Why European Inflation is MUCH Worse - Peter Zeihan

Now, the United States may have a slightly damaged demography, the whole boomer versus zoomer problem, but America's baby boomers did something that most of their equivalent cohort around the world did not do. They had kids. And so say what you will about the millennials, and there's so, so very much we can say about the millennials. They're here, they're spending now, they're going to be investing in a few years. And that gives the United States a ballast demographically and economically that most countries in the world have. And now here's your host, Jason Hartman, with the complete solution for real estate investors.

Welcome to episode 1888 1-88-8. Gosh, I love that number. That's a good number. Remember, eight is the feng shui number for wealth because it's infinite. And I will just mention to you, I'm not any huge believer or anything. Did live, I owned a couple of houses where the address numbers added up to eight. And those were very good years for me. So who knows, who knows if there's anything to this or not? But hey, if you're watching on video, look at my shirt. I am wearing the Empowered Investor shirt. This is a good shirt to wear to the gym. It's a good shirt to wear to a deal to make some money. Yes, Empowered Investor. That's what we're all about, empowering investors. Okay, so today, what do we have for you? First of all, if you are seeing this on video, check out this chart with the article entitled investors Wave Goodbye to Negative Yielding Debt as Central Banks. And I will just add around the world fight inflation. Well, yeah, very, very true, very significant. But in reality, the debt is still quite negative. So we will talk about that in just a moment. And by the way, sound quality not as great as usual. If you're watching on video, you know that I am not at the homestead. I'm in a hotel room right now. So just recording here, mobile for you. So please forgive us on technical production aspects not being as good as usual. All right, so this chart you're seeing basically the total value of negative yielding debt globally. And you saw how in 2014, 2015, it was a rather low amount and then it increased as they were talking about fighting a potential recession. That was just part of the business cycle. You'll remember, right about the time Trump came in, we talked about how the business cycle was long in the tooth. We did a lot of episodes about that at the time. So we started seeing higher amounts of negative yielding debt back then in the $12.5 trillion range. And then we saw it go down again and then up dramatically as we went into the, the repo market scandal. And right after the repo market scandal was Covid 1984 and all the efforts to print money and ease the money supply. And of course we all know the story, we don't really need to talk about it, but now we are seeing the opposite because obviously inflation is going to be a problem if you create tons of money out of thin air, if you suppress interest rates, if you have financial repression. Financial repression, where basically you have a situation where savers get punished and debtors get rewarded. Well, haven't I been telling you for 17 or 18 years now about II DD inflation induced debt destruction? Of course I have. How do we take advantage of the exact same business plan that governments and central banks all around the world are using, I might add, very effectively to reduce their own debt in real terms? Right, they are definitely doing that, but this chart and this concept isn't really quite true as they are putting it out there for us. So we'll talk about that in a minute, but let's go to the next slide here. The article below that chart just goes on. You know, the world's pool of negative yielding debt has shrunk to a roughly seven year low as the era of exceptionally loose monetary policy draws to a close in major economies. The total stock of negative yielding debt last week stood at $2.4 trillion. Now that's according to Bloomberg Barclays Index, but it's an 87% reduction. That is a big, big number. And you know what? I don't have my sound effect machine with me because that would deserve a sound effect if I had my little gadget with me, but I don't. Here at the hotel, investors willingness to buy debt that guaranteed a loss if held to maturity. Right? So these bonds, these Treasuries, basically if you hold them as an investor buying the debt, you were punished. And that was a very unusual quirk in the financial markets of the last decade. The article goes on to say the stockpile, and by the way, I'm paraphrasing here just for speed, the stockpile of such debt began to swell in the mid 2010s as the the European Central bank, the bank of Japan and others went negative to counter too low inflation. They wanted to create inflation. And remember when we talked about this and I likened it to the idea of renting a storage unit, how basically, you know, if you've got extra stuff, hey look, I've got extra Stuff And I rent a few storage units. Right? You might do the same. Hey, the self storage business ain't a bad business either. We've certainly talked about on that on prior episodes. But you know, you have to rent a storage unit and pay for storage for your excess stuff. And that's exactly the metaphor for what was going on around the world when we had so much capital, so much money sloshing around in the system. And by the way, we still have that, and we still really have a lot more negative yielding debt than this article talks about. I'll get to that in just a moment. But you got to pay for a storage unit for your money and your excess stuff, right? You got to pay the bank to take your money. I know that's so counter to the way we think. But it has been the case at quite a few points over the last several years. Okay? It then exploded early in the COVID 19 plandemic intentional Freudian slip there as global central banks sought to prop up economies by slashing rates and buying large quantities of