CW 799 FBF - Defending Investments Against the Demons of Risk and Inflation with Doug Utberg

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com welcome to the Flashback Friday edition of the Creating wealth show with Jason Hartman. As he rapidly approaches 1000 episodes of this podcast, he has hand picked individual episodes that he feels is going to be good review for you. To prepare you for the future by listening to the past, let's dive in.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He he's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Glad you could join me today. Thank you so much for listening to the show and please tell your friends and family about the show. We really appreciate expanding our listener family which has been growing quite rapidly since we started the show, oh what, five, six years ago now. And we're just glad to see that and want to get the word out to more people. So we appreciate you spreading the good word. So, couple of things before we get into our show today that is about defending the demon of investing. And when we're investing, we do have several demons. We have several things that can really derail our road to success. And we have a speech from one of our events that Doug did. We will be playing that speech here on the show today for you and I think you will get a lot out of it and I think you'll enjoy it. A couple things though before we do that. Number one, I don't know if you noticed, but we did a big makeover to the website@jasonhartman.com and as part of that makeover we are changing the location of this podcast feed. So hopefully you will not even notice that. It'll be totally seamless to you, we hope. But you know how technology goes from time to time as I'm, as I do. I'm sure you've had troubles with it from time to time before. So we just want to warn you in advance that we're doing that right now you actually get this show probably on itunes. Most of you, I think about 80% of you listen on itunes. But that feed comes from a website called creatingwealthpodcast.com and we are going to display, dismantle that site and move all of the shows over to jasonhartman.com the reason I'm telling you this is because if we have any technical problems that we don't foresee, you'll know that you can go to jasonhartman.com and always get the show if there's some delay or problem with that feed for some reason. And you can always, of course, reach us at the website or at the office at 714-820-4200. So that'll be coming up before show number 220, we think, which will be one of our 10th show where we interview Gary Chapman, who will be talking about the five Love Languages. Again, a non financial topic, but it's always financial, isn't it? Because if that can save a marriage, one of the reasons divorces are so costly, because they force people to liquidate assets at inopportune times. Not necessarily because he or she got half, but because they force people to liquidate assets at the wrong time and derail people's financial plans. So if that can save a marriage, then, hey, that show is financial, isn't it? It's going to be really good for people, but it'll just be good for life, enrichment in general. A couple of other things we've got, of course, the Meet the Masters event. It's coming together very nicely. October 14th, 15th and 16th, Hyatt Regency in Irvine. Special room rate for all of you traveling in $119. Just mention that you're with Jason Hartman and Platinum Properties Investor Network and you want part of that room block for those special rates of 1:19 per night. We'll start.

