In this New Year’s episode of the Creating Wealth podcast, Jason Hartman reflected on the newly left 2017, as well as noting some predictions for the 2018 year. He discussed scalable business models, electronic music, rising interest rates for the year, and the US economy bubble. He mentioned that there will be a lot of new subject matter covered at and after the upcoming Meet the Masters event.

Hartman also spoke with Danielle DiMartino-Booth, founder of Money Strong and author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America. The two discussed DiMartino-Booth’s thoughts on the new GOP tax reform, as well as whether corporate repatriation will improve the economy, the issues with cryptocurrency, and the shrinking labor force in the United States.

The Business of Electronic Music

Jason Hartman begins with wishing listeners a Happy New Year from Las Vegas, Nevada. He has recorded the episode on New Year’s Eve and mentions that he’ll be seeing Calvin Harris to bring in the new year after winning a charity auction that will allow him to meet the highest paid DJ in the world backstage. Calvin Harris earned around $160 million last year.

Hartman states that the best business model in music has to be electronic music, because an artist needs only to show up as one person with sometimes only one piece of equipment. The DJ stands at the booth, gets the crowd excited, adjusts the sound, and performs. Electronic music is highly duplicatable, but it still stands to earn DJs millions of dollars if the work is well-received.

The 5-Year Plan and Meet the Masters

Hartman mentions that now that the 5 Year Plan contest has come to a close, the entries are now being evaluated, and hopefully by the next episode of the Creating Wealth podcast, some winners will be selected. Hartman states that he does not plan to announce the winners during the podcast, rather, at the upcoming Meet the Masters event in La Jolla, California.

He also states that the raffle is still open to win two free general admission tickets to the Meet the Masters event. The Ron Paul dinner party is sold out, but there are still general admission and VIP tickets available at www.jasonhartman.com/masters.

Rising Interest Rates in 2018

Hartman states that there is a lot of new topics to discuss in the new year, but that he will save most of his predictions and the year-in review until after Meet the Masters takes place, because he plans to reveal some of the new topic there.

He does say that he predicts that 2018 is going to be a fantastic year. The Chinese value the number eight, as it is a number associated with prosperity, and when the number is turned on its side, it symbolizes infinity.

Hartman states that interest rate hikes are coming this year and it is motivating people to buy properties. As interest rates rise, he plans to see a little more supply in the market, as well as a new strength in rents with fewer people being in the affordability area ideal for buying properties.

He mentions that there were abnormal forces at work in the recession, the worst economy in over seventy years. There was a good deal of government interference, and that was led by people who had very little consideration for real market dynamics. Politicians during the recession repeatedly called to keep people in their homes but never asked if people deserved to be in their homes or if they were qualified to have homes.

Hartman predicts that the next recession cycle that hits will not be a result of irrational lending practices on the side of real estate, as they’ve been very conservative in lending practices lately. He mentions looking at a year-in review back in February of 2017 and observed that Trump was doing things through executive order to lessen Dodd Frank and lessen regulations. This might be one of the good things to come out of the Trump administration.

He recalls a recent conversation he had with a client, Dan. Dan mentioned that he hoped Hartman wasn’t upset with him for buying a $1.6 million home in Orange County, California. Dan and his wife had a baby on the way, so they purchased a home. Hartman looked up the home and while it was beautiful, the Zillow estimate was at $5,900 per month if it happened to be rented out.

Because of this conversation, Hartman mentions another significant aspect of the GOP tax reform, the loss of 25% mortgage interest deduction. This could be bad for the high-end real estate market. Ryan Schellhous, Certified Public Accountant and guest on the podcast last week will be explaining more about the GOP reform at the Meet the Masters event.

Our US Economy Bubble

Hartman states that with all the money coming into the market, it would be easy to suggest that we are living in a US economy bubble that could blow up a bit bigger before it bursts. He also notes that it’s hard to tell when you’re at the bottom of the market that many people are waiting for. He states that when we’re at that level, we won’t know it, just like we won’t know when we’re at the peak of the market. Not even the most informed people, the Central Bankers, know when we’ll be there, and they have as much information as is available.

