CW 901 - Daniel Amerman - Real Estate vs National Debt & Turning Inflation Into Wealth
25 Oct 2017 · 48 min
Daniel Ammerman breaks down how the U.S. national debt of $20 trillion forces the government to keep interest rates low and allow inflation to rise. Real estate investors can exploit this by using fixed-rate mortgages as a wealth tool: inflation erodes the debt while you keep the asset, a strategy he calls inflation-induced debt destruction.
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Just like I had that photo op on Friday with Gloria Allred. Yes. Love her or hate her, Gloria Allred, arguably the world's most famous attorney. I was in Los Angeles as you know, pitching my free court online court system that I've, that is my passion project that I've had the idea for for like five years now. Well, it's finally up and working, you know, sort of. Well, I don't want to say it's totally working. It's not totally working. But you know, there's an old Silicon Valley saying by a famous entrepreneur there, forgive me, I do not remember which one, but it's someone famous who said if you are not embarrassed by the first iteration of your product, you waited too long to launch. So the idea is Eric Reese, Lean Startup Methodology, which is great methodology for launching high tech businesses. Anyway, that is cool. And yeah, check out freecourt.com and we've got Dan Ammerman back on the show today. I think this is his, maybe his fifth or even sixth time on the show. He also is thinking about coming to join us at Meet the Masters in January in beautiful La Jolla, California. So that's not formalized yet. I would do want to make that disclaimer, but we've been talking about it so we you might see Dan there as well giving a speech. And Dan always has some of the most interesting ideas. He's a true intellectual. I love his work. Been following it for, I don't know, almost 10 years now, I think. Anyway, he's back today. That's our guest today, Dan Ammerman talking about the national debt versus real estate investing. And of course, with the underlying theme of turning inflation into wealth, we debate a little bit about whether there is any inflation in the first place. So you'll hear us talk about that and some other great stuff. And by the way, thank you to all of you who responded to jasonhartman.com ask. Yes, Jason hartman.com ask and this is a page that we will be using for various things over the years. If you've got a question, go ahead and go to jasonhartman.com ask and ask me the question. But more importantly, what I'm looking for now is people with unique skill sets. You know, we spend a lot of money. And by the way, I should I didn't even really announce this any in any formal way. We are an Inc. 5000, fastest growing company in America now. We grew 107% in the past three years. So it's an honor to have that recognition and, you know, achieve that out of 38 million companies in America. It's pretty, pretty amazing. And you know, I should have applied for that before. I think I'm pretty sure we would have made it four times in our history, but just never got around to applying. You know, it's like the lottery. They say you can't win if you don't play. Well, you, you can't win the Inc. 5000 if you don't apply. But anyway, we spend a lot of money. Why aren't we spending it with our own listener family? We'd love to spend it with you. 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We love to spend it with our listener family and our client family. Jason hartman.com Ask without further ado, let's get to another great interview with Daniel Ammerman.
Here.
He is. Foreign it's my pleasure to welcome back a multi returning guest and that is Mr. Daniel Ammerman. He's a charter financial analyst and we've had him on the show. Many of you asked to have him back. In fact, one of our listeners just recently asked to have Dan back. And I love his work because it's super wonky, it's super detailed and he really analyzes things on a very, very deep level. So it's a pleasure to have him on the show again. Daniel, welcome back. How are you?
Thank you. I'm doing really good, Jason. Thanks for having me back.
Good. Remind our listeners, where are you located? Are you in like Minneapolis or something?
I am on a hillside above Lake Superior.
Oh, okay. Good stuff.
More than northeastern Minnesota, just unbelievably beautiful place, particularly these days, Great Lakes area.
Good stuff. Well, Dan, what's some of your latest and greatest? You've had a pretty productive year. You've got lots of new outlooks and analysis. You know what, what are you working on? What's kind of the the latest and greatest from Dan Ammerman?
Well, what I've been working on is being able to exactly identify and quantify a lot of the national issues that we have going on and then make them very personal in terms of the implications for an average person and also directly tie this in to returns and financial modeling for real estate investment strategies, which is just some fascinating stuff. But I guess the starting point is that in my wonky way, I did something that was quite fun and that was I reverse engineered the Congressional Budget Office long term outlook so I can take the US Government the way that they look at it and do various things with expenses, with taxes, with inflation, with interest rates, look at all of that and see the impact for the nation as a whole. And then I can go from that to the impact for individual savers, investors, and then the impact on various types of real estate investment strategies. And one way I like to think about it is that there are many different ways that the federal government can deal with the issues that it has in terms of, let's say, the national debt and the coming rapidly escalating payments. They're going to be due to the boomers for Social Security first and then Medicare. And the really interesting part is some ways of doing that are very profitable for Donald Trump and other ways he would lose a fortune. And I can identify each way.