6Pm and then we'll go all day Saturday, probably into the evening on Saturday, depending on, you know, which speakers we have lined up and so forth. And then all day Sunday from about 9 to 6. So check the website register. We just had a couple more registrations this week and we have a lot of early birds this time. Remember, the price does escalate in $50 increments as we get closer to the event. So it behooves you to register right away. Properties we want to really focus on some really exciting new financ programs we have, and they've come largely out of Atlanta, Georgia. And Atlanta has been one of our top markets for the past, oh, two, two and a half years now. And there are several reasons for this. And show number 221. We'll be talking more about this when we get back to financial stuff. But let me just tell you a couple of things that really, really makes this market quite desirable right now. Remember, you're listening to Flashback Friday, our new episod published every Monday and Wednesday. It is one of the fastest growing, most stable metropolitan centers in America, 5.4 million people. Its increase in growth since the 70s has been phenomenal as well as having added 1.1 million people in just eight short years from 2000 to 2008. It's the second largest metro area in the southeastern U.S. the ninth largest in the country, the top city and primary transportation hub in the Western US it has the fourth largest concentration of Fortune 500 companies, its world headquarters. You probably know some of these. But world headquarters to Coca Cola, I bet you probably knew that one. Maybe not. Home Depot AT&T, you probably knew Delta Airlines and you probably knew Turner Broadcasting System, Ted Turner's company's in Atlanta, Newell Rubbermaid is there, SunTrust bank and many, many others. 75% of the Fortune 1000 companies have business operations in the atlant area. Of course, the Hartfield Jackson Airport, the international airport there, has been the world's busiest airport since 1998. It's got a huge biotech center. There's just all kinds of reasons to be really, really interested and excited about Atlanta. It ranks third in the country in job growth, second as America's best cities to relocate. Forbes magazine ranks Atlanta as the fourth most affordable metro market. And Forbes also ranks Atlanta as the number one rank rental market. It has low homeowners insurance rates, low property taxes and great housing inventory. It's pro business. We really like Atlanta and we haven't talked about it too much lately. But on show number 221 and as we get into the 220s, we will talk more about it. Let me just give you a couple of property examples though. A lot of them on our website@jasonartman.com are sold. But there are a few properties for sale there. Maybe I'll just highlight one or two of them real quickly. Here's a nice property in Stone mountain built in 2006. So newer property, only $55 per square foot. If you were looking at the photo of this property, as am I, you would see it's a really nice looking property, $99,500. It'll take you subject to qualifying about 27,000 total cash in projected rent 1150 per month, positive cash flow projected at almost $3,500 per year, giving you a cash on cash return of 13%, an overall return on investment of 28% with some very conservative assumptions. And guess what, it's also got a rental guarantee in place. So during the initial period you're rent guaranteed. So your risk is really removed from the equation there. Here is another one that's interesting. This is a more expensive property, multi unit property, $400,000. And just some great numbers here. Overall projected cash on cash, 15% overall ROI on that one projected at 33% and a cap rate of 10%. And as you know, cap rate is the number that the commercial people like to talk about all the time. We think it leaves some very important metrics out of the equation. So we don't really love cap rate as much as some do as a real, real metric to value our investments. But these financing programs that you're going to hear about in upcoming episodes are pretty darn exciting and we're starting them in Atlanta. So if you are interested in investing in real estate with your IRA or you are a foreign national, we have had a lot of buyers from down under, our friends from Australia and I love Australia, I love New Zealand. What a, what beautiful, beautiful places. Of course we've had people from other great places in the world, Japan, Europe, the Middle East. There's just all kinds of people. And of course I don't need to mention Canadians. They're our close by Neighbors buying up U.S. property now because our dollar has been so debased and it's probably going to get a lot worse frankly. Oh, by the way, I want to mention to you, I just interviewed last night, Jim Rogers. Yes, that's Jim Rogers, the big time hedge fund manager, author of many books. I discovered him when I read his book Adventure Capital, which I highly recommend. Just a really interesting book. If you like markets and finance and you like travel as much as I do, read Adventure Capitalist. It's like reading a novel. It's really pleasurable book to read, really interesting. So I interviewed Jim Rogers from Singapore last night and we talked about the further debasement of the dollar and the coming inflation and so forth. And that interview, as soon as it's edited it will be in the members section@jason hartman.com so again, special shows like Members may be the only ones that get to hear them, but they certainly get to hear them first. So that'll be in there. But back to this financing Jim Rogers. It just reminded Me of it. Back to the financing. We've got some phenomenal financing we're putting together and I'm actually financing some of the deals myself for you, our client, potentially, if you're interested in this, where you can borrow fixed rate financing for five years in a market where there is virtually nothing available to people who want to use IRA funds or foreign nationals who want to purchase Property in the U.S. five year fixed rate financing at very competitive rates. And you can do this with, and get this, I know it's not like the conventional market if you can qualify for conventional financing. But for those who can't, these properties are inexpensive where you can put 50% down. I know that doesn't. That's not like 20 or 25% down. I get it. But when you're Normally looking at 100% down, half is a much better deal. And you can do this starting in the Atlanta market. We may roll this out to some other markets as well. This is totally rare. It's totally unique. So far as I know, nobody else is offering these type of financing opportunities at the rates we are offering. So one of our clients just got one $65,000 property and I'm actually financing half of it for him through my foundation, the Jason Hartman Foundation. And that one, he will, instead of putting 65,000 in, he only has to put 32,500. So that makes that pencil a lot better. Of course, if you can get conventional financing, hey, more power to you, it is better. But this is sort of special circumstances financing and it's a lot better than what's out there now. The last thing I want to conclude with before we go to today's top about the demons of investing and fighting. Those is something I mentioned several shows ago. And you know, it just came up and I was thinking of it and wanted to just bring it up to you again. And it is that movie, you know, I gotta, I gotta get it from Netflix and watch it again. The movie with Jim Carrey. I don't know if you saw it, but yes man, yes man, that's the name of the movie. I was with a couple friends of mine the other night having dinner and this was back in Orange County. I was in Newport beach having dinner with a couple of friends. And this was just last week. And I just thought of this because I brought up wanting to introduce one friend to another. And I pulled up this friend's profile on Facebook. And then my two friends sitting there that I was talking to, both females were saying, oh, this and that. And you Know, I don't know. This doesn't seem like a friend I'd be interested in knowing. Whatever, right? And it was just a friendship thing. It was not like I was trying to fix someone up on a date or anything like that. Not a, not a love connection. But what was interesting about that is that here are two people, I'm wanting to introduce them to a new friend and they're finding all the reasons why they don't want to meet this friend that they don't even know. And I'm thinking, you know, that's not just them. I do it. I know you do it too. We all do it. We all do this type of thing. And the movie yes man is such a good lesson for life in so many ways because it just shows you. And I tell you, I know that when I get out of my own way in my life overall, generally, on balance, good things happen to me. Just say yes more often than you do now. Just go out there, take a risk. And you know, I find this true as a, as a, as an employer and as a boss sometimes, believe it or not, I don't have all the ideas and sometimes I don't have all the best ideas. It kind of takes a long time for most of us in life. I know it has for me to come to that conclusion, be the first to admit it in my self disclosure. But sometimes I just let other people run with something and you know, I'm thinking, well, you know, what if they don't do it right? Or what if I don't like it or whatever. And other people have really good ideas and other people do some really great things and just letting go, the concept of letting go and delegating and saying yes to opportunities when they present themselves. And you know, like Jim Carrey, he would say yes to everything. If you, if you remember the movie and if you haven't seen the movie, that's your homework. I want you to see this movie. Yes Man. And he would just say yes to everything. And you'd see how it winds down the path of looking like something awful happens because he said yes and then it turns into something good. And that something good would have never happened if he didn't say yes to the first thing. So putting those dominoes into place. Now of course this doesn't mean be, be stupid. It doesn't mean be silly. It doesn't mean make idiotic, careless, reckless decisions. Of course it doesn't mean that be a prudent, wise person, be a prudent, wise investor. But more often than not. See if you can force yourself to say yes even when it's a little uncomfortable, because I will just bet you that good stuff will happen when you open doors and say yes more often than not. So your homework is to see the movie. Now let's talk about some of the downsides, some of the risks when investing. This is a speech that Doug, who you've heard on the show several times, gave at one of our events and it's about a year old now and I think you'll really enjoy it as he talks about fighting the demons of investment. So we will be back with that in just less than 60 seconds and I will look forward to seeing you at the Meet the Masters event in October. Until then, let's listen to the speech and we will talk to you on the next show. Number 220. Just a reminder, you're listening to Flashback Friday. Our new episode are published every Monday and every Wednesday.

