Jason Hartman discusses inflation, the trade war, and economic lag. He brings on in-house economist, Thomas, as they discuss few charts on home sales, inflation, and mortgage rates. They explain the urgency of planning for the next recession now and how to do so.
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. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:52
Welcome listeners from around the world. This is your host Jason Hartman with Episode 1060 810 68. Thank you So much for joining me today. As I am coming to you from Florida Yes, I am back in Florida, and actually in Boynton Beach at the moment, I always thought that was a funny name for a place. I don’t like that name very much. Just kind of, I don’t know goofy. Anyway, I’m here. I flew into Fort Lauderdale last night. Wow. After being in Salt Lake City and Denver and most especially beautiful Aspen. I was in Aspen for 10 days. I was gone for 20 days all together on this trip. I tell you Florida, I thought it would have cooled off by now. It’s not cool. And guess what? I got here just in time for a very first occasion for me, right? This is the first I’m new at this. I’m new at this. My first hurricane yes what an adventure. My first hurricane is coming our way should be here tomorrow. From what I hear. I’m heading over to a speaking engagement in Tampa, Florida. They say that Tampa might have perilous, deadly 12 foot storm surges. Wow, that’s pretty scary. I hope that doesn’t happen and I hope everybody’s okay. Yeah. Wow. That’s I don’t mean to make light of hurricanes because this is no laughing matter really isn’t hopefully, Florida will get through this one okay. A lot of people have evacuated in the panhandle area. As you may know if you are a regular listener, you know that I absolutely did. I love weather phenomena. I don’t know why ever since I was a kid, I’ve always I’ve always looked up at the sky been very interested in the weather. It’s quite fascinating to me. So this hurricane thing even though it can be devastating, obviously, is kind of morbidly fascinating for me. So this will be my first one. Hope that everybody makes it through this one, okay. They seem to be prepared. Hopefully it will be no major event. No major event, hopefully. But if there ever was a time in the economy to be talking about major events, it’s probably now. And that’s because we haven’t had a major event yet. Things have obviously been booming for a long, long time. And I’m going to have one of our economists on the show today. And we’ll have that in a few minutes. And then I will come back on after that, to discuss more important things that are in the news and going on in the real estate investing world. But this is really an important time to be thinking about the economy to be thinking about the next recession. I want to help you prepare in advance. Yes, I think we got a few years left of nice, nice smooth sailing, but we do see signs there are signs, warning signs, let’s talk about them in advance. And let’s be prepared and let’s go get through this next cycle, which will inevitably come nobody knows exactly when, or how severe it will be, or what will happen. And you know, where there’s always like, you know, it’s certain sectors of the economy, right. For example, last time, of course, it was the mortgage meltdown. And then the second phase of the Great Recession. I’ll just call it the Wall Street scams, you know that it was I predicted the first phase of that quite easily. Many people argued with me, as I was predicting that in 2003 2004, I knew that would come to an end, I knew the mortgage lending was way too liberal way too liberal. But I did not know the shenanigans of those crooks on Wall Street we’re up to behind the scenes, because I am not an insider in the modern version of organized crime known as Wall Street. Okay, so interesting article speaking of walls, In the Wall Street Journal, and this is about how the jobless rate, of course, and I mentioned this on the last episode, is it what a 49 year low. I mean, anybody who wants a job can have a job. We’re basically for all intents and purposes, we are at full employment, full employment. And hey, I got to tell you, we have been hiring people, one of whom you’ll hear about in just a moment, you’ll hear from him like crazy the past several months, you know, the last several months in my career have been incredibly busy, incredibly busy. And, you know, I’m maybe I’m a glutton for punishment. I don’t know, sometimes it gets a little too stressful. But it has really been an exciting time in a lot of ways. Because even though I’ve had some real challenges lately, some tough stuff has happened to me. A lot of great things too. You know, I Really, it’s kind of been a bit of a kick in the pants and I got really quite engaged in a lot of things. And it’s, it’s been fascinating. One of them is my general studies. I’m always studying things for you so I can share them with you. But I’ve been doing that, like tenfold recently, more studying than usual. And more working than usual. So I’ve been working pretty hard lately, folks. Thank you for the pat on the back. I do appreciate that. So this wall street journal article as the economy is booming, the Trump boom is underway love him or hate him. I did say he’d be good for the