1818 FBF: Macroeconomic Overview of China and Russia with Tom Essaye Editor of ‘The Stevens Report’

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Welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 406406. And our guest today will be Tom Essay. He's editor of the Stevens Report and he's got some very interesting thoughts on the market, the economy, junk bonds, and a warning of a US correction, Russia being an opportunity or a falling knife. Some interesting stuff. So I think you'll like that. But before we get to our guest, I have back on the show here my mother who happened to stop by on her way back from the Socialist Republic of California. As you know from prior episodes, my mother is an extreme do it yourselfer. Of course, you've heard of extreme sports. People surfing 100 foot waves and doing crazy stuff, you know, jumping out of space spacecraft basically, or weather balloons, I should say, from the stratosphere. Well, my mom's an extreme do it yourselfer and she's really excited today and I'm gonna bum her out. So, mom, why don't you tell everybody what you're excited about?

Well, I just got back from Los Angeles after having rented my first little house there for $4,000, which was $700 more than what I was getting the previous year.

So.

And I rented it in absolutely one day.

In one day. Okay, fantastic. That's an amazing story. Now, I would propose that the reason you rented it in just a day is because you got taken advantage of.

And here's why. That house in West Los Angeles that we actually used to live in, now you did tear it down and rebuild it a few years back. But that house is worth about $850,000. And you're excited because you rented it for $4,000. Right?

Right.

Because you had it rented for what, before? 3,300.

3,300.

You think you're up $700, and I think you're down $4,000 a month. Okay, do tell, do tell. Yeah, right, exactly. Well, you've heard me lecture you on this repeatedly, and that is the concept of the rent to value ratio. If you invested $800,000, or in that case, $850,000, the value of the house with my company, and you have invested with my company. No, you', learn, you know, I don't know. You just don't want to take advice from your kid, do you? Is that it?

It's always risky to do that.

What, to take advice from family members?

Yeah.

Okay. Don't loan money to a friend or a family member because then you will. You will be the person who's not in control of that transaction. But anyway. Okay, let's talk about this house for a second. So $850,000 worth of real estate should generate about $8,500 per month in income. Okay. About 1% of the value overall. And I don't know why it is, but you're just so maniacally focused on things. You always say to me, well, until I get my house finished, my big mansion and Gulf Shores finished, I can't, I don't want to think about selling properties or buying properties or anything. Right. You know, you have like a real one track, singular focus.

Yes, I do. I do have that.

That's good in a lot of ways, right?

Yeah, it's excellent.

Your tenant renting it for 4,000amonth. I mean, those are extremely high numbers and I don't like those high end rental properties like that. But you got an $850,000 house there. I want you to get $8,500 a month for that. You going to come around and listen to me eventually here?

Probably, but, you know, it was the first house I ever bought.

Yeah. Oh, so, yeah, that's true. That house. You bought that in 1976. You have an emotional attachment.

No, not really, but you know, it is. Well, you, you been able to refinance it and do other things. It's kind of a little security blanket.

Yeah, right, right, right. You rebuilt that house and you, you move back into it. And the reason you moved back into it. So we lived in it when I was a kid.

Right.

And then you move back into it to qualify to make it an investment property so that you would have had the opportunity to 1031 exchange, or not to 1031 exchange it, but to sell it and take the homeowners you exemption of the one time, $250,000. Or at that time it might have just been the rollover. The law changed, the tax law changed there. So I don't know what it was.

No, what happened is that the property had gained too much in value. If I had sold it, I would have had to have paid way too much in taxes as an owner occupant.

But you didn't sell it?

I didn't sell it. I turned it into a rental account. So now I can do 1031 exchanges on it.

Right, right. So you could 1031 exchange into several properties or an apartment building or something like that and get more than double your money per month. Like even if it didn't do that, well, even if you had terrible problems on all the properties you exchanged that for, you'd still, I'm sure, get at least $6,000 a month for $850,000 invested. You know, in like the worst case scenario, if you had vacancies, evictions, lower than expected rents, all of that stuff, you know, you'd still be a lot better off, I bet.

Except I'll be dealing with a lot more tenants.

