CW 301: Geopolitical Outlook & Income Property Investing with Bud Conrad Author and Chief Economist of Casey Research

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Welcome to the Creating wealth show. This is your host, Jason Hartman. And this is episode number three, 301. We're in the three hundreds now. Here we go. Today we're going to have Bud Conrad as our guest and he is the chief economist with Casey Research. We're going to talk about some interesting topics with him and he's the author of a new book, Profiting from the World's Economic Crisis. He's got a bachelor's degree in engineering from Yale University and we will get to him in just a few minutes here. But first, I've got Michael back on the show and he of course is one of our investment counselors. And we wanted to talk about two recent article that we saw that I think will be of interest to you as real estate investors. And also I realize we only had him on the show once before and we didn't really talk about his background. So I thought we should take just a quick moment to do that today. Michael, welcome. How are you?

I'm doing great. Jason, how are you doing?

Fine, thanks. Hey, how's the weather in Southern California?

Absolutely amazing. We got the Santa Ana winds, I think it was about 80 degrees down at the beach. It's almost summertime.

Yeah, fantastic. That's how it feels here in Arizona. You know, it feels like the weather in Phoenix or in Newport Beach. It's pretty much about the same thing most of the time, except in the summer.

Then it's just ridiculous out here. But yeah, it's beautiful here. It's like I have spring fever today. It's a gorgeous day out. But hey, before we get into these two articles that I want to discuss with you, I just thought it would be good and you know, I meant to ask you to do this last time. Just tell us a little bit about your background because you've only been on the show once before, but I did talk you into it. But you were with Keller Williams, the real estate firm doing traditional real estate before this. And just thought I'd ask a little bit about your experience because I have a lot of familiarity coming from traditional real estate myself. Years ago in the Irvine, Newport beach markets, you know, wanted to ask you about that. But even before we talk about Keller Williams and so forth and the Newport beach clientele, give us some of your background. Where do you go to college?

I went to UC Santa Barbara.

All right, and your degree is in engineering, right?

Correct. Electrical engineering. So I guess you got me and Bud today both electrical engineers by degree.

There you go. Yeah. Now, I don't know if Bud is electrical engineer. He's an engineer, but I can't remember what type of engineering. But yeah, so you've got the analytical mind. There you go.

Yeah. And it was actually really nice. You know, I've been at a couple Meet the Masters and most of the people that I talk to end up being engineers, which is just a great fit for me. We have similar thought process processes and I totally get the way they want to analyze and do their due diligence on properties.

And I can see that you're really getting a lot of use out of your engineering degree, by the way.

Oh, man. My mom is still upset 10 years later, 11 years later, she's still upset that I'm not an engineer. But she understands that this is what I wanted to do with my life and I've always wanted to be self employed and get into investing. And that was really why I ended up where I am today.

Yeah, I cannot tell you, you know, I've hired hundreds and hundreds of people and I cannot tell you in my old traditional real estate firm, the one I sold to Caldwell Banker back in, oh, five, how many people I have hired with either engineering degrees or get this one, psychology degrees. That's a big one. Not too many good jobs there. Philosophy, English degrees, English. These things don't really do, do much in the world. A lot of times in a country where we've outsourced the manufacturing to China, less demand for engineers, which I think is really a sad thing. And I've commented on that before. You know, I want to see America be more into the sciences. And you know, I think engineering is just an incredibly important field and it's so unfair because it's, it's fairly underpaid and there's a great commercial about it and I don't remember who it was for, but you know, I gotta Find this commercial because it was really good from, I don't know, a few years ago. And it had the inventor of the USB port and he like walked into this room and all the girls were tearing his shirt off like he was a rock star. And then, you know, some rock star came along and nobody was paying attention to the rock star. It's like a perfect commentary on how our society just doesn't really revere the right things. Because everybody loves Apple Computer and Apple products, right? Well, most people, and it's like engineers are just. They're not. They don't get nearly enough credit.

Yeah, well, actually you mentioned the pay actually straight out of college is very good, which was my initial attraction. But I graduated in 2002 after the DOT com bubble had popped and it was just time to look for something else. I still love the technical aspects and am intrigued by technology, but the unlimited income potential is what initially got me into real estate.

Well, I mean, the pay was good. It's not nothing compared to real estate. I always say that sales is the lowest paid, easy, the highest paid hard work, being an entrepreneur, which really is being in sales in one form or another. Unlimited income potential, of course. But. But yeah, it, it just, it kind of doesn't seem fair. I mean, I remember we used to have an engineer working for us that was an investment counselor and he was, I don't know, I think at the time maybe 55 years old and the most he had ever earned in his life. Now he wasn't very good at it and he even said he wasn't very good at it, but you know, it was like $65,000. I mean any. It's amazing. It's really. I don't know, I don't think the pay is that good, but I guess if you move up into the upper echelons of. Can be very good. But it is very, very important. And it just seems like we have this society that is built largely on marketing and public relations and media. Like we were commenting how on Facebook, you know, everyone is now their own publicist. It's a strange world in which we live these reality shows and it's kind of unfair. It's kind of backwards if you ask me. But enough of that. And then what were you planning to do with your engineering?

I was in electrical and it was digital design. So I studied how to design.

Application specific integrated circuits and that was. I thought it would just be fun because there's a little bit of programming involved and you could do this rapid prototyping using software Create a model of how you wanted these microchips to operate. You could download it into a programmable chipset and then you could do prototyping in the lab. If that worked, you would send it out for fabrication. So it just was neat to be able to rapidly take something from the computer to the test bench and get physical results out of the product.

Yeah, very interesting. And when did you get into the real estate business? Did you start with Keller Williams?

No, I was actually with a regional company in Southern California. FirstTeam.

Sure.

And I actually didn't ever want to be a real estate agent. I had just done a lot of reading about investing in real estate and was initially drawn to it based on the fact that there was people talking about anybody on virtually any income, if they became a real estate investor, would be wealthy by the time they were retired. I initially thought I would be an engineer. And as time went on in the depressed engineering job market, I was waning away anyway. And I just thought, you know, what if I can sell real estate, I'm just going to be exposed to it and working with it as a daily product. I'll be that much savvier of an investor.

