Will Trump's America First Policy FINALLY Fix the Inflation Problem?

It is my pleasure to welcome a returning guest back to the show and that is none other than Professor David Colum. He is a professor of organic chemistry at Cornell University. He has loads of insights into culture, society, politics. And we are going to focus on what just happened. We just had a big event going on this week. I'm told many are excited about it. So we're going to talk about that. And David, it's a pleasure to have you back. It's been two or three years I think since you've been on with us.

Yeah, time flew. I would have said it was a year ago, but the older you get, the more time takes these gigantic leaps. So when you're four years old you can't imagine being five and when you're 65 or 70 years old, it takes a blink of an eye to get to the next five.

I know that's really the percentage of.

Your life is shrinking. The percentage left is shrinking.

Right, right. It's a scary thought to many people, but it is what it is. What does this new administration mean? What are they going to do what you are, what's the economy going to look like and what can our people listening and watching do to deal with it more effectively, become more prosperous, et cetera?

I worry his financial policies are going to be a little too self serving and blow the debt up a little bit. I don't think he's as strong at that stuff as you would hope. I'm a little unclear about how to handle his ideas on tariffs. Although his tariffs ideas are a little different than say the Smoot Hawley tariffs in the sense that we just blocked people from sending shit over his if ideas. Look, we want you here, you have to build the stuff. Here you just have to pay Toyota. Bring, bring it, bring your plan. Right. You want to build it. But here it will be inflationary because we pay our people what better.

Yeah, so, so that's a good point. I want to focus on that for a moment. So tariffs also, you didn't say it, but closing the border and blowing the debt up, those are all three very inflationary. Okay, all three of those things. So how much inflation are we talking about? And you know he's, he's pressuring already pressuring the Fed like he to lower rates which is also inflationary. So inflation could be the thing for the Trump administration. Right.

I've written quite a bit this year, rough drafted so far on inflation and trying to understand it. For example, I've come to the conclusion that there are few if any good Examples of which you inflate your way out of debt. Let's start there. I think inflating away out of debt is a trope. Mike Green called it a trope.

You don't think that works, huh?

Give me an example.

Well, I mean, look, if you owe a trillion dollars to China and there's 10% inflation in a year or two years or whatever, then you've just got a hundred billion dollar discount.

But they're going to run from our debt. It's going to be a total mess. And I think it eventually. I think it eventually leads to defaulting.

Yeah, I mean, look, you know, well, defaulting.

So not inflating away, though. Defaulting is not inflating it.

Well, I just want to say we've been doing this plan really since 1971. But what did you say?

Defaulting is not inflating in a way that ultimately is a deflationary event.

Right.

Tell us about that.

Go into that.

Well, if you default on a debt, the money vaporizes. They say that you create inflation by creating money. Right. And you created money by creating debt. And so this idea that you are going to get yourself out of debt by creating debt, this is a fascinating concept. Right. There's kind of an absurdity to it.

It's an absurdity that only the US can pull off.

Well, but we're not pulling it off. But we're not pulling it off. We've got bad inflation, in my opinion, and our debt's going up faster.

Oh, yeah, but, but the question is, how much worse would it be? I mean, think about what we've been doing. We've got $36 trillion in debt. We're increasing it at $1 trillion every 100 days.

We've got.

Great.

I agree.

You know, and so how you do.

It is you shrink the government.

Sure, I think that's a great idea.

But that's blocking and tackling. That's not inflating in a way. That's blocking and tackling. Yeah, okay, right. That's a different story. Now, the people who say, oh, we'll just inflate. So I'll say, you know, we've got $250 trillion of unfunded liabilities. Those who don't know what that means. Unfunded liability is a liability which if you project revenues out with rational assumptions, that's what's left that you don't know how you're going to pay for. Treasury just signed off on 175 trillion for just Medicare and Social Security.

My question is over how much time? 10 years.

Infinity. Infinity. They project out to infinity. So you say, here are the revenues going forward. Here's the, here's the obligations going forward. We've got 250 trillion of exposure that.

We don't always carry. That we always carry as a forward looking issue.

But, but it'll keep compounding.

Right?

Right. And, and then people say, well, we'll just inflate it away. I say, okay, so we owe $2 million a piece in theory. Right. Each taxpayer, crudely speaking, about 2 million. I said so, okay, okay, you'll inflate away. So what you're going to do is take away $2 million of my spending power. What's the difference? You can't just flippantly say, I'm going to flight it away and pretend like that doesn't have the same arguably even worse consequences. Because it's very disruptive to the economy to have your currency, which is a critical communication channel, supply demand, meet a price. And if your currency's shifting, that system breaks pretty fast. And so I really do believe this idea will inflate it away. And then you look for an example and the examples turn out not to work. And so people often say, well, they'll say Weimar, Germany, right? You go, well, first of all, that was a hyperinflation led to World War II, so that's a poor one. But it also didn't inflate away the debt because Germany owed its national debt in gold. They effectively through inflation, defaulted on their populace, but their debt to the world persisted. You go, okay, post war United States, they had interest rates 10% below the inflation rate. You go, but you're ignoring the fact that we were a juggernaut of productivity and we were, we control 40% of the world's GDP. So to separate the idea of inflating away the debt versus American industry just banging it out year after year after year to give inflation the credit seems preposterous to me. There's an Israeli example that, that's, I'm not yet clear on how they did it, but they basically spiked up inflation and spiked it back down. And I don't know how they did it.

