1289: GDP & Real Estate Investing

Once we did encounter some challenges because we are part of your network and because I have an investment counselor, I always felt like I had somewhere to go for an answer. I always felt like I had somebody with more experience than me that I could lean on. And if Sarah didn't know the answer, she got the answer.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Greetings from the Big Apple, New York City, and welcome to episode 1289. Adam is here with me today and we want to talk to you about recession and gross domestic product, otherwise known as gdp. You hear a lot about these things and we're going to take a little dive into an economics lesson today and what it means to to you as a real estate investor. And if you're a non real estate investor and you're obviously here because you're thinking about becoming one, well, what does this mean to you? Right? What does it mean and does this relate to us as real estate investors? Well, of course it does. It relates to us in a very, very big way and we'll see how that impacts on us. Adam, welcome back.

Thanks for having me. Gdp. Three little letters that make a big, big difference.

So I got to tell you what I did. I got up very early this morning, which isn't unusual. I always get up early. I'm an early riser. Early to bed, early to rise. Yeah.

You sent me a box at like 2:00 my time. That was ridiculous.

Well, 2:00 clock in the morning. Yes.

That's only because it said the time that you send it to me was like 2:30 and I replied it like 2:52aM so mine was delayed, people.

I was not awake at that time.

Well, look, the point is that old saying, early to bed, early to rise makes all of you listening, healthy, wealthy and wise. It's a good thing. I definitely like being an early bird. I'VE had times in my life. When I was younger, I was a night owl, but definitely like being an early bird, it's just better. You know, One of the things we want to do for our overall health and wellness and the feeling of having more time to accomplish our goals is to be in sync with nature as much as possible. And in being in sync with nature is being in sync with our circadian rhythm. And when the sun goes down, we want to be sleeping a few hours after that. Think of if we were primitive people living in caves, we would not be awake at night most of the times when it's dark, we'd be awake in the day. And other than general self protection and maybe having one person in our tribe on watch or a couple people on watch for predators, you want to be sleeping when it's dark and awake when it's light. So it's sort of like living on the farm. When the rooster crows, you want to be up. Then your body is in harmony with nature. But, Adam, I gotta tell you something. Enough about that. So I did something interesting today. After I landed at the airport here in New York City, I decided, well, I used an app called Rome to Rio, which is a cool app, by the way, listeners. I've been to 83 countries, some of those many, many times. So, you know, in terms of overall trips, I don't know, you know, hundreds probably. A friend of mine told me about this app a couple of years ago when we were in Eastern Europe, said, you ought to check out Rome to Rio. And it's an app that just tells you about the best transportation methods. And I wanted to just experiment a little bit. Usually in the States, I just take a ride, sharing ride everywhere. But I decided to take public transportation like a commoner. I just wanted to sort of, you know, experience it a little bit, right. And. And see how rundown and old New York City subways are. So I took the bus, the airport to the train station and got in a really interesting chat with this bus driver. We were just gabbing away, he and I. He was telling me that he's making good money for this job. He's been doing it a long time. He grew up here. He was talking about how the neighborhoods have changed. And you know, how. I think it was his grandmother, maybe, forgive me if I get that wrong, who bought a house in Queens and years ago for like $6,000 and sold it many years later for like $2 million. You know, decades and decades later, of course. Right. That wasn't just due to real Estate appreciation. It was due to gentrification and massive changes in New York City. A lot of it would be to the credit of Rudy Giuliani, the former mayor, who, by the way, is now Trump's attorney, interestingly. And he talked on and on about that and kept going on and on about how you can't afford anything here. How many of his bus driver friends have retired and left New York City and they've moved to places like Fort Worth, Texas and Louisville, Kentucky, and they're buying mansions there versus the little two bedroom flat that they had in New York City. You know, after becoming 60 years old or so, they're just getting out of this crazy market. We talked about how everybody was leaving California, everybody's leaving New York, while the New Yorkers are moving to Florida, all the Californians are moving to Arizona, Texas, Nevada. So it was just an interesting conversation, but the moral of the story is that the expensive cost of living and the high tax burden of any place does not really relate much to the quality of life. Thoughts on that?

Oh, based on what I saw in New York, I would agree.