Now, when you say for Trump, are you talking about his personal portfolio or just his legacy to the country?
Something that people are just not picking up on, but I think is really important. And a lot of it has to do with kind of a base ignorance on the part of, let's say, the media, who's not really following these issues, is that he is not a generic Wall street billionaire. He has an entirely different source of funds than many of the famous people you might hear about who have much greater net worth even than he does. He's a real estate investor. And I'm not saying that I've modeled his exact personal exposure, his own asset liability combination. I'm sure that's very complex. But he is generically subject to many of the same things that all real estate investors are. And that means that he has a very different exposure to what's being done when it comes to things like interest rates and inflation and the trade off between them and so forth than, let's say, a Wall street investor would. And I think there could be some very important implications there.
Yeah, well, what I like to say, Dan, is Donald Trump is our first real estate president. You know, love him or hate him, and there's certainly a lot of hate out there, especially in the media. And just to restate my position, I don't love the guy by any means. I think he's a bit of a doofus. I can't believe some of the stuff that comes out of his mouth. Like, if I had his job, I keep thinking I'd be so much better at that. The funny, the funny thing is, is that, you know, well, not the funny thing, but the tragic thing is he just can't get a fair trial. I mean, the media just won't give the guy a break. It's, it's, you know, really, that's just piling on all the Time.
I'm not trying to get partisan with him in any way. I'm trying to do just the opposite there. And the, the way that I phrase this is that let's say Donald Trump had two choices, okay? And they were each equally good for the nation. Okay. Neither one hurts the nation, neither one helps the nation more. So it's kind of neutral for the nation as a whole. And with one of those choices, Donald Trump makes a lot more money than he does right now. And with the other of those choices, he loses a fortune.
Yeah. Well, the obvious choice, if we assume.
Yes, if he has the choice and it's all the same for the nation, what do you think Donald would do? I think there's a lot of information value there.
Sure, sure. Okay. Good, Good stuff. Well, well, first of all, I want to ask you before we dive into that, let's talk just for a moment about the cbo, the Congressional Budget Office. Right now. I don't know a lot about the cbo, but from what I little I do know, it seems like on both sides of the aisle, they're viewed as a pretty credible source. I don't believe much about what the government says, especially when it comes to the consumer price ind or unemployment statistics. You know, the government has a huge incentive to manipulate everything and lie to us like crazy. But I don't know, is the CBO credible? You know what, like what, what do you, what's your take?
Everything's relative is my take on that. And I look at statistics from quite a few different sources and they've been going different directions. For instance, if you look at the people who are forecasting the long term future, one of the things I really focus on is financial viability because this is so tied in with interest rates and inflation and so forth. If you look at the Office of Management and Budget, which is the White House, they do their own long term forecasting. They provide no supporting detail whatsoever. They just say, we're the government, trust us.
Scary statement. It's like, like the Ronald Reagan quote, I'm, I'm here from the government, I'm here to help or whatever that was he said. It was always so funny.
And if you look at the Social Security Administration, which is another source of remarkable long term projections, I would say they should be writing fiction. Some of these projections are so remarkable in terms of the optimists in them. They sort of tell you what they're doing, but there's no way that you can track the numbers. And I'm not saying I can do everything with the Congressional Budget Office. But they provide sufficient efficient documentation where you can figure out what they're doing. And that, that then gives you the opportunity to check on the reasonableness and to run your own assumptions and kind of see, okay, they're being, you know, this is probably not going to happen. This is way too aggressive and so forth. But that is what I will give the Congressional Budget Office credit for. Out of all the government agencies who are doing long term projections, they're the only ones who will really show you what they're doing in terms of the detail that it needs to replicate it, which is why I based my work on their long term outlook.
Yeah, good, good stuff. Well, I had Lawrence Cutlikoff on the show a couple of times. I interviewed him again yesterday and then I'm interviewing him again tomorrow. And he's, as we both know, done a lot of work on this unfunded mandate, unfunded entitlement scenario. And you talk about that a lot too. And some of your latest work is on that topic and what it means not only to the country, but to the individual. And that's what I love about your work. So let's talk about that. Let's go ahead and dive in.
