1569 FBF: Economic Trends & Income Property Investing with Karl Denninger Founder of ‘The Market Ticker’ Blog

If you don't have any investment, real estate investment, you will not have the opportunity to learn to make mistake, 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 multimillionaire 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.

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 Carl 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 in property tax liens, possibly getting ripped off, investing in tax liens, and I think, 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. I'm totally joking. And then we'll get to our guest here. So, Michael, welcome. How you doing?

Good. It's good to be back on the show.

Yeah, it's been a little while for you. You've been surfing a lot lately, haven't you?

Yeah, just enjoyed summer maybe a little too much and making the most out of my time in California. I may be heading to Texas in 60 days for a permanent move. So I got to enjoy the beach while I live a block away.

Good for on the verge of moving to Dallas, the big D. It looks like And I gotta 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 gotta 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 posted this.

Yeah, I commented on it.

Oh, you did? Okay.

The 11 billion in new taxes for California.

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, 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 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 I'll see you out there.

Yeah, I might see you there. So why did we bring that up about the Dallas thing, moving to. Oh, just because we Were just making small talk there. Yeah, well, hey, good for you. Yeah, good for you, good for you, good for you. So this first article that I shared and you agreed we should talk about it on the show, what do you think?

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 $197,000 Washington D.C. home he had paid full and paid in full 20 years ago because he had a property tax bill of $134.

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 that thing on Saturday Night Live many years ago, that guy used to say, baseball been Betty, Betty good to me. Well, real estate been 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 someone is out there, you know, like a homeowner's association or a tax collector, and these tax liens are sold at auction a lot of times, not in, they're 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's got a whole bunch of equity, if it's owned 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 always at risk, and that's the moral of this story.

But 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 were saying a high mortgage balance potentially lessens your chance of foreclosure.

I am absolutely saying that.

But I'm saying to 99% of people, if you go and ask them what's the highest potential risk of foreclosure, the only thing they're thinking about, I would say most of the time is going to be a high loan balance.

They're going to be running out to their friends and saying, I listened to, to this podcast with this guy, Jason Hartman, and he sounds like a quack. I am not a quack. I am an experienced. 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, 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 stuff stocks, you usually put 100% down. When you buy a mutual fund, you usually put 100% down. When you buy a bond, you usually put a hundred percent down. When you have a savings account in a 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 as little down as you possibly can. I know that this is counterintuitive. 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 and it was paid in full 20 years ago and he lost it over $134 tax bill. Not, not good. And, and it says this tax bill, Bernie Coleman or Benny Coleman was the guy's name. He said, let me see, what does it say here? Mom and pop investors. He said, okay, so 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 since 2005. In Bernie Coleman's case, his $134 tax bill grew into a $4,999 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 $44.79 debt. This is destroying lives. An urban real estate professor. Folks, tax liens, homeowners associations, these are your two biggest worries. When you have a lot of equity, 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 or 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 or 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 because I alluded to it, I want to just mention, and I'm going to have more to come on this in 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 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 Pip West, Platinum Properties. Platinum Investment Properties West, a rather similar name to my company's. 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 Pip West. And the guy I had on the show seems like a really nice guy. His name's Don Fulman and his partner Charles Sells, S E L L S. Well, Charles Sells lives back in like think Hilton Head, South Carolina area. And Don Fulman lives, I believe in Orange county in 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 this story, we're talking about that I should consider foreclosing on. But they told me I had to send them $1,750 per property to start the foreclosure. Well, I sent. They picked 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 feet a oversee the process was another $750 per property, which 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 of years ago, was I paid them. I paid them $7,500, 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 Fulman 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 check 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 questions. 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 lawyer talking to their lawyer, and it's a big convoluted mess. We'll see how it all that was.

Great overseeing that they provided.

Yeah, yeah, they really, you know, I just think these guys ripped 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 woe 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 opportun 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 see, just like this guy's $134,000 deal.

Well, $134.

Or, 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 balanced opinion here as a respectable news reporter that I am. But I. I think I got ripped off. I'm. I'm. I'm pretty sure I did. And we'll see. We'll see. In fact, Don Fulman, Charles Sells and Pip 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 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?

Maybe Coco ate the pigeon.

Yeah, yeah. You know, you could have found me on Facebook, Twitter, my own website. I got like 16 different websites. I mean, not a legitimate excuse in my opinion, but, hey, let's move on. Michael A Property. We got two properties we want to talk about. So give us the first one.

