Jason Hartman starts this episode by talking about the adjusted limits for Fannie Mae and Freddie Mac loans. He discusses the prediction of the Mortgage Bankers Association (MBA) on purchase volume and the status of the US job market. In the interview segment, he continues his conversation with Charles Goodhart and Manoj Pradhan regarding the global economy and interest rates, with Japan as the main subject. They also talk about being more national and self-reliant of the countries, inflation, and Goodhart’s Law.
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Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multimillionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11, states had hundreds of tenants and been involved in thousands of real estate transactions, this program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:53
Welcome to Episode 1602 1602. Yesterday, I talked to you just briefly about the Fannie Mae loan limit, while I should say the Freddie Mac, Fannie Mae loan limit, these two usually kind of go in lockstep, as you know, these are the big agencies that become the secondary mortgage market. And they make the US real estate market very special compared to other markets around the world because they create a lot more liquidity and a lot more velocity in the housing market. And boy, do we ever have a housing market with velocity nowadays? Wow. I think you all know that. So we won’t even we won’t even go into that today. But now this is uneven across the country, because it is adjusted geographically. But most counties and it goes county by county, most counties will see about a seven and a half percent increase in the loan limit. Frankly, I don’t know why they think they needed to do this. I’m all for throwing a little more barbecue lighter or charcoal lighter, I should say, or gasoline on a fire to make it bigger. Sure, go for it. I mean, the markets already this. This is like something you do when the market needs help. Right? When the market needs help. And you need to stimulate it, this is essentially another form of a stimulus, okay, increasing these loan limits. And if you ask me, it’s it just wasn’t necessary. I don’t know why they did it. But you could argue that they’re just adjusting to market prices prices have gone up, they gotta increase the loan limits, so that you don’t have to go into a jumbo loan category, you can stay in the conforming loan category, and still buy a higher price property. So everybody out there, you know, loves it. Everybody’s kind of thinking of themselves rather than the broader economy and what it means for the market, which is kind of what I’m trying to do. I’m kind of trying to think of the broader thing, the big picture, if you will, and most people are just thinking like, Hey, what’s in it for me? So fine. It’s good for me to I’m just saying it’s not really necessary. And I think we’ve got a market that’s already at a fever pitch, why? Why are we raising the loan limits, so the usual suspects, but not always get the highest loan limits. So for example, if you’re in New York, or Los Angeles, or one of the more expensive overpriced areas, if you’re in San Francisco, then you’ll see the highest conforming loan limit range of $822,375 for single unit properties. And if you’re in the lower priced areas, you’ll see a limit of $548,250. And then you have a couple of steps in between there. But interestingly, in the low priced areas, which is most of the country that $548,000 limit buys you substantially more house then the higher $822,000 limit does in some of these overpriced, cyclical business unfriendly landlord unfriendly poorly run disasterous markets. Not that I have an opinion about that or anything. Okay, so there’s your update on the loan limit increases that we will see next year. Okay, so, the Mortgage Bankers Association that is the M Ba, not to be confused with the master’s degree in business administration, the Mortgage Bankers Association MBA Released revised estimates for the third and fourth quarters of 2020. But they also predicted a prediction. We love predictions, don’t we? Yes, we do. predictions are always gonna interesting. They predicted what will happen in terms of purchase volume mortgage transactions that are purchased money loans, as opposed to refi loans. A purchase money loan simply means that you’re getting the loan the mortgage to purchase a property versus refinance a property. So they predicted that 2021 will see a record volume of purchase money loans, as if 2020 wasn’t absolutely crazy enough, the whole country, it seems like is buying a house and if they’re not buying a house, the refinancing a house. So they’re forecasting an increase in purchase money loan originations to you’re ready for this 1.5 9 trillion. That’s what the T trillion dollars in volume, which would break the previous record of now, everybody wants to look back to? Are we in a bubble? Is it you know, are we going to have another great recession? Well, the previous record in 2005, for that number was 1.5 1 trillion in purchase money volume. Okay. So, and then refinancing will decline a little bit next year. That’s their prediction. Now, you