Jason Hartman starts the show by giving us a number of economic world headlines. He hosts Cody Mamone, CTP, a Vice President for PNC Bank, to chat about cryptocurrency and Bitcoin. They also discuss the debt. They examine how consumer debt continues to increases and relate that to the impact of interest rates. They further the discussion on interest rates, explaining how even slight changes in rates affect investors and homebuyers.
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Jason Hartman 1:03
One of the unique strategies I implemented a few years ago fit with my 10 commandments of successful investing, especially number eight, thou shalt borrow to accelerate wealth and reduce risk. And number 10 thou shalt only invest in tax favored assets. So my money grows tax free, and I can leverage down payments. My friend Pat Donahoe his team at paradigm life got me started, and I have a few accounts with him now. Check out this perpetual wealth strategy at be your bank.com Welcome listeners from around the world from 164 countries around the world. This is your host Jason Hartman with Episode 922 922. And today I have a returning guest he was on several years ago, when I knew him in the early days when he was attending college at ASU. And that is Mr. Cody Malone. Now a vice president, you The commercial and institutional banking side at PNC Bank living in New York City Cody, welcome back. How are you?
Cody Mamone 2:06
Hey, Jason, great to be on the show again. It’s been too long.
Jason Hartman 2:09
Yeah, it’s it’s been great following your career path. Congratulations on your success and your recent move to New York City and, and you’ve got a VP position at the ripe old age of well below 30. I know that.
Cody Mamone 2:24
Now, we’ll just keep it there. We’ll keep it broad.
Cody Mamone 2:27
It’s been quite the move in a year so far in terms of transition, but it’s been for the better.
Jason Hartman 2:32
Yeah, good. Good for you. Talk to us a little bit about what’s going on in the economy. We’re going to cover kind of consumer sentiment, unemployment, consumer debt levels. We’re going to talk about cryptocurrencies a bit and the absolute nutty crazy mob mentality going on there. There’s a lot going on in the world, the unemployment rate is down to about 4%. So by all indications from the outside, at least, from the mainstream media would Like the economy is on fire, like it’s doing great. What are your thoughts?
Cody Mamone 3:04
So there’s a lot of different positive economic factors that been, you know, encouraging the equity markets to rally to all time highs this year, even at that pace bonds and fixed income prices still haven’t sold off to normal pace that you would assume with that sort of inverse price action. But for the most part, think the macroeconomic factors like the labor statistic that came out on Friday in terms of the unemployment rate being at a almost 10 year low, right around 4.1%. I think it came in at things like that are definitely on the forefront of the, you know, economic focus, Federal Reserve, you know, started cutting down its balance sheet at a slow but substantial pace over the next quarter or so. There’s a lot of positives that have been built and reinforced in terms of the tax plan. They just got passed within the Senate. So I think there’s a lot of things that have materialized that people Thought that weren’t going to this year with the new Trump administration coming in. So even though those were sort of factored in initially after he won the election last year, a lot of those materializations that just happened definitely propelled equity prices to all time highs, and then a lot of subsequent related assets along with those. So, in terms of overall economic health, I think there’s still opportunity and some concern even for 2018, and they’re on after
Jason Hartman 4:29
good stuff. So Cody, you sent me this article from JP Morgan Chase, about the difference between saving and savings, which is a interesting distinction. The subtitle, the current household savings rate, or saving rate, I’m going to be clear, is the lowest on record at 3.1%. But that doesn’t mean consumers aren’t thinking about the future. In fact, this low savings rate may be a sign of household financial strength. Most people would defer With that, what are your thoughts about this?