And you know, that is unfair. That's a ripoff. Because you'd think if you pay a lot to live somewhere, you should be, you know, getting something for it, right? You'd get a better place to live. There's just this huge disconnect between the cost of living and the quality of life. In fact, it's really reverse of that many times. And one of the things I said is, yeah, but you know, in a place like New York City, if you're hiring for a business, you can get really smart people. And he said that was true. And this guy was a, he was a smart bus driver. He was no dummy. This guy was. I mean, I get that he works for the MTA and stuff. And you wouldn't necessarily think this guy's going to be, you know, some brilliant guy, but he really was very informed and he says his friends and the people he knows that owns businesses, it's just not true anymore. It used to be that you'd get these really bright people applying for jobs here, but they're leaving, you know, and so you see this brain drain moving out of these high cost of living places because they're getting smart, too. And all, you know, we talked about how all the Wall street zillionaires are moving. They, they live in Florida, technically, right?

Yeah. I think a lot of it is. It's not necessarily a brain drain. It's that the brains don't have to go there anymore because of all the technology. Why would you move a trading company to New York whenever you could run it from anywhere? Why would you move there? I mean, unless you're trying to become like a Broadway star or something, something like that. You don't have to move your brain to those places anymore.

Yeah, you can teleport your brain, right? Yeah, yeah, absolutely. So, reminds me of a really interesting thing. I remember back in the 80s, a big book that was quite well known, best selling book and book series really was Megatrends by John Nesbitt. And I always enjoyed reading Futurists. And I still love futurists. Right. And Alvin Toffler is another one. John Nesbit, back in the day. And I remember reading, I used to subscribe to John Nesbitt's writing really expensive newsletter. Well, I thought it was expensive back then. It was like $400 a year. I remember him talking about, he wrote the book megatrends and megatrends 2000 and all these different futurist books. And he talked about how you could now live in what he called a quality of life area or city or town because there was this great new technology. And guess what it was. He personally moved out of the big city. I can't remember which big city he was from, but he spent most of his career in the big city, the urban area, whatever it was, I forgive me, I don't remember which one. And he moved to Telluride, Colorado. Right. A beautiful sort of ski resort town. Expensive, beautiful ski resort town. And he said he was able to do that because of this big technology. You all sitting down? You ready? Federal Express.

Game changer.

That was the big game changer. Yeah, you said with Federal Express, I can live anywhere.

Oh, boy. I'm dating myself. Right? Yes, I've definitely been around a while, folks. Well, hey, before we get to our GDP and recession discussion and how it impacts real estate investors, some other good news. We just got it yesterday. The. I will say crooked. I think he's crooked. CEO of WeWork has stepped down. Yay. You know, I didn't share this a long time ago on the podcast, but Adam, you saw me post this in our Venture alliance content group, our private group. I posted a couple articles about how he was running this scam where he would lease office space. It really looked like a scam. Now, again, it's an alleged scam. Okay, I have to say that because he's not been convicted, but it's just my opinion that it's a scam. And the Wall Street Journal Seemed to think so, too. He was basically either leasing or buying properties. He was doing both, depending on the deal and then subleasing them to WeWork and make it out like abandon. And he wasn't disclosing that. Can you imagine the kind of sham and trickery? The reason I posted that article in our content group was because it harkens back to Commandment Number 3, Thou shalt maintain control. And what does that mean for WeWork investors, the venture capitalists, the angel investors. Now, they haven't done their IPO yet, but they will. And then it'll to the stock investors in the public market, right? The economy has been on a tear. It's been booming under Trump. Love him or hate him, Trump has been phenomenal for the economy. Just phenomenal, okay? I mean, unemployment is literally at a 50 year low. It's crazy. Certainly there are signs of problems and recessions and no question about it, but this economy has lasted a lot longer since Trump got elected. It's not a political thing, it's just a fact. Okay? But here's the thing. You stock market investors, you think, well, well, Jason, you're always bashing Wall street in the stock market, but it's been doing really well lately. And I agree with you, everything's been doing well lately. The whole economy has been on a tear. I mean, real estate has been incredible lately. No question about it. Incredible. But the question is, compared to what? You know, commandment number three still applies because you're not in control. And imagine how good it is for the insiders, all the profits, all the cream they are skimming off the top. Imagine what your returns would be as investors in stocks and mutual funds if the insiders weren't there taking all the profits off the top. The world may never know, as the old commercial said, the world may never know. Right? How many licks does it take to get to the center of a Tootsie Roll? Tootsie Pop. That's the commercial for you older folks. And the answer was, the world may never know because we don't know how much they're skimming off the top. Right? They're just given a good return to investors. But it could be phenomenal if they weren't there. Okay, you ready to dive into this GDP discussion?

Let's dive.

