1838: What Are Your Dollars Actually Worth? Eric Basmajian Part 2

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Welcome to episode 1838-1838 and greetings from Dallas, Texas, or actually I should say Plano, Texas. I am doing a speaking engagement. I just need to jump on stage here in about 15 minutes, but wanted to record a quick intro for you here. And we've got a great show. We've got part two today, part two, I should say two with Eric. And we are going to continue that discussion from Monday on. Interest rates on the market, on the economy, predictions as to where the market is going. But I got to tell you, a friend of mine sent me a video today. This is a guy on YouTube I keep talking about. I've invited him on the show. Want to get him on the show. I'm not going to mention his name right now. But you cannot believe, folks, the amount of clickbait and the number of false comparisons out there when it comes to the economy, the real estate market, there are so many people who are just deceiving and misleading you into believing things that simply aren't true. I wish I had the chart to show you. I'm going to show it to you on a future episode, but I'm just going to tell it to you now. Basically, this person who will remain nameless, a big YouTuber with these great clickbait titles, you know, you got to buy the clicks, you got to get the clicks, right? That's the game. We all understand that. And unfortunately, it becomes misleading at some points. He, he's talking about the foreclosure moratorium. We all understand what happened with the foreclosure moratoriums, right? And as he's talking about that, he talks about the foreclosures that would have happened had it not Been for the moratoriums. Right? A valid idea. Conceptually, that's true. And how there would have been so many more properties on the market had the moratorium not occurred. Okay, on its face, that's true. And then he shows these charts about these moratoriums and how the number of foreclosures that didn't happen because of the moratorium, and then shows an inventory chart of the amount of housing inventory and says, hey, the inventory problem, this housing shortage is fake. The inventory problem wouldn't have happened if the foreclosures were allowed to happen. But guess what? The timeline is distorted. Because all he does is take an ad the number of foreclosures he thinks would have happened that didn't happen, and then says, here's the amount of inventory we needed. But compared to what? That's the question. What he doesn't tell you is this important thing, huge thing left out of that discussion. What he doesn't tell you is that those foreclosures would have been dripped out over time, over the last 18 months or two years, and he makes you think it would have happened all at once. Like there just would have been 700,000 more homes dumped on the market and the inventory problem would have just been solved. Poof. Like that. Not true. The foreclosures would have been dripped out onto the market over time, and the purchases absorbing that inventory would have just happened over time. These things happen gradually, right over the course of two years. If there's 700,000 new homes dumped on the market and 700,000 purchases, that's what would have really happened. But these leaps in logic occur with these people, these doom and gloomers that are false narratives. I'm not saying there won't be a housing bubble. There is one brewing, probably, but we're probably a year or two away from it, if not longer. Right? A broken clock is right twice a day. And all of these doom and gloomers, they will say, well, I called the housing crash way before it happened. Sure, if you keep making predictions for five, 10 years, you're going to be right. Eventually, yes, there will be an adjustment. No question about that. But the problem is all of the money that would have been lost as people waited and tried to time the market by thinking there's a crash. No one counts, that they don't count that they just say, oh, my gosh, this guy was right. You know, it's just. Folks, look, I know it's a bit of a rant and I gotta jump in, I gotta get on stage here where I'll have slides to talk about this and, you know, probably I'll just share the video from this presentation on a future show. So that's coming up. I just wanted to share that idea with you. Don't be fooled. Don't by this clickbait. Don't be fooled by this sensationalism. Go deep on the statistics. Understand that you can't take a snapshot and say it would have solved the housing inventory problem. It's simply not true.

Okay.

It's simply not true. This stuff happens over the course of time and the inventory absorption happens over time as well as the inventory coming onto the market happening over time. So that's the way it really works in real life. It doesn't work like these guys say it does. All right. Be sure to join us in Jacksonville. A few more people purchase tickets for this great event we're doing in Jacksonville. Super excited. I want to spend three days with you. This is a wholesaling event. So we are going to teach you how to buy wholesale properties. And by the way, I want to tell you in advance, we have a little bit of a hidden agenda here.

Well, it's not hidden if I tell you, right.

