2281 FBF: Global Change & Fiscal Hangovers with Investor Analyst Keith Fitz-Gerald of Money Map Press

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Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to talk you some really exciting things that you probably haven't thought of before and a new slant on investing, fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Grading wealth show. This is your host, Jason Hartman, and this is episode number 274. Thanks so much for joining me today. We're going to talk about some interesting stuff. We've got a great guest coming up after the intro portion of the show. This is that I'm doing with one of our investment counselors, Steve. How are you, Steve?

Not too bad. How are you?

Good, good. If I. Hey, not too bad. That's not optimistic enough. You know what I want to say here? Hey, everybody listening? And Steve, you got to try this out. Sometimes when people ask me, how are you? Or how you doing? I say this and it really freaks people out. If I was doing any better, I'd owe the world a rebate.

Try that one.

Okay, I will do that today. I'll report back on how it goes.

Okay, let's do a test. Steve, how you doing?

If I was doing any better, I'd owe the world world a huge rebate.

Awesome. Fantastic. Or at least a TARP bailout, right?

Oh, wow.

Yeah. Hey, I wanted to have you on today. You know, you're one of our investment counselors and we haven't had you on the show before. I've known you for, I don't know, about a year now, maybe a little, little over a year slightly. And I'm glad that you're working with us, but we have not exposed you to the podcast yet. So thanks for joining us here today and, and helping me with the intro portion of the show. So it doesn't have to be a monologue, right?

Yeah, my pleasure. Y.

Well, hey, we're going to talk about a few interesting things before we get to our guest today. You know, the first one, Steve, I wanted to chat with you about is commandment number three, thou shalt maintain control. Probably one of the most important of my ten commandments of successful investing. And there's just story after story after story of scandals in the financial world. I mean, I'm sure it just blows your mind as much as it does mine and all the listeners. And, you know, we've got this new story about Knight Capital. This is a firm that's on the brink of disaster now after millions of accidental trades. Wow. What do you think?

Well, you know, we're looking at the commandments here. Obviously, we want to maintain control of our investment because in one of the subheadings of that commandment, you might be investing with an idiot. And I think that's what happened here.

That's a very good point. A lot of times I really hedge, I really sort of focus on you might be investing with a crook. There are three things. So that's very good that you brought that up. The first one, you might be investing with a crook. The second, you might be investing with an idiot. And the third, assuming they're honest, assuming they're competent, they take a huge management fee off the top. But here, this is just an example of investing with an idiot, right?

Oh, yeah. Yeah. How'd you like to be manning the tech support desk that day? 45 minutes. And $440 million in trades in that time period. Because this new software that they implemented apparently just went haywire.

Unbelievable.

Yeah, it's crazy. It's crazy. I just. I don't. I don't think I can put any kind of money into something like that where you can have some kind of a bad horror movie plot take over and the machines just run wild and burn through all the money in 45 minutes.

Well, you know, there are many science fiction movies about that, including the most famous, 2001. That was a great movie produced back in the 60s. And how computers might take over the world and really mess things up. And, you know, this is an example of it, isn't it? 440 million. Almost half a billion dollars as a, quote, accident, unquote. I mean, that's right. Shocking, huh?

Yeah. Four times their annual net earnings in 45 minutes.

Unbelievable. So do you think the investors are going to lose money or is it still have to be determined?

Oh, geez. Who knows who Knows, I mean it's, it's a big chunk of money, but I think they got to somebody who offered to buy them. They're getting some capital to hopefully erase this mistake, but they got a big hole to dig out of. The too big to fail criteria is very subjective and there's only a couple of people who have that instruction manual and I'm not one of them.

Yeah. And that whole too big to fail and depending on government bailouts thing, especially if Romney wins in November, I think you're going to see that go largely by the wayside because there's just so much anger and opposition against these bailouts that it'll be interesting to see if it actually happens if Obama wins. I think it'd be more likely we'd see more of that in the future if it happens. So print fake money, bail out the rich, bail out the elites so that they basically have corporatized socialism. So all of their gains and wins, well, that's part of capitalism. All of their losses are socialized and on the burden of the taxpayer, but not really even the taxpayer. And that's the interesting thing, you know, we always talk about. It's a taxpayer bailout. Not really, because when you really think about it, Steve, it's really a bailout of anybody who has any assets denominated in dollars because the value of those dollars will decline as they print fake fiat money to bail these criminals and idiots out over and over again. Just unbelievable.

Yeah, it is, it is. And it'll require more and more money for every additional bailout. It's going to continue to separate the poor in the middle of class from the elite. It's going to be horrible. The inflation that's going to result from that is just going to absolutely wipe out anybody who hasn't positioned themselves correctly now.

Yeah. And the basic positioning concept, just as a reminder to all our listeners, is denominated your assets in things. This is the Jason Hartman philosophy basically right here. You're going to hear it in like a sentence. Denominate your assets in things, things that are of universal need, like housing, for example, and denominate your liabilities in depreciating dollars that will, where the debt will be inflated away. So have debt, long term, fixed rate debt that buys you those things like packaged commodities, housing.

Right, that's right. That's right.

Good stuff. Well, let's talk about a really negative article. You know the website Zero Hedge? A lot of my friends like this website. It's sort of pretty wonky, you know, I guess nobody knows who writes this. This article was submitted by, get this name, Tyler Durden. Now, do you know who that is, everybody?

I don't know who that is.

Educate me. Let me tell you something. One of the best written movies. I'll just tell you a little story about this. I saw the preview for a movie called Fight Club many years ago, and I was in Chicago and I was waiting for this girl to fly in who was gonna come hang out with me. She was flying up from Dallas and she missed her plane and she was late. 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. So I was wandering around Michigan Avenue in Chicago and I didn't have anything to do, so I wandered by a movie theater. And the only movie that was playing at the time that made sense for me to just walk in and see a movie was guess what? Fight Club. Okay. And from. From the previews, I didn't want to see this movie. It looked barbaric, like a bunch of guys who fight and beat each other to a pulp. I mean, terrible. But let me tell you, that movie is so well written. It was very, very clever. Really one of the great movies in terms of the writing quality. I really appreciate writing quality and dialogue in movies and, you know, the concept like that. And Tyler Durden, as I recall now, my memory is foggy, here was the guy who was trying to wipe out all the debt by basically bombing all these corporate offices. And at the end of the movie, you see all these skyscrapers just crumble away. And the whole concept was to wipe out the debt that the corporatocracy has had gotten all the consumers to charge up, so they became basically slaves to the system. So this is obviously a fake name. Right on Zero Hedge. You know, you never know who writes these articles here. It's all like an anonymous, you know, an anonymous blog site.

It does have Brad Pitt's picture there at the side of the article.

There you go. Y. Yeah, exactly. So anyway, this was kind of an interesting article and, you know, I want to kind of dissect it a little bit. Tell us about it.

