Introduction:

Mike “Mish” Shedlock is a renowned economic blogger. He joins the show to discuss how expensive real estate has gotten because of the Federal Reserve and government policy.

Mike Shedlock / Mish is a registered investment advisor representative for Sitka Pacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Key Takeaways:

(3:34) Introducing Brian, a local market specialist from Little Rock
(6:13) Why Little Rock is appealing to investors
(15:55) Discussing an actual Little Rock property
(21:25) Introducing Mish Shedlock
(22:03) Conversation opens with discussion of current geopolitical conflicts
(31:28) Why the reserve currency status is a curse rather than a blessing
(39:53) Predictions & outlook on the economy, inflation
(41:01) Outlook on the real estate market
(46:44) Closing comments

Links:

Read Mish’s blog at http://globaleconomicanalysis.blogspot.com.
Visit Sitka Pacific’s Investment Management Page to learn more about wealth management and capital preservation strategies at www.sitkapacific.com.

Audio Transcription:

ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, this is episode #403, 403, and our guest today will be Mish Shedlock. You’ve certainly heard his name, I’m sure, in economics circles. Mish is quite a big deal. He’s a big name out there, and has some interesting insights. I certainly don’t always agree with him—I don’t always agree with anybody. But he’s got some interesting insights on the economy, and I wanted to bring him back on the show for the second time today.

But before we do that, one of the things we really pride ourselves in is sort of a twofold thing. Number one, it’s not being committed to any market with any physical presence. Unlike the national real estate firms, and many of our competitors in the investment sort of cottage industry of the business, we do not open offices in any particular location. And we do not have any long-term commitment to a market. And that may sound, on its face, flaky or something. But there’s actually a very good reason for it. And the reason is, is because we want to be area-agnostic. And that’s one of my 10 commandments of successful investing, is to be area-agnostic.

So, what we do, is we form relationships with our boots on the ground people, that we call our local market specialists. And if the market changes in a particular geographical area, as it always does, and always changes over the years, we will move in and out of recommending that market to people based on that, and because we don’t have a team on the ground that we’re paying for, and we don’t have an office in that market that we’re paying for, it allows us to be area-agnostic. And not be strongly committed to that market.

Now, you may be thinking, well, Jason, what about all your investors that you tell to buy in a market, and to buy and hold, because that’s your philosophy? Well, they’re covered, no problem, because we provide rental coordination and management support of their properties for life for free. And we continue to maintain the relationships and help the investors who have stabilized properties in a market, but there might be a time when we tell new investors not to enter a market if it’s oversaturated with investors at any given time, and it’s very hard to rent your properties, for example—then we would stop recommending that market, until it becomes more equalized, and there’s a better equilibrium there, and it’s better for investors to enter the market. If they have a stabilized property in that market, heck, just stay there and milk the property for cash flow, and enjoy the excellent returns you get on those properties.

Introducing Brian, a local market specialist from Little Rock

JASON HARTMAN: But entering a market and staying in a market are two completely different things. With that said, I wanted to introduce one of our local market specialists, our boots on the ground people, from Little Rock Arkansas. And that is Brian. Brian, how you doing?

BRIAN: Hey, I’m doing great, thank you.

JASON HARTMAN: You didn’t know I was going to say all of that stuff before you went on today. If you have any comments, or thoughts, or feelings about that, let me know. You probably didn’t like hearing some of that stuff, I bet. Hey, you’re not committed to this market? You’re not gonna refer business to me for life? No, we’re not, we’re only going to do it when it’s good.

BRIAN: I think that’s fair. And absolutely…I think that’s part of the analysis that any investor needs to make on a market, and take a fair look at it, and if it makes sense, then, you know, that they should move forward with it, and if it doesn’t make sense then they shouldn’t. But I think Little Rock is the case that it does make sense.

JASON HARTMAN: It definitely makes sense right now, and I tell you, we’re having a tough time keeping inventory in your market, and you know this all too well, because we’ve got a property tour there coming up at the end of September, and a whole bunch of our people have been purchasing properties from you, and some have been flying in to see you in advance of the tour to pick up the deals! So, we asked you, in about ten days, to start holding properties back for the tour. I want to talk about Little Rock in general, and, you know, why it’s appealing to investors, but I just wanted to ask you first about kind of what’s going on there with people buying, and the struggle to keep inventory.

BRIAN: That’s a great problem to have for us, but yes, it’s been a challenge to get enough inventory here and hold it. Like you mentioned, we had an investor here yesterday from Atlanta, who had been doing a property under contract, and paid her some money and sent her [indiscernible]. I’ve got two more coming in Monday as well, and another that, you know, has two properties that they’re wanting to review. So, those are challenges. And a lot of these are properties that we haven’t had for very long, just gotten them with construction completed. There does seem to be a great level of interest, and again, that’s a good problem to have for us.

