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 multimillionaire 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. Thank you so much for joining me. This is Jason Hartman, your host, and this is episode number 332. Our guest today will be Les Leopold. He has been on the show before, and I think a long time ago, he was on one of my other shows, probably the Holistic Survival Show, a few years back, but he has got some interesting things to say about things that interest us as an investor, so we will get to that here in just a bit. We have five things to cover first and I’ve got Steve here, our investment counselor, who you’ve heard on the show many, many times. We’ve got a few things to talk about that you’ll find not only interesting and valuable but also a little bit funny too. Steve, welcome, how are you?
STEVE: I’m doing well, I’m doing well. Five things to talk about with you and I means a long intro, probably.
JASON HARTMAN: You know, we’ve never been known for being shortwinded, have we? [LAUGHING].
STEVE: No [LAUGHING].
JASON HARTMAN: Yeah, so let’s jump into it, what’s first?
STEVE: Well, I wanna hear about that this trip to Europe. Are you all sophisticated and European now?
JASON HARTMAN: You know what, I wouldn’t call Europeans that sophisticated, honestly [LAUGHING].
STEVE: [LAUGHING].
JASON HARTMAN: It’s funny how Americans idealize Europe, and I always have too. I remember my first trip back there. I was born in Europe but my first trip back as an adult, I went with a friend of mine who was also impressed with Europe. So some people are so impressed with Europe. Looking at it this time – I mean I’ve been back many times and I love to visit Europe – but as an economist, I am completely unimpressed [LAUGHING] with Europe. Of course, every country is different and every city is different too, but generally my impression this time between Switzerland, Germany, Austria, Croatia, Montenegro, Spain, and Iceland, I remain unimpressed. And I gotta tell you something very funny that happened. I didn’t mention this when I talked to Britney on our last episode about my Europe trip. [LAUGHING] Steve, you’re gonna love this one. Are you ready?
STEVE: Yeah, yeah.
JASON HARTMAN: And the listeners are gonna love this too. Now just so you know, this is purely what she said. I did not go online to research this and verify the information and whether or not these tax rates are true and correct but it’s just what the girl told me, so here it is. When you’re in – many countries do this – they have a VAT or a value-added tax and you pay it when you buy a retail item there. When you leave and take that item out of the country, you can get a refund for part of the tax that you pay. I never get into an airport early because I have yet to see, in all of my travels now to 69 countries and some countries many times… I have been everywhere. I’ve been a lot of places, not everywhere, but lots of places. I have yet to see a plane leave early.
STEVE: [LAUGHING]
JASON HARTMAN: [LAUGHING].
STEVE: Right.
JASON HARTMAN: [LAUGHING] You know, it’s always the game. They have a saying in Hollywood if you’re an a inspiring actor or actress, when you go to do these auditions, the game is hurry up and wait. You’ve got to be there on time, of course, and then you wait two or three hours to get your turn to say three lines to hope that you’ll get the part, right?
STEVE: Yeah that sounds about right.
JASON HARTMAN: [LAUGHING] It’s a hugely inefficient process.
STEVE: But they’re not gonna go, “Hey, looks like everybody’s here. Let’s shut the door and leave.”
JASON HARTMAN: Exactly. So it’s a game of hurry up and wait, which is the same game the airline industry plays on us. So, this was one of the rare occasions where I actually arrived to the airport early and had all this extra time. I thought, you know what, I remember I bought a – in Iceland, you know, the whole trip was too hot, too warm, but when I got to Iceland, it was such a relief to have cool, crisp weather, and I was actually a little chilly. I bought a thing to go around my neck – and I don’t know what it’s called – it’s kind of a funny thing you can put around your head around your neck. It’s more inventive version of the old concept of a scarf –
STEVE: Yeah.
JASON HARTMAN: Or a muffler, right?
STEVE: Right.
JASON HARTMAN: Anyway, it was kind of a cool product that they said everybody really liked and so I bought one. And I don’t buy much because I like to carry my luggage on, that’s the other thing I’ve learned from all my travels.
STEVE: And you pack luggage like, you know, circus clowns into a car.
JASON HARTMAN: I am an expert packer.
STEVE: Yeah. You are the champion of the –
JASON HARTMAN: [LAUGHING] Another lesson I’ve learned, I pack light and travel light and pack well. You can go online and there are all kinds of YouTube videos on how to pack properly. There is a definite art and science to that.
STEVE: [LAUGHING].
JASON HARTMAN: But anyways, I don’t buy much because I don’t wanna be checking bags traveling back. So I buy this thing and it’s like everything in Europe, so overpriced. It’s probably fifty bucks or something like that, by the time you convert it to dollars, but I was cold and it was worth it, so I bought it and she gave me this little envelope and this slip and says, “You know when you go to the airport, you can get some of your tax back.” And I’m like, “Are you kidding? I’m not gonna bother with this,” right?
STEVE: Yeah.
JASON HARTMAN: But I had some extra time and I thought, hey, I learned something about this how this works. I’ve never bothered to get my money back on anything I purchased offshore before and so I go to the counter and the cutest twenty-something girl behind the counter says, “How do you want your refund back? We can put it on your credit card or give you cash or whatever.” And I’m like, “I’ll take it on the credit card. I’m not gonna spend any more money.” And when I said, “By the way, how much do I get back?” She says, “You get 15% back.” I said, “Oh, really? Wow. Is that the amount of your sales tax here?” And she goes, “No, sales tax is 25%.” And I go, “Twenty—are you kidding me? Your sales tax is 25%?” And she goes, “Yeah.” And I go, “Well, you must not have income tax then in Iceland or it must be really low, right?” And she goes, “No, no, no. Income tax is 40%.” And as my mouth was open and my jaw was dropping to the floor, the other two girls in the booth there next to her were all kind of jumping in the conversation. I go, “So wait a sec. You pay 40% in income tax and you pay 25% in sales tax. You gotta be kidding me?” And she says, “No, but we have free health care.”
STEVE: [LAUGHING].
JASON HARTMAN: [LAUGHING] Oh my God. You must be kidding me.
STEVE: Oh, it’s free. Okay.
JASON HARTMAN: Yeah, yeah. I mean like, you know what’s funny, Steve? I have had countless, countless discussions and debates with taxi drivers in England over the years. I mean I’ve been to England many times, right? Love it. Great place.
STEVE: Yeah, yeah.
JASON HARTMAN: And awesome history, awesome place to visit. I can’t say the food is super great or anything but the Brits are not known for their food but you know, they’re known for fashion. They got good styles there. I mean [INDISCERNIBLE] of course but, and France, but you know, England is a great place. I love going to England but every time, invariably, when I get into a conversation with a taxi driver especially in London, it always goes into how are things in America, how are things in England because we used to be joined there and now we’re not. And then they say, “The problem with America they always say is if you get sick, you’re gonna go bankrupt.” And I was like, “Oh my God. What is with the European mentality? What is the big deal about this health care thing? I mean –
STEVE: They’d just rather be bankrupt all the time.
JASON HARTMAN: I think they’d rather be sick.
STEVE: [LAUGHING].