economy. And hey, I was right again. I’m wrong about a few things. One of them being interest rates, you know, that been terribly wrong and interest rates. And we’re going to talk about interest rates versus home sales in just a moment with our in the house economist with one of them here. But this wall street journal article is quite interesting, because it talks about the comparison of 1960 That, of course is the year we landed on the moon, Neil Armstrong landed on the moon, and Buzz Aldrin, was there with him. And for those of you who think it was filmed in a Hollywood movie studio, hey, you might be right. I always thought that was the wackiest conspiracy theory ever. Like we didn’t land on the moon theory, until I watched a documentary about it. And I must admit, I was swayed into thinking, maybe that was a big scam. Who knows? Who knows? I really don’t know. I don’t believe in too many wacky theories, but there are some realistic conspiracy theories. And I do believe in those. Remember, as I always say, the United States of America was a conspiracy against Great Britain against England. Right. And that was, that’s a conspiracy. Okay. You know, don’t you think the folks over there in Europe are thinking Oh, they were conspiring against us. Of course they are. That’s a conspiracy conspiracies are All over the place. But some of the theories are a little wacky. I thought the moon was kind of wacky. But anyway,
Jason Hartman 8:05
1969 we landed, in theory, at least two guys on the moon, right. And the civilian labor force at that time consisted of about and these are seasonally adjusted numbers by the way, of about 75 million people. In 2018. It’s more than double that around 160 million people. The labor force participation rate, okay, was about 60%. It’s about the same now. Not really any difference. Okay. average hourly earnings, seasonally and inflation adjusted. Now, the problem with inflation adjustments, as you know, is they are misleading because the official statistics are never the reality. They always understate inflation. And I’ll tell you when we did a show on this before and I played Several very important clips, I believe one was from Tom keen on the economy, Bloomberg. And that was quite interesting. And it talked about how in the late 70s when inflation was, well, we had, it wasn’t just inflation, it was stagnation. It was the misery index, right? The Jimmy Carter disaster, right. But it wasn’t all his fault. He inherited some of it for sure. They always do nothing new there, Obama, everybody inherits something. Okay. From the prior guy. We had the misery index, things were tough. They were bad, right? At that time, that was really when the powers that be started manipulating the inflation numbers. So up until the late 70s, or even the mid mid late 70s. I’ll say about 78. I can’t remember exactly 1978. The inflation statistics were probably pretty reliable. But then They became rather hokey as they are now because they keep adjusting. Now, you know if you’ve been to any of my live conferences and I hope you’re joining me for the one coming up in Hawaii, you know that inflation statistics are manipulated, how many ways 123. Right. waiting. hedonic ‘s and substitution waiting hedonic and substitution. You’ve heard me talk about that before. No need to repeat them now. But that’s the three major ways they manipulate the stats to fool us into believing things are different than they really are. Okay, average hourly earnings are about the same as they were in 1969. inflation and seasonally adjusted fact they’re slightly higher now, but remember, that’s goosed, or juiced or whatever the right word is, with the manipulation of the consumer price index, and or the core rate, different things I’ve taught you about that before. We won’t Go and do it now. But those are the two most widely used inflation barometers. Okay, the consumer price index, the 12 month percentage change in that index in 1969 was 6%. pretty significant, pretty significant. But of course, now, they manipulate the numbers more, right? And so they say they tell us they want us to believe that right now, it’s about two and a half percent. And I would argue that it’s quite a bit higher than that in real terms, but maybe not as high as 6%. depends who you talk to. We all have our own personal CPI, our personal inflation index, depending on how we all spend, right? The 10 year Treasury yield, monthly average back then was just under eight, and now it’s about three. Okay. The Fed funds rate the effective rate back then in 1969, landing on the moon or at a Hollywood studio. Just under 9%. And now, right about 2%. So just a comparison. And there’s a lot of talk about a comparison of the way things are now to a comparison of the way things were in the late 1960s. Okay, I’m going to come back in a moment. But I want to play a short clip here, a talk I had with our economist, I just think this is interesting stuff, talking about interest rates versus housing sales. Now remember, this is all national, and they’re not segmenting. And they don’t consider the three types of markets linear, cyclical, and hybrid, blah, blah, blah, right? This is just macro macro macro stuff. So let’s talk about that. And a couple of other things, and I will be back in a few minutes right after this.
