CW 1128: New Apartment Construction, 2018 Econ Review & 2019 Predictions by Dr David Collum, Cornell University

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Welcome to episode 1128. 1128. This is your host, Jason Hartman. Thank you so much for joining me today as we have another year in review type of show. But looking at last year, our guest today publishes every year. He's a professor and he publishes this very comprehensive year in review. I can't remember how many pages it is, but it's a lot. It's a lot. It's a big year in review where he looks at the financial markets and all sorts of stuff in the economy and I think you'll find it interesting. He does say the number of pages during this interview, as I recall, you know, it's over 100. So it's a very comprehensive report and we'll kind of dive into that today. But first, wow. Real estate development last year in the apartment world is nothing short of astonishing. It is astonishing, I tell you. Do you know how many apartment units were built last year? Yes, this is according to a CBRE report. That's the big commercial real estate firm in the top 20 markets. Okay. The total number of apartments constructed last year coming online was. Are you sitting down? Are you ready for this? It's a giant number and it is the highest number since the 1980s. They didn't say what year in the 80s, interestingly, but since the 80s, the report says that 267,900 units were completed last year. That is absolutely mind boggling. It is amazing. Now the question is, where were most of these apartment units built and what does it mean to us as real estate investors? Well, it means that the big institutional investors with more cash than brains many times, but you know, a lot of brains too, remember? And when I say that, I'm not actually saying they're dumb. They're not dumb. Okay? These people that do this stuff have lots of brains and lots of analysts and lots of financial engineers. But what I mean by is they are motivated by an interesting set of factors. This interesting set of factors includes things like the availability of funding of money they can raise, which doesn't necessarily correlate at all with the demand in the marketplace. So what does that mean? Well, it means when they have cheap capital, low interest rates, abundant investment capital from their various sources, mostly related to Wall street, the modern version of organized cr. They overbuild sometimes, right? And I don't know if they've overbuilt yet. I think temporarily they probably have overbuilt, but we shall see. So what does this mean to us since we are really single family home investors for the most part? Well, it means that we offer something special that is difficult for the institutional investors to offer now certainly many of them do we know about invitation homes and all the other biggies that we've talked about on the show over the years. But again, in terms of the overall marketplace, in comparison to the overall marketplace, they are a drop in the bucket. Even though they sound like big numbers. Right. You know, when One company owns 50,000 single family homes, that sounds big, but it's really not very big compared to the 16 million plus single family homes owned by mom and pop investors that's you know, that's a drop in the bucket, right? But when we look at all these, you know, most people want a single family home. They don't want to live in an apartment. And interestingly, as I have shopped apartments in many markets around the country, you know, and of course I've shopped many single family home markets. Obviously that's my, my core business. But I always look at the apartments too and look at the competition they offer. And what's interesting about them is that the institutional apartment owners are so much better at getting people to spend more money than we are. As, you know, mom and pop investors, right. We are not very good at it. They have lots of add ons and charge for this and that pet rent, we've talked about that parking. It's mind boggling and it's really a sign of inflation overall. Maybe they do rent surveys, right? These big surveying companies that survey institutional apartments and they'll say, well, you know, this is what the rental rates are. But that isn't really the real rental rate. It's the same way inflation understated and miscalculated because there are all these add ons. Okay? So the average, what's known as the average customer ticket. Okay, well that's what I call it. That's what they call it in retail. Okay. And I'll call it that in real estate too, is higher than it seems. So rents are really rising more than the surveys would indicate. Okay. Because of all these add ons for, for. I mean, you know, you go and look at an apartment in any major city. I mean, I remember I was at an apartment complex in St. Petersburg, Florida a couple of months ago. Okay. You know, it was, here's the base rate, okay? It's $2,700 a month for the unit. Right? Well, what about parking? Well, parking is another $80 a month and. Oh, so that's an assigned space? No, that just means you get to come in the garage and look for a parking spot. If you want an assigned space, that'll be 150 per month. Oh, you have an animal. Well, your pet rent will be $30 a month per pet. Okay. And soon they'll be saying, well, hey, do you want fries with that? And that'll be extra, right? You know, do you, do you want electricity piped into your unit? Oh, that'll be extra. Oh, you mean for the electricity? No, just to have it there. You still have to pay for the electrical just like you do now. And so they sub metered all of these units you know, nothing's included. You know, it's just another sign of inflation. Okay? So check this out. Here's the breakdown for you, okay? Now, the problem with this article is that it's misleading. Why is it misleading? Because they never asked the famous Jason Hartman question. Compared to what? Compared to what is the question. So these numbers I'm about to share with you should be compared to the overall number of housing units in that market, the population in that market, and the number of rental apartments in that market already. Right? But they don't tell you this, they don't tell you this. So you've got to take everything with a grain of salt. But here are the numbers. Not compared to what, sadly, which would be the proper way to state these numbers. New York City had an additional 32,000. I'm going to round off for speed. 