And this is another great CNBC explains video from their YouTube channel. Check it out on YouTube. I'm going to play this because it offers some good basics for our discussion today. So this starts out with the reporter in London buying a cup of coffee and Using that as an example for.

Gdp, how do you measure the size of an entire economy? Let's say I buy a coffee here in London for three pounds. Those three pounds are factored into the United Kingdom's gdp, and so is this barista salary and this espresso machine. In fact, most of what's around you is part of gdp.

What is gdp?

GDP is an important gauge of the overall health of an economy. It stands for gross Domestic product. Simply put, GDP measures the total value of all goods and services in a country. That means it measures a lot of stuff worth a lot of money. Here in the UK GDP is around $2.5 trillion per year. In the United States, the world's biggest economy, it's around $19 trillion every year. How do you get to these numbers? Well, you can calculate GDP in a few different ways, but the most commonly used equation goes like consumption plus investment plus government spending plus net exports equals gdp. Let's break that down. Consumption is another way of saying consumer spending. It's the money you or I spend on physical goods like coffee and on services like a haircut. In many developed economies like the UK or the US Consumer spending makes up more than half of a country's gdp. The second part of the GDP equation is investment. This measures how much business is spend on things like buildings, land, and equipment. It also includes a major consumer investment. Buying a home investment can take a hit when the economy is suffering. You can see in this chart, domestic business investment plummeted in the US during the financial crisis. That's because companies were trying to save money instead of putting it towards things like factories, machinery and equipment. Okay, now we get to government spending. This is the money local, state, and national government spend on things like roads, school, schools, and defense. Government spending varies a lot depending on each country's approach to public goods and services. Take for example, France, where government spending amounts to roughly 56% of GDP. That's compared to 41% in the UK and 38% in the US so the.

Bigger the government spending component, the worse the economy. Isn't that interesting. Imagine that. Adam, you'll probably disagree.

I do disagree, but.

Oh, come on. So you think that France with half its GDP being propelled by the government, and the U.K. with 41% being propelled by the Government, and the U.S. with a. Still way too high a number, but at least it's lower. You think that the government should hog that much of the economy rather than the private sector? Really? Come on. Socialist.

It's not socialist. I don't believe the government should control the means of production. What I think is due to the fact that we still have unemployment, I know you're going to say it's the lowest it's been in a really long time, but due to the fact that we still have unemployment, due to the fact that we still are not up to our 100% capacity, I think the government could spend more and we would still be fine and still not see much inflation.

I do believe that member Adam is a fan of mmt, modern monetary theory, which is a pipe dream, but we're going to talk about that some more. Make sure you listen to that interview with Mike Norman, folks. That was a.

And Randy Ray.

And Randy Ray, yeah, the Mike Norman one especially was pretty heated. He hung up on me. Only happened one other time in the last 15 years, but yeah, very interesting. Adam, though, wouldn't you concede that when you have unemployment at say, 3%, wouldn't you just call that full employment? I mean, some people just don't want to work.

Okay, going back to real quick MMT thing. Mmt, the main proponent is a jobs guarantee. And what that is is people who are currently unemployed can go to the federal government or go to their state government or local government and get a job and the federal government will pay their. Their wage. And that's going to be pretty much your federal minimum wage. And so all you have to do as a company to hire more workers is to pay the minimum wage or better and you'll get the person. And that way you get rid of unemployment and people who just don't want to work, fine, but you're not getting any money, so you eliminate all of your unemployment benefits and it just goes to a job.

Okay, so is that different from universal basic income?

Yes, it absolutely is. Because you have to work. Universal basic income is a joke. It should never be done.

Well, I'm surprised you say that because.

That'S literally something for nothing.

Right? Right. But there's some people making kind of a decent case for that. Of course, I had presidential candidate Andrew Yang on the show somewhat recently, and I think we reran that interview right around the first set of Democratic debates when he was up there on stage. We've had many presidential candidates on the show before, folks, and yeah, he's a big proponent of that. It's interesting as we look at the future of automation, but that's a huge tangent in and of itself, so we won't go there. But here's what's. You know, when we talk about GDP and we talk about the current account balance or really trade, International trade. And, you know, they would say that the US Has a current account deficit because we import more than we export. And this is, of course, a very long topic in and of itself, but just remember how this impacts housing, okay? As real estate investors, look at all of the stuff in the properties we own that is imported, all those doorknobs, those hinges, that drywall, A lot of it. You know, a lot of the lumber.

All the natural resources we. We don't have at the ready here in the United States.

