327: Steve Hochberg, The Phillips Curve, Elliott Wave

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Thank you for joining me today from 189 countries worldwide. Hey, speaking of countries, North Korea is in the news. You've heard the rumors. Has Kim Jong Un passed away? We don't know. I guess nobody in the non hermit world, meaning North Korea, obviously the hermit regime, the hermit country probably doesn't know the answer yet, but there are conflicting schools of thought on what will happen if he does pass. Number one that I want to mention, and it's not the number one theory, it's just the one I want to mention, is Jim Rogers. What he said I thought was very interesting. Now Jim has been on the show three times before. He's the very famous author and hedge fund manager. You see him in the news all the time. And he predicted that North Korea would fall, that it would open up, that it would bring a bunch of inexpensive labor to the world. Now granted this labor, what kind of knowledge are they going to have? What kind of skills? I don't know. I'm not quite as optimistic as Jim Rogers is about that. But nonetheless it would become a very interesting region for many years to come. The other theory, I guess that taking place is that Kim's sister would take over and supposedly she is far more vicious than he is or was, we don't know, and would rule with an iron hand even worse than he did. So who knows what will happen. But let's hope for the best. It would be so great to see North Korea open up. And I'll tell you something, even though nobody's traveling now, and I'm not even thinking about traveling and I'm enjoying the quarantine. I know I'm weird, I know it's hard on a lot of people, but honestly I kind of like it. It's just nice to not have to go anywhere. And you know, I've said this before, maybe you've heard it. It's the first time in my life when I have like no sense of fomo, you know? You know the acronym fomo, Fear of Missing Out. Previously. If the world were functioning as it normally does. You know, if I'm not going somewhere, if I'm not on a trip, if I'm not going to a confere, I'll open up social media and I'll see all my friends are at this great conference and I'm missing out. Or my friends are on this great trip around the Mediterranean and I'm missing out. And so you have that fomo. And the FOMO concept really ties in very much with the keeping up with the Joneses idea. And I'm not saying that any of this is good or even psychologically healthy at all. I don't think it is. But it just is. Look, that's the way we're all wired. I know you're wired that way too. You may claim to be immune from it, but you're not. Because guess what I know about you. I know that you're human. I know that you have the same basic wiring I do and everybody else does. I know we have the same nervous system, the same brain parts, the same prehistoric mentalities, the same fight or flight response. And I know you have the same set of emotions. So that's what I know about you. So anyway, it's interesting. But yeah, no concept of FOMO at all. Which by the way, as I predict how the recovery will go from this catastrophe of the first self imposed depression or recession or depression. We'll see, we'll see. But as I predict, it will be the modified square root symbol. I may have mentioned that to you before. The modified square root symbol and more to come in my upcoming Pandemic Investing course that's turned into an entire course now. And we're going to do it virtually. And you know what many of you are asking me to do my Creating wealth one day conference virtual or the JHU conference virtually. And you know what? I'm into it. We're going to do all of this stuff I have learned in this past several weeks and probably you have too. How to do things better virtually. Creative destruction. Joseph Schumpeter, the economist Joseph Schumpeter. We're all learning to do this. And yesterday I mentioned that my dog's veterinarian said download the telemedicine app. Well, guess what? Today right before I started recording, I got an email from my doctor and my doctor I had asked previously if I could have a telemedicine appointment. And guess what? They said no, we don't do that here. And by the way, my doctor is with a big medical company, right? With lots of doctors, lots of Resources, lots of technology. Well, anyway, I just got an email. The doctor is ready to see you Dash. And you don't even have to leave your home. And it's a picture of a person holding an iPad having a virtual meeting with their doctor. Seriously folks, telemedicine is long overdue. We're finally there for the veterinarian and the human doctors. The good stuff that is coming out of this is immeasurable. And if I didn't really make the point yesterday, the lagging increases in efficiency that will be generated from this and making the economy more frictionless, making showings of properties more frictionless. Oh, and by the way, thank you for all of you who joined our webinar on Friday and Saturday. It was great success. We got great reviews on it. So thank you for joining us for that. And you all asked a bunch of great questions and hopefully we've answered all of those. If we haven't yet, please make sure you get with your investment counselor either through Jason hartman.com or if you already have one, you can just email them direct or calling 1-800-hartman and we'll be happy to help you with any follow up, any questions, comments or concerns about the webinars that we had. And some of you asked about the electronic lock and showing system that the property manager presented on that webinar. And hopefully we've provided all that information to those of you who asked by now. But again, if not, reach out to us. But look, folks, these efficiencies are making business more efficient. You know, I doubt my doctor and I know my veterinarian didn't reduce their price for their exam fee, but I do know