Yeah, the, the problem is, any example we can talk about other than the US Pain is, is pain. It's not the same thing because they don't have the reserve currency, you know.

Yeah, well, we could lose it too though.

I, I know, I'm not scared of that, you know. Well, well, well, everybody wants to talk about the bricks. I don't.

No, no, no, but the bricks is not about a currency, though, in my opinion. The bricks is about alliances.

Yeah, I understand.

Well, and so you got 25 non trivial countries saying we're not with the US anymore. That makes us as a reserve currency.

How does that play under Trump? That's what they've been saying. Does it change over the next four years?

Well, Trump's going to talk to Putin right away. He probably already has. And Putin has said, look, I want to talk to him. Putin said the other day, I would not be averse to reaching out to Trump. I think Putin would love to get Zelensky at the table to stop that war. And I am appalled how many people don't understand NATO's role in that war. But they. So if Putin wants to get the Lenski at the table and he knows that Trump wants to end the war and so somehow someone's going to put a gun to Zelensky said, here's the deal, we screwed the pooch. Not my administration's problem. Here's what we're going to do. You're going to lose this chunk of meat right here. You get to keep this chunk of meat over there. It's a real estate problem. You know, you understand we're going to default, we're going to default, we're going to default on the eastern Ukraine. And it may not even be, you know, Russia's taking, might just cordon it off in some way that says, you know, quit screwing around. I wish NATO would quit screwing around.

So, so, but go, go back to the, the point where you got onto that with the BRICs and the Reserve currency. And I just want you to circle back and finish that thought.

So, so I was on Kitco and, and they said, well, you know, they asked about the BRICs and, and she mentioned the meeting that they had about two weeks ago in Russia. And I said, you just answered your question. I said, we have demonized Russia as best we can. And 25 countries just met in Russia to talk about alliances. They met in Russia. Right. There are 25 very important countries, including some real serious oil producers who met in Russia. So I think this idea that we are king of the world is on very shaky ground. It's not to say we're going to lose reserve currency status, but I don't even know with computers why you need a reserve currency. Why can't you denominate? You have to sign contracts, but every currency is connected in a microsecond timescale. So I can, I can sell you something and you can Pay me in Zimbabwe dollars. And if it's all done by computer, I then switch those for whatever currency I want instantaneously.

Yeah, so. So a CBDC solves that problem. But let's.

Well, I don't like that one either. Right. We both know that's the worst of all the choices.

Yeah, no, no question about it. Okay. The real question I think we have to tackle, David, is compared to what? Okay, yes, we've got all of these challenges. The dollar has its headwinds, but compared to a Democratic administration, I mean, we're way better off, way better now at keeping that reserve currency status and American hegemony much better.

Now here's the deal, though. I think our fatal mistake was weaponizing the dollar. We weaponize the dollar. If we had said, look, the dollar's precious. We don't play with that. It' reminds me, when we boycott an Olympics, you go, no, you're supposed to send your. Your guys to the Olympics. Right? We're all supposed to get together. So that. That upsets me. So we weaponize.

Let me just give that some context, if you will. So you know what David is saying? When Russia invaded Ukraine, we weaponized the dollar. Of course, we've weaponized it long before that. But this was the big.

We really got serious.

This was the nuclear missile weaponization of the dollar. Okay, Against Russia. And now every other country in the world is saying, gosh, I could be next. I better not make my whole economy dependent on dollars. So go ahead.

There goes the reserve currency. You just described it well, but it.

Didn'T go away yet. And it takes time.

It takes time. I don't know if it takes a long time. So if you look at something like the euro, the reason the euro took, what, 20 years or something is because it's a very complicated currency. But if the brics say, you know, screw a brics currency. We're just going to denominate in gold. They go to the printing press. By Monday, they're printed out notes that say, redeemable for 1/10 of an ounce of gold. It's over. If you want. You know, I'm not a bitcoin guy. I do podcasts with bitcoin guys. They all want me to buy a bitcoin. I'm like a. They're like the guys with bibles under their arms and my front doorstep trying to get me to join them in Christ on a crusade. And I go, no, thank you, that's okay. But bitcoin guys have the idea, right? At least I'm just waiting to see what the hell happens to bitcoin, because I don't. I think it's not necessarily safe by any stretch of the imagination. But it could be that, yeah, Trump.

Has promised to be the bitcoin president and make a national reserve with bitcoin. I mean, if he does that, it's going through the roof because other nations.

Are going to copy it.

You know, maybe he won't keep his promise. I don't know.

Politician not keeping his promise. There we go.

Imagine that.

News flash. Newsflash.

