2127 FBF: The Impact of Quantitative Tightening on Interest Rates & a Better Use for $1 Trillion with Richard Duncan, Part 2

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Welcome to episode number 958. 958. You know what I'm struggling with today. By the way, this is your host, Jason Arman. Thank you for joining me. I am worried about episode number 1000 because it's coming up. It's coming up faster than we all think. It'll be here before we know it. What are we going to do for episode number 1000? If you have any suggestions, go to jasonhartman.com ask and I completely understand, by the way dear listener, that you are not asking anything. Well, you could ask for hey Jason, why don't you do this? But you could just tell me something. But since we don't have Jason hartman.com tell, you have to go to Ask. So there you go. Go to jason hartman.com ask with any feedback, thoughts, suggestions, questions, anything you want us to know. Just go there and you know, type a few things out and I'll read them. I look forward to it. Jason hartman.com ask so you know what I'm doing right now? It is what time is is almost 8pm here on Monday evening I am having a beer. What kind of beer am I drinking? Newcastle Newcastle Brown Ale. This stuff is good. I like it. I hardly ever drink beer and I have not actually purchased beer to go into my refrigerator at home in many years. That's why this is a momentous occasion. I bought a six pack and you know, I couldn't believe how much a six pack of beer costs nowadays. How long has it been since I bought one? I don't know. This was like $9. But hey, Jeff, there's no inflation. Disneyland just raised its prices by 18%. 18%. But there's no inflation. I know, I know there's no inflation. And the funny thing is when it comes to a lot of, well, not all of them, but a lot of consumer products, automobiles, iPhones, Samsung Galaxies. Is that what they call them? Those non iPhone people, the prices don't actually decline, but the quality does go up, at least in theory. And hey, in comparison to the old phone that Apple slowed down on purpose and didn't tell us about until they got busted, the quality is a lot better in comparison. Right? And you know, if you think about the Apple phone slowing down scandal, they really wanted everybody to ask my famous question. What is my famous question? It is compared to what? Compared to what? That's the question we always must ask ourselves about everything when analyzing an investment. We ask ourselves, compared to what? When we analyze the rent versus the value of a property, we say, compared to what? We always view things in perspective, in percentages, in ratios, because that is the only right way to view things. Not in absolutes, but by comparison. Because when we want to get the most out of our money and we don't want to have sleepy money or lazy money, for example, sitting in home equity not working for us, we ask ourselves, what are the best options available? In fact, to take a phrase from the appraisal world that I talked about recently when we talked about the different types of property appraisals, the question really is compared to what? And it's the highest and best use principle. So what is the highest and best use of our investment dollars at any given point? Right. What are you really saying? Or what are you really asking? I should say you are asking, compared to what? And that's so true of just everything in life. And it harkens back to the dogs that don't bark concept and how you can't hear the dogs that don't bark. So lot of stuff on that. And when we go to part two today of MacroWatch's Richard Duncan, I want you to always ask yourself on this episode, every episode and every other piece of media you consume in the world, compared to what? That's always the right question, compared to what? So there you go. Okay, Join us at the Ice Hotel. Join us in San Jose. Hey, what else do you have to do? Compared to what? Right. Compared to what? Well, let me see. If you come to San Jose on March 3, you go to jasonhartmanuniversity.com you will learn a lot of good stuff, you'll meet a lot of great people and it will be better than whatever else you have planned that weekend. I guarantee it. Well, I guess I can't really guarantee that because who knows what you have planned, right? But the question is always compared to what. So, yeah, you'll have a good time. Folks, I really want to stress the importance of getting out and meeting people, meeting us, coming to our live events, whether they be the San Jose conference, the Venture alliance event, the very unique and special bucket list, once in a lifetime trip to the ice hotel in Sweden in April, whatever it is, come out and be with people. Come out and meet us. Don't be trapped behind your little earbuds, okay? You gotta meet some people, meet our clients. Meet people that are really doing things in real estate. These aren't the fake people, they're not the people you see on those hokey infomercials. These are real people doing real things in their real lives with income, property, the most historically proven asset class in the entire world. So yeah, come out, come to a live event. It's really important. It's always been a bit of a compulsion, addiction, OCD thing to just learn all I can. Honestly, it's a little bit, I kind of gotta watch it. You know, it's a little bit of an addiction that's kind of like an addictive behavior. So it's, you know, it concerns me a little bit. You got to keep all this stuff in check all the time, right? We all have these little funny behaviors and certainly if you've been listening for any length of time, you know, I have lots of funny behaviors and funny habits, right? But yeah, you know, everything is got to have some balance compared to what, right?

