In today’s Creating Wealth intro, Jason talks about how he will be changing his portfolio soon. He will keep the audience posted when he decides where to buy from next. He also talks about two very important Business Insider articles about the topic of oil and how one of those articles contradict what today’s guest, Jim Norman, talks about on the show. Jason wants to provide an overall balanced opinion on the oil subject and reads out loud what both articles say.
Jim Norman is a second-time guest on the show and he talks to Jason primarily about oil and where it is headed. He is a now retired journalist and editor for Platts Oilgram, Forbes, and Business Week. He is also the author of The Oil Card, which you can buy off of Amazon. Jim and Jason talk about NYMEX manipulation, economic warfare, both Houston and North Dakota real estate markets, and more.
Key Takeaways:
2:20 – What the heck is happening with oil?
4:45 – One of Jason’s biggest mistakes in real estate is over-diversification.
8:50 – Always important in any business to consider the life time value of a customer.
13:30 – Governments hate deflation and will do everything they can to stop or delay it from happening.
19:00 – Jason introduces Jim Norman and they talk about his book, The Oil Card.
23:45 – It’s much easier to move oil prices around and manipulate them than any other commodity.
30:35 – Is oil really only worth $3 a barrel? Jim clarifies.
36:30 – It takes a while for economic warfare to succeed.
39:40 – Jim talks about whether Putin will be a threat or not.
45:50 – Prices can fall and remain long for a long time, especially in places like Houston.
53:45 – Jim doesn’t think the drop in oil prices is why things are cheaper. He believes it’s also due to technological advancements.
57:18 – It’s in the government’s favor to have inflation. According to Jim, all roads lead to inflation.
Tweetables:
“For oil prices, this is a political price, it’s not a fundamental price.”
“Do you want jobs in the US or do you want low cost products?”
Mentioned In This Episode:
The Oil Card by James R. Norman.
Transcript
Jason Hartman:
Hey, welcome to the Creating Wealth show, this is episode 471. Thank you so much for joining me today. It is, yeah, it’s Superbowl Sunday and I live in beautiful, gorgeous Phoenix, the most populous capital city in the United States of America. It is crazy around here. There’s a lot going on, so I can not believe they have the Phoenix open, which the big day was yesterday, Saturday, on the same weekend, in fact, two consecutive days, the next day is Superbowl.
I mean, this town is just buzzing. It’s kind of fun, it’s pretty neat. By the time you hear this recording, we will have a Superbowl winner. I’m not going to speculate whether it’ll be the dodgers or the kings..Oh wait, that’s not football, is it? Anyway, okay, my humor. You know, most people don’t get that joke. I’m just trying to say I’m not huge sports follower. No body seems to get my jokes about that, but whatever. I am financial guy though. I like that stuff.
Gosh, today I’m so excited for this episode, because we’ve got Jim Norman back on the show and I’ve been wanting to get this guy back for a while now. As you know, I’ve been really speculating on what the heck is going on with oil prices. This is a pretty, like, a tectonic shift that at least temporary has occurred with oil price dropping so much and, remember, part of our investment strategy is what I call package commodities investing and so what does this mean?
What does it mean to us? What does it mean to oil affected areas? What does it mean to the broader economy? What does it mean to the real estate market? The real estate market, of course, one of the wonderful things about it is it’s multidimensional, so we’ve got not only the prices, we’ve got the rents, we’ve got the other dimensions as well. We’re going to explore some of that today and I just gotta say, Jim is a super interesting and smart guy. Second time on the show for him. He was on, I don’t know, 3-4 years ago, a while back. He wrote a book called The Oil Card. He’s retired from the oil industry now, but is still watching it and has some interesting things to say.
I will say, however though, I think his personal experience, well, like our of ours. I mean, always our personal experience taints and affects our views, right. I think it’s kind of overplayed when he talks about the Houston market, but you be the judge. You know, I think those most dangerous words, “This time it’s different.” Right? This time it’s different, but we shall see, we shall see. So, before we get into the talk with Jim, a couple of things. Number one, Atlanta, we are really coming back online strong in Atlanta. We went about a year there without any real inventory. Just a meager amount of inventory. Prices went up quite a bit and very, very difficult for our providers over there. We have a couple of them to get good inventory, but we’ve got some good inventory in Atlanta.
Actually, I’ve been moving my portfolio around and kind of changing some things up. I’m not a big fan of selling stuff, but if you’re selling and 1031 exchanging into something else, that’s a pretty good deal. So, I’m 1031-ing out one of my properties and, you know, I’m not sure where I’ll buy. I’m thinking either Memphis or Atlanta, I’m looking at Indianapolis again, you know, I’ve own several properties in Indianapolis over the years. I don’t know, you know? We shall see. I’ll let you know.
How does that sound? I’ll let you know where I decide to buy, but I’ve got properties in a lot of the markets we discussed and, again, one of the mistakes that I freely admit I try to be, you know, transparent and admit my own mistake, I do make them for sure. One of them was over diversification and I have to say, you know, Fernando who we talked about a lot lately, I think he’s a little over diversified. I think you’ll agree with that. I told you not to Fernando. I said no more than 5 markets, right? I think you’re in a little bit more than 5, maybe 6 or I can’t remember.
