Jason Hartman and his guests report on a variety of things from doomsday scenarios and derivatives (Wikipedia definition below) or the “derivative time-bomb” to how institutional investors like pension funds, insurance companies, mutual funds and REITs (real estate investment trusts) can overpay for assets, plus a short talk about private money lending/hard money lending.

You’ll also hear some thoughts on property management and operational / organizational improvements with our Local Market Specialists (LMS) for the St. Robert, Missouri market with it’s huge Fort Leonard Wood military base http://www.ftleonardwood.com/ and the opportunities created for landlords and real estate investors.

Wikipedia definition: A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.[1][2]

Under U.S. law and the laws of most developed countries, derivatives have special legal exemptions which make them a particularly attractive legal form through which to extend credit. [3] However, the strong creditor protections afforded to derivatives counterparties–in combination with their complexity and lack of transparency–can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. [3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy. [3][4] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives–including greater access to government guarantees–while minimizing disclosure to broader financial markets. [5]

One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.[6] Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile.

Derivatives can be used for speculating purposes (“bets”) or to hedge (“insurance”). For example, a speculator may sell deep in-the-money naked calls on a stock, expecting the stock price to plummet, but exposing himself to potentially unlimited losses. Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.

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

JASON HARTMAN: Welcome to the Creating Wealth Show! This is your real estate, economics, and investment reporter, Jason Hartman, talking to you about how we can all profit from the rather gloomy situation we find ourselves in in the global economy nowadays. And I think today you’ll find this to be a very interesting show. We’re going to talk about institutional investing, private money lending, and just a whole bunch of things. So, we’ll get on with that. I’ve got a couple of guests here that I recently recorded, and I’ll put them on in just a moment. But hopefully you enjoyed the last show, where we talked to Doug Casey. Some of you said he was pretty gloomy, pretty pessimistic, and I certainly agree. We’re gonna talk about the derivative time bomb, and you’ve heard about all of the derivatives out there on prior shows. We’ve talked about this, and how those are nothing more than maybe a house of cards.

But I think you’ll find this interview to be somewhat optimistic, frankly, because there’s a little more to it than meets the eye. Throughout history, it seems like every doom and gloomer seems to get more attention than the positive person. Certainly if we look in the mainstream news media. If we turn on our television and do that, we know that bad news sells. The old saying is, if it bleeds, it leads. Was it Don Henley, wrote that great song about the bubble headed bleached blonde comes on at five, she can tell you about the plane crash with a gleam in her eyes, it’s interesting when people die, they want dirty laundry, right? And that is unfortunately just a truism about human nature. But, I think you’ll find this interview today to be a little more rosy, and there’s a lot of reasons to be quite rosy. As Doug Casey said—I love the way he said it. He said, rather angrily on the last show, but you can profit from this stupidity. And you can. You definitely can.

Well hey, let’s talk about some of the stupidity right now. Recently my friend Katie Sperry, who posted this great thing on Facebook—she talked about the federal budget, explained in simple English, and it’s really, really great and easy to comprehend. You may have seen this before somewhere around there. But here’s what it says. It says, I love it when complex things are simplified, so that we can all understand. So here are the bullet points, folks. United States tax revenue—and I’m gonna round off here, for the sake of time—$2.2 trillion. Federal budget: $3.8 trillion. New debt: $1.7 trillion. Now, these are all with ‘t’s,’ you notice. National debt: $14 trillion, $14.2 trillion. Recent budget cut: $39 billion. So, those are the numbers. So you’ve got, $2.2 trillion for our revenue, you’ve got a federal budget that is about $3.8 trillion, new debt about $1.7 trillion, national debt $14.2 trillion, and you’ve got a measly 38, or really $39, if you round it, billion budget cut.

Now, remove eight zeros and pretend it’s a household budget. And I love this. This is great, what Katie posted. Annual family income: $21,700. Money the family spent: $38,200. New debt on the credit card: $16,500. Outstanding balance on the credit card: $142,710. Total budget cuts, which some politicians are proud of, $385. Stop the insanity now. Vote them out and demand a balanced budget. Isn’t that great? Very good. So Katie, thanks for sharing that on Facebook.

And by the way, pardon my voice, folks. I’m fighting a cold. And note to self—whenever you’re fighting a cold, don’t go to a cold climate. I just got back from a business trip, and it was pretty chilly there. About 27 degrees. So, not the place to be when fighting a cold.

Another interesting article comes from Conrad Allen. And this was on the ActiveRain website. And Conrad is a RE/MAX agent, and I think he said something pretty interesting. It was a follow up to a NAR—National Association of Realtors blog, and I think they have limited credibility. And by the way, speaking of NAR’s limited credibility—so, NAR is the, I believe the largest trade association in the world. It’s got about 1.2 million members. So, there’s a lot of realtors out there. I’ve been a member of it many years, back when I was in traditional real estate. And my company, Open Door Auctions, is a member of it now. I’m not personally a member. But, NAR keeps a lot of great statistics. But recently they just admitted a huge error over the past couple of years, and I don’t know if you caught it in the media, but it basically said that about—they overestimated home sales, because they counted many of them twice. They overestimated them by about 20%, so, the market was really worse than NAR told us. Gosh. It’s amazing. Anyway, here’s the post on ActiveRain from Conrad. Pretty interesting. Is inflation dead? NAR blogged about this. The CPI, or Consumer Price Index, has not risen in the last couple of years. This has hurt our seniors, because raises in their benefits are based on inflation rising. NAR’s Mr. Yun feels that inflation will be down compared to the last 30 years. Is he crazy? How can inflation go down when the government is printing money 24/7? How can inflation now go up? The CPI has increased 160% over the last 30 years.

Let’s just repeat that one, okay folks? The CPI, the Consumer Price Index, the official statistics—now, this is just yours truly talking here—has increased 160% over the last 30 years. Now, that’s the official numbers. And we all know the official numbers for the CPI are totally underestimating what the real rate of inflation is. But 160% over the last 30 years—pretty darn bad. I think how inflation is measured is the issue. Rent has increased 202%. So, do you see how rent outpaced the official inflation statistics? Rent has increased 202%. Food has increased 152%. Gasoline, 197%. And the median home price, 150%. Now, of course, the problem is, like our talk with Doug Casey and with most experts, those are national numbers. They’re usually based off Case-Shiller, which only profiles 20 markets, and 14 or 15 of the 20 are lousy, in my opinion; you wouldn’t want to touch them. Only 5 or 6 are good.

And by the way, we will be coming out—I’ve got my yearly forecast report coming out soon, and I’ve been working on that the last two weeks, so we’re gonna get that out to you very shortly here. Hopefully before the first of the year. And, many of you, thank you for purchasing that over the years. We publish it every year, and I think you’ll enjoy that. But of course that’s a national number, so we know how maligned that is, because the old saying is, all real estate is local. Now, back to the article.