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has handpicked to help you today in the present and propel you into the future. Enjoy.

So all that stuff is really important, obviously. So Jason Hartman university.com for the upcoming event in San Jose, Silicon Valley. We'd love to see you there. I want to encourage you to not. Yeah, I know this is going to sound funny to not plan any vacations this year. Yep. I really said that. Why do I say that? Why do I want to encourage you? I want you to enjoy life. Life. I want you to enjoy your semi passive income from your income properties because, and I didn't say passive because there's really no such thing as passive income that it doesn't exist. Compared to what? Well, we are going to do some really fun, cool stuff this year and you're invited and we will announce all this stuff as time goes on. In May, we've got Venture alliance in New York. We're gonna have another event that's gonna be in a pretty cool location. I'll give you a hint once we get it kind of worked out. We're just investigating this now and then we've got another event later this year that's gonna be in our really cool location. So my idea here is to help you save money on life's single largest expense and to get more enjoyment, more rol. Return on life. We talk about roi, return on investment. We talk about roi, return on inflation. Well, we want to help you get more R O L return on life. And if we can do that and make it tax deductible, so much the better, right? So much the better. So we're gonna have some events in some really cool destination vacation education locations, right? And so, yeah, why not take a tax deductible trip to one of our educational events in a spectacular place. So stay tuned. Now, hey, San Jose is not one of these destination places. Silicon Valley. Hey, it's cool, it's pretty up there, it's nice, the weather's good, etc. Etc. But that's not what I'm talking about. So we're gonna announce those as we get them worked out later this year. But save your vacation time to vacation with us because you really might like it. So more on that coming up. And what else? Well, Keynesian economics versus the Austrian school. It's John Maynard Keynes versus Hayek. Right? The battle of the century in economics. You've probably seen those funny little YouTube videos. There were two of them that I know of. There may actually be a third. I don't know, maybe there's a fourth by now. But years ago, in fact, we showed one of these at a Meet the Masters years ago. And that's the battle of the two schools of economic thought. Well, what you're hearing today is a more Keynesian school, as you know from Richard. But, you know, Keynes had his points. He's. He certainly did. At least in the short term. It works well because it's an instant stimulus when you prime the pump. That's Keynesianism priming the pump. The government initiates spending in a sector. Certainly our Democratic president, Donald Trump, who, by the way, is a Democrat, as much as Democrats hate him well, hey, Republicans, a lot of them hate him, do. What's interesting about that is, over Thanksgiving, I was at my mom's house and on her bookshelf, she had the book the Art of the Deal that I actually read when I was 24. It was my copy of the book. In fact, the pages looked a little bit old. And in going through that again, you really realize how Trump is a New York liberal. I mean, he really is. Yeah, I know. He ran on the Republican ticket. All of the things liberals love, like jobs, they hate Trump for that, because God forbid they should have more jobs and better jobs. And wage increases, not by fiat, by law, the way Bernie Sanders would want to make them increase by market. The wisest, most sustainable form of wage increase. The free market. Oh, my God, the free market. Yeah. That tends to work better than government fiat, than the government making a law. Right. But Trump, hey, listen, go through some of his old material, and you'll realize how. How far to the left Trump really was. Okay, so I'll just say that. But, yeah, it's interesting how the world is, you know, it's complicated. It's complicated. It's not as simple as it looks. There's a lot of nuance. And so it's funny, you know, when I was in my early 20s and when I was in my late teens, I had really strong opinions. I know you're thinking, oh, Jason. Yeah. You're such a pushover. You have no strong opinions now. Yeah. Right. Well, hey, I'm only 29, but just kidding. But, yeah, you know, and I couldn't back then, I couldn't see all of the. The nuance, all of the. Hey, Shades of Gray. The movie just came out again, the third one. I hear it's terrible. Haven't seen it. Yeah, all the. All the nuance, the shades of gray. That's really what you start to understand more of as you get a little older, you get a little wiser. You understand how complex these political things are, these economic things. It's just complicated. It really is. And in our attempt to simplify things, let's get to our guest today, part two of Richard Duncan. And remember to join us in Silicon Valley on March 3rd. We'll see you there. Here's part two of Richard Duncan.