But, you know, I. I give him a pretty good grade on doing that last time around. I think he really did keep his promises most of the time. Let's talk about deregulation, because I think that's going to be a hallmark of the Trump administration. I think he's going to make it easier to build more homes. We have a housing shortage problem. I know you wanted to ask me some questions about that. I'm happy to answer them. But, you know, just give us your thoughts on the deregulation. I mean, I think that's just going to untether business, and there's just going to be a lot more velocity of money and the economy's going.

Well, I was. I was with a. I was with a lawyer. I can't remember, he sued California for something big. But I had dinner with him and we talked about a bunch of things. And the thing that he mentioned in passing, which I brought up and said, I think was the most important Supreme Court decision in history, or in my living history, was the Chevron deference overturn. To make a long story short, a decision I think was in 1938, basically gave the bureaucratic state the ability to say if the law doesn't say no, or if it's ambiguous, we can do whatever we want. So administrative state could fine you, could punish you, could put you in jail. That got overturned. And so basically what it said is that an ambiguity in the law or the absence of a statement in the law does not mean that the administrative state, the bureaucratic state started by Woodrow Wilson, enhanced by FTR, and grown ever since, can just come in and mow your ass down. Which means that basically, in theory, almost every regulation in the country is potentially susceptible to challenge as unconstitutional.

Wow. Wow.

Now, some of them are there because the law says they can be there, but the absence of a statement about the ability to do something has been removed, supposedly. So I said to him, I said, what does that mean? Because you mentioned it in pass. I know this lawyer said in your Talk. You mentioned passing seems huge to me. And he says yes, we're just waiting to see how this plays out. Right. This could be like, you know, Brexit, where it passed you Holy moly. And then they just didn't do anything. But you can now, you know, in theory, the IRS could come at you and you can in theory say unconstitutional. Right. You could before, even in theory. But now the Chevron deference overturn. I don't even know what Chevron deference means. Right. What's Chevron deference? I don't know, but it was a big case. It was a humongous case that got 10 minutes of pressure.

Okay, so housing, do you believe. I'm sure you do, that we will see a lot more construction under Trump?

I'm not sure part because, and again, this is your world, not mine. But I'm wondering the consequences would be if the Barry Sternlichs of the world have to unwind all their positions at some point. It's almost an emergent system for me. Where I go, I'm not sure. Now people are living in those houses and then they get unwound because interest rates, let's say the rates fight the Fed like they're currently doing. Right. My nightmare scenario was previous equity bear markets. This is not a nightmare scenario because I'm in my bunker of doom, so I'm positioned for this. But the nightmare scenario for investors is that we have a bear market in both equities and bonds simultaneously. The Fed has had a luxury for 40 years of not letting that happen. So every time the equities go down, the bonds go up. And that has saved the 60, 40 portfolios over and over and over. Now the interest rates are going up despite the Fed dropping rates. And that is what Bill Fleckenstein calls the bond market sort of taking, taking over. So the bond vigilantes taking over saying, we don't care what the Fed fund rates do, we're not going to lend you money at that rate for 10 year treasuries. We've lost Russia, we've lost China, possibly the Arab countries. Right. Who's going to buy our bonds? And so those rates could keep going up. That would cause Airbnbs to fall apart. Right. Because people can't just hold them at 0% interest rates unless they got a 30 year mortgage. But I bet a lot of them didn't because, you know, if you can get dirt cheap mortgage, dirt cheap debt, you'll, you'll lever the hell out of it. You know, those guys did that number.

Of People with the high rate mortgages or the variable rate mortgages does not exceed about 10 million.

Okay, but how about the Blackrocks of the world?

What about them?

Aren't they levered up the kazoo?

Oh, well, yeah, I mean, their leverage is a whole different type of leverage.

That I think they could have to unwind it though.

No, sure, sure. Yeah.

Well, renting single family houses is a lousy business. As he says to the real estate expert, not knowing whether he's right, but, but it's a lousy business. It's just not. The best way to house someone is build a rectangular building that holds 500 people with 800 square feet apiece. Right. That's the most efficient way.

Sure it is. But that market is very oversaturated. It's very.

That's right. And well, and that will fill some of the void.

Yeah. So what David's doing is pointing out that for real est estate investors, a big apartment complex has more economy of scale than a single family home. Obviously. Right. We all know that.

But I don't think you could rent my house for the cost of owning my house. So I think if you, if someone bought my house and I'm going to rent and make money, I think they're delusional.

How much is your house worth?

With about a million 1.1 something.

Okay, so your house is way too expensive to be a rental. So if it's, if your house is worth a million, we'll just take that for round numbers. It would probably rent for about 4,000 to $4,200 a month. Maybe 4,500, am I right?

But that's a razor thin margin in a high rate environment.

Of course. But I'm asking you if I'm right.

Yeah, I would. Well, I, I don't know for sure, but that sounds like a decent hypothesis. Yeah.

Okay, so maybe it rents for five grand if you're lucky. Right. If it's a million, so that's a 0.5 RV ratio and that's a deal I would never recommend to an investor. But if you get a chance, you're.

