AMA 39 – Capital Crisis with Chris Mayer

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Jason Hartman talks with Chris Mayer who is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. He also is a contributor to the Daily Reckoning. Visit: or search Jason Hartman in the iTunes Store for more. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. Mayer’s commentary has been featured by MarketWatch, Russia Today TV, the Atlanta Journal-Constitution, and the Huffington Post.

Narrator: 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.

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Start of Interview with Chris Mayer

Jason Hartman: It’s my pleasure to welcome Chris Mayer back to the show. He is the author of two newsletters for Agora Financial, Capital in Crisis and Mayer’s Special Situations. And the thing I like about Chris is that although he is a stock person, and Chris you may object to that I know, so just give me a moment. I’m going to call him a stock person, and you know I usually don’t like to invest in stocks and things like that where you don’t have control of things. I like being a direct investor. But, the great thing about Chris is that he wrote a book called Invest like a Deal Maker. And it’s really taking the approach of what is the underlying value of the asset, the commodities?

So we talk a lot on the show about buying income property far below the cost of replacement or far below the cost of construction. And that’s what Chris recommends doing with companies. He also has some new opinions and thoughts on the housing market, which we’ll hear about today. And just some really interesting insights. So, Chris welcome back. How are you?

Chris Mayer: I’m great. Thanks for having me back. It’s good to be on.

Jason Hartman: And you’re coming to us from Baltimore, Maryland today?

Chris Mayer: I am in Baltimore, yup.

Jason Hartman: Okay, great. Well tell us a little more about, if you want to expand on my thoughts about investing like a deal maker.

Chris Mayer: Yeah, I thought you had a pretty good characterization of it. I don’t mind being called stock picker. I think that’s alright. I think of Peter Lynch and some of those guys. But to talk more about the deal making aspect, what makes that different is that like you actually, I’m not really interested in owning just any stocks, and so I’m more interested in thinking like a deal maker. And that is, they’re thinking about the things like the assets and control and they’re thinking about the business as a whole, sort of what can be done with it as opposed to when you hear a lot of more amateur stock pickers, they’ll mostly focus on things like what’s the price earnings ratio, or what’s the dividend yield or what’s the growth rate?

But when you talk about deal makers, and a deal maker might be as an example somebody like a Carl Icahn or somebody who’s buying or selling whole companies. Someone who’s more of a direct investor and has control over that investment. And they kind of look at them in a much different way. So I’ve tried to focus my investing activities around sort of the way those folks look at businesses.

And one of those ways, as you talked about, replacement value. And that’s really a big part of it. Because the housing analogy is perfect and I’ve used that analogy before to describe it to people how it works. You can buy a house for significantly less than what it costs you to construct it. You might have a pretty good deal there. And you can apply that same kind of analysis in the stock market, where you can sometimes find companies where the assets that you can buy in the stock market cost you far less than what it would cost someone else to build them from scratch.

Jason Hartman: Absolutely. Now, I want to talk to you a lot about housing today. Because that is a primary focus of the show. Or I should say real estate investing. But before we do that, let’s talk for a moment if we could about the financial services industry, Wall St., stock pickers… you’ve talked about investing like a deal maker, which I think is a fantastic way to look at it. The investment bankers, the corporate take-over guys back in the 80s, the people that would greenmail the board, cut up the company and sell off the assets and a lot of people characterize them as evil and so forth.

But they really in a lot of ways had the right idea, because they looked at the underlying value of the assets of the company. And sometimes, what we really realize from all that stuff going on in the 80s is that the company is worth more when you buy the stock to gain control and sell off all the assets. Like the pieces of real estate, the equipment, the goodwill, the trademarks, etc. than actually running the company itself, right?

Chris Mayer: That’s right. And I think the big problem that we’ve found in American finance and why the corporate take-overs, part of the reason that they came onto the scene so strong is that we’ve found that a lot of American corporations really, what they lacked was owners. They lacked somebody who was there watching the shop, they lacked somebody that was there thinking creatively about the assets that they had and what they might do with them. They lacked the entrepreneur. So if you look at some of the best investments over the last 50 years, you’ll find that they almost always had a dominant entrepreneur as part of it.

So you look at Wal-Mart, you had Sam Walton. You look at Apple, you had Steve Jobs. You look at Amazon, you had Jeff Bezos. There’s just a long, long list of companies where you had this controlling inside owner and someone who thought long-term about the business, and someone who had invested interest in doing the right thing over the long term. And that’s really what I’m focusing on.

