CW 945 FBF - Global Economic Structural Imbalances with Karl Denninger Author of 'Leverage' and 'The Market Ticker' Blog

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Welcome to the Creating Waltz Show. This is your host, Jason Hartman and this is episode number 285 talking to you on the day after the election as America is going to descend into a socialist utopia. And you know, I don't really believe that, folks. I don't believe socialism is utopia at all. But I've got Steve here with me and we wanted to talk about the strategy to win with Obama in a second Obama term and what you can do, what you should be doing, what you should be thinking about in terms of your investments and your outlook about things and just kind of some thoughts on what the right strategy is. Steve, welcome. How are you?

Well, I'm hard at work the day after the election here. You know, you have to be, and you can't be on autopilot anymore. You have to be actively engaged in dealing with the policies that have been in place and the policies that are no doubt coming down the pipe here.

Yeah, well, you know, Steve, you better be hard at work because as the saying goes, millions on welfare are depending on you. And Obama has been the biggest expander of the welfare state in American history. Millions more on welfare soon to be on welfare will be depending on you soon. One of the things on the Facebook last night that I made a comment on, which we'll talk about is, isn't it amazing how many people are on disability in today's world? I mean, here we are, we live in the information age where people aren't working on assembly lines dealing with heavy machinery that often. I mean, they are a little bit, but manufacturing has largely been gutted and there's all these disabled people. I just don't understand how that happened. Whereas years ago there were fewer of them, but just another ruse to get free handouts from the state. So before we dive too deeply into that one and we got a comment that it ties into later, but tell me what some of your thoughts are.

Well, that's true. And granted there are a fair amount of legitimately disabled people, but it does seem that whatever the entitlement is, it just seems to be growing like crazy. You look at the numbers and what the unfunded entitlements are out there and look at this fiscal cliff that's hanging over us that President Obama and the Republican Congress get to fight about once again. And I personally don't see any kind of agreement that they could come to. The only path forward is to continue to print more money. I mean, does anybody really see the cuts coming to these kinds of programs that need to be happening? I mean, nobody really wants to make the hard decisions here, whether it's Republican or Democrat, because it's just vastly unpopular with the electorate.

Yeah, no question about it. And you know, I'll say probably the best thing that relates to that is just what I posted last night at about 9:30 when I heard that Obama won the electoral vote. And that's this how? I mean, a candidate can't win on the concept of saying, be more responsible, expect less from government, do more yourself. I mean, that's not a winning strategy. The best political business plan ever was to just give out free stuff. And that's why politics always, over time, leans to the left. And I'll tell you, I've done lots and lots of charity work, you know, in my younger days. I don't do as much now. But you know, I have my private foundation and I do stuff there, but it's related to my interest, which is investing. And, and by the way, that's jasonhartmanfoundation.org you can look it up. And basically what that foundation does is when I sold my last company in 2005, I endowed it with about $200,000 of my own money. Never taken a donation. I don't take Don, so I'm not asking for one. I just put my own money into it and then I use it to further the foundation's mission, which is financial literacy for young adults. And I have a podcast related to it. So if you have a young adult that's maybe late high school early, you know, or in college or Post College, 20 something type, young adult. Have them listen to the Young wealth show. It's a free podcast. Okay. And you know, it's just kind of the same stuff we talk about here a little bit, but geared toward a younger audience and much more. Cool, but where was I going with that, Steve? Well, you know, I guess it was really the Facebook comment and I think this sums it up fairly well because I'm surprised that people are surprised now. I have very liberal friends that, you know, were rooting for Obama. I have conservative friends that were rooting for Romney. I have people that don't claim to have a party affiliation that were rooting for one side or the other. But at about 9:20 last night, I started getting all these text messages and emails and instant messages on Facebook of people saying, oh, this is terrible, complaining, complaining, complaining that Obama looks like the, you know, he was the projected winner. And I just didn't answer them all. And I just went to my Facebook page and I wrote on it and here's what I wrote. I go, hey, people, are you really surprised? It's nearly impossible to compete with vote buying parentheses giving people free stuff in exchange for power. And the parentheses, telling people that government will do less, they will get less isn't a popular idea. This is why government always gets larger, goes broke, and countries degrade into socialist disasters before an ugly revolution finally changes it back to a responsible society. Look at the bright side. My investment strategy works much better under a big spending, irresponsible government. It means lots more inflation that makes us rich and a poorer population, more renters. I don't like it philosophically, but it's very profitable. Remember that. I stopped being an optimist years ago. I'm just an opportunist. Join me. It's very liberating.

And you know, yeah, yeah, that's a very good one. And there's a very good post as well on there because I of course follow you on Facebook. But Alex, one of the commenters said, and I'll read this really quickly if you don't mind, he says, jason, I'm torn up over this. I disagree with the Obama policies in the welfare state that's being created. But at the end of the day, I'm thinking it's better for my 20 properties and 230 properties under management. Almost any house we rent out below $850, the tenant is getting some sort of benefit. It was not like this when I first got in the business. We had one girl who got on disability the day she turned 18 and she was still in high school with a K. So it goes back to what you said, opportunism. I mean, you can complain about it if you don't like what happened yesterday, although apparently about 51% of the population is just fine with it. But if you're a 49 percenter, then it's time to take advantage of it, because there is. Yeah, there's no bones about it. The entitlements are growing and growing and growing. And if that tax check that you're having to write every year keeps getting bigger as it has been and as it will continue to do so, not just in the actual figure, but in the value of the figure. I mean, the inflation that's happening and you still have to write that check, but these entitlements are growing. So, hey, a great way. Why not get some rental property where the tenants are on government assistance? Think of it as a tax refund every month.

That's absolutely the way I view it. And you know, Steve, it's interesting because our administration, the Obama administration, has the promise to be the great uniter. And I've just never seen the country more divided. Well, I wasn't here for the Civil War. I guess it was maybe more divided then, but people are really divided. So on the one side of the things, you know, the poor say the rich are getting away with murder. They're not paying enough tax. And I actually agree with that. I know a lot of you might be surprised, thinking, you know, I'm some sort of, like, elitist Obama detractor, okay, that thinks that. But I do think the rich are getting away with murder in a way, okay? I'm. I'm no supporter of the Wall street elite. I grew up poor, ok? I grew up poor with a single mother, okay? I lived in crappy areas all my life. This is why people are sort of surprised at how I seem sort of urbane and kind of yuppie ish. But I'm pretty tough, okay? I mean, I remember, you know, in junior high school, I would get mugged in the hallways all the time. Kid would stick a knife to me and say, hey, give me your money. They'd hit your pockets and say, hey, I need bus money, and steal it from you. I mean, those are the kind of neighborhoods I grew up in. I mean, they were not good. Har Vista, California. Venice, California. These were not good places, okay? And, and, and I don't mean Venice, the nice area along the beach that you see in the movies. I Mean Venice. I went to Venice High, which, you know, the movie Grease was filmed there. That was Rydell High. But also the movie American History X about gangs, was also filmed there. And that was more accurate, obviously. But I mean, I get it. I agree. The rich are kind of getting away with murder. It's. It's the middle class that's disappearing. And then on the other side, people are saying it's not fair that so many people are on disability on we welfare getting some sort of government entitlement. Look, folks, none of us are going to change the way this is. The country is losing its middle class, and I don't like it any more than you do. The rich are getting incredibly rich. And as the middle class disappears, when it won't completely disappear, but it's getting smaller, no one would argue that as it gets smaller, the question each of us have to face is which direction are we going to go? Are we going to get sucked down the vortex into the poor? And you know, unfortunately a lot of the middle class, that's happening to them. But the other question is, could we rise up not in a riot type of sense, but in a financial sense, could we exploit the things? The way you might get mad that someone's exploiting the system and cheating the system by saying they're on disability because they got a pain in their neck. Well, I've got lots of pains in my neck, but I'm not getting disability. Okay, so what I said to Alex, my reply was on that Facebook thread. Alex, I hear you. Obama is massively expanding the welfare state. Isn't it amazing how many people are on, quote, disability, unquote. Nowadays we have more disabled people than ever. An obvious vote buying, fraud scam. Just exploit the way things are by following my plan and laugh all the way to the bank. And you know, I hate to say that I don't want to be that way, folks, but I'm just telling you, that's what you got to do. You can only work in the system in which you find yourself, and that's the way it is. Okay, so I guess I'm kind of saying for people that don't like the results of the election, you know, deal with it. And how you gonna deal with it? You're gonna follow my plan. My plan actually works better. I'm not all upset about the election, you know, I mean, heck, I wanted Romney to win. I don't think that's any secret here on the, on the show. But I'm not bummed out at all. I mean, either way, I'm gonna profit from it. It's just how you do it. So denominate your liabilities in dollars in fake currency, and it'll devalue. It'll devalue the amount of your liability and then denominate your assets in things. Rental properties, little income properties. Those are things, those are commodities. Those don't go down in value. They're traded globally, and they're not indexed to any single currency. That plan works beautifully under Obama. So am I mad? Not in the least. Hey, you know, I got a little bit of a. I don't want to call it hate mail, but I got a bit of a mean. Well, it wasn't that mean, but, hey, Dion, you sent me this email the other day, okay? And you're calling me on the carpet here.