No, it's not. The agenda is this. We are trying to create more inventory for our network and we want to teach people, we want to teach you to hopefully become one of our partners where you can make, if you can ramp up this business and buy these wholesale properties and sell them through our network. Now you can sell them however you want, but you could also sell them potentially through our network to our investors. If you'll go out and do the legwork, you could build a great business for yourself. And that's what we want to help you do when we're in Jacksonville. If you don't want to do that, that's fine. Just go get good deals for yourself. Good deals to buy and hold or fix and flip or just wholesale these deals where you literally need to have zero capital, zero nothing. And you can, you can acquire properties and assign the contracts to people and just flip them and make 5, 10, 15, $20,000, maybe even more on a bigger purchase price deal. So this is going to be a really exciting event. Go to jasonhartman.com wholesale jason hartman.com wholesale and join us in Jacksonville for a Friday, Saturday, Sunday mentoring event. Small, small group. This is hands on. We're going to go out and do this stuff together. Jason hartman.com wholesale do not miss this. It's going to be great. And without further ado, let's get to our guests. Let's get to part two with Eric from Monday. Just continuing that. And a lot of people really just had wonderful, wonderful feedback about Eric as a guest. So I'm glad to have him back. And here is part two. Right now.

The income is skewed, economic growth is skewed. So if we have people whose standard of living is growing at 10, 20, 30% per year and the average is one, that means that there's a significant portion of the population that's below zero. And if your standard of living is declining, you're not going to be able to move out of your parents home, buy the new house, have household formation, start a family. And that feeds into demographics. So this is the 15 to 64 year old population growth rate. And this is charted for Japan, Europe and China. And the reason this is extremely important is because when working age population declines, as I mentioned, you cannot sustain a real estate market. What this chart shows is in early 1990s, Japan's working age population growth rate went negative. Japan fell to zero percent interest rates. They had a major real estate bust and they never recovered. They're still at negative interest rates. In 2009, Europe's working age population fell negative and they went to negative interest rates and their real estate market never recovered. In 2015, China's working age population fell negative. And these numbers are way overstated for China. Their demographics are than this chart suggests, but they went to negative working age population in 2015. And what happened in 2015? Any of your market listeners will know that China devalued their currency by about 2 1/2 percent. August 2015. And they tried to reflate their property bubble one more time. But what are the stories in the news today in China? Real estate.

Right, Evergrande, There you go.

And then we look at the United States.

It's the best, which is better off than anybody.

Better.

Way better than anybody, which is a big leg up for the United States. But the working age population is grinding to basically zero. And these numbers are as of 2019 these estimates were made and sadly the numbers that have come in for 2020 and 2021 are dramatically below what these estimates have suggested. So the real numbers are likely showing that the working age population in the United States is on the verge of contraction. Now again, this is a long, long, long, long term variable. That doesn't mean that the real estate market is going to go down tomorrow. What it does mean though, and the reason I extrapolated the estimates, 2030, is to imply what's the demand curve for housing going forward. Right. And when you look at this chart here, this shows the average consumption of housing and vehicles by age cohort. Housing and vehicles are the cyclical engine of the economy. You need people to buy houses and cars, so there's construction, so there's manufacturing activity, so there's production. And what you see is when you get past age 54, the consumption of housing and vehicles starts to really trail off. So you really need a robust population growth in this 25 to 54 year old bracket.

Sure. And you know, this would be Harry Dent's S curve. And you, he studies this stuff a lot, although a lot of his predictions haven't been so great for a while.

That's right. And that's why, Jason, these are all secular economic trends. So if you're studying these variables, you need to have, and you need to be very clear that you're talking about a five plus year timeframe. You could see in this top bar here, when I say secular economic trends, three to five plus years. So you gotta be very clear when you're talking about these things that you're not making a forecast about what's going to happen tomorrow. That's why you have to overlay. And what I do in my process is these cyclical trends. The cyclical trends you could see in that top black bar are what's going to happen in the next six to 18 months. Right. And what we're, what we're going to see, in my view, because of these leading indicators that I'm tracking, is we're going to see a declining secular trend and we're going to now see a rollover of the cyclical trend. So we're going to see a decline in the growth rate. That doesn't mean negative growth, but the growth rate is going to come down. So we're going to go from four to three to two to one.

Yeah. Okay, so nobody is talking about this issue. You know, the baby boomers had really good economic times as they were passing through the decades. Right. The 70s were tough, obviously, but you know, overall, the baby boomers did pretty well for themselves. And of course, the millennials resent that. Their own children resent that.

But here's the reality.

The next 10, 15, 20 years, those baby boomers are going to be passing on their wealth to their millennial children.

Nobody is talking about that. You know, I guess it's just hard to see what that means. You know, what does that mean to the economy? What does it mean to the housing market? The baby Boomers have money. So. Any thoughts?

