388: Cantillon Effect, Hartman Predictive Index, Protect Yourself From Inflation, Largest Wealth Transfer, Hartman Comparison Index™ Part 2

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The transfer of wealth between the generations is through inheritance. And, and that's true, that is one way. But there's a way that it happens while everybody's still alive through inflation. Why is that? Well, because most young people have debts and most older people hopefully have assets. They have savings, stocks, bonds and equity and real estate. And guess what? The savings, stock, stocks, bonds and equity and real estate get diminished through inflation and so does the debt. So the debt of the young people actually gets repaid. It's an intergenerational wealth transfer without anybody dying or inheriting. So it's a pretty amazing mechanism really. Now, one of the things I always say is that when the government is broke, it becomes predatory against its citizens. And sadly, this is true. It's one of the reasons I left California because I noticed my former home state that I lived in most of my life, the Socialist Republic of California, became very predatory. I remember one time when I just had it, I was just so done. I had several offices back when we used to have offices. We're virtual companies since 2012, we used to have big offices, expensive offices. I remember one day we moved into a new office in Irvine, California and some inspector came in, a government bureaucrat. And I had real estate agents. And real estate agents are never the office, right? It's common for them to share an office, right? And in this little office we had, there were two desks in one office. And the inspector comes in and says, oh wait, you know, in this office, because you have two desks, which nobody's even ever at the two desk, much less one desk. You have to put a strobe light and a fire alarm in here and it'll be $2,700 and if you don't do it, we're gonna fine you. And I'm like, this state has become so predatory against the citizens. I'm just done. So I left California and moved to Arizon. This is what happens, right? And one of the way they're becoming predatory is through inflation and financial repression. So let's take a look at a real life example. In 1972, that dollar was worth a dollar. Okay, that's fine. No inflation happened yet in 1972. We're talking about the same time period, but by 1984, which by the way, how many of you read the book by George Orwell, it's all happening, it's all coming true. Read the book again. Okay? You got to read 1984, the book and Fahrenheit 451 and Atlas Shrugged and Brave New World. That would be another good one because it's all coming true, sadly. Okay? We need to be aware of it. By 1984, that dollar was only worth 40 cents. Okay? So the value of the dollar had declined. It lost 60% of its value in 12 short years. And this is, you know, we were off the gold standard by then, right? By 2001 it was worth 24 cents. So if someone got a 30 year mortgage, a 30 year fixed rate mortgage, they saw a lot of inflation induced debt destruction. This is not a theory. It happened to tens of millions of people. And maybe around the world, hundreds of millions of people, but tens of million just in the US they saw the value of their debts massively decline. So in 1972, you would borrow on a mortgage at 7.37%. That was the interest rate back then. Makes you realize how incredibly cheap mortgage rates are now. Money is super cheap right now, negative interest rates. And that's a way we can all win by using leverage in a fund on our other investments and so forth. So these people borrowed, millions of people borrowed, got mortgages at 7.37%. But after inflation over that three decade process, the real rate they were paying was 1.06%. Isn't that incredible? Say that's incredible, right? Okay, yeah, that's incredible. Okay, but remember, mortgage interest is tax deductible. So at the typical tax rate, of course everybody's tax rates differ, and I get it. But the typical tax rate after inflation and after tax benefits on an owner occupied home, they got paid to borrow. They were paying or getting paid negative 1.16%. Isn't that amazing? This happened to millions of people. And that's why homeowners got so rich and others got left behind, right? Because they just simply got inflation induced debt destruction. They got to live in a house for three decades for free and they actually got paid, right? So not free, got paid to live there. So huge, huge benefit. So here's the example. Typical mortgage size, just over $14,000 in nominal dollars, the name of them. They repaid about 36,000. In real dollars, they only repaid 16,300. And after tax, real dollars, 12,000. So you see the negative interest rates there. But today it's dramatically better than that. Okay, let's talk about part two and let's see, how's my time doing? Okay, I got another two hours. Okay, fine. So. Right, Bridger, two more hours. So let's talk about measuring sticks. Now, why do I say that? Here's the reason. Let's go back to that, what we started with at the beginning, the bubble question. Are we in a bubble? Right. Who thinks we're in a bubble? Asset prices are just too high. They've called it the everything bubble. Right? Come on, raise your hand. Right. Okay. Okay. Who doesn't think we're in a bubble? Yeah. Who's not voting? There we go again. How many people are married? How many are single? How many aren't? Sure. No. People just aren't voting. Okay, so here's the problem with this bubble question is that people are using only one measuring stick, and that is a huge mistake. The measuring stick they're using is the dollar. Why would you only compare things to one thing? To try and determine the value of something. You know, look, even if you shop for something expensive or you need a quote for something, say you need a new roof on your house, hopefully you're going to get three quotes right? You're going to at least compare it to three things. But with real estate prices and other asset prices, we just compare it to one thing, the dollar. But the dollar is a moving target. The dollar's worth is changing constantly. It is a huge flaw that could lead to big mistakes to only use the dollar as a measuring stick. Okay, let's talk about real estate specifically. There are three types of real estate markets. Now, in the United States, there are about over or almost 400 what's called MSAs, Metropolitan Statistical Areas. Right. That's a mouthful more than inflation induced debt destruction. And There are over 3,100 counties in the U.S. i don't even know how many cities there are. It's a big