So, Steve, why don't you read that.

And then I'll respond to it.

Yes, we've got mail. And this one's good enough to read aloud on the show. It's from Dion. He says, Jason first, 99.44% of the show. I'd be curious to see how he measured that of the show and its guests are great. Your philosophy is helpful. However, you need to know this, because if you continue down this path of quaint snark and cynicism, you'll be doomed. And the ladies whom you've notably admitted you have a hard time with don't like it at all. So I'm sitting here listening to you on your last podcast whining about why you don't like Obama, and it's getting annoying. You even have the audacity to say he's somehow shrouded in secrecy. All of which you know full well is a load of crap. We conservatives are losing because we've lost our faith in what's right. Right. Pun intended. If you're for smaller government, then be about that and talk about that. If you're for less regulation in certain areas, then do the same. But please, please, please stop with the crap from the loony bin. There's nothing in Obama's past or present that we, the American people, have not seen before that does not amount to a hill of beans. The people elected this man, like it or not. And we have to be opportunistically or we have to opportunistically live our lives based on that reality. If the people elect Willard Mitt Romney, then we'll do the same. Both will bring advantage and hardship in many forms. Again, I beseech you not to indulge in the fanatical shortcomings of the people that are destroying the conservative movement. I think you're better than that. Or I could be wrong. I respect you as an American should. I admire your accomplishments and my Christian heart loves you. Sincerely, Dion. So, Jason, other than the fact that you apparently have no game with the ladies, what do you have to say about this?

All right, well, first of all, I have great game with the ladies. The problem is I want to find the right lady, okay? So there's a huge difference between being able to get a date with any one of them versus the right one of them. You know, I look at marriage as a pretty high risk proposition. I gotta be honest with you. I wouldn't go into a business deal that looked anything like a marriage because basically, you don't know what the deliverables are, okay? And you have no refunds, and you're risking everything you've got, okay? So you better believe I'm gonna make that decision carefully.

Yeah, there's no pro forma either.

Yeah, yeah.

No, there's no pro forma.

There's. And they misrepresent everything. You know, I've heard the horror stories a million times, but. But that. Not said I'm not cynical about it. I mean, I really do want to get married, and I really do want to have a family. I've certainly waited long enough, and I'm more than ready. I actually thought I'd get married in my late 20s, way back when. Anyway, things are the way they are. But I will agree with Dion that women tend to skew towards Obama. There's no question about that. They created this sort of fake war on women. And, you know, I think that's a red herring, but that notwithstanding. But. But when you say Dion about this, he's not shrouded in secrecy. I mean, I don't know. You must read totally different stuff than I do, but I think he's totally shrouded in secrecy. I mean, maybe you don't know about this. And I know Trump sort of viewed as a little bit of a strange dude. Donald Trump. But, you know, he offered. Do you know about this? That he offered, you know, may. Steve, do you know about this? He offered $5 million to Obama's favorite charity a few weeks ago. And there's a video. It was very popular on YouTube and around social media. He offered $5 million to Obama's favorite charity in Obama's name if he would provide his college records and all of this stuff. And he's like the most secret president that has ever happened in my lifetime. I mean, he is. I think his past is very much shrouded in secrecy. I don't know why you don't. I mean, you gotta agree with me on that. Steve, any thoughts on that one before I move on to the next point?

Well, yeah, certainly that. Because I think that's true. They tried to deflect that into the campaign by making a big deal about Mitt Romney's tax returns. Yet at the same time, nobody has seen President Obama's college transcripts or his admission papers or anything like that. And that's the funny thing is the logic of, well, every president, starting with your. Every candidate, starting with your father, Mr. Romney, has released their tax returns. Well, ironically enough, they have done the same with their college records and their transcripts. That's the funny thing is, though, in politics, everybody uses these arguments and you can always backend it and find a way to where it applies to them, too. But in any case, if somebody doesn't think that Obama has been shrouded in secrecy, I just don't really know what else to say. Hey, look, it speaks for itself.

Yeah, I think so, too. I mean, look at folks. Obama. His whole past is so weird, and his very brief political career is so weird. You just gotta know Obama's a puppet for somebody, for the New World Order.

Or the Bilderberg Group.

And I don't know if you listen to my holistic survival show where I interview some of these more paranoid people, conspiracy theorists and so forth, but let me tell you something, folks. I don't think these people are nuts. I mean, they've really got a lot of facts. The facts coincide when you go from one to the other, and they say a lot of things that make a lot of sense. I mean, there are certainly powerful elites like George Soros and the Rothschild family and the George Bush dynasty, both Bushes and the Bush family, you know, that really do kind of run the world beyond politics. And Obama just. I mean, the guy's got no resume, no experience, no nothing. You know, he was almost like an absent senator. And then he becomes president. I mean, he's the least experienced guy in the room at any given time. You know, it's just crazy. But so that. That kind of person makes a very good puppet. But look, I just want to tell you, Dion and everybody else, I'm going stop kind of talking about all this stuff because the election is over and I'm going to get much more back on strategy. It's the day after the election now, so that's why we're talking about it. So the show in the upcoming episodes is not going to be all about this stuff. Okay? We had an election yesterday. We got to talk about it. And then, you know, the next paragraph and the next point you make is about smaller government. Yes. I'm obviously for a small, smaller government. And I don't even want to say that I'm a Republican, I'm really a libertarian. I just think government should stop trying to legislate moral. I don't think it works. I have my views on it, but I don't think it's really government's business. Okay. I just don't think the government can be good at that. I know what I believe, but is it up to government to do that? I don't really think so. I don't think it's effective. I don't think it works. Okay. And certainly government should be smaller because the smaller government is, the more freedom people have. You know, the best way I saw this on a picket sign once, Steve, is, you know, the larger government, the smaller the citizen. And you know, that sums it up. That says everything right there. When the state or the government becomes larger. You listening? And Steve, you and I, we are all smaller. You can't both be big. Either the individual is big or the government is big. And this, other than the Magna Carta, this was really the first, the first organization of a society ever, America, where it was all about the individual. And, and it's a complet new idea 230 some odd years ago. So you want to have a smaller say in things, you want to have a smaller life, you want to give your power away, then vote for bigger government because that's exactly what will happen. As for the handout culture and the vote buying culture, Doug, who's been on the show before, he made a perfect comment on this Facebook thread. And by the way, folks, if you want to be friends with me on Facebook, of course we've got several business pages. There's, there's the platinum Properties Investor network page, which is, we're going to change the name of that to Jason hartman.com page. And then there's Jason Hartman author page. And you know, you could please go like all those on Facebook. There's a lot of good information. It's slightly different on each page, so you'll like those. But if you want to friend me on my personal page, a lot of you, you go and you send me a friend request. I don't know who you are and I'm not going to Accept you. Right now I'm looking at, I'm got hundreds of friend requests that I haven't accepted. So if we don't have a lot of mutual friends, you better write me a note and tell me who you are. Okay. And say, hey, I love the show.

Or something and I want to, you.

Know, I want to follow you and we can get you in there. But. But Doug said it perfectly. This is the fewest words I've ever heard. It all make sense. And he said this, Steve. He said, in a nation of children, Santa Claus wins.

Well, Christmas is early this year.

Yeah. That is so profound. Because children want things, children are needy. And you know, folks, to some extent, we've become children because we just want government to do stuff for us. And the candidate who gives out the gifts, who gives out the presents, that's Santa Claus. That's who's going to win. So kind of enough on this aspect of things. Other thoughts, Steve?

Well, agreed. You know, and Dion, in the letter that you got, is clearly, he's agreeing with most of the philosophy of the show. He has a particular problem with writing on President Obama. But it really is. It's the policies. And these tie directly into small government. I mean, point to me a time in history when government has ever voluntarily contracted itself and not grown. It just, it spreads and it spreads and it spreads. And, you know, if we go back in history, we look at, and this is my opinion, granted, but the Constitution is definitely trying to limit it. You have to actively try to limit it because it will grow and grow and grow if left unchecked. I mean, we recently had Mayor Bloomberg in New York tell the citizens what size of soft drinks they can buy. Yesterday on the ballot in California, the voters decided that they were going to tell the adult film industry what kinds of specific practices they had to use in their business. I won't get into the details, but you can definitely find out about that. I mean, it's telling everybody what they can do. And that is a symptom of unchecked government. And here's the moral hazard in that. You say you tell the government, well, I want people to not be able to do this or I want to force them to do that. Well, what happens when somebody you don't agree with is in power?