Little Rock, Arkansas, one of our newer markets that we've been working in. And I drove through real briefly.

Three weeks ago or so, I was driving. I drove a good portion of the country, saw through Memphis and drove through Little Rock and really liked what I saw. So this one is 1800 square feet.

Now, just out of curiosity, what were you doing on that trip when you drove through Little Rock in Memphis?

I was going from Virginia to Dallas with my little brother so that he could take his car back to SMU where he's going to school. So it's just nice to hang out with my brother. And, you know, it was 1300 miles, so it was good for him to have somebody to hang out with.

That's a long drive, but yeah, so you saw some of the places and good stuff. So tell us about this property.

So it's 1808 square feet in 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.

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. Yep.

So that's right about a 1% RV ratio. And that's cash flows.276amonth, which is. I like these numbers. On this property, total return on investment is projected at 33%. Fantastic.

Yeah, and that's with 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 self manage, you could save that maintenance percentage projected at 5%. So yeah, great. 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 in the. I don't want to say it's an everyday occurrence, but it's a few times a week occurrence where the local market specialist will upload properties to the website. They'll put in all the numbers they want and then we'll go and get back to them and say, no, no, no, no, no. We don't think this rent estimate of 1,200 per month is reasonable. We think you should lower to 1150 or whatever it is like that. And they'll have to like reduce the assumptions. So this is probably exactly what happened here. He typed the headline in at 11% cash on cash. But then when he changed the assumptions, probably at the request of one of our investment counselors, it got a little bit worse than that, right?

Yeah, it could be. This is a 75% loan to value ratio. So I bet if you bumped it to 80, it might get one more.

Point on the cash on cash.

On the cash on Cash. And then there may be some other number in there changed.

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.

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 5,000. People still think there's this great opportunity. I say at 5,000, it's probably worth 200, and if you pay 200 now, you're going to be sorry.

Yeah, and that's $200. In places.

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 they're, 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. And look, folks, I always reserve the right to change my mind, okay? Like if three years from now something changes, which with Detroit, I can't imagine it will, but maybe there's, 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.

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 year pro forma going to look like?

You got to have cash flow, folks. Look, 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 super cheap stocks thinking, well, they can only go up. And, 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, they don't perform. But it's like this mentality of the bargain hunter, the sort of the collector bargain hunter mentality. And 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 and 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? 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.

Yeah.

Does that mean.

What is Burke nowadays, by the way?

I don't know.

Let me pull it up.

Yeah, look it up while 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, most people think he's become a sellout to the establishment, and that's probably true. But. Yeah, I don't know. It's an interesting thing. So let's start playing this video. You look up shares of Burke, and remember, there's two classes of shares for Burke, so don't get confused.

1, $73,300 today.

Wow, that's pretty. I'm kind of surprised it's that high. Last time I checked, it was like, I don't know, in the 120s, I think.

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.

But, hey, if you buy one share. And now you could buy a house instead. But if you buy. 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 share is so they can go to that stupid meeting in Omaha.

315 shares traded hands today.

Yeah. Well, 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.

Operation Compliance has to be one of the most troubling things that I've ever heard of in the city.

The police officer they got riding with this compliance. They need to be out stopping people, just knocking people in the head, you know, I'm running a legit business.

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.

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 Bing announced a new regulatory crackdown on code violence violating businesses. A crackdown he expected to shut down 20 new small businesses a week. It's Operation Compliance.

What I think about Operation Compliance is I think that they could be doing something better. Cleaning up some of these vacant lots out here and cutting some of the grass throughout the city and boarding up some of these houses.

Clean up the streets.

You're taking our tax dollars.

Clean it up.

These two business owners have managed to keep their businesses open on Livernois Avenue, though many other businesses along the road have been targeted and shut down by Operation Compliance in the preceding months.

You know, when we call for their services, as far as someone breaks in, they never show up, but yet still they want to come and, you know, blackball you and close your business because you might be a little late paying fees or something like that. Unnecessary harassment from, you know, the city, complaining about our signs out in front.

Of the buildings and all this and.

That, but it ain't bothering people downtown with the money, but they mess up with the black communities and the poor people. It is hard to run a business in Detroit. It's taken me three years to get approval for an outside patio.

Larry Mongo runs Cafe Dimongo, a remarkably successful restaurant and bar in downtown Detroit.

You're truly trying to serve the public interest. You would simplify things, but simplifying things in Detroit means loss of jobs. So politicians rather try to tax me to death, charge me to death, to keep their votes and keep their relatives. And I'm going to say it like it is, keep certain 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 restaurateurs, 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, 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.