country. There's no such thing as a national housing market. In a country as large and diverse as the United States, there are only a bunch of local markets. But to help make it simpler, I think we can divide this into three types of markets, three broad categories. And this is also true worldwide, not just in the US So one type is linear markets. These are the slow and steady markets. Okay? These are the markets that are very profitable, have good cash flow. These are the types of markets around the country that my company helps people buy properties in. These good, stable, linear markets. Very reliable. And I'll show you some charts of the differences in these cyclical markets. These are the markets that are in the news. These are the markets that get all the attention. These are the markets I would not recommend investing in because they're too expensive, they have bad cash flow, and they're much more volatile. If you're looking at a chart, they look like a roller coaster up and down, Right. When they're peaking and they're going up, it's glorious. But when they go down, it's really tragic. Right, so that's the cyclical market and then hybrid markets that are just in between the two, three types of markets. Now, let me give you an example of these. In the US Cyclical markets would be places like where I grew up, Los Angeles. They would be San Francisco, Seattle, pretty much the west coast of the U.S. right. They would also be South Florida. Miami would be a cyclical market. I don't live too far far from Miami. They would be the expensive northeastern markets. Boston, Washington, D.C. new York, of course, cyclical markets. And the rest of the country is pretty much linear. Around the world, cyclical markets are these trophy cities. London, Paris, Dubai, Hong Kong. Right. These are the markets we hear about. Vancouver in Canada is probably the most cyclical market in the world, actually. And the rest of the world is pretty much linear. Some are hybrid, there's some hybrid spots. But mostly most of the world, most of the country is a linear market. Right. But it doesn't get much attention. So here's a chart. Here's what Memphis, a linear market looks like. We've helped hundreds and hundreds of people invest in Memphis over the years. It's just a great cash flow market. Large renter population, the logistics, capital, the US really linear. So the chart looks fairly boring there. This, however, is Miami. More pronounced ups and downs, more like roller coaster. Okay, this is Indianapolis, another market we've been in for a long, long time. Very linear, very boring. I mean, there's like only one exciting thing in Indianapolis, the Indy 500. Everything else is super boring. Okay? Sorry if you're from Indianapolis, but it's a good place to invest. This is Los Angeles. Look at that. I mean, talk about a roller coaster. You lose your mind investing in a market like this. These are the very, you know, this is the conservative versus crazy markets. Okay? It's the old tale of the tortoise and the Hare. Right. Who wins the race? The slow and steady wins the race. Right? Okay, so let's go back to that gold standard discussion. 1971 was our last connection of the dollar to gold. And look what happened. Look at how inflation just started taking off right after that. In fact, I've long had a theory about this. I think that Richard Nixon. Remember Richard Nixon's. Of course, you know, on August 15, 1971, he gave the speech about how we're going to temporarily suspend the convertibility of gold, or dollars to gold. Right. Close the gold window, as everyone calls it. But shortly after that, he took a very famous trip, a diplomatic trip. To where? China. I think Nixon, although I've never read or heard this anywhere, it's just my own theory. I think Nixon knew that massive inflation was coming and he needed to make relations with China a super cheap labor market that could eventually become the workshop of the world. And it did. And China alone, along with other globalization and immigration. Not saying that the immigration policy is right, but the government just did the immigration policies and the trade policies to hide the real inflation rate. The only question is, where's the next China? Right? China's prices have come up, their wages have come up, their standard of living has come up. So the ability to hide inflation in the future will be diminished because globalization already happened and it's lifted a lot of people around the world out of poverty. That's great. But where's the next cheap labor market? I mean, they're trying to do this in Africa. But remember, Africa's not one country. It's a whole bunch of countries, very fragmented, a lot of languages, a lot of different belief systems there. So it's not like China. Okay? And that will be very different. So you, you see that inflation took off. Now if you look at the Case Shiller Home Price Index versus the Consumer Price Index, the most widely used real estate index is Case Shiller. And the most widely used inflation index is the Consumer Price Index, the cpi. You see how those get out of sync at some points, right? Okay, well, let's look at a couple of these indexes real fast. Case Shiller index, super widely used. It sucks. Quote me on that. This index sucks, okay? It's no good. Don't use it, okay? Why? Because it only profiles 20 markets. And guess what? 15 of the 22/3 of them are cyclical markets. Or not. 2/3, 3/4. I can't even do math. I need more coffee. Okay, so those are cyclical markets. Why would you only profile cyclical markets? It doesn't give you a good piece of information. Now, this one's better. This one's published by nar, the national association of Realtors. The Housing Affordability Index. I like this one because what it basically does is takes the median mortgage payment and compares it to the median income. And it tells you in an area how many people can afford a house. That's pretty good. But guess what? It has some flaws. It doesn't include foreign money coming into a market. So for example, when I owned my traditional real estate company years ago back in Southern California, I eventually sold that to Caldwell Banker. I, you know, we had all of this foreign money just pouring into the market. A lot of Chinese money, Middle Eastern money, et cetera. And the Housing Affordability Index doesn't even see that. It's totally blind to it. It also doesn't see the people that bought houses in a certain area years ago and are moving around just trading equity. They don't have the income that would make the house affordable. They're just trading big chunks of equity in Newport Beach, California.