JASON HARTMAN: It’s a good problem, but it’s a problem nonetheless, and it becomes challenging. It seems like with all my years in the real estate business, there’s never this nice, gentle, easy point of equilibrium. Either there’s too many sellers—when you’re in what’s called a buyer’s market—that we had a few years back of course during the financial crisis, or there’s too many buyers, and you know, that’s referred to as a seller’s market. I don’t really buy into any of those stereotypes, because there’s always an equalizing factor. I talk about that in my talk on the three dimensions of real estate. Now, there’s really more than three dimensions, because income property’s a multidimensional asset class, but the buying and selling market is one side of the market, and the other side of the market is the renting and leasing side of the market. Those two are inextricably intertwined. Tell us about Little Rock, and why it is appealing to investors.

Why Little Rock is appealing to investors

BRIAN: Little Rock as a whole—we really did very well through the financial crisis, if you want to call it a financial crisis. Our unemployment numbers, really, were better than the national average. So, it’s a stable economy here, for one. We don’t have the large ups and downs of a Las Vegas or an LA or another market like that. So, that’s one, is the stability. Two, this is the capital city of Arkansas. We have about 300,000 people here, and countywide, somewhere around a million. And so, we’ve got, as far as an employment standpoint, we’ve got all of our state government is located here. They’re a major employer. We’ve got our three largest medical facilities in the state here—Saint Vincent’s Hospital, University of Arkansas for Medical Science—that’s our med school, and that’s our largest state hospital system, and we’ve got the Baptist Health System. So, medical is a big employer here. And then we’ve got a lot of headquarters here too. There are national and international companies. So, any instability, a lot of it’s—our geography, and our location here, being a capital city, and having a lot of these businesses and headquarters centered here—those are great things. Beyond that, just our infrastructure is good, and I think as the city has grown, we’ve got some very established neighborhoods that are stable, and they’re a good mix of tenants, a good mix of residential owners that actually occupy the properties. So, we don’t have just giant rental-only areas. It’s a good mix, pretty much throughout the city.

JASON HARTMAN: Right. What you mean to say by that is, owner-occupied versus renter population. And you don’t have areas like some cities do, where they’re just overrun by non-owner-occupied, or tenant-occupied properties, right?

BRIAN: That’s exactly right. I’ll give you a quick example. A neighborhood that I really like a lot is the Broadmore neighborhood, and it’s a great example of what we’re talking about. It’s a great mix of owner-occupants and renters. You know, it’s near the University of Arkansas at Little Rock, about 13,000 students and faculty there. But the great thing about the neighborhood is, like I said, it’s a great mix, they still have an active homeowners association, it’s not a mandatory—there’s no HOA dues, or anything like that, but I like to see a neighborhood that has a neighborhood association. I like to see a neighborhood that has a neighborhood pool. I like to see a neighborhood that has an active park, and those types of amenities next door. So, that’s the type of neighborhood that we’re looking for, where it’s a good mix, there’s still a viable neighborhood infrastructure, and where there’s a good mix of owner-occupants and a good mix of tenants.

JASON HARTMAN: Now, you’ve lived in Little Rock all your life, and that is 41 years. Tell us about what you’ve seen with the economy there, and the real estate market throughout the decades, if you would.

BRIAN: I’ve been investing here myself in real estate since 1997. That’s when I bought my first rental property. So, a pretty decent spread of years. For a long time we saw a lot of depreciation, like a lot of the country did, and then of course we did have the economic downturn we experienced a few years back, and really, we didn’t lose as much value, we just kind of stayed stagnant. Again, that kind of goes back to the stability here. But you know, the city itself has grown from the downtown area. It’s mostly grown west, and it’s grown south, and some of the older more established neighborhoods, you know, that’s where we’re seeing a lot of potential for investment there. We’re seeing a little bit of turn over with the people who lived there for 30 years, and they’ve gotten to the stage in life where they may move to an assisted living facility, or a retirement facility. So, a lot of turn over in some of these older neighborhoods, which is great; we’re seeing younger families come in, and it’s also an opportunity to buy investment properties. So, in some of these neighborhoods, that’s the kind of natural progression; it’s moved west and moved south. But real estate values have stayed pretty stable, with the exception of, for a few years during the downturn.

JASON HARTMAN: Can we talk about what it’s like to be a landlord there, and what kind of a target tenant is, and what the expenses are relating to a property there? They’re pretty low. I mean, the property taxes are very reasonable, and that can be a big deal, folks; it can make a big difference. It’s funny, because of course Texas has high property taxes, but they have no state income tax, and everything else about Texas is so massively business friendly that it offsets the higher taxes. But I was talking last week with someone from New Jersey—oh my gosh! Their tax bill is outrageous! I can’t believe what they pay. And some of the California property taxes—of course, you have Prop 13 in California, which has been probably the thing that literally saved that state, when Howard Jarvis was able to successfully make Prop 13 a law in I guess it was the late 70s, I believe. Maybe it was early 80s. 78-81, somewhere in there is what my memory says. Then they figured out a way around that, because they have all of these special assessment districts, where they’ll put these bond issues, and these special assessments into the tax bill. So they’ve more than doubled the Prop 13 tax rate in some areas in California! It’s just an end run around Prop 13. So, that hasn’t worked out so well. Your expenses are pretty low there.

