see the doctor across the park and pound of steak. It’s absurd. And as we squeeze from the bottom, we eventually get to the point where the people at the top have higher and higher demands for tax rates. And the only alternative to jacking those taxes up, which eventually people will simply say, you know what, and this happened back in the 1970s. And, you know, in the 1960s and 50s. People got to the point where they got to that 90% cut off and they just said you know, I’m gonna go to the beach for the rest of the year, right? Yeah, okay, I’m not gonna I’m not gonna work and keep 10 cents of every dollar that I make. I’ve had enough I’m gonna go live the life of luxury You can go stick it, Uncle Sam. And that’s a perfectly logical thing to do people start to ask the question, how much is enough? Well, what happens as you start to shove that up is that your only two options are to cut it out. Stop that, or you continue to do. And as a result, the wedge teach being pushed further up the scale towards the wealthy. While at some point, you know, this is this is what caused the revolt in Egypt. This is why there were two essentially two revolutions in Egypt in the last three years. It was not, as is commonly perceived, because the people were upset with Hosni Mubarak, the piat. The reason people, right is because they were hungry. You saw a doubling of the cost of living over there in space. 18 months? Well, when you have nothing in your belly, it’s very easy to talk you into picking up a rifle. No question about it.
Jason Hartman 55:51
Yeah, I completely agree. Okay, so to keep food in the belly of US citizens, so they won’t rise up. And, you know, look at our government is very good at that. I mean, you know, we’ve got Obama phones we’ve got now we’re gonna have theoretically free health care, which is going to be incredibly expensive. If you want to make health care really expensive, just make it free. That’s always been my opinion. And that’ll obviously be a disaster. But politicians here are very good at pandering. I mean, they’re very good at doling out the goodies to keep the peace. And by the votes, you got to give them a lot of credit, unfortunately for that, right. Yeah, certainly. I mean, this is, but this has been the game for the last, you know, the last several years. And one of the first things that was done when Obama took office, was he essentially eliminated all means testing for food stamps. Okay, so all you have to do is just not making enough money, all of the rest of the things that used to go into getting a food stamp application went out the window. So now you have people like this guy that was on television a couple of weeks ago, that isn’t perfectly good condition. He can work if he wants to. But he stone California Clarke foods. Oh, yeah, that guy, I remember him on Fox, they did a great story about this, this guy who was feels completely entitled to just collecting food stamps, and sitting at the beach and picking up chicks all day and partying. And so just unbelievable. I mean, the abuses are just absurd. But that that means that it ultimately when more and more people tip to that side of the scale, then the production goes down, the innovation declines. At some point, everybody just says, hey, why not myself out? Right?
Karl Denninger 57:25
Well, you know, I mean, it’s what we have, what we have coming? And what people need to understand from a from a standpoint of how do they manage their own finances? How do you manage? If you run a business? How do you manage that? If you are in a management role, a larger company? What do you you know, how do you realign your thought processes, what people need to understand is that no one that is currently in the working population, if you’re younger than about 60, you have never known a time in your working life, as a professional, when you have not been in a declining rate environment and were cranking up leverage has at least been non destructive. And in most cases, it has been one of the ways that you’ve made money and have become wealthy. If you don’t stop doing that, before the worm turns on you. It’s going to destroy you. And it doesn’t matter whether you are an individual, whether you are a business or whether you are a government or whether you go to United States. And people are sitting here looking at this thing. Oh, no, no, that can’t happen. Or are you sure you would not only can it will?
Jason Hartman 58:26
Well, that’s the only thing I was saying. I believe it happens on an individual level and municipal level, even a state level. But at the federal level, I think they can just defy gravity for a darn long time they’ve been doing it. And I think they can just keep kicking that can down the road for a long, long time. You know, I don’t think it’s fair. I don’t think it’s right. But essentially, we’re outsourcing the problems to other countries. We get other countries to buy our debt, and we can keep kind of billing them around to buy it. As long as we have that military and as long as we have all that influence.