that they're going to increase their efficiency. So when they increase their efficiency, what happens? Their business is more successful, it's more stable, they've got more money to spend into the economy and the economy grows. This isn't all bad news that's happening. We've heard all the bad news. But there's a lot of good news coming out of this, okay? And these increases in efficiency will be with us forever into the future because people are learning how to do things virtually. It's a great thing. Okay, we're going to get to part two of our Elliot Wave discussion from yesterday. And by the way, part two is better than part one. I didn't tell you part one wasn't as good yesterday, did I? Nope. Part two is better. You'll like what we talk about today as we just wrap up this interview and we'll get to that in a Moment. But first, I want to talk to you about something I've alluded to before and maybe didn't go into it deep enough because it's particularly applicable now. It's an economics concept that I have mentioned before. It's called the Phillips Curve. And the Phillips Curve, I was talking about it on Facebook with one of my economists buddies today. And this is a really important concept. And again, it has its proponents, it has its detractors. Some say it was disproven by what happened in the 1970s. And let's just go into this a little bit, okay? So the Phillips Curve is this economic concept, and it was developed by someone named A.W. phillips, an economist. And basically the idea is that unemployment rates, the rate of unemployment and the rate of inflation have this inverse relationship. Okay? In other words, when the economy is doing well, it's booming, you're naturally going to have inflation because, hey, look what happens. People have a wealth effect. They have more money to spend, they feel very optimistic, consumer confidence is high, and they're willing to spend without much care. And this not only applies to the individual, but applies to businesses too. Right? So companies will spend more money, they'll hire more people, they'll do more advertising programs, they'll buy more machinery and equipment. You know, maybe if they've got, maybe it's a small business that has a couple of trucks to do deliveries or service or whatever they do, and maybe they'll buy some more trucks and hire some more drivers. Right? People are feeling good. So as they spend their money into the system, naturally you have more dollars chasing a somewhat limited, although it's not completely inelastic, supply of goods and services. So you naturally have the inflationary pressures. That's natural. And most everybody listening can understand how that happens. Right? And then when you have unemployment and things are bad like they are now, when you have unemployment, you generally have deflationary pressures because people don't have all that money to spend into the system. And so you have supplies and you have demand destruction. Remember, we've talked a lot recently about supply demand shock, which, by the way, we're definitely experiencing, and we're going to experience a lot more of it to come. My prediction, and that's because supply chains have been damaged first. The demand is destroyed, and we've already seen a lot of that. I mean, how much demand is there for air travel, cruises, restaurants and haircuts and. Well, actually, there's quite a bit of demand for haircuts, but there's no supply. A friend of mine today Got a haircut. And I'm like, I asked, I said, hey, do you have some underground connection here? Is there a gray market barber that's open? Because I want to go, I need a haircut too. Hey, this is the first time in my life, or at least in the last 15 years, and I'm going to say this right here for the first time, I have too much hair. Yeah, I actually have too much hair. I can't imagine I'm going to think that very often. But yeah, hair needs a cut. And so we have a supply destruction there. So if I could get a haircut right now, I would pay triple the normal price that I pay just to get it right. So that's an example right there of supply demand shock. And I think I shared with you the other day the example of checking the airfare prices. And it's another perfect example. So more of that to come. But the detractors of the Phillips curve say that the concept was debunked in the 70s, because in the 70s we had this unique situation which I say we're coming into again and we're going to have it again. So you can't accuse me of being an optimist, okay? I'm definitely not being optimistic about where we're going because we definitely have some real, real problems. Make sure you heard me say that. I just think that you can position yourself around it and actually do quite well through this whole crisis. You know, you got to have some things in your own house in order to take advantage of it. Got to have a job or an income. It's not for everybody. But I'm saying most of you listening, because I know who our listeners are, can definitely take advantage of the situation. And at the very least, you can tread water while others are sinking. But at the very best, you can do a lot better than that. Okay, in the 70s, what did we have? You know what I'm going to say? Stagflation. We had a comeback of the misery index, and under Jimmy Carter, we had this terrible, very undesirable situation where we had high inflation and high unemployment at the same time. The inverse relationship that we would normally expect to see if the Phillips curve was always right. The Phillips curve was on the bench. It took a break. It didn't work in the stagflationary environment. I think coming up in the future, it's also going to be. It's. Detroit will say, see, See, the Phillips Curve doesn't work. Right. But I think generally the concept does work. I think there are Those just those whereabouts of stagnation. I don't mean stagnation, I mean stagflation. Stagflation. There is a