Well, essentially the article, it's very doom and gloom oriented about the future of the housing market. It's forecasting that There are essentially 14 million homes in the so called shadow inventory. And everybody has their own definition for what shadow inventory is, but, you know, really broad definition of that for our Purposes here are homes that are at high risk of being foreclosed and being distressed for sale homes on the market. And he thinks that the home builder projections over the long term where they're at right now are still way, way, way too low, despite all the positive news about home builder sentiment and housing starts and building permits that's come out in the last few days.

Well, and let me tell you, I just want to mention on home builder sentiment, it is amazing how bullish the home builders are and how quickly that has changed. I mean, it's like I read article after article after article about how home builders are. The home builder sentiment is the best it's been in five years and builders are starting to build again. And that is amazing. I mean, imagine if you're one of our clients listening and you had the foresight, the vision and the courage really, because it took some courage, you know, a few years ago to buy into some of these properties when you could get them for 35 or $40 per square foot. And now builders are building and in most markets, the stuff they're building is about $100 or even a little more per square foot. In markets like California or something like that, it's way more. But you just built your profit in. There it is. You got it. Okay. Congratulations, you won the game.

That's right. If they were feeling any better, the world would owe them a rebate.

There you go. There you go. Now one of the things, though, that causes builders to build and makes builders feel optimistic is when the money starts flowing in. Right. And so this shows us that the money is moving off the sidelines and that is causing builders to feel the wealth effect. But also people are buying the houses. I mean, inventory is dwindling. But here you've got this article that is very negative.

Right, right, it is. And one of the main things that it brings up that I think is very good for what we're doing here. When it comes to purchasing income property with long term fixed rate debt, it's saying that consumers don't want to buy these houses because they're uncertain about the economy. They don't want to make any long term decisions. And purchasing a home is a long term decision. So even if that were the case, obviously you want to own a bunch of rentals, right?

Most definitely. Because that means more renters, right?

That is exactly right.

And here's the other thing. When they say something like, oh, people are afraid to take risk. They're afraid to make decisions like long, long term commitments like buying a house or an investment property. And the reality is though, in most cases, Steve, and you know this as well as I do, the person taking the risk is the bank. It's not the buyer. I mean, the buyer, if it's an investor and they can get financing, they're taking 20% of the risk and the bank is taking 80% of the risk. If it's a homeowner who's buying on a conventional mortgage, they might be taking 5% of the risk or 0% in some cases, depending on the type of financing they get. And the bank is taking 95 to 100% of the risk. So what is the risk committing to a 30 year mortgage? Well, we've all seen what happens. I mean, this is counterintuitive. We've all seen what happens if people can't pay the mortgage. What do they do? They just walk away. Show me where the big consequences are. You see all these strategic defaulters out there and it sounds crazy, it sounds counterintuitive, it sounds irresponsible. If you're a first time listener listening to me say this, you, you think, oh, you know, this guy's, he's out of his mind. Well, not really. Go back and listen to some of the old episodes where we interview some of these people, we interview some of the experts on this and you'll see where in some cases it just, it's like it's almost a no risk equation, isn't it?

I think so. And as long as we follow that commandment that the deal must make sense today, the economy and the housing market can do what it will in the future. But if the deal made sense when you purchased it and you've got that long term fixed rate debt, like you said, there's really no risk. I mean, tenants are paying all that mortgage for you and it's so cheap right now. I mean, most of the properties that we do are $100,000 and under and the mortgage payments are very, very small on those things. And they're fixed, they're fixed for the next 30 years. I just don't see the doom and gloom that this article presents. I don't see it.

Yeah, I don't see it either. I'd love to see one of these guys. Whenever I see this kind of stuff, they never really take into account population. Now granted, the population is increasing pretty dramatically both through birth rate and immigration. Now immigration has declined since the economy hit the skids for sure. Which almost points out how Mexico is exporting their poverty to the U.S. mexico needs to solve their own problems and the corrupt government there. You know, what they really need is a revolution in that country so that the people can start to have rights. Because it is just unbelievable how their government is just constantly abusing the people there. And it is so sad really, but Mexico is just taking its problems and exporting them to the U.S. but at the same time, the U.S. is really an accomplice in Mexico doing this. Because what they're doing is they're importing deflation. And this is why inflation isn't much worse. Because if you can import cheap labor from Mexico and import cheap goods from China, the only thing you don't have in America is jobs.

That's right.

You get to say the inflation rate is much lower because it is. But it's just interesting to see how this will turn out. But these guys never really talk about the population. They talk about the shadow inventory. And I agree there is a lot of shadow inventory there. But the other thing they don't talk about. And Steve, we've had this discussion before. Remember all of those articles we saw a few years ago about the timeline for adjustable rate mortgages adjusting? Okay. Do you remember those?

I do.

I mean, the doom and gloomers love this stuff. Whether you were reading the Daily Reckoning, you know, any of Bill Bonner's work or Addison Wiggin, who we had on the show, I think Addison Wiggin was like episode number 111 or back there somewhere in that range. And all the Agora press and we've had a lot of those Agora guests on the show, all of the Agora press and you know, a lot of the major media press was saying, oh my gosh, there's going to be this tsunami of foreclosures as adjustable rate mortgages adjust. And they could tell based on the origination times of these mortgages when they were going to adjust. Very true. But you know what they completely left out of that equation? They were looking at origination data. They had no idea how many millions of these properties were sold, how many of them were already foreclosed on and being resold, how many did loan modifications or workouts and how many were the people could actually absorb the payment and make the payment. They didn't tell you any of that. And one of these big waves, by the way, was last year. I think it was May or June of 2011. That was like a huge spike. Whenever you'd look at these graphs of these adjustable rate mortgages, oh, the world is going to come to an end when these mortgages adjust. There's going to be 10 million new foreclosures. I'm just making that number up, bunch of them, and everything's gonna go to hell in a handbasket. The reality was a lot of those problems had been solved already before those loans even adjusted. They were solved preemptively, either by the person selling their home, refinancing it, short sailing it getting foreclosed on, already doing a workout, or a loan mod. I mean, it just doesn't tell you that. It's like it gives you half the picture.

Yeah, you're just assuming that because it's an adjustable rate mortgage, it ends up in a foreclosure. That's not the case. You know, there's plenty of people that took those out that actually could afford them, that could get the workouts, that already sold the house. So that storm wasn't nearly as big as those people predicted it to be. And they defined that as shadow inventory. And nobody really has effectively defined what that is. You know, this Zero Hedge article is talking about 14 million homes in the shadow. I've read recent reports from Morgan Stanley that say it's more like six. Then I heard on CNBC that it's one. You know.

If the deal makes sense today, you're good.