See, one of the things people really have to realize about interest rates. People talk about rates going up 1%. Well, that 1% could be 20%. You know, it's not 1%. It's compared to where it was. That's how you have to look at it the typical rule is every 1% in interest rate equals 10% in purchase price. Okay, so that same property, if it's a, you know, a million dollar property in Los Angeles, it's a hundred thousand dollar swing for each 1% in either direction. Approximately. It's not exact. People buy houses on a payment, not a price. So, so funny how the economists look at this stuff, Richard. They say, oh well, house prices have gone up this much or that much. Well, yeah, but the question is, what has the payment on that house done based on the mortgage rate? Everyone buys the house on the payment. Yeah, they all look at the prices and talk about the prices and say, oh, prices are so high, but really what they're buying on is a payment. Would you agree?

Yes, I agree.

Same way they buy a car. Okay, so talk to us about some of the other things on your list here.

Well, just about the course correction you mentioned earlier. Yes. So if the stock market falls another 10% from here, I think the Fed will pause its tightening, it will stop hiking the federal funds rates and it will put the quantitative tightening on pause as well. And if the market falls 20% from here, then the US economy is going to start moving back into recession and at that point the Fed would probably cut rates again. If the recession becomes severe enough, they'll launch another round of quantitative easing, push everything back up again. So yes, everyone needs to understand that the government and in particular the Fed is managing the economy primarily by pushing up asset prices and they will do their best to make sure they don't fall too radically.

Why do they feel they need to do this? Why do they feel they need to tighten it? From hearing you talk, it sounds like you feel that they're overreacting. Is that a fair statement?

I don't think they're overreacting. I actually pity the Fed. They're in a situation now where if they don't tighten, then a big bubble will form. Stocks prices in particular. And as you mentioned, in all the property in the trophy cities, there are already massive bubbles. Stock market on a cyclically adjusted PE multiple has only been higher than this twice in history, in 1929 and at the time of the NASDAQ bubble. So if they don't tighten, then these bubbles are going to run completely out of control and when they pop, they're going to wreck the financial system again. So the Fed needs to tighten, but it knows that if it tightens too much then these inflated prices will crash and that will wreck the economy. They'll try not to allow that to happen.

Yeah, right, Right. So no Fed chair wants the recession to occur on their watch. No president wants it to occur on their watch. How does the new tax reform act play into this? You mentioned it before, but I'm particularly interested in the concept of American companies giving out bonuses, pay raises directly they've stated because of the new tax law. And also I'm interested in the concept of repatriation of offshore money by large companies. What are your thoughts?

Well, so essentially the government is not going to reduce its spending at all. It's going to keep spending that never happens on the same thing that it has been spending on and plus some more.

Right.

But the thing that is going to change is that corporations and the very wealthy people will have to pay a lot less money in tax. And so does that trickle down? It does trickle down to some extent. I mean the rich people have more shoe shines and they will hire more gardeners. So it does.

They have to hire more gardeners. They have more houses.

That's right. The thing is wealthy people are already very wealthy and they may not spend any more than they're already spending just because they have a few million dollars more than they had before. But the spending that does occur, much of it, a significant part of it will go to buying things produced in China. So it will help China's economy probably just as much as it will help the US economy. But it all comes at the cost of a much larger government debt. One and a half trillion, between a trillion and 1.5 trillion. No one really knows. They're saying over the next 10 years, most of it coming sooner rather than later. And the other negative consequence is that because the government is going to be borrowing more, that's going to tend to push interest rates higher and that will hurt everyone by making the stock market fall and probably property prices fall, but also making credit card bills more expensive and financing for cars and automobiles and homes. So there was justification, I think, for having fiscal stimulus. I think it would have been much wiser and much better for the US Economy instead of increasing the deficit by a trillion dollars or more by cutting taxes on corporations and wealthy people. I believe the government should have invested a trillion dollars over the next 10 years in New industries.

The first time I first, hey, I remember this talk. First time I ever had you on the show, years ago, you suggested that the government, and it was during the Great Recession, you suggested that the government spend 3 or invest $3 trillion. I think you said a trillion for infrastructure, a trillion for like biotech. And I Don't know. Trillion on something else. Right. Do you still, was that, am I quoting you right on that?

That's right. And with this tax cut, they've just wasted one and a half trillion of that that they could have spent in new investments. I mean, for instance, if the government were to invest a trillion dollars in genetic and biotech research over a 10 year period, within 10 years they could cure cancer and probably Alzheimer's disease and radically expand the productive lifespan of everyone alive. Furthermore, that would have created real jobs in the US economy, trained up and educated the people much more than they are being educated. And it would generally have made the US economy much more productive, creating businesses that would allow us to sell things to other countries in exchange for the low cost manufactured goods that we're buying from them. So the government should invest and stimulate the economy. That way they will get real benefits. If a government sponsored corporation invents a cure for cancer, they could list that on NASDAQ for $10 trillion and it would pay for itself many times over. So this tax cut, while it will stimulate the economy, it's wasteful. It's wasting a great opportunity for the government to invest that much money in new industries and technologies. And that way they could make America's economy great again.