Sounds a lot like California.

Isn't this 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. And 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 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's 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 U.S. the population 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 willing to pay the premium to live in California. But the parallels are stunning between Michigan and California. And that has led me to coin 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?

Yeah, I think so. We just, you know, the. I guess we've picked up some other industries in California. But I know due to taxation, you know, that had a huge effect on, on the movie industry. And you know, that's a lot of studios would build stuff in Mexico and they were going To Canada to shoot things. Florida, Florida, just so expensive to shoot.

In California Creek in Carolina, even la.

I mean, just the business taxes in LA prompt a lot of people to move just outside of the city tax.

Yeah.

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?

Thomas owns Detroit Athletic Company and has been doing business in the city since age 11, when he started selling peanuts and hats outside of Tiger Stadium. Even then, dealing with the city government was not easy.

They would look for violations, so it might be the fire department. And they would come and they would say, hey, you're set up too close to the fire hydrant. They would claim that there was some rule we were in violation of. 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 how it would be glossed over.

Little crony capitalism there. Wow. Yeah. Little bribery. Yeah. Give us a hat and we'll go on our way. What a bunch of idiot government workers. You know, can you. This is just so distasteful. It's like. It's like doing business in a third world country. It's just ridiculous.

I don't know. It's pretty dangerous. That guy was trying to set up a patio outside his restaurant.

Well, 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 it, 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'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 to. But, you know, he's. The owner's 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 will 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 Rose's, 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 what, though.

On something like this in particular, though, like in areas like Coronado Mar, Manhattan Beach, I was just up in Manhattan Beach. There are citizens that are contributing to this, though, because I know there are citizens that complain about parking.

It's the NIMBY syndrome in crime Del Mar.

And when I was in Manhattan Beach, I mean, I live on the Balboa Peninsula, parking is horrendous. When I go to Manhattan beach, it's a thousand times harder. And clearly wealthy residents have had a hand in removing as many parking spaces as possible to keep people out of there.

I don't doubt it. Look, it's like Laguna beach, okay? It's the NIMBY syndrome. N I M B Y 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 too, unfortunately. But they all want all this stuff, right? They want a landfill to 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 right. That there's no question. That's true. But.

But we do know how it goes.

Yeah, we definitely know how it goes. Nimby. Not in my backyard. Just remember that one. Okay? Final, final part of the video here.

You just learn to comply. I think it's really a shameful thing that.

People who are entrusted with power would corrupt, would become that corrupt, where they, you know, would even shake down a little kid.

Representatives from the city of Detroit declined multiple requests to be interviewed for this video.

How convenient.

The government website says that we are sending a message that if you are doing business in the City, you need to follow the law.

Imagine that in light of bankruptcy, where businesses and people have fled the city in droves, they're shutting down businesses that have succeeded. They may not have the requisite permits that 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 pay for the compliance certificate, then I have to go to all these different electrical dissect, set up appointments. This person might say, I'm okay. The next one said, well, he shouldn't have okayed you. I look at the bill I have to pay sometimes I just really. And I have said it to him, why don't I just come to you? Because it seems like what you want is money and just give you one check. Luckily I could afford it. But what about 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 say, hey, don't they rob you?

And 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, according to the city. Well, didn't those champions in 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 capitalists. I don't know.

It still sounds like a good place to invest, Jason.

Yeah, yeah. Let'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?

Yep. Since we have the Austin tour coming up, we picked a home outside of Austin and it's really a beautiful home.

That is. That is. I'm looking at the picture now. That's a good looking house.

Yeah. 2,260 square feet. Pretty big house for $136,861 per square foot. Seems like a great deal. It's all brick.

What do the projections say?

1,400Amonth in rent. And that is cash flowing.

So slightly more than a 1% RV or rent to value ratio. Good.

Yep. Cash flowing about $2,300 a year at 75% financing and total return on investment 25%.

Wow, that's fantastic. So cash flowing about $2,400 a year on 48,000 49,000 invested. And the reason you've got more cash invested here is because you're paying for your fix 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 at 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, it 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 got to tell you folks, Austin in the fall is, it's, it's tough. I mean, the city is just, it 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 jasonartman.com click on events and do that and reserve your room immediately. And they're still going to 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 going to talk to Carl Denninger, the ticker guy here in about 30 seconds. So thanks, Michael.

Thank you.

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@jasonhartman.com.