32,000 units built. Dallas, Fort Worth, another 21,000 units. Los Angeles, my hometown, 20,000 units. Seattle, 14,000 units. Washington, D.C. 14,000 units. Denver, 12,000 units. Boston, 10,000 units. Miami, South Florida, 10,000 units. San Francisco, Bay Area, 9,300 units. Chicago, 9,000 units. Orlando, 8,000 units. Austin, 7,000 units. Charlotte, 7,000 units. Atlanta, 7,000 units. San Antonio, 7,000 units. Phoenix, 6,000 units. Minneapolis, 6,000 units. Tampa, 6,000 units. Nashville, 6,000 units. And Portland, 5,000 units. So, folks, a lot of new apartment buildings, a lot of new apartment units coming on the market. But of course, they never say compared to what, because if you did, New York City, for example, and just took the overall population, I mean, it's obviously massive. So 32,000 units added to the supply isn't really that much. Okay. In the overall scheme of things. But it's still a lot since, you know, it's the highest point since the 80s. Okay, Valentine's Day is coming up. Happy Valentine's Day. I hope it's very romantical for you. I thought I'd share with you a little interesting survey. You know, we're always hearing, you know, women are oppressed and, you know, men are evil and all this kind of stuff. I'm just getting really kind of sick of hearing that, because, hey, it's just not true. Most men are really good people and they take care of business and they do good things and they take care of their families and all that kind of stuff. So I just thought this was interesting. As you know, you always hear about the pay gap and all of this kind of stuff, right? Valentine's Day. This is a recent survey I heard on the news, and it says that the average woman will spend $64 on Valentine's Day for her partner. The average man will spend $339. Now why isn't there a government program to help these guys out who are outspending their female counterparts by 530%? I mean, seriously, you know, a 530% increase in spending, what will they spend the money on? Well, 19% flowers, 23% chocolate, 18% jewelry, 9% clothes, 23% dinner and food, 7% lingerie, 9% adult toys and 9% experiential gift. Okay. Of some sort, like an activity. Right. So anyway, I thought that was kind of interesting. Last thing for today before we get to our guests. Another interesting thing. You know, this trend is something I reported on quite a few years ago, but it is the thing that is happening. And one of the biggest markets for this, by the way, is my old Hometown, Orange County, California. The Orange coast, right. The O.C. more married homeowners are seeking roommates to cut cost more than 280,000 married American households now live with a roommate. Now compared to what? I don't know. Okay, because I don't know how many married households there are. Right. And is that homeowner married or renter? Married says that homeowners are seeking this, but it doesn't say the 280,000. So anyway, whatever, right. But the interesting thing here, right, is okay, so new data from Trulia reveals that in 2018, nearly 4.2 million U.S. households lived with a roommate or a boarder. Of these households, more than 280,000 belonged to married couples. Right. So I mean, isn't it amazing that, you know, we live in an era where a married couple has to take on a roommate to be able to afford their home? And that's just quite, really kind of mind boggling if you think about it. You know, here you're a married couple and you got like this single person living with you. You know, I don't know, it's just sort of an odd, it's kind of an odd scenario. And the top housing markets for this with the highest rate of married couples living with a roommate was Honolulu, where we just were for our profits in paradise event a couple of months ago. By the way, meet the Masters is coming up. Do you have your tickets yet? Jason hartman.com masters get your tickets. It's going to be a great event. And by the way, we do have Saturday evening musical entertainment. Remember, we had our Journey tribute band last year. Well, we're going to announce something real soon. I'm Just dotting the eyes and crossing the T's on our musical entertainment for Saturday evening. Okay. And Orange County, California, Right. Also the highest along with Honolulu. So interesting study there. Interesting study. More there. It says, furthermore, on average, every hundred thousand dollar increase in the median metro home value equates to a quarter percent increase in the share of married couples with roommates. Okay. This is an interesting trend. We will see how it develops. Okay, without further ado, let's get to our guest. Oh, hey, there's one more thing I gotta tell you. We are running a Valentine's Day promotion. You know, years ago we used to do this thing called Frugal Fridays, right, Where we would offer a special on one of our educational products or maybe an event just for one day. So we are going to do it on Valentine's Day today and we are going to have the audio from a prior Meet the Masters event on sale for half price just on Thursday, only on Valentine's Day. So take advantage of that. You can do that@jason hartman.com. okay, without further ado, let's get to our guest and talk about his report of the last year. And let's take a year in review.