Yeah, exactly, exactly. It's like the legal system. You may be involved with someone who is on the opposing side and the judge strikes down one of their motions or gives them a bad deal. Hey, the next time that's you that gets the bad deal, there's a quote about that, sort of. And it says something like this. And I can't remember who said it, but I may disagree with what you say, but I will defend to the death your right to say it because the next time they'll be coming for you. That's the dangerous thing about, you know, like racism, for example. The reason you can't allow it to exist is because the next time you might be the target of it, your group might be the target of it. So these are very dangerous things. You know, when government gets big, it's. It's a cancer, you know, you gotta constantly keep it in check. So again, folks, we're not gonna make this. This is not a political show, but politics totally influence investment strategy. And if you're bugged that I talk about this stuff, and I know I've been talking about it more because of the election, and I'm going to talk about it a lot less because the election's over. But it's the whole context in which we live. It's like how a fish lives in water. We live in a sea, but the fish can't see the water. We live in a sea of laws and customs, and these laws, and those are political. And the tax code is the law, and that's political. And what you can do to your investments and how much you can raise the rent every year and how quickly you can evict a tenant, and you know, whether you can add an addition on to your investment property and what kind of permitting process you have to go through, all of this stuff is politics. And what kind of mortgage is available for your property, unfortunately, is also politics. And whether or not you can buy the property for less because the vendor that sells it to you is dictated by law, because the government controls Fannie Mae and Freddie Mac, basically, these pseudo governmental agencies, whether they can sell that property to you the day after they buy it or they have to wait 90 or 180 days affects their holding cost, and that holding cost affects the price which you pay as the investor, that's politics. If there's a environmental law that says you have to put low flow faucets and low consumption toilets in all your rental properties, that's politics. This is all political, folks. I've had people write me emails about stop talking about politics and stick to real estate.

Are you kidding?

It's the same thing. I mean, give me a break. So anyway, I don't know. Is that enough of a rant?

Yeah, I think that's as.

All right, I'm gonna Shut up.

A rant as we're gonna do for a while. The election's over. We all have a good idea for what kinds of policies and things are coming down the pipe and we can structure our investments accordingly. This is gon to come up from time to time, but definitely the heat and the frothiness of the election is over and it's time to get to work.

Yeah. So the time to get to work. Now. What do you do as an investor? Well, you do pretty much. My strategy hasn't changed. It didn't change at all. I just say double down. In fact, one of the comments on that Facebook thread was, it's time to double down. And I couldn't agree more. One of my followers wrote that because. Because now you know that probably in a second term, I mean, you know, there's no fear of I have to get reelected. It's only about legacy. And it's pretty clear that our president likes the European style socialism. So what that means is a poorer population and that means more renters and it means more government aid. And the way you as an investor work in that environment is you'll probably see more section 8. And you know, if you, if you're bothered that you pay too much in taxes, hey, this is how you get some of your taxes back. And by the way, hey, Steve, I got to tell everybody this. I love our ridiculously, disgustingly complicated tax code. I think it's completely unfair, yet I am totally benefiting from it. Just like an opportunist. You want to know how much tax I paid? I filed my tax return. I don't think I mentioned this on the show yet, but I filed my tax return, my personal return, on the last day of the extension, which I believe was October 17th, or maybe it was the 18th this year, but it was the very last day. You know, got to get to the post office before 5pm to get that postmark. Guess how much tax I paid. You're not going to believe this.

I don't know how much.

I filed tax returns in a few different states where I have properties. Some states don't require that you file, some do. I don't really understand that, but. And certainly in California. And I filed my federal return and I filed for the first time in Arizona. Arizona, okay. Or at least the first time as a resident. Here, I paid the state of Arizona $92, and I get a rebate from the federal government of about $8,400, which is coming to me in the mail. And I just like a month Ago got a rebate of a lot, lot, lot more than that. I don't know if I want to say the amount on the show, but I tell you, with these properties, and it's not just the properties, it's business. So those are the two things that rich dad explained so well, Robert Kiyosaki, is that when you own a business, you earn your money and you spend your money and you get to spend a lot of it before you pay the tax man. Because a lot of your expenses for life can be run through your business. I mean, that's no secret. That's nothing illegal. You got to make sure they're valid expenses. But you know, can your business pay for your cell phone? Can it pay for a lot of your automobile, for a lot of yourself, your gas, you know, of course it can. Okay. A lot of these things, a lot of meals and entertainment can be business expenses. So you pay the tax man last when you own a business, and properties are a business too, because you know, a lot of your properties, you can write off a lot of these expenses before so you can spend your money pre tax. Meaning, Meaning you have more money to spend. Whereas employees, they get prepared earned because they, they earn their money, then they pay their taxes and then they get to spend what's left over. Entrepreneurs get to spend before they see the tax man. And with owning businesses and with depreciating your properties, the best write off on the planet is depreciation. And if you can do it, my sincere advice is to become a real estate professional. The greatest gift from God that has ever existed in the tax code, as fast as you can mean you got to acquire some properties to do that, you got to have. There's no number, by the way, but in order to qualify for those hours of 500 material participation and 750 total hours per year and all the other things you got to qualify for, We've interviewed experts on the show. We'll have them at the Meet the Masters event, which, by the way, is almost sold out. Can you believe it? Yeah, it's not until January 18th and it's almost sold out. So if you want to come to that event, if you want to attend, go to jasonartman.com click on Event Events and register quickly. It's almost over. I bet that'll be sold out here over the next couple of episodes.

Not too much time.

I think there's, I think we've got probably about 16 seats left. I mean, and I even emailed the hotel yesterday. The Hyatt Regency in Irvine asking if we could get a larger room. And they said we don't have any larger rooms. All of our space is booked that weekend. This is it. And that beautiful conference center with the stadium seating and the big plush leather chairs that are on wheels. So you're super comfortable. It, it maxes out. And we, I think we got about 16 seats left for Masters, so register quickly. Jasonartman.com what was I saying before that? Gosh, this is awful. I'm getting, I'm having senior moments too often, Steve.

Yeah, you're having a senior moment. But definitely we were talking about the taking advantage and minimizing the taxes and how as an entrepreneur you spend before the tax man gets you.

Yeah. And, and depreciation on your real estate. So to qualify for those number of hours, you probably need to get at least 10 properties or so under your belt because the IRS is never going to believe 500 and 750 hours. There are two, two hoops there. Okay, so if you don't have 10 properties yet and you're listening to this, get yourself to that 10 property point. Folks, we've had a lot of people that have started out with us and they had zero properties. They didn't even own their own house, which might have been better for them. Actually. You've heard me talk about that. But it all depends on you and your financial situation. But in a couple of months you can have 10 properties. In a couple of years you have 10 properties. Just get started. And over the course of a few years, you know, you can get 100 properties. I mean, we've got clients now buying dozens and dozens and dozens of properties from us. Every month they're getting more properties. I mean, for, for what is going on politically right now. I really think, think that is the best thing to do because when you denominate, when you get a bunch of those mortgages, you're denominating your liabilities and dollars and inflation is destroying the amount of money you owe. It's destroying your debt. It's paying off your debt for you. And you control commodities that have universal need and you get huge tax benefits. And the debt that you accumulate with those commodities you outsource to a tenant. This is the ultimate and equation. Definitely, definitely stock up on properties, double down. The election last night confirmed that that is what you need to do. Anyway, let's wrap it up. Steve, anything else to say on those points or any other points?

Couldn't have said it better. Yeah, this is time. You wouldn't believe the interest that I have received today in acquiring properties. It's almost like we got some big news last night or something.

Yeah. Yeah. Well, that's interesting. See, I haven't heard that from any of the investors counselors but you because I haven't talked to any of the other ones today. So I got to see what, you know, what the rest of our team is saying. But yeah, business is strong and this is, this is a great time to be buying up properties like crazy. Remember, you're listening to Flashback Friday. Our new episodes are published every Monday and Wednesday. Let's go to our guest here. We will be back with today's guest and I don't know what guests we have coming up because we pre record all the comments. Guest but whatever guest it is, we'll be back with our very interesting guest in just about 60 seconds.