It'S my pleasure to welcome Carl 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 285just several months ago. So let's welcome him back. Carl, how are you?

Oh, 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.

The most concerning element of today's marketplace is what's going on in the emerging markets. And this has turned into a huge issue that not very many people are talking about. We've seen generally rising asset prices in the United States now for the last three, four years. And over the last six months, they've been 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. It's down some 12% over the last couple of weeks. And the stability 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 peripheral countries in Europe up Greece, for example, which is not over, despite what people will tell you.

I would agree with that.

And all of this is in an environment which, from a US Market perspective, looks very benign. Well, this is exactly the same sort of environment that we saw.

Just before the Asian debt crisis broke out in the 1990s. It's somewhat similar, although displaced geographically from the environment that we saw in 1987, before our market came apart in 1987. And there are some echoes of what we saw in the 2007, 2008 time frame 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 showed up in our markets prior to each of those dislocations. At the same time, we're seeing the same kind of warning signals, but because they're not happening here in the US Some people are ignoring them. And I think this is extremely dangerous.

So why are people ignoring them? I mean, this isn't getting a lot of attention, is it?

No. And a lot of the reason for it, I believe, is that you have a market that has become drunk on the Federal Reserve's credit emissions, the quantitative easing games, and what they call the pomo, 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 the hamburger, but on a grander scale. And so the liquidity goes to work somewhere and it seeks a return, as 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 the people to buy this because it's a great buying opportunity. Well, this is the same kind of thing that we saw in 2007. In 2007 you had Kramer on TV every night telling you about the Four Horsemen of the apocalypse that were going to save the world. And of course that worked right up until it didn't.

In 1999. We had the same thing in the late 99 and early 2000. There were the 10 stocks in the new millennium that everybody was touting. And of course, of those, I think there are three that are still in business. So this is the same kind of mania that we've seen time and time again. It is.

The usual suspension of disbelief, if you will. The idea that a company like Amazon can make a couple of cents a share and sell for $290 a crack and 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 are spending here will end up being returned in some form or fashion to shareholders. The problem is that you're making the assumption that that day ever comes.

Yeah, well, with some Internet companies and big brands, they seem like they can keep kicking that 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 print it anymore. It's electronically created, which is even worse. And at some point, I mean, the chickens have to come home to roost, right?

Yes, they do. And the problem that most people have some trouble getting, although they see it in their daily lives, they just don't connect the 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 essentially charging your groceries. And at that point, the end is near because of course, what do you charge after your groceries? That's the last thing that's in your budget that you could actually afford with cash. We don't shop for the price of cars anymore. We shop 299 for the payment. Right? That's what it costs a month. 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 phone is 50, 60, $70 a month, $100 a month. Same thing with your cable television. How much is a month, how much, 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 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 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 roll that debt over is lower than it is today, the illusion continues that we are spending less as a percentage of revenue in order to service this debt. The problem is the principal amount continues to increase. And so as long as that trend is able to be maintained, everything's fine. You seem to be solvent, you're able to make your debt payments and nobody seems to have any problems. Then we get to the point, interest rates get to zero, and one or 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, take the 10 year treasury for example. Or you can take the 30 year mortgages if you want, it doesn't matter, they look pretty much the same. And you graph them out, you will find that every major dislocation that we've had in the market over the last 30 years, 1987, mid-90s, the Asian debt crisis, 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 10 year curve, you will see that the 10 year 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 that debt and 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 downtrends. So the problem here is that 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 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 hit you square between the eyes if you're not prepared for it.

Okay, so let me ask you to just in a nutshell, explain how, I mean, we're talking about, at a national level, about the country, about America or the US and how this debt has to come home to roost because for the consumer and the nation, when we roll that debt, as you talked about, it's going to be more expensive the next time around. Am I summing that up correctly?

That's exactly right. 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 at 2%. Okay? And that's because today the short term interest rates are very low. 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 the interest rate's pretty reasonable. Well, next year when you go to do this, there will probably be 2.5%, then it'll be 3, then it'll be 3.5, then it'll be 4 instead of 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. And.

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.

No, the US can't get away from this mechanic. 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 know, that Ally Financial, formerly called gmace, thought that they could get away with for a period of time as well. It's what Lehman Brothers thought they could get away with for a period of time. It's 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 Velucas report. It was in the formal forensic write up of the bankruptcy. Very dry reading but very well written by the way. And the gentleman who did it is someone that I am somewhat acquainted with and he's extremely sharp.