It's my pleasure to welcome back a returning guest, and that is Dr. David Collom. He is a Betty R. Miller professor of Chemistry and Chemical Biology at Cornell University. But we are going to talk about the geopolitical environment a little bit, but especially economics. And happy to have him back. David, welcome. How are you?

Hey, it's great to be back again. That was great last time.

It's good to have you. So as we review last year a little bit, let's just kind of remind people, you know, we forget so quickly what happened. And as they say, those who do not learn from history are doomed to repeat it.

Right, right.

Well, take us through last year if you would.

Actually, one of my premises is, and I actually wrote about this in the introduction of my annual survey, is that a lot of stuff goes by us and it's lost forever. Right. Our brains don't capture it that well. And so one of my motivations is to actually catch these things on the fly and see if I can come up with a narrative that makes sense at the end of the year. So each year has a certain personality to it. And then I write about topics that catch my eye. In particular, I would say this year was less political. Last year was about 50, 50. This year was more two thirds economic in part because the political part so intractable, I couldn't make sense of It, Yeah, yeah.

For anyone to say this year was less political, that's sort of an amazing.

Statement, but able to grasp. That's it.

Yeah. And the question is always, compared to what? Right. Compared to what?

Right. Compared to what? Right. So, economically speaking, again, I mow through a lot of subjects, but I spent an inordinate amount of time focusing on market valuations. And it's not that I haven't talked about them before. I've talked about them every year for 10 years now, actually. They seem so excessive to me. And I guess right about the time I started to write, you could feel the sort of the vibrations in the market. And so I said, okay, this year I better lay it out obsessively. Sort of the logic that then I can say, I told you so. Right, right.

And you're talking about stock market valuations.

Of course, primarily, but also bond market.

Yeah. Okay. Oh, good, good. I'm glad you mentioned the bond market. But with stocks, even given the recent volatility and the slide down a bit, they're still overvalued, aren't they?

By a huge margin. Yes, I saw this morning, Howard Marks came out and said, I'm buying aggressively now. And I'm thinking. So we went on a run from the 09 bottom. That was 2 or 300% off the lows. The GDP grew at 2.1% a year. So the GDP grew maybe 30% total, and the equity markets went up tenfold. That. That just doesn't make any sense whatsoever. And so for a 16% drop in markets or 18% drop to big correction and time to get back to business. I think there's a delusion behind that.

It's not enough. It's not enough. So dive into that a little more about it. Unpack that, if you will, about the GDP versus overall valuation relationship.

Well, in theory, equities value the gdp. Right. The GDP is everything. Everything. In fact, there's those who say that it's way, way more than it should be. So, for example, if you mow your lawn, they throw that into the gdp. It's a ridiculous calculation.

Right, right. Every haircut. I mean, it seems as though that should be more about production than services and maybe more about exports. But of course, that's tracked separately.

Well, there's also a thing called NDP which no one uses anymore, and it's called net domestic product, and it supposedly is gdp, net depreciation. And so that's closer to reality because a lot of things are rotting. Right, right. So NDP is what you're actually Making this real progress. But the GDP, roughly speaking, the S&P 500 should in some proportionality refle the price. The GDP of the country, because it's the 500 biggest businesses in the country. This is the famous Buffett indicator. This is where he says that you should value your equities based on the gdp. And they're near all time highs. They were a little higher in 2000, they were lower in 1929, they were lower in 67, which was also an awful time to start investing. It's the second highest it's ever been. Other metrics take it to all time highs. So there's some metrics that put us at nosebleed levels with ndp.