So when I think about deal makers, I’m also thinking what I’m really looking for is an owner. Someone who’s there. And what I don’t like is the trend in American finance, and really it’s a problem all over the world, where you have corporate management teams that have really no stake in the businesses that they manage or the stake that they have is given to them with low cost options.

So the incentive really isn’t for them to think long term about the business, the incentive is for them to keep their cushy positions.

Jason Hartman: Right, and their big salaries and their bonuses. And what they end up doing is kind of raping and pillaging the company usually and taking too much out of it so that it can’t operate correctly. But when you talk about Sam Walton and Steve Jobs, and there are many other examples too, rather than just the “financial” people, the business people, what you’re talking about there is the guy that is watching the store. Those companies had a soul. They had a person that was at stake who really saw a vision, and really cared. No one cares as much as the shop keeper about the shop. And of course this is why big government doesn’t work, this is why socialism doesn’t work, this is why communism doesn’t work…

Chris Mayer: That’s applicable to a wide range of things.

Jason Hartman: It’s true it is. It’s why relationships and marriages don’t work sometimes.

Chris Mayer: That’s right. It’s all based on incentives and who has ownership.

Jason Hartman: And who believes in it and who’s at stake. So what I would say about the companies that you mentioned is that they had a soul. They didn’t just have a financial person who was looking to just tear it up and make their tenure for four or five years.

Chris Mayer: And the thing about it is too, we talk about a lot of the famous examples and we could talk a lot about those, but there’s also… and this is why I spend a lot of time trying to fare it out, is there are other companies too that people have probably never heard of that also have, you look at a CEO and he’s the cofounder and he owns 17% of the shares or he owns 25% of the shares, and there’s a family involved that owns a big stake in the business.

And it’s remarkable because it’s not only that these businesses, as you mentioned before, that they take out as much as they can or we both talk about how they just try to protect their salaries, but when you have a person behind it like that they’re also willing to change and push the business forward. Because if you have a care-taker management sometimes they can take really big risks because they have nothing to lose really, but sometimes they can be care-takers in that they take no risk.

And really what you need to thrive is you need an entrepreneur. You need someone who is going to push the company in new directions. Steve Jobs is a classic example. He’s had a tremendous impact on Apple. You can look at Apple while he was CEO, while he wasn’t CEO, and Apple when he was CEO again, and there’s marked differences between those different periods. You can do this across the board. You can look at IBM and look at it when the Watsons were running it and then IBM post Watson. You can look at almost any company and you can see remarkable differences when there’s not this person at the helm. So yeah, I think it’s very important.

Jason Hartman: I think that’s a great point. One of the things I’d say to listeners that are investing in income property is that that person is you. You are that person that has a passion about it, and you are the shop keeper. You’re the person who cares, instead of relinquishing your hard earned money to some guy at Merrill Lynch who sticks it in a couple of mutual funds, and you don’t have any soul in that. There’s just no… no one has thrown themselves into it. And you know what’s interesting Chris? You talk about Steve Jobs, and I’d encourage any of our listeners to do this because it’s such a great story. Of course, it’s a big story so it’s not really applicable to a lot of investors.

But it illustrates the point that you’re making. There’s a website. One night I just got kind of interested, when there was some news about Steve Jobs’ illness on the news, I just looked it up and it was all of Steve Jobs major speeches from the very beginning of Apple. And all through the years, and I watched them in chronological order and it took a couple hours as I recall to do this. It was just really interesting. And I remember when I bought my first company back 13 years ago, when I’d give a speech there was that same twinkle in my eye. I had that passion for the business that Steve Jobs had, and that’s really important.

Chris Mayer: Oh yeah. And it’s funny you mention that because I did something similar. I looked at his speeches, and there was one commencement address I think it was at Stanford…

Jason Hartman: It’s Stanford, yeah.

Chris Mayer: It’s brilliant. It’s a classic and I’d certainly encourage anyone to read that. The passion for what he does clearly comes through there. But other things about Jobs that I’ve come across also that’s interesting, is when you look at the number of times he’s failed, there’s a lot. Again, it’s that whole entrepreneurial thing about being creative and trying things. He’s had his share of that. But he’s also had tremendous successes. So all of this I think plays into what we’re talking about.

Jason Hartman: It sure does. And I always say to people, if you want succeed more often it’s really pretty easy. Just increase your failure rate.

Chris Mayer: Yeah. The founder of Agora always says, “Fail, but fail quickly”. So there’s no stigma to failing. You just get it done and move on. If it doesn’t work, we do the next thing.