BRIAN: We did, we’ve got a—as I understand it, this is what I’m used to here, but what I understand compared to other markets, we do have a lower tax rate here, and they do come and do an assessment, I believe it’s every five years, and if your property has appreciated or depreciated, they will adjust it. And at no point would it rise more than 5% in one year. So even if they said, hey, your property, this last time we assessed it $20,000 additional in value, but they don’t hit you with that all at once. So from a tax standpoint, it does seem friendly. As far as our tenants here, like I mentioned, we’ve got a lot of great employers here as well, but a lot of the areas that we target, our tenants are probably going to be a working family, a lot of the time. We’ll have mom is a nurse, or an LPN at the hospital, the dad is a postal worker, I mention this as a real live example of a property I’m thinking of right now. Two kids, both in local schools. So, they’ve got a good, solid income; maybe they have got a credit score that’s not quite high enough to get a home for themselves, to purchase, but they definitely are a good quality renter that we’re happy to have there. So that’s kind of—I think a lot of people right now here are in that position—they make a good income, they just can’t qualify to buy a home. They’d be a great potential homeowner; they just can’t qualify for it right now, coming out of the recession.

JASON HARTMAN: Right. What—

BRIAN: And so, those are the guys we’re getting these days.

JASON HARTMAN: One of the things also people ask—you know, if homes are so affordable in these different markets that we recommend, why doesn’t everybody just buy? Well, you just alluded to one of the reasons. Let me give people a couple others. Number one is, we really recommend, because—and maybe it’s just me, because I’ve become very, very conservative and prudent with my money at my old age here—in your 20s you just spend everything, and you look back and think, where did all that money go? I made a lot of money! I don’t have much left! And you just kind of get sick of that and think, gosh, I gotta be a little more careful. I gotta be more conservative with my investing. So, that has definitely happened to me over the years, and so, I’m a pretty conservative investor nowadays, and I like linear cash flow markets.

One of the things I’ve noticed throughout the years, being from California, and being in the real estate business for so many years in California, is that in those cyclical markets where they have the big peaks, and the big, ugly fall—they go up and down like a roller coaster—when it’s up, everybody gets really, really greedy, and they get this gambler’s mentality, and they get really scared. It’s sort of like the take away concept; they get really scared that they’re gonna lose out on the opportunity to buy a home. In those cyclical markets, people get this—it’s really a false sense of urgency, but it is an urgency nonetheless—to dive in and buy something. You know, when maybe they shouldn’t be buying, or maybe they couldn’t afford it, or they stretched too far, or whatever, but in the linear markets, they don’t feel that urgency very much. And Little Rock is definitely an example of a linear market, as is most of our other markets around the country. So, that’s another reason.

But the biggest reason I think that these tenants don’t buy, is what I call financial immaturity. And I definitely noticed this at the start of my real estate career. When I was selling as a very young 19 and 20 year old realtor going to college part time while selling real estate in my Volkswagen Jetta—at the first Century 21, and then RE/MAX after that—when I was doing that, I would work with a lot of first time buyers, and a lot of investors, and I was selling HUD & VA repos. And I always noticed the conversation they’d have; it always was, they could live in a nicer rental property than they can afford to buy. So, they always had to take one step back to take two steps forward to get into the homeownership game. Financial immaturity is about instant gratification! People who aren’t willing to delay gratification for a bigger, longer term goal. I think that’s why most people ultimately stay in the renter pool. They can always rent a little bit nicer than they can afford to buy. At least initially. That’s definitely a factor there too. And there are other factors too…

BRIAN: I certainly agree with you, Jason. And I would say also, I’ve noticed a lot of the Millennial Generation, these people who used to be first time homebuyers—prime age, 24, 25 years old—

JASON HARTMAN: They’re burdened with huge debt!

BRIAN: They came out of seeing their mom and dad struggle in the recession, they come out of college with some college debt, they don’t want to commit to buying a home right now! So, I think that’s another thing, I think we’ve lost a lot of first time homebuyers, and I think now they are potential renters.

Discussing an actual Little Rock property

JASON HARTMAN: Let’s talk about an actual property now. I asked you to grab a property to talk about, and give investors some information, but I grabbed one while you were talking, actually. I just went to jasonhartman.com, and I wanted to talk about this one, because it’s a fourplex. And we’ve been talking mostly about single-family homes in the Little Rock market. This property is 3844 square feet. You can see it at jasonhartman.com/properties. And it’s $234,900. It’s $61 per square foot, and subject to qualifying with 25% down, it’ll take about $68,000 to get into this property, all said and done. Projected rent, $2600 a month. So, that’s more than 1% RV ratio, which is getting pretty rare, to be able to achieve that nowadays, that 1% RV ratio, is getting difficult. And this is better. This is better than 1% RV ratio. Based on all these projections, and all the expenses in there—the vacancy factor at one month per year of vacancy for each of the four units, a conservative appreciation rate, just based on national averages, your positive cash flow here is $644 per month, or, $7700 per year, getting the investor a cash on cash return of 11% annually. So, that’s about 1100% better than you’re gonna get in a CD in the bank. Assuming you can even earn 1% anymore. I haven’t checked lately. It’s so low it’s not even worth checking nowadays. When you include all the multidimensional aspects of an income property investment, your return is projected at 36% annually. 36% annually! And you’ve got four units here, so if one goes vacant, you’re only 25% vacant. Just wanted to get your thoughts on this property, and then if you have another one you want to mention, go ahead.