Yeah, well, you know, that's interesting because that's exactly how I got into the business. That's exactly the same story. I started reading these real estate books and got my first one at age 16 years old, nothing down by Robert Allen. And that kind of inspired the whole thing. And by the time I was 18, I was enrolled in Century 21 Real Estate School. And by the time I was 19, I had my license and I was in the business. And I went to one of these seminars, probably Told the Story before on the show. And, you know, I didn't know what they were talking about, although I'd read some real estate investing books. I was 18 years old, I was still in high school. And I went to this seminar in Anaheim and a bunch of speakers were up there talking about points and things like this and the due on sale clause. And it's all Greek to me, as the saying goes. So I just thought, you know, I remember I used to be. Well, I still am, but, you know, I was a big fan of the late Earl Nightingale. And I remember him saying this on one of his old tapes. Tape. We used to have tapes, not eight track, but cassette tapes, not that long ago. And he said, he said, you want to get rich in real estate? Learn the business first. And so I just got into the business because I was so. I knew nothing. And so I Just started selling it. And gosh, I did so well selling it. I started working with investors selling government repo properties in the. Mostly in the Inland Empire of Southern California and Rialto Fontana. I mean, it was pretty disgusting what I used to do. You probably have a much better story, and I'm going to ask you that in a moment, but let's talk about me first.

And, and so you'd go into these houses. They'd all be boarded up. They were HUD and VA repo houses. And you'd go into these houses and there'd be no lights. You know, you'd bring a flashlight and your, your legs would get all bitten up by fleas because they were. There were these fleabag houses, and soon as they took the pet out, the fleas had nowhere to go but on the first living thing that walks in the door. And that happened to be me a lot of times. And, you know, I would show people these properties and they would buy them and bid on them. And that's how I really developed my love for income property and real estate investing. So that's great. So now, now you started with first team and how long were you there?

I was there for six years.

Oh, okay. And then how long at Keller Williams?

For two years.

Okay, great. Any takeaways that you want to mention from your experience in working with clients? I mean, in Southern California, investing is gambling. Basically, it's all based on appreciation. Nothing makes sense from a cash flow perspective, at least not in the coastal areas where we both worked. But any, any experiences or things that you'd like to share with the audience that might be relevant?

You know, I don't know if anything in particular stands out, but it just intrigues me when a local investor would be completely happy with a 5% return on his investment. And there's a few beach properties in Newport beach that makes some sense to me. You get the summer rental where you get a full month of rent in a week, and you get that for 12 weeks out of the, out of the year. And then you do a winter lease for nine months. So you're getting significantly more income and those can have a decent profit. But at the end of the day, I don't like California. From the term, from the landlord perspective.

Of tenant law, it's a landlord unfriendly state. But those beach house rentals, I mean, you're talking about Balboa island and stuff like that. I've tried to make those pencil, and those don't even pencil, you know, because the winter rental is Usually pretty hard to pull off, number one. And of course the rates go down a lot and you know, for that four months of summer you do get the higher rates, but you lose a lot of that income in management fees because when the manager is managing those weekly rentals, they charge a heck of a lot more vacation rentals. The management fees are exorbitant. Now they do provide a lot more service. It's a lot more management intensive, so you can understand it. But I don't know, I've never been able to make those pencil on a $1.2 million beach cottage.

You think that works in 1.2 is pretty cheap. You know, I'd seen a couple from time to time. I wouldn't say they consistently penciled out. So you still had to wait for the right property to show up and it just had to be in that right range of getting the premium rent for the purchase price. And some of the houses though just have, they've had people rent them for 10 years, 20 years. You know that one family has that week booked every single year for the last 10 years. So you know you're going to have really good occupancy levels.

Yeah, yeah. If you get that sort of a track record like that. Yeah. Interesting. And. But did they have success a lot of times with those winter rentals though? I found a lot of those properties to be just sitting vacant. A lot of times they couldn't get the winter rental and make it happen because everybody that wanted to move in wanted a one or a two year lease. They wanted to stay.

Yeah, I mean it was mostly targeted at college kids. And then due to the budget cuts, just this year UCI cut off the shuttle that would run down to the slope. So that's going to severely hamper the nine month rentals at this point.

Yeah, yeah. And UCI, by the way, is the University of California, Irvine. Not all listeners know that. Oh yeah, national audience, global audience.

Yeah. So yeah, a nine month rental for the most part is not very attractive. I am seeing more people take up the. I think some of the rentals have gone to weekly all year though. And I've actually run into people recently just at social events that said, oh, we were just, you know, in January we had a week down at the beach and it was really nice. And actually one person said they had, they took the month of January and it's amazing how many people live locally in Orange county and they just commute the children back and forth and commute to work and just get to live somewhere for one month. Out of the year down at the BEACH and then 11 months back at their house.

See, I hate to base my investment on wealthy people who can afford to do that. That's just not. Not my kind of thing. I want bread and butter housing that people really need. Not. That's optional. Optional luxury housing like that is. I just think that's highly volatile and risky.

Well, and the maintenance when you're on the sand. I've seen a house, I think it's been complete for nine months and it's already showing wear and tear from the elements.

Yeah, yeah. The salt water is. They had a yacht. You may not know that.

I didn't.

It was a yacht. And I say, because technically the definition, it's over 40ft. It was a yacht, folks.

And you know that story of the two happiest days of a boat owner's life.

You buy it the day you sell it.

Yeah. Because things, when you are near saltwater, it is like being in a vat of acid all the time. It's just the destruction and corrosion. Mind boggling. It really is. It really is. But anything else you want to talk about about your experience real quickly because I want to touch on these two articles and get to our guest.

No, I don't. You know, I'm really happy that that traditional real estate is over and I'm completely focused into serving clients that I've met at Platinum. And that's. I really just enjoy the conversations. And you have such an educated client base. It just blows my mind. And people bring so many different perspectives being that we have a global client base. So it's been really fun and really happy that I decided to make that move.

Good, good. The interesting thing, and you know, I say a lot of our employees and staff and investment counselors come out of our audience because you were a listener to the podcast, you had attended several of our seminars and you were basically doing the client track and then you said, hey, I want to work for these guys. I like this company. So a lot of our people come right out of our audience. So if anybody listening is interested in opportunities with us or has proposals with us for us, you know, ideas of how we could increase our business, we're always happy to listen to that. And I will tell you that we're always looking for highly skilled web developers and copywriters and video production people who can produce short like YouTube documentary style videos and things like that and take our content and use it in different ways and expose it to different audiences. So just keep that in mind, listeners. Good Fantastic. Hey, so rent increases, an article that you brought to my attention is about, about rent hike transparencies or how to sell the increase. Your thoughts on this one?