Jason Hartman: Right, the problem is most people wallow in it and poor me, and it’s a pity party and they don’t move on from their failures. But the failures can be great educations. Nixon said “failure that does not destroy you strengthens you”. And I firmly believe that’s true. But on the financial services industry, before we talk about some specific companies and housing and real estate and that stuff, I just wanted to give the comparison. Because I think there’s sort of maybe three major tears: there’s the tear of the mainstream financial services industry, which I think has been in a bubble for a few decades, the bubble has burst.

I think people have discovered that the emperor has no clothes, that walking into Ameriprise or Merrill Lynch or any of the other companies that sell you a bill of goods, a bunch of stupid mutual funds, it just doesn’t work. I think that industry is over and it blows my mind the people I know personally as friends in that industry, nice people, etc, but when I ask them questions their knowledge is just so elementary. They just don’t have any details. It sounds like they listen to the morning call at Merrill Lynch and they heard this is what we’re going to say today, and they just go on and they repeat that spiel to all the clients.

And you look at the commercials for these companies on TV… I don’t mean to pick on Merrill or Ameriprise – I just happen to mention those two names. There’s a whole industry of them. I’m speaking of them generically because they advertise in their bank. But the commercials, the advertising for these companies is so generic. It is amazing these big image ads of people retiring and living the good life. And frankly, I don’t know anyone who’s followed their plan who’s achieved that situation.

Chris Mayer: Yeah, I guess there’s not a lot of people in the Forbes 400 that have done it by investing in mutual funds. I certainly agree with your point, and also I think a lot of it falls on people because they invest in these things, and I have good friends too who have money in these mutual funds and these are people who will go out of their way to save money on gasoline, who go the extra mile when they want to buy a washing machine or anything like that, checking consumer reports, talking to people. And yet, when it comes to thousands and thousands of dollars, their life savings…

Jason Hartman: Or hundreds of thousands…

Chris Mayer: Hundreds and thousands, they’ll commit on nothing more than oh, the flimsiest of rationales.

Jason Hartman: Yeah, it’s the guy reading all of the reviews on before he buys a two hundred dollar printer, yet he’s…

Chris Mayer: When it comes to mutual fund, they have five stars then in he goes.

Jason Hartman: Exactly. So the next tear. That was one tear. I’m just going to call that the main stream financial services industry. The next tear is the tear that you mentioned of, I’m going to call them stock pickers. So these would include, and I’m a big fan of this name I’m about to mention by the way, I really want to get him on my show, people like Charles Payne. And I like Charles Payne, I think he’s great. Jim Cramer, who maybe I like less, and all of the people out there giving specific stock recommendations. That would be like the next tear, which I think is better than the mainstream financial services industry. But I think the top tear is the tear of investing like a deal maker.

And that includes being a direct investor sometimes, or at least investing in something where you know that the founder or operator has absolute vision and passion for the company, and you’re buying the assets far below their replacement costs. Would you agree that those are three different tears that maybe investors interface with out there?

Chris Mayer: Yeah. I think those are interesting tears, and I think that two of those things you nailed are very important. I have a system I use when I pick stocks, and I have an acronym so people can easily remember it. And the acronym is CODE.

C is cheap, which you mentioned with buying below replacement value, O is for ownership because we want people to have a stake in the business that we invest in. So that’s two of the four right there. The D being disclosures, meaning it has to be something that’s transparent. Transparency is very important, meaning that we can understand the business, we know how they make money, and follow it. And E is for excellent financial condition. Which covers for a lot of sins. We don’t want to invest in things that have excessive amounts of leverage and those kinds of things. So those are kind of my four pillars of how I look at these stocks.

Jason Hartman: So say the code again, just so people get it.

Chris Mayer: Yup, CODE C is cheap, specifically buying below replacement value. O is for ownership. We want people to have a stake in the business, and D is for disclosure, which has to do with the transparency of the business so we can understand what’s going on. And E is for excellent financial condition. We don’t want to invest in things that are excessively leveraged. So those are the core principles.

Jason Hartman: Right, right. So we’ve got these three tears. So let’s talk about the corporate world and the stock world for a moment, and then I want to talk about real estate stuff. What do you like out there and why do you like it?

Chris Mayer: Yeah, well that’s a good question. I think right now is a very, very uncertain time so one of the things that I’ve fallen back on is to look at what the insiders themselves are buying. And that’s been a big part of for the last couple months that I’ve been writing these letters.

Because one of the most remarkable things we had and that we saw in this called the August Crash, is that we saw insiders come out of pocket and start buying stock in numbers that we haven’t seen since 2009. So that certainly has gotten my attention, and that is really sort of an interesting response to a crisis because a lot of people have sold. If you look at individual investors, they’re pulling money out of mutual funds at record levels. So they have a tendency to take money out at the bottom and put it back in when things are going well.

