Jason Hartman starts the show discussing J. Kyle Bass’s speech from the recent CPDC Conference about China. He goes further into the economic data that comes out of China and is wary of some dangers to come. Later on the show, investment counselor Adam chats with Graham, one of the networks mortgage lenders. They discuss where interest rates will be this month.
Investor 0:00
Basically found creating wealth podcast by searching iTunes in immediately resonated with your message, you know, the great returning investment, significant, significant reduction in taxes, steady income that could eventually replace my corporate job income. Also, what I found very powerful is along with that message, I was impressed by the high caliber of your guests. And I remember listening to economist investors, lawyers, authors, basically people who could present their expertise and allow me to judge their response against your message. So as an example, when you talk about inflation, your your your ideas about inflation going up over the next few years, I could vet that message against your guests and in be sure that what you were saying made sense. So that was very powerful to me.
Announcer 0:53
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:43
Welcome to Episode 1187 1187. This is Jason Hartman, thank you so much for joining me today as I’m coming to you from my home. I am back home on the Treasure Coast in Florida. And it is A day where a storm is about to begin. It’s nice to be back in the good old US of A, you know, I love to travel, you probably gathered that by now I’m at 83 countries and counting. And the trip to China and South Korea over the last two and a half weeks was amazing in so many ways. And I promised last week, as I was reporting to from Hong Kong, or maybe it was Shanghai, I can’t remember I think was Hong Kong, that I would share a couple of excerpts from Kyle basses speech. It is really interesting and enlightening, because as NGOs, the US, so NGOs, the world as NGOs, China, so NGOs the world and to some extent as well, it’s the second largest economy on Earth, a huge consumer of resources. And you know that I am a big proponent of packaged commodities investing. And as such, I think you’ll find this interesting, these crazy crazy real estate prices. Just a whole whole bunch of things to consider in here. So we’ll get to that in a moment. Let’s kind of dive into a couple of excerpts from this talk and dissect it a little bit. And here is Kyle bass.
J. Kyle Bass 3:13
They purport to have an economy that’s 15% of global GDP. When you look at cross border currency settlement, they don’t even represent 1% of
Jason Hartman 3:22
cross border currency settlement. So, so what he’s talking about is he’s talking about China, that claims to have 15% of global GDP in terms of the size of their economy. But when you look at the way the cross border currency transactions are settled, there is really very little activity. So how reliable are China’s statistics and their statements about the size of their participation in the global economy
J. Kyle Bass 3:52
of take their word for their domestic rmbs based economy converted back at a rate that they stipulate is the rate and we do give them credit for being 15% of global GDP. For the last six or seven years, our work is basically shown that China’s desperately short of US dollars. They run their own economy, where they have RMB where they control the printing press, and they printed more money than any any economy in the in the history of the world is printed domestically. They run the printing press, they run the police, right, they run the narrative and they also control the price level domestically of everything except really their real estate. So they can control their own economy but what they can’t control their dollar reserves. And I think Roger was getting to the point that the Chinese companies list in Hong Kong primarily and raise money in both Hong Kong Europe and the US they raise dollars primarily, they’re so desperately short dollars, and that’s starting to really show itself and and to Rogers point, they’re borrowing so many dollars and he was mentioning that we’re headed to a trillion in fact, Chinese corporate borrowing in dollars is already eclipsed $2 trillion. Last year, it’s gone to about 1.1 trillion The inclusion the MSCI as you saw the articles in the Wall Street Journal, saying that China pressured MSCI with all the pressure they could put on, put on them to get their their
Jason Hartman 5:10
