2066: Government Debt and the Reverse Repo Facility & What It Means for You

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My name is Jeremy. I'm a big supporter of Jason Hartman and grateful to Jason for a lot of what I've learned over the last four years. I can attest to him. We've had some good success using the strategies, being a little more conservative on some of the decisions, so we've purchased a couple of properties through Jason's network. I feel like I owe a lot to Jason and the team.

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

Welcome to episode 2066 and greetings from Florianopolis Brazil again, or Floripa as the locals say. We are going to have our conversation continuing with Joe Brown today, but I also wanted to remind any of you that if you are not involved in our Complete Solution Framework, make sure you get involved. We offer the complete solution for real estate investors with a very good five step program that can help you with all aspects of your income, property investing, career. So check that out. Go to Jason hartman.com and make sure you are taking advantage of the Complete Solution framework. We've been offering this for many years and happy to help you implement it. It really is a phenomenal way to approach your real estate investing. So check that out. And without further ado, let's get to our continuing conversation with none other than Joe Brown.

So somebody who owns their home free and clear, they may sell in order to buy something else.

Right? And an important point to make is that to those people, their houses feel very cheap because they're not paying a mortgage. All they have to pay is taxes and insurance. Maybe a little HOA bill, but these people are extremely comfortable. Yes, that's what people don't realize. And as I always say, if you want to have a real estate crash, or even a correction for that matter, you have to have millions, if not tens of millions of distressed owners. We're not even close to that. Right, Go ahead.

And looking at the people who do have mortgages, which is about half of American real estate, we can see that 90% of these mortgages that currently exist have a rate below 5%. It's insane.

Also very comfortable.

None of these people are going to move for an 8% mortgage. Now let's say that some really bad things happen economically and the Fed doesn't lower rates and you get the top percentage feeling stressed. We still have 2/3 of people with mortgages under 4%. Most people who own a home would have to pay 6 significantly more to move out in rent. It's the wrong comparison to look at current mortgage payments on average for a new home versus current rents. That's the wrong comparison. We have to look at what most people are paying currently versus rents. Because in the great financial crisis, you could walk away from your home and you could save a thousand bucks to 2,000 bucks a month to walk away from your home and go rent.

Well, and it actually was better than that. During the great financial crisis you could say stay in your home for a year or two and not pay for anything.

Yeah, right. Exactly right. Then lastly, we get to supply demand, which is the people of who need a place to live versus the number of places that there are to live. So this is one way to look at that. This is housing production, this is housing starts. We can see that since 1970 this has been on the decline and we've had a little bit of a rebound since 2010, but it's nowhere near what the average was from 1990, you know, forward. We just broke in the bottom in 1990. So we're nowhere near the long term average of housing production where the population growth has been the same. So that's why housing starts as a per, as a share of population has gone down. Now I would like to bring up a counter, counterpoint to this that, that somebody has shared, which is total housing units versus total population which looks like it has been increasing. So people look at this and say, okay, well if you take a look at all the housing units compared to the population, we're actually on a, on an all time high. So this is not housing starts, this is total housing units. The problem with this is this doesn't take into account all the illegal immigration that has happened over the past decade, which is 10 million people, which is a huge percentage of people that need a place to live. The other thing, this doesn't take into account is the change in demographics over the last 60 years, which is the number of people per housing unit. So 70, 80 years ago, you used to have.

Everybody was married. Yeah.

Everybody was married and everybody had kids, and you piled people into bedrooms. So every house was a three bedroom house with six people in it.

Right.

Today it's the exact opposite. You have one or two people living in a housing unit. And most of the new housing starts are massive square footage because you have to for profitability, for being a builder.

But it's not profitable to make a small, cheap house.

Exactly. And very few bedrooms. You look at a lot of 4,000, 5,000 square foot houses, they're three bedrooms. Sometimes there may be four. And so when you look at the usability, you can't just look at square footage. You can't just look at housing units. You have to take it all into account. There's fewer people living in every housing unit. There's a lot more population than is currently being counted, and there are more people who need a place to live than there are places being built for those people to live.

Yeah. Let me, let me give you one more factor that you didn't mention. A lot of people look at population. And the birth rate has definitely been declining. There's no question about it. Looking at population growth over the past decade or two is not an accurate way to look at it. What you've got to look at is the population growth that happened 30 to 36 years ago, because that's household formation today. So you've got to lag that by over three decades. Millennials love to compare their lives to their baby boomer parents lives and whine about how bad they have it. Right. But that's really a very inaccurate thing. I mean, you know, they've some valid complaints. I'm not going to totally dismiss it. But the Millennials are on the slow life plan. So everything they do is about six years behind schedule. So if you want to compare your baby boomer parents at age 30, you have to look at yourself at age 36. Millennials, okay? And if your life is comparable in terms of your financial life, then you're not getting a raw deal. Okay? So that's the comparison. Then millennials will say, well, our parents didn't have student loans. And they're right. College is a scam. Okay? It's a, it's a ripoff. But guess what your parents did have that you don't have is a huge expense. Children. Okay? You know, and I would venture to say that children are more expensive than student loans. So, you know, I mean, you're having children, but you're doing it six years later. You're doing everything six years behind schedule. Okay. You know, you're all digital nomads for six years. You saw the whole world. Your parents didn't get to do that. Okay. So, you know, it's just different, Right?