And the insiders tend to give you a different indicator. Normally thematically I might tell you certain stocks I like, whether I like energy, or I like this or I like that. But right now it’s more patchy, and so I’m picking and choosing among things that the insiders are buying, where their fundamental business seems to be very profitable and have a bright future. So I can mention specific names if you want to know…

Jason Hartman: Yeah, absolutely. I’d love you to mention some specific names. But before you do that, the insider thing, certainly that seems like great advice. I want to buy into something where the insider has faith in their own deal. I want my partners in that venture to be at stake, right? You never want a partner who’s not at stake and doesn’t have “skin in the game”, right?

Chris Mayer: Right. And some of them have proven to be pretty good buyers of their own stocks. There’s some of these CEOs that you look at, and you say well the last time he bought stock was here and look what happened, and that sort of thing.

Jason Hartman: Yeah, absolutely. So the one thing though that could sort of tilt this equation and make it maybe a little less valid, I’m just trying to be a skeptic here so forgive me but just sort of the general economic environment where there’s just loads of money that’s been sitting on the sidelines for the last few years, and maybe the reason the insiders are buying more is they just sort of have this money available. They’ve got to do something with it, and one of the things they’re doing is buying their own stock, but they’re also doing other stuff too. Your thoughts on that?

Chris Mayer: Well, my experience is that the insiders won’t buy their own stock unless they’re pretty confident. There are some insiders where you’ll look and they’ll be token purchases, so those you’ll discount. There’s some insiders that buy and maybe they’re on the border or something, and that’s probably less of a signal than if you had the CEO and the CFO and the chairman of board all buying.

Jason Hartman: The act of operations…

Chris Mayer: Yes. And so there is something to that. And I also would lean back on a lot of the academic research that’s been done on this, which shows that insider purchases as a whole outperform the market depending on what study you site. Something between 6-10% percentage points a year that can be outperformanced there. So I think there can be a lot of skepticism because when I’ve talked to people about this, I thought you were going to say because I’ve heard this objection before, is people say well, there’s a lot going on with the economy now, a lot of bad stuff in Europe, bad stuff in…

Jason Hartman: So they’re moving the money back to the thing…

Chris Mayer: So they don’t really know. They don’t really understand the macro situation. They’re discounting. Well, their company might look good, but they might be overwhelmed by events.

Jason Hartman: So that’s the theory of there’s no other place to put the money, so they think their company is that safe haven in other words.

Chris Mayer: Yeah, and you’ve got to remember too with the insiders, in a way most of them are betting pretty heavily on the company. They may have a big stake already. They get their salaries and livelihood out of it, so for them to then reach in their own pocket and put more money in is usually a pretty strong statement. Of course there are exceptions and nothing’s perfect. But in general if you’ve got a chairman CEO and they’re buying million dollar shots of the stock at a time and you can buy right alongside them, then that’s usually something interesting.

Jason Hartman: I agree with you. The only thing I’d love to see, and I doubt this is even possible, is a study of the amount the insider holds of that company’s stock in relation to their own personal net worth. For example, so if an insider buys a million dollars’ worth of stock in their own company, but their net worth…

Chris Mayer: He’s a billionaire.

Jason Hartman: Yeah, but their net worth is a hundred million or a billion dollars, that’s chicken feed to them, right? It’s nothing. So it looks good on paper that hey, that insider is buying, but they might just be doing that to sort of make it look good and they might just have a moderate faith in the company. But they’re throwing a few bones at it, whereas they’ve got so much net worth out of the company. That would be a great study.

Chris Mayer: Yeah, I don’t know if there are any studies that address it quite that way, but there are studies that show that CEOs that have at least some percentage at stake in the business outperform. So I’ve seen CEOs where they’ve done threshold at 10% and they look at their stocks and compare it to control group where the CEOs on much less percentage. And the CEOs which have a bigger percentage of the business do well. so there’s something to holding a sizable stake in the business. But I haven’t seen it relative to their own net worth, which would be more difficult to do as you suggest because you’d have to know their personal financial statements and so forth.

And a lot of these guys also are… I’ve been in this business writing newsletters for seven years and before that I was in corporate banking for ten years. A lot of them in addition, even though they may have 10% net worth in the company, there’s a quite of bit of ego involved in all this and there’s certain pride in being part of a successful company and a company that does well. So some of that, I mean I don’t know a company that they’re going to throw money into something deliberately in an effort to deceive people, but I’m sure that’s happened at some point. As a general rule I think it’s probably not the case.

