2217 FBF: 9 Effects & 2 Types of Inflation, Construction Costs & Trade War Impact

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I thought the event was amazing. I thought that I knew a lot about real estate, but coming to your seminar, I realized there's a lot of things that I don't know. And one thing that you did, besides teach me a lot about real estate, is you inspired me to look beyond where I live and to, you know, kind of shrink down the world and make it smaller so that I can invest in places that are further away and get better returns. So I really appreciate that and I'm excited to be here this weekend. And again for me and from all the people I heard there, thanks for doing these events because they're great.

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 Hunt 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 listeners from around the world. This is episode number 12:03, 1203. And this is Jason Hartman, your guide as we try and figure out how to achieve the best return on investment, especially through the most historically proven asset class in the entire world, and that is income, property. And you know, the question we need to have is as we look at the economy, as we look at monetary policy, as we look at the trade war, and by the way, I don't know that trade war is even a fair phrase. Look at it. It's a trade negotiation. That's all it is. I mean, everything, every transaction in the business world is a negotiation. You could say that business is war. Sure, you could say that love is war as the saying were, right? Or what's the saying? All's fair in love and war, right? Yeah, that's the old saying. But look how does it relate to you as an income property investor? What should you do? What are the takeaways? We like to get into the ivory tower a little bit. We like to discuss the academic theory, but what really matters is how does it affect all of us as investors and what can we do to protect ourselves? What can we do to plan for the future? What can we do to achieve the best control over our financial future? And what can we do to achieve the best return on investment? So we're going to dive into that today. It's a little bit of a continuation from yesterday's episode where we ended causes of Inflation. Adam is here with me to continue our discussion today. Welcome back, Adam.

Thanks. It's good to talk about inflation and also I'm just going to call it a trade disagreement.

Trade disagreement. I'm going to call it a trade negotiation because that's what it is.

Where did you want to start with the inflation talk here?

Well, gosh, you know, we left off yesterday. And let's just review these. In some ways, I think we ought to call the first part of this show the Investopedia segment, because that's where the article's from. It's really quite interesting. And as we were discussing it, Adam, before starting the episode today, I think maybe we came to the conclusion that this, this is a little bit big for a show. So we are going to put the link to this article because I think you need to read it. We're going to put the link to it in the show notes@jasonhartman.com so just go to jasonhartman.com, look up this episode and right in the show notes, you'll have a link to this article. But the nine common effects of inflation. I said causes. I believe I misspoke. Cause and effect, they're sort of the same thing in some ways, but they're definitely related. Cause and effect, the old rule of cause and effect. So number one, erodes purchasing power. Number two encourages spending and investing. Number three causes more inflation. Number four, raises the cost of borrowing. Number five, lowers the cost of borrowing. And I know contradictory items, but that's a sign of intelligence. Can you hold two contradictory ideas in your head at the same time and compare them and see the gray areas and the nuance and all of that. Number six, reduces unemployment. Number seven, increases growth. Number eight reduces employment and growth. Number nine weakens or strengthens the currency. I know it's a little much to try and discuss here, so we really do think you need to actually read this article. In addition to listening to our armchair quarterback backing of the article. But another thing, there was a related article here that I thought was interesting and I thought it was worth talking about because I think it really relates to real estate investors, especially the cost of housing and the cost of construction, because such a big part of any property you buy is related to the component that involves, well, the L word. No, it's not love, it's labor. Labor. Adam, thoughts on any of those nine items?

I think the number three through nine are important for kind of figuring out when inflation is going to come and kind of what impact it might have. But I think number one, and number two, eroding purchasing power and encouraging spending and investing are the ones that are really going to impact the choices you make. So you need to realize as inflation comes that it does erode your purchasing power and that it will encourage people to spend more money, which could then lead to more competition for your investment properties. So it's important to know the other things. So know that, hey, I believe more inflation is coming because I'm informed. And whenever that does happen, I'm going to get ahead of the eight ball and I'm going to start purchasing investment properties before everybody else jumps into the game because they realize their dollar is becoming worth 85 cents now.

