The Dollar Becomes a Crowded Trade

AMA2-25-15The US dollar continues to trade strong in world markets. But as it continues its climb, some market watchers worry that it might be time to put on the brakes.

According to a recent article from Business Insider, the dollar has become what’s known as a “crowded trade” in the international money markets. What’s more, it may be the world’s most crowded trade, the darling of speculators and eager investors convinced of its long term strength in a world of volatile currency shifts that make the dollar’s stability more appealing than ever.

While the dollar’s surge is a testimony to that very stability and long-term value, it doesn’t always bode well for international commerce and domestic prosperity. And in a crowded trade, there’s always a time when the crowd disperses.

A crowded trade, in the world of international investing, is one that attracts a large number of investors and speculators, all holding to a set of convictions about the market itself an the continued rise of the asset in question.Trades become crowded when that asset gets suddenly hot – the price appreciates fast and quickly attracts a flock of speculators and long-term investors convinced of its money making potential.

That’s what seems to be happening with the dollar, whose surge in popularity comes at a time when other major currencies are facing problems at home and abroad. In the face of those currency woes, the dollar becomes a safe alternative. Argentina’s 2014 debt crisis boosted the dollar’s popularity on both the legitimate and black currency markets.

Facing international disapproval and economic troubles at home, Russia has seen a steep decline in the value of the ruble. Worries about its long-term stability, Russians of all income levels began converting their savings and investment into foreign currency – mainly the dollar – whenever possible. Russian banks experienced shortages in foreign currencies, and black market trading surged back.

In Europe, too, the Eurozone is suffering financial setbacks. A majority of the Zone’s member nations dare either headed toward or already in periods of deflation, with flattened prices and slowing economic growth. The euro is trading lower than its leading competitors, causing the European Central Bank to ponder a round of quantitative easing that would put more euros into circulation.

Those moves, along with Switzerland’s decision to let its franc float against the euro and other currencies in world trading, have triggered talk in investing circles of an impending “currency war” of increased volatility in world markets and aggressive maneuvering by central banks.

It’s in that uncertain environment that the dollar sits at the top of the currency trading heap – maybe little too high, in the opinion of some economists and financial experts, who worry that the current “dollar rush” could collapse all too quickly.

That’s why they’re calling for some restraint on the dollar’s strong showing. A strong dollar sounds like a good thing, but may actually not be. The downside of a crowded trade is what happens when the asset takes a tumble – a scenario that’s been likened to a crowded theater with only one exit. What happens when everyone decides to leave at once? In the monetary world, the equivalent is a quick unloading of the underperforming asset.

Against a very strong dollar, other currencies trade weaker. That can affect international commerce and financial transactions of all kinds, including pricing of goods sold internationally and the management of dollar denominated debt held by countries around the world.

Easing off on the dollar’s surge would give world markets a chance to find balance and forestall a rush to abandon the dollar when its trading slows. But the fate of the dollar and its future as a crowded trade depends largely on the decisions of the Federal Reserve, which has observed that a strong dollar could harm US interests abroad and slow the economic recovery at home.

The Fed is in the process of tapering off its own most recent round of quantitative easing, an intervention aimed at keeping interest rates low in order to stimulate the economy’s recovery, and under new leadership is taking a cautious approach to major shifts in monetary policy.

As Business Insider points out, the landscape of international finance is constantly changing. World events and domestic upheaval make long-term predictions a risky business. But for now, as the dollar flexes its muscles on the world stage investors with an eye to future returns are happy to join the crowd.  (Top image: Flickr/SqueakyMarmot)

Read more from The American Monetary Association:

AMA111: Six Steps To Wealth With Linda P. Jones

Will Deflation Derail World Economies?

The American Monetary Association Team

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AMA

AMA 111 – Six Steps to Wealth with Linda P. Jones

 

Jason welcomes Linda P. Jones to the show. Linda is a podcaster and financial expert who teaches others how to have a wealthy mindset and how to build wealth the right way. She became a multimillionaire by the age of 39 and talks to Jason about her stock market background, six steps to building wealth, and where the US dollar is going.

 

Key Takeaways:

2:30 – Linda realized early on that mutual funds weren’t going to make her rich.

4:30 – People who are overly cheap or frugal do not have a wealthy mindset.

9:30 – Linda shares her story on how she made money in stocks.

14:20 – Even if you have a full-time job, having a side hustle is a great way to begin creating wealth.

16:45 – About every 8.5 years the US sees a financial cycle.

20:50 – Linda is a big fan of gold and silver and she explains why they’re a great investment.

25:10 – The only reason the US has so much power is because they have a monopoly on money.

 

Tweetables:

Nobody ever got rich saving money. They got rich by creating money, by creating opportunities. That’s how wealth is created.

If people just save money and put it in the bank at 1%, it’s going to take 72 years for it to double.

The price of gold is going to have to re-adjust to its true price of what it should be trading at.

 

Mentioned In This Episode:

Money Love by Jerry Gillies

http://www.lindapjones.com/

 

Transcript

Jason Hartman:

It’s my pleasure to welcome Linda P. Jones to the show. She is America’s Wealth Mentor and she is the only financial expert who teaches the important of having a wealthy mindset before and during your wealth building. Linda teaches the savvy wealth-building knowledge that Wall Street didn’t teach her that made her a multimillionaire at the age of 39. She’s a contributing author to three number one bestselling books on Amazon, host of the Be Wealthy and Smart podcast and winning of the bronze Stevie award for Maverick of the Year for her revolutionary approach to  financial education. So, I’m looking forward to having her on today and discussing some of these ideas with her. Linda, welcome, how are you?

 

Linda P. Jones:

Thank you, Jason. It’s great to be here. I’m great.

 

Jason:

It’s good to have you. Where are you located? Give our listeners a sense of geography.

 

Linda:

I’m in the Palm Desert area. It’s called Rancho Mirage. It’s between Palm Springs and Palm Desert.

 

Jason:

Been there many time. Good, good stuff. So, you have six major areas that you focus on, is that correct?

 

Linda:

I do. I really learned that our six steps to wealth and from my childhood I always want to be wealthy, I grew up among people that were very wealthy, but we were middle class and I wanted to know how do people do that and sort of became my life’s mission to discover how that happens. I tried different things. I went into the investment industry. Listened to what they said to do and realized that if I buy mutual funds and wait my entire life, I’m never going to be reach.

 

Jason:

Yeah, mutual funds, I mean, they’re just a scam, aren’t there?

 

Linda:

Well, they are not always a scam, but they definitely are not going to get somebody to a super wealthy level. They might be able to give you some growth above and beyond what you can get certainly at a bank and other places, but they definitely are not the end-all, be-all  for wealth building.

 

Jason:

Tell us what you’ve learned and let’s dive into these 6 steps.

 

Linda:

Okay, well the first step I learned was that millionaires were always feeding their mind with positive things about how they could really think bigger, how they could put positivity in their mind, and realize that they could achieve a lot more than they thought was possible. So, step number one is to create a wealthy mindset. So, it’s really about being grateful for what you have, but also just deciding what’s going to be in your mind. Instead of letting the TV and negative media feed your mind, it’s about you putting in there what you want to be in there through different statements that you want to put in there that you create and write down and commit to memory. You know, allow that to really be your belief system.

 

Jason:

Yeah, I think that’s very true. I remember many years ago we hired a speaker of a great old book by the way, I wonder if the guy is still around, he’s name was Jerry Gillies and he wrote a book called Money Love. It’s definitely an old book, it was quite a while ago, and I remember a group of people from my real estate brokerage hired him to come in to speak to us and he had us do the wealthy mindset activity of imagine you’re at the wealth level that you desire and imagine we’re at a cocktail party and talk, act, be that person. The funny paradox about this is that certainly we all need to be prudent and wise with our money, right Linda, but being cheap and being overly frugal is definitely not a wealthy mindset, is it?

 

Linda:

It’s not and, you know, there’s a big trend right now toward frugality and what I call frugalism, which is living in a 200 sq ft home and not having a drink with your friends, but camping in the woods for your fun activity. I mean, that’s all well and good, but you know if you’re focusing on becoming frugal, there’s only so much you can cut out before you’re actually living in the woods, right? So, I’m not a big fan about being frugal. I am a fan of being careful and smart with your money and smart with how you spend it and invest it, but I think that this frugalism, this whole sort of trend is really getting out of hand.

 

Jason:

Frugalism is getting out of hand, I love it. So, yeah, because it makes you focus on the wrong thing, doesn’t it? I mean, I like to say to people, nobody ever got rich saving money.  They got rich by creating money, by creating businesses, by creating opportunities, by creating rental housing for people. That’s how wealth is created. It’s not created by saving money. I mean, certainly you need capital to do a lot of these things and you need to save to get to that point, but what’s the distinction there. Maybe help our listeners understand the fine line.

 

Linda:

That’s the prefect segue into the second step, because actually my second step is save an nest egg, but I agree with you, it’s saving an nest egg for the purpose of capital. It’s not saving for the purpose of saving. You know, if people just save money and put it in the bank at 1%, it’s going to take 72 years for it to double. So, just saving alone, you’re exactly right, it’s not going to work, but when you realize that you have to have some sort of side invested or what I call a side hustle where you have to have something on the side where it’s going to grow your money faster, that’s really what the saving is all about; is to get it in the investment.

 

Jason:

Yeah, to develop capital to do the investment, okay. So, is there is more to step two then?

 

Linda:

No, that’s pretty much it.

 

Jason:

Okay, how about number three?

 

Linda:

Step three is to find a mentor and that’s something that you’re great at and it’s something that I started became good at as well, just really directing people, what are the steps, what are the things you need to do, because, sadly, a lot of people that are writing books are actually journalists and have never created wealth and I think that there’s a huge distinction there, because I will read people and I’m sure you’ve done the same thing, Jason, where you read these financial books and you go, “Where is this person coming from?”

 

Jason:

Oh, they’re so basic and just dumb.

 

Linda:

And they are not going to get people to their goal, they’re not going to, like you said, they just tell you to save money, you’re not going to become wealthy.

 

Jason:
It’s amazing how we could even pick on without even naming names, I think our listeners know who they are, a lot of the gurus that you see on television, really, their place just doesn’t work. I mean, it’s amazing how they became so popular. I almost think that that might be a conspiracy, you know, to provide misinformation to the masses so that the powers that be can stay in power.

 

Linda:
Well, you know, it’s an interesting point and that would be a very fun topic to talk about on another show, but I think that, you know, I never heard about FICO scores until, and I was in the investment industry a long time, I never heard FICO scores discussed and all of the sudden it just became the focus on television, you know, and all these topics that, yes, it’s important if you want to buy a home and a good credit, but it’s not the end-all, be-all of wealth building. There was very little time actually spent talking about what you’re going to invest in that’s going to grow your money and create wealth for you and that’s what I love about what you do is, you know, talking about real estate and getting people to understand that’s an important vehicle for them.

 

I don’t have any one particular vehicle that I am a fan of. There’s many that I am a fan of, of course, I made my money in stocks originally, then when on to make some very nice money in real estate and, you know, there’s other things as well. I’m a big believer  in gold and silver even though right now we’re having a little bit of difficult. I think that’s more a currency war than it is an investment issue, but I really think that once you understand what’s going on with the currency people can invest like billionaires who are buying up a lot of gold and silver right now.

 

Jason:

When you talk about stocks, I mean, that just amazes me because literally in all my years, as I mentioned off tape before, I have never met anybody who wasn’t an insider who created any real and significant wealth on Wall Street, investing in stocks, bonds, and mutual funds. What did you do? Tell us what happened and how you did it?

 

Linda:

Well, I was looking at how to invest and, you know, it was really interesting because Wall Street would always say don’t buy individual stocks, they’re too risky, and I was actually in the mutual fund industry, so I was actually talking about diversified portfolios all the time and really believed in that, but I also saw that wasn’t going to get to the higher compounding levels that were going to build true wealth and I really understood that you needed to invest in a money engine, which is actually step four of the six steps to wealth.

 

So, I looked around at what are the different money engines that I could invest in and I tried some real estate, I tried some foreclosures, they actually went well, but my returns weren’t quite what I was hoping for. At that time, I noticed the stock market had been going up 30% for a couple of years, this was the early 90s, and I’m like wow, what’s up with that? Because there’s all this really hard work I was doing in real estate and I’m like, you mean this is a paper asset that I could invest in and if I knew what I was doing and picked the right companies this might even work? I started to, I read how to make money in stocks and I would buy Investor’s Business Daily and follow that religiously and..

 

Jason:

Were you a dividend stock investor or either one?

 

Linda:

No, at that time the tech stocks were doing very well.

 

Jason:

So, we’re talking what, the dotcom bubble? Is that the era?

 

Linda:

The dotcom bubble, tech stocks, and internet stocks and basically concentrated in that area, and yeah. There were several companies that did extremely well.

 

Jason:

Okay, so that’s interesting. So, you really pretty tolerant of investing in speculative stuff, you know, where you’re just buying simple for capital appreciation. You know, you say you like gold and probably silver too, I don’t know if you said silver, but those assets don’t produce any cash flow at all, they’re purely one dimensional. You’re just buying them, you know, buy low, sell high is the business plan. That’s it, there’s nothing else to it, wait for the dollar to collapse. It kind of surprises me that you’re tolerant of that. I don’t know, as I’ve aged I’ve become such a cash flow investor.

 

Linda:

Well, I think that’s a good thing and I think that’s also a result of interest rates being so low and I think that interest rates were not quite so low at the time I was investing so it wasn’t so critical to be getting those higher rates by looking at dividends and other things, but I think since interest rates have come down so low, it’s become a critical part of investing and a critical, you know, part of the compounding equation.

 

Jason:

So, you had some good timing on some tech stocks or dotcom stocks in the early, like, 2000 era, right?

 

Linda:

Yeah. (#12:07?) one million and then it doubled in the next year. So, made a million dollars in one year the next year, so…

 

Jason:

Did you do private placement or simply trading stocks online type stuff?

 

Linda:

Just trading stocks.

 

Jason:

So, no private placement memorandums, right? Any IPOs?

 

Linda:

Nope, no IPOs.

 

Jason:

That’s great to hear. You’re the first person that I know of who has done that, so that’s awesome. Okay, next step?

 

Linda:

Next step is to compound it at a high rate. So, couple of things here. One thing is that you need to get to some higher double digit returns in order to really build wealth for yourself and that’s what you do and what you teach and also incorporating the smart use of leverage. So, a lot of people are saying don’t have any debt, debt is bad. I really found that debt is a tool and leverage is a tool and leverage is something that gets you a higher rate of return.

 

So, as you know, but let me go through for the listeners just a simple example, if someone paid $100,000 for a home and that home went up 10%, it’s worth 110,000, they made 10% on their money. If, however, let’s say another person just put down 10% on a $100,000 home, that home went up 10%, now they’ve made a 100% on their money just by having that leverage they actually dramatically their rate of return and that’s the power that leverage has. That’s why real estate over the years has been such a great investment. One of the reasons..

 

Jason:

Oh, leverage just rules. I mean, the old Archimedes’s quote, he said, “Give me a lever long enough and I’ll move the entire world.” Leverage is a very, very powerful tool and real estate really is the most leverage friendly asset class, so that’s a great thing, yeah. Okay, good.

 

Linda:

Absolutely. So, I think compounding, you know, if people are smart with their leverage and if people are smart with their use of debt, you know, debt can be used to get into a business as well, which businesses compound at a high rate and 77% of the wealthy have actually made their millions through owning a business.

 

So, I’m really a proponent of having a business and even if you work in a corporate situation having a side hustler, because that’s how I started, you know, I was full time working, traveling at a very business job and family life and started all this stock investing on the side. That’s why I recommend that people start their business is just with a little side hustler or their real estate with a side hustler.

 

Jason:

Side hustler, most people would say moon lighting. I love how you say side hustler. It’s great. It’s awesome. Good, good stuff. Okay, great, what else? We’ve got two more steps maybe?

 

Linda:

One more.

 

Jason:

One more, okay.

 

Linda:

the 6th step is to protect your wealth. So, the great thing about leverage is that it can get you higher compounding rates, but as you know, the downside of that is if you’re in the wrong place at the wrong place, it can work against you. So, a lot of people, you know, in the 2008 crisis were leveraged to the hilt and were, you know, just playing the same game and not seeing that money actually moves in cycles and that cycles actually come and repeat and, so, many people were caught looking the other way were highly leveraged and when values dropped, you know, had some really significant financial issues. So, I want people to really be aware of protecting their wealth and realizing that you don’t wanna have that leverage, you don’t want to have your foot on the accelerator floored on the leverage the whole time. You want to back off of that as you have some success.

 

Jason:

Absolutely. Great points. Linda, tell people where they can find you and learn more?

 

Linda:

They can find me at LindaP.Jones.com or on my Be Wealthy and Smart podcast on iTunes.

 

Jason:

Fantastic. Where do you think the economy is going? There’s been a lot of talk about deflation recently. I have been on the side of inflation for many years just with all the money creation. I just got to think we’re going to have some inflation, but it’s kind of a mixed bag. Lately, you look at oil prices, it’s really pretty amazing how cheap oil has become.

 

Linda:

I agree. Well, I we’re definitely having a bout of deflation here and where we are in the cycle would say that we’re probably do at the end of this year for some interest rate hikes, which will get us another kind of situation like we had in 2008 again and I’m not trying to be a huge predictor, but I’m just saying that about every 8.5 years we do have cycles that tend to repeat and so, I think that we could see some inflation come back in later on this year. We could see things to pick up and heat him and the fed raise interest rates, which can be a real problem.

 

Jason:

So, we’ve got a bout of deflation, but ultimately you think it will become inflationary, then?

 

Linda:

I do. I think it’s going to balance itself up the other way where we’re going to have some interesting rate issues.

 

Jason:

It seems like most of the economists out there think we’re going to have low interest rates for awhile and you seem to disagree with that and the reason the rates would go up is because of inflationary pressure, most likely, but one of the problems seems to be that a lot of this money that’s been created, I should say currency, it’s not really money; money is something real like gold, but a lot of the currency that’s been created out of thin air over the past several years, it hasn’t really hit the streets and it’s just in the hands of the banks and this is why we’re not seeing much inflation. What are your thoughts about that?

 

Linda:

Yeah. I think it’s surprising that we haven’t seen that because there’s just be so much money printing. I mean, the quantitative easing has been astounding. I think we’re going to see another round of that and that’s probably going to lead into the higher interest where they eventually do see it start to show up in the economy and start to heat up the economy too much.

 

Jason:

So, any thoughts on timing for this?

 

Linda:

Toward the end of this year, around October of 2015 into 2016.

 

Jason:

So, we’ll have sort of a deflationary bout in until then and then we will start to see inflation raise at that point?

 

Linda:

I think we could see interest rates start to go up, yeah, in October.

 

Jason:

So, if you want to secure long term three-decade-long fixed-rate debt, do it sooner rather than later, it sounds like. What other thoughts or advice would you have, Linda or just where things are going, anything, I thought I’d just leave it open for you.

 

Linda:

Well, it sounds like you’ve been educating your listeners about gold and silver and what real money is, which is fabulous thing because not many financial experts are doing that and I really believe that we’re in a different game than we’ve ever been in before. With this quantitative easing, we’ve had the government printing money unlike ever before and when you have an oversupply of anything, it’ll eventually will cause the price to drop.

 

So, I do think that while right now the dollar is very strong, we’re also seeing all the bricks, countries find alternate funding, they’re funding ways to trade with each other without using the dollar. They’re getting their own Swift system. I mean, all of this interbank trading with these other countries is now going online, which we never had that before. They were forced to use the dollar before as the petrol dollar as the world’s reserve, but as we get farther down the road here, I think we’re going to see that these other countries are not using the dollar. Eventually that will catch up with the dollar and, as you said, real money is gold and silver and what a better time than right now to pick up as much as you can.

 

Jason:

I have to say though, Linda, I’m not much of a gold bug. I mean, I do own some. I think I’ve got all of the four major metals now. You know, I have invested in it over the years, but I think it’s too speculative. Again, I just go to that cash flow point and the fact that I don’t get any income from gold, I don’t get any tax benefits, you know, it’s just like this very simple buy low, sell high speculative strategy and I’m afraid of the way the central banks and governments around the world manipulate gold prices. It seems like they’re winning. They’re really the most powerful entities on earth. It shouldn’t be this way. Like philosophically, I agree with you, completely, but I’m just looking at the way the world is even though it’s not right that it is that way.

 

Linda:

There’s only so much supply and demand. Unlike the dollar, you can print paper money till the cows come home, there’s no limit to how much paper money you can print, but gold and silver don’t have that ability and so, what’s happening is as people are taking possession of gold and not just allowing paper contracts and gold to be sold, but they’re actually wanting the physical gold, if you’ve followed the news this week, they were four countries that just asked for their gold back. So, we’re starting to see countries wanna have it in their possession. They’re starting to lose faith in paper money. It’s just starting to crack and so what people need to realize is right now the price of gold and silver is below what it actually costs to take out of the mine.

 

So, this is a manipulated price. This is a manipulation of the central bank to make the dollar strong right now, which because gold and silver move inversely to the dollar that’s made them go down, not because they’re not in demand, not because they’re not rare, but because it’s a manipulation, but that can only continue for so long. As soon as their is no more supply to deliver, those prices will change and they will reflect the accurateness of supply and demand, which right now is completely artificial.

 

Jason:

Okay, so, that’s a really good point that you bring up. So, why can’t that manipulation go on forever? I mean, it’s been happening for decades. It sort of brings me to that saying that, you know, having a stock background when you were in the financial services business, the investor complaining that, you know, the market is irrational, I’m right, the market is wrong. Well, you know, the answer is, well, the market can remain irrational a lot longer than you can remain solvent. I’m just afraid that they can just manipulate for a long, long time.

 

Linda:

Well, the reason they can’t, Jason, is because of the supply. So, what’s happening is every single futures contract that is coming due for gold right now is being request in physical. So, before they used to just roll over paper contracts of gold and silver.

 

Jason:

I think that’s a Ponzi scheme. I really believe and, you know, tell me I’m crazy, but I think COMEX is, you know, it’s just my opinion, I have no proof, but I would just venture to guess that could well be a Ponzi scheme that could crack at some point.

 

Linda:

Yeah, wouldn’t surprise me either. I mean, basically they were trading paper for something they didn’t have, they didn’t have enough to actually be able to deliver it, so as this is starting to heat up and as more people are demanding the physical gold and silver, eventually we’re going to not be able to deliver and there’s going to be default on the delivery of those future’s contracts and when that happens, the price of gold is going to have to re-adjust to its true price of what it should be trading at, not this suppressed, artificial price.

 

Jason:

Yeah, very interesting. It’s going to be very interesting to see how this plays out, but right now, you know, amazingly America still seems to be in the position of being the brink’s truck of the world. The Russian economy is falling apart rapidly, Greece is falling apart again, Europe is socialist disaster. We can grouse all day about how the US is so poorly managed and so in debt and everything is wrong, but look around, who’s any better off? You know, any major country, I mean. There’s not much out there.

 

Linda:

There’s not much out there and..

 

Jason:

Russians are just getting a hold of every dollar they possibly can, you know, they look at that as better than gold, interestingly.

 

Linda:

Well, I think that this, you know, these sanctions that happened against Russia and then Russia struck back and then the United States, you know, made the dollar very strong, which just tanked oil prices, which made Russia’s oil and currency drop. So, they’re, you know, in between a rock and a hard place. I mean, they are a real mess, but understand that the only reason that the United States had this power is because they had a monopoly on money, so now..

 

Jason:

Well, it also had the monopoly on being the biggest military the human race has ever known and that’s how it keeps that and enforces that monopoly.

 

Linda:

That’s right, but as these other countries, as China and Russia and Brazil and all the bricks decide to trade amongst each other without the dollar; for the first time ever in history, this is taking away the dominancy of the dollar. It’s just happening right now, so it’s too early to see it, but to my view that’s what’s going on right now and that’s why the dollar is so strong is that, I think, the federal reserve is doing it can to prop up the price of the dollar, because it knows that it can’t do it for every much longer. So, it’s going to do it as long as it can, because its days are really numbered.

 

Jason:

It’s an interesting debate. I’m just concerned that they can kick that can down the road for the next three decades, but maybe they can only do it for another three years. Who knows. We will see, we will see. It’s really, Linda, when you really look at it, it’s really illogical and that’s why it’s just darn hard to predict this stuff, because they’re all sorts of other forces outside of it beside math. If it were just about math, the dollar should have collapsed by now. Very, very interesting discussion with you today. Give out your website one more time.

 

Linda:

It’s LindaPJones.com.

Jason:

Linda Jones, thank you so much for joining us today.

 

Linda:

Thank you, Jason, my pleasure.

 

Announcer:

This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit   www.hartmanmedia.com   or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.

AMA

Will Deflation Derail World Economies?

AMA2-23-15Low prices delight consumers. But those falling prices may signal darker days ahead in the form of deflation, which flattens economies and leads to long-term recession. As prices drop and sales flatten in many of the world’s leading economies, experts fear a global epidemic of deflation that could have long-term effects on local and international commerce.

Consumers don’t like inflation, but central banks do. Inflation means higher prices and a sense that money doesn’t “go as far as it used to.” But a little inflation keeps commerce humming and debts being paid. It helps a country’s economy avoid deflation, which has a less obvious but more detrimental effect on local development and international trade. For government run central banks, the magic number for inflation rates that keep economies afloat is about 3 percent.

Deflation accompanies falling prices. Unchecked, it can create the dreaded “deflationary spiral” in which prices drop, but consumers don’t buy. That creates a surplus of goods and supplies that aren’t being used. To move them along, prices drop even further. But if people still don’t buy, the cycle continues, spiraling down into a hole of stagnation and recession.

When that happens, less money circulates in the economy. Consumers buy less and have more trouble paying down debt. That happens on a national level, too, as counties going through a round of severe deflation struggle to manage their own indebtedness. Let unchecked, long periods of deflation can plunge a country into economic chaos for years.

The current epidemic of deflation is hitting well-off countries in North America, Asia and the Eurozone. According to a recent article from The Economist, inflation rates in many of those countries is running well below the sweet spot of 2 percent – or is likely to do so in the near future.

In North America, Canada and the US are still seeing significant economic growth, but their inflation rates are still low – and falling oil prices are threatening to push them even lower. But the economic giants of Asia are seeing more trouble ahead.

In china, the inflation rate is below 1 percent. Japan’s rate is significantly higher, but a variety of factors affecting Japan’s national and international financial health threaten to push it down. In other Asian countries such as Thailand and Vietnam, deflation has already settled in.

The situation in the Eurozone is worse. As the Economist reports, 15 of the Eurozzone’s 19 member states are already in deflation. The most public face of the Eurozone’s economic troubles is Greece, but prices are flat for major categories of goods in more prosperous members such as Spain and Britain as well.

What’s behind the worldwide wave of deflation? One easy target is falling oil prices, which have dropped at times to prices under $100 per barrel in world markets. But the drop in oil prices actually has an upside – and oil price shifts are only one of many factors contributing to the threat of a round of deflation.

Lower oil prices mean savings for consumers in the form of lower gas and heating prices. The cheaper packaging of goods like cleaning products and soft drinks also passes on savings o buyers. That means consumers have a title more money available to buy other things, or to pay down debt. Governments benefit in the short run, too, from collecting more taxes and tariffs on energy consumption and usage fees from corporations.

In the long term, though, continued low prices overall keep the economy stagnant. If prices stay low, so do wages, and the job market suffers. Debt, both personal and national, gets harder to pay. People buy less, and the economy falls into s pattern of stagnation and paralysis that’s difficult to turn around without artificial intervention.

That’s when the central banks step in with quantitative easing – a plan to stimulate growth by pumping money into the economy, manipulating interest rtes, or both. The US Federal Reserve is in the closing stages of its latest round of Quantitative Easing since the massive housing collapse of 2008 plunged the country into recession. That stimulus involved the buyup of billions of dollars worth of mortgage backed securities and bonds in an effort to push interest rates low and keep money moving.

Now, the European Central Bank is rolling out a similar plan to buy treasury bonds and other kinds of securities in an effort to get more euros into circulation, The Bank of Japan is planning its own initiative to keep inflation at a comfortable rate and forestall deflation. Other countries are mulling similar interventions to stop the slide,

It’s too early to claim that deflation will dominate the world’s economies. The US dollar is trading strong in world markets against other currencies, which also affects international commerce and pricing, and other factors – including oil production – are constantly in flux. But for consumers in general and investors in particular, it’s worth remembering that falling prices may have rising costs.  (Top image: Flickr/PhilipTaylor)

Read more from The American Monetary Association:

Deflation and Oil Prices: Should Investors Worry?
Swiss Franc Fallout Ripples Round the World

The American Monetary Association Team

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Deflation and Oil Prices: Should Investors Worry?

AMA2-18-15Oil prices are falling, dropping below $200 USD for a barrel of crude. And while that makes US consumers happy, the tumble in prices is fueling worries of a looming round of deflation that could ripple throughout the economy and trigger another round of intervention by the Federal Reserve.

Because petroleum products play an enormous part in the economy as a whole, the ups and downs of the oil industry affects just about all major sectors. In areas where Big Oil has a high profile, jobs, housing and local retail and manufacturing are buoyed – or potentially sunk – by the boom and bust cycle of worldwide oil supply and demand. That’s why the recent fall in oil prices has economists and financial experts concerned about the possibility of a “deflationary spiral” that could eventually require another round of government intervention.

For consumers, the major concern is inflation – higher prices, and a dollar that doesn’t go as far as it used to. But the consequences of deflation may actually be greater. The “deflationary spiral” that financial experts fear begins with a drop in prices, as we now see with oil.

But although that drop should mean that people buy more, they may not, choosing to wait instead for even lower prices to come along. If that happens, there’s an excess in the production of various commodities. To move that inventory along, prices drop even more. But if consumers still aren’t buying, the cycle continues to perpetuate itself, spiraling down and down.

A healthy consumer economy is driven by the willingness of people to buy things. And if that doesn’t happen, the whole structure is weakened. Consumers delay spending, and debtors have a harder time securing debt. And because energy is a linchpin of that structure, the drop in oil prices could signal the beginning of a deflationary spiral and threaten another recession.