Supposed to get like a seventh of the, the cost of the house per year. Isn't there some sort of back of the envelope number?

The lowest you want to go is. Okay, so $1 million worth of real estate, which should be three or four single family homes in the rental market, should give you overall an aggregate of $7,000 or more a month income. Okay. And you can do that in entry level housing because there's such an acute shortage of entry level housing.

You know, what if the guys who have who got were able to get interest rates in the fraction of a percent category by staying short term and exploiting the Fed's generosity. When those guys have to start unwind these highly levered, you know, packages, these huge tranches of single family houses, that's going to change the dynamics, isn't it?

You're talking about the institutional investors, but they're a very small part of the market. Let's talk about some numbers, okay? And no one knows exactly. And everyone calls an institutional investor. We've had problems defining that in the industry, okay? Some say it's any entity that owns over a thousand homes, but the problem is they have all these sub entities and nobody really knows.

It's a very complicated system.

It's hard to tell, okay? But the point is, you know, there's about 140 million housing units in the U.S. okay, give or take. About 80 million of those are owned by regular owner occupants. There are some vacation things, okay, Some. Remember before Airbnb became so popular and you know, it sort of grabbed its big foothold, I'd say, in 2012, when everybody started talking about it, okay? Although it was created in 2008 and there was an industry before that that obviously going back to the 70s, but before Airbnb got popular, remember, lots of people with money and means had second homes, right? That was a normal behavior for, you know, millions of people, okay?

But especially at low rates, right?

And they didn't even rent them out, okay? But when Airbnb came along, they all thought to themselves, well, gosh, you know, if I'm rich and I put my house on Airbnb, my second home, you know, then I could buy another Ferrari, okay? So, you know, I might as well just get some extra income and make my asset work, okay? So everybody kind of became an Airbnb person even if they didn't need to, okay? So not all of that.

Did that prevent them, but did that prevent a lot of people from having to hit the market with a sale? Did that keep them from entering the seller's market when it was good?

But Airbnb got completely oversaturated, okay? And it's. That market is oversupplied. It's still struggling as it should be. And you know, look, 15 years years ago I was saying this on my show. The great thing about a podcast is you can just go back and listen to the old episodes and see that I'm right, okay? Because the number of non primary beds in the world, David, Massively expanded. I mean, even at the rise of. Of the.

I think you're making my case, though.

No, I am making your case to some extent, but it's not, it's not a black and white thing. Okay. That's what I'm.

Oh, I know. I know that now. My question I like to ask because I didn't have an answer to it for, for quite a while, is when in 0809, when the most crazy real estate market since the Florida 1920s market, which I bet you have, you read Bubble under the Sun.

No, I have not that Florida.

Love the book. It's an entertaining book. Especially if you know Florida. If. Especially if you don't. If you know Florida. Because it's sort of the history of. Of all the towns in Florida.

I'm looking it up right now. But. But I have studied the early Florida crazy real estate market and Swamp.

An easy read. This is an easy read. And the funny thing was, is that the bubble. It depends. Actually, ironically, I said something and Chanos jumped on me and said, well, that was not quite it, but on Twitter, and I'm going, well, I've been one up by that guy. The claim is that the market burst when a ship capsized in Miami's harbor and it took 38 days to get out. And they said that in theory was not a problem, except by the time they got the ship and cleared the harbor, the bull was over. It was over. And then Baltimore, the ship hits the bridge and I go, oh, wouldn't it be weird if that was some. But it was entertaining. It was such an entertaining concept. So the question I ask is, in 0809, who wrapped up all the inventory? I didn't know where it all went. I said, they created a ton of houses. Where'd the inventory go?

Well, the institutional investors got into the game shortly after that. They only control about 2% of the market. They do hold most of that now. They have. In terms of aggregate numbers, their numbers have only grown, but they of course rejigger their portfolio like anybody does. They sell things, they buy things. You know, that's a normal behavior.

They got bribed to buy it, though. Right now the fixed income market is not bribing them to hold it.

In other words, your point is you think institutional investors are going to do a sell off?

I think so. I think they. Some. I think they've started, haven't they? Evan Stern, like, aren't these guys. I know they're liquidating commercial real estate, not in aggregate.

And we're talking single family homes, not the commercial properties, obviously.

Office. Right, right.

Terrible.

Single family homes. Yeah.

Single family in aggregate. They are still growing their inventory overall, they're still building, build to rent communities. I just had a big institutional investor on maybe two, three weeks ago. He had some great data charts, graphs. They're buying, they're, they're all pretty much increasing their numbers.

That's not momentum. You know, if you get out over your skis, it takes you a while to get back away from over your skis. So if you have a hundred million dollars invested in a project, you don't just shut it down as soon as things turn south.

Of course not.

You've got to keep, you got to cross your fingers, you got to crush your fingers. You gotta go, you know, if I can just weather the Fed dropping the rates and then if the Fed drops the rates, the rates go up, not down and the margins go up, not down, then you say, okay, now I have to sell. That's my worldview.