He notes that even if you’ve bought in the high-end market, there’s a chance that you’ve probably got a little more juice and will be okay for a while longer in your market.

DiMartino-Booth’s Thoughts on GOP Tax Reform

Danielle DiMartino-Booth, founder of Money Strong and author of FED UP joins the podcast to discuss her views on the new tax reform. She will be speaking at the Meet the Masters event and was the only speaker at the Stansbury Conference to receive a standing ovation for her speech.US economy bubble

When asked for her thoughts on the tax reform, DiMartino-Booth responds that for her, it’s too convoluted and that any form of tax reform should have the aim to simplify the tax codes. She mentions having spoken with CPAs recently and that they’re happy in business because the tax reform has made things a good deal more complicated. She notes that there was a clear lack of honesty from our politicians, and that because of this, doing away with the carried interest provision didn’t happen.

The reform, according to DiMartino-Booth does not seem feasible, as it depends too much on unicorns existing that she’s unsure of how much faith to put into it. The government seems to believe that the US will not go into another recession for the next ten years, which might not be a reasonable aim.

Hartman asks that with the worst economy in seven decades and the slowest recovery, where should the onset of the recovery start? DiMartino-Booth explains that the answer depends on who you are. If you’re an investment banker, business has been good since 2009 with unnaturally low interest rates that kept the bond market on a record run for seven years in a row. If you’re a random person or a millennial still living with your parents, there has not been movement in the mobility figures. For some people, the recovery hasn’t yet started. For others, it could be 2009 or 2012.

Hartman notes his surprise at the very slow approach into the housing market by millennials, with over 80 million people making up the demographic. He also mentions that some of the issue might be the anemic job market that young people face.

When he asks about the impact of companies buying back their shares, DiMartino-Booth notes that a lot of people are not paying attention to this occurrence because the market has just come through a record rate of quantitative easing. She mentions a seminal report by Michael Hartnett, Chief Investment Strategist at Bank of America that stated that 2017 was the global record for quantitative easing. People don’t appreciate that too few people are talking about this. She states that if we enter this time period in 2019, quantitative easing should be cut in half in terms of what the Federal Reserve has already agreed to. That’s a trillion dollars, and according to DiMartino-Booth, there’s no way that this is not going to negatively impact risky asset markets. 

Hartman asks how much of the cutback is going to be on the US’s part, and inquires about how extreme 2017 has been. DiMartino-Booth explains that it’s half, if he’s referring to the balance sheet reduction amount that the Federal Reserve has pre-committed to while saying that we are not data-dependent. This will reduce the size at a $450-billion-dollar annual run rate, which the Fed says will be like watching paint dry. DiMartino-Booth begs to differ.

The Biggest Experiment in Monetary Policy

When asked about how the trickle down is going to look, DiMartino-Booth explains that she doesn’t know what the unwind is going to look like. Previously, the country didn’t know coming in and we won’t know the exit now. The odds are increasing that policy makers are running out of the ability to control interest rates. This is a big risk that DiMartino-Booth is seeing, and it’s why we are seeing confusion in the bond market.

She notes the predictions in massive steepening in the massive tax cut, but also states that we have not seen it. The differentials between two and ten-year yields refuse to go past sixty basis points for any substantial period of time. The bond market is dictating that any rise in interest rates that the Fed seem bent on continuing is going to slow any economy that is leverage-dependent. 

The world has gone from $150 trillion in global credit around 2007 to over $220 trillion today. The economy has never been built on this much credit, which is why DiMartino-Booth states that she has so many variables, so many “I don’t know” answers.