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So the topic today is going to be fighting the demons of investment. And if I do my job right, by the end of this presentation you'll be extremely angry and be ready to go out and rip apart everything that you see. And you think that I'm joking when.

I say that I didn't tell you. He also drinks a lot of coffee too.

I feel that in order to stay sufficiently angry and motivated, I need to drink coffee more or less all the time. So let's start out and say why are we fighting these demons of investment anyway? And well, there are really two key demons that I like to point out. The first is the demon of risk. And anybody who's paid attention even half of the days to the market knows exactly what I'm talking about. Because especially during the second half of 2008, one day the Dow would be up a thousand points, the next day it would be down 2000 points. One day it's up 500 points, the other day it's down 1500 points. When things get extremely volatile, it gets really, really hard to predict the future of your investments. And needless to say, it's very difficult to bring yourself to invest when you don't have the slightest idea where they're going to be going and the second is inflation. Jason talks about inflation quite a bit, but inflation is an ever present risk just because it'll devalue the money that you're using to invest. So say even if your stock holdings double, if they only buy half as much, you're actually worse off than you were before because you have to pay taxes on all that gain. So now let's start by taking a look at the demon of risk. And the thing that's important to really keep in mind here is that many people are blind to risks that they can't immediately see. Say, for example, you're looking at a real estate property, you say, okay, well, there may be a risk that the value is going to go down. Okay, well, everybody can see that. But what about the risk that you won't be able to get a tenant because your rents are too high? Or all kinds of other sorts of things? You know, people say, oh, well, well, I see the stock market prices might go up, prices might go down, but what about the risk that inflation is going to destroy the value of all of your dollars? So it doesn't matter whether it goes up or down. So to demonstrate kind of what I'm talking about here, let's start by taking a look at 1974 to 1994 in this time. This is really when the buy and hold religion of stock market investing got going. Because as you can see, you have a nice linear growth. All you got to do is just dollar cost, average in at regular intervals and you're going to be fine. Now let's fast forward. Yeah, see, we got 8% compounded growth rate, 10% compound rate if you bought after the 87 dip. But now let's fast forward to 2009. You have these two gigantic bubbles that collapsed and then built back up again and collapsed. So your compounded growth rate has actually shrunk over this extended time period. But then if you look at what happens during these bubbles, you go up at this fantastic growth rate, but you contract twice as fast, you go up again at a nice fantastic growth rate and you contract twice as fast. So that means in this market where volatility is the new normal, you not only have to buy and hold, but you have to buy at the right time and then sell at the right time. Otherwise your goose is cooked. Because if you bought anywhere near that top of the market there, you're in pretty serious trouble. And a lot of people who did have experienced very, very traumatic losses in their stock market investments. So now I'd like to kind of transition Out a little bit. And let's think back about risk a little bit. So in the world where I come from, people think about risk as a linear trade off between your rate of return and your level of risk or volatility. And in the short run this is true. And in order to get these high rates of return, for example, hedge funds and mutual funds will do is they'll get a whole bunch of leverage, they'll go out. Well, what Lehman and Bear Stearns and a lot of the other investment banks did was they go out into the overnight lending market and they borrow a whole bunch of money and they'd invest that money. You know, a lot of times it would be in the mortgage backed securities because they could borrow for say 3% and then they could get 6.5% and then they'd get a 3% spread. And if you're at 50 to 1 leverage, you make a lot of money doing that. But what happens is when you look at it over the long term, risk is really more of a bell curve where over the long term you start up fairly conservative. As your risk goes up, your return goes up. But when you eventually push the risk past that threshold, you increase the probability of incurring a total loss. So in this case we have conservative and aggressive, but as the risk profile increases, you get to insane and then eventually suicidal. And the reason for this is because if you have a high enough level of leverage, you know, I'm not talking 5x leverage or 10x leverage, you know, that's, you know, that's prudent leverage on a stable asset, that's nothing. I think, you know, Lehman and bear, they had 30, 50, 80, 90, 100 to one leverage. Just ridiculous, unbelievable levels of leverage. Even the smallest, this little hiccup in values, the slightest little disruption will just send you straight off the cliff, nose diving to the point of no return. Unless of course, you know, uncle government comes to bail you out. And this is kind of where I get into what I call the post responsibility era. Now I didn't want to put this in because, and Jason said, well, no, Doug, you need to include something about all these bailouts, okay? Because you could take as much risk as you want now and someone's gonna bail you out. And I'm like, that just feels wrong to me because to me I've always thought that, that if you take risks and you're an idiot, then if you too much risks, you lose all your money. If you tell people, well, we're going to bail you out, we're going to bail out people who act like idiots. All you're going to get is more idiocy, which is true. But if the government's bailing people out, if they're throwing hundred dollar bills in front of your feet, you'd be kind of dumb to not pick it