CW 322: Sequestration & Furloughs with Frank Vernuccio Co-Host of 'The Allison Report' & President of COMACTA

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Welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 322 and thank you so much for joining us today. Today we've got an interesting show for want to talk with one of our local market specialists in Kansas City, and that is Zach, who's been on the show before talking about St. Robert. He's going to help me do the intro portion of the show today, and it's not really about his product or his developments per se, but we might touch on that just a little bit. And we're going to talk about a recent article about Blackstone and I think you'll find that interesting. And then we've got as our guest today, Frank Vernusio, who is the editor in chief of the New York Analysis of Policy and Government. And he'll provide some interesting perspectives for us in the second part of the show today. So first of all, Zach, welcome. How are you?

I'm doing well, thank you.

Yeah. You know, I'd ask how are things in Kansas City, but I was just there two days ago, so I feel like I already know. Has anything major happened since I left?

No, I don't. Not to my knowledge. I think maybe the Royals won again. I don't know.

Yeah. Well, that was fun. You and Jessica and your son Aidan and I, we all went to the Kansas City Royals baseball game on Monday evening and I don't think any of us even know who won or lost that game.

No, I think Aiden was the most intelligent about baseball amongst all of us. And he's less than four years old.

And Aiden is three and three quarters years old. So. Yeah, there you go. There you go. I think they wasted those seats on us because we're such big sports fans.

Yeah, no, exactly. Trying to figure out if we're going to a hockey game or football or baseball or what Sport we're actually attending.

Yeah, you know, I thought it was the Kings and the Lakers playing, actually. I just wasn't sure.

But you're confused on what city you were in.

That's true. You're right. You're right about that. Hey, but let's talk a little bit. You had an article you wanted to bring up that was pretty interesting. It was in our content section. And by the way, for those of you who are members and you've joined our member site@jasonhartman.com what we're working on right now is we're working on sharing all of these internal articles that we use in our business and kind of opening that up to all our members and somehow getting them to feed to our members website so you'll have access to all this stuff directly. Many of these things we don't even ever talk about on the show. Some things we do. But just so you can kind of keep up, a lot of you have asked, you know, what are you guys reading, what are you studying, what reports are you reading, what newsletters are you reading, what articles and so forth, what books. So that will all be ultimately in the members section@jasonhartman.com so this would be one of them. But Blackstone is denying that it is the cause of housing bubble 2.0. Now, I don't think we're in housing bubble 2.0, but, you know, what are your thoughts about this article?

Well, I found this article quite interesting because it actually is in response to an article in the New York Times. And in the New York Times article is essentially accusing Blackstone of raising prices in all these cities and being one of the private equity companies behind the rising prices and recovery 2.0, if you will, a real estate bubble 2.0 as they are referring to it. And they are really phrasing this as a negative thing, which was quite interesting and I found that quite intriguing.

Well, I mean, when it becomes a seller's market and it's commonly called a seller's market because there are so many buyers out there buying up product, buying up properties, and you have a limited supply of product and you have a large supply of dollars chasing that product, and with that you get what we call inflation. Okay. When you have too many dollars chasing a limited supply of goods and services. And that's exactly what's happening right now in the vast majority of the real estate markets around the country. So they're accusing Blackstone of buying too many properties and driving up prices, right?

That's correct, yeah.

Well, what are Your thoughts about that? I mean, do you think that's true or do you think that's an unfair assertion?

Well, I think in certain markets it probably is. No doubt it's having an effect on the pricing. The biggest thing that caught me as kind of an interesting perspective on it was from the New York Times is how they were phrasing it as such a negative thing that the prices were going up. Whereas I bet if you pull articles, I didn't do this, but I would almost guarantee you could find an article in the New York Times talking about how bad it was when prices were going down and how bad that was for homeowners. And now they're phrasing it, that the private equity is essentially evil and doing a negative service to the economy whenever prices are rising because of them. And now they're phrasing that as negative. It kind of strikes me as a no win situation from that perspective on.

The way it's phrased. Well, you know, I mean, this article we're reading, the original articles on Zero Hedge, written by the good old nom de plume, Tyler Durden. Okay, that's obviously a fake name from the movie Fight Club, but that's the typical populist angle of the New York Times. I mean, should that really surprise us? The New York Times, Left leaning New York Times. The big evil capitalists are buying up all the properties and not leaving them for the poor homeowners. But when prices are going down and people can't sell their homes and woe is me, they're just never happy. It's ridiculous.