JASON HARTMAN: You know, I just think there’s this like culture of sickness there. Everybody is so worried about getting sick all the time. Hopefully, being sick is the last thing you have to think about in your life, right?
STEVE: Well, you can take some responsibility. Granted there are things, injury and illnesses that are just gonna happen, but a lot of these things – if you just use your brain for 10 seconds – you’re not gonna have to worry about it.
JASON HARTMAN: It’s like, eat right, get some exercise, you know, some obvious stuff but –
STEVE: They have a different perspective, you know? I was in a workshop in Boston once and executives had come in from all around the world to attend this workshop and I was sitting next to a British fellow at lunch. He had arrived a couple days early.
JASON HARTMAN: By the way, I gotta interrupt you.
STEVE: Yeah.
JASON HARTMAN: You know what we forgot to mention that England has the best of any place in the world?
STEVE: What’s that?
JASON HARTMAN: The freaking accents.
STEVE: Yeah, they do.
JASON HARTMAN: I love the way they talk. I mean just let me hear a British person. I just love it [LAUGHING].
STEVE: I know. Everything they say has more credibility.
JASON HARTMAN: It’s just so classy. I mean, they got that and it’s awesome.
STEVE: Yeah [LAUGHING].
JASON HARTMAN: Okay go ahead.
STEVE: Right.
JASON HARTMAN: You’re in Boston. Tell me more.
STEVE: So I’m in Boston sitting next to this British guy at lunch, and he tells me that he got to Boston a couple of days early. I said, “Well, what you’ve been doing?” And he said, “Well, I just took a tour of all the revolutionary sites. I want to see what went wrong.” [LAUGHING].
JASON HARTMAN: [LAUGHING] You know what went wrong? It’s the same thing that’s going wrong with America today. It’s called taxation without representation [LAUGHING].
STEVE: Without representation. [LAUGHING] I know his point of view is, wow, they got riled up and made their own country. What was the big sauce all about?
JASON HARTMAN: Yeah. Maybe we need to do that again because we’re certainly not being represented anymore [LAUGHING].
STEVE: Yeah, something is wrong.
JASON HARTMAN: Yeah, something is definitely wrong. That’s funny. All right. Well enough of the Europe thing but well, one more thing on that is I’m gonna talk on my JetSetter Show – I’m gonna have them on as guests – the potential local market specialists in the southern part of Spain that you referred to me Steve. Tell the listeners, if you would, what you know about that. When I said I’m going to Europe, and I asked you do you have any contacts, I always want to look at real estate in all these places I go. I always do it faithfully because I’m addicted to what I do. I absolutely love this stuff, but you instantly knew that Marbella was like their Miami, right?
STEVE: Yeah. I had known this developer, a British guy actually, who had been living in Spain. We had been talking for quite a while, and he told me about how he had to wind down his developments and how almost everybody had to because Marbella was going through, you know, what Miami or what Las Vegas had been through. It was ground zero of their crisis over there. So much building, so much happening and I, of course, perked right up saying, “Oh, new properties in a nice area? I wonder how good this can really be.” I didn’t do a ton of research into it beyond that. I just sent you over there to do it.
JASON HARTMAN: Well, let me tell you, that place is gorgeous. I was so impressed and – it’s that old thing of like the how our mind plays tricks on us with comparisons. I always try to overcome that and remember it because we’ve got to try and not be too swayed by things that might mislead us, whether it be our emotions or our perceptions. It’s like the old trick the traditional realtors have, show them the ugliest house first and then show them an okay house and then show them the nicest one last. It’s like the traditional realtor showing a home buyer around in a city in which they live. That sort of a trick has been used in real estate because it, by comparison, things look better, right?
STEVE: Yeah.
JASON HARTMAN: You know, the first house the buyer gets to, they think, “Is this all I can get from my,” if you’re in Orange County, “my $600,000?”
STEVE: [LAUGHING] Yeah. Right.
JASON HARTMAN: Or maybe a million [LAUGHING] um and uh, [LAUGHING]
STEVE: [LAUGHING]
JASON HARTMAN: And then they show them a better one and then the last one is the best one. I went from Barcelona which, I’m telling you, I was so disappointed. I had been to Barcelona before and, God, it felt like the Detroit of Europe, man. I mean, that place was not clean. Granted, old European cities are known for, you know, listen, I’m not new at this, okay? I have been almost everywhere in Europe and they’re not known for being super clean, but there’s graffiti everywhere. It’s felt like desperation in the air. Nobody has got a job. Look at the stats, nobody has a job. [LAUGHING] I mean, that’s –
STEVE: Yeah, well, bored, unemployed, young people equals graffiti, does it now?
JASON HARTMAN: Yeah, well it equals crime and lot of other problems.
STEVE: Yeah, it’s a problem and nobody can afford to hire anybody because of all the free healthcare.
JASON HARTMAN: Yeah [LAUGHING]
STEVE: It’s free though.
JASON HARTMAN: Yeah. It’s free. We’re seeing socialism collapse. I mean, we’ve been seeing it collapse for decades. You know, I remember in, of the front of, I think it was Time Magazine, you know, someone can probably look this up on Google, maybe in 1990, you know, like 23 years ago or 1993, about 20 years ago. The front of it said “The End of the Welfare State.” It was on the cover of Time, you know, liberal publication.
STEVE: Was that the April 1st edition of Time?
JASON HARTMAN: [LAUGHING] Yeah. April Fools Day.
STEVE: Yeah.
JASON HARTMAN: Our listeners finally learned what that was when I announced my retirement, remember?
STEVE: Yeah. After I had to explain for like two weeks –
JASON HARTMAN: Yeah.
STEVE: To people.
JASON HARTMAN: [LAUGHING]
STEVE: That was a spoof.
JASON HARTMAN: Yeah.
STEVE: Thanks for doing that.
JASON HARTMAN: Yeah. That was a hassle but [LAUGHING] –
STEVE: [LAUGHING]
JASON HARTMAN: But it was kind of funny playing a trick on the listeners.
STEVE: Yeah.
JASON HARTMAN: But yeah, I mean, it just doesn’t work folks. When are we getting a clue here?
STEVE: Yeah. My dad and I were joking yesterday because we had some neighbors that had to move back to Brisbane, Australia. Some people that we know pretty well, and they were not happy about it actually. It’s a long story but we were [LAUGHING], we started joking that in these countries with socialized medicine, they have to have the attrition factor because you schedule a guy for an emergency appendectomy in six months but half of them will be dead before then, so you could actually get a cancellation by default if you want to begin your surgery that was scheduled [LAUGHING] that far out.
JASON HARTMAN: Listen, it’s part of the business plan to have people die waiting in line.
STEVE: [LAUGHING] I know.
JASON HARTMAN: I mean, that’s exactly what happens in England. It happens in Canada, probably to a lesser degree, but England is worst about it.
STEVE: Jason, it’s free though.
JASON HARTMAN: Yeah. Well, [LAUGHING]. Hey, if you wanna see healthcare get really expensive, just make it free [LAUGHING].
STEVE: [LAUGHING]
JASON HARTMAN: So, there you go.