Here's your chance to catch up on all of those creating wealth shows that you've missed. There's a three book set with shows one through 60, all digital download. You save $94 by buying this three book set. Go ahead and get these advanced strategies for wealth creation. For more details go to jason hartman.com.

My pleasure to welcome Carl Denninger to the show. He is the author of a book called Leverage and also a well known blog called the Market Ticker. He's also known as the Ticker guy and it's a great pleasure to have him coming to us today from I believe, Florida. Right, Carl, how are you?

I'm doing great. Yes, Niceville, Florida. And there really is a town called Niceville, believe it or not.

Well, that must be a very, very nice place. But hey, the financial collapse and the gamesmanship on Wall street wasn't so nice. Tell us a little bit about the book Leverage and your background and how.

You came to write it.

Well, I'm a former Internet entrepreneur. I ran one of the first public Internet companies in the city of Chicago in the 1990s. In fact, we were second by a day. So it's probably fair to say we were first because the other guy went bankrupt and at one point there were a hundred competitors. So it wasn't like we had the market to ourselves by any stretch of the imagination. But during the 1990s, I saw the same sort of fraud that happened with the housing market and the banking system occur in the tech sector. And it was essentially of the same sort of magnitude and the same basic design. In other words, we will sell so many billions of dollars worth of widgets or pet food or whatever the fad was of the moment. And then companies would go into the market and they would sell these securities to investors, collect all of these funds and essentially spend it on bonuses and handouts and things like this. And then when they got in trouble, bubble, oops, sorry, all the money's gone. Well, when the tech market crashed, it was a couple of years after I'd gotten out. I sold the company and actually gave a couple of interviews. You can still find one that Ziff Davis published that basically said, here it comes. We got into the whole situation there in the 2000s. Greenspan made a concerted attempt to try to re inflate the bubble and of course you can't control where the money goes. Went into how. So in the early part of 07, we had this dislocation in the stock market that initiated in Asia. I don't know how many listeners remember it, but it was the first kind of rupture in the stock market over the previous four years. And when that happened, I started looking for the why? Because anytime you see a market sell off by 5,6% in an evening without any particular apparent cause, there's got to be something going on that you're not, you're just not paying attention. And what I found was some very disturbing things in the financial system. Not long after that, Washington Mutual reported its first quarter earnings for 2007. And it was paying out dividends for money that they didn't actually have. They were basically taking the negative amortization interest that had built up on people's loans, counting that as income, which is legal, but then they were paying that out in dividends. So not only was it on the balance sheet, it was actually walking out the door. And this exceeded the amount of cash that the company was taking in. Well, that sort of a thing can't go on for very long. That's the same kind of deal that was being done during the tech bubble. And it was going to lead to the same kind of outcome. So I decided after seeing several of my friends bankrupted during the 2000 crash, that I wasn't going to let that happen without there being some kind of warning put out there. And I started the market ticker as my means of communicating what I saw going on in the market. And things just kind of snowballed from the there. We got through 2007, we had the peak in the stock market in the latter part of the year. And then of course in 2008 we let off with Bear Stearns and then Lehman Brothers and Fannie and Freddie and all the other fun and since then I've been chronicling the supposed alleged recovery and what's really going on within both the capital markets and within the broader economic system, along with the political implications. And it's turned into pretty much a full time job. Leverage was an attempt to condense all of that some 6,000 plus articles that have been written on the ticker in the last five years into something that a person without a lot of financial background can pick up off the street, read as a nice easy read over a couple of evenings and understand how we got where we are today. But more importantly, we put forward a plan there to actually address these structural imbalances and fix it. Because jumping up and down with your arms in the air screaming that the world is about to end is all fine and well and you see a lot of the chronology kind of books that are out there in the marketplace, but what you don't see is books that put together a plan for actually getting the system back into shape where it can serve the people on a long term sustainable basis and return us to something that approaches prosperity, which is really the goal is to have an economic system for everybody.

Yeah, well, absolutely. So first of all, let's talk a little bit about the problem. I mean, of course it's been discussed chronicled everywhere, but I just don't want to miss the opportunity to just chat about a few things of the problem. So you called the book leverage. And what specifically does leverage refer to? Does it refer to reselling one loan in 30 different pools? Does it refer to the 30:something to 1 leverage ratios that these investments and banks had? Talk a little bit about the problem side, if you would.

Sure. The basic premise of the book is that we have not had real economic growth, that is organic economic growth for the last 30 years. And that's probably going to shock a lot of your listeners, but this is the functional reality of what's been going on in the economy pretty much since 1980 forward. And what I mean by that is that we are simply borrowing more and more money to continue to add leverage, that is debt to the system. And so it appears that we are having strong economic growth during certain parts of the cycle. But in fact what's actually occurring is you're debasing the capital that is present in the system during that entire process. This is how we've managed to run trade deficits the way that we have over the last 30 years with various countries of Mexico, China, etc. It's how we've managed to offshore our jobs and not have These problems immediately correct themselves. And essentially it's also the reason that our federal government has been able to run huge deficits. During the Bush years, It was about $600 billion a year. During Obama's presidency, it's been over a trillion. And in excess, all but this last year of 10% of gross domestic product. What's really happening when you do this sort of thing is you are adding additional credit into the system, but not capital. And so it essentially becomes a geometric series. And this is one of the underlying themes in the book, is that all geometric series are unsustainable in the intermediate and longer term. You can use them in the short term, but they are absolutely unsustainable. And in fact, when they are put forward as public policy, they are frauds. And so when you have somebody say, I am going to maintain Medicare, for example, and medical spending by the federal government from 1982 last year has grown at an average compounded rate of 9.3%. What you are saying is that you are going to be able to continue to do that on a forward basis forever. Bankers have this very simple rule called the Rule 72 that approximates the doubling time given a particular growth rate. So if you take that and you divide it into 72, you find that about every seven years and change, you double the actual amount of money that is spent. Well, if we spent, and by the way, we went from $53 billion in 1980 by the federal government on medical spending to $850 billion last year, that's how that number comes out. So if you look at that and you say, well, that's what it is and that's what's going to be, then we will spend more than $3 trillion 15 years from now at the federal level alone on medical care, while the entire Federal budget is 3.8. So that is clearly not going to happen. All those people who are out there, politicians telling you that if you're 50 years or older, you're not going to see your Medicare and Medicaid be tampered with. They're lying. And the reason is your life expectancy, if you're 50 today, is about 35 years, roughly to 85, assuming you live to be 80, the federal government would have to spend $14 trillion a year on medical care before you die.

And that's more than the gdp.

So it's like it's approximately gdp, but it is three times the current size of the federal budget.

Yeah, right, right. But it's about a trillion more than gdp. So, you know What's a trillion here or there, right?

Well, the point of course is that you can never spend more than 100% on anything, right?

Right, yeah, of course. Unless you print the money and have the reserve currency.

But that doesn't work either. This is one of the other things that I try to focus on, both in my writings on the blog and also in the book, is that take a look at what's been going on here for the last four years. We've spent approximately 10% between 8 and 12 for the last four years in deficit by the government. Let us take the economy and abstract it. Just a moment. Let us say that there are 10,000 units of GDP being produced. We'll take the word dollars out of it. Any unit of GDP could be a certain number of gallons of gasoline or bushels of wheat or it doesn't matter what it is, but it's a constant of some sort. And then There are also 10,000 units of currency and credit in the system. So one buys one, you have one unit of currency and credit, you buy one unit of output. Everything's in balance here. And this is just for the purposes of illustration, but I think your listeners will understand it once I explain it this way. So now the government comes along and says I'm going to emit another thousand 10% units of credit that I'm going to borrow into the system. And this will help people because they don't have enough money, they're unemployed, they are, you know, they're disabled, whatever the justification is from a political perspective. So what's actually happened here? Well, what's happened is that the cost of a unit of output has just gone up by 10%. Right. So now you need 1.1 units of currency or credit to buy the same unit of output that you needed to buy before. And we would say, well, that's inflation. Well, in reality it's a little more simple than that. It's a tax. Functionally it's exactly identical to the IRS guy showing up at your door and saying give me 10% of everything you have.

Well, the inflation is the insidious hidden tax. Of course it steals money right out of your wallet without you sending anybody a check.