To coin a term, to coin a phrase. Richard, how does the government do that though? I mean, do you really trust the government to spend the money wisely or invest the money wisely? I mean government doesn't have the greatest track record with that kind of stuff through the tax bill. Aren't they just letting the companies do that by letting them keep the money and their tax rate goes down, they can invest that well.

Do you really trust the corporations? I mean they all went bankrupt and 2007 and had to be saved by the government.

Well, that's only because they were so highly regulated that they, you know, could get away with all these shenanigans because there, there was no checks and balances, no new players could come in and compete with Goldman Sachs and Lehman because the regulatory bar was so high. So there's like there is no startup culture on Wall Street. Isn't that mind boggling that we've got this like vibrant startup culture in almost every part of the economy except banking, brokerage. I mean you've got some fintech and stuff like that. I know, but that's not really like startup culture. Right? There's not two guys in a garage. They're building a great Goldman Sachs. Right. There's nothing there. Because the regulatory hurdle is so high. And I think the best way to keep a check and balance on these disgusting companies on Wall street and these disgusting banks like, I mean, Wells Fargo, my God, I have to say, I love that new Fed edict. They can't grow until they stop ripping people off. You read about that, I'm sure.

Right, well, right. So I mean, you're saying they're too heavily regulated, but they weren't regulated enough people off and.

No, no, no, I'm saying that the best thing is to have the competitors regulate them, but because you don't have that, or at least not very much, hey, you're, you're in it. You're in so deep, you got to now have the heavy hand of, of the regulators do it, because nobody else is going to keep them in check. I mean, there's not a bunch of other big money center banks to go to. You know, there's like a few of them. Right. Anyway, we might go too far afield with my libertarian ethic here, and I don't want to argue about that, but.

Well, let me give you some examples of why I do think the government can pull off what I've just described.

Yeah, yeah, that's what I wanted to get to. Sorry.

Just as the government succeeded in sending a man to the moon 40 years ago, and their moonshot, there could be an equally successful cancer moonshot, the private sector still hasn't been able to send a man to the moon. So that's 40 years. That government directed investment accomplished something of enormous importance. Moreover, I'm sure like everyone else, you have a smartphone and everything that makes your smartphone smart came from government funded research.

Yeah, well, the military, I mean, like GPS and stuff like that.

That's right. Everyone seems very happy about spending 7,800 billion dollars a year on the military for defense. Well, not very many people, not very many Americans have died in wars recently, but hundreds of thousands of Americans die every year from cancer.

Right.

Spending money on medical research is defense. It will keep people alive who otherwise will die. So just as our military, the government, won World War II and sent a man to the moon. And then through this investment has produced the smartphone of GPS and of course the Internet itself and just about everything else in the smartphone that makes it smart. It was all from government research, government funded research. So yes, the government can invest successfully. There's no reason the government can't invest just as successfully as the private sector. And so that's what you're seeing to a large extent in China now. I mean, China is. Their government is Investing very aggressively. They're going to become the dominant players in many of the leading industries over the next 10 to 20 years if their economy doesn't collapse in part because the government is investing and directing investment there very successfully. So now they dominate solar panel industry, for instance, and soon also the electric car business. Soon China is going to no longer need oil because they will have an electric driven economy, solar fired.

So does China get any advantage on that kind of stuff by, you know, being technically, although it sort of doesn't look like it a lot of times a communist country, you know, they're, there's definitely some real efficiencies to being communist. You can just do what you want. You know, if you want to build a road, you just build it and tell everybody to move if they're in the way. Right. Are there some advantages there, you know, to admit to with China and also the fact that they, you know, they just pollute like crazy so they don't have much in the way of regulation so that their businesses can grow like that?

Yes. It's not just communism, it's more broadly. Totalitarianism, authoritarianism, Totalitarianism, Whether it's on the left or the right, if you have a totalitarian government with absolute control, it's easier to get things done. Of course, it comes at a very high price in terms of individuals having no recourse to government decisions and often suffering on an enormous scale. The Soviet Union was totalitarian and industrialized very rapidly during the 20s and 30s, but millions of people died. But it industrialized so quickly it was able to defeat Nazi Germany in World War II on the back of its totalitarian efforts to industrialize.

Is the 3 trillion still the same as it was back then? When we talked originally, is it the same 3 trillion, same direction?