Right?

So this has its flaw, but it's not bad. Now, one index is my second favorite. It's the first American. First American title publishes something called the Real House Price Index. And guess what it says? It says that house prices in the last 21 years are now 26.8% cheaper than they were 21 years ago. Do you believe that?

Well, this is my second favorite index. But let's get to my favorite the index, the only index that really asks, compared to what? Life's most important question. This is the question we are constantly playing in our heads, I think. Compared to what? When we. If we're single or maybe not, and you go online to an online dating site, what do you do? Compared to what? Compared to my ex. Compared to the other one I just looked at. Right, Swipe left, swipe right. You know, all this, it's really weird world we live in, right? But we are comparing human beings. Compare, compare, compare. This is what we do all day. How do you know if the food is good? Well, you're going to compare it to another meal. You had to know if it's better or worse, right? How do you know if you're rich or poor? Because you look around and you see everybody else and you say, compared to what? This is life's biggest question. Compared to what? So I created an index that basically does this. It answers the question, is it cheap or is it expensive? And it is called the Hartman Comparison Index. Now, as I started developing this index that I hope will become a really used thing in the media and so forth. It is comparing things, right? So let's just look and try to answer if real estate's cheaper, expensive, expensive by using the index. Okay, let's look at gold. Now, I'm not a fan of gold. I'm not a gold bug. But gold has been considered money for 5,000 years. You cannot deny that it is a measuring stick other than the dollar. You know, they say that 5,000 years ago, you could have bought the equivalent of a man's toga and a pair of sandals. Today you can buy a man's suit and a pair of shoes. Right? And it's like the same thing, right? It's very consistent with its value. So in 1970, the median house price was just over $22,000. Follow where my mouse cursor is. Gold was 35 bucks. We were still on the gold standard. So that was a government price, basically. And it cost you 646 ounces of gold to buy the median price house. You needed a decent sized suitcase to carry all that gold into the closing table to buy the house. Okay, fair enough. Ten years later, by 1980, in dollars, the house price had tripled. It was $66,000. Yet you could fit the gold in a much smaller briefcase because it only cost 102 ounces of gold 10 years later to buy a house that everyone thought was more expensive to because they were measuring it only in one thing, dollars. Mistake, mistake, mistake. And I'll show you a lot of other reasons it's a mistake. So let's look at today. Today, as of last month, the median house price is 380,000 bucks. And it will cost you 212 ounces of gold to buy that house that everybody thinks is so expensive. Okay, it's more expensive than it was in 1980, but it's cheaper than it was in June. It was a little cheaper, but it's cheaper than it was pretty much Everywhere else except 1980, right? In fact, compared to 51 years ago, it's one third the price, approximately. So the question I want you to answer is priced in gold, is housing cheaper, expensive? Okay, we established that it's cheaper. How about this one? How about oil? Oil is arguably the world's most important commodity, at least now. Yes, I get alternative energy and, you know, tree huggers and love them all. Okay? But today, oil is still the thing, okay? I don't care what you say. Oil is the thing. So in 1970, when oil was $3 a barrel, you would have had to pull up to the title company with multiple trucks of barrels of oil with 6,700 barrels of oil to buy a house. Today, 51 years later, you only need 5,600 barrels, 5,590 to buy that more expensive house priced in dollars. So priced in oil, is it cheaper? Expensive? It's not super cheap, but it's cheaper. Right. Okay, well, what about rice? Rice is the commodity that is basically the food supply for 2/3 of the human race. Priced in rice, a very important commodity that is food to 2/3 of the world. In 1970 you would need 43,000 units of hundredweight rice. Today you only need 27,000 units as of June. M6 means month six. Okay, so this one's not updated in September, but 27,000. Okay, so it's not the cheapest it's been. In 1990, housing was the cheapest, priced in rice, but priced in dollars. It was, you know, double what it was 10 years earlier. So you can just see the progression here. Right? But today it is cheaper. Now here's one for you. How about the s and P500? This is a good gauge for how the economy is doing. Right? The s and P500 index. Great index. So in 1970 it would take 243 shares of the S and P to buy the median price house. As of June of this year, it only takes 