Okay, and just a quick attribute to that one that's from multifamily executive and you know, we just like a broad source, a broad base of sources. So this is, you know, taking a perspective from big institutional, multifamily developers and operators and their thoughts on how to keep rent increases going as most of them are looking for a 3 to 5% increase. And you know, it basically just comes down to you need to keep your properties in really good condition. You want to make sure that everything looks good, that they're very attractive. And you know, I think one thing that was interesting is some of the operators said, just be transparent about it. Go to your tenants, explain that your costs are going up. You know, utilities are going up, there's new taxes, there's other fees with owning properties. And just let them know that unfortunately you need to pass it on. And instead of trying to kind of warm it into, we're sending out the new lease in a month and, you know, trying to sneak in a rent increase there. So what do you think about that, Jason?

Right, right. Yeah. No, I think that's tr. Don't be too afraid of. I mean, this is a balance, okay? There's a fine line here. And what I'm about to say, don't be too terribly afraid of the tenant moving because when they do move, sometimes you can increase the rent a lot more. I remember I had this one property that I was self managing and the tenant moved out. And I remember at the time, you know, I just kind of didn't want to have a vacancy. Wasn't like business wasn't booming at the time. And I remember being a little bit, I don't know, a couple things that hit me in my financial life at that exact time. And I can't remember what they were, but you know, I was feeling kind of a little bit weak. I thought, oh God, now they're moving out on top of all this other stuff that's going on. And it turns out I got a new renter in three weeks, I raised the rent over $300. So a lot of times having the tenant move can be the best thing, but sometimes it's not. It depends. Every situation is different. But don't be too afraid of the moving number one. Number two is they expect rent increases. Tenants expect this just like they expect pay increases, cost of living increases. People just, I don't Even think most of the world has any concept of what inflation is or how inflation works, but they just think, oh, prices just go up because that's just what they do. It's like people just expect it. So don't, don't worry too much about raising your rent. I mean, believe me, they're expecting it.

I think in the last podcast you mentioned people with a lot of equity tend to be lazy landlords.

Right, right. They have lazy money. Exactly.

Yeah. If you're always going to be, I don't say you want to push the envelope of rent prices, but if you want to keep the mindset that you're going to keep growing your rent in a reasonable manner, then you're going to have to make sure that you're not a lazy landlord. You need to monitor vacancies, see what's available in the inventory, look at what rents are doing in the market. And you want to just stay abreast of what's going on around your rental properties?

Yeah, absolutely. That's the thing to do. Okay, good. So now let's talk about the other end of the spectrum here. Let's talk about deadbeat tenants, what to do when someone doesn't pay their rent. And I mentioned on the last episode that we're going to do a piece and it's coming up pretty soon here. Maybe next show. I think next show we're going to do Steve Forbes and have his interview, but maybe the show after that we're going to analyze a best case, a medium case, and a worst case scenario and really drill down and look at the return on investment you get even when things go poorly, when you have long vacancies, repairs, maybe an eviction. You know, like the worst stuff that could happen. Okay, we're going to take a look at that and kind of analyze that and I think you're going to be pleasantly surprised, folks. It's better than you think. Even when it looks really bleak and bad. People don't know how to keep score very well when it comes to real estate. And that's one of the things you've got to be better at that so you can keep your head about you and make good non emotional, rational decisions. But deadbeats? To evict or not to evict.

All right, so this is from Allpropertymanagement.com this article came from. It's called the deadbeat dilemma. And you know, basically this is a part of being a landlord. Eventually you're going to have someone that doesn't pay rent or is doing Something else that's going to cause you to have to evict them. So there's obviously a few different ways of going about it, but one of the first things they talked about in this article is don't go in the house and put all of your tenants possessions on the curbs. Because as landlords we have to be really careful, especially in states where tenant law is very strong, that we don't suddenly become the one who's getting prosecuted financially and legally. At the end of the day, I.

Just love the things. I mean, this would appear to be obvious, right? They have a what not to do section and you mentioned the removing tenant property, but some of the other ones just crack me up. What not to do. Don't thr threaten or assault your tenant. Don't lock them out of their own house by changing the locks and don't turn off their water, heat or electricity. You really have to tell people this.

You know, I bet it's probably, I just see people, you know, in the heat of the moment, it's probably the most dangerous time. Someone's having a bad day and they're just really upset and that, you know, the common sense may just fly out of the window for a moment and, and that would probably lead you to threaten them potentially, which would be just a bad call. But I like the part where they talk about, you know what, you might just try to go negotiate with them, understand, See if there's something going on. Do they not have a job right now? Did something happen? Do they not have enough money to leave? Maybe you could give them two weeks free rent and a couple hundred dollars to help them move and that'll get them to leave on good terms and not damage the property and solve your problem by just getting them out of there as fast as possible. So honey over vinegar is highly undervalued at times.

Yep, absolutely. You know, you get, you get more bees with honey than vinegar for sure. But most people listening, if they're investing through our network, they're using a property manager. Now of course, we have taught many of our listeners how to self manage their properties and I'm a big believer in this. It's working for me very well actually. I never thought I could self manage a property from 2,000 miles away and I find that it's pretty great. And at the last meet, the Masters event that we had in Irvine, you know, we discussed this at length. But the reason we're telling you about these two articles is sometimes you're really doing this through your property manager. But get your property manager to think a little more creatively. Get them to work with the tenant. And some, you know, if you want to, although I don't necessarily recommend it and your property manager probably won't recommend it, but you can do it. You know, it is your property and you can talk to your tenant directly. So that may be something you want to do. But just some, just some thoughts there. Okay. On the practical side, good stuff. And you can hire an eviction service to do the unlawful detainer. And you don't have to go to any fancy attorney that charges by the hour. These are usually flat rate, very inexpensive things to do. And just you got to understand, everything does not go right in business. And sometimes things go very well and sometimes things go sideways and they go bad and you gotta just roll with the punches and remember that life is a marathon, not a sprint. And my mom is just such a great example of this. I gotta get her back on the show to talk about more of her experiences. She's such a do it yourselfer, Michael. And I know you've heard her on the show, but she's such a do it yourselfer that she actually flew to Los Angeles from Mobile, Alabama or Gulf Shores, Alabama, where she's building her southern mansion. She flew there to rent one of her properties. I mean, it's just crazy. It's like I said to her, why don't you just have, if you're not willing to have a property manager mom, just have an agent lease it up for you. And she's like, no, I do it so much better than everybody else. I'm gonna do it myself.