bonds. So they were this huge bond buyer. We know. I talked about how the Federal Reserve, our own central bank here in the US was the world's biggest investor, right? So they were buying this debt that made no sense. They were doing dysfunctional things, distorting the market. And that's exactly what they did. But now the policymakers are grappling with prices rising at their fastest levels in decades. So the European Central bank last week became the latest major central bank to respond, raising its key rate by half a percentage point to zero. Yeah, you heard that right. Raising it to zero. Japan, the biggest holdout. And we all know about the lost decade that turned into the lost two decades that maybe turned into almost the last three decades, right? But of course, other issues going on with Japan and Europe, namely demographics and if you don't have children, you can't have an economy and you can't have a country. It's just the reality of the situation. But that's another subject. And I digress. They were the biggest holdout and the world's largest source of remaining negative yielding debt. Okay? So times, they are changing, as Bob Dylan wrote. And we've all seen that. We've seen that in the real estate market and it is definitely playing out. And you know what is driving me crazy, folks? I gotta say this is not strictly about the article, but just a general comment. This morning I was at home, I went home for the weekend here and I'm back at the hotel and no, this is not a staycation. But I'm going to tell you about it later. Okay, I just got to wait. Wait a little longer and then I'll let you know on what I'm up to. But yeah, I was watching some YouTube videos about these people talking about the real estate market collapsing. And I don't know, you know, who knows who's going to be right or wrong here? I think most of these people are going to be pretty much wrong. We're certainly seeing some adjustments that I predicted a long time ago in the cyclical markets. Those markets overvalued. But you know what nobody is talking about except yours truly and that is if we see real estate markets continue to soften. Now we're not seeing this in the low end markets, but we got more builder inventory coming online. We're definitely seeing this in the mid and higher priced markets and we're definitely seeing this in the cyclical markets. Now what do I mean by that? What's the distinction there? Well, all cyclical markets are softening. There's not really an exception to that. But we have in hybrid markets and in linear markets we have lower price segments, mid level price segments and higher price segments within all markets. Right. You understand that. And so the mid and higher price properties in even the cyclical and linear markets and hybrid markets, those are softening all around. So what drives me absolutely nuts about all these prognosticators and all their predictions is, you guessed it, rents. Almost nobody is talking about rents. So as buyer activity is curtailed for whatever reason, we still have a structural, pardon the pun, housing shortage of low end entry level houses in this country. There's no question about that. So what does that do to the rental market? Remember if you attended maybe 2010, 2011, meet the masters, I was talking a lot back then about how a 1% decline in the homeownership rate equates to approximately 1 million new renters. And what does that do to rents? Well, they shoot up of course. More upward pressure on rents. So remember, as investors stop agonizing over whether the prices are going up or down. Look, I don't think there's going to be any big adjustment in the entry level housing market. I've given you a ton of reasons for that. The Hartman comparison index, the true cost of housing, the rental rates, the commodities prices, yada yada yada. You've heard all of this. We've talked about this ad nauseam on prior episodes. Not going to go into it here. But regardless, rental yields see more upward pressure when sales soften. Absolutely true. It always works out that way. So just understand that as an investor you want to be a yield oriented investor. Also want to remind you, be sure to check out our Empowered Investor Pro membership. Really one of the best ways to accelerate your success as an Investor. Go to empoweredinvestor.com we'd love for you to join our community. Join me on regular Zoom meetings where you can interact directly and we can have two way conversations. Really a great resource. Plus a ton of archives discounts on events, both virtual and live. Just a great thing. Empowered Investor Pro. Go to empoweredinvestor.com and go join us. Okay. Also our Collective Mastermind, the one I run with Ken McElroy and George Gammon. We have got our Mexico vacation coming up in Playa del Carmen and that is coming up here in just a few weeks. Go to thecollectivemastermind.com to check out more info about that. But just a couple quick speaker announcements for that event. We've got Simon Black, the sovereign man, speaking at that event. These are great because you can interact with the speakers directly, hang out with them, have drinks with them, share meals with them in a small intimate environment. We've got about 60 of our members coming to this event in Playa del Carmen, Mexico. Just a lot of cool stuff we do with the Collective Mastermind focused on connection, capital and community. And also one more speaker announcement. Chris McIntosh, the hedge fund manager, will be there as well. It's just going to be a phenomenal event. So go check out thecollectivemastermind.com for more on that. Now I frankly can't remember if I shared this with you before, but regardless, it's short and I want to share it with you again. And it is so important that you understand these things from both a monetary and fiscal perspective, but also from a geopolitical perspective. And that of course is our frequent show guest Peter Zion talking a bit about the economy and where we are going with prices. So let's listen to this.