Lehman went to Citibank to do a tri party repo transaction or absolutely ordinary overnight financing transaction and took them some collateral and said we want cash to just, you know, because banks have to settle their accounts every night with their customers, right? You know, somebody comes in and they want to cash their investment, they want to invest this. There's always cash floating back and forth between these firms and Citibank look at their collateral and said that's trash. What else do you have? And Lehman's answer was nothing.

Fair enough. So everything you said is about functioning in a normal, well, not normal, but a rational market where you have counterparties and regular motivations and so forth. So what I was getting at and hang on for just a sec, let me just run this by you, okay? You might find this kind of interesting. Getting at is, I completely agree. I mean the U.S. you know, maybe not on the balance sheet, but certainly on the P and L is insolvent. Okay? I mean this is absurdity. 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 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, 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 real game. It's, again, there's more to it than just the numbers.

Well, of course there is, but you need to. At the end of the day, two plus two still equals four. And what we have in this tree is essentially a confidence game. Just like all economies and all currency.

Systems, they've got to be built on confidence.

Yeah, the entire markets are 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 confidence 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 confidence is maintained, everything's okay. But we whittle 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, the cost of. Cost of buying a 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% cutoff and they just said, you know, I'm going to go to the beach for the rest of the year.

Right?

Yeah, okay, I not going to work and keep 10 cents of every dollar that I make. I've had enough. I'm going to go live the life of luxury and 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 debeze. And as a result, the wedge teacher being pushed further up the scale towards the wealthy. Well, 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 reason people rioted 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. 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's very good at that. I mean, you know, we've got Obama phones, we've got. Now we're going to 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 buy the votes. You got to give them a lot of credit, unfortunately for that, right?

Oh, 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 stock stamps. Okay. So all you have to do is just not make 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 is in perfectly good condition. He can work if he wants to, but he's still in California and he collects food stamps.

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, 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 knock myself out? Right?

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, 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 where cranking up leverage has at least been not 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're the United States. And people are sitting here looking at this saying, oh no, no, that can't happen. Well, I assure you it not only can, it will.

Well, that's the only thing I was saying. I believe it happens on individual level, a 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 bullying them around to buy it. As long as we have that military and as long as we have all that influence, what are they going to do?

We had all that military in the 1970s, right?

Well, yeah, but the 70s we came up that, remember?

Well, wait a minute, we came off Bretton woods, right?

No convertibility. Right. And things seem to be just fine for about four or five years till.

75, no big deal.

And then all hell broke loose.

Well, look who we had captaining the ship, right?

Well, who's captain in the ship now?

Well, actually, you got me on that one, Carl.

Well, by the way, how high did the 30 year treasury bond go?

I don't remember, but it was bad.

Well, but here's the. You know, there's two sides. This it is. Whether or not that was good or bad depends on what side of that you are. There were people predicting the end of the world, the United States, hyperinflation and the end of America. When Jimmy Carter was in office and all this was going on. If you have 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.

It's hard to argue with that. It's hard to argue with that. 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, what can individuals expect?

Well, what I expect individuals to find is that as the cost of borrowing goes up and as the credit squeeze continues, the paradox is that you're going to actually see the impact of what if we were asked about it, we would call 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 for the same house inflation. And so we won't call the reversion to the.

We called it appreciation.

Yes, we did, didn't we? So call it depreciation, if you prefer, because that's what's coming. The price earnings multiple will come. The ability to use financial vision 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.

It will not happen overnight. So the cycle, if one is looking at, say, a graph with the X and Y axis right, time on one side, asset prices on another, at 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?

No, I would say that 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. There's been opposite. There's been an increasing multiple in all those things. We are now entering a secular decrease. However, this does not mean that it will be a straight line. First off, the exchange between those two states is likely to be extremely volatile and dangerous for people in the capital markets for quite a period of time, I expect several years, where you will still have people hanging on to the idea that the stock market is going, you know, the Dow is going to 36,000 or 40,000, okay, and they will die very hard. And they will be carried out on stretchers and shields because they will not give this idea up until 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. It's going to be true with bond yields and credit. It's not. But again, it's not a straight line. So what you have to look at as an individual is, 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 market's going to move before that countercyclical, before that cyclical counter trend in the secular change occurs. And whether you can stay solvent long enough for that to happen and to take advantage of it and get out with your hide intact is an unknown.