And the interesting thing is very few people realize it in the way you said it, which is of course accurate. But most people are motivated out of fear and out of fomo. Fear of missing out. Right. Because every market cycle that I have seen where it's been one of these really tight inventory cycles where there are very few properties to buy and prices are going up quickly, people buy not really out of opportunity as much as they do out of fear. Fear of missing out, they say over and over, out loud and in their own mind. And if it's a couple between the two of them, they say, look, if we don't buy now, we're going to miss out and we're not going to get a home. Now that's for the home buyer. But of course that traditional home buyer impacts the investor because it's the same exact marketplace, right? The investors are buying in the same poor pool, the same marketplace that the home buyers are buying. So that fear of missing out as a motivator, of course, for investors, that's why we see in a hot market, we see declining return on investment, we see inferior rent to value ratios, inferior cap rates or capitalization rates, and all of those return metrics are impacted. So yeah, you're absolutely 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 hand picked to help you today in the present and propel you into the future. Enjoy.

And one more nuance to that that I think is important when I have taught you over the years in prior episodes and at our live conferences about the Hartman Risk Evaluator, where when you look at a property, you can't quantify it or understand it as a single entity, you must understand it as at least two entities, land value and improvement value. The land and then the house or the apartment or whatever structure is sitting on that land. Two very distinctly different value drivers. And the one that is more susceptible to. To violating my new commandment number 21.

Commandment number 21, Adam, of the ten commandments of successful investing, clearly we cannot count.

Math is hard.

Math is hard. Yes, it is. But I issued commandment number 21 recently, and that is thou shalt avoid manias, okay? The mania that is the far and away the biggest value driver when there is a mania is the land value, not the improvement value. It's the land component of that investment, and that's the one that is susceptible to the big swings. The land value is high in cyclical markets, and it's low in linear markets, and it's in the middle in hybrid markets. So what are your thoughts on that? And then let's go to your other point about the nine common causes or nine common effects.

Well, looking at my property taxes, which I think is important for anybody to do, I would have to say that I can't agree with you more than I do, because the land value of our properties in Memphis is only $30,000 for a home that is on the same amount of land that our house here in Austin is, which is $100,000. But if you were out in California or up in the Northeast, they would laugh at $100,000. They'd be like, that's my garden. Out in cyclical markets, they're incredibly high. You're looking at, you know, 500,000, 600,000 for a home on the same land as in Austin or Memphis. So it's really important because that's where your crash is going to happen, because the cost of construction is going to go up a little bit based on that. But your real big crash is going to come in your land values, as you mentioned. So if you have something where the home value is only impacted $30,000 because of your land, then it's probably only going to go down 20,000 maybe, as opposed to potentially hundreds of thousands of dollars in the cyclical markets.

That's what it took me 19 years to discover. And that's what I call the Hartman risk evaluator right there. You just nailed it. So good job on that. So if you want to have a secure future where you are not a speculator and not a gambler and you are obeying commandment number five, thou shalt not gamble, invest in linear markets with low land values. So did you have another point on the nine things? And then let's shift gears to cost push, inflation and demand pull inflation at the moment?

No, I think number six and eight, where it talks about unemployment and employment is going to be impacted by our next Investopedia article. But those, I think numbers three through nine are important for everybody to read because it will show you a lot of things that you can look at and say, okay, in the future, when I see these things, I'll know inflation is here or coming. And now I can adjust my investment strategy to take advantage of that.

Yeah, good point, good point. Now, one of the things that we have to realize as we discuss these two major types of inflation, cost push and demand pull. I would really liken it to what Earl Nightingale taught me many, many years ago is that he was the one that promulgated the idea that we become what we think about. Napoleon Hill did it much earlier. And Earl Nightingale gives Napoleon Hill credit after he, as a young man read the book Think and Grow Rich. And he talks about how our environment is shaped by our thoughts, but also our thoughts are shaped by our environment. So these things are circular. They are a feedback mechanism. Now you're thinking, what does that have to do with inflation? Well, it has a lot to do with it because neither of the two things we are about to discuss in terms of the two major types of inflation happen in isolation. They are a mirror like reflection of each other. They are a feedback loop. Adam, why don't you start and let's talk about this.

So our first type of inflation is cost push inflation. And that is, simply put, it's when the cost of production goes up. And the biggest part of production is the form of wages, what people are getting paid. And so as people get more money, they are fighting for the same amount of goods. And so the price naturally starts increasing. So that is the cost push. So as cost gets pushed higher, inflation comes in on the product side.

All right, now, demand pull, pulling versus pushing through the supply chain.

So demand pull simply means there aren't Enough items to begin with. And whenever that happens, you start seeing people fighting for that item. So for an example of that is it happened to us recently when Harvey came into Texas and people. Yeah, when Hurricane Harvey.