Jason Hartman 12:58
It’s my pleasure to welcome economists Thomas young, he is a PhD economist with 15 years of real world experience. He works with the Utah legislature, and he’s an expert in econometrics and big data. Thomas, welcome. How are you? I’m good, good, good. It’s good to have you on the show. You’ve done some good research for us. And I’m looking at some of the graphs that you’ve created and so forth here. Very interesting stuff as we study the effect of interest rates on home sales. And of course, we, you know, as we’ve talked about, and all my listeners know, home sales cannot really be called one big monolithic thing with you know, 383 essays and metropolitan statistical areas. It’s such a tongue twister in the country, almost 400 markets. As you know, I divide them into kind of like three categories linear, cyclical, and hybrid. But that said, we do need to look at the broad big picture because most of these studies don’t segment this stuff down very well. As we compare the 30 year mortgage rate to existing home sales Thomas, what does that tell us? You’ve got some interesting stuff here starting in maybe 2012. Especially.
Thomas 14:12
Yeah, so when I looked at the relationship between the 30 year mortgage rate and a broad measure of the number of existing home sells sold across the United States, the relationship is inverse, meaning that when mortgage rates go up, puts downward pressure on existing home sales. It looks like the lag between when mortgage rates rise and when home sells into drop is around three to six months, it can go up to nine months. I think the recent rise in the 30 year mortgage rate is just now starting to get priced into the existing home sales arena. It wouldn’t surprise me if mortgage rates stay where they are or if they continue to rise. This existing home sales Maybe go from the turn 5.34 million to perhaps as low as 5 million, which is, as horrifically It’s okay. It’s not real strong. It’s just okay.
Jason Hartman 15:13
Now what I’ve noticed, and I’d love for you to comment on this Thomas, it’s kind of counterintuitive. And I’m now into, well, I don’t want to say it in years, but I’ll say it in weeks 1700 and 26 weeks in the business so far, I think it’s a long time. What I’ve noticed over the years, is that when rates go up initially, that actually counter intuitively has the effect of making the market much busier and making people buy because there there’s this fear of loss. This you know, FOMO fear of missing out as they say, right, and so people jump in and buy, buy buy, but obviously that can’t last spike a caffeine injection. Initially when rates go up, people make decision It causes them to get off the fence. But then ultimately, it has the effect of slowing things down. So you say that the lag time is three to six months, maybe even up to nine months. Is that correct? Yes. Can you dissect that a little more elaborate on that a little more? I mean, I mean, it was nine months in when we’re looking at your graph here was nine months in this first spike in What 2012? Right. Yeah. So back in 2013, when rates begin to rise, the existing home sales market continued to rise for nine months until the peak in September and then and then they started to decline and they declined for about five months until February 2014. And that’s when the 30 year mortgage rate began to decline again, then home sales picked up right and remember here, we’re talking about all three types of markets, all all nearly 400 essays, so it’s just the samples are just too darn broad. Because what we’re seeing In the low priced linear markets, the spike in rates, I mean the market is just it’s booming. It’s just no inventory. It’s unbelievable how tight it is. But in places like where I grew up in Los Angeles overpriced cyclical markets that have been really overpriced past the point of fundamentals for several years now, or any high priced cyclical market, definitely, we’re seeing some softening Orange County where I live most of my life as an adult in Newport Beach area, very soft in those cyclical tight markets. So in the future, when we have you on the show, I want to divide this up as best we can, and really kind of parse it into cyclical linear and hybrid markets, if at all possible, but Thomas, take us up to now the next big arrow on your graph is 2017.
Thomas 17:54
Right? Yeah, mortgage rates started to rise in September 2017 and in November For 2017 existing home sales teams, they’ve been kind of trending slightly downwards since then.
Jason Hartman 18:07
Interesting, interesting stuff. Okay, let’s go to another thing. And let’s talk a little bit about one of my favorite subjects inflation, as my listeners know, and as you know, too, I talk a lot about inflation induced debt destruction and the actual benefits of inflation to investors, which are pretty significant. And inflation has been pretty mild for the last several years, at least according to the official stats. But how does it impact the overall economy in GDP and just general sentiment growth?