BRIAN: I really like that property. Like you mentioned, I mean, we don’t see a whole lot of multi-family, but this one is—so, we try to be discerning when we find a multiple-family unit, in those that still meet all our criteria of being in a quality area, and being a property that’s going to be desirable for renters, and this one certainly does. This particular property, it’s not in an area where there’s a whole lot of multi-family. This area is primarily anchored by a very large, large sprawling single-family area of town that’s very well established. This fourplex, I believe, was built in the late 1970s, and so, most of the neighborhood around it was as well. But this one particular street in this neighborhood has several multi-family units on it. But other than that, it’s all single-family as the base of its area. So that, to me, is desirable, but all that single-family—because all that single-family really adds lots of stability to an area. So, that was an excellent thing. Another thing is just the geography here; where this property is located is further on the western side of Little Rock. As I mentioned earlier in our call, Little Rock has grown from its central core downtown, it’s really kind of grown west. And so, that’s where we find a little bit of our better shopping. As we go west, a little bit of our higher income, household ratios, some of our better shopping, it’s some of our better amenities, and that sort of thing. So, this is certainly what I would call west Little Rock. It does have some of the things that are really appealing, but the unit itself, it’s got great street appeal, it’s got a lot of great neighborhood amenities that are associated with all of that single family neighborhood that’s around it, and it’s got great access, basically some major travel arteries through town. So, those are the things I really like about it, and I think those are the things the tenant will like about it too; what will make it attractive.

JASON HARTMAN: What are we going to see on the property tour? I know you don’t exactly know yet, but you are rehabbing some properties now in anticipation of the upcoming tour, and you’ve gotta start holding properties off the market soon. Our policy is, people on the tour get first shot, okay folks? That’s the deal.

BRIAN: Absolutely. I mean, we’ve got some other great areas. I think I mentioned some of the medical centers earlier that are also large employers. One of the properties we had that is there on your left side, and it’s in a great area, it’s getting very close to one of the largest medical centers there, which is probably the premium medical center of the area. So that’s a big anchor. It’s also very close to that west Little Rock kind of border, and all of the great shopping and amenities that are out there, so I’m really excited about that one. We’re doing a full makeover on it. And that’s physically what we do here. This one in particular is going to end up with granite countertops. It’s going to have all new tile surfaces, all new carpet in the bedrooms, it’s gonna be getting a new roof, it’s gonna be getting a new HVAC, I believe it’s even going to get a new hot water heater. That’s typical of what we do on a renovation here; we really do the work. So we really feel—people ask us, why did you put granite countertops in a rental unit? Well, quite frankly, it attracts much better tenants. And none of our competition in the market for rentals is doing that. So, we really feel going a little bit of the extra mile and making these units really stand out, really brings in a tenant that has—not—they don’t own the home, but the next best thing, the pride of ownership. I mean, they really are proud of their home. And so, that makes a big deal here. So, anyway, that’s gonna be one that’s on the tour, along with several others; we’re going to have a lot of those same renovations and upgrades done.

JASON HARTMAN: Any closing comments before we get to our guest, Mish Shedlock?

BRIAN: No, that’s all! Thanks for having me on.

JASON HARTMAN: Okay, appreciate it! And we will be back with Mish Shedlock, in just a moment.

[MUSIC]

Introducing Mish Shedlock

JASON HARTMAN: It’s my pleasure to welcome Mish Shedlock back to the show! His real name is Mike Shedlock. So, Mike “Mish” Shedlock. And he is a registered investment advisor with Pacific Capital Management, and he writes a fantastic highly read blog entitled Mish’s Global Economic Trend Analysis, and I’ve been following him for many years. He’s been on the show before, and it’s my pleasure to welcome him back. Mish, how you doing?

MISH SHEDLOCK: Pleasure to be back on the show. The easy way to find me is just do a Google search for Mish, that’s my nickname.

Conversation opens with discussion of current geopolitical conflicts

JASON HARTMAN: When you have a distinct name like that, it’s easy to find you. There is a lot going on in the world. We’re going to talk about the dollar, we’re gonna talk about inflation vs. deflation, we’ll talk about real estate values, but since it’s so in the news now, Ukraine, Russia, Israel, Palestine, some geopolitical things we just would be remiss if we didn’t kind of start with that.

MISH SHEDLOCK: Oh, I think that’s an excellent place to start. And there’s economic ramifications of these things too. This is not just a localized thing here where Ukraine and Russia are battling this thing out. There are major economic forces here. Germany is a huge trading partner of Russia; the US is pressuring Europe to put more sanctions on Russia. Well, that’s kind of easy for Obama or McCain or anyone in the United States to say, just do it, when it’s Europe that’s going to bear the brunt of this. France is already protesting some of the things. They’ve got agreements to sell some weapons systems to Russia, of all things, and they want to go ahead through that. Chancellor Merkel in Germany is resisting more sanctions. Why? Because Germany and Russia are pretty huge trading partners, and cancelling some of those deals would actually hurt Germany far more than Russia. So, as I said, France came to the same conclusion; cancelling equipment deals to Russia is certainly going to hurt France more than it is Russia.