might be asking, how do they make a prediction like that? Well, is it a prediction on interest rates, now, our rich uncle Jerome Powell says, they’re gonna keep rates low, for quite a while, which is going to keep throwing gas on the fire fuel on the fire, punching the Punchbowl candy, handing out candy, you know, whatever, they’re going to keep doing that. And that’s going to keep the market on fire, it’s going to make houses appreciate more, it’s going to make rents increase more, although probably not as much as the houses will appreciate meaning, the rent to value ratios, the RV ratios, will get even more out of whack. And investors entering the market next year will feel like Wow, I can’t get a good rent to value ratio anymore. And they’re right, rents will go up a bit, but prices will go up more. So you should probably buy sooner rather than later. And you know, expand your portfolio as much as possible. assuming you’re in the building stage of your life, if you’re in the stage where you’ve made all your money and you want to relax a little bit then just reap the benefits of the current portfolio you have. Right. But one of the reasons the refi market might be decreasing a little bit is because with refinances, there’s no urgency, it’s just a matter of lowering your payment, even if interest rates ticked down a little more, which would be incredible. And even if they do that, it doesn’t necessarily mean it’s worth doing a refinance. So all the people, the millions of people that already refinanced, they don’t need to do it again, people purchasing obviously need financing for their new home purchase now. Also, you know what I like? Well, sometimes I don’t like it, but sometimes I like it, is when you’re looking at an article online. I like to read the comments. Now. Some of them are epically stupid. And you think, do these people get to vote really, really dumb comments, but some of them are really smart. And some of them make you think so this one will make you think a little bit. not that big a deal but maybe too much of a buildup, but here we go. Alright, so Okay, you can stop now sound effect. Some of those are a little longer than that. Anyway, this comment on this particular article about the volume predicted for next year, chance man says and that’s the person’s handle. I’m not sure that’s their name. But it says Good morning and thanks for the summary. I believe this sentence for 2020 the NBA is estimating 3.9 trillion and mortgage originations the highest since 2003 and 50% increase from 2019 should read as 3.3 9 trillion, not 3.9 trillion. Okay, so he’s correcting their math. But what’s amazing about that is that it’s a 50% increase from 2000 19 Wow. I mean, people in the mortgage business are making money, hand over fist. They are making tons of money. Now, we’ve talked a lot about this uneven recovery. And here’s some bad news for you. This is really shows you that a lot of people are really suffering, I am looking at a chart. And these are this is data from the BLS, the Bureau of Labor Statistics. And it shows It’s entitled service sector struggles to recover lost jobs. And so it says change in total non farm employment in the US between February and October of 2020. by industry, and this isn’t showing all the industries, it’s just showing the industries that are suffering. And some of this is a little bit surprising to me, actually, some of it is pretty surprising, and some is not surprising at all. So the industries that are down just ever so slightly down utilities, mining and logging, financial activities, information, I don’t know what that means everything. every industry is an information industry nowadays, transportation and warehousing down about 1.2 7 million jobs are down for transportation, warehousing. That doesn’t totally surprise me. Construction surprises me though. That’s down a little more point two, 9 million. Okay. So, you know, point two, 9 million construction, because construction is an essential service. And there’s a lot of construction going on. But I would venture that those construction jobs last are definitely not in housing. There’s a massive labor shortage in housing, labor. But all of the people that were building out office spaces, retail spaces, retail construction, new office construction, that’s virtually you know, non existent, nothing going on there. nothing going on at all, in fact, like negative growth, obviously. So when you lump them all together, I guess, constructions down slightly, manufacturing, down point six, 2 million, so more than half a million down in manufacturing. And I’ll tell you, for someone who is looking to buy a new car, I have never had such a hard time buying a car. I mean, I go on the manufacturers website, I spec out what I want. I deal with these car dealers and so forth. And it is a huge hassle to get what you want. Because these plants have been shut down. And there’s a shortage of vehicles. So real, real hassle there. wholesale and retail trade down. No surprise there. Professional and business services down 1.1 5 million. That one surprises me and doesn’t surprise me at the same time. I guess, you know, a