If you look at it literally in terms of what is due, first of all, if you want to get technical, there is no unfunded liability.
What does that mean?
Because the way the law is written is that the Social Security Administration does not have to make any payments, that it does not have the money.
Right. But it better make them or we're gonna have riots in the streets. So, yeah, good point.
For as long as the trust funds are outstanding, and there is deep weirdness when it comes to what the trust funds really are. They're not at all what the government says they are. And I've got a really interesting analysis called Two Sets of Books, where I look at two sets of books that the government keeps or the trust funds, and they're real in one set and, and they're fictional in the other. And it's just a very strange combination. But once those are gone, under law, the benefits are supposed to be cut unless the taxes are raised. Now it's a political question about what happens at that point. But that's also kind of a distraction because there are so many different tools the government can use to change the amount of payouts that are being made. And one of these, I'm going to have a new analysis coming out on soon. It was just announced a couple days ago is we have a lot More information on the 2018 Social Security increase, which is about 2%, and that's the biggest in six years. So that sounds like really good news. Except you have this issue with hold harmless, which for people who are not collecting Social Security, many people who have that, that may sound like some very strange term. What does that mean? What it means is that Medicare premiums, the Social Security payments net of your Medicare Part B premiums, cannot actually fall in nominal terms. But increases in Medicare premiums are allowed to eat up your entire increase in Social Security, just as long as the rates don't fall. So what's happening is you have all these Social Security beneficiaries. According to the Wall Street Journal, the average increase in the monthly Social Security payment is supposed to be $28 based on the 2% increase. But of that, $25 is going to increase Medicare Part B premiums. So the net increase is only $3. And that means Social Security. Even though everyone will tell you it's inflation indexed, people want you to believe in this stuff. It's very openly not. It's only partially inflation indexed where they're supposed to be getting even according to government inflation statistics, a $28 increase, they're really only getting a $3 increase.
So in other words, that means people are getting poorer, right?
Yes. The standard of living that can be supported by Social Security is falling.
And even if they really got the whole increase, the inflation index itself is maligned. So you know, it's not, it's not real because of that. So it's. It's like a double. It's a one, two punch, right?
Oh, it's a triple at least. Yeah, it's triple.
Okay.
The other thing you have to keep in mind is that Social Security is not paid off the CPI U, the urban is paid off CPI W, which is wage earners, which has been substantially depressed compared to expenses, which, which is CPI U over time. And then you take the composition of the CPI U and in fact, retiree expenses tend to be some of the highest cost portions of that index. So even if you were to give the government the benefit of doubt and say, oh, all these calculations are immaculate. They're working exactly the way they're supposed to. You can still compare actual retiree expenses to typical CPIU, typical national expenses, and you know, all the accounting they're doing for cell phones, getting smarter and all that kind of stuff. And then you take that and you look at things like the holding harmless and the adjustments as well as the difference between Labor Index and CPIU and all of a sudden you're moving it down 2, 3% per year very easily.
Yeah, yeah. It's shocking how this is, but what.
That does is that that does two things. And again, because I'm immersed in the heart of this, I say see the two side by side and it's just like a perfect meshing that I think people need to be aware of. This is mandatory from the government's perspective, to avoid financial disaster over time. They have enormous incentives to make this happen. But that doesn't change the harm that it does to individuals. I think we've known each other since 2008, at least.
Yeah, yeah. Almost. Almost 10 years, Dan. We're going to have a 10 year old.
Almost 10 years, Jason. And there's been a phrase that I've been using the whole time to anticipate what the government's going to do, and that is that it will meet promises in form, but not in substance, and it will do so in a deceptive manner as a political requirement. And that's exactly what we're seeing with Social Security. In theory, it's fully going there. In practice. No, it's not. This is being done in a way that the average person doesn't understand because that can. Keeps the politicians in office.
Yep, yep. Yeah, that's what they're, that's what they're motivated to do. So a heavily indebted nation. There are, you know, there's a lot of meaning on a national level and a global level for that. Right. But the typical impact on the investor. Right. What does that mean? And, and I, I love how you tie it into real estate, because I know that's one of your favorite asset classes, at least it used to be. You can, you can correct me if I'm wrong, but you know, I love the multidimensional nature of income property and how you can, you know, you can sort of switch strategies because of that, but, but kind of tie that in for us. I'm looking at your chart, by the way. You've got a great chart on this, on your website.