Anyway, over diversification, you want to diversify for sure. 3 markets is probably the optimum number. 3 cities, strategically in different parts of the US, but don’t over do it, because as you over diversify, your portfolio becomes more difficult to manage and you’re dealing with different parties. Insurance is a state by state thing. Unfortunately the national insurance company that I was talking about before hasn’t worked out so well. They denied a claim of mine. I’m very unhappy about that. They denied one of our client’s claims. I’m very unhappy about that. They denied some other people that I found out about that aren’t clients of ours, their claims.
You know, I’m sure they paid some too, but what was that movie, that John Grisham movie, was that The Pelican Brief? Where the insurance company that just didn’t pay out the claims. I think it was The Pelican Brief, maybe, I watched that again recently a couple of months ago. That was a great, great one to see again and if you wanna laugh, by the way, I tell ya. You know what’s funny about our culture? Is the way we have all of these televisions shows and all of these movies. I mean, there are extensive, imbalanced, there are just too many of them really, centered around the legal process in the United States.
I think that has got to be some sort of mini conspiracy and the reason is is they hold lawyers and the legal process up as if it’s some, you know, great mysterious thing. You know, I’m going to talk on the future about hacking the legal system, because I think I’ve managed to hack it a little bit to get around the monopolistic approaches that attorneys have and courts. Courts actually help the attorneys, because heck, judges are just attorneys. They help them in the same thing. Try not to be too much involved in the legal system, but when you are, you know, if you have to be and, you know, I have to say I’m very happy to report we’ve never been sued by a client. Knock on wood. I hope it never happens.
Whenever there’s an issue that needs to be addressed or challenged, we take care of our clients and that’s really one of our foundational principles that is part of the culture of my company and it’s deeply ingrained. Our people who really care, you know, over the years I’ve had some investment counselors, effectively sales people, they just start acting like it’s a numbers game and forgetting it’s a people business and the lifetime value of the customer is so incredibly high, which by the way, Cody, one of our listeners, he’s been on the show before, told me recently he shared a stat from Tom Sosnoff; I think, I think that’s the correct pronunciation; that the lifetime value, did I mention?
I may have mentioned this, at the risk of repeating myself, the lifetime value of a credit card customer for a credit card company half a million bucks. Half a million dollars! And that’s like the average customer. I mean, can you imagine, you know, most people listening to this show or in the upper middle class, I’d say, some people are truly wealthy who are listening as well, their lifetime value to those credit card company has got to be a lot higher than that, because how do credit card companies make their money? They make it from spending. Now, of course, they make it from absorbed, should be usurious interest rate, usury, usurious, I think that’s the right way of saying that, usury laws, you know, that they’ve lobbied to make legal.
So, anyway, that’s lifetime value. Very important in any business to consider the lifetime value of a customer. Okay, we were talking about oil prices, there we go, Jason, another one of your tangents. Okay, so, oil prices, Atlanta, yeah, Atlanta, just check out Atlanta. Go to JasonHartman.com. We’ve got some good properties there again. Also, we’ve got some great stuff in Memphis. Chicago is coming on, you know, south Chicago, not Chicago proper words. Little more landlord friendly and gosh the rent evaluations are phenomenal. We had a couple of Chicago land providers in our network. You know, I’m no fan of Illinois or Chicago, but boy, these are v-ratios. That’s what, you know, I didn’t mentioned that as one of my choices, I’m thinking about buying there too, because the RV ratios are pretty darn phenomenal there. You do have higher taxes, but your RV ratios, Rent to value ratios more than offset them, so check that out as well. Go to JasonHartman.com, click on properties, and check out all of our offerings. There’s some great stuff there.
While you’re there, be sure to take advantage of the remaining, but dwindling supply, you know, if I was actually a good marketer and I knew how to do this stuff right, I would have sold all of these, like, the day I mentioned it, but our Meet the Masters home study course, the best of Meet the Master that we’ve still got several boxes of those left. Go get them. Heavily, heavily discounted price. Take advantage of that while it last. Once they’re gone, the physical product, they’re gone. We’re not reordering them.
We will ultimately have a new Meet the Masters product probably in the range of $500. This one is only $200. You know, this stuff, even though it’s past events, it doesn’t change a whole lot. That’s one of the things I sort of love, but in a way as a business person, I little bit hate about income property, because it’s such a slow, slow moving thing. It’s nice. The content is pretty evergreen.
I mean, of course the market changes and things like that, but the principles of it don’t change very quickly. You know, our approach changes a little bit too over the years, of course, depending on market changes and economic climate, but it doesn’t change very quickly. I think that really limits the amount of content. For example, there could never be, I don’t think, a televisions station on real estate investing like a CNBC or Bloomberg where they’ve got constant things to talk about. They’ve got all these companies to profile, all these gyrations in the market, all this volatility, you know, all of these ups, these downs, this roller coaster ride. That really gives them a lot of content if you think about it. There could never be an all day challenge on real estate. There’s not enough to talk about. You know, that’s one of the things that’s sort of interesting. As a business person, I’d love to have more of that, but as an investor I like it the way it is very well. I like it the way it is, very, very well.
Okay, so, before we get to Jim Norman here, two Business Insider articles, I’ve got to mention. Number one, OPEC, OPEC’s general secretary Abdulla al-Badri, okay, I guess that’s how you say that, I don’t know, don’t hold me to that, he is predicting that oil prices will be upwards of $200 a barrel. Now, I wanted to tell you that, because it’s very opposite of what Jim Norman’s going to say. Now, we should see if we can get him on the show, OPEC’s general secretary. Kind of seems like he’s probably not that accessible. He says that there is a built in shortage as oil fields around the world naturally decline at an average of 5% per year.