Karl Denninger 58:59
What are they gonna do? We had all our military in the 1970s, right? Oh,
Jason Hartman 59:03
yeah. But the 17 we
Karl Denninger 59:04
came up with remember, well, wait a minute. We couldn’t we came off Bretton Woods, right. Right. Right. No convertibility right. And things seem to be just fine for about four or five years
Jason Hartman 59:16
till 75 no big deal.
Karl Denninger 59:19
And then all hell broke loose.
Jason Hartman 59:20
Well, look who we had captaining the ship Right.
Karl Denninger 59:24
Well for those captaining the ship now. Well,
Jason Hartman 59:27
actually, you got me on that one girl.
Karl Denninger 59:31
By the way, how high did the 30 year treasury bond go? I don’t remember but it was bad. Well, he was he was the he was the you know there’s two sides of this. It is bad. Whether or not that was good or bad. Depends on one side of that. You are there were people predicting the end of the world, the United States hyperinflation and the end of America. When you know when Jimmy Carter was in office and all this was going on right? If you had the stones to buy 30 year treasury bonds in size at that time and simply sit on them. You have lived the last 30 years in a very comfortable place.
Jason Hartman 1:00:14
Yeah. It’s hard. It’s hard to argue with that. It’s hard to argue with that. So, so let me ask you, I mean, to sum this up, what is your prediction? I mean, what do you think will happen? Sort of, more specifically? I mean, you know, what can individuals expect?
Karl Denninger 1:00:28
Well, I expect individuals to find is that the, as the cost of borrowing goes up, and as the credit squeeze continues, you’re going to prepare taxes that you’re going to actually see the impact of what would if we were asked about it, we would call it deflation. The reason we won’t call it that is because we didn’t call the inflation inflation. We didn’t call the s&p 500, going from 150 to 1600. Inflation, we didn’t call the price of houses going from, you know, $30,000 to $300,000, the same house inflation. And so we won’t call a reversion to the mean, we call this appreciation. Yes, we did, didn’t we? Yes, so, so call it depreciation, if you prefer, because that’s what’s coming, the price earnings multiple or the ability to use financial beaten to expand earnings that aren’t really there will disappear. And the price of assets will come in line with the productive output of the economy, this will not happen overnight, they will not happen overnight. So this the cycle is one is looking at a you know, say a graph with the x and y axis right time on one side asset prices on another, it First we’ll see more inflation of those assets to the ultimate time when you got to pay the piper. And then we see deflation of those assets. Is that the correct way you’re looking at it not I would say that what we what we have is a secular shift from increasing multiples against production in the price of all assets to a decreasing multiple, that’s the secular trend. So we’ve had a secular trend over the last 30 years has been the opposite. There’s been an increasing multiple and all those things, we are now entering a secular decrease. However, this does not mean that it will be a straight line, that it will first off the the the exchange between those two states, it’s likely to be extremely volatile and dangerous for people in the capital markets for quite some period of time expect several years, but where you will still have people hanging on to the idea that the stock market is going to go the Dow is going to 36,000 or 40,000, okay. And and they will die very hard. And they will that they will be carried out on stretchers and shields, because they will not give this idea up until there they buy the last dip that does not come back, the same thing is going to happen to the price of other assets. But it’s not going to be a straight line, the same thing is true is going to it’s going to be true with bond yields and credit it’s not. But again, it’s not a straight line. So what what you have to look at as an individual is if you are over levered, now you want to get out of that situation, if you can, if you get trapped, you will probably get an opportunity. But the problem is that you don’t know how far the markets going to move before that counter cyclical before that cyclical counter trend in the secular change occurs. And whether you can stay solid long enough for that to happen. And to take advantage of and get out where your hide intact as an unknown. It’s what we have right now is a market that is extremely unstable. in all respects. We just had a housing number, a new home sales number that came out. That was absolutely terrible. Everybody was been running around for the last two months, telling us that the shift in interest rates, which has been small in percentage terms, okay, and in in percent of change terms has been very large. But in percentage terms has been very small. We’ve had everybody telling us that this is not a big deal is not going to hurt the home cycle is not going to hurt the housing market is it’s not a big deal. And then all of a sudden whammo Here comes a figure that is massively Off Plan.