This is something I've come up with recently and I'm really happy with it. It's, it's titled the Personal Challenges created by the National Debt. And it's analysis matrix. And what I mean by that is that each component here has one or more detailed analyses that I have this show for people exactly what's going on there. And the top row is the nation, and the bottom row is typical investor impact. So first and again, when you run the numbers and this is just fascinating information when you look at what's going on right now with the Federal Reserve and what they're talking about with, with increasing interest rates and so forth. And you take into account the United states has a $20 trillion national debt, total debt. Okay. And this is incidentally one of those games that people play is that they'll say, well, it's not really a $20 trillion debt, it's about a $15 trillion debt because the rest is just like this. Fictional entries. Right, but the problem is the fictional entries are the Social Security trust funds. So either you accept we have a $20 trillion national debt which is larger than our national economy, which economic history would indicate we're really hitting the problem area there, or we only have 75% of the economy, but then Social Security has no safety margin whatsoever. No fun.
Yeah, and when you say the economy, you're talking GDP, right? Which I believe is about 16 trillion now, right.
Somewhere around there it's over 18.
Well, hey, we're doing better. You know, there's another manipulation. Look at the way they manipulate gdp. But we don't have time to go.
Into that one GDP deflator and the mysterious things that happen there. Yes, but, so what I look at and I've got specific analyses that track each one of these in different ways. But it's crucially clear when you look at a $20 trillion national debt, that interest rates can't rise to too much. That's one of the things I model, is that right now our interest rates, if you look at the 10 year treasury, are about 5% of what they were on average between 1962 and 2007. Okay. When they're a little over 7%. And it's just amazing what happens if interest rates were to return to historical norms. What does that mean? It means the US Government's deficits rise as soon as everything has a chance to adjust by a trillion dollars a year just in interest costs, which absent a major just huge tax increase, immediately sends the deficits and the national debt shooting upwards out of control. So all else being equal, a heavily indebted nation needs lower interest rates.
So does that mean rates will stay low?
There's other things that can go on too. And that's one of my most recent analyses is I showed how you can have higher interest rates and maintain financial solvency. You do it by boosting the rate of inflation. Okay. But if you have high interest rates and the rate of inflation doesn't jump, it's a financial disaster scenario. So One of two things happen. Either our interest rates and this is what everyone is projecting, this is what the government's projecting stay at a much lower range than usual over the coming 10, 20, 30 years, or at some point things spiral out of control unless the inflation loophole is used. And what does that mean? Well, I also track this very specifically with analyses in terms of what that does to the average retirement investor who is, let's say, using interest bearing assets to save. What does that do to their wealth accumulation and what does that do to their standard of living in retirement? This is just so critical for retirees because more than anyone else, they are planning on being able to make payments or to pay for their expenses using interest payments. And that whole thing has just been crushed by Federal Reserve actions since the financial crisis. So when we say a heavily indebted nation needs lower interest rates, that may sound very abstract to most people, but that the bottom line for all of us on a personal basis, less wealth is being created and we have a lower cash flow in retirement than we otherwise would, all else being equal. So this is absolutely life changing happening right now, but people are not aware of the connection. And of course, as a real estate investor, on the other hand, our interest rates can be pretty nice and continue.
To be pretty nice. Then.
Yes.
Okay. All right. So that means that the population overall is becoming poorer, right?
Yes, exactly.
And you know, I've wondered a lot, Dan. I've racked my mind with this and I just look at the homelessness and it seems like every city now, it's just homelessness is just a massive problem. This is purely anecdotal. I have not studied this issue. I just see it everywhere. I mean, it wasn't like that when I was a kid and you know, it wasn't like that when I was in my 20s, but it's like it now. And you know, I just got to think, you know, the liberals will say, well, you know, Reagan closed all these mental institutions in the 80s. I mean, oh my God, you know, it's probably too long ago to matter by now, but I don't know, it really does seem like that is a huge symptom of this. Possibly. But on the other side of it, you know, things technology has advanced so much that, you know, in many ways we are living better now. This is what I hate about hedonic indexing, by the way. I mean it's logical, it has a rational basis. But it basically says that if you hedonically index and that's what the government does to you know, many will say, I'm sure you all, and I will to an extent manipulate the inflation rate, lower the published rate. It says that we aren't entitled to progress. You know, I mean, think about it. If you hedonically indexed from the time nice Edison invented the light bulb or someone even way before that invented agriculture or the wheel, you know, I mean, everything would look like it's free nowadays, but it's not. It's simply not true. Right.