difference. By the way, stagnation is just when everything stops, right? Well, I guess you could argue that's what we've had recently, stagnation. But stagflation is where you have the inflation and the high unemployment and the low GDP all at the same time, right? And so you can't always use the same tools to fix these problems. For example, we've seen the monetary and fiscal policy. Remember, monetary policy comes from the central banks and fiscal policy comes from the government. Fiscal policy is how much can you tax? How much can you spend? Monetary policy is how much money can you print? How much money can you create out of thin air? Fiat money. You know, you've all heard the people that say that, which by the way, fiat money, it just ain't true, folks. Remember I talked to you the other day about the 18 aircraft carriers that the US maintains, okay? And you know. Oh yeah, I know. The dollar's not backed by gold. Oh, if it's not backed by gold, it can't be real. It's going to collapse. Oh, God, Seriously, if I hear that one more time. It's just that talk about something that's been debunked. That theory has been debunked a million times. As the Peter Schiffs of the world have been saying, the dollar's going to collapse and the US is going to become this third rate country. Keep on predicting for decades and decades that that's going to happen. But at the end of the day, who's got the aircraft carriers? That's what's gonna keep it from collapsing. Okay? So, you know, yes, someday, someday you'll be right, but I have a feeling you won't be alive for that day. Okay, anyway, so where were we? Where were we? Senior moment here, folks. Okay, so monetary policy, well, it's not just about how much money you can create out of thin air. This fiat money, right, it is backed by aircraft carriers and missiles, but maybe not gold. So it's not just how much you can create in terms of money, but it's also the general tightening and loosening that goes on, which is part of the QE or quantitative easing concept for sure, but it's not all of it because the banks can say, okay, we'll tighten the reserve ratio or we'll loosen the reserve ratio. And by just doing that, you're not really creating money per se, but you are allowing More money to flood into the system. And so it's a really complicated thing. I mean, listen, I really doubt even that Alan Greenspan or Ben Bernanke or Jerome Powell or Janet Yellen, our current and past Federal Reserve chairs, really even fully understand how the system works. I certainly don't pretend to, but we understand some little pieces of it. It is a super complex system. There are so many levers and buttons and toggles and it just truly boggles the mind. So anyway, the central banks and the governments, they have this target rate of inflation and the US has that target rate of about 2%. And in that environment, they hope to keep inflation at about 2% and keep unemployment low and manage the Phillips curve now. Now, when I was talking with my buddy on Facebook today, by the way, I asked him to be on the show. I'm going to reach out to him again, see if we can get him on. He talked about Ray Dalio's plan. And of course you've heard the name Ray Dalio. We've talked about him on the show before. He's the big, big time billionaire hedge fund guy. And Ray's idea was that basically. Let me just summarize this for you quickly and we'll get to part two of Elliot Wave Theory. So my friend, also named Jason, says Ray Dalio, has some interesting thoughts and ideas here. Long story short, he proposes that instead of using common fiscal policy of fluctuating interest rates and quantitative easing, that we instead fix interest rates at around 0% and fluctuate taxation instead. Basically, during times of high productivity, where demand and inflation will by definition be increasing, we increase taxes and pull money out of the economy and pay off accrued debts. During times of lower productivity. In other words, GDP is down, unemployment is high, economy's in a slump, we decrease taxes to provide stimulus because when you decrease taxes, you put more money into the system. That's the Laffer Curve, the Reagan trickle down theory of economics, which, by the way, does generally work okay if you're not a Reagan fan. Well, sorry, you're just wrong because that actually does work. Now, it doesn't work perfectly, okay, the distribution is always unequal, I get it. But it generally works if done properly. We should be able to keep employment full and be able to regulate the money supply and be able to modulate the economic curve through changes in taxation and money supply instead of changes of interest rates. In interest rates and money supply. And I think what he meant to say, there really is money creation because the supply of money would come from lower taxes that's how you would increase the money supply to stimulate the economy. You'd lower taxes, and then when the economy was good, you'd raise taxes to tighten the supply of money. Okay. It's an interesting concept that Dalio talks about. It's kind of a modification of. Well, it certainly is another way to manage the Phillips Curve. And it's also a way to sort of modify the system we have now. And it would make it a lot more transparent because you would see the tax rates rather than the monkey business that goes on behind the scenes nowadays. But anyway, quite interesting way to manage the Phillips Curve. But it all comes back to the Phillips Curve concept. So that's what I wanted to share with you today. Okay, without further ado. So let's get to part two of the Elliot Wave theory. In part three of the book, you've got talking about protecting yourself, and you've got many asset classes listed. Bonds, real estate, collectibles, cash, just staying in cash. Then you talk about how to find a safe bank. Are we looking at a banking problem this time around? We certainly had one last time around. Oh, yeah.