I remember hearing that on the podcast and I was blown away by that.

So she does it every time, I.

Guess, if you have the time. And maybe it just makes you happy at the end of the day that you, you know, got to manage it and you do it according to your.

Standards every time she does, and she does a good job of it. And she's, she's made a fortune in with income property and her properties are spread out now all over the country and she's managed them herself. So there you go, the ultimate do it yourself or much more so than I am. So good stuff. Okay, well, hey, let's get to our guest and I want to thank you for joining me today. We've got some great episodes coming up, folks. Steve Forbes will probably be the next show, but there's a bunch of other great interviews already done already in the can that we will play for you on these next few episodes. So some real good stuff coming up. And we will be back with our guests with Casey Research. That's Doug Casey's office here. In just 60 seconds.

Be sure to call into the Creating wealth show and get your real estate investing and economic 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 480-788-7823. 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 Bud Conrad to the show. He is the chief economist with Casey Research. And as you know, if you're a regular listener, we had Doug Casey on a couple of months ago and it's great to have Bud back. And we're going to tailor our conversation a little more specifically to income, property and real estate investing today. And it's a pleasure to have him. From Northern California, right, Bud?

That's right. I'm in Silicon Valley here where Apple's headquarters, HP headquarters, Google headquarters and such are right around the corner.

Fantastic. Let's talk about the big picture of the economy, the geopolitical situation globally. And, and maybe we'll funnel that down to how it affects individual investors and, and talk about real estate, too. I know that. And I got to mention something about that. Doug's a little bit outlandish sometimes. I think I don't know him very well, but he said he was buying apartment buildings in Egypt and I couldn't believe that. I was shocked.

The ultimate contrarian. And I think that was what was driving him to look at that. You may also know that he is a large holder of lands in Argentina.

I know that. Yes. I know that one.

Based on the basic idea that Argentina was hitting bottom, prices were low, and everybody else said, why would you invest in such a far off place? And it's turning out and he's now been at it a little while, things are doing just fine. So I would not write off what seems like kooky ideas to the more mundane of us. Doug has done very well with his big picture view.

Yeah, sure, sure. And I would agree with him on his argent you know, I've been to Argentina and I would agree. The problem with Argentina, though, is it's so corrupt. I mean, corruption is just like. It's part of its charm.

Almost.

I can understand your point of view.

Yeah. But, but anyway, let's not get too distracted with that. I love Doug's research and, and all the stuff he does. He's. He's fantastic. He was a fantastic guest too, on the show. But yeah, we were talking a little bit before we started about kind of the broader geopolitical situation and how China's going up and snagging so many of the world's opportunities, which we should be doing. But what are your thoughts?

Well, I think it's important to look at the big picture geopolitical situation, what's happening in the world, before we get down to details, and I'm sure we will, of what's happening in the US Itself and in the big picture. The dominance of the United States as the monopole individual power with full spectrum dominance is clearly not going to continue. Yes, we've held that space after the decline of Russia, but boy, the Asians are doing extremely well. Certainly China has done even more than what we remember as the Japanese miracle after World War II with their Miracle and they are the mover of new things in the world. The west will decline as Asia. Many problems, of course, that are also true there, but does very well. Problems that are coming up more recently are that China and Japan don't seem to like each other very well. These Senkaku Islands, as the Japanese call them, have become a focal point of conflict. That I think is serious. But I do think that the strange thing is that Japan wants to destroy its currency. Mr. Abe, the new Prime Minister, says let's have a currency war and we don't care. We want to make our currency even weaker than yours. Very strange position. He may get what he's asking for, which may be 3% inflation, at which point his government is bankrupt because he can't afford to pay the interest on the deficits that are outstanding in Japan that are way beyond any reasonable thing that a major developed country has normally been able to achieve.

Well, I want to ask you about that just to jump right in before you go on. So many countries intentionally devalue their currency. China, of course, is repeatedly accused of suppressing the value of its currency, not letting it float. Why do they do that? Is it just for the short, short sighted goal of increasing exports? Because all in all, I mean that that isn't a good thing. Speak to That a little bit. Is it just a short sighted, quick, quick jolt of caffeine type of mentality?

Yes, that is definitely a part of it. Politicians tend to be short minded and so forth, but I also think there has to be a little more nefarious side to this. They're the ones who print that money that they say is to help us all, when in fact they're the ones that are primary beneficiaries. First off, if you think about that for a minute, if they got a cover, as Bernanke seemed to have during the early phase of our own crisis of saying, oh dear, we can't have deflation, that would be horrific. Let's do a little inflation and oh yes, that's good, we need to fight deflation because how horrible that would be becomes the mime of the public in a lot of the commentary like CNBC news or something. In fact, yes, we lose on inflation, but they gain everything. They gain the differential by being the first to spend the money. So I think that's another reason on top of what you just suggested, that they're short term and selfish. But I think that they have a real immediate gain personally for them and their friends, the bankers that are the part of the game that causes all this to happen. So I think the incentives are very much there for the potential future inflation to escalate fairly dramatically, which gets back to the US a little bit. Let me throw something in.

Well, I just want to, I just want to touch on your deflation comment because I, I could tell you sound like you're being a little snarky and I agree with you completely that it is monetary policy coming out of Bernanke is a disaster of epic proportion. Okay, I completely, Many people consider him a hero.

They, they said from the 1920s style depression.

Yeah, but, and the same thing about the maestro, Alan Greenspan, who I think was another absolute disaster. But, but like Doug says, you can make money from these idiots, you know, I mean, so I personally, I believe I know how to invest very well for that and I believe my listeners do too. But on the broader whole, I don't think it's good for the country and I'm taken care of well enough that I'm kind of more concerned about the country, to tell you the truth, and making another couple of bucks for myself. But we gotta just talk about deflation for a moment because as much as I hate to ever agree with Ben Bern, deflation is a really, really dangerous force in my opinion. And here's the biggest reason there are Many. But I think here's the biggest reason. It causes people to put off buying decisions. And when you put off buying decisions, it massively reduces the velocity of money and it just becomes this downward death spiral. You know, as much as I hate inflation, I think it's the lesser of the two evils in a way, isn't it? Or am I crazy?