That means that oil companies need to develop about 200 billion barrels of oil supplies over the next decade and a half just to keep up with demand. Just to keep up, not to have any gains. So, he cites all sorts of supply shortages and he says oil is going to $200 a barrel. So, I try to give you both sides so you can decide of things, you know. We try to give you a balance view of things with, of course, my own bias, yes. My own bias that hopefully you love and appreciate.
Okay and there’s another Business Insider besides this $200 a barrel oil prediction that says 3 reasons why lower oil prices won’t lead to a deflationary spiral. You know I’ve talked a lot about deflation and inflation and disinflation in prior episodes, so I won’t cover all that again, but just suffice it to say governments will do whatever they can not to allow inflation to occur or deflation, they love inflation, sorry, I misspoke. They will do whatever they can to make sure deflation does not occur, because deflation is a very, very dangerous thing. You know, it causes people to delay spending, to put off purchases. I mean, why wold you buy now if it’s just going to be cheaper in the future? This kind of naturally is built into Moore’s law and technology.
You know, other things in like hard assets, it’s not really there. Those tend to be inflationary in nature and it also makes it very hard for central bankers to lower interest rates to stimulate the economy in deflationary things. So, here’s what he says, the author says about oil prices and why you shouldn’t be concerned that low prices now contrary to the $200 a barrel price, they will not lend to a deflationary spiral.
Number one, lower oil prices are good for debtors. For households it increases income available for spending or for repaying debts. For governments of oil importers lower oil prices raise revenues — gas tax collections go up slightly as people buy a bit more gas and the stimulus to consumer spending raises sales and income taxes more than it lowers tax payments from oil producers and workers. Lower gasoline prices do not delay spending, they encourage spending. I would agree with this, by the way.
People will use more of something if it’s cheap. I mean, obviously, lower gas prices do not make the central banks job harder, they make it easier. Lower prices mean more both less inflation and stronger growth, moreover lower oil prices do not raise the real interest rate that is relevant to borrowers. What impacts borrowing is the nominal rate relative to the ability to repay the loan.
Now, we’ve talked a lot about that on prior episodes about the idea of inflation induced debt destruction of getting paid to borrow of real interest rates and dollar value versus nominal interest rates and nominal dollar value. Nominal meaning in name only. You know, if we say the nominal price of is X or the nominal interest rate, what we think we’re paying, is X, but when we have inflation or deflation going on around it, what is the real rate? What is the real amount we’re paying? What is the real interest rate? So, you already understand that from prior episodes, but yeah, this is neat.
Now, here’s what he says at the end of this Business Insider article, it says, deflation is bad if it lowers the price of domestically produced goods, encouraging buyers to delay purchases and making it harder for companies to repay debt. Deflation is also bad if it means weak growth in both wages and incomes. By contrast, deflation from falling oil prices is good news for every country that is a net importer.
So don’t worry. Okay. We’re seeing that balance shift, okay, they call it the current account balance. We’re definitely seeing a shift to that, but what happens when you have falling prices, you have less investment, less development, and you heard from the prior article where the OPEC general secretary talked about $200 a barrel, massive increase in oil prices. He says, we’ve already hit bottom. He’s saying oil prices will go up by 5 times. 500%. I mean, that’s crazy. Who knows what’s really going to happen, but that’s his view.
So, you’re going to get a different view from our guest today, Jim Norman, and without future adieu, let’s just go over to him. Oh, one more thing, there’s always one more thing with me isn’t there? One more thing. So, you’re going to notice something really cool and really swanky at JasonHartman.com. We’ve finally added, I’ve been wanting to do this for while, just we didn’t get around to it, but a little tab on the right hand side of the website and also on the Hartman Media website too where you can send us a voice mail.
So, if you have a question that you’d like us to address on the air, just go to our website and right from your computer and I believe from your smartphone too, you can record a voice mail message. Make it concise, make it witty, and ask a question, make a comment, whatever. If we like it, we’ll play it on the air. I’ll answer it for ya. Okay? So, send us a voicemail from Jasonhartman.com as well while you’re there. Okay. Here’s our guest today, Jim Norman author of the Oil Card.
It’s my pleasure to welcome Jim Norman back to the show. He is contributing writer for McGraw Hills Platts Oilgram News and senior editor at Forbes and Business Week. Author of The Oil Card: Global Economic Ware in the 21st Century. I had Jim on the show a few years ago and he predicted a big decline in oil prices and as we’ve been watching oil prices decline and how that affects just every part of the world economy, because oil is in so much of what we buy. It’s almost in everything. I just wanted to get him back on the show to talk about this. Jim, welcome, how are you doing?
Jim Norman:
I’m doing well. I’m actually retired now, so none of those jobs really imply. I’m just sitting back watching the world go by.
Jason:
Well, isn’t that a nice place to be, huh. Good, good. How long ago did you write the oil card? I retired from Platts Oilgram in 2007 and curiously started writing this book. It came out in 2008 just at the time when oil prices had hit a $150 a barrel after having climb from $10 a barrel in the late 90s. What got me going on it was just I said these prices are crazy, there’s no real free market reason for these prices this high and in fact the point of the book was to point out the long history in detail of how oil prices have been actually used particular by the United States and it’s allies as a economic weapon.