Yeah. So, well, also that, you know, a lot of people say, okay, well, that six year lag makes a huge difference in the amount of wealth you can accumulate over a long lifetime. But the other thing about that is that by and large, the younger people have not entered into homeownership yet.

Well, that's, that's, that was one of my points is home. I didn't say it. But homeownership, marriage, household formation, you know, whatever, right? It's six years behind schedule.

Right. And so there's a bunch of pent up demand. Like, you know, some of this is statistical, but some of this is anecdotal as well. There's a bunch of pent up demand from people in their 30s and young 40s who have been waiting on the sidelines because they thought it was going to crash. And the moment it becomes affordable again, they'll buy. There's a huge amount of people who are renting that would prefer to not rent.

Right. So that's called shadow demand. Right. During the Great Recession, we heard a lot about shadow supply or shadow inventory because there were homes being held off the market or that were in the foreclosure process. It was moving very slowly and they didn't come onto the market. Right now we have a lot of shadow demand. We, you know, we have a lot of millennials that have been living at home or, you know, don't even have a place to live because they're traveling, they're being digital nomads. But, you know, that gets a little tiring at some point or they have roommates and they're ultimately going to split up and form their own household, even if it's a solo household. Okay. With just themselves. So these factors are different and they warrant peeling back the onion. And I'm glad you're doing that, Joe. So what else do you want to share from this? You know what I like about it is everything. You've got to weigh the probability. Right? And at the end of your very long X post, you basically say that, look, the possible downside to waiting is less than the possible upside. Right? I don't know if I said that. Right. Anyway, the point is that there's a higher risk, you could be suffering more and your affordability could actually get worse because if interest rates come down, it's gonna cause prices to go up even more. I mean, it surprised everybody that prices have appreciated during a time when the cost of money has tripled. I mean, that's just shocking to most people. But they didn't count on the lock, in effect, of all the cheap mortgages out there. And they didn't count on, you know, the issue of there's just no supply.

Yeah. I think the downside remains that I've been saying for three years now, if you do not own a home, your personal residence, there's a good chance that if it hasn't happened yet, you will be prevented from entering the housing market forever. That you will be, you will be a renter forever. You won't be able to break in after that because you don't get any of the upside by renting. Your rent will increase every single year and you will not be able to lock in a payment for the rest of your life with a fixed rate mortgage. If you do buy, there is a chance that things get so economically terrible, devastatingly terrible, that unemployment spikes to a point where we have enough people forced out of the high interest rate mortgages that they bought in the last year that it brings some supply online that forces prices down. Yeah, in my opinion, that would probably be sufficient for a Fed pivot and lowering interest rates. But if that does not happen, there is a chance that prices come down at some point, though, if that continues, you just let that play out long enough, prices come down fast enough, everything else would have had to get so bad that you do eventually get the lowering of the interest rates. Because a recession depression, prices collapsing is a reversal of inflation. That is deflation. And if we get deflation, the Fed doesn't have to fight inflation anymore, which means they can keep positive, positive real rates while pushing interest rates down to 1%, in which case then you can refinance and you can lower your monthly payment. And so to me, it seems that the potential downside to staying out of the real estate market outweighs the downside to stepping in.

Yeah. And even in the cyclical markets where the risk is higher, your area, Phoenix, for one. But definitely, you know, the west coast of the United States, the expensive northeastern markets and South Florida, where I am, these markets have softened a bit and adjusted a bit because they reached just insane highs. With everything you said, I'd say that risk is higher in those markets. But if you're Buying an entry level house in a linear market, your risk is pretty low. To the downside overall, when you look at the real cost of housing, the payment, the opportunity to refinance, etc. Etc. Versus the possibility of waiting and the fact that there's just so little of that inventory being built and it's been in such short supply and it just can't be economically built anymore. The builders, they can't afford to build those low cost houses, so. Right, right. It's, it's a very interesting scenario. On top of all this sales activity is way down. I mean, you know, anywhere from 15 to 30% or so, you know, depending on what market you're talking about. So the realtors are starving, the mortgage people are starving, they're complaining like crazy. But don't let that influence you too much because that does not tell you the dynamics of the housing market and the supply demand issues and all that.

