CW 399 – Discounted Notes, Market Trends and Econ 301


Bill Cheney is the Chief Economist at John Hancock Financial Services. He joins the podcast do discuss how job growth was affected by the weather this past winter and if investors are feeling positive or negative about the stock market and economy.

Cheney also talks about whether investors think it is a good time to:

– buy a home
– purchase a big-ticket item
– start a business

Cheney wraps up the conversation by providing data on Americans being concerned about healthcare costs and the national debt.

Key Takeaways:

(1:07) With Doug, discussing insights from recent conference
(15:55) Discussing the current direction of the market
(20:18) A quick word on the upcoming Little Rock property tour
(21:52) A special message from Bill Clinton
(22:28) Introducing Bill Cheney
(22:36) Employment and the job market
(28:45) On the current sentiment regarding the stock market, the economy, and housing
(32:19) Remarks on the stock market
(43:09) Closing comments


Visit John Hancock Financial at


Bill Cheney directs economic research for John Hancock Financial Services, the U.S. division of Toronto-based Manulife Financial Corporation. Based in Boston, he forecasts macro-economic and financial trends and analyzes the potential impact on the company’s individual business lines and investments. Cheney is a member of the National Association of Business Economists.

Audio Transcription:

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 host, Jason Hartman, and this is episode #399. Our guest today will be Bill Cheney with John Hancock Financial, and we’ll be talking about some great stuff with him here in just a few minutes. Some very interesting insights on the economy. However, before that, I am with Doug, who you’ve heard on the show many, many times, and we are in Tampa, Florida, where we’ve been attending a conference the last couple of days. We wanted to just share with you some of the insights from the conference we’ve been attending the last couple of days, and talk to you about the exciting new note business we’ve been working on for quite a while now, and doing a lot of due diligence, and stuff like that. So. Doug, how are you?

With Doug, discussing insights from recent conference

DOUG: I’m doing very well, Jason.

JASON HARTMAN: How have you enjoyed the last couple of days? These have been long days. 12, 13 hour days.

DOUG: Yeah, very long days. I used to complain about your conferences, because we never got any time to talk to each other. But for goodness sakes, we have two five minute breaks, and that’s it.

JASON HARTMAN: This is really tough, this one. Yeah, no question about it.

DOUG: There’s a couple things that really popped out to me, when we’ve been talking at this conference. And for everyone on the podcast, the tenor of this conference has been largely among people who are in the trade, predominantly people who do things like fix and flips, or acquire properties wholesale. And there’s a couple really big things that I pulled out of this conference, I think. Number one is that the fix and flip business, a lot of those people are really having to scramble for inventory.

JASON HARTMAN: Oh, no question about it.

DOUG: They used to be able to pull properties out of the MLS, get foreclosures from HUD, they could go get properties at the county steps. Now people are having to switch to direct mail and bandit signs. This is like 1985 style.

JASON HARTMAN: Right, yeah. It’s all old style. And you know, probably the phrase I’ve heard here most often is the phrase, dried up.

DOUG: Yes.

JASON HARTMAN: This dried up. That dried up.

DOUG: Exactly. And one of the reasons why this is happening, is what I call an influx of dumb money. Mainly dumb money from hedge funds.


DOUG: You have a lot of hedge funds that are buying up properties that are dragging up prices that are pushing them past the point that makes sense to really be a reasonable investor for the amount of risk that you’re taking on—

JASON HARTMAN: And certainly we saw that happen in Phoenix for sure. We’ve see it happen all over California. And since then, we’ve seen it happen, I think Atlanta was one of the first markets that that really caught hold in after Phoenix. We saw all of the Texas markets basically get inundated with dumb money like that. The institutional money. Which, it’s not their money; they’re just willing to pay because it’s someone else’s money, and then get paid really for acquiring and controlling more assets. That’s how you get more money.

DOUG: One of the things to really remember is one of the reasons why institutions always have and always will act like that, is because fund managers will get fired for holding cash. If fund managers are fully invested, and they lose money, as long as they lose less money than other fund managers, they’ll be fine. But if they hold cash, and don’t make as much money as other fund managers, they’ll get fired.

JASON HARTMAN: Right, right. There’s tremendous pressure to keep the money invested.

DOUG: There’s tremendous pressure to always keep all of their capital invested.

JASON HARTMAN: Similarly, and what’s interesting about that, is that the same thing happens at investment firms. When you’re the sucker investor who goes and puts your money at Ameritrade, or Merrill Lynch, or Ameriprise…I’ve got a few Ameri’s there. The pressure is, you’ve gotta keep the client invested, even if it’s bad for them. There’s just not much willingness to go to cash. And sometimes going to cash is the best thing for the investor, right?

DOUG: Sometimes it is. There are times when it’s just smart to sit on dry cash.

JASON HARTMAN: Yep, absolutely. Keep your powder dry, as the old saying goes.

DOUG: One of the other things that really spoke to me, or that I really pulled out of the seminar, is how a lot of the market is shifting toward notes. Or how notes are becoming more and more important in the marketplace. And there’s a couple reasons for that. And when we say notes, we’re primarily talking about either acquiring mortgage notes from banks and hedge funds, or acquiring seller finance notes. And the reason for that is because there’s a segment of the population that is basically unfinancible by institutions. Because all the institutions have the exact same underwriting standards, and if you don’t meet those standards, you can’t buy.