up. And so in the post responsibility era, there are opportunities where even if you have taken risks that have turned out badly, there are chances to not be totally wiped out. Am I saying you should depend on that? No. Am I saying you should be aware of it? Absolutely. Let's think a little more here about fighting this demon of risk. Now we've all seen these cyclical markets and this is based on the trailing 12 months. So in some of the markets like LA LA actually hasn't done as bad for the last 12 months because a lot of the dip has already happened. But let's say that instead of looking at these cyclical markets, what if you look at a couple of the markets that are a little more on the linear side? Well, so you know something, that would just be crushing if you'd invested in Vegas or Phoenix or Miami. If you'd instead taken that same money and gone somewhere like Austin or Dallas or Houston or Indianapolis, it would be either a very, very minimal loss or some of these have actually appreciated over the last 12 months. Originally when I did this, I was doing peak to trough and Jason was like, no, just do 12 months. Yeah. Richard asked whether this is based on market value. That is correct. Yeah. If you're buying it below market value, you can absolutely add that on. And the metaphor that I like to think of for risk is Hercules fighting the Hydra. Now I'm a little bit of an eclectic nerd and I enjoy mythological images. And for those of you who aren't familiar with the story of Hercules, he had 10 tasks that he needed to undertake and one of them was fighting a multi headed Hydra or this big beast. And what happened was every time he tried to cut off one of the heads, it would grow two more. And so this is kind of like when someone like Goldman Sachs decides that they're gonna to contain the risk by buying credit default swaps from aig. They're cutting off that one head, but two more grow. Now if AIG can't pay their credit default swaps, well then they're in serious trouble. And eventually what Hercules had to do was he had to, I think have his cousin cauterize each of the heads after he cut them off. And so what you really need to do is understand where Your risks are and take actions to mitigate those risks. For example, if you're taking on leverage, if you use that leverage to purchase a asset that produces cash flow, that will pay for the interest on that leverage, well, now you've just really neutralized a lot of that risk. Because even if your value goes down, well, you've still got cash flow. You can carry that loan forever and you don't have to worry about the value going up. At some point it'll go up, and you don't care when it is because you've just cauterized that risk. Now let's talk about inflation. This is the nice big 5 million pound gorilla in the room. So what inflation does is inflation taxes your wealth by destroying its purchasing power. And I'm just going to go through really, really simple illustration of what causes inflation. Prices, first of all, are an equilibrium between the amount of money in circulation in the economy and the amount of goods and services that are produced. And if the amount of money increases and the goods and services stay the same, the prices have to go up. If you just kind of think about it as two bubbles, right? You know, one bubble is your money and another bubble is your goods and services. If the goods and services go down and the money stays the same, prices have to decrease. If the money goes up and the goods and services stay the same, the prices have to increase. Now you'll always have things trading off commodities go up and down. And if we spend more money for, say, soybeans or oil, that means there's less to spend on something else. And then when there's that less lower demand, then the prices will adjust downward. But the only thing that can drive all the prices up at once or all the prices down at once is the supply of money. Now that's not totally controlled by the Federal Reserve because one piece is money supply and another piece is credit supply. And that credit supply is a little more tricky, but it does, generally speaking, tend to correlate with your money supply. Now, I'd like to talk for a second Jason's hit on this more than once of your personal rate of inflation. This is a little bit of a clincher when it comes to inflation because commodities tend to inflate in a linear manner, meaning that anything that's, you know, the sticks and bricks, your, you know, your coffee, your soybeans, energy, you know, food, energy, building materials, all those are commodities that will go up at a linear rate, sometimes a high linear rate, depending on what's happening with money supply. But technology, you know, Things like this. Now, I'm sure I'm the only person in the world that has a Google phone instead of an iPhone. But you know, stuff like your iPhone or your Google phone, five years ago, the price of that was infinity because it didn't exist. Whereas now everybody can get one for, say, 200 bucks. And so technology has exponential price decreases, and there's always that technology curve pushing new products, new innovations. But the clincher is that you need to have enough disposable income after paying for your food, your energy, your place to live, to where you can experience the benefits of technology. And when inflation pushes up prices, what it does is it disproportionately impacts people of lower incomes who have to spend more of their money on things that are denominated commodities. Who people have to spend more of their income on things like housing, on things like energy. Driving to and from work. Like Jason was saying, most people that work in service sector jobs here in Costa Mesa don't live in Costa Mesa. Yeah, they live in Riverside. And they have to drive for what, 40 miles one way or something like that. And so that means that since they have to drive so far to and from work every day, they have to expend a higher percentage of their income on energy just to get to and from work. So now let's take a look at something called monetizing the debt. And so now, have any of you heard of the phrase monetizing the debt? Well, Jason, I know you've heard of it. Very good. So basically, now just kind of feel free to let us know.