When a sluggish economy threatens recession, it may be time for government intervention in the form of quantitative easing, as the Central Bank artificially manipulates interest rates and the flow of money to keep major sectors moving. That’s what happened during the troubled years following the housing collapse of 2008 when the Federal Reserve instituted not one, but three rounds of easing. The last of these, dubbed QE3, involved the buying up of $85 billion in mortgage-backed securities every month to keep interest rates low and encourage buying.

As the economy began to stabilize after the housing crash, the Feds began a gradual taper off of the stimulus in 2014. But now, some economists worry that deflation triggered by the drop in oil prices could mean another round of easing to prop things up. But according to a recent report from Business Insider, the current drop in oil prices may actually make that kind of intervention less likely – and it may not even lead to the usual consequences of deflation. In fact, the opposite may be true.

As Business Insider points out, lower oil prices benefit consumers, who will pay less for gas and heat. Lower gas costs free up household income for buying things or paying down debt. As people buy more gas, the government is able to collect more in taxes and tariffs on those transactions. While the “deflationary spiral” paradigm depends on consumers’ reluctance to buy, even when faced with dropping prices, in reality, spending less for gas probably means people will be spending what they’ve saved in other ways.

Lower oil price alone aren’t likely to cause problems for central banks, unless prices in other major sectors also start to drop. Low oil prices help to keep inflation down, and because consumers can buy more and pay down debt, the two major consequences of inflation – a slowdown in buying and problems with covering debt – probably won’t happen, except in certain areas of the country where the drop affects the performance of local oil producers.

In those areas where oil production is a major contributor to the local economy, a slowdown could mean a drop in housing prices and loss of unemployment as well as the decline of local businesses. But in those areas where oil is sonly one of many enterprises in a diverse economic picture, those effects are likely to have little impact. (Top image:Flickr/cliftonsteed)

Source:

Udland, Myles. “Three Reasons Why Lower Oil Prices Won’t Lead to a ‘Deflationary Spiral,.” Business Insider. businesinsider.com 1 Feb 2014.Insider. businesinsider.com 1 Feb 2014

Read more from The American Monetary Association:

AMA 110: Learn Visually with Jeff Desjardins from Visual Capitalist

Bitcoin Ponzi Scheme: New Coin, Old Scam?

The American Monetary Association Team

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AMA 110 – Learn Visually with Jeff Desjardins from Visual Capitalist

 

Jason Hartman invites Jeff Desjardins on to the American Monetary Association podcast today to talk about the neat infographics Jeff’s company produces. Jeff is the president of Visual Capitalist and many of his infographics have been featured on Ink Magazine, Business Insider, Wall Street Journal, and other news outlets. Jason and Jeff talk about Visual Capitalist, Bitcoin, and more on today’s episode.

 

Key Takeaways:
2:15 – Jeff explains what Visual Capitalist is.
5:45 – The infographics that Jeff’s company produces are usually based on complex topics people have a hard time grasping.
8:30 – Advertising with Visual Capitalist is more cost effective than on more main stream media websites.
10:40 – Jeff talks about his favorite infographic that he and his team worked on.
14:50 – Jason and Jeff talk about Bitcoin in this segment.
15:45 – Jeff explains the hype cycle in technologies.
19:55 – Jason would love to be wrong about Bitcoin, but you simply can’t invest in it just yet.
21:00 – A lot of people learn best visually, so Jeff would like to produce more content for them in the future.

 

Tweetables:
“When you provide someone with an ah-ha moment, they’ll love you forever.”

“People get really excited about new technology as it comes out and there’s that whole sort of hype phase to it.”

“You know what the dollar is backed by? Aircraft carriers, fighter jets.”

 

Mentioned In This Episode:

http://www.visualcapitalist.com/

 

Transcript

Jason Hartman:
Hey, it’s my pleasure to welcome Jeff Desjardins to the show. He is the president of a really cool company that I discovered maybe a month/month and a half ago. It’s called Visual Capitalist and you know there’s an old saying that a picture says a thousand words and that’s probably never more true than on this website, because they have some great visual content to illustrate issues, alternative investments, and so forth. Jeff, welcome, how are you?

Jeff Desjardins:
I’m great, thanks.

Jason:
So, you’re located in Vancouver, Canada. I will be there in just about 10 days, skiing in Whistler, so I’m looking forward to it.

Jeff:
Perfect, so is everybody else here. We’ll also be up the hills as well.

Jason:
Yeah, it’s a beautiful place. I’ve been to Vancouver and Whistler many times. Good stuff. Well, how old is Visual Capitalist?

Jeff:
We launched about three years ago and when we first launched it was more the idea than the current distribution mechanism. We thought we could work with different companies and explain complex issues around them using these visual and eventually it morphed into what it is now, which is a media website featuring content each day.

Jason:
Are you a graphic designer? I mean, what’s your background that you would start a company like this? How did you happen to do it?

Jeff:
I wish I was a graphic designer. Sometimes our team does such great things that I have no idea how exactly it is done. My background is in advertising and media. I’m really good with putting together the message and understanding the background of how to really tell a story and how to communicate complex issues in that sense, so I work with our team along with other members of our staff to really get that message out, but really the expertise lies with our designers who are amazing and we’re so lucky to have.

Jason:
Good, good stuff, but I mean, what did you see out there? Were you reading and studying, I mean, you do a lot of coverage of things like federal reserve and central banking and you’ve got visual elements to make that rather complex issue of monetary policy pretty understandable for people. Were you just interested in the topic and you decided, hey, this is so hard to learn this stuff, wouldn’t it be nice if we had a visual component to it?

Jeff:
Yeah, I had actually seen infographics and data visualizations and they had caught my attention quite a long time ago, even in the mid 2000s this stuff was kind of coming out and I was always enthralled by it and I always found it was super easy to learn using it and I guess what happened was I consulting for some different investment industries and found the type of company a lot of people were producing was very difficult to understand and one big problem is a lot of the people that are retail investors and even institutional investors, they’re looking to absorb all these different chunks of news throughout the day and they’re overwhelmed with emails and information and it’s just a big overload.

We wanted to create something that people really enjoy looking at and they are able to retail the information that they remember and when you can provide someone with an ah-ha moment when they’re trying to read something about something that normally confuses them, you know, they’ll love you forever, so that’s really what we’re trying to do with our content.

Jason:
It’s definitely got that good viral component, no question about it. Tell us about some of the stuff you cover on Visual Capitalist. I mean, you’re a news organization in a sense, aren’t you?

Jeff:
Definitely, definitely.

Jason:
But, like, you don’t cover current events? Well, yeah you do. Ebola, what’s ahead for 2015, so I guess it’s not maybe as pressing as the news, but you cover current issues, for sure.

Jeff:
So, our work is generally designed to cover issues that are relevant at a time and there’s a bit of a lead time when you’re putting together the graphics, so when we..

Jason:
But, harder than a story, right? Text or a podcast, for example, or a news report on the news, yeah.

Jeff:
Exactly and today, you know, everyone is so good at that on the financial blogging side, so when something happens, so for example, central bank cuts its rates today like the Canadian bank did today, you know, we don’t have time to really respond to that as fast as the regular blogger that can just update something in WordPress and then boom it’s good to go in 5 minutes. S

o, from our perspective, we want to tackle issues that are sort of lingering things that people have trouble understanding and really wanna learn more about and stuff that is always constant, so when you’re talking about something like the history of gold or the history of currencies, these are things that are relevant and have a shell life for years and when we tackle things that are more news related, you know, that’s generally topics that are, they’re going to be in the news for awhile.

So, things like Ebola, obviously, were in the news for a month or two or if you’re talking about events with central banks with the deflation and inflation argument and things like that, people are going to be looking at the stuff for years and it’s going to be relevant for a long time. So, even though it’s created today, it’s still stuff that can be looked at in the future.

Jason:
Yeah, no question about it. So, what is the business model behind it? Is it typical like any news organization, you know, you sell advertising or what?

Jeff:
Yeah, that’s definitely a part of it. We’ve recently moved to where it’s creating more of an editorial calender where we’re covering topics that we think are going to be important and relevant at a certain time. So, as an example of this, at the end of November in 2014, the Swiss central bank was, sorry, Switzerland had a referendum on using gold. Yeah, exactly. So, we knew that date was coming, so in our editorial calender we set it up so, before that, we had sort of a gigantic piece that explained everything that you needed to know about that event, so in that case, it ends up being relevant, timely with this news event, and what we did is we sought out a sponsor that would be interested with coinciding with that message, which is going to get a lot of viral spread, a lot of social media spread, and I think we were able to find I think in that case a bullion dealer that wanted to coincide with that message and it did really well over 500 or 600 shares and it got posted in a lot of places like Zero Hedge and all of these different website that feature this kind of information. So, it’s a win-win for us and for our sponsors to be able to have that sort of viral thread.

Jason:
Yeah, yeah, but I mean how do you support your business and pay your staff off the viral thread. I mean, the advertising component is one, but what else has to happen for it to work? I mean, you can’t really monitor that pass around rate, can you? To be able to tell advertisers, look, how much exposure you got with this, you know, particular piece or can you?

Jeff;
Yeah, these are good questions. The way that I would describe it to someone that we’re talking to as a potential sponsor or a client is that, look, if you’re trying to reach quality investor audience and if you want to advertise in certain places, so let’s say you wanna have an advertisement on maybe Business Insider or on Wall Street Journal all these other areas, it’s going to cost you a pretty penny to do that. What we offer is by putting together this sort of really shareable and possibly viral visual image that explains something that people want to understand that you associate yourself with, we can get your branding and logo in a bunch of different places that would normally cost a lot of money to be advertising on and get tens of thousands or maybe even hundreds of thousands of views in the process. So, we’re able to get that exposure by having our content picked up on dozen and dozen of websites that get a lot of exposure themselves.

Jason:
That’s great. So, you’ve got that ride on the coat tails and pass around type phenomenon going for you, for sure. You know, when you talked earlier about how it takes longer to produce these pieces, because they are graphical and they require, certainly, some creativity and imagination to them as well as the actual design work, how long does it take you to produce one of these?

Jeff:
Yeah, for sure, we typically tell people it’s about three weeks, but realistically we can do it in a day or two if we have nothing else going on and we have our whole team working on it. So, it really depends on the situation. We’ve even done it in the past where there was..in Canada, there was an election that happened and over night we had someone in the office, overnight, compelling all the results for the election and creating a graphic to be ready to go the next morning. So, it is possible to do it on very short timelines, but it definitely takes some planning and commitment from the team to do it. So, when we’re trying to figure out deadlines and that kind of thing, it usually just depends on how pressing it is and what other work we have going on.

Jason:
Take us in to some of your favorite pieces that you’ve done and let’s talk about those and maybe learn some good stuff.

Jeff:
Yeah, for sure. One of my favorite pieces that I’ve helped put together the content for was one that we put together, I believe at the end of the summer of 2014 when there was a lot of buzz about the Tesla gigafactory that was being built in Nevada or that is being built in Nevada.

Jason:
The battery factory, yep.

Jeff:
So, we found that a lot of people sort of understood the concept, you know, they wanted to build more batteries so that they’re able to bring down the cost of building each battery and that’s going to allow them to sell the different models of Tesla, so what we did was we wanted to basically show that in a more useful and intuitive way as well as going against into some of the business aspect and as well as going into the supply chain and where they’d be able to procure the different commodities that they need to build that, so we put that together and we were able to bring on a sponsor of a cobalt company and also a graphite company and both of those materials are used in lithium ion batteries and both of them have supply issues around them based on where they come from, so we wanted to involve them in there and to show how the raw materials affect the overall battery construction as well.

So, we put that together and released that at the end of July in that particular one, because it was a story that not many people had dove into those aspects of sort of the commodities and the procuring of raw materials and things like that. We were able to get some really nice spread through Ink Magazine used it and so did Cnet and a really big German newspaper I noticed was quoting my name the next morning as well. You know, by covering those kinds of issues, it’s really a sweat spot for us, because it’s educational, it’s timely, it’s relevant. It tells people something that they didn’t know and it sort of helps break a story in an area that we have lots of expertise about and then it also does really well for our sponsors as well.

Jason:
It’s interesting when you talk about the Tesla too. Wall Street Journal did an interesting piece and it seems like it would be a good one for you guys about how the electric car is the higher polluted than good old internal combustion engine with gas, right. You know, it’s because certainly coal, you know, 40-50% maybe of the nation’s energy comes from coal, so that’s an issue and then also the construction and the batteries and so forth. That was an interesting comparison that the Wall Street Journal did. I thought it could be illustrated visually very well.

Jeff:
Yeah, no, it’s interesting and a lot of people forget this as well, because when they think about these things they don’t think about where their electricity comes from, so it really depends where you are in the world, locally, and that makes a difference. So, for example, up here in Vancouver the vast majority of our power is from hydro, so if you were to use an electric car here, it’s going to be a different story than if you’re going to be doing it from an area where, oh, this guy just used a bunch of electric, okay, add more coal on to the stack into the plant, right? So, that’s a much different thing, but yeah, people need to realize that if you’re using a battery-powered car, recharging that battery takes power and you need to get that power from somewhere.

Jason:
Yeah, it sure does. I mean, it’s funny how people get so self-righteous about that and they think they’re doing such a great thing, but it’s really not good at all. That’s fascinating. I think you could illustrate that visually very well and there’s so many things you can illustrate visually very well. I love some of your stuff on monetary policy, but you know, Bitcoin is an interesting one. I actually predicted several months ago at a bunch of my friends that are just die-hard Bitcoin freaks, I call them, they’re like cult members and I would love nothing more than to be wrong about Bitcoin, but I don’t think I’m going to be wrong.

So, I predicted when it was like it, I don’t know, about $420-$430, I predicted it would go to $250 and it went right down past that, below $250. What are your thoughts on Bitcoin in general? I mean, I love the idea, I’ve done many, many shows on it, but I just don’t think that anything that does not have the blessing of the most powerful forces on earth, governments and central banks, will ever stand a chance of surviving, you know?

Jeff:
Yeah, it’s a great question. I love talking about Bitcoin, but I think, I guess I have a couple of points on it, one point is that I think it’s going to be interesting, because if you look at something like technology hype cycles, which applies to all kinds of different technology, it sort of shows that, and we have a little graphic on this somewhere on the site as well, but it shows that, you know, people get really excited about new technology as it comes out and there’s that whole sort of hype phase to it and then it takes some time for people to be able to implement that technology and for its uses to grow and, as a result, all that initial hype sort of dies down and what’s called the trough of disillusionment and then it slowly works its way back up as all the engineers and all the inventors and all the people in our society that make things work as they work with this new technology to actually make it into something. A good example of that is something like 3d printing, right, where everybody got really excited about it and then it sort of fell off the map for a little bit and no one was talking about it, but now there’s starting to be some really interesting uses for it.

Jason:
Oh, 3d printing is going to change the world. I love it, yeah.

Jeff:
Exactly and Bitcoin is right up there as well, but the problem is there’s a lot of talk about it and obviously with the price of Bitcoin that created a lot of interest as well, especially in 2013 and with the events with Silk Road and all of these different things. So, it’s in the news, everyone’s talking about it, but right now and if you talk to VCs and you talk to, you know, tech people, they’re so many people that are working on it right now in terms of finding away to make it a solution for everyday consumers and they’re working at creating all of these different apps and adding new layers of technology onto the block chain and doing all of these really interesting things, so I would not be surprised if it pops up a little bit later on sort of when you least expect it when someone comes out with one of these apps, you know, the Uber of Bitcoin apps or something like that that’s really going to make it accessible to people and change things. In the short term, I think you’re right with regards to central banks and governments being the not giving their blessing, but in the long term, especially block chain technology is fantastic and..

Jason:
But that’s not unique, you know, like anybody can do block chain. It’s not unique to Bitcoin and Bitcoin is not private so all of the privacy advocates and, you know, Libertarian people who don’t want the governments intruding on their life, which I can’t say I blame them, I’m one of them, but you know, cash is far more private than Bitcoin.

Jeff:
In a way, in a way, but I mean Bitcoin..

Jason:
That’s how they busted Silk Road is they followed the block chain, right?

Jeff:
Right, but you can also, taking proper measures, you can keep Bitcoin complete private and anonymous, but it does take a certain amount of effort. Definitely random people that are buying drugs off Silk Road might not have been able to take all the security measures.

Jason:
Or hiring hit men.

Jeff:
Exactly.

Jason:
Scary stuff.

Jeff:
I wouldn’t recommend it.

Jason:
Yeah, I wouldn’t recommend it either, but it’s interesting as a concept to talk about it and to think about, but yeah, I just think we’re talking about the most powerful entities on the planet – the central banking and the governments cartel. The gold bugs love to say the dollar is not backed by anything, but I think they’re so wrong. You know what the dollar is backed by? Aircraft carries, fighter jets.

Jeff:
The use of force.

Jason:
Yeah, it’s unfortunate, but it’s just reality. I’m not saying it’s right. I don’t like it any better than anybody else, but it’s the reality of the world. I don’t know, am I wrong?

Jeff:
No, but the interesting thing about Bitcoin is there are some people that are bearish on Bitcoin itself, but bullish on block chain technology, creating a revolution in currency in some way that we can’t see yet or creating a revolution in other areas of well. So, that’s why it’s so interesting about it is it’s very rare you have some sort of new technology emerge sort of out of nothing, right.

Jason:
Yeah, it became big pretty darn quickly. It’s pretty amazing, yeah.

Jeff:
Yeah, those are really the two points for me is A) that it’s separating Bitcoin from block chain is sort of important just because, as I say, there are people that are bullish on one and bearish on the other, but also two, I think with regards to, from the technology stand point, a lot of times there is this through of disillusionment that people go through with any new technology like look at virtual reality, right. That died down and now everybody all of a sudden again is excited about the oculus rift and that is something that was 10 years in the making, so…

Jason:
Right, right. Well, we shall see, we shall see. Again, I’d love to be wrong about this. You know, again, you can’t invest that way or even save that way if you don’t call Bitcoin an investment, but you call it just a savings mechanism, store of wealth…

Jeff:
Or a speculation.

Jason:
It’s just so speculative. I mean, you just can’t rely on anything like that, so anyway. So, the website, I mean, I guess I don’t have to ask you to give out the website it’s just VisualCapitalist.com, right?

Jeff:
You’re correct.

Jason:
Good stuff. What’s next for you guys?

Jeff:
What’s next for us and it’s something that you sort of alluded to at the beginning that you’re asking me about whether it’s a news site or not and that’s where I really wanna take it is I wanna be putting out 5-10 things a day and I know that it seems ambitious from the visual standpoint and also keeping up with today’s news standpoint, but I really want to have daily repeat visitors. People that are checking out the site multiple times a day to see what ‘s new and to keep up on their news and information, because people learn the best in different ways and a lot of those people learn visually and so taking everyday concepts that are important in the news and with what’s happening the world and distilling it down into charts and infographics and data visualizations that people can understand, you know, eventually more interactive. That’s really where we want to go and we want to build that daily audience that is on our site all the time and when I think of something like other websites that I visit, I mean, I’m visiting them 3-4 times a day to get updated on my news. I’m checking it when I’m in transit or when I’m at home or when I wake up in the morning and that’s what I want people to have with our site.

Jason:
Yeah, good, good stuff. Well, I wish you well with it. It’s a really cool site and it’s a really great way to learn things. Check it out folks, VisualCapitalist.com and Jeff, thanks for joining us.

Jeff:
Yeah, thanks so much.

 

Bitcoin Ponzi Scheme: New Coin, Old Scam?

AMA2-10-15The Bitcoin is looking more and more like traditional money every day. In just a few short years, the upstart digital currency has gone from a mere novelty to a multimillion dollar trading commodity subject to many of the ills that plague “real” money backed by national and international banks. The latest step: a massive “Ponzi” scheme that bilked millions from Hong Kong Bitcoin investors.

Created in 2008, Bitcoin went public with its first transaction in 2009. Touted as the first completely democratic, decentralized form of currency, the digital coin was welcomed as a way for anybody to conduct transactions anywhere in the world in private and independent of the regulations and control of traditional banking.

In the years since that first Bitcoin transaction, the cybercurrency has had a dizzying run that saw it accepted for transactions involving things like in vitro fertilization, luxury cars, travel, college tuition, real estate – and drug dealing. Bitcoin even entered the international currency markets, trading for prices reaching as high as $200 against established currencies including the dollar, euro and yen.

Established banks in the US and abroad took a wary view of the Bitcoin, with state bank in some countries refusing to deal with it – and others declaring it an outright threat. But still the Bitcoin continued to flourish, thanks to private Bitcoin exchanges that sprang up around the world, primarily in Asia.

The Bitcoin suffered a massive wave of bad publicity that in some ways validated the claims of its worst critics when in 2014 the digital coin was implicated in the takedown of the huge online drug marketplace Silk Road. Run by the notorious Dread Pirate Robert, the site was meeting place of buyers and sellers of all kinds of illegal goods and services – and to no one’s surprise, the virtually anonymous Bitcoin.

The FBI and international authorities shut down Silk Road and confiscated its stash of Bitcoin, to be later distributed among the agencies involved in the operation. Bitcoin survived – but so did its reputation as a tool for illegal activity and money laundering.

Bitcoin transactions take place with the help of Bitcpon exchanges, online sites where users can exchange hard currency for coins and vice versa. The most prominent of these, Mt Gox, failed spectacularly in 2014, amid reports it had lost nearly 745,000 BTC (Bitcoin), which at the time was worth about $400 million. Since then, several other independently operated exchanges have sprung up, including Bitstamp and Bitfinex.

The Mt Gox incident was the best-known case in which a Bitcoin exchange folded, taking masses of money with it. But Mt Gox wasn’t directly implicated in fraud. Now, though, the Hong Kong based exchange MyCoin, is – as the world’s newest coinage becomes implicated in a type of fraud that’s nearly a century old – the Ponzi scheme.

Like Mt Gox, MyCoin closed down abruptly in the early day of February 2015. The online exchange completely disappeared – taking an estimated $386 million USD in client investments with it. And events leading up to that vanishing act strongly suggest an updated version of the venerable Ponzi scheme.

The Ponzi scheme, named for Carlo Pnnzi, a con man who perfected it back in 1920, is an investment scam that makes its money not from investing clients’ money in profitable investments, but from bringing in more new investors. Eventually the scheme collapses without a constant stream of new participants.

That seems to be what happened with MyCoin. Investors told local authorities that not log before it vanished, the company changed its trading rules, forbidding investors from exchanging all their Bitcoins unless they brought in new investors.

Cases like MyCoin, Mt Gox and Silk Road point up the fact that, by its very nature, Bitcoin is a largely unregulated – and unregualtable – currency. But those highly publicized struggles also serve as a reminder that in just a few short years, the digital coin has made significant inroads into the world’s financial structure.

As investors keeping a close eye on the fate of the dollar and other “traditional” currencies are realizing, the Bitcoin is here to stay – and it’s a force to be reckoned with. (Top image: Flickr/BTCkeychain)

Sources:

Baipal, Prableen, “ A Look At the Most Popular Bitcoin Exchanges.” Investopedia. investopedia.com. 19 Nov 2014

Kelleher, John. “Bitcoin Mass Hysteria: The Disaster That Brought Down Mt Gox.” Investopedia. investopedia.com. 2 Sept 2014

Rosenfield, Everett. “$386M Allegedly Missing, As Investors Fear Bitcoin Ponzi.” CNBC Investing. cnbc.com. 9 Feb 2015.

Read more from The American Monetary Association:

Swiss Franc Fallout Ripples Round the World

Can a Strong Dollar Stifle Profits?

The American Monetary Association Team

Final_AMA_Logo-150x1502

AMA 109 – Learn About The US Job Market with Ahu Yildirmaz

 

Ahu Yildirmaz is the Head of the ADP Research Institute. She has some great insight about the workforce market and gives the audience a sense of where the job growth is really happening in the United States and why. Ahu talks about how there’s a lot of growth happening in both the South and West regions in the United States. Ahu also tells the audience that there is a gender gap between male and female hiring rates and explains why this might be on today’s show with Jason Hartman.

 

Key Takeaways:
2:15 – Ahu talks about where she gets her data from in the employment reports that ADP produces.
5:25 – Are people working more full-time or part-time hours? Ahu breaks it down.
9:00 – Northeast and Midwest are lagging in terms of job growth.
12:45 – Texas is doing exceptionally well right now.
14:45 – Job growth is happening a lot faster for men than for women.
16:15 – Why is there a gender gap? Ahu and Jason give their opinions on the matter.
20:25 – When the economy is not good, employers are looking for people with experience so they don’t have to spend resources on training new arrivals.
22:45 – Ahu thinks robotic technology will be good for the job market.

 

Tweetables:
“The South added the most jobs and grew most quickly followed by the west.”

“Almost 70% of the new jobs created in Sept came from South and West.”  

“Texas is really the tiger state not only in the South, but nation wide.”

 

Mentioned In This Episode:
ADP.com

 

Transcript:

Jason Hartman:
It’s my pleasure to welcome Ahu Yildirmaz to the show. She is head of ADP Research Institute and you’ve certainly heard of ADP. They are the very large payroll processing company and they have a lot of interesting information on jobs and what’s going on in the employment markets, so it’s a pleasure to have her with us today. Ahu, welcome, how are you?

Ahu Yildirmaz:
Thank you. I’m good, Jason.

Jason:
It’s good to have you and you’re coming to us from New Jersey I believe, right?

Ahu:
Yes. That’s where our headquarters are.

Jason:
Good. Tell us first of all your data that we’re going to talk about and dive into today. Where are you getting the data from? Is it just ADP clients or is the data broader than that?

Ahu:
You know, ADP pays 1 and 6 US workers.

Jason:
Wow. That’s amazing.

Ahu:
That is amazing. So, what that means that we have access to 24 million US employee level database, then what we do, we partner with Moody’s Analytics every month to produce our employments reports. So, based on 24 million employee data set we model it according to DLS weight for the national job numbers. So, our job numbers come from, derived from, empirical data sets and we do publish every month, two days prior to government, the national employment numbers.

Jason:
Okay, great. So you publish before the government. I love that. Fantastic. So, overall, you know, we hear a lot of debate, Ahu, about, you know, the Obama administration would like everybody to believe that unemployment is down, but there are a lot of questions in the way that is counted, right? There’s the labor force participation rate, which, you know, to me seems to be a pretty valid way to look at things. They have the whole issue of the discouraged workers coming off the unemployment rolls and maybe you’re the wrong person to ask, I’m not sure, because you don’t really deal on the unemployment side, you only deal on the employment side, but if you have some comment there, it’ll be appreciated.

Ahu:
Well, our unemployment rate is more than the job numbers, right. We have to look at the labor participation rate as well as the population growth assumptions. So, different assumptions and different numbers come into the picture, but we report is the net job numbers, net added new jobs into the economy and that’s factual data.

Jason:
Excellent, excellent. So, are we doing better or worse?

Ahu:
I think we’re doing better. We look at the past 12 months, we are adding, on average, 200,000 jobs per month and in September we had another good month. US economy added according to our ADP national employment report, 2,000-13,000 private sector jobs and, again, this is very consistent with the growth we are getting the last 12 months and the good news is that the job gains are growth based across all industries and all company sizes.

Jason:
What about the issue of underemployment? There are complaints about that, about how with college degrees and masters degrees are working at coffee shops and not fully employed and many companies have been reducing hours to navigate around ObamaCare, making workers part time, contract, you know, there’s all sorts of complexities with this, of course, so I just want to ask you about that, because, you know, the interesting thing about what ADP does you know how much people are making. You actually write their paycheck, so is that amount is going up or is it going down, especially as it relates to inflation?

Ahu:
Yes, that’s a very hot topic and not the mention that last Wednesday we launched a new report from ADP Research Institute, which we call ADP workforce vitality report. In this report, what we do, we go one step further, we put down the employment numbers and we look at in terms of the wages, industries, hours worked, as well as gender income groups, who creates these jobs, what are these new jobs. So, it’s not just one job number, but we’re going to be able to dig further what kind of jobs are being created in the marketplace.

So, I can tell you from our first report that when we look at the growth in wage rates, we see an acceleration in the wage growth, so that’s good news, but we also have to look at whether these new jobs are coming from millennials or are they low paid jobs versus high paid jobs. For example, the sectors like retail, leisure, and hospitality versus fiance and technology companies and those are mixed.

Jason:
Okay, so, the results are mixed. Anything more on that though or?

Ahu:
Sure, again, in September both goods and serving producing industries have solid gains, but manufacturing and trade transportation and utilities added the most job. So, manufacturing, trade transportation, and utilities that includes retails jobs are very much consumer driven, but also more low paid jobs, but on the other side, manufacturing jobs are more mid level in ComCharts and we had a very good month in terms of manufacturing in September. There’s a sector for leisure and hospitality where we known that it is most employed by millennials, young aged, and low-waged jobs and definitely that’s a big part of job creation that we have been seeing lately.

Jason:
Okay, good, good. So, I like hearing good news about manufacturing. I like that a lot, because manufacturing is a very important base part of an economy. So, when we break this down by regions and states, tell us what the picture looks like in various states and regions around the US.

Ahu:
Yes, regional patterns remain in place and very much consistent what we have been observing past 12 months. In line with the US figures for September job gains remain fairly steady in most regions and states of the country, but again, the South added the most jobs and grew most quickly followed by the West. So, South and West are the regions really doing well and we still see that Northeast and Midwest are lagging in terms of the growth. Just in terms of the numbers, the South accounted for 42% of net new jobs followed by 25% generated in the West. So, what this means is almost 70% of the new jobs created in September came from South and West.

Jason:
That is absolutely staggering. I mean, I don’t know if the listeners are really understanding how big of a deal that is. I mean, that is just a staggering number that, you know, somewhere around 70% of job creation is coming from those two regions. So, you know, when we break that down, I guess the first thing we could say is people like warmer weather, because that’s what they get, but you know, the old rust belt economies and the business unfriendly states in which those rust belt economies are affiliated with, you know, that’s not where mostly where the action is.

There are a couple of exceptions and bright spots in everything that I know, but you can break down the West for us and that includes California, it includes Oregon, Washington, probably Arizona, Nevada. How do you divide that region? Do you include all of the four corner states, because I would think that California isn’t as much as a contributor to that.

