CW 439 – Jason Hartman – Rent-to-Value Ratios, Bitcoin, & The Case-Shiller Index

There’s a nostalgic feeling to today’s Creating Wealth Show as Jason Hartman provides a live recording from the 2014 Meet the Masters event in Orange County, California. This gives listeners a taste of what they can expect from the January 2015 event in Irvine, California, and also provides a good opportunity to see how far the financial and real estate worlds have come over the past months. Key topics covered include the Case-Shiller index, reassessing Rent-to-Value ratios and the development of bitcoin.

 

Key Takeaways

04.30 – Jason Hartman’s investment strategy doesn’t focus on appreciation – if it happens, it’s a bonus.

07.45 – Bitcoin and its competing alternative cyber currencies really came about because people are starting to doubt the fiat money Central Banking model that we’ve become accustomed to.

10.50 – Despite being the most commonly used index, Jason Hartman would only recommend 6 of the 20 markets proposed by the Case-Shiller index.

14.08 – As humans, we find it inherently difficult to know when to cut losses and just walk away.

15.50 – Niall Ferguson claims that the most powerful part of the financial system is the bond market, and we would all do well to remember that.

20.09 – Real estate is not a very liquid market and so even when prices drop, they don’t drop as quickly as most other asset classes.

26.18 – Rent-to-value ratios change totally if you think about the actual utility cost per month – how much is your renter paying to use your property, and how does that compare with what you think the value is?

31.23 – The forms and uses of money have changed many times throughout history, and now we’re dealing with the technological side of currency, which has led us to bitcoin.

39.50 – Jason Hartman goes through step-by-step considering the relative merits and failings of the dollar, bitcoin, gold and income property.

 

Mentioned in this episode

The Ascent of Money by Niall Ferguson

 

Tweetables

When it comes to real estate, play it safe and steer clear of the big, sexy, siren song-style locations. Tweet this!

Money: I don’t care what you call it, I only care how much stuff I can get for it. Tweet this!

The price of a property is bogus. It’s all about the utility cost – who is using it and what are they paying. Tweet this!

If the powers decide to, they can outlaw bitcoin the way they outlaw cocaine and just say that you can’t trade it. Tweet this!

 

Transcript

Introduction:
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, and this is episode number 439. Thank you so much for joining me today. Today, our guest is none other than yours truly. That’s right, Jason Hartman. We’ll be playing a live introduction for a Meet the Masters event, and I thought that would be very much in keeping with the theme of our upcoming Meet the Masters event in January that many of you have registered for. Thank you for the onslaught of early registrations, and be sure you join that group. The people that come every year understand that you want to register early, because you get the lower, early bird pricing and the price goes up as more registrations filter in. The early bird gets the worm, the early bird gets the discount. Do that at www.JasonHartman.com, we are getting very busy planning an excellent Meet the Masters event for you. Again, like I said on the last episode, I’ve kind of lost count because we used to do these twice a year and now we only do them once a year. I think this will be the 16th Meet the Masters event I’ve done. I’ve got to go back and figure that out, but anyway, here we go. Let’s dive in and listen to a live tape of me speaking at Meet the Masters. In the beginning I’m talking about my house dog, Coco, who’s there. She’s kind of roaming around and she just looked at me when I said that! You should see this right now, that was funny. That’s what I’m referring to, since you don’t have a visual, but she was doing some funny stuff in the room. Let’s just dive in and listen to that, and please register as soon as possible for our January Meet the Masters event. Go to www.JasonHartman.com, click on Events and you can get your tickets at the early bird price while they last. Here we go.

Good morning, everybody.

Audience:
Good morning.

Jason:
So we’re going to talk about a lot of great stuff this weekend. Again, tonight we go until 9pm and so it’s a long day today – 12 hours. After 9pm, we do have some optional activities – we have a fire walk, shark dive and tos of cool stuff like that, as I mentioned last night at dinner.

Anyway, welcome and thank you all so much for coming. Let’s see who here is from the furthest away. We’ve got some East Coast people, I know. How many from the East Coast? Okay.. And how many from another country? Japan?

Audience member:
Yes.

Jason:
OKay, I remember when you registered. Thank you for coming such a long way, congratulations. Give him a hand, if you would!

Audience:
[Applauding]

Jason:
We’ve had people come from Europe, the Middle East and now Asia too. Coco was really excited about that, actually. It’s kind of neat to have a seminar with a house dog, huh? Gosh, she’s amazing. One thing that I will say about Coco, is please don’t feed her anything. She’s a total scavenger so if you drop any food, please just pick it up. The other thing is just be careful; she’s still in that training stage where she does jump on people a little bit. Be careful she doesn’t knock your coffee out of your hand or something like that. Just be careful, you have an idiot roaming around the room and it’s not me! It’s her!