STEVE: Well, a dog left something on my front lawn for free this morning.
JASON HARTMAN: There you go. Well, I hope you picked it up by now or maybe Obama’s men will come and pick it up.
STEVE: [LAUGHING]. Yeah, I will have to tell them.
JASON HARTMAN: Hey, but another thing that’s kind of part of socialism in the United States – I mean, listen, the US isn’t immune to this word. It’s a disaster in so many ways and that’s the fact. Although we benefit from it and have benefited from it as investors – real estate in America has been subsidized since the Great Depression – and there’s another sign that this may be coming to an end. If it does, most investors think that will be the end of the world. I think it will be the beginning of a brave, new, wonderful world. I don’t want to say brave new world because that wasn’t a good world depicted in Huxley’s vision of a brave new world, but in this case, it actually would be a good world as long as investors adapt their thinking and know how to play the game. Remember, income property is a multi-dimensional asset class, and as such, you can always profit in a different dimension. You can be at a certain phase in the market. You can be a capital gain investor and make big profits and big gains by being more speculative in your philosophy and your technique. In other parts of the market, you can be a cash flow or an income investor, or like a new investor, a bond investor but much better than either those. And in other parts of the market, you can invest for diversification and asset protection and income tax benefits. It’s just so multi-dimensional. In other parts of the market, you can invest for sweat equity and adding value through creativity. There are so many wonderful options. One thing that we see, if we see some of the real estate socialism end – ultimately I think it could be a very good thing for those who already own property and have positioned themselves in advance for this. Probably I could say with confidence, eventually, because it’s gonna happen. It has to happen eventually because the math simply doesn’t work. Now when it’s going to happen? I don’t know, Steve, but what is your take on Fannie Mae and Freddie Mac?
STEVE: Well, there was a story this week because there has been some noise in the Congress and in the Senate about Fannie Mae and Freddie Mac. In fact, I have a quiz for you and the listeners, Jason. Are you ready?
JASON HARTMAN: You’re putting me on the spot again?
STEVE: You’re gonna do okay with this. I mean this is –
JASON HARTMAN: You’ve done this to me before. You know, you really can’t make the host look stupid in front of his listeners but okay.
STEVE: [LAUGHING]
JASON HARTMAN: Go ahead and –
STEVE: You don’t need me to do that.
JASON HARTMAN: And, [LAUGHING] thank you.
STEVE: [LAUGHING]
JASON HARTMAN: You know, I will get you for that one.
STEVE: Yeah, that’s true.
JASON HARTMAN: [LAUGHING] But yeah, I hope I get this right because we’re just gonna say – we’re not gonna edit this – but go ahead. Give me the quiz.
STEVE: [LAUGHING] Okay. Here is a recent quote from this USA today story, and the person quoting this is referring to Fannie Mae and Freddie Mac. For too long, these companies were allowed to make huge profits buying mortgages knowing that if their bets went bad, taxpayers would be left holding the bag. It was heads, we win, tails, you lose, and it was wrong. Who said this? A. Rush Limbaugh, B. George W. Bush, C. Mitch McConnell, or D. Barack Obama.
JASON HARTMAN: Okay, so the question was awfully long. It’s basically saying that this can’t work because taxpayer will be left holding the bag. Do you want to just repeat that a little bit?
STEVE: Yeah, basically for too long, these companies are allowed to make huge profits, you know, knowing that if their bets went bad, the taxpayers will be left on the hook.
JASON HARTMAN: I’m gonna say that’s Rush Limbaugh. You wouldn’t hear that from George W. Bush; although, you should hear it from George W. Bush.
STEVE: Yeah, well, a lot of people think he would but yeah, [LAUGHING]. We probably would not hear it from him. Well, I regret to inform you that you have been made to look stupid on the show because –
JASON HARTMAN: Oh!
STEVE: I mean, God. This was Barack Obama, the free-wheeling –
JASON HARTMAN: Oh, give me a break.
STEVE: Capitalist that we all know and love.
JASON HARTMAN: You got to be kidding me.
STEVE: I’m not kidding you. [LAUGHING]
JASON HARTMAN: [LAUGHING]
STEVE: Those words came out of Barack Obama’s mouth.
JASON HARTMAN: Well-
STEVE: It was not on April Fools.
JASON HARTMAN: Well then that just goes to show you what a hypocrite Barack Obama is [LAUGHING].
STEVE: Yeah, absolutely.
JASON HARTMAN: That guy, you know what, I should have known you were setting me up for that one because, that guy, his words almost never match actions. That’s how he has fooled so many people [LAUGHING].
STEVE: Oh, I know, I know. Did he put down his copy of Atlas Shrugged, and then walk out to the podium and rip off that cloak?
JASON HARTMAN: Oh yeah, probably. That’s just absurd. I mean, he, he did not, you should have asked me who would have meant it, not who said it.
STEVE: Okay. [LAUGHING]
JASON HARTMAN: [LAUGHING] Hey, I’ve got a question for you. How do you know a politician is lying, Steve?
STEVE: I’m gonna go with, when his lips are moving.
JASON HARTMAN: Yeah, well, you got that one right. It’s too damn easy.
STEVE: [LAUGHING]
JASON HARTMAN: Okay, go ahead. You got another one?
STEVE: Well, that was the quiz.
JASON HARTMAN: That’s the whole thing?
STEVE: So you have failed miserably.
JASON HARTMAN: Oh, God. I don’t even get a second chance.
STEVE: No. But you know, it was definitely a setup. There is bill introduced in the House of Representatives right now to eliminate Fannie Mae and Freddie Mac. The House of Representatives is Republican controlled. I personally don’t think very many of them really want to do this. They just want to look tough to their constituents before the midterms but then the Senate, who you know is narrowly Democrat, just barely right now, has introduced a bill that’s going to wind them down. It won’t eliminate them completely. I’m calling bull on the whole thing. I think they’re all trying to look like they’re doing something but I don’t remember when government has voluntarily shrunk itself in the last 50 years. Before anybody says, well, Fannie Mae and Freddie Mac are private companies, come on. If you really think that, get on a flight to England, make an appointment for 13 months from now so you can get an MRI and have your head examined. We all know that Fannie Mae and Freddie Mac are quasi-private companies at best and, you know, it would certainly if they went away. There would be some ramifications in the housing market, you know? It would probably make rates go up. It would probably make prices go up because, remember, the housing market has been artificially inflated all this time. That’s what we talk about on this show. There is nothing that you can do as an investor about it being artificially inflated. The only thing you can do is take advantage of it.
JASON HARTMAN: Well, that’s interesting language you’re using. What do you mean by artificially inflated? Let’s drill down on that for just a second.
STEVE: I read a book – and I would recommend this to all the readers – I think you had Dr. Thomas Sowell on the show.
JASON HARTMAN: Oh yeah, he’s awesome.
STEVE: Yeah, he wrote a book called the Housing Boom and Bust.
JASON HARTMAN: Yup, and I had him on the show to talk about that exact book.
STEVE: Yeah, and it is the best, most comprehensive, well, that and also Michael Lewis’ book, The Big Short.