Well, you would deal with more tenants, but if you have that in a apartment building, then you still have kind of a centralized situation. Even though it's more people spreading it around, you don't even have to go to that extreme. And investors, listeners, this is something for you to think about. High end properties never work well as rental properties. An $850,000 house makes an awful rental property investment. If you don't want to buy eight properties or 8.5 properties, if they're $100,000 each, you could buy four $200,000 properties and you could diversify and have those in different markets, you know, not have to come across the country as the extreme, do it yourself or to rent your house. I mean, that, that just cracks me up. I don't know anybody like you, but.

I do like to visit Los Angeles for shopping stuff.

Well, okay. You know, you could do shopping in Phoenix, where you are now with me.

Definitely.

Great shopping here, of course. Right. So that's one thing we wanted to talk about. The other thing we wanted to talk about a little bit is technology. I remember years ago, six years ago, in fact, it was I bought you an I yeah, and you never used it. And then I bought you a Kindle and you never used that. I decided I. You're the most anti technology person ever, and I'm not buying you any more tech items.

I prefer perfume and jewelry.

Oh, okay. Yes, yes. So perfume and jewelry is better than. Better than technical items. But you were really pleased at the technology on your little iPhone. Tell the listeners about that. You know, as the extreme do it yourselfer. Now, most of our clients, you know, they've got property managers. They don't manage their properties themselves. They never even talk to their tenants. But as the extreme do it yourselfer, you found it easier to run the credit report, right?

Yes. I had three tenants that all wanted that house.

Well, of course they did. It was only 4,000. It was a steal.

Well, actually, I was only charging 3,850 for it.

Yeah, it was. Oh, so you had a bidding war even?

No, I just decided that it should go for 4,000.

Okay.

All right.

So I told just one person I would rent it to them.

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.

Okay, and one thing I want to say, though, so know listeners, that that's less than a 5 RV ratio. I want you to get 1%. I didn't say that before, so I wanted to throw that in. Okay, go ahead.

I didn't have time to go and fax my applications for credit reports, so I took out my iPhone, I took a picture of each application and just emailed it to the credit reporting company. I was flabbergasted at how beautifully technology works.

It's pretty cool, isn't it? You took a screenshot and just emailed it and it was done. It's an amazing time to be alive. And the tools we have as real estate investors are awesome. All of the stuff that is going to shape our economy forever technologically is just mind boggling. Let me share with you something that is amazing. I read this article yesterday on Newser. It said you could someday get from China to San Francisco in 100 minutes. That's just over an hour and a half, right? Amazing, right? And I couldn't believe this, because what struck me about it is in the article was a picture of none other than a submarine. And I'm thinking submarines don't go very fast. But there is a technology called super cavitation. And listen to this, folks. This Is amazing. What they basically do is they have a submarine and they intentionally form an air bubble around the submarine. And they say this submarine would have a top speed. And they say that the Chinese government has perfected this technology. It's already used in torpedoes, by the way. Okay, this is already used, this air bubble technology. And this submarine could potentially reach a top speed of, get this, 3,600 miles per hour. Now I thought the fastest way to get anywhere was to go through the air, right? Not the water. The fastest submarines on earth now only go 46 miles per hour. So that's what our fastest nuclear submarines do. Torpedoes using this technology have hit 230 miles per hour. But they say they can get this thing up to 3,600 miles per hour. Now, on prior episodes, you've heard me talk a lot about the self driving car and the impact of the self driving car on real estate. And this submarine, Elon Musk, what does he call that? The hypertube or the hyperloop. Hyperloop technology, if that ever happens. Of course, in the Socialist Republic of California. You've got this totally stupid LA to San Francisco train that'll probably never actually get built.

The train to nowhere.

The train to nowhere. Yeah, you know, Jerry Brown, which takes.

Longer than going on a regular train.