Thomas 18:40
Yeah, inflation generally eats away at the value of assets. You know, the higher inflation is usually that means lower GDP growth in the coming years. Right now inflation’s floating about 2.7% year over year. That’s the CPI. You are Consumer Price Index for all urban consumers. Inflation is the hottest it’s been in seven years. Although in August, it does look like rather than inflation has peaked, we might see some disinflation in the coming months. Okay. So you believe inflation is
Jason Hartman 19:17
Pete? Now what about I mean, we could not have this discussion in a vacuum without discussing the trade war, as they call it. Right. So now that has two interesting effects. That on the negative side and the one the media reports on most it makes the price to American consumers of lots of things, everything that you know, at every store and every you know, car, it makes those prices increase, because a lot of those materials are obviously important, but it also makes the unemployment rate a lot lower and causes wage growth. Maybe you disagree with any of that. So feel free to pick that apart and unpack that a little bit. But what does the trade war mean? inflation in your eyes.
Thomas 20:01
Yeah, it certainly means higher prices for consumers. I was surprised that dollars been as strong as it has been, and that with a stronger dollar
Jason Hartman 20:11
and puts downward pressure on inflation. I think that’s one of the reasons inflation has not picked up like someone expected one, right. The thing though, when you talk about currencies is it’s all relative, right? It’s every currency, it’s Fiat. And it’s all a race to the bottom right, ultimately. But yeah, you know, Trump has talked a lot about China artificially suppressing
Thomas 20:33
the value of their currency to increase exports. Right. So the opposite effect. If there is weaker, the dollar is stronger, relatively speaking. Right. So talk to us about how that plays into the whole picture. I mean, I think Trump has a point that Chinese policymakers have artificially deflated their currency to boost exports in relation to the dollar. You want certainly as well. More than probably what it should be a stronger dollar puts downward pressure on inflation relative to trading partners. Do you know what’s making Chinese goods sold to the US less expensive as well? I haven’t seen yet a big drop in imports to the United States. So I don’t think the tariffs are having a, you know, a material economic impact on the Import sector or on the manufacturing sector yet.
Jason Hartman 21:31
Well, it’s still pretty early, right. And when we talked about our first issue today, and we compared interest rates to home sales, you know, there’s a lag time right, we discuss that. So the question is, in the trade war, how long does it take to get the feedback? See, the problem is with all of these things, there’s a lag time and the feedback doesn’t come instantly. Any thoughts on how long that lag is? And when we see that feedback? Oh, it wouldn’t surprise me. It sucks. start showing up in the October November numbers. Small Business optimism came in a little bit weaker this week. Yeah, a year, it’s a little bit weaker across the globe. It looks like you know, economies are slowing down a little bit. I wouldn’t be surprised if we see it with the numbers in the next couple months. Mm hmm. Well, Thomas, thanks for joining us appreciate it. And we will look forward to doing some other studies with you and kind of dividing things up and unpacking them a little bit more than the mainstream media does, especially in terms of linear cyclical hybrid real estate markets. I think that’s very important. And you know, the old saying, folks, all real estate is local. So keep that in mind and we’ll look forward to talking with you in the future. Thanks again. Okay.
Jason Hartman 22:55
I hope you enjoyed that little segment and a little talk about a few elements of the economy You know, this is so important as real estate investors to understand what is happening and adjust and adapt our strategy to the powers that be, you know, I say don’t try to fight it align our interest with the most powerful forces the human race has ever known governments and central banks. We are merely players, performers and portray errs as Shakespeare said, right, each another’s audience and they are the masters and we’re the puppets on the strings. Right? So we want to align our interests with these most powerful forces. And these parallels between now in the late 60s are really maybe interesting and ominous, not ominous, but they’re just interesting. This article also I believe, this one is from the Wall Street Journal. I can’t say for sure, because I cut it out of the paper. And I don’t know. Yes, we’re not looking online. This is not a web sight. This is the good old fashioned newspaper which you have to admit, at least I really enjoy the format of a good old fashioned newspaper and magazine and paper book once in a while, this stuff has been slow to go away. It’s not a dinosaur yet. Anyway, a little part of this article, it says, The 1960s were a period of falling unemployment. So in other words, the job market was getting better right for the first part of the decade, low inflation. But in the mid 60s, wage growth and inflation began to ratchet higher. The inflation rate went from 1.9% at the end of 1965 to 5.9% at the end of 1969. Now, I don’t know about you, but that’s a shocking difference, right? It basically tripled, it tripled, the inflation rate