1851 FBF_Pension Ponzi Schemes, Asset Inflation, War On The Middle Class, Bernie Madoff, Market Cycles, American Greed - Pat & Jason

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Welcome to the Creating Wealth Show. This is your host, Jason Hartman with episode number 872. 872. Thank you so much for joining me today as we talk about a variety of things. And I've got none other than a returning guest, a client and a Venture alliance member, but Pat Donahoe here with me to talk about the biggest Ponzi scheme in US History outside of the Social Security system, which was actually bigger and it was the inspiration for this one. Yes, that's the one by Mr. Bernie Madoff, who Madoff, with billions and billions of dollars of people's money. We're going to talk about that. We're going to talk about real estate investing. We're going to talk about one of the biggest industries in the world. The only industry that I know of that has what known as a negative cost of capital and negative cost of capital. It's an interesting idea. You know, most companies, they gotta expend capital before they get it back. This one is the opposite. It's kind of an interesting industry. So we'll dive in and talk about that, too. Did I, did I tempt our listeners enough with a little bit of mystery there, Pat?

I hope so. I hope so. It was tempting to me, too.

Yeah, yeah. You didn't even know I was gonna say that I did it. Yeah. You know what industry I'm talking about, right? Don't say it yet. Negative cost of capital.

I won't give it away.

Okay, all right. You do know, though. Okay, so you have, you've got an interesting article here that was posted in our content Facebook group that the Venture alliance members are in. You know, it's about Madoff called the USA giant Ponzi Scheme. And, you know, he's right. But as the old saying goes, Pat, two wrongs do not make a right. My mom used to always say that. To me, two wrongs do not make a right. Tell us a little bit about this. You took a pretty deep dive into this topic, and I think it'll be very interesting to investors.

Yeah, I did. And the reason is, before the article was posted, I had already known about this individual, the one that was interviewed by this specific journalist, and his name's Harry Markopoulos. And Harry Markopoulos was really the central figure of a documentary called Chasing Madoff. And it was brilliant. It was fascinating. Really, really well done documentary. And Harry Markopoulos, essential.

He found out about Madoff 10 years in advance of Madoff turning himself in. And he had gone to extreme lengths to notify the regulatory bodies, notify investors, financial publications, and in the end, they didn't listen to him. And he had attorneys that were helping him. He actually resigned from his position as a cfa, a certified financial analyst with a financial institution, because he was so adamant about getting the message out that, listen, this Madoff guy is a crook, and he was trying to out him. So it's a brilliant, brilliant documentary. And so I knew about that kind of coming into this article. But now Harry Markopoulos, he is essentially a freelancer, contractor, goes out and really analyzes companies and financial institutions with the objective of doing the same thing that he did with Bernie Madoff, which is figuring out which funds are legitimate, which companies are legitimate investment opportunities and so forth. And he has made some pretty bold claims when it comes to a few banks, which he's not able to give the details because of settlement issues. But also he's talking a lot about the pension system, specifically the municipality pension issue that exists right now, as well as the US Government and the unfunded obligations that they have coming to them in the future and the improbability of being able to actually fulfill on those promises. So he makes some very bold claims. It's a fascinating article, but also there's an audio interview attached to it as well.

Yeah, fascinating. Well, I just recently, as I mentioned before on the show, watched the HBO documentary called the wizard of Lies with Michelle Pfeiffer. Boy, she's gorgeous. But not in this movie. She plays Ruth Madoff, which she plays a much older person in the movie, along with Robert De Niro. And that was really good. You know, that's fiction, you know, based on truth, obviously. But, you know why? I think the first thing, I want to kind of tee this up as we talk about it today, because the first question is, you know, why is this important to the average investor who's listening? Right? And it goes back to what I talk about in my Creating wealth seminar, which is the six ways I've identified for the US Government and really every government around the world, pretty much almost every government, to get out of the, quote, mess, unquote, that they're in. Right. And that is, you know, one of them is to inflate their way out. And I believe that's what's going to happen. I believe it's the most likely way. I think it's the least harmful way to get out of the mess. And it's really a very good business plan, actually. I mean, I say that sort of tongue in cheek because philosophically, I think it's pathetic. But, you know, we. Here, here is the circumstance we're in. And if I was, you know, running the government, or any government, or the Federal Reserve or any central bank, it's exactly what I do. It's. It's the least harmful, most palatable business plan, okay? And it is a business plan. Let's not deceive ourselves. That's exactly what it is. It's a business plan. It's a very good deal for governments with debt, and pretty much every government has a massive amount of debt, and it's a very good deal for investors who are here listening today. And, and so talk to us about what Harry discovered. I'm guessing he has a Greek background by his last name.