These are the numbers reported by NAR. Inflation has averaged 5.3% a year over the last 30 years. The monetary policies of the US, the Europeans, and others, does not bode well for inflation. The US government can and does create money out of nothing. We are a fiat economy. It is only the faith of others that the US will pay its bills that keeps this economy going. If the US loses credibility with the world—in other words, with its creditors—this house of cards will come tumbling down.

Now. Me talking again here. The article’s almost finished; just two more sentences. Just me talking for a moment. I disagree with that analysis. And here’s why I disagree with it. Because, it is nothing more than a race to the bottom. Every global currency that I am aware of is a fiat currency. Fiat meaning by authority, by decree, just created out of nothing, just created out of thin air. So it is a race to the bottom. And again, I’ve talked about it on past shows, but you look at the US, and you think the US is a total mess, it’s a total disaster. We love to throw stones at the US government, and fortunately we’re in a free country where we have the first amendment, where we have freedom of speech, and we can do that, hopefully without fear of reprisal from our government. There’s a reason the first amendment is first. It’s the most important one.

And it’s just—it’s nothing more than a race to the bottom. So, you might look at the US as the best house in a bad neighborhood, and a bad neighborhood of monetary policy and currencies. So, really, I don’t think there’s very much difference between the US and most other countries out there. The fact that we have the largest military, and the world’s reserve currency, and a lot of those benefits, are very helpful. And we probably have the strongest rule of law in the world here. And that is another thing that makes it a very attractive place for investors.

So, last two sentences, back to the article. Inflation allows this government to pay back its commitments with cheaper dollars. Well, sure it does! And you know what? Frankly, that’s a great business plan, in my opinion! That’s the business plan I’m encouraging all of us to adopt! I sure do it myself! Get long term 30 year fixed rate mortgages, pay them back in ever-depreciating dollars. Remember, part of my ultimate investing equation is, denominate your assets in things. In commodities. Especially packaged commodities—rental properties sitting on cheap or free land that produce income. And denominate your liabilities in dollars. In fiat currency. Because those will constantly be debased by inflation. Last sentence: inflation is alive and well, and will rear its ugly head soon.

And you know folks, another thing that I really like to do when I’m reading these different articles and blog posts around the internet, is read the comments. Now, some of the comments are really just inane and stupid. But some of them are very good, okay? So just a couple of the comments here, from many, many, many—there were I think 45 comments on this article at the time I printed it off. Just ask the next economist, and you’ll get a different answer, Conrad. I agree, we are spending more and more just to get by. Another comment. Inflation is alive and well, as you so aptly pointed out. The next “crisis” will inevitably when it starts truly rearing its ugly head again. The price of food alone is concerning. If things keep going this way, I won’t need to think about dieting; I just won’t be able to afford to eat. Conrad, sadly, far too many senior citizens rely on Social Insecurity to get by. They will be the ones that will suffer the most.

Another comment: 20+ years ago, commercial landlords—in other words, landlords that own commercial real estate—tied their rental increases to an increase in the CPI. Now, smart commercial landlords now have fixed increases in their lease agreements, and negotiate them with a lessee. So, again, the commercial landlords aren’t as dumb as they used to be by relying on the official statistics or the CPI anymore. They’re getting smarter and just building in their own increased. Or I’ve seen some of them do like CPI plus 2%, or CPI plus 3%, because then you’re getting closer to the real rate of inflation.

Another comment: inflation? What about the cost of insurance, the cost of gas, and the cost of heat, fuels, and utilities? So, look it. We see the reality of the situation. Inflation is here, inflation right now is probably easily between 9 and 10 percent, regardless of what the CPI, what the “experts” say. Here’s another comment. Yes, and if you check the price of gasoline in 1999, it was hovering around a dollar a gallon. That is a 220% increase in 12 years. Another comment: in the Obama economy, more and more money is being printed or created electronically. The increase in the fiat money supply is the true definition of an inflation. And by the way, folks, that is absolutely correct. The definition of inflation is the increase in the money supply. That is the academic definition for inflation. The thing that we all see is an increase in prices. But real inflation is simply an increase in money supply. It’s not an increase in prices. An increase in prices is the result of the academic definition of inflation.

Other comment here: the price of groceries—notice how sizes are getting smaller. A half gallon of ice cream is now one and one half quarts. A quart of mayonnaise is now 30 ounces. A half gallon of orange juice is now 59 ounces. An 8 ounce bar of Dial soap is now 5 ounces. So, you know, and I would definitely say that that is absolutely true. A lot of manufacturers of these goods—they don’t believe that you will pay the prices, so what they do is they simply keep the package size the same, but reduce the size of the contents inside the package. And we’re all fooled, aren’t we? So, that can of tuna fish is, instead of being 6 ounces, it’s 5 ounces now. Just take a look, and start noticing this stuff at the store. Very, very interesting.

Hey, I wanted to talk to you about hard money lending. Again, I love being a long term borrower, but I also love being a short term lender. I’m just getting paid off on another one of my private loans, or hard money loans. Basically the same thing—hard money or private lending. And I loaned about $95,000, and in just 94 days, I will get paid back an extra $3200. Talk about making your money work for you. Passive income. What a beautiful, beautiful thing. Now again, long term lending—not interested in that. The longest I would go out is five years. But these little, short, hard money loans, where they’re 94 days—I mean, what a beautiful thing. If you’re interesting in this, just shoot me an email. [email protected] And you may not be eligible for this. I do have to say that, because this show is heard all around the world, and there are various legal issues, and you have to live in sometimes the same state where you’re making the loan, and things like that. Again, I don’t pretend to be a lawyer. I don’t pretend to know all of these laws. But I will refer you, if you shoot me an email—[email protected] I will refer you to the right party who can help you, and help answer questions.

So, that, very, very important. Take advantage, if you can, if you’re eligible, of some short term private money or hard money lending can be a great little adjunct to your real estate investing. Ultimately, I do like real estate investing the best, still, because it has the multi-dimensional characteristics that we’ve talked about so many times on the last 231 shows, basically. So, the multi-dimensional characteristics of income property are better than lending. But, for short term simplistic investing, I do like the private money lending. So again, if you’re interested, shoot me an email and I’ll hook you up with the right people who can help you with that.

Also, Doug Casey, on the last show, #231, talked about nanotechnology and commodities, and I kind of had some time to ponder that a little bit. And I used to be a member of the—what was it called? The World Future Society. I’d like to get them on the show, actually. But the World Future Society had a magazine called The Futurist, and I remember really enjoying the articles, and reading about nanotechnology, and all of the great new things that are coming our way through the miracle of technology. And nanotech is certainly one of them. Here’s a distinction I want you to really start to make, and constantly be mindful of, when we think about investing in what I call packaged commodities, or assembled commodities investing, where we’re basically getting the land for free in the markets we’re recommending. Not the national markets. Not the overvalued markets. But we’re basically getting the land for free, and we’re buying far below the cost of construction or replacement. And as such, when we do this, we put ourselves in a great position. Because although Doug, when I asked him about the commodities side of the real estate investment, he thought that nanotechnology might change that game. And I’m not so sure it will. It will definitely change the game in terms of more high tech items. Nanotechnology is going to make for incredible things. Tiny little basically molecules that can be injected into our bodies through a syringe, and have cameras on them, can monitor data about our body, can go through our bloodstream and attack cancer cells without attacking the good cells. Little tiny probes that will go into deep space that are maybe the size of a bullet, not a big spacecraft anymore. Little probes that can go into space and take pictures and send back data and can go to Mars and other planets faraway, and all kinds of incredible things are coming our way.