JASON HARTMAN: Well, we always know historically, Mish, that you can never count on France to be a good friend.

MISH SHEDLOCK: Yeah, yeah. France doesn’t want to do—

JASON HARTMAN: They’re not into loyalty.

MISH SHEDLOCK: They’re not into doing what Obama wants them to do. And hypocritically so, actually, had it not been France but some other country that had that deal with Russia, you can bet your bottom dollar France would be making a stink about some other country not cancelling that sale. There’s hypocrisy everywhere you look. Going through the geopolitical side, we see a mad rush to judgment. Literally by all the mainstream media. No one’s looking at any evidence. McCain and Obama have both—the republicans and some democrats alike—have come to the conclusion that Russia and the rebels are guilty, but I believe that it was most likely done by an accident. An accident by who, I don’t know. Ukraine’s possible, Russia’s possible, although I doubt it. The rebels are possible. And then, today we saw an accusation from Ukraine, that Russia did this on purpose, which I think is an inane accusation. Russia had everything to lose, nothing to gain from this. The only country that had anything to gain by doing this on purpose is actually Ukraine. So, I sorted through the possibilities. There’s a lot of evidence there now, that has come in, that says, this plane just didn’t blow up, or just didn’t crash, that a missile did hit it. It could have been a surface-to-air missile, it could have been an air-to-air missile, the latter could only have come from Ukraine. Even if the rebels did it by accident, there’s some conflicting reports here about Ukraine military flights in the area. Was that done on purpose? There’s some air traffic control anomalies from Kiev. A lot of variables here.

JASON HARTMAN: Okay. So, let me—we talked, Mish, at first about the serious economic impacts of some of this geopolitical stuff. We’ve got listeners in 164 different countries. The vast majority of them are in the US, or Canada at least, but all over the world, certainly. What does it mean mostly to someone in the States? In the US?

MISH SHEDLOCK: If Germany slows, that’s going to slow all of Europe. Europe’s trade with China is going to slow. China is slowing on its own accord. Right now, and this is so funny, because it’s quite the opposite of what some people thought. If you remember the scenarios in 2007, 2008, that China was going to decouple from the rest of the world, and keep on growing—I debunked and challenged and was correct, that China was not going to decouple from the global economy. I would suggest the same thing is true now in reverse. The US is not going to decouple from the global economy if China slows, if Germany slows, if the UK slows. That’s the implication here. And as we look through the US jobs numbers, everyone’s been touting them up, and very few people have actually managed to dive into the details of actually what’s happening there. In the household survey last month, it appeared that we created a couple hundred thousand jobs. If you actually go through the report and look at it, we lost close to a half a million full time jobs, and gained massive numbers of part-time jobs. Now, is that just a one-time anomaly? Or is something else going on here? Certainly the household data has been way skewed compared to the mainstream media jobs report, and to find these things, all one has to do is go through the report. There’s no conspiracy here. The government puts out all this data. Mainstream media reports on it one way, ignores the rest of it, and oddly it is ignoring the critical piece here, especially in regards to part-time jobs.

JASON HARTMAN: The unemployment figures are so maligned. The inflation figures are so maligned. Everything is just maligned, to make the government look better than they are, to keep the people at rest, to provide bread and circuses. I mean, it’s just unbelievable, how many highly overqualified people you see working menial jobs. You know Mish, it hit me again. I mean, certainly I’ve talked to people working at Starbucks who have college degrees, masters degrees, probably there are quite a few PhDs. It shows how misplaced our resources are in the current economy. You know, an Uber driver driving me in a town car a month ago, I was talking to him, you know, what else do you do besides drive a car for Uber? And he says, oh, I was an investment banker. I worked on Wall Street. I’m like, what are you doing doing this now? A couple weeks ago a lady came to clean my house, and she said she was an accountant. And you’re cleaning houses! English speaking, American, not an illegal. It’s just—it’s just unbelievable, the way this is happening. But, I do think there is a bright side to it, and that is that so many more people nowadays know that they can’t depend on the establishment. I think they’re realizing that college, in many ways, is a bit of a rip off, and they’re just being much more entrepreneurial, and I think that’s leading to a lot of innovation. I’m certainly excited about 3D printing, and just all of this technology that’s coming out. It’s just gonna make the world an amazing place.

MISH SHEDLOCK: There is a lot of technology coming. And there’s two ways to look at that. I tend to agree with you that this is a positive kind of thing. That doesn’t necessarily mean it’s positive right now. I mean, certainly you look at the cost of education versus what someone’s gonna get out of that when they take their job, unless they’re on some high end field or get a high end job, going to college is now quite a questionable thing. Yet, I’m a firm believer that all we need to do here—the real answer here is to stop throwing money at it, and freeze the competition.