And talk to us about what he, what he. About the municipal government situation. Because, folks, this is a big deal. Municipalities around the country are in trouble. So you have this, this crisis at all levels, at the municipal level, at the state level, at the national level, and then at the level among nations globally. So let's start with the municipal things.

Yeah, it's in. It's international. But I would echo just a few things that you said, Jason, before I comment on that. If you really where I had a huge breakthrough, and this was years ago when you came out with your 10 commandments of real estate investing. I think that there are. There's some very wide. And I'm not sure, I don't even know what that backstory is, but there are some very wise, there's very wise guidance in There.

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And if you look at really the common ways in which Americans are managing their finances, it violates almost all of them. And so you look at the situation that we're in, and it shouldn't be too surprising if you're familiar with that. So I would look at the pension system and his whole, again, background in financial analysis, and it comes to what he discovered with Bernie Madoff, which is just the. There's no real rational way in which he could be achieving the returns that he was saying he was achieving. And so it really comes down to that same premise, which is these municipalities, or it's federal, it's state run as well. And really the improbability based on a rational observation of what's going on. Because to the average individual, if they're promised a pension, that's exactly what a pension is. It's a promise. It's a contractual obligation that one party has to another. And if you look at really pension systems of the past, they're, you know, the reason why companies go to, you know, deferred compensation like a 401k is because with those type of benefits, the company is not on the hook for the outcome, whereas pensions, they are. It's a contractual obligation. So companies, companies have gone bankrupt in the past and we've seen municipalities start to go bankrupt because of the obligations they have to their pensionees. Obviously, Detroit is a perfect example. So if you look at really the pension idea, the pension idea is essentially that a company is allocating money to the side for the future, and they create a fund. And the fund is based on the number of people that are in there, a mortality factor, which is when these people pass on as well as a rate of return. Okay, so you have all those different variables. And so what happens is these municipalities are stating very high rates of return. Now, we're not talking, you know, these aren't, you know, maybe to you or me, they're not, you know, really big returns, but we're talking about billions and billions and billions of dollars, Right? If you had, you know, a couple hundred thousand dollars, it's easy to get a 12, 20, 30% return. But if you're talking billions and billions of dollars, they are overstating their ability to get a return. And they are stat percent or 8%, which really shows that if they're not able to achieve those numbers, which they're not, then what's going to happen is they're going to default on those pension obligations. If you look at really the greatest bear run, this is a point that Markopoulos makes in the audio interview as well as the article, is that since 2009 there's been this massive, massive bull run in markets and investments in. And yet these pension funds are still underfunded. Not by 5% or 10%, by like 40, 50% in some cases worse. So what that means is that they essentially have, if it's 50% underfunded, they have half the amount of money they need to actually pay out all the obligations that they owe to those that are going to receive pensions. So that's the first thing that he claims is that these pension funds are just not administered the right way and they're making very aggressive claims which are likely to not pay out, especially if there is a correction in the market, which also he says is an inevitability.

Right. It is inevitable. And you know, the pension thing is pretty much, I mean folks, if you have a pension or if you took your job or your career, based on the concept, I'm sure in part based on the 401k, the 401k jail that you're in. By the way, if you want to look at an interesting, very old video I did that was really widely viewed and traded around even before social media type in 401k jail for one or getting out of 401k jail, kind of interesting short little video. But you know, it's basically a sales job, right? It's essentially what happened is you were being pitched by a someone that was selling you something and they were selling you as part of your job perks, a pension, right? And it's important to remember that, you know, these pensions really have to be like divided up and you know, between defined benefit plans. And that's what just sunk the, the American auto companies for a long time, right? Defined benefit plans versus defined contribution plans. There's a difference, you know, and this is what the, you know, the left wants in every country, you know, every democratic country, you know, that's left leaning. They want, they want defined benefits rather than defining their contribution, right? It's sort of, you could even play that on a much bigger level than with pensions and just society in general. And so, you know, this is a sales pitch and it can't, these are promises that can't be kept. They're just not going to be kept. And so of course you've got to be self reliant and you've got to do your own thing and do your own plan so that you don't become victim of this and you don't have this huge expectation and you get to the time where you can start, you know, benefiting from your pension in 10 or 20 years and you're like left with way less than you thought. You know, that's, that's the likelihood. It's just whether even if it's Social Security, which is another form of a pension, right. It's just not going to be there for you. And even if it is, it's going to be inflated away. Okay. You're going to get paid in inflation, debased dollars.