JASON HARTMAN: Yeah, it’s a cookie cutter formula, and I tell you, that number of people is increasing. It’s been increasing, and it keeps increasing quite dramatically. The great think about—look it, folks, conceptually, this is a great thing about the world of entrepreneurship. I’m hanging out with entrepreneurs constantly. After this conference, I’m going to another conference on Friday in Dallas. I’m staying two more days here; you’re leaving today and going back. But, entrepreneurs are so adaptable. This is why central planning doesn’t work. This is why government doesn’t work. Because entrepreneurs, in a week they can transform their business and do something else. It’s amazing how adaptable they are. We’ve heard that phrase, that I mentioned a few minutes ago, “dried up;” that we keep hearing, the last couple of days. When something dries up, they just go look for a new source, a new avenue. And so, that’s what investors listening right now need to also think of. Because inventory has been scarce for them too. A lot of people listening to the show are saying, hey Jason, you know, I went to your website, and there’s just not much for sale. Believe me; we’ve noticed. It’s a huge problem in our business. Notes represent another opportunity to control the note asset, but not only to control the note asset—to maybe actually control the underlying real estate through a circuitous route.

DOUG: When most people think of note investing, they think of like a bond. Where you buy it, you get the interest payments, and you get paid back at the end. That’s one way to do note investing.

JASON HARTMAN: That’s sort of the elementary way. That’s like the first level. And it’s okay. But you do have some exposure—of course there’s always the normal exposure of will the borrower default. But the second exposure is the inflation risk.

DOUG: One of the thing that’s nice about either the seller carried notes or the discounted notes, is that your effective yield is considerably higher than you’ll find out in the commercial market. Since these products are less liquid; since they don’t have [unintelligible], since they’re not traded on an exchange, there’s not as much money going after them. Money pushes the price up and the yield down. When you have the lower prices and the higher yields, you have a cushion to protect you against inflation. And then the collateral that it’s secured by, in our case is a property. So, in some cases, what some very savvy investors have started doing, is purchasing non-performing notes on properties in good rental markets, foreclosing on the note if they can’t get it worked out, and that is how you acquire a property for a price to get it to really make sense as a rental.


DOUG: And I think we’re gonna see that more and more and more as prices escalate and as it becomes less and less reasonable to buy properties retail as rentals.

JASON HARTMAN: And that formula has a name. It’s called Loan to Own. And it doesn’t necessarily mean that you made the loan. You might have purchased the loan. And then you essentially become the lender. So, you loan to own, if you will. That’s an opportunity. There are a lot of layers to this. We’ll be talking about it on future episodes. And I tell you, I was first exposed to the idea of investing in notes when I was 19 years old. And I remember, I just loved the idea. I’ve done a little bit of it. I’ve only dabbled in it over the years. But I really have the past, maybe two years, wanted to get more into it, and I’ve been investigating a lot. I’ve been attending events, reading stuff. It’s getting close. So, the idea is, more on this later.

DOUG: The principle barrier to the private note business is the same barrier that we have to real estate, only worse. Which is that it’s fragmented.

JASON HARTMAN: But it’s good; that’s where the opportunity is.

DOUG: Notes are even more fragmented, but that’s where the opportunity is—because it’s fragmented. In the case of real estate, you have the MLS, defragmented real estate, significantly. There is no MLS at all for notes. And what that means is, in order to feel like you’re not a guppy swimming in the Pacific Ocean, you need to have somebody who can help you sort through who’s telling the truth, who’s actually giving me a good deal, who’s gonna try to completely fleece me out of my money. That’s what scared me away from note investing. Because like you, I’ve been looking at it for years and years, and just thinking, this sounds great; how do I know they’re not getting shafted? And that’s really what Jason and I are working on; we’re doing the work on the back end to vet the providers, and to give investors the tools they will need to be able to make good purchases, just like he’s done for the rental properties. Because what we want to do is, we want to bring this investment vehicle to investors—

JASON HARTMAN: In a standardized way.

DOUG: In a standardized way—

JASON HARTMAN: And that’s the way we’ve always looked at and analyzed rental properties.

DOUG: And give them all the tools to make the right decisions themselves. We don’t want any investors to trust us and say, okay, I said this is a AAA loan. No no no no. I want to give you the tools—

JASON HARTMAN: So you can analyze the data.

DOUG: To do your own rating, so that you are the educated investor, and you’re not dependent on us. Because—

JASON HARTMAN: It’s Commandment #1. Thou shalt become educated. And I always say, be your own best advisor. What I’m here to do, is to empower you to be your own best advisor. And the education is almost completely free. You know, we do have a couple information products and courses we sell and so forth, but basically, you don’t need to buy any of that. You can get it all for free on the podcast.

DOUG: Yeah, all your best stuff you give away for free.

JASON HARTMAN: I know. No, I’ve got some good stuff I sell.

DOUG: That’s true. You’ve got some pretty good stuff you sell. The stuff you give away is pretty good too though.

JASON HARTMAN: Here’s the difference, actually. Oh, thank you. Free stuff is good. Here’s the distinction. The stuff that I sell, is in a more structured format. The stuff I give away, that’s on the podcast, that’s not as structured. It’s more of like, a news show, where we’re talking about this and that, and we’ll talk about this and that again two episodes later, and three episodes later. And it’s fragmented.

DOUG: Fragmentation!