Ahu:
Yes, but let’s remember that technologies still continues to drive the job growth in the West and established tech centers in California, but definitely Oregon and Washington now show that gains and they are holding on to gains, so it’s not only California, Oregon and Washington are definitely helping on the West side and this is mostly driven by technology, because this (#10:52?) has all the large big tech firms and they continue to hirer and it’s a very dynamic from the South. South has completely different story.

Jason:
So, tell us about that, that’s interesting, and certainly you’ve got Washington, no state income tax, you’ve got Oregon with no sales tax living on the border is probably paradise, because you don’t pay anything. I know people that go back and forth. They shop in one place, live another, and it’s quite a good deal, but what’s the different in the dynamic with the South and the West?

Ahu:
The population growth is more than twice as strong in these regions for both West and South relative Midwest and Northeast. So, stronger population growth translates into stronger demands for a variety of consumer services and housing as well as stronger labor force trends, so this is valid not only for South, but for West as well. So, both of these regions benefit from stronger demographic, but when it comes to the South, we see more dynamic industries.

The South is gaining from manufacturing and much of it is related to order sector and definitely oil energy related sectors and high tech companies are huge particularly in Texas. So, Texas is really the tiger state not in the South, but nation wide and it drives a huge growth coming from different sectors. High-tech, oil related energy related activities as well as population growth really drives the housing activity at a faster pace compared to the other states.

So, it’s a mix of all. Then we have the sunshine state, Florida, where we see a lot of hospitality, tourism activities helping to overall job numbers, whether it’s part time or full time, it helps with the job creation in that state. These are mostly, again, high turn over, low wage, young aged jobs, but leisure and hospitality, we see huge job gains, especially in South driven in Florida.

Jason:
Very interesting. Okay, good, good. Let’s talk about gender for a moment and then I want to get into different sectors, so how are the two genders doing in the job market? I’ve heard a lot of reports that during the fiance crisis men really struggled and women were the beneficiaries. I don’t know exactly why it was, but I remember reading a lot of articles like that.

Ahu:
Jason, the recovery continues to be he-recovery. Last Wednesday, as I mentioned, we launched our new report and you will see the numbers how the rate of wage growth differs between men and women and our data shows that the rate that wages are changing for men and women differ and what is more interesting during 2011 and early 2012, wages declined for both men and women at the same rate, but once the economy started recovery the pace changed and what we see is that the rate is much faster now for men and I have to say to gap is widening. It’s not closing.

Jason:
Really? That’s interesting, because I think one of the reasons men suffered so much during the financial crisis was because a lot of those jobs were housing and construction related jobs where there were just massive layoffs, but now you’re saying the men are doing better than the women in the work force.

Ahu:
In terms of the wage growth, yes.

Jason:
In terms of wage growth, okay. So, what do you attribute that to?

Ahu:
I mean, again, as the economy gets better, as you said, as we start adding more full time jobs and when it comes more across broad manufacturing, high-tech jobs as well as the construction jobs, the demand for that type of workers increase and that puts the pressure on wages. Just to give you an example, there’s a shortage in the US now for US truck drivers and that skill set and we had a similar gap in terms of the skill set in construction too. Those are mostly male-focused sectors and that puts the pressure on the wage growth.

Jason:
How does it put pressure on the wage growth, though?

Ahu:
So, when the economy gets better we see that some jobs are still being chilled. There’s a talent gap, skill set gap, in the job openings and job fillings and most of these jobs are related to male-dense sectors like transportation, utilities, as you said, construction and as the demand for these skills go up we also feel the pressure on the wages for these kinds of jobs therefore the wage growth accelerates and these are mostly jobs that are being filled by men. That could be one reason.

Jason:
Okay, okay good. So, what is your overall feeling about this. I know this is obviously a charged issue when you hear these stats about how women only make, you know, 73% of what men make. I think there are some interesting ways to dissect that, but I wanted to ask you your thoughts on it.

Ahu:
My personal thoughts on that, probably women..we may be less demanding. It depends. So, it’s hard for me to answer this question, but from a supply perspective, from a job creation perspective, they’re not seeing much difference. This could be something acute, this could be something related to women behavior in the job market, but this is my very much personal opinion, Jason. It’s hard for me to really connect that to a resource.

Jason:
Sure, sure and I’ll share a couple of mine and you’ll have some comments on them, because, you know, as an employer, over the years I’ve hired hundreds of people and I think there’s a lot of self-selection that goes on and that may just be for whatever cultural reason, but I have definitely noticed and, you know, I don’t even hire for this kind of position anymore, but when I used to put an ad in, I’ll say the ‘paper’, you know I’m talking 10 years ago and further back than that, but if I put that ad in for a receptionist position, invariably it would be a 100% or 99.9% female applicants whereas if I put an ad in for outside sales, it would flip and it would be 70% male and maybe only 30% female. So, a lot of this is really a self-selection issue, isn’t it?

Ahu:
That could be, that could be. I agree, but it’s also related with the educational level.

Jason:
Well, educational, I mean, women are beating hands down, aren’t they? The men better get on their game here, because they’re losing! You know, you look at law school enrollment, business school enrollment, and it’s like 55% + female. I mean, I’m not sure why that is either, you know?

Ahu:
Yes, but also personal priorities similar priorities definitely make it a big role for women in the labor force.

Jason:
Most definitely. So, when you look later in one’s career, when someone is, you know 35,45, or 50 years old in the workforce and then you look at those statistics, many times women leave the workforce for maybe 7-10 years and I don’t now what that average is by the way, but there are some stats on that. I’ve certainly read them before, you know, then you question, well, are people paid…is their age dictated by their number of years of experience? Certainly not as much as it used to be, but that is part of it, isn’t it?

Ahu:
Absolutely. Absolutely and also the economy plays a major role. When the economy is good, we have more flexibility hiring and taking risks from employer perspective, but when the economy is not good like the past couple of years, I think employers became more selective and did not have patience to really train the worker on the job. So, when the economy recovers and gets better you will see a much more flexible labor market for both genders.

Jason:
So, what happens? Is it they’ve had to cut their training departments and they just don’t have the resources to train people or as the economy improves what will happen there, why will there be more flexibility? That’s an interesting point.

Ahu:
It’s related to training course, but it’s not all about that. You have to produce the same amount of output now with less headcount or you don’t have the flexibility to increase your team, to increase your labor force, because of the uncertainty. I definitely felt that in my own team when the economy was uncertain, they wanted to, you know, be more careful about bringing a new person in the team, but when we get more certainty, more relaxed about the economy, we will feel less pressure and we will be able to bring more workers into the labor force so that they would have time and money to train them and prepare them for the job.

Jason:
So, Ahu, go ahead and give out your website and then I have one final question for you.

Ahu:
Our website is ADP.com/research.

Jason:
Research. Excellent. You’ve got some great material here and I wanted to ask you just your thoughts on robotics. You know, on the show we’ve been talking a lot about the self-driving car and obviously transportation. You mentioned truck drivers earlier. That’s a huge part of the workforce, but so many other areas where we’re probably going to see a pretty major, major impact from robotics. Are you talking and thinking much about that at ADP and seeing any of the effects of that yet?

Ahu:
This is very much interesting and timely. I just had a great conversation with one of my colleagues from ADP Innovation Lab. We have an innovation lab at Charleston, New York and I was there a few weeks ago and we actually talked about this specific topic. It will be interesting to wait and see how it’s going to shape, but from labor market perspective I always believe while it will impact some sectors in a negative way, it will definitely create new jobs, new job titles, and boost some of the other related sectors. So, we have to wait and see how that’s going to come into the labor market numbers.

Jason;
Yeah and my general thoughts on that people are always fearful of new technologies, because they do displace workers for a period of time, but then ultimately those workers certainly find something else to do and they create a new thing and someone certainly has to manage the robots if they don’t take over the world and manage us, which they might, but I think the future is very bright in terms of that, but the hard part is that adjustment cycle that takes maybe two years whenever any new major thing happens there’s a fall out and a readjustment period and a re-training period and that’s the part that really hurts most people, so the best thing to do is, you know, stay with the trends and constantly upgrade your education and I’m sure you’d agree with that, right?

Ahu:
Completely agree, but there’s also a big job for the corporations partnering with the universities so that we can prepare the new graduates to these unknown jobs for the future, so if they get into some private program and partnerships with universities, corporations, and with the help from the government, I think we can part working towards preparing the workforce for those undefined, unknown roles and the positions for the future.

Jason:
Absolutely. Well, good stuff. Well, Ahu, thank you for giving us some great insights into some of this and sharing the ADP research with us. We appreciate having you on the show.

Ahu:
Thank you.

Swiss Franc Fallout Ripples Round the World

AMA2-7-15Fallout continues from the Swiss National Bank’s recent decision to drop it cap on the Swiss franc’s value in trading against the euro. This latest salvo in what’s being called the new currency wars is having some surprising effects not just in Switzerland’s European neighbors, but also the rest of the world, including the United States.

The Swiss move to drop the cap on the franc came in mid January 2015 in response to The European Central Bank’s plan to institute a round of quantitative easing that would get more euros in circulation and boost European economies. Immediately after the cap was removed, the franc surged in value and the euro dropped.

That plunged Switzerland into some quick efforts to shore up its own economy, which seemed poised to fall into recession. Some brokerages failed, and the government embarked on a rapid round of buying up foreign currencies, including lots of euros, in an effort to weaken the franc’s strong showing. The effects of the suddenly surging franc were felt in neighboring Eastern European states like Lithuania, whose national debt is franc-denominated. Those countries with franc=denominated debt may be forced into buying up more foreign currency to shore up reserves as the franc continues to float.

There were consequences in Western Europe too. One of the most surprising of these is the unexpected boost to the profits of German brothels, where Swiss clients make up about half the clientele since the currency change. Since the franc is still trading strong against the euro, it goes much further for services of all kinds, including those of prostitutes.

But German houses of ill repute aren’t the only enterprises feeling the effects of the new valuation of the Swiss franc. It’s even affected the US dollar and virtually any US company doing multinational trade in this increasingly globalized world. And the ripple effects from the rise of the franc demonstrate just how interconnected that world really is.

As we’ve reported here before, some large US concerns have been touched by the rapidly changing states of the euro and the franc. US based megabank Citigroup, one of the world’s largest international currency traders, took a moderate hit, measured only in the millions, from the franc’s surge. And even the computer giant Apple saw a dip in its last-quarter profits thanks to the weaker euro.

The same issues face many other smaller companies doing business in the international community. The euro, along with the dollar and yen, and yes, the Swiss franc, are widely viewed as the stalwarts of the global currency world: stable and secure monies that can survive the fluctuations of the market. But those markets are increasingly volatile – and in the “currency wars,” many bets are off.

That’s why the US dollar, long the world’s go to currency for stability and strength, has also been caught up in the ongoing euro-franc drama. In recent trading the dollar’s value fell against the euro, even as the euro was regaining some strength against the Swiss franc. The dollar’s tumble in value actually benefited the franc, which still continues to ride high even as the euro regains some strength thanks to the efforts of the European Central Bank.

The franc/euro/dollar dance may not be just a result of market forces at play, though. Even as the ECB planned a round of bond and security buying to get more euros circulating, speculation arose that the Swiss National Bank might be actively intervening to manipulate the value of the franc against the euro – and indirectly, against the dollar too.

Most Americans have never heard of the rumored “global currency war” – and most never will. But those skirmishes being played out in Europe and the rest of the world involve the good old greenback – as well as the many of the goods and services it pays for, that are taken for granted every day.

The current situation is another demonstration of the interconnectedness of the world’s money markets. And that interconnectedness affects businesses small and large, from brothels to iPhone sellers and beyond. (Top image: Flickr/imagesofmoney)

Sources:
Porgione, Sam. “Dollar Falls vs Euro on Swiss Bank Speculation, Optimism on Greece.” Reuters. 5 Feb 2015

Sheahan, Maria. “German Brothels Are Booming, Thanks to the Swiss Franc.” Business Insider via Reuters. Business Insider. businessinsider.com 6 Feb 2015.

Read more from The American Monetary Association:

US Banks Hit By Swiss Franc Fallout

Who’s Winning the Currency Wars?

The American Monetary Association Team

Final_AMA_Logo-150x1502

AMA 108 – Learn About The Mobile Commerce Market with Dr. Windsor Holden

 

Dr. Windsor Holden is the Head of Consultancy & Forecasting with Juniper Research. He has written over 40 full-length reports while working with Juniper Research and he talks about one of his pieces, Mobile Commerce Markets, with Jason on the show today. Jason and Windsor talk about the future of mobile payments, Bitcoin, and how people can look forward to securer online transactions.

 

Key Takeaways:
1:45 – What’s the latest on mobile commerce?
4:30 – Windsor explains what host card emulation is and why it’s better.
6:20 – The involvement of Apple and Apple pay means that the mobile commerce industry will be improving a lot faster.
9:00 – Bitcoin has many hurdles to over come before it can be adopted by the mass market.
11:00 – Bitcoin fluctuates more than gold or any other currency.
12:30 – Windsor predicts that we will see a lot more tokenization in the future and less third party
interactions.
14:00 – Windsor gives out his website and how you can get his latest report on the mobile commerce market.
16:10 – Mobile commerce and paying online will be much more simple, secure, and user friendly in the future.

 

Tweetables:
Over half of Bitcoin transactions went through MtGox and 850k Bitcoins disappeared.

Bitcoin is far more volatile than gold. If you look at the way in which Bitcoin prices fluctuated via any currency.

Apple is a great educator when it comes to technology. It created a mass market for apps, handsets, and the tablet.

 

Mentioned In This Episode:

http://www.juniperresearch.com/viewauthor.php?author=62

 

Transcript

Jason Hartman:
It’s my pleasure to welcome Dr. Windsor Holden to the show. He is research director at Juniper Research. He is author of the report Mobile Commerce Markets – Key Sector Strategies, Opportunities & Forecasts for 2014 through 2019. So, for the next 5 years of mobile commerce, very interesting topic. Windsor, welcome, how are you?

Dr. Windsor Holden:
I’m very well, thanks. Thanks for inviting me on the show.

Jason:
You’re coming to us from just outside beautiful London, England, right?

Windsor:
That’s right, yeah. We’re in a little town called Basingstoke, which is about 45 minutes on the train from London.

Jason:
Good stuff. Well, tell us what is going on with mobile commerce. Apple pay is in the news a lot lately, we’ll see where that goes, but what’s going on?

Windsor:
Okay, you mentioned Apple pay, Jason, but I think what we have to do is look at Apple pay in why the context of contact-less payments. Now, if you go back a couple of years when you first had contact-less payments introduced into the US, there really wasn’t much momentum behind it and that’s certainly been the case up until maybe the start of this year. Now, we’ve since seen two really critical developments in contact-less payments. Now, what I mean by contact-less payments is where you take your phone and tap it against the point of sale terminal.

Now, the two key developments of these, first of all, the preeminent model before now has been one where the secure element, which the sellotapes, the security of the transaction was placed on the SIM card, which in turn was controlled by the carriers. The Verizons, AT&Ts, T-Mobiles. Now, that model was never attracted to other stock holders, particularly the banks and the car companies. Well, the carriers of this historic have been quick greedy depending unrealistic revenue shares. That was certainly their downfall in the content space. Now, the key to NFC is finding a secure model that is financially viable.

When the secure elements of the SIM, when it’s controlled by the operators, that’s not attractive, but under what’s called host card emulation, that secure element is virtualized and placed in the Cloud. Now, it doesn’t need any operator involved. That’s why the banks are so interested.

Jason:
Yeah, this is pretty technical. So, define operator. I mean, you gotta speak to the layman here. So, what is an operator.

Windsor:
Okay, an operator. It’s an AT&T, it’s a Verizon, it’s T-Mobile, it’s a wireless network provider.

Jason:
Okay, so what’s the issue with this and with near-field communications is that the banks did not want the encryption code to be on the SIM card in the phone. Is that it? They wanted it to be on the cloud, it’s more secure that way? Is that the issue.

Windsor:
There’s this piece of whether it’s more secure, arguably it’s more secure on the SIM, but the banks certainly feel that is it is secure enough. Essentially, the banks want to own the customer and you have a very complex and not necessarily financially viable situation where the operators were the trusted service manages. They had a significant role to play. They were demanding as they aggregated content of significant revenue cut, which the banks felt did not necessarily justify going ahead to the project. When you take the operators out of the loop, it becomes that much more attractive. You can then integrate it, if you’re a bank, you can integrate it into one of your apps and just push it straight to the customer.

Jason:
Okay, so the banks like it now. Is that where we are?

Windsor:
The banks are very much interested in it now. You’re starting to see the first partly commercial deployments, in fact. There are two maybe three in stay.

Jason:
I remember see that Wells Fargo was going to do something with it and then that seemed to evaporate. Do you know about that?

Windsor:
I haven’t picked up on the Wells Fargo piece. All I can say in Europe there’s an awful lot of interest around it, but largely because the fact you don’t need the operator involved with it. It’s the app store situation all over again. When you have the portals as a content provider, it was very difficult for you to get your content out there. With the app store, anyone can get their content out there and you got a great revenue share. So, it’s the situation over again.

Jason:
What’s going on with the banks, I mean, do they want to replace credit cards with this type of technology?

Windsor:
No. It’s an alternative way of reaching out to the customer. Purely because I think, customers are becoming more, more mobile centric. They are more accustomed to paying remotely by their mobiles and by their tablets, so in that case it’s a logical add on to be able to pay at the point of sale with them, but people talk about being the end of cash, let a lot credit cards, and we’ve got a long, long way to go before we get anywhere near that, Jason. That’s a long journey.

Jason:
So, credit cards are going to be here for a while.

Windsor:
Oh yes, absolutely. Now, talking about Apple pay itself. That’s particular potent given the Apple strength within the US market in particular. We always said the involvement of Apple in the NFC was absolutely critical if the initiative was to gain momentum. Apple is a great educator when it comes to technology. It created a mass market for apps, the mass market for consumer handsets, the mass tablet market. NFC is a fundamentally new way to pay for goods and services. When you’re a child, you buy candy from the candy store with dollars and cents.

You know how that works. When you may be 16-18, you get a bank card, a debit card, and you soon pick up how that works. This is all completely difference. It’s a fundamentally new way of paying. This is a huge consumer journey and it needs someone to be able to transmit that message to the consumer. It’s not just consumers having a handset of which they can make a payment, they need to know that they’ve got such a handset. They need to know how to make a payment, they need to want to make a payment and feel secure in the payment process.

Jason:
What does this mean for the world of payments? Does this mean the cost of these payments will go down and then I want to ask you about cryptocurrencies like Bitcoin.

Windsor:
Sure. Potentially, yes. It’s certainly off of the potential for the cost to go down if particularly then get new players in the space offering rates that are more favorable that are currently on offer. It’s a competitive market, the other players will have to respond if they want to remain competitive. Now, moving on to the cryptocurrency space, which you’ve touched on with Bitcoin, for example. There are really many, many hurdles to overcome. Now, we’ve spoken about the consumer journey with NFC. You really have to magnify that by 100 times with Bitcoin. Remember, regulators can’t even decide precisely how to define Bitcoin. Is it a currency? Is it a commodity? How do you explain what Bitcoin is to the mass market? It’s not an easy concept to grasp even if you’ve been working in the payment space. It really is something, at the moment, has a particularly niche audience or be it one, which is attracting players like Paypal and Microsoft to implement payment or top-up mechanisms that utilize Bitcoin

Jason:
What kind of mechanisms?

Windsor:
Essentially what you can do now with Microsoft, you can top up your Xbox with Bitcoin. Paypal are now permitting through the Paypal hub payments to be made via Bitcoin. These are the very first steps in the water by the bigger places to push this into the wider public awareness.

Jason:
Do you think Bitcoin has a good future or is it speculative?

Windsor:
It’s incredibly speculative. If you think about it, Jason, last year the currency plummeted from around, you know when Bitcoin fell, $900 to about $300 and that was largely down to MtGox collapsing, which baring in mind, over half of Bitcoin transactions went through MtGox and suddenly 850,000 Bitcoins disappeared. You understandably felt a bit weary about investing in Bitcoin or making transactions in Bitcoin. When you add that to the fact that when you get a Bitcoin fork where on the public ledger it can be split in two, then you can’t make a transaction on the forked ledger until that fork has been resolved. So, it’s very, very, shall we say, shaky grounds on which to create a mass market.

Jason:
Yeah, it definitely is. I think it’s very speculative. I agree with you and I think the governments and central banks don’t like Bitcoin. They may tolerant it just to keep the people happy, if you will, but overall it represents a competition for their fiat currencies. I mean, that’s the business they’re in. I mean, why would they give up that control? People say such silly things like, well, they can’t stop it if it’s decentralized. Of course they can stop it, they can just outlaw it.

Windsor:
It all boils down to what you need currency for and I actually need it to do things like pay bills and buy things from Amazon and unless until I can do that, then I’m not, I as a consumer, am not going to go down the road of purchasing Bitcoin, even as an investment, it’s very shaky. It’s far more volatile than gold. If you look at the way in which Bitcoin prices fluctuated via any currency or verse gold and silver.

Jason:
Well, I love that the Bitcoin people and, listen, I just want to say for the record I would love to see nothing more than Bitcoin and succeed and be a huge success, but I just think the practical realities say that it’s going to have a rocky road. So, that’s my stance. I love how people criticize the US dollar or any currency around the world as being fiat currency not backed by anything. Well, Bitcoin is not backed by anything at all. At least gold and silver are real!

Windsor:
The fact that you have a fork event in the block chain, which stops any currency, any transactions or threaten the security of any transaction made until that fork is resolved, that’s not a good road to go down.

Jason:
Good point, good point. So, credit card companies shouldn’t be intimated by Apple pay, then?

Windsor:
No, not at all. What’s interesting about Apple pay though and this is something to look at going forward for next year as well is it’s actually incredibly secure. On the one hand, you’ve got the tokenization, which is great and we’re going to see a lot more tokenization of transactions next year.

Jason:
Define tokenization.

Windsor:
Essentially it’s replacing the actual data. Your bank data, the transaction data, with computer generated tokens, which fulfill the same purpose, but without the third party seeing the precise details of the transaction. So, your details are never given to a third party. So, that’s the one element of it. The other is, of course, touch ID. So, when you bring those two together, that makes it more secure than any existing card transaction. I think we’re going to see..that demand is a big mobile play going forward particularly given the concern over privacy, over data storage. If you can give more and more guarantees as to the security of a given transaction, then that’s going to be more appealing to the consumer.

Jason:
Okay, good. I want you to give out your website if you would, Windsor, and tell people where they can find out more about this. Can they find that report or is that a report your charge for?

Windsor:
Right, okay. You can..our website is www.Juniperresearch.com. Now, while we charge for the full report, you will be able to download a white paper giving the summary of that report and indeed of others in our range about other topics that we’ve talked about today particular NFC and other areas of digital currency. You can download those white papers free of charge from our website.

Jason:
Good stuff. So, anything we didn’t cover real quickly. Maybe predictions for the future of how this will all play out in terms of telecom and payments. It’s a very interesting time, I mean, this is a big deal, isn’t it?

Windsor:
It is. I’ve kind of touched one of those areas just now, Jason, with regards to the next year being one where we really see security of transaction being paramount given the concerns that we had given the data leaks that we’ve seen. Consumers are becoming more conscious of the need for the transaction online and on the mobile device to be secure and when you’re bringing biometrics into the picture like touch ID, we’re going to see a lot more of that kind of application coming in to make those transactions more secure, but indeed, across mobile payments as a whole, I think the prognosis is extremely good.

One other thing to bare in mind is that, you know, we’re talking here about point of sale transaction. There’s an awful lot of remote transactions happening over mobile and what we’re seeing now is migration from the desktop over to the mobile and, in particular, the tablets as you see a raising catch commerce.

Jason:
We are moving toward, I don’t want to say frictionless kind of commerce, but the friction is being reduced, isn’t it? And by friction I mean middlemen, people that are collecting a piece of the pie. If we can reduce the cost of transactions and make them faster and easier, we all like to go to the big sites we use like Amazon, for example, because our credit card info is already there, we can buy in a click. When it’s something that’s not on Amazon, you gotta fill out all that information, of course, you can use tools for that, but still, it’s imperfect. You know, if we can really make the payments with a lot less friction, I think that’ll increase the velocity of money, speed commerce, and increase opportunity for everybody ultimately.

Windsor:
Absolutely. You mentioned releasing the friction. It’s essentially simplifying it for the people in the value chain and the people at the end of the day is the consumer and the easier you make it for the consumer to fulfill a transaction, then the greater of success will be, but one mistake that some players have made is just focusing purely on the transaction. Bare in mind mobile offers far more than just the ability to fulfill a transaction. It can all be about loyalty as well and really the entire retail life cycle from engaging the consumer to really post-purchase analysis.

Jason:
Very, very fascinating. It’s an amazing time. It’s going to be amazing how this plays out over the next 5 years. Dr. Windsor Holden, I appreciate you joining us today.

Windsor:
Thank you very much.

Can a Strong Dollar Stifle Profits?

AMA1-29-15Can anything stop Apple? The computer giant posted record earnings for its most recent quarter, fueled by sales of its flagship device, the iPhone. Though it looks as if nothing can make a dent in Apple’s performance, one thing might: the performance of the dollar in world currency markets. And that has repercussions not just or Apple, but for US companies large and small.

According to a new report from Business Insider, this past quarter was the most profitable in Apple’s entire corporate history, with profits topping out at $18 billion. But the company still didn’t make as much money as it could have, and the much discussed global currency war is to blame.

In recent months international finance experts have termed the overall volatility of the world’s currency markets a “currency war,” as various national banks make currency policies to further their own agendas. Case in point, the Swiss franc’s recent surge – a move viewed by many as a white flag of surrender in a game of brinkmanship between the Swiss National Bank and the European Central Bank.

In January 2015 the Swiss National Bank removed its cap on the Swiss franc’s trading value against the euro – a cap that it had held firm for over three years. The decision to let the franc float against the euro came as the European Central Bank was making plans to begin a program of quantitative easing to boost the euro.

That plan, similar to the US Federal Reserve’s plan to help the economy by buying bonds, involved buying large amounts of securities to get more euros in circulation. The Swiss National bank’s hard line on capping the franc’s trading value was seen by many as a political bone of contention. The Swiss surrendered – and paid the price.

The franc soared in value, forcing Switzerland to buy up large amounts o foreign currency to keep up. Neighboring nations, whose debt was denominated in francs, scrambled to renegotiate and back the debt with more foreign currency. Even US currency trading giant Citigroup felt the hit.

The fate of the Swiss franc offers some insight about life on the front lines of the currency war, where the US dollar, also trading very strong, is also causing ripples around the globe – and making a dent in the profits of Apple and other companies doing business worldwide.

As the dollar gains strength against traditionally strong currencies such as the euro and the yen, global markets are bracing for another round of adjustments that could change the way goods are priced in various markets.

A strong dollar seems like a good thing. The dollar is after all the model of stability and security among the world’s monies. It’s the foreign currency of choice in places where local currencies are unstable or losing value. The dollar’s reputation in the world’s money markets was made clear in the early weeks of 2015, when the Russian ruble’s value declined by half in just six months. Fears of a currency collapse led Russians to convert their savings into foreign currencies, mainly the dollar, and to acquire as many dollars as they could. In debt-ridden Argentina, too, the dollar trades briskly on both black and official markets.

Like the Swiss franc, the dollar denominates debt for a number of countries around the world – and changes in the value of the dollar can mean changes in that debt as well, as indebted nations turn to other foreign currencies to back up the debt.

And as the dollar rises, the value of other currencies sinks. That means that foreign customers buying US goods (such as Apple’s iPhone) will have to pay more for those goods than previously. And that means less revenue for the company providing those goods.

The company has to make a choice: adjust pricing to accommodate the new currency valuations, or leave things as they are and absorb the hit to profits, which is what Apple has done in most areas of the world.

The currency wars pose a problem for just about any company doing business on a multinational level, not just giants like Apple. The world’s currency markets are constantly in flux regardless of interventions like the European Central Bank‘s quantitative easing plan. And as the dollar stays atop the list of the world’s most stable and desirable currencies, it will remain a player in the world’s currency wars – and the profit margins of its multinational corporations. (Top image:Flickr/imagesofmoney)

Sources:

End, Aurelia. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 28 Jan 2015

Holodny, Elena. “Russians Scrambling To Get Their Hands on US Dollars.” Business Insider. businessinsider.com 16 Dec 2014

Udland, Myles. “Apple Just Reported a Record Quarter. But Analysts Wanted To Talk About Only the US Dollar – Here’s Why.” Business Insider. businessinsider.com 28 Jan 2015.

Read more from The American Monetary Association:

US Banks Hit By Swiss Franc Fallout

Who;s Winning the Currency Wars?

The American Monetary Association Team

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AMA 107 – Dr. David E. Goldberg talks about changing engineering education with Jason Hartman

 

Dr. David E. Goldberg is a professor, writer, and a civil engineer. David has written several books on the topics of engineering and algorithms. Some of these books include The Design of Innovation, Genetic Algorithms in Search, Optimization, and Machine Learning, and, his latest book, A Whole New Engineer. Jason sits down with David to pick his brains on the latest in AI technology, why there’s a decline in engineers, and we also get to find out a little bit more about David’s most recent book.

 

Key Takeaways:
2:10 – David jumps right in and talks about AI, Artificial Intelligence, technology.
5:20 – To design a kidney by human hands is impractical, but nature has been able to create one for the past 3.5 billion years and more.
9:15 – As better or new technologies arise, so will the ethical questions.
12:45 – What’s happening in engineering education right now?
15:40 – Engineers were seen as heroes and that view reached its apex around World War one and two.
17:55 – Roughly speaking, 6.9 billion of us owe our existence to technology since our agriculture days.
20:30 – It’s not just in the US where engineers feel unwanted; it’s happening in Asia too.
24:10 – Closing thoughts? Students who feel trusted end up doing the most innovative things.

 

Tweetables:
It seems to me that these innovations get baked in to systems in ways that we’re not even aware.

If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars.

It’s remarkable how little we teach about capitalism history.