Everyone. Peter Zion here coming to you from Colorado Today. We're going to talk a little bit about inflation and what's the best way to put this? Well, the new data that come out of the United States government is, is not great, suggests that the inflation rate within the American system is about 9.1%, which is.

Okay, so you remember I was talking about that article about negative interest rates and negative yielding debt. Not really true when you look at real inflation rates, obviously, because you understand real inflation much different than the consumer price inflation. But he's Talking about the 9.11% number and how it's not good news, not good data for the vast majority of people. But for us as real estate investors, because we know how to use inflation induced debt destruction, it is fantastic. And this is why the concentration of wealth keeps getting more and more severe, significant, whatever you want to call it. But at least you, for your own financial situation, will put yourself on the right side of that equation using our inflation induced debt destruction technique, easily a 40 year high.

And if you look at most of the things that are going on with the markets and with jobs and with energy and with food, it's going to be going up. So let me just kind of knock down all of those real quick so you see where we're coming from. We're looking at fertilizer limitations on a global scale. The Chinese have restricted the export of phosphate because they need it for rice. The Russians are discovering it's harder to get their potash out because of the shutdown of a rail or partial shutdown of a rail line that goes through Belarus and into Lithuania on the way to the port of Kaliningrad. And because natural gas prices are so high, a lot of companies, particularly in Europe, have just stopped making nitrogen type fertilizers at all. So we've got price pressures in all three. In addition, the world's number one wheat exporter, that would be Russia, has invaded the world's number four wheat exporter, which would be Ukraine, and is systematically destroying all civilian infrastructure. It comes across with a double emphasis on agricultural infrastructure. So we have already lost one of the world's great agricultural powers. And probably before the end of the year, Ukraine will devolve into a net importance quarter for at least several years. On top of that, the baby boomers are moving into retirement. And the replacement generation that is taking their jobs are known as the Zoomers. While the baby boomers are the largest generation we've ever had and the Zoomers are the smallest in calendar year 2022, that is already a shortage of 400000 workers. That number is going to increase each and every year until at least 20.

Just think about how significant that is and how that puts so much inflationary pressure into the system. When you see higher wages having to be paid because of this continuing labor shortage. Now, some of it will be solved through automation, but certainly not all of it.

34 where it will probably peak at around 900,000 shortage. None of these pressures are what you would call transitory and they are in addition to the fact that the US consumer has about $2 trillion of spare cash still saved up from the aftermath of COVID And so we're not seeing meaningful reductions in retail sales or general consumption. In fact, with us now, mid summer, people are, are traveling as much as they possibly can, which is putting more pressure on everything. The only way to get inflation under control. Well, you've got two options. Number one, you can suppress demand, or number two, you can increase supply. And there's really little reason to expect either of those to happen in the next several weeks. So we should expect the data for at least August and September to be as bad, if not worse. This is not going to get better anytime soon.

And as frustrating when he says worse or not getting better, we benefit from that because we know how to use it to our advantage, as that is.

So much worse everywhere else. Now, the United States may have a slightly damaged demography, the whole boomer versus zoomer problem, but America's baby boomers did something that most of their equivalent cohort around the world did not do. They had kids. And so say what you will about the Millennials, and there's so, so very much we can say about the millennials. They're here, they're spending now, they're going to be investing in a few years. And that gives the United States a ballast, demographically and economically that most countries in the world don't have. Now, why does that matter for inflation? Inflation? Well, it means that the U.S. federal Reserve still has a consumption profile that it can regulate with interest rates. So the Fed is likely to do another sharp rate increase very soon and at least one or two more before the end of the year. Because the American system has consumption, we have a tool that is still appropriate to the situation. The Europeans don't. The Europeans don't have half much of millennial generation. So if they were to raise interest rates, it really wouldn't have any impact on consumption. So if they raise rates at all, they're going to be going more slowly and in lower increments. And that is widening the differential between rates in the United States versus rates in Europe, which is pushing the Euro through the floor. Just today, same day that the inflation data came out, the euro officially dropped below parity, something that had it hasn't done in 20 years. And while there's always all kinds of fun and crazy stuff that happens with currency trades, on the whole, we shouldn't expect it to ever recover. There's no consumption. Interest rates are not an appropriate tool. You should expect capital costs in Europe to Steadily rise at the same time that in the United States there's a greater return on any sort of investment. That tells me whether you're looking at food or energy or labor, North America is in a better position. And so North America is going to be the safer investment bet. And we just have this in this massive flow of capital across the Atlantic.

He's right.