But the thing I love about the income property, the packaged commodities related to the income property, is that it’s very unlikely that there will be a disruptive technology, in my opinion. Because these materials are so simplistic. I mean, look it. Back on about Halloween of this year, October 31st, 2011, we hit the seven billion population mark in this country. Seven billion people. Amazing. Amazing how quickly the population grows. And when we hit that, you gotta remember, all those people need resources. They have three basic needs. Food, clothing, and shelter. And shelter—guess what it’s made of? It’s made of commodities. Packaged commodities. Concrete, lumber, energy, petroleum products, all of these things. And although some things will have disruptive technologies that really change the game the way the integrated chip changed the game from the vacuum tube—does anybody even remember what a vacuum tube is? You go look at an old radio in an antique store or something, and you open up the back, and there are tubes in it that have the air vacuumed out of them. And that was replaced by the integrated circuit, or the integrated chip, right? Or the microchip. Whatever you want to call it. Intel Inside.

And so, these are areas where it is very likely you’ll have a disruptive technology. But in the very, very simple thing, unless we’re going to live inside of a force field, and that’ll be our future home, and it could be someday. Probably far beyond the world of the Jetsons, because when I watched the Jetsons cartoon as a child, all their houses, even though they were floating in the air, were still made out of, guess what? Packaged commodities. Building materials. And so, I don’t know that you’re going to see any disruptive nanotechnology or any other type of technology in that world too much. But it’s something to ponder. I’d love your opinion on it, by the way. and if you’d like to leave comments at www.jasonhartman.com, please feel free to do so. Love to hear your opinion on that kind of stuff.

Anyway, let’s get to our guest. I recorded this interview just a couple of days ago, and I think you’ll like this interview, as we talk about derivatives, the derivative time bomb, how institutional investors tend many times to overpay for assets. And by the way, I just want to clarify why we’re talking about that. The reason we’re talking about institutional investors like pension funds, insurance companies, RITs, or real estate investment trusts, mutual funds, big companies just where you might buy stock in them—the reason we’re talking about that is because if you are not a direct investor—if you’re investing in the traded assets, which of course we don’t recommend, then you will fall victim to being part of that overpayment for these assets. So, again, Commandment #3: thou shalt be a direct investor. Invest in things that you control directly. Be a direct investor.

And so, you know, we’re going to talk a little bit about doomsday scenarios, and why they may not be true at all. So, I think you’ll like this interview, and we’ll be back with that, in just a moment. Oh! By the way! Lest I forget, be sure to join us on January 7th in Phoenix. Register at www.jasonhartman.com, and join us for the Creating Wealth Boot Camp, and our informal tour of the Phoenix property market. We’ve got two local market specialists lined up for you, and we’re going to be touring on Sunday morning, January 8th, at 10 AM, and you can also possibly meet with our local market specialists on Friday the 6th, and then the boot camp is all day Saturday the 7th. And we will get back in touch with you with hotel confirmations and so forth very shortly. But it will be very convenient, right by the Phoenix airport. We’re looking at the Hilton, or the Hyatt Place there, and just kind of finalizing our contracts. So, we will announce that very soon, and we’ll look forward to seeing you on January 7th, but again, if you come to Phoenix, if you fly in, there will be an airport shuttle to take you to the hotel. You do not need to even rent a car. Just reserve your plane ticket now; we’ll get you a special rate on the hotel—looks like it’s going to be around $89 a night—and we’ll be back to you with that information on the very next show.

If I don’t talk to you before, a Merry Christmas to everybody, and we will be right back with the interview with our special guest in just a moment.

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ANNOUNCER: Now you can get Jason’s Creating Wealth In Today’s Economy Home Study Course: all the knowledge and education revealed in a 9-hour day of the Creating Wealth boot camp, created in a home study course for you to dive into at your convenience. For more details, go to www.jasonhartman.com

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JASON HARTMAN: I’m here with Zach and Jessica, and we are talking about institutional investing, and why it doesn’t really offer you the returns that it should; it doesn’t offer the returns that a direct investor would obtain, and we’re gonna talk about the reasons for that, and what happens when big institutions with large pools of money come into marketplaces, what they do to cap rates, what they do to investment returns, etcetera. And we’re also going to talk about one of our markets, one of our military markets, and how it’s kind of flying below the radar, which I think you’ll find interesting as well. We’ll touch on property management, and just several other sort of eclectic topics in this discussion. Let’s start off—I’m gonna ask a question here, and I’m in Kansas City, by the way. So we’re talking about the Missouri market here mostly, but not exclusively. And it was interesting, because when you picked me up at the airport yesterday, we were driving by this newly built apartment complex, and it had a few hundred units, it was a large apartment complex, an institutional type investment, and you said, guess how much that complex is just about to be sold for? I guess this deal is not totally done yet, but it’s in the various media, in the rumor mill here. And Kansas City’s a small town, when you look at vertical industries, you know, when you look at like real estate development, it becomes a really small town, okay? It’s a small city anyway. And you said, guess how much that’s selling for? And I thought, well, I’m sure it’s about $120,000 a door, that was kind of gonna be my guess. But before I could even speak, you said, $150,000 a door. And that’s what the rumor is, at least. Not confirmed yet. But it makes perfect sense, because the construction of those units probably cost about $80,000 a door, I’m gonna guess something like that, and what happens is, you’ve got these large pools of money out there, and the money needs to go somewhere, doesn’t it?

ZACH: It does. And what we’re seeing with institutional money when they come in the markets, it really drives down the cap rates in the market. With multi family, especially. And we’ve been seeing that more and more over the past few years, and I really contribute that to three main reasons. The first one is the interest rate environment we’re in. Interest rates are extremely low, historically low. And whenever you have that cheap, or low cost of funds, or debt, it allows for a very low cap rate. A very low acquiring cap rate. And still, allowing the institutions to get reasonable yields that they’re looking for.

JASON HARTMAN: So, when you say it allows for a low cap rate, what you mean is that almost that money coming into a market because these institutional investors are buying product, they’re buying property, and I couldn’t believe the cap rate on this apartment building. I said, gosh, that investment stinks! It’s like, maybe a six cap. And you said, no, it’s worse than that. It’s four and a half or five cap, which is awful. Now, just for comparison, especially if you’re a new listener, the typical cap rates, and we don’t really look at cap rate as the ultimate metric, because especially when it comes to the smaller residential type investor, who’s buying small apartment complexes or single family homes or fourplexes, whatever they may be, cap rate doesn’t tell you everything. It’s a very poor metric, I think, because it only evaluates price versus income. And, of course, you know that income property is a multi-dimensional asset class, and as such, it’s price, income, leverage, tax benefits—there are multiple dimensions to the investment, and that’s what gives you your return. But our cap rates are typically I’d say probably, if you look at www.jasonhartman.com, the lowest cap rate on the website is probably right now I’m gonna say, nine, ten percent.