Well, what's already happening, Jason, is, is there's, and this is what's really scary is that you're seeing a lot of precedent being set in the legal system as far as what municipalities can do. So there's a few in California that essentially they were able to not have to go bankrupt per se, but kind of negotiate payouts. And there's a few loopholes. There's always a loophole legally with something because there's so many laws that are out there. But it's one of the things where those type of actions are taking precedent to a very widespread epidemic, I would say, because these are, if you look at the health of the pension system, it is in very poor health.

Across all 50 states. There are some that are obviously better than others. But really looking at some that are in bad shape, one bear market, one correction could start to wipe out a lot of these. I think what you'll see is as one goes down, the others start going as well. And it's a snowball effect. So I would say that those that really have a pension, it is not a permission slip to.

Not have responsibility and not do something else. If you have a pension, great. But pay attention to it, understand where their assets are, show up to meetings. I would say start to question it, even if it's a corporate pension and a lot of that documentation is available to the public. But I would say is really understand what you have as opposed to trusting that a municipality or a government or a company, long after you're not working with them, has your best interest in mind, which is very, very seldom, very seldom.

Is it ever that way? I mean. Yeah. Is it ever that way? Okay, so talk to us a little bit about you. You said something interesting, Pat. You said that it's based on the pensions are based on actuarials. And part of the problem is, although it's a great thing, but part of the problem is people are living too long, right? Social Security, that's the problem. I mean, the Social Security system was designed when people would live an average of like four years into retirement, right? And so one of the things that's kind of interesting is that, you know, these life insurance companies, right.

I mean, they have, they use actuarials to rate their policies. And you know this better than any guest I'm ever going to have. So I would argue that their policies might be kind of a bargain because they don't really think they're going to have to pay death benefits very soon. Is that, tell me about that thinking in your industry.

Well, and this is one of the points that Markopoulos makes right at the end of the interview, he talks about the insurance industry. And it's a very loosely regulated industry. So it's a state regulated industry and you have these huge, massive, kind of international groups that are involved with the US Market. And what I would say is that in insurance companies you have kind of brilliant, almost perfect math as far as when a group of people is going to pass on, right? And it's the only guarantee in life. And so it's one of those things where they have enough data and they share a lot of data too, where they know if it's a group of a thousand people exactly when every single one of those people is going to pass on. So that science is very accurate these days. Looking at really, you're right, the Social Security system, pension systems, what they're doing is they have all of those numbers. What they're doing though is they're overstating the rate of return, okay? Because they want to have that money for themselves. Because if they overstate the rate of return, they're not going to need as much money to pay out in pension. So what you see happening is whether it's municipalities or corporations or whatever or the government, perfect example, they're essentially taking that money and not putting as much as they should into those funds. So with the insurance industry, it's really, it's fascinating. We can go up on a lot of tangents here, but you have kind of a publicly traded insurance company and then you have a private mutual company, publicly traded companies, they are all basically held to a quarterly standard, okay? So the decisions that they're making are meant for shareholders. And those shareholders want to see the health of the company on a core quarter, quarterly basis. So it's almost impossible for insurance companies to make long term decisions if they're publicly traded. And you're, you're seeing a lot, a lot there right now.

So this is one of the things that, you know, I, I hear from people all the time is that when they, you know, entrepreneurs, when they have a company and they go public, it gets all screwed up because now you've got all the Wall street motivation and you've got to, you've got to serve too many masters. Right? You know, you, you know, the company, a lot of them say, whether they work for it or it was their company, it was a great company to work for. I loved it. I felt like we were on a mission, we were doing good things, we were changing the world. And then we went public and then it went down the tubes.