Right? Right. Yeah, I agree. I agree. We've gone from just in this talk, we've gone from 1 million 6 million to 13.5 million. It's all over the board. That's the whole point. Yeah, no question about it. And then you look at stuff like this. Here's an article. This is an Associated Press article And it's dated August 8th. Okay, so it's fairly recent here. And it says US late payments on mortgages hit a three year low in the second quarter. It says Los Angeles, US homeowners are getting better about keeping up with their mortgages, driving the percentage of borrowers who have fallen behind to a three year low according to a new report. So when you've got rates this low, there are so many escape hatches for people that the shadow inventory thing I think is it's overplayed. It really is overplayed. Now, of course, and we'd be remiss if we didn't talk about this, Steve, but remember the famous quote, all real estate is local. So the question is where? In a country as large and diverse as the United states, there are 400 distinct major markets here. So I'd say that the places where you have the most adjustable rate mortgages are markets that we'd avoid like the Socialist Republic of California, where you have high land values or you have properties that do not make sense the day you buy them. Yet I do have to say prices are actually rising in many California cities right now as we speak. But I still wouldn't touch it because the cash flow doesn't make sense and the risk is still very high. But places like New York City, that are expensive, any expensive markets, that's where you see more of the adjustable rate mortgages. You see a lot less of this stuff in the Midwest, in the south, where people are more conservative, where they can actually afford their homes more often than not. And it's just kind of a different world. So that's another thing to know.

Yeah, it definitely is. I talked to a client from New Jersey the other day and told him what the investment price of one of the properties are that we're doing right now. And we had to talk for a few minutes about how that was the whole price, it wasn't the down payment.

Yeah, it's like sticker shock in reverse, right?

It is, yeah.

Hey, we should make up a new phrase for that, Steve. Let's call it sticker joy. Sticker joy instead of sticker shock. Yeah, absolutely. You know, and then there's a whole nother component that we didn't mention yet. And that brings me to another article about. This one's entitled. This is a newser article entitled Foreigners gobbling up American Homes. And this says that non natives, okay, non Americans, are taking 8.9% of all U.S. home sales. I mean, that's an amazing thing that almost 10% of the American market just right now is driven by foreigners. The article starts off, it says the Canadians are coming, okay, for our real estate. A weakened dollar coupled with a buyer's market is prompting foreigners to snatch up expensive homes here in the U.S. of the $928 billion spent on U.S. real estate in the year ending in March, 82.5 billion came from foreigners. Our neighbors to the north accounted for the most, with 24% of all foreign home sales just going to Canadians, followed by Chinese at 11%, according to Forbes magazine. And that while the Russians might get most of the media attention for the millions they drop on swanky apartments. Hey, that's my favorite word, isn't it? Swanky.

It is. I didn't know you were Russian.

No, no, but I'm not. But I like the word. It's good. So the Russians are dropping a lot of money on swanky apartments. And I'm quoting that from the article. Buyers hail from all corners of the globe, including Argentina, South Korea, Armenia, Brazil, Peru and Malaysia. So isn't that amazing, Steve?

That is amazing. And I would say two things to that. Number one, congratulations to the foreigners. You know, the Canadians, Australians, Israelis, everybody that sees the opportunity in this market, they see it for a reason and they're willing to put their capital into this market. Number two, Americans, your country's on sale and everybody else knows it. It's time to buy some income property. I talk to foreign investors every single day that are searching for good deals here in the US because they know that this is such an opportune time. Much of the world, especially Europe, with all the turmoil that it's in. The article mentions this. They need somewhere safe to put their money. They feel like putting it in the US Housing market is a good place to, to go considering what they're expecting to happen in the Eurozone.

No question about it. Now, the US has for a long, long time been thought of as the Brinks truck. Okay? In other words, the armored car. The place that foreigners could go and they could stash their money in the US in our banking system and in our financial system. And that one I wouldn't trust. But you know, they could buy assets here and have them outside of their country. And what's really interesting is some people talk about the decline of the US and the rise of China is that Chinese millionaires are scrambling to put their money in the United States. I mean, folks, this talk of US decline, it is accurate. I agree that the US Is going downhill, but my point is compared to what I mean, China has a long way to rise before it even comes close to the US in my opinion. We'll see. But our guest, I think it's our next guest actually that I'm going to have on here in a couple of minutes. I think we talked about that in that interview. I can't remember. But one of our upcoming guests is going to talk about import export parity between the US And China, which is quite an interesting discussion. We've got that coming up either on this guest here in a few minutes or on a future show. But Steve, any more thoughts on that?

Well, I just, it's blatantly obvious to the foreigners that this is the time to buy and they feel they're willing to go through that process of getting their money, especially out of China, for example. That's not easy to do. I've worked with clients on that. And getting a good chunk of money out of China into the US Is not an easy project. But they're willing to do it because of how confident they feel in where these assets are priced at right now.

Yeah, no, the deals are nothing short of incredible. They really are. And by the way, foreign nationals listening to the show now, I just want to remind you that we do have special financing available for foreign nationals. So make sure you go to Jason hartman.com you can contact one of our investment counselors about that through the website and they will be glad to help you line up financing for foreign nationals. Very unique opportunities there. Hey, two more quick things, Steve, and then we gotta run. But I wanted to talk to you about two more articles. One is about student loans and this one, you know, I've talked about it many times on prior episodes. But this whole, the student loan thing, this is the next big bubble in our financial system and there are over a trillion dollars in student loans. Now see, this is what happened is the government flooded a certain system, the college system, with money by doing these student loan guarantees. And all that they did is make the price of college skyrocket through the roof. College is largely a rip off nowadays. I mean, if you compare the regular inflation rate, the broad inflation rate, the consumer price index to the tuition inflation rate, you'll see that the tuition inflation rate has been about double, double the standard inflation rate. I mean that's just mind boggling. What has gotten so much more expensive about running a college? I think it's gotten a lot cheaper with technology. I mean, all these kids today, you know, I live a block from asu, Arizona State University. You know what all these kids do, they take their classes online now. They use a program called Blackboard and they, they do everything online. I mean, they don't even need to go to a campus anymore. It's unbelievable. I've got a friend of mine, she wants to move to Washington D.C. and she goes to ASU and you know, she wants to get into politics. Oh boy. And I said, well, what are you going to do? You going to change schools? She says, no, I'm just going to stay with ASU and take all my classes online and live in Washington D.C. so think of how easy that makes it for the university, how cheap it makes education to provide it. They have massive scalability of the Internet. So I think if they weren't such bloated bureaucracies, the cost of tuition should really be lower than it was decades ago, not higher. But the government flooded the system with money. And so look, what's the definition of inflation? What happens? Too many dollars chasing a limited supply of goods and Services that causes prices to go up, doesn't it? And that has absolutely happened with college. But what does this particular article say? This is a new twist on it, right?

This is a new twist. And this is going to sound eerily familiar with very broke government scrambling for dollars wherever it can find it. But if you're a current recipient of Social Security benefits and you owe money in student loans, expect to see part of those Social Security checks levied by the government in order to pay off the student loans.