And our usual cap rates are probably between ten and twelve percent. So, when you talk about an institutional investor accepting cap rates of four and a half, five, or even six percent—I mean, that is a lousy deal! And what happens is, when money becomes plentiful, and we all know during these, the Great Recession that we’re in, it’s been sitting on the sidelines. Corporations are flushed with cash, and a lot of money’s been sitting on the sidelines. And now it’s starting to come off of the sidelines, because the money has gotta do something. You can’t keep it in the bank, or you are—that is the sure losing bet. That is playing not to win by any objective standard, because we know that banks are paying far less than even the official inflation rate now. So, it’s pretty amazing that they would accept such low cap rates.

ZACH: Yeah, it really is. And there’s a couple other contributing factors that I look for in that, and you alluded to one of them, and that is other yields, or lack of other quality assets to invest their capital in. When you’re sitting on pools of money and everything, they expect you to make money with it; you can’t just sit on it long term, because they’re not making a return. Their time value goes down extremely quickly, whenever they’re not using it.

JASON HARTMAN: It’s almost like—and this is one of the reasons government is so massively inefficient—government, oddly enough, the incentives are all in the wrong direction. So, someone running some division of the government, the Department of Education, the Department of Transportation—their goal, the goal of these bureaucrats, is they’ve got to spend their entire budget. If they don’t spend their budget, guess what happens? Their budget gets reduced the following year. And that right there explains the totally dysfunctional nature of government. No one’s incentivized to save money; they’re all incentivized to spend more, increase their power, and do that. And the same is true with institutional investors. If they don’t deploy the money, they don’t get more. They’ve got to deploy it. So, they tend to deploy it in less acceptable ways, because remember, it’s not their money! Okay? Now, of course they want to earn a high return for their investors. But again, they’ve got to deploy the money. And this is why being a direct investor just makes so much more sense, doesn’t it?

ZACH: It really does. And with the multi family outlook and everything, and the cheap cost of debt, you really see—obviously the institutions have a really positive outlook on the long term with multi family. You could contribute some of that to an inflationary environment where multi family tends to do very, very well in. Especially when they have long term interest rates that are four percent, four and a half percent potentially on some of their debt. They can accept a low cap rate, because they believe there’s gonna be rental rate growth, and when you see all that, it potentially—that’s the only way you can really justify that it makes sense for them potentially in the long run.

JASON HARTMAN: Yeah, you’re absolutely right, and I mean, they are right also. I mean, I just watched a little short video today that talked about how in numerous cities around the US, renters are paying five percent more than homeowners now. So, if that isn’t a sign of a couple of things, number one that ultimately there will be some appreciation pressure on prices of homes and apartments, but the demographics coming at housing right now are nothing short of phenomenal. Probably the best they’ve ever been in history. Because you’ve got 80 million Gen Yers, the largest demographic cohort ever in America, four million larger than the Baby Boomers; they’re coming into their prime household formation years, so they’re gonna be renting first, buying later, and you’ve got retiring Baby Boomers who are liquidating stock market assets, okay, and that’s one of the reasons I think the stock market is completely puffed up, in terms of real dollars.

Now, in nominal dollars, we’ll see. But in real dollars, the stock market is just—it’s an illusion, okay? But it’s interesting, because I kind of look back and I compare this to 1998, 1999, 2000, during the dot com bubble. And what happened during the dot com bubble—I mean, I remember, and I think I have this videotape—yes, it’s a tape—somewhere, of a CNN story called GetRich.com, and it was about all these people making just ridiculous, absurd amounts of money. If you just started a company and stuck .com after your name, venture capitalists were flocking to give you money, and they were giving you stupid money! And I remember visiting a couple of these companies that just did the most sort of inane things. I visited them because I had filed for a patent on an Internet business process back then that would basically create and distribute news releases.

The only time I’ve ever filed for a patent; that was an interesting process to learn all of that. And I went to some of these companies, and you know, of course they had the requisite Ferraris and Lamborghinis out front, and these children, okay, they were children, and I don’t just mean children in age. But children in maturity. They were just immature people, okay? Largely. Who had a bunch of money thrown at them, and they were just hiring people that they didn’t need, they were spending—I mean, their offices were gorgeous. Brand new Herman Miller, highest, top of the line furniture everywhere. Just stupidity! Not the way real people run a real business. And they had no earnings. And still, they were getting more funding. Instead of talking about your earnings and your profit and loss, they would talk about your burn rate. What is the burn rate of your company? And companies were being sold at 20 times earnings, and they had no—I mean, 20 times infinity! They had no earnings at all! It was just completely dysfunctional.

And that’s—there is a hint of that that happens with institutional investors, because they’ve got to place money, and they’re under extraordinary pressure to do that. And the whole point of this conversation, folks, is that you—many times, hopefully you’re not, but most of your friends are—the investor in these institutional pools. They bought a RIT, a real estate investment trust, they own shares in that, they own stock in an insurance company, they bought a stupid silly life insurance policy that isn’t term insurance, and it’s one of those “investment” type policies, which are a complete scam, if you ask me. And we’ve talked about that on prior shows. And it just gets, it just gets really dumb. And what’s interesting about this, Zach, is that you and Jessica—and we ought to have Jessica talk here, she’s gonna talk a little bit more about the market, and operations, and some property management here in a moment. But you are working on your largest deal ever now. And that deal is a, like a $30 million project, right? And so, tell us a little bit about that, and what you have experienced in talking to large, big players, big institutional investors. Because I think it ties in with this conversation, doesn’t it?

ZACH: It definitely does. And it is an apartment project, and it is right around the $30 million range. One of the big things is that you’ve gotta—when you get into that range, you’ve gotta crack the nut, I always call it, as far as getting big enough to attract institutional money. And when you do that, it’s very interesting how they look at things completely different. Our returns, you would think a $30 million project, apartment projects and everything else, you would have a huge economy of scale, and everything else, returns would be really, really good and everything. It’s actually not. And comparing to the smaller investments. And the smaller investments, we refer to this, and I think you used the term a little bit before, flies under the radar. And whenever you have smaller investors, you have $50 million to deploy, or $300 million to deploy, on multiple projects, well, you can’t get down into $2 and $3 and $400,000 deals. So, in turn, the returns on those stay much larger.