 

Mentioned In This Episode:
The visible hand by Alfred Chandler

http://bigbeacon.org/

http://www.amazon.com/David-E.-Goldberg/e/B000APHEJU

 

Transcript

Jason Hartman:
It’s my pleasure to welcome Dr. David E. Goldberg to the show. He is emeritus professor of engineering at the university of Illinois and he’s the author of several books starting way back in, I believe, 1989. Just a couple of titles here for you, one we’re going to talk about is A Whole New Engineer; The Coming Revolution in Engineering Education, The Entrepreneurial Engineer and The Design of Innovation: Lessons from and for Competent Genetic Algorithms. This is interesting stuff, folks. So, even if those titles don’t sound super interesting or maybe they sound nerdy, stick with us, because you’re going to like what Dave has to say. Dave, welcome, how are you?

Dr. David E. Goldberg:
I’m great, Jason. It’s really good to be with you.

Jason:
Well, the pleasure is all mine. I had to say that for our non-engineer listeners of which I am one, I guess. So, you know, I don’t know what we should talk about first. We kinda got two broad topics I really want to cover in this interview and I really kind of want to talk about your renown research and expertise in the field of AI or Artificial Intelligence. So may people now are talking about the singularity. Maybe for those who don’t know you can start off by explaining what that is.

David:
Yeah, so there’s this idea that technology is accelerating so rapidly that we’re going to come to a point where it overwhelms us and perhaps takes over from us and that’s the singularity and whether or not we believe in that it’s pretty clear that technology is accelerating and becoming ever more important in our lives. So, people who know my recent work on engineering education reform may not know this background that you alluded to in doing Artificial Intelligence. I’m a trained civil engineering that migrated in computer science and as part of my dissertation work to do some work on something called generic algorithms or evolutionary computation.

You can give a really simple cocktail party of it. It’s the idea of using Darwinian survival of the fittest on the one hand and ideas from genetics like the idea of having a chromosome and the idea of using mutations and cross-over recombinant DNA, if you will, and you take those two things, throw them into a computer, so instead of designing by hand a jet engine, you would create a chromosome that represents different jet engines and mom jet engine and dad engine would get together and have baby jet engine and overtime you would evolve generations of more efficient jet engines and this isn’t science fiction. This is something that has been used by General Electric to evolve jet engines or companies in Japan have evolve production schedules for steel plants and even people have used genetic algorithms to evolve music and art. So, it’s very cool stuff.

Jason:
That is fascinating. Is this considered singularities? Is this bio-engineering? I mean, I’m quite fascinate by the idea of 3D printing of kidneys or whatever else we might need.

David:
So, generic algorithms can be separated from biological applications, so you’re using the idea of genes to create an artificial genetics that helps you to evolve the solution to whatever problem. So, of course, you can turn on biological problems and use genetic algorithms to evolve solutions to the design of all kinds of thing. If you think about things like nanotechnology, for example. Nanotechnology and biotechnology for that matter you’ve got perhaps 1,000 or 10,000 or millions of decisions to make in designing an artificial kidney; to use the example you’re talking about; to do that by hand is impractical, but nature has been doing this for 3.5-4 billion years in this way, so we use nature’s algorithms of choice for evolving and solving hard problems and voila you end up with pretty good solutions and not in billions of years. We’re doing this on computers, we’re doing it real fast, we can do it efficiently. So, some of the work I did was instrumental in helping us understand how quickly we can evolve to solutions to how complex to a problem.

Jason:
How much of this can we do now? I mean, we’re growing ears and body parts in labs, right? When do you call it cloning? When do you call it engineering? I don’t know. There’s this blurry line I don’t exactly understand what to call things anymore. I guess that we means we’re approaching the singularity right?

David:
Well, I’m not sure about that, but I think you can, you know, so when you’re a scientist or an engineer and you’re involved in these kinds of projects..when you’re the outside looking in things look a bit magical and a bit mysterious when you’re on the inside using these algorithms, you know they work for good reasons and these designs come out and you test them and if they function according to plan, they’re doing something good. So, when you’re in the middle of it, you can sign causality or you know why things are working for the most part so it’s not some of the hype around not knowing as is may be a bit overblown.

Jason:
Really, this is just incredibly fascinating stuff. Can you speak at all, this is probably not your area, but I thought I’d ask, you know, what this stuff means to us, what it means to the economy, what it means to the society as a whole, and then I want to ask you about the education side, which is fascinating too.

David:
I think you started off right in saying it’s not my area. When we look back on prognostication in eras that were much more slower moving than ours. That kind of prediction was almost always wrong in profound kinds of ways. That’s one of the things that’s so interesting about human creativity. Now with these kinds of tools and these kinds of leverage that we have, it’s perhaps even more difficult to predict what these things mean to us, but it seems to me that these innovations get baked in to systems in ways that we’re not even aware.

To a certain extent, some of these advances and machine learning and artificial intelligence are already being baked into IT systems that we use on a daily basis and more of that is coming and as you say there are these nano/bio kinds of technological designs that are intractable without using tools like this. So, things like this are either here or on the way and they, I think, they will continue to provide opportunity and there’s also a negative and there’s a potential for doing harm. So there are ethical questions to the degree in which we use these technologies and we know what they’re producing and the side effects that we’re producing and the extent to which those are predictable or not. So, there are very real questions about sustainability and growth and the ethics of using these kinds of technologies and there are no simple answer.

There are no answers like putting your hand up against history and saying stop. That doesn’t work very well and, on the other hand, fully laissez-faire and unregulated of trails of say various kinds of genetics outputs could be very dangerous of us. So, in many ways that could be why we need to boarded the education of scientists of engineers in the century.

Jason:
Yeah, absolutely. Well, one of the areas where I think this has just fascinating, wide-ranging impact is in the field that is…It just seems like it’s booming right now and that’s the area of longevity sciences. We might be on the verge of just cracking the immortality code. I don’t mean immortality in the pure sense, that might be, you know, maybe…it might never happen, but certainly some major, major advances in the field longevity are seemingly pretty close. I study this stuff and I find it fascinating. Think about what it means to the economy. Think about what that means to the social security system. The retirement age. The sustainability. You know, I always like to give environmentalists a hard time when they’re giving everybody else what they should do, but the fact is everybody alive and that they are alive, they’re consuming resources and, you know, Malthusian idea that people are just not a resource they’re a cost only, but people solve a lot of these problems. They do create. So, we’ll see where that balance goes, but just in the area of longevity alone, wow.

David:
I couldn’t. So, I agree. There is a sense sometimes if you listen to people who are speaking strictly from an environmental sustainability perspective that everything is a cost and everything is a resource. It tends to ignore the innervation capability of human beings. I think I agree with you that it’s a huge mistake and it’s one of the ways in which predictions are wrong. Predictions can either overshoot and undershoot and there is often times a tendency to over predict harm. I mean, when was the last time you saw an optimistic science fiction movie where the future looked more interesting and bright than the future that we have and yet, in many ways, if you look back into the 40′s or 50′s and project forward, those were the lives we’re living right now and there are brighter and things are more optimistic than people projected back then.

Jason:
Yeah, they certainly are. Very interesting. Well, what’s going on in the field of engineering education with the exception of many stars in engineering mostly in Silicon Valley, I guess. You hear about the people that got into a start up and made it big and so forth. It doesn’t seem like engineers are very well paid on the whole and I think that’s kind of unfair because everything we look around, everything we use all day is the result of some brilliant engineer. There’s this funny commercial, I wish I could remember what it was for. You’re probably know what I’m going to refer to where it had these rockstars and all the women were tearing their shirts off and then it had the Indian engineer guy that invented USB and it flipped the world around. They should be tearing his shirts off. This is something we use everyday, right? You know, it’s just kind of funny our culture doesn’t seem to allocate the recognition and maybe the pay correctly. Your thoughts?

David:
Well, there is an ebb flow in history to how engineers are viewed. If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars and, I mean, we talk about electric engineers and computer scientists now, but think about the late 1800′s, Maxwell equations have just come out so people are predicting and some of the first results on magnetics and electromagnetics or radio just come out and so there were all kinds of companies started and engineers were really stars and not just electrical engineer, civil engineer has built bridges and buildings and ships were built of enormous unprecedented size.

So, there were this sense of emergence large technology and large scale business, which engineers were at the center of. There’s this terrific history of large scale business in the United States. The visible hand by Alfred Chandler and he talks about, well, who invented modern business enterprise and it was the civil engineers who started the rail roads, because they were the first people to work across vast distances and they needed a difference kind of organizational structure, so they made up modern business enterprise. There was a sense of excitement back then, which then got squelched in World War one and two and there’s phrase that philosopher Steven Goldman, he says, engineers became socially captive in World War one and two. I think that’s a good description.

So, these very large vertical integrated return to scale kinds of companies were built and engineers were working bees in those companies and that continued and was really sort of reached its apex just post World War two and the Cold War. So, what you’re alluding to in Silicon Valley is a phenomenon between the end of World War two and what has happened now. I called them the three missed revolutions. We had the quality revolution where statistical quality control when Japan came back and the Japanese beat us around the ears with it, the entrepreneurial revolution of various garages in Silicon Valley, and the IT revolution from the microchip to the personal computer to the internet.

So, here we are in the opening moments of the 21st century and we live in this really different place that where once after World War two, we wanted obedient engineers to shut up and sit down and do what they were told and now we want the next Steve Jobs who wasn’t an engineer, but we want our engineers be that guy or that gal whose starts the next great tech company and many of our young people, the students, going into engineering have those aspiration, because they see these role models out there.

Jason:
So, why is engineering education so important to our economy?

David:
Well, so again, there are roughly 2 million or so in the US who call themselves engineers. There are about 4 million or so that are in mathematical and computer science. I mean, it’s a pretty big part of the work force, but if you stand back from it and say, look, we’re on this planet. We’ve got 7 billion people on this planet and more coming. If you just do a fundamental analysis of the situation and say, alright, well, what would happen if we did like some people would have us do and turn off the technology. Where would be? It’s hard to know exactly, but if you dial back to the days when there was only crude technology like agriculture, if you go back before crude agriculture.

Say, dial back 7,000-8,000 years or so, what do you got? You’ve got about 100 million people on the planet. So, roughly speaking to 6.9 billion of us owe our existence to the technology that’s been developed since agriculture. So, turning off technology isn’t an option. Keeping it going and having it function well and better and serve us better as human beings is even more important than ever. So, in that very fundamental sense, having the next generation of engineers be chosen from amongst our best and brightest is really important.

Jason:
It certainly is. So, I’ve always thought that engineering was a very, very important career choice. I appreciate engineers like crazy and you look at it compared to the, you know, how they’re getting sucked away into the game of Wall Street in that, what was that movie called, Margin or..I can’t remember the name of the movie, but it was a couple of years ago and the founder of this huge brokerage firm depicted in the movie as probably Lehman Brothers, they were probably predicting; I’m not sure; comes in at midnight asking this young kid, you know, who was a quant who just figured out this whole situation they had that no body else saw in the company managing the risk and the billion head of the company says, so, you know, what’s your background kid? And he says, I have a PhD in blah, blah, blah, he says, basically what that means is I’m a rocket scientists. He says, well, what you’re doing here? And he says, well, Wall Street pays a lot better than engineering. I think that’s a sad commentary. I really do.

David:
If you talk to the kids today, the students today, the motivations aren’t entirely financial, but if you factor in the fact that engineering is itself fairly uninviting and there’s this possibly of a larger paycheck, it’s hard to fault people. It’s not just an American problem. One of the interesting things we found out in researching the book and I had the pleasure in working on engineering education change in Singapore. We often think of Asia, okay, if we don’t generate enough engineers in America, well, at least we can always turn to China and India and they’ll give us the millions of engineers that we need, but even in Singapore is a the canary in the Asian coal mind for engineers.

I was working at the National University of Singapore and one of the things the engineering dean told me was that it used to be that engineering was the number one choice of young people accepted at NUS. That’s what where you went and many of the people in government were engineers, many of the people in the top jobs were engineers. Engineering was respected, but they too have fallen on this kind of sense that almost anything, but an engineer. It seems as though when countries become sufficiently affluent, kids wanna do something other than become engineers. So, one of the things that…

Jason:
The distinction though, the Wall Street example I gave is that, you know, the financial in engineers and the financial innovators on Wall Street are really just leaches on the economy in almost every case in my humble opinion, disagree with me if you like, but all they’re doing is find ways to move things around and relabel things and, you know, cut things up and make derivatives out of them. They don’t actually create anything anymore. Okay, granted, companies need capital to grow and thrive, and so forth. So, conception ally, I don’t have a disagreement with the idea of capital formation of the stock market, of course, but it has just become such a corrupt…as I always say, the modern version of organized crime. You know.

David:
I would agree there are excess. I guess I’d disagree to the extent that all of that activity, you know, so efficiently and capital is important and I personally know hedge fund managers and people who work with business to help restructure them more efficient so…

Jason:
Yeah, I get it. I have investment banker friends too and hedge fund friends too, but the real value creation is when you create something new out of thin air and it changes everybody’s life. That’s like actual value. Of course you need capital to do that many times, so I get it. There’s a middle ground.

David:
I think if you go back..So, again, if you go back in our time machine to the invention of securities back with the Dutch example and I think the early trading companies. So, the whole capitalism is a fair early invention and remarkably..It’s actually remarkable how little we teach about capitalism and its history and many of the objections to capitalism are objections that were held back in the 1500 and 1600s when it was first emerging and we seem to be in the same argument over the course of centuries, but..

Jason:
I am a complete capitalist. So, don’t worry about that.

David:
Those things be it the idea of the invention of shares and selling shares and having markets and the efficiently that brought to capital and the way that allowed business to scale was the kind of innovation that you were talking about.

Jason:
Okay, we don’t need to debate that one, but I get it. Okay, so I want you to give out your website and then ask you for some closing thoughts.

David:
The website for our work on changing engineering education is www.bigbeacon.org and there’s a movement to transform engineering education to help bring about engineers that can face..we’ve been talking about the ways which our times have changed and how do we education..how do we unleash the courageous engineers we need for this century is what the Big Beacon is all about and the book is called A Whole New Engineer.

Jason:
I hope that has an impact on things and we see a lot more people getting into the field, because, as I mentioned, I think it’s just incredibly important. So, yeah, good stuff. So, any closing thoughts? Anything I didn’t ask you, you didn’t happen to say, you know, just to wrap it all up for our audience?

David:
I think, in terms of the key, and one of the big surprises in what we found in working on education today was the sense that of empowerment that we give students and it really comes from three things. Trusted students; when students are trusted by faculty or other students, they end up finding the courage to take an initiative, which leads to real learning and that’s the emotional equation that lends to the kind of learning that we need in this century and that’s a message that doesn’t apply to engineers. It applies to all kinds of entrepreneurial thinking, it applies to kinds of opportunities that we face in this century. So, that equation from trust to courage to initiative seems to be the kind of unleashing reaction that we are missing in education generally and we need to get into it.

Jason:
Good, good stuff. Well, Dave, thank you so much for joining us today and talking about some of these issues and I always say, it is an amazing time to be alive. I think the next 5, certainly the next 10 years, it’s going to blow our minds, quite literally. We’re going to have amazing stuff coming down the pike. It’s really exciting, it really is.

David:
I couldn’t agree more. Thanks Jason for having me on the show.

Jason:
Everybody, that’s David E. Goldberg, an emeritus professor of engineering at the university of Illinois and the author of the several books that we mentioned.

US Banks Hit By Swiss Franc Fallout

AMA1-22-15In the tightly knit world of global finance, what happens halfway around the world can have devastating effects at home. Case in point: the fallout from the recent Swiss bank decision to drop its cap on the franc, which is hitting even US banks and the sturdy dollar.

The Swiss National Bank’s move to let the franc float against the euro went largely unnoticed outside of financial industry ad business news. But the move was widely viewed as another salvo in what’s being called a modern currency war – and that meant it had wider implications for currencies all over the world.

In mid January 2015, the Swiss National Bank removed its three-year-old cap on the franc;s exchange rate against the euro. The move had been intended to keep the franc from appreciating too much against the euro.

The European Central Bank was planning its own version of quantitative easing, a plan to stimulate the euro zone’s economy by buying up large amounts of securities. The plan would put more euros into circulation – and that by extension would increase demand for the Swiss franc, a favored “safe” currency for chancy times.

In order to pave the way for the ECB’s plan, the Swiss had to bow out, relinquishing the capon exchange rates for the franc and letting it “float” against the euro. It was a costly maneuver, to be sure. Some investment firms crashed and the Swiss National Bank was compelled to buy up massive amounts of foreign currencies to keep pace.

Though the immediate fallout from the Swiss decision was felt in adjacent Ares such as Eastern Europe, where much national debt is denominated in Swiss francs, it also rippled around the world, hitting even US megabanks such as Citigroup.

In addition to its place as one of the largest banking institutions in the US, Citigroup is also the world’s largest currency trader. In the wake of the Swiss National; Banks decision. Citigroup lost more than $150 million, according to a recent article from Bloomberg Business.

Though that isn’t much money in the high stakes, high volume world of international currency trading, financial insiders point out that the issue isn’t so much money lost, as it is trust lost. Citigroup’s losses as a result of the Swiss decision point to risky positions on global trading issues – and that might raise red flags for investors.

Citigroup isn’t the only one feeling the heat from the SNB’s move, either. Hedge fund management companies, brokers and smaller banks whose transactions involved the franc are also facing losses. And on the international front, major international banks such as Germany’s Deutsche Bank have also faced struggles.

Interestingly enough, Swiss banks themselves haven’t suffered significantly – yet. But some industry watchers point out that the long-term effects on Swiss institutions – and the economy a whole – could be severe, as the flow of assets into and out of the country could slow. What’s more, the credit ratings of Swiss banks could suffer, along with their existing accounts with other European banks.

With Citigroup and other US banks feeling he impact of the Swiss National Bank’s decision, what does the “currency war” mean for US investors – and the health of the US dollar at home and abroad?

European import and export initiatives dealing in euros and francs could suffer. But like the Swiss franc, the dollar is still a go-to currency in most parts of the world, valued for its stability and security. And as the currency wars heat up, vulnerable investors and citizens concerned with safeguarding their assets may well keep turning to the dollar, not the franc, as a safety net in a world of volatile currency trading.

Those conditions also make investments on US soil more appealing. International investment in Us real estate, for example, is reaching historic highs, thanks to its reputation as a highly stable asset that can keep investment funds safe from turmoil at home. And as the front lines of the currency wars expand to other areas such as Asia, demand may be even greater for a stable, safe haven for assets and savings.

Historically, that was the promise made by the bankers of Switzerland, who offered international investors a discreet, secure home for their assets in a tumultuous world. Now, as the Swiss franc floats in free fall against the euro and the global currency world struggles to adjust, new players – and old – may step up to claim victory in the world’s latest currency wars. (Top image: Flickr/PINEAPPLEXVI)

Sources:
Eno, Aureloa. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 18 Jan 2015.

Logutenkovo, Elena. “Bank Losses from Swiss Currency Surprise Seen Mounting.” Bloomberg Business. bloomberg.com 19 Jan 2015.

Read more from The American Monetary Association:

Who’s Winning the Currency Wars?

Interest Rates:TRends for 2015?

The American Monetary Association Team

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Who’s Winning the Currency Wars?

AMA1-18-15It sounds like the plot of a bad science fiction movie. A mysterious, invisible war is going on behind the scenes of the world’s major banks, with cutthroat brinkmanship and dirty strategies to get the upper hand in the global currency markets. It’s not the plot of a grade B flick, but by many accounts, a reality. Just ask the Swiss, whose recent power play with their franc brought the “global currency wars” to public attention.

Hardball money maneuvering might seem commonplace among the hard-charging emerging powers of Asia and other areas of the world, but it’s little Switzerland, that historically neutral country that’s known for its elegance and discretion in money matters that’s standing on the front lines of this new financial battlefield. And the outcome could ripple through the rest of the world’s major currencies – including the US dollar.

In 2012, the Swiss National Bank imposed an exchange rate “floor” for the Swiss franc against the euro. The plan was to keep the franc from appreciating too much against the euro. But, according to a recent article from Business Insider, by mid-January 2015, the SNB had abandoned that floor, allowing the franc to float freely.

The world’s money markets run on a complex system of constantly shifting rates and conversions that keep national banks largely stable and hold the line against runaway exchange rates that put local economies and international trade in jeopardy. International exchange rate boards such as Libor and a variety of banking commissions and consortiums monitor and adjust the flow of currencies and prevailing exchange rates.

But the behavior of individual banks, along with changes in local and global economies, can shift the balance dramatically. That’s why the Swiss national Bank’s decision to capitulate and abandon its floor for the franc against the euro sent shock waves through the global financial community.

Without the artificial imposition of the SNB’s floor, the frank immediately gained 30 percent against the euro. Stocks in export dependent Swiss companies plummeted. Eastern European countries whose mortgage debt is carried in francs were also hard it. And the situation raised fears around the globe that other currencies might follow suit.

Some financial experts speculate that the SNB caved because of expectations that the European Central Bank might embark on a new program of “quantitative easing” – an initiative to buy massive amounts of bonds that would get more euros circulating in the market. That in turn, the ECB expected, would actually increase demand for the Swiss franc, which has a reputation as a “safe” currency.

In the face of these developments the Swiss had no real option but to retreat and pull the floor out from under its own currency.

Quantitative easing is an term that’s become familiar in US financial circles of late, thanks to the Federal Reserve’s foray into manipulating the behavior of interest rates and currency values through bond- buying. The latest round, termed QE3, was a massive intervention designed to prop up the country’s struggling economy in the aftermath of the financial collapse of a few years ago.

With improving economic signals, the Fed’s version of quantitative easing is tapering down. But the same strategy of buying up large numbers of bonds and other kinds of securities as a financial prop for a shaky economy has been applied in other countries as well, with mixed results.

While the Fed’s program came under fire for its scope and aggressiveness, variations tried in European countries such as Spain and Greece have been equally criticized for not being aggressive enough to have a lasting impact on the currency crisis facing the country.

Now, as the European Central Bank contemplates its own version of bond buying, the Swiss reluctance to abandon the floor on the franc’s exchange rates appeared to be a politically hostile move. Capitulating in the face of the ECB’s plans might have been a politically savvy move – but it was certainly costly. The Swiss National Bank ended up buying massive amounts of foreign currency – an amount equivalent to 85 percent of the country’s gross domestic product.

The effects of this latest skirmish in the global currency wars aren’t limited to just the euro and the franc. The turmoil could spread to other markets such as those in Asia and Latin America. And the US dollar isn’t immune, either.

Because the Federal Reserve expects interest rates to surge as its own quantitative easing plans taper down, those rising rates, and the dollar’s performance against the euro and other leading currencies, could play a role I heating up the currency wars. For now, new Fed chair Janet Yelllen has taken a largely hands off approach to manipulating the dollar, but as the front lines of the currency war move closer to home, that could change. (Top image:Flickr/ju-x)

Source:
Eno, Aurelia. “The Seis Natioal Bank Is the First Casualty of the Modern Global Currency War. Business Insider. businessinsider.com 18 JN 2015

Read more from The American Monetary Association:

AMA 106: New York STate Tax with Ashlea Ebeling

Bond Rates Plunge- But Where’s the Crisis?

The American Monetary Association Team

Final_AMA_Logo-150x1502

 

 

AMA 106 – New York’s State Tax with Ashlea Ebeling

 

Ashlea Ebeling appears as Jason’s AMA guest. She is a Forbes editor and talks about the different estate taxes you might face all across the United States. She also touches on federal and income tax on the show. She tells the audience every year she develops an interactive map on Forbes of where you should not die in the United States that you can check out in the show links.

 

Key Takeaways:
2:50 – How does New York’s state tax have a 164% marginal tax rate?
7:20 – Can you avoid estate taxes? Ashlea breaks down four way you can do this.
11:30 – You have to be careful of inheritance taxes and need to look carefully into that before you give your properties away.
14:20 – Ashlea likes the idea of Roth IRA. Jason thinks there’s nothing stopping the government from changing the rules.
18:10 – There are a lot of new tax rules and regulations happening for 2015 that people need to be aware of.

 

Tweetables:
The lesson is people need to know about state to state taxes.

Everyone says Florida, but there’s 7 of these no income tax states.

Good luck calling the IRS ‘cus they’re predicting 34m wait times for the 53% of people that wait on the line.

 

Mentioned In This Episode:

http://www.businessinsider.com/bond-market-panic-phase-of-financial-crisis-2015-1

http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/

http://taxfoundation.org/

https://twitter.com/ashleaebeling

 

Transcript

Jason Hartman
It’s my pleasure to welcome Ashlea Ebeling to the show. She is an associate editor with Forbes magazine and Forbes.com. She wrote an interesting piece recently about the New York state tax and how we should be aware of a 164%, yes you heard that right, marginal tax rate and profiles different states around the country and their tax situation and a whole bunch of interesting things. So, it’s a pleasure to have her on today. Ashlea, welcome, how are you?

Ashlea Ebeling:
I’m just fine. Thanks for having me on the show.

Jason:
Well, it’s good to have you. First, let’s dive into this article. I mean, this is insane! I can not believe it. How do we get to more than 100% tax.? As if 100% isn’t bad enough.

Ashlea:
So, New York state tax has this provision called a cliff and people are trying to change it. It’s obviously a problem, but the one thing is New York made sweeping changes to its state tax law just this year and they doubled the amount that is exempt. So, if you had over 1 million dollars before, you would owe a state tax on that amount and they doubled it now to 2.625 million, but the cliff problem is if you die with 5% than that new 2 million dollar number, you face this cliff and that’s where the crazy marginal tax rate would come in.

I can give an example. So, Sharon Klein with Wilmington Trust, she kind of gave me an exact example, because the New York state department of taxation, they did a summary memorandum on the new law, but they neglected to spell out of the affects of the cliffs. So, her example was a taxable state of $2.625,000 would pay no tax, but if you had $2.1 million dollars, you’d have a tax liability of $49,000, so that’s more than the $30,000 of an increase of the value of the state. So, your state has gone up by $37,000, but your taxes would go up by $49,000. So, that’s the affect of the cliff.

Jason:
Boy, this is crazy.

Ashlea:
So, the lesson is people need to know about state to state taxes. The federal estate tax is almost..that’s been changed, so there’s a big, big exemption. The federal exemption of $5 million per person indexed for inflation is now permanent and that is indexed for inflation, so next year the exemption it’ll be $5.43 million. So, obviously most people don’t have to worry about federal estate taxes as all. In the meantime, the state estate taxes can be as long on inheritance taxes it starts at the first dollar and the states with state taxes, New Jersey is the lowest exemption with $675,000. So, people with a nice house, they’re in a state tax territory.

Jason:
Right, they certainly are. So, what do you think, what change do you think will come to this law?

Ashlea:
Well, there are people trying to change that cliff, so it’ll be more gradual. So, that’s a possibility that could get tweaked in the next legislative session and the good news in New York is the law that’s been put in place is it’s eventually going to match the federal exemption in two year. In 2017 the New York state exemption will match the Federal exemption. For most people it’s not going to be an issue.

Jason:
So, when one looks at a state to consider a move, they need to consider what life stage they’re in. If they’re in their career stage and are earning a lot of money, you obviously want a state with no or very low income tax. If you’re retired as mom retired many years ago and she, you know, I told her she should move to Texas and she said, no way, the property taxes are too high and she didn’t care as much as income tax. Texas has no state income tax. So, it really depends. It’s like, where to live during your career years, where to retire, and then where to die. Where to retire and die may be two different things, right?

Ashlea:
They’re very different. It’s going to depend on each family’s specific situation, but you’re right you’re going to have to look at the whole tax picture. You want to look at income tax, sales tax, property tax, there’s a state tax, gift tax. It’s a little crazy that there’s that much to look at, but it makes a huge difference and then for retirees, there’s state pension tax breaks that come into play. So, that’s another. That even goes into the category of income tax, but you have to see whether your state tax is social security or whether it doesn’t. My mom just moved from Virginia to Connecticut, so now her social security is being taxed when it wasn’t in Virginia.

Jason:
Wow, okay, so you’re in Connecticut, I believe, right? And that’s the only state with a gift tax?

Ashlea:
That’s right, Minnesota had one, Tennessee got rid of theirs, I think that was 2012 and Minnesota put one in in 2013 and then last year..earlier this year they finally got rid of it again, so gift taxes are a bit controversial, but the idea with the gift taxes is that the state don’t want people giving big amounts to their heir in a way to avoid the state to state tax. So, Connecticut, for example, has a 2 million dollar limit that you can’t give more than that without having to pay a tax that would go to 12%.

Jason:
So, do we see a lot of people in these states where you have a high state tax, you know, especially in New York, what do they do to get around it? Do they use a charitable remainder trust or what is the vehicle they’re using or do they just try and spend all their money before? I’m spending my children’s money…

Ashlea:
There are probably four big ways that people avoid or get around the state estate taxes. One would be moving, so you could be in New York and then also have a home in Florida and you’d make Florida your residence, but you’d have to really do it, you’d have to be there more than a 183 days a year, you’d have to change bank accounts, drivers licenses, there are all kinds of residency rules to make sure New York doesn’t pull the estate back into their territory. So, moving is the big one. Everyone says Florida all the time, but there’s 7 of these no income tax states.

The second big move that people do is setting up a traditional credit shelter or bypass trust when the first spouse dies and that puts the money that goes into that trust would then be exempt from a state tax, but the tricky thing is is on the federal level you don’t have to worry about, because there’s something called portability and you have all of this..So someone who has $5 million dollars when at the federal level they can send the money over to their spouse and the it’s protected even without a trust, but the state level there’s still more of a need to a trust and estate planning.

Jason:
Very interesting. Anything more you wanna say about different taxes in different jurisdictions, because I want to just wanna touch on some of the other stuff that you’re following and writing about.

Ashlea:
Well, if we look at the, for the state estate taxes, it’s 19 states plus the district of Colombia that have these taxes and why you need to keep track of it, we have an interactive map that we keep on Forbes.com called where not to die and every year it’s updated. There were 8 states that were ensuring changes for 2015, so that’s one place to look. The tax foundation has great maps on tax climate on income tax, taxes on all these other states, so that’s another place for people to look.