And we never saw that.

Well, yeah, we definitely. It's like we said before we went on the air today, you know, come on. The way governments around the world and central banks around the world solve problems today is when there's a fire, they throw gasoline on it. Which means when there's too much debt, they just add some more debt. Right.

And that's the problem because we haven't really solved. Our debt structure is not in line with our income structure right now. There's too much debt. I think the GDP the last I saw was about 20, 22 trillion dollars. We have about 70, I think $71 or 72 trillion dollars of total credit market debt. So we're 3.2 times or so in debt relative.

You're not doing national debt then?

Yeah, no, I'm doing total credit market debt because it's a debt it's owed by someone. So I don't think we've really corrected what we. Well, I know we haven't corrected what we've accumulated even through the credit crisis of 2007, 2009. And I think that needs to be brought back in line. If you look at historical debt levels, for example, the 1920s or even the 1970s, when we're in that really bad bear market, debt levels were much more in line with income levels. And we've gotten way out of whack.

And income means tax revenues or total income of government Households, corporate versus total debt of government households and corporate. Right, right.

Total income levels of everything. What's interesting is that the Fed just had what the media is calling QE infinity. I mean, they basically backed. They basically threw money at it, as you said. But what's interesting is that everything the Fed has said they're going to do has been backed by the Treasury. The treasury has pledged to cover any loss that the Fed is going to incur through their lending programs at some point. That can't go on forever because the Treasury's receipts or tax receipts are falling. So at some point the treasury is going to say, I'm sorry, Fed, but we can't back everything that you're promising right now because we just don't have the receipts coming in and our debt levels are out of whack. And at some point people are just going to not buy American. And I mean, they're going to just. I mean, the dollar will crash and interest rates will spike and because they just have too much debt relative to the income we've got coming in.