So, and again, there's, there's a, a difference there. Yeah. And this is something we've talked about over the years is that saying there's one rate of inflation is inherently fictional. You can't do it. It's different for. It's not just different for every person because every person's consumption pattern is on average a little bit different. It's different for each person in each year of their life because our spending patterns change as we age. And this is so critical when we're looking at someone who's looking at getting by, let's say, with Social Security payments in their later years, because the hedonics of what their smartphone will do for them if they have one is almost meaningless compared to the much larger share of their income.
Can I buy food.
And shelter? Yeah, right. And those have been rising faster than the overall inflation index.
Okay, so, so can we pause a little bit? I want to get into your analysis here, but let's dive into this. Is there any inflation or not? Because that's what we're kind of talking about. So let's just go a little deeper if we can, in that, go ahead with what you're saying. And I want to throw some questions at you.
A lot depends on the individual. I have been arguing for years, as you know, that the government has an enormous incentive to choose a method of inflation calculation that will present lower results than would otherwise be the case. To some extent, they almost have to do that because that determines how much gets paid out in Social Security, that determines how much gets paid out to workers who have cost of living adjustments and so forth. So there's an enormous incentive to do that. And then we also have other factors like the reporting rosy economic statistics is based upon having a low rate of inflation. You know, the lower the rate of inflation you report, the higher the rate of economic growth.
Right, yeah.
So there's, there's multiple different reasons for them to do that.
Oh, yeah, yeah. No, no one will deny, at least, no, none of my listeners will deny that the government has an incentive to manipulate the numbers you know that, that's for sure.
But you know, the other things you're looking at too is. And of course an awful lot of the shop shelter component depends on where you live in the country. For many areas in the country to say we have almost no inflation. When you look at what's been happening to rents, that's like a gross insult.
Oh, totally.
Or when you look at what's happening to housing payments. And.
Here'S one of the problems with the housing thing. You know, it's just so maligned because the density of housing has increased dramatically. Dramatically. You know, in, in 1972 or 1974, someone could buy their first home in this beautiful area of Newport Beach, California called Harborview Homes. Okay. And they'd get it, they'd get, you know, or, or it could be, you know, even not as nice an area. Lakewood, California, the sort of stereotypical baby boomer, you know, post World War II area. Right. They'd get a quarter acre lot. Yeah. Their square footage wouldn't be huge. The square footages are on average, you know, higher today. But it's the square footage of living in a condo or a townhome versus a single family detached home in a great neighborhood with great schools on a big lot and you know, green belts and walking areas and you know, the location being close to the beach, etc. It's not. But you know, the stuff is so false the way it's presented. And you and I talked, you know, just to give you a little more firepower for this discussion. You and I talked about the self service revolution, if we'll call it, before we started the show today. And you know, so much of what we do today is self service. The service component has gone away. You know, we're doing everything online, we're doing it ourselves. We used to have a lot of this stuff done for us. We used to not pump our own gas. Now we do. You know, I hate these restaurants. I go to these, you know, modern kind of cool, trendy restaurants where you stand in line to wait to order your food and then they do bring the food to your table. Sometimes they don't even do that and they still expect a frickin tip. I'm like, you're not waiting on me.
20% tip.
Yeah, yeah, yeah. You know, when they turn that little iPad over and they're using square or whatever, you know, the Suggested tip is 20%, 25%. I mean, like I was in a taxi in Austin, Texas a few months back and the, the tip choices were 25 to 40% for this dirty, disgusting taxi? I mean, are you kidding me? Like I'm happy to tip, but not for self service. Okay, like, like the restaurant example is totally clear. I mean, you know, you know, so that is, that is inflation. You know, you used to always go to a restaurant, you always got waited on. Now you're not getting waited on. I mean, sometimes you are, obviously, but there's a lot more inflation that can't really be calculated or we don't really see or acknowledge.
Right, yeah. There's other, I think the best example, and this is true also of corporate employees, which is particularly true for anyone who, let's say is self employed and playing their own insurance to claim a low rate of inflation. When you look at what has been happening with health care premiums and deductibles is fantastically insulting.