Just to go back to that for a moment, with ndp, in other words, that doesn't count replacing old things that have worn out. Right? That doesn't count that into the GDP figure.

So for example, if you owned a house, crudely speaking, to keep your house from falling into its foundation, this sounds appalling to people, but you have to put about 4% of the value of the house in every year to keep it just treading water. So in a GDP measurement, the repairs on your house would be considered progress, it would be considered production, but in fact it's just replacing the garbage that's falling into the foundation. And so theory, that doesn't count. And so NDP catches real growth, real progress, right?

In terms of making new things. Okay, got it. But GDP is just like the CPI numbers and just like the unemployment numbers. Uncle Sam is always trying to make things look better than they are, right? To keep the population at bay and make us feel happy. Right? Happier than we should be, right?

They certainly are in part because they have tied to it the CPI and the CPI getting cooked. And I'm told it started in the 60s. So LBJ supposedly used to get financial numbers and throw them back in someone's face and say, make them better. Right? And over time they got more and more massage, more and more cooked.

And so, and they got seriously cooked in terms of the CPI. In the late 70s there was that other Fed chair, I don't know if it was before or after Paul Volcker, that one that served a very short term, like a year or so. I can't remember his name now, but I heard an interview with him or I think Tom Keene on the economy was doing that interview on Bloomberg. It was pretty fascinating about how in the late 70s they really learned how to cook the books on the CPI and really mislead us in terms of what real inflation numbers are.

There's this thing called the Boston Commission. Right. And the Boston Commission got put together to say, you know, are we really getting the CPI? Right. So you hire a bunch of PhD economists, you'll get a pretty goofy model. At the end, they decided that we were missing improvements. So they decided that to the extent that you have intermittent windshield wipers on your car, the price of your car is really overstating inflation. That's all the hedonic indexing, right, hedonic indexing. They also, by the way, came up with goofy ideas like if the price of steak goes up, then you'll switch to pork substitution, and that's the substitution. But what they don't do is they don't account for the fact that you've just stepped down in quality. So they should basically take the price of pork being cheaper and therefore you'll use more of it. They should do a hedonic adjustment on the price of pork.

Right. Weighting, substitution and hedonics are the three primary ways they mislead us in terms of inflation indexing. But hedonic indexing at its core is a logical thing. I mean, I can understand that. But you know what it says, David? It says that we as people are not entitled to progress. The inflation index is entitled to progress, not us. Imagine if we hedonically indexed from the day the light bulb was invented or the wheel.

Everything would be free.

I'm willing to give them that. But here's the real problem. So again, I didn't write about this this year. You have to go back years to find this stuff. But they'll, for example, take a blender. My favorite example is a blender I once broke. It was a 40, 50 year old blender and I broke it and went, bought a new one. Now that blender lasted 50 years. The new one has more buttons, has more speeds, has more everything. I think they hedonically adjust it to say therefore it's a better blender and it'll last about three years, let's call it.

Yeah, that's interesting because the quality isn't as good and everything's in this kind of disposable society.

Right, right. And so the per year cost as a rental, the per year cost just went up tenfold.

Yeah. So, you know, look at most everybody listening will agree because we've talked about it a lot, that the numbers are obviously skewed. You know, there's a. Everybody's got an agenda. Go back to the year in review, if you would.

So this year I talked about valuation, 20 plus metrics of valuation. They all put us at round number 2x over value, and that's 2x overvalued relative to a historical means. Whether you use price to GDP or price to revenues, price to sales, Tobin's Q, price to gd, there's all sorts of these metrics. There's tons, there's composite. They all put as 2x over value, which means the market to correct to the norm, has to drop by 50%. If it goes through the mean, which we all know what the mean means, it has to spend half the time below the mean. So it's got to go through the mean or redefine it, then you're even more than that. And that's where Hussman comes in, says, I think we're going to go to 60 or 70% down before this is over. And then the question is, are the valuations people are using based on earnings and stuff correct? When you realize that if the market corrects 50%, what's going to happen to earnings if we inflation and wages start going up, what's going to happen to the world record profit margins that companies are experiencing right now? They're the highest profit margins ever and that is on the backs of stagnant wages. If we get real wages going up, then the companies are going to lose their profit margins. Then they're going to lose.