It is a very corurian (#19:46?) notion, but I think events have proved out that a micro level the US government and its allies, particular the Saudies, have the ability to manage even the price of a globally fungible commodity like oil and to move it up or down or keep it out of whack for protracted periods of time as a means of punishing the Russian who are desperately dependent on crude exports or trying to slow down the Chinese who are equally vulnerable as an oil importer.
The point of the book was that, after having kept oil prices low for a long time to bust the Soviet Union, my thesis was that in fact we pushed oil prices dramatically to try and crimp Chinese growth, but I said at the time that these prices could change dramatically depending on the behavior of the Russians. If the Russians go off the reservation, as you would say, you could look for another volatile drop in oils prices and indeed that’s what happened in 2008 when Russian troops entered the republic of Georgia and oil prices were brought down from a $140 a barrel, very rapidly, to a $1.40 a barrel. Russians removed their troops from most of Georgia. They’ve continued to garrison one small chunk of it, but when they withdrew oil prices immediately came back up and they hovered it about $100 a barrel ever since then rather mysterious and artificially, I think, high level of a $100 a barrel.
Jason:
You know, Jim, before you go on, I just gotta make a couple of comments. I mean, that’s fascinating what you’re saying. As everybody knows the US has the reserve currency of the world and the dollar, but maybe oil is really the reserve currency if we can, as a country, truly manipulate the prices like that. I mean, that is shocking. Russia went off the reservation again with Ukraine and here we go, right?
Jim:
That’s right. It has been a nose dive and there’s really no fundamental reason from the physical supply and demand for oil changing that would justify that at all. The mechanisms for moving in these places are not so much the physical price for oil, it really occurs in the futures market in cases of the NYMEX, because there the prices of oil is set not with barrels, of supply and demand, but with dollars. You can just throw dollars at the NYMEX and you can push the price up. You can take money out of the NYMEX and it’ll bring the prices down and that’s what you’re seeing. I think people are mistaken when they think that OPEC is the price setter. They’re not and if you listen careful to their statements, they will admit that. They are price takers.
Ever since the early 80s, really, the price, the global price for crude oil has been set in futures markets on the NYMEX and that’s a venue which is particular adaptable to, again, economic warfare, financial management by de-pockets players and so, you can bring the price down dramatically, very quickly, or push it up just by moving money around. It’s not unlike, really, the nation nations that you see going on in the global interest rate and currency markets with rampant, blatant government intervention all over the globe now to basically manipulate currency levels, interest rates, those kinds of things.
You have to look at crude oil just being rather..it’s an extension of that. Internationally it’s much easier to move oil prices than these global financial numbers because the market is really so much smaller in crude oil prices, so it fits exactly in the same category as global currency management efforts.
Jason:
Yeah, certainly James Rickards and all the people that talk about currency wars, it’s quite fascinating, but as you’re point out to us, it’s really easier to manipulate oil and it’s just needed or sold by everybody. It’s probably the ultimate de facto currency, you know, in fact, it’s not a currency, it’s money. The gold bugs would argue dollars are currency, but actual money is gold and silver and I’d argue oil or something that actually has use, you know, real use, of course, silver does a little bit, is much more important as money than all of the others. I’m not sure I caught, Jim, how the US can manipulate the NYMEX? That’s parcial of what you said, right? They’ve got to be able to do that to make it work.
Jim:
In the book, I got into some detail how it occurred back in the 80s. When the NYMEX first came in existent in the early 80s as a paper market for oil, that’s when you were able to begin trading paper barrels. The NYMEX at that time was characterized by unimaginable strange short selling of oil. In other words, somebody is going into the market selling a lot of paper barrels. That was dragging down the price. Looking back, you could see one of the principle players in the oil future at that time was a particular individual whose resume was curiously interconnected with the national securities establishment, so it was clear to me at that point that there was a government hand in the futures market and that was later confirmed by other people in the oil industry. It was well known in certain circles that the whole game was to bring the oil price down to bust the Soviets and it worked. How would you move the price up? Well, you just roll more money into the futures market.
Jason:
Just to give context to that, you’re talking about, what, the late 80s when you say that?
Jim:
It was early 80s. It actually continued through the 80s.
Jason:
So, it took a while, in other words, and that wasn’t the only thing that busted the Soviet Union, obviously. You know, the arms race, you know, I think that’s really a business plan. I was for it.
Jim:
Oil was really the killer for them, because, curiously, the amount of money they lost in oil prices pretty much equated to the amount of money the Russians had to borrow from Western government to buy wheat to feed their people and it was, the terms of those loans was the clue to the Soviets from moving troops in the eastern Europe when people picked up their pitch folks and decided to break away from the Soviet Union. That’s when the Soviet Union really fell apart and virtually they ran out of money and turned off the lights in 91. They just went away without shots fired.
It was a confident exercise in economic warfare and I think having tasted blood the US and the west realized this was the way modern wars will be fought, economically, and that’s the context I think in which you have to view everything that’s going on globally in terms of currency manipulations, commodity of availability and pricing and all kinds of trade related stuff that’s going on. How do you run the price up? Curiously in 2001, the government tassel was called the spotting futures modernization act, this was ginned up during the Clinton administration actually cast under Bush.