Yes, you're right. I think on both of them the problem with deflation is not just the slowing of people putting off their transactions, it's the oppressiveness of debt. For example, a mortgage holder in a house of a deflating price underwater still is required to pay the full price of his mortgage. In other words, that's a big transfer of wealth to the lender in such a situation and a real loss to the debtors. And so I think the deflation is extremely bad. I like another comment you made about Bernanke. Whether this is good or bad, I think we need stability and in some sense he was trying to achieve that, avoiding deflation. I don't think deflation was as serious as most people feared it would be. And I think we are just beyond some of that now. I think we're going to be moving out towards inflation in the future. And I think that's an important conclusion probably for the most important one that one should draw away from my opinions about where the US economy is going. But before we get to all the reasons for why, I would just simply say that we can't trust the government to not continue to add money in through its deficits into the future because that's their benefit to do so. They get to spend the money first and then we get to put up with the fact that our savings, retired people, whatever are your mom, are going to have less in the bank in terms of purchasing power.

They're a lot poorer and less unless they do the opposite of what you just said. Deflation makes debt more onerous, but inflation makes debt a lot less onerous. So get into debt, have long fixed rate mortgages and then have the other asset that always goes up in inflationary times. Which is commodities.

Exactly. Or real estate. Anything that can.

Well, that's commodity. Yeah.

Physical asset. Therefore protection against destruction of the currency. My basic view is that 2013 will be the start of the new trend and direction of the recognition in the world and ourselves of the non omnipotence of the dollar. In other words, that the dollar's power will decline and that therefore there will be inflation. And then once it gets going that inflation feeds back on itself in Higher interest rates, which then adds to the lack of confidence in the currency, which then adds to the future inflation. And that that long term cycle which was going the other way pretty much since 1980 at the peak of our inflationary time, I think hit bottom last fall and will go the other way. It's my view about how this is happening. You know, you can see it yourself. You're in the real estate business. You probably know much more about the on the ground business of it than I do. The big fear in the early part of the big downturn, some people call it the greater depression, others give it different words. But the last big recession was deflation in particular, that you'd have repudiation of debt, namely people going into foreclosure on houses. And that's actually extinguishing purchasing power as debt is removed from the system. Therefore that is deflationary. And of course that's what Bernanke was leaning back against. The point I'm trying to get to is if you look at default rates and so forth, they're in pretty good, sizable decline in the US particularly here in Silicon Valley. My goodness, we're in a housing boom again. This is feeling like 2000 again for the housing part of it. Houses come on the market, inventories are low in the nice areas. You can't find a house for under a million dollars in a reasonable neighborhood. You want to buy a garage, you can pay 200,000 or something, but you can't live at it. It's crazy out here. And the point of all what I'm trying to get is it's not the houses changed, it's the paper dollars in which they are denominating them that are losing the confidence. And it's already happening here and I expect it'll happen over the next couple of decades pretty dramatically to being much worse than what happened say through the 1970s into the peak of 1980. That's my own personal prediction. I even fear that we may have to repudiate our dollar as a currency sometime in our lifetime because of a long term outlook of deficits from our government. That for which there is no answer. That I can see.

The only answer, if it's almost too good to be true. But the only answer will be an America centric technology that America really owns. Like the way it owned the Industrial Revolution. If there's some great technological breakthrough. I mean technology is the only thing that can save us and maybe it, it saves the whole world. Because technology is generally deflationary and it makes the Standard of living higher. And so if there's some new nanotechnology, energy, biotechnology, what, you know, whatever it is, that could be the thing. And it really is the thing now. I mean, it goes, it's been going on throughout history, of course, as, as the powers that be are destroying the economy and destroying the currency, the inflation keeps getting better. So the question is, which force is more powerful? Does inflation happen faster than technology improves and makes life better? And it's always the struggle.

Nice trade off. You're proposing for us quite different topics.

Yes, right, right. But you can't eat your iPad. That's the problem.

Gold eater, they say, although you can do things that are pretty amazing and the technology has been wonderful. I guess you probably don't know, my undergraduate degree from Yale is electrical engineering and I spent a whole career in computer companies, starting with IBM and ending up with Tandem, which became part of Hewlett Packard eventually. But the point I'm trying to get to is, yes, I'm a believer in the value of technology. I think my generation with electronics, communication, cell phones and so on, I think our kids generation hopefully will be biological. I think the things they're doing where bodies can rebuild themselves, that's a very, very different thing from getting somebody a pill or giving them some surgery by generation. And combinatorial genetics, there's just a lot more things that could be done than we have really done figured out yet. Even though we've cracked our own human genome code, we've got a lot to do that could be very, very changing. Life changing in a real way of life.

Sure, sure, sure it can. But let me just mention something because I just did. Episode number two, number 290 was on longevity. A recent episode I did, and I interviewed someone in your neck of the woods, Sonja Arison, who wrote a book called 100 Plus. And if we all start living longer, I think that's a very inflationary trend for two reasons. Number one, more people consuming more resources. Okay, so a shortage of assets and resources. But number two, and I know that's a little bit Malthusian, I get it, but there's always new innovations, you know, and people are a resource in and of themselves. We talked about that on the show. But the other reason is more entitlements. When they set the retirement age at 65, people would just live a few years. Now they live 30, 35 years sometimes. And that's a lot of entitlement spending, which is very, very inflationary. So interesting stuff. But, but listen, I don't Want to get too much off on all these tangents because I know we could talk for hours and that's my fault, by the way. But talk a little bit if you would, about just the situation with like Iraq, for example, when that whole. When the talk of war started, I remember hearing in the media that we would pay for the cost of the war with their oil. I don't know the Iraqi people really wanted to agree to that deal in advance, but whatever. Call us nation builders, imperialist invaders, whatever. But it's not turning out that way, is it? The Chinese are gobbling everything up.

