Jason Hartman starts the show with a reminder of refinancing and his strategy fo refi til ya die. He looks at the strategy in light of COVID-19 and talks about the 1% rule when it comes to rent-to-value ratio. Later on the show he talks to Brent Johnson about the dollar milkshake theory. They have a discussion about macroeconomics. Johnson talks about the US currency and how it compares to global currencies and gold. Then he goes into his thoughts about modern monetary theory and its problems.

Announcer 0:02
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 0:54
Welcome to Episode 1491 1491 We’ve got Brent Johnson on today. He is with Santiago capital. And he’s a fantastic wealth manager, investment advisor with some really interesting insights into the economy. I think you’ll like this conversation a lot, a lot, a lot. And for attending today, guess what, you get a free milkshake. You’ll know what I mean in a moment about that one, because he talks about the dollar milkshake theory, which is an interesting way to look at it. I like it. I like it. So before we get to that, let’s take a couple of listener viewer questions. Actually, these are from my YouTube channel. And by the way, keep the great questions coming on YouTube. Even if you don’t always know what you’re talking about. Yes, you know, when you you get some random weird comments on YouTube. It’s a strange environment for sure. But let’s see here. Some of these are great questions to ask. You know, some of the randoms will throw them out. Some we might add in just for entertainment purposes. So we’ll we’ll see. We’ll see. Okay, we’ve got a question slash comment from Yakov. And it is about the 1% rental rate, the RV ratio, which by the way, I told you the RV ratio is on sabbatical. It’s on sabbatical until the interest rates go up. You do not have to live and die by the 1% ratio anymore. It’s sort of the opposite of what his question is. It’s actually his question goes the opposite way with 1% Rv ratio with these super, super low interest rates. And he says, but don’t you have to take into consideration what your profit is. You can buy a property for $140,000 and rent it for 1400 or 1450. But what if your expenses on the property are hot? Well, it’s kind of a fair question. But remember, the 1% Rv ratio is just a rule of thumb, hold up your thumbs, give me two thumbs up right now, that is a rule of thumb. It doesn’t tell you the complete picture by any stretch of the imagination. And really, I created that ratio that now everyone is taking credit for many years ago back in 2003. And you know, listen, there were other To be fair, there were other RV ratios. And then there was what I heard it started hearing about in around 2008. Some investors talking about the 1% rule. I just called it the RV ratio. And I remember reading the Orange County Register many years ago, that newspaper, it talked about rent to value ratios, but it completely figured it this very weird way. And I was wondering, why didn’t they just do it the simple way like I did it didn’t understand that but The way I came up with that is I just started using property tracker at property tracker calm or real estate tools calm the main site. And I kept doing those performance and doing the math over and over and changing the assumptions. And noticing that if you got around 1%, you were doing pretty well. And this was actually not meant to address the question he’s asking. It was meant to address the people at the opposite ends of the spectrum. The delusional person who has a property that they’ve had for many years in expensive, cyclical market, where they shouldn’t be buying properties in the first place, unless it’s their own home. And they’re following the Jason Hartman quote, one of the many that says, invest in places that make sense. So you can afford to live in places that don’t make any sense. Invest in places that make sense. So you can afford to live in places that don’t make sense. So if you’re doing that, well, hey, buy yourself a nice home. That doesn’t make any sense. But since this show is focused on investing, and return on investment, we’re not going to talk about that, because that is a different kind of return on investment, the psychological return on investment. We don’t address that here. It’s not what we’re about. So it was meant to solve the problem of this delusional person. And here’s the example of that person. It’s the opposite end of the spectrum from the question being asked, that has a property that say, for example, it’s in the Socialist Republic of California where I used to live, and that property is now worth a million dollars, but they bought it a few decades ago for $300,000. And they’ve never refinanced the property because they don’t know About my great strategy that is the most tax efficient way to extract wealth from your property or your entire real estate portfolio. What is that? It’s Jason’s refi till you die strategy. Don’t you love it when people talk about themselves on the third person? It’s very kooky. But I’m just feeling a little kooky today. So there you go. Anyway, they’re not using the refi till you die strategy. They’ve let the equity build up in that property. They’ve owned it for decades, and their mortgages paid down really low. So say, for example, their mortgage balance is $100,000. on that property, they’ve had it for decades, the property’s worth a million bucks. They’ve got $900,000 in gross equity. And they think, Well, let me see. I can rent that house for 30 $500 a month. I’ve got positive cash flow. What a brilliant investor I must be. No, you’re actually a foolish investor. This investor should be listening to the podcast because having a bunch of equity in the property makes our brain go to mush. mushy, mushy brain, not so good. What you want to do is constantly be using good, high quality, low cost, arguably negative interest rate, investment grade, fixed rate debt, and refinancing that property and keeping it adequately and properly leveraged. You know, keeping your property properly leveraged is almost like watering your house plants or servicing your car on a regular basis. This is how you service your investment portfolio. You take your car in for servicing what every 7500 miles or something, at least that’s what my German car tells me to do. And you take it in and you get it serviced. And that’s what you need to do with your properties every seven to 12 years, you need to refinance them and follow the refi till you die plan. Anyway, his question, it’s a sort of valid question. But if you have a property that’s $140,000, and you’re renting it for 1400 or 1450, you are doing great. In fact, I doubt you can get a good quality property in this market that will perform that well. That’s not a bad thing. That would be a very positive thing. Okay, so there you go. But remember, it’s just a rule of thumb, meant to counteract the mushy brained people that have too much equity in a property and they think they’re having positive cash flow, because they don’t know how to do math, and they forget about the opportunity cost, the opportunity cost of having A bunch of equity sitting in a property doing nothing. Lazy money, sleepy Money, money that is not working for them. We want to extract equity, buy more properties, or invest it wisely in some form or fashion. Of course, you know, I’m going to say more income properties, or maybe a business and make our money be working for us. We don’t want dead money equity. Another question comes from shallow gold. And that question is actually a comment telling me how wrong I am. I love these. These are the best. Jason Hartman is doing the same broad brush statement that he accuses the talking heads on CNBC Manhattan. I’m talking about in New York on this one YouTube video and now it’s a mess. Manhattan was hard hit. It was certain neighborhoods in Brooklyn and African American Hispanic neighbors. hoods in Queens, which have I got a, as I’m reading these questions, I sort of have to correct the grammar and the misspellings. Okay. That have a low density.