My view is really a brain child of the national security establishment, which was, the purpose was to allow, basically, an unlimited flow of hot money into a relatively small commodities futures market and it did that wonderfully and it just ballooned that market all out of proportion instead of having to be basically an actual user or provider of food the way the original commodity rules were set, it basically allowed all kinds of other kind of money, so called investment money, pensioned money, and so called investor money to come flooding into that market and it vastly came in on the long side. ETF and other people’s pension fund buying crude oil futures, which before then had been a no-no. It was crazy for them to do that, because the risk was so high, but all of that money flowed in and the volume of contracts on the NYMEX just exploded.
I mean, it went sky high. So, what you’ve seen since last June has been ranked exodus of that money. Again, an opposite direction moving out of the futures market. Open interest has declined dramatically as people, contracts expire instead of rolling them over into new contracts. The money is just going out of the market and I think what happens the treasury department is rarely the locust of economic warfare fighting in the government. They actually control a significant amount of funds through various accounts that they have, holdings of foreign banks, and so forth. Plus, their ability to entice orders through major investment banks. We don’t really know who is buying and selling these futures, but you can see the vast amount of trading by which we call the swap dealers. The investment houses that would be basically channeling these funds and that money is just running out of the futures market.
In fact, you could drive the price of oil, it’s about $46 a barrel now, down half from six months ago, you can drive it easily in the low 30s and basically play havoc with traditional fundamental analysis, just by playing around the money coming out of NYMEX. So, oil could go a lot lower.
Jason:
That’s amazing. Well, okay, so a few things and, you know, maybe I’ll just throw a couple of them out, you can take them as you wish, but I seem to remember you on the show before making an extraordinary prediction saying that oil is really only worth maybe $3 a barrel, do I remember that correctly? Well, I think, what I was saying the marginal cost of producing a barrel of oil is really only about $3 a barrel. Once the wells are drilled, I mean, those barrels would keep flowing even if oil fell below $3 a barrel.
So, it’s like, you can have a dramatic drop in the price of oil and the supply will not necessarily respond very quick. In fact, what would happen is oil producing government that depend for oil fills to meet their budget, would actually be incentivized to produce more even at an all in loss if they were generating cash. Business do that too. Jam, they’ll stuff below their all in cost. It generates cash for them. You can see the same kind of thing happening here.
Jason:
It’s the old thing. You lose money on every deal, but we make it up in volume.
Jim:
Sorta, yeah. That’s why, you see, OPEC, their behavior in this, to me, is very telling and it exemplifies the role of a price taker. So, basically sitting there looking at each other saying, what the heck happened to the price of oil? Then, they would tell you, Mr. Putin himself has said flat out, this is a political price, it’s not a fundamental price.
Jason:
Yeah, that lends me to a couple of other things. Putin, of course, knows that the US is doing this, right, then it makes me concern about will there be some retaliation. What could he do? That’s one thing and then another thing I want to bring up, Jim, is are you saying this is not a sign of deflation? That deflation is not occurring, it’s just all of this political currency war with oil and that’s what’s going on or is this a sign of a broader deflationary trend?
Jim:
You have to think of these things in separate cubbyholes here. Deflation, I think there is a tremendous deflationary pressure globally going on across all kinds of prices, what’s happening in oil however is a separate phenomenon, which I think is driven, again, by geo-political mandates. At the same time, you have this global inflationary push by every central bank basically devalue of the currencies, push inflation up to try and create dissemblance of demand, because I think all of these governments are scared to death for asset deflation, again, because it’ll ruin all of the banks, it would destroy vast amounts of wealth. Burrowers would benefit well. It depends who wins and who loses.
Jason:
I know, it’s such a complicated equation and one of the things I just say as a follow on today is, if there are real deflationary pressures, they can just paper over that, because by printing, you know, by money creation, because inflation from everything I can understand is really a great business plan for governments. Governments love inflation and they are going to make that happen no matter what. Now, I know, we can always argue Japan, look at Japan the last two decades, but Japan isn’t in the same spot the US is in. That’s largely a demographic problem in my opinion, but governments will create inflation, it’s a good deal for them.
Jim:
Oh yeah, a big can of (#34:33?) is like heroin. They’re hooked on it. They can’t stop inflating, but even so, it looks like the deflationary pressure is globally have them running very hard on the treadmill and it’s still not working. Global demand is not what it needs to be to soak up all the vast industrial capacity that’s been created globally, particularly in China. This is where China is going to fall off a cliff, I mean they are over capacity..
Jason:
China is in terrible shape. I totally agree with you. So, that lends me to another question. You didn’t address the Putin thing yet though. Putin knows this, what is he going to do about it? Is there going to be retaliation? I don’t want to forget that, but on that note of China, Jim, where would..Like you said very early in the interview today that we wanted to do that to cartel Chinese growth. Why would we want to do that? I mean, China is, we’re exporting our inflation to them and they’re bringing deflation to us and the consumer thinks they’re winning and that’s got to make for happy voters the fact that you can go into stores and buy stuff so inexpensively. It’s another way they paper over inflation pressures, They hide it with the import/export. We do it with Mexico by letting all of these immigrants in. They’re bringing deflation with them, because they all work for less.
Jim:
With China, it was just our manufacturing back shop. It wouldn’t care, but the fact of the matter is China is using the cash and the capabilities to arm itself and I think that in the long run the US national security establishment saw this coming down the pike long ago back in the late 90s after the experience during the Clinton administration, they could see China was not always going to be a benign trading partner and so I think, again, economic warfare is something as ways of very, very long time frames in terms of decades, which is why I think you can’t positioning where we’ve basically been, leaning on the Chinese to increase the value of their currency, we got them in the WTO thinking that would correct some of their egregious trade practices.