Wall Street. Jason, you know this, and this is another tangent, but if you look at really those that ever win with Wall street or with the stock market, it's those that either do reverse mergers and go public again or entrepreneurs that gain venture capital in the venture capital groups, kind of pushing them to the public, they're the ones that always win. Or sophisticated traders that have a lot of knowledge. It is not the retail investor. Retail investor always loses. However, these other groups would not be able to make their billions if there wasn't the demand from the retail investors that come through mutual funds and ETFs and other types of, of funds that typically will come through American savings, like middle class, upper middle class savings. So it's fascinating because you have essentially part of our financial services industry, a huge part of it, preying on the retail investor.

Preying is an understatement. Where are all the clients? Yachts? Yeah, absolutely. No question about that. Okay, well talk to us a little bit about the insurance industry, if you would, and any more interplay between this and any more, you know, suggestions for investors of ways they can protect themselves from some of the problems. And you know, maybe if you want to identify other parts of the Ponzi scheme that Harry brought out, I mean, we sort of went down the rabbit hole into just one, which is the pension thing, because I think that affects most of the listeners, you know, in one way or another. Okay, so if you don't think that affects you and you're thinking, well, I'm an entrepreneur, I don't have some corporate pension and I don't work for the government. Oh no, it affects you because guess what's going to happen? The government is going to have to bail out some of these plans and. Or it's probably endor, it's probably both. And some of them are just not going to be able to pay. And that's going to change the composition of the economy. Okay. Because there will be more people retiring into much lower economic standing than they expected. And those people are rental market for you. And so that's going to change things. And I, you know, I think you're just going to see people in many ways moving down. It's kind of a weird time, Pat. You know, like I think that you're going to see a lot of people moving down. You're going to see continue to see a concentration of wealth. You're going to continue to see this like attack on the middle class. But at the same time technology is making things so much better that that extra money, if you will, created in the market or saved by individuals and companies due to the deflationary effect of technology goes into assets and investments and that increases asset prices and creates asset inflation. At the same time you have like consumer and labor deflation. I mean, I was just looking at a list for SAS software companies. Okay. SaaS is s AAS software as a service, which is, you know, most software companies are now SaaS companies. You know, you hardly ever buy a disk and you know, put it in your disk drive, your CD ROM or whatever and download it on your computer. You know, most of it is a software as a service where you just go visit a website like property tracker. And your software is a service, right, where it's, it's being managed online, a subscription based model. And you know, the revenue per employee of these companies is astronomical. Okay. And why is the revenue per employee so high? It's technology. Okay. You know, I'm in one of these companies was making $530,000 per year per employee. That is incredible per employee type revenue. I mean I remember years and years ago Google was doing like 270,000 per employee. I have no idea what it is today, but you know, that could never be achieved before all that technology became available. I mean revenue per employee in the past was, you know, you'd hope to get three times their salary. Right. It's just mind boggling the efficiencies created by technology.

I would say that you're right on that point. And you're also right in the other point where you have asset inflation and it comes to all the different forces that are occurring. And I think one element of that asset inflation is that you have the whole business cycle theory from the Austrian school of economics, which is you have this central bank trying to increase aggregate demand. And what it does is it really creates an imbalance in the economy because you have more money chasing fewer things. And so it has created some asset bubbles in a lot of different areas, which really masks over some of the inefficiencies and issues and who knows what's going to happen. I mean, Markopolis, one of the points that he made, and he's not able to talk about the details because he's under a settlement agreement, but there are some banks that he looked into and really called them out, which threw up a bunch of red flags. And of course it probably went to court and there were some settlement arrangements and non disclosures and so forth. But I would say that right now, if you really look at what you are, specifically if you're an entrepreneur, if you're a business owner, if you're a real estate investor, it doesn't really matter because in the end all of us have customers. If you own rental property, your customer is your tenant.

If you're an entrepreneur, even if you're an employee, your customer is your boss and the company's customers.