tripled. And this ostensibly before fingers are as manipulated as they are now. The Fed didn’t act forcefully enough early On to counter that inflation he’s talking about right. By 1969, it had finally decided, and it ratcheted up the overnight rate. That’s the overnight rate where banks borrow from each other right, from 6% to 9% that push the economy into recession and lead to a 36% fall in stocks. It was a lesson in the dangers of central bank complacency. So now we have and I hate central planning. Yes, philosophically, right. But that’s the way it is. That’s what we’ve got. We’ve got the Fed trying to pull the strings and run the economy, this managed economy. I think the market should manage the economy. I mean, it’s much better idea but we don’t have that right. So the Fed this time, the most transparent fed, I believe in my adult life, certainly, right. I mean, Greenspan, well, Volcker Greenspan, there was another guy in there for like a year. I can’t remember his name and then Of course, Bernanke Yellen. And now Powell, right. So this time, we have a very activist Federal Reserve, and a very transparent Federal Reserve now one the toxin code and hieroglyphics the way Alan Greenspan did. So they are very forthright about exactly what they’re doing. They’re going to raise rates, they’re going to raise them several more times. Get ready, stock up on those cheap, fixed rate mortgages. And if you think they’re too expensive now, just wait, remember, remember, it takes a while to work its way through the system. But if you’ve been to any of my live events, where I talk about in depth and show the graphics for the three dimensions of real estate, I call it the three dimensions of real estate. There’s really more dimensions than that, but that’s just my nickname for it, you know, in my teaching, that these things there are correlating and non correlating indicators with his stuff. So when rates go up, what does that do? Well, other investors tend to not get into the market, they tend to not buy investment properties, right. So that reduces the supply of rental housing. At the same time, you have renters who cannot get into the buying market, because they’re now priced out because of affordability problems that get worse and worse. And so they stay in the renter pool. And that means increasing demand for rent for rental properties, right, and ultimately, supply and demand the curve meets. And then you have a simple situation, or you see extreme upward pressure on rents. But like everything, it takes a little while to work its way through the system. And this is why it’s so hard for governments and central banks to try and be planners. It’s a mess. It just doesn’t work. And it doesn’t work because they’re always looking in the rearview mirror. They’re always looking in the rearview mirror. Mirror. I mean, none of us could plan very well, if we were just always looking in the rearview mirror, it’s very tough to do that. They have to wait a long time for this feedback loop to come around and tell them what their actions yielded from a year or two years earlier. Very, very difficult job. You don’t want to look in the rearview mirror. So over the next few years here on the show, I want to help you and at our live events, of course, I want to help you plan for the next cycle, the next recession, it will come. Nobody knows exactly when, but it will come and we’re going to help you be prepared. So stay tuned for that over the next few years, for sure. Go to Jason Hartman comm check out you can type in three dimensions of real estate in the search bar there. Also register and join us for our Hawaii profits in paradise conference and our venture Alliance retreat in Hawaii immediately following that, love to see you there. That’s it for now. Thank you so much for listening. And Until the next episode in two more days, happy investing.
Jason Hartman 29:15
What is the sort of the one trick, the hack, the secret that really empowers people to success. And I think at the end of the day, it’s leverage, because leverage helps you do more with less. I’m Jason Hartman and I’d like to invite you to our very first two day conference in beautiful Hawaii, Waikiki Beach. We are at the most iconic resort on Waikiki Beach. Many of our attendees are making a vacation out of this event. It’s in the first week of November, perfect time to go and you will learn about short term rental properties, long term rental properties The most innovative strategies for real estate investing available today. You know, I purchased my first rental property at age 20. And since then I’ve been involved in almost 10,000 real estate transactions. I’ve made the mistakes, and I can help you avoid the pitfalls. Many of you have attended our conferences over the last 14 years. And this one is a totally new event. If you’ve been following my podcast and my work, you know, that I have unique strategies, not the same, half baked, warmed over stuff you hear from other real estate speakers out there. We have helped thousands of people invest in properties around the us and we can help you do it to come and meet our local market specialist come and learn about insurance about financing, meet other investors and what a beautiful environment to do that in beautiful Hawaii on Waikiki Beach. Also, we have a mastermind retreat, right after that Beautiful Hawaii, many of our attendees are bringing their family. So I hope you’ll join us and happy investing.
Jason Hartman 31:15
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