Yeah. So there is going to be a large transfer of wealth from boomers to their children. But what you can't pass on is income or employment. Right. So if you get a large pool of money and it's managed properly, you can pull off a synthetic income stream and try and make that last forever. But if you don't have a income stream coming from employment and that pool of capital is not large enough, you're going to eventually eat that away and you're going to have a declining standard of living.

But I take, for example, the real estate market and the baby boomers that, you know, there's about, what, 18 million or so single family homes owned by mom and pop landlords. Right. And the baby boomers own a lot of those. A huge portion of those, those rental properties. They own their own home, they own stock, they have assets, and it's just living off assets.

Right, Right.

Largely they have business.

So the question cuts two ways, right. It's, it's also who's going to buy the one to $3 million house that those boomers are selling?

And I've wondered that a lot too. The. Well, those aren't McMansions for 1 to 3 million anymore.

But now it's becoming, at least in the areas that, in the east and the coasts, that's becoming a standard house.

In any desirable area. You're not getting much for a million bucks anymore.

Right.

The McMansions that the baby boomers do own. And it's, you know, interesting. I mean, I remember Harry Dent predicting this back in the 90s, that by about 2010 to 2013, there'd be a stock market crash and there'd be a McMansion crash because nobody was there to buy those properties. Right. Yet that's been wrong. Right. It's lasted a lot longer than he predicted. Maybe can't last forever. Maybe he's 10, 15 years late on his prediction, who knows?

But I also get the sense that.

Culturally millennials won't really want McMansions. They'll consider them un. Environmental.

You know, it's just a very different.

They may concoct a story because they can't afford them anyway.

Right, Fair enough.

Going back to that prediction, I wouldn't predict a housing bust without the growth rate of the working population being negative and likely to stay negative.

Right.

So if you predicted this 10 years ago, it's not a surprise that it didn't come true because the growth rate was declining, but you still had more people in that, in that demographic now if we had a curve that looked like China or Europe or Japan, where it was below zero and staying below zero for the next 10 years, I'd say, yeah, with high degree of certainty you're going to have a real estate bust. The US however, is now over the next 10 years going to be a little bit of a trickier situation because these estimates which are proving to be optimistic, are showing that you're basically going to hover at 0% growth in this prime age 15 to 64 year old cohort. The data that's coming in now is actually showing that it's trickling slightly negative, but again that's a longer term variable. So I just wanted to clarify that point, that I'm not trying to go on record telling you that the market's going to crash tomorrow. But if you do want to understand where the next 10 years of a real estate market are going to, this is the absolute single most important variable to look at.

So you're saying over the next 10 years it will cool off.

I think that over the next 10 years the US housing market will cool off, especially in directional terms. Over the last 10 years that we've had was quite a remarkable 10 years in the US real estate market. I can't say because the curve of population growth doesn't look to be sustainably negative. I can't say that you're going to have outright declines or a crash, but you will not have a repeat of the last 10 years in US real estate.

Would you have that repeat if they get into another situation where they're loosening and just increasing money supply, buying asset purchase program, low interest rates? Does it come back at that point?

Well, it'll certainly be better than the mortgage rates at 5%. But what the Fed is ultimately doing, and it's taken a while to trickle to the real estate market because the demographics were somewhat supportive, is you can lead a horse to water, but you can't make it drink. Right? In economic research papers, this is called what's a liquidity trap? Right. You can push liquidity into the financial system, but you can't force borrowers to take it. Right. And we've seen that play out with real economic lending. So when you look at something like commercial and industrial lending or any of the real business sector lending, it really has not responded at all to this increase in financial liquidity. It's all gone to financial transactions. Right. So if the demographic curve is incredibly negative, it won't support the real estate market. Case in point is Japan. They've Been doing quantitative easing and have negative interest rates for the last 20 years, but their real estate market hasn't responded. Europe's had negative rates and quantitative easing. Their real estate market has expanded.

Well, it's really about you got to have children.

It's really about demographics.

You can't have a country or a continent without children.

Exactly.

You've got to have demographic growth.

So no question it'll help if they buy up MBS and compress that spread again and drive the rates back down to two. Sure, it'll be a lot better than five, but either way, it's really demographics. If you're looking at the ten year picture, sure.

Okay, show us some more charts.

All right, so let's flip over to the cyclical picture. We talked a lot about the longer term, what's going to happen with the demographics. But let's look at the.