lot of people call on offices, they go to the offices, they repair the copiers, they maintain the phone systems, the servers, all of this kind of stuff has gone to the cloud. So you know, I can see that. That’s good. Now the lawyers seem like they’re doing pretty well. There’s a lot more lawsuits with COVID and so forth a lot more things to sue each other over. So their business is good. The not necessarily a good thing for the overall economy, but it is what it is government down 1.2 2 million jobs, education and health services down kinda surprising when you put Why are they lumping those two together? But this one will be no surprise at all. Are you ready? The worst hit of all of them. This is down 3.4 9 million. So three and a half million jobs down. And this is ugly, folks. This is really, really bad. It is. Yes, that is a bomb dropping on the leisure and hospitality industry. leisure and hospitality This is not a good time to be owning a hotel, or to be in the travel business. So there you go. And and by the way, all those stats I just shared, seasonally adjusted, so they do have some adjustment. Okay, now also Americans who are unsure of being able to pay rent that’s important to us as landlords. But here’s the problem. When you look at surveys like this, they’re almost always 100% or at least heavily weighted toward apartment dwellers rather than single family home dwellers. So that is problematic at the outset. Either way, it’s not as bad as someone would some would say Some might think right percentage of US adults who have the following confidence level. So this is just what they think it’s like consumer confidence. It’s just their viewpoint of their ability to make next month’s rent payment. And here’s another problem with this chart. It doesn’t give you any reference point, it does not answer the Jason Hartman question. What is the Jason Hartman question compared to what, and so there’s no reference point of what it was last year, or 10 years ago. So we don’t know what to compare it with. But here’s what they say. 12% of these renters, mostly apartment dwellers, of course, have no confidence in their ability to pay rent next month. 18% have slight confidence 22% have moderate confidence. 47% thankfully, have high confidence, that’s good. And 1% says they’ve already worked out a deal with their landlord to defer their payment. And that’s according to data collected for just a short time short period, October 28 to November 9, and that is the household pulse surveyed. All right, I got a bunch of other stuff to go in to on an upcoming episode. But we have part two, where we talk about good hearts law today.
So let’s get into that part two of the episode, as we talked from yesterday, that demographics and age distribution and all sorts of amazing stuff. So here we go with part two. Oh, wait, you know, I always almost forget, don’t I and I have to remind myself, many of you have asked about the Black Friday sale, what it includes what’s involved, just go to pandemic investing.com slash Black Friday, pandemic investing.com slash Black Friday, and check out our black friday bundle deal with a whole bunch of great offers for you.
All right now our guests. Okay, so go on, you know, I’m looking at the table of contents, you cover a lot of things in this book, let’s switch gears and, and you know, grab it in another area that you want to cover. I just want to make sure we get all this out.
Charles Goodhart and Manoj Pradhan 17:23
Well, one of the one of the key things that we get asked, and and you alluded to this yourself, right, which is that the tip of the spear or the blueprint for an aging society, has already been seen, many argue in Japan. So Japan’s been aging for a very long period of time. Like you’re saying the concerns are that they don’t really have much immigration inward. So their population growth is really dwindling into nothing. And if all of that is true, why haven’t we seen our thesis playing out there? Why have we seen in many cases, the opposite? And chances are no, we’ve looked at this topic. And our argument is that the way Japan has been treated has been symptomatic of a lot of the problems that we see in the analysis of the global economy. It has been one reason why don’t you see your thesis playing out You mean inflation,
Jason Hartman 18:11
right? inflation, because Japan has huge debt levels, about 230% of GDP, and it has an aging population. But it also has, you know, it’s really like the last three decades, you know, I mean, not not even two decades anymore. So why don’t you see it playing out
Charles Goodhart and Manoj Pradhan 18:28