Anyway, okay, good. Let’s dive into it. I’m just going to talk about a little overview of last year; a couple of the big trends we saw happen last year and then throughout the weekend, of course, we’re going to talk about a lot of forecasts for 2014 and what to expect from our income properties.

Again, welcome. Really, what we saw is the big three things that happened in 2013 that affect us as real estate investors are: we all saw a lot of appreciation last year. That’s a welcome change, but as you know from following the podcast and from coming to other events (I know a lot of you are regulars and you come to a lot of events, so thank you for the support there) we don’t really invest for appreciation. We just look at appreciation as the icing on the cake. It’s great, you’re lucky, I’d rather be lucky than good any day of the week, but unfortunately, you can’t depend on luck. You can’t really even create it. That’s just the icing on the cake.

We did definitely have some nice appreciation last year, though, so that was a welcome change. It’s interesting too, because last night at dinner I was talking about a chart that I’ve got to bring back, because it’s a chart that I used to show a long time ago (like 2004, 2005). It was looking at Orange County, California where we are now, my old home town, and it was comparing it (I’m pretty sure) to Kansas City, Missouri. This chart showed an 18 year period. You know I talk a lot about linear markets versus cyclical markets, right, and how I used to be a cyclical market investor, and now I’m a linear market investor because I just think it’s much more reliable and it offers a much more conservative approach. It was interesting because it was Orange County, being a very cyclical market with big ups and really ugly lows that are very devastating to people, versus Kansas City which is just one of these linear markets that just sort of chugs along. As I recall from that old chart that I haven’t been presenting in years, it showed Kansas City, boring Kansas City, beating Orange County, California, exciting Orange County, California. Literally, Orange County has 7 television shows about it: The O.C., Laguna Beach, Newport Harbor – what are the names of the others? Real Housewives of Orange County. It’s amazing. I don’t know Kansas City, do they have any shows?

Audience:
[Laughs]

Jason:
Yeah, so the point here is that all of these things that are like big talk, sexy, a lot of news media tension – those really aren’t the places to invest. Staying away from the sexy stuff and the siren song (what is that, a Greek myth, I think?) is what you want to do.

We saw some good appreciation and inflation and we saw tapering, as well. We saw the start of the Federal Reserve’s tapering. There was a lot of talk about it for a long time, but it finally started to happen. What is tapering? It just means a reduction in the money supply, a reduction in the creation of new money or new currency, is what we should say. We’ll talk more about that later. Then bitcoin! How many of you have heard of bitcoin? Kayley, don’t raise your hand! Really, Aaron? Real money! Real fiat money, not bitcoin!

Yeah, so bitcoin is pretty amazing. There’s a lot of news about bitcoin, right? Raise your hands – how many people know about it again? Yeah, most of the room. So what we saw last year is an amazing new thing. Really, this deserves attention and discussion. Crypto-currencies or cyber currencies, bitcoin being the most popular of which, but there are many others out there. Litecoin, I think, is the number two, and there’s a whole bunch of others behind that. This is indicative of people becoming very suspicious of a fiat money Central Banking model that has been around with us for a long, long time.

Last year was the 100 year anniversary of the Federal Reserve, which is the US’s third Central Bank. In that 100 years, from 1913-2013, the dollar has lost about 97% of its value. They’ve done a great job, right! If you took $100 in 1913, put it in – I guess Folgers was around in 1913, I’m just thinking it’s one of those old companies but maybe not! – but you put it in a Folgers coffee can and bury it in your backyard (hopefully you kept your property!) and then dug it up 100 years later, it would have been worth $3 or $4. It’s not as bad as Zimbabwe, but that’s a pretty bad track record, right? We’re seeing people all over the world losing faith in their governments and their Central Banks, which obviously have a very cozy relationship. That’s a big deal.

Is it an investment? I don’t know, I kind of doubt it. I’ll tell you my story of bitcoin in just a few minutes. Asset prices; let’s talk about asset prices and just look at the year in review. One fantastic asset last year – it wasn’t as good as bitcoin, but I think bitcoin might just be like tulips and be in a bubble, so we’ll talk about that. This asset had an amazing growth rate, and the reason I mention it is because we talked about it last year. A year ago in January, we were in this same room. Many of you were here then and we talked about this particular asset. It had zero losses throughout the year and it had a 214% gain. Any guesses?

Audience:
Real estate?

Jason:
No, I wish! I wish I could say real estate performed this well. Any other guesses?

Audience:
Bitcoin?