JASON HARTMAN: Yeah. Watch the price drop.

MISH SHEDLOCK: The cost of education will collapse.

JASON HARTMAN: As it should.

MISH SHEDLOCK: That’s what needs to happen. Look at all the places where government has intervened, and look at all the places where there are cost distortions. We have the union contracts, we have the discrepancy between what a government job pays and what a job in the private sector pays, you can blame that on public unions. Look at the cost of education. Again you’ve got a public union issue, and you’ve also got all of these programs to make it affordable. They didn’t make this affordable. They made debt slaved out of students by loaning them money. Give the students money, or access to money, they don’t know what they’re doing. A lot of these kids graduated with debt they cannot possibly ever pay back, and the implication of that is very deflationary. These kids, with a lot of debt and no job, no means, or a part-time job, or a low-paying job, say at Starbucks, to pay back this debt, we’re suppressing household formation, kids are moving back home to live with their parents, all these kinds of things. These are real economic forces at play. We’ve also got a massive Boomer retirement that’s started. Boomers are gonna be downsizing their lifestyles, perhaps moving to smaller homes. They’re certainly not gonna be buying all the toys, and fixing up their houses, and all the other things they did when they had a job. All these economic forces at play suggest deflation. The only reason why we’re not there now, is the massive printing of money by the Fed, outside of oil and pool and education and healthcare; the other place government interfered, prices haven’t done much.

JASON HARTMAN: Here’s the thing though. There’s no limit to the printing press, or the money creation ability of government and the Fed, so that is completely untethered. And inflation, for governments, really seems to be far and away the best business plan for them. Because they get to not default on anything, politicians get to make a lot of promises that they can’t really keep in real dollars, only in nominal dollars, in order to get reelected and stay in power. They get to debase the debt they have to foreign countries—namely China, Japan too, of course, and others. That’s a good deal for government! I mean, especially when you have the reserve currency. I don’t know how the US would do anything else but inflate, it’s just such a good deal for them.

Why the reserve currency status is a curse rather than a blessing

MISH SHEDLOCK: Until it all implodes. And by the way, the reserve currency’s a curse, and not many people realize that.

JASON HARTMAN: Oh, tell us about that! That’s interesting.

MISH SHEDLOCK: People claim, well, just wait. Watch what happens when China—when the Yuan becomes the world’s reserve currency. The currency isn’t at risk; China doesn’t want it. Europe doesn’t want it. And the reason why they don’t want it, is that China wants to suppress the value of its currency so that it can increase its exports. Japan wants to do the same thing. All the European politicians are screaming that the Euro is overvalued. Here’s what happens. If China wanted the Yuan to rise, which is what would happen if China were to replace the US dollar as the world’s reserve currency, then China is buying US treasuries like mad to suppress the value of the Yuan! If they wanted it to rise, they could have easily let it do so. So, it comes with a curse. And part of the curse is what the US is fighting. And actually, if you look at the Fed now, and US government politicians, they’re crying for the Yuan to go up!

JASON HARTMAN: They’re artificially manipulating their currency down to increase their exports. I know that everybody’s upset about that. But it seems like the reserve currency’s a huge privilege! It gives you the opportunity to print your way out of any problem, when you have the reserve currency. So, tell me a little more clear, if you would, as to why another country wouldn’t want to be the reserve currency.

MISH SHEDLOCK: It puts this artificial support for the value of the US dollar.

JASON HARTMAN: So, it would hurt their exports?

MISH SHEDLOCK: Countries don’t want any support for their currencies right now. Nor does China per se want to do the things, or is even capable right now, of doing things to be a credible reserve currency. It does not have large, fluid, open bond markets. Heck, it doesn’t even float the Yuan yet! It’s still tightly controlled! Europe is as big a currency as an aggregate, if you add all of Europe together, as the United States. There’s nothing there for the Euro. And a lot of it is just this misguided thing. Everyone seems to believe, oh my god, what would happen if oil was priced in Euros? My answer is, absolutely nothing would happen. Literally. Nothing would happen if oil was priced in Euros! Currencies are fungible. If Saudi Arabia doesn’t want to hold US dollars, it doesn’t have to. You can get a price of gold in any currency in the world. You can get gold priced in Canadian dollars, in US dollars. Any commodity is the same. You can buy any commodity in any currency, and what matters is where Saudi Arabia holds its reserves, not the unit of currency that it’s priced in. Currencies are fungible.

If Saudi Arabia didn’t want to hold US dollars—even if it received dollars—it could just go on the Forex market and sell dollars, and hold Euros. Hold Yuan. Hold anything it wants to right off the bat. So all this notion that people have, is just seriously misguided. That everyone’s holding dollars just because oil is priced in there, or the US is the reserve currency—the fact of the matter is, the US runs a trade deficit with China, and most of the rest of the world. The fact that the US runs that trade deficit means that someone else, mathematically, must hold US dollars. That’s why they’re holding these dollars. The US is running a deficit. If the US didn’t run a deficit—if we ran a surplus, and China ran a deficit with the rest of the world—guess what would happen? We would see more and more holding of Yuan, rather than more holdings of US dollars. It’s the US trade deficit mathematically says that this must happen, and it’s all a function of math, regardless of what governments even want. Those are a few extra points that people don’t even realize.