Yeah, exactly. And so I would say that really looking at how society operates, if something affects your customer, it may not directly impact you, but it indirectly impacts you. So I would say that just being being versed, you know, following your first 10 commandment, which is just the education side of things, it's really understanding how economies worked, what signals are where you see opportunities. Because I think looking at really where we're at, and he points this out too, there's going to be a correction. Things right now just don't make much sense. In a lot of different areas you see signs, I mean, the pension industry is in the trillions as far as how big it is, if there's a massive correction there, then the ripple effect is going to be huge. And that's either going to wipe some of what you're doing out or it's going to give you amazing opportunities. And you need to understand really what happens and that what actions you should take in order to be on either, to be on the good side of that fallout. And that's where I would say comes really to that education side of things. And that's one thing that Marcopolo has said, is that right now he's not investing in anything. He has everything in cash. And I find that fascinating because that's.

Risky if you ask me.

Well, it could be, but it depends on your objective. His objective with cash isn't just to hold cash. His objective with cash is when there's a correction, that is when there are amazing opportunities that you can capitalize on. I think that was his point and good friend of ours, Ken McElroy, you know, he started to be kind of blowing whistle on some types of investments that he's out of, really trying to stay on the sidelines, hoard cash for another correction. And I've seen, you know, just this past, I think it was a couple weekends ago, I saw this huge kind of apartment investing mastermind group. There were just hundreds and hundreds and hundreds of people trying to figure out how to invest in multifamily investment. So it just shows you that there's, it's interesting, you have kind of the guru side of things that understand economics, understand numbers, they understand the rationality of it all. But then you also have those kind of, that have been waiting on the sidelines for so long, coming in right at the end where maybe there's going to be a correction. So it's really interesting, Jason, where you have tons of opportunities that could potentially happen because of it all.

Okay, so first of all, I want to say good luck timing the market. I just don't know anybody who can really do that. But, but, you know, certainly the vultures. And I say that in a positive way and in many ways the vultures who have a bunch of cash when, you know, the, when the crap hits the fan, you know, they can go in and buy a pass as cheap, but they never know how much cheaper it might go, right? It's like really hard to time that. But, you know, that notwithstanding, I've talked enough about the myth of market timing. But before the. I want to talk about the cycle that you just alluded to, Pat, about how really it's the middle class investor that always buys in at the end. Like if you were just picture everybody in your mind a, you know, a chart where you see it go up, you see it go down, you know, it's like a bunch of little mountains, right? And peaks and valleys, peaks and valleys, you know, high points and troughs, right? And you picture this chart and what happens is at the bottom of the cycle. And so we'll call it in general real estate. Now, of course, to do this properly, you need to segment this between linear markets, cyclical markets and hybrid markets. Obviously, if you listen to the show, you know, enough about that. But, but let's just talk about real estate generically, as everybody, the uninformed person that's talking on CNBC and giving stupid sound bites does, right? So they'll say well you know, the, the trough, the Valley was in 2008, 2009, okay? And now it's 2017. And so there's been a big upsurge, right? But what happens to everybody, the psychology of investing in any market, whether it be stocks, real estate, gold, Bitcoin, Ethereum, whatever, it doesn't matter what it is. Any asset class out there, ok, is always that the, the, the sophisticated investor will charge in with cash that they have or access to credit or capital of some sort. And you know, at that trough they'll buy up assets, okay? Now they never know it might go lower, so they couldn't. They make mistakes too, of course, otherwise, you know, everybody would just give their money to them and they always win, but it's just not that way. And so then as the conversation starts and the news hits the media of oh, you know, people are buying again, people are making money, people are coming into the market and market's going up, right? The Dow hit a record high, blah, blah, blah. And then, you know as that, as you start to get near the summit, near the peak, right, is when the vast majority of the middle class, kind of like uninformed investor, dives in. And we're always talking here about cyclical assets, not the linear assets because those don't behave in this way, okay? But then they get in and then the peak happens and they bought an asset if it's in real estate that wasn't sustainable because it didn't produce cash flow and it never made sense. And they violated commandment number five, thou shalt not gamble, right? And then the assets started to go down in value, value and then they're thinking, oh, what should I do, what should I do, what should I do? Oh, I'm just going to be strong and disciplined and I'm going to wait, okay? And then it keeps going down in value and it keeps going down in value and there's this sell off, right? And then they finally, because they never followed commandment number five, they never bought an asset where they put themselves in position where they had staying power. They're basically forced to liquidate the asset at the, in the valley, at the trough, okay? And it's like that pattern just repeats itself. You know folks, if you want to see this, you just get a little older, you know, just get a little older. Which is pretty much guaranteed for everybody, right? And you'll see it, you know, the pattern. It just happens every time. It's so reliable. Right. Any thoughts or comments on that, Pat?