Unbelievable. So now what they've done, not only are student loans the only debt not dischargeable in bankruptcy, it's the only one. They are now saying that they are going to levy your Social Security payments, okay, when you deserve them years later, they're going to take those. If you haven't paid your student loan, they're going to steal your Social Security. Now, Social Security was supposed to be a totally separate and distinct program completely on its own, but now the government is finding ways to just cheat people out of that. It's unbelievable. You could have paid into the system your whole life, and they have now found a way to tie the student loan to that. But you know what this all means, Steve? What this means is this means that this generation y, the largest demographic cohort In American history, 80 million people, depending on who you talk to, bigger than the baby boomers, these people are going to be renters for a lot longer. Their family formation is starting much later. They're not getting married as young, they're not having kids as young. Many aren't getting married or having kids at all. And they're going to be poorer because they're going to be burdened by this massive student debt. And you know what that means? That means a lot of them, unfortunately, are not going to be able to buy a home. So what are they going to be? They're going to be renters. And folks, you people listening? Investors, let them rent that housing from you. Provide a service to these people because God knows they need it. The, the demographics coming at the rental market now are probably the best they've ever been in the history of the human race. I mean, it is so incredibly powerful. This is a, to use the words I used of those articles about adjustable rate mortgages, this is a tsunami of renters coming at you. Take a barrier.

It certainly is. It certainly is. And the government's going to be looking for money wherever it can get it. You know, I'll go on record on the program today. Watch next in line on this student loan thing is they're going to start to levy tax refunds in order to cover student loan defaults. And it's just more pressure. Like you say, people have to downgrade. They can't buy the McMansion anymore. They can't do these things. They have to live in reasonable rental housing. That's their only alternative.

Yep, yep. And everybody listening can provide it to them. So do that. Hey, I want to talk to you about some more articles, but you know what, we don't have time. Steve, this has been a great discussion. Thanks for joining me today.

Anytime, Jason. And I'm doing so great now that the world would owe me a rebate. Do I have it right now?

Well, I agree. I hope everybody thinks so, too. So that's awesome. Okay, Steve, thank you so much. We will be right back. Oh, by the way, a couple quick things I just want to announce here. Be sure to join us for our Atlanta Creating wealth boot Camp and Property tour at the end of September. You can sign up@jasonhartman.com events and that'll be a great program. We'd love to meet you there in person. And also check the website, the blog, go back and listen to the past episodes of the podcast and check out our educational products while you're at the website as well. I think you'll really like those. We will be back with our guest here in just a moment.

Be sure to call into the Creating wealth show and get your real estate, investing and economics questions answered by me personally. We'd love to have you call in, share your experiences, ask your questions and a lot of other people listening have those very same questions. So be a participant in the show at 480-788.

That's 480-788-7823 or anywhere in the world via Skype. Jason Hartman, ROI. That's Jason Hartman, ROI for return on investment. Be sure to call into the show and we are going to enter all of the callers in a drawing for some nice prizes as well. So be sure to call into the show and I look forward to talking with you soon.

It's my pleasure to welcome Keith Fitzgerald to the show. He's the chairman of the Fitzgerald Group and chief investment strategist at Money Map Press. He's also the author of a fantastic book entitled Fiscal Hangover and it's great to have him on the show today. Keith, welcome. How are you?

I'm doing well. Thanks for having me on the show. Appreciate it.

Pleasure is all mine. Where are you located today?

Well, I am physically coming to you From Beaverton, Oregon. Normally I split my time between here in Japan and the rest of the world. I do travel quite a bit in an effort to see things that other people don't see. And I think that gives us an edge when it comes to finding opportunities, even in today's world.

Fantastic. Well, you've got subscribers in 35 countries and you've got a huge resume. So we're looking forward to hear what you have to say. Maybe the first thing we'll start, since it's so topical, is can we talk about Goldman Sachs and the recent, the recent decision by the Justice Department not to do any indictments, which a lot of people are pretty appalled about that. But what are your thoughts on it?

Well, you know, gosh, there's two levels on this. Number one, I think it's an absolute travesty that they are dropping the criminal probe of Goldman Sachs. So far we have not had a single mega bank, nor even a trading house been held accountable for their role in financial crisis. And technically, this is where it comes down. Technically, the Justice Department has really said that they can't meet the criminal standards of proof needed to prosecute. That to me is a cop out. And it suggests three things. It suggests A, a lack of confidence in the Justice Department potentially, B, the fact that we have a clear need to change the law so that they can prosecute this kind of stuff. And C, perhaps the worst of all things is that the sleazy characters that are involved in this continue to maintain their incestuous relationships at all levels. By this I mean our regulatory authorities, the traders involved, the administrators involved, the folks inside the beltway who make the decisions. This is just disgusting that selling clients materials privately described as crap is acceptable behavior.

So basically the allegations stem out of Goldman Sachs unloading incredibly toxic and probably worthless assets onto what other firms?

Well, other firms into the trading networks. You know, these were things that in many cases Goldman Sachs was trading directly against their clients. Facebook is another great example of that. Goldman Sachs, when it gets involved in a transaction, frequently comes in in the very early stages. One part of the firm buys it for its own accounts. The other part of the firm is ostensibly selling it to other clients. So you're at odds with each other. People who go to Goldman Sachs and think that the firm is acting in their best interest are in for a very nasty, rude awakening.

Well, I'm sure you're familiar with that letter. I read it on the show from a departing high level exec with Goldman about how the firm has changed over the Years and how it's just become this orgy of greed. That's my own description, but.

It'S unbelievable.

I don't think you're far off. I think that one of the sad things is that banking should be boring. And in today's day and age, the financial crisis has proven that when you have bankers allowed to trade against their clients, when they don't have to disclose their activities, and when in fact they can run the route, something is dramatically wrong with the capital system that has functioned so well for so long.

Yeah. And that actually leads to a good question. What is wrong with it? I mean, is this. It seems that the attitude really, there was a huge shift in the, in the 80s, I would say. You know, I'm not a Wall street historian by any means, but it seems like the old mentality used to be invest for income, and then it sort of changed. Invest for speculation. It's all about a good thing story. And all of the firms started acting like there's no tomorrow. Just take what you can get today. Rape, rob and pillage and let the chips fall where they may. What's with this sort of short term mentality that's going on?

Well, I think there's a couple things and I think actually I allude to this in my book Fiscal Hangover. You know, if you go back and you look at market history, into the late 1800s, early 1900s, the stock market was viewed as the domain of professionals. The average individual did not invest in the stock market. That really didn't come into vogue until about the 1920s, when all of a sudden there was easy money available. And there was the perception that somehow the stock market is a guarantee of future returns. Somewhere across the line in the last 50, 60, 70 years, that became a proxy for savings. So really at the very beginning, there wasn't this idea that you could go and make your wealth. And in the stock market. That's a relatively recent development in history. As far as what drives this, I think there's a couple things going on. Number one, we had the dramatic increase of leverage at the end of World War II. We were levered up roughly 10 to 1. So that meant there was $10 in the system for every one that was borrowed or lent. And that gave us a certain amount of flexibility when it came to rebuilding much of the world's economy that literally had been torn apart through conflict. In the 60s and 70s, that went up to 31. Then it went to 60 to 1 in the Commodities Modernization act in 2000. By the time that Hit and the restrictions were removed on the transparency and reporting requirements specifically associated with off balance sheet investments like the credit default swaps and things that are driving this financial crisis. Now leverage reached almost 100 to 1. So it became a constant battle of, of not necessarily the return on your money, but the return of your money. And when firms involved change their compensation plans and quarterly reporting accelerated, you had a tremendous mismatch between three things. The regulatory function, the needs of the investors and the owners of the firm, all of which were at odds. And that promoted an activity that is not unlike the gunfight at OK Corral. It's the Wild west, last man standing winter. And in this case it's the firms.