Yeah, yeah. So the deductibles are higher, the premiums are higher. But Dan, not just that, the exclusions are higher. Okay. If you look at any insurance policy you have nowadays, because these insurance companies have been litigated and litigated, you know, they just exclude everything. Now you gotta buy all these separate policies nowadays, you know, like as a business owner, right. You know, your basic business owner's policy that used to cost, you know, very little money, used to cover all sorts of things, employment issues, you know, media liability, defamation, stuff like this. Now you gotta have a separate policy for everything, you know, and so that's another sign of inflation. Great point. You know, look at it, look at a typical investors, you know, homeowners insurance policy nowadays, you know, it's. Does it cover wind and hail? And you know it, they got a million exclusions. Another sign of inflation.
Good point. It's not, that's not included within the indexes.
Yeah, right, right. Okay. So your contention is there's a lot more inflation out there than we really see. And I, I'm going to agree with you. Right.
And you can look at that on multiple different levels. And that's part of it too is understanding there are quite explicitly multiple different levels. If you dig into it and you can explain a great deal there. But again, when you run the numbers over time, and this is very traditional, we have, you know, this goes back many centuries. If you have a heavily indebted country that controls the value of their own currency, they have influence over the value of their own currency. What do they do? They inflate. They have to. Now some people focus just on the extreme examples there and they look at hyperinflation, you know, Essentially defaulting to inflation or something like that. And there's certainly examples of that. But the much more common historical norm, particularly if you have a functioning economy, is to moderately increase the rate of inflation. And this is part of what I did in a recent analysis, and I was looking at what this does to standard of living in retirement, going out 10 years, 20 years, 30 years. And if I recall right, the numbers that I was generating were a 10 to 15% reduction 10 years out, 35%, 20 years out, 50%, 30 years out, just from a very, just that little more than 2% per year difference in the rate of inflation. But at the very same time that's going on, when you're doing what I'm doing, you're running the national numbers. Having a 2% higher rate of inflation is magic in terms of maintaining financial solvency.
Right, right. And what I always say, yeah, nothing is free. And Dan, what I always say is that, you know, you can pretty much bank on inflation because, you know, one thing I would say, never bet against the Fed. Align your interests with the most powerful forces the human race has ever known. Governments and central banks that have standing armies. Okay. And, and you know, it's a great business plan for governments. I mean, look, we can grouse all day about how bad fiscal and monetary policy is, but the fact is, if you're the government and, you know, the incumbents want to keep their power and give out goodies, they're not going to stop doing that. Just look at the incentives. Right. Follow, follow the incentives.
Oh, they're enormous. And along that.
Enormous. And, and so they're going to stay in office, they're going to keep spending and, you know, keep being profligate. And inflation is a fantastic business plan for governments, isn't it?
Oh, it is, it is. And you can tell that not just modeling the future, but looking back at the past. I have kind of a fun financial analysis that I just put out yesterday. I took a look at Warren Buffett's prediction from last month that we would be at Dow 1 million in 100 years. Dow 1 million or.
Wow. Wow.
I ran the numbers on it. You know, he realized when he said it that people think that was ridiculous. He goes, oh, no, this isn't ridiculous at all. Just run the numbers. Well, okay, took him up on his challenge and I ran the numbers and there is virtually no profit in going from Dow 23,000 to Dow 1 million in 100 years. If we have historically average rate of inflation.
You're just strictly keeping pace with inflation. You're just, just, you're just hedging, that's all.
Particularly on an after tax basis.
Wow.
Your annual return is four hundredths of 1% per year in inflation adjusted terms. If we go to Dow, 1 million, it's just amazing because 1 million in.
100 years and you'll, you haven't made any money. That's shocking. And Dan, you know what? I'm not a fan of his, although I do think he's what I call the master of the soundbite. He's been on the show before and that's Peter Schiff and he said it. You know, he just has these zingers that are great. I mean, but, you know, I think he's, you know, out of his mind and a lot of things. But one of the things he says is, he says if you look, you know, at the, at the market from the Great Depression from 1929 until about 2007 or eight, I believe, of course, these are important periods because we had huge events obviously in those times. Right. But, but what he says, the point is still very valid. He says, he says the Dow has kept pace with gold. Everything is an illusion created by inflation. The returns have been dividends. That's it. Nothing else.
I mean, the dividends. Dividends used to be major too.
Yeah. Right. And then now there's.
It used to be the dividends averaged about twice what government bond yields were.
Wow.