JASON HARTMAN: Yeah, that’s great too. We haven’t been able to get Michel Lewis on the show. I think he is too famous.
STEVE: Yeah, he is too good for us but we’ll work on it. Maybe we’ll scale up a ladder.
JASON HARTMAN: Hey come on, we have had three presidential candidates on the show, big candidates, not small ones, like people that could have won, okay?
STEVE: That’s true.
JASON HARTMAN: [LAUGHING].
STEVE: Hey, we had Meredith Whitney. She is no slouch either.
JASON HARTMAN: Yeah, well we have had all kinds of famous people but anyway, go ahead. Hey, we’ve got Steve and Jason on the show.
STEVE: That’s right. Hey, Michael Lewis, who do you think you are? Get on the show.
JASON HARTMAN: [LAUGHING]. This is going to be in the transcript, and you know, he’s probably got a Google alert setup for his name and he’s going to see that. [LAUGHING].
STEVE: We love your books, Michael. We’d love to have you on the show.
JASON HARTMAN: Yes, we want to hear more about The Big Short, but okay. Go ahead.
STEVE: Yes. [LAUGH]. So, what I mean is this is how I perceive it, you know? Listeners, feel free to correct me if I’m wrong, but much of the housing crisis is rooted back in the 90’s when there was a lot of pressure on banks to make loans to people that – there is no other way to say it – really shouldn’t have been getting loans. Making homes more affordable, so to speak. Well, that’s not what the market would bear and so, you have Fannie Mae and Freddie Mac that are guaranteeing these loans. People originate them, Fannie Mae buys some packages and sells them, and they’re guaranteeing this and so, of course, Wall Street is going to go bananas. I mean you throw a big steak into a cage full of tigers and you get mad at the tigers for eating it? We all know what Wall Street is. They’ve always been greedy. Don’t say that they’re just more greedy now. But when Fannie Mae and [INDISCERNIBLE] the government is on the back end of this thing guaranteeing all of these mortgages. That’s why this has been artificially pumped up, in my opinion. If the true market was dictating what the terms would be, a lot of these people would have never purchased houses. We never would have had a boom nor would we never would have had a bust.
JASON HARTMAN: Right, true. The market would have been much more stable, and that’s the same issue with the money supply if we have sound money. In other words, it was attached to something and not just complete fiat back when we were on the gold standard before 1971. I’m not a big proponent of the gold standard, by the way, just let me put that on the record. And you know, I’m not a big proponent of gold [LAUGHING] okay?
STEVE: I’ve heard, yeah.
JASON HARTMAN: And, hey, Jason Hartman was right again. Look what gold has been doing, right? So, there you go. And even if it was going up, it wouldn’t matter because there are still so many other issues. Is the gold going up or the dollar going down? You’ve heard me talk about that ad nauseam.
STEVE: That’s right.
JASON HARTMAN: But even if it could be done by a formula like Bitcoin. We could even have fiat currency so long as there was a hard formula. It could be fiat. It could be just currency, not money. If it had an actual formula that limited its supply and made it intentionally scarce and then made it impossible to debase the currency, but in our world today, the politicians, they ruin it. [LAUGHING].
STEVE: They would screw that up. I’m skeptical about Bitcoin. The first time I heard about it, you were about 10 feet away from me talking to somebody. We were at an expo in Nashville and these people at this expo, well they were survivalists, nothing wrong with that, but some of them were just wow, okay?
JASON HARTMAN: Yeah, they’re out there. They were nuts, yeah [LAUGHING].
STEVE: This guy with no teeth, who had clearly knocked back a whole jug of moonshine right before he came to the show, he was the first person who informed me about Bitcoin, so I did not have the best first impression.
JASON HARTMAN: [LAUGHING] Hey, don’t shoot the messenger. Bitcoin is okay. But I don’t know. You know, the problem with Bitcoin is that the regulators are going to shut it down. They’re going to find a way. There is way too much risk. Think about it. Anything that is in competition with the fake money produced by the Federal Reserve and the Treasury Department is going to be under attack because that’s their competitor. They don’t want alternative currencies. Why do you think they have legal tender laws that say – right on your dollar bill – for all debts public and private. If you open a business and you put a restaurant on the corner, Steve, and you say, “Look, we don’t accept dollars. We only accept gold coins or silver coins,” you’re going to be hauled off to jail. That’s illegal.
STEVE: Yeah.
JASON HARTMAN: You are going to go to prison.
STEVE: Right.
JASON HARTMAN: You are forced to accept dollars.
STEVE: Yup. You have to do it. You do not want to go toe-to-toe with somebody who can create money out of thin air.
JASON HARTMAN: Yeah, or has the power to inflict violence on you in a prison, and that’s called the government. The government needs that power. Okay, it should be the only entity that has it, but that’s a whole other discussion. Okay, anyway, so Fannie Mae and Freddie Mac – the reason – look, if Fannie and Freddie are put out to pasture, what is that going to mean to investors? It’s going to mean probably lower real estate prices but probably much higher rents because, think about it, people only have three choices. They can buy, they can rent, they can be homeless. So given those three choices in a marketplace, what they are going to do? Well, if buying gets a lot harder, then that will create more renters, and if there are more renters, the most fundamental rule of economics is what? It’s supply and demand. So when you have constrained supply, which you will always have when it comes to housing for so many reasons that we have discussed before, then you will see an increase in rental rates, probably a dramatic increase. Now here is the other thing, Steve. You said, that the existence of Fannie Mae and Freddie Mac artificially inflated real estate prices, and I agree with you that that is true in cycles. Certainly in the last financial crisis – that was a cycle – and it is true in cyclical markets, in the bubble markets, California and New York, high-priced markets, okay, Miami, etc. But in the linear markets, that bubble was far less pronounced because those prices that went up, there was some upward pressure on them. But it wasn’t anything major, so the fall they took wasn’t that significant either, right?
STEVE: Right.
JASON HARTMAN: I don’t really know. I don’t think anybody knows. I think this may be impossible to really know, but I would assert that the true prices of real estate in linear markets, the markets we recommend around the country, are actually not inflated even now. Even in say Phoenix, which is one the more inflated markets that we would still recommend. I mean, we never recommend overinflated markets in California or New York City or those types of places, okay? But we would say Phoenix is too high. We are really not that interested in it right now because it has gone up too much, but that’s nothing compared to some really high-priced markets. But if you look at markets like the various cities in Texas, whether they be Austin, Dallas, San Marco, Houston, San Antonio, or you look at Indianapolis, where you used to live and we have done mountains of business there, or many other markets around the country that we recommend, I am not really sure prices are overinflated even if Fannie and Freddie went out of business. Now, if they went out of business tomorrow, we would probably see prices initially soften in those markets, maybe 10%, which is not that big of a deal. So your 120,000 dollar house goes to 108. So what, no big deal. And the reason I say this is because when you look at real estate around the world and especially having just returned from Europe. I mean their housing stock is so much more expensive than ours. Even in less desirable locations of less desirable cities, I mean, you try to buy real estate around the world. You look at Panama, Costa Rica, Argentina, all markets I’ve looked in extensively. All over Europe, give me any city or country in Europe and it’s expensive. So, I am not sure that our real estate is really that expensive in linear, non-bubble type markets. Your thoughts. By the way listeners, Steve and I have never discussed this issue before.