Right. You know, the cabinets, the faucets. I mean, there's just so many things. It's incredible. And so we've done an episode on this before as we looked at the trade war and how that would impact construction costs. So there's some pretty significant impact issues here. I don't think we have time to talk about the trade stuff today, but what we really want to do is tie in the GDP discussion with the recession discussion. So let's keep going, Adam, because we're gonna. We're gonna run out of time here. Okay, here we go.

That brings us to the final part of the GDP calculation. Net exports or exports minus imports. A lot of countries have negative net exports, meaning they bring in more products than they send out. For example, the UK imports around $1 billion worth of coffee every year, but only exports around 315 million, meaning its net exports of coffee are negative. Countries around the world collect data on consumption, investment, government spending, and net exports. This makes GDP a universal measurement and a way for countries to stack up against one another. But it's not just the sum of the equation people look at. You'll often hear about the GDP growth rate or the percentage change in GDP over time. Generally, if an economy is healthy, GDP growth expands. If an economy is in bad shape, GDP growth contracts. Two consecutive quarters of negative GDP growth are referred to as a recession.

There you go. So that's important. Now, keep in mind, this relates back to the Phillips curve, which is inflation and employment, how they look at that. And it also relates back to the size of the population and the inflation rate and the gdp. So a lot of economists would say if the population is stable, it's not growing or shrinking, but inflation is. You know, let's say the official rate of inflation is just, for example, for round numbers, 5% and the GDP is only 3% of any given country, then you got a problem. Okay, that's bad, right? So you want these numbers to kind of track each other. And also, when I was in India several years ago. I remember reading a lot of the newspapers there, and they were talking about the Indian economy. Right. On that trip, I was listening to an audiobook called the Elephant and the Dragon. I can't remember the name of the author, and that may not be the exact title, but you get the idea. You know, the dragon is China, the elephant is India, and the. They were talking about these two economies and of course, the interplay with the US And Europe and the rest of the world and the way the supply chains work. And what's interesting is that you look at countries like India and China, and they've shown really high GDP rates of maybe 8%. Don't quote me on that, but somewhere around there at times, and you know, that's not that big a deal, they need those kind of growth rates with the sort of population they have and trying to lift those huge numbers of people out of poverty. I mean, those countries need to have just massive growth. The U.S. if it has a GDP of 3 or 4%, we think we're doing pretty good. Right? But it's a mature economy, and just like a mature industry or a mature business, you're never going to see those kind of huge growth rates. Right. In a startup business, you can see big giant growth rates, because when you have zero market share or you have, you know, 1% market share, doubling it to 2 is not that difficult. But when your market shares 50%, doubling it to 100 is extremely difficult. So the same for a company in a country. It's the same thing, Adam.

So first off, I'll tell people the book is by Robin Meredith. It's the Elephant and the Dragon, the Rise of India and China and what it means for all of us.

Thank you for looking that up. Yeah. Good job. Good job.

If we saw the United States growth rate at 6 to 10%, I would say we would need to check our numbers, because like you said, it's just our economy is so huge and we're using up so much of our people and our production that it would be sketchy, to say the least.

The numbers are all sketchy. We just have to assume that all of the numbers from all countries are all rigged, but at least they're all a rigged benchmark because they still relate to each other as a benchmark. So let's finish up this one, and then let's go to the next part and talk about recession.

But GDP doesn't always give a full picture of the economy. Critics say the equation puts too much weight on price production and Manufacturing and not enough on services and the digital economy. Just think of Spotify. For $10 a month you can listen to unlimited music from a huge range of artists. In the past, you'd have had to buy all of those albums separately with each one contributing to gdp. It's hard to factor a digital service like Spotify into the GDP equation.

Is that a product placement? You know, that's like, that's an ad. How much did Spotify pay for that? Why didn't they say? Just consider jasonhartman.com where people can buy income, property and they can invest nationwide.

I mean, it is a good, it is a good example though. It is a good example though. The fact that we haven't changed the equation for gdp. True forever. And the economy itself has changed drastically since then. And so, you know, why aren't we looking at a new way of calculating it?

No question about it. You know, technology changes everything all the time. And this is hedonically adjusted in the inflation mix, but not in the GDP mix. So that's, that's a very good point.

Which is used to measuring physical goods. GDP also doesn't measure economic equality and well being. So even if a country is really rich, according to gdp, wealth may be spread unevenly. Plus GDP excludes unpaid work like volunteering for charity or childcare. And it doesn't factor in costs like pollution or illegal activity. Some experts have come up with alternative measures to GDP that measure overall happiness and quality of life. But so far none of these have stuck. Maybe it's just too hard to put an economic value on that first sip of Morning Joe.