Okay, I don't think that's happening, but we can agree to disagree on that.

But I'll tell you, anyone listening who believes me now, you is nuts.

Well, thank you, but. Okay. Let's just talk about the Fed for a moment though. These last two rate cuts, I mean, we just had one this week and then last month they were sort of weird, right? Because the mortgage rate. Very weird. Both times went up, up. Which is unusual.

That's my point.

I know, I know, I know. But overall, overall, I think the trend is toward the pivot and it's. They're gonna cut a little more now with Trump getting in. I think they're kind of taking a wait and see. Next month maybe, and maybe the month after that. But overall, I think the trend is rates to ease a bit. Yes.

No.

What do you think?

Maybe. I'm not sure the dial works. Is, is as correlated with them. I think it's possible that we' 40 year period where the Fed got to. At least it's like a shopping cart with a steering wheel for the kid and the kid thinks he's driving the car. And I think we could discover that the Fed's twirling the knobs is not going to work. We've gone from interest rates of 16 higher percent to zero. That game is over. The question is, are we doing a James Grant huge credit cycle rollover and entering the other half of a credit cycle that could last another 40 years?

I think we just don't know.

That's right. But, but it should scare people to death if they are out over their skis on this stuff. Now again, you say that the, that the rental units are oversupplied, that will pull on apartment.

Wait, wait, wait. Apartment rental units are over?

Yeah, that's right, that's right. But that will be that, that will suck up consumers when they're doing the, when they're doing the cost benefit analysis. Say, look, I can rent for this. Yeah, I have to pay this to buy. I'm gonna rent.

This is the beautiful thing about income property, David. You're either in a market where rents are being pushed up because people refuse or can't move out of the renter pool. So you can adjust your strategy because it's a multi dimensional asset. You can be in a capital appreciation market when money is loose and housing supply is short and demand is high, or you can be in a cash flow market when rents are being pushed up because money is tight and people can't move out of the renter pool. As long as you must have one factor though, the population must be growing, at least in your market. Right. Because if you don't have that or at least a stable population, then you got a problem.

Well, that gets to the must question. Do we have a demographic reversal going on?

Yeah, well, we overall do, but America keeps papering that over with immigration. And so, you know, we've got a favorite topic, we've got a different attitude toward that now. He did say, you know, let's get some immigrants from non countries. And of course everybody, you know, just pilloried him over that state.

And of course, yet again, he destroyed his Entire campaign for 15 minutes and then got it.

But he wasn't wrong.

No, he wasn't wrong at all.

Like, like, I know it's hard to hear that, but the fact is, do you want immigrants from Haiti or Norway? I mean, you know, well, and people.

Talk about we are a country of immigrants, but they're forgetting that we were a country of immigrants when they were coming through Ellis island and we were expanding westward and we, we just needed hot bodies then we need, you know, Silicon Valley types more. We need. And we've. You should look at the demographics of my classroom now. It is, we are no longer, you know, Bob Smith and Jane Doe. We are a highly international class, of course. And so we've done that.

International is fine. Let's just make it international. SM.

Yeah, yeah, what is it? Ms. 13? We do not need those guys, Right?

Yeah, no, I think they can stay home.

Yeah. But getting them out of here is going to be hard. And getting all the nationals who were sent here by their sovereigns to hang out until told to get into trouble. If you're an enemy of the United States and you saw the open borders and you didn't take the opportunity to send a ton of your operatives in, you're not a scary enemy because you're too stupid. It. Yeah. Right.

Before you go, tell us what you predict, what you think is going to happen with the economy. You think inflation. Now you sound bearish on real estate, but inflation is great for real estate. We love inflation as investors.

Well, it's a hedge, right? It's a hedge. Well, so the leather than a hedge.

You probably don't know this, but I created a strategy years ago called inflation induced debt destruction. And the inflation pays your debt off for you. So while the asset is the hedge against inflation, because the ingredients of the asset are commodities. Lumber, concrete, copper, wire in the walls, petroleum products, glass, steel, labor, energy, you know, those commodities hedge against inflation very nicely historically. But the debt gets debased by inflation. And that's, that's exactly what the government is doing. Right. We started the show with that topic.

So I in Ithaca could live in a house. That's a third the cost of my house comfortably. Now I did the math on that, precisely that, and said, you know, what does real estate do? And the Thornber Group, I think did it and said, look, owning a house like is sort of round number slightly above inflation. And when you, when you bean count absolutely every last stride of it as an owner, but since it costs three times what I needed, I really had to say, look, this is not just a house, right? This is not. You can't just say, well, I have to own this. I could have gone a third. I lived in a four bedroom farmhouse on two acres. It was great, but I moved to the lake. So I know this math. And again, if I can find a way to rent it for more, then I understand that. Here's my pitch for why we're in trouble. This is not a real estate trouble. This is an equity trouble. In 1981, China came out of the middle ages basically and started selling labor. They desperately needed capital. They started selling labor for pennies on the dollar. Russia had not yet collapsed, but they were desperate for capital and they started selling resources for as much as they could to build Russia's capital base up. The baby boomers hit the workforce as a huge demographic slug and they brought their wives with them. And so we had the phenomenal demographic push and interest rates and if you listen to Buffett, he says, this is the whole game. Interest rates were at 16, they dropped down to 1, down to 0, effectively over the next 40 years. These are all tailwinds. These tailwinds cause the market valuations. And now I'm shocked by how many people don't understand what a valuation is. Valuation is the price of equities divided by something that ought to track equities. So it should flutter around as opinions change, but it should not trend.