JASON HARTMAN: It sounds like what you’re saying in there, at least part of what you’re saying, when you talked about Saudi Arabia especially, is what I always say. Is that things matter because they have intrinsic value. Currencies are just a fluctuating measuring stick. Yes, they’re fungible. And that’s great. At least for now, as long as they remain that way. The things matter. The Saudi Arabian oil—that’s what matters, because that has intrinsic value. All the other stuff is just an exchange mechanism.

MISH SHEDLOCK: Pretty much. I don’t know that there’s any intrinsic value, any particular intrinsic value that one can define—

JASON HARTMAN: Well, oil has intrinsic value. Gold does.

MISH SHEDLOCK: Well, yes, but you can’t put a price on it. Oil has value, property has value, tangible goods have value, but we have value but we can’t say exactly what that value is. They’re going to fluctuate with various currencies over time. There’s no intrinsic value to the US dollar; there’s only value by force. The US government passed a law that businesses must accept the US dollar by currency. Otherwise, no one in their right mind would take the damn thing! Historically, when available, gold and or silver have always been money. When gold hasn’t been available, then silver, then copper, then furs, in prison, cigarettes, have all been used as money. Tangible goods. It’s the government that came by and said, you must take US dollars. They were once backed by gold; they’re no longer backed by anything, but it’s by force. It’s by mandate. The government says you must take these; that’s your reason why they have value. You don’t want to accept these pieces of paper—

JASON HARTMAN: The exact definition of fiat money, Mish. I love it.

MISH SHEDLOCK: No one would accept these pieces of paper were it not for government mandate.

JASON HARTMAN: By the same token, government mandate is all you really need. Because within the country, the police will come and get you if you try to trade outside of the dollar, basically. Or if you say, we don’t accept dollars; we’re only going to take cigarettes at our store; they’ll come and arrest you because of the legal tender laws. Around the world, when you’re the reserve currency, you push that dollar down every country’s throat by saying, look, maybe gold doesn’t back the dollar, but the military does.

MISH SHEDLOCK: It’s pushed down throats by the fact that the US runs a trade deficit. That is the mathematical means by which it happens. The US runs a trade deficit, other countries per force accumulate US dollars. It’s what they do with those dollars that determines what happens. Take the instance of China. China soaks up all those dollars, prints Renminbi to buy those dollars, artificially lowering the price of the Renminbi vs. the US dollar. That’s the mechanism at play, and the problem here is, there is no global enforcement mechanism. Before Nixon closed the gold window, gold was fleeing the United States at a rapid pace. France was turning a French surplus, demanding payment in gold; Nixon came by and said, nope, sorry, we’re not going to do that anymore. Once that enforcement mechanism went, there was no mechanism on any country in the world to reign in deficit spending, do anything about trade deficits. The advantage of gold is there was an enforcement mechanism. That enforcement mechanism is gone; every country in the world lacks such an enforcement mechanism, and that explains the massive, massive rise in credit over the years, and in fact, global monetary printing, global currencies have gone up five times in the past few years. Credit expansion is rampant, because there are no controls on the system, and this has less to do with the US dollar being a reserve currency than the fact that there are no longer any kind of controls on government printing anywhere. Certainly credit expansion in China is happening at a far faster pace here than the United States. Yet all the hyperinflation, all the talk here in the United States would have you believe that this is a US phenomenon only, when in fact it’s a global phenomenon. All the central banks are essentially doing the same thing. Europe would all perhaps, except Europe, and Europe would, if it could, but the German Bundesbank has so far pressured the ECB to not go the same route as the United States. For how much longer that lasts I don’t know.

Predictions & outlook on the economy, inflation

JASON HARTMAN: Very interesting stuff. So, Mish, predictions? Do you think deflation is coming, or inflation?

MISH SHEDLOCK: It depends on how we define it here.

JASON HARTMAN: Yeah.

MISH SHEDLOCK: I view deflation as a decrease in money supply and credit, and I like to mark credit to market; I view inflation as an increase in money supply and credit. If one views inflation as price increases, and ignores assets, well, then we might have inflation for quite a while longer. No matter how you measured it, we had deflation in 2008, early 2009. Credit was imploding, the CPI went negative, home prices were actually crashing, no matter how you viewed it. I think we’re gonna have a similar sort of reckoning again. I can’t tell you when. But if we ignore assets, and just look at prices—say, of food, and of oil, of energy, because of peak oil, we might see those still rise. But I suspect we’ve got another, at least small bout of price deflation coming, and perhaps bigger if we include houses. If we include all assets in that definition, and certainly if we include credit and credit market to market on the balance sheets of banks, then we’re in for a massive bout.

Outlook on the real estate market

JASON HARTMAN: Let me ask you about the real estate, because we were talking before about the bubble markets. You know, California, Miami, the more expensive properties in Chicago, the northeastern United States, whether they be, you know, New York, Massachusetts—there’s a lot of expensive stuff up there too. You believe—and I think rightfully so, because I agree with you—that there is a bubble in those higher priced properties, is that correct?