It's amazing how unsuccessful that program is been and to me sort of predictable. I'll go back even a stage before that. I was in a meeting at Stanford where George Shultz spoke and this would have been in 91, I guess it was the original Gulf War and it was two days before the bombing. And he said they won't do it at nighttime. And I was just like, chills up my spine, my goodness, what are we doing? That's the roots of the next war where we didn't want to finish, didn't know how to finish it. And somehow we think that we're going to be successful with Libya. I love Gerald Sinenti's snide comics with Brooklyn Droll says. What do you think? That if they were making parsnips in Libya, we'd have invaded them?

Yeah, right.

The world resources is a very important issue. One little piece of it is that we have discovered a new technology, to use your word again, namely fracking, that's making U.S. united States rich again, at least in natural gas, and likely to be better. We are producing more oil, which is a shock to people like me who believe that the peak oil kinds of concepts have some real limitations. They aren't making any more dinosaurs. What used to be the title one talk I'd give, but in fact we just got a nice little tailwind from that before we're done. And I don't know how much of a reprieve it will be for us to develop all of this, but it's got to be significantly positive thing. So I agree with you on technology and technology may be hard to predict, but it's definitely something we want to build.

So let me, let me just speak to the oil and natural gas issue for a moment because I agree, I think this country is very rich just in natural resources. The problem is all of the idiots in the White House and the tree hugger movement, they won't let us get at it. Well, they still want all the goodies that those things produce. They just want to have, they just want to import them from the biggest polluter, China and act like they're so holy holier than thou over here with all these environmental restrictions and it's just, it's just like stupidity. Some of the stuff we do here. I don't know, do we have this kind of like self loathing thing where we don't want to be successful or something?

I don't think it's that simple of a thing. Yeah, it's contentious and I'm disappointed personally that we didn't build the pipeline down from Canada.

You're talking about the Keystone pipeline, of course.

Exactly. But yeah, there's many things. This is a debate that I have often. I love my country born here. I am not moving out, don't plan to anyway. But there are so many problems that do make it necessary to be an understanding of opportunities of world ownership, living and investment. And I don't have an answer for you because when I say oh, let's go live communist dictatorial government doesn't sound like the place for me personally, of course I don't fit in culturally so it's not really an option. But the point only I'm trying to get to is yeah, there are many things I dislike about many other people's points of view on our country. But I hope that we can return to some of the earlier values where we weren't so oppressively overburdened by our government. This was the American concept. Doug is very good at talking about this better than I am. I'm a nerdy economist. Checks what the Federal Reserve is likely to do about how many money dollars they're going to print, how they sequester them on the balance sheet. But anyway, to value your question, I think there's some very serious problems in our population's understanding what I call it, acquiescence to government over control. Using government as the power wedge to get things done rather than doing things. I think it's a bad trend. I wish it were better. It will weaken our dollar and will be part of the late stage empire decay, I suppose. But it's still a wealthy country and I am planning to support as best I can what we have.

Well, so what is your take on real estate? You did an article recently about real estate and the economic cycle. Talk about that, if you would.

Well, there's many things that could be said. The article is like 25 charts showing things like rental rates versus purchasing rates. Showing the most fun one for me is the ratio of housing prices to gold. The point being that I think we've bounced off the bottom. I'm not expecting fast returns. Real estate tends not to be something that moves really rapidly and dramatically. But I think having seen it, crash is a better word for 40% off from the peak. Compared to something like, say, gold, which is up from $250 to $1,650 over the decade, housing looks like it might be the better, more useful investment. There are different kinds of risks. I don't want to take your story away from me. You know what they are? Taxation. Major downturn in economy will affect real estate. But on the other side, people want to come here, people want to live here. Housing is necessary, important. There are tax benefits. And the one that, as an economist jumps out at me is affordability. Housing prices, which were going through the roof and the peak that caused the bubble that caused the subprime crash, from financiers giving money to anybody who could fog a mirror, kind of flipped around. They've tightened the requirements, but the rates are low. And if you have good income and good credit, you can buy. And right now, frankly, there are good opportunities if you can find them. And if you're a good searcher, you can take an edge on that, where you contribute. The smarts of knowing that this foreclosed house is really 30 or 40% below what it could be. Turned around, fixed up, new lawn, and a few things. Flipping makes sense again, I think. Real estate. And what the heck, you know this better than I do. Jason, what about these guys? Goldman Sachs sets up a fund to go invest in real. Wait a minute. It's just like the Fed. There used to be a phrase, don't fight the Fed. I loved it. Came back to Marty Sweig's day. But look at it this way. It's better to front run the Fed, right? They make an announcement and they say, look, we're going to QE3. We're going to buy $40 billion of mortgage debt every month. I mean, this is something that amounts up to something like half the government federal deficit. And that's a tailwind to keep interest rates low, make housing attractive for more people. Go buy houses. And you're coming. A little while ago, you said maybe you should or shouldn't be in debt, Go into debt every way you can. Get a mortgage. You don't need a house. Get a mortgage on it anyhow. Pay it off in worthless dollars, do it.

Exactly, exactly. I tell you during the 70s, 80s and 90s, people thought they got rich on real estate. I mean tens of millions of people benefited from this. And everybody loves to hate Jimmy Carter.

And real estate will never go down too. Remember that.

Yep, yep. Well it does. But see the thing is it's not just about it. Its price. That's the most simplistic thing. That's like a non dividend paying stock when you just look at the price. Of course getting a good price is better than not getting a good price. But you look at the income the property generates and just on a, you know, in a good property, anyone that we would consider a cash on cash return of anywhere between 12 and up to over 20% annually. Occasionally that's pretty rare. But I mean of course you can get it in slum properties, but we don't like slum properties. So that's what you get, cash on cash. And then you know, if you buy it under market, hey that's great too. I like the buy and hold strategy the most. I've made some money flipping here and there, but I just find that the people that buy and hold are the ones that ultimately seem to have real wealth over the years versus the flippers have spending money. And then you have the thing I call inflation induced debt destruction. I know that's a mouthful. Say it ten times fast, bud.

Well, I understand exactly what you're saying. That you pay it back in worthless dollars. I think it's an important tailwind to the other concept that I think is really fundamental. Rental rate, income to cost of purchase, your cap rate or whatever, how you calculate it, that you get cash on cash, that's positive. If you can find that on top of appreciation. And you're saying significantly on top of you get 0% in the bank or 12% of real estate, which is a better deal.