there? Actually, actually, it’s interesting you say that, and let’s use that as a starting point. Right? I mean, the first point you look at is they really did have a lost decade, there’s no doubt after the asset price bubble burst they really had last decade. But since then, they’ve had 1% GDP growth, which doesn’t look fantastic at all. But when you consider that the population and the working age population has been falling and workforce has been falling by 1%. The difference between the two which is productivity is 2% a year. If you offered 2% a year productivity growth to the advanced economies, they bite your hand off today. So they’ve done very well on that front. The second thing to keep in mind is Japan is not an autarkic society, there was no way that Japan was blocking off either the disinflationary forces, or the impact of this massive labor supply shock at its borders. So Japan going into inflation, while China was deflating the rest of the world is incomprehensible. When we look at Japan, and we look at it as a closed society, and we say, Well, this is what happened in Japan, they wouldn’t have deflation because of its demography. What we’re effectively doing is we are saying that Japanese corporates and and the policymakers there, disregarded the rest of the world and they absolutely did not one of our key contributions to that debate is finding new data and new evidence from Japan’s own ministries. That shows very clearly that Japan’s corporate sector looked at the domestic economy and said, That’s not where I want to invest. What I do want to invest in China, North Asia. Brazil Poland. And indeed, if you look at what’s been happening there, the ratio of overseas to domestic production not only of manufacturing, but of employment services, profit, everything has been increasing at a very steady pace for the last 30 years. So Japan behaved in a profit maximizing manner outside, within its economies, its labor force was treated as we all know very differently from the rest of the world, you could not really fire those with employment for life contracts. So Japan moved them from manufacturing to services, where you could better protect their hours, and then move to part time workers. So I think Japan on our point of view has been misdiagnosed. And using that as a roadmap for what is yet to come is an extremely misleading story, which is why we have market prices where they are right now. And they’re about to be proven wrong.
Jason Hartman 20:53
And when you say market prices, are you referring to the stock market,
Charles Goodhart and Manoj Pradhan 20:56
partly to a low to a large extent, I mean, interest rates. So if you look at way interest rates are and this is the point you made earlier, which is that, you know, there, Japan’s debt has skyrocketed, and what has allowed them to remain that high, which is a point Charles has made many times is that the cost of servicing that debt has fallen to incredibly low levels. And so what we’ve seen for the futures, everyone’s expecting interest rates over the next 10 2030 years are going to remain very low, which means there is no pressure on stock markets, and the impact on currencies as unknown. If we are right, we’re going to start with those interest rates being at the wrong level. And all of the subsequent changes that will reverberate through the risky asset spectrum will then be a function of that initial change. And we’ve been living in a remarkably favorable time and capital. And with the result that what has happened is being debt ratios everywhere have gone up very, very sharply. But interest rates have fallen just as sharply. So debt service ratios have remained flat or even decline. So the burden of the debt has not been increasing. But interest rates can’t go down anymore, and are very likely to rise somewhat, in the aftermath of a pandemic, and with the reduction in the working population that we see coming. And with the greater protectionism, the end of globalization, the return of business to each country is one of the features of the COVID pellet pandemic, was it every country became even more national, they, they all insisted on keeping their own drugs and personal protective equipment,
Charles Goodhart and Manoj Pradhan 22:42
the COVID pandemic has moved globalization even further backwards,
Jason Hartman 22:49
the COVID pandemic has really promoted the Trump agenda at the end of day Trump back in 2015. And 16. You know, he This is all the stuff that he was talking about. And, you know, he’s getting it through COVID, if not his own efforts, obviously. But you know, I think there’s some sense to that, I mean, countries should make their own PPV and some of their own things and their own vaccines. And, you know, so some of that should be done on shore. You know, that’s just my personal opinion, we can’t be dependent, you know, every country can’t be totally dependent for emergencies style needs on other trading partners that need them themselves, right. And
Charles Goodhart and Manoj Pradhan 23:28
you have to be aware of the implications of that. Because in the past, with globalization, any employee, I could turn around to the workers, and say, if you insist on having a higher wage, so be it, but we will move the production offshore, and you will no longer have a job. That is no longer going to be the case. I’m the effect of globalization and the massive upward supply shock in the labor force. And the shift of labor out of manufacturing where they were relatively well, concentrated and and unionized to the service economy to the gig economy has absolutely trashed the bargaining power of labor. Oh, I know. And the bargaining power of labor is going to come back.