Jason Hartman: Well and the ego is definitely a powerful thing, so that’s good that they have ego in the game. I want them to have their ego invested in it.

Chris Mayer: Yeah, you want that.

Jason Hartman: Well tell the listeners some of the things you like and why. Maybe three examples would be good.

Chris Mayer: Okay, well one recent example that I’ve recommended is a company called Federal Mobile, which Carl Icahn actually owns 76% of the stock. So you definitely have an owner there. And this is a company that makes auto parts. And it’s fallen quite a bit in August. Sell offs down to about $15 or so. And he’s been buying it for about two weeks straight. In the collapse he was buying it a million dollars a shot. Now we know that Carl Icahn’s a billionaire, so you can make of that what you will. But he owns 76% of it. And the other thing I like about it is the CEO has particular incentive.

When Icahn took out Federal-Mogul bankruptcy, he brought in his own handpicked CEO, a guy named Alapont. And he has option to buy four million shares at 19.50. So when the stock hit 27 dollars a share earlier in the year, he didn’t sell or exercise any of those options that he could have. The options expire in 2014. So I think that’s a good incentive there. I think the alignment of all the incentives that I look for are set up really well here at Federal Mobile. And I think that the business has gone through a tremendous transformation. They’ve taken a lot of costs, they have tremendous opportunity overseas, they have more and more cars.

I’ve done a lot of overseas travel. Columbia, South Africa just this year. I’m heading to South East Asia soon. And everywhere you go there’s cars, cars, cars. So there’s tremendous opportunity for auto parts over the long term. So Federal Mobile is a play on that. That would be an example of something that I’ve recommended recently that I like.

Jason Hartman: Talk about transparency. Why aren’t the transparent? These are publically traded companies. They do all the filings as they’re required to by law. How do you evaluate transparency? You’re not just going with the basic requirements that the SCC puts out, right?

Chris Mayer: That’s correct. This is more of a qualitative issue. But I would say that transparency business model has a role in that. So off the bat, I’d say that almost any bank would fail transparency except perhaps some of the smallest banks that are maybe thrifts and have loan portfolios that you can get a pretty good handle on as far as what’s in them. But for a large, multi-billion dollar institution there’s just no way you can get inside that portfolio and get comfortable at all with what kind of risks they’re taking. And in fact, I’d argue that the presidents and CEOs of these companies don’t really know what kind of risks they’re taking.

Jason Hartman: Well I think if the last few years has taught us anything…

Chris Mayer: That’s right. But you can also extend it beyond that. You could take a business model that seems very simple, like say a natural gas pipeline, but it can be made to be very complicated and not transparent with financial engineering. So I’ve seen pipeline companies that have layered on top of that a number of derivatives buying and selling different natural gas say forward and so forth that makes it not transparent.

So I think when it comes down to it, you have to be able to understand how the business makes money and it has to be pretty simple. So most of the time because I have this limitation, most of the companies I invest in are companies that make something. Because you can generally follow a manufacturing operation. You’ve got cost of input, they make something and out it goes at a certain price. You can get a better feel for it.

Those kind of ideas, or even like a retailer, although I haven’t recommended any retailers in a very long time. Or energy companies, a company that produces natural gas is something you can generally get a hand on, that produces oil, real estate companies. So these would be examples. So disclosure is a qualitative test, and you have to really be honest with yourself whether you really understand what’s going on in the business. There are certain red flags I think that you would look for.

We saw this in the last few years in the banks: you have this special purpose off balance sheet joint ventures and things that are contributing income, and basically they’re little black boxes and that’s something you have to heavily discount. But in general it’s a qualitative gut feel based on what you have discovered.

Jason Hartman: You know what I get approached with fairly regularly? Oil and gas exploration deals, and oil and gas production deals. When I say gas I mean natural gas. And these are just small deals where a guy has a fund… and he’s raising a million dollars for a fund, and he’s going to all his friends and family and getting 50 grand from each person type of thing. Do you have any thoughts about those?

Chris Mayer: No. I think that is an area that has been rife with problems in the past, so I would be particularly careful. You have to know and trust the people, and I would think you’d have to have some basic knowledge of oil and gas so you know what you’re getting into. But I haven’t recommended any of those. I’ve seen a number of things like that. I see a lot of these kind of deals too. Private farm land deals, real estate, oil and gas, those are all very popular.

Jason Hartman: It’s interesting. And definitely exploration would be incredibly risky, versus production which is less risky. But still there is always a chance for fraud and so forth. So Chris, you went to Saskatchewan recently, and it seems like your trip there you had some thoughts of commodities on your mind, didn’t you?