Yeah, it's pretty risky.

You have to manage it. You know all the rest of that and they're even done little shows on cnbc. But how is Goldman Sachs going to manage it when the disposal backs up? I think they'll figure out how.

I ultimately think that the real estate industry is so fragmented, especially in the single family home world, that the big institutions are just not going to like it. And, and some of the like. I read about one hedge fund, I can't think of the name of it, forgive me, but they're selling out now and they don't think the market has peaked. It's just, they just, it's like Warren Buffett's comment, I'd buy a couple million houses if I could figure out how to manage them. And that's the problem. The opportunity really is there mostly for the small individual investor because it's so fragmented. And I always say to our clients, I say embrace the fragmentation. That's what makes it hard for Goldman Sachs and the rest of the big institutional investors. In the Wall street world, you can deploy billions of dollars with a mouse click. That's a lot easier than dealing with a bunch of sorting, picking, vetting properties, dealing with tenants and managers. And it's kind of complicated. But for the small investor that wants to have 20 properties, hey, it's beautiful. They can handle it. They're not expecting billions of dollars in return. They just want a good return. Let me take a brief pause. We'll be back in just a minute.

Now you can get Jason's Creating wealth in Today's Economy home study course. All the knowledge and education revealed in a nine hour day of the Creating wealth bootcamp created in a home study course for you to dive into at your convenience. For more details go to jasonhardman.com.

I want to ask you, you do have a lot of charts here and I don't see the one. At least I'm not seeing it. The gold to housing price ratio. I love that one because gold toward.

The end, maybe it didn't get in.

Yeah, gold has its flaws in my opinion, but it is a great measuring stick stick. It's probably the most consistent measuring stick of all. Can you talk to us a little bit about the gold house price ratio?

Oh well the point there of course is that gold is the one that's been up so much that houses look really cheap. And that's sort of a surprise to people who think that well, gold is the measuring stick because gold has been moving quite a bit which I think is a lack of confidence in the currency and kind of a coming off its own bottom of a decade or so ago when seemed to be manipulated down by combination of central bank selling and kind of a psychology that combines with it and required investment by mining producers to sell forward gold. A lot of things that probably manipulated below the sensible price. I don't think it's above a sensible price now in the sense that I really mistrust dollars still and even more so than I did in the past but as a measuring stick against what houses are an opportunity for. And I think you've brought up the point of the edge that an individual can bring to it by being there stomping on the property and really seeing what's there. And that's not the kind of thing a New York banker does with a billion dollars. So I think there's some sensibility about that. Yeah. I think if you think about what the long term, what is it? Front running the Fed believing that you don't trust the paper dollars, that you will pay it off in worthless dollars, that along the way you may get paid some tax benefits and significant rental income. There's a lot of supportive reasons to believe that real estate could be one of the. And another comment. Despite my complaints about my government, there's a lot of people would like to come here willing to pay a million dollars to come buy a house in Silicon Valley and move from Hong Kong or Singapore or wherever it is. We have lots of agents that have come here and they can do so when they pay money for a real estate agent. I think it's just a lot of tailwind here. I think you're onto something pretty important.

Yeah. Yeah. Real estate may well be the trade of the decade, as it were, but looking at this chart, I did find it. By the way, you say that housing is similar to gold in many ways. Both are real tangible assets with real value. Both can be held outside the financial system. That's interesting. And both serve as inflation protection. Housing has some advantages over gold. It can produce rental income and has major tax benefits including the ability to deduct yearly depreciation, which by the way, depreciation is the world's best tax write off because it's non cash. I love it. And it's even possible to have positive yearly cash flow from the rental property without having any taxable income. And the gold to house price ratio, I guess in it looks on your chart like about 2005, it looks like it took. What does this mean? Just help me read this chart. It's the first time seeing it, but 500 ounces of gold to buy a house and now it only takes 100 ounces of gold to buy a house. Is that the way am I reading it? Yeah.

Yes.

Amazing. Wow.

Five to one. Better to buy houses now than it was in 2005 based on looking at it through gold as the defining window. And that's probably overstating the situation, but the shift is one that many people don't think about, especially us people that come from the sort of style of gold bugs. We just think gold's going up forever. Why bother with me, with anything else? Well, some of the other things might be just as good or maybe even better if you sit, if you can manage it do all those things you just talked about so that you get the competitive edge, not just a general big market. Yeah, well, that makes sense to me. And behind all this is, I think, something you would agree with me, that we do need to do some active investing, not just be passively letting some broker tell us what to do or give it to some annuity. Because if we do, there's a wonderful video from south side, it'll be that's all gone. Kid puts his money in a savings account and guy says, oh, sorry, your money's all gone. I mean, that's what's happening even if you don't put it in a risky investment. Because the government, I think, is going to continue to print. The motive and incentives for them to do so are there, destroying the paper money. So we've got to do something. This is one of the best, I'll tell you that. My best of the decade is probably shorting treasury bonds, but the average investor doesn't understand that, doesn't want to do that. And frankly, I've been a little ahead of the game on predicting such a thing. But there's going to be trades in this decade. I think real estate is one of them.

Yep. I couldn't agree with you more. And what you're talking about is when you say the government's going to print is you're saying you're really talking about how people's savings are just being robbed. Inflation is a liar and a thief. It's a pickpocket. It is systematically pickpocketing you every moment of every day, even while you sleep, because your savings, your stocks, your bonds are being devalued. They're under attack constantly by inflation, the insidious hidden tax. Now futures for Case Shiller Home prices are up. Just touch on that if you would, real quickly. And then I want to just ask you also about the home builders, that other side of the equation.