Cody Mamone 5:01
Yes, saving versus savings. Basically, there is a differentiator between how much consumers able to save, you know, on a monthly or bi weekly basis, you know, given their income levels, and then how much they have in overall savings as part of their, you know, personal balance sheet. So, historically, we’ve seen about eight and a half percent of consumer income being classified as their savings on a bi weekly or monthly basis, you know, however they choose to budget it. In this case, it’s eight and a half percent monthly, but over recent years, it’s come down to about 3.1%. So, almost a third of that decreased so it’s a significant deterioration in terms of a quote unquote savings rate from the consumer. But closer we examine the financial position consumers in terms of their balance sheet, which you can see higher overall FICO scores across the spectrum in this perspective to be classified as a improving credit quality overall, so savings versus saving. If you look at it in a different context, there’s a lot more spending going on in terms of capital goods being spent on rather than being deployed into savings for consumers. So the amount of money Americans have set aside for future growth has grown about 10% annually since World War Two, that steady growth of savings over decades, it’s pretty much crucial in terms of financial planning, and it hasn’t changed significantly. So even though Americans may be saving a smaller amount of every paycheck, the total amount of money being put away for their future years continue to climb. So there’s an alternative measure that some economic forecasters and analysts sort of look at is the different compensation method. So when a lot of people think of savings, they think of the headline savings rate, which is return basically, by subtracting your spending from your income. And by that definition, a lot of households are saving less than their paychecks, but it’s more of a limited view. So if you look at a broader The point and take into account things like durable goods. So durable good think of, you know, washer dryer major appliance or refrigerator, even all the way up to higher dollar value items like a car. Consumers are spending their current income on significant amounts of more capital expenditures, you know, like these durable goods,
Jason Hartman 7:19
right. And those durable goods, obviously, as the name would imply they’re durable. So they last a long time. But you know, they may last a long time. However, people just replace them, because everything just keeps getting so much better from a technological perspective that people will just buy a new one. I mean, look at how high tech these refrigerators are getting. It’s mind boggling. What refrigerators are starting to do, but every appliance really, you know, in the world of the internet of things, and these connected devices, it’s pretty interesting, you know, Moore’s law may well be may need to be sped up a bit, given the old metric that 18 months in power of a processor, doubling and so forth. This is not a concern them is that the overall view of this that the lowest on record savings rate of 3.1% is not a concern, at
Cody Mamone 8:09
least through this sort of objective lens. You know, this economist, his name, Jim Glassman, he’s the head economist of commercial banking over there, JP Morgan. So I mean, within his opinion, which is, you know, an interesting perspective that a lot of people don’t take into account durable goods and personal capital expenditures in terms of household spending versus savings, but you can also categorize it as a long term sort of savings, deployment of capital, you know, from income. That is one way to look at it. But I think there’s other factors that I’d like to get into here, terms of, you know, hard data from the Federal Reserve that they keep track of, in terms of consumer credit, and the smorgasbord for lack of a better term of, you know, online personal lending that’s taken place and sort of accelerated, you know, as a mortgage securities and other investment vehicles for yield, that people will invest in yield, both institutionally and on the consumer level have slowed down since the financial crisis. So getting back to that, looking at the Board of Governors Federal Reserve data, they keep track of all i know you hate the Fed and very strong opinion on their monetary policy and guidance. And it’s a scam. We all know that. But it is what it is we’ve got, as I always say, just align your interests with the powers that be, don’t necessarily try and fight them. That’s the way to work within the system. So regardless of my opinion about hating the Fed, sure, go right ahead. Well, but yeah, so in addition to obviously, monetary policy, do a wide variety of other things that the central bank, you know, function is the best at so one of those things is keeping track of hard economic data that all of their member banks provide. So being the largest and smallest, you know, consumer and corporate banks within the United States. So, looking at some of the data they provide in terms of consumer credit, one thing that stuck out Over the last quarter is the amount of revolving outstanding consumer credit. It’s ballooned just over a trillion dollars for the first time ever. So we’re at $1,000,003,000,000 as of q3 now this is consumer debt not including student loans, though, right? Because that’s already at about 1,000,000,000,002, which is
Jason Hartman 10:21
insane is just
Cody Mamone 10:24
yeah, this is just revolving so think of any type of revolving credit product from a credit card to a personal line of credit to sort of hybrid products that are out there that you’re flexible principal repayments and terms where things aren’t fixed in nature. So they can be passively carried on for example, you know, your credit card can be carried on perpetually for about 20 years or so, from the bank’s perspective of lending money to Wow,
Jason Hartman 10:51
that’s just insane. It’s absolutely insane.