Chris Mayer: Yes, and I went to Saskatchewan and I had a couple companies I was visiting. One company I like very much that I visited there which fits a lot in what we’re talking about is a company called Alliance Grain Traders. And that’s a company where the people running it have a big stake in it, the employees and the insiders own I think together 35% of the stock. And the founder is still with it, it’s only ten years old. But Saskatchewan is an agricultural powerhouse really.

And Alliance Grain Traders processes pulses, which would be things like chick peas, and lentils and different kinds of beans. So I was also going there because I’ve been writing about Saskatchewan, probably have been writing about it for three or four years. Because some of the farmland deals out there are very interesting. The government there for a long time had a very tough view on foreign investors.

And it’s kind of funny because even if you are a Canadian, let’s say you were born in Alberta, you couldn’t buy Saskatchewan farmland. You had to be born in Saskatchewan to own Saskatchewan farmland. And they eased those rules and so investments started to flow in and so there’s a lot of interesting opportunities in Saskatchewan.

Jason Hartman: It seems like really, the safe play for the future is commodity oriented things. You mentioned manufacturing companies, companies that make something, tangible stuff. It’s always great to hear about high fliers like Groupon, that may not be such a high flier when it finally has its IPO.

Chris Mayer: $50 billion in Facebook or something.

Jason Hartman: Right, and Facebook and all these kind of virtual companies. But if you ask me, the population is increasing dramatically, we’re going to hit another billion mark this year or maybe we did just hit that… nobody exactly knows the world population but they have lots of stats on that. But people consume. The three things people need Chris, for sure, which we absolutely know they don’t need a new pair of Nikes, they don’t need a new iPhone, they’d love to have all these things but we know for sure they need food, clothing and shelter.

Chris Mayer: Yeah, food, water. Those are big investment themes.

Jason Hartman: Yeah, no question about it. But people don’t have the chance to do those directly in most cases, and we’ve talked about the deal maker philosophy which I couldn’t agree with more. But talk to us a little bit about housing if you would.

Chris Mayer: Well, a little background first because I have been a housing bear for a long time.

Jason Hartman: I know that, and that’s why I want to hear from you on this.

Chris Mayer: That’s right, and I can go back as far as I think it was late 2002, I wrote a piece saying that Fannie and Freddie Mac would go bankrupt and the tax payers would eventually have to bail them out, and I’ve been a long time talking and writing about the housing bubble. So only recently this year, I reversed that position. So I think now that we went through this whole big housing bubble, and I think the thing is dead, and we are closer to the bottom than we are the next peak. I think that’s for sure. You never call the exact bottom, but I think housing looks interesting.

And I’ll tell you I talk to a lot of different investors and people who are doing a lot of different things, and one of the things that has struck me recently is the amount of institutional money that has started to look at housing as an investment where they’re renting out the house. And there’s all kinds of boots on the ground, view points from different people. But in general what I’m hearing is that it’s not so difficult to buy a home today and rent it and get 8-10% cash yield on your investment. And I love that idea, because I think, if you look at housing prices they’ve come down tremendously. They’ve plummeted.

In some markets it depends. There’s a lot of ways to measure this. You can look at priced income and all that sort of thing but we’re definitely on the bottom rung of all these different evaluation methods. So I think, though it may take years before housing prices surge forward or we have another housing boom, now I think is a pretty good time to establish some positions in say, the rental home market and just sort of wait out the storm.

Where can you get 8-12% on a physical, tangible asset that has value? And this is another point in the evaluation is that most of these houses now, you can easily find houses trading for well below replacement value what it would cost you to rebuild them. So I think it’s a very interesting place to be right now. And I would say things look up from here for housing. As crazy as it sounds to say it.

Jason Hartman: But I don’t think it’s crazy at all. I agree with you completely. It’s interesting to hear that from somebody who’s been bearish on housing for years. You thought housing was a bad deal in 2002, and then of course the speculative frenzy and the greenspan pump, post 911 greenspan pump, was just kicking out ridiculous amounts of money into housing for years and the price was just absurdity.

Chris Mayer: Yes, and we’ve seen this happen with all kinds of speculative blow-offs. I remember writing bearishly about the stock market in ’97, and of course there were three years to go before it peaked and they were tremendous. There was just a lot of tremendous room on that. So these things always go longer.

The reason why I say it sounds naive, it doesn’t sound naïve to you and I’m not surprised because you’re actually more of a practitioner who’s in the market and sees the deals he can do. And most people I talk to like that completely agree with the position I’m saying, but I do get a lot of resistance from readers who don’t see that and they just read the headlines, which is still a lot of scary stuff about housing.