representative weightings increase. Now MSCI is a ratings agency. What is so interesting about what Kyle is saying is that you know, for all of the doomsayers and all of the people and listen years ago, if you’ve been following my work for the last 15 years or so, I used to be one of these people. So I know the thinking I was very much engaged in the idea for a short time, admittedly, thankfully, at least a short time. And maybe not admittedly, but thankfully is the right word. I was kind of going down this path where I was believing all the doomsayers about the dollar and the dollar is going to lose the reserve currency status and all that stuff. Well, I quickly snapped out of my delusional thinking, but there are a lot of those doom and gloom errs out there. Peter Schiff. All the rest that crowd Gold bugs and so forth. And now the cryptocurrency bugs. And I just don’t think that’s going to happen. You can hear, you know right here that these Chinese companies and Chinese banks especially, they’re just dying to get their hands on more US dollars. Remember the dollar is likely the most important product, the US exports. I know you might think well, Ford exports their cars right not not as much as some of the foreign automakers export their cars but you know, our companies export but there is definitely a current account deficit in our import export, right. They call that the current accounts deficit. So we don’t export as much in terms of goods, but we shared who export a lot of dollars and the whole world the entire planet still, you know, regard Those of those doomsayers out there. They love getting their hands on the dollar. And they need the dollar because the dollar is the settlement vehicle for all international transactions, it is the reserve currency. Maybe it won’t be that way forever. None of us really know. But for now and for the foreseeable future, in fact, I would argue, as long as the US wants to keep it that way, because the dollar may not be backed by gold. But again, it is backed by the largest military force in world history. So dollars they’re in and they’re not going anywhere anytime soon if he asked me, but you know, we’ll see what the future holds.
J. Kyle Bass 7:42
Which is happening now. They’re actually going from 5% waiting to a 20% waiting, which is forcing us retirees that index to these things. All of our money is going into companies that actually don’t have big four auditors. They actually don’t allow audits they file glossy financial statements. Our annual reports. I don’t mean to go off on a rant here. But I think it’s important to understand exactly where China is and what we take for granted, I think in financial reporting. One of the other issues that you brought up, Roger was,
Jason Hartman 8:13
so in China, it’s even more opaque. And you know, it’s bad enough in the US, right. But even more opaque there in terms of their reporting from their companies, instead of having audits, they have nice glossy financial reports. Right. So, or annual reports, same thing, not the standard that we have in the US,
J. Kyle Bass 8:32
basically the primary and secondary sanctions as the sanctions on Iran, go into place. All of the companies that do business with the Iranian National Oil Company, the rain international shipping company, and everyone that’s listed in the primary sanctions are secondarily sanctionable. And that is up to the United States government to go ahead and and sanction those secondary entities. But you think about one thing that we can do, I think in this with this organization, I think we can also, let’s say issue edicts, as far as What the US can do as action items. And one thing we can do is the you know, all pensions and endowments run under an IRS exemption, a tax exemption. And so if the IRS issued guidance that said, You’re not allowed to invest in primary sanctioned entities period, it’s against the law. And if an entity is secondarily sanctionable, are the, what we deemed to be secondary sanctionable continuing to do business with primary sanction, companies, we should just make them. We should force divestment. If you want to keep your tax exemption, you’re not allowed to invest in these things. That’s trillions of dollars. It’s something easy for our country to do. So.
Jason Hartman 9:38
You know, he’s going on front a bit of a tangent, and, you know, hey, I go off on tangents all the time. So here’s one, just some food for thought. Not a deep talk about it. But let me tell you a lot of these endowments, you know, by some of the most prestigious institutions in the country in the US, right, and maybe around the world, I don’t know, but in the US at least, and I’m not picking any one Name, I’m just throwing this out there as an example, but say Harvard University or Yale, or any of these huge endowment funds, and I’m not specifically pointing them out, I’m just giving that as a kind of general example. They are invested in all sorts of sleazy things, okay. And it’s very opaque. You know, people don’t know, they don’t know how socially responsible or not those investments are in here, he’s talking about how the sanctions work against these foreign governments like Iran, North Korea, etc. You know, it’s just kind of interesting. Like, if you want to solve the problem, just say, look, if you’re going to do this stuff, if you’re going to invest your money there, then you’re going to lose tax benefits. And that would solve the problem probably very easily.