Cody Mamone 10:53
Okay, it’s
Jason Hartman 10:54
it’s not 20 years of credit card debt for the thing you bought 20 years ago that will be absolutely useless. Have no economic value,
Cody Mamone 11:03
despite your thoughts on financial reform from 2008. And there’s been some scrutiny as of later for the CFPB, or newer financial protection bureau that was formed, they did have some material impact on disclaimers that were included with, you know, credit card applications and you know, the larger font in terms of stating that, you know, you have up to 20 years to basically pay this you will be basically obligated to give your firstborn and then some terms of interest payments, so, so yeah, just touching over different credit statistics across the consumer balance sheets of revolving credit being just over a trillion dollars, credit card receivables and securitization, you know, at all time record highs, non revolving consumer credit $2.7 trillion, which would include 1.4 trillion, almost one and a half trillion dollars by the end of the year estimated student loan balances for consumers. It’s just, you know, an outstanding $3.8 billion or so in terms of overall consumer credit outstanding, not including mortgages. So, basically everything excluding mortgages is about $3.8 billion, or $3.8 trillion, excuse me, it’s hard to even fathom. It’s a giant number no matter what, definitely. Even at the end of 2012, we only ended at $2.9 trillion as an economy in terms of overall consumer credit, outstanding. So to expand that almost 30% in the last five years or so, it’s pretty astonishing. If you look at wage growth, I mean, where’s the wage growth and there’s been on average for the past five years, one and a half to at best 3% on a given year terms of consumer wage growth. So, you know, I asked you in the question for all of your listeners is that differential or delta between that explosion in credit across the balance sheet and leverage per se? Where’s that excess funding going to come from on In terms of the income line item to fund all of those extra interest payments, and you know, all of that extra credit. So there’s a massive expansion in the credit markets at the consumer level. And that’s being exacerbated by all of the online and peer to peer lending options that have come into play as of late for either consolidations, personal loans, you have banks largest Goldman Sachs getting in with their new markets, product terms of consumer lending, so there’s no shortage of options. What’s the market product? Yeah, that’s basically an online lending platform, their direct to consumer online bank, if you will, where personal loans and online savings products are now available through the bank, just like a lot of the other banks have historically provided consumer lines of credit, so forth, but it’s new for them to provide it. Is that what you’re saying? Correct? Yeah, to get into the consumer game. That was a big step forward. for them. They acquired a GE commercial bank portfolio A few years ago, terms of their savings product, and they just relaunched their overall platform is markets. So they’re competing with all over the majors like Lending Club prosper marketplace or online lending and peer to peer loans.
Jason Hartman 14:07
I think this peer to peer stuff is quite fascinating. And I think when you combine that this might be a good transition to talk about cryptocurrencies a bit and maybe we can talk about interest rates after that a little more, wrap it up. But it’s interesting. I had dinner with a friend last night who’s big into the cryptocurrency stuff and I think that says just tulip bulb mania. It is psychotic. What is going on right now. It’s sickening. it’s sickening, sickening. You can smell the disappointment already, but you just don’t know when it’s coming. There Will Be Blood in the streets of people that lose their money in this casino. Like you cannot possibly imagine. It is going to be devastating to people who have just been gambling, they’re totally gambling. As I’ve said before, when it comes to Bitcoin or any other alternative currency. I would love to be wrong about this, but I’m not going to be wrong. We will see how long We’ll go how big the bubble will blow. But if this were really something being used as a currency, rather than a speculative vehicle, I would be a believer, but it’s not. Okay. So there’s no one using it. You can buy, you can buy things on Overstock. I think Expedia takes it now. But there’s no real market for using this as an actual currency. It’s just not happening. So what you see here is an absolute speculative frenzy. It’s beyond ridiculous. It is so dangerous. And maybe that’s the reason they will shut it down the powers that be because they certainly don’t want a competitor for their product. Remember, every government and central bank’s main product is currency. That is their primary widget that they sell your thoughts, Cody.