80 shares of the S and P to buy the median price house. So just think about this for a minute. In these other commodities that are in the index, if someone is saving, just picture like a young couple saving for their first house and they think it's probably going to take 10 years to save. So they get paid every month or every two weeks, whatever they get paid. And instead of storing that money that pay in cash, in dollars, they convert it to something. They could convert it to gold or rice or oil or S and P shares. Right? They convert every paycheck to the other commodity, the other measuring stick rather than dollars. Well, if they do that, you know, how are they going to look 10 years later? The house might get a lot cheaper for them. Sometimes it gets more expensive. I'll give you one example. Orange juice priced in orange juice, which I don't think I have that chart here. Housing has become actually quite a bit more expensive. But hey, you know, you could, you could save money on the orange juice by adding some champagne. That's a mimosa. Put some vodka, it's a screwdriver. Okay, so there's options here. Okay, so only 80 shares of the S and P to buy a house today. Well, what about rich people? The Forbes magazine has an index called the Cost of Living Very well Index. Now, some of you, this is your cpi, right? It's not the typical person's cpi. It's the Cost of Living Very well. Well, for rich people, in 1970, it would be 581 shares of the Cost of Living Very well index to buy a house. And today it's 506 shares. So it's a little cheaper here. Priced in median income. Okay? So here it would take you 2.6 years to buy a house on the median income in 1970. Today it's more expensive. Takes you 4.8 years. But wait, there's more. Let me show you this. Okay? Here's copper. Copper. It's more expensive, okay, but not the most expensive it's ever been. Haircuts. How many haircuts, if you're a hairstylist, do you have to do to buy a house? Well, in 1970, 9100. Today, 9600. Little more expensive than haircuts. Right? But it's not about the price. And this is what I'll end with here. It's not about the price, it's about the payment. Because the vast majority of people finance their house, obviously. Right? Okay, well, let's take a look here. Mortgage payments. In 1970, when the index starts, the typical mortgage payment for the median price home was $142. Now, if you adjust that for inflation 51 years later for the official inflation rate, it's only gone up to $196. It's a little more, but not much. And here's the big flaw here. The official inflation rate. The CPI is a total freaking scam. Okay? It's totally understated. They use three basic things I talked about on my video with Bridger that you should watch because I'd like to get it over a million views. That would be cool. Wouldn't it be cool, Bridger? Okay, we're at like 840,000 now, so please watch it and share it with your friends. So they manipulate the index in three major ways. Weighting, substitution and hedonic indexing. So waiting, they have this basket of goods in the cpi. They just say, you know, if it gets out of whack and it seems like inflation's too high, we'll just change the weighting of the elements in the basket of goods, okay? Substitution beef prices went way up. Well, we'll just assume that everybody will switch to chicken. But Chicken's a dirty bird. And I like beef better. Right. So they're not going to count. Hedonic indexing. That's the story of the iPhone. So the $1,500 iPhone is better than the old phone. And even if it's the same price, they assume you pay less because the item got better because technology improved it. Now that's logical. But guess what? It says to us, we as people aren't entitled to progress. The Consumer Price index gets the progress, not us. Right? Everything should become better, faster and cheaper over time. That's called progress. Okay, what about the mortgage payment? Priced in troy ounces of gold, 4.1 in 1970, point nine in 1980, 2.1 in 1990. But today it's cheaper than it's ever been to make your mortgage payment in gold in barrels of oil, it only takes 16 barrels per month to pay your payment. Not the cheapest. 2010, it was a couple barrels cheaper, but it's pretty darn cheap. Shares of the s&p, 1971.5 shares to pay your mortgage. By 1980, it went up. It was 5.3. And then you see what happened over the years. But today it's the cheapest it's ever been to pay your mortgage in shares of the S and P. How about hours worked at the average wage? 41 in 1970 it went up. It was. It peaked at 83 in 1990, but today it's 46. A little more expensive than it was 51 years ago, but not much. Okay. And I don't have time for questions. I don't think so. Anyway, that's it for me. Feel free to connect with me. I love Voxer, by the way. It's a great app. Russell Brunson got me into it. Happy investing to all of you. Thank you very much.

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