Well, monetizing the debt is what we're doing now. We're playing a game. We sell bonds to other governments to finance our debt debt, but the other governments don't want to buy them now. So we have this little game where we sell them to somebody unknown for a month or so, and then the Federal Reserve buys them back with dollars we printed.

I don't think I possibly could have said it better myself. So, yeah, so when the market stops buying bonds, we break our normal cycle of the treasury bonds being sold to the market. And then we say, well, instead of the market buying these bonds, we're going to sell it to the, to the central bank. But the way that the central bank buys the bonds is they increase the money supply. And the extreme danger here is that when the central bank increases the money supply that goes out into bank reserves and the banks, then you then have the opportunity to loan that money out. I don't remember what the current reserve Ratio is, but it's something like 10%. So whatever the Federal Reserve pushes out into bank balances can multiply out by a factor of approximately 10 for effective money out in the economy.

Economy.

Which means that if the central bank buys too much in bonds, they can explode the size of the money supply. And that's why they're hiding it. Yeah. And so now one of the things I'd like to get into here, and this is the slide that should make all of you extremely angry. Yeah, this is a very important slide. So there are some people who say, oh, well, you know, there's actually deflation coming. And I can understand some of the arguments, but let's just look why the inflation is going to come. So let's start with the 11.9 trillion national debt is today. I think I made this slide like two weeks ago. So it's growing like $200 billion in the last couple weeks. But our gross domestic product is around $14 trillion. Now bear in mind that for paying all the debt in all of the US this is it. That $14 trillion is all there is. Now let's add on our business and consumer credit and then mortgage debt. So it's about $4 trillion of business and consumer debt debt and then another $14 trillion of mortgage debt. So when everybody says, oh well, that, that national debt, that's only like 80% of GDP, I go, okay, yeah, that's the government side, but people have loans too, and that's around 30ish trillion. Between all those, that $30 trillion that all has to be paid out of that $14 trillion of GDP. Oh, wait a second. Now there's another piece I forgot to tell you about. We just did this big bailout initiative where we're on the hook for about $8 trillion. And we also have these things called entitlements where we've promised to give people a whole bunch of money that we don't have. And so now if we, if we layer on the bailout liability, which is estimated to be up to about $8 trillion, and then if we add on the entitlement liability from the Government Accountability Office. How many people here know about the difference between cash and accrual accounting? It's really boring. I know. It's a number monkey data nerd kind of thing. So cash accounting just says you only count money as spending when you spend it. Accrual accounting says you count money as spent when you incur the liability. Now, the government forces every single publicly traded corporation to do accrual accounting. So for example, anybody that knew that knew how to look up financial statements knew that United Airlines was in trouble for about 20 years because the liabilities for their pensions exceeded their assets many, many times over for years and years and years and years and years. But they didn't actually go bankrupt until they ran out of cash. But the government does cash accounting. They don't accrue for liabilities. The Government Accountability Office says if you force the government to do accounting like they force everybody else to do it, what would it look like? And what it would look like is $63 trillion is the present value of the unfunded liabilities. And this is from March. So. So it doesn't include health care, doesn't include the son of the bailout or the second son of the bailout or the third son of the bailout, and doesn't include any of the other stuff that's coming in. So now when you look at these two graphs, you have to understand that this $14 trillion, that's it. That's all that there is to pay for this. This is present value. Travis made a great point. Is that. So even the present value of all this doesn't have to be paid in one year, which you're right, it absolutely does. But you figure, well, if we were going to take all this out in loans at, say, 5%, that would be $5 trillion that we'd have to pay in interest, which is a third of gdp, which is a lot of flipping money. And so just realistically speaking, there's no possible way the government's going to raise $63 trillion in debt. No way, because nobody's going to buy it. I mean, China's already balking at buying what, our $12 trillion in debt. So what has to happen? You know, Jason has his six ways that the government try to eliminate all of its obligations. But. But you're not going to steal $63 trillion of oil. I mean, I suppose you could, but it'd be hard. You know, you're not going to sell $63 trillion of ports. The only real way that you, that the only two options you have left are one is to default and one is to inflate just because the sheer magnitude of dollars here is too great for any of the other options to be viable. The purpose of this here is just to say that the total liability is so much greater than current output that there's almost no possible choice for when this actually has to get paid, because this isn't going to have to be paid now. It's really going to have to be paid in about 10 or 20 years. And so when that bill finally comes due, the only possible choice is going to be either default or inflate. And you know, no self respecting politician is ever going to default on an obligation because they'd never get reelected. And so that means what's most likely to happen is the government's going to inflate the money supply to satisfy the nominal obligations. And then everybody who's getting pensions, annuities, Social Security payments, Medicare, all of those people are going to see the purchasing power of what they're getting paid drop down to almost zero. And then everybody who has inflation favored assets, like hopefully everybody in here is actually going to do quite well because they're going to have a natural arbitrage from their loans. That's why I keep telling JC he needs to quit whining about the government, government spending so much because they're going to make him rich. Okay, so now let's take a look at when is the inflation going to come? And this is really thinking about now. All of you have probably heard about the deflationists, the people who say, well I actually think prices are going to go down in the near future and the prices may stay down for a little bit because currently there's relatively high unemployment. And now I think the reported unemployment is about 10% or getting close. But the unemployment plus discouraged workers plus.

Involuntary part time workers is about 17%. And most economists agree that what they call full employment or basically anybody who really wants to work can find a job is about 5% because you always have people who are leaving and then restarting new jobs. But since that unemployment is relatively high, employment's going to have to grow for a very long time before we get back to a full employment situation where you'll have wages consistently stepping up. So that means anything that's involving low skilled labor or that's in the service sector is going to have suppressed labor prices for quite a while. In addition to this, factory capacity utilization is under 70%. And so the pricing model for factories is for factory or manufacturing goods is that if your factory is running under full capacity, then what you do is you cut prices to try to fill up the factory because depreciation for a factory hits regardless of whether you produce one unit or not. So I work for the Intel Corporation as my day job and our factories cost about three to four billion dollars a piece to make. And if we're not producing chips, we still have to pay that depreciation. So that means if our factories go under capacity, all of our pricing managers get calls every day saying, as we say, ftf, fill up the fab, or ftff, fill up the something or another fab, the economics of our business model is keeping that fab full. And so as long as the undercapacity and the unemployment is relative, as long as the capacity utilization is low and the unemployment's relatively high, we'll be able to hide some of this inflation for a while by pushing down wages and by pushing down prices. But this can't happen forever because otherwise nobody will build new factories. And if you push down wages forever, well, then, like Jason said, there's no customers. If nobody's working and there's no customers, who's going to buy all the stuff?