Jason:
No, bitcoin actually did better. Modern art? No. By the way, I used to be a bit of an art collector and I still own all that stuff and I’ll tell you something: art is a total misnomer of a market, if you ask me. It’s so liquid – things theoretically have value but who will buy them? Just try to sell them! Just try it. It’s just so liquid it doesn’t even work. No, 214% gain with no down-time throughout the entire year, so this was pretty much a straight up upward trend and it was Coco! You guessed her weight last year – remember we had that contest last year? She weighed about 14lbs a year ago, and by the end of the year she weighed about 44lbs, so that was a straight up gainer. OKay, there she is last year at Meet the Masters.

Let’s get serious. The Case-Shiller index – you know what I think about Case-Shiller, right? I’ve talked about it on the podcast a lot; Case-Shiller is the most commonly used index when it comes to real estate prices. However, the problem is that it profiles only 20 markets, and of these 20 markets, I would dismiss 14 of them and not recommend them. Only 6 would meet our cash-flow oriented, linear oriented, conservative investment quality markets. The other 14 are cyclical bubble markets. What’s interesting here is that this is the entire 20, it’s the Case-Shiller composite index, right? It showed that last year we were up 13.6%, but what’s interesting here is if you look from when the bubble kind of started here in 2000, it went up and up and up and then of course, it had a horrendous fall. It was the worst fall in 7 decades, as we saw the worst economy in 7 decades. It started bumping around and then last year we had some really nice gains. Again, the frosting on the cake. Nothing we depend on, just an extra bonus perk for investors.

The average here, if you just look at it like a straight line, is 3.6%. It’s not bad when you leverage that because if you leverage it – remember, one of the things we love about income property is that it’s a multi-dimensional asset class, and as such, you don’t just act like a gold or a bitcoin or a stock investor in expecting things to go up in price. You get cash-flow, you get tax benefits, you get all kinds of nice things along the way, so it’s a multi-dimensional asset class.

Let’s just look at it simply. If you were able – and you certainly were able back in 2000, that’s what led to the bubble – to put nothing down on a property, you could put 5% down, you could put 10% down. Let’s just take it at 10% down with 90% leverage. You have a 9-1 leverage rato, and that 3.6% (remember, that includes 14 cyclical markets we wouldn’t recommend). You don’t have the big downturn, which you wouldn’t in the other 6, but Case-Shiller doesn’t split it out like that, unfortunately, because they don’t look at things the way we do. There, you would actually have done better because you wouldn’t have given so much back. Recovering from a loss is very, very difficult. If your asset goes from $100 to $50, you’ve lost 50%, right? But to get back to $100, you have to have a 100% gain. That’s why it’s so important to just curtail losses and ideally, not have them at all. You really want to minimize losses. This is one of the problems that speculators have when they invest in speculative things like metals, like bitcoin, like appreciating markets or cyclical markets like Orange County that have big depreciation too. The same is true of people that go to Las Vegas, right? As Kenny Rogers famously said, ‘You’ve got to know when to hold ’em and know when to fold ’em, and know when to walk away and know when to run.’ People have a really hard time cutting losses; it’s just part of our human psychology of just cutting losses and running and doing the next thing. They’ll usually write it down.That’s one of the things here. If you had leveraged that measly 3.6%, at 10% you’d have a 36% gross ROI. That’s not bad, not bad at all.

Let’s talk about tapering a little bit. The Federal Reserve – finally, we’ve got a new Fed Chair now, Janet Yellen, as you all know, and she seems like another Keynesian, another Greenspan-Bernanke, maybe not as bad, I’m not sure yet. She has the highest net worth – a lot of this is secret and we don’t really know what these people are worth – supposedly of any Fed Chair, or at least incoming Fed Chair. Hers is about $13 million. It’s not that big a deal, but for that kind of position that pays what, $180,000 a year, something like that, it’s a big deal. What this taper means is that instead of buying $85 billion a month in bonds, which is just creating fake money out of thin air, that’s all it is, they’ve now cut this to $75 billion. That represents about a 12% reduction in the creation of new money, and that’s pretty significant. 12% is a significant reduction in one single step, so we’ll see what kind of effect that has on every asset class, and that’s another thing we’re definitely going to be talking about a lot this weekend.

Here’s an interesting thing in looking at the bond market. Is anybody familiar with the author and media personality Niall Ferguson? Do you know him? He’s awesome and he has a great book called The Ascent of Money and I’m just going through it for the second time now. One of the things he says is that the most powerful part of the financial system – this isn’t for investors, but it’s for overall power over the financial world – is the bond market. The bond market is the world’s bully, and you’ve probably heard of the term ‘bond vigilantes’. Niall Ferguson talks about that a lot and it’s pretty interesting. What happens here is that this taper was announced, it pushed bond prices down – I’ll bring this back to what it means to real estate in a moment – lower bond prices mean higher interest rates and upward pressure interest rates. What does that mean for us as investors?