STEVE: That’s true. I agree with you, Jason, because you can look. I pulled the data from the Federal Housing Finance Agency, Fhfa.gov. I’m a little bit of a geek. I like to take their housing price index and put it in the spreadsheets and make graphs out of it. How nerdy is that?
JASON HARTMAN: You’re more than a little bit of a geek but go ahead.
STEVE: Yeah, that was your revenge for my earlier comment?
JASON HARTMAN: Yeah, yeah, it was but being a geek is a freaking compliment nowadays [LAUGHING].
STEVE: It kinda is, yeah. They do rule the world.
JASON HARTMAN: Do you remember that movie Revenge of the Nerds? [LAUGHING]
STEVE: Yeah. [LAUGHING].
JASON HARTMAN: That has become so, that was a prediction. I mean, you know, with Bill Gates and Steve Jobs and all the rest, I mean they run the world.
STEVE: And so now I put this into a spreadsheet, and maybe I’m a little bit cool for it, I don’t know. You look at the linear markets. I could not make the argument that Fannie and Freddie have artificially inflated those because look at the chart. It doesn’t inflate. I mean it goes very steadily.
JASON HARTMAN: The problem is that Fannie and Freddie have been around for so many decades that it is really hard to tell, but I mean, I will just tell you, in any country that I looked at around the world, it’s semi-desirable as a place to potentially invest. You’ve got to convert it because they all measure in square meters where there is about 10 square feet to a meter. So if they say you’ve got 150 square meter flat, that is about 1500 square feet give or take. You’re going to pay 200 by the time you do the currency conversation and the size conversation. You’re going to pay about 200 to 250 dollars per square foot, if not a heck of a lot more, whereas in these markets that we recommend, I mean look, we’re going to talk about two properties today, Steve. We are going to talk about a highly desirable city. We’re going to talk about an Austin suburb, and let me just look here, 64 dollars a square foot, another one 48 dollars a square foot. [LAUGHING].
STEVE: Yeah.
JASON HARTMAN: You couldn’t touch stuff like that in any of these other cities around the world, and they don’t have Fannie Mae and Freddie Mac. They don’t have good mortgage financing, most of these countries, at all if anything.
STEVE: Right.
JASON HARTMAN: So, this is why I can’t make it work internationally. I’ve tried. I’ve beat my head against the wall to try and make something work offshore out of the country. You go to Nicaragua for God’s sake. How many would put Nicaragua at the top of their list, probably very few people, okay? It is not cheap there either. [LAUGHING]
STEVE: The financing is horrible, so yeah, I mean the availability of it has not brought prices down but, yeah, they don’t have Fannie Mae in Europe, as you say, but kind of what we’re going off of here is what you said is that it enables these bubbles and enables these cycles because the speculators, they don’t have to take any responsibility. If they were the one on the hook at the end of the day, you can bet that they would adjust their terms and that there is a lot of these loans they would have never made in the first place. So, I think that, under the guise of making home ownership affordable and making it more available, it created more heartache and more problems.
JASON HARTMAN: Oh, ultimately it has. Listen, I’m not in favor of any government program but I’m just saying as investors, let’s take advantage of it. If we can make it work for us, hey!
STEVE: Amen.
JASON HARTMAN: Let’s be opportunistic and do that but the point being, what does this mean if you’re listening? This means that if you can get a Fannie Mae or Freddie Mac loan now, you better get one and you better get as many of those as you can. You can probably get 10 of them and you can buy 10 houses, and if those go away, it’s probably going to put really good upward pressure on your rental income, which is going to be great for you if people can afford to buy. And later, of course, the private market will come in and try to fill the gap, but I doubt that it will ever be as good as Fannie Mae and Freddie Mac, because Fannie Mae and Freddie Mac can lose billions and billions of dollars. They are subsidized by the government. They’re illogical. Private businesses are not going to be illogical like that. They’re going to require that they have working sound economic models or at least semi-sound. I’m not going to say every type of business has a sound economic model but they are not going to last for very long. I mean, there will be other financing sources than there are today.
STEVE: Yeah.
JASON HARTMAN: But they are not going to be as good as Fannie Mae and Freddie Mac. I mean these are, this is the way to get some of your tax money back is to go get a Fannie Mae or Freddie Mac loan. It is a government program that even the rich can qualify for. So [LAUGHING] –
STEVE: [LAUGHING] Even those evil rich people.
JASON HARTMAN: Yeah, even those evil capitalists.
STEVE: [LAUGHING] And Fannie and Freddie have actually turned a profit in the last couple of years –
JASON HARTMAN. Yeah.
STEVE: But that’s misleading because –
JASON HARTMAN: Probably cooked in the books.
STEVE: It is all going right back into their payoff, yeah exactly.
JASON HARTMAN: [LAUGHING].
STEVE: That’s a side point, but it’s going to pay off their bailout that they’ve got. So, I guess they are okay for now. You should take the advantage of them as investors but I need to go on the record here. Barack Obama is more likely to shut down the Marine Corps than he is Fannie Mae.
JASON HARTMAN: Fair enough. You’ll probably right about that. Okay. Hey, we gotta wrap up of, course. We’re going so long here. Let’s talk about Russia real quick because this is hilarious. [LAUGHING]
STEVE: [LAUGHING] This one’s funny.
JASON HARTMAN: This is just a funny story. Doesn’t have that much to do with real estate but Steve –
STEVE: Will Detroit try this?
JASON HARTMAN: Yeah, maybe Detroit can do this and that will save Detroit. Yeah, right [LAUGHING].
STEVE: [LAUGHING].
JASON HARTMAN: Tell us about it.
STEVE: Oh, we got a headline here [LAUGHING], um, to boost the economy, Russia frees jailed entrepreneurs.
JASON HARTMAN: [LAUGHING] So what they’re doing, it’s a news article, it says faced with economic malaise, Russia needs some more entrepreneurs, and it knows just where to find them – in prison.
STEVE: [LAUGHING]
JASON HARTMAN: The Putin administration official has made it his mission to scour the prison camp system, once known as the gulag, for businessmen that can be granted amnesty. He’s got no shortage of candidates. Russia has 110,000 people serving time for “economic crimes” and at least 1 in 10 prisoners – so they’ve got, now think about it, I mean the US has the highest incarceration rate of any civilized country, if not any country in the world. I mean it’s disgusting what we do in the US. Our prison system has become a whole government program and a whole bunch of people in private enterprise are benefiting from building prisons. I think there’s an IPO and a fund you can invest in to finance prisons. God, don’t do that. We’re becoming a police state.
STEVE: Uh.
JASON HARTMAN: I mean it’s just absurd here. We’ve made everything unlawful and we’ve made everything a reason to put someone in jail here. It’s ridiculous, but maybe if things get bad enough in America, Obama will scour the prisons for all the talented people who happened to smoke a joint and they put them in jail for it.