Well, yeah, the futures market is one potential price predictor in the sense that people are theoretically willing to take a bet in the futures market on what the prices will be in the future. That's what the Case Shiller Index was set up for. I wouldn't overemphasize it in the sense that the market's not very liquid. There are not a lot of players in it. Who knows they are. However, if you just take their particular view of it, it's one of many say that they think housing prices are going to go up, which is no surprise to me because I think they're going to Go up for my own reasons. But that's just sort of what I would call confirmation. The other one that's sort of a surprise for me is how much home builders both crashed and have already recovered. Housing prices haven't moved up that much. What's happened is inventory has been pulled down, their prospects look much better and people are already somewhat front running them. They may not be the best investments that they were a couple of years ago and I don't think many people were calling for them at their bottom to be bought, but now they're starting to call for them to be up. I'll say that's sort of a mixed bag of prediction. Let me sort of bolster this with something that's sort of in my mind. I did a little piece which we'll publish tomorrow in our daily dispatch comes out of Casey research on the fiscal cliff. And here's an example of a flip that I don't think people have interpreted properly. Most people said, wow, they saved us. We didn't go off the cliff. I say, no, they just printed up more money. They just, and this is the point I want to make out of that. It's in the article. I have a couple of charts to support it. They are just taking the can down the road. They, under the circumstances most favorable you could possibly imagine of laws already in place that would have improved the deficit, decided to change the laws to make sure that we continued on the path to perdition, destruction of the dollar, higher gold and higher real estate prices. And I suspect that anybody looking at this with a little bit more sensibility than the headline news on mainstream media that oh, they saved us would say, oh my goodness, they've admitted they will never save us. We're going off the other cliff, which is the deficit cliff of too much deficit which can't be paid back, which leads to a whole lot of other things and implications about what's going on in the future when you try and figure out how governments manage too much debt. But we have a few lead horses that have told us what happens when you look at the pigs of southern Europe and what I think is going to happen to Japan. I think there's some worldwide inflationary printing.

Everywhere and I agree that's the only way out. Governments always inflate their way out of a problem and of course it's not a cure, it's just a false cure. It allows them to kick the can, which that's what everybody wants to do. The difference is though, when you look at all the examples in history of, you know, inflating your way out of the debt and so forth, that so many other prime examples, Argentina, Weimar, etc. All of them Zimbabwe. Zimbabwe is the funniest of all of them. I mean, what a joke, what an absolute disaster. But you know, none of them had the reserve currency which we don't really have any right to maintain. We may lose that status, but we do have the biggest military and we can really throw our weight around a lot with that. And it's not always so overt that you know, you're just going to invade a country and start dropping bombs. I think it's a little more subtle than that in a lot of ways the way we throw our weight around. So that may really allow us to kick the can down the road a lot longer I think, huh?

Yes, that's right. Our dominant, both military and economic position in the world. People have trusted the fact that the dollar is a reasonable place in which to invest. But I don't think most people realize how dependent we are on those foreigners. Half our government debt to all those treasuries are held by foreigners. Should some one of them become fickle and say, gosh, you know, minister of finance of some Middle Eastern oil wealthy country says I'm going to run for the exit. And they're big enough, they could affect the market for enough other people. And they are all kind of held off in a prisoner's embrace of not wanting to be the one that causes collapse. But we're in a much riskier position because our long term trade deficits that have accumulated than most other people realize. So I think it's a little, what's the word, improper to believe this status will last.

Here's my really cynical, conspiratorial, maybe outlandish comment on that and I just want you to hear it. So as soon as that Middle Eastern oil rich country runs for the exit and says I'm not doing it, I'm not honoring the reserve currency status of the dollar anymore, don't we say, well, don't you have weapons of mass destruction? Aren't you a terrorist state? Aren't you harboring terrorists? I think we need to find a reason to go in and invade you and bomb you. I mean that's, it's really ugly, I'm telling you. But these countries that don't play our game, they become rogue nations.

Well, I guess.

Am I too pessimistic?

Well, no, actually I had one reaction was when are you going to get to the cynical plot port? Because the facts do Support exactly what you said. Saddam Hussein said he was going off the gold standard. We have forced Iran off, excuse me, off of paying for oil in dollars. China is setting up bilateral agreements all over the place. It's one of the ways they run their successful African operations is they say, okay, you want to buy Chinese goods, we want to build a port for you, everybody's happy. And by the way, we don't need to use dollars. Shanghai Cooperation Organization. There's just a lot of what I would call sniping at the edges of this supposedly criminal position that came out of World War II in Bretton Woods. And we have attacked countries that have suggested they wanted to allow for other means of payment, including Gaddafi. It's just. I don't really know what to say except that I don't think you're as conspiratorial as you suggested. That's all I can say.

Yeah, I know. I just wanted to say that for the more level headed people out there that might think I'm crazy, both of.

Us were nuts, huh?

Yeah, okay. Oh gosh, it's something else. Well, hey, this has been a great discussion, bud, and you know I appreciate your insights. The article is quite robust. You do have a lot of charts and graphs there that are very telling and interesting. Is there anything you want to say in conclusion? And also give out the Casey Research website if you would.

Ah, sure. This is sort of my life's work, so it becomes really important to me and I like to have people make comments and so forth. I mentioned that I have a small piece on the fiscal cliff in tomorrow's Daily. Well, in a daily dispatch that will publish and can be easily read free. My other publication that's fairly regular is the Casey Report. You can purchase it, try it for three months. If you don't like it, get your money back. Highly recommended. Both of them are available on the site called CaseyResearch.com C A S E Y R E S E A R C H Hope you have a chance as a listener to go check it out. I also have a book available on Amazon, published by John Profiting from the World's Economic Crisis that gives a more long term bigger picture view than my usual monthly commentary of how I think about monetary systems. I recommend it if you're intending to follow me. And I hope that generally that the world understands, as it seems like you and I and many of your great guests do, that this is not a stable system that will automatically just return to normal. I think we have to protect ourselves because I think the government's destructions of currencies worldwide is something we really all have to be aware of and plan for. And of course, as you said, we can front run them and win on the game.

Yeah, I think we can. And I think we also need to realize that it's really just a race to the bottom among these currencies. And in a strange way, we may be a pretty nice house in a bad neighborhood in terms of countries because.

It'S just all complete fiscal and monetary stupidity planet pretty much all over the world, isn't it?

I think so. It's nice to be talking with somebody like yourself that is more than versed in this, but actually out there doing it, helping people get involved in their own futures and doing well with it. So I'm glad you're actually making things happen as opposed to just commenting about it.

Well, you know, we all have our roles and without those of you who are doing the research and writing the articles, we wouldn't know what to do. So I appreciate your role as well, Bud. Hey, thanks for joining us today. And everybody make sure you go check out Bud's book and the Casey research website as well. Thanks so much.

Take care. Thank you for your call.

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