JASON HARTMAN: Embrace the fragmentation. I always say that. And that’s when it comes to investments; because the fragmentation is the opportunity. When a market becomes more perfect, like—the most perfect market would be, I’d consider it to be the stock exchange. You’re not gonna negotiate on the price of Apple stock. The price is the price, period. It’s a deal. That’s the deal. There’s no negotiation. And there’s no fixing it up and making it look better, or marketing it better to get more for it. If you own it, with a house, you can do that. And with a note, you can do that. And what we like to say, is that these deals, because of fragmentation, they’ve got a little hair on them, so to speak, okay? You know, you gotta kind of peel back the onion, and analyze it, and that’s what Doug and I have been working on, is the tools to help you do your own rating system. And so, more on this later. But I think it’s really exciting.

DOUG: Just to whet people’s appetite a little bit, a pretty typical internal rate of return—which is your overall rate of return over the life of a note—

JASON HARTMAN: IRR, is the holy grail.

DOUG: It’s in the low to mid double digits. It’s around 10, 12%, is pretty standard.

JASON HARTMAN: Yeah. And it’s not bad. Now, look it. That’s not as good as the real estate. On the real estate, with the multi-dimensional asset, if you go to and click on the properties section, and you look at all of our standardized pro formas, and all of that data, it’s all nice and standardized, you’ll see returns, overall returns of 25-45% annually. That’s fantastic. And you’ll see cash on cash returns where you don’t have to have all of those multi-dimensional things; just two dimensions to cash on cash. Expense—in other words, the investment amount—versus the net cash flow every year. Then, you know, you’ll see cash on cash returns of anywhere from 8-12%. It’s pretty good.

DOUG: It is. But I think the one thing that you get with notes, is that you get more stability up front. Because in order to really get stabilities with properties, you need to get to the law of large numbers. You need to hold for a long time, and get to the law of large numbers. Because with any one property, you could have stuff go wrong. And if you only have—if you have something go wrong with one property, and you have two properties, you’re shot.

JASON HARTMAN: Half of your portfolio is a problem.

DOUG: Yeah, half of your portfolio is not performing. But if you have, say, 10 properties, and you’re holding them all for 10 or more years, and you have something go wrong with one property, that’s just a nuisance. It doesn’t derail your strategy.

JASON HARTMAN: No question about it. And the other thing is, that the properties benefit dramatically from inflation, as we’ve talked about on the last, you know, 398 episodes. Right? The notes get hurt by inflation. So, inflation-wise, they’re not as good, by any means, and they’re not good from a tax perspective.

DOUG: They’re not good from a tax perspective.

JASON HARTMAN: Owning a property is great tax-wise.

DOUG: One thing to consider with notes, though, is that inflation has an indirect impact on notes, which is because almost all of these notes are secured by real property. And so—

JASON HARTMAN: So the collateral becomes more valuable.

DOUG: When the collateral becomes more valuable, your chance of having a sale or refinance goes up. And when a sale or refinance happens, you get paid 100 cents on the dollar, as soon as refinance happens.

JASON HARTMAN: And the typical deal is 7½ years. That’s the typical cycle. If you have a note that’s got a 30 year term on it, for example, or a 20 year term, as a lot of the more private notes are shorter than the institutional notes, the likelihood is, although it cannot be guaranteed, is that you’re gonna get paid off within 7½ years. So if you buy a note that’s got three years of seasoning, you’re probably only likely to hold that note for 4½ years. 3 + 4½ is 7½.

DOUG: On average, yes. Law of large numbers.

JASON HARTMAN: Law of large numbers. And the other great thing about the note side of the equation, is it’s got a lot more scalability. So, for our investors that don’t want to deal with a physical asset—you don’t want to hear, oh, the garbage disposal broke, or the garage door opener broke. If you’re really sick of that, although that’s a very profitable business, and fortunes have been made—

DOUG: All of our 60 hour work week folks.

JASON HARTMAN: Yeah, exactly. If you don’t want to hear that stuff, if you’re working your corporate job 60 hours a week, as Doug mentioned, then the note business, depending on what segment of it you’re looking at, in terms of what investment you’re looking at there, can be very nice, because it’s a paper transaction, and it does allow for a lot more scalability. If you have a lot of capital to deploy, if you talk to Doug, he could put you into a portfolio of notes, and you could deploy several, several hundred thousand dollars, or even millions of dollars—

DOUG: Very quickly.

JASON HARTMAN: Very quickly. Within a week or two. You could do it faster, but you want to be careful, obviously. So the faster you do it, the more likely—

DOUG: [unintelligible].

JASON HARTMAN: That’s really the thing you’re looking at. There are advantages and disadvantages to each side of it. And more to come. We don’t need to go all into it today.

DOUG: I was going to say, one other consideration, too—for people who want to be more aggressive, you can be more aggressive with notes. The way that you would do that, is you would look for what’s called non-performing notes, which is notes where the owner is not currently making the payments. And the reason why many people find these appealing, is because you can typically buy them for extremely steep discounts.



JASON HARTMAN: Not as steep as you used to be able to buy them.

DOUG: Not as steep as it used to be, but for example, you can buy a non-performing note for—

JASON HARTMAN: 30 cents on the dollar. 20 cents on the dollar, maybe.

DOUG: Let’s say 30 cents on the dollar. Let’s say you happen to get lucky, hit a grand slam home run, and a month after you buy it, the person is able to sell their house. Let’s say they had positive equity, they sold their house, and they cleared the loan. You can theoretically buy at 30 cents on the dollar, and if they refinance themselves, successfully, you can get paid off at 100 cents on the dollar. That’s the grand slam.