Absolutely. No, I think overall, with what this is what's happening here, I do believe Blackstone is having and all the private equities, not just Blackstone, all the money flowing in definitely is having an effect. I'm sure you've talked to a lot of your local market specialists just regarding the shortage of supply in the housing in different metropolitan areas. Just because of all that private equity is coming in. No doubt that's having an effect. No doubt what it's doing is just creating the floor and solidifying the floor and the housing values, thus making it easier, making lending criteria, making underwriting criteria relax and go back to more normal type standards because there's not the fear that the bottom of the pricing is still yet to come, so to speak. It's helping to alleviate that fear, thus making it easier for first time homebuyers to come into the market. And thus as a whole, there's huge ripple effects with that from consumer sentiment and consumer opinion. To all those different things, there's tons of ripple effects on how that has a very positive effect on the economy.

Zach, you know what's interesting about this article? It cites some of the price issues and the long term trend price issues. And I'll just share this little portion of it. It says home prices remain well below long term trends despite their recent increase. New home Prices nationally are 37% higher than existing home prices as opposed to the long term average of 13%. So you know what that says is that there are still bargains in the resale market. That's what that's really saying. And that statistic is also influenced heavily by where they're building new homes. For example, if they're building more new homes in more expensive markets, then of course that skews the averages and the median. And then it says home prices are still 22% below the long term price trend from 1951 to 1999. This is why home prices are rising even in cities where Invitation Homes is not buying, like Detroit and Salt Lake City where prices have risen 19% and 10% respectively, year over year. So it's pretty interesting. I mean, the thing I find interesting is that home prices are still 22% below the long term price trend. And that's almost a 50 year sampling. So pretty amazing deals out there still, right?

Oh, I absolutely, fully agree with that.

Yeah. Tell us a little bit about what's going on in terms of your development. You've got your new Kansas City project that you're just about to open.

Yes.

With that, like we've talked in the past, we're acquiring one of the failed subdivisions from the Hangover of 08, if you will, and being able to do a new development and able to reduce the overall new construction price point, thus to bring it back in line and keep it in line with what works rental rate wise. By acquiring the failed subdivision, we were able to get that at a steep discount, of course, and help to make all that a feasible investor friendly type product.

Yeah. And talk to us a little bit about the financing that may be, and I want to say may be available on these, because this really applies to people that have more than 10 loans, that they've maxed out their Fannie Mae 10 loans and want to buy more. You've got some pretty good commercial financing. You've always been good at that in terms of your banking relationships. When I was out there, we had a great barbecue lunch on Tuesday with one of your bankers and you've got another good source as well. Tell us about some of the financing that they're offering.

Yeah, we're able to. Well, first off, these are triplexes. So with the triplex it's actually set up to where we can set it up to where each individual unit can be sold off individually. I won't get into the detail. We run into some issues with Fannie and Freddie with that. We can still do all the Fannie and Freddie, but it gets a little more of this or that decision. Whereas with commercial, we are able to do the whole triplex on one loan. But if you ever decide to sell off one, one unit, we are able to do partial releases. So it adds flexibility to the exit strategy and flexibility to the investment along with it looks like at a minimum we'll definitely have five and seven year fixed products on the commercial front. But it's looking, I'm getting much more optimistic that we're going to be able to secure a 10 or 15 year financing option on the commercial front. 10 or 15 year fixed?

10 or 15 year fixed, but amortized over what, 25 or 30 years ultimately.

25.

Yeah. Yeah. That's pretty awesome. And what do the rates look like on that?

It's looking like in the five with no points.

Yeah, yeah. Fantastic. So that's pretty darn good for commercial financing. You've got some pretty good options there. Fantastic. And what's going on in the Kansas City market in general?

Overall?

It seems to be coming back. It seems like overall permits are way up. Just a visual drive through. You see a lot more construction, a lot more bricks and sticks going up. And you did 12 months ago, that's for sure.

Good, good stuff. Well Zach, thanks so much for joining us today and talking about this. And let's get to our guest. We'll be back with him in just less than 60 seconds.