JASON HARTMAN: Even worse, you can’t get down to $3 million deals. I mean, you just can’t do it. It’s just too hard to manage so many small deals. So the institutional investors, they have to look for stuff upwards of really $5, $6 million, and up, up, up, up, up, much higher than that. And they’ll accept such low cap rates. It’s so interesting, because I subscribe to all of these different email lists of different commercial brokers, all around—well, I was going to say all around the country. All around the world. And I see their very corporate stuff that they send out, and the investments—once in a while I forward them to you, and to Doug, and some of the other people in my sort of inner circle of advisors. And one of them, they’re saying, here’s a B of A branch that you can buy on a triple net lease. And the cap rate is like, 5.3%. And it’s B of A! This is a company that is essentially insolvent! Or, the worst one ever was Blockbuster Video. How a commercial broker can go out and peddle Blockbuster Video stores, freestanding stores on triple net leases—that is beyond me. It is complete fraud, because Blockbuster is—are they completely gone? I haven’t seen one lately. Almost completely gone. And Jessica, you’re not saying anything here. What do you think?

JESSICA: Well, they’re just mostly kiosks now, but yeah.

JASON HARTMAN: It’s amazing though, how they can do that. And even at such low cap rates. It’s ridiculous! Yeah, yeah. No, I know. Well, I want to weave some more of this discussion about this in here, but let’s talk a little bit about, like, we talked about the St. Robert market before, and it’s just such a great opportunity. I was just there with you a little over a month ago, and Jessica is working on a lot of the operational details of the business now. And I gotta tell you, I was really impressed with your team there. We had lunch, we spent several hours together driving around looking at different properties, took a lot of video and so forth, and had a lot of discussions about it. But what an impressive market! And again, totally below the radar, as the expression goes, right? So Jessica, what are you up to nowadays in terms of the operational details and things like that?

JESSICA: Well, we’re sort of a unique company, especially for the area. We are a vertically integrated company, so, what that means for our clients is, we have our investment segment, we have our construction development, and then we also have our property management. So, we take our clients through each step. And most important, I think, is the property management, because that is what makes the investment.

JASON HARTMAN: Couldn’t agree more. So, it’s kind of like, our saying is, the complete solution for real estate investors, on a macro, nationwide scale. Well, yours is the complete solution for real estate investors on a local scale. And what are you seeing out there in that marketplace? And you know, Zach will probably want to chime in on this too. But in terms of the staff, what’s the vibe, what are their feelings, what’s happening in terms of how quickly things are renting, and how that market’s going?

JESSICA: Well, in our particular area, and with our company there, the property management, we are first and foremost property management, and we’re real estate second. And that makes us very unique, and gives us a unique position in that area. When we have other brokerages that we’re competing against, they just passively accumulate single family homes, but we are the area’s largest multi family property.

JASON HARTMAN: Right. So they’ll dabble in them, and do every other kind of real estate, jack of all trades master of none. But your model is very specific, and it’s almost exclusively, not exclusively, geared toward investors. And we’ve been doing business for several years, and our investors are coming from all over the world. And oddly, investing in a town they’ve never heard of before they checked it out. And you know, they’ve come out to look at properties and so forth, and they’re just as impressed as I’ve been. I’m part of that little 10-unit deal that we’ve got there, and just working really well.

ZACH: No, exactly. And we’ve done some really in-depth market studies here recently that—the 2010 census came out and everything, and we went back and did some analysis on the supply of housing, and how that has increased over the past two to three decades, and how the population has increased, and what we’ve seen is like a 27% population increase over the past five years. And the housing supply has not kept up with that. And we get really in depth on that. And the whole analysis kind of—the end result is what we’ve seen as a housing shortage of approximately 2-3,000 units in the area. And that’s including single family homebuyers and rental properties. We look at probably a 60/40 rental ratio. 60/40—60% renters, 40% homebuyers in the area. That puts them up 14 or 1500 units short in the area.

JASON HARTMAN: And tell them the reason that the renter population is so high, because it’s transient, right? You want to talk about that a little?

ZACH: Yeah, absolutely. And with the military population—typically they’re there for anywhere from one to three years, which typically most—even if the cost to buy a home is cheaper in the area, they still will not buy, because you can’t recup commissions and everything else in three years’ time, just because you’re not in that big of an appreciation type market. So, typically they will still rent, even if they’re only going to—even if they’re going to be there three years, which in turn, that yields a very strong rental market. Especially when you look at the number of people coming through the area, and the number of potential renters that you have to tap.

JASON HARTMAN: So, Jessica, in terms of what you’ve been working on in St. Robert, tell us a little bit about the structure of your staff and so forth out there, if you would. Just so the investors can learn a little bit more about that, and who does what, and just kind of how it all works, in terms of that complete solution.

JESSICA: One of the kind of neat things that we do, we have been established there, and so we do have a great tool we use for all of our rental properties. It’s a software that does all the tracking for us. So, something kind of neat that we do with our staff is we do track all the properties that we do have coming in, and also the type of residents, and how long they are staying there. So, we do have pre-leasing sort of forms, so we are capturing people coming into the area maybe six months in advance. So, that’s something that’s really important for our staff. I’m actually making that the most important thing for them to be focused on at this point, is capturing those renters that are coming in so that it closes up that window and that gap between turnover.

JASON HARTMAN: Right, and you wouldn’t have that opportunity in a non-military place. So you’re basically digging your well before you’re thirsty, in terms of lining up these renters half a year in advance, and getting them nurtured, and getting them ready to go so that when you have the right property for them. Very interesting. What else would you say on this institutional subject? Because I think it’s so important, and why they’re missing, like, it just—I always think about it, as to why you don’t see Goldman Sachs or any of these rotten big institutional companies in this market, and I always say to our investors, this is such a fragmented business. It’s just too hard for them to manage. Now, you do see hedge funds buying properties and flipping them; buying big bulk what they call tapes—and that came out of the Depression; a tape is just a list of foreclosure properties that are real estate owned by a bank. They used to be on a tape, I guess; like a ticker tape, or something, with all the addresses, I don’t know. But that expression, tapes, came out of the Depression, from what I can tell. And you see them buying big pools of properties and reselling them. But, you rarely see any large pools of money in the buy and hold business. And I think the buy and hold business is the ultimate profit, the ultimate wealth generator for an individual investor. And it’s just too fragmented for institutions to get into. So that leaves the opportunity for us, so I always say, embrace the fragmentation, because if it wasn’t fragmented, we would see a lot more competition from institutional investors, wouldn’t we?

ZACH: Absolutely. And what we’ve seen, in getting into the institutions that do buy and hold, they want the bigger markets. They can’t deploy enough capital, coming back to the amount of capital they have to deploy—they have a fixed amount of overhead on every deal that they take on, every deal that they invest in. So, when you look at their fixed time investment, they have to deploy a certain amount of capital. Even if the investment goes well, if they don’t deploy enough capital in it, it never moves their radar, it never even comes up on their radar on a big fund, even if the investment goes great and they’ve only deployed two or three million dollars on a half billion dollar fund or something—they have to deploy a lot.