Not, not a guy named Harvey.

Yeah, it's. Everybody in Texas knows what Harvey is. But if you're outside of Texas, I apologize. So when Hurricane Harvey was coming in, there was a slight decrease in the amount of gasoline that came into Austin. But people were terrified of that. And it actually made. We actually had gas shortages and the gas prices started skyrocketing and that was a demand pull. There was a slight decrease in the quantity that was available, but the demand did not change, which shot the prices higher.

Okay. As far as real estate though, this is interesting looking at both of these types of inflation, because they both very much affect you as a real estate investor and they affect your renters as well. I would say that mostly when it comes to real estate, demand pull is the biggest component of the inflationary picture. I'm curious, Adam, if you would agree with me on that or disagree?

I kind of disagree with you because I think it's more of a. When people have more money in their pockets, they're more willing to buy the property as opposed to when the properties decrease, people start fighting over them.

And it's not really more money in their pockets, it's more ability to borrow money because real estate is largely a credit based asset.

Right. But more money in their pocket for wages, which means they can put a down payment down, which means they can.

Get the loan or they have a wealth effect of a rising stock market or some other wealth effect factor. But what I meant when I said that is that there is a limited supply and when the demand increases, wow, they're not making any more land. Right. That's when you see these prices escalate like crazy. But you're right, it's a chicken and egg discussion, isn't it? Because of course for them to do that, they got to have more money or access to the ability to borrow more money in the first place, right?

Yeah. And I think going back to what we talked about at the beginning with the trade war, I think, or trade disagreement or trade negotiation, this could be a big thing for cost push in terms of inflation for real estate. And that is if it gets to the point where cost of production overseas gets too expensive, it's going to come back to the US it's going to drive wages higher for workers, in which case they're going to have more money and are going to be fighting over either rental properties if they're there just for a short amount of time, or purchasing properties which will then drive the cost of of our properties up.

Listeners, I want to make sure you caught that and you made a record of it because Adam is officially becoming a Donald Trump supporter. Yep.

I agree with some of the things he does. I will say that.

What don't you agree with?

You come on this show and you sure sound like, yeah, I like what he's doing. And you know, listen, as far as the trade negotiation, not the trade war, I think he's absolutely right. Philosophically, sure, I think free trade is great, but it's not when the parties aren't, to use the old biblical concept, they are not equally yoked. You cannot have an open free trade when the parties are not equally yoked. So as soon as China wants to impose the same minimum wage laws, the same OSHA requirements, worker safety requirements, allowing workers to have the same ability to sue their employers as they do in the US Et cetera, et cetera, then the parties will be in the same environmental regulations. Don't forget that one. That's a big one. They'll be equally yoked. And we can have all the free trade we want.

And it's also, I mean, we're going to get to a Business Insider article from Gary Schilling as well. But I think it's important to know that we in the trade negotiations, it's important for all Americans to remember that most any country can create goods, but not every country has the monetary stick that we have as a country. So I mean, we can go with China.

When you say we, you mean the US Having the reserve currency and the biggest military and the biggest brand, et cetera, et cetera.

So if China doesn't want to produce the United States goods for X amount of money, we can go to India, we can go pretty much anywhere else in the world and say, hey, we all produce our goods for X amount. And somebody is going to say yes, which is why we are in a very strong position in the trade negotiations. Because if you have the dollar and you have a good, and you need to pay your rent or you need to pay your taxes, the good's not going to do you much good right now.

Here's the thing, though. If China, and this is what Peter Schiff was saying many years ago, can ultimately decouple from the US Meaning they can create their own consumer economy, they can create a middle class or a customer essentially out of their own population that is as big as the customer of the United States, then the US Would not be in the catbird seat, as it were, and it wouldn't be able to negotiate the way Trump is negotiating. Right. Because Peter Schiff's theory is, well, China's not going to need us. Well, he's been totally, massively wrong about that. But it sounds good. It's a good theory. It's a good soundbite. I mean, I heard him saying that back in the early maybe 2003, 2004. I remember that.

Yeah. Well, his assumption assumes that workers in China are going to be willing to put up with the current market that they're in. I mean, like you said, the minimum wage thing, the safety, health, I mean, once it gets to the point where they, as the society reach that point, they're going to be more like the Americans and say, hey, we don't want to work 14 hour days, six days a week. You know, we want to, we don't.