Discussing the current direction of the market

JASON HARTMAN: Or even if you do a workout with them and you get paid off at 70 cents on the dollar, it’s still a grand slam. So there’s a lot more there. But Doug, I want to talk about one more thing, before we go to our guest today. And that is, the direction of the market. The vibe. You know, I’m constantly talking to people—I mean, what my investment counselors and I do virtually every day, is we’re talking to people. And we want to always bring that knowledge to you, the investor. Because we’re getting an anecdotal feel, just the vibe of the marketplace. And the last two days, talking to 35 real estate investors, has been very interesting to get the vibe. So, I want to ask your take on it. And we haven’t really talked about this much, because we haven’t had any time. So I don’t know exactly what you’re gonna say. But what I would say—the vibe I’m getting—and we’ve got people here from all over North America. In the low priced markets, the vibe is still really positive; there’s still money to be made. Inventory is scarce; the vibe is that values are still increasing nicely. But in the high priced markets, I was talking to a guy from Los Angeles today, my hometown where I grew up in LA.

DOUG: Jason town.

JASON HARTMAN: Yeah. LA is totally overrated, if you ask me. He’s just talking about how the market is really just starting to crash. Prices have softened, and it’s still hard to get deals, oddly. But the buyers are just not willing to pay anymore. He was saying that the buyers are just saying no. And they’ve been saying no for about a year. The prices have just gone up too much, and well, it’s kind of looking like the start of a crash. Maybe I’m being overly dramatic. I don’t know. They print another trillion dollars next month; maybe that’ll change.

DOUG: The vibe I got is that people who are wholesalers, and fix and flippers only, a lot of them are having a lot of issues, because they have to hustle. And because, we were hearing about people laying down bandit signs, doing direct mail. We have some people, which was very interesting, was they have a sequenced funnel where they have virtual assistance that pull comps, that do follow ups in order to screen their leads, but it’s all based on direct mail.

JASON HARTMAN: Yeah. Do you know what I heard this morning? Is that the acquisition cost to get one deal to the table, in Los Angeles, via direct mail, is $2500 per property. Oh my God. That’s enormously expensive.

DOUG: There is even another person where he’s designed an algorithm that scrapes public data to use neural analytics—

JASON HARTMAN: This guy’s brilliant, yeah.

DOUG: To determine what your highest probability contacts are, to help people narrow down their marketing. What that all told me, is that the fix and flip model is at a shift; it’s at a pivot point; the old model, old ways, the ways that people used to do things, isn’t working anymore. And everybody’s having to figure out how to adapt. Alternatively, we had a few people in attendance who owned lots of properties. Their properties were appreciating, but a lot of times, they had so many properties, that they just couldn’t keep track of everything. They were exceeding their human limitation. Joe from Indiana had I think 500 total properties. That’s a lot.

JASON HARTMAN: Yeah. That can really be a scary thing hanging over your head.

DOUG: Yeah, that’s a lot. The vibe that we got from everybody was just very different, depending on which side of the industry they were in.

JASON HARTMAN: And where they were geographically.

DOUG: Where they were geographically.

JASON HARTMAN: That’s the thing I really wanted to stress. When I started talking about Los Angeles versus the lower priced markets—what I always say is, all real estate is local. There is no such thing as a national housing market, and man, I’ll tell you, the last two and a half days here, once again that’s just hit me in the face, because it is a major difference. The person who’s doing the stuff from the suburbs of Detroit, the person who’s doing the stuff in Memphis, the person who’s doing the deals in Cleveland, he’s here, by the way; I met with him in Cleveland just about a month ago. Versus the guy in LA and Seattle. I mean, it’s just a completely different story. You’d think they’re in different countries, or different times. Because really, the time continuum of the real estate market could almost be shifted based on geography. For example, in LA, markets topping—it’s actually falling—a little bit. That’s happening there. But all real estate is local. That’s the point. I say it all the time. So I don’t need to belabor it. More to come on notes. Let’s get to our guest today, and then remember, our next episode is the very famous and awesome Dan Millman, Way of the Peaceful Warrior, and he’s gonna talk with us on episode #400. So, that’ll be great.

A quick word on the upcoming Little Rock property tour

JASON HARTMAN: Just a quick word on our Little Rock property tour; you know this is again one of the markets that hasn’t been ruined by dumb money, because there’s not much dumb money in there, okay? And it’s incredibly landlord-friendly, as you heard about a couple episodes ago.

DOUG: One of the things I was telling Jason about was that, played this video, and then cuts right off into an interview, and I’m like, Jason—

JASON HARTMAN: I was in a hurry!

DOUG: How can you not follow that up? But the thought that I had with that video is that, just because you own a property in an area where you have—

JASON HARTMAN: Everything on your side. The law’s on your side.

DOUG: Where you have the ability to use the law, you can separate yourself as an owner by being the ethical owner. You may not be a very large person, but you can be the giant of dwarf town. If you are in the—

JASON HARTMAN: It’s all relative.

DOUG: If you are in the midst of many unethical people, you can make a name for yourself, simply by being a person of your word, by dealing straight.