No, for sure, yeah. And I would say that's where, you know, I look at my experience during 2000, 2008, 2009. That was kind of my first taste of when things don't go the way that you planned. And I know that there are many who have gone through multiple cycles. I think those that have gone through those cycles are the ones that really kind of understand those trends. Now. I agree with you. It's one of those things where you can't perfectly time a market. But I would say that those that I invest with and kind of personal philosophy that I have, which is why giving. I do business with you. It's because you've been through those cycles, you understand the dynamic. And it's not that you know how to perfectly time things. Nobody does. But with you, you and me, we look at really, what's our goal, what's our path, what are the returns? What do we really need? What is it, you know, when we put cash up, when we make an investment, okay, what do we need as far as a return is concerned and how do we measure that? That's where, if you do have that education, you're not gambling, and you are able to make investments that really fit within what you're trying to do. Now, typically at the top, it's not worth investing in a property or an investment that's going to potentially lose money and it's paying you 5 or 6%. That doesn't make much sense. It's really, if it's paying double digits and you really need to know how to understand a property, understand markets, which you do, and then put your capital at, you know, you invest that. But really looking at most individuals, it becomes this very trendy thing where they trust another person and know the performer looks amazing and they're like, oh yeah, your performer looks awesome. Let's do this deal.

Without proper due diligence, trusting people, just think for yourself.

People are the ones that always screw everything up, not the actual investment or underlying idea.

No, I know. So one thing that's also interesting is that, you know, I think part of the psychology of the investor is, is that that's to blame. One other component of it is that they're. They're trying to get an investment that. Where they hit a home run and, you know, stop trying to hit home runs. Just hit a double, get to second base, right? And, and you know, or, or even first, right. Just, just get good returns, invest for yield, let a little time go by, and before you know it, you're going to be rich. Okay. You know, Everybody wants to, oh, I'm going to buy, you know, Bitcoin or ethereum or gold or silver or, you know, this stupid apartment complex that is completely a dumb investment, right? In a cyclical market or this massively overpriced house in la. And you know, the greater fool theory, no matter what, you know, says, no matter what I pay, some greater fool will come along and pay more. You're trying to hit a home run. You just got to stop doing that. You know, that's basically a symptom of greed. Stop being so greedy. You know, that's what I'd say to investors. Just get a good yield and, you know, the same works as a seller, right? You know, whenever you do a deal, you gotta leave, as the old saying goes, leave a little meat on the bone for the next guy, right? Because if you don't, you know, you're just, you're trying to hit a home run again and they're just, they're gonna figure out a way to weasel out of the deal. Okay? As I've always said, the best deals, whether they be in real estate or anything else, never close. Because usually someone wises up before, before it's time to bring your money to the closing table and they realize either I paid too much or I sold too cheap. Regardless of what side of the table you're on and what the asset is, you know, usually someone wakes up and that's just how it goes.

And I do think if you're, you know, you're in, everyone's in a business, everyone invests. And sometimes they're two different things. But I say in the end, really, your reputation, what you do, the value provide to others is the most important thing that you can control. And I would say that, you know, in business that's one thing, in real estate it's another, where right now we're becoming this very open, transparent society where if you do not have an equitable type of transaction, you're not going to be gaining that good reputation. I would say that our market is also becoming, or just the free market in general is becoming this not policing service, but this accountability service where we do have some negative outcomes if we don't do the right thing, if we don't provide more value than what we take in as profit and money. Right?

Yeah, yeah, no, absolutely. And that's, you know, that's a good thing. I mean, no matter how good this one deal anybody is in, and if they think they're gonna get a home run, believe me, you know, down the road A little bit. You're gonna want to do another deal and that reputation's gonna really matter, so. Yeah, yeah, good point, Good point. Pat, give out your website and tell people a little bit about your podcast, if you would.