So, that in turn typically and virtually always yields bigger markets, because you have to have bigger investments. So, in turn, that means a market like ours—you’re not really going to ever see big institutional money come into it. Which is a great thing for small investors, because when you do that, the cap rates stay higher, you don’t have cap rates driven down, and in turn, that keeps the fragmented business, and keeps—it allows for opportunity for the smaller investors. So, what we’ve also tried to do, though—there are pros with the bigger investors, and a lot of that is economies of scale, control over a lot of different things, streamlining processes and everything. We try to take the positives with the bigger institutions and the things that they have advantages, competitive advantages, so to speak, with them, and try to implement those on a smaller scale for smaller investors. And we did that by keeping our product very similar. I don’t want to use the term cookie cutter, necessarily, but by using the same product, a) we create a history and a track record with that product that’s very predictable. We know what it has done over the past few years, which in turn means you’re not going to get something that’s a high-risk, brand new thing that nobody’s ever tried. It’s very proven.

Which is, if you look at institutional investors, and you’re looking at RITs and stuff, all they can tell you is their past history, whenever you’re looking at publicly traded stuff. They all do look backs. So, you look at—you use that same analogy on this, we’re creating a very similar product that we’ve had success with. And when you do that, you take a whole layer of risk out of the whole investment process, when you have something that’s been proven time and time and time again, hundreds of times over from the past few years. That is—that takes a whole layer of risk out. So, by doing that alone with using the same similar units, we streamline all of our marketing, we streamline all of our renting, all of our leasing.

It allows for us to pre-lease. If we had a portfolio of 500 units that are all fragmented units within our portfolio, you can’t pre-lease, because you don’t have any consistency of what’s coming available. So, by having the same product coming available, we know we have x amount of the same two bedroom unit coming on—or, that should be coming open six months from now. We start taking pre-leases three, four, five months in advance if the opportunity’s there, which in turn, all the equates to a better bottom line for the investors, because of decrease in vacancy, decrease in turnover cost, all those different things. So, we feel like we’ve really taken the best of the institutional world and implemented it on a smaller investor type scale, and left behind the bigger institutional drawbacks.

JASON HARTMAN: Let me take a brief pause; we’ll be back in just a minute.

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[MUSIC]

JASON HARTMAN: So, two things from that that I just want to point out and kind of maybe clarify to what you were just saying. Number one is, the deal has to be large enough to move the needle. And the stuff we’re talking about on the show, it’s just not large enough to move the needle for a big fund or a big institution. So, again, that’s why you have the opportunity for higher cap rates, higher rates of return, higher cash on cash return. Just better in every way, than an institution’s going to get. And, you’re not going to pay some fund manager massively disgusting criminal fees off the top for managing the deal. I mean, you’re really going to avoid, by being a direct investor, the three major problems you have when you relinquish control of your financial future to somebody else. Number one you might be investing with a crook, because you’re in control; you’re not giving it to anybody else. So, that’s the number one problem.

The number two problem is, you might be investing with an idiot. So, you could lose money, because of their malfeasance and their graft and corruption, or you could lose money because of their sheer stupidity and their mistakes. And number three, you can lose money, assume they’re honest, assume they’re competent, you can lose money just because they take such large management fees off the top. And you know, I always go back to Lou Dobbs’ book War on the Middle Class, which was just a great book. And he said in there, he cited a whole bunch of cases in the stock market, in the public markets, and one was Larry Ellison, founder and CEO of Oracle, and he said from like—forgive me, this is from memory here, but it’s pretty close, and you can just look up the book, it’s called War on the Middle Class by Lou Dobbs. But he said, in the two years from 2000 so 2002, Larry Ellison’s personal take from Oracle was like $860 million, or something like that. Almost a billion dollars in two years, not bad, right?

Yeah. I’ll take half that. I’ll work for half that amount. And so, that was his take in two years, yet in the very same two year period, his shareholders lost 61%. And that’s totally legal! That’s just an example of huge management fees taken off the top—robbing, just stealing, from investors’ returns. How can you take almost a billion dollars out of the company when the investors lose 61% in the exact same time period? That’s crazy that that is legal. But that’s our system, okay? So, do with it what you will. And the second part of it is, with institutional investors coming in, and they’ve gotta move the needle, but also, coming in and accepting these low cap rates. It reminds me of not just the dot com era, but the era when I sold my traditional real estate company about six years ago to a Coldwell Banker affiliate. And back then, during the heyday of the real estate market where it was just going crazy, it was completely illogical, a good economy—you know that old saying, a rising tide floats all ships? It raises all ships? Well, it also raises a lot of stupid ships. And people get really dumb and careless when money is plentiful, just like they did with the VCs and the dot com era. But back then, every independent real estate company owner—they were like the smart ones, were just designing their company to be sold to Coldwell Banker!

Because they knew Coldwell Banker would frankly overpay! And they did—I saw it so many times in our market. They bought a couple of other big real estate companies in the Orange County area, and it just seemed like they were overpaying for these. And undoubtedly the deal was, someone—the edict was, someone in that company said, we’ve got to expand our brand. We’ve only got a couple ways to do it. We either open new offices ourself, or we buy existing companies. So, here’s a big fat budget. Go out and buy companies, and essentially pay whatever you have to within “reason.” And they did. They just bought up companies like crazy. And then the guy who was on the buying spree with the company, I heard like by 2007 I think it was, he got fired. [LAUGHTER]. So, you get to use all the money for a time, and then they ultimately axe you. So, he was chopped off there. But the other part of it is, and you alluded to this in what you were just saying. People in the stock market, and in the traded asset world, whether it be stocks, bonds, mutual funds, RITs, real estate investment trusts—the thing they say, that I hear them say over and over as to why they don’t like real estate and they love the traded assets like stocks, they say, I can go to my computer, and with the click of a mouse, I can deploy money, or I can sell and I can get my money out and turn it into cash.

With the click of a mouse. And they love that liquidity. And they say, that’s the reason they just don’t like real estate. Because it’s too illiquid. And so here’s my quote for the day. Liquidity creates volatility. If you have liquidity, you have volatility. And when you were talking about the rental market in St. Robert, or in any place, it’s just so non-volatile. It moves rather slowly, and it’s just a very predictable thing, where you’re not subject to rumors of what’s going on with a company’s CEO, did they write him a blog post like the Whole Foods guy did a couple of years ago—he made this blog post and got in trouble for it, and all these just crazy, silly things that happen in companies because they’re the sum total of a bunch of behavior of a bunch of humans. You know, what lawsuits are they in, what’s happening with their investment banker and their brokerage house and their rainmaker and all these other people. It’s just a really simple business, and I think it’s almost too simple, and people who consider themselves to be very bright or very educated—which are not the same thing, by the way. Bright and educated are different. Sometimes they go together, sometimes they don’t. But they consider themselves almost too sophisticated for these simple, silly little investments that are frankly creating wealth for more people than anything else. Any comments on that?