So, as I said, we're in the biggest money printing extravaganza in world history. And there's more to come, by the way. This isn't it. But the question is, how do you know that? If we look at the debt to GDP ratio right now, it's high. Okay? It's like, I don't know, 70% or something like that. I think. Don't quote me on that one. I'm sort of pulling it out of memory. But it's high, right? Everybody would agree with that. And since we're in uncharted territory, how do we know what that limit is? You know, if you look at the typical household and just go with me on this thought experiment for a second, maybe it isn't analogous, but if a typical person, you know, household between a couple, say, living in a house, earns $100,000 a year and they buy a $400,000 house, and that $400,000 house has a $300,000 mortgage and they got another 100 grand in student debt and they've got another $50,000 in car loans, just for example. So what do they have there? They have $450,000 in debt. They make $100,000 a year. Do they have too much debt? I don't know. They financed the house over three decades. The interest rates are super low. The student loans are complete ripoff, of course, but the rates on those are even low. I don't know. How do we know when you have too much debt.

I'm going to answer this from an Elliott Wave perspective. And we can't speak to individual situations because those are individuals, but we can speak to the aggregate. And the way you know, you have too much is through the wave pattern, is through the structure of the market. When the market completes an Elliot Wave, a rally, which we call a five wave rally pattern, that means that psychology has reached its extreme, optimism has reached its elevated high point, its peak point, and it's ready to reverse. And all of these debt levels can continue to expand and willy nilly, as long as optimism is high. And if optimism is high, people will borrow, they'll start businesses, people listen up to popular music, the hemlines on their skirts rise. I mean, a lot of things happen throughout society.

They do have, by the way, listeners, they do have a skirt metric. Okay. When the skirts get shorter, we're optimistic about the economy. When they get longer, we're pessimistic. And for example, look at the Roaring Twenties, the short dress, flapper dresses. Right. So it's funny.

Yeah. I mean, and there's a lot. And there's other things. For example, at peak levels of optimism, you tend to get what we call the skyscraper indicator.

Yes, right. I've heard about that.

Tall buildings are built. And so how do we know when we've reached that limit in debt is when optimism has reached its peak and starts to reverse and we go toward that next extreme in Pest, we do that correction, as we call it in Elliott Wave terminology, an ABC decline. That's when we know we've hit the limit and debt levels will start contracting after that.

Okay, but you're talking.

So a little bit of an esoteric.

Got it, got it. That was good. But you're talking about people and society and that's fine. I'm talking about government. Everybody complains that the debt to GDP ratio is too high, it's out of whack, that we're going to have. The dollar is going to crash, it's going to lose its value, it's not going to be the reserve currency of the world anymore, which I think is ridiculous. I think those people, they've been wrong, wrong, wrong for decades. But maybe Peter Schiff will be right someday. I don't know. How do we know how much debt to GDP a country can handle? Even Japan is. No one would argue that it's doing well. But they've got other problems. They have a demographic problem. They have zero immigration, they have no young people coming in. And that economy has been stagnant for a long time. And they have really high debt to GDP. I think it's like 229%. It's like triple what ours is. And we have the reserve currency and they don't.

Right. But the way I'm looking at, and my answer is that broad, it's macro. And debt can be sustained and expand as long as optimism is high. And when that changes, and we think we're in the process of that changing, then you have a problem. Then debt, even though you're financing your debt at essentially 0% interest rates, it's still debt. You still owe it to someone, and the debt accumulates to a level where it simply is unsustainable to be serviced through the revenue stream that you got throughout the economy. I think we're there right now and we're in a process of retrenchment, which is a very healthy process, but it's extremely painful for people who aren't prepared for it. And that's kind of what Bob was trying to accomplish or is trying to accomplish and Conquer the crash 2020 is to get people prepared that you don't have to get caught up in it. The markets may go down, things might retrench, asset prices might go down.

But.