Yeah, it's just unbelievable. It's certainly not just Wall Street. I mean, it's government too. I just can't believe like year after year there's this debate on spending and debt. And you know, it's been going on for decades, time immemorial really. And our spending's up another 2 trillion plus dollars. I mean, this is just crazy.

It's an abomination. It is irresponsible. It's, it ought to be an embarrassment to anybody that's an elected official. But you know the Sad thing, that $2.1 trillion that we're about to argue about for another boondoggle here, another bunch of glad handing politicians, that's a fraction of what's actually the problem. That is 0.96% of the money we already owe ourselves. According to Lawrence Kotlikoff of Boston University. The actual fiscal gap, that's the present value difference between projected spending and income we've already approved is $222 trillion. That's $11 trillion more than last year.

Unbelievable. I mean, that's the unfunded mandates and entitlements then, right?

That's right. That's right. So they're fighting over a rounding error. I mean, they're trying to fix a leaky faucet when there's a financial tsunami sitting out there. It is so unbelievably irresponsible to defy belief.

Now, Lawrence Cutlikoff was on the show before. What, what year are you talking about? You know when you say, because I used to call it five years ago, I used to call it the $60 trillion time bomb and apparently my estimate was just massively low. And you know, I've had guests on talking about about $120 trillion, but what year does that go through when you, is that projected out to say, 20, 30 or how long?

Yeah, his most recent work, the 202 trillion is the present value associated with last year year's data and that's according to the Congressional Budget Office.

But I mean those unfunded mandates and entitlements, in terms of, you know, how far in the future is that projected to.

That varies by the programs involved, as I understand the research. So some of the programs extend 2020, some of them are 25. The very long ones like Medicare and Medicaid, maybe even as long as 2030. But again, the difference here in the way that he's calculating it versus the way that the guys inside the Beltway are calculating it is that he's saying, look, it's money we've already allocated and appropriated, therefore it is not only appropriate but necessary to estimate the present value cost of that. And I think Karlikoff is onto something because the present value of money is how the entire world functions. It's kind of like Wimpy in those old Popeye cartoons. Give me whatever dollar for today for, for cheeseburger on Tuesday or however that expression.

You know, Keith, I gotta say that I love that quote. I use it all the time in my live seminars and I think I've said it on the show before because Wimpy understood inflation and how to invest. You know, he said, I'll gladly pay you Tuesday for a hamburger today.

Exactly. And so I think Kotlikoff is, you know, people are fighting over this 2.1 trillion and we're going to have lots of sound bites and very earnest looking politicians and attacks and all kinds of other things. But the reality of the situation is we've got 535 ding dongs inside the Beltway, none of whom understands that they voted this stuff in. It's not the President, it's not the Bush era tax cut, it's not Clinton, it's not any particular administration. It's the collective body of our leadership.

It's just unbelievable. It really is, isn't it? Many people have said you are a great visionary, possibly have the best predictive record in business. I mean, what do you think one should do in light of this, all the Wall street corruption, the government corruption and just largesse. You know, I say just get into long term fixed rate debt, you know, against commodities. You know, that's kind of.

Yeah. You know, this is interesting because now you're getting into the fun stuff. You know, as devastating as this is going to be in terms of being a financial crisis, one of the things we know from history beyond any shadow of a doubt is that every time we have a great inflection point, we have massive wealth creation opportunities. What you have to do now is simply concentrate on protecting your assets in the meantime. So to me there is tremendous opportunity. For example, in energy there is tremendous opportunity. In medicine there is tremendous opportunity, believe it or not, even in short term U.S. treasury debt. I, for example, don't believe that we've seen the end of the debt bubble. I think that things are going to unwind a little bit further and that we're going to actually see negative interest rates in this country for a short period of time, much as we did in Japan and as Europe is already experiencing.

Let me ask you a question about that. Don't you think we already have them? I mean, if you ask me, we.

Have them in nominal terms for sure.

In other words, and let's just explain that to the listeners, we're both talking about the same thing here, I hope, which is that you can borrow money for below the rate of real inflation. Right? That's negative interest to you. Right?

Right.

Okay, good. So we agree. Go ahead.

But I think we're actually going to see the coupons go that way. I think we're going to see in Japan, for example, where I've been For more than 20 years now, we saw this in the 90s where things became so unsettled that investors had to effectively pay the government to keep their money overnight. Now in Germany, we're seeing some of those things happen already. We saw that recently with several other countries over there where the negative rates on overnight lending literally, the rates on overnight lending literally went negative for a couple days or a day or two on auction. I think we'll see that here. And that suggests to me that we're going to see the 10 year note, for example, break 1%. We might even see it go negative before this is done. So the point is, yes, this is terrible. Yes, this is a fiscal disaster. But that doesn't mean you have to A, stick your head in the sand and have somebody kick you in the butt when this is over and B, there are plenty of defensive things you can do with your money today. Now I heard many of the same Comments Back in 2000 we had the dot bomb crash. People said there's nothing to buy. This is terrible. We can't do anything. Well, that's not true because if you look at something like Altria, for example, which is a big, what I call a global stock, something with large diversified exposure, highly recognized brands, that stock in fact returned well over 1000% in the last 12 years, if you look at the total return. So the price and the dividends matter. So those are things you can do. Energy, for example. In times of stress, the world doesn't start using less energy, just miraculously. Even if we have perfect fungibility right now with another source, scientists estimate we're looking at 30 years before the 60,000 industrial processes that depend on petroleum are altered or changed or switched. So that suggests to me you need oil, you need energy investments. And many of those things actually pay very high dividends. So even if the market goes to heck in a hand basket, you are accumulating purchasing power, you're hedging your wealth, you're protecting your assets. Assets. And this is the best part. You're getting ahead for the recovery because it will get here eventually.

Most of the inflationists or the people who think society is going to collapse in general, and some of those get pretty far out if you ask me. But they would say that in your answer, Keith, you left out one huge thing. And you know what it is? It's a four letter word. Gold. I just wanted to get your take on the metals. I'm definitely not a gold bug. I mean, I own some, some of it. I think it's a defensive strategy, not an offensive strategy. I think it's okay. I don't think it's anything great like some would have you believe. But what are your thoughts about the metals, gold and silver?