JESSICA: I understand the appeal to just click a button and start investing. But personally, for myself, I like a little bit more control over my money. So, investing in something like what we are doing in St. Robert makes sense to us. It’s something proven, it’s something you can do due diligence on it, it is a little bit more work up front, but after that it’s pretty passive. Our property management staff down there takes care of everything, so—

JASON HARTMAN: That’s a good point. The first word in real estate is real. It’s something real, it’s not a paper asset which is just a fiat currency. It’s another form of fiat currency. Fiat meaning by decree—it’s valuable because I said so, and that’s what the dollars in your pocket and every currency in the world virtually is a fiat currency. And that’s what stocks are. That’s what—they’re just paper. They’re just fiat. They have the value the market gives them, and some investment bank originally said, this is going to be the value of this stock. This is what we’re gonna sell it for. And then the market starts manipulating it from there. And I don’t say manipulating in necessarily a bad way. I like capitalism, certainly. I just think that you should be in control, like Jessica said, of your own financial future by being a direct investor.

ZACH: Exactly, and to take it, to expand on one other thing you were talking about, the attractiveness of the liquidity. Everything has a pro and a con to it. Everything has a reciprocating—everything that has its reciprocating positive has a reciprocating negative. And with that liquidity, one thing you mentioned was obviously the volatility. But also lower returns. When you have that much liquidity with something, it typically drives down returns, because it quickly drives money into it, so the supply coming into something—always see more supply—the more supply of something, money coming into something drives returns down. Just like we were talking about with the bigger institutional investors—

JASON HARTMAN: Supply and demand.

ZACH: Yeah, supply and demand. Simple economics. So, when you have that, that’s another tradeoff of that liquidity that you’re getting, you’re also getting lower returns, generally speaking. So, that’s definitely another pro and con.

JASON HARTMAN: One more thing I want to just talk about for a moment, and we should do a whole show on this sometime, but, we had an interesting conversation at dinner last night, when we were enjoying some barbeque. Kansas City barbeque. And that was a conversation about derivatives, and the doom and gloom scenarios. Any of you that are listening to this show, you might also be listening to my Holistic Survival Show, which is a very negative show, but it’s by design, because I have this morbid curiosity about the end of the world. So, the Holistic Survival Show, if you don’t listen to it, and you suffer from depression, or are on medication, or anything like that, do not listen to this show, okay? Alright? But on that show, you know, I have all these doom and gloom bears, people that predict a very bad future. But what we always do is try and ferret out the silver lining in the cloud, because every problem creates an opportunity. The Chinese symbol for crisis and opportunity are the same, and literally translated it means, crisis is an opportunity riding the dangerous wind. I remember I had this one employee years ago, and I would always say, he found the cloud in every silver lining. Some people are like that.

The best way they can brighten up a room is by leaving it. And so anyway, the Holistic Survival Show—this is really almost a topic for it. But, we were talking about the doomsday scenarios last night, and we were talking about the derivatives bubble. And I’ve had several people on the show talk about that. And you brought up a very salient, very interesting point. And we were talking about the size of—nobody really knows. But if you look at the size of economies—I mean, what’s the GDP of the US? It’s around $12 trillion a year, right? The US debt’s around $15 trillion now. Just since Obama’s been in office it’s gone up by like 50%. Like $5 trillion, just under Obama only. And he’s not even finished with his first term, okay? Hopefully it’ll be his last term. But then you look at the global GDP. All goods and services produced on the entire planet: about $60 trillion. The entitlement obligations of the US government, about $60 to some say $100+ trillion. So, that gives you a size perspective of what we’re looking at when we talk about this.

Now, some people have talked about the amount of derivatives out there in the world, in all of these—and the derivatives are just a—it’s almost hard to explain what a derivative is, but many people already know. But it’s basically something that follows something else. That’s kind of one way to say it. It’s not the thing itself; it’s the thing about the thing. I don’t know if that’s—I’m just kind of making this up here.

ZACH: It’s derived from something else.

JASON HARTMAN: Right. So, it’s derived from something else. It’s the thing about the thing. I like mine better. The thing about the thing, okay? So—the thing about the thing. What is the value of all the things about the things? Okay? They’re not the things themselves. They’re not the commodities; they’re not the soybeans, they’re not the coffee, they’re not the oil, they’re not the gold, they’re not the silver, they’re not the construction materials, they’re not the pork bellies, they’re not any of that—they’re the thing about those things. And the doomsayers talk about the derivatives as being the big shoe that’s about to drop. And they say—they estimate the value of all the derivatives in the world at like $300 to maybe $600 trillion, with a ‘t,’ dollars. In other words, 5-10 times the entire GDP of planet earth. Wow. Big numbers. Okay? And you made a really interesting point about that last night. And no one on my Holistic Survival Show talks about this. They all talk about the negative, and the scary part of it, and the numbers are scary as heck, right, but they don’t talk about what is true, which is what you brought up last night, and I’ll let you make that point.

ZACH: One thing we were talking about with all the derivatives and the amount of them, like Jason was saying, the things of the things—are—the things about the things—are typically tied to an obligation to buy, or an obligation to sell, or something tied to the price of something else, an underlying asset, typically, is what’s referred to. So, all those contractual obligations, like you were saying, have been estimated to be anywhere from $3-600 trillion. Well, what they don’t ever mention, is when something goes wrong, and those contractual obligations need to be met, those derivative contracts need to be met and fulfilled, and that’s why he’s talking about when there’s $3-600 those are obligations, contractual obligations that have to be met in the event of something else happening. And for that to happen, typically there’s a reciprocating—we were talking about pros and cons earlier. There’s a reciprocating—a lot of times you have reciprocating derivatives, on both sides of a commodity.

JASON HARTMAN: The short and the long.

ZACH: The short and the long, exactly. And whenever you have that, a lot of the doomsday scenarios that I’ve heard are, what happens if everything goes terrible, well, then you have $3-600 trillion of obligations that are being called, and those obligations are trying to be met by institutions that typically—that, well, that definitely bankrupts every institution in the world for the next 10 years, because it zaps all GDP, technically. So when you look at the size of that, it can be found very overwhelming very quickly, when you look at the size and scope of the of the potential for that. But, whenever you have a reciprocating transaction on both sides, a derivative on both sides of the equation, it’s—

JASON HARTMAN: You have a counter-party transaction. You have a counter transaction; for every seller, there’s a buyer. So if someone loses money, someone is making money.

ZACH: So, you can’t have all those obligations be called at the same time. When you have a counter-party transaction like that, if something goes down in value, then somebody’s making money on that, and somebody’s fulfilling that obligation, but somebody’s also making money on that same transaction by shorting something. So, it’s not always perfect. And also, the other thing about the derivatives, they are tied to so many different assets—everything. Everything from currencies to commodities to real estate to everything. And whenever you talk about $3-600 trillion of obligations, that’s across every asset class that there is on earth. And you would have to have all those things go wrong at the same time, and not even taking into account the counter-parties on both sides of those transactions. So, I’m a naysayer to the doomsayers, if that makes sense. I just—I can’t fathom that everything could go wrong at the same time like that, it’s actually factually impossible.