Right, yeah. And one final point about that. People always say prices are set on the margin. So even if supply and demand is way down, a number of sales are way down. If that house sells for, you know, half of its current price, you know, of what, what you thought it should sell for, then that's a housing crash. And it's like, technically, yes, but if.

You don't sell it, it's not a crash if you just hang on and stay.

For anybody who's not being forced out, which is almost everybody, it doesn't matter. You have to weigh personally, should I rent or should I buy and should I lock in my payment for the next 30 years or should I have an increase in payment for the next 30 years and will there be inflation or deflation over the long term?

Yeah, very interesting, Joe. I didn't want to dominate the conversation totally with the real estate stuff, but just talk to us for a moment before you go about any other things that you're working on, what you're seeing in the markets and in the economy. Just, you know, free form, whatever you want.

Sure, yeah. I think right now the biggest thing short term that we need to pay attention to is government borrowing and where they're getting the money from. And so there's this facility at the Fed called the reverse repo facility.

Right.

Basically this is a, an account that the Fed has that financial institutions can park cash and right now they're getting paid 5.3% on that, which is insane. And it's. If you put your money in a money market account or a high yield savings account, many times that's where the Banks are and the financial institutions are parking the cash they give you, you know, the, a little bit, most of that and then they keep the difference. Right now they're getting paid 5.3%. The government borrowing is just insane. For anybody who hasn't looked, go to the government's website, the Treasury's website, the, you know, debtclock.org and you can see just the massive increase and the speed at which the government is borrowing more and more money. Right.

33 trillion and counting.

And counting. Just the other day they did like $275 billion in one day, right? Absolutely astounding numbers. A lot of this is at the short end of the. So they're borrowing for four weeks at a time, eight weeks at a time, then they have to pay it back by borrowing new. They're, you know, this debt is rolling over every couple of months. The reason why they're borrowing at the short end is because rates at the short end they're paying like five and a half percent. So where they're getting that money from, who's lending that money to them is all the cash that's in the reverse repo facility. There used to be $2.3 trillion in the reverse repo facility getting paid that risk free money straight from the Fed. But once the government starts borrowing at a little bit higher rates, it becomes more attractive than to stay in the reverse repo facility. So that money goes the financial institutions instead they decide to lend that money to the government for the short term, one month, two month loans. And so there's now only about the.

Same is really true with Treasuries. I mean that's the inverted yield curve. Yeah, I mean, yes.

Right, right. And so the long term debt is not as attractive right now because if I have cash I can loan it to the government for a month and get five and a half percent or 30 years and get four, four and a half percent. So it's like why would I take on that risk of loaning for 30 years? I can get a better return for only one month.

Right.

And so that's where all the money is going right now. And they're getting it. Primarily it's coming out of the reverse repo facility. To give you a picture of the amount, the reverse repo facility had $2.3 trillion in it six months ago. Today it has $1.3 trillion in it. So in six months, $1 trillion has left the reverse repo facility and been lent to the U.S. government instead. Because it's just attractive enough at the rate at which the government is borrowing, it has, in my opinion, at most six months left before all the money decides to leave the reverse repo facility and lend itself to the government instead. But once that happens, there's no additional cash in the system to do that. So government borrowing rates skyrocket after that. So short term government borrowing.

By the way, I'm so glad you mentioned that. I think that's one of the big pressures for a Fed pivot. Am I wrong?

Well, will be, yes.

I mean, the government doesn't want its cost of borrowing to be high, right?

Yeah, technically. I mean, the government doesn't care about its cost of borrowing as long as it can continue to borrow because it just borrows more to pay off that high cost debt.

You know, some would call that a Ponzi scheme. Right. Or check kiting. It's more like check kiting than a Ponzi scheme, but.

Right, right.

I don't even know if anybody knows what check kiting is, but in the.

Old days, probably not, but in the. Yeah, it used to be write a.

Check and it took, you know, five days or a week or even two weeks to clear and then someone could write another check. This was illegal. Okay. And you could write another check and before it cash, you could just move these checks around and, and never pay the bill, right?

Yeah, yeah. Some big schemes played on the back of that.

Right.

So the point at which they do care is when they go to borrow at, let's say, 6%, 7%, and suddenly there's nobody there to lend to them. And so government debt goes no bid. So rates skyrocket to 15, 20, 30% because there's nobody, no cash left to lend to them. That's when the Fed does step back in, either by choice or by force from the government to print the money to lend to the government. That's when the pivot happen. But until that point, rates are going much, much, much higher and that translates to higher rates for everybody else. So long term, we definitely have inflation because there's no other way than printing that this is going to be resolved. So definitely inflation long term, we could see some very big dislocation and massive trouble in the treasury markets short term ahead of that.