J. Kyle Bass 10:44
Something. I chair the risk committee, the largest public endowment in us, University of Texas, and we implemented that policy last year. So that should happen. That should be a forced happening. I think, from the perspective the IRS comment real quickly on something Gordon said You know, he said the strongest economy wins. And I think that’s exactly true. And Roger proved through working with the Saudis, that you could pump enough oil to get oil to $10 and destroy the Russians. And for that we all thank you, Roger, but I think looking forward to China,
Jason Hartman 11:16
so you might remember when I had and I cannot remember the guests name, but he talked about how oil could end up at $3 a barrel, incredibly cheap oil, right? And how, of course, countries use this as a weapon against each other, right, increase the supply, collapse the market in terms of price, and, hey, you know, that’s what, when that’s done, it’s a punishment against countries like Venezuela and Russia. So get the Saudis to pump enough oil. And now, you know, the US is exporting to and the US is very energy rich. I mean, what happened to all the peak oil theories and all this stuff from the 70s and all the doom and gloom and you know, the world was going to go dark and you know, None of that mouth huzi and stuff came true. It’s the complete opposite that’s happened. So that’s just kind of an interesting note. But, you know, this ties in so much with real estate investing, because when Kyle talks about the real estate prices in Hong Kong, and I touched on it last week, and we look at the largest consumer, of those packaged commodities, those ingredients of all the houses that we invest in, the copper wire, the glass, the steel, the lumber, the concrete, the petroleum products, all of that stuff, all the energy it takes to build a house, right, all of that stuff. And, you know, most of you listening have been investing with us, or, you know, most of you that have been investing with us, I should say, for many years, you know, you’ve purchased a lot of sort of working class housing stock, that’s the housing stock that they have not been building, hardly at all coming out of the Great Recession the last 10 years. And so think about it, all those commodities. All those ingredients of all your houses are so important, you got such a good deal on them. Even if you buy one today, you’re still getting an incredible deal, even though prices have increased quite a bit since the depths of the darkness of the Great Recession. So you’re getting something in new control something that isn’t being recreated. There’s a huge shortage of that type of housing stock. So consider yourself very, very fortunate in that respect.
J. Kyle Bass 13:28
You know, we talked about IP theft, and they’ve stolen, whether you’re looking at God reports or USTR reports to the President, they steal two to 300 billion a year of IP. So we know it’s interesting. That’s a pretty big number, right? I’ve never seen one public company file an 8k showing evidence of IP theft. And there’s two to 300 billion of it a year so I think we should force public companies that go complain to the government to file a case. Alright, so I’m going to get get off of that rant because I really enjoyed those prior to speeches, little bit of a tangent there. Talking about Hong Kong is functionally relevant. That the entire picture of what’s going on in China. If you believe that China’s desperately short dollars, Hong Kong is where China raises all of its dollars around the world, if you remember how Hong Kong’s agreement came with the US and with Great Britain with us, it came in 1992 and the Hong Kong US policy act that mitch mcconnell lead in the Senate, it got signed. And basically we treat Hong Kong as its own sovereign, even though China technically controls Hong Kong, as long as Hong Kong maintains its democratic electoral process, its autonomy and its economy and its autonomy. And it’s judiciary, we treat them as their own nation. And we have a free trade agreement with them their most favored nation trading status. We don’t have any of the tariffs that we put on China or the any of the manner in which we deal with China from a trade perspective doesn’t happen to Hong Kong as long as they maintain that autonomy. So I’m going to get into real
Jason Hartman 14:56
so I mean, that’s so interesting, because when we were there, last week I just got back home yesterday. You know, we went in and out of Hong Kong twice, coming in from Mainland China coming in from my guests. We came in from gancho the first time, came in on the high speed train, and then went through immigration, which is a huge pain. It’s amazing that you’re in the same country, you know, it’s still all China, right? In theory, but not really. It’s a Hong Kong as a very much a separate entity, you know, very much of a hassle to emigrate from Mainland China and Hong Kong, you know, multiple checkpoints, talking to customs people, you have to go through the scanners where they have the infrared cameras that scan you to make sure you don’t have a fever and you’re not sick and you’re not bringing diseases in just the whole shebang. It’s a real hassle. I mean, it was easier to get back into the US from Mainland China than it was to go from Mainland China to Hong Kong. And then we left for a day and took a day trip to Macau. And now that’s a whole different thing as well. Same deal over again real big hassle. So very much separate,
Unknown 16:05
a quick financial picture of Hong Kong. And then I’m going to talk to you about the political side, because the financial picture of Hong Kong is, is, let’s say, one of the worst in the world. Their banking sector is almost nine times their GDP, their household leverage when you look at private sector credit to GDP in Hong Kong I have.