And that was by far the biggest source of long term investing in stocks. And that's been something I've been writing about for years, is that when everyone learned that stocks were the magic wealth creation machine, they bid the prices of stocks up so high that the dividend levels crashed and the number one long term source of wealth from the stock market is no longer there.
Yeah.
It's just amazing.
It really is. It really is amazing. Okay, so what does this mean? Let's kind of circle back to that main point. We've touched on it. But, you know, with your chart here, tell us what it means to individuals and investors and let's kind of sum that up.
Okay. If we look at the nation and you look at the numbers over time, for a nation that has a national debt that exceeds the size of their economy, which is true of the United States, if they're going to maintain financial solvency, they need a higher rate of inflation.
So. So expect it. Because it's coming.
Yes. I'm not saying it needs to be hyperinflation. I'm not saying it even needs to be 10% per year. 8% per year, but 5, 6% per year can really get the job done without getting people too terribly upset, particularly if it is reported through various measures as being less than that.
Right.
And what that means is that you have lower purchasing power for what wealth is created. Okay, now let's put this together. All right? What did we just go through? All else being equal, a heavily indebted nation needs lower interest rates. Simultaneously. All else being equal, a heavily indebted nation needs a higher rate of inflation. So what does that mean? You have less wealth created. You have. That wealth that is created has a lower purchasing power, you have a lower cash flow in retirement, and that cash flow in retirement has a lower purchasing power. It's the vice.
Right. So what do you do as an investor?
Well, the first thing is to understand what's happening here. And I shouldn't laugh because it's not fun. This is so important to so many people. But sure, I work with this stuff all day long. And it is, you know, it's crystal clear what's going on here, what's happening. And I think first and foremost, people need the knowledge to defend themselves if you can do it. And I've got a lot of materials on that. I'm a believer not just in income properties, but in income property asset liability management.
Okay, explain that, if you would. I mean, briefly, you're.
And again, we've had this discussion 2008.
I just want to bring people up to speed. Maybe they didn't listen to those old podcasts.
We'll return to it.
Yeah. Okay.
Yeah. You are a big fan of the income property, and I'm something much wonkier. I'm a big fan of the mortgage, not because I like debt, but because debt can do very unusual things for you when you're using asset liability management strategies that are simply not available to an ordinary person. Corporations use it all the time. Major investors use these things all the time, but individuals don't.
Yeah, very, very good point. So use that debt, and the debt deflates through time with inflation. And, you know, I always say, Dan, that most people think they made money on the real estate deal because the property appreciated in value. But largely that again, is an illusion created by inflation. Right. Because it usually just tracks it. It. It just tracks it. But when, but when you leverage it, then you multiply that. So if the inflation rate is 5% and you've got 80% leverage on that asset, then you, you have that multiplier effect that, that 5 to 1 ratio. Right. Which is fantastic. But also you have what I call inflation induced debt destruction. And I, I talk about your charts all the time on that that are just incredible. And you know, you have that, that chart that, you know, we famously talked about showing someone who bought the median price home in 1972 and then they kept it for 30 years, paid the mortgage all along, and they basically got paid to borrow the money. They got paid to live there. They not only lived there for free, they literally got paid to live in that house for three decades. Incredible, right?
Yeah. If you do look at the numbers on a national basis, over most long term holding periods, you do not come out ahead buying a residential home, particularly when you take into account the aging of the property. However, when you take into account the inflation driven destruction of the debt that's financing the property, you can come out hugely ahead. And that's really the source.
Yeah, yeah. And, and see, see, you gotta buy. Like, like I always say that the mortgage is, is. I, I'm more a fan of the mortgage than the property, so I really am. I, I agree with you completely. But in order to get that great mortgage, that long term fixed rate, low cost, arguably negative interest rate, I mean, arguably, depending on what the real inflation rate is, debt, you have to buy the property. So the property is sort of a symptom of getting this great mortgage debt, right?
Yep.
Yeah. Very interesting. Very interesting way to look at things. No question about it. Well, Dan, is there any question I didn't ask you today or anything else you want to share before we wrap it up?
No, I think we've had a good discussion. I've enjoyed it again, Jason.
Okay. Yeah, me too. Give out your website. Tell people where they can find out more about you.
Danielamerman.com and that's Ammerman is spelled A M E R M A N. Fantastic.
Danielamerman.com Dan, it's always great to have you on the show, so thank you for joining us again today.
Thank you, Jason. It was fun talking with you.
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