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So now here's another one that particularly gets my blood boiling. So for those of you that have parents of the World War I, World War II generation or know people who are around in this area, the big thing back then was war bonds. They financed the wars with war bonds that paid 2 to 4% interest. And they had all these patriotic posters. You know, help America, Save America. Buy war bonds. But what happened was there's two real interesting things I want you to pay attention to with the war bonds. Number one, 10 years. Number two, not transferable. So what that means is if you bought a bond from the government during World War I or World War II, you're stuck with it for 10 years and you can't sell it. And it's at like 2% interest. And by the way, after both world wars, the government devalued the dollar by about 50%. So, for example, my father was in the armies and in the army, I think, from 1967 to 1970. And you know, his platoon officer Said, hey, you need to buy savings bonds. So he hucked a whole bunch of savings bonds. And when he got off the plane From Vietnam in 1969, you know, he cashed in all these savings bonds. And the purchasing power of the money he got back was less than what he paid. And he had to pay taxes on the interest. And so this is one of the ways that people really, really, really, I'm going to avoid using too crude of metaphors, but really, let's just say get shafted by the government. Is that what the government will do is it'll issue this debt at extremely low rates and then inflate the currency so the purchasing power of the money you get back from these bonds is worth less than what you paid for the bond. And then you have to pay taxes on the interest. So now let's say, what about gold? Jason's got his thing against gold. And you know what? I agree with him. For those of you that are fans of the Daily Reckoning, Jason and I both get the Daily Reckoning. And Bill Bonner, the author of the Daily Reckoning, he's a big, big, big, big gold bug, loves gold. But what's unique about gold, well, it's a commodity. So that means it can't be debased by. Debased by inflation. But here's something that's kind of interesting. So back in the, in the, in 1929, the Federal Reserve was on a gold standard and they decided to contract the money supply, which ended up bringing a whole bunch of gold stock into the United States because everybody was on a gold, on a gold standard back in the 20s and early 30s, up until 1931, because that's when England went off of it. But when the US Depression started, then what it did was the US Economy contracted and then the exports from the US Suddenly dried up to all the other countries. And then the other countries sent gold to the US because gold was the settlement asset for trade deficits. Well, then what happens is in 1931, England gets tired of sending gold over to the US and says, sorry, we're going to go off the gold standard. And so now the US has this big stockpile of gold. It's contracted the money supply, it's made this big deflationary spiral. Whole bunch of gold poured into the Federal Reserve vault. And then something interesting happens. In 1933, right after being inaugurated, President Roosevelt issues an executive order that confiscates all privately held gold. And that privately held gold was confiscated at $21 an ounce. Immediately after that, the Pegged rate was increased to $35 an ounce, destroying 70% of the value of all that gold that had just been confiscated. So basically what the government did in the early 1930s was basically it confiscated all the privately held gold, repegged it, then you re pegged the dollar against the gold, and basically made a profit of $15 per ounce on every ounce of gold that it had sucked out of the economy. Gold can be decent, be a good way to hold value. It's good money. It doesn't get debased by inflation. But don't kid yourself into thinking that the government can't take it away, because it has. And I don't know if it will, but it can. And so now I'd just like to do a little, kind of a quick chronology of the dollar's purchasing power. I'm sure many of you have seen this graph before, but the dollar currently is worth 5% of what it was when the Federal Reserve came into existence in 1913. So the first big devaluation of the dollar came after World War I. Because generally speaking, the way that governments get rid of debt isn't usually by paying off. It's by inflating it away. Like we were just saying, they'll monetize the debt. They'll debase the value of their currency and inflate away all the debt. Well, then after World War I, then the Federal Reserve suddenly wanted to increase their gold stocks. So they decided that they wanted to create the deflationary spiral that started the Depression. And then after World War II, they debased the currency by half again because they needed to pay off the World War II debt. They had all those war bonds that they needed to get rid of. Well, now you get into the 60s and 70s. And so like Jason was saying the other day when I showed him the slide, he said, But, Doug, the 50s were great. Weren't they say? Well, yeah, the 50s were great because the manufacturing capacity of the whole world was bombed to crap. 80% of the manufacturing capacity in the entire world was in the U.S. i mean, and so basically anybody that could fog a mirror could get a job because there were no factories anywhere. They'd all been bombed to the ground. But by the next 20 years, they'd been built up. So then suddenly, you know, suddenly there was a much more competitive market and the US Was looking. It was in a lot more trouble. And that's when it started having to inflate the currency again. As we can see in 1971, the government went off the gold standard. The gold standard was artificial though, because it was pegged at $35 an ounce and nobody was allowed to own gold. So if you can't own gold, is there really a gold standard? I don't think so, but that's me. You know, the government now has to finance a large number of social programs that were started in the 40s and 60s. And then it also has to pay the debt from the Vietnam War. So it continues inflating the currency, except again. And now the cpi, the Consumer Price Index becomes really important because everybody says, well, okay, if the government can control the money supply, well then the price level or inflation, that starts to become a big deal. And now every year the CPI changes. And that's where we get to this, as Alan Greenspan called it, the great moderation, the period from about 20, 25 year period from 1983 until 2008 where you had relatively stable prices. But as we can see, that's the consumer Price index in and of itself is a little bit of a tricky animal because the way it's calculated is, number one, food and energy is taken out because it's said to be too volatile. Now I suppose there's a case for that because food and energy are volatile, but they're real. You know, you and I aren't going to live for very long if we don't eat and don't use energy. By pulling those out, it makes prices appear more stable than they actually are. In addition, we have Jason's favorite, which is Hedonic. Hedonics basically says that if my computer gets twice as good as it was last year, the CPI assumes it costs half as much, which is partly valid. But for example, let's say that I'm buying a lower end PC that costs $300. I can't buy one that's half as good for $150. They don't exist. I can't buy a 1985 equivalent car for $400. They're not. Nobody makes them. And so the limit with Hedonics is that you can't necessarily go back and buy quality levels from 10, 15, 20 or 30 years ago because nobody makes them anymore. But we still assume