Audience:
Higher mortgages.

Jason:
Higher mortgage rates, cost of borrowing is more. So what does that do to the market? It has the effect of cooling it. It cools the market down, and when you cool the market down, if you have the same amount of demand and the same amount of supply (assuming those things are equal, though they never are exactly) it tends to put downward pressure on real estate prices. But remember, the cost to borrow is higher for you, for me, for every would-be home-buyer out there, so they may think ‘Well, I don’t want to be a renter anymore, I want to be an owner, but now it’s more expensive to be an owner because it’s more expensive to borrow’. Remember, generally speaking, for about a 1% rise in interest rates, the price has to drop 10% to equal the same monthly payment. That’s very significant. People buy a house the same way they buy a car – they buy it on a payment, not a price. We do that too as investors. We look at the monthly cost.

One of the things that we’ve never really separated out before in our talks or on the podcast is something we’re going to really tease out this weekend. That’s the concept of utility value of a property being the rent you pay if you’re a renter, or the rent you get if you’re an investor. That’s going to be a big theme that we’re going to touch on a lot this weekend, and about how that differs from the price of the property, which is largely smoke and mirrors. It’s especially that way in cyclical markets, like Orange County, where we’re sitting. That means higher rates, but it’s less of a motivator to buy.

What is the opposite side of that equation? Remember the law of cause and effect. For every action, there is an equal and opposite reaction. Well, if it’s more expensive to borrow, what happens? Fewer people invest and fewer home owners buy. If there are fewer investors, there are less rental properties on the market for rent. If fewer home owners go and buy, that means that they will continue renting so there’s more supply of renters so it has the effect of pushing rents upwards. The problem is this: the rents react very slowly. Too slowly. They kind of flutter a little bit, but they do go up over time. Prices, especially in cyclical markets, are going to go way up and fall really abruptly. However, it doesn’t happen as much as in other asset classes.

I don’t even know if she’s still the Chief Economist – Michael, our of our investment counselors would probably know this – Leslie Appleton-Young, Chief Economist for the California Association of Realtors, is she still around? Do you happen to know? I don’t know, but she said something very valuable during the beginning of the downturn, and I think she was right. Remember, all of these National Association of Realtors, Chief Economists like Lawrence Kuhn, I had him on the show a long time ago, and people criticized me. If you want to criticize me, now you really have an opening! How many of you listened to that one? It wasn’t that good? That was one show I actually prepared for – the first time! Did you notice I had some tough questions for him? I’ve got to give him credit, he answered them and was pretty good.

One thing Leslie Appleton-Young said, and this is valuable: “Real estate prices are sticky on the way down. They don’t drop quickly, not nearly as quick as any other asset class that can have huge fluctuations. Why is that? Because real estate is not very liquid.” Remember something: liquidity creates volatility. It’s interesting because I heard one of these talking heads on CNBC, which are mostly people that I think are just idiots, or their promoters – one or the other. They were talking about how if a market is more liquid, it’s less volatile. The absolute opposite is true! The more liquid it is, the more volatile it is! You can trade stocks with the click of a mouse; you can’t sell a property like that, so that makes it more sticky and it makes it more slow to react. You have time to consider things and make decisions.

Okay, so higher rates pull yield-seeking or ROI (Return On Investment-seeking) capital from markets, and what does that do? It creates the sea of capital looking for yield. A couple of episodes ago on the Creating Wealth Show, I talked about this, and I didn’t express it exactly in this way, but it’s really that last third interview with Harry Dent that made me think of it. It was “OKay, Jason, a lot of your strategy is based on inflation. You think inflation is coming, there are three major economists that disagree with you (most everybody else agrees that inflation is coming and it will definitely come in a significant way, and that’s what I think), but the question is – even if we had deflation, there would be no place to get yield. You would have extremely low interest rates, or even zero rates like Japan. You would not have any place to get yield.” I say the only place investors will find yield is in cash-flow producing income property and cash-flow producing real estate. That’s going to be it in a deflationary environment because rents are even more sticky than sales prices. They move incredibly slowly. Why do rents move slowly? That’s an interesting thing to look at. If a property is on a one-year lease and tenants usually aren’t as financially savvy as home-owners, potentially. I happen to be a renter, as you know, and I highly recommend renting a high-end property for yourself and owning lots of lower-end properties that you rent to other people. That’s an awesome little arbitrage you get there.

Renters generally don’t shop that much, and so they’re on a one-year lease. Moving is a big hassle and they don’t want to move so if the owner sticks them with a 4% rent increase every year, they’re probably not going to move because it’s not worth it. It’s just too much of a hassle. That’s the reason rents are sticky. This is just kind of an overview of some stuff that we’re going to dive into in more depth over the weekend.