Well, exactly. But here's where people miss the understanding of how this works. We live in a world in which we do not have hard backed money anymore. That's been true for a long time. So here is the fundamental problem that goes along with a fiat currency world where you do not have hardback money. And that is that every single time that you emit credit into the system. Because remember, the Visa card in your wallet spends exactly the same way as does the hundred dollar bill, as does the roll of court. Of those, only one is not debt backed, and that's a roll of quarters. The rest of them are represented by a credit on the other side of somebody's balance sheet. So if we look at the Fed Z1, which tells us where all the credit is in the economy, who holds it and what it is, that is the monetary base, not the amount of credit or currency that is being held. M1, M2, M3, M Prime, any of these M's, forget that's a lie. The currency base is all of the credit and currency that's in the system. And since all currency must be backed by a dollar of debt somewhere, you can just ignore that, that's a wash. Therefore, all we've got to do is take a look at the Z1 and sum everything up. When you do that and look at the growth there and the growth of incomes in nominal dollar terms, and you base one chart off the other, you take those two numbers and you run a subtraction on them, you find something very interesting. I took one thing out of that debt number and that is the financial credit between financial firms. And the reason is that that never gets into the economy. That is just banks handing money back and forth between each other to claim they have collateral against whatever they're doing, credit default swaps, whatever games they're playing. But everything else ends up in the economy. A mortgage ends up in the economy. A C and I loan, commercial industrial loans ends up in the economy. Consumer credit ends up in the economy. Student loans, of course, go to college, car loans, everything else. When you look at this, what you'll see is that from 1953 until approximately 1980, we had real income growth that went up and down. We had recessions, we had bad times. But in general, real income growth in the economy was somewhere between 4 and 10% annually, with some periods lower, some periods higher, but averaged right around 5ish over that entire period. Now that's real income growth. That's in real purchasing power terms. That's an incredibly sound, vibrant economy. And that's what we had in the 1960s and 1970s, all up until 1980. Then we had the oil shocks, followed by the deep recession in 1984, 1985, and during that time, real incomes were decreasing at approximately 10% annualized. From that point forward, we played Ponzi. Nobody has made any real income progress in terms of Debt on an adjusted basis from about 1986 on forward. And in the 2000s, after the tech crash, we simply goaded people into borrowing more and more against houses, against this, against their 401s, against everything they could get their hands on. And just before the world fell apart in 2007 and into 2008, we actually had, during the depth of the crash, we actually had a negative 20% annualized income number that was put up on, quote, quarter.

Unbelievable.

That's unreal. Now here's the really bad news. It has never gone positive since the third quarter, 2000, including today. And the worst news is that as of the last Z1 update that was just out a few days ago, we are now in the area. In the last quarter, we're at an annualized rate of about negative 3. Okay, so if you're wondering why the middle class is getting destroyed and has been over the last 10 years, there's your answer. It's right there in one chart.

Sure, sure. And then you take. And to make matters worse, look at the entitlement obligations coming up over the next 10, 20 years. Look at the massive student loan debt crisis. It should be called a crisis because the only debt that's not dischargeable in bankruptcy is student loans. And that just topped a trillion dollars with a T. I mean, this is insanity. But here's the thing. This is to some extent hard to see. And let me just tell you that I had Bill Waddle on the show. I don't know if you're familiar with his work, but you know, he did an excellent video that was very viral on the Internet last year that was about how the poor are really much better off than they've ever been. And the poor are actually, you know, well, kind of rich in a way. And you look around and you just experience things in your own life and we all do. And even though, you know, Americans haven't had a raise in decades, it seems like they're living better in so many ways. Now, of course, these are, this is really what hedonic adjustments are all about. Certainly, you know, we've all got iPhones nowadays and we've imported deflation from China and other foreign countries and Mexico for the actual on site labor component of it, you know, and I think this is hidden a lot of the real inflation that has occurred and it's also created a lot of unemployment, obviously. But you know, it's just hard to like come to grips with what is really going on because we've got all these outside forces acting upon us if it were the 1950s, and, you know, we were a much more isolationist country before globalization, it would be easy to see that people are worse off, you know, and then if we didn't have all this technological advancement at the same time, it would also be easy to see that. But it's a little. It's just a little more deceptive nowadays or a lot more deceptive.

Oh, I don't know. I don't know that that's necessarily the case. It's very much in your face. It's just that nobody wants to actually face it. Yeah. Here's where the, where some of the problems come from. Let's talk for a moment about the whole labor parity issue and the problems with China and Mexico. We have covered up what we've done there. If you take two countries and one runs a trade deficit with the other, and neither is tampering with the currency. They're both free floating currencies. So we have a free floating currency regime. So we have fiat money like we have now. But both nations, you know, the trade balance floats based upon what things buy in the two different countries. Now I run a trade deficit with this other country here in the United States. States. What happens? My capital goes out of my country to the other country to pay for the goods that I import. Right. Because I got to pay for them. So the money goes out of my country into the other. This makes their currency much stronger than ours. And as that currency becomes stronger, the price of the products and services that they export back to us goes up. Well, that chokes off this imbalance rather quickly. And it happens completely automatically. You don't have to do anything to stop it. It's just, just the way it is because of the flow of capital that goes over into the. As you drain capital out of one place, you get weaker. Okay. There's nothing magical about this. All right, so why did it happen and why does it continue? And the answer is, because what the federal government did, and the Federal Reserve is involved in this as well, because without them, it can't happen. What the federal government did was issue credit into the economy to make up the whole in capital. So what you've done is debase the capital of your nation in order to maintain the illusion that you have cheaper things at Walmart. Okay.

No question. Yeah, I agree.

Couldn't agree. Right.

The truth, though, is that you haven't done anything of the kind. What you've done is destroy the purchasing power and the productive power of your society by taking all the capital and giving it to someone else.

Listen, you are right. I agree with you, however, is show us that real destruction in purchasing power. I say all the time on the show when they cite these statistics about how since World War II the average home in America has, has more than doubled in size. And, and, and they try to make it seem like people are living better. But post World War II people didn't have the kind of debt they do now. Obviously. But you know, let's even forget the debt. They're living in much more densely packed environments. I mean, maybe the home was 900,000,000 square feet when a young baby boomer bought it Post World War II, but the lot size was a quarter acre. Now you're living in a stacked condo. It may be larger inside, but certainly we're, you know, we're crammed together a lot more. Everybody's car is better than it was before. Everybody's computer is better. Everybody's phone is better. And listen, I don't think, although hedonic adjustments are way logical. I mean, I can see how they can argue them, but I think what hedonics do is they tell us that we are not entitled to progress. The consumer price index gets the benefit of progress rather than the actual people. Things should get better. Isn't that what progress is called?

Yeah, yeah. But let's see. Here's one of the things that I think a lot of people miss. And this is one of the other central points that I try to hit on in the book and also have in my column a number of times. And it seems to go over people's heads. It doesn't matter how many times I say it. It doesn't seem to make any sense until you think about it from a standpoint of where we've come from and where we are today. Okay, we all know about all the explosion of technology, right? You can carry around in your hand and you probably do a computer that is more powerful than a mainframe was.

35 years ago and more powerful than all of what NASA used in 1969 to put us on the moon.

What went on? They actually had to design a specialized computer to go into that capsule because they had to meet the weight limits in order to get it up there. Okay. Today a three dollar calculator from Walmart has more computational capability than that computer did.

Incredible.

Yeah, it really is. But now here's the thing. Consider this. The natural state of all economies over time is deflation. And the reason is exactly what you just cited and what I just cited. We have this Thing called productivity. Humans are intelligent. We therefore come up with ways to get more by doing less. So we originally went out, we planted seeds in the ground, or we gathered and hunted, okay? We went out and shot animals with, with makeshift bows. Then we figured out how to build this thing called a gun. And all of a sudden it got easier to take that deer that you wanted to eat. Then we came up with plows and we hitched mules and other animals to it. And all of a sudden we multiplied our force again. Eventually we built steam machines to be able to do some of this. And then internal combustion engines and tractors and automobiles and trucks, various sorts of machines. Now we've branched out into electronics. It used to be that if you wanted to get a message across the country, you had to write it on a piece of paper and give it to a rider on horseback. Okay? Now it happens in, you know, in literal milliseconds across the nation.

Carl, what you just said was extremely interesting and I just want to point this out because I've got a pretty, pretty smart group of listeners here, okay? Because we talk about these issues all the time on our episodes. And what you said is, you said the natural state of every, I think society or maybe economy is deflationary.

And you are right.

Now, isn't it interesting that that is true because things get better because of progress? Progress is deflationary. I think that would be a fair statement. We both agree on progress is deflationary. But isn't it interesting that at the very same time, if you look throughout history, every paper currency has ultimately diminished in value to its intrinsic value. Paper and ink, nothing.