Well, I think you need them. I mean, don't get me wrong, I think gold is a very, very important part of any investor's portfolio today. It has to be. And the question is, do you want to buy gold because it's going to appreciate or do you want to buy gold because it's not going to appreciate? I think the answer is somewhere in between. If you think the world is going to hell in a handbasket, then I would buy diapers, bullets and medicine. Frankly, if you look at, for example.

And maybe some vodka too.

Yeah, vodka, right, exactly. Because if you look at, for example, Hurricane Katrina, it wiped out an area roughly the size of Great Britain. They weren't trading gold for cheeseburgers, but they were trading bullets, diapers and medicine in the aftermath. And that says to me, you know, boy, that that's something really critical here. On the other hand, I had a gentleman come up to me after I finished a talk in Florida and he said, you know what he says? I get it. He said, I didn't understand you a few years ago when you made that comment But I get it now because I buried my wealth in a fence post. It is now 30 miles out in the Gulf of Mexico.

Meaning oil.

His gold.

Oh, his gold. Okay.

He had buried gold coins in a fence post in a coffee can and it had been wiped out. The. So he understood the difference. He said, okay, I understand this. Now, what that points out is you want to buy gold really, not because it's going to go screaming higher. You want to buy it because it's going to hedge the rest of the things in your portfolio. My favorite way to do it is to buy it because it hedges the value of your bonds. Gold has never, ever, despite what you hear on those late night commercials, never, ever been proven to be an inflation hedge. But it has been proven to be a great crisis hedge. And that's where you can hedge that against the value of your bonds, which in fact do react to inflation and to interest rates.

Why do you say contrary to. That's interesting, your statement there, contrary to the popular belief, what you hear on late night tv, that gold is an inflation hedge, you say it's not. What do you mean by that? Just elaborate on that if you would.

Sure. You bet. Well, one of the things you see if you watch all those commercials at night is gold's an inflation hedge and you need to buy gold because of inflation. Really? That's not true. It's never statistically been proven to have a valid relationship to inflation or inflationary rates, but it has been proven to have a statistical, roughly a 10 to 1 relationship with interest rates themselves, which are symptomatic of inflationary pressure. Therefore, the more appropriate use of gold is not the bet that it's going to go far higher, but the bet that it's going to hedge the value of your bonds and therefore the income that those things kick off.

It's just interesting. And I want to get off this gold topic, but I got to mention one more point because I have some other stuff I want to cover with you. Of course, but you ask any gold bug and they talk about the performance of gold over the past 10 years, which has been good. Finally, it's been extraordinary. But you know, we've waited a long time. I mean, you go a couple decades before and it was lousy.

I mean, well, and again, this points to, you know, the term gold bug has some very negative connotations in my mind. One of which is that they invest in gold at the expense of a balanced and disciplined investment program with the rest of their assets. If that is your definition of a gold Bug, for example, I would submit that's a bad idea because essentially what you've got to have is a pyrrhic victory. You've got to have everything else go to hell in a hand basket in order to make out like a bandit on gold. On the other hand, if you're using it as sort of a 5 or 10% allocation in your portfolio, you're hedging the value of your bond, you're using it to preserve value and wealth, as many central banks around the world are doing, I would submit that that's a more appropriate use of the gold.

Yeah, and I would agree. And so what I was going to say is if you ask any gold fan, maybe I won't use the word gold, bug. I'll just say a fan of gold. You ask any of them, did the gold go up in value or did the dollar go down in value? And they will universally say the dollar went down. Well, then what did you really gain? All you did is keep you treaded water. That's great. It's better than losing money. But it's not an offensive strategy. And that's really my complaint about it.

Well, you know, and there's something, there's one other thing that they need to consider at the moment, and I talk to thousands of investors a year around the world about this, is that now, for the first time in history, we have the ability to collateralize trades with gold. And what that means is that if the stock market gets into trouble, then very often the institutions, the very first thing they're going to let go of is gold because it's highly liquid and they can perfect the counterparty risk. So gold, in fact, if stuff does go down, gold, in fact, may be one of the very first things that gets sold instead of marching higher.

Well, that's a very good point. There will be an unloading of gold, which will actually suppress prices initially, at least. That's right. Yeah, very good point. And I think the same rules apply to silver. Pretty much. Right?

Yes. And, you know, and silver is an industrial metal, obviously, so there's a lot of use for it. But I think, roughly speaking, the same rules apply, although silver does not have the relationship that we've been able to quantify with bonds and interest rates.

Let me take a brief pause. We'll be back in just a minute.

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Let's kind of switch gears here. Recently you talked about China missing its export estimates. What's behind that? I mean, is that just a sign of things cooling off?

Well, a lot of people are interpreting it that way and they're saying, oh my gosh, the sky is falling. Well, they've been saying that effectively for 40 years and for 40 years they've been wrong. Now one of these days they're going to get it right, but so far they haven't. And I think that's very painful because those who have sat out China have certainly missed a tremendous run up in an expansion of wealth. But the thing that people are missing is this, is they're saying China missed its exports and that's a big deal because it was only 1% versus the 8% expected. Really what they're missing is this, is that imports actually are up China has got a stated goal, stated policy. Goal. This is official government policy. They want balanced imports and exports. People think China lives and dies by its exports, but exports really account for only 2% of the labor force and probably 30% of its GDP. So that's not a country that's going to live and die by its exports. What they should be concentrating on is the imports. 10 years ago imported 90 cents on the dollar, then it was 95 cents, now it's 97 cents on the dollar roughly. They will by 2015 be importing just as much as they're exporting. That's going to naturally create surplus like this.

In the meantime, in just three years they're going to have a balanced trade export.

That's right.

That's unbelievable.

I mean, well, again, this is what, you know, I have been speaking till I'm blue in the face about 20 for 20 years. And I'm not, you know, I don't profess to know everything, so don't get me wrong. But here's the thing. People talk continually about China being an export basis economy. It is not an export based economy. A very small percentage of what it produces is actually exported. The huge growth in China is due to 1.3 billion people who want what we have and who simply want to have a better life and who are developing their own economy at a speed that is five times ours, with a huge velocity of money flow that is much faster than. And they're doing what's never been done in recorded history, raising the standard of living in an entire country at a speed that we simply can't imagine. So we make the mistake of applying Western analytics to a market that is clearly not Western and we don't like the results.

Well, Keith, that really begs a whole other area of thinking here and that is if China really creates their own consumer class. I know they've been trying to do that. I know they want it, do it. Of course that makes sense. Then they can sell their, their great manufacturing power can sell inside their own country if consumers have the money to buy. But that leads to a huge potential crisis, frankly. Because the way I see it is that they have been kind of beholden to the US to buy our Treasuries and they won't have to do that anymore. And when that, there's already been a lot of balking about that and you know, some, a lot of resistance, but you know, when they don't have to do that anymore and we can't sell our toxic debt like Goldman Sachs was selling their Toxic assets everybody knows we can never actually repay, then that portends maybe some pretty significant inflation because all we can do then the last resort is just print our way out. Right?