Jason Hartman 10:12
We have a tower in downtown Brooklyn 184 units. We have 17 units under contract. Still closing. We have signed two contracts in April. When this is over, people will want to go out and socialize, not, again on correcting the errors not to stay in their cocoon in the suburbs. Well, I hope you’re right, and I’m wrong. But I don’t think it’s gonna work out that way. Here’s why. First off, the suburbs are already popular. The Suburbs ain’t so bad. A lot of people in fact, 10s of millions of them, maybe maybe hundreds of millions. I don’t know you Have to do the math on that. Now, not hundreds of millions, at least not in the US. 10s of millions of people in the US live in suburban neighborhoods, and they might like them or be bored by them a little bit. You know, suburbia has its detractors. And I agree with a lot of those criticisms. But here’s the thing. It’s not just about COVID-19 anymore. What else is it about? Of course, it’s about civil unrest. It’s about riots. And people are realizing that you don’t really need to live in a high density city. Most people that do that have done that for their career. Okay. Now, listen, in suburban neighborhoods. I hate to break it to you shall we have friends, we have restaurants, we go out and socialize. And it’s really cool. convenient. You’d go over to the restaurant, I can walk to them from my house, even though I’m in suburbia. And if you wanted to drive, you go over and drive and there’s lots of parking, things are quite easy. There’s lots of tables at the restaurant, it’s not crowded. And guess what? The other thing I am concerned about in this why Sam, I hope I’m wrong is that this may last a lot longer than any of us want it to. And I’m not talking about the riots and civil unrest that will come and go, but it’s gonna come back again, even after it goes. But I’m talking about COVID you know, I was researching vaccines. And apparently vaccines are a much bigger deal than other drugs and other pharma because vaccines take a long time to make and a long time to get approved under normal circumstances. Now, this one is obviously going to be fast tracked, but you know, they talked about vaccines in the past that took 20 years. Yeah, I did say that 20 years to come to market. And the reason is the standards for approval have to be so much higher. Because these are not going into the bodies of sick people. They’re going into the bodies of healthy people. And so it’s a much more complex thing medically, and in terms of FDA approval, and so forth. And and again, this isn’t just about the FDA, this is about the entire planet Earth. So who knows, but maybe we’ll return immunity before we even have a vaccine. Maybe a vaccine won’t even be possible. I don’t know. Is that a is that a thought? Maybe there will never be a vaccine. It Has everything been vaccinated against? No, I don’t think we have a vaccine for other things. Right. So there may never be a vaccine. We don’t know. Nobody knows. But certainly the entire science community of planet Earth is working on this. We’ll see. I don’t know. But then even when we have a vaccine for this one, people are going to experience a long term, post traumatic stress disorder, PTSD from this. I think it will be generational in nature. And I think things have changed for a long, long time, because people will be worried about the next one. The same is true with the riots and the civil unrest. Look, the country in many ways is tearing apart at the seams. So the race riot goes away. Well, when is the next one we had? We’ve had lots of riots throughout history. Lots of times when things are dangerous. It’s too dangerous to leave your door in suburbia. Life doesn’t change at all right? And you can say that’s boring, but fine. No one’s worried about riots in my neighborhood. I’ll tell you that much. take it for what it’s worth. You guys decide. Alright, without further ado, I got a couple questions out of the way we get better get to work. Johnson Well, actually, you know, remind me to talk to you about this because this is pretty significant. The Consumer Financial Protection Bureau is going to eliminate and we did talk about this just briefly A while back a couple of months ago. I think it was the dti requirement, the debt to income ratio, the dti for qualified mortgage standards. Wow. That one, you know, it just goes to show you that there are a lot of ways that they try to juice the economy to stimulate markets. And they’re not all about QE, money printing reserve requirements of banks, so the banks will lend more. There are a zillion ways they do this. And one of them is to get loosey goosey on loan. requirements and make it easier to qualify, which