I do think one of the things she said that is very important in the fact that about the income distribution. And it's important whenever you're looking at the GDP of the United States to remember or to think about the fact that as GDP grows or shrinks, you need to couple that with something like wage growth because you have a whole lot of money coming in to the, as they say, as the democrats say, the 1%. And you can say whether or not that's a good thing. But the fact is the 1% do get a big, you know, growth in income. And so if the GDP is going up but wages are stagnant or declining, that's not going to be as good for the country on a whole as if the GDP is going up and you see wages rising with it.

Fair statement. No question about it. That income distribution issue is a very big one, especially nowadays where the rich are getting so much richer. But also it's fair to argue how that has all changed because of technology too. I mean, I could have never really imagined a day back in say the 90s when 12 year old kids would be walking around with twelve hundred dollar phones in their back pocket. And that's now a necessity. So even poor people have all of these tools.

Oh, I agree. I'm just saying that if you're looking at, if you're trying to gauge kind of how the middle class and the lower and you know, the bread and butter renters that we have and see, you know, how they can fare with a rent increase, say, and you look at the fact, if you say, oh well, the economy is growing at 3% so I can go up 3%, well maybe, maybe they'll be able to afford that. But if the economy's, you know, going up 3% but their wages are staying the same, then that wealth is most likely going solely to the rich and not coming down and being met by the middle class. So you want to kind of look at both things in order to figure out what our demographic can afford.

There's no question about that. And it reminds me of one of the recent episodes on our Alexa. If you haven't added the Jason Hartman Real Estate Update Alexa skill to your news briefing and your news flash that, you know, I mostly listen to it in the morning, but any time of day. And one of the recent little mini episodes was about the average pricing. And this is so true. When they talk about the housing market and what the median price is or the average price is nationwide, it's like saying, well, what's the average temperature in Miami and Anchorage, Alaska? Okay, it averages out at 45 degrees, but that means nothing. It's meaningless. You know, that number doesn't mean anything. If you look at 400 real estate markets around the country that are distinct. And so that's been the problem all along, you've got to be hyper localized. That really is analogous to the GDP thing that you're pointing out because it's local to the income of each household or each person. It's a per capita number and it's unevenly distributed. Just like real estate prices and the temperature in Anchorage, Alaska versus Miami, Florida.

And people, you can tell that Jason's really on the road because he just straight up said Alexa and nothing came on in the background.

That's true. Yes, I did, I did. And I, I felt like I could say it so freely because Jeff Bezos's cronies weren't eavesdropping on my conversation. But right Now Tim Cook's cronies are eavesdropping.

And the NSA is too. You know, nobody's talking about the NSA privacy invasion anymore, are they? Have we just all forgotten about that?

We've all just accepted it, I think.

Yeah. It's just life. It's just life. Okay, Adam, not tomorrow's episode. And not because it's a 10th episode tomorrow and we've got Flashback Friday and then Saturday, of course, we have our weekly guided visualization. By the way, we'd love some of your feedback on that. Should we continue with the guided visualizations? We are doing some that you need to really pay attention to listeners. And those are the compilation. And I believe we've got a compilation this Saturday. Do we, Adam? Do you know?

I don't believe so.

Okay.

I think we did the compilation a couple weeks ago.

Okay. Okay. Well, the compilation one is probably one of the most important ones. You need to do a little guided visualization meditation to. Do you want us to keep those going? What do you think of them? Any changes we should make? Any improvements? That's a very powerful tool. I know it's a bit New Agey. It's a bit New Agey, I get it. But it's a powerful tool. But on Monday's episode, let's go into recession. What is a recession? What does it mean to us as real estate investors, even though we've talked about this before, a few techniques in terms of how to deal with the recession. And we'll talk about that on Monday's episode as kind of a continuation of today's episode. That'll sort of be part two, because now you understand that a technical recession is two quarters in a row of declining gdp. That's what an economist would tell you, and you heard that today. But we'll dive into a deep look at what a recession is and how to deal with it. Sound good, Adam, for Monday?

Absolutely. I'm ready to talk.

All right, we'll do that. And tomorrow We've got a 10th episode coming up for you and I think you'll really enjoy it. So be sure you get your tickets for profits in Paradise. Go to jasonhartmanlive.com that is going to be a fantastic event and we will look forward to seeing you there at the end of October. Until tomorrow, happy investing.

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