MISH SHEDLOCK: Oh absolutely. California is the poster child. We’re back into bidding wars in California with consumers getting into bidding wars over properties they could rent for far less, and that’s the very definition, I think, of a bubble—when prices are massively above price to rent, and massively above what people make in income. We were standard deviations above that in 2005, 2006, all across the United States. We’re back there again in some places. Some places in California, not all places in California, are in that area. Some places in the northeast. I don’t think we’re back there yet in Florida or Las Vegas. And so, while all markets have recovered at least somewhat, some have fully recovered, and those areas are, once again, back into a full blown bubble, there’s no other way to look at it.

JASON HARTMAN: I agree. It just seems so simple, Mish; when you can rent a $1 million house in California—or, let’s make it a more realistic number. Let’s make it a $500,000 house. When you can rent that house for somewhere in the neighborhood of $1800 per month, it just makes so much more sense to be a renter! It doesn’t make sense to own that property! Conversely, if you were to go to Houston, and you were to buy five $100,000 houses that rent for $1000 a month, you would have $5000 a month out of that $500,000 investment, vs. $1800 in California! Of course you know that California’s in a bubble. So are a lot of areas in Miami. The northeastern United States. Any expensive market like that, it just doesn’t work. The rent-to-value ratios get way out of sync with reality. And it just becomes a much better deal to be a renter.

MISH SHEDLOCK: I don’t know anything about the prices in Houston.

JASON HARTMAN: They’re cheap.

MISH SHEDLOCK: Let’s say that there are other reasons—Houston does have an energy market. So, Houston has a source of jobs.

JASON HARTMAN: It’s just one example, yeah.

MISH SHEDLOCK: I live in Illinois. And there’s a huge flight of people, some major businesses have actually threatened to leave Illinois, and they had to give them tax breaks to actually keep them here. But, just to give you an example here, property taxes in Illinois—I live in about a $500,000 home. My property taxes here are about $14,500 a year.

JASON HARTMAN: Oh my God! That’s enormous! Wow! Ouch!

MISH SHEDLOCK: Illinois has a decent sized state income tax that Quinn passed a massive through, and we have an 8% sales tax. All things considered, Illinois is not one of the places where one would reasonably want to live. Yet I’m happy here, I live here, there are forces that the law of inertia says, you stay here. Something at rest tends to stay there until pushed. Things have happened here enough in Illinois that some people have taken the push. People are fleeing Illinois for places—actually the most common place people from Illinois go to is actually Indiana, and the second most common place, I believe, is Texas. So, people are going where there’s jobs, where taxes are lower, where they have more freedom to do all kinds of things, and I don’t think that bodes particularly well for states like Illinois. Illinois has the worst funded pension funds in the nation, some of the teachers plans are about 20% funded, maybe 30% funded, and that’s after this massive rise in the stock market over the last two years. What are they going to do if and when, and I think it’s more when than if, the stock market takes another hit? Some of these things are going to go bankrupt, and Illinois is passing more home rule taxes here now. Chicago just got the go ahead to pass some more taxes on something.

JASON HARTMAN: What’s a home rule tax? What do you mean by that?

MISH SHEDLOCK: Oh, well that’s—a home rule tax says the state has a sales tax of let’s say 7%. Well, Chicago has the right—actually, every city has the right to up that for whatever they want. So maybe it’s 9% in Chicago. It’s a minimum of this state-sponsored floor, but various localities can come in there and say, well, in this area, sales taxes are higher. Chicago has one of the highest sales tax rates in the entire nation. So, that’s a home rule tax. And we have them not just on sales taxes but on all kinds of taxes. Illinois has more taxing bodies than California or New York or Texas, states far larger than Illinois! You want the most taxes on the most things, and the most taxing bodies, then come to Illinois.

JASON HARTMAN: Yeah, unbelievable. When will these politicians learn? They just gotta be friendly to business, or the businesses just take flight. It’s crazy.

MISH SHEDLOCK: They cut some strings, actually, to keep a couple of businesses here in Chicago. For the life of me I can’t remember off the top of my head. But a couple major—oh, Caterpillar threatened to leave Illinois. Quinn had to do some pretty emergency stuff to get them to stay here. So, they cut the businesses. They cut the business taxes to get Caterpillar to stay here, but what did that do for the property owners? It didn’t do anything. For us.

Closing comments

JASON HARTMAN: Mish, it’s always interesting to talk to you, and it’s always interesting to read your blog. Tell people where they can find you once more. Just Google Mish?

MISH SHEDLOCK: My blog is www.globaleconomicanalysis.blogspot.com. That is a mouthful. The simple way to find me is just do a Google search for Mish. I talk about oil, gold, interest rates, silver, the global economy, the geopolitics, which is I’m concentrating heavy on Ukraine right now. Check it out, and I think you’ll like what you see.

JASON HARTMAN: Good stuff! Well, Mish Shedlock, thanks for joining us today.

MISH SHEDLOCK: A pleasure to be on.

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Transcribed by David

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