But if you're prepared for it and you're safe, you're going to have tremendous buying opportunities when we finally do hit that ultimate bottom.

Okay, so last question for you. I know we got to wrap it up and sorry I kept you a little long here, but you're very interesting. So of any asset class out there, and I know you talk about real estate as a monolith and you kind of have to, because that's the way everybody talks about it, but we know it's not. So we understand that. Okay. There's different types of real estate in different markets, obviously, but is any asset class on this list good? Would you buy bonds, collectibles, stocks? Keep your money in cash? What's the recommendation?

I think there's a huge bull market starting right now, and it's the bull market in cash. No one wants cash. Cash pays you zero. Essentially, it's just sitting there. But one thing we did in this month's issue of our newsletter, which I write with my partner, Peter Kendall, it's called the Le Wave. Financial forecast is we showed a chart of the Dow industrials inverted, because when you invert the Dow, what you're really talking about is cash relative to equities. We're starting, in our opinion, a huge bull market in cash. What our overarching recommendations to investors right now is be safe. There's really no downside in safety right now. Be safe. Short term cash or cash equivalents, such as floating rate notes from the Treasury. You're not going to get a huge return on your money, but you're going to get a return of your money. And I think in certain environments, and they're rare throughout history, I think we're in one of those rare environments right now where being in cash is going to allow you to pick up assets for literally, literally 10 cents on the dollar. As we go through this retrenchment and we finally get to the end of the bear market and then you can step in and really increase your wealth exponentially after that.

Yeah. So that cash is okay as long as we don't have inflation and all the inflation bugs and gold bugs out there. And gold is doing fairly well. And I'm not a gold bug, just so you know, but it's kind of coming back. They would say with all this money printing, we're going to have massive inflation and cash is going to get destroyed. But you think the opposite.

I think we think the exact opposite. And it's all explained in conquer the crash 2020. The problem is not dollar bills. We can print all the dollar bills we want. The problem is credit. And credit can be extinguished faster than you can print dollar bills. And so what deflation really is is a contraction. And in the volume of money and credit, everyone focuses on money.

I was saying the same thing in 2008. Everybody was on TV saying, well, the money supply. And I'm well, what about the credit supply? It's cash plus available credit. That's what determines how much money there really is in terms of the money supply. I totally agree with you on that. But why is it that you can extinguish credit faster than you can print dollar bills? Seems like we can print dollar bills pretty fast.

Well, all you have to do is not pay your loan and there's a default, there's a de facto default. So that's the problem right there. We have plenty of dollar bills circulating in society. It's just the credit we need expanding in order to keep things going. And I think that's the problem that we're facing right now. So I think being in cash right now, I don't think inflation, inflation might be the problem. Hyperinflation might be the problem. I think after you go through the deflationary phase, and for example, gold's a good example. You said gold's been rallying but actually gold topped in 1921 back in 2011. I mean, we've been in a bear market.

Listen, I don't like gold. I'm not a gold. You don't have to convince me about gold.

Yeah. So I think that once we get through the deflation, then we'll have to kind of see where we go from there. It could be stagflation, it could be hyperinflation. We can't see that far around the corner, but we do see right ahead of us. And we think we're going into a deflationary period here.

Yeah, and I disagree with you. I think we're going into a stagflationary period. And either way they're both unpleasant, so we can agree on that. But yeah, unpleasant for most people at least. But there are some that obviously do well in any environment. Give out your website. Sure.

It's www.elliotwave.com. that's two L's and two T's in Elliott. And it's one word. Elliotwave.com got a ton of free stuff on the website. Explains what Elliott waves are. Some free commentary, and you can kind of click around and see if it makes sense for you.

Hey, Steve, one last question. I forgot to ask you. Where are you located?

We're in Gainesville, Georgia, which is about an hour northeast of Atlanta.

Yep, I know it. Good. Good stuff. Well, hey, thanks for joining us today and be safe out there and happy investing.

Same to you and all your listeners. Be safe.

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