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It'S my pleasure to welcome Frank Vernuccio to the show. He is editor in chief of the New York Analysis of Policy and Government and co host of the radio program the Vernuccio Allison Report. Frank, welcome. How are you?

It's great to be with you today.

Well, the pleasure is all mine. Tell us a little bit about what it is you do and then let's jump into some important topics in today's news, sequestration being not the least of them, but give us a little background first, if you would.

Well, the New York Analysis of Policy and Government takes one major issue each week and tries to do an objective analysis of it, kind of like an executive briefing. And we try to be as thorough as possible and as objective as possible. Something you don't get very much in today's news.

Well, that's for sure. It seems like everyone has an agenda nowadays and journalistic standards have largely gone out the window in favor of opinion pieces. But maybe just touch on that for a moment. There was a survey I was just hearing about last night actually on talk radio or. Well, no, I believe it was on Sirius, I believe it was on Fox. And it rated the different cable news stations, msnbc, Fox, cnn, on their percentage of opinion pieces versus percentage of actual news or journalism. And you're probably familiar with this as well. But what sort of happened to the news media, if you will? And you know, I just wanted to get a comment on that before we dive into some of the.

Sure. I don't know whether the News was ever truly 100% objective. Clearly it wasn't. But the reality of it is that in the past several years, and particularly I think since 2008, the press has become very much more in the camp of one particular ideology and far less in the camp of being objective journalists. The survey that you mentioned found that some networks were more egregious than others. I believe it was. MSNBC was about 85% opinion and only 15% journalism. The others had various other figures but were far better than that. But on the whole, we've abandoned the era of even pretending to have objective news and really gotten over to the fact of more being yellow journalism in the sense that every newspaper, every media source, with a few exceptions, mostly in the blogosphere, mostly in talk radio, tend to be more objective, but the rest tend to be more biased in favor of one candidate or one party or the other.

Let me mention an interesting theory I developed on that years ago and I actually wrote an article in one of the trade magazines about this. I call it the monologue media versus the dialogue media. And here's what I mean by it, Frank. In the monologue media, that's traditionally the old sort of dinosaur media outlets, network television, book publishing, newspaper publishing, of course there's an editorial page and an op ed page in the newspaper, but it's not the bulk of the public, obviously. And the monologue media is sort of the old school media. And it tends to, and I don't even know what your leanings are, but I'll just mention this, it tends to, in my opinion, lean very left, very liberal.

Well, you're absolutely right. The old J school concept of putting down who, what, when, where and why in each article seems to have gone out the window. And based in the 1960s, the J Schools, the journalism schools, changed their model. They went away from who, what, when, where and why, and they started talking about something called advocacy journalism, which presuppose a point of view and you fit the facts to set your point of view so that you're really not giving people information, you're giving them opinion. Now, opinion is fine, but it should be labeled as such. And for the those of us, the majority of people who are journalists, they need something to base their own opinion on. And without the facts, you can't get there.

Yeah, yeah, true. And so just finishing my point there, the dialogue media, which you alluded to before, is largely talk radio and the blogosphere, the online media, and so there the dialogue media tends to lean to the right or the conservative side of the spectrum. And oddly, I believe that is because it is something where people call into radio talk shows and they can. They can debate points with the talk show host. They can most of the time, post, take a bl post and post a comment below the blog post. And so it just begs the question, regardless of your political leanings, that maybe one side of the aisle can withstand the scrutiny of debate and the other can't. Just my theory.

I agree with you wholeheartedly on that. It's interesting if you compare, for example, Fox News, which is decidedly conservative in its journalistic opinion, nevertheless has a substantial number of folks on the left who will be guests on their talk shows. On the other hand, if you follow something like msnbc, you find that there's very little presence of anyone with. Other than a hard left point of view on that network.

Yep, I agree. I agree. And you know, their slogan in and of itself is left leaning. You know, the lean forward slogan. That's a liberal slogan.

Okay, that's a. Yeah, the whole forward thing is basically no socialist, progressive standard slogan.