Well, but the reason is because what ultimately happens is that you get people in the financial realm. Remember, the con of creating alleged value that really doesn't exist out of thin air goes all the way back to the days of Hammurabi. Our banksters didn't just invent this themselves. They're not the smartest people on the planet. This con goes back to the days of fractional receipts for gold during the time of the money chambers in Hammurabi. And it's the same scam. But what happens invariably, and this happened in Rome, it's happening here today, is that governments get this idea in their head that they can just a little bit of inflation, it'll be okay. But what they don't realize is that even if they were to maintain stable price prices, that they would still be robbing the public because the productivity supposed to belong to you. You're the one who became more productive you're the one who came up with the better design for the machine or the, you know, the thresher or the combine or whatever it was. You're the one that created that. The government didn't create that. You made it. All right? Unlike Barack Obama, you know, you didn't. You didn't make this. Oh, yes, I did. Yeah, you didn't build that. Oh, yes, I did. But what the government does in incessant is with the help of a certain group of people who we nowadays call bankers, they turn around and they sell you on this idea that this slow, natural increase in prices is the way of the world and that's the way things are supposed to be. It has been a lie since the first man walked upright on two feet, and it's still a lie. And by the way, it is also illegal. It is black letter L in the Federal Reserve act that the Federal Reserve shall regulate currency and credit. They get it right. They understand. The actual law says monetary and credit instruments, okay? So they recognize that the two are equivalent so as to produce maximum sustainable employment, stable prices, and moderate long term interest rates.

They invent things for this called the Phillips Curve.

Yeah, but, but the actual. But the actual statute says stable prices, okay? Now, Bernanke just gave a speech a couple of days ago where he, he used that infamous, you know, low and stable inflation is what he claims his mandate is. That's not what the law says. The problem with the law is there is no or else in there. Consider what would happen if you had a law that said, thou shalt not rob banks, period. Okay? No or else go to jail for 20 years. Okay? There'd be a line of masked men out the door of every bank in town. Well, this is why it's happening. It is our responsibility as citizens, our responsibility to sit down and tell our politicians. The natural state of all economies is that productivity improvement means that you can buy more. That improvement in productivity is ours. It's not yours to steal. It's ours. But furthermore, not only can you not steal that anymore, you can't steal even more than that by continuing this charade. And you may not spend that which you cannot tax. That which we won't pay for, you can't spend, period, because that's that back door into your wallet. And the thing is, is that when you get down to it, between that and the violation of what I call $1 of capital, if we were to impose that on the financial system and on banks, the entire problem would go away overnight. Now, of course, all the Excess leverage would come out of the system overnight too, which would have a really interesting effect on asset prices and things like this. But after that adjustment was taken, it would be.

We'd live in a real sound money world.

Well, we'd recover. See, there's the thing is people want to talk about things like Medicare and Medicaid. Okay. Are the huge budgetary gotchas, Right. You can't fix Medicare and Medicaid. You have to fix the underlying medical system. Since the 1980s when Ronald Reagan passed EMTALA, which is a law that says that if you're having a heart attack, they have to treat you at the closest hospital whether you have any money or not. Since that time, we have put into the law monopoly level protections for every area of the medical system. System. You cannot go into Canada with your car, buy a trunk full of Viagra, $2 a pill, come back into the United States and sell it for two and a quarter. When it sells at the Corner Drugstore for 20 bucks. If you try it, it's a felony, you go to prison. That is a monopoly law protection that is specific to the medical industry. If I tried to collude with other people to do that as an Internet company when I ran my isp, I'd still be in jail, so. And that's not the only place it happens. In 30 some states, there are laws called con laws. Believe it or not, they actually call them con laws. And boy are they well named. The actual acronym stands for certificate of need, which means in order to open a hospital, an MRI center, or anything like this, you have to have a license that shows that there is a need in that particular community. And guess who sits on a licensing board? All the people that own the current mri.

Yeah, how can we.

How convenient. So we have consider what really goes on here. Okay? I have a flat screen panel in my bedroom, nice LCD TV, and I have four monitors on my computer, all of them LCD flat panels. I paid about $250 a piece for the ones that I have on my computer. Five years ago, those things were $2,000 apiece. Five years ago, a cell phone that could do what mine does was Unobtainium at any price.

Yeah, we all agree with, but why.

Isn'T the cost of an MRI scan two bucks?

Because there's a monopoly.

That's right. But see, this is where the problem is.

There's a government sanctioned, maybe not government induced, but a government sanctioned shortage and.

There is a monopoly. And not only that, they're able to hide the cost of These things. Through all the cost shifting that goes on, Juanita, the illegal Mexican immigrant can come into this country seven months pregnant, has never had a medical test in her life, has never had any prenatal care. She's drug addicted and alcohol dependent. She goes into labor five minutes after she walks across the border, she gives birth. Her child requires $2 million worth of NICU treatment because otherwise it will die. Guess who gets to pay that bill? You do. By force, when your appendix needs to come out. No other country in the world allows this.

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Well, there are actually stories of Mexican women waiting, literally waiting for their water to break and then running across the border to have the anchor baby. It's well documented. You can read about them in major magazines. I've read them before myself. It's incredible. I mean, this is just incredible. You know, it's. You couldn't write fiction like this, what goes on in our world today, but the government has sold, sold out to a bunch of special interests. And that's what we're going to have. We're going to have all these perverted motivations and we're going to have all this pandering. And that's just the way it is. What do we do about it, though? That's the question.

Well, we, the people of this country have to decide between two outcomes. And we need to make a decision fairly soon because we're going to get the second outcome if we don't. You know, there's a, there's a. If you listen to Rush, old rock and roll, there's a famous lyric. If you choose not to decide, you.

Still have made a choice.

Yeah.

From the song Free Will, a great song.

That's right. And that's one of my favorite sayings. The options that we have are to either force the financial industry to stop writing hot checks, basically impose what I call $1 of capital, which is essentially a standard that says that for each dollar of loan that you make, you must have a dollar of actual capital behind you. Now it can be in the form of a mark to mark market daily asset. In other words, there's nothing illegitimate about taking an asset and impounding it in exchange for current liquidity. There's nothing wrong with doing this. If you don't pay, the asset gets seized, it's not there anymore. But there is something criminally wrong with creating credit in the system, driving inflation, driving asset bubbles when there is nothing behind it whatsoever. So what you do is you say to financial institutions, you either have to have an asset that's impounded during the entire time it's opened, and by the way, we're going to mark those things to the market nightly, or the alternative is you have to raise capital either from equity holders, bondholders or retained earnings. You have to have actual capital behind every single loan you write. This stops all the gains with margin and all the other nonsense that goes on in the financial system. It stops it in a day. This would take the Z1 by the way, and take the green bar from my chart, which is interfinancial credit and class it to essentially zero in an after. The ripples through the financial system would be cataclysmic, but short lived. You have to break the monopoly protections. Essentially what we have to accept is. And then at the same time we have to talk to our government and say what we want provided in services today, we must pay in current taxes, which means an awful lot of what the government does today has to go away. Now. The economy would contract dramatically. Back in 2000, I ran a calculation on this at the time of the crash in the stock market market. I said, what would be the actual, you know, the actual contraction if we just let this thing burn itself out? And the number I came up with is about 78% of GDP, which would have been a horrific recession, but not a depression. In 2007. I ran the same calculations using the same set assumptions and the same numbers, but pulled forward back those seven more years of data and it was then 10%. And then as we got into 2007, 2008 suddenly went to 20%. Well, if we extrapolate that out with the $5 trillion that the federal government has put on the sheet since then, we now find that it's somewhere between 35 and 40, which sounds impossible to sustain, but in point of fact, it's not. If you look at 19, 20, 21, we had an insanely sharp deflationary collapse that lasted such a short period of time that they don't even call it a depression. But in terms of time adjusted rate of change in the producer price index, it's the largest move downward that's ever been recorded in the history of the United States States. Eighteen months later, the economy was back to full employment. Everybody who should have gone bankrupt did. And as a result, the economy cleared itself out. Now, there was a huge adjustment downward in asset prices, as you can imagine. But then following that, we put up a 60% plus increase in industrial production over 12 months. So once these problems come out of the economy, once all of these crazy things that we currently do that make absolutely no sense, once they go away, there's all this capital laying around, people will deploy because hey, guess what? One person's distress and disaster is another man's fire. Sale I did this during the 1990s when I set up my Internet company. I took advantage of the opportunity to buy hardware at ridiculous discounts from people who were going broke. I got 8,300 square feet of office space in downtown Chicago for $8 a square foot.

We should say annualized. It depends what state you're in as to how that's calculated. But yeah. So it was less than a buck a square foot per month. That's a phenomenal deal, especially in downtown Chicago. That normally probably be $4 a month.