Well, don't repeat too much into that. And here is how I would push back on that and offer maybe two other things to think about. Number one is that this is kind of like a high school dance. We have arrived at the uncertain place where we need China. China has arrived at the uncertain place where they need us. They can no more stop buying our treasuries than we can stop selling them. The two nations need each other because our currency, in fact that gives them the flexibility to produce their growth in many ways shapes and form. So they need that surplus, they need that value and the exports have to continue. That having been said, they are developing at such a speed, with such a ferocity and they have so much pent up demand that they have arrived in a space or they have developed the capacity where we are dangerously close to being, becoming irrelevant in their growth model. Now Washington doesn't understand this and Washington continues to browbeat China and say you've got to do this and you've got to do that. China has never got to do anything. They've had the world's largest GDP for 18 out of the last 20 centuries. They will have it again very soon. And I think smart US companies, and these are the kinds of companies I encourage people to invest in. Smart companies are already figuring this out. They understand that they've got to localize and they've got to go where the Chinese money is. If they want the growth, if they just want status quo, they can go to Europe, they can go to the nanny states of the East. But if they want the growth, they got to go to Asia.

There are some very significant changes. How do you predict that it will be balanced in three years? That's just. Can it really happen?

Well, it's not me, it's actually the Chinese government. I mean, they said this in 2000, 2010. They reiterated the goal in 2012.

Does it look like it's really possible?

Absolutely. There's no question in my mind that they will achieve it. Having spent more than half my career in Asia at this point in time, one of the things I have learned about the Chinese, and Chinese government in particular, is they never say anything that they can't produce. This is already baked in the cake by the time it's been made public. And you can allege, as many people do, I run into this argument constantly around the world as well. The Chinese cook their numbers. It's like, well, really, you know, you made off. Doesn't ring any bells. MF Global doesn't ring any bells. You know, United States government doesn't ring any bells.

The US Government cooks the books, too.

I mean, every government cooks the books. The difference is they've got $3.3 trillion in cash sitting over there as a surplus to pay for all this. They can recapitalize their banking system three times over and still have. We are trying to print our way out of a hole that is so deep we can't possibly see the bottom. Those are very different scenarios. And I think this is not to say China is perfect. There are clearly massive problems over there. They will have their ups and downs. But if you look to our own history, again, as I did in Fiscal Hangover, there are tremendous parallels. They are where we were in the early 1900s, late 1800s, and Beijing is much like St. Louis in the 1850s. It's the jumping off point for a better economy. It's the Wild West. It's a chance to expand. People forget that here in this country. We endured two world wars, presidential assassination, multiple depression, recession environments over the last hundred years. The Dow was still up thousands of percent. This is simply their century.

Right, but the Dow being up thousands of percent, you know, that's. That's in nominal dollars, certainly more than real. I mean, some of it may be real dollars, but you can also argue since the Federal Reserve came along in 1913, the dollar's lost 96% of its value or so.

Well, that's a very fair point, which is why I continually refer to the need for total return as your investment benchmark. Forget what the S and P is actually doing. Look at the total return, the dividends plus reinvestment. What has that gotten for you? And the answer is, is pretty darn decent return over that time period.

Peter Schiff made an interesting statement on CNBC a couple of years ago when he compared gold to the Dow and gold to the S and P. And he said, since the Great Depression, the only stock market returns have been dividends. That's it. The rest is just an illusion created by inflation. I'm almost exactly quoting him. And I have my differences with Peter Schiff. Believe me, I've had him on the show, so he's kind of the master of the sound bite.

I've been on TV with him many.

Times, but I think he seems to be right about that one. Has there been any real gain in stocks other than dividends? And if you don't have dividend paying stocks, then if you just treaded water.

Like the gold bugs, yeah, that's pretty much you're treading water. And that speaks to a lot of research we've done over the years. My research shows that on average dividends contribute to somewhere between the neighborhood of 85 and 95% of total stock market returns. Why on earth. And this is work that's backed up by Robert Shiller, this is Dr. Jeremy Siegel. They all show similar findings. There is a hugely disproportionate emphasis on dividends because they actually produce the returns in the value. I look back at hundreds of years in market history and I wonder why on earth people would invest in growth stocks when that's the case. The answer is that Wall street in its own self interest has created this huge, for lack of better terms, this huge marketing lie and foic it upon the investing public that you've got to be exciting and you've got to have all these growth stocks. The data just doesn't bear that out.

Yep, I couldn't agree with you more. It's people looking to hit that sexy home run. I'd say if you can hit singles and doubles consistently, you're going to win the game.

Well, you know, there's a reason why sports coaches know that. That's the philosophy. They've got to have consistent runs batted in, they've got to have consistent field goals, they've got to have consistent scoring. The home runs are nice and they're fun and they pack the stadiums, bring the stands to their feet. But you know what, the heavy duty hitters hit their fair share every single game, right?

Yep, no question about it. But you had talked recently about how the federal government told the banks prepare for collapse and don't expect any federal aid, no bailouts. What did they mean by that? I mean, do they know something we don't?

Well, you know, that's an interesting question. It's one of these things that people don't think about. Oh my goodness. The government told them to do this.

Ha.

Well, that's a logical reaction. Now from a financial perspective, financial professional's perspective, every financial institution is responsible for preparing contingency plans. And those have always been there. The contingency plans have gotten more detailed and more aggressive since the events of 911 and since the financial crisis. But what's different in this particular directive from the federal government is that this is sort of like a living will. The federal government for the first time said, hey, you guys have to prepare and Detail the actions you would take so that you could liquidate your businesses and not blow up the financial system while you do it. This is an idea that is outlined in the Dodd Frank act, which I think is more like Dodd Frankenstein. But the bottom line is it's an attempt by the regulators and the congressional body to get our businesses to act decisively. If we have another financial crisis now, I think it's a great step, but the problem is this is more like a financial Maginot line and probably about as effective. The next crisis is going to be different than the one we're living through now. Until they break the big banks up and put in some regulation that forces them to choose between commercial banking activity and investment banking activity, we're still at risk. And it doesn't matter what kind of things they put in. But that's where that comes from.

What do you think of Bill Gross's recent comment about how equities are dead? I mean, obviously that's a self interested comment on his part, I would say. What do you think about that?

Well, Bill Gross is a fascinating individual. He makes some well publicized calls, unfortunately, several of which have been massively wrong and very costly for his investors. For example, in February 2009, he said, get out of bonds. Those are terrible. They're going to go away. That cost an estimated $5.7 trillion. Of course, according to Peter Cohen, February 2012, 2012, he said the same thing again, a mistake. He's back in bonds. So for him to say the death of equities, I can't tell what's going on there. But certainly his credibility as a Bond Manager is $1.4 trillion under management. I disagree. I think avoiding equities is a path to ruin. Equities have always involved risk and risk produces returns. It's how you control the risk that matters when it comes to profit. And most people have that backwards. The other thing to think about, and I think that Gross is missing or simply didn't have time to get into his comments, is this is that the markets don't price on growth, they price on risk. Pricing on growth is something Wall street analysts have cooked up to keep you distracted. So you again want to turn conventional thinking on a zero price for the consistency of returns and the consistency of your profits, not necessarily the growth prospect.