Interesting. One last thing for you, Joe, and I appreciate you sticking around for this, but that is the yield curve, because you've kind of alluded to it here, or at least I did. So many will say that yield cur. Inversion predicts recession. And that may be true for an overall recession that, you know, hasn't been officially declared. And it's certainly hard to have a recession when you give the unemployment market is just like non issue, you know, so. But some people kind of confuse it when it comes to housing because they said, oh, inverted yield curve, inverted yield curve. That means the housing market's going to crash. I don't think any of these 90% of the country with mortgages at sub 5% rates or 42% of the country with no mortgage at all, they don't care about the yield curve. Why are we talking about this sort of obtuse thing they care about their payment is cheaper now than it would be if they do something else. By a long shot, it's cheaper. So do you want to comment on the inverted yield curve?

Yeah, absolutely. I think it's a big sign of economic pain that won't hit the real estate market. And the reason why is exactly what you just said. Because American households are loaded up with debt. So you take the half of Americans almost who have no mortgage and you take the, you know, the huge percentage with mortgage rates under 4% and then you look at their budgets, you look at their credit card balances, you look at their car loans because they haven't had this mortgage debt. They're still highly leveraged. And so when push comes to shove and people no longer are able to afford to pay all the bills, they're going to stop paying their credit cards first. Then if push comes to shove, they're going to stop paying their car loans. Their homes are going to be the last thing they'll walk away from because that would result in more economic pain than walking away from the other stuff. Which means we'll see it coming from a mile away. And the only reason it hasn't happened yet is because like you talked about, the jobs market heavily skewed. The jobs market is actually not very strong right now. Full time employment over the last three months is down by 692,000 jobs. Full time jobs lost jobs are increasing because people are replacing those full time jobs with multiple part time jobs.

Yeah. So it's the gig economy. Sure.

Not only that, but the struggling households. You're working at McDonald's and you're working at Taco Bell and you're working at Wendy's. So you look like three jobs to the establishment, but it's only you and you're working way more just to make ends meet.

Right.

And so the stock market, heavy risk to the downside, lots of economic pain coming. But the housing market is going to be almost fully insulated from that because nobody's going to walk away from that first. You're going to let your expensive stuff go first.

And they've got 28 years left on those cheap mortgages, so it's not going to cure itself anytime soon. But one of the things I do want to say about the jobs issue, and I've heard that analysis before, of course, just like the CPI or all the government stats. You know, I had John Williams, the founder of Shadow Stats, on my show before, and, and you know, I, I get it, but a lot of jobs aren't counted also. Okay. And that is because of the gig economy. So if someone's making money with Uber Fiverr, TaskRabbit, people have become pretty innovative about putting odd jobs together and getting by on that. You know, some are doing.

Especially young people, actually. Especially young people. There's very few young people who want to go the traditional route of get good grades, go to college, get a job and have a career for 40 years and, and get a movie watch.

Lot of that stuff isn't really counted very well.

Right.

Yet people are getting by on it, and some are actually doing pretty well on it.

You know, it's a big issue because the IRS in the last year to two years has started to track and look at and require reporting for payments above $600.

Right.

And so it's enough of an issue where the IRS is saying we're losing out on taxable income because we're not finding all the people who have taxable income that are getting it through these, through these apps. And so that's why it's reported now. It was always taxable. If it's. If you make over $600, it's taxable, but it hasn't been reported in the past. And so enough people are making their money that way now in an uncounted way, but they're trying to make it reportable now.

People have to realize it's kind of hard to be unemployed nowadays, you know, unless you really want to be. If you're just a slacker, then, okay, you can be unemployed. But there are so many ways you can easily earn money nowadays with the gig economy. It's. It's just pretty great, actually.

Yeah. Yeah. That's a great way to finish it off, is that there's this quote by Thomas Babington McCauley. I believe that I might have his name wrong, but I think It's Thomas Babington McCauley where he says, on what basis can we look back throughout history and see nothing but progress up until this point, yet confidently say that we have nothing but destruction and gloom in the future ahead of us. Statistically speaking, we are better off today than any people on earth has ever been throughout history, and the likelihood is that continues. And while there may be hardship in certain places, for some people, that's not going to be the norm and it never has been. Humans are have, have a knack for figuring out ways to make things better, and that's true today. And all you have to do is look at things as opportunities rather than problems to start taking advantage of it.

Yeah, that's, that's a great point, Joe. I appreciate it. Give out your website. Of course people can find your great YouTube channel, but give out your website too.

Yeah, YouTube channel is heresy Financial. That's where I put out everything, you know, a couple times a week, put out videos and then I run Heresy Financial University, so heresyfinancialuniversity.com for more in depth training.

Excellent. Good stuff. Joe Brown, thanks for joining us.

Thank you for having me.

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