Jason Hartman 16:04
initially, it’s like a shot of caffeine, it does juice the market. But ultimately, you come down from that. And when you come down from that shot at that jolt of caffeine, you come down lower than the mean energy level you had before. And you set yourself up for the next problem. So that kind of thing is probably ultimately irresponsible. And we’ll see how it plays out. But you know, you don’t see the effects for several years, and whoever or whatever committee decided on that. They don’t usually hang around, see the consequences. They’re usually long gone. And that is the way the world works. So if you need us reach out Jason hartman.com. And without further ado, let’s get to Brent Johnson. Part One today, part two tomorrow. This is a fascinating interview. You’re going Love it. Here we go. It is my pleasure to welcome Brent Johnson. He is the CEO of Santiago capital. And he really does just a fantastic job of explaining macro economic concepts. You’ve probably seen him out there in the news media. And we’re going to dive in today and talk about a variety of things, not the least of which is a future of the dollar. And with all this money printing, a lot of people have questioned that. But I would always ask you to ask the Jason Hartman question, which is compared to what, and we’ll dive into that today. Brent, welcome. How are you? I’m good. Thank you for having me. Looking forward to talking to you and your listeners today. It’s good to have you and you’ve probably explained this so many times, but Rumor has it You brought us a milkshake today. And

Brent Johnson 17:49
it’s actually $1 milkshake, and it seems to be one of your core theories or thesis. And I just like you to maybe explain that to the listeners very briefly, because I think it’s important for the rest of the conversation. Sure. So I’m happy to do that. You know, I’ve talked about it quite a bit, but it is really kind of central to the way I see things developing over the next several years. And it really goes back a couple years ago, and I did a presentation while I’d seen this movie called, there will be blood. And it’s a movie about this kind of ruthless oil executive that will just do anything to beat us competitors. And towards the end of the movie, he was trying to buy a piece of land next to his that had oil on it, and the guy wouldn’t sell it to him. And finally, he just said, Well, you know what, I don’t even need you to sell it to me because I’m just going to stick a pipe down into the ground. And even though it’s on my side of the fence, I’m going to drink up your oil. Instead, I’m going to drink your I’m going to drink your milkshake. And so when I kind of started developing my thesis a couple years ago, I explained to everybody that even though the Fed had printed a bunch of currency, starting in 2009, the dollar actually rose in value over the last 10 years. So just because you print currency doesn’t necessarily mean that the dollar is going to fall right or that your currency is going to fall into So the way I tried to explain it was the whole world is printing money. And they’re mixing this liquidity milkshake for lack of a better word. But for several reasons, the US at the time, the predominant reason was higher interest rates. And we still have higher interest rates, but they’ve come down a lot. So it’s not as a key factor now, but at the time, we had a lot higher interest rates in the rest of world. And so I explained to that even though the rest of the world was doing the printing, we were sucking up all that capital into the United States. And as that capital flow to the United States, it goes into the United States dollar and it pushes the US dollar higher and it pushes us asset and US dollar asset prices higher. And I largely think that’s what’s gonna happen over the next call it two to three years, I think, the rest of the world, US included is going to do fiscal spending, they’re going to do QE, they’re going to do mmt. They’re going to flood the market with liquidity to try to counteract the deflationary forces. And I think largely what’s going to happen is the US is going to be the recipient of capital flows, and we’re going to drink the rest of the world’s milkshake for lack of a better word. Damn Damn