Jason Hartman 1:04:07
So, give us a timeframe on this, if he could I totally understand it’s a prediction. Nobody really knows. I mean, my thesis is they can just kick the can down the road for another decade or two. But you don’t know, is as optimistic as I am. I mean, and I say optimistic with biting my tongue. I don’t think that’s optimism. I think it’s ridiculousness, I just think they can get away with it.
Karl Denninger 1:04:29
I don’t believe that we’re going to see a turn. And and my thesis a year ago said that this year, we will see something come out of either the emerging markets or Europe and I thought it was coming from Europe. I may actually be wrong about that. It may come from India. But it’s the same problem, okay. And it’s a global liquidity squeeze because of the interconnectivity, we will not be able to escape the the impact of it coming over here into the United States. And I expect that that we’re going to see the start of it, but the worst part of it the part that they’re really bytes into people’s backsides is not going to come for another year or two, maybe even a little more. But I do believe that the, you know, the the eye of the storm, if you will to center hurricane, as is pretty much, you know, we’re seeing that I was on the horizon coming from the other side.
Jason Hartman 1:05:16
This is a global issue. Obviously, it’s not just the US and believe it or not, I mean, I know we probably disagree on this a bit from our conversation here, but I think the US is in a pretty damn enviable position to tell you the truth is, as you know, not by the numbers, not by the ridiculous spending and the debt levels, but by the brand name the Brinks truck mentality, you know, we’ve always investors around the world have always looked at America as the Brinks truck safe place to keep your money safe place to keep your capital, your assets, rule of law, which of course the Constitution is getting trampled on left and right. I agree with the Tea Party on that for sure. biggest military etc. All the things I pointed out. So the question is the capital has inflows and outflows I mean, if Europe continues its collapse, which it most surely will I got back from Europe two weeks ago. And I gotta tell you, Spain is a disaster. Obviously Greece’s you’ve got Ireland and Portugal, in Italy, all they’re all messed up to and the more socialist better off seeming countries, they’re not so great, either. Okay. But you know, and then obviously, everything you said about India, but so will capital flow out of those places, because they are worse off than we are? And will, where will it go? I mean, I’ve got a friend who lives in China who thinks China is like the greatest thing he’s American. And like, I keep sending him articles about all the Chinese millionaires that want to move to America that want to move their money to America, they want to get their money out of China. It’s all it still seems all about the US. That’s where the capital flows. I mean, foreign direct investment here is it’s phenomenal. No,
Karl Denninger 1:06:55
no, you’re not for for, you know, for a period of time you’re spot on. Okay, we we have benefited tremendously over the last six months. From those capital flows there as the European situation the Chinese situation, you look at their PMI Oh, the production numbers and you know, all the economic indicators, they started to turn a little bit but the last six months have been absolutely awful. And and yet our markets have gone up. Well, their serve have softened. And in some cases, Europe’s have been just bizarre, but the emerging markets have been terrible. And look at then you go well, odd, you know, why is the doctor going up like this and pick up because the money comes over here. And it’s it’s the rotational trade, it’s the belief that we will be fine, even though they are hosed. The problem is, is that due to the interconnectivity of the banking system, especially in the derivatives, trade, that is not going to work out. And for that matter, when you look at the multinationals, you take a look at what Caterpillar is saying about the demand for their machinery outside the United States. I saw a report that I believe they said they were off 23% that’s a huge number. Okay. I mean,
Jason Hartman 1:08:04
so in other words, that’s, that’s a sign that there’s not that much building in other words, and infrastructure. Right. And, and while
Karl Denninger 1:08:12
the demands just not there, so I mean, this is, you know, this is the problem is that you have all of this financialization. And when you take on leverage, what you have to understand is just like putting a multiplier all leverage is a multiplier. It’s, it’s a lever. Okay. And so it magnifies gains, but it also magnifies losses,
Jason Hartman 1:08:30
it magnifies losses if you exist in the real world. And I just, I just think America doesn’t exist in the real world. I you know, listen, I think it’s ridiculous, it’s illogical. But I’ve mentioned all the reasons. So we shall see my friend. I mean, by all logical standards, you should be right. And I should be wrong. I just think that there are there are these other factors that I mentioned about the brand name, the reserve currency, the theoretical rule of law, still better than most places, or a lot of places at least, and the good, the good old military and the fact that we can just throw our weight around? It’s it’s not right. It’s kind of bullish. I mean, I, I disagree with it. I think it’s wrong on many levels, but
Karl Denninger 1:09:09
it’s the way it is, I think there’ll be you know, there’ll be plenty of that that will go on for a while, but, but the end result doesn’t change.