Let’s talk about currency. Currency, obviously, is a medium of exchange. Nothing too complicated there. If you look in your wallet, what’s this called? (If you can see it). Thank you, Smart Alec, yes, contest winner right over there – Federal Reserve note! That’s because it’s only worth faith, that’s all it is. It’s a $20 bill, right, and it was called a $20 bill throughout its life. 100 years ago, it was called a $20 bill, although back then, you could trade it for silver or gold. It was a gold or a silver certificate. One of our clients actually gave me two of these things and I have them hanging in my house. He gave them to me in a nice picture frame and they’re 1928 and 1923 $10 bills. Right on there on one it says ‘Gold Certificate’ and on the other one it says ‘Silver Certificate’, and you could actually trade it for something real. Now you can trade it for faith. It’s called the same thing, but the value of it obviously fluctuates dramatically. Sovereign currencies (which just means ‘given by the country’) are controlled by that country’s Central Bank, and other Central Banks, and that country’s government. The important thing to know is this, and this is what we’ve got to always be internalizing. No matter what, we’ve always got to be thinking of it this way. I don’t care what you call it, I only care how much stuff I can get for it. It doesn’t matter, stuff matters.

I always use the example – how many of you saw the movie Castaway with Tom Hanks? Why was Tom Hanks’ life tough on the island? Because he didn’t have any stuff. If he had more stuff, life would have been more convenient and more luxurious, right? Things matter, but the money doesn’t. The only question is how much stuff can you buy with it – how many goods and services? If we look here, nominal as we know, means name only. I know this is a review for a lot of you, but I’ve just got to set it up because we’re going to talk a lot about this stuff over the weekend. It is the price in terms of the currency in name, so now here’s the distinction that we’ve never covered before. That’s the price of the property.

Let’s take an Orange County example, since we’re sitting here in Orange County and I lived here for many years and I’m quite familiar with it. I owned a lot of properties here too. In Orange County, the typical deal is you can rent a $600,000 house, which is not a real nice house here. Does anybody live here, by the way? Where do you live? Ah, Los Alamitos, I went to Millikan High, so yeah, right there. In Orange County, for a typical $600,000 house, you can get for about $1800-$2000 a month. Is that a good deal? It depends who you are. Are you the owner or the renter? Remember: The ideal is 1% RV ratio, so as an investor, if I deploy $600,000, I want to get $6000 a month. As a renter, I’d love to live in a $600,000 house for only $1800 a month, that’s a killer deal. If you go up in price, the deal gets even better – it gets much better. If you rent a $5 million home in Crystal Cove, right around the corner from here, I don’t know lately, I haven’t checked, but you’d probably rent that for $7,000 a month. Pretty good deal as a renter, not an owner! What we think is legitimate is the real value, and this weekend, we’re going to call this the utility value per month. This utility value per month is about how much income the property either produces for the owner or the renter pays to use it.

I remember a lot time ago, I was at church in Irvine here, I was at South Coast Community Church, as it was called back then. There was this really good sermon that Pastor Tim Kimmons gave, and it was all about materialism and how we shouldn’t be as materialistic and all the typical drill, which I don’t totally disagree with. One of the things he said was really, really valuable – it was a super good thing he said. He said we don’t really own anything. We are just trustees from birth to death, and I think we can all agree with that. Like they say, there’s no luggage racks on the hearse – you can’t take anything with you. The Egyptians though so and they built pyramids and tombs and put food in there for King Tut, but they walked funny anyway! The real value of a property is the monthly utility cost. The price of it is bogus and it’s a smoke and mirrors game. It’s just fickle and nonsensical. We’re really separating the monthly value versus the overall price or value of a property, and that is going to help us distinguish a lot more this weekend.

We talk a lot about what do I call it? It’s inflation-induced debt-destruction and/or the double-inflation arbitrage. Here, what happens to the value of your mortgage debt? The value of your mortgage debt is the currency value, the name of it to be repaid, but the real value is the difference between the property’s price and the real value of the debt. This is what represents your wealth, this is about the asset you have here. I commonly give this example: If you have $1 million in real estate mortgages and the inflation rate is 10% – just for round numbers – in one year, in real value, you only owe $900,000. But the property price may have gone up because, remember, we had 10% inflation. Say it was 100% finance just for simplicity; it may have gone up by $100,000 to $1.1 million. This spread of what you can get for it on the market versus the real value of your debt represents the asset you have. Does that make sense?