Jason Hartman 16:21
So in other words, the way I read that now, look, you know, I really simplify things because I think they’re just a lot easier to understand. You know, you can talk in esoteric language, use lots of acronyms, blah, blah, blah. But when he says the banking sector is what he say nine times the, you know, the GDP, right, the real GDP. And what that says to me, is the smoke and mirrors economy is much bigger than the real economy, and eventually, that comes home to roost because what’s real is real and what’s fake is fake, and the financial world The Wallstreet economy versus the main street economy. One is real. And one is a game of moving money, creating, quote, financial innovation, unquote, and moving it around and changing labels. And you know, it’s just a derivative of the real economy might be a good way to look at it. So not much real economy going on is what he’s saying in comparison to the banking economy
J. Kyle Bass 17:27
will have slides that I want to show you really quickly, and I don’t know which order they’re in. Alright, well talk to your first Hong Kong used to be the southern port for China. This is a ratio of Hong Kong’s GDP and the numerator and China’s GDP and the denominator. So this is what represented percentage of China’s economic importance to Hong Kong used to represent so in the mid 90s, it was as high as almost 30%. And what you see is, is as China’s scented the WTO and spend all the money they’ve spent building out their own southern port infrastructure in their trade infrastructure, Hong Kong’s become Much less economically relevant, but still very financially relevant to China. It’s really important to see how Hong Kong’s economy has changed over time is China in it did that investment in their port infrastructure, the blue bars are goods and mostly US dollar based goods. The red bars are services. So Hong Kong used to be a big exporter of goods and a big importer of services and right around the financial crisis, their economy flipped and their economy flipped to today. They’re actually a massive net US dollar based goods importer, and they’re a services export, and they export to hop into China, right, China, Hong Kong faces China for about 80% of their GDP. What’s happened in Hong Kong in the last 10 years is something that will never happen again. So since they’re pegged our currency, the US dollar they import our rates. So when our rates went to zero in 2008, their largest trading partner went to the gas pedal China. So what happened to Hong Kong real estate from 2008 to today is the largest real estate investing in world history, as you all know, Hong Kong Real Estate’s the most expensive real estate in the world. It trades around $10,000 a square foot.
Jason Hartman 19:08
Did you hear that?
J. Kyle Bass 19:11
Wow.
Jason Hartman 19:14
$10,000 per square foot. Katie bar the door. As the saying goes that is in sanity. That’s absolutely nuts. Think about the houses you own right? If you’re one of our clients, you probably paid depending on you know, if you purchase something recently, you probably paid somewhere between $65 and $150 per square foot for a property and 150 would be on the outside. That’d be the high side. You know for like a real Class A type property through our network. So $10,000 per square foot, the largest real estate price expansion World History that is absolutely in credible incredible.
J. Kyle Bass 20:09
And the reason being is free money for 10 years, and their largest trading partner was growing double digits. Now that’s reversing household leverage when you get private sector credit to GDP in Hong Kong is now the highest in the world. So another hundred percent of GDP. The other two lines here are the US and Japan.