Charles Goodhart and Manoj Pradhan 24:14
I think, if you just to put Charles’s point in a slightly different way connecting to the initial comment you had is is where do we where do we stop that story? If it is for national and public interest that you’ve produced BP at home and disregard profit considerations? I would have no objection to that. But then you could kick that story on to a few other industries where you could make similar argument you could be endless. Yeah.
Jason Hartman 24:40
I’m just saying, you know, it just seems logical that some of this year you can’t be just completely dependent. But look at that’s a neither here nor there. That’s just my opinion. Okay, I could be wrong. But you know, what, you’ve got a diagram in the book where you talk about stagflation. And I’ve predicted that that is the era We’re moving into, I don’t know if it’ll be the 70s style stagflation, but I think we are going to see a higher inflation. And I think we are going to see a real shift in employment and so forth. You, you’ve alluded to it in kind of different ways. And I’m just wondering, do you think that’s what we’re coming into stagflation? And for the inflation component of that, you say inflation is coming? And I agree with you, by the way, how much? Like, can you put a number on that? And are you talking about us when you say that, or global or both?
Charles Goodhart and Manoj Pradhan 25:35
I think we’ll be lucky if we can hold inflation to a rate of about four or 5% per annum
Jason Hartman 25:41
as an official number, like a CPI number, which most people believe that’s understated, you know,
Charles Goodhart and Manoj Pradhan 25:47
but it seems at the moment, because of the shift in the consumer basket, what people buy the current CPI figures, very impatient and almost meaningless, and certainly underestimate the true rate of inflation at the moment, they’re not by an enormous amount.
Jason Hartman 26:04
Let me get an opinion from you on that. Do you think the true rate of inflation is is 50%? higher than the CPI? Is it double the CPI was
Charles Goodhart and Manoj Pradhan 26:13
so good, because we can have a CPI of zero.
Jason Hartman 26:18
Well say the CPI is at their target rate of 2%. When it is okay.
Charles Goodhart and Manoj Pradhan 26:22
You guys know, it’s 2%?
Jason Hartman 26:24
I understand. But but just say it’s two we’ve been, is it really three? Or is it really four? You
Charles Goodhart and Manoj Pradhan 26:29
know, it’s probably right around two. Okay. That’s that that’s more in, in Europe? I’m not, I wouldn’t like to be dogmatic about what the US situation.
Jason Hartman 26:42
Okay. All right. Fair enough. Fair enough. Okay, so but but stagflation. Is that where we’re coming into
Charles Goodhart and Manoj Pradhan 26:48
the inflation? Yes, the question of stag, I were in some ways, were quite optimistic in that we do think that productivity per worker is going to improve, because he noted to retain women remain competitive manufacturers who are able to maintain an enormous profit margin, by shifting everything delay wage countries abroad, will now have to invest in order to make their workers where you need wage costs are likely to rise more productive in order to cut cut down on labor costs. So we think that productivity per worker will rise as he did in Japan, we think that investment will corporate investment will go back up, and that productivity will recover, but will do very well, if we do as well as Japan. And you talked about three last decades. We think that given the demographic difficulties that Japan faced, during the last two decades, they’ve actually done very well. And we will all and that includes the US and the UK, be doing very well. If we can increase our productivity per worker to the level that Japan has managed to do.
Jason Hartman 28:02
Yeah, look, Japan is impressive, intellectually and technologically. And in terms of ambition, I mean, their workers are extremely ambitious. They work very hard, very many hours in Japan. So so fair enough, I was sort of including the demographic problem into the mix. And China, by the way, has a demographic problem coming up in a decade or so as well. So you know, the one child policy is about to really rear its head. Go ahead, manouche. But I really want to make sure and I know we’ve been going long, I want to make sure because I’d be totally remiss if I did not ask you a little bit more about good hearts law. So I do want to get to that before you go. But man, it was you were gonna say something.