So unless that's an interesting statement, valuation. Say that again.

Market valuations are the price of the market divided by something the market should track.

In other words, the dollar.

So, no, because the denominator is also subject to the inflation. So price to gdp, price to book value, things that also inflate. And so the inflation cancels in a valuation. So if inflation drives up the price of the equity, it's also driving up the profits. The nominal profits is dropping. It's driving up nominal revenues, it's driving up all these things. So if you look from 1880 to 1995, valuations just flood around. They don't change, they go up and down. And in 1981, they were at rock bottom. So we started in basement level valuations. Let's use pe. It's one of the most easily cheesed numbers, but price to earnings ratios most easily understood. And it was 6. So you were being paid 15% to own the market. The market was priced for 15%. Now, let me give you a counter example. Take some company that's got a PE of 100. The market is pricing that to return 1%. And you can say, well, but there'll be inflation. I go, but that won't change the fact your price earned 1%, because although that will drive the price up, it'll drive the price of everything else up underneath it. You don't gain, you know, you don't gain by inflation. You got to create wealth. And so then the question is, what's the next 40 years going to bring? And it turns out, if you make some very simple assumptions, one is that the GDP grows the same as it did in the 20th century. Oh, let me finish that first thought. From 95 to the present, the valuations left the channel. It was at the high end of the channel, and it exited the channel. So from 1981, low to the present, valuations, which should not trend, compounded 3.5% a year, compounded annually, three and a half percent a year. If you assume the GDP grows normally and the valuations over the next 40 years regress to the historical norm, we will not move a dollar. Those are not complicated assumptions.

In other words, it sounds like you're saying nominal gains, no real gains.

That's right. Yeah, but valuations adjust for inflation. Naturally. Any valuation metric worth anything adjusts for inflation.

I agree, but here's the thing.

And consequently, to get out of 150 to 200% overvaluation, you need to organically grow out.

As far as the general macro economy, I think your statement holds water. The issue is, though, that the smart investors and the upper middle class and the wealthy, obviously, you know, they use leverage. They don't really use their own money directly to do any kind of investment. You know, they borrow against equities.

No doubt the top 5% will do well.

Well, yeah. So they're leveraging and so they're getting a compounding effect on whatever happens. For example, with income, property or just real estate, Just your own home. It works either way. If the property just keeps up with inflation and treads water. Right. You're just hedging. That's better than nothing. But when you leverage it, say 10 down or 10 equity, you've got that multiplier effect of that leverage. So the 6% appreciation and real inflation of 6% turns into 60%, and that's why the rich keep getting richer.

I do believe that that will regress to the mean, too.

Tell me about that. How will it help?

Well, you know, the problem is, is the word leverage keeps showing up. And leverage has a nasty habit of unwinding.

Yeah, but it doesn't unwind on the people who take it out, unfortunately. I mean, it does unwind on the economy, but, you know, that's just the too big to fail socializing losses.

So the person who's listening to your podcast, except for the fact, since you're a real estate podcast, maybe they've jumped jumped on the right train. But the average person is told, look, put money in the S P and sit and wait and buy and hold, and the market fixes itself. What I'm saying is over the next 40 years, the market is going to fix itself and you're going to go nowhere. Best analogy is the Nikkei got out over its skis in 89. Nominally, it's broken even in 35 years.

Right. Japan has a demographic problem, the US does.

So do we. Yes, we do. We're behind them. Not really behind them.

Our population is still growing.

Let me make a case for demographics. Let me make a case for demographics.

Go for it.

Everyone says that you need the population to grow, for the economy to be healthy. What you're saying is you need new entrants to pay for the existing entrance.

Yeah, that's a Ponzi scheme.

Exactly, exactly the definition of a Ponzi scheme. I do not believe Ponzi schemes last indefinitely.

Yeah, well they don't. But here's the thing. Therefore it's just like the saying. Maybe it was a Warren Buffett, I can't remember. But you know the saying, the market can remain irrational a lot longer than you can remain solvent.

So I can remain irrational longer than the market can remain solid.

My point, David, is they can kick this can down the road for another hundred years. You know, we don't.