Cody Mamone 15:46
Yeah, I absolutely agree. And it’s just crazy because when I was on the show back in, I think it was 2013. In the springtime. We were going over the same topic briefly in terms of you know, a comparison to the A tulip bubble that you know, every pundit around the internet likes to use as a metaphor for the bubble in Bitcoin but you know, it was trading about 800 or so per US dollar back then now we’re talking 18 to 20,000, which was obviously unforeseeable, but just beyond ridiculous, and it’s just a matter of being at 250 billion dollars of market cap. Now, how long does it take to go back down to its real value, which no one knows? Because it’s not backed by any type of real tangible type of government that any of the G 10 or global, anybody can come out with a new cryptocurrency tomorrow? There’s already a bunch not backed by anything material.
Jason Hartman 16:40
You know, what’s mind boggling to me? Is that the environmental destruction that is taking place with Bitcoin and other cryptocurrencies. So, folks, this is mind boggling. It is what I think it was Joseph Schumpeter. I mentioned it before the economist, who talked brilliantly about the concept of creative destruction. He also talked and I believe it was him possibly wrong attribution, but fake work. And Bitcoin or any cryptocurrency is fake work, literally nothing is being accomplished here by pushing fake news. Yeah, right, exactly. You’re pushing electrons around having computers, solve mathematical equations to mined coins, or to populate the blockchain with a transaction. And it’s shocking. Cody, you sent me a thing the other day about how much energy how much electricity it takes. And you were in the energy business when you were with the oil company to create one Bitcoin transaction. This is such a when you look disaster, you look
Cody Mamone 17:44
at all the power consumption and essentially you’re running a network, you know, personal servers and video cards when you really break it down with a micro level. And all of these video cards consume, you know, extreme amounts of power. And so when you’re running all of these on a 24, seven basis and You know, prices keep exploding and create more incentive for people to mine Bitcoin and more servers keep coming online. It’s sort of self fulfilling in terms of that capital deployment circle. It’s expanded to I forget what the source was, I think it was in the Wall Street Journal, they published something but it’s essentially the similar power consumption to the country of Denmark’s output right now, just in terms of power needed to power the Bitcoin transaction network right now. It’s just
Jason Hartman 18:27
control. Absolutely mind boggling.
Cody Mamone 18:30
Environmentalists trying to stop and we’re all the protesters right now protesting, you know, environmentalism,
Jason Hartman 18:36
you know, what I bet is happening is that the power companies are behind this.
Cody Mamone 18:43
They might be
Jason Hartman 18:44
Yeah, it’s absolutely totally beyond mind boggling something
Cody Mamone 18:47
that you know, rarely see analyzed in terms of, you know, cryptocurrencies, how much power it takes, I mean when you look at how much power it takes for the US Mint to print a pallet of hundred dollar bills or pallet of Even pennies which are worthless but off topic subject. It’s like not even comparable but the backing and monetary value of one versus the other. How can you say one’s worth 18,000 US dollars with no central backing or no daily type of exchange among peers that you see within us dollars? I mean, there is no one exchanging Bitcoin peer to peer, let alone consumer to business or vice versa. So, okay, so
Jason Hartman 19:27
so what’s coming though? This is the big deal. Are we going to see increased Vol. I mean, the volatility is insane. It’s insane amount of volatility. Now, are we going to see an increase in that? Because these will be traded now on two exchanges? I believe in Chicago, right?