Charles Goodhart and Manoj Pradhan 28:42
Yeah, I was gonna say I mean, if you think about it from an econ 101 point of view, right. I mean, it’s been a very long time since since I taught that class. But if you think about it, from that point of view, it’s it’s interesting to contrast it against something like the 70s stagflation right there, what you would get is a negative supply shock, that would create a negative output gap. So you’d have unemployment at high levels, and you would get the inflationary impact. What we are arguing is different over here is that what you’re getting with a declining labor force is that potential growth itself is going to come down. And real factors in our case, as we have argued, all the ones that are going to lead a nominal variable, like inflation higher, so if you mean by stagflation, that you’re going to get lower growth than we’ve had in the past. That is absolutely right, because inflation will be higher and growth will be lower. But it’s not the kind that you get massive amounts of unemployment, you get really lucky relocation of labor from one sector to the other. But overall, we think with productivity and employment, it will actually benefit workers not only from a social but from an economic point of view.
Jason Hartman 29:47
Good. So the news is not all bad. 10 right. It’s good in some ways, for sure. Right? Right. Okay. Okay. You want to wrap it up with good hearts law
Charles Goodhart and Manoj Pradhan 29:58
when the government when The government or anybody in a position of power makes a relationship into a target, then the previous relationship will tend to break down. Let me give you an example, not economics. But shall we say, from education, let’s say that there is a pretty good relationship between somebody his score in mathematics, and overall ability to deal with all the success in later life. So the government then targets a mathematical exam, in order to try and raise standards. So no schools get graded on the result for this particular maths exam. The result of that is that every school then effectively focuses on getting the students to pass that particular maths exam, without necessarily having a grounding in a whole series of other kinds of important educational training, or necessarily knowing much about maths outside, there’s specific areas in which you’re going to be tested in the exam. As a result, what you would find is the prior relationship between mathematics ability, as tested by this exam, and subsequent success in life, would collapse. Making something into a target changes the way everybody behaves. It changes the way the people who is subject to the target pave, and even changes the way that the authorities themselves Bay. Again, to take an example governments don’t like it, if the targets they have set are not met. So very frequently, they will actually change the way that things are scored, in order to ensure that a sufficient proportion of the population is doing this actually gave us a targeted toe. Yeah, fascinating
Jason Hartman 32:10
that that’s, that’s really excellent. You know, it almost makes me call the mind to I’m sure you’ll say unrelated things, because I think they are unrelated. But you know, they’re kind of in that. I want to say like the double slit experiment, and hawthornes law, or the Hawthorne experiment, I guess I should say, I don’t know if that became like a law, if you will. But you know, that you whenever you you make something a thing, then the focus changes, and it skews it if it abuses it, right. That indicator, right. Yeah. That’s very interesting. Very interesting.
Charles Goodhart and Manoj Pradhan 32:43
You remember the Westinghouse experiment? No, I don’t know that one. Tell me. It’s a lovely one. Western has experiment was there’s a factory and they tried to see what made the workers more productive. Uh huh. And they changed
Jason Hartman 32:56
that was the lighting, right?
Charles Goodhart and Manoj Pradhan 32:57
Yeah, are they and then they change the period of the tea break, and they change the period of the, or the break to go to the john aid. So every time they change, something, productivity went up. And then they thought, you know, I wonder what’s happening. And they started changing it the other way, productivity still went up. Was that what made productivity go up? Was it actually people felt that others were interested in right? And because they were interested in them, they worked actually harder. And, and because they were being observed, then change their behavior. So the very fact of of undertaking changes and changing bodies, changes behavior, and then changes the relationship.
Jason Hartman 33:44
Absolutely. Absolutely. Very good stuff. Do you have a website you want to give out or I mean, the book is available, of course, in all the usual places, and it looks great. By the way, you’ve got so many charts and graphs in here. I just, I love that. Did you have a website you’d like to share anything? We don’t have ever website?
Charles Goodhart and Manoj Pradhan 34:02
I think we’re happy with just the book being pushed out there.
Jason Hartman 34:05
Okay, good. And the book is called the Great demographic reversal, aging societies waning inequality, and inflation revival, Charles Goodhart and Manoj Adham. So thank you so much for joining us today. Very interesting discussion.
Charles Goodhart and Manoj Pradhan 34:22
Thank you.
Charles Goodhart and Manoj Pradhan 34:23
Pleasure. Thanks for having us.
Jason Hartman 34:29
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