Can you just elaborate on that a little bit more? You said markets don't price on growth, they price on risk.

Right. And if you think about this, so here's, let's use the bonds, for example, because that's something near and dear to Gross's world.

If you look at bonds, that is Gross's world. That's his whole.

Yeah, that's his entire world. $1.4 trillion worth of his world. But here's the thing. If people say, oh, okay, I can get 3%, 2%, 1% on my bonds, that's what's the return on my bonds? Well, a professional trader looks at that and says, no, that's the risk associated with your money.

The higher the return, the investor is thinking, boy, I can get more from my money. The trader looks at that and says, how much additional do I have to risk to get my money back? The markets price on risk, they don't price on growth. Nobody looks at a stock and says, well, gee, I think it's going to go up X, Y and Z. Except for analysts who perpetuate get things wrong. The old joke is God invented analysts to make weather forecasters look good.

The problem is that really, if you get down to it, this concept of total return and dividends that we talked about, that's a function of risk. If you control the risk, you'll get the returns. And that's where dividends come from.

Interesting. I can't imagine bonds would be anything of interest in my view of the world. My view of the world is inflationary, yours may differ. But bonds just get so I share that belief.

I share that belief. But here's the thing, right? If you avoid bonds and if you've gotten out of them like Bill Gross suggested or others have suggested over the years, on the assumption that bonds have bubbled out, you've missed one of the greatest bond rallies in recorded history. Now, I think we are dangerously close to the end of that game. I think that interest rates are going to, to rise and we are going to see inflation change here in the very near term. But before we get there, I think that the crisis in Europe has to unwind. That to me says that there's still the need for additional security and the logical place. The best looking horse in the glue factory is still the United States dollar and the United States Treasuries. That says to me that there's still appreciation left in the bonds, particularly on the short end of the spectrum. I wouldn't touch 30 year bonds for all the money in China. I wouldn't touch those kind of things now, I wouldn't touch them in the future because those are going to be very volatile. But studies show that if you keep your duration under four or five years, keep that short term ladder and Continually roll it over, you can avoid 70, 80, 90% of volatility, the long bonds and still achieve very similar returns.

Yeah, I don't know, that seems too risky for me. But that's why there are people who are specialists at doing that and trading and so forth. I just like my simple thing of own lots of income properties and have lots of debt against them.

Exactly. Well, there you go. Because you know again, this is the greatest principle in the book. If you can use OPM or other people's money, then you know, if you can produce income with that, that broadens and improves your return on equity. And I would argue that that's a good thing to do.

And I just cannot wait for the debt to be decimated by inflation. See, the way I look at it is, is it's like we were talking about gold earlier or really any commodity, the commodity will tread water against inflation. Okay, It'll keep up. It'll just be maybe a nominal appreciation and no real appreciation. Maybe it'll maybe a little bit, but not much. It'll exceed inflation by a couple points and that's great if it does. But at the same time you've got dividends being spun off by the income of in this example of property.

And then the best thing of all is what I call, and I coined this phrase, inflation induced debt destruction. Say that 10 times fast. Oh my goodness, that's like unique New York.

I don't think I can say that five times real fast.

Hey, I said ten times.

I can't even do it.

Ten. There you go. But then inflation will just come along and pay those debts off for you. I mean, if you ask me, that's the US Government strategy with China and Japan.

Well, I think you're onto something there and I think you're very accurate in your comments. I think that very clearly is their goal, is they want to have this inflationary piece actually pay off their debts. Now I think they're also delusional because unlike real estate, if you buy the right property, you have a lot of variables going for you. Perhaps you get a solid income stream. Maybe you've got some water in your nearby, you've got a key retail center. You've got something that makes that uniquely appealing, that's going to produce hopefully a higher, more stable income stream over time that can be reinvested and turned into other properties or other investments. The federal government has got a pile of hundreds of billions or trillions of dollars of schlock on its system and they are operating on the assumption they're going to be able to spin that off and sell it. Well, I don't know if anybody inside the Beltway stopped to figure out that if this crap is so bad that nobody wants to buy it, what on earth makes them think they're going to write it off on the taxpayer dollar and then somebody miraculously is going to want to buy it years from now? That just demonstrates to me they don't understand how real money actually functions.

Yeah, I don't know if they understand or not, but I think even if they do, for some of the 500 plus people inside the Beltway do understand, some don't. But I think by and large they just think, who cares? My time is now and I'm gonna keep buying votes with other people's money, with fiat money. And that's the problem with incumbency. You know, that's the problem with any incumbent politician, you know, whether it be Obama or anybody else. They just make more promises and create the money out of thin air to keep them.

Well, it's not only that, it's incredibly disrespectful in a disservice to the taxpayers that they supposedly lead or support or whatever the word is you want to use. I think it's incredibly arrogant of these folks to be doing exactly what they're doing.

You know what's amazing, Keith? I just want to get your thoughts on this final thing and I'll let you go. It's amazing when you look at the left of the political aisle, you look at the liberal side, they somehow have the trademark of the compassionate side. You know, we care about other people. You know, we want to give them free health care, we want to have more welfare, expand the welfare state. All of the stuff that of course, has been proven over and over not to work. But you know, we won't even debate that. And I have no idea, by the way, what your political leanings are as I'm bringing this up.

Oh, they're irrelevant when it comes to money, but that's okay.

Okay, you're agnostic in that sense. But what's amazing is I just have to say, how compassionate can it possibly be to spend the money of future generations and saddle them with massive amounts of debt? I mean, where is the compassion in that? To me, I would just call it selfish. You know, get what I want today, buy votes today.

It's appalling. I mean, I just, there's, there's no other word in the language I think, that can be used to describe what they're doing. You know, other than a bunch of four letter ones that are probably not appropriate for a family radio show.

So really, these guys are just, it's absolutely criminal what they're doing and a whole lot of them ought to be summarily removed from office.

I couldn't agree with you more. Well, Keith Fitzgerald, thank you so much for joining us today. Great discussion with you. Your book is Fiscal Hangover and you've got some other books coming out, of course, that's available on Amazon with great reviews, by the way. And your website, that's Keith Fisker. And there's a dash between the Fitz and the gerald.com right there is a hyphen.

It's keithfitz-gerald.com but you know what? The better place to go is actually go to moneymorning.com fantastic. And they will find myself and all of my cohorts and join, I hope, a highly irreverent, fun filled family of investors around the planet.

Fantastic. Well, Keith Fitzgerald, thank you so much for joining us today. Great discussion.

Thank you for having me and it was a real honor. Appreciate it.

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