Jason:
I’ve seen some very complex charts as you were talking about the comparisons a few minutes ago. I’ve seen very complex charts in terms of all 50 states or maybe 51 one with district of Colombia, 52 with Puerto Rico, which has got some very desirable income and capital gains tax opportunities right now. It’s just a really complicated metrics of all these different issues one needs to consider.

Ashlea:
Well, when you’re thinking of capital gains tax, that’s another thing that people completely don’t think about and that can be taxed in California. I think it’s up to 10.3 there is the top rate for income tax. So, if you’re selling real estate that you know that when you’re going to into it with the capital gains rates are going to be. Not just the federal rate, which has been increased now to 20% to higher income earners, plus there’s another net investment income tax and then there’s the state capital gains tax. You have to add all of those together to really know what your tax rates are going to be.

Jason:
So, I’m looking at the where not to die map now. I found that while you were speaking just a moment ago and I guess the red states, are those the undesirable ones?

Ashlea:
Those are the estate tax states. The blue states are also undesirable in their inheritance tax state and again that’s something a lot of people don’t know. The difference in New Jersey and Maryland, they have both the state and inheritance taxes are a little different, because it’s who gets the money, who pays the tax, whether or not you pay the tax, so Pennsylvanian is a good example. It used to be the spouses paid Pennsylvanian inheritance taxes of 6% tax rate and then people complained about that, because generally for state taxes, spouses don’t pay state taxes at all.

You can give anything when you die to your spouse and it’s state tax free, so this inheritance tax, they were paying 6% in Pennsylvanian, they cut it to 3% in 1994 and then the next year they cut it to 0% and then they get similar to other states, but there’s still..in Pennsylvanian, if you have an estate going to children, grand children, or parents, it’s a 4.5% tax and if it goes to a bother or a sister, it’s a 12% tax, if it goes to a nephew or a niece, it’s 15% tax. So, New Jersey has a similar law to that too and there’s people changing it there too where they think it’s not fair if you’re single and giving your estate to your sister, you’re taxed, but if you have children and you’re going it to them, you’re not taxed.

Jason:
Yeah, very interesting. We should mention the red and blue on this map are not political red and blues, so..

Ashlea:
No, but to some extent to it is if you see like the north east as this big chunk of estate tax states. Washington has the highest rate. Washington state has the highest rate of 20%.

Jason:
Wow, that’s something else.

Ashlea:
Then, the interesting thing, there is prescient for repeal. If you look at this map a few years ago it had a lot more estate tax states. North Carolina and Indiana repealed their taxes in 2013 and Kansas, Ohio, and Oklahoma all repealed theirs in 2010.

Jason:
It is interesting that it follows the political map to some extent and that doesn’t surprise me, but tell us about some of the other stories you’re working on. I know you cover some real estate stuff. I’m kind of looking at your portfolio here on Forbes.com.

Ashlea:
One of my favorite topics is philanthropy and you mentioned charitable remainder trusts, that’s something that’s another great tax move for people who are charitably inclined and I had a nice example of a son who inherited a vacation house in the family and they put it in a charitable remainder trust and then it’s a way to give, to give real estate to charity that works.

Jason:
What do you think of the Roth IRA versus the traditional?

Ashlea:
Well, we at Forbes are huge fans of Roth IRA, but again, it’s a tax place, so if you’re going to be in a higher bracket in retirement, it’s a total no-brainier, you definitely should do it, but some people who should be doing, but aren’t thinking about it are actually in a low tax bracket now and they’re young, so they should be putting money in a Roth, because they don’t get any advantage of the pre-tax that you would for a regular traditional IRA.

Jason:
So, just to explain to the listeners who don’t know, a Roth basically says, pay the tax now, but let it grow tax free. So, you can take it out and the idea is that the tax rate would be much higher later in the future as the country is more fiscally insolvent and looking for money and you’ll just have that money that’s compounded for you over the years tax free because you paid the tax earlier. My fear and why I…maybe I’m just being too paranoid, but the reason why I’m not a big Roth proponent is I just think the government is going to become more and more hungry in years to come and they might just change the law. I mean, what is to stop them from doing that?

Ashlea:
Some people do have that fear and I can’t say that’s implausible, that it could never happen, but I think that’ll be such a outcry that it wouldn’t happen and then another point, you’ve got this two buckets. You automatically, if you’re at a work place plan, any employer money that goes into a plan and earning pre-tax, so some people like doing some Roth, some pre-tax to hedge their bets and whether you actually take money and pay taxes on it to do a Roth conversion, which you can do to try and get more money into a Roth that that’s would be more of a heads in a basket way of what you’re saying.

Jason:
I think these retirement plans are going to become the low hanging fruit in a hopefully not, but a very likely, unfortunately, I think, desperate where the government will say, you know, they wanna nationalize them or, you know, it’s just so easy to attack the retirement plans.

Ashlea:
Well, they’re already proposals out there in the administration that you can only put a certain amount in your retirement plans and after that point then once it’s a, I think, it’s at 2million dollars, once it’s at a certain balance, they’re different numbers depending on the different proposal that you wouldn’t be able to add anymore. So, when you say the proposals out there there’s a reason to be somewhat scared.

Jason:
It seems like the guard against that might be to have a retirement plan whether it be a Roth or traditional that’s one issue that we’ve already discussed, but have it be self-directed, because if it’s self-directed and the assets aren’t just with big brokerage firms and really simple electronic transactions, that’s not going to be low hanging fruit for the government. You know, the self-directed plans if you’ve got, if you own some notes or mortgages, you own some real estate…

Ashlea:
Self-directed plans are great for people who are…you have to really research what you’re putting in with them and make sure you’re not worried about the self-dealing rules, but there are definitely is a place for those for folks. I think though if the government puts in limits, they’re going to apply across the board whether it’s self-directed or through a regular brokerage. Theoretically if you have Roth money in there, you have more money in if they’re just putting limits on and not making a difference between Roth and pre-tax, you can basically have a bigger retirement pot with Roth money.

Jason:
Very interesting. Any other stories that you’re working on or have recently covered that you wanna talk about? Just thought I’d open it up for you.

Ashlea:
Well, I guess the biggest one I finished that got a lot of attention was about the upcoming 2015 tax filing season, which you wanna think about fourth quarter, but the IRS commissioners are warning that it’s going to be the worst season ever and congress is now back in lame duck session and they have 50+ tax extenders that expired, tax clause that expired at the end of last year they still haven’t they decided what they’re doing with. So, there’s a lot of tax news by year end that people should pay attention to, because what happens on those bills is going to affect your tax that you’re paying when you write your check in April or when you’re getting a refund, you’ll get less of refund.

Jason:
Ashlea, so, when you say it’s going to be a really difficult season, what do you mean by that? Law changes, audit risk, what?

Ashlea:
So, law changes, because of these tax extenders, whether some of them..and it’s everything from taking the reduction for sales taxes to teaches to buying $250 worth of supplies to $4,000 college tax breaks, commuter tax benefits, it’s a big list. So, chances are one of the things on that list will affect you and if they don’t, if congress doesn’t get around to figuring out what they’re going to do with those laws by early December, then the IRS commissioner that’ll delay the whole processing of returns, they might have to delay the start of the tax season and that might potentially delay refunds.

Jason:
Wow, what a mess. You know, I remember I was talking to Steven Forbes and then he gave a speech to our group and he just, you know, as a proponent of flat tax, he is so right. You know, he just said, let’s just drive a stake to the school system and start fresh, because this is so overly complex. I mean, I can’t believe it, Ashlea, you know, I am scared to death to sign my tax returns every year, there’s no possible way I can understand the hundreds and hundreds of pages that I’m putting my name on every year. I mean, I don’t even think one highly qualified CPA can understand all of that.

Ashlea:
Well, there are always people say three people get three different answers if they file your taxes for you, which is unfortunately is right and if you call the IRS hotline, you might get two different answers if you call two times and then good luck calling because they’re predicting 34 wait times for the 53% of the people that actually hang on till they get a live person there. So, I wished I had better news on that front, but that’s kind of the way it is. You do the right thing and try and understand the tax laws and get the right kind of advise and one of the reasons they also said about the delay is they’re putting..they’re going to have on the website, on the IRS website a list of tax prepares and obviously if you go to a CPA or an enrolled HN, they’re high standards they have to hold too, but there’s never been a problem with unregulated tax prepares, so we always have to warn people of that. They are going to put up, the IRS is going to start putting up on their website a database of qualified tax preparers.

Jason:
Very, very interesting. We will see how it’ll turns out. Ashlea, give out whatever website you’d like, is it just Forbes.com or something specific?

Ashlea:
Oh, so Forbes.com. The where not to die you can type in if you’re interested to learn more about estate state taxing and my name is Ashlea. So, that’s an easy why to find my articles too and I’d love you to follow me on Forbes or Twitter.

Jason:
What is your Twitter?

Ashlea:
Just Ashlea Ebeling.

Jason:
Okay, Fantastic. Well, thank you so much for joining us, Ashlea. Very informative.

Ashlea:
Thank you, me too. Take care.

Bond Rates Plunge – But Where’s the Crisis?

AMA1-16-15Ever since the financial collapse and recession of a few years ago, financial experts have been watching the sky or signs of falling. They’ve scrutinized the behavior o US assets at home and on the world stage for sings of another collapse and recession. Currently topping the list of assets to worry about: the plunging yield rates of US Treasury bonds and other assets in world trading.

According to a recent article from Business Insider, the rate of G3 government bond yields in the global marketplace has averaged lower than 1%. That’s a historic plunge, not seen even in the 1930s, when the Great Depression paralyzed the US.

The G3 is a currency group consisting of the US dollar, the euro and the yen. Its one of a number of designations describing currencies with similar characteristics, such as clout in global trading or political significance. It’s a variation on the more familiar G7, a group of 7 countries associated in terms of their outlook and behavior in international money markets.

The drop in 10-year yield rates affects all three of those currencies, not just the US dollar. As reported by Business Insider, in early 2015, the US yield of 1.959% was trumped by the yen’s drop to 0.288. In the Eurozone, the German yield hit 0.443.

Those kinds of rates are raising concerns about another widespread financial crisis. In the past, plunging rates have signaled a lack of confidence in the markets – the “panic phase” before the crash, as in the run-up to the Great Depression, when currency rates and values fell and so did devastated bankers.

But, say global financial experts, that’s not the case right now. The US economy is by many indicators on the road back from its downturn of 2008. The housing collapse that came about from years of reckless lending to unqualified borrowers led to the discovery of widespread bank malfeasance and forced a cleanup of lending standards.

The Federal Reserve stepped in to prop up the struggling economy with a string of stimulus plans, collectively called Quantitative Easing, which pushed lending interest rates historically low. The last version the Fed’s plan, known as QE3, is now winding down – and that’s fueling worries that the US economy might retreat again, hamstrung by rising rates ad a decline in borrowing.

Similar scenarios are plaguing other countries with major stakes in the global financial market, too. In the Eurozone, Greece continues to struggle with its own major debt default. And turmoil continues in countries on the fringes of that zone, including Russia and Ukraine, that are facing their own difficulties with devalued currencies and the specter of deflation o inflation.

Still those very scenarios are keeping the dollar robust. It’s the currency of choice for worried savers in countries like Russia and Argentina, and it continues to trade solidly against the euro and other leading monies.

If that’s true, then what’s behind the plunge in asset prices – and what do the mean for the future? Should investors worry that another panic is just around the corner?

Not necessarily, say advisers for the G10, a group made up of the G7 (the US, Germany, Japan, France, the UK<, Canada and Italy), plus Belgium, Netherlands and Sweden.

While those 10-year averaged yields are in fact at historically low levels and apparently inclined to hover there for the foreseeable future, those low rates in themselves don’t constitutive a run up to a serious global economic downturn.

The global economy can be fragile, vulnerable to sudden shifts and crises with both local and worldwide reach. But it’s also stubbornly though, riding out natural disasters, economic collapse ad political turmoil to remain on a largely even keel.

In the G3, for example, the Eurozone’s struggles are countered by the relatively strong performance of the dollar, which is in some ways driven by the money worries of Russia and others.

Though today’s low bond yield rates are unprecedented, they’re only one indicator of the world’s financial health. And, say market watchers, they may be a symptom of a panic that’s unlikely to materialize – a vote of no confidence that things will make a dramatize improvement.

The drop in bond yield rates offers a glimpse into the complex workings of the global money markets – but for worried investors, the sky may not be falling just yet. (Top image:Flickr/rutio)
Source:

Ro, Bam, “It’s Like We’re In the Panbic Phase of a Financial Crisis.” Busines Insider. businessinsider.com 6 Jan 2015

Read more from The American Monetary Association:

Interest Rates: Trends for 2015?

The Bitcoin Bounces Back

The American Monetary Association Team

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AMA 105 – Smart Indianapolis Real Estate Investing With David Porter

 

David Porter is a long time client of Jason Hartman’s real estate company. He has been working closely with Jason’s team since 2009 and has made several investments in both Indianapolis and Arizona. He catches up with Jason about how he is doing with some of his properties, talks about why the Indianapolis market is so great, China’s economy, the future of shipping, and more on this week’s episode of AMA.

 

Key Takeaways:
3:10 – David first bought his Indianapolis property in 2009.
8:40 – David talks a little bit about his background.
17:10 – You’re more in control with real estate investing than you are with stocks.
22:15 – Take advantage of your ability to borrow and invest it in a conservative way.
24:25 – David has since an increase in retail shipments this year.
28:45 – Will China be stronger than the US’s economy?
33:15 – Jason and David think the United States can stretch out their debt problem for a while.
41:50 – 3D printing, glowing trees, and more. Jason talks technology.
49:30 – David wants to buy homes he can see himself or his children living in one day.
53:50 – David has experienced a 700k appreciation since he started in 2004.

 

Tweetables:
Cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot.

As mismanaged as the US is in so many ways, I think they can kick this debt down the road for decades long.

 

Mentioned In This Episode:
Abundance by Peter Diamandis
Makers by Chris Anderson
Khan Academy
David Porter’s first interview – http://www.jasonhartman.com/89-%E2%80%93-the-%E2%80%9Cfree-lunch%E2%80%9D-metric-what-it-tells-about-income-property-%E2%80%93-an-impromptu-discussion/

 

Transcript

Jason Hartman:
It’s my pleasure to welcome on of our clients back to the show. He was actually on a long time ago. I think it was maybe 5 or 6 years ago when he started investing with us. His name is David Porter and it’s a pleasure to have him join us today. Dave, welcome, how are you?

David Porter:
Great, Jason. It’s great to be back with ya, yeah, I think it was a good 5 years ago when I last joined you on a podcast.

Jason:
I remember that day all too well. I remember I was rather stressed out sitting in my office and your investment counselor, Sara, kind of came into my door with you and I was thinking, please don’t bother me, I’m so busy right now! Then Sara said, Jason, you gotta hear his story. This is David Porter, our client and you just gotta hear his story and it was a really cool story of, I think, your first investment property that you got from us Indianapolis, right?

David:
Right. It’s so funny, you think, Jason, when we first met the economy was crashing. It was 2008. Yeah, some of these foreclosure opportunities were developing. I purchased my first property with you guys with Indiana.

Jason:
Good stuff. Then you started buying up Indianapolis, you were kind of quite the real estate mongol there. I don’t really know what you’ve done all these years. I know Sara has been in touch with you, but I haven’t..I hear about you once in a while, but tell us how it all went and what you’ve been doing and so forth.

David:
So, let’s see, we got started, I just looked at some records before we got to talking here. We started talking late 08. I purchased my first property in Indianapolis in March of 2009. That was an unbelievable…You think about it now since the prices have gone up since then, but $85,000 in that foreclosure market, we picked up a 3000 sq ft, 5 year old home in a suburban, very, very nice neighborhood. It’s incredible. That property today is renting out for $1250.

Jason:
One of the things that I was talking about way back then and I’ve talked about it many, many times since then. I’m probably boring my listeners saying the same stuff over and over, but it was the concept of buying below construction cost. It was also the concept I’ve talked about a lot that I call regression to replacement cost. You have a background in financial services and then the transportation business, shipping and trucking companies and so forth. By the way, I wanna ask you some insights, because those are really interesting parameters about the economy and global and national trade and so forth, so maybe we’ll get to that, but you bought this house; I thought you paid $89,000 for that house and your insurance company told you you had to insure it for $240,000 or something?

David:
Yeah. Your memory is very, very good. Those numbers are almost spot on. That was the story repeatedly, because after that I bought 8 more properties in Indianapolis. When you think about it, it’s okay, the insurance company made a mistake, they’re trying to charge me too much, and all that kind of stuff, but it kind of makes sense when you think about it. To rebuild and buy all the lumber and to create a 3,000 sq ft house, it’s going to cost you a couple of hundred thousand dollars, it doesn’t matter what you pay for it. So, that’s kind of their thinking and that’s what I kind of had to do. I shopped it around.

Jason:
So you bought the house for $85,000 or $89,000?

David:
$85,000

Jason:
Okay, $85,000 and the insurance company told you you had to insure it for $240, is that?

David:
It’s real close, I don’t remember the exact number, but it was $240 or $250 or something like that.

Jason:
So, at first, that must have upset you. You’re thinking, why do I have to pay insurance on such a large amount when I only paid $85,000 for the house, but the insurance company was thinking, if that house burns down, that’s what it’ll cost to rebuild it, right?

David:
Right, as mad as I was, the only thing that would have been worse is if they’d say, no, we’re only going to insure it for $50,000, because you only paid for…

Jason:
Yeah, that wouldn’t have been good.

David:
Yeah, the way you put that. It was really a great way for me to think about it. There was blood in the streets at that time. Again, the economy was falling apart, people were very concerned about what was going to happen. I’m telling my friends, hey, I’m buying these houses in Indiana, so I’m here in California. They were like, okay, Dave, you’re buying houses in Indiana, that’s really strange.

Jason:
They probably thought you were crazy right?

David:
They thought I was crazy, absolutely. I didn’t know at the time we were buying these homes over the course of 3 years. You never know if you’re buying at the bottom or really where you at. I’m a very conservative investor, I don’t like a lot of debt. I felt it was a very conservative investment, because based on what I knew the rents were and the rental market was relatively strong despite everything else because everybody else was losing their homes. The rental market is still a great place to be me. Even if it went down 10%, I mean, how much lower could it go given the fact I’ve got this plot of land in a nice suburban area and relatively new construction and good size, right? How much lower could it go? It couldn’t go to nothing like a stock.

Jason:
I agree with you. Even if it did, you’re still really a prudent cash flow investor. Cash flow is the name of the game if you get the capital appreciation. Hey, you’ll take it, I’ll take it, that’s the icing on the cake. Either way, cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot. These investors, well, they call themselves investors, I call them gamblers, but who invest in these high priced markets just waiting for something incredible to happen, I don’t know, I think they’re in trouble.

David:
That’s speculation, right? One of the biggest regrets I have in my real estate career is one of the houses I first bought to live in. California went through one of its down markets and I sold it at a loss and wrote a check to leave and I wish I would have just held on to it, I’m sure you’ve heard that a million of times, but other than that I’ve never sold property. I think there’s only so much real estate. They’re not making new real estate. If you have property in a solid area, that’s a great long term investor. My whole strategy around this is to create a nice passive income stream to take me into retirement.

Jason:
Absolutely. I think you’re doing a great job at that. So, tell the listeners, if you would, Dave, how many properties did you end up buying in Indianapolis or greater metro area of Indianapolis?

David:
So, I bought 9 all together in the greater Indianapolis area.

Jason:
What gave you..I mean, you saw the blood in the streets. Back then you were in the shipping business. You were in the container shipping business and that was experiencing a down turn. I mean, global trade was suffering. I used to read articles and I remember asking you about this and there were just empty shipping containers everywhere. It wasn’t even wise to run these freighter ships, because, you know, there was so little trade. It was a scary time. What gave you the confidence to invest back then?

David:
You know, it was really the best place to go at the time with your money. So, I had a career in shipping for about 20 years at the point, so you’ll learn I’m not a very good market timer. In 2007 I left the transportation business to go into financial consulting for investors. We will putting together portfolio of stocks, basically mutual funds, of high net worth investors. At the time I heard you commercial, I mean, things were just falling through the floor. Lehman brothers thing was happening at that particular time and I was just kind of curious. There must be another way.

When I learned about the approach, when I saw, again, these assets in some over built markets that taken such a hit, but the rents had stayed solid and my goal was rents. My goal was the cash flow. My welfare would be independent of the value of the underline asset really, as long as the rents hold up. I really liked that idea. If you think about a stock portfolio, a mutual fund portfolio, the rule of thumb for advising clients for retirement is you can take out about 4% of your portfolio per year and that’ll last you well into your retirement, perhaps even 30-40 years. Things like that. They run a lot of back testing, there’s no guarantees with that, but it’s kind of safe.

So, when I looked at the kind of income I could generate with the portfolio of houses, I would need much more money invested in mutual funds to generate that equal amount of income. So, that’s the way I looked at it. What would I have to invest in order to generate a certain amount of income. Real estate was clearly the winner at the time. It was fact back. I saw the market was so beaten up, I didn’t see a big down side even on the value of the asset itself.

Jason:
I agree with you. When you were buying the properties in Indianapolis, which maybe we can get to, but when you were buying those were you paying cash for them or were you getting financing on them. I can’t remember, I think you mentioned on the show a couple of years back.

David:
It was a combination of the two. At the time when I went into this, Jason, I had zero debt in my life. Zero debt.

Jason:
And you met me and you got into debt, right?

David:
Yes, you corrupted me.

Jason:
I’ve done my job.

David:
I’m still conservative. My cash flow has paid off on several of these properties, but what I did I just had some other property that was owned outright. Basically, if you were credit worthy at time, they were throwing money at you, very low interest rates, historically low. I did take out a loan and I’m paying on it today. It’s 3.49% fixed interest for 30 years.

Jason:
Oh my gosh. Until recently, Dave, you’ve been getting paid to borrow that money, for sure. I mean, I would say, and I’d have to admit as much as I don’t like admitting this or even have it be this way, that inflation is actually pretty darn low this last year now. It was definitely higher in the last few years, but it’s calmed down. I’m really surprised. Do you listen the podcast regularly?

David:
Not regularly, but sporadicly. I’ve listen to a couple dozen of them over the years. I haven’t heard any recent ones.

Jason:
I’m surprised inflation rates aren’t higher, I’m surprised interest rates aren’t higher.

David:
I am too.

Jason:
I think inflation is coming back, I don’t think we’ll see it low for very long.

David:
It’s not going to last forever. I did hear, you interviewed Richard Duncan. He is my favorite economists and even he as bright as he is and he does this full time, you know, are we going to die a death of icey deflation or hyper inflation, I mean, it’s hard to tell. Neither one of those scenarios is very good, but clearly what we’re doing isn’t sustainable.

Jason:
Who the heck knows. It would be sort of possible to predict economic scenarios with some accuracy if it wasn’t for central bank intervention. You just never know what they’re going to do. They just interfere with markets and they pervert the whole thing. You can’t predict stuff very well because of them. I mean, you could think, what would they logically do and you can sort of predict that, but it’s still, you know, it’s difficult.

David:
I don’t think we’re operating in a logical world right now. Richard Duncan puts it real well and I think he said it on your podcast. This is what really broke my heart. When I was in the financial services industry. I was with a very good firm. They were thinking about things, they weren’t speculating in stocks or penny stocks or any kind of thing. It was a pretty conservative approach, but people would like to think they’re investing in capitalism, but they’re not investing in capitalism.

As Richard Duncan says so well, it’s sadism, and that’s to your point. What is the government going to do with the banking system? What’s the reserve requirement? What are they going to do with interest rates? All these things throw stocks for a loop. You know, when you’re taught in school and I have an NBA, I am a fiance major, that’s my training. They tell you that you evaluate stocks by the value of earnings of the company. Well, I wished that was the case. It’s not the case, it’s part of the equation, but..

Jason:
It’s more about the story, right?

David:
Yeah, it’s the story and it’s what the government decides they’re going to do with their policy and how that’s going to impact a particular industry.

Jason:
That’s ridiculous.

David:
And there’s no way to factor that into a spreadsheet.

Jason:
I agree with you. So, what exactly was your background in financial services? Were you an adviser, did you work with clients and help them invest their money?:

David:
Yes, I was. I was a registered investment adviser. We dealt with high net worth clients and we put together portfolios of index funds, so within in the world of investing that’s a pretty conservative, reasonable, well-diversify way to go. We had all types of portfolios that would be in alignment with somebody’s age and risk tolerance, basically.

Jason:
Ladies and gentleman, what we have here is a defector.

David:
I still have a foot in the camp and..

Jason:
I’m glad you came over to the other side.

David:
I am too. So, going back to my investing in real estate story, I came to realize largely with your help and I can honestly say if I hadn’t attended some of your sessions and had some of the conversations, and read some of your material, I wouldn’t have thought about it this way, but having untapped ability to borrow, having that ability to borrow and not utilizing it is kind of like sticking money under your mattress, you know. Maybe it’s even worse than that because you don’t even get the money.

So, what I did is I took that ability to borrow and I put it to work in a very, very, very conservative way and it was clear to me my income stream would more than pay for debt service I would have and in addition you get all the benefits our tax code allows us to do with those interest payments. So, it really helped me a great deal. I don’t borrow as much as I could borrow. I’m comfortable where I’m at. I’m still in a very conservative position, but what I did was I took some money out of some property holdings I had and paid cash for a number of properties in Indiana.

Jason:
So, you didn’t really completely follow my plan. I would have said lever everything up.

David:
I know.

Jason:
Because it’s kind of counter-intuitive, I think the more conservative position is to actually be the borrow. I know, I know that goes against the grain to what a lot of people think. I completely get it, you know, I used to in the old days think pay everything off and, you know, I remember having this conversation with a friend of mine. We were on the board of a caner charity in Orange Country, California, where I used to live. Her name is Katherine. I remember her parents had some financial hardship and I remember thinking, gosh, they were losing their house.

They had this gorgeous home and they were going to foreclosure and I remember thinking, you know, the thing to do is to just pay off your own home so at least you own that and all the other investments could be leveraged and you’d never lose your house, but the reality is we have a perpetual lean on our houses called property taxes and in some cases a second lean called a home owners association.

You know, those agencies or their investors, because people buy tax leans as a trader-able asset, they look at those in a predatory fashion. If you’ve got a lot of equity, you’re target. I don’t like having big equity in real estate, even though I own some homes with equity, but if I could lever them more, believe me I would.

David:
So I’m kind of in between where I was and where you are now, but..

Jason:
Move the needle a little bit.

David:
You’ve moved it a lot really, you know. It’s worked out well. Also with Platinum’s help, I went into Arizona. So, that’s a different market. You told me at the time, I went into Indiana, you said, Dave, you were cautioning me, you said, you need to get more diversified. You’ve got too much in Indiana. You said, Indian is like a bond, you shouldn’t expect a lot of appreciation there, but it seems like the rents are pretty stable, so it’s good for that if that’s what you want to have and that’s what I was looking for. The income, the stable, long term income, but the Phoenix market, as you well known and you’ve taken well advantage of, got beat down awfully hard.

I think the dynamics of that market is you got the weather there and a growing economy and it attracts people and if you look at the demographics of North America, I knew people were going to come back to Phoenix again. So, we bought a couple of properties in suburban Phoenix, Gilbert and those have worked out extremely well. The thing I love about Arizona is the property taxes are low, insurance is low, and I did get some really nice appreciation on those properties as well.

Jason:
Yeah, Phoenix is a very desirable city. Now that I’ve lived here for a little over 3 years, it’s kind of a gem. A lot of people don’t know about it. People in California that lived in Orange Country, where I used to live and LA where I grew up as a kid, they think I’m nuts. I ask them like, when was the last time you were actually here? You know, it’s a really nice place. We’ve got super swanky restaurants and all kinds of nice things here. Other than three or four months, hot, but it’s a dry heat, it’s a pretty nice place. Although, right now, it doesn’t make sense for an investment stand point. It’s too expensive. It’s a hybrid market. Indianapolis is a linear stage of California. You’re in Southern California, right?

David:
That’s right.

Jason:
That’s a sicklier market. So, Phoenix is in between the two. We’ve moved in and out of Phoenix a couple of times. Sometimes it just gets over valued or at least, maybe I don’t want to call it over valued, I just want to call it where the cash flow isn’t good enough for us and that was one of those time.

David:
But, I’m holding on those properties there and I think that..

Jason:
Your basics are low.

David:
Yeah and it’s worked out very, very well for me and on top of that we’ve got a couple of properties I’ve held for a long time in California. So, yeah. I’m a happy real estate investor.

Jason:
Good for you. One of the things I wanted to go over was that concept you were…Oh gosh, forgive me, I’m having a senior moment here. See, I can finally say I’m having a senior moment.

David:
Are you over the line now?

Jason:
No, I’m not over the line. The AARP is still a long ways away I’m glad to say.

David:
Good for you.

Jason:
Oh gosh, it’s something you just mentioned. It was the concept of debt or…eh, I don’t remember. I’ll remember after we finish the talk here today, of course. But, what are your thoughts..you’re in the trucking business now, so what do you do exactly?

David:
So, the company I’m associated with in Southern California, we do local trucking and a large part of what we do is taking domestic shipping containers to the railroad from all the warehouses that are unloading all these containers that are coming from China, Vietnam, Japan, Korea, and so forth. We do a lot of local trucking shuttling goods from the harbor to the railroad most of the time and then we also consolidation/de-consolidation, and some warehousing work as well.

Jason:
So, your industry has a really good parameter on the economy. You know what the volume of trade looks like, where it’s coming from, where it’s going to. Are there any thoughts that you have or ideas that you just wanna share or maybe we can sort of hash them out?

David:
What I’m noticing..So, we deal with a lot of the large retailers from all over the country because the goods that we’re picking up here they wind up in Chicago, New Jersey, Atlanta, Dallas, Memphis, where ever for the large retailers. It seems to have been a strong retail session. At least, they ordered a lot of stuff. I don’t know if it’s going to sit in a warehouse on the east coast or not, but I can tell you in previous years we hadn’t seen this level of activity. This is, what we call, peak season in shipping is a season from basically labor day up until just after Thanksgiving leading up to Black Friday there and all the shopping that gets done. This peak seasons was unbelievable. It was extremely busy. I haven’t seen it this busy for many, many years.

Jason:
Are most of these goods coming from good old China?