In fact, it’s kind of made them immune to that, so they’ve just been even more rampant in marketing stealing, predatory pricing. All of the bad things we can do, which is why the whole world is going to gang up on the Chinese and I think ultimately what you’re going to see..when it becomes clear the currency war don’t work, to re-balance trade, then you’re going to see the emergence of outright tariff, non-tariff barriers emerging global as happened back in the 1930s, frankly, and unfortunately, currency wars ultimately don’t work. Everybody is a continual race to the bottom, no body really gains much of an advantage there and you’re going to see more and more movement towards protectionism. People are going to make political hand, which is probably a bad sign, I think. Trade wars lead to real wars
Jason:
I just don’t know what to think about the trade, well, the tariff idea, it’s just such a tough equation. Do you want jobs in the US or do you want low cost products? It’s sort of like that. Granted, I think some of that manufacturing is definitely coming back to the US as wages rise in China. I think 3D printing is going to have a part of it. It’s not for major, big manufacturing, but sort of customized manufacturing and prototyping and stuff, that’s a huge, huge advancement. Maybe if you want to speak to that, but don’t forget about Putin and what’s he going to do. I want to make sure you answer that.
Jim:
Putin is in a very tight spot. He’s come right out and said, they wanna regime change me out of here. It’s true. I think the game plan is to basically hurt Moscow so much with flow up prices that they give up on trying to retain their stack in Ukraine, that they stop trying to support Syria and various other geo-political steps. Putin, I think, he’s not crazy, but he is desperate, I would say. He doesn’t have a lot of cards in his hand, but he does have some resemblance of military strength, the ability to be provocative, I think that his clandestine services are still quite capable and active. There’s still a lot of stuff he can do to make life difficult for the west, but the trouble is he’s in a tightening noose and I think things there are going to be ever more desperate for him.
I think at some point, so desperate you could see a repeat of the Soviet situation where all of a sudden you wake up one day and it’s gone. You know, it’s possible..so, the Soviet Union was gone, maybe you could see Putin might just be gone or something. I don’t know. It’s hard to see the end game in these things, but you have to brace for the worst though, especially when people are heavily armed and have nuclear weapons, you know, my own view is that much of the characteristic activity going on globally has some kind of state support it behind it. It just doesn’t make any sense otherwise. I don’t see how it could be funded and supported otherwise.
Jason:
Well yeah, but what’s that got to do with Russia, though? I mean, aren’t we talking about the middle east and Al-Qaeda and that kind of, you know, and ISIS. I mean, the Russians, they don’t tolerate that crap, you know? They are much better than we are in nipping that kind of stuff in the bud. They just go kill everybody. In the US it’s like, I don’t know, is that political correct, you know?
Jim:
I think the Russians are on the receiving end a lot of stuff and probably on the perpetrators of some of it. I don’t know. It’s just very hard to tell, but I think along with economic warfare I think the whole terrorism thing is another aspect of unconventional asymmetric warfare and I think it’s going to be with us increasingly, I think.
Jason:
For a long time, yeah. That’s unfortunate. We’ve probably, you know, it’s just too easy to do it, but you know, I’ve always wondered, Jim, really in terms of the US, how much of a threat it really is, because in the post-911 world, I mean, it’s been so many years, we’re so vulnerable, our borders are still wide open. It can’t be that hard to do something, if they wanted to get us, couldn’t they have gotten us a zillion times by now?
Jim:
Well, this is what I mean. The US in the media were portrayed as a crumbling weakling, but in reality we are the global gorilla and no body really wants to mess with us.
Jason:
I mean, compare to what? That’s what I keep asking. Well, the US is a disaster in so many ways, but compared to what? Look around. Who is better off? Yeah, you know, it’s always a game of relatively is how you need to look at all of this.
Jim:
In fact, the US is so strong. It can absorb the collateral damage that occurs from things like oil price manipulations, in fact, back in the 80s..
Jason:
Absorbed it very well, I mean, it’s a benefit mostly unless you have an oil related job and that’s another thing I want to ask you about, but go ahead.
Jim:
Back in the 80s you remember the US in order to bust to Soviets basically sacrificed vast swabs of its independent oil industry. Those companies just toppled over, they were dying left and right, that actually precipitated the S&L crisis, if you recall back in Texas. There was so much asset deflation and bankruptcies in middle America that the S&L thing, but the US government just absorbed it, bailed out what they needed to. The major oil companies rolled on, that’s all they cared about really, and the other thing to keep in mind about oil is that in the grand scheme of things the US has probably long uncrude oil. What I mean by that is if you count us and our family, the Canadians, the Mexicans, the Saudies, we basically produce more crude oil than we use.
If oil prices are very high in affect we’re spending the money within the family, when oil prices fall, the Suadies, the Canadians, the Mexicans, all hurt, but we bailed the Mexicans and basically the Saudies in the 80s and I think we would stand ready to do that again, although those countries, I think, had seen this coming and built up substantial rainy day funds, so there is tremendous resiliency regarding oil prices either up and down within the United States. So, I think the US attitude will play these games all day and all night. The Russians can’t.