The going rate in downtown Chicago at the time was 40 per year. Per year, Right, right. But the reason I got that price was because prudential plaque needed to fill the space. Now, due to a potential violation of their lending covenants, and I happen to have cash and was willing to put it on the table and secure the space, not only rent it, but prove that I could pay. So I slapped a big check down on the table and we caught a deal that nobody else could get, right? Well, the same thing happens here. You get these kinds of dislocations. But look, the guy with the 10 CNC machines that you paid half a million dollars for, he goes out of business, those things get sold for $5,000. Well, now what's your cost of producing high quality auto and aircraft parts when you only had to pay five grand for the machines?

Sure, it's lower. So it creates a whole slew of startups. That's why in every big economic downturn, there's you know, it's just a big transfer of wealth that occurs. Those who see the opportunity, have confidence to take it and are prepared for it can seize opportunities. And those who aren't prepared and have frittered their future away, they can't seize those opportunities. And maybe that's the reason the rich get richer. I think it's certainly a plausible reason for it, but yeah, no question about it. So it's very beneficial to consumers in many ways to have those bankruptcies and then new providers can pop up and provide things at lower cost. It's the way of the world. It's the way it should be. No more bail. Else couldn't agree.

Well, that's the thing. People say, well, this would be terrible and put all kinds of people out of work. And my answer to that is no.

It'Ll bring new people into work.

That's right. It doesn't work that way. Because what happens is those people who got out over their skis, they go bankrupt. They should go bankrupt, all of them. And from that, however, comes opportunity, comes new employment opportunities, comes new businesses. If every bank in your town were bus tomorrow, the next morning, somebody would open a new bank.

Of course they would. Well, absolutely. You know, our government's attitude is always kick the can down the road, fight fire by putting gasoline on it, which means debase the currency. They do it everywhere around the world. When the G20 leaders meet, it's always about creating more fake money out of thin air. And oh, the Fed's going to stand behind us. Other central banks are going to stand behind the problem and solve the problem by, you know, taxation and money printing. That's all they can do. They have no real ideas. It's always the answer.

Yeah, the problem really is that we have so many people who are imbued with privilege that they have bought and paid for from our politicians. And then you have people that are demagoguing things that are just completely ridiculous. Look at the pension situation in Chicago, for example, Illinois and Chicago General. And in your public sector unions, which by the way, even FDR said were absolutely a terrible idea and should never be permitted because you're essentially bargaining against yourself, which is the dumbest thing in the world that you would ever let anybody do. However, they have managed to obtain promises to pay money that can't possibly be collected. The only way that Illinois can manage to fund those would be to triple property tax. Well, if you actually triple property taxes, by the way, I used to own a house in the Chicago area because I lived there I lived there for 13 years while I was running my Internet firm and I looked up the property taxes on that house. I've now been here in Florida for about a decade and I know exactly what I paid before I left because I used to have to stroke the check every year. They have more than doubled in the 10 years, even though the cost of the house, of course, it went up dramatically during the bubble and then it came back down. It's not a whole lot higher now than it was when I bought it, but the property taxes have doubled. So you're going to triple them again off of this level. Nobody's going to pay those. They can't. So what's going to happen? Half the people are going to leave.

Yeah. There will be a big asset sale and prices will drop. And you know, that's the one thing is you look at how incredibly mismanaged and basically criminal the government of California is. I always call California the new Michigan. Yeah, I mean, it's just disgusting what has happened to my old home state. And the one thing that has kept the real estate market there somewhat intact is Prop 13. Good old Howard Jarvis. If he hadn't done that back in, I don't know, what was it like? 78. It was a long time ago. California, I bet, would have 5 or 6% property taxes by now because they would have looked anywhere they could to, you know, support the public employee unions and grow the size of its massively inefficient government. It's just absurdity. But. Well, listen, let's end on a somewhat positive note here, if we can. Any advice on what people can do? I think one of the best strategies is just exploit the opportunity because, you know, there are opportunities and ways to exploit this mass of irresponsibility that's going on in our world. And one of them is to own commodities and own them with long term.

Fixed rate debt because the debt's debased.

By inflation, just like your savings account.

I would disagree on having any debt, if possible at all. What I like to say to people when they ask, well, how do you invest in a world like this? How do you do that? The first thing I will say to people is that duration risk is death. In a world like this, you want no duration risk at all. So anything that you have that cannot be immediately turned into liquid cash capital is a fool's errand.

Let me explain my position there. When I say long term fixed rate debt against commodities, I'm talking about buying rental properties so the debt is outsourced. To the tenant. Now granted, rents fluctuate and so forth.

Well, you're making a terrible assumption there. If there's a collapse in employment, you're going to be collecting zero rent on those properties.

These are low. Actually, I'm not making a terrible assumption. And there will be more of a collapse in employment, I think, I think unemployment is going to get worse, not better. So two things happen, you know, when that occurs. Number one, these are low end properties, necessity oriented housing. And so people above that will move down and they will need the lower end properties. And then also, you know, when you see collapses like this, I'm not saying I'm for it, we agree politically, I'm sure. But you see more Section 8 expansion, you see more government programs and this incredibly insane mantra of the government, keep people in their houses. Well, the reason they say that is it's just pandering. Keep them in their houses so they'll vote for me. So I'm not saying that people will live as well. I'm saying you'll catch people moving down the ladder.

Oh, I think, yeah. But I think the assumption you're making here is that it doesn't get terribly bad to the point the government has to cut that off. And that's where I believe the danger is. And see, because you're still counting on the government being able to gear up, up. So what I look at is I don't want duration risk in what I hold. What I want to do in a situation like this is look at the potential opportunities that will come my way provided I have capital available to me when they present themselves. And that means that essentially what I'm doing is in the capital markets, I'm a short term trade, my swing gets very short. I'm looking for base hits, I'm looking for things that have durations measured in days, weeks or months at the outside, but always things that can be liquidated immediately if things turn in an ugly way that I don't like. And that way I'm never out over my skis beyond a level of loss that I'm reasonably comfortable with.

Yeah, that's an interesting point.

But here's the other side of that, okay? What I'm waiting for in this interim period, what I'm trying to do is earn a positive alpha, okay? Which is, I mean, that's the goal, right? So I'm trying to earn a positive absolute return. And what I am expecting to have happen is that when, when this game ends, and it inevitably will and must, because the mathematics say it will I just can't tell you exactly when it's going to happen. The dislocation is going to bring opportunities that you've never seen in your lifetime before. The last time we saw this kind of opportunity was in the 1930s. 30s. And if you have capital available and are able to deploy it, the rule that you use is you figure out what you think the appropriate valuation is or whatever it is that you're looking at and planning to bid on. And you offer the guy who's trying to sell it half of that, and if he's really desperate, he'll tip your bid. And if he's not, you go to the next and you keep doing this. This was done during the 1930s by some people who had saved capital. They didn't get rich quickly, but over the next 20 to 30 years they became fabulously wealthy because they were able to buy assets at a nickel on the dollar.

Sure, but the question is, nobody knows what the nickel on the dollar is because value is a moving target. We don't know that that time has already passed. I mean, look, my clients are buying properties all over the country below the cost of replacement, below the cost of construction, and they're buying them with 30 year fixed rate debt at the lowest rates that have ever existed since they've been counting. I say that the duration risk, and I love that term, by the way, I love your term duration risk. I say that the duration risk does not belong to the borrower, it belongs to the lender. That's who's taking the risk. When I go into real estate deal, I only invest 10, 5, 10, 20% of the cost of the property. You know, now granted, the property could be taken away, but let's just look at history for a moment since, since the 30s, okay? And since the laws changed about the way property works and lending works and so forth. Every downturn since then in real estate has been a downturn that has benefited people in debt, the highly leveraged people. It's counterintuitive, I know this, have actually won the game. And they have been the ones to get all the loan modifications, to get the short sales, to get the workouts, to get the freebies to sit there and collect the rent on their properties for one, two, three years while the bank figures out if they're going to foreclose or not, and then finally do a short sale at the end of that long period where they've been getting massive positive cash flow because they haven't been paying the mortgage. And I'm not saying this Is right. I'm just saying it's what it is, okay? Because I know what's going on out there. And then not only that, they'll get a check from the bank of America or some other big bank for anywhere between $2,530,000 as a cooperation fee for doing the short sale. This is insane. And they'll get a non recourse agreement saying that the short sale is non recourse. I mean, our society is totally perverted. I mean, we're rewarding all the wrong behaviors. I'm not saying they're right. I'm just saying this is the way it is.