Well, the companies will just pass that through to the consumers if they can. Right, Right.

But then the GDP becomes a farce unless they correct for it. What happens is the consumer has less and so the whole thing spirals. So the gist is right now we're in a meta stable situation, in my opinion, where we've got a situation here where we have to sustain the unsustainable for the markets to stay at the current levels. And I spent 15 pages banging on that concept. I don't stock buybacks in a big way because there's a subtlety to them that I realize actually the stock buybacks are a ruse. Ruse in a way that people don't. I can't find anyone who's writing about it. So we know that they're using them to pump the shares. We know that they're using them to boost executive bonuses, to hit their targets, to get their 100 million a year, whatever it is. We also know that they're buying it peaks. That's not contested at the last minute and it's actually not in there. Well, I did an analysis on a fictional billion dollar company and the conclusion that I Drew from arithmetic. This is not projections. This is nothing. That if you do share buybacks with cash on your balance sheet, you buy back shares and you extinguish them, you gain precisely zero to the penny to the penny, there's no gain. And it turns out that if you look at the net tangible assets on the balance sheet and the value of the company and the shareholders, they own exactly the same net tangible assets at the end of the buyback, where it gets surreal. If the company chases the price up at all, whether they're causing it to go up or whether they are just tracking it up, then while the price is going up and shareholders are cheering, the per share net tangible assets supporting those shares is going down. The net assets per share is going down. People all think they're going up. They say, all less shares, I own more. Fantastic. That turns out to be arithmetically wrong. Using sixth grade math.

They're seating their own tip jar. It's a house of cards. That's just an illusion. Right.

Well, they're swapping something on their balance sheet for something else.

Yeah, right, right.

And if they taste the shares up, they're swapping it for something that's getting more expensive. And so if the company's valued at X, they're now paying more than X.

But it can be worth it to them, obviously, to play that game. David, I want to make sure we talk a little bit about real estate. We've seen a real change, especially toward the end of last year. I've been predicting for years that the high end, what I call cyclical markets on the two coasts and in South Florida are highly overvalued. Same with markets like that around the world. Highly overvalued way past the point of fundamentals. And finally the slowdown really is happening. The New York market is just crashing like crazy. We're seeing this, the lower end markets, those sort of bread and butter, what I call linear markets, are holding up very nicely. In fact, inventory is still very scarce and prices are still rising in those markets. And of course, you know, you can't talk about real estate without making it local, but. But from a national perspective. Any thoughts on real estate?

Yeah, several. One is that after the 0809 bust, we had this odd situation where obviously people were liquidating their homes like crazy. We overbuilt the houses, people then got foreclosures and the houses went on the market. We had a glut.

Oh, strategic defaults left and right, millions of them.

I mean, and so then what happens is following that, you Find that home ownership rate is dropping and the prices are rising. And anyone who knows free markets would say how can that possibly be right? The supply demand curve is broken at that point. Turns out the buyers I think are private equity. So these big, big companies that are buying up single family dwellings.

Oh yeah, like never before. America is really becoming a renter nation. You know, you see these, we've never had this happen before where these institutional investors have owned thousands upon thousands of single family homes. This is a first in history. What's happened over the past nine, 10.

Years and the reason we never have, and this is what's critical is that it's a lousy business. So if you want to, if you want to.

It's a very fragmented business and I don't think they all have the tolerance for it.

Are razor thin if at all, if they even exist. And so, so if you want to house lots of people, you make a rectangular building and you make rectangular units and you pack them in tight like, like sardines, like an apartment. That's how you make money, right? Like apartments, like condos, you name it. Single family houses are awful businesses. So what, what made them possible? Well, ultra low interest rates gave them a razor thin margin to make money and then they levered up and now in a rising rate environment, and I think we're going to reach some threshold, whereas the rates rise, there's no longer a profit in it. Now here's what ought to happen.

But wait, you know, if they have the advantage that the traditional investor gets, which is pretty awesome, a three decade long fixed rate mortgage at an artificially low interest rate, arguably a negative interest rate below the rate of real inflation or at par with it, they're pretty good. Now I don't know enough about their financing at an institutional level. They don't get those Fannie Mae loans. They're probably much shorter than that right now.