Only the government could be this good at anything. Right? And I'm being sarcastic, of course. The government is terrible at most everything. The amazing thing here is think of the impact on real estate prices. If you want to visit San Francisco and you can do that from Shanghai, China in an hour and a half. What does that mean? Real estate has always been based on three things. Location, location, location. Right? I say the thing here with self driving cars and with high speed transportation technologies of whatever type, or unmanned technologies. Okay? Because either unmanned or high speed, it doesn't have to be fast, it can just be self driving. If you had a self driving motorhome, you could just jump in your motorhome and sleep and wake up and be in your destination. So that means that the value of very expensive real estate, I say will be diminished in years to come because people don't need to live in location, location, location. Now of course, when it comes to walking your specific number neighborhood, that matters because you know, people will still walk and want to be in a good neighborhood. But does it mean that you can be in a nice neighborhood of Phoenix like I am? Or do you have to be in a nice neighborhood in Manhattan, New York, vastly different prices, or Los Angeles vs. Phoenix or Dallas vs. Los Angeles? Or San Francisco, much cheaper to live in those places. And these are the kind of markets we recommend, the markets that are the lower priced markets where properties make sense. The day you buy them, they get 1% or even sometimes greater RV or rent to value ratios. In my mom's house example that we've been sort of joking and bickering about today, that would be $8,500 per month in income versus 4,000. Like if you look at Southern California where I grew up, okay. Where we both lived for many, many years. The thing was you'd always rather live in Orange county or Los Angeles than Riverside or San Bernardino, the Inland Empire, as it's called. Okay. That was always like, you know, the cheap seats at the concert.

Okay, exactly.

And people would commute because there's this old thing in real estate that people drive until they can qualify. That's kind of a funny saying, drive until you can qualify. And so people will make that long commute in order to be able to afford a home. With this new technology that we're on the verge of, we're probably going to see realistically flying cars. Those aren't too far away. People have been dreaming about that ever since the Jetsons. Okay. When I was a little kid and used to watch that cartoon, amazing stuff. There's a company called, I think it's Samson Motors and I'm on their email list and they have convertible light sport aircraft. It's very easy to get a license to fly this plane. And you land on the Runway and the wings fold in and you drive right off. So it's a car and a plane all in one price. Right now I think stands at around 150, $170,000. But you know, that'll come down. The light sport license for flying a plane, you can't drive it, you can't fly at night and you can't fly in bad weather. But that's fine, you know, you can just land and drive. If nightfall comes upon you, there's really some amazing stuff. The most realistic though of all these things and the most amazing thing and the most impactful thing I think will just generally be the self driving car that might go as fast as 80, 90 miles an hour. It'll take you from one place to the other even at current speeds without you driving it. If you go online and you look for the Hyundai Genesis, the 2015 model, there is an amazing video where they demonstrate this car's self driving capabilities. And here's what they do. This video will blow your mind. It Shows you that a $50,000 car, nothing experimental, nothing at Google's labs, nothing that costs $200,000. A 5, $50,000 car today almost drives itself. Here's how it works. Basically what they do in this video is they all start driving maybe six cars in a convoy. And they're, they're just right behind each other on the road and a truck comes along and all of the drivers jump out of the car. They jump out of the car. They jump out of the sunroof into the truck that's near them and they jump over at 60 miles an hour. They jump onto this truck. You know, you've seen this stuff in the movies, folks. It can be done. And they leave the car on cruise control. And then there' truck in the very front of all the cars in this convoy. And the truck. Now the cars have no drivers. Okay? The truck makes a sudden stop. Oh, and by the way, before the sudden stop, there's turns in the road and the cars all perfectly stay in their lane. I mean, mom, this would be good for you because, you know, many times I've called you like the world's worst driver. Right?

I do need one of those cars.

Yeah. So you admit it?

Of course.

You. Oh, you admit that you're.

I wouldn't have any more bumps in my car backing up.

Okay. Anyway, they jump out of the car and the car stays in its lane and the truck in front slams on its brakes and all the cars stop beautifully. With no drivers, there's nobody in the cars. It's amazing. This is here. Now, this is not some pipe dream. And Elon Musk, the founder of Tesla Motors, he said by next year, one year away, and he said this a few months ago, we will have. And when I tell you, when Elon Musk says something, it happens in reality. I mean, the guy is an amazing CEO, although I do think his Tesla car is pretty overpriced. But he says within one year we will have a self driving car affordable for the highway. For highway driving. You're driving from Phoenix to Orange County. That's highway driving. And the vast majority.

I could be reading. I could be doing all sorts of things.

You could be, you could be reading, you could be taking a nap. You know, I'm sure they're going to make laws against that, of course, but ultimately, once the technology is proven, and it's pretty proven already, but once it's proven widely.

Can't wait for something like that.