Want to, we don't want to live at the factory. They live, I mean, some of them live at Foxconn and work 12 hours a day.

So as that happens, their cost of production is going to increase, which will then make them not necessarily the best place to go. And so production will shift somewhere else and then they'll be playing the same game that we're playing.

Right. It's always dynamic. Nothing is forever, everything is dynamic. Marketplaces are dynamic as they should be. They should be very liquid like that so that, you know, capital and customers and producers, they can all allocate in the places that's most advantageous for them. That's the great equalizer. And, well, it's the invisible hand, as Adam Smith taught us. Right?

Yeah. And especially as it gets more expensive in China, if Peter Schiff becomes correct, then a lot of the production will be shifted back to the United States, which is great for the linear markets that we're in because they're mostly the blue collar creating the goods. And if more production comes back over here, then they're going to have a lot of money in their pockets.

I got a couple random thoughts on this I want to share and I'd love to get your comments on them. And by the way, listeners, if you have any comments for us or you just love the show and you want to tell us, and you've already written a review on itunes or stitcher radio or whatever platform you're listening on, and we appreciate your reviews. Thank you for that. If you've already done that and you want to give us some Feedback. Tell us you love the show. Go to jasonhartman.com ask or make a comment and tell us you think we're crazy. Whatever you want us to know or ask a question, whatever jasonhartman.com ask. But here's a couple random thoughts. Number one, I have not studied Henry Ford very much. That is one obviously famous person from our past that I have not really studied much. But I have read about how he increased wages for his workers so that they could become his customers. And I find that to be interesting as it relates to things we've talked about over the years, Adam, like modern monetary theory and this kind of idea. Right. But Trump will definitely bring jobs back to the US and he will create wage inflation. I mean, he's already achieved that. Okay. As Americans. Right. Really hadn't had a raise since 1977. They have since Trump got into office. Wages have been going up and the labor market's been very tight. So that's kind of one random thought. The other one is about our recent speaker at Meet the Masters and Japan, because they both kind of relate to each other, and that is George Gilder, who has been on the show many times and also was the speaker at our recent conference. I'm talking about. He talks about how the resources in the world are basically the same, and the only real significant difference is human ingenuity on how to use those resources. Right. They're the same as they were when we were living in this world, has the same resources. And what created modern civilization was that we figured out how to use those resources and harness them very, very effectively. And when you see a country like Japan, when it had its boom time up to the late 80s, and then it had the lost decade that became the lost two decades. Right. And Abenomics and. Well, Japan's a whole interesting story, but mostly, I think, a demographic problem. I think Harry Dent is right about that. You look at a country that achieved marvelous success and had really very few natural resources. The resource they had was Japanese ingenuity and discipline. And they had some new factories that the US Rebuilt after bombing them. Okay. So it's pretty interesting to look at that when you think of the context of all of this stuff. But back to the cost push and the demand pull, inflation. I think, Adam, we should talk about the labor component of real estate. That's a pretty important one, don't you think?

Absolutely. I mean, that's, you know, every dollar that goes up for the wages of the workers. You're talking about, you know, 40, 50 workers at your home at any given time, you know, that cause your price per square foot to go up pretty significantly as the, you know, cost of each, the general contractors goes up.

It sure does. It sure does. And just to give you some insight into how significant this is in booming markets when there are boom times and every builder and every home rehabber is trying to do more and more construction, these trades become so scarce and so valuable that literally contractors will walk up to job sites of other, other companies, okay. And they will see the guy there framing the house and the mason doing the brickwork and the electrician doing the electrical work, and they will offer them cash bonuses to walk off the job and come to their job. And it happens a lot. This is something we saw in Florida before the Great Recession quite extensively where, where people would buy homes in Florida, a lot of it driven by investors at the time when it was a crazy market, certainly not that crazy nowadays, but it was in 2003, 2004, 2005 even. And they would hire a builder to build a house and the workers would literally get stolen off the job to go on another job. And there were all these half finished houses that were just sitting there. And the Great Recession hit and wow, it was a mess. It was a mess for a lot of people. This happened in the oil sands area up in Canada. Okay. I think that's Fort McMurray. And it happened in the Dakota area with the oil boom there. When that was going on, you just couldn't get workers. They would import the workers into these areas. It happened in Alaska during their boom times and the Alaska pipeline and so forth. And still you have to incentivize people to move to Alaska. They don't just pay no state income taxes, they actually get money back just for living there. So it's pretty interesting, you know, how things get when there is a mania, when there is an extreme boom time.