Jason Hartman 20:00
good. It’s a really good metaphor. And you know, Brent mmt modern monetary theory has gotten a lot of interest lately. I don’t know if it’s sort of the over entitled socialist element of the millennial generation that’s brought that on or, you know, Bernie Sanders or, or what it is. But when so many people owe the US government money or the US companies money, and then taxpayers owe the US tax agency, the IRS money, the only way they can repay those debts is in dollars. So that creates this sort of cycle. This vicious circle, if you will, of strength for the dollar, which should be getting debased. A lot of people would say, gold bugs would certainly say that. Maybe speak to that a little bit if you can.

Brent Johnson 20:48
Yeah, sure. So and I think one I don’t want to criticize anybody else’s thinking but I but one of the common mistakes that I’ve seen other people make is that they analyze the US and analyze the US dollar in vacuum. In other words, they say, we have all these debts that we can never pay off, we’re gonna have to print all this currency or do all the stimulus in order to ease the burden. If you add more supply, that’s typically bad for the price. So the price of the dollar comes down. But what they forget, or what they don’t properly analyze is that everything’s relative. It’s a relative world, right? fiat currencies all float against each other. And the fact is, is that all the other countries are in the same situation that we are. And all of these other countries have these debts that they can’t pay. All of these other countries are having deflationary pressures. So they’re having to print currency as well. And what really unintel a new system is designed or Intel, a new alternative to the dollar is established. There’s no other place to go. Other than the US dollar, people will talk about gold and people will talk about a basket of assets or maybe a commodity backed pool. And yeah, that that’s theoretically possible, but it’s just not a reality today, at least not a reality. global leaders and politicians are ready to move to at this point. Now at some point they might be, but right now that they’re not. And so what you have is when you have a situation where the dollar is the dominant currency, all of the debt is actually demand for dollars, right? If you take if you take out a loan, you basically created demand because you have to pay that loan back. You have to service the debt, and then you have to pay that loan back in the future. Exactly. So that’s so that is demand for the dollar. And then what even less people realize is that there’s $2 markets, there’s the US dollar domestic market, and then there’s the offshore dollar market, and that’s called the euro dollar market. Now, that’s different than the euro currency. I’ve talked to a lot of people and they’ll get the euro currency, right? Can the euro dollar confused? It’s basically just dollars that exist outside the United States. And in that market, there’s at least 12 or 13 trillion that’s owed. And depending on kind of how you slice and dice it and go into the dark pools in the shadow banking system, it can easily be double that amount. So There’s an incredible amount of demand for dollars outside the United States. And when you look at other currencies, there’s not typically a huge demand for other currencies outside their markets. What I mean by that is, there’s not a whole lot of demand for Brazilian reals outside of Brazil, right? There’s not a lot of demand for euros outside of Europe, there’s not a lot of demand for Chinese Yuan, outside of China. But there is huge demand for dollars outside of the US. So when people focus on the supply of dollars, and that we’re increasing the supply via QE, and that’s going to weaken the dollar. I feel like they’re just looking at half the equation. I actually put something out the other day it was it was a picture representation of Plato’s Allegory of the Cave, where, you know, somebody’s looking at the wall, and there’s a light shining behind them, and all they see is the shadows on the wall. Right to them. That’s the whole world. Right, right. Yeah. Because that’s all they see. But the real world is behind them. Yeah. And I kind of feel like when when people

Jason Hartman 23:52
have just the light projecting the shadow, right, right. Yeah.

Brent Johnson 23:55
Right. And I kind of feel like the people that are just focusing on the Fed and the Fed programs, they’re just looking at shadow on the wall. They’re not looking at the whole world. And the demand for the dollar is so high for a number of reasons. And that in my opinion, the dollar still gonna go much higher because the demand will outstrip the supply.