that those price decreases continue to happen. So now let's take a look at some normalized market returns relative to the Consumer Price index. So from 1974 to 2009, the CPI grew at a growth rate of about 4.5%. Okay, so now everybody says, okay, well, buy gold, right? You know, gold, gold's the safest, safest asset Et cetera, et cetera. Well, gold hasn't grown that much more than the cpi. Even if you take into account its recent price spikes. Gold only grows at about 6%, which is probably more like the real inflation rate, as you know, Jason and I are fond of saying. If you want to see the real inflation rate, just look at gold prices. That's a lot closer to what the real inflation rate is versus what the CPI says. So now let's say, well, what happens if you look at the S&P 500? So the S&P 500 grows a little fat, has a little better compounded growth rate, but what it does is it peaks up and then crashes down, and then peaks up and then crashes down. Well, so now let's think outside the box here a little bit. Raise your hands. How many people here have heard that real estate only keeps track of inflation, that real estate doesn't have real appreciation, that their prices just keep track of inflation in the long term? Has anybody here heard that? There's a couple of my friends that have said that. Well, let's say that that's true, and let's say that real estate appreciation only tracks with inflation. But you get to buy it at 5x leverage. You get to put 20% down, and you can use leverage. Well, if you just lever up the CPI by a factor of five, you're outperforming the gold and the S&P 500 for all but about two years. And that, frankly, is the real power of real estate, is that even if the appreciation just tracks with inflation, then the leverage lets you beat the returns of almost any other asset class over an extended period of time. So now let's take a look at what Jason likes to call packaged commodity investing, or buying a house that's made of bricks and sticks. So if we look at the cost breakdown of a typical housing unit, now, this is not including land, but a typical house is split pretty evenly between the labor and the material cost, both of which are constantly getting more expensive. Labor prices can be suppressed for a little bit. I know that. Especially construction labor has been held pretty flat for a while just because. Because a lot of the immigrant labor has been in the construction industry. But still, labor prices are always going up, material prices are always going up. So one of the things that locking in at a particular price, especially if you lock in below the price of construction, what that lets you do is that lets you experience the linear price increases for all those commodities. Now let's look at a typical housing cycle. And this is just A theoretical example, but. But for example, in a market, say like Phoenix or like Orlando or Miami, what happens is, you know, you have this red line, which is your cost of construction. It goes up in a pretty even line. But then when you have a whole bunch of demand, the prices rocket up. And then as soon as the prices go up, then all of the builders say, okay, we need to start building because we can make a whole bunch of money here. Now, Jason, how long did you say the building cycle is? Two to four years. Right, Two to four years. And now how many people here can guess where the building cycle's at right now? Fast, slow, dead stop, almost dead stop. So what that really means and why this concept is so important is that the building cycle in almost all the markets, especially the bubble markets, is at a dead rock stop. And so that means that as soon as values start ticking up, it's going to be two to four years, probably more like one to three, before any new inventory hits the market. So that means that as soon as there any kind of real increase in demand, the prices for everybody that already owns houses in these markets is going to go up until new supply hits the market. That's this piece right here. Because when you have a bubble and all of a sudden it pops, prices go down, down. They go down below the cost of construction. If you can buy below the cost of construction, then what that means is you are now buying in at a point where nobody can build for the price you bought it at. And nobody is going to build until the market prices increase above the cost of construction. Because people don't build to lose money. You know, most builders don't say, hey, I want to lose $5 million. Let's get going. Make it up on volume. Yeah, exactly. We'll make it up on volume. So this is, I think, especially when you're talking about markets like Indianapolis or Phoenix or all these markets that have these foreclosures where you can buy at 60, 70, 70, 60, 50%. Yeah. Atlanta. Yeah. All these markets we can buy below the cost of construction. What you're doing is you're almost. You're locking in an almost sure arbitrage opportunity because at some point there is likely to be demand that pushes the value up back above the cost of construction. And when that happens, then that's going to trigger the new builds, but they won't hit the market for about two years. And during that two years before the new supply hits the market, your supply is basically going to be steady. It's not going to be Changing, not going up, not going down. So anybody who owns property in a static supply market while demand is increasing is going to see prices go up pretty significantly. Now, I don't know exactly when this is going to happen. I think we can be reasonably confident that it's going to happen. Excellent question, sir. So the question was, what happens when interest rates go up? Now, what typically happens with interest rates is that when interest rates increase, then it will suppress the prices. So the price growth will either slow or the price growth will stay flat, but it will push more people out of the buyer pool into the renter pool. So this is what Jason and I call the heads I win, tails I win bet. Because if interest rates stay where they're at or go down, more people buy. Your value goes up. You can now sell 1031, exchange into a new deal and trade up. Now, if the interest rates go up, it'll suppress values, but it'll increase your rents. Because now there's more people that need to rent because they can't afford to buy. Your cash flow goes up, and you can just sit on the property and buy and hold it and then refinance it in seven years, take the money and go invest it in something else or buy a toy or something like that. It is the proverbial heads I win, tails I win, cannot lose arbitrage argument, which is, frankly, what attracted me to platinum properties. Let's take an example. Jason was talking about Indianapolis with its 2%, its measly 2.4% appreciation. Let's say you start with that 2% appreciation, but wait, you also have leverage. So now with that leverage, that 2% appreciation turns into a 24% ROI, but you also get cash flow on top of that. So now when you layer on that cash flow, you're talking another 6ish percent. And then if you qualify, you could also get some tax benefits, which gets you to an roi. And these are just hypothetical numbers, but they're not uncommon. Based on the pro formas we've seen, you can be looking at. Oh, actually, yeah, yeah, yeah. The properties that I bought actually do better than this. I just want to do. So I bought two properties at Indianapolis. The first one had an RV ratio of 1.5, and the second one had a measly 1.4 RV ratio, which is, you know, only double what Jason recommends. But the point is that what real estate does is it lets you realize value from more than one direction. So you're not totally reliant on appreciation or totally reliant on cash.