Hartman mentions that it would be interesting to see a chart on increasing credit and money supply compared to one of global GDP and population. DiMartino-Booth states that this chart would be a way of illustrating less bang for your buck. She explains that this chart would point to needing more incremental debt for economic growth and further explains that every time that the Federal Reserve goes on one of these binges and fails to control itself, the longer the interest rates stay low, the worse the hangover is later.

Hartman wonders aloud how long the Federal Reserve, the US, and the world can continue to defy gravity by kicking the can down the road forever. It makes no sense to him and he asks if it’s all about math.

The Confidence Bubble and Cryptocurrency

DiMartino-Booth answers that the shame of it is that market bubbles have become meaningless. The biggest bubble, she says, is the confidence bubble in the abilities of central bankers. There is far too much confidence in them.

Hartman takes a moment in talking about standard currency to mention cryptocurrency and the tulip bulb mania associated with it. DiMartino-Booth states that the original idea of cryptocurrency was appealing to libertarians that believed money printing would destroy the value of the dollar. The general idea of it was good, but logic left the station along the way. She states that it has went beyond tulips and argues that if something can lose 25% in a week, it’s no valid way to store value.

Hartman agrees that when he heard about cryptocurrency, he wanted to be wrong in his predictions about it, and would have loved to see it succeed. However, the idea from gold bugs was that our money wasn’t “backed by anything” but creating new cryptocurrencies at the drop of a hat is the definition of a fiat currency.

DiMartino-Booth mentions that people ask her all the time about her best parallel when it comes to cryptocurrency, if it’s like 87, 99, or 2007. She explains that her best parallel is between initial coin offerings and initial public offerings, like 1999. She also states that with the $70 trillion in leverage, it might be like 2007, or there’s a possibility that it’s both.

When Hartman asks about the reform intending to repatriate flowing money back into the US, DiMartino-Booth states that it wasn’t good news last year. She notes that if companies are at the point where they want to expand their workforce, we need to ask why. Does it make sense to expand a business? Unless the business cycle has been permanently killed off by the Federal Reserve, and we can keep the economy going for another two or three years, it’s going to be the longest recovery in US history.

Hartman states that money sleeps, and that even if it’s offshore, it still has an impact on the market. DiMartino-Booth answers that there are significant investments and capital expenditures overseas and mentions this as one of the issues for tax reform. Last time around, companies bought back their shares with what was repatriated into the US. What if, she asks, the companies bring cash back onshore and pay down the debt they have built up?

Hartman answers that if they pay down a debt, the lender gets paid off and looks for a new loan to make. With paying back stocks, the stock seller now has money and it can go to another investment.

The Two-Decade Shrinking Workforce

DiMartino-Booth questions whether the money goes back into building anything that’s lasting and mentions that economists seem to be confused over the productivity conundrum, when there is none. Out of all the developed countries in the world, the US is the only one that has had a shrinking labor force for over two consecutive decades. That’s what happens when you don’t invest, she warns. There are proceeds in every transaction, but they need to be put toward a productive end. The housing boom in 2007 was not a productive one. Many homes were built but there was no lasting productivity gained. In this new cycle, a lot of restaurants have been built, but that also has not been productive.

Changing the Education System

DiMartino-Booth states that the greatest way that we can invest in a productive end is to start with the education system. The Germans and Chinese have no intention of slowing their dominance, and we need to educate our children better than we have. She calls for bringing back vocational training as well, even if we have to remove the unions to do so, and this will take politicians with spines.

In closing the episode, DiMartino-Booth offers listeners to visit her Money Strong website, where she has an always-interesting weekly newsletter. She also has information at www.dimartinobooth.com, and her Twitter handle is @dimartinobooth. She mentions that at the Meet the Masters event, she plans to discuss the Federal Reserve, what prompted her to write FED UP, and the first non-PhD in economics leader in the last 30 years, Paul Volcker, the Federal Reserve chair that made the country take the hard medicine. She also mentions that being no friend of Wall Street should be a #1 job description.

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