Jason Hartman 24:12
Yeah, I agree. So just a couple comments that are sort of maybe interesting. One is that the thinking about the monetary system as we’ve all come to learn how it works, which is this crazy House of Cards, smoke and mirrors game of deception, and you know, you talk about magic tricks. By the way, I want to ask you about that magic trick you show in one of your presentations, because I’ll get to that in a moment. I gotta get the secret about one. It’s amazing. But we realize that money is lent into existence, this weird concept. It really takes a while to get your head around and years ago, I got my head around it, right. That’s fractional reserve banking, era thinking, but also the fact that dollar demand is lent into existence, the dollar strengthening is lent into existence, or it’s created by a taxing agency by the IRS. Right, one of those two. That’s right. So with that said, Does modern monetary theory actually work? Or is it a pipe dream?

Brent Johnson 25:16
Well, it’s a little bit about it’ll work for a while. Just like fractional reserve banking reward for a while. And fiat currencies will work for a while, but eventually they’ll fail. Now, but these things can go on for a very long time, right, like decades or centuries. Yeah. Right. I mean, there’s a famous interview with Doug Casey, who’s a longtime gobo. He’s been on the show two times. Yeah. There’s a fantastic interview with him and Phil Donahue from 1980, where he goes through and lays out all the reasons that the dollar is going to fail. And he’s absolutely right. They will, but this is 40 years ago, right? Or 50 years ago, and it just ended. And it just hasn’t happened yet. So I think he’s right. I think it eventually will happen. But the point is, is these things take a long they can take a lot longer than you think that they can. I think the modern monetary theory is it’s really just the next step in, you know, socialized government socialized spending, we’ve kind of gotten to the end of the Keynesian monetary game, you know, the debts are so big now, it’s just almost impossible to continue this game. And so I think the mmt is just the natural progression. And I really, I hate the idea. Yeah, it’s coming. Right. And you better just prepare for it. Yeah, no, I agree

Jason Hartman 26:24
and so’s universal basic income that’s coming to you if he asked me and all this stuff. Yeah.

Brent Johnson 26:28
The one thing I want to make clear to everybody is when I explained my dollar milkshake theory, and that I think the dollar is going to get stronger. I think the United States economy is going to dominate the rest of the world over the next four or five years. This isn’t the American exceptionalism argument. This isn’t. This isn’t an argument that we deserve it or that we’re worthy of it and that we’ve done better than everybody else. That’s not it. It’s just

Jason Hartman 26:49
a practical argument.

Brent Johnson 26:50
It’s just a practice. It’s just the way it is. And I don’t necessarily like it, but but it you know, you shouldn’t necessarily invest for the way that you want things to be. You should invest for the way they’re going to be. And I just think this is the way it’s going to be

Jason Hartman 27:02
right. And speaking of not liking it or not being fair, the thing you didn’t mention is that the major product of any government is its currency, in my opinion, at least. And the way to force your product onto buyers, if you will, is to have the biggest military the world has ever known. That’s the reason that, you know, among what you said, and that is the reason that the dollar is going to be the reserve currency for a lifetime. It’s just not going to be displaced very easily. Yeah, we can we hear about Russia and Brazil are trading outside the dollar or China or whatever. You know, these are like little things. They’re just not a big deal. Yeah,

Brent Johnson 27:45
yeah. I mean, again, the reality is, is that I said there’s several characteristics of this straw that we use to suck up the rest of the world’s capital. The US military is a very big one. Global reserve currencies are taken there, they’re not given. We’re not going to just hand it over. Somebody would have to take it from us. And I just don’t see anybody that’s able to take it from us now. And then people will come back to me and say, well, the US hasn’t won a war and 50 years you lose every war you enter. Well, I think that’s a little silly to say that.

Jason Hartman 28:12
I think that’s kind of like, that’s kind of like litigation, it’s hard to really understand who’s winning and losing, even after a verdict. A lot of times, there’s a lot of stuff that goes on behind the scenes. So winning and losing artists obvious as it might seem right when

Brent Johnson 28:27
they show the Superbowl and you know, the Jets are flying over and they’re singing the National Anthem, and they say, coming to you from 180 military bases from around the world. Yeah.

Jason Hartman 28:36
I think you might be winning. Yeah. This will be continued on the next episode. Thank you for listening and happy investing.

Jason Hartman 28:51
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