I don't think that's true. I don't think that's true. I think, I think we're at the end of a 40 year credit cycle and James Grant and these guys are going to be right. And I think it's going to start to unwind and it's going to grind and it's not going to be the guy. Here's one thing I'll tell you. Crashes don't correct anything. They don't correct anything. To really correct the markets 150, 200% overvalued, this is 60% correction needed, right? To correct the market you need to not only bring the prices back to earth, you need to correct investors attitudes. If we crash 50% tomorrow, the dip buyers would show up by the bazillions that would therefore would correct nothing. You need to knock the investors down, they get back up, you need to knock them down, they get back up. And by the end of 1981 we had knocked the investors down and over the previous 14 years they had made nothing nominally and lost 70, 80% inflation adjusted, they were broken. That's the bottom. We are going to go through some period like that. Now if you own the high in 06, boot up. This is a challenge to your readers. Boot up an inflation adjusted S and P that covers at least a century. Go to a high and the first thing everyone wants to talk about is how long does it take to break even? And It'll be like 20 years, right? The question I ask you is how long does it take to hit that high? Not for the first time, for the last time. And then 1906.

I was on a live stream with Peter Schiff last night, right? The ultimate bear.

May God have mercy on your soul.

I know he keeps talking, talking and he's always wrong, but he's interested.

No, he's not always wrong, though. No, he's not always wrong.

I would argue with that.

No, no, he was calling.

Hang on, hang on, hang on. You'll get to that in a second. Let me finish. So, you know, he made a really good statement years ago that I agree with. He says since the Great Depression, the S P or the Dow. Sorry, the Dow, I believe, has had no real gains. There'd been nominal gains only. The only return is dividends. That's it. And I agree.

I pretty much agree.

I agree too. You know, he's. He's right. So go ahead with your.

So what are the dividends? Right now? Use that as a valuation metric. What are the dividends?

Well, I. I don't know. I'm not a stock.

They're like one and a half percent.

Yeah, they're. Yeah.

Okay, so we're priced by that model. And by the way, we're also. We're not at a low. We're at a high. Right. So by my model, if you look at 1906, the break even was something like 70 years later. You look at 1929, the break even. The last time that we hit that same inflation adjusted price was in the early 90s. So if you were owning the market in 29 and you grew to be an old, old man. Zero. Now, over that century, interest rates went from a high of 6% to a low of right now, 1 1/2 percent. I would argue the market. That in itself shows you how overvalued the market is.

Listen, I'm not gonna debate that because I probably agree with you. I'm not a stock market fan. I'm not a stock market expert.

Rip the S P soul out.

I'm the guy. Whoa. I'm. Listen, I'm the guy who says the stock market is the modern version of organized crime. Okay. I think they're a bunch of crim criminals on Wall Street. Okay, but let's just switch gears on that for a minute, okay? And about the economy in general and maybe the stock market too. And you know, look at the incredible advances we're on the verge of with artificial intelligence, nanotechnology, biotechnology. I mean, we are.

I don't buy that.

You're the organic chemist. Okay, so we're living in a pretty amazing time the way I look at it. Am I. I'm wrong?

No, I think you're wrong. Wrong on that.

Okay.

I think you're wrong. I would say that if you'd said that in 99, I would have agreed. I would say so.

So we had the Internet. I think AI is as big as the Internet in general.

Well, let me put it this way. Fascinating thing. Robert Gordon's. If you ever read Robert Gordon's book, it's about wealth creation. Some wealth creations in the title or something. Robert Gordon wrote a brilliant book and he talks about Amazon is not pioneering compared to the Sears robot catalog. Yeah.

Okay.

You look at the modern companies like Facebook and Twitter and all These monsters, the Mag 7, they're dwarfed by Standard Oil, US Steel. And then I was watching Peter Thiel the other day being interviewed, and he said, tech has been stagnant for 25 years. Well, Peter, that's that. I was blown away and I am a disbeliever. AI, I'm not convinced. I think it's gonna. I use AI. I think it's going to be great, but I don't think it's going to be. I don't think it's necessarily going to transform. Someone was making the case, kind of Tony Nash was making the case how much it makes him more efficient. Stuff like that. He's in the money industry. And I said, Tony, everything you're describing about increased efficiency involves sloshing money around, around. I said, that's not wealth creation.

It's not the real economy. I mean, you know, it's not the.

Real economy at all.

Peter Thiel is famous for saying, we expected flying cars, but we got 140 characters instead. Right.

So that's a great quote.

Yeah, it's a great quote. And on our. Our technology, except for what Elon Musk is doing and some. A few others.

Right.

Is not physical. Okay. It's just software, which is the world, obviously, and it does move stuff around more efficiently. But that just works really well for a financialized economy, as you said.

That's right.

But it doesn't. It doesn't build anything, you know? Yeah.

How many of you listening to this would say that their lives are being made better by the digital world? Now you get into these infinite loops and stuff where you're trying to get some help from someone and you can't get any help. And. And so then the question is, is this wealth creation? The answer is I don't think so. And then you look at someplace, some company like Facebook, are they really making that much money on ads? Is it possible maybe The Katherine Austin Fitz $14 trillion missing from the Pentagon is finding its way into Facebook and finding its way into Amazon and finding its way into these companies? And the answer is maybe yes, that's a dragon. That's a Drag on the system. So I'm not convinced this is a revolutionary economy. When was the last product Apple put out that was innovative.

Yeah, right.