Flow.

Because for example, if you buy a bond, you're completely reliant on the cash flow. And if whoever you bought the bond from, be it the government or the company, decides they can't pay, you're done. Done, you're finished. If you buy a property based on speculation and it doesn't go up in value and you're trying to just float all the cash flow, well then you're finished too. Well, let's say that you buy a property below the cost of construction with high quality debt that produces cash flow, maybe even enough cash flow to pay your interest. Well now you can sit on it forever because you can just, you can just cash the checks every month, wait for it to go up in value. If it rockets up in value, you can sell it out and trade it up. It is a absolutely win win opportunity, which is actually what really attracted me to it in the first place. So now here's my piece on really defeating the demon of inflation. So I don't know about any of you, but I love the movie 300 that came out a few years ago with King Leonidas and the Spartans. So the first piece that I look at for defeating inflation is your shield, which is the tangible assets. Now if you're a gold bug, this is as far as the gold bugs go. They have tangible assets that are shield against inflation. Shields are great, but they don't win wars. So the next piece is cash flow. This is your armor. So this is what happens if you buy a property with cash. You've got tangible assets, you've got cash flow, but you don't have that spear. You don't have that really great offensive weapon. Well now if you have leverage with value appreciation, well now you get to meet the Spartans because now you have that nice shield of tangible assets. You've got that cash flow armor protecting you and you have a long spear that's, that's ready to just poke a big hole in inflation. I would like to say in a brief presentation, but I don't know how brief I've been in a brief amount of time. I hopefully hope that this has been an opportunity to learn a few of the important things just about risk and inflation. Because over the long term you have inflation, risk and investment volatility is all pushing in on your well being. But if you take action, you can push against all of these factors and you can win. Jason has the formula. He figured it out a little while ago and he taught it to me. He's teaching it to everybody here. And he's going to teach it to everybody that comes here next time. The real key is whether or not you're willing to take action because it doesn't have to all be at once either. Because like for example, I bought my first property and then I convinced my wife to buy a second one and now I'm refinancing both of them because the cash flow was so great that the market value exceeded our purchase price by a pretty significant margin around I think 20 or $30,000. And so I'm refinancing both of them at 80% of value. So I can, I'll be able to pay off all my first loans and pull out cash so that I can reinvest in another property. That way I'll be able to refinance it, pull out cash and reinvest in another property. And as long as you just keep doing this one step at a time, one more property, one more deal, just continue building your portfolio. At some point you're not going to need to build it anymore because you won't have to work and you'll just be able to cash the checks every month and then watch your values go up when the government and deflates the crap out of the currency because it can't stop spending. So now I don't have an opinion or anything. But anyway, so this is the time for my shameless self promotion. As Jason said, I write a weekly newsletter called the Business of Life. You can go to Business of Life llc, it's a big mouthful. Or you can just go to dugutberg.com they'll both take you to the same place. But please feel welcome to subscribe. It's free. I'm not going to spam you, not going to sell your address. I just like to. I just like to send out my weekly newsletter and hope that I can enrich people's lives in some way. So I closed in January of this year and the second one, my second property I actually bought with a home equity line of credit on my house so that I actually purchased it with cash. I wired a, wired a check over to the. I think this one was actually fha, but I wired a check to the agency and because of that, since I bought it with cash, the seasoning period for refinance is much, much lower than if you buy it with financing. So if any of you have the opportunity to use a line of credit, what you can do is you can buy with cash and then have the short seasoning period, get your rehabs done, get a renter in and then refinance it, pay off whatever you originally loaned. Or you can just use the money you got, buy another one with cash, season it, rehab, refinance and build up that way. It's a very effective way to build a build an inflation portfolio.

Have you listened to the Creating wealth series? I mean from the beginning? If not, you can go ahead and get book one that shows 1 through 20 in digital download. These are advanced strategies for wealth creation. For more information, go to jason hartman.com.

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