It's phenomenal, folks. It is an incredible time to be alive. That's the bottom line. And this technology is going to shape the way we invest, the way we think about investing. It's going to shape the economy dramatically. It is largely a deflationary force. And that's what also makes me think the government is doing everything they can to screw everything up. That's what I generally think. However, maybe they're right. Maybe Keynesian economics, maybe obamianism, as I call it, and many people do, maybe it'll actually be okay. Because maybe what will happen is technology will literally rescue us all. And this massive government spending and these deficits and these entitlements that are coming due and all of these obligations that would in the past have caused massive inflation. I mean, right now we should be extremely. Experiencing massive inflation. Maybe all these things really will be muted dramatically by technology. Check this out. I recorded an interview today for another show of mine. The guy was talking about these things. They're called bio blocks. And there is a Kickstarter project now, Kickstarter, the crowdfunding website where you can donate 40 bucks to back these people's campaign on kickstarter, and they will send you a new life form that they created in their garage. A new life form. And new life forms are being created all the time now. It's. It's kind of scary. It's like, you know, maybe Frankenstein, right? And the guest said he talked with a major authority figure at the FBI, and, you know, they said, what are you doing to regulate this stuff? And he said, nothing. It's just. There's nothing to regulate it. So someone could invent Frankenstein. What's happening here is what they call the democratization of science. We've already seen the democratization of publishing. I'm doing it right now. You know, no one had to tell me I could make a show. No one had to hire me at a radio station. I just created a show. And by the way, I go off on tangents. You know, I tend to do this. And by the way, I want to thank all of you listeners very, very much, because just yesterday I found out that my show, the creating wealth show, is now the number two real estate show in the entire world according to itunes rankings. Now, Jason, that's terrific.

Yeah.

Isn't that great news? Now, itunes isn't the whole world. Of course, you know, people can listen to to podcasts without itunes, right? It's about 70%. It's probably a pretty good bet. As the itunes ranking goes, so goes everything else. And my show's now number two. There's only one Other that beats me. And I'm not going to tell you who it is. And that show sucks. So don't listen to it.

Tell me off the air.

Okay, I'll tell you off the air. You know, all my listeners will be curious and they'll go figure it out. So Bioblocks and Kickstarter, for $40, they will send you a life form they created and check out what it is. It's weeds. It's a weed that glows in the dark. Really, It's a plant. And they created this in their garage. And they're looking for funding for more research on Kickstarter. So we have the democratization of raising capital, we have the democratization of publishing, we have the democratization of science. Okay, which means food, maybe from the plant. Maybe, yeah, maybe something great will come out of this. You can buy these bioblocks and Bioblocks are like Legos that basically put life forms together. And so people are experimenting and creating all these different life forms all the time. It is an amazing time to be alive. There are gamification websites that have gamified the concept of gene sequencing for the human genome. All kinds of science and discoveries will come out of this. And, you know, these are deflationary forces. They make life better and they ultimately end up being fairly inexpensive. And so it is an amazing time to be alive. If technology doesn't rescue us before the chickens come home to roost on the terrible math and the budget deficits and the spending and the bad economic and monetary policy, well, then we'll have inflation and your income properties will hit a home run for you.

Inflation wise, they are the best hedge against inflation.

No question about it. Nothing else beats it. If that doesn't happen, if we don't have massive inflation and things just kind of go the status quo stagnation example, you're going to do pretty well. And even if we have deflation, you're going to outdo pretty much anything else you can do. And I've given that example on prior episodes. I don't have time to go through it now. This little intro for Tom essay is running kind of long, but Mom, I had one more question for you and I just want to you you to share with your listeners. Why income property? Why did you become interested in buying real estate? You were a single mom. You didn't have a lot of money. You were bumping your head up against the glass ceiling, which really in those days was there. I, I don't think it's there that much anymore. But please. Female Listeners don't send me a bunch of hate mail. You know, I think the world's pretty open and equal nowadays, but back then, you know, there really was a glass ceiling. Oh yeah, no question. So just tell them quickly about that and then we'll get to our guest.

I was associating because of the job I had with a charity, with people who had a lot more money than I had. And I was constantly thinking about how could I make some money. And I knew I wouldn't make it being an employee.

You worked for Muscular Dystrophy association and then you worked for the Leukemia Society and ultimately became the executive director of the Leukemia Society LA chapter. That's kind of a big deal. And, well, and you're smirking at me. It's not a big deal. You're saying you were meeting wealthy donors and board members and they were investing in real estate. Right.