Right. Also used by the Obama administration or Obama campaign. Okay, good. Well, hey, let's dive into some of the issues that's just kind of interesting to talk about. The. The background out of which so many people's beliefs are created in the news media. But sequestration, obviously, huge, a huge news topic. It seems like we move from one crisis to the other in this country. It's beyond ridiculous. It's either a debt ceiling problem, sequestration thing, and frankly, Frank, I never understood why they called it sequestration. I mean, that just seems like a complete misnomer to me. But maybe you have some thoughts on that.

Well, when President Obama first introduced the concept of sequestration. And yes, President Obama did introduce it, even though now he tries to avoid claiming credit for it, the concept was that you would set up a series of cuts so stupid and so radical that of course the two sides would get together and do anything to avoid them. They'd come together and compromise in a reasonable way. Well, what happened was. So in other words, you sequestered it away from the elected officials. What happened was they couldn't come together. And so now we're stuck with this kind of goofy budget deal, which nobody likes and which, instead of cutting the fat, is cutting the muscle. It doesn't discriminate between programs that are necessary and others that are really just pork, which are out there to help elected officials get reelected. So we are seeing these disproportionate cuts where instead of just cutting nonsense programs. We're cutting meat. And the military perhaps is the most salient example of all. Defense accounts for only 17% of our entire federal budget, but it's taking 50% of all the cuts. And we're not talking about cutting some program that's not really needed or some expensive weapons program that possibly we could do without. We're talking about going to the heart and soul of our defense, and we're putting ourselves in an extremely precarious situation.

No question about it. I like to see that government is being cut, or at least I should say the growth of government is being cut, which is the more proper way to look at it. But this should be done in a planned, logical, systematic manner, right?

Oh, you're absolutely right. And in fact, if we just went back to the budget of 2008, which wasn't so great either, it was spending too much even then. But if we went back to 2008, we'd see a lot of our problems go away. The growth of spending from 2009 till now has been astronomical, and not just in the sense of an overall budget. I mean, we're talking about growth in programs that really didn't make any sense. Let's look, for example, at some of the stimulus programs. $791 billion went into the stimulus program, and no one can produce any real results from it. You know, the last time something like this was tried, during the Great depression of the 1930s, we had things like the Civilian Conservation Corps, which built forest, forests for national parks, built bridges, built dams, build buildings. But the $791 billion of the stimulus program just seems to have evaporated into the ether, and we have gotten nothing for it.

It's just sad. I mean, the waste is incalculable. It really is. Talk to us a little bit about the DoD, though, and the furloughing of so many of these employees. Is that really as big a danger as something?

It sure is. Again, we go back to the fact that Defense takes only 17% of the budget, but it's taking 50% of the hits. Every single civilian employee of the Department of Defense is having their hours cut by 20%. No other agency is suffering that kind of loss. And we're not talking about people who push paper or who do nonsense jobs or bureaucratic jobs. We're talking about the folks who keep our airplanes flying, who keep our ships afloat, who treat our military veterans and families when they get sick. So, you know, it's a hard time to be in the American military Right now for a whole host of reasons. But if a guy who is toting a gun in Afghanistan has to think that his wife back home can't get the medical treatment she needs because of these cuts, well, that's pretty serious. But there's an even more unusual angle to this whole story, because a lot of those civilian employees in DoD are really dedicated to their jobs. Some of them wanted to come in on their days off with no pay and continue to do the jobs of keeping our military equipment safe. And bizarrely enough, a memo went out from the pentagon forbidding civilian DoD employees from volunteering on their day off. Which leads to the larger question. Was this a hit intentional to just reduce the budget, or was this part of the larger anti military mindset that the Obama administration has expressed? Well, certainly since before even Obama became president, he expressed this even as a United States Senator.

Well, okay, so are you saying that Obama, as much as he complained about sequestration, thought it would actually be good for his agenda?

I have to tell you, if you study this, it really is a great thing for the Obama agenda. It really does exactly what the president, even before he became president again as a United States senator, advocated doing. So I don't think there's ever been much of an impulse on the part of the White House to avoid sequestration.

Yeah, yeah. Well, certainly as far as the completely immature politicking and the blame game goes, it seems like right where Obama wants it to be. But I, you know, I didn't know from an overall agenda point of view he would think that. So that's interesting. Well, what other issues are big in your reporting and your analysis nowadays besides sequestration?