JASON HARTMAN: Yeah, absolutely. But when you get a bad apple, a really bad, rotten tenant, which occasionally you do get him, then you can use the full power of the law on your side, which is nice. It’s the complete opposite of New York and California, and many other markets like that. So that is interesting. If you didn’t hear that video, it’s pretty, pretty darn shocking. Go back a couple episodes ago and listen to it; I think it’s about three episodes ago, and that’ll blow your mind. Join us for our Little Rock property tour, because landlord-friendly beyond belief, really, hasn’t been ruined by the dumb institutional money, and we’re gonna have a great tour there at the end of September. You can register at Before we get to our guest, let’s see what Bill Clinton says about it real quickly.

DOUG: Let’s listen to Slick Willy.

JASON HARTMAN: Here he is. Then we’ll have our guest.

A special message from Bill Clinton

BILL CLINTON: Hi. This is Bill Clinton, and I want to invite you to hang out with my friend, Jason Hartman, in my hometown of Little Rock. Jason and his interns, you know I like interns, are having his famous Creating Wealth Seminar and Property Tour here! So drop everything, including Hillary, and go register at, right now. This event is coming up soon, but, as I like to say, it depends on what the meaning of the word ‘is’ is. See ya there.


Introducing Bill Cheney

JASON HARTMAN: It’s my pleasure to welcome Bill Cheney to the show! He is chief economist at John Hancock Financial Services, and Bill, where are you coming from today?

BILL CHENEY: I’m in Boston.

Employment and the job market

JASON HARTMAN: Well it’s great to have you on the show. Just want to kind of dive in here and talk a little bit first about one of the most important things, and that is, employment. Your take on the job market and the future prospects?

BILL CHENEY: Well, as you say, it is one of the most important things out there. It’s important to real people, it’s important to the Federal Reserve, and it’s been a consistent source of disappointment for the last five years or so. Clearly the job market is improving. The unemployment rate is coming down. Whichever measure you use, whether you use the one that says it’s 6.7, or 12.6, or whatever, it’s coming down. So, that’s all good. But it’s been at a kind of glacial pace, and certainly we’re still at a level of activity in the job market that feels like a recession to a large number of people.

JASON HARTMAN: It’s so much harder to calculate nowadays, because so many people have their own solopreneur gig, they’re doing contract work, and things are inconsistent, and obviously you look at employment, you can’t just say that. You kind of eluded to the labor force participation rate. But also, the issue of underemployment I think is a significant one, where we’ve got people with masters degrees serving coffee at Starbuck. That’s not how it should be, right?

BILL CHENEY: Absolutely that’s not how it should be. I guess I have to say that over my career I’ve lived through quite a few recessions, and in almost every recession, we have that phenomenon. It’s people losing their jobs, it’s harder to get a job, and people are willing to take jobs beneath their qualification level. That hopefully changes as things pick up, as you get closer to something you might call full employment, and I think in every cycle, it feels as if it’s gonna be forever. It feels like it’ll never get better. But so far in my life, every time it does get better. New opportunities emerge, and people start getting better jobs, as well as more jobs.

JASON HARTMAN: I’m sure you’re familiar with the ridesharing service Uber. Do you use that in Boston?

BILL CHENEY: I haven’t used it, but I’ve read about it, yes.

JASON HARTMAN: Yeah, it’s a pretty neat service. Lyft is another neat service that’s a competitor of theirs. It just strikes me as amazing; whenever I use those services, I always talk to the drivers, and I hear how one of them just recently used to be an investment banker on Wall Street, and now he’s driving a car for Uber.


JASON HARTMAN: Talk about a change, huh?

BILL CHENEY: Again, I think this is something that you just have to realize happens in every cycle. You know, in 1980 you were hearing all these stories about people with PhDs in physics driving cabs. Subsequently, the physicists all got jobs on Wall Street, and it was people with other kinds of advanced qualifications who ended up in the cab in the recession. I think if I say that the normal progress of things will be that unemployment will come gradually down, gradually down, and eventually, almost without noticing, we’ll find that the labor market has actually gotten kind of tight, that wages are going up, and people who were viewed as almost unemployable will start to get jobs again. Kind of like the late 90s. The problem is that for any individual, it doesn’t mean that your skills will end up being worth anything. And that’s really the problem. From one decade to the next, different people find that their skills are in demand, and some significant chunk of the population, like former cabs, may find that their jobs are going away to Uber or some brand new competitor that we haven’t even thought of yet.

JASON HARTMAN: It is amazing. I mean, there’s so much amazing technology, and so much innovation coming out of the world today. It’s very exciting, no question about it. But it makes for a very quickly changing demand level, in the labor market, and those skills are always changing. But the one thing I think we can all agree on is that spending a fortune on college, and going into a massive amount of debt for a liberal arts degree, is probably a pretty bad deal.

BILL CHENEY: I’m not 100% certain about that, but I think you’re probably right. And I certainly feel as though there’s been something out of kilter in terms of the rate at which college costs have gone up. It’s not that a liberal arts degree is a bad thing; I think there are a lot of contexts in which it can actually be a valuable training in how to acquire and use knowledge, which may be transferable to a lot of other activities. But the cost, in particular, does not seem to have been affected by all the technological advances which have driven down the cost of doing business in other sectors. It’s unclear at this point whether that’s just inherent in the nature of education, or whether it’s because of the sort of institutional restrictions that we have in terms of accreditation and hostility to massive online causes, and qualifications acquired through for profit institutions. I suspect there’s gonna be a lot of competition in education, and it’s actually going to drive down the average cost. Harvard will still cost a fortune, but a degree—a useful degree—may get cheaper.