Well, of course, 3 trillion is an arbitrary number, but yes. I mean, I think we need to have. Rather than driving up the budget deficit by cutting taxes for people who are already very wealthy and increasing the income inequality in the country and meanwhile not addressing any of the problems that are causing America to decline relatively to the rest of the world, much of the rest of the world, we need to come up with a plan of how we're going to, to restructure the economy. And we can do that through government investment in new industries on a very large scale.

Well, that's not going to happen under this administration. It didn't happen under the last one. I guess we're left with what is going to happen. I mean, what do you think will happen? What are the next few years going to look like for us? Or have you already addressed that with what you said before?

I think it's too early to say that it. I think it was Churchill who said, America always does the right thing after it's exhausted every other possibility. So we're running out of options. We're running out of possibilities, and this option makes sense. And ideas that make sense catch on. So we need investment, not just building new roads and bridges. We need investment in nanotechnology and biotech and, and genetic engineering and renewable energies, to name just a few. And this would rev up the economy. And we can afford to do this. The US Government debt is high and getting higher, but it's nowhere near as high as Japan's government debt. In fact, Japan's government debt is 250% of the economy.

It's crazy.

Whereas the U.S. government debt is only 100% of the U.S. economy.

You know what's interesting about that? When we talk about those debt numbers, Richard, they're so scary. But again, there's no real comparison. You know, you gotta ask yourself the question, right? Compared to what? And we don't know how high it can go. In other words, what I'm getting at is how far can they kick this can down the road? At what point does it end? Is it indefinite? Maybe you can just kick the can down the road for another five decades, I mean, before you pay the consequences. Nobody knows. It's uncharted territory, isn't it?

Five decades from now, the people are going to be some sort of genetically modified cyborg with artificial intelligence and quantum computers. If they can't take care of themselves, then I don't feel sorry for them.

Right.

We need to think about making sure that our economy and civilization doesn't collapse if this bubble begins to implode. So it's now 2018. They kicked the can 10 years down the road. That's worked really well for me relative to the depression that we would have suffered through had they not. So if they can keep kicking it for another 30 years, that's going to probably work out just about right for me.

Yeah. Right. Well, hey, you might be living a lot longer than you think.

Well, if they invest in medical technologies, then yes, I have the potential to live very much longer than everyone expects.

It's amazing. It's truly amazing. Well, Richard, are there any questions? I didn't ask you anything else you wanted to share with the listeners today?

Well, I think the important thing is for your audience to really focus on quantitative tightening. Everyone became very familiar with quantitative easing. And everyone now remembers and recognizes that every round of quantitative easing pushed the stock market much higher and asset prices in general much higher. But what the press is not focusing on enough is what is now quantitative tightening. It is the exact opposite. Before, the Fed was creating money and buying assets. Now they're selling assets and destroying money. This is going to have very bad consequences as long as it persists. And this is not getting enough attention. But you can see already now that they have started destroying $20 billion a month from January. Interest rates are moving higher and in combination with the larger budget deficit has to be funded. This is putting upward pressure on interest rates. And this isn't going to end anytime soon. So everyone had better buckle in and be prepared for much more volatility in the stock market in the short term. And if the Fed continues hiking, as it has said, and destroys 23% of its balance sheet by the end of next year, then markets are going to go down, stocks and property. And so people had better be prepared for that.

Richard, you have an offer for our audience that you wanted to share, I believe, and give out your website.

My business is I produce a video newsletter called Macro Watch. Every couple of weeks I upload a new video. It's essentially me making a PowerPoint presentation describing something important going on in the global economy and how that's likely to impact stocks and bonds, property and currencies and commodities. And I sell this on a subscription basis for $500 a year. But I'd like to offer your listeners a 50% discount. So if they visit my website, which is Richard Duncan economics.com that's Richard Duncan economics.com they will find a offer to subscribe, hit the subscribe button. They'll then be prompted to put in a coupon code for a discount, 50% discount. So if they use the code global, that's global G L O B A L, they will be able to subscribe for $250 a year. Before that, they will immediately have access to 41 hours of videos that are in the archives that they can begin watching immediately, addressing almost every major subject of importance in the global economy. Plus, they'll get two new videos a month for a year ahead. So I hope they'll check it out or at the very least go there and sign up for my free blog at richard duncan economics.com Richard Duncan thank.

You so much for joining us, Jason.

Thank you. It's always a pleasure talking with you. We're always hitting on some very interesting subjects.

Absolutely. We'll see what happens. Thanks again.

Okay, thank you.

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