So there’s no question if you look at the US mortgage market, something like 45% of the US mortgages that are still in some state of trouble, they’re either under water or they’re in foreclosure or something, but if you look at the individual deal as an investor I think it’s pretty attractive.

Jason Hartman: So when you invest in stocks and when you invest in companies, are you an income oriented investor or are you capital appreciation? I have a feeling I know the answer to this, but I just want to ask you.

Chris Mayer: I would say that I’m indifferent to it when I’m looking at stock. I’m looking at total return. So sometimes income will play into it, but sometimes I won’t at all. If I can… It just depends on the situation. What I want is the greatest total return overall that I think I can get.

Jason Hartman: See, I would say that what people just fail to understand about real estate is that it’s a multi-dimensional asset class, and companies, if they’re dividend paying have two dimensions. They have capital appreciation, and they have income. But with real estate you have several dimensions. You have income, and that’s what you’re saying when you say just get 8-10% rental yield return and wait it out with no capital appreciation. Who knows which way that’s going to go, right? So you’re basically investing in a bond or a dividend paying stock. The principal value of the bond or of the stock can go up or down but it still spins off the income for you.

And then you’ve got the potential for capital appreciation. And I just want to propose an idea to you Chris. I don’t think we’re going to see much, if any, real appreciation measured in real or constant dollars for a long time. because for that to happen we have to have incomes increase, and I don’t think that’s looking good for the foreseeable future here for the next five years or so. But I do think we will have inflation. So I think in nominal dollars we’ll have increase in prices.

Chris Mayer: Yes and I think if you look at different times of rapid inflation that real estate in general has been a pretty good hedge on that.

Jason Hartman: Certainly they have, but it gets better. Because if you leverage the property, say you put 20% down, you don’t just hedge against inflation… I had a guy on my show…

Chris Mayer: You have an active short against the dollar basically. That’s the brilliant thing about it. And you can fix it at such low interest rates now. I think it’s incredible.

Jason Hartman: It is, because if you put 20% down, you’re leveraging or shorting the dollar by a 5-1 ratio, right? so if the inflation rate is 5% but you’ve leveraged and you’re not paying the debt surface cost on the leverage the tenant is, you’ve really outmaneuvered inflation assuming that real estate keeps even pace with inflation by a 5-1 ratio. So that’s wonderful. But it gets even better. I don’t think we’re going to have any real appreciation for a long time. But I think we could have what I call a regression to replacement cost.

So if you buy a property now for say, $50 a square foot and say that it costs a hundred dollars a square foot to rebuild that rebuild that property today, plus you’re basically getting the land for free. So in some of the markets we like, like Dallas, Phoenix, Indianapolis, Atlanta, and some others, the lot values are cheap in those markets. It only cost for a single family home lot, 15-25 thousand dollars.

Chris Mayer: Yeah, I’ve heard some prices in Phoenix have been rolled back to where they were in ’94.

Jason Hartman: Oh yeah, it’s amazing. I just recently moved to Arizona from California. I left Newport Beach to move to Scottsdale, and some people think I’m crazy but I think I’m brilliant. But I like it a lot better out here. But it’s amazing. Things are half price. This was obviously a huge bubble here and it blew up. So even if there’s no real appreciation, all you really have to have happen to really double the price of these properties or even triple them because sometimes we buy at 1/3rd the value of replacement, is just have what I call regression to replacement costs. What do you think of that?

Chris Mayer: I think that’s exactly right. I think long term you do have a regression to replacement, and I see that in the stock market also. A lot of different assets, things will fall dramatically out of favor for a while, but over time markets kind of correct themselves and I think that will happen to housing one way or the other. I think there will be some supply that will disappear, there will be houses that are torn down or whatever. Demographically, the US is still in a pretty decent place especially compared to Western Europe. We’ve got a country of 300 million and still growing.

That’s going to just naturally soak up some supply. Household formation in the US is still growing at a pace. And it will be patchy. So you mentioned your specific market, and I think that’s important to note that there are some markets that will come back and be attractive and there are some that may never come back. I know reading different stories about whole towns in Florida that basically grew up only because of the housing bubble and there’s no reason otherwise for the town to exist. I’d be much less inclined to make an investment there, than say Tampa. You know Tampa. That’s a city. It’s got a reason for being. It’s been there for a long time. That will come back.

Jason Hartman: I think what you’re referring to in Florida is the central Florida areas. Those were literally nothing more than a symptom of Wall St and bank money flowing at developers.