JASON HARTMAN: I can hardly wait to see that, Bill, and I just have to think, these people in the ivory towers of academia, are shaking in their boots with what is going on. I mean, the fact that they can’t sell education at lower prices when they’re doing—you know, so many college students are taking courses online nowadays! A completely scalable, inexpensive delivery process, and then you look at all of the free education out there. I’m a huge fan of the Khan Academy, and there are many other things out there that are doing this too. The real thing that’s allowing this monopoly to still exist is the government student loan entitlement complex. Because they’ve driven up the prices. If the government didn’t insure student loans, the money wouldn’t be out there for the universities to grab. The cost of college would be set by the marketplace.

BILL CHENEY: It is a source of frustration, and it’s so clear that if you pump a lot of money into a given system, whether it’s education or healthcare or housing or space travel or something, the first thing that you tend to do is drive up the price of the scarce resources that are used in producing them, like professors’ salaries, or astrophysicists’, or whatever it may be. Or houses. Those things are all very much driven by the availability of funds to buy them.

On the current sentiment regarding the stock market, the economy, and housing

JASON HARTMAN: You have feedback from investors. Your company’s clients, and also of course your own research and your own thinking—but what’s the sentiment out there, in terms of the stock market, the overall economy, housing?

BILL CHENEY: We sponsor a quarterly investor sentiment survey to answer precisely those kinds of questions. We ask questions of a decent size sample of people who have not huge incomes, but sort of decent middle class incomes, and a chunk of money to invest. And what we’re seeing, which I think is consistent with my reading of the overall economy, is that they are steadily feeling somewhat better. From one quarter to the next it seems like people are getting a little less worried about the things that worry them, a little more confident about their financial status in the future, and in particular in retirement, and therefore, I guess, a little bit more optimistic about investing in what would otherwise be considered very risky assets like stocks and houses. So, we’re seeing that marching along. Now, it’s not that anybody thinks the happy days are here again. People are still very worried about politics in Washington, about the national debt, about healthcare costs, about potential changes to Social Security, about oil prices. You know, there is a list. But the intensity of those concerns seems to be going down over time. Each quarter we see a slightly smaller percentage of people being concerned, or very concerned, about those issues. And to me, that’s a valid reflection of the fact that despite all the gloom and doom talk that we lived through after the financial crisis, the worst scenario did not come to pass. You’re always worrying about another recession, or some financial meltdown happening elsewhere in the world and sucking us down into a vortex all over again. But those things didn’t happen.

JASON HARTMAN: You sure? I mean, a lot of people went into foreclosure, a lot of people walked away from their mortgages by choice…the banks got a lot of taxpayer money. I don’t know. Isn’t that the vortex?

BILL CHENEY: Because things were so uniquely awful, that was why there was such a high level of fear about things really going down the tubes. But if you compare now to, let’s say, early 2009, when president Obama was being inaugurated for the first time, it really felt as though we were just spinning into oblivion, that we were facing a rerun of the 1930s, and we didn’t. We had some very dire consequences, as you say, for mortgages and employees and so on, but the employment rate peaked at about 10%. In the 1930s, it was 25. And it wasn’t obvious at that moment that we weren’t going to the 25. So, I think if I say, sort of the darkest fears which people were both pedaling and just feeling on their own account, for not crazy reasons, those darkest fears were not what came through. What did happen was not good; I mean, we’ve been struggling, trying to recover, in a way that I think is deeply disappointing and probably means we didn’t do all the right things, but one way or another, we’ve been on this gradual struggle of things getting a little better each year, from one year to the next, to the point where now it seems to me that the economy probably is poised to grow significantly faster, I think. People are better off in terms of home prices and equity values in their 401(k) plans, if they have them. Companies’ balance sheets are pretty strong. Banks have kind of recovered. So, the things that were holding back the economy the last couple times it started to recover, I think it’s probably easier now, and I think that’s what’s been reflected in that survey of investors. I think that’s what’s really going on.

Remarks on the stock market

JASON HARTMAN: What do you think about stocks, though? So many people are saying the stock market is overvalued at this point.

BILL CHENEY: I certainly see the reason why you’d worry about that, and it’s certainly true that while I think the stock market is a decent barometer of how the economy is performing, it certainly gets ahead of itself sometimes. The poster child for that was the 1999/2000 period. But when I look at a sort of economy-wide top down look at the stock market, to look at the total value of all corporate stocks relative to the total value of all corporate profits, it doesn’t look that far out of line from historical averages. Now, historical averages are just historical averages. They don’t prove that you’re gonna stop at any particular level. But it does suggest to me that stock values are not radically out of line, provided that companies can go on making the profit margins that they’re doing now. If profits dropped for any reason, then the stock market would turn out to have been overvalued. But if corporate profits keep on rising, the kind of pace that I think is likely, it was in an expanding economy, then I think we’re going to find that stock prices were reasonable enough, and they’re probably just as likely to go up as down.

JASON HARTMAN: Are you saying that from a price to earnings ratio perspective?

BILL CHENEY: It’s sort of like a price to earnings ratio when I look at these economy-wide numbers. But they’re not the PE ratios that you’d get from any financial report anywhere. It’s more the numbers which I pulled out from the national income statistics, of things that go into GDP. But for the total corporate profits, and total value of corporate equities, I think it’s kind of like a PE ratio, it’s the same idea. And as far as I’m looking at it, that ratio does not seem to be out of whack with history.