Cody Mamone 19:46
Correct. So 3:40pm Eastern time. Right now in about two and a half hours. The first live products getting rolled out on the Chicago Board options exchange or CV. So they’re one of the three major futures exchanges here in the United States. So they launched the first Bitcoin related product, which is a derivative product called a futures contract. So just for your listeners to get some background a future product is basically a contract stating that you believe the price will be at a certain level at a certain future point in time to be settled for either a physical product or cash settled, meaning it’s just settled for discrete US dollars in this case. So bitcoins going to be you know, cash settled, and the CBO, a product that’s launching today for the first time it’s going to enable any type of speculator to come into the market and voiced their opinion on a long or short position,
Jason Hartman 20:40
right. And it Hey, you haven’t been able to short it so far, right? You can only go long,
Cody Mamone 20:44
correct because when you’re shorting something, you essentially have to borrow the physical asset from another person that’s willing to lend it to you temporarily for you to either deliver it back to them at a certain price or to exchange it at a future time for a different value with another Counterparty, but like shorting stock, for example, you know, you’re basically borrowing it from something called the dtcc, which is a central house for, you know, stocks in the United States where all of the brokerage firms clear through. But in this case, you’re going through the derivatives exchange, which is the clearing house. So the Clearinghouse is there for solely one purpose to manage risk among counterparties. So, the way they do that is you have to put up initial margin. So initial margin would be your capital of about 30% or so in this case to go long or short. One of you Bitcoin futures contracts.
Jason Hartman 21:36
So what is this mean? Does this mean we’re going to see a more accurate pricing of this fake currency, which you know, you can argue all day, the dollars a fake currency and I’ve done it many times, and I you know, I agree the differences though, the dollar has the rule of law and the largest military in human history behind it, and a giant history and infrastructure. Bitcoin doesn’t. So
Cody Mamone 22:01
Yeah, just add real quick as you always say, compared to what? Yeah, with the US dollar, you’re able to say, well, the US dollar compared to what you’re comparing it across the G 10 currency basket. So the yen, the Swiss franc, the Euro, the pound, you know, all of these, you know, universally acceptable currencies that all have their own military central banks, hundreds of years behind them, just the most infrastructure you could ever need. already built in. It’s already developed. When you say compared to what in terms of Bitcoin, it’s not comparable to anything, which really puts it on a little island in the South Pacific, in terms of comparability, so that creates its own set of challenges, just from a logistical standpoint in terms of ease of use. But in terms of risk, it’s just unquantifiable right now, it’s just unlimited. So, I think the opportunity to go short at a moment’s will, through these new futures conduits that the clearing houses are going to provide, it’s going to create more volatile ability, it’s going to create more opportunity for the currency to organically correct itself where it needs to be compared to normally compared to throw like the peer to peer platform. So a coin base all of the infrastructure that you can go on and live online and buy, you know, Bitcoin, your virtual wallets. They’re all compared to a US dollar denomination. So I think it’ll help correct it back down to where it should be comparatively to the US dollar long term.
Jason Hartman 23:27
Okay, so your prediction, I mean, this volatility goes down. Real sensible pricing comes into play or this just attracts more speculation and volatility increases. I don’t know, you know, could go either way.
Cody Mamone 23:39
It creates a two sided market, I think is the most important takeaway right now, I without
Jason Hartman 23:44
but what does that mean? What does that mean to the price and the stability,
Cody Mamone 23:48
it’s going to be unstable for the foreseeable future, I think until a lot of the larger legacy players that have held on to and supported Bitcoin, longer term, sort of take their feet out of the market and sort of liquidate their holdings. At the end of the day, I think if you see a lot of that transpire, then a lot of the smaller retail level activity will start to dissipate. And people will step back and sort of evaluate things more closely. But you don’t just go from 10,000 to 15,000, you know, within a couple day period and not have a bubble on your hands. Yeah, it’s it’s absolutely nuts. It’s iconic. Okay, interest rates, interest rates are hard to predict, obviously very hard to predict one of the toughest things of all because, you know, of course, it’s not a natural market, it’s been a lot easier compared to the prior central bankers with the Fed. So if you look at Ben Bernanke, he just his language and dialogue around fed projections from 2008 through 10 years, I think that I did 2011 or 2012 was very, very difficult to sort of articulate where they were going and what the strategy was behind the Fed. their balance sheet, their interest rate strategy, Janet Yellen came on. And she’s been a lot more transparent with the public and financial markets in terms of what they’re willing to do, what their targets and emphasis is on with macro economic data influencing their decisions, both short term and longer term. So it’s been a lot easier, I will say, to predict and anticipate what the Fed will be doing three months out versus 12 months out and the last central bankers being Bernanke, even even Greenspan before
Jason Hartman 25:32
so Cody, an amazing chart from john Byrne’s real estate consultant, he’s speaking at our upcoming meet the Masters event on interest rate sensitivity in terms of mortgage qualification, this is going to blow your mind and everybody’s mind. And I think it bodes well for the strengthening of the rental market in the future. So I’ll share that in a moment. But overall, your thoughts are we’re going to see higher rates in the future would that be correct?