And I do want to make sure, Eric, that I ask you your thoughts on the many, many people out there who are saying we have a housing shortage, 5 million homes short, certainly we have a massive inventory shortage. I mean, and let me just give you the metric on that, if I could. So, you know, most will tell you that for housing inventory at any given time you need about 1.2 to 1.5 million homes for sale. We currently have about 241,000. So inventory needs to increase by 3 to 500% to be normal. That's not a recession, that's just balance.

Right?

Right.

So what do you think is that.

I mean, in your eyes, is that false or are the building permits going to make up for that? Is there enough construction coming that it's going to solve that problem? Or is there a housing shortage of 5 million homes or some number like that?

Right. So two comments on that. First comment is that a lot of these numbers are long term averages. Right. We look at the last 50, 60 years of economic data and we draw a linear average and say this is the average number of homes per person or this is the average number of supply and we're X percentage below that number. Therefore, we're short. But what we have to remember with the housing market is the demand curve is not linear. The demand curve is set by those demographics and the demographics are declining. So that linear average is not going to take us back to equilibrium. Equilibrium. We're going to find equilibrium below that longer term average because the demographics are worse than they had been.

So when you look at a demographic chart, that is the, you know, the sort of pyramid shaped chart, the common one, Right. I mean, The US Is so much better off than like any country, except maybe in the Middle east or Africa. Right. I mean, the US is just so much better off and it's very open to immigration, which Japan isn't right. You know, and Russia isn't right. Not that it has a ton of people knocking at its door anyway.

Right.

But you know, like our demographic problems can be solved without a birth rate.

It can be solved through immigration. Absolutely. But what's important to note is that in the last Census Bureau report, which was the preliminary 2021 numbers, we had a triple whammy of negative demographics. We had more deaths. Part of that was because of COVID of course, but we had more Deaths in the 25 to 54 year old bracket as well. So we had more deaths, we had less births and we had less immigration.

Yeah. And by the way, some of that I want to mention, of course is opioid crisis, addiction problems.

That was in the 24 that were.

Exacerbated by Covid in the lockdowns.

No question. That was a. The fentanyl deaths were actually cited in the report because it was such a large percentage of the 25 to 54 year old. So in the last administration we reduced the amount of immigration for sure. And then everyone expected that when we rolled over to this new administration, we're going to have this resurgence of immigration, but we actually haven't. We're actually maintaining this lower rate of immigration than we've seen over the last five or ten years. So we could see these numbers reverse. Like Canada, for example, has a economic policy of immigration where they're trying to add a certain number of people per year to their country through immigration, which is helping their demographic curve a little bit as well. So my response to you on the supply is that we are short. There's no question that the inventory is tight right now. But I would caution people when looking at this long term 50 year average of that's what balanced is, we're going to find balance at a lower level than we were over the last 50 years because the new demand is a lot less. But just flipping over to this new chart here, because I do want to talk about the cyclical economic trends or what's going to happen over the next six to 18 months because the longer term stuff we certainly hit on in the earlier part of the interview, I talked to you about what I called coincident economic data. That's what's happening right now. This doesn't tell us where we're going. This just tells us what's happening right now. And coincident economic data, you have to pull it from what I call the four corners of the economy. So you have income, consumption, employment and production. Those are the four corners of the economy. They move in a cycle. Every economy has those four corners. You take China, you take Japan, you take Europe. They may have more production than we do, but every economy has those four corners. So what I do is I take the best indicator of real income, real consumption, real, real production and employment. I smush them together and I create a composite. This is called the coincident index. And I look at the growth rate. So what you'll see in this chart, for those people who are listening, is through the end of 2020, through the beginning of 2021, the growth rate was rising rapidly. We had a lot of stimulus. We were coming out of the COVID lockdowns and the growth rate was pushed up to 8%. Then in April 2021, the growth rate peaked and the growth rate started to come down to 6 to 5, to 4 to 3. Now we're sitting at about 3.5% growth. And this is over the last six months, like a six month annualized picture.

Which is definitely higher than the beginning of your chart in October of 2020.