OKay, so bitcoin. Why is this whole bitcoin thing significant? I feel like we’re gong to talk about bitcoin quite a bit this weekend and I almost feel like I’ve got to get in the bitcoin business. I’m not, and I don’t own any bitcoin at all. You’ll hear my story of the first time I ever heard of this thing and tried to understand it, and I was with Michael and his brother and I was speaking at a conference in Belize, one of my least favorite places. You heard the interview with John McAfee, right? Don’t go invest in Belize. Please stop this stuff with these crazy ideas in these third world countries, okay? Bitcoin is a virtual currency. We talk about the Federal Reserve creating fake money, well bitcoin is a cyber currency. I couldn’t even get my mind around this. It took like a month for me to just relate to this concept. Bitcoin is essentially a mathematical equation. Nobody really knows for sure who invented it. They think it’s a Chinese guy. I think the Chinese invented math. The abacus – wasn’t that the start of it? See, they’re smart, they know this stuff.

Anyway, so it’s this virtual currency and you can buy stuff with bitcoin. People were buying a lot of illicit stuff, the Feds shut down a website called Silk Road, where you could hire a hitman. Oh yeah! And you could pay in bitcoin. It’s only like $1000, it wasn’t that much. I didn’t use it, but I was thinking about it! Am I going to get in trouble for saying that? I am joking. Well, I actually did kind of think about it; I have an enemy or two. You know, you could knock someone off for $1000 in bitcoin, but back then, bitcoin was only $42 when I first heard about it. It was kind of a lot of money, but then bitcoin became worth over $1000 for just one coin. People could buy drugs and prostitution and all this stuff, and this website was called Silk Road, but they shut it down. I’m sure there’ll be a million others like that for every one they shut down.

Here’s what I really had a tough time getting my head around. Mining bitcoins. How do bitcoins come into existence? Well, if you think about the history of money, and I’d highly recommend that book by Niall Ferguson called The Ascent of Money, Money, at first, was goods, it was bartering of stuff. Stuff matters, right? Tom Hanks, stuff matters. Then it became precious metals in the form of gold and silver coins. So that was the start of it, and how did those come into existence? They were mined. They had to be mined out of the ground. With bitcoins, they are ‘mined’ off of the Internet. Does this sound like a scam yet? It may be. There’s a ton of videos on YouTube saying bitcoin is the ultimate ponzi scheme, it’s a complete scam and it may well be. I just don’t know. Cody over there – raise your hand, Cody. Cody is one of my college buddies from a different generation, and I met Cody because he lived in my apartment building a block from ASU. He graduated almost a year ago, right? So Cody sends me an email about a month ago and it’s for a bitcoin mining machine.

Audience:
[Laughs]

Jason:
Yeah, it’s essentially a server that goes on the Internet and processes transactions. When you process bitcoin transactions, you get paid and you’re a miner. How much was that, like $1700? Wow, so if you want a fast mining machine like something that would get the stuff out of the ground – I don’t know what it’s called but something from mining – there you go! Just remember that during the gold rush – at least in California – the people who got the richest were the people selling the picks and the axes and the Levi’s jeans to the miners. It wasn’t the gold miners. They were just selling the infrastructure and so that’s the whole bitcoin mining thing. Maybe the best deal is to sell bitcoin mining machines. I’m not sure. It’s just hard to wrap your head around these cyber currencies, and there’s a whole bunch of them. They’re kind of a big deal.

Here’s what happened just last year. This is shocking. It’s a bigger return on investment than Coco, the dog! In 2013, the price in January started out about $15 and ended the year at about $800, but peaked at about $1200. When I learnt about it I was in Belize, and I remember that Michael and I, and I think you’re brother-in-law were standing on the beach and we were listening to this really interesting, kind of cagey guy, and this guy had a company that did these VPN things that would hide your identity. You could then surf around the internet anonymously. This was kind of a sketchy crowd that I was hanging out with, but I spoke at this conference down there. He explained bitcoin and I just couldn’t get it. It was $42, right Michael? That’s when I learnt about it, and then I just watched it go way up. It may collapse just as fast.

We’ve seen this chart before – tulips, that’s the most famous one. In Holland, they thought tulips were the big investment and people were buying them up and they obviously had a huge crash. Is bitcoin a bubble? Yeah, I think probably. When will the bubble burst? I don’t know, there’s the $42 and about a thousands businesses a week. You heard in the news last week that OverStock.com is going to take bitcoin. The OverStock CEO is being really challenging and antagonistic to Jeff Bezos of Amazon.com saying ‘They’re going to have to take bitcoin, they’re going to be forced to because we’re taking it’. You can buy goods anywhere. You can go and look on a bitcoin exchange and you can meet a guy at Starbucks and give them dollars for the bitcoin. It is mostly used online. Will that last? I don’t know. China outlawed bitcoin and the price went way down.