That's an excellent point. So then the question is what are the odds the private equity guys threw it out? 30 years?

Yeah, I doubt it.

I think they did some real short term, ultra cheap stuff.

Simply what they do.

That's exactly. And so now you're going to have a liquidity problem because these guys are going to be rolling over loans and they won't be able to get them at the rates they need them. So what are they going to do? They're going to liquidate real estate. We are going to see the 0809 glut finally show up as the rates rise. Will be some threshold and then you Got places like Palo Alto. The median house is 3 million.

If that's beyond observation absurdity.

And you got all of Canada now crashing, right? Canada's now the real Vancouver was the.

Poster child for ridiculous appreciate. I mean just beyond ridiculous. You know, two and a half million dollar tear down shacks in Vancouver. I mean you can't make this stuff up.

And some of them are not tore down. I posted a picture on the sold for 2.6 million I think it was. And it was just a pile of sticks. It was no longer a house.

Unbelievable.

And you got. Australia apparently is giving out now. I heard London's giving out now. And so I think we're starting to see a cascading failure because I think the banks around the world are all trying to tighten.

You know, I think it relates to your stock market discussion earlier. You know, when we see these areas, these tech saturated areas, namely Silicon Valley, but of course there are many others around the world. Everybody wants to be the new Silicon Valley. Right. You know, when we see these stocks finally get in line with real legitimate value and other normal economic pressures and the share buybacks waning and so forth, I think those housing markets in those ultra high end tech oriented areas are really going to suffer. I mean they've got to.

My understanding is people are leaving Illinois for the first time ever. People are leaving San Francisco for the first time ever.

People been leaving California for quite a while, rightfully so too, you know.

And so I think they will equilibrate. I think we will regress to some mean maybe it's going to be more expensive than, you know, Ithaca, New York, but I think they'll price correctly. I think it was Genentech, they said the only people can afford a house are the founders. It's just that crazy. It is.

Any thoughts about what's to come? Dust off your crystal ball there.

Yeah, I think we started the downturn. I've fought this several times, but it's been a monotonic march upwards since 091 that I, you know, in all the other bubbles, I think we're in a massive bubble. All the other bubbles we've ever had there was a great storyline. So whether it's 29 and we just invented all sorts of appliances and cars and planes or whether it was even the tech bubble where there was this new era of digital connectedness and they always had a great story and the current story is central banks have our backs. So it's a pathetic story. It's a monstrous bubble. I think it's going to unwind if it doesn't unwind now, it'll unwind later. But I think it's starting.

What's it going to unwind with, though? Is it going to be the stock market? It's not going to be real estate this time. I mean, there's no subprime crisis. I mean, unless we just can't see it. The banks have been very conservative housing.

Having some serious leverage in it. Yeah, right. So here's how it's going to take place. The worst case scenario and the guy you might want to have on this guy named Chris Cole from Artemis Capital. He wrote about the VIX collapse, which is kind of arcane for a lot of people, but an entire market, that's the volatility inde.

But why do you think. Just unpack that a minute.

So the VIX collapse was where people were betting on an arcane measure called volatility. It's much more than it sounds. And he had written about it and talked about it about five days before it collapsed. Now people say, what do you mean it collapsed? Well, this is a multibillion dollar market that literally went from existing to not existing. In 15 minutes, this collapsed like a house of cards. And in 15 minutes they were vaporizing, liquidating entire investment vehicles.

Oh, people lost a fortune.

They were gone. He says that was not it. He says that was not the big one. Those were what he calls the explicit volatility bets. And on top of that are volatility bets like company share buybacks, where you're betting the market's not going to punish you. Risk parity bond funds, where you're betting that the bond markets aren't going to kill you. So. So the black swan that people somehow don't believe can happen, I think is when the bond market and the stock market collapse together. Now, last time in 0809, while your stocks made you suffer, your bond saved your bacon. So if you're sitting 60, 40, you didn't get crushed as much as you remember.

Why does the bond market collapse? Is it because rates are so much higher at that time that there's just a yield issue, or is it a default issue?