A lot of them had made their wealth by investing in real estate. I was always reading in the newspaper for lectures and seminars about how to do things, how to learn things. And one of the seminars I went to was entitled do you really want to be rich? And it was the two series seminar. The object was to turn $1 into $2, literally. But the person who gave the seminar became rich by investing in real estate. And the simplest way that think about investing in real estate was to buy a house as the first step and then to just keep buying little houses because I knew I could manage those.

That's easy to do.

So anyone can really do it. The thing that is just get started, just do it.

As the Nike saying goes, it's amazing. Like all these people that invest in stocks and, you know, Wall street type traded assets and so forth. Like I never hear the story. The person who started with $10,000 and created a whole bunch of wealth from the stock market or from mutual funds or from bonds or anything else. I've heard that story a zillion times with real estate with income property. Isn't it amazing to you?

Real estate is a lot of common sense. To be very good in the stock.

Market, you got to be an insider.

You have to be kind of an insider. You have to take a lot of specialized classes to be a trader. No matter how good you are, you still could lose it all in a great big crash. But in real estate, that little house will still be standing there.

That's the great thing about it.

It might be worth a little less, but it is still there and it is still a real asset.

The investment we recommend starts with the Word real.

Exactly.

Need I say more? Okay, mom, thanks for joining me today and letting me tease you about fact that you're getting cheated out of $4,000 a month by that tenant.

Well, you should just congratulate me because I'm making $700 more this year than I did last.

See? Always looking at the bright side. That's awesome. Let's get to our guest, Tom Essay. We'll be back with him in just a second.

It's my pleasure to welcome Tom Essay to the show. He is editor of the Stevens Report and has some interesting ideas and thoughts on the stock markets and the junk bond market and interest rates and Fed policy. We will talk about that. Tom, welcome. How are you?

I'm doing well. Thank you very much for having me on.

Pleasure is all mine. You're coming to us from New York City, I believe.

Coming to you from sunny Florida.

Oh, sunny Florida. You said you were on east coast time and I just assumed you were a Wall street guy, so.

I used to be in a former life, yeah. But I've come south now for about 10 years.

Are you a recovering Wall street guy then? Is that a fair way to put it?

I am, yep.

Yeah.

I used to work on the floor of the New York Stock Exchange.

Fantastic.

Right there in the heart of it.

Good stuff. In the belly of the beast. You were talking to me before we started about what's going on with the market in general. And I don't want to make this too timely because the show's kind of evergreen, but in terms of right now you're saying people should watch the junk bond market because that is a good indicator, right?

It's interesting, sort of. With the proliferation of ETFs now, individual investors can pay attention to a lot of things that previously they would have needed a Bloomberg terminal to use. And there's an etf, jnk, and basically that's an ETF that monitors an index of junk bonds. Junk bonds basically predicted the current correction that we're seeing in markets, and it predicted it by about a month. JNK topped out about a month before the S&P 500 did. That by itself is not particularly exciting, but if you consider the fact that the market is now concerned that the Fed may be starting to switch policy, that it's going to go from what we've all become very used to, which is 0% interest rates and round after round of QE, it's fine. Going to end that. And that decision or the anticipation of that decision is going to cause reverberations in parts of the bond market, junk bonds first. And that's why it's very important to watch them as a leading indicator for stocks going forward.

So basically here the Fed must be really seeing an inflation threat then, finally, right?

I think that they're starting to. Yes. I'm of the opinion that inflation is a lot greater than what the Fed or the economic data says it is.

Couldn't agree more, by the way. I couldn't agree more.

Anybody who's living in the real world, who has to go buy groceries and go buy gas and go buy health care, which are things that we all cannot do without, realizes that the inflation rate is a lot more than 2% year over year. But nonetheless, we have to deal with the statistics at hand. But I do think that the government, the Fed specifically, I believe, is starting to address the fact that they have been too easy for too long twice now in the last 15 years, and that has ended up causing significant problems in the economy and in the banking system, each one larger than the last. And even though they may not see a significant uptick in inflation statistically yet, at this point, the marginal benefit of additional QE versus the marginal damage you're probably going to cause is switched and it's time for them to start dialing back. The Fed is always slow to do that, but I think they're starting to realize that they have to explain the.