What I say is this: Gold, silver, bitcoin, any crypto-currency, anything that challenges the most powerful institution in the world – the bankers of Central Banks, namely the Rothschild family, which is potentially worth a figure that nobody knows. Think Forbes 400 – there’s Carlos Slim, the Mexican Telecom guy who was the richest man with like $70 billion – and then of course, you’ve got Warren Buffett and Bill Gates who are $50 billion ish, give or take. It’s just a billion here or there, no big deal. You think they’re rich? Some have estimated the Rothschild fortune to be worth $230 trillion! That’s with a ‘t’, not a ‘b’, and certainly not an ‘m’. Trillion. Just to give you a reference point, the total economy in one year of the United States of America is about $13 trillion, and the total economy of the entire planet Earth in a year is about $60 trillion. That’s a lot of money! It’s unbelievable, really.

My contention is that Central Bankers do not like this, even though Bernanke did make a seemingly positive comment about it, I think that was window dressing. I think the powers that be will find a way to crush this. They can just make a law against it like China did. They can just make a law and saw bitcoin is like cocaine – you can’t trade it. Can you trade cocaine? No, not without going to prison. It’s a good just like corn or gasoline or anything. They could just outlaw it and say it’s illegal. Anything that competes with such a powerful, established interest is not something I want to bet on. ATM machines are going to start working in bitcoin, potentially. That’ll be interesting. If it ever really arrives and it ever becomes something real, I say this is how you’ll know: When it’s traded on future’s exchanges, 4X derivatives markets, then it’s probably here to stay because a huge powerful interest called Wall Street will be behind it. Until then, it could be squashed like a cockroach.

Questions? Do you have a resume on money laundering? If they’re running it and if the Rothschilds get into the bitcoin business, the Federal Reserve and all the other Central Banks will say ‘Oh yeah, it’s here to stay’. Why would they? They have fake dollars that they’ve done a great job of impoverishing most of the world with, and enriching some! I say let’s be on their side. Let’s do what they do. Let’s work inside their plan and just use it and exploit it.

OKay, so the last slide here and I’ve got to wrap up because we’ve got to have Steve up here. This is just a comparison of some assets and a year ago, I’d never even heard of bitcoin. I wouldn’t even have mentioned it, but now we’re talking about it so it’s kind of interesting. Look here at this chart – what’s controlled by the Federal Reserve and other Central Banks? Well, fiat dollars, the stuff in your wallet is controlled by the Federal Reserve. Bitcoin is not. Gold is partially, and the reason I say that is because gold and silver – when I say ‘gold’, it’s a proxy for all metals (platinum, palladium, silver, whatever), but the Central Banks around the world manipulate the price of gold and other metals by buying it and selling it and storing it and suppressing it and taking it off the market and putting it on. They can intentionally inflict pain on investors because of that. Income property is not controlled by the Federal Reserve, however, you might say ‘Look Jason, that’s not really true’ and you’d be right to say that because the Federal Reserve does control the availability of cash to buy it. They control the financing opportunity for income property, somewhat indirectly, but remember, since it’s a multi-dimensional asset class, if they tighten the ability to finance the property, that puts upward pressure on rents. We all know this because we understand the multi-dimensional nature of income property.

Does it rise in value when the dollar declines? Well, the dollar is the dollar so that’s irrelevant? Bitcoin, we don’t know yet for sure. It probably does in relation to the dollar. Gold? Yes, that’s the historic thing of 5,000 years ago for an ounce of gold you could buy a toga and a pair of sandals. Today, you can buy a man’s suit and a pair of shoes. It hasn’t changed much, except the clothing got a little better, and it’s made in China! I think the toga was probably made in Rome; they probably didn’t import those.

Is it subject to theft? Certainly people can steal your dollars, they can steal your bitcoins, they can steal your gold. It’s kind of hard to steal your income property, those are kind of hard to move. It’s hard to steal the title. There are scams in real estate, of course, but those are so rare as to be almost negligible.

Is it used for illicit activity? Dollars? Certainly. Bitcoin? Most definitely, that’s how it got started. Gold? Absolutely. You’ve seen movies where they give them the gold and then they get the missile launchers or whatever. Income property? No, not really used in illicit activity. Well, meth labs.. If you could do percentage rent on those, I think it would be the ultimate business.

You need to look at if the asset was deteriorated by a bad tenant. It might not mean that it was used in illicit activity. There are minor things occasionally, but income property doesn’t normally fit into that category.