Chris Mayer: Whole town’s created just out of credit and all they are is houses in the middle of nowhere.

Jason Hartman: Right. The point I want to make there is I think regression to replacement cost is not appreciation. It’s just regression.

Chris Mayer: Right, although it depends where you bought, right? If you bought half replacement value it will be appreciation for you specifically, but it’s just getting back to a more normal market.

Jason Hartman: So Chris, that’s interesting what you say about housing especially because you’ve been a bear for so many years, so I really like to hear that. It gives me a lot of confidence that I’m doing the right thing. But I’d be interested to hear your take on Warren Buffett. Because I’m beginning to think that Warren Buffett is like a shill for the Obama administration. He’s throwing fundraisers for Obama, and he’s doing things that just don’t make any sense. But he’s got a huge insider advantage. He just bought a bunch of B of A stock. Did that make sense?

Chris Mayer: And he was also quite hypocritical because he’ll talk about taxes and then he’ll be sure that when he does these deals he’s in preferred stocks, 70% of the dividends which are tax deductible and so forth. His actions betray what he’s saying. If we wants to pay more taxes, that’s just one issue.

Jason Hartman: But for some reason he says that his taxes should go up yet he doesn’t do that.

Chris Mayer: He doesn’t do that.

Jason Hartman: What I heard about it was his famous line, his secretary pays more taxes than he does, is that he only pays himself a 100 thousand dollar a year actual salary and he takes the rest of his money in a more preferred means that’s taxed at a much lower rate. And it’s interesting to me that Warren Buffett’s secretary doesn’t make a hundred grand a year. You’re the secretary for the second richest man in the United States of America and one of the richest people on the planet… I don’t think he’s paying her enough.

Chris Mayer: When it comes to Warren Buffett, I think that as investors it’s definitely when you’re looking to learn about investing to study his career. Because it has been a remarkable run. But the Warren Buffett of the last 3-5 years or so has been much more of a political animal. Not just the taxes but on all kinds of issues like you say. So he’s fallen down some pegs in a lot of people’s minds.

Jason Hartman: But one of the things, like when I read Buffett biographies and so forth, I kind of like his philosophy. It’s sort of the value investing, buy good sensible companies, not the high fliers that just have underlying value and operate and hold. And that sort of strikes me as a good philosophy.

Chris Mayer: Yeah, and I think you could kind of divide Warren Buffett kind of in three careers: So the early Warren Buffett, when he ran the first Buffett partnership and he was involved in special situations and then there were sort of the middle years where he became more of the Warren Buffett that most people know, the guy who espouses all that folksy investing wisdom and then there’s the latter years where he’s become so large where he can really only buy whole companies and where he’s become much more less interesting to study as an investor, and where he’s become much more political.

Jason Hartman: Yeah, it’s interesting. That’s a good way to divide him up. Well hey Chris, what else would you like people to know before you go and of course give out your website. You published two different newsletters. Tell us where we can get those.

Chris Mayer: Yes, I would say the best place to go is – I write columns there. It’s a free e-letter that comes out every day, and you can find out more about my newsletters there and like I said it’s free so you can’t beat that.

Jason Hartman: Absolutely, and it’s a great newsletter. I just really enjoy the philosophy. I will say it’s a little longwinded, but it’s entertaining. I love the way they just sort of bash the left leaning political world and so forth. It’s funny. Really good. But in closing, what thoughts would you have for people looking forward, and any thoughts you have about the future of the economy: inflationary, deflationary, insolvency for the United States, whatever you got.

Chris Mayer: The inflation thing, I tend to think that we’ll see it sooner or later. This is one of those things where a lot of people are looking for it and have been wrong for a few years, but I think it’s inevitable. And this most recent episode with Operation Twist where they’re driving down interest rates even further… there just can’t be much more room to go there. Overall, I would say that there’s still a lot of investment opportunity out there.

So I try not to get so down too much on the macro economy because there’s lots of instances in the past where you can look at the two and they don’t necessarily dance together. In other words you can make pretty good investments in bad times, and there’s lots of examples of that. So I would say to stick with those basic principles that we’ve been talking about in this interview.

Look to invest with people who know who have track records, that incentives are lined up with yours. Stay picky – the great thing about investing is that you don’t have to invest. You can sort of wait until that perfect pitch comes along. So that’s really my parting wisdom I guess.

Jason Hartman: Fantastic. Well, Chris Mayer thank you so much for joining us today.

Narrator: The American Monetary Association is a nonprofit venture funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions on 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 or email [email protected] 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.

The American Monetary Association Team

Transcribed by Ralph

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