Mechanism on the junk bonds though, for a moment. I don't want to just gloss over that. You talked about how the junk bond market started experiencing trouble or sensitivity to the Fed's tightening threat early. Now, why, why do the junk bonds feel that first?

That's an excellent question. And the reason is because an offshoot of Fed policy. Okay, which of zero interest rates for five plus years and round after round after round of QE has been that investors have reached for yield because normal debt instruments now pay nothing, courtesy of the Fed. Investment managers still have to enact, still have to get a return, right? So basically what it's forced them to do is to pile into higher yielding assets, somewhat ignoring the inherent risk in those higher yielding assets, just because they need to get that yield. I'm not making a direct analogy here, but to liken the piling into the junk bond market to what we saw in the subprime market is not completely off base. Now, I'm not saying it's going to be the same thing and we're going to see a redo of the housing crisis, but the reason that the junk bond market is going to be the first to feel the disruption from the Fed starting to potentially tighten policy is because it's become the most distorted. So if you think about the subprime housing market, right, what did investors do? They piled into it because A, subprime debt paid a higher interest rate than normal debt. And it did that, of course, because it was riskier and B, it was most leveraged to a rising housing market. Similarly, junk bonds pay the highest yield of any major bonds because they have more risk and they are more leveraged to a rising bond market. So to a point, we're seeing a repeat of the same effect we saw in subprime housing. Again, I don't want to scare people. I don't want to say, hey, this is the same thing, because it's not. The behavior, though, by investors is similar. The first to feel the effects of the housing market starting to go down. Junk bonds will be the first to feel the effect of market going down. And that's why we need to watch them. It's because they're like a warning light.

They're the early indicator. They get hit first. Okay, very interesting, very interesting point. You and I agree, thankfully, that inflation is a lot higher than they'd lead us to believe. But with that, what's interesting is something you said to me before we started. We talked for just a couple of minutes. You thought that the recovery, the economic recovery, and I'm kind of putting that in quotes, that word recovery.

Which is fair enough, sarcastic quotes, you think it's. That's pretty real. It sounds like I do.

The term that we've been working on for a while here at our firm is escape velocity. Does the economy finally have the momentum to break out of this 1 to 2% annual GDP growth malaise that we have been in since 2008? I believe that finally, after five plus years of low interest rates, after round after round after round of applause, QE and a recovery, at least in nominal prices in the housing market, that finally we are starting to see that recovery hit escape velocity. Now, does that mean that I think good times are here again and we're back to the 90s where the economy is roaring? Certainly not. But I do think compared to the pace of growth over the last several years, we are seeing a definitive uptick. And I have both economic data and anecdotal evidence to tell me that I live in South Florida, which as we all know, was one of the hardest hit areas economically out of the housing boom. Tell you that for four years I didn't see an earth Mover working in the area I'm in. And now stuff is going up again like you would not believe. You know, we're trying to hire here. At my research firm. When I was hiring three years ago, I had a mountain of qualified resumes for, you know, an entry level position. Now I'm having trouble filling that position. So that anecdotally tells me that things have gotten better.

That's interesting. But, you know, that could be based on geography or, you know, certainly maybe a lot of people. You know, I don't know. There's a lot of factors there. But it's anecdotal.

There are a lot of factors.

Yeah.

Okay, it's anecdotal. And again, do I think the economy is roaring? No, I don't. But do I think that the pace is a little bit better than what we've seen over the past couple of years? I think that's probably fair. Now, is it sustainable? We don't know.

I agree with you that it is better than it was. But in overall terms, I mean, if you believe inflation is understated, as do I, then if you look at gdp, which is, is probably overstated, I mean, we can there, you know, there's lots of people that'll pull that one apart too. If you look at gdp, if you look at stated inflation and you look at population growth, the country is shrinking, the economy is shrinking. I mean, there's no question about it in my mind.

I agree. I mean, so let's differentiate for a second sort of the economic data and the general state of the economy on an absolute basis versus, and this is something that I try and talk to people a lot about, the economy is by itself just sort of this esoteric thing. You can make economic growth numbers go up or down relatively easy, depending on what you're doing with monetary policy. What we need to worry about is, is the economy starting to make people's lives better? Are we making more money? Are the things we have to buy costing less? Are we getting a benefit from an economic increase? I believe the answer is no over the last five years, because what you've seen is wages stagnant, the job market mostly stagnant, although we've seen a little bit of an uptick recently, but it's still not very good. And the cost of everything we have to buy going up consistently. So if you ask me, is the quality of life of the American person better now than it was five years ago or better now than it was two years ago, my answer would be no. And whether or not the economy is accelerating or not. That by itself is only one piece of the puzzle because you're absolutely right. If the economy is accelerating but inflation is accelerating with it at a faster pace, then it doesn't really matter. You're not getting the benefit to you as a person.