David:
Yeah, especially in California. Our manufacturing zone is called Tijuana. No body is making anything here. What ships out of here is brought in from overseas or just over the border in Mexico or Tijuana.

Jason:
We can thank NAFTA for that for better or worse. What are those called, the Maquiladora zones.

David:
Exactly.

Jason:
I remember Ross Perot talking about them in the giant sucking sound.

David:
He was right about that.

Jason:
He was right about a lot of things. I wish he would have been elected as nutty as he seemed. I think it would have been the only guy who would have actually shaken things up and made something different.

David:
You know, it’s fumy, I voted for him and then I voted for him the second time and he kind of got a little off kilter with some of this theories about the Republican dirty tricks committee trying to ruin his daughter’s wedding and all that. You know what, even if that’s true, I wouldn’t say it.

Jason:
Makes him sound like a paranoid freak, right?

David:
Exactly.

Jason:
So, there’s a lot of talk about how China is really beginning to slow down and they are suffering and, you know, years ago you used to hear people like Peter Schiff and others like him, sort of the doom and gloom committee talk about the concept of de-coupling. How China will de-couple from the United States, meaning they’d create their own middle class, they’re own consumer base and they’ll have countries around them that trade with them and they won’t need us anymore and when they won’t need us they’ll stop buying our treasury bonds and our interest rates will sky rocket and we will be dead, but the exact opposite has happened oddly. It’s really interesting. They’ve just not been successful at creating their own middle class and their own consumer base. The people with money are bringing it over here.

David:
Exactly and that’s great for the real estate situation we’re talking about.

Jason:
It’s great for the everything situation.

David:
And the stock market as well. When I read about their real estate market, the bubble is finally..at least the air is coming out of it. So, it’s interesting, I mean, my view on that, you know, Peter Schiff. He’s interesting. I read his books, but, you know, I think maybe he’s got a little too much invested in that gold camp and all that type of stuff.

Jason:
Yeah, I agree. The gold camp really has gotten it wrong most of the time.

David:
Well, you know, they’re going to be right. What do they say? A broken clock is right twice a day, but I don’t discount it entirely. Overtime, I would not be surprised to see all of that to come to fruition over time. I don’t think that’s going to happen, you know, by 2020 or any time real soon. I mean, we just heard some statistics recently how China their GDP is going to surpass ours earlier than what everybody expected prior to 2020. Some measures of the economy would show that their economy is larger than ours right now, so I think over time you can kind of see how the trade is going and what the direction is, but no body wants to piss off their largest costumer and that’s us. For better or worse, it’s kind of hard to bet against the United States in the long run.

I do have some very serious concerns about this house of cards we have with our debt situation and all that, I don’t know how that’s going to play, but again, going back to Richard Duncan, I hate to keep quoting him, but this could continue for much longer than what for most people think it could continue. Japan has shown that. Their economy is not like the model economy or anything, but people would rather hold yen than rupees right now. People thought Russia was the way to go not long ago.

Jason:
I just think as illogical and unfair as it may be, the United States finds itself in a really impressive place in history and has benefited from a lot of that. As mismanaged as it is in so many ways, I think they can kick this can down the road for decades long.

David:
That’s exactly right, you know. So, to prepare your entire life for something..hey, it could happen. China could make some nutty announcement next year, I kind of doubt it, it could happen, but I would tend to agree with you some time after 2020 we’ll be well into retirement and who knows. You can’t live your whole life in fear.

Jason:
I agree with you. The interesting things about China, and we don’t have to talk about this forever, with China as soon as they start to maybe gain a foot hold, say things go really well for China, then they’re going to be facing this really huge ugly demographic problem and that’s the same thing is really behind hurting Japan so much or at least inhabiting their recovery. They just don’t have any young people.

China has far too big a male population, not enough females, and the one child policy in 10 years, they’re going to be looking at a really tough demographic problem. If they ever hope to get any real social safety nets there…I just don’t know if that’s ever going to happen. I hope it goes well for them. Listen, it’ll be nice if the whole world would prosper and we all live in harmony and it’ll be great, but if you’re comparing countries, like you say, it’s really tough to bet against the United Sates. I just don’t know how you could really do it.

David:
Yeah, it really is. The one thing that really is very interesting and I’m sure you’ve read about this, how China and Russia are gaining away from…

Jason:
They’re trading outside of the dollar.

David:
Of the reserve currency of the US. The thing that saved us, I think, the only thing that saved us that can’t save a Greece or an Italy is no body will allow them to indefinitely print their money and accept it. You know, we’ve got this weird license that allows us to do that. Other people can’t do that or they would be fined too. So, I don’t think that we’re so smart or so great or whatever. I think you’ve put it well. We’re in a unique spot in history. I think we’re allowed to do that. It’s kind of relic of what we used to be. It’s not rational or logical, we do get to do that and it’s saved our butts. No body gets to do that.

Jason:
I agree, I agree. We’re just kind of…We worked our way through the industry revolution, we won that guy, and now we’re just kind of lucky.

David:
Let’s hope we can catch up. There are some unique things going on right now. I’ll throw out a book too. Have you happened to read Ray Kurzweil’s Abundance?

Jason:
Oh, that’s actually Peter Diamandis.

David:
Oh! I’m sorry. Peter Diamandis, thank you.

Jason:
They talk about Ray Kurzweil a lot in there and Steven Colter was actually on the show. I love that book. It is amazing. It leads me to another question, but what were you going to say about that?

David:
I was just going to say that there is a lot of reasons to have home and there are with the advantages of technology and with the speed that things are moving along, people don’t even realize, you know, you’ve got technologies increasing every year and a half or so for the same cost. We’re at the point now, initially, we’re making experiential gains in what we’re capable of doing and what we’re going to have access to and that’s going to provide a better standard of living for everybody. I think the next 10 years is just going to be an amazing time for us.

Jason:
For the whole world. The whole world is going to benefit from this. We’re in a position where we have, what I’d like to call, the democratization of everything. You know, other than the wall street and cronies and the crony capitalism and the unholy alliance between, you know, government and mega business. I’m not even going to call it big business, it’s mega business, whether it be pharmaceutical companies or the banks or whatever, right. Elizabeth Warren, I’m definitely not a democrat, but she gave a great speech that I just posted on my Facebook page where she just outed all these criminals with Citi bank. Criminals, I’m using this word loosely, obviously. Just my humble opinion. You know, it’s just a total scam what’s going on, but the technology is just leveling and flatting and flatting the earth. I mean, crowdfunding, 3d printing, all of these things, gene sequencing.

Last night I watched a TED talk..Have you heard of this kick starter, this glowing plant?

David:
No, I don’t know about this.

Jason:
Oh, it’s mind boggling! Basically what you can do is you can go to a website now, and you can do this today, and you can design, for better or for worse, you know, it is scary I’ll admit. It’s Frankenstein whatever, but you can design your own life form made of whatever DNA sequence you want. You can put your credit card in and you basically, this website, helps you make this blueprint, and you can order this life form and the UPS guy will deliver it to you. Someone did that and made a glowing plant. It’s a kick starter project, they raised a ton of money, and they hope they ultimately trees will replace street lights. I mean just fathom that for a moment! It’s incredible.

David:
Oh my god. I’m going to check it out.

Jason:
Google it, you’ll find it. It’s an amazing time to be alive!

David:
So everything is leveling out. Another great example, they were talking about the Sony hacking situation with North Korea.

Jason:
Right, that’s kind of scary.

David:
I haven’t followed my way on to it, but this is dark side of the internet that you can get to do to, the dark net, what I heard yesterday, if you or I wanted to do that, it would cost us about $1,000 to find somebody in Russia or China that will do that for us. To take down a corporation for $1,000 bucks!

Jason:
Wow.

David:
When they started to talk about this, I thought the person would say 10 million dollars or something like that. $1,000 bucks! You could do it.

Jason:
Wow, that’s mind boggling. Now, that might cost you your freedom and your life, but wow, that’s mind boggling. The power is moving to the people and it is really, really cool. Now, one thing I wanted to ask you, because you’ve got so much familiarity with shipping and in the book Abundance and I’ve been talking about it for years on my show, but 3d printing. Is that going to move a lot manufacturing back to the US? It’s not for mass production, I understand.

3D printing is for more like artisan-type production and there’s a great book I read last year when I was in Europe and it’s by Chris Anderson who has written three great books that I know of. He is the editor of Wired magazine and I believe he owns TED now, the conference, and the book is called Makers. It’s all about the 3d printing revolution. I mean, are those ships be needing to come here quite as much because we’re just going to print stuff? I read an article yesterday we basically emailed a wrench to one of the astronauts at the international space station and what I mean by emailed is emailed the design for the 3d printing they have now and four hours later he had a wrench in his hand made of matter, made of atoms.

David:
Isn’t that amazing?

Jason:
It’s incredible!

David:
So, I’ve sat in some of these conventions I go to in transportation and logistics and that’s a very real thought. I mean, it’s not going to happen real soon, but to kind of ask two questions. Is 3d printing going to have a big impact on shipping? Yeah, I think it will in time. The second part is a lot of things are coming back. Again, with the dynamic in China, wages are increasing there. They’re calling it near shoring. It’s not necessarily coming back to the United States, some is, but a lot of it’s going back to Mexico. Some stuff was in Mexico and those Maquiladors moved to China, now it’s coming back.

Jason:
Wow, it’s really quite fascinating what’s going on in the world. What an amazing time to be alive. Just sit back and witness this stuff. Certainly we have our share of problems, but like I say, technology might save us all.

David:
Well, I think so too. I think that for our kids, I really believe there’s never been a better time to be alive in terms of there’s never been more opportunity for everybody. I mean, you could be the poorest poor person, maybe not the poorest poorest, but if you have the access to the internet, you’ve got unlimited education and access to information, role models..

Jason:
For free! You’ve got the Khan Academy, it’s free! You can learn, you can get 10 PhDs at the Khan Academy for free, it’s amazing.

David:
That’s just tremendous opportunity. I read where they’re predicting in the next 10 years, we’ll have our first high school billion. We already have plenty of kids that dropped out of college to become billion, but imagine a high school kid becoming a billion, not just because our currency is debased, but because they’re creating real value. Yeah, so it’s an amazing time. There’s unlimited opportunity out there. Yeah, there’s problems, but Jason, you’re a little younger than me, but when I was growing up and you probably heard some of that stuff too, I literally, my elementary school teacher in third grade told us, “You know what? I don’t think you guys will live to see 30, because there’s going to be a nuclear war.”

Jason:
Wow, really?

David:
What kind of manic teacher was..

Jason:
Today you’d get fired for that.

David:
I think justifiably so. That was a ridiculous thing to say to young kids, but that’s what we were worried about. Nuclear annihilation, cold war, all these stuff. There’s really, we’ve got these terrorists, but not massive nuclear annihilation as a very real possibly. There’s always something to worry about.

Jason:
There’s always something to worry about, but hey, before you go, I just wanted to ask you about real estate for a moment. Have you estimated your returns on your portfolio or do you just like collecting your checks and you don’t think about it too closely?

David:
Yeah, I tend to do it each year as I’m getting the taxes done. I can tell you that..well, just over the last 10 years, which is really kind of my real estate timeline outside of personal residences and vacation properties we use for our families and so forth. We’ve seen a 7 digit, I shouldn’t call it that, because that could imply up to $9 million dollars, but over a million dollars in just in appreciation and the return that we’ve earned, again, it could have been much greater because we didn’t chose to use a lot of leverage, but..I’ll tell you this, when I was running the numbers when I was doing the analysis in terms of what I was going to buy, routinely my returns with a moderate amount of leverage, not a lot of leverage, was 25% to 30%.

Jason:
Annually?

David:
Yeah and that was only assuming a 4% annual appreciation and I have received much more appreciation than that. I haven’t figured it out in terms of what is my appreciation. Really, the right way to think about this, I think, is what your appreciation has been, what your cash flow has been, and what’s your…and think of that cash flow in terms of the tax benefits you’re getting. Here’s the other thing, the great advantage of these properties that we bought in foreclosure. You get your statement from the county and it gives you the assessment.

Jason:
Your property tax assessment.

David:
Yeah. The 80% of the value was in the building, right. So you get depreciation on all that. So, I’ve had some very nice sessions with my CPA, because these properties I get to depreciate so much. It’s totally legitimate. I’m using the documents that the government is giving me, so it’s very much a tax advantage return. I’m not paying any taxes, obviously, on the appreciation and on my cash flow I’m getting a nice tax flow benefit.

Jason:
Yeah, depreciation is the holy grail of tax advantages. It makes income properties the most tax favorite asset in America by a long shot. I mean, I don’t know of anything even close, because it’s a phantom write off. You don’t pay anything to get that. Your property could go up in value, have positive flow, and the way IRS looks at it you’re still losing money, which is good in that sense.

David:
I don’t want to ruin that. It’s a beautiful thing. If you go back to the bond analogy you gave me all those years ago, it’s almost like it’s municipal bond. You get those wonderful tax advantages. The other thing I want to share with you too, Jason, kind of the experience of being a real estate investor is a person who has a full time job, a family, 3 kids, you know, on the go, some people are like, Dave, okay, you’re buying these out of state properties. First of all, that’s nuts. How are you ever going to see your properties? My answer to that has been, well, I’ve had rental properties in California and they’re in the same city I live in and I very rarely went by there. If you’ve got good property mangers and you’re kind of managing your property managers. My management of my property mangers consists of calling them when I see I have a vacancy or sending them chocolates at Christmas each year. I don’t spend a lot of time doing it.

Jason:
You send them chocolates? Wow. I never give anything to my managers, maybe that’s why they like you better.

David:
I’ll give you a great example and this is one of your property managers that one of your local market specialists turned me on to and, again, this was in Indianapolis. I wasn’t happy with my insurance premiums out there, so your local market specialists is the one that turned me on to the property management company. The property management company turned me on to a insurance group that allowed me to package all these properties and reduce my insurance premiums by 50% in that market. I wish I could remember right now, but I checked it out at the time, very high rated insurance companies. So, they can take very good care of you. I want them to like me more than the other landlord they have when they have one tenant and two houses and need to decide where they want to put the tenant.

Jason:
You want them to think maybe we’ll get some chocolates from this.

David:
Exactly. Let me get that chocolate benefit. You know, I spend very little time on this because I do use property managers. I’ve gone the other route and tried to manage it myself.

Jason:
You did self-management from a distance, because I do both and I’m just shocked that I could even do that. How was your experience? It sounds like you weren’t keen on it.

David:
I wasn’t. Well, I tired to be a property manager here on the properties in California what happened is when it started south. I wasn’t going by the properties enough and then when it started going south, quite honestly, I didn’t know what to do as far as taking people to court stuff and all that.

Jason:
Tell us what happened. What do you mean? Did you have an eviction?

David:
Yeah, I had an eviction. So, what happened at that point in time, I found a property manager and said, hey, get me out of this mess and you can manage the properties from now on and that’s what we did and it’s worked out great. I think these people earn their 7-8% or whatever it is that you’re paying them for me. Now, maybe if I was a retired guy and I liked doing that stuff, fine. So, the work I think with getting these investment properties was really deciding which ones you were going to buy and doing your due diligence in that regard. Certainly you were a big help, your team was a big help in helping locate the appropriate markets that had the good returns in certain areas in those markets and all that, but even after that you have to decide, okay, which house are you going to buy? I really enjoy that process. Again, with all this technology we have, you can drive down the street, you can look in your neighbor’s backyard.

Jason:
You can do it Google maps. You can drive down the street.

David:
Yeah. I did it with every single one of them. One of the earlier podcasts, I would look at the schools, what is the whole situation with the schools.

Jason:
Dave, I forgot, you are the guy that created or discovered the free lunch metric!

David:
You remember that!

Jason:
Yes. I remember naming it that. It’s a good idea. Feel free to tell the listeners. It’s on the old podcast, which I’m sure is still posted, you can find it at JasonHartman.com and maybe on iTunes. I don’t know, those old ones on iTunes, I think they drop off after a while, but it’s on our webiste, I’m sure. It’s still posted. That was a great idea that you did. Tell our listeners about that.

David:
Everyone has their own view the types of properties they want to invest in and there is a need for section 8 housing, there is a need for penthouses, and there is a need for solid single family residences, which is what I was looking for. I didn’t want any trouble. What I looked at was what was the percentage of children in the local school that qualified for free lunch. So, if it was below 50% it was an area that I was comfortable with.

Now, the houses that we purchased, I always wanted to think about it as, you know what, I’d live there or my kids totally comfortable and happy with them living there. I’m very proud of our real estate portfolio. I think they’re very nice properties and I’m proud to own them and I think we provide a very nice housing arrangement for people. That kind of was one of those tests for me. If less than 50% of kids in the local school get free lunch, I was happy with it. I considered it a reasonably solid economic area.

Jason:
That’s a good metric. Like you said, there’s an investor and a property type for everybody and you like the A properties, kind of the nicer properties. We have those and we have B properties and we have C properties. Honestly, the C properties, they have the great numbers, the tenants are just more flaky. They’re just more difficult to deal with. The thing I say about C landlords is it’s going to require a little bit more of your attention and it’s going to require you to manage your emotional state better, because you’re just going to have more trials with C type properties. We’ve got them all, we used to only do A and B type properties. We got into the C stuff because a lot of our clients wanted it. So, they can take their pick and you know, you’ve got your pick and your model and it works for you, so that’s awesome. I love it.

David:
That’s worked well with me, but you know, there were some of these properties that I bought that I hadn’t, I certainly had never seen them, because they were out of state. I may have driven through the general area and I didn’t go to see them after a couple of years after the fact. I mean, that happened. I would talk to people about that and they’d say, how could you do that? How could you just trust that everything is okay?

Well, I didn’t just trust. I did my research. I can walk through the house virtually, I can walk through the neighborhood virtually, I know everything about the schools, I know everything about the crime report in the area. I can pull everything, and I did pull all that information up, when I would ask them though, what about these companies you’re investing in in your mutual funds, do you know what’s going on? Do you sit at the board of directors meeting? Do you know if they’re about to get sued or are in the middle of a lawsuit or are considering being bought or buy something or some legal problem?

Jason:
Or the CEO is just about to get nailed for some huge sexual harassment case, you know, you don’t know this stuff.

David:
I know more, virtually, of the fundamentals of the investment on this real estate if I never, ever go there. People, if they’ve own Apple stock, they’ve been to Copertino, and visited with the manager, they don’t do that, but they’ll have no problem putting $50,000 in Apple stock. So, people really need to understand how they’re talking about things. Everybody hears about the nightmare land, tenant stories, and..

Jason:
Like the one story, right, that everybody has had to discourage them.

David:
Yeah, but I don’t know my tenants, they don’t know me, I’ve got great property managers. I spend, it’s really just the accounting stuff. I spend an hour a month on it and it’s not a big deal and it’s just an investment I’ve been very happy with.

Jason:
An hour a month for how many properties by the way?

David:
13 rental properties.

Jason:
So, 13 rental properties only takes you an hour a month? See, I tell people, and I know this is high, but occasionally if there’s like a problem property, it could suck up a little bit more time, so I just tell people assume one hour per property per month. So, if you’ve got 13, I’d say 13 hours a month, but you only spend an hour a month for all 13 properties, huh?

David:
I’ve had good fortune, I guess. I mean, I just don’t have big problems with my tenants. I mean, you’ve got the occasional dishwasher, air conditioner, it’s an email in the middle of other stuff I’m doing, I’d say yeah, do that. No, get another quote. It doesn’t take much time. Once you’ve got them established and you’ve got the property manager taking care of it, I don’t see how it could take me 13 hours a month.

Jason:
Yeah, I agree with you. I think as humans, I mean, certainly we all do this. I know I do it, I’m sure you done it at time, everybody listening probably has to, we all kind of get into our way and we sometimes mirco manage stuff, we get upset about something and then we just get all freaked out about it and then it sorta just occupies our emotions and then we go dump on other people. It’s not exactly a good quality, but we all have to admit we’ve all done it.

David:
Well, I’ve been more than willing to pay, whether it to be property managers or the initial stage by these properties that aren’t new properties that need aren’t new properties and need a little bit of rehab. Now, my brother in law who is a client of yours, I referred him to you, he kind of had a different approach. He took vacation time, he flew down there, he helped rehab the properties,

Jason:
He’s a hands on guy.

David:
Yeah, little more handy type guy. I didn’t want any type of experience like that.

Jason:
Me either. I don’t like that. We don’t do that stuff.

David:
You know, he slept in the property.

Jason:
Oh my gosh, he’s like my mom. My mom is like that.

David:
Working on it and painting it and stuff, but he likes that. God bless him, if that’s what he likes to do, then that’s what he should do, but I consider that some type of torture and I don’t want to do that.

Jason:
That’s called work and I don’t like work like that.

David:
To me it’s all about passive income, so we’ve developed that and that provides some nice benefits from pay down some of these and not only that, but we’ve used the proceeds to investment in another business, which is doing quite well right now and generating even more passive income. It’s just been really good all the way around.

Jason:
Good for you, that’s awesome. So, just to recap. I’m keeping you long here, but it’s just been a great conversation, so thank you so much for coming on the show. So, you’ve made over a million dollars in appreciation and how many years? When did you start?

David:
So, that would be starting in 2004.

Jason:
Oh, 2004, but when you started with us..I mean, that was your California stuff.

David:
Right, so I started with you in 2009. So, those properties, well, all I have to do is black out my California properties there. It would be about $700,000 in appreciation in the California and Arizona properties.

Jason:
See, that Arizona, it’s a hybrid, but you gotta be careful you don’t give it back. Well, you bought early enough, you’ll be okay. If someone were to buy today or in 2006 in Arizona, they could eat it.

David:
Right.

Jason:
Same with California.

David:
I think, you say, there’s no such thing as bad…you know, there’s all these different markets all over the country and everyone raises and falls and that’s the great service that you and your team provide, which market makes sense to be in right now based on what your goals are, right?

Jason:
That’s what we do, that’s what we watch for people, and the comparison though is the Indie properties gave you much better cash flow than the California and even the Arizona properties.

David:
Yeah, absolutely. Those are going to be hard to beat from a crash flow perspective. I’ve been very pleased with the stability, the tenant base, the economy there, and, you know, because we did buy at the time we bought, we got much greater appreciation than one would expect normally to get in Indianapolis. I think you could still by in Indie and still do real well from a cash flow stand point.

Jason:
Oh yeah, Indie’s still good. The prices are still higher than they used to be, but you can still make your cash flow numbers there, which is why it’s kind of our market. I mean, we’ve got other markets that are great too, but Indie has been a very good market for us. I personally made a lot of money myself buying properties there. I love it, it’s good, good stuff. Well, Dave, it’s very inspiring story and thank you so much for sharing it with our listeners and coming back on our show again. I really appreciate it. It was great talking to ya.

David:
Alright, my pleasure, Jason.

Interest Rates: Trends for 2015?

AMA1-8-15With every new year comes a round of predictions about the financial future. This year, as in many others, the fate of interest rates in 2015 and beyond is the subject of speculation, most of it pessimistic. Financial experts and economists are once again predicting that US interest rates will soar in the coming months. But several surprising factors both foreign and domestic play a major role in what happens to those rates – and they’re largely beyond the control of US economists.

Interest rates can be a key indicator of economic health. Typically, lower rates for both personal and commercial loans mean a more robust consumer economy – more people can borrow money, and that means more purchases of major items, new business startups an other enterprises. That in turn feeds the job market, keeps houses selling and encourages world commerce.

In the US, interest rates have spent the last several years in an artificially imposed holding pattern. The financial collapse of a few years ago was driven in part by runaway lending, especially in the housing industry – and that put millions of unprepared buyers in homes they couldn’t afford, with mortgages they couldn’t maintain.

The housing crash and the recession that followed prompted the Federal Reserve to intervene with the much-publicized Quantitative Easing initiatives that involved buying up large amounts of bonds and mortgage backed securities. That plan, the Fed reasoned, would encourage banks to lend more at lower interest rates and get the economy moving again.

In the years after the crash, interest rates did remain low – reaching historically low levels that did indeed stimulate more home buying. The employment picture brightened too, and although the dollar struggled in world markets against currencies like the euro, it remained a standard for international finance.

Those and other factors were enough to signal the end of Quantitative Easing. When the Fed announced in mid-2014 that it would start “tapering” QE3, the latest version of the stimulus toward the end of the year, market watchers began worrying that without the Fed’s manipulation, interest rates would surge. And that, they feared, would stall borrowing and trigger another collapse.

So far, that hasn’t happened. Rates have crept up, pushed by market forces, and that’s triggered new concerns that as the stimulus winds down, those rates will finally soar. But as a recent Business Insider article points out, events outside the country can affect the rise and fall of US interest rates.

The global nature of 21st century finance means that in a kind of “butterfly effect,” what happens in one area of the world can affect conditions thousands of miles away. Economic upheaval in Russia and the countries of Europe and Latin America can affect what happens to US interest rates.

Russia begins 2015 with an uncertain economic future: struggling with debt, sanctions and continued unrest in Ukraine. The ruble is in severe decline. Russians of all walks of life are opting to either invest abroad or convert their assets to foreign currencies. And the currency of choice is the US dollar.

Other countries too are doing brisk trading in foreign currencies as they face debt and currency crises. Greece is attempting to restructure its debt after its recent collapse. Argentina’s black markets trade briskly in dollars after that country fell far into debt. Even though the dollar has fluctuated against other world currencies, it’s still in wide demand for its stability and security – and that helps keep rates low at home.

World energy prices play a role in the rise and fall of US interest rates – and those prices are set in response to a host of factors both political and economic. Low energy prices can play role in holding down interest rates, too, and at the close of 2014, those prices were relatively low.

Environmental factors can also affect rates. Destructive weather events and other natural disasters can stress local and national financial reserves and increase demand for funds. And on the economic front, rates of deflation and inflation also play a role.

The rise and fall of interest rates is a measure of economic growth – and one worth watching for investors and consumers alike. For now, a combination of factors at home and abroad are keeping rates low – and challenging the perennial pessimism of economic forecasters. (Top image: Flickr/gorfor)

Source:

Oyedele, Akin. “5 Reasons Why Interest Rates Won’t Surge in 2015.” Business Insider. businessinsider.com. 30 Dec 2014

Read more from The American Monetary Association:

AMA104: Learn About Africa’s Economy with Todd Moss

The Bitcoin Bounces Back

The American Monetary Association Team

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AMA 104 – Learn About Africa’s Economy With Todd Moss

Todd Moss is the chief operating officer and senior fellow at the Center for Global Development. His work focuses on U.S and Africa relations and financial issues that sub-Saharan Africa is facing. He is also an author and has written several books with his most recent one, The Golden Hour, being a national bestseller. He talks to Jason about Africa, the economy, and why it matters.

 

Key Takeaways:
2:50 – 7 out of 10 of the fastest growing economies in the world are in Africa.
6:10 – We are seeing Africans transition from being very, very poor to becoming middle class.
9:25 – There’s a lot more foreign investment in Africa and the countries that were very badly managed in the 70-80s are now being managed much better.
11:30 – Will outsourcing and manufacturing move to Africa? Todd explains in this segment.
13:50 – A lot of Africans speak English as their native language and the second largest language is French.
16:25 – Is there a strong Al Qaeda presence in Africa?
22:15 – Todd talks about his latest book, The Golden Hour.
24:30 – Africa is changing very rapidly and Todd hopes more people will look at Africa as a place to vacation to in the future.

 

Tweetables:
When you add a Africa’s billion people to the global economy, that’s a huge boost.

An African immigrant to the US is more than twice as likely as an American to have a graduate degree.

 

Mentioned In Episode:
Abundance by Steven Kotler and Peter Diamandis

http://toddmossbooks.com/

 

Transcript

Jason Hartman:

Welcome to the podcast for the American Monetary Association. This is your host Jason Hartman and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it and comment on our website or our blog post, we have a lot of resources there for you, you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

It’s my pleasure to weclome Todd Moss to the show. He is chief operating officer and senior fellow at the Center for Global Development and former Deputy Assistant Secretary in the Bureau of African Affairs under George W. Bush at the U.S Department of State. He is also the author of The Golden Hour and it’s a pleasure to have him on with us today. Todd, welcome, how are you?

Todd Moss:
Good, thank you, Jason. Pleasure to be with you.

Jason:
It’s good to have you. Just to give our listeners a sense of geography, where are you located? DC?

Todd:
I’m just outside Washington, DC.

Jason:
You’re in the belly of the beast. Good. So, let’s talk about, you know, the global economy, national security, and why all this stuff matters to people, especially Africa. You know, Africa I sort of view as the kind of forgotten continent. It’s just has never really made any real, you know, real impact on the global stage it seems. I mean, 100 years of that is steadily declaring GDP for most nations there, what’s going on there?

Todd:
Yeah, I think most Americans think of Africa as a far away place that maybe has a few problems, but nothing we should really very involved in or nothing that has to do with us and certainly Africa’s economic performance for a good part of the 20th century was pretty terrible, but Africa is really particularly in the last 10 or even 20 years has really gone around a turn around that most Americans have not yet recognized. Right now, Africa is one of the most dynamic regions of the world economy.

7 out of 10 of the fastest growing economies in the world are in Africa. We just in just a few weeks we had the first ever US Africa Summit in Washington DC. Leaders from 50 countries came to meet with president Obama and really the highlight of it was billions of dollars in new investment announcements from big brand name American companies that are expanding into Africa and this includes IBM, General Electric, Coca Cola, you know, real household names that are very excited about the growth opportunities in Africa.

Jason:
I think most of our listeners would be surprised to hear that, that you said 9 of the fastest growing economies?

Todd:
7 out of 10.

Jason:
7 out of 10. So, what are those? What countries are those?

Todd:
So, the fastest growing economies are some of those that have had some of the worst headlines in the past. So, you’d probably be surprised that Ethiopia is one of the fastest growing economies and it’s doing remarkably well right now. Rwanda, which only in 1994 had the horrific genocide, has been growing very, very fast. Other countries include Ghana, Mozambique, Nigeria is growing very fast even though they have some problems. Kenya, Tanzania, Senegal. So it’s really quite broad based. It’s not only oil economies.