That makes inflation in Europe even worse because oil is dollar denominated. Natural gas is dollar denominated. Food is for the most part dollar denominated. So is fertilizer, so is iron ore, so is box oxide. So are most of the commodities and most of the finished metals. And now the Europeans are not simply dealing with less consumption and less economic activity and more exposure to Russia. They're also dealing with an environment of a currency weakness. So everything that they need to make modern society work has to be imported in someone else's currency. And that currency is going through the roof. So, yes, inflation in North America, it's bad. It's probably gonna get worse. Nothing compared to what the Europeans are wrestling with. Okay, that's it for me. Until next time.

You know, I just think he nails it. I think that is right on. So there's a lot of lessons in that short video. Just make sure you take them to heart. Maybe rewind and just listen to that again. It's pretty darn brilliant in a lot of ways. One more thing before we go today. Wanted to share this with you, alluded to it before, just quickly, but Amazon purchased iRobot. You may have heard about this, right? This is the vacuum, the automated vacuum cleaners, right? I used to have one of these go around my house and do the vacuuming. I just. The housekeeper does it a lot better. So I do it the old fashioned way by hiring somebody. Right? But think about the amount of detail data these spy companies, these tech companies have on us already. It's absolutely shocking, terrifying, scary in so many ways. And who knows how this data will be used 10 years from now, 20 years from now. Who knows? Something we said today, something we thought today, something we read today, something we purchased today that's okay and normal today may be viewed very differently in 10, 15 or 20 years. We've certainly seen that with cancel culture doxxing, all of this crazy, crazy censorship and so forth that we have going on nowadays, right? But you just never know with a robotic robot. Amazon is literally seeing your entire house. How scary is that? They're seeing what's in your bedroom, what's in your kitchen, what's in Your kids rooms, they're seeing everything. I mean, I don't know if you saw this product and I don't know that it ever launched. I thought it was a super cool idea. I'd love to buy one myself and use was this Alexa, by the way. I can say that here because I'm in a hotel. She won't start talking or anything. Well, I guess she's on my phone. Anyway, this Alexa powered quadcopter that would go around your house and it was connected to your ring doorbell. Remember Amazon owns ring. Okay. So they own, they see all those cameras, they've shared them with police departments without consent of the consumer that owned the camera, that it should own the video, the footage on that camera. Right. They've shared them with police department. And this helicopter would fly around your house and take pictures and make sure that, you know, pipe didn't break or a window wasn't broken. That's all great. I love that. I love that idea of being able to send that thing around when I'm not home to just keep an eye on stuff. Right. Awesome. Problem is you have these big disgusting, evil tech companies and you just have no idea what they're going to do with it. And so far their track record is pathetic, disgusting, awful in every way. Shame on all of these big tech companies. I don't know if you saw the latest from Mark Fuckerberg, but it's just absolutely disgusting. You know, they withheld and suppressed and turned the volume down on the Hunter Biden laptop story. Literally changed an election. It's absolutely shocking the amount of power these companies have. And if we are not forever diligent, if we are not talking about this in a conversation we have at least once a day with somebody, we are going to be very, very sorry. Because these companies are just running the world and they're running over the world. They're trampling over our rights. So it's a very important thing. Keep getting the word out. Please talk to everybody, you know about all of this stuff, about the abuses of these tech companies because they're really pretty scary, scary stuff, you know, not about real estate per se, but hey, the corporatocracy is buying up all the real estate too. So far as investors, we're benefiting from that big time. That may not always be the case. That table may turn at some point, but, but we are now benefiting from higher rents because they're much better at raising the rents than we have been as mom and pop investors. They're raising the prices. That's good for us too, as long as we're in the game. If we're not in the game yet, hey, that's harder. But the corporatocracy is. You know, I don't know if you remember the original movie, the billionaire Boys Club movie that was on television. I don't know if that original one was ever in movie theaters. They did a rebank of about it that was in movie theaters. I've seen both, but I remember the original one in maybe the late 80s or so. And I remember one of the characters saying that the world is not run by governments, it's run by corporations. And that was so prescient because that's exactly where we are. And it's really run by governments and corporations, of course, and central banks and, you know, they're all together and they are not working in the best interest of the citizens. Remember the saying, the bigger the government, the smaller the citizen. And that's the saying. But I would add to that the bigger the government, the bigger the corporatocracy and the more fascist they are because they are definitely in bed together with their lobbyist and their cronyism. The smaller the citizen. So the bigger the corporations, the bigger the government, the smaller the citizen. Talk about this stuff, folks. Please talk about this stuff. Keep raising the issue in all of your conversations. It's critically important. Anyway, that's it for me today. I'll see you Wednesday. And Friday will be our flashback Friday but also a 10th episode show at the same time. It's rare that that happens, so we will look forward to seeing you on the next episode. Go check out empoweredinvestor.com for more or Jason hartman.com for directly on the real estate side of things. And until Wednesday, happy investing.