JASON HARTMAN: You made a statement just a couple minutes ago about an expanding economy. So, do you think the economy is expanding now?

BILL CHENEY: Oh, absolutely the economy is expanding. We still have positive overall economic growth, GDP is kind of a fuzzy concept, which it is expanding, and mean time, we are still seeing job gains. So, if we got 190, 200,000 jobs a month, that is definitely a sign of a healing economy. I don’t know whether I’d say healthy yet, but certainly healthier than it has been.

JASON HARTMAN: You said that GDP was a fuzzy concept, and I agree with you, and my question was a bit of a trick question, I’ll admit. Because I wanted to ask you, Bill, your thoughts on the real rate of inflation. Do you go with the government’s number, the official stats, the CPI, or do you have your own thoughts as to what it really is?

BILL CHENEY: I think the CPI is about as good an estimate as you can make. I know the Fed and a lot of us economists like to talk about what we call the core CPI, which means excluding food and energy, which obviously annoys people, because it’s like—

JASON HARTMAN: It annoys me.

BILL CHENEY: Well of course. I have to pay for food and energy. And the point is not to pretend that food and energy don’t affect the cost of living; the point is that they are both kind of volatile, and they don’t represent a very good predictor of what inflation is gonna be the next month. So, if you’re looking at what inflation is likely to be six months down the road, you get a better idea from filtering out all the fluctuations of food and gas prices, and looking at the trend underneath that. But you have to come back, ultimately, and look at what the actual overall level really is, to get a grip on the cost of living. And, I think the reality is that in fact inflation is remarkably low right now. There are some components of it, like, as we were talking about before, college tuition, which are still going up way too fast. Healthcare costs have actually slowed down, but they’re still going up faster than the overall CPI. All these different items are weighted together in, I think, in a more or less accurate proportion to how big they are, and the average person’s budget. If your budget happens to be heavily weighted towards college age kids and some health problems, then you’re facing extremely rapid rate of increases in prices. But if your kids are either out of college or a long way from college, and you’re all healthy in the family, and you’ve already got the fixed rate mortgage, etcetera, then you’re facing very little inflation at all. And I think it averages out to about what the government is telling us. I would also add, actually, that a bit of inflation is not the worst thing. I think the idea that we would all be better off with zero inflation, or that inflation particularly hurts the less well off, I think is a mistake.

JASON HARTMAN: I buy the Philips curve argument, and I agree with you to a small degree. And I think ultimately inflation is a really good business plan for governments, especially those irresponsible. Because that’s all of them. They all like to pander and buy votes with money they can print. It’s a pretty good business plan, really. It’s better than the alternative. It’s better than deflation, which is I think a pretty scary thing, because it causes people to put off decisions, slows the velocity of money, and that can have really tragic consequences in many ways. So, I won’t argue with you there. But the reason I asked about growth, and you know, do you think the economy is growing, that very generic question, and then about inflation, is because, when you look at inflation versus GDP, regardless of what you think the real GDP is, or the real rate of inflation, are we just treading water?

BILL CHENEY: Honestly I don’t think we’re just treading water. I think, when you look at the underlying sort of real variables, sort of, are people getting more stable to afford more stuff or better stuff over time, I think the answer is actually yes. But you know, if you look at a car that you can go out and buy now for whatever, you know, $25,000 or something, it’s gonna be a whole lot better than a car you could have bought 15 years ago. There’s all kinds of extra features and safety measures—


BILL CHENEY: And the same is true of the stuff you buy with your healthcare dollar. It’s better than it was in the past. So, you’re getting all these dimensions of progress, quite apart from the sheer scale of the economy, the fact that in fact we’re creating jobs, and producing more stuff. You can argue about whether—you can get into a more Buddhist argument about whether more stuff is actually good for you—

JASON HARTMAN: Yeah, but that’s a whole nother discussion.

BILL CHENEY: Yeah, from the materialist perspective of, you know, an economist’s perspective, we are producing and getting more and better stuff over time.

JASON HARTMAN: True. That’s what the people that run the inflation indexes would say, is that that should be adjusted with hedonics. And so, do you believe in that? The concept of hedonic adjustments?

BILL CHENEY: Well, that’s a tricky question too. I do believe in it. For precisely the reason that I was giving you. You can look at a basket of goods and say, well, this would only have cost you x dollars in 1965. But when you start looking at it, that basket of goods in 1965 would have been junk. You wouldn’t accept 1965 quality healthcare now. You wouldn’t even probably be allowed to drive a 1965 quality car, in many cases now. Things really do change over time, and to a considerable extent, they represent improvements which should be reflected in price indexes. But we’re not very good at reflecting reductions in quality over time, which probably should be attributed to the service sector, in many cases. There are certainly components of the economy where we’re all pretty sure that we’re getting worse service than we used to a generation ago.

JASON HARTMAN: Yeah, and I don’t know if that’s really true, either, by the way. You know?

BILL CHENEY: Well, it’s true in some cases. It’s definitely not true in others. I mean, you think of financial services, and how impersonal and obnoxious banks are, but at least they’re open, and you can go to the ATM.

JASON HARTMAN: And they’re open longer! You know, when I was—

BILL CHENEY: Yeah, they’re open longer—

JASON HARTMAN: They used to close at 2, 3 o’clock in the afternoon.