Jason:
Yeah, that’s amazing. Senegal, even. Wow. So, the first thing that everybody should obviously consider is that when you have a tiny economy, just like a tiny little company, it’s not necessarily that difficult to get it to grow quickly. Bigger companies, bigger economies, it’s harder to get it to grow fast. This is definitely good news, that said. I’m not taking away from that. What do you attribute that to? You know, some of the countries mentioned seem pretty backwards. I just gotta ask you, how much Muslim influence is there, because that, I think, not meaning to offend anyone of course, but I think that’s a growth inhibitor. It just seems that way to me.

Todd:
Let me take those two questions separately. What’s been driving growth in Africa, so yes, you’re partly right a lot of economies are still small so they’re growing from a small base, but what’s changed from the 1980s or the 1970s is that economies are starting to build momentum. Economies start going at a faster pace and it’s easier to maintain that and what’s very exciting I think both as an investment opportunity, but also for Africa’s future.

What we’re seeing in many, many countries is this once in an lifetime transition where families are going from being poor into the middle class. So, we’re seeing families buying their very first refrigerator that their families ever had. The very first television. Many are buying the very first motorcycle or car in the family and that’s kind of the transition we went through in the 1930s and the 1940s and that starts to perpetuate itself. So you can imagine when a family buys their very first washing machine, suddenly all the girls and women in the family, they don’t have to wash clothes any more, they can do something else even more productive.

Jason:
That’s really why I asked you about the Muslim thing. You can’t really grow and be, you know, do anything great as a country, I mean, unless you have massive oil reserves and you’re just lucky, if you’re going to obsess women and do this kind of crazy stuff. You are never going to encourage tourism if you’re cutting people’s heads off or stoning people.

Todd:
Fortunately for Africa, there are very few cases of some of the radical religious furor that you see say in Pakistan or that we’re seeing now in Iraq. In fact, Islam in Africa is generally very, very moderate. Many countries in Africa have large Christian and large Muslim populations. Now, occasionally politicians can kind of stoke people to get upset with the other side, but it’s actually quite rare you’d have an elitist base of violence in Africa and even in the country of Mali, which is where The Golden Hour, my new book, takes place.

For hundreds of years, Mali has been a country of extremely open and tolerant religious diversity where all kinds of different Islamic sects and other religions have come and traded. The kind of craziness that we’re seeing in the news now is as foreign to most parts of Africa as it is to us.
Jason:
That’s good to hear, I’m glad to hear that, because that’s certainly going to lead to advancement opportunities. So, what do you attribute the growth to? You know, countries that are doing things right in Africa, what are they doing?

Todd:
Well, there’s been a number of factors. Some outside factors has been commodity prices have been generally on an upswing just like oil and copper and gold have been pretty good. The international economic environment, other than the recession in 2008/2009 actually have been very favorable for Africa.

The international financial system is strong enough that African countries can tap a lot of..a lot of countries are tapping private capital markets now in a way that they’ve never done before. So, the international environment is general favorable. You’ve seen a lot of investment coming not just the US, but from Europe, China, Japan, Canada, Australian is putting a ton of money, Malaysia. So, there’s a lot of people looking to invest in Africa. That’s helping.

We’re also seeing some really positive internal changes. A lot of countries that were really badly mismanaged in the 70s and 80s are now managed pretty well. Now, that’s not to say there are lot of economic problems in lots of places, but in general countries are doing a lot more of the right things and they’re able to do attract investment and get their own economies going.

Jason:
I had Steven Kotlet on the show and he wrote a book with Peter Diamandis called Abundance: The future is better than you think. They talk a lot about in that book and I’ve heard a lot of other futurist talk about the raising billion and, you know, Africa has a population of about 1.1 billion people and if these people can enter the global economy, you know, at first blush marketers and business owners and, you know, governments might think, they don’t have much money to spend, but they are so big in terms of number, when you add a billion people even if they hardly spend anything, that’s a huge boost to the economy and that’s why Africa really is important.

I don’t know how much we’re going to see of it there,but you know, outsourcing, manufacturing, and stuff like that? You know, China has certainly prospered from that dramatically. Estimates are that about 275 million people have been lifted out of portery through globalization. This is excited and great news, but of course, you can argue the other side , US workers have been hurt by that and that’s certainly valid also, but I think we’re in a free trade environment, period.

That’s just the world in which we live nowadays and we’re going to have to learn to adapt to that and some of the advances in technology, like 3D printing, are going to on-shore a lot of this back to the US. Americans workers, you got some good stuff your way. It’s not all bad, but what about the outsourcing and manufacturing in Africa idea? Is that going to happen in any big way or is that going to remain the domain of China?

Todd:
Well, right now, it still largely an Asian story. Manufacturing is sort of the one real negative in Africa is that we have not seen manufacturing take off and in large part even as China has moved up the value chain. You had countries like Bangladesh step in and Bangladesh and dominates the textile market, which is traditionally the gateway for countries in the manufacturing sector.

Now, whether Africa will replace Bangladesh in 10 or 20 years, I don’t know. I think it’s probably more likely some kind of automated system or robots will be making our clothes rather than thousands of low income women in factories, but clearly these changes in Africa that you’re talking about, the demographics, are huge, huge opportunities.

When we look at something like the explosion of cellphones and banking services in Africa where companies are making huge, huge profits off of…by expanding and meeting the needs of relatively poor customers, we can see that the potential is huge. As those incomes raise, as people go from earning $1,000 a year to $5,000 a year. They’re just going to be buying all kinds of things that they don’t currently have that, you know, some American companies will be providing.

Jason:
Well, it’s really an amazing thing. It is a big deal, no question about it. What about the language issue though in Africa? I mean, you’ve got, you know, Swahili has been a language as English has, but you have all these different languages, you have these tribal factions, you have different religions. I mean, gosh, it’s a challenging place, isn’t it?

Todd:
It’s an extreme diverse continent. You do have, like anywhere else in the world, the business language is largely English. Many, you know, hundreds of millions of Africans speak English. A lot of schooling is in English. The second biggest language in Africa is French. So, there’s a lot of common languages and, you know, very common in Africa for you to meet somebody who speaks 5 or 6 languages. For us, I struggled just to learn Spanish, but all of my African friends have no problem with half a dozen languages or more. It’s an adaptive masochism that they’ve had that will help them be very globally competitive.

One more really interesting connection between the United States and Africa’s growth story is the immigrants from Africa to the United States, we don’t have that many because Africa’s pretty far. Most migrants go to Europe. The migrants that we do get in the US from Africa are extremely highly skilled. In fact, an immigrant to US from Africa is more than twice as likely as an American to have a graduate degree.

Jason:
Really?

Todd:
You are really getting the cream of the crop from Africa and what’s exciting for Africa is of course they do, you know, they’re starting businesses, they’re becoming doctors and nurses here in the US, but many of them go back and start businesses back in their home country. So, most of the booming, new African companies were founded by returnees either from Europe or the United States who maybe they worked for Goldman Sachs for years and they went home and started their own bank. That’s really good for them and really good for us.

Jason:
Todd, I just gotta take issue with that comment about the graduate degrees and so forth. I mean, I don’t see that. I see a lot of these African immigrants driving taxis in the US.

Todd:
A lot of the African immigrants the US will have college degrees even if they’re driving taxis, but certainly around Washington, DC, we have plenty of African cab drivers. We also have a lot of African doctors, economists, other kinds of professionals. You know, there are just..they are relatively small relative to our population, but they are highly educated.

Jason:
Let’s talk about the security, the national security about it. How big of a presence does Al Qaeda have? You did allude to that before, but I want to take a deep dive into this a little bit. There’s certainly problems with political instability, there are coups, ethnic violence, drug and weapons smuggling, kidnapping, address that for a moment if you would. It’s just kind of a broad question, take it where ever you want

Todd:
Sure, as the US hammered Al Qaeda in the middle east, we’ve seen Al Qaeda and Al Qaeda copycats sort of pop up in some very weak places including Somalia and including in the middle of the Sahara Desert. The original Al Qaeda groups that emerged in the Sahara Desert were Algerians that were fighting with their own government in Algeria and had migrated south to take advantage of Mali’s inability to country its border. That sort of merged with some, as we’ve seen Al Qaeda do in other parts of the world, they kind of merge with local grievances.

So, some of the Al Qaeda type groups and when I say Al Qaeda here, I mean people that declare themselves to be Al Qaeda, it’s not that they’re taking direct orders, but they’re replicating what they think Al Qaeda would do. They teamed up with some local groups that were upset with the government of Mali and they were able to take a large part of the territory in 2012 until French forces invaded and pushed them back.

So you are seeing this confluence where Al Qaeda is taking advantage of local problems, but in general it’s not, Al Qaeda is a much smaller problem in terms of numbers in Africa is just the potential from them to grow in Africa.

Jason:
Address that for a moment if you would, Todd. The reason there is a potential for them to grow is due to economic hardship and lack of opportunity, probably. You speak to it yourself, but that’s what I’m thinking.

Todd:
That’s part of that, but it’s also that some of the governments are unable to control their territory. So, the government of Mali might have had 3,000 troops, not very well equip troops, trying to patrol the area the size of Texas in 100 degree plus heat. No body has ever controlled that part of the world ever in the history of mankind and to hope that 3,000 Malian troops could do so, you know, is wishful thinking, but that just creates these sort of pockets where Al Qaeda an hide, they can operate, they can train, and that’s why the United States is going to be forced, whether we want to or not, is going to be forced to get involved more intensely in some of these places.

Jason:
Okay, very interesting. So, I mean, what do we do about that? You know, how do we, what’s the solution to this Al Qaeda thing? It’s just crazy what’s going on in the world with these…why do people want to live in the 7th century A.D? I mean, it blows my mind.

Todd:
I can’t explain it and unfortunately I don’t have any great answers for you to solve it, but I do think the one thing we can’t do is turn away and pretend and sick our head in the sand and pretend it doesn’t exist. I think we know already that’s going to make matters worse. We do need to be very clear in our objectives in those countries. We are expanding our military footprint in parts of Africa. The Washington Post reported just on Tuesday that we’re opening another drone base in the Sahara Desert, so I think we’re going to see more drones and more direct counter-terrorism operations from the military, but that’s really a band aid.

The real heavy lifting is going to come from African militaries themselves who are just going to be better able to operate in those environments and understand who the enemy is and that’s going to mean that the US is going to have to get a lot better at security corporation with those militaries. We do a lot of it, but we’re just not that good at it yet. So, I think that’s really what we’re going to have to do on the military side and then there are more economic and political actions that we can take to try and support more open, more inclusive societies.

Jason:
Todd, give out your website real quick and then I just wanna talk to you about one more topic before we wrap up here.

Todd:
So, the website is ToddMossBooks.com and The Golden Hour, the new novel about the American diplomat in Mali is on sale as of today.

Jason:
Fantastic. Your book talks pretty much as much as about the way Washington works as it does anything else and I just wanted to ask you or maybe I should say the way Washington doesn’t work that might be a more proper…*Laughter*. Maybe I shouldn’t say that to someone in government, right, but..

Todd:
No, no. You should, that’s the point of the book,

Jason:
Your book talks about the way Washington doesn’t work and, you know, what does it reveal though, what does your experience reveal though about how the different departments work together. I mean, the government is just so mammoth. It’s so over bloated nowadays, you know, does the State department work with the Department of Defense and the White House and the CIA? Do they all really work together well or is it….

Todd:
On occasion different agencies do work together well. More often the norm is that they don’t and even within the State Department there are dozen of offices and bureau that also don’t work very well together. It’s not that people don’t want to get along with each other, in general, these are all patriotic, well-intentioned Americans and they’re all trying to do the right thing, but when you have a bureau whose mandate is counter-terrorism and you have another bureau whose mandate is to promote democracy and you have a third bureau whose mandate is to not ruffle anybody’s features, just to keep everything quiet, you can imagine when there’s a crisis and you have to decide what to do, people have very, very different ideas of what’s the right course of action.

So, The Golden Hour is exactly about that where the protagonist, Judd Ryker is suppose help the State Department react quickly to a crisis in West Africa, but he finds that he most of his time doing battle within the building and the different agencies that are all trying out plank each other and that’s a big part of the story. I wanted to take readers inside the White House situation room, inside the State Department operations center and then inside the classified of a US embassy overseas to hear what, you know, how those discussions happen when there are all these different opinions and they’ve got very little time and very little information when they have to make very important decisions.

Jason:
Very interesting. It’s an amazing exploration and there’s just a lot of information here. You know, just any final thoughts on Africa before you go?

Todd:
You know, thank you for that. I’m thrilled that you liked the book, I hope your listeners will like it as well. You know, Africa is just changing very, very quickly. I’ve just been working for a very short time on Africa. It’s just about 20 years, which is nothing in the history of a country or a region and the changes I’ve seen underway are just remarkable and, you know, I hope that people maybe when they hear the word Africa they think of starving children or warlord or something like that that instead they’ll think, oh, maybe that’s somewhere I want to go on vacation or maybe something to think about investing or maybe read another novel about Africa. I hope that they draw that from The Golden Hour.

Jason:
Good stuff, good stuff. Well, Todd Moss, thank you so much for joining us today. The book is entitled The Golden Hour, we appreciate you coming on the show and talking to us about it.

Todd:
Great, Jason. It was a pleasure.

The Bitcoin Bounces Back

AMA12-29-14After a rough couple of years, the Bitcoin is surging back with a vengeance. Just a year after its fall from grace in the Silk Road drug site scandal, the digital currency’s market value has even beaten gold in the world’s markets. Whether hailed as a welcome alternative to government-controlled currencies or despised as a subversive tool for illegal activities, the Bitcoin is clearly a coin to be reckoned with.

Since it hit the scene in 2008, Bitcoin has been widely embraced not just by the small group of cybernerds who spend endless hours running algorithms to digitally mine the coins, but by people of all kinds, especially in countries where governments and currencies are unstable and untrustworthy. Because it’s totally digital, Bitcoin isn’t produced or controlled by any central bank anywhere, making it a major step in the democratization of currency worldwide.

Bitcoin transactions are virtually anonymous, and they can be used just bout anywhere two parties agree to use them. In the early years of Bitcoin’s existence it was viewed mainly as a medium for private transactions, more like barter than a fully functioning currency system. But after some high profile Bitcoin transactions involving in vitro fertility treatments, luxury cars and real estate, the coin made its way into global financial markets, where it traded at numbers ranging from a low of $20 to $1242 by late 2013, beating the price of gold at $1664 for the same period.

Bitcoin was fast becoming a legitimate player on the financial scene, The US Department of Justice proclaimed that Bitcoin cold be considered a legitimate means of exchange, and Bitcoin exchanges such as Mt Gox sprang up to smooth the way between the Bitcoin and traditional currencies. The IRS pondered ways to tax assets in Bitcoin.

But by 2013 the coin’s new higher profile had taken a major hit with its connection to illegal drug transactions, mainly on the booming online drug marketplace Silk Road. Silk Road was raided and shut down, its vast store of Bitoin confiscated by US authorities. The leading Bitcoin exchange Mt Gox also shut down, and heavy hitters in the traditional financial world began to strike back.

In the early days of its existence, Bitcoin was largely ignored by the mainstream financial word, dismissed as nothing more than a digital curiosity. But after Bitcoin hit the world currency scene and became the darling of the “shadow net’ of illegal online activity, government and financial entities took steps to neutralize the perceived threat.

US banking giant JP Morgan Chase published a patent for a “Bitocin killer,” an electronic alternative to Bitcoin that the bank could monitor and regulate. The Russian and Chinese governments declared Bitcoin illegal and transactions involving it void. Bitcoin was in quiet retreat, its value dropping and its exchanges closing down.

But nearly a year after the closure of Silk Road and the collapse of Mt Gox and other leading Bitcoin exchanges, the granddaddy of digital currencies is rebounding. Prices are rising again as Bitcoin eases its way back into the mainstream financial world.

Leading US newspaper The Chicago Sun Times announced in early 2014 that it would accept Bitcoin for its subscriptions and advertising. Online trading giant eBay added a “virtual currency” option to all its listings. Now, online colleges, led by Cyprus University, accept Bitcoin and Wells Fargo Bank is considering offering Bitcoin services too.

By spring 2014, Bitcoin prices had jumped, rising by 64 percent in little more than a month to reestablish its place as a legitimate form of currency. Its success has inspired a number of imitators such as the Feathercoin and LItecoin. The Bank of Canada even experimented with its own version of a digital coin. And a number of private trading consortiums and clubs have adopted a form of digital currency for internal use. But none of these variants has had the staying power and profile of the original.

In the few short years of its existence, the Bitcoin has changed the way the world views money. It’s fueled debate about who does (and should) control currency, raised issues such as Internet freedom and the right to privacy, and made users both rich and poor. As the digital upstart pushes old standbys like gold to the margins, it’s clear that whatever its future, the Bitcoin has made its mark on the way money works in a digital world. (Top image:Flickr/btckeychain)

Source:
Desjardins, Jeff. “Bitcoin vs Gold.” Infographic. Visual Capitalist. visualcapitalist.com. 30 June 2014

Read more from The American Monetary Association:

The dollar: The World’s Go-To Currency

Is Digital Currency Real Money?

The American Monetary Association Team

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AMA 103 – Jerry Robinson Talks Bankruptcy and strife on America’s horizon

 

In today’s American Monetary Association Show, Jason Hartman invites Jerry Robinson, author of Bankruptcy in Our Nation, to the show to share his views about what bankruptcy would look like. They discuss a variety of topics and consider frankly just how bleak America’s future could look. Robinson also gives his opinion on the impact of America’s international relations, as well as posing the interesting notion that we can see the path of America’s future by looking at the past of the rest of the world.

 

Key Takeaways
02.44 – Jerry Robinson’s Bankruptcy of Our Nation deals with facets of the economic crisis such as what happened, why it happened and what we thought would happen.
05.03 – In a number of ways, the 2014 picture we draw now looks very similar to the state of the world in 1914.
13.54 – No-one does anything for nothing. A closer look at the incentives can provide a lot of insight.
19.58 – The psychological impact of the economy is already taking an effect. People now expect prices and values to go up, and are surprised if they don’t.
26.14 – Maybe we need to reassess our definition of evil to better match today’s global situation.
30.09 – If the relationship between the US and Saudi Arabia changes, it could change the entire balance of power in the Middle East.
32.09 – Exports are always going to be vital, and we need to consider the impact if the US becomes energy-independent.
39.53 – International threats, and especially those involving cyber-attacks, must be taken seriously. Even if you’re living in a city, know the precautions you can take.
44.03 – Find out about Jerry Robinson’s Five Levels of Financial Freedom at www.FTMDaily.com/fivelevels.
01.00.02 – With mortgage debt, as an investor you don’t even need to pay this off yourself – your tenants pay it off for you.

 

Mentioned in this episode
Bankruptcy of our Nation by Jerry Robinson

 

Tweetables
So many people today try to formulate a solution to problems they don’t even fully understand.

Can we ever have peace as long as the Central Bankers run the world? Are they so money-focused?

The US can only keep playing this game for so long. Managing relationships in terms of who you are and aren’t fighting has a limit.

 

Transcript

Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to the American Monetary Association’s podcast, where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason:
Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it, and comment on our website or our blog post. We have a lot of resources there for you and you can find that at www.AmericanMonetaryAssociation.org, or the website for the Foundation, which is www.JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Jason Hartman:
It’s my pleasure to welcome Jerry Robinson; he is Editor-in-Chief of Follow the Money quarterly financial newsletter, host of Follow the Money weekly and author of Bankruptcy of Our Nation: Twelve Key Strategies for Protecting Your Finances in These Uncertain Times. Jerry, welcome, how are you?

Jerry Robinson:
I’m great, thank you so much for having me on. It’s a pleasure to be here.

Jason:
It’s good to have you. Your book is fascinating, and I want to just dive right in and talk about that. Let’s maybe start off with talking a little bit about the overall situation, and then dive into some of the discussion on the petrodollar and what that means to people.

Jerry:
Sure, well the book, Bankruptcy of Our Nation, I don’t think is really a prophetic book. Whenever I wrote the book, back in 2007, I was under the impression that we were going to be in for a major, major economic collapse. I was desperately trying to get the book published so we could get the word out, and no-one would touch it. In fact, no-one would even consider it until September 2008 when I was speaking at a conference out in Denver. I was talking about this very topic – in fact, the name of my speech was ‘Surviving Financial Chaos’. The market totally imploded in September 2008, as you well remember, and when I got back from the speech that I was giving, I had 5 missed calls from my literary agent and he said ‘We have 5 offers for the book’. It was such an exciting moment for me so we were able to get the book published. The publisher wanted to get it out very quickly so it came out just at the end of 2008 and towards early 2009.

The book really breaks apart what we thought was going to happen and of course, what ended up happening with the whole economic crisis. It kind of explains in layman’s terms what really happened, and I think it’s unfortunate that so many people today often try to formulate answers or solutions without firmly having a grasp of what the real underlying problems are. In the book, we lay out what these underlying problems are: ie, fiat money, a debt-based monetary system, fractional reserve banking. Many of these things that are very faulty, that have terrible foundations, that cannot last, that are unsound and that over time, are simply going to break down. That was the whole message of the book. The book goes on and explains how people can take actions to protect themselves, even some specific things that people can do. The book is a mixture of both what went wrong and what individuals can specifically do to insulate themselves from what we believe is still going to be a further downfall in the years ahead.

Jason:
What does that downfall look like when you talk about Bankruptcy of Our Nation? Obviously we create fiat money in mass quantities out of thin air, and we can get away with this for a few reasons. Number 1: Every nation can get away with it for a certain amount of time, and then it ultimately becomes unsustainable and the country collapses. The difference with the US is we have the largest military in human history, we have the reserve currency – at least for the moment, and there are several other factors that I think do make it pretty unique. What does a bankruptcy look like? Does it look like a collapse of the economy, or does it just look like we’re inflating away this irresponsible spending that the government has been engaging in for so many decades, and especially over the last 7 years? Most people are just impoverished by the inflation, but some are enriched by it – they know how to play the game and invest for it. What does the bankruptcy look like? What do you mean when you say ‘bankruptcy’?

Jerry:
Jason, what we usually refer people to is to look back to 1914, as opposed to where we are now in 2014. One hundred years ago, you had a very bloated British empire that was on its way down and everybody knew it, and then you had this ascending United States of America that was very disarticulated. It developed the Fed in 1913 and it suffered from the panic of 1907 before that. As we got into World War One, Europe tore each other apart, and this really benefited the United States. The United States then emerges and enters this Roaring Twenties era, and then has this Great Depression. Then World War Two, of course, is where the United States really takes off. It’s really since the 1940s that America has really had the stranglehold, so to speak, on the global economy, and it has had that world reserve currency status. It’s similar to what’s happening now. If we fast-forward from the 1914 picture to 2014, we see something very similar. The American empire itself is bloated, it’s over-extended and it’s all over the place. Our military is woefully under-prepared for some of the challenges that it faces and it simply cannot afford to take care of all of the things that it wants to take care of. It’s over-promised and now it’s going to under-deliver, and that’s exactly where the British Empire was 100 years ago. And China is the new United States, so to speak, in this picture, where here we have China rising and you have all these complaints: ‘China certainly can’t get much bigger’, or ‘Certainly, it’s going to implode’, or ‘Certainly, it’s going to have a problem’. That’s what they said about the United States back in 1914, and no doubt, it was a very disarticulated time for the United States. The US dollar was still being formed and it was nothing like it is now; it was still blocked out of many international financial markets so it took a while for the US to reach its state of ascendancy and finally reach its peak. This really came back in the Seventies and Eighties.
Since that time, we’ve been on the downward trend, even though it may not feel like it, and we have countries like China that are now rising to take our place. It is simply the mechanism of history, Jason, that empires rise and empires fall. I think whenever you’re inside of a declining empire, you tend to either A) ignore it or maybe you can’t see it because of the fog of war, or B) you think to yourself ‘This is going to be the worst thing that ever happened in the history of the world, because it’s a bit arrogant’. We all tend to think that our country and our situation is the most important in the whole world. Well, we expect the US to continue declining, not at a precipitous rate, but at a aggravatingly sharp rate.
I’ll give you an example.

Jason:
Is that worse than precipitous? I don’t know.

Jerry:
It is, but I’ll give you a perfect example. If you have a choice - and this is terribly morbid, but let’s think in the terms of empire – if you have the opportunity to kill the empire by throwing it off of a cliff or by rolling it down a steep grade and letting it hit every single rock on the way down, and then it dies, just throw me off the cliff! I think that’s what most people would say. Just throw me off the cliff; don’t roll me down the hill and make me hit every rock along the way. That’s exactly what the US is doing. It’s rolling down that steep grade. This is a slow, steady decline and it’s going to be not just economically challenging and economically damaging, but we’re beginning to see that it’s going to be psychologically damaging too.
Americans can’t quite come to terms with the fact that other nations may be rising or that other currencies may challenge the dollar. They just can’t seem to grasp that.

Jason:
I definitely get the idea of context. Fish live in water and I assume they probably don’t notice the water. We live in air, and thankfully, unless we live in Cairo or Mexico City, we don’t notice the air! So you’re right about that, and I definitely see that. There’s this kind of arrogance and there’s the fog of war and all that stuff, but it’s so interesting because this is such a contrast from one interview I did yesterday with a guy named Peter Zeiahn, who used to work for Stratfor as a VP. He wrote a book called The Accidental Superpower: The Next Generation of American Pre-Eminence, which talks about how this is a relative issue. America’s a mess, I agree, and I agree that it’s in decline, but look at the rest of the world. My God! We may be mismanaged and doing all sorts of things wrong, but everybody else has got fiat money too, and they don’t have the reserve currency, they don’t have the big military, they don’t have the big brand name and they don’t have our geography. I think the geography cannot be underestimated. Go ahead.

Jerry:
I think it’s a good point, but again, think about America’s military. The United States, right now, cannot afford America’s military.

Jason:
We’ve got to get out of everyone else’s business. This is just absurd, acting like the world’s policeman, and it’s usually not for humanitarian issues as we would like people to believe. That’s neither here nor there; Ron Paul is right. We’ve got to contract these military bases all over the world. It’s absurd and it’s every sign of empire, just like you said. I agree.

Jerry:
What makes it even worse, Jason, is the fact that it is too big. Yes, we are in too many places. And yes, we have too many bases. But the sad part of it is that China and other countries like it are the ones that finance it. Many people take great solace in knowing that yes, we are pretty bad, relatively speaking, but when you look at the whole world in focus, I guess things aren’t as bad as they could be. The truth of the matter is exactly the opposite.

It’s worse than we can imagine because what we have built, we can’t afford. What other countries have built, they can afford. What we have built, we need them to pay for, and when they get tired of paying for it, then what good is that military?

Jason:
So tell me about that. What happens when they get tired of paying for it? Certainly, many people, including yours truly, have said ‘What happens when China and Japan stop buying our debt?’ Then we’ve got to raise interest rates to attract investors. It’s such a freaking ponzi scheme, it’s disgusting, but our own Federal Reserve just buys our debt instead. What a scam! The whole thing’s a sham, obviously. So what? How does it look when that happens?

Jerry:
This reminds me of the 2008 and 2012 Presidential Elections. We just had Ron Paul on our weekly program last week.

Jason:
I’m a huge fan of Ron Paul.

Jerry:
Yeah, he was on and we were talking, and one of the things I brought up to him was so bizarre – I said ‘All the Conservatives and Republicans have this real fun saying. They say ‘Well, I love Ron Paul’s monetary economic side; I hate his foreign policy.’

Jason:
He’s right about his foreign policy. If he would just pander a little bit, he could have won. If he would just say ‘We’ll hang out in Israel, we’ll do everything we’re doing for Israel and we won’t let Iran get a nuke’. If he just would have said that, he probably would be President and the whole country would be better off.

Jerry:
Well, take that logic of someone who says ‘I really like Ron Paul’s In the Fed message, I like his sound money message, I just don’t like his foreign policy message’. When you take that and you add 1+1+1, you get a very strange answer – how in the world can you finance our foreign policy without a Federal Reserve? In other words, they want to get rid of the Fed, they want sound money and they want to keep dropping bombs on everybody. You see, you have to have a Fed..

Jason:
You can’t do both.

Jerry:
You have to have a Fed in order to fund those wars.

Jason:
Of course, and that’s why the Central Bankers love war and we’re never going to have peace as long as the Central Bankers run the world.

Jerry:
You’ve got it.

Jason:
It’s more than the military industrial complex; that’s just the first tier that everybody sees as somewhat obvious. The real complex is the Government Central Banking complex; that’s the real thing that creates the war. They have to have the war machine – they finance both sides! It’s absurd.

Jerry:
People just don’t think about it in terms of basic incentive. When I’m walking around in my own city, there’s certain incentives that I have and there’s certain incentives that I don’t have. Everybody, in their own life, can think ‘Why do I get up and go to work?’ ‘I get up and go to work because I need money’. Those are real basic incentives that we all understand, but many times we don’t apply that same logic to things like Central Banks.

What does the Central Bank want? It wants to loan money to a Government.

How do you loan money to Governments? You create a demand for loans from the Government.

What’s the perfect way to create demand for a loan from the Government? A war.

When you really back up into it, what you just said is very correct, but it’s because of the incentives. Many people don’t think that far; they realize that they’re driven by incentives, but they forget that these guys who are Republicans, Democrats, Central Bankers, whatever the case might be, have incentives too. Usually, they’re contrary to what is best for this nation going forward.

Jason:
Yeah, no question about it. So what does the bankruptcy look like? Is it just inflation? Well, not ‘just’, that could be really bad, obviously. When you say ‘bankruptcy of a country’, how does it look?

Jerry:
Look, America is unique in the fact that it does have more wealth on paper and even in physical form, than many other nations. We are very, very, very rich, relatively speaking. Again, that means that the bankruptcy is going to first take the form of a psychological pain. It’s a psychological denial; it’s ‘No, China is not getting bigger. No, China’s going to fail. No, the Euro’s going to crash. No, the Middle East stocks can’t possibly rise. No, India’s not going to rise’. It’s very America-centric, so there’s a psychological denial which will cause many people not to diversify their investments and to not take advantage of foreign growth. Therefore, they’ll stay right here in the United States, and as that ship sinks, we’re going to continue to see that psychological pain. The actual physical and financial pain that’s going to be inflicted is going to be, as you mentioned, inflation, in the fact that we have printed so many dollars and there’s so much demand for the dollar – therefore, the Central Bank has a permission slip to print money whenever we have a problem.