Well, I think one of the biggest issues that's not being discussed about, but which has become, I think an increasingly crucial issue is the drop in the defense posture of the United States. If you go back to 1990, the United States Navy had 600 ships. Today we've got 286. We used to have 37 combat wings in the United States Air Force. Today we've got 20. There were 18 divisions in the army. Now we've gone down to 10. And unfortunately, while we've been slashing our defense posture to the bone, and we haven't even mentioned the fact that the President has advocated a unilateral reduction in the United States nuclear forces, our potential adversaries overseas have been ramping up their military spending to an unprecedented degree. Today, the People's Republic of China has a military that's every bit as capable as ours. If we look to Russia, Moscow has returned to a Cold war posture. As you may recall, last summer, strategic nuclear bombers from Russia were sent to both the west coast of the United States and flew over some of our bases in the Pacific. At the same time, a Russian submarine, a nuclear submarine, was cruising off of our Gulf Coast. Now, of course, you've heard all the news lately about what's going on with Iran and now what's going on with North Korea, which has openly threatened to lob a nuclear missile in our direction as soon as they're capable of doing so, which will be, by the way, next year in 2014. So I think the biggest undiscussed story on any of the news media right now is the really vulnerable and increasingly vulnerable position the United States faces around the world when it comes to defense issues.

I sort of wonder, though, if the military isn't benefiting, in a sense from the same issues that private industry is benefiting from in terms of scalability and technology may maybe something to consider. And, you know, I. I don't want to see us as a weak country by any means. Militarily, I think we need to be strong. But with drone planes, and I have my disagreements with the drones, especially in US Airspace, very much concerned about that. But with, with technology, are we able to cut, Are we able to gain more, if you will, killing efficiency through technology? And can we cut because of these new technologies?

Well, the problem is with every new technological advance, there's always a counter advance. And the technological edge that the United States enjoyed for years really has been diminished sharply by the progress of our potential adversaries. For example, at one point in time, American satellites could pinpoint targets around the world without any fear of being destroyed. Now, of course, with the demonstrated capability of the People's Republic of China to destroy our satellites in orbit, that advantage might not last much longer. In fact, it's probably pretty much gone now. You go forward to different types of planes, our planes, which we have not really engaged in the purchase of as many new planes as we probably need. Some of our aircraft are being flown by pilots whose grandfathers flew the same.

Well, you're talking probably about the B52 there, right? The workhorse.

That's absolutely correct. As well as some of our tankers and some of our others. So that's become a real problem with sequestration. Now. One of our biggest fists of power in the water has been the aircraft carriers. Now we're seeing that some of our carriers are going to be docked because we don't have the money anymore to float them. So a lot of the advantages that the US Used to have, we no longer have.

Well, okay, I don't want to belabor the technology point too much, but I want to maybe move on to kind of the next point of that. And just further playing devil's advocate with you, I really liked what some of the things that Ron Paul was saying, and you may not be a Ron Paul fan, I have no idea. But when you look at the military, I mean, do we really need, you know, forgive me if I don't get the Number exactly right, 170 bases in foreign countries. I mean, it just seems like.

Well, the philosophy behind that began as far back as the end of the War of 1820. It was the decision of the United States, consciously or unconsciously, that we would not fight wars on or close to our soil. And at that point, the United States began the concept, particularly after the First World War, of reaching out and preventing fighting from going anywhere near the American coastline. So the concept of putting bases in Europe or Asia or anyplace else was that we'd stop any kind of foreign advance away from our homes, rather than waiting until the enemy got here and fighting them on the spot. Now, whether, you know, you can debate, I guess, in particular a particular base or a particular site and so forth, but I think it's a pretty good idea to keep fighting far away from our soil. And that probably makes sense.

Yeah, I agree with you. We have a pretty nice position in the world geographically, though, with these two huge moats around us. And, you know, I don't think we need to worry too terribly much about our neighbors, except the one who is invading us illegally from the south. But that's sort of a different perspective.