I think there is. I think there is a. You are correct in that since the 1930s, this strategy has worked on a repetitive basis. And in that it has, you know, it has proved to be quite useful. I will simply note that there are a number of assumptions in there that I think you need to be very careful with. And they're dangerous because this is the same set of assumptions. Essentially they were being played out during the 2000s by the guys that were flipping condos down here in Florida. And the people who got caught on the wrong end of that when the music stopped, not only lost their deposits, they got sued for the balances and many of them were completely wiped out. Now you can't take what somebody doesn't have.

Okay, right, sure, fair enough. And I hate condos, by the way.

But the thing is, is that the basic model was, was essentially that was that, you know, I can turn the cash flow and then I can flip these before, you know, before things go bad.

The, they were basically doing, they were doing options. They were trading long with options on real estate and they were crazy. Those are speculators, those are gamblers.

I understand, but what you're doing is you're, you're looking at the cap rate and saying that from the, from a cap rate perspective, this thing, cash flows and therefore I'm clean. And if everything goes totally down the toilet, then I just walk away on the thing. You just need to be very careful that if everything goes down the toilet, you actually can and that you don't end up out in the street in your underwear by the time they get done with you. And yes, up until this point, this strategy has worked out fairly well. I'm just not convinced that I have no problem, for example, with buying distressed properties for cash, not using any leverage whatsoever. And there were some opportunities about a year and a half, two years ago down the southern southwest part of Florida that I Had some people contact me on. I didn't get involved in it primarily because I don't live there. I'm too far away. But you were able to pick up some single family homes down there that had sold for three and four hundred thousand dollars a couple of years prior, literally for 20 or 30 grand. Now that is a crazy discount. And those things will cash flow all day long even in a term distressed economic situation. The problem was that only 1 out of 10 of them was viable because the people on the way out the door had done things like poured a bag of cement down the toilet. Okay. And since it's great on its slab on grade.

Yeah, that's exciting.

The value of that. Yeah, the value of that property is zero. Okay. Yeah. So you have to, you know, you had to be there to go down and inspect everything. You could not do anything remotely.

You know, I mean, listen, obviously any investment, you got to know what you're doing. You can't, you know, any idiot is going to get destroyed in anything. I'm just saying that the concept of owning commodities because commodities have intrinsic value, fiat money does not. People need things. Things matter. Resources matter. And if you can control resources where, at least initially going into the deal, the debt is outsourced to a tenant where, where you have positive cash flow instantly, okay, you know what you're buying. You're a prudent smart buyer, okay? You have the right team helping you with it and then you have this long term fixed rate debt that is just going to be massively debased by inflation. I mean, look, this is how people got rich in the last few decades. They thought they created wealth because their real estate went up in value. I say the way they really created wealth, the secret wealth creator, was that their debt went down in value. I mean, if you borrowed, if you borrowed money on the median size, on the median price home in 1972 and you got an 80% loan to value ratio and then you turned around and kept that loan for three decades and it was about 7.3% then you, you actually, even on a home that wasn't a rental property, okay, where you didn't outsource the debt, you paid it yourself. Just with the average rate of inflation, the official rate, which of course is understated over those three decades was 5.1% you% got paid 1.16% to borrow that money for three decades.

I mean, that's unbelievable.

You're right. But here is the problem with doing that, okay? And this is why I bring this up and why I say this is essentially you're taking duration risk and you need to understand the danger. And if you look at the Z1 graph, and this is one of my favorites, I have it up on the forum all the time on the ticker. It's all over the place. You will see that during that period from 1980 to 2010, you had an extraordinary ramp in the total amount of systemic debt. And that's what supported what you were doing. And the increase in value that you saw, the alleged value anyway of that home, because that's where that extra inflationary pressure went. Now here is the premise that you are basically wagering on when you do this and that is that in the future going out for the next 20 years, you are going to be able to. And actually the periodicity on this thing is about eight and a half years. So you are saying that over the next 10 years, let's just use that as an example, that we are going to find a way throughout the economy to take another $54 trillion in aggregate debt and somebody is going to accept that on their balance sheet. If you are wrong about that, then what you're trying to do is going to fall back on you and collapse. And that's the problem, is that I don't believe that. And this is what the government's been trying.

What you're arguing is that the government is that the chickens are going to come home to roost and we can't keep kicking the can down the road. That's what you're saying, saying there. But I say that if that happens, and you may well be right, I kind of think that, you know, we can kick it down the road for a lot longer. It's disgusting, but it's just the way of the world. I mean, as long as we've got that reserve currency status and as long as we've got the military to push people or other countries around and back it up. True. So, but the, the risk really belongs to the lender. By the time any of that happens, people will have Yield yanked their 5, 10 or 20% down payment on that property out of it just through cash flow.

Okay.

By the time the chickens do come home to roost, if they ever do, I mean, who knows, we might kick this can down the road for another five decades. I don't know. When will it end?

Well actually. Well actually I have a very, I have a very good answer to that question. When will it end? And that is that mathematically within the next 10 to 15 years it will end Whether we want it to or not. And that is assuming the market doesn't call us on it first. And history says the market always does, which means that you don't have 10 years. Okay? Now, this is the same thing that has happened in Europe and is happening right now in Europe. It's the same situation that they have in Greece, they have in Spain. We're now starting to see this metastasize its way into Italy and France. Mathematical relationships are not, you know, I thinks they will. And so what you have now is, what we're really looking at is how long do we go from zero, meaning tomorrow, to this hard wall that is 10 to 15 years out? And it moves slightly depending on some assumptions that you make in growth rates. But between 10 and 15 years, it becomes immutable logically.

You're absolutely right. The problem is, at the end of the day, it comes down to who's got the bully pulpit. And if we still have it, if we still have the biggest military, can it really be taken away from us? Is the jig really up? I mean, we can bully China and Japan to buy our bonds forever, as lame as they could be.

I disagree. It doesn't matter. It doesn't matter because when what you are seeing happen now, if you look at the trends and what has happened over the last four years, we've had all this alleged support, okay, From China, Japan, everybody else, right? We've been using our bully pulpit and we've been using it aggressively, and so far we've been apparently successful. But look at the shift that has occurred onto the backs of the people in the lower and middle economic strata and the fact that they are now at an accelerating rate, ending up on the dole, which is why the labor participation rate has not moved off the bottom in the last three years. Without the labor participation rate coming off the bottom, there is no way for the government to ever get out of this hole because only employed people pay taxes. So this is where the wall comes from, ultimately, is that when you take all these interrelated parts and you put them together and you start running regression analysis on this, you find that there is a hard wall that's out 10 to 15 years hence. Much of it is demographic, but much of it is also from the things that we've done over the last 10 to 15 years, really from 2004. And so the question mark is, at what point do people in the markets, irrespective of the bully pulpit, turn around and say, okay, we're not going to let you go all the way to the wall and hit it at 100 miles an hour. We want our money first. Give it to me now. And I don't know the answer to that, neither does anybody else. And anyone that gives you a hard date in front of that 10 to 15 year time frame is guessing, because they can't. You know, it's about psychology. It's not about, you know, it's not about hard numbers.

It's about the history of war is what it really is.

Right. But once you get to that, once you get to that point, we're not talking about psychology anymore. We're not talking about kicking the can. We're talking about any kinds of things. We're talking about arithmetic. And two plus two. Still four.

Yeah, it is. I know in a logical world you couldn't be more right, but there are other forces beyond money and investment and markets at play here. But a very interesting discussion. I want to have you on the show again. We've gone very long here and we got to wrap up, but really a great talk. I mean, I just, I just love it. And, and by the way, I got to tell you something, you are obviously a Rush fan. I've been a Rush fan for many years and I love their lyrics. Neil Peart, the drummer, was highly influenced by Ayn Rand and I heard him say that in an interview. It's without a doubt the most intellectual rock band in history.

That's Rush the Band, not Rush the Limbaugh.

Yeah, not Rush the Limbaugh. It's Rush the Band. So, folks, if you don't know what we're talking about, look it up and you are in for a treat. You are in for lyrical excursions into philosophy, mythology. Just incredible stuff. So good stuff. Well, hey, Carl, give out your website if you would, and just tell people where they can learn more about your work.

Yep, you can follow me on a daily basis at Market Ticker. You can follow my tweets, Ticker Guy, on Twitter. All of the new articles I post are announced on there. So if you want a quick and easy way to keep track of them, that's a good place to do it because I usually put four or five out a day. And then Ticker Forum is connected to the Market Ticker and there is some slightly more actionable and real time trading stuff that I talk about and that is on a donation basis for access to those areas. But the base to be able to follow it doesn't cost anything. You just sign up, get yourself an.

Account, and you're in good stuff. Well, Carl, thanks for joining us today.

Thank you very much. Have a good day.

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