Think about the Alan Greenspan doctrine. The Greenspan doctrine was this: 1987, Alan Greenspan gets in to the Federal Reserve as the Chairman, and we have a big stock market crash. He cuts rates as the solution. In 1994, the Tequila Hangover, he cuts rates. 1997 and 1998, the Asian Financial Crisis, long term capital management debacle and all that, the Fed cuts rates. 2001, they cut rates. 2003, they cut rates. That’s all they do, and they keep printing more money.

Over time, once that becomes the solution to everything, then you become addicted to that solution. Here’s the problem: if the dollar itself is not in demand everywhere like it is now, you lose that permission slip to print money. Then you can’t solve the problems of the nation by simply hitting the Print button because there’s nobody around the world who’s willing to hold those. That’s how the whole thing works. If we can print the money and then get it out of the country, then we don’t have that inflation. What happens in a case like this is where you don’t have that global demand for the dollar because maybe people want to hold Yuan, or maybe people want to hold Euros, or maybe they want to hold gold or something like that. Then they don’t need as many dollars and as that demand for dollars goes down, we also lose the permission slip to create an excess of supply.

Here’s the big, big kicker. If you live in an economy, Jason – let’s say that we live in this fake economy and it has $1 million total supply. That’s it, that’s the total money supply. Well, you have no houses that cost $2 million, that’s impossible. Everything has to cost less than $1 million. In fact, it has to cost dramatically less because you have to spread everything out across that amount. That’s in essence what we have done. We have driven up the amount of money, and then we’re surprised when our 401(k)s go up, or when our house values go up, or when we get a raise. In fact, where we are today, Jason, and this is that psychological pain I’m trying to explain – we live in a time now where the present must be the minimum. People are dissatisfied if the market does not go up. Something is wrong if they don’t get a raise. Something is wrong if their house value doesn’t go up. Something is wrong if their IRA doesn’t go up. They’re addicted to the present being the minimum; everything has to be the minimum and everything has to go up from here.

The problem with that is it’s completely unsustainable. A) That’s not how things have worked throughout history because of the Gold Standard, and B) that’s an unsustainable model. Things cannot continue to go up in value, so here’s what we say: as we see a decline in the demand for the dollar around the world and for US debt, that’s going to translate into an overall deflation in the US prices. It’ll begin with an inflation. You’ll have all of these dollars come back from around the world – perhaps it happens instantly, but I think it’ll happen slowly. You have all these dollars flowing back and then we have to suck them out. How do we do that? We suck money out of the system by raising interest rates. If you and I are driving down the road and we see a bank and they’re saying ‘Hey, we’ll give you 8% a year for a CD’ - you know we’re hitting the brakes and taking all of our money out of the mattress and throwing it in the bank. That’s how the banking community and the banking industry sucks money out of economy to prevent high inflation. What they’ll do is suck the money in through high interest rates and that seems to fix the problem. We have so much excess money that we’re going to have to keep doing that over and over and over again to where it’s going to cause major problems. Think about the trillion dollars we have in student loan debt, think about all the credit card debt, think about all the adjustable rate mortgages out there. It’s just a mess.

If you get higher interest rates, that’s going to be very devastating to people. This ‘present is the minimum’ kind of psychology where everything should go up is going to be destroyed. In fact, it’s going to be the opposite. Things will be declining and deflating back to a place of normalcy and back to a place of sanity. That, I think, is going to be the hardest thing for people to understand: things don’t go up anymore, they just seem to be going down every year. That’s because we have too much money in the system; it’s going to have to be reduced over time because the global demand will not always exist for it, and that means the housing prices, stock prices, the amount you get paid when you go to work – all of those things are all factors based upon the amount of money in the system. If the money supply shrinks, so do all those values.

Jason:
Okay, so if the money supply shrinks, then we have deflation. If it expands, we have inflation. That’s the general rule as Milton Friedman would have said – inflation is and is always a monetary phenomenon, or something like that, as his famous quote goes.

I think the opposite will happen. I think that the government will print their way out of the irresponsible problem they’ve created – they’ll just create more money out of thin air. If other governments won’t buy our treasuries, of course we’ll attempt to throw our weight around and bully them into it, whether it’s by trade agreements or visa requirements or maybe invading the country with military. Whatever, I’m not saying it’s right, I’m just saying this is what goes on.

Jerry:
I think we’re on the same page there, we’re probably coming at it from different angles. What I’m saying is that we are going to see a period of great inflation, it’s going to be hyper-inflation of sorts. Hyper-inflation never lasts forever; it always ends in a period of great deflation and revaluation. It’ll begin as a period of inflation, but the rates will have to go up in correspondence with that, and we’re not going to be able to get the rates high enough to be able to manage the excessive amount of money. Even if they print money, if it doesn’t leave the country, they’re just going to be creating more inflation so they’ll have to raise interest rates. It’s a vicious cycle.

It’ll begin as inflation, there’ll be a big response to the inflation, and then as they raise interest rates and as the economy grinds to a halt, then we move into a period of deflation. Again, they don’t have a permission slip to print money anymore. If the Chinese will hold the dollars and keep them out of our banking system, we don’t have inflation. But if the Fed prints them and they don’t leave the country, that’s inflation and you can’t get rid of that. They can print all they want to, but if it doesn’t leave the country, you have inflation. Therefore, they’ll have to raise rates and that will stop working. They can keep printing, like you’re saying, but there’ll come a time when if the money is not demanded outside of the country, they’ll be smart enough not to hit it because they’ll just be creating a terrible amount of inflation that will ultimately lead to a period of deflation as we move back to a level of sanity.

Jason:
So, I think one of the challenges when we’re looking at this type of economy. Obviously, the economy in the country is very complex, but then you take it to a global scale and it gets incredibly complex. What economists are trying to do is anticipate how people, countries, companies will react to various stimuli. In the past 10 years, almost every prediction I’ve made about the economy and the real estate market has come true, except one glaring mistake I’ve made. The glaring mistake is interest rates. If you asked me in 2005, ‘Would we have significantly higher rates by 2008?’ I would have said ‘Yes!’ and I did, publicly. I was completely wrong about this, and the reason I was wrong is because it doesn’t make sense. This isn’t just about logic and math. There’s so much more going on here that is perverting the incentives. One of the things that’s doing that is this giant government we have, with its military and with the fact that it can kind of defy gravity and kick the can down the road. It’s been doing it for a long, long time and it’s really doing it now.

Who’s to say, Jerry, how much deficit and how much debt and how much unfunded entitlements for the future we can withstand? Is that number $17 trillion? Is that number $60 trillion? Or $220 trillion? I had Lawrence Kotlikoff on the show, and he said ‘Unfunded mandates are $220 trillion’. The whole GDP of the planet is only about $60 trillion a year. That’s insane, right? We would all agree with that, but it doesn’t exist in a rational world. I agree, if you do the math, absolutely.  We should be sucking wind by now and having 25% interest rates, but it’s not just math. Thoughts?

Jerry:
Well, I would say that’s certainly true. The interest rates being so low now, and you even used this word, it’s distorting.

Jason:
It’s artificial.

Jerry:
It’s artificial and it’s distorting incentives, it’s distorting the overall market, it’s hurting savers, it’s punishing those wanting to save and it’s encouraging speculation. It’s doing everything that we did in 2007. We haven’t learned a single lesson and we’re just repeating it over and over and over again. Countries get a few chances to do this, Jason, they don’t get a pass forever. You already have countries like China, Russia, India – the BRICs nations are coming together saying ‘Look, we’ve got to come up with a different solution’.

Jason:
You can’t blame them, we’re exporting our inflation to them. They’re the ones hit with it, not us. We are a little bit, but it hurts them more. It’s really unfair.

Jerry:
It really is, and it’s becoming more exposed as to America’s true intentions with all of this. Back in September 2000, Saddam Hussein emerged from a meeting with all of his cronies and they had decided to take a gamble and move from accepting dollars for all of their crude oil to accepting Euros. About 4 years later, he was hanging from a tree.

Then you had Iran do something similar, North Korea did something similar – they said ‘We’re not going to pay for anything, we’re only going to use Euros, we’re only going to buy from people who sell in Euros’, and then Venezuela did the same thing. Then we had Bush talking about this ‘axis of evil’ and these evil, evil countries.

Jason:
The people that don’t participate in the Central Banking cartel are the evil ones, right? Conveniently.

Jerry:
These countries are extremely evil, they have terrible human rights records and therefore we need to isolate them and call them the axis of evil. By the way, ignoring Saudi Arabia who still publicly beheads people and still has terrible human rights. If you’re going to talk about human rights, Saudi Arabia tops the list. Or China. But there was no mention of that because China and Saudi Arabia understand how the drill works – you use the US dollar and you don’t fight back. China has been fighting that, Russia has been fighting that and you’re beginning to see Russia now being labeled as part of this axis of evil. ‘It’s an evil empire we’re seeing’. It all has to do with protecting our petrodollar system that we built back in the Seventies after the Bretton Woods system broke down. The petrodollar system now is breaking down before our eyes, many countries are moving away from using oil for dollars and dollars for oil. Instead, they’re looking for other things. China and Russia are using their own currencies when trading oil, and this is the kind of thing I’m talking about, Jason.

If everybody around the world must have a dollar in order to buy oil, then it creates that artificial demand for the dollar, and that’s exactly what we’ve done. We’ve created an artificial demand for the dollar that didn’t exist prior to the Seventies. Everybody has to have it. They don’t want to have it, they have to have it. Well what happens when that goes away?
Suddenly you’ve got to figure out what to do with all these trillions and trillions and trillions of dollars. If those things aren’t going to be held by all these countries, they’re going to have to come back here. Then we’re going to have to decide on either A) everything that we have is now going to have to be worth more, or B) we’re going to have to suck this money out of the system and raise rates, and that’s going to lead to a period of deflation. This is what I’m saying.

Jason:
Okay, so let me just ask you about that before you go on. What you’re saying is that basically if those dollars have to come back, that’s because the dollar is no longer the reserve currency?

Jerry:
Yeah. There’s no further demand and no need. ‘I don’t need to hold the dollar, I can hold my own currency because now I have other countries who are willing to take my currency for things instead of making me convert to a dollar.’ Because all of these nations around the world with a gun to the head artificially have to prop up this artificial demand for the dollar to buy things, it’s created this permission slip for the Fed – any time we’ve got a problem, we just print money. Well, that’s fine, but what happens whenever these countries begin to trade in their own currencies is that they don’t have to keep the dollar around. They send the dollar back, and when the Fed hits the print button, it doesn’t go anywhere. All the money stays in the country, and that’s when the game is over.

Jason:
Okay, so what would lead up to that? What would have to happen? What you’re describing is the dollar not being the reserve currency anymore, right?

Jerry:
Exactly. A number of things could happen. 1. Saudi Arabia could suddenly decide that it no longer wants to use the dollar, it’s tired of the US and it’s going to have a new deal with China or with Russia. You could see something like that. I think Saudi Arabia, in my ways, is the linchpin that props up the dollar more than people realize.

Jason:
We sent our economic hit-man over there years ago to do the job, so when Saudi Arabia was a wasteland, we turned it into a semi-modern country. I kind of don’t want to say it’s modern when they’re cutting heads and hands off people, it’s despicable. Go ahead.

Jerry:
Well, of course. That’ll be a very big shock, I think, for many Americans, when they see bombs falling on Saudi Arabia because they’ve always thought that Saudi Arabia was somehow different from all of the other Islamic terrorist regimes that are over there in the Middle East. They’ve always thought Saudi Arabia was our buddy. They didn’t realize that it was just a back-room financial deal and that as soon as it goes wrong, the bombs are going to fall.

The United States hates Saudi Arabia and Saudi Arabia hates the United States, that’s no secret. What it a secret, though, is why we like each other. We like each other because they take dollars for oil and they don’t complain about it. They turn around and take those dollars and they invest them in US bonds – it’s called petrodollar recycling and it’s been going on for years. Saudi Arabia gets the whole thing and they get all the benefits. You’ve got groups like ISIS now, running around saying that Saudi’s the Great Satan and they want to take it down. Over time, when this royal Saudi family, which has really buddied up with America – when they lose power or when they change their minds, the whole balance of power in the Middle East changes and the demand for the dollar certainly goes with it.

The US is playing a very dangerous game, trying to manage all of its relationships around the world, trying to keep peace with the right people, and trying to continue to fight the other people. In the long run, it’s all going to break down.

Jason:
Okay, so let me just ask you one thing about that. One thing you didn’t address in that equation, which I agree with so far, is the fact that Saudi Arabia and the rest of the Middle East is about to lose its biggest oil customer. We are probably going to become an actual oil exporter pretty soon. The US is so much richer in terms of oil than we ever realized, and then Canada of course is too. The US is going to be energy-independent. Granted, it might be with fossil fuels to the chagrin of the Obama regime, but we’re rich in natural resources, as you mentioned earlier, and we didn’t even know it until fracking came along and oil sands technologies. Who cares about Saudi Arabia? They’re just going to have the rest of the world as a bunch of smaller customers after we’re gone.

Jerry:
Well, maybe. The way to look at it perhaps differently, is to say that somebody like Saudi Arabia created an artificial demand for the US dollar because they sell their oil in dollars. Because they do it, other OPEC nations do it. It’s kind of a domino theory. If the US begins exporting oil and doesn’t need Saudi Arabia anymore, then why would Saudi Arabia choose to sell all of its oil in dollars? Why not sell it in Yuan? Why not sell it in a different currency where somebody’s actually going to give them a benefit?

That’s the thing. We can sell all of our oil in our own currency, but if we lose all of our buddies around the world who are agreeing to doing the same thing, we’re still in the same boat. In other words, we have to have a global demand for our debt and we have to maintain a global demand for our currency. If we don’t, then we implode, and I think that’s the risk that’s facing Washington right now. They have to maintain this demand globally for both.

This is the double-edged sword of the oil exports that we have.  Yes, we certainly have an oil renaissance happening here, albeit it’s shale, rather than pure, conventional oil. Nevertheless, we are still exporting that, or we’re going to be able to export it and we’re going to do very well with that. Again, though, that just basically shoots all of our friends in the face who have been agreeing to take our currency for everything. If we’re now their challenger, they lose their incentive to continue to prop up our currency. It’s one of those things where it’s a real difficult thing for the United States, and it’s really going to be interesting over the next decade to see how Washington handles this going forward, especially all the oil you just brought up. That’s a whole other can of worms.

Jason:
Yeah, it certainly is. It’s going to be interesting, that’s for sure. The other wild card, Jerry, that I think it’s worth discussing just for a moment is that of course these countries are probably pretty disgusted with the US spending and the exporting of inflation. China sells stuff to us, we buy it and then we depreciate the value of the currency, so we force them to sell things on sale to us for less than they thought they were getting. That is definitely not a cool deal for them. It’s not like the US is going to sit idly by and let the whole world just decide they’re going to trade outside of the dollar and not go with the Bretton Woods plan and the petrodollar plan. We’re going to do something about it, right? We’re going to throw our weight around and say ‘Hey, look, if you’re not going to trade in the dollar, then we’re going to pressure you somehow. Maybe we’ll blow up your satellite.’

Jerry:
Oh yeah.

Jason:
This is not a friendly game. ‘Maybe we just won’t buy as much from you, or maybe we’ll impose tariffs or visa requirements.’ You can hurt other countries in a zillion different ways and pressure them in so many ways.

Jerry:
That’s right. Empires don’t have friends, they have subjects.

Jason:
Good point.

Jerry:
America’s an empire, no doubt. Maybe it’s a reluctant empire, but it’s an empire. Yeah, countries around the world – when they decide to make a change and the United States tries to woo them back, they’re going to have to do better than they have already. For example, the United States has been over there messing around with its Asian pivot over in South East Asia, and it’s been brokering deals, especially the one that’s made all the headlines as the TTP. There’s been a lot of concern about the fact that China has been left out of that trade agreement.

The United States has really just kind of shot itself in the foot; it’s really not doing a great job of reaching out and embracing the emerging countries. It’s been very selective with the ones that it’s befriending, and China and Russia have been picking up the slack and they have been forming relationships with many of these other emerging nations. You’re really kind of developing this bi-polar world – one that supports NATO and the US and the West, and another that supports this BRICs kind of development. I think that’s where you end up. You end up in a place where somebody’s going to have to choose sides, but the US has kind of lost its ability to come across as an honest broker. I think its hand has been shown; everybody knows now. We’re spying on all of our creditors!

Jason:
That’s just ridiculous.

Jerry:
You go down the list and you think ‘Gosh, when does the blow-back really hit the United States?’ I don’t even think we’ve seen the blow-back from the Snowden affair. I think Americans themselves are still trying to figure out what that even means. I don’t think many people even know how to process that, let alone the companies around the world, the foreign corporations who have been targets of that. There will be blow-back.

Jason:
When you say ‘that’, do you mean the NSA spying that Snowden revealed to the world?

Jerry:
Yeah, I should clarify. I’m referring to the NSA spying that’s been going on for so long. Imagine, Jason, if we were to find out that China was actually aggressively looking at us through our television screens as we sat and watched TV on the couch. Wouldn’t we be a little upset about that? Wouldn’t we have a little more distrust about China? Wouldn’t we be a little bit more concerned? It’s almost as if America just says ‘Well, deal with it, it’s tough, we’ve just got to protect our own,’ and they don’t realize that these nations have feelings and they also have their own share of wisdom and they’re going to say ‘This may not be the best thing to be hanging out with America the way that they’re proceeding’, and I think over time, you’re going to have a severe blow-back from that.

We’re already beginning to see that in the technology industry; many of our big tech companies are running into problems because of the NSA. I think it’s just this long, slow grind, Jason, that we continue to see this downward spiral. I don’t think it’s a off-the-cliff or we’ll run into a brick wall and it’s all over. I don’t subscribe to that theory; I think it’s a slow grind. I think it’s a terrible slow process that is humiliating both psychologically and financially. Our standing in the world is already being questioned now. There are so many things that we could talk about, but yes, I think that that’s where we’re heading.

Jason:
Okay, good. Good points. So what should people do? We’ve talked extensively about the problem, and in hundreds of other episodes I’ve done the same. What’s the best game plan for one to protect oneself against the problems we face?

Jerry:
I’ll tell you – I have an interesting story to share. I was living in Houston, Texas, of all places. It’s a very big city. It’s not where I’m originally from, but I went down there to start a business. I was down there for some time and a few years ago, something in me just really convicted me. I’m sure it was the Lord, and I just sensed that I had to get out of Houston and get out into the middle of nowhere. My wife and I began doing research and we said ‘Where will we move to?’ We started looking and we decided to move to North-West Arkansas, based upon all these different factors. We did a little spreadsheet and got kind of nerdy about it, but we really wanted to figure out where the best place to go for us was and for our situation.

We moved up here, we got a mini ranch, we built a garden, we are slowly getting off of the grid. We have wood-burning fireplaces, wood-burning stoves and we’re slowly getting off the grid with water by using a well. We’re doing everything that we possibly can because, Jason, I think not just the financial things that we’ve been talking about are a threat to the American people, but at the same time, some of the punitive damage that’s going to come to America is not just going to come through the barrel of a gun, it’s going to come through a cyber attack that shuts down your whole electric grid. Or it’s going to come through a cyber attack that takes down your bank, it’s going to come through a cyber attack that takes down your local utilities. Currently, the Wall Street Journal has been reporting ad nauseam, constantly about how many of these public utilities here in America are dealing with unbelievable amounts of cyber attacks from China, Iran, Russia and other places like that.
Eventually, one of those is going to succeed. I think it’s imperative for people to be ready. If they are currently living in a city, I think they can certainly take precautions. There’s some good books out there on urban survival, I’m sure you have some good materials as well.

Jason:
Hey, I do a whole show on it – the Holistic Survival Show.

Jerry:
Yeah, there you go.

Jason:
Absolutely. There’s a lot of great resources, and one of the things I want to stress, Jerry, is that this is not nutty. It’s nutty if you spend your whole life on it and you make it everything you do, but basically, for about $200-$300 per person in your household, you can gain a huge edge in prudent, rational preparedness. This is not difficult to do, okay. Even if you live in a city. It’s like the old story of two hikers – they’re hiking in the woods and they see a bear. One of them starts running away from the bear and one of them stops to tighten his shoelaces. The other says ‘Hey, what are you doing, man? You’ve got to keep running. Forget about tightening your shoelaces, you can’t outrun a bear.’
The other one says ‘I don’t need to outrun the bear, I just need to outrun you!’

Jerry:
[Laughs]. Right.

Jason:
And that’s really what it is. As vicious as that sounds, you just need to outlive or out-survive the people around you. When you do, there will be leftover resources available, to some extent at least. I think 3 days is the first magic number, and then 3 weeks is the next one. It’s 3 days water – you’re going to die if you don’t drink for 3 days (or you’re going to get close), and food is 3 weeks. Have a ham radio for communications off the grid. It’s just some really simple stuff; this is not difficult to do.

Jerry:
No, no, it’s really not. As you pointed out, it’s not nutty. I think what’s nutty is buying into the whole idea of the American dream and thinking that somehow, we’re not facing real serious issues and problems. I think that being awake and aware to that is vital. Some of the things we do, Jason, is we teach something called the Five Levels of Financial Freedom. It’s completely free, people can log onto our website and see it there.

Jason:
Give out that website.

Jerry:
It’s www.FTMDaily.com/fivelevels

Jason:
What are those five levels?

Jerry:
Those five levels are five kind of large steps with some micro-things inside of them. They’re kind of the big planks. These are five steps that my wife and I have taken to financial freedom. We call them the Five Levels to Financial Freedom. We went literally from a one-bedroom apartment to where we are now, and we’re much better off now than what we were. We used these five levels to get there, and they involve A) Diversifying your savings, B) Diversifying your investments, C) Diversifying your income sources. Along with that, basic preparatory type actions. We talk about the need for having a go-back, we talk about the need for having food and water storage, we talk about the need for people to actually invest in a portion of their savings – not actually invest, but take a portion of their savings and diversify. I’ll give you one example.

We have something we call DSL. It’s our Diversified Six-Month Liquid Savings Reserve. Most people tell you ‘Hey, you should have 3 months of liquid savings’, or maybe even six months of liquid savings. We agree, but we did a back-test in the study that showed that if you will take that savings and not just throw it in US dollars, but if you’ll diversify it, you can really get a lot more bang for your buck. We did a study that went back 25 years, that showed that if you took your six months of liquidity and threw it in 3 month bills and just kept reinvesting them over and over again, or if you had taken that same six-months liquidity and put one third of it in the bills and taken the other third and put it into stable foreign currencies, and taken the last third and put it into gold and silver, for a period of 25 years, the return is just outrageous. We even took out some of the extra gains in gold and silver to make sure it wasn’t being jacked up by that price gain in metals.

That’s one thing. We diversify our savings. We also diversify our investments with something we call ‘PACE’ – P: Precious Metals, A: Agriculture, C: Commodities, E: Energy. We talk about those areas as ways to diversify our investments against some sort of inflation, and then we also teach the absolute importance – and I think this is one of the most important things for people today – of diversifying their income streams. I don’t know how many people I’ve met over the years who have one income streams, maybe two income streams. The average US family today, in America, is three income streams. Usually Mom and Dad have an income stream, and then there’s usually some sort of seedy or money-market account that throw off pennies in interest. That’s usually their three income streams. They hope to get a few more by the time they retire. Well, we teach the importance of having many, many income streams. We have an Income University at our website where you can learn 22 different income streams and how to create them.

Some people have more time than money, and other people have more money than time, so some people may not be able to get all 22 income streams because they don’t have the ability, but if you have time, you can always trade it and receive money. If you have money, you can always take that and enhance its returns and do better as well. Some people will tell you they don’t have either, and those people usually have their priorities backwards. Some people will say that they have both, and that’s of course, a great place to be if you have both time and money. All 22 income streams cover all of those different situations, whether you have too much time and no money or a lot of money but not a lot of time. There’s plenty of things that everybody can do, and I think that oftentimes, we get so obsessed with trying to pay off debt – and I think that’s a good thing – but oftentimes we forget that we can add on new income streams.

Jason:
Yeah, and let me comment on the debt thing for just a moment, if I may. I know we’re kind of wrapping up here and we’ve been going for a while, but one of the things few people really understand deeply, and my listeners do because I’ve talked about it for so many prior episodes – it’s the idea that in an inflationary environment, and we both think we are going to see some significant inflation, debt actually transfers wealth from lenders to borrowers. Borrowers are actually enriched by debt because they pay the debt back in cheaper dollars. If you look at what happened in the Weimar Republic at the way that lenders and borrowers interacted together, you just see. When you put the debt against a commodity that has universal need, and my love is real estate – I love getting a 30-year mortgage, blow the rate of real inflation on low-priced real estate. That’s necessity housing, not luxury housing. I want it to throw of cash-flow the day I buy it.

Then, the debt is debased by inflation. I created a little trademark term and it’s a mouthful: inflation-induced debt-destruction. It’s just an amazing phenomenon; it’s like the hidden wealth creator. Then you have a commodity like precious metals – think of what little houses or apartment buildings are made of. They’re made of copper wire (a commodity), lumber, concrete, petroleum products, glass, steel. These are all things that are traded globally, not indexed to any one currency.

I just think that’s such a good equation. Have some metals and some other things and some preparedness too, of course. I wouldn’t totally rush to pay off debt unless it’s consumer debt. I like the mortgage debt because that’s being paid by someone else. I don’t pay my own real estate debt, my tenants do.

Jerry:
That’s a good strategy. We mention that too. The one caveat with that is to make sure that your audience or whoever follows that advice locks it in on a fixed interest rate.

Jason:
Oh, most definitely. Never adjustable rates, no way.

Jerry:
If you have an adjustable rate, it works against you, actually.

Jason:
Oh yeah, absolutely. You’re going to get payment shock when the inflation finally does hit and the rates go up, but who knows how long they’ll kick that can down the road. When you’re borrowing, I’d say real inflation now is always understated by the government. Real inflation, now, is probably 6-8%, in reality, although the government would have us believe it’s much lower. If you can borrow at 4.5% for 3 decades, if someone takes out that mortgage today, they’re not going to make the last payment – or I should say, their tenant’s not going to make the last payment until 2044. Do you know how much inflation we’ll probably see in the next 3 decades?

Jerry:
Oh sure!

Jason:
It’s insane!

Jerry:
And you know, Jason, I’m an economist, I do a lot of investing, I’m a real estate investor.

Jason:
I didn’t know that, I’m glad to hear that you like real estate.

Jerry:
Oh, sure. It’s one of our income streams that we love. We’ve built many different income streams and I love rental real estate. I love, as you said, that 30-year mortgage. I would take a 40- or a 50-year mortgage.

Jason:
Oh, I’d take a 200-year if I could.

Jerry:
I could go on like Dave Ramsay and other people who say ‘Don’t have any debt at all’, but we do like the whole concept of real estate. Many people today, as you well know, are very happy to borrow as much as they possibly can. Some of the wealthiest people I know are borrowing to the hilts at fixed interest rates.

Jason:
Oh yeah, and borrowing specifically against a commodity that has universal need, like housing.

Jerry:
Exactly.

Jason:
That’s a great deal, and of course, it’s the most tax-favored asset in America. We don’t even have time to go into that one, but taxes are the modern version of slavery. If you want to really lower your tax bill, own a lot of long-term buy-and-hold income property.

Jerry:
I agree.

Jason:
Just prudent, non-sexy, boring stuff in markets that don’t make the headlines. It’s not going to be Southern California. You want to own stuff in Texas and Georgia and Tennessee. These are great markets, we love them.

Jerry:
Well, many of the things that we teach over at our website include things like options trading for people who maybe want to do that, rental real estate for sure. We also talk about affiliate marketing. We have 22 different income streams, so anybody out there who’s just wanting to add another income stream on, that’s what we love to do. We’d love to help them.

Jason:
Good stuff. Really good. Jerry, give out your website again.

Jerry:
Yeah, it’s www.FTMDaily.com

Jason:
And just remember from the Nixon-Watergate days, deep-throat said ‘Follow the money’, so there you go. Good stuff. And the book is on Amazon with 4.5 stars and good reviews. Any closing thoughts?

Jerry:
I would just tell people to really keep their eyes open right now. I expect the market overall to probably do fairly well as we head into the year and into the next year; this is historically from the stock traders’ almanac and from all the investors and all the different cycles that we’ve studied, this is usually the best time to be in the market. It’s the third and fourth year of a Presidential candidacy and cycle. The third and fourth year are often great times to be in the market. We also offer, at our website, a market barometer. We were able to step aside and get out of the market before the collapse. I really do pride out system on catching that. I expect to see another major collapse. I don’t expect it to come within the next year – I think we’re still a couple of years out, but we don’t really guess at that. We have a system called the market barometer which has a great track record, going back all the way to the 1929 crash (we back-tested it). Maybe you have money in a 401(k) or an IRA and people say ‘I don’t want to sit through another one of these major collapses’. We have a market barometer that is available at our website that people should definitely check out.

Jason:
Jerry, I’ve got to say, I’m a little surprised that you’re a stock market fan. I call it the modern version of organized crime, and a conservative guy like you, I would think that you wouldn’t be too in favor of the stock market.

Jerry:
You know, the stock market has been really good to me because I’m a trend-trader. I trade with the trend, and so when the market goes down, I make money. When the market goes up, I also make money because I use options and I use inverse ETFs and leveraged ETFs. It’s been really good to me, so it doesn’t really matter what the market’s doing. I don’t really root for the market to go up, I just root for the market to move. If the market moves, I make money. When the market’s stagnant and kind of moves in a sideways motion, okay, you’re right and it’s probably a bad place to be. When it’s going up or down, I can’t complain and I like the market at that time.

Jason:
Good stuff. Well, Jerry Robinson, thank you so much for joining us today. The book, again, is Bankruptcy of Our Nation, so check it out on Amazon and all the usual places. I appreciate you joining us.

Jerry:
It was great to be here, thanks Jason.

Outro:
The American Monetary Association is a non-profit venture, funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions in inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by the Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own, and the host is acting on behalf of the Jason Hartman Foundation exclusively.