BILL CHENEY: Exactly. There used to be bankers’ hours. And now bankers’ hours are pretty long.

JASON HARTMAN: Yeah, I agree.

BILL CHENEY: So, in a lot of ways, I think hedonics are a very complicated question, in terms of, is the quality of goods and services going up, down, or sideways? But, commodity by commodity, I think it’s actually quite important for the statisticians to measure this stuff, and try and reflect it in the price of the goods and services that go into the CPI.

JASON HARTMAN: That’s an interesting thing that you just said. I just want to propose a kind of a different idea to you. On hedonic adjustments. We don’t have to go into this too deeply. I know we’ve got to wrap up here. But I believe that logically hedonic adjustments make sense. I don’t argue with any of that. However, when you look at the big picture, and you mentioned the Buddhist argument about materialism and so forth, so I’m gonna give you a big picture idea here too. And that is, that—it kind of says we’re not entitled to progress! Why should the progress be adjusted into the index to make inflation look lower? If we get a computer that’s twice as fast nowadays as we got two years ago, and the index only says it really costs half as much in their version of real dollars, doesn’t that say that I’m not entitled to that progress? Aren’t we entitled to have everything get better and cheaper and faster and more useful?

BILL CHENEY: I don’t know whether I’d use the word entitled. But I mean, certainly the whole point of the economy is to deliver more, better, faster, the whatever. You know? Is to make our lives better over time. But I think the point of the CPI is kind of to measure how much better. It’s not a pretense of, you know, if the price of everything goes up by a factor of two, but everything is actually also better by another factor of two, then you know, you want to figure that in to any estimation of how good your life is economically. Sort of how, what your standard of living is. And the point of the CPI is to be able to pull out of your estimate of the increased standard of living, the part that is just the change in prices. But you don’t want to pull out of it the part of it which is the improvement in healthcare services. Now, I mean, computers? I do have a problem with that, because I’m not sure that, you know, the increased power of a computer, if it’s twice as powerful, that in any sense, that that’s twice as useful. So, there’s some quirkiness there.

JASON HARTMAN: And especially because all of our competitors have it too. So if we’re in business, and our computer’s twice as fast, so is our competitor’s. So net, it’s really the same. We’re just playing on a level playing field. It’s not like you’re the only one with the fast computer, right? And you have some big advantage in the marketplace.

BILL CHENEY: Well, I mean, as a business, that’s true. But the point of the CPI is to measure the cost of things for final consumers, and the fact that I just bought a new Mac to replace my 7 year old Mac, it’s way better. It’s more fun, it’s quicker, it enables me to do things. I mean, the old one wouldn’t even run TurboTax. So, I’m better off now with that new computer. Even though it didn’t cost any more than the old one did 7 years ago.

Closing comments

JASON HARTMAN: I kept you a little longer than I originally planned, so I apologize for that, but this is an interesting discussion. And I just thought, before you go—first of all, give out your website if you would, Bill.

BILL CHENEY: If anyone’s interested in our Investor Sentiment Index, and any other information about financial products, go to That’s the company website. A simply name.

JASON HARTMAN: Do investors think it’s okay to buy big-ticket items right now?

BILL CHENEY: Our survey is showing that investors on the whole feel like this is a good time to buy big-ticket items, to buy a home, which of course is the biggest of big-ticket items for most people. They do perceive this as a good time to be taking a little more financial risk than they would have a quarter ago or two quarters ago. But it’s still kind of on the edge. Most people are still very cautious about the idea, for example, of starting their own business.

JASON HARTMAN: The nice thing about starting a business nowadays though is that it’s so inexpensive. I mean, talk about deflationary pressures of technology. Like, there’s a book called the $100 startup. It’s kind of true. You couldn’t do that 10 years ago.

BILL CHENEY: Yep, that’s right. That is one of the huge benefits of technological change, is that now you can outsource everything by the drink. A la carte. If you need a little bit of computer services, a little bit of computer storage, a little website, you can get one for, as you say, next to nothing.

JASON HARTMAN: And that is a fantastic thing. And overall, it leads to a lot more innovation, because all those entrepreneurs with ideas can now come out of the closet, if you will, and bring their ideas into the marketplace. Whereas a lot of them, they couldn’t before. And I think that—

BILL CHENEY: Yeah, absolutely.

JASON HARTMAN: Bodes very well for the future. I mean, that just makes me—it gives me goose bumps. We’ve seen what’s happened over the past 5-7 years; the technology has become really, really exciting. I just think it’s only gonna get so much better.

BILL CHENEY: I’m absolutely with you on that. I think the ability of young people to create apps in their parents’ basement and start a business—almost anybody can start a small business, and see if it flies, and if it doesn’t, no great loss.

JASON HARTMAN: The cost of failure has gone down.

BILL CHENEY: You try another one.

JASON HARTMAN: Yeah, great. Leads to a lot of what Joseph Schumpeter called “creative destruction.” Creative destruction has become a lot less expensive than ever before.

BILL CHENEY: Right, a lot less destructive.

JASON HARTMAN: Yeah, absolutely. Well, Bill Cheney, thank you so much for joining us today! Really interesting discussion.

BILL CHENEY: My pleasure.


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Transcribed by David

The Jason Hartman Team
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Episode: CW 399: U.S. Housing Market, Stock Market & Employment Forecast with Bill Cheney Chief Economist at John Hancock Financial Services

Guest: Bill Cheney

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