STEVE: [LAUGHING]
JASON HARTMAN: This is absurdity.
STEVE: Yeah, they have to reach pretty deep into the bullpen here, you know? And what’s funny, the article talks about how the Russian police are under pressure to make arrests and they take bribes from businesses to arrest their competitors.
JASON HARTMAN: Oh my God. Can you imagine. How corrupt!
STEVE: Oh, I love America.
JASON HARTMAN: That’s so scary. Yeah, this is probably coming to the US soon [LAUGHING].
STEVE: [LAUGHING].
JASON HARTMAN: Just unbelievable.
STEVE: Yup, so you don’t live in Russia, you know? Well for the few [INDISCERNIBLE], don’t make your competitors very mad. You can end up in the gulag.
JASON HARTMAN: Yeah, that’s a scary thought. Well hey, we only announced this on the last episode a few days ago, but we’ve got our executive Austin Property tour coming up and – what executive means – it’s an abbreviated version of the tour. No Creating Wealth seminar but I will be there so, of course, we will have discussions over a couple of meals and you can ask me questions and so forth and I’ll be talking to you as we’re touring around, but this is limited to just 20 people. It’s a small tour. It’s a get in and get out quick. If you don’t have much time, this is the perfect kind of tour. We’ve never done these, this new thing we’re calling the Executive Tour. No seminar, you just come in, we’ll start at 9 a.m. on Saturday, and what’s the date Steve, the 28th, I think, of September?
STEVE: Yeah, sir.
JASON HARTMAN: Yeah, September 28 and then we will tour Austin. We will be done in about, I don’t know, 4 or 5 o’clock that day. You’ll be able to buy properties on the tour and it’s just such a great city. I have thought about moving there many, many times, really just an awesome city. I’m so glad that we actually have product that works there. So join us for that. Sign up at jasonhartman.com. If you become a member for just 120 bucks a year, you get half your membership fee back as your tour discount, so go to jasonhartman.com, become a member of our inner circle and get a whole bunch of benefits – our monthly conference call, discounts on products, discounts on this tour. You get 20% off, so you save 60 dollars on the tour. Basically, you get half your membership paid for right there. We’d love to see you there. Remember, the space is limited. It’s a small executive tour, so it’s just 20 people. Our normal tours have 40 or 50 people on them, so this would be a small, quick tour. Steve, two properties real quickly before we get to our guest.
STEVE: Two properties, one here in the Austin, Texas area. Great looking property built in 2005. Your total cash investment, if you use financing, would be about 40,000 dollars, and you’ll get a 7% cash on cash on this thing. Jason, you’ll pay 64 dollars per square foot, which I think is a very good deal –
JASON HARTMAN: Wow!
STEVE: In Austin.
JASON HARTMAN: Well, considering that the property was only built in 2005 – it’s almost new – 64 bucks a foot. You’re buying below the cost of construction, and you’re buying in Austin. Now remember, one thing about Austin that makes it good for investors -although, philosophically, I don’t like these policies and I talked about it extensively with Thomas Sowell on the show when we had him on, you mentioned in this episode, Steve – but Austin has a pretty strong environmental movement, so there are some limitations on development there, and that makes it more expensive to build. Once you own, it’s like the old saying, you know, what do you call a developer – someone who wants to build a house. Well, what do you call an environmentalist – someone who already owns the house, [LAUGHING] because they don’t want anyone else to build there, right?
STEVE: That’s exactly right.
JASON HARTMAN: So it’s the same idea. You have a little of that pressure in Austin, which is actually good once you’re an owner, so yeah, 64 dollars a foot, incredible deal. Overall return on investment there projected at 26% annually. Even if it only goes half as well, 13% annually, my famous saying. What’s the next one Steve?
STEVE: I’ve got one here in Indianapolis – I have some inside information on it – that’s why I wanted to feature it.
JASON HARTMAN: Indianapolis, okay.
STEVE: This one is a $99,000 dollar property. It brings in 11% cash-on-cash, 41% total return. It’s only 48 dollars a square foot. It’s a little bit older property, but here is what’s great about it. This might not mean a lot to most people, but it’s in Washington Township. I actually have done a ton of properties in Indianapolis. I have never done a property in Washington Township because it’s too expensive. It’s the older, more established part of town on the north side. It’s where all the old money is. Good school districts, very solid area, and I think this property is a very good deal at 48 dollars a square foot there. It’s going to rent like clockwork every time because people want to be in the school district, and it’s the first property I’d ever seen available in Washington Township.
JASON HARTMAN: Fantastic, okay good. Did you give all the stats on that? I don’t think so.
STEVE: I don’t think so.
JASON HARTMAN: So you projected – let’s look at the projections. $223 a month cash flow projection. That’s almost $2700 dollars per year, and your cash-on-cash return at 11% annually. Your overall return investment projected at 41% annually, and again, in all our performance, we have the vacancy rate, maintenance cost, management fees, it’s all in there. You can see these at jasonhartman.com, click on the properties tab, and you can look at this pro forma in detail yourself.
STEVE: Yup, and for the record, this one already has a tenant.
JASON HARTMAN: Yeah.
STEVE: And they’re at $1175 a month.
JASON HARTMAN: Pre-rented, hey fantastic. Well Steve, thanks for coming on. Let’s get to our guest. We did a long intro, as usual, today. We’ll be back with Les Leopold in just a moment.
[BACKGROUND MUSIC]
JASON HARTMAN: It’s my pleasure to welcome Les Leopold back to the show. I had him on a couple of years ago, and he is out with a new book, and I gotta tell you, I love the title. It’s entitled “How to Make a Million Dollars an Hour: Why Hedge Funds Got Away with Siphoning Off America’s Wealth.” Les, welcome back. How are you?
LES LEOPOLD: Fine, thank you so much for having me.
JASON HARTMAN: Good, and I always like to give the listeners a sense of geography. Where are you located today?
LES LEOPOLD: Right now, we’re talking to you from an old town called Montclair, New Jersey. We’re about 12 miles from dead center Manhattan, New York.
JASON HARTMAN: Fantastic. Well, that’s where a lot of financial crime takes places right there in good old New York [LAUGHING], in the Big Apple [LAUGHING].
LES LEOPOLD: That’s for sure.
JASON HARTMAN: Well tell us about this book. I mean, haven’t hedge funds made the rich a lot richer? You’re saying they’re siphoning off wealth? Tell us more.
LES LEOPOLD: First of all, I got into this because I saw an amazing statistic, which was that after the economic crisis, while we are in a deep, deep recession in 2010, the top hedge fund guy made as much in one hour as the average family makes in 47 years. Think about that. One hour equals 47 years. So, I got very curious about how is this possible. First of all, what is a hedge fund and how could somebody who runs one make that much money? The next thing, the next fact, factoid, that I discovered was that hedge fund made as much profit in that year, and with under 100 employees, as Apple Computer, which has 700,000 employees and contractors around the world. So, I thought, now here is a puzzle. We need to understand this because the obvious question comes up. What are they, what did they do? But the real question is, do they produce economic value commensurate to the money that they receive? That became the question that drove the book. How did they, what are they, how did they do it, and are they creating real value for our economy? That took me on a heck of a ride.