Well, the market is so leveraged that you can all of a sudden. Italy, for example, about a month ago, their interest rates went from 0.4 to 2.8 in about two days. I can't even explain that except to say it's a meta stable system. You say, why did the avalanche fall? Why did the earthquake occur? When you have this much leverage and you have this much energy so sort of cramped into the system when it's time to go, when it's time to collapse, when it's time to correct. Like a bomb, like an explosion, like a volcano. You can't model it. It's not rational. It just goes. So I think that at some point the bond market just loses control. It just all of a sudden it goes bidless. You're going to have central banks bidding it up. But what if cornered by an inflation problem? So what if all of a sudden the inflation really starts to take hold and as salaries rise, as commodities rise, as tariffs kick in, and all of a sudden the central banks go, wait a minute, we can't save the markets while at the same time without losing control of inflation. So as bonds lose their bid, interest rates soar and things start breaking. There's Kentucky, for example, state of Kentucky. Their pension fund is funded to the tune of about 22%. They are so.

But every state, the average state is funded to the tune of about 70%.

You said that you were talking about this on another interview. I heard you mentioned, I think that the federal government probably just bail out the states. And I agree with that, by the way. But that is going to be very inflationary. Right.

I thought there'd be inflation before, but at some point you end up with a mess.

You got to have it. There's no other way.

So we've got this unstable system and you know, do you cut the red wire, the blue wire? I don't know. But if they lose the bond market, then they'll by definition lose the stock market. And then you'll have both halves of your portfolio going down simultaneously. And people haven't seen that happen.

That is one scary thought.

We got China deleveraging right now. Someone said, oh, this is the biggest communist state to ever deleverage. I go, this is the biggest country to ever delever, period. China could just destroy the planet Delever. And they are starting to.

And China is so overrated.

Yeah, I know.

It has a huge banking imbalance. They got a mess on their hands. It's way, way bigger than anything we've got. But if pension funds are funded to 70% at the bubble high, what are they going to be funded to? When we cut 50% off the stock market and beat up the bond market and unemployment goes to 10% again, these are normal events. So what are the pension funds going to look like?

The only thing that can save all of this financial mismanagement is technology, you know, well, just the fact that it makes things so much More efficient. It just makes capitalism work in such a frictionless manner.

I'll take the other side of that. Go ahead. You take the 20th century we went from horse drawn wagons and in a century we went from horse drawn wagons to pulling fossil fuels essentially for free out of the ground, which is basically the enthalpy with the heat, the energy that you use to build civilization. So civilization represents order that requires heat and energy to create. The 20th century we tapped fossil fuels and the GDP grew what, 3.5%? Yep.

There's no peak oil problem until all those doomsday people from the 70s. No peak oil problem?

Well, there could be. I still think there will be someday maybe, but the techies might save us on that. But the key is, the key is though that if tapping all that fossil fuel gets a 3 1/2% growth rate, how are we going to get 3 1/2% growth out of fangs and out of Google and out of Microsoft?

It's just hard to tell. Maybe it's not those types of technology. It's materials technology like graphene and biotech and I mean there's so many amazing things going on, it's really hard to reconcile. There's no question we've got massive financial mismanagement. There's no argument on that. But.

Right. Live to see us break the sound barrier. Can you beat that? Can you beat that? I mean, I don't think so. I think that if you can get three and a half percent growth out of the 20th century, to think you're going to get get 5% growth out of the 21st century I think is nuts.

Interesting. Yeah. Who knows?

I mean then the question is, do you grow yourself out of a big mess at 3.5% a year and I don't think you do.

Very interesting. David. Give out your website and tell people where they can find you.

I don't have a website. Really? Although you can find some stuff at Dave Goes rogue and it's the top link on a virgin computer.

And you've got your Cornell website though.

I got a Cornell website. I don't know what to call it. I'm in the Cornell Chemistry department. It's an IQ test. You gotta reach me. If you can't, you're not find me with that information. I don't want to talk to you.

That's a qualifier.

Yeah. And you can find me on Twitter. Avidbcolum. C O L L U M My pinned tweet is my year in review. So that gives you a window in my soul. It's Irreverent. It's long.

How long is it? How many pages?

About 150.

Whoa. That's a book.

Yeah, it is a book, but the people who've read it, no one has said it's too long. I wish I hadn't read it. I don't know how many read it. I know there's hundreds of thousands of clicks, but they could be keeling over dead before they get to page 20, right?

You never know. David, thanks for joining us.

You bet. Thank you.

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