Sure. So the website is, well, a couple websites, but the main company is paradigmlife.net but for your listeners, we create a website called beerbank.com which they can go visit. And the podcast is the wealth Standard, and It's just the wealthstandard.com and the podcast, really, Jason, we don't really have necessarily a primary focus. Obviously, we are in. I'm in the insurance industry, and we have a very.

Well, you had me on your show, so, you know, there was no focus.

Tangent alert. Tangent alert.

And that's really, for me, you know, I started the podcast like 10, 10 years ago, and I'm not obviously, nowhere near, you know, the amazing amount of information you have, but I did it because I like to talk about, you know, what my philosophy is. I think it's valuable to other people. And so we do. We do have kind of a variety of topics, but you and I see eye to eye in a lot of different. Lot of different issues. But I would say that we're in the insurance industry. Our focus really is to just show how a unique type of insurance policy plays a role with all of your investing just to improve everything. We do focus on that a little bit, but for the most part is just really helping individuals understand the comprehensive nature of our economy, of our society. Looking at trends, being aware, kind of going to your. One of your first commandments, which is just education, becoming aware, understanding how things work. I know, for yourself, as opposed to, you know, having to rely on the hyperbole that's out there.

As I always say, become. The commandment number one is thou shalt become educated and become educated so you can be your own best advisor, okay? So that, you know, you. You can be your advisor, right? Not somebody else. Listen, you know, you may have listened to all 871 prior episodes of this show. I know a lot of you have, and thank you for being addicted, so I appreciate that. But, you know, don't make me your advisor, okay? Just make me the catalyst that makes you think. Okay? Think for yourself. And, you know, that's what our clients are doing. And, you know, think, you know, not everything I say makes sense. Okay. I make mistakes too, you know, so, you know, we just want to. To think and learn and grow. But, Pat, I gotta ask you an important question before you go. And I Know, we got to wrap it up. But I always like to, whenever I'm in a deal, I always want to look at the counterparty side, right? And I did. We alluded to that earlier when we kind of talked about the longevity thing and how, you know, the will these death benefits on life insurance policies play out. But I, I baited people at the beginning of our talk today with the only industry in the world that I know of that has a negative cost of capital. And that industry, by the way, is the insurance industry, okay? So what I mean by that is, look, insurance is the one thing in life that you pay for before you ever use it. And you might buy it and never use it, okay? Whereas everything else, you know, if you want to buy a widget, if you want to buy an iPhone, Apple had to spend a fortune in research and development and in production cost and manufacturing and marketing to get you to buy that iPhone. And then, of course, they mark it up, right? And so that's the way normal businesses work. But insurance is really unique, okay? In it's got that negative cost of capital. It's a very unique model. So I always like to ask, like, what's in it for the insurance company, right? So talk to us about that for just a moment and we'll wrap it up.

Well, I would say this, this comes to really any, any company, you know, private company or public company, where they have the fiduciary responsibility to their owners, right? So that's why companies have boards, right? So if you look at a board of a publicly traded company, the decisions that they make, the executives that they appoint, it's for the best interest of the shareholders, right? So all the decisions they make kind of go through that kind of that filter. So the same thing with. Because there's publicly traded insurance companies and private insurance companies. So for the publicly traded ones, they're looking at out for the best interest of shareholders, and then you look at the private side of things, and they also are run in a similar manner where they have a board and they make decisions for the owners of their company. And for mutual companies, which are the companies that we work with, it's for the best interest of the specific policy owners that own them. And that's why if you look at their activities and you look at what they're investing in, they're very conservative. They've been very consistent over the course of time because they are beholden to really the promises that they make when it comes to the policies that they issue. And then for specific policy owners, the Profits associated with their activities are distributed on a pro rata basis based on the ownership of the company, which is based on the policy owner's specific type of policy and amount of policy.