Jason Hartman 20:27
So So in other words, 300% of GDP household credit, so people in Hong Kong on carrying a lot of debt.
J. Kyle Bass 20:35
the banking sector is now eight and a half times GDP. You guys remember Iceland, Ireland Cyprus back when the European crisis was happening? Those dominoes fell on the order of the size of their banking system. Hong Kong’s banking system is now as large as they were then
Jason Hartman 20:49
fake economy versus real economy.
J. Kyle Bass 20:52
Other Fun fact the two largest banks in Hong Kong, HSBC, and Standard Chartered are orphaned children a British financial institution. stations that don’t have any British depositors. So I think those those banks are in a precarious position. This is the key. So when you run, when you run a currency peg on to the US, you import our rates. And then to defend that peg, you have to have what we call excess reserves. So this is a busy chart. But let me just put it in perspective. In the last year, Hong Kong is spent 80% of its rainy day fund defending this peg to the US. And the only reason pegs work is you have synchronicity in economy as well. Now, Hong Kong’s economy is much more relevant to say China’s economy is much more relevant to Hong Kong than the US. And they’re spending a lot of the rainy day funds trying to maintain this, this peg that’s existed for 36 years. So it’s a subset of what’s happening in China. China’s house is on fire and now Hong Kong might need a few fire engines from China and we’re not necessarily necessarily sure all of this doesn’t revalue to Gordon’s point and thinking back to the fall. Soviet Union, it looks to us like I don’t want to say fraud. But let’s say the disingenuous nature of the exchange rate between the RMB and the USD, given the fact that China is completely running out of dollars and raising dollars through Hong Kong and Hong Kong as as levered as it is and running out of its own rainy day funds. If you have money invested in Asia, I would rethink that and I’d rethink it very quickly. And if you have Hong Kong dollar deposits, you’d be foolish not to convert them into US dollar deposits because that
Jason Hartman 22:30
you don’t even Okay, hey, we got to leave it at that and get to the rest of our show. But that is scary. It is mind boggling how imbalanced things look from Kyle’s talk. And that’s a very, very enlightening talk. So you can check it out on YouTube. Just look up j Kyle basses speech at CP DC conference. And this one is off secure freedom. Check it out. Really very enlightening. And thanks to them for bringing that to us. Very, very interesting stuff for sure. Maybe we’ll go over the rest of that talk later this week. Just finish it up. But I hope you found that absolutely fascinating. And I did and pretty, pretty mind boggling. Yeah, truly, it is. Without further ado, let’s get to the rest of our show today.
Adam 23:24
Welcome to the May edition of the mortgage minutes. We’re joined today by Graham, one of the lenders in the Jason Hartman network. How are you doing today, Graham?
Graham 23:30
I’m good. Thank you. I appreciate you asking me.
Adam 23:33
So we’re interested here. What is the interest rate you’re seeing right now for, say $100,000 loan with
Graham 23:40
good credit. Well, once again, it varies from one lender to the next. There’s four factors that go into rate. One, of course, is your credit score. The other one is a percent of down payment, whether it be 20 or 25%. Typically, you’ll get a better rate with 25. Then there’s a loan amount adjustments. The Fannie Mae adjustment started 151 25 100, so forth, and then the lower you go, the worst array gets. And then of course, the type of dwelling, whether it be a single family versus duplex, the pricing is a little more aggressive on the duplex. But as far as a range is concerned, I think we’re still doing in though in the lower fives probably anywhere between five and two, five and eight, up to five and three eighths and five and a half. So I think we’re still at a very good level of interest rate, which is kicking off some nice cash flows. And now
Adam 24:27
what about there are a lot of properties through the network that are in like the $80,000 range, what kind of are the rates very different for that? Do they go a lot,
Graham 24:36
I mean, between 180 and 260, you’re not going to see a whole lot of variants, maybe an eighth best at that, and that’s a lot. Okay, where you get nailed is when you fall below 50 there’s a huge adjustment there. And most lenders out there usually won’t do loans below 50. I know some Stop it. Even 175 we go down to 50. But beyond that, it’s just not cost effective. And plus, it’s not favorable for the investor. Now, in your office, have you seen mortgage applications rising or falling in the past month or two? You know, it’s interesting. I always stay consistent. I think, if I was to give a general feel it was a little soft there at the beginning, but I think we’re starting to see it pick back up. Is that because the Fed is holding the rates? Maybe? I think that we’re starting to see more inventory out there. And I think we’re starting to see more and more people, you know, get off the sidelines and say, Okay, I’m tired of look at my 401k statement. Now, it’s down to one on one. So they’re starting to get in the game as new investors. And that’s really, really good. So yeah, I think we’re seeing some tick up in the applications.