Jason Hartman 1:09:15
Yeah. And the question is, how long can it go on? At some point in the charade has to end you are 100% right about that. The only question is, who knows when, I mean, who the heck knows when, you know, we’ve been spending like drunken sailors since the 70s. In this country. And it’s, it’s just, it’s absurd. You met you mentioned something before we actually started recording that I’d like to just bring up again, about GDP numbers in the US and how they’re not adjusted for inflation. And, and in reality, it’s much worse than it looks, isn’t it?
Karl Denninger 1:09:50
Absolutely. The the reality if you graph this, I put this chart up every quarter when there’s when the feds z one and the GDP numbers come out because the Z one That canonical listing of all of the flows of funds, that the Federal Reserve monitors, they keep an enormous amount of data there, their data cycles all back to 1953. So it’s extremely complete, and allows you to look at the trend in things over very long periods of time, which is really nice. If you’re doing analysis that when you look at that you you put, you know, you plug all this stuff and drop it into Excel and start running some charts on it, what you find is that, from 1980, until 2008, there was not one three month period where our output or GDP increased faster than the debt in the system did. And in fact, at the height of the bubble, just before it blew up in 2007, we put $6 of credit in the system for every dollar output that we added. Now, when you think about that, that’s particularly insane, because what that is, is all over. And it’s in it’s all over us, because every dollar that you borrow, you spend on something immediately. So it’s counted in GDP. All right. So if I’m borrowing five more dollars that I am producing, then, in fact, what I’m doing is just rolling over old debt furiously to try to keep somebody from crawling along and going out of business. Oh, yeah. Yeah,
Jason Hartman 1:11:15
it’s hiding. Basically. No, it’s just it’s essentially check kiting, and on a grand scale. And yet, this is what we did for 30 years. And we never paid the bill. That way, no, nine, we got the bill, and boy did it stink. And now we’re back to doing it again. History repeats itself, my friend. It’s just mind boggling. It’s just mind boggling. Well, hey, Carl, very interesting and lively discussion. give out your websites, if you would, I mean, market ticker market, dash ticker.org, where you do a commentary on the capital markets, but tell people where they can get your book or any other resources you’d like to give out? Yeah, the books called leverage how cheap money will destroy the world of Amazon and all the other usual suspects have it, there’s a link to it at on my webpage on market hyphen, ticker.org. If you click the, it’ll take you over to the publishers page, and you can pick where you want to get it from.
Karl Denninger 1:12:08
It goes to all the common online places, so just not to be discriminatory before against one particular company. And and then there’s there’s going to be a new offering coming in the next few months. So if you keep your eye on the ticker, you’ll see the announcement on it.
Jason Hartman 1:12:24
Okay, you want to give us any clues, or you can’t just leave us with that. You got to give us a clue.
Karl Denninger 1:12:30
Something in the pipe. But unfortunately, it’s not announced yet. It won’t be for another couple of months. So there’s there’s some software and systems work that has to be done before it’s ready.
Jason Hartman 1:12:39
But it is related to analysis in the markets. Good stuff. Well, hey, Carl, thanks for joining us again today. We’d love to have you back on the show for a third time in the future. And call us anytime something comes up and maybe we ought to bet a 10 bucks and see which outcome well that 10 bucks won’t be worth anything by them. But
Karl Denninger 1:12:57
I think a stick there’s I mean, you know, steaks always gonna be a steak, right? Yeah, that’s true. That’s why
Jason Hartman 1:13:01
that’s why commodities and things that have real value other than, you know, other than currency. Let’s bet the steak dinner. Absolutely. And
Karl Denninger 1:13:09
I can always eat the steak.
Jason Hartman 1:13:10
Yeah. You’re absolutely right. All right. Well, Carl, thanks so much for joining us today. Thank you.
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