Cody Mamone 25:59
Yeah. I would agree with that. So you’re looking at a 10 year treasury bond right now about 2.4%. Call it. Yeah, historically, we’ve seen that over the last 10 years closer to 5% or so. And then even the 30 years only about 40 basis points above where the 10 years out right now at 2.8%. So to go from 10 years to maturity all the way out another 20 years for an extra 40 basis points. It’s just way too flat, in my opinion. So I think that you’re gonna have a widening curve, at the very least in 2018, where the spreads materially widen, across the different maturity lengths for interest rates, and then also rates themselves will rise just given the levels of economic positivity to keep rolling out and that’s foreseeable In my opinion, and very much achievable with the new administration. So I think you’ll probably get another two maybe three, if you want to bonus rate, hike into that. An 18 one in the spring one in the fall, call it right around 25 or 30 basis points apiece. So the end of 2018. You know, my forecast would be right around to 2.25% in terms of federal funds estimates for the next year. Okay. Well, let me let me wrap it up with this. So I always talk about the three dimensions of real estate, which there’s really more than three dimensions, but that’s a catchy name. So we’ll leave it at that. Now this chart is about interest rate sensitivity in terms of qualifying for mortgages, so it basically it’s shocking, okay, it says if rates continue to rise, more will be forced to rent. A 1% increase in mortgage rate would disqualify
Jason Hartman 27:45
5 million households from owning a $200,000 home. So 1% increase, 5 million households owning a $200,000 home if interest Rates move higher millions of potential single family homebuyers will be unable to qualify for a mortgage based on current income levels and will likely rent we expect rates to hit 4.9% by 2020. Now they’re the time this chart they’re quoting the rate at 3.9%. Now remember, folks, this is not for investment property investment property. Non owner occupied rates are higher than owner occupied rates. So we’re talking about owner occupied rates here. But a $200,000 mortgage, you heard that a $400,000 mortgage, just $600,000 mortgage, it’s pretty much the same path. The number of households who can qualify now are about 80 million, okay, for a $200,000 mortgage, about 50 million for a $400,000 mortgage, just under 30 million for a $600,000 mortgage. But when those rates rise, it is mind boggling how the qualification levels drop. You just see People just left out of the housing market. And I mean rates have been artificially low for so long. This ultimately has to happen. Absolutely. And that’s where it comes back full circle to that point we originally touched on and consumer balance sheets of those suppressed wage growth numbers that we’ve seen over the last few years. But that explosion in consumer credit. So when you’re looking at underwriting a mortgage, one of the characteristics in the five C’s of credit is capacity. They don’t have that capacity right now at these artificially low rates, let alone normalized rates if they were to increase, so that definitely speaks to that point. Yeah, no, it’s it’s no question about it. So I talked about how, over the next 10 years, there are amazing demographics coming at rental housing, but there’s also amazing economics coming out rental housing. So the three dimensions of real estate. If you’re unfamiliar with that, listening to this, go to Jason hartman.com and just type in three dimensions of real estate. also go to Jason hartman.com slash masters. Join us for upcoming meet the Masters event. And Cody, thank you for joining us again. Do you want to give out a website or anything?
Cody Mamone 30:06
Yeah, it’s been a pleasure thanks for having me again can visit all over you know economic data through the bank through PNC. His website, basically is pnc.com and search insights under corporate institutional and you can view all her economic insights through the bank. You can also reach me personally through my website, see, hyphen, Aaron, calm if you want to come into contact personally, so Excellent. Good stuff. Thanks for joining us. Happy investing everybody. All right. Thanks, Jason.
Jason Hartman 30:33
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