Absolutely. So what's important to note here is a couple of things when we're looking at a recession, right? So let's talk about recession, because that's what's starting to come into the conversation with yield curves that are inverting is, okay, so are we on the cusp of a recession? So I have three criteria that I use to identify. Is a recession an imminent risk? Right. Criteria number one is the direction of growth has to be declining. So that is satisfied the direction of growth is coming down. Right. Criteria number two is the growth rate has to be sufficiently close to zero. So we have to be in the 1% range for a recession to be imminent. You could have a recession occur in the 2% range if it's declining. And the reason is because the way recessions happen is the growth rate's declining, it gets close to zero, and then a shock hits the economy and the shock knocks a couple hundred basis points off growth. If we had a shock here in April 2021, with a growth rate of 8% and it knocked 300 basis points off, the economy would drop to 5%. Still no recession. But that same shock today could put us close to a recession. Right? So it's not. When we talk about the war, is the war going to tip us into a recession? You got to look at where we are, where we're going and how close we are to zero. So we're not close enough to zero yet to say that a recession or we're on recession's door because we're not close enough to zero. And the third criteria would be, these are the four components broken out, right? So this is industrial production, the growth rate, this is employment, the growth rate, consumption, the growth rate and real income. The growth rate, one of these four has to be negative and zero or four are negative. Right now this bottom right shows real personal income that will go negative in the next month or two because oil prices have spiked, prices have spiked and inflation is taking another leg higher. So when we look at the leading indicators to say where are we going over the next two months? Let's say we're going to be looking at this picture. The growth rate is still going to be trending lower. Criteria number one, satisfied. We don't know exactly where the growth rate is going to be. We have to look at the data and real personal income growth will be negative. So criteria number three, satisfied. So we'll have to look at how over the next couple of months this increase in interest rates, this decline in real income and this increase in fuel and food costs, how does that impact broader consumption and employment? If it really impacts consumption and this growth rate edges closer to 1.5%, then I would say that we are getting closer to recession's door. But that's not my forecast at the moment.

Okay, yeah, very interesting. You know, the thing that's impossible to account for, Eric, is we are in a centrally planned economy, obviously. And the reaction of the Fed, all of the folks saying the real estate market was going to crash, it was over when Covid hit. And then the exact opposite occurred. And most of them admitted, well, I didn't know what the Fed was going to do. Well, of course you didn't know. But the obvious thing is politically they want everything to keep on going, right? So the question is always what is the reaction going to be? But also maybe they've backed themselves into a bit of a corner.

Big time. Big time. So this time is not like the other times, right?

Because hey, the saying is this time it's different.

Right, Exactly. And this time the just what we call initial conditions are different. Right? Because the central planning of the Federal Reserve has really been heavy handed the last 12, 15 years, let's say after the financial crisis. And in that 12 to 15 year period, we never had an inflation problem. They actually couldn't get inflation above 2% on the CPI. If they tried, they were trying as hard as they could, they couldn't get there. So every time you had a panic in the stock market or in stock market generally reacts faster than the real estate market. So let's say every time you had a panic in the stock market, the Fed was able to pivot and they were able to say we're worried. They call it financial conditions, which just means stock prices. Really they would say financial conditions have gotten too tight. We're worried it's going to hurt employment, which is one of our mandates. Therefore we have to stimulate again. Fine. They can cloak that up and say that financial conditions will impact employment and it probably would. So sure. But they do have a dual mandate and we're never challenged on the inflation component. So they were always able to pivot very effortlessly. This time if you do have a little bit of a freak out in either the private credit market or the stock market and the CPI is 8%, they're either going to have to make a very clear statement that they really don't care about inflation or they're going to have to continue tightening policy into a panic in the asset market, something they've never done before. So this Fed reaction function, I don't think anyone has the real answer. We could all place our bets, but it's certain that the initial conditions this time around are not the same as they were the last time. So everyone can have their opinion on if CPI is 8% and the S&P is down 25%, what do they do? I don't know if we know the answer to that yet.

Yeah, yeah, I think you're right. We don't know. Thank you for all of the information and the visual charts included. If you are listening on audio only, be sure to go to the YouTube channel so you can see Eric's materials, his charts and give out your website too.

Sure. So you can go to epb macroresearch.com right on the homepage I have a link that says learn about Eric's secular encyclical framework. I would encourage everyone to click on that. It's totally free. I don't ask for your email or anything. It's just a free document. But it's packed with my entire framework of how I think about the world. I start with the long term secular trends and then I go to how do I monitor the shorter term cyclical trends. So if you're interested in anything I had to say and you want to learn more about it, epb macro research.com it's totally free. It gives you my whole sort of outlook on how I see the world there.

Excellent. Eric. Thank you so much for joining us.

I appreciate it. Jason. Thanks for having me.

Hey Jason, I just want to say this.

Your presentation in Tampa was one of my favorites. I have been sharing that slide that.

I took a picture of with like just about everybody I know about price.

Of housing versus gold per ounce and just incredible.

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