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 has been running around for the last two months telling us that the shift in interest rates, which has been small in percentage terms, okay, in percent of change terms has been very large. But in percentage terms it's been very small. We've had everybody telling us that this is not a big deal, it's not going to hurt the home cycle, it's not going to hurt the housing market, it's not a big deal. And then all of a sudden, wham o, here comes a figure that is massively off plan.

So give us a time frame on this if you 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 seem 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.

I don't. I believe that we're going to see a turn. And my thesis a year ago said that this year we would 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 impact of it coming over here into the United States. And I expect that we're going to see the start of it. But the worst part of it, the part that really bites 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 eye of the storm, if you will, the center of hurricane is pretty much, we're seeing that eye wall on the horizon.

Coming from the other side, 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's getting trampled on left and right. I'll agree with the Tea Party on that for sure. Biggest military, et cetera, 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 got to tell you, Spain is a disaster, obviously, Greece is. You've got Ireland and Portugal and Italy all, they're all messed up too. 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 where will it go? I mean, I've got a friend who lives in China who thinks China's like the greatest thing. He's American. And it's like I keep sending them articles about all the Chinese millionaires that want to move to America, that want to move their money to America, that want to get their money out of China. It's all, it still seems all about the U.S. that's where the capital flows. I mean foreign direct investment here is, it's phenomenal. No. Am I crazy?

No, you're not. For, you know, for a period of time. Your spot on. Okay. We have benefited tremendously over the last six months from those capital flows as the European situation, the Chinese situation, you look at their PMI or their production numbers and all of their economic indicators, they started to turn a little bit. But the last six months have been absolutely awful. And yet our markets have gone up while theirs have softened. And then in some cases the Euro, Europe's have been just bizarre. But the emerging markets have been terrible. If you look at it and you go, well why is the Dow keep going up? Why is the S and P. Because the money comes over here and it's the rotational trade it's the belief that we will be fine even though they are hosed. The problem 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 know, you take a look at what Caterpillar is saying about demand for their machinery outside the United States. I saw a report, I believe they said they were off 23%. That's a huge number.

Yeah, I agree.

Okay.

I mean, so in other words, that's a sign that there's not that much building, in other words, and infrastructure. Right.

And, well.

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 it's just like putting a multiplier. All leverages is a multiplier. It's a lever, okay? And so it magnifies gains, but it also magnifies losses.

It magnifies losses if you exist in the real world. And I just, I just think America doesn't exist in the real world. 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 old military and the fact that we can just throw our weight around, it's. It's not right. It's kind of bullyish. I mean, I disagree with it. I think it's wrong on many levels, but it's the way it is.

I think there'll be, you know, there'll be plenty of that, that'll go on for a while, but the end result doesn't change.

Yeah. And the question is, how long can it go on? At some point, 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 seventies in this country and 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, again about GDP numbers in the US and how they're not adjusted for inflation. And in reality, it's much worse than it looks. Isn't it?

Absolutely. The reality, if you graph this, I put this chart up every quarter when the fed z1 and the GDP numbers come out, because the z1 is the canonical listing of all of the flows of funds that the Federal Reserve monitors. They keep an enormous amount of data. Their data set goes all the way 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. But when you look at that, you plug all this stuff in, 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, our 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 of output that we added. Now when you think about that, that's particularly insane because what that is is all rollover. And the reason it's all rollover is because every dollar that you borrow, you spend on something immediately, so it gets counted in gp all right, so if I'm borrowing five more dollars than I am producing, then in, in fact what I'm doing is just rolling over old debt furiously to try to keep somebody from calling a loan and me going out of business.

Oh yeah, yeah, it's kiting, basically.

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. Then 0809 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-ticker.org where you do the 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 book's called Leverage How Cheap Money Will Destroy the World. Amazon and all the other usual suspension. There's a link to it on my webpage on market ticker.org if you click there, it'll take you over to the publisher's page and you can pick where you want to get it from. It goes to all the common online places not to be discriminatory for or against one particular company.

And then 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 an announcement on.

Okay, you want to give us any clue? Boy, you can't just leave us with that. You got to give us a clue.

I know something in the pipe, but unfortunately it's not announced yet. It won't be for another couple of months. There's some software and systems work that has to be done before it's ready, but it is related to analysis in the market.

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 bucks won't be worth anything by then.

Oh, I think a steak dinner is. I mean, you know, steak's always going to be a steak, right?

Yeah, that's true. That's why. 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 see, I can always eat the steak. Yeah. Fantastic. You're absolutely right. All right. Well, Carl, thanks so much for joining us today.

Thank you.

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