Adam 25:41
All right. And now the 10 year Treasury, which is what most of our mortgage rates are tied to, has been inching up in the last month, not a huge amount, but a little bit. What do you attribute that to and what factors do you see impacting that and our potential mortgage rates for the next one to two months,
Graham 25:58
I’m going to say, you know, the most It is the inflationary figures. Unemployment is still good. They’re up about 4.9% over the last report, I feel that we’re probably going to see probably more than a couple of months, you know, the feds met yesterday. And of course, you know, Mr. Trump wants to keep things pretty level right now, which I think is an end result they are going to be level. And I’m just looking at the last four months history here on the 10 year bond, and I’m and I’ll just read it four months ago, it’s like 2.5, the next month, 2.5, the month after that 2.4. And then of course, 2.4, the lower the higher the rate, so speak. But I think for the most part, we’re going to see it pretty much level for the next three to four months, which is good thing people say it’s going to stay level all year. But you know, if I knew that I’d have a crystal ball, or at least I’d be living on the wall street making more money.
Adam 26:48
Now. I’ve heard some things. Obviously the Fed at the end of last year said hey, we’re going to raise it four times. Now they’ve said hey, we’re going to keep it level for the year. But I’ve heard inklings of potentially them, cutting rates. Now, if they cut rates, what impact do you think that would have on the treasury bond rates? And how would that impact? What would that do for the confidence?
Graham 27:08
Well, of course, the confidence will go up. I think that if we see any cuts whatsoever, to, in layman’s terms come back to as a net result on interest rates, probably no more than a quarter. I would love to say we can get back in the force. And we might, we really might. But for the most part right now, I think we’re pretty stable. You know, I can get consumed with all kinds of different reports that I read from, you know, economist and so forth. And I usually like to go with trends and the trend is good. Now, the trend is dropped. Okay, so we’ve seen it easing up a little bit, not a whole lot. I mean, if you look at it on a graph, it’s hardly noticeable at all. But you know, like two weeks ago, you know, instead of the five to five and a half, we were probably at probably five and a quarter to five and five, eight. So we have seen it soften a little bit and what tips would you give to anybody considering getting a mortgage within the next One to two months like what would you say to those investors? Well, I am an investor. So the way I look at it is I’ve been dealing with investors for 20 years, and you talk to any of the season guys out there, they’ll tell you anything below 7% is a good return on investment property. And guess what? That’s still good today. We just been spoiled for the last 810 years. So that’s the problem. You know, we’ve got down on the fours hovered around there for several years. And then we kind of crept up to the fives. But for the most part, you know, if you take a difference in rate, you know, we’re talking seven $8 difference in payment. me as an investor, I don’t really try to sit around and play guessing games. When I see that the rate is good. And I see that the trend is good. I lock okay. I don’t like to float. So I dress this to all my customers. If you locked in on a right today, would you be more upset if you didn’t lock them in and they went down? Okay, so that that’s just the
Adam 28:52
way I play it. All right, Graham, thank you very much for your time today.
Graham 28:55
I take care.
Jason Hartman 28:58
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