Jason:
Yep, we are in a very enviable position and I’m not saying it’s necessarily right to throw our weight around, but it is the way it is. That’s the point and all we can do is react to it, none of us can control it, except the powers that be and they may not even be who we think they are, but that’s a whole another discussion. That’s a conspiracy discussion, you know. Okay, Jim, so, give us your thoughts, you know, one of the real estate markets..I have a real estate investment company as you may remember and we’ve done hundreds of transactions over the years in Houston. Always like Houston, I own property there myself, but I put a yellow flag warning out to my listeners who are real estate investment saying that, you know, be careful of Houston. We were being pitched heavily on investing in North Dakota and we didn’t do that one and I’m glad now, because I think a lot of these jobs could just evaporate with oil prices this low until and unless they come back up, what are your thoughts about the oil employment picture?
Jim:
Oh, I think you’re going to see massive layoffs and they’re going to come sooner rather than later. You’ve already seen a lot of service companies, they’re not going to wait around for prices to really hit bottom. They’re chopping jobs left and right now. They’ve seen what happened in the..
Jason:
I’ve seen it already, I mentioned a few on my show, yeah.
Jim:
So, and that’s going to translate demand for all kinds of particular real estate. I know, I lived in Houston in the 80s. I remember, I bought a little house there that had been vacant for year. I bought it for $30,000, fixed it up, lived in it for several years, and thanked my lucky stars that I was able to sell it and break even when I got transferred out of Houston in 84. Prices can fall and remain low for a very long time and, you know, particularly in places like Houston where it’s kind of one company kind of town, I mean, it’s one industry.
Jason:
Well, Houston is not one industry, though. I mean, that’s not fair to say is it? You’ve got so much health care there and, I mean, there’s way more. You know, North Dakota is a one horse town, okay. You know, that is…
Jim:
Houston does have other things going for it, but the oil business that ultimately is the bedrock for all of that stuff, so in the 80s it was a good example. Houston just got terribly beat up in the 80s. What I wonder about is places like New York where, you know, the market seems so impervious to any kind of downward movement, but I think it’s extremely, exceedingly over valued in terms of affordability.
Jason:
You’re talking about New York city, of course.
Jim:
New York city, yeah.
Jason:
I mean, that’s absurd, New York city is absurd. I mean, that’s the perfect word for it. It’s absurdity. You know, they just had a $100 million dollar penthouse sale like two weeks ago or something. This is just psychosis, you know? There’s no rhyme or reason for that kind of stuff, but what were you going to say? You agree with me right? You think it’s totally over valued?
Jim:
Yeah, in fact I’m in the process of moving out of New York. We’re going to move to New Hampshire and build a house, because sooner or later markets equilibrate. Sooner or later move to where they ought to be and it’s going to have to happen in New York and probably a bunch of other places too.
Jason:
Sure is. I think Miami is on the target. I think all of California. You just can’t have a business unfriendly environment like you do in California, New York, and sustain these crazy high prices. You know, there’s a lot to be said about he technology impact I think. People can really be geographically independent somewhat nowadays. Not everybody, of course, but a lot of people can. That was never true before. You can live in lower cost areas and, in my opinion, a much nicer life. Much more breathing room in your financial life. You don’t need to live in expensive places anymore, right?
Jim:
Right. I think that’s absolutely true. In fact, I think urban life in America is going to get more challenging as the budget situation is really come home to roost for most major cities in the US.
Jason:
What about North Dakota though, what about the oil sands. I mean, these oil price declines, they’re not really attributable it sounds like then to this increase supply to this wealth America didn’t know it had several years ago, right?
Jim:
Definitely there’s been more production coming out of North Dakota. In fact, US oil production overall has gone up and that’s contributed to to this rather marginal surplus production globally, but that’s not enough to explain these price changes, really. You gotta look behind that, but all of these boom town situations, you’re going to have ups, you’re gonna have serious downs and the little guys, the smaller companies, basically anyone who has taken on leverage are in an extremely vulnerable position, because I think this very low oil price down draft is not going to bounce back like it did in 2008. I think this will persist for a period of time and a lot of companies have taken on very high yield debt to fiance their drilling and stuff. You gonna see work out after work out after work out out there and a lot of companies toppling over.
Jason:
Yeah, right where you say work out, you mean with the bankers, right? To fiance the deals.
Jim:
Right.
Jason:
Yeah, I’d say it’s kind of counter intuitive, Jim, but the people who took on the most leverage, sometimes they get the best deal of all, because they get the bail out, you know? The banks bail them out. We saw them in the housing market for sure, tens of millions of people got bailouts.
Jim:
Yeah, I don’t know if that’ll happen to oil assets, though. I think you’ll see forced sales, merges, bankruptcies throughout organizations, again, like the 80s in Texas. It was not a pretty sight.
Jason:
Is North Dakota kinda be pretty much out of business for a while? I mean, is that going to come to a screeching halt or what’s going to happen up there?
Jim:
Well, you know, companies lease that land, they have to drill a certain amount of time or they lose leases. So, there will be a continuing level of drilling and I think that the cost of field services is going to come down dramatically, so that will continue to make it possible to keep the rigs working at some level, at some price, that iron is going to find work somewhere I think.
Jason:
Is that not true in Houston though?