It just really worries me because I sort of see it anecdotally in my own life, but then I kind of don't see it. It seems like most of my friends are doing fairly well, but it feels like, or I just keep reading about this underclass is just growing and growing. Obviously we've got Obama ism in full swing and you know, the food stamp president and so on and so forth. All the things that the people on the right say, which are hard to argue with, frankly. Agreed. We don't need to make it a political discussion necessarily. But feel free if you want to take my lead.

I agree with you. I will tell you, listen, it's my opinion. But I believe that one of the main reasons the Fed has stayed as easy as they have been and has done round after round after round of QE is because of the government and the administration, because we came out of a once in a century crisis or twice in a century crisis. And the one thing that you, the cardinal rule of coming out of something like that is you don't make any major changes, right. And you let the economy kind of get under its own two feet again and then you can start making structural changes to things. And what did we do? We did the exact opposite through policy, Dodd Frank, the health care law, multiple other changes. It froze business. It froze business and it froze decision makers. And I believe that history will look back and it will see the Fed's reaction to that as basically saying, well, the fiscal side of Washington is now an anchor on the economy because they are injecting all this uncertainty, fundamental uncertainty into the economy. We have to stay easy to counteract what they're doing and that's going to have unfortunately some pretty significant consequences.

Companies, including my own companies, I just want to deal with freelancers. I don't want to have employees, I don't want to have fixed overhead. I don't want to, I don't want to make long term commitments. But I used to think differently about that before Obama. It just seemed more certain. And I'm not saying anything was great under the Bush administration by any means. There seems to be just this huge level of uncertainty now. I just don't want to make long term commitments. And I think a lot of companies feel the same way.

I think that's absolutely right. I mean, the fundamentals of what you base your decision making on a business standpoint have been called into question. Banks to this day are still living in fear of what the government is going to tell them they owe for sins of the subprime crisis. I mean, it seems like every time an attorney general from New York or Mr. Holder want to get on TV, they just announce that the banks are literally ATMs for them. Because they just walk over to them and say, here's another fine for something you did six years ago.

And what they're really doing when they do that is they're really punishing the shareholders. They're not really punishing the executives who run the companies under the ground. And not, not one person has gone to jail out of this whole unbelievable global meltdown we had a few years ago. It is insane that the head of Countrywide got a slap on the wrist. What was it? Mozilla got $70 million fine or something? Which is like me giving you 20 bucks.

And I agree with you completely. I mean, I think that unfortunately, what they don't get. And the administration has made a living politically demonizing big business, and they will continue to do it. And I was on Fox Business the other day talking about how, you know, the President was saying corporate CEOs are whining, right? And they have to stop whining. Things are pretty good for them. They're whining because they're sick and tired of swimming against the tide of the economy. Most CEOs have eked out profitability over the last several years by cutting costs, cutting benefits, streamlining their operations. But you can only do that so much. At some point, you have technology. Absolutely. At some point, you have to actually start selling more stuff, whatever it is, Right. And you generally sell more stuff when the economy is better. A rising economic tide helps lift all boats. They're sick and tired of having no rising tide, and that's why they're whining. And guess what? I don't know why the administration seems to think that if a company makes more money, all that money just goes right into the CEO's pocket. That doesn't happen. It's not like if they make more, they get 100% of it. The employees get more money, they can make pay raises.

Well, all of the stakeholders. Listen, I don't believe for a moment that it trickles down very equally. I do think at the top of these companies, it's become a monopolistic practice. At the C level and the board of directors. And I think a lot has to change in corporate governance. I am not happy with that at all. But I know I could sound like a bit of a socialist saying that, but I just don't think it's right. Some of it trickles down to the employees. Certainly a lot of it trickles down to vendors and costs contractors of the company and the shareholders of the company. Who do you think owns these companies? Middle America. People that have the stock in their retirement plan. That's who owns them.