Yeah. And when you get that mania and you get the lack of workers, one of the easiest parts ways to solve that is through immigration. But it's also a terrible sticking point politically. So I mean, if we were willing to allow a whole bunch of, you know, construction workers come into the country, it could solve the problem pretty quick. But politically, that's usually not the best. And societally, sometimes it may not be your best decision.

It can be very costly in the long run. Obviously now, you know, there have been guest worker programs certainly for agriculture, and I don't know if those have applied to construction or not. But one of the interesting things about that and such a Irony how political debates play out. I remember back in the 80s when all of the liberals, all the Democrats were like hating on the Republicans. And here was the dialogue back then. It was like, well, these evil businesses shouldn't be allowed to hire people without double checking and triple verifying their immigration status. All the businesses are so greedy, they just want to hire all the illegals. Okay? Like that was the dialogue back then. Isn't it amazing how it flipped? It flipped now to even before Trump, okay, It flipped, you know, in the last decade or so to Hillary Clinton saying things like, you know, the politically correct thing was workers without papers.

It went from illegal alien to illegal immigrant to workers without papers to undocumented workers, was somewhere in between there to workers without papers. And now it's funny how the exact same issue has completely flipped, right? It's like now those evil Republicans, they want to close the border and the Democrats are just so kind hearted, bleeding hearts, they want to let everybody in. See, before the businesses wanted to get the cheap labor, but now the Democrats want to get a free voting block.

Not cynical at all, are you, Adam?

You couldn't write fiction this good. It's just funny. It's just funny how the debates just flip. It's the exact same issue. Yet the way things are stated and the words they are given have huge meaning. They really do. I think you have more to say on the trade war before we go the trade negotiation, but how the US Will win the trade war. Anything more on that?

Mostly it's just that as it comes, as it plays out, as things get more expensive, it's just important to look at where the. So say you're talking about cars get more expensive. Well, then the question you have to ask yourself is when cars get more expensive, what's the first job that's likely to come back to the United States? Are we going to start shipping things in from overseas? Okay, well, if we're going to ship things in, then I should look at what's going on maybe on the coastal areas or along the Mississippi river and kind of where are the jobs going to come in? Because that can tell you a lot about what area might see appreciation potentially. But also looking at where are my workers going to have the money to pay the rent and I will not have to worry as much about the area and you know, having to evict tenants and all of that. Looking at where the money is going to flow back into the United States based on what happens in the negotiations.

Yeah. So it's obviously a big country and That's a great point. Where will that as they use it in the land development business, that path of progress be? What will be the areas that are really the benefit beneficiaries of this, and what will be the areas that don't capture any of this benefit? Right. That's a good question. We have really, really liked from the beginning of me being in this business, helping nationwide investors back in 2004, we have been always thinking that the south, first of all, is the play. And the Southeast, particularly being the play, the southeastern region of the United States, that has become more and more expensive. So we have looked at Midwestern markets and done lots and lots of business in them as the south and the Southeast went up in price. But by and large, the auto companies, the right to work states where you don't have to join a union to get a job, which is a ridiculous concept. The warm areas, the nice climates, low cost of living, perfect for retiring baby boomers and in many ways perfect for millennials, right?

Yeah. And as retired baby boomers happen, if they want to buy, you know, new properties or rent new homes in that area, you're going to need more construction. So that's going to help out everybody.

Yeah, Absolutely. Adam, I think we got to wrap it up. What do you think?

I think it's about that time.

All right. One last thing. Well, two last things. Jason hartman.com for the upcoming cruise. Lot of interest in that. But get yourself signed up, get your stateroom booked for our cruise to Grand Cayman, Cuba and Jamaica. It's going to be a great time. That's in November, but we got to get your reservations in as soon as possible. And if you are a spam victim, yes. If you have received spam from a real estate company who will remain nameless, but another real estate company, if you got an email from a company where you did not sign up for their email list, let us know about it. We are doing a little investigation here and we'd love to know and we would very much appreciate your help as our dedicated listeners. So go to jasonhartman.com and let us know or send an email to reviewsjasonhartman.com you can just forward that spam that you receive over there and we'd love to take a look at it for you. Thanks for listening. And until tomorrow, happy investing.

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