JASON HARTMAN: Tell us more about it. I mean, I remember reading an article years ago talking about how the 2 and 20 formula that is known throughout the world of hedge funds. Where they charge you a 2% fee every year on your amount of money invested so if you – these hedge funds usually have big minimum so they tend to skew towards wealthier people as investors – but maybe a $250,000-dollar minimum would be sort of a typical hedge fund, but they’ll charge you 2% annually of the amount of your principle that’s invested plus they’ll charge you 20% of any money they make. So, Les, this analysis of that 2 and 20 formula showed how you could actually lose a whole bunch of money investing with a hedge fund. Now, of course, I just can’t remember how it was presented. It was sort of complex but you can certainly lose your principle. That’s not a big revelation to anybody but, just by the formula, that fund could make money but you could actually keep losing money as the fund made money. Some how the way that formula was computed – but go wherever you want in terms of how it’s siphoning off wealth.
LES LEOPOLD: Let’s take a walk through that.
JASON HARTMAN: Yeah.
LES LEOPOLD: You have given us a good introduction. So hedge fund is an investment vehicle primarily for the wealthy and large institutions. You need at least $1,000,000 of net worth to be permitted to invest in a hedge fund, or an income, I think, over $250,000. It’s supposed to be for sophisticated investors only. So the way it is sold is like you’re gonna get entrance to this very high roller poker table at an exclusive Vegas casino. It’s gonna be, you know, just the wealthy playing against the wealthy, and the smart players are gonna win a lot of money for you. So you gotta find the right hedge fund. There’s 90,000 of them. Nine thousand of them, about a trillion-dollar investment. So this is a high rollers game that you are getting into, high stakes game. But in fact, that’s not really how it works. What happens is hedge funds have their own strategies for making money and many of those strategies most of us would call cheating. Some of them are illegal. Some of them are barely legal, and many of them are outright illegal. So let me share with you the one that led to this guy making – it turned out to be a $2.4 million an hour. His strategy was something. When I found this out, I couldn’t believe it. By the way, I found this out after I wrote the last book, so I was naïve when I wrote the last book. I couldn’t believe this was going on. Here is what happened. The hedge fund colluded with not one hedge fund, but many hedge funds. They colluded with the large banks who had too many toxic related securities, mortgage securities on their books, and they wanted to get rid of them. So they packaged them together and sold them off. That was, we all know that happened. But what the hedge funds did is they helped the big banks create a security that was designed to fail. They found the worst mortgages they could find. The ones in Vegas, no offense, the ones in Arizona, the ones in Florida, they were put up by the most unscrupulous mortgage brokers. They found those mortgage pools, put them together, sold them like they were good as gold and then bet against them. Now think about that. It’s like if I was a pharmaceutical manufacturer, I design a drug, I sell it to you so we’ll kill you so that I can collect the life insurance. That’s precisely what they did and that was – there’s one particular version of this called the [INDISCERNIBLE] between Goldman Sachs and this one hedge fund that the government – there was actually a joint committee – Democrats and Republicans agreed on these findings. They analyzed that one in particular. And they found that a billion dollars [INDISCERNIBLE] and these three large institutions lost a billion dollars, and the hedge fund guy won a billion dollars by designing a security so that it would fail. Now, the SEC came in and fined Goldman Sachs $550,000,000 for not disclosing what was going on here. Guess what they fined the hedge fund?
JASON HARTMAN: How much?
LES LEOPOLD: Zero.
JASON HARTMAN: Zero? How convenient.
LES LEOPOLD: Because it was not the hedge fund guy’s responsibility to sell the security. So that’s how they made the billion dollars. Now where did that money ultimately come from? It ultimately came from those institutions and from the people investing in those institutions, but most importantly, it came from all of us because it was one of the reasons that the housing bubble inflated and then burst. They used this to keep pumping a lot of toxic mortgages into the system. And once it started bursting, this accelerated the pace. So this was incredibly harmful activity. Not only did it not create any value, but it created negative value. So that’s just one of about six or seven eye-popping strategies that I came up with in putting this book together. And I will be glad to give you some more.
JASON HARTMAN: Les, I mean you know, a hedge fund, there are so many misnomers about that phrase. What is a hedge fund exactly? Maybe just tell people what it is. What it was originally meant to be? What it’s become?
LES LEOPOLD: Sure.
JASON HARTMAN: And also, how do you start one? Can anybody start a hedge fund?
LES LEOPOLD: Good question.
JASON HARTMAN: My dog was planning to start a hedge fund [LAUGHING].
LES LEOPOLD: Well, originally they were set up as hedge. It was a way – a guy in the 60s invented a way to basically let go using financial techniques. He can sort of take the ups and downs of the market out of play, so that you will just be betting on the direction of a particular stock or set of stocks. With a hedge against the vicissitudes of the market, the ups and downs of the market, it’s no big deal. What it later became was almost a license to steal. It was a way to make super, super returns that nobody else could possibly do by taking enormous risks, but also the key was that these guys don’t want to take the risk. They try to find sure bets. They try to find rigged bets. They try to find bets where they cannot lose, where they know the outcome before they go in. I don’t know specifically what it takes to set up a hedge fund. You know, you need a certain amount of money. There are certain rules that you have to apply for but if you know – if you can get 20, 30, or a million dollars together, you too could start a hedge fund. But the key thing is are those rigged bets? There’s a reason why 70 hedge fund traders have already been convicted in the last couple of years for insider trading. Because if you know information that everybody else does not know, you can’t lose in making your market bets. So, insider trading, they put away a billionaire hedge fund guy, Roger Martin, for he had a whole ring of people who were giving him insider trading tips. They sat as Board of Directors and they would call him up moments after an important decision was made that hadn’t been announced. He gets that information. He buys the stock or sells the stock according to the information, and then he would make, one instance in a matter of minutes, he may now earn $1,000. Overall, they found $65 million dollars worth of instances where he made money this way.
JASON HARTMAN: But, Les, didn’t anybody tell him that the only people that are allowed to do insider trading are members of Congress? What was he was thinking?
LES LEOPOLD: [INDISCERNIBLE]
JASON HARTMAN: [LAUGHING] Big sarcasm.
LES LEOPOLD: They don’t make enough money.
JASON HARTMAN: Yeah, right.
LES LEOPOLD: People might say, well, God, you’re exaggerating. They cannot all be thieves, and maybe they’re not, but one very credible source I find is Jim Cramer from Mad Money.
JASON HARTMAN: Uh-huh, sure.
LES LEOPOLD: On CNBC.
JASON HARTMAN: Yeah
LES LEOPOLD: He ran a hedge fund for 10 years.
JASON HARTMAN: And he bragged about violating SEC regulations and talked about how stupid the SEC was. You’ve probably seen –
LES LEOPOLD: Absolutely.
JASON HARTMAN: That video. It’s unbelievable.