You hit the nail on the head. I mean, I don't think that the administration realizes that the vast majority of the nation's retirement is in 401s and IRAs. And what do they own? Stocks? Yes. The CEO will make money and he will get rich. And I agree with you 100%. The plague of other people's money in corporate America has gotten out of control. These executives feel that they can do whatever they want because it's not their money. Heads I win, tails you do lose. But at the same time you have to accept that the CEO is going to make money. If the company becomes overall profitable, it's going to do a lot of good too.

I want to get two other topic areas in before you go real quick. One is just to stay on this topic for just a moment. Not governance, but the general economy topic is how bad do you think inflation is going to get? Or do you think the Fed can nip it in the bud? Or do you think it can get out of control?

Again, I do not think the Fed can nip it in the bud. I'm not a hyperinflationist, but I do think that we could get a pretty significant inflation problem.

Put a number on that. Just arranged.

I'd say probably based on their statistics, I think you could probably get between 4 and 7% annual inflation on the CPI, which obviously will be significantly higher for real life.

Right. And so what that means in real life is that's probably 8 to 12% real inflation.

I'd agree with that. I think that's something you could legitimately see. I think you could see interest rates have to go well into the teens to break it again.

The two other topics are China and Russia. Gotta mention those. What do you think is China? I mean, China is such an enigma. I don't know what to think about China overall. I don't think their future is that rosy.

You know, I don't think it's is either. But I think that unfortunately a lot of the bearish China arguments, which I'm not in disagreement against. A lot of the bearish China arguments are colored by people's distaste for the way they do things and the way they've set up their government and the fact that they believe it's sort of one big real estate bubble that has to go poof. And I'm not saying that's incorrect, but I think that what is happening is that China is going through an enormous transition as an economy. They are making the same transition that the United Kingdom made in the 1800s and that this country made in the 1900s. They grew into prosperity on the backs of workers through manufacturing. Now they realize they must make the transition from a manufacturing based economy to a balanced or service based economy. And that transition is bumpy. So I do not think that China is going to be the growth engine that we are used to. I don't think it's going to implode either. I think that they're going to slow down growth and that they will over time make this transition to a more balanced economy. I'm not a big China bear. I don't think that the economy is going to implode because of a real estate bubble. Part of the reason I don't believe that's going to happen is because we have to remember that all the Chinese banks are state owned at the end of the day. So all the real estate property and all the real estate loans that have been made have been made by the government, in effect. So that changes how a real estate bubble pops because the government never actually has to sell any of the property if they don't want to. Now they'll take a hit on their balance sheet and certainly there'll be repercussions of that. But it doesn't have the same sort of cataclysmic result that we saw here in the United States.

Good analysis.

Russia, Russia, Ukraine. And I don't mean to in any way diminish the event, but from a market standpoint, it just simply isn't that important at this point. I know it generates a lot of headlines, I know it's generating a lot of angst, but here's the deal. It's a local event that it's the Europeans problem at this point. If Russia invades Ukraine, which is still a low probability event, then it becomes a bigger, bigger problem. That I think is a reason to sell stocks in the short term. But short of that happening, I think it's more a distraction for the markets than anything else. It is not what's Causing stocks to trade lower here.

I think from a geopolitical perspective though, it just scares me. The aggression, it's like we used to see decades ago. Kind of don't know what to make of it.

I agree, I agree it is concerning from a geopolitical standpoint.

Well, Tom, really good discussion with you. I know you've got an appointment, we've got to let you go. But give out your website, tell people where they can find out more about you and just any closing thoughts you might have.

Thank you very much for having me on. I've enjoyed it. I would love to do it again. And for those people who are interested in our publications, the Sevens Report. It's a daily market research note. You can read it in, in seven minutes or less. It comes out by 7am every morning. And you can go to sevensreport.com and just put in your name and email address and you'll be signed up for a free two week trial. We don't ask for your credit card, we don't want your credit card. You simply get the report for two weeks. If at the end of that period you want to buy it, there'll be a way that you can do that. If you don't, you just stop getting the report. It's our way of providing a staple of Wall street, which is the morning research note, to sophisticated self directed investors so that they can know what's going on in the markets each and every day in a quick read.

Well, Tom, essay, thank you so much for joining us.

Thank you sir.

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