And SpaceX, I think Elon's amazing. I don't think the electric cars, I think the electric car market is going to get crushed. I think already getting crushed.

I mean.

That's right.

Look, electric cars are not ready for prime time. Battery technology has gotten a lot better, but it's still not good enough, you know.

And by the way, I don't think the alternative energies work.

Yeah.

So we're going to be back at fossil fuels. So if your crowd wants to diversify away from real estate, go back towards the commodities because I do not believe that ExxonMobil and these guys are going to have trouble selling fossil fuels. And I do have a position in nuclear power. Now here's the danger. The new second gen nukes which could revolutionize the world. You want to talk about revolutionize the world? Provide better energy. That's the whole game. Right?

And we're on the verge of that.

And we're on the verge of that.

Now that now does it.

All the green weenies, that's the bullish.

That were supporting Jane Fonda and the China syndrome from the 70s. Right. Now that now that they can make money from it, suddenly Google's all about nuclear power.

You know, I have a theory that they're actually, you know, there's AI is bringing nuclear power back. One could flip that argument and say is it possible they're using AI to smuggle nuclear power back. Back. Is it possible? The causality is different. And they said oh, an interesting way to put it. We can sell because, because a couple of years ago I said nukes are coming back. They got to come back. Yeah. And, and I thought maybe energy problems in Europe because of Russia and stuff like that would, would trigger it. And then they had a warm winter. So it didn't. But if you freeze your ass off for a winter, you will be begging them to put a nuclear power plant in your neighborhood.

Sure.

And, and, and so the second gen nukes, which I'm not an expert at, but I tried to write, listen to the experts. The old plants, they use 6% of the energy and then the rest gets sent to waste. The second gen plants can use that 96%.

Incredible.

They can go literally to the waste dumps, get the shit back and use it. Now here's the question. Does investing in uranium make sense? Then by that model, the answer may be no. Maybe we've got more uranium in waste than we'll ever need.

Yeah.

Right. And so. So it's a complicated. I. I'm supposed to do a debate with an economist about climate change, and I think he's going to take an economic slant on it. He's going to take two emergent systems and superimpose them in the debate, I think. And I'm going to go, how can you possibly predict the influence of the emergent climate with the emergent economy and make sense of that? I don't know. It'll be interesting to see what happens.

We shall see. David, we could talk for a long, long time and it's always interesting having you on, but just kind of wrap it up for us or share your thoughts on anything. I didn't ask you just before we go.

So I'm not qualified to hold a conversation with you on real estate. I do think that if the S and P gets the wind knocked out of it, real estate's going to be in the splash zone. I do think that the real estate has the advantage of being hard asset investors. Right. I think concepts are not going to sell well in the next 40 years. I think you're going to have to actually make stuff, and I think real estate kind of makes stuff, provide something real, that sort of thing. So I agree with your enthusiasm for real estate. I'm not sure the next three years of your existence are going to be rosy as long as you're not too leveraged, which in our conversation, I think some of your listeners might be. By the way, I got to ask you a question. You know those two prepubescent real estate investors? I met those. Those two kids. You know, the two kids. No, there's these two kids who, like, are millionaires now because they start investing in real estate. I met him in a meeting. I was at an investment meeting with. It was the same meeting with Peter Schiff was there. It was a really interesting crowd in any event. So the real estate argument's a fascinating one to me. Commercial real estate nightmare. Yeah, that's a nightmare. And I think we might not ever get back to needing those things they built. And they don't convert the condos. No, not very well. So. So then the question, it becomes this question, what do you do with that building? And it's going to happen to college campuses, too. We got one right up the lake that closed. What do you do with it? What do you do with the campus? And so there's going to be some.

Very hard to convert some of these properties. No question.

I heard the Number someone who analyzes properties supposedly for a living that says, okay, here's what I think you can do with this. Says only about 25% are repurposable.

Yeah.

What do you do with the building? What do you do with an 80 story high rise that you can't.

It sits there and it's got a high vacancy rate and someone bought it for, you know, pennies on the dollar and they manage it and, you know, with their cost basis being so low.

Is it possible that this appalling left wing policy of stuffing migrants into commercial real estate is a bailout for commercial real estate? I don't know, Intentionally.

It's going to shift back anyway. Yeah, maybe.

Well, but, but if, but if you get paid 300 bucks ahead for migrants and you have to provide no services, you don't have to clean the room.

Right.

When it's all done, you've collected pure profit and then you renovate the thing to clean up the missing pipes and.

Yeah, right.

And start over. It's conceivable that the federal government said, okay, we're going to bail out real estate by putting in migrants.

Well, that bailout is ending under Trump.

But today, the way they're doing it, did you see what happened in New York City?

No.

Eric Adams kicked them all out the next day after the election. Now, I think Eric Adams has cut a deal with Trump.

Yeah. Hopefully he needs one.

Well, he needs Trump. Trump supported him at that, at that press dinner. And I think, I think Trump said, look, you bail, I'll help you out.

Yeah, well, he's going to need some help. And now he's probably.