Jim:
Well, Houston is where the companies are headquartered and that’s where, you know, a lot of manufacturing is there. So, you see that already in the off hill service industry scaling back anticipation of this, but you’re just going to see the price cutting and service costs coming down so that..the rig challenge of (#51:31?) from 2,000 rigs working maybe down to 1,200 something like that. They’ll still be rigs working. You’re still going to get these leases drilled and, I mean, even at $40 a barrel, a lot of this fracking type productions still make sense. So, it’s not going to be the end of the world, I don’t think, production is going to continue, I think oil and natural gas prices are going to be quite affordable for quite a while here.
Jason:
So, doesn’t that ultimately lead to a prosperity movement, a wealth effect for America consumers? I mean, gosh, it’s incredible. I drove to California from Arizona recently to do one of our seminars out there. I couldn’t believe it! I mean, it was so cheap to get there and bank. I didn’t fly, but air fares are coming down too. I got a couple of flights coming up and I couldn’t believe how, I mean, those really haven’t come down. I don’t think those have adjusted enough yet, the air fares with the oil prices. Would you agree with that, by the way?
Jim:
Yeah, yeah. There is a wealth effect there, but you know, actually, American motorists are actually, I think, rather impervious to prices. They’re going to drive the same distance anywhere pretty much. At very high prices you do see some reduction in miles driven, but I think, like you said, it’s more of a technology thing where people just don’t have to drive. I think, more of a limiting factor is the amount of time you want to spend sitting in traffic jams rather than a price of gas.
Jason:
Yeah. Well, I’m not just talking about driving though. I mean, it’s in the price of everything. It’s just baked in. Heck, it’s in the price of coal production, oddly, because there’s so much oil used to produce coal in terms of mining it and so forth. It’s just in everything. It’s in every consumer product, right?
Jim:
Yep, and like you said, technology is relentless. That’s where I think the real driver behind this global deflationary pressure is that everything is getting cheaper mainly as a result of technology advances and so forth. I think governments continual up hill treadmill to try and keep prices up in the face of it.
Jason:
Yeah, technology is awesome and it does make things cheaper and better constantly. It is a great thing, but as we talked about earlier, the inflation business plan for governments is such winner for them. I mean, that’s just the way out, you know, right?
Jim:
In the real estate, it’s really where the government is going to make such a killer. I think that’s why government revenues are actually so much higher than people to expect, because the capital gains tax structure now on real estate is not as favorable as it used to be. You can’t just roll over a gain and dodge tax. You can shelter some of it, but every time somebody sells a house now, the government basically have positioned to reap gains, plus you have the Obama care real estate tax, that’s a hidden killer in there. New York has the so-called..
Jason:
I have heard a debate about that. I heard that was an urban legend. The Obama real estate tax. I haven’t seen that on any of my deals. I mean, is that actually true?
Jim:
I think that it is true if you ..
Jason:
There’s a lot of stuff going around on social media about that when the affordable care act was passed and then it was debunked. I don’t know if it’s true or not. That’s interesting.
Jim:
I think it’s quite true. Over a certain level of gains, you pay 1%, I think it’s 1% or more tax on that as apart of the Obama care legislation. So, for investors, if you’ve got gain on property, you get the 1031 exchange opportunity for home owners as long as you trade into another one, you can shelter $250,000 if you’re single or $500,000 if you’re married. That’s the last I knew, unless this has changed.
Jason:
I don’t think it’s trade. I think you just get to shelter $250,000 as an individual on a real estate gain, $500,000 as a couple, and you can do that every 3 years, but if you go over that, you get whacked at the capitals gains rate plus in New York you get the cuomo tax plus there’s the Obama care tax. We had a Forbes reporter on the show talking about New York’s 164% inheritance tax and, you know, that was sort of more of a headline than reality, but the way you do the math depending on if you’re an estate is just a slight bit over $2 million dollars that the tax just escalates astronomically, so they’re certainly forgressive as they say.
It really bodes though what you’re saying, Jim, that governments want to see inflation, because the IRS doesn’t just adjust for inflation. You know, the tax revenues from stock market gains and real estate gains are not indexed, so the government wins collecting those big taxes when..if they can figure out a way to inflate these assets and maybe even cause people to sell them and increase velocity another way they benefit, right?
Jim:
Right and plus their pension obligation depreciate basically that way. I mean, the deck is stacked. It is heavily stacked in favor of government to inflate. All road lead to inflation, basically, which is why this down drift in oil prices, it’s anomalous, really. It just cries out why is this happening and I think you have to look at these broader geo-political imperatives that are really driving it.
Jason:
Well, good, good stuff. Thank you so much for giving us some insight on to this. You can get The Oil Card on Amazon.com. You maintain a website or a Twitter account nowadays that you are relaxing and enjoying life?
Jim:
No, no. If somebody wants the book or an autograph copy, they can email me at [email protected]. That’s one way to do it. Otherwise there’s the Amazon site. The publisher is TrineDay, a little company out of Oregon, which has some websites now and then. Kind of up and down, but we are a well kept secret. Actually, the book is almost out of print now. It’s time to do another printing. I’m going to have to go back to work here to get that done.
Jason:
Well, you can print the same book if you don’t update or maybe just update the intro or something, but you know, it’s an excellent analysis, Jim. You’ve got 4.5 stars on Amazon. So, I would encourage our listeners to go out and get it and take a look. It’s fascinating as you can tell from our discussion today. Again, thank you so much for joining us. Really appreciate having you back on the show.
Jim:
It’s a great pleasure. Thanks for having me on.