By the way, and you bring up a great point on that, because over the past 10 to 15 years, both the Chinese and the Iranians, and it still bothers my mind that the Iranians are doing this, have made significant inroads into Latin America. For example, the Chinese have two civilian bases on either side of the Panama Canal, which is an incredibly strategic position. Chinese military are training the military of some Latin American countries. And we've seen, and we've discussed lately extensively, because of the death of Hugo Chavez, the influence of Iran in that particular country. So when you bring up the point about a danger to the south, it is there. And perhaps the model that we have of some terrorists flying in from the Middle east with a bomb might not be as potent a problem as an illegal immigrant or an Iranian or terrorist Hiding among legitimate illegal immigrants. And that's a mouthful to say, isn't it?

Yeah, it's a total oxymoron if there ever was one.

Coming in as just an economic illegal immigrant and smuggling in weapons of mass destruction. It's not inconceivable and there's a great deal of fear that that in fact could occur.

Yeah, well, no question about it. I mean, after 9, 11, 2001, the government of course had the opportunity to hermetically seal our border to the south and they didn't do it because there are political and economic reasons which are just politically correct. And we want to import deflation so we can inflate everywhere else. And it's just a terrible situation. All in all, beyond ridiculous. Let me ask you this. Just maybe this will be our final topic to cover. You've got a post about the fiscal cliff on your website and we started off talking about sequestration and the government side of the economy. What are your thoughts overall, Frank, about the economy and where we're going particularly? Are we headed into a time of significant inflation?

Well, it's almost hard to see how you can avoid that. You know, we've gone through a period where we now accept periods or amounts of unemployment which would have been considered unacceptable just a few years ago. Although the 7.8 current figure of unemployment is terrible in and of itself.

It's totally manipulated. It's really 20% or more when you calculate.

I agree with you fully. But within that percentage, even within the accepted government figures, the official government figures, there's another figure that's startling and frightening and that is a 38.1% of long term unemployment. People who are legitimately within working age want to work but have been unemployed for so long that they're considered long term unemployed. And as you know, people who have been out of the job market for a considerable period of time have a very hard time ever getting back to into it. So we look at the replacement of that 38.1% and again, as you said before, it's probably higher than that. Taking them out of the productive job market and they're making a living or trying to live basically on government handouts. Now if we have fewer and fewer people producing goods and services and a fewer and fewer amount of workers who are paying for benefits for those folks, well, that economy can't endure very long. Sooner or later it's going to crash. And we have done all sorts of things by manipulating the Fed, by manipulating currency and interest rates and so forth so that we Keep putting the problem off a little bit further and further, but when it all falls apart, it's going to be spectacular and terrible.

You say spectacular as if that's a good thing. Well, I see very significant inflation in our future. Like you say, I don't see how it could be avoided. And the other interesting massive manipulation in the numbers is when you look at the GDP stats and you adjust them for inflation and population growth. And the US Economy is shrinking rather dramatically and it has been for quite a while, I would say. You know, I haven't done the math on this, but it's a relatively easy equation to figure out. You just impute the population growth and the labor force growth and then real and then reported inflation. So you can have two sets of books, if you will. And you see that our economy is shrinking at a rate of probably over 10% annually.

Well, I think that's a legitimate concern. I mean, you even look at the amount of our exports. Our exports have been reduced pretty sharply. I think they dropped 5% the last figures that I saw. We can't be a nation that produces nothing again. We go back to this sort of strange idea that somehow or other we can just survive on giving benefits to each other without any kind of concept of, well, who pays for that? Or where does the money come to pay for it? And you get distressing comments from governments such as, well, we can print more money. No, you can't. That only works. That's a Ponzi scheme. It only works. So long we're manufacturing, we've been unilaterally disarming in manufacturing as well. So we kind of have got to stop this nonsense of thinking that we can all live by working for the government and maybe occasionally slinging a few hamburgers to make a buck or two. It's not going to work.

Yep, very good point, Very good point. Well, hey, give out your website and tell people where they can learn more.

Sure. Our website is usagovpolicy.com and if your listeners would like a free subscription to my newsletter, they can get one by simply sending their email to usgovpolicymail.com fantastic.

Well, Frank, thanks so much for joining us today. And let's keep the faith that there's going to be some sort of turnaround, some sort of American America centric technological advance that'll make us rich again. Or at least maybe the politicians and the environmental lobby will let us start mining our own natural resources. We didn't have time to talk about that, but there is some hope out there.

That would be great. Thank you so much. I look forward to being with you again.

All right. Appreciate it.

Take care. Bye.

Bye.

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