Okay, so talk to us about how that works. Like if someone buys a policy and then they borrow, you know, 75 or 80 or 90% of that money right out of the policy almost immediately, and then they go buy real estate with it or you know, that, you know, that can be a pretty good deal because they still got some other perks and they basically pay back the policy premium. But if they, a lot of people don't do that, right? And then, then the insurance company goes out and they invest that money. And I mean, you know, like kind of give us a little bit of an idea of what their books look like. Like how, how much are they really making a good profit off this deal and in what areas are they making the profit? Is the people that don't borrow back from their policy or do they just get some, and I hate to almost say this, but, but some collateralized debt obligation in order to make those loans to let people borrow from their policies?

Yeah, no, and that, you know, we can go up on a tangent with a lot of the publicly traded companies and their exposure to the derivative market. There's some exposure right now and there's been, there was exposure during 2008 and 2009. That's why, you know, some of the biggest companies in the world almost went under and needed a bailout.

AIG.

Yeah, AIG's specifically, there's a few others. And that was again, it goes to. Those are publicly traded companies, again, their fiduciary responsibilities to shareholders. And they're trying to appease this really quarterly standard when it comes to the returns they're getting and their profitability and so forth. So if you look at the companies that we use, a couple of them had zero losses across the board during that whole mess. And they actually were able to capitalize on incredible real estate deals, incredible business type of deals with debt associated with large corporations and so forth. So it's one of those things where if you do have a conservative mindset and you're looking out for the best interest of these long term obligations, you are able to weather storms and capitalize on them. So again, let me go to the loan side of things that you talked about. You got to realize that when you give insurance money to an insurance company, okay, they're promising you certain things in return for that money. And one of those things is a specific you know, cash amount that they will give back to you if you end up canceling the policy. And so looking at another thing that they will give you is a loan against that amount of money. Now the loan side of things didn't exist in the beginning of these type of policies. It didn't occur until about 100 years ago where, you know, the farming industry really had this kind of this harvest season. And that's the only time that they made any money. But yet they were, they were saving and putting money with insurance companies in these type of vehicles. But because they didn't have liquidity, it really hurt their farming. So what they did is they really kind of went to these insurance companies and figured out ways in which the insurance company could lend them money to, you know, to just, you know, throughout the season and until harvest. And that's really where the insurance companies looked at it and said, okay, yeah, we're not going to be able to invest this money, but we are charging interest on it and that interest comes to us and becomes a part of our revenue stream. And that's the case today. So when you take a policy loan, right. It's not necessarily taking money out of your cash value account. It is borrowing directly from the insurance company. Your collateral is the actual cash value. And when you make an investment, you put money into a property or a down payment and you're receiving returns, there.

You are on the hook, you have the obligation to pay back that loan with interest and that interest becomes part of the revenue stream and income to the insurance company part of their profitability.

Yeah, it's an interesting business for them because basically what they do is they have that negative cost of capital. Some people don't take any money out. Okay. So they can just invest all of that. But if people do, they can basically become a lender. So they like become a bank without even having a bank charter. Okay. In a way. Or they become a lender and. But they have a bit of that money that they can still use to invest and pay to run their business and their administrative fees. So yeah, that's interesting industry, correct? Yeah.

And you also look at just insurance in general. These are a very small, these type of policies are a very small percentage of their business. The lion's share of their business is.

Company pensions.

It'S disability insurance, it's term and traditional life insurance, long term care. I mean, there's a lot of different parts of the business that is also revenue to the bottom line. It's not just these policies. There's a smaller percentage.

Good stuff. Pat, thanks for joining me today and talking to us about good old Bernie Madoff, the pension Ponzi scheme, what it means to investors, market cycles. Gosh, we covered a lot of stuff. So that was awesome.

We did. No, it was a fun conversation. Thanks for having me on, Jason.

Good stuff. Hey, it was a pleasure. And to all our listeners, go to to hartmaneducation.com contest. That's hartman education.com contest. I know it's not the Jason hartman.com website this time. I wanted to have you go over there and see the new contests we're running for an Amazon Echo and you can talk to Alexa and do all kinds of things with her. It's pretty cool. I love those things. I've got, I've got three of them in my house now, so they, they're pretty great. And Alexa just yesterday ordered me an Uber and oh wait, she's gonna think I'm talking to her now. So go to hartmaneducation.com and enter to win an Amazon Echo and take advantage of that. Hartmaneducation.com and then of course, our main website is Jason hartman.com. all right, happy investing, everybody. We'll talk to you on the next episode.

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