JASON HARTMAN: Yeah, and that’s a good point. So, every generation—and I brought this up, this is how we got into the conversation last night. Every generation laments that the times in which they live are the most pressing, dangerous, risky times, and I think back to the 70s, and last night when we were at your house, we watched the Jimmy Carter Malaise speech, on YouTube, and boy, he was just a disaster of a president. But I do think Carter was like an honest man. I think he was a good man. He was just a lousy leader. But every—I mean, look at what happened in the 70s. I mean, in the 50s people were building bomb shelters, and I know this because I watched Happy Days as a kid, and I remember Fonzie and Richie would make out with girls in the bomb shelter that the Cunninghams had. And so, they were building bomb shelters, they were afraid of polio and nuclear war. In the 70s it was starvation and Soylent Green, and remember all these crazy movies that were out in the 70s, and the end of the world, and gas lines, and energy shortage—I remember on the freeways, half the lights would off, or none of the lights would be on, on the freeways, and the streets, and it was all just like, somehow, we made enough electricity, and we’ve got—we use a lot more today. Not by population, but individually, because all our gadgets.

ZACH: They’ve been talking about running out of oil for decades now.

JASON HARTMAN: Yeah, the peak oil theory, which may or may not be true, but then, there’s a counter to that. There’s alternative energy, of course, there’s the abiotic theory, that the earth actually produces oil all the time.

ZACH: New technologies are always being produced to derive more oil—

JASON HARTMAN: Yeah, from oil sands, and extraction—yeah, no question. So there’s all these things. And every generation looks as though, this is the end of the world. And I remember Denis Waitley, who was on the show, he was a big mentor in my life when I was 17 years old. He said—he quotes this story, and I can’t remember it, so forgive me, but the headline of it in the Boston Globe, I think it was, in like 1860 or something, was, World To Go Dark: Oil Blubber Scarce. They were running out of whale blubber. Sorry, did I say oil blubber? They were running out of the oil to run the lamps, right? And so, the world was gonna go dark. And somehow, it didn’t. Right?

And there’s all these doomsday scenarios, and I just think that—I’m beginning to think after interviewing all these people on my Holistic Survival Show, thinking that I’m gonna jump off a bridge myself, because I’m interviewing all these people, that all these scenarios, they’re just not gonna play out like that. Because there’s just more to it. And it seems like everybody, when they come out with the doomsday thing, they’re only looking at one side. Now certainly, wealth will be transferred. And it’s already being transferred. We are in the midst now of the largest transfer of wealth in human history, and that is bad. And Occupy Wall Street movement has been grousing about that, and you know, they’re right! They’re right, that the 1% are getting much richer, and it is unfair, in a lot of ways. And I’m not a socialist when I say that, okay, but certainly wealth is being transferred. And the cups and the assets, they’re moving around on the table.

There’s no question about that. So, by listening to this show, you have to position yourself in a way to win with this wealth transfer. The way you do that is through the ultimate investing equation. You buy what I call packaged commodities investments, you buy these houses, you buy them, you get usually free land, and you buy a bunch of construction materials, and you finance them with other people’s money, and inflation comes along and increases the value of the commodities, the construction materials, and it decreases the value of the debt. I recently interviewed Doug Casey on the Creating Wealth Show, and he talked about how we could easily have 100% inflation annually. Think about what that does. If you owe $1 million on a piece of real estate, in one year, inflation has destroyed the value of that debt. You owe nothing, in essence, in real dollars. So, what an opportunity!

Get into debt as fast as you can. As long as it is debt attached to commodities, and it’s long term fixed debt. So, responsible debt, yes. I’m not saying go run up your credit card. But even then, even then, the problem is the interests will kill you before the inflation hits, on that one. And you’re not—you’re not buying things that produce income. But even then, those people will be helped a small amount through what’s probably coming, and coming pretty bad. It’s gonna be pretty bad. So, that’s the point. It’s not like it’s the end of the world. It’s just the end of the world for people who are unaware and uninformed and don’t know how to play the game. The game’s always changing. We just have to adapt to those changes. Any closing comments on that?

ZACH: No, I just completely agree with everything you’re saying. The game is definitely changing, and it’s continually changing. I mean, we go from industrial era to technology and the dot com boom, you mentioned all of that, and things are consistently changing, and it’s changing very, very rapidly, and that’s not going to slow down; it’s going to speed up. Definitely speeding up.

JASON HARTMAN: Yeah, good point. I think that change happens faster nowadays than at any time in history, because communication happens faster. And an economy is just a result of—like, when we had Robert Prechter on the show talk about the Elliott Wave theory, he writes a lot about the psychology of investing, and how people, they enter marketplaces whether it be buying a cup of coffee or buying coffee beans on the commodities exchange, they enter markets, they experience certain emotions, ups, downs, wins, losses, and then they share those emotions with other people, and then other people act based on other people’s emotions, and it creates what we call an economy. And so, the economy is the sum total of really, people’s thoughts and emotions. And mostly emotions, I’d say.

ZACH: Hence the misery index.

JASON HARTMAN: Hence the misery index. Look at Jimmy Carter, right? Yeah, absolutely. And so, that’s the opportunity we have, is to really just understand that, and make it work for us. And that’s what the show’s all about. So, Jessica and Zach, thank you for joining me today, and this totally impromptu conversation. We went all over the board, as we usually do, off on many tangents, and it’s just kind of a good topic to talk about this stuff, so, thanks again.

[MUSIC]

ANNOUNCER (FEMALE): I’ve never really thought of Jason as subversive, but I just found out, that’s what Wall Street considers him to be!

ANNOUNCER (MALE): Really? How is that possible at all?

ANNOUNCER (FEMALE): 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.

ANNOUNCER (MALE): I know! I mean, 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.

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

ANNOUNCER (MALE): That’s because the corporate crooks running the stock and bond investing game will always see to it that they win! Which means, unless you’re one of them, you will not win.

ANNOUNCER (FEMALE): 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.

ANNOUNCER (MALE): Yep, 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.

ANNOUNCER (FEMALE): We can pick local markets, untouched by the economic downturn, exploit packaged commodities investing, and achieve exceptional returns safely and securely.

ANNOUNCER (MALE): I like how he teaches you to protect the equity in your home before it disappears, and how to outsource your debt obligations to the government.

ANNOUNCER (FEMALE): And this set of advanced strategies for wealth creation is being offered for only $197.

ANNOUNCER (MALE): To get your creating wealth encyclopedia, book one, complete with over 20 hours of audio, go to www.jasonhartman.com/store.

ANNOUNCER (FEMALE): If you want to be able to sit back and collect checks every month, just like a banker, Jason’s creating wealth encyclopedia series is for you.

[MUSIC]

ANNOUNCER: 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 any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively.

Transcribed by David

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Episode: CW 232: Institutional Investors, Derivatives & Private Money Lending with Jessica & Zack

Guest: Jessica & Zach

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