Ease of use. How easy is it to exchange in dollars? Super easy, right? Very convenient, but that also creates more volatility because it’s highly liquid. Bitcoin? Very easy, now with OverStock.com, but most people don’t take bitcoin yet. Try to pay your hotel bill here and it probably won’t work. You can say ‘I have bitcoin’ but you’ll get a response asking ‘Uh, what’s that?’ Gold? Very difficult to use and exchange, and the one thing people don’t realize about these metals is what happens when you try to sell them. Just try it. I promise you, and I did try as an experiment. You basically have to pay closing costs in and out of the deal because when you buy the gold or the silver or the platinum or the palladium, you pay a premium over the spot price, and when you sell it, you’re either only going to sell it at spot or at below the spot price. To ship it back and forth to buyer and seller you’ve got to insure it, and I think that’s a hugely high risk of theft. Say you send 10 coins to get your cash out, most of these coin dealers are online. Obviously, they don’t want you walking in having a big vault there – only the little ones have actual retail locations, but most of it is done where there are companies that you call up and you have a call center and you send it somewhere. Who knows if they’re going to really say you sent them 10 coins? They might say there were only 8 in there. Ease of use for income property? No, not easy to use or trade – it’s very slow to trade and is very illiquid, which I think is a benefit.

Subject to bubbles and crashes? Dollar? Certainly. Bitcoin? Most definitely. We’ve got one coming up, I’d say. Gold? Most definitely. Income property? Yes, but it’s more sticky, especially in linear markets. Here you’d have to really separate out the linear market from the cyclical market.

Inflationary debt-destruction, or as I say, inflation-induced debt-destruction? Does it have an advantage in that way? Dollars? Certainly not. Dollars are destroyed by inflation. Bitcoin? I don’t think so. I think bitcoin is very similar to dollars in that way, although relative to dollars it may look like bitcoin’s doing well, but ultimately, bitcoin I think is subject to inflation too. They say the supply is limited in open-source mathematical equation. I’m going to be like Warren Buffett on this stuff in that in the first dotcom bubble in 2000 or 1999 when all these stocks were going nuts. Remember the words from 13-14 years ago: It’s a new economy. What happened? Warren Buffett said ‘I’m not doing technology, I don’t understand this stuff, I just want to own Geico and Coca Cola and stuff like that. Maybe it’s good to be a little less sophisticated sometimes. Gold? No. It ideally just keeps pace with inflation. It’s insurance against inflation, but it doesn’t have an advantage from inflation. It’s a pace-keeper, not an exceeder. Income property, though, because of the multi-dimensional aspect and the debt against it – hugely advantageous with inflation.

The last one we threw in for Steve – disliked by Paul Krugman? Steve, are you listening back there? Where are you? Whatever Paul Krugman says, just do the opposite. That’s a pretty good idea because he’s an idiot. Fiat dollars? He likes them, so I wouldn’t want to have my money there. Bitcoin? He doesn’t like that because it’s not part of the Central Banking scheme or the government. Gold? He doesn’t like that, and he doesn’t like income property, so just do the opposite of what he says and you’ll be in pretty good shape.

Alright, that’s it for me for now. You’ll see a lot of me this weekend, but Steve, come on up and let’s talk about what investment counselor’s are here to do and then we’ll take a little break.

Outro A:
I’ve never really thought of Jason as subversive, but I just found out that’s what Wall Street considers him to be.

Outro B:
Really? Well how is that possible at all?

Outro A:
Simple, Wall Street believes that real estate investors are dangerous to their schemes because the dirty truth about income property is that it actually works in real life.

Outro B:
I know. How many people do you know, not including insiders, who created wealth with stocks, bonds and mutual funds? Those options are for people who only want to pretend they’re getting ahead.

Outro A:
Stocks and other non-direct traded assets are a losing game for most people. The typical scenario is you make a little, you lose a little, and spin your wheels for decades.

Outro B:
That’s because the corporate crooks running the stock and bond investing game will always see to it that they win. This means, unless you’re one of them, you will not win.

Outro A:
And, unluckily for Wall Street, Jason has a unique ability to make the everyday person understand investing the way it should be. He shows them a world where anything less than a 26% annual return is disappointing.

Outro B:
Yup, and that’s why Jason offers a one-book set on Creating Wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us.

Outro A:
We can pick local markets untouched by the economic downturn, exploit packaged commodities investing and achieve exceptional returns safely and securely.

Outro B:
I like how it teaches you how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government.

Outro A:
And this set of advanced strategies for wealth creation is being offered for only $197.

Outro B:
To get your Creating Wealth Encyclopaedia Book One, complete with over 20 hours of audio, go to www.jasonhartman.com/store.

Outro A:
If you want to be able to sit back and collect cheques every month, just like a banker, Jason’s Creating Wealth Encyclopaedia series is for you.

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