LES LEOPOLD: I wrote a whole chapter on him based on his earlier book and that video. He made on average for 10 years 23% return every year and how did he do that? He used a variety of techniques that were clearly illegal and he admitted that it was illegal in terms of the way he was manipulating markets, but the one that got me the most was at the time he was running his hedge fund, he was also a commentator on CNBC. They loved him because here was a guy who was from Wall Street coming to talk to them. And what he did was he planted false leads with his colleagues who then would report it as news and then would make his bet [INDISCERNIBLE]. So in other words, he would rig the news to help his bet. He would literally manipulate his colleagues, the people sitting right next to him on some of these shows, by afterwards telling them you know, I think such and such is going to happen, you know. You can use me as background but don’t use my name, blah, blah, blah, blah. They would try to check it out and then report it. That’s called rumor mongering, total illegal, obviously unethical. It’s amazing that he admitted it. He even mentioned the names of the people that he manipulated. But most importantly, in his interview that you saw on the web which, by the way, you can’t see anymore. You can find a transcript but they took it off of YouTube. He says if you’re not willing to do these things, maybe you shouldn’t be in the game.
JASON HARTMAN: Unbelievable.
LES LEOPOLD: In other words, he is saying I did it. Everybody does it. That’s what he is telling us. Everybody does this. Otherwise, you couldn’t possibly survive in this game. So they developed their [INDISCERNIBLE] that would allow them to bet on [INDISCERNIBLE] by knowing who’s gonna win before they make their bet. One way or another, that’s what they are about. Now, I’m not saying every hedge fund does that, but it’s remarkable how many are under investigation for doing some version. Like some of this, it’s legal, like high frequency trading is legal but there’s about, I don’t know, $120 billion dollars wrapped up in this game. They make $5 to $20 billion a year and this is mindboggling. They set up these incredibly expensive, state-of-the-art computers right next to the stock rexchange, so they get the feed in nanoseconds and have these automated programs that can basically work in a different, in a parallel universe to you. So when you make your trade on E-Trade, they’re able to see what you’re doing, buy the stock ahead of you and sell it back to you for a few pennies more before your trade goes through.
JASON HARTMAN: Unbelievable. Yeah, and people actually think they can beat these guys who think the speed of light is too slow. They need to literally be 186,000 miles per second. It’s not fast enough in the game of high frequency trading. That’s why they pay exorbitant lease prices –
LES LEOPOLD: Right.
JASON HARTMAN: To landlords to be right next to the exchanges and they are completely outstripping the profits from the average investors who think that they can actually trade and make money. It’s a joke, it’s unbelievable. The whole game –
LES LEOPOLD: One guy –
JASON HARTMAN: Is so [INDISCERNIBLE].
LES LEOPOLD: Catch this. One of these guys admitted that, in the last five years, he hadn’t had a losing day and the longest he ever held the stock – for him a long-term hold was 2 seconds.
JASON HARTMAN: [LAUGHING] God. That’s insane.
LES LEOPOLD: What value does that produce for the American economy? As far I can tell, it’s the equivalent of a hidden tax. Why should these guys be collecting a tax on everybody’s transaction? Instead, if we have a small financial transaction tax, it would more or less wipe out the high frequency traders and it would generate enough money to send every kid that wants to go to a public college and university in this country, two-year, four-year or whatever. They could go tuition free. That’s how much we could generate –
JASON HARTMAN: Well –
LES LEOPOLD: To the financial transaction tax.
JASON HARTMAN: The only part I don’t agree with you is if you let the government have the tax, they’ll figure out the way to waste it. [LAUGHING] and make the monster bigger and worse then –
LES LEOPOLD: I would put it to a trust fund. I won’t let that happen.
JASON HARTMAN: Yeah, but you know.
LES LEOPOLD: We couldn’t let – what’s the most important thing you’ve got to do in this? Right now, we have [INDISCERNIBLE] or trillion dollars with the debt, right? It’s one of the biggest thing –
JASON HARTMAN: Yeah, I know, the college, the student loan debt bubble is huge –
LES LEOPOLD: Right.
JASON HARTMAN: And the other thing to know about that is that it’s such a scam too because you can’t declare bankruptcy and get out of it. You’ll never get a second chance.
LES LEOPOLD: Exactly. Right. So I’m saying, instead of the trust fund to public education of this country, God knows you have to have a college education just about to get a decent job, you need to have college education. Why not make it the equivalent of high school now truly. So, here’s the way to pay for it. Create a trust fund and have the people who crashed the economy for us finally pay their dues.
JASON HARTMAN: Well, that’s the whole transitional thing but, you know, how to solve the problem, but at least let’s bring awareness to the problem, okay. So, a couple of things on the book, how to make a million dollars now? I want to ask you about, okay. So, one chapter is entitled rip off entire countries because that’s where the money is. Are you referring to Iceland there?
LES LEOPOLD: No, actually, I was referring to the first big hedge fund plan, first billion dollar trade was George Soros, [INDISCERNIBLE] on the Bank of England.
JASON HARTMAN: Oh yes, good point. Soros’ ill gotten gains, just like the Kennedy family’s origination. I’ve had Jim Rogers, his former business partner, on the show a couple of times. But tell us about Soros.
LES LEOPOLD: Well, Soros, it’s very interesting. It’s an iconic trade and the reason that it’s iconic is because a lot has been written about it. They justify it. And basically what happened was, as they were trying to put together the European Union, the various currencies, which were supposed to be held within a certain bond, and it was pretty clear that as the people recognized that England was going to have a tough time after the Berlin Wall fell, and Germany was worried about inflation. England had a tough time keeping the pound within the range. It was likely to be devalued but they didn’t want to devalue it because, if they devalued it, they’re violating the treaty as they raise interest rates to keep it there. There are mortgages tied to the Bank of England’s interest rate. So, they were kind of stuck. As far as the people saw that, they shorted, they bid against the pound massively. Massively, and then other banks in the United States joined in so they created this artificial run on the pound and finally England gave in and so Soros made a billion dollars. And the money came directly from the taxpayers of England. Now the irony, of course, is that Soros said that he’d be glad to stop this currency speculation once there was a European Union because, as a refugee from the Holocaust, he understood that it was good to get the country, you know, especially French, Germany, and England tied closer together economically, so they’ll never go to war again against each other. And that’s a wonderful sentiment. The irony, of course, is that the same thing is happening now, but instead of going after currency, now they’re going after the debts of various countries and they have the banks. So, they have the equivalent of the same kind of thing like in – gang up on a bank – they stayed in, put out some false rumors about how they were doing this to various banks, and then people start taking the money out of the bank. The value of the bank declines, and they make a bundle. They did the same thing with funds and other entities, so wherever you see trouble in Europe, you can be sure there’s piles of hedge funds trying to make it worse. Look, you don’t have to just bet, you can bet so big that you actually determine the outcome. That was the sort of the secret and they are still doing it.
JASON HARTMAN: Amazing stuff what happens at the highest levels of finance. You know, I think you alluded to this earlier, but step 9, as you talked about it in the book, is about betting on the race after you already know who wins. Can you elaborate on that a little bit?
LES LEOPOLD: Well, yeah, I think in the sense of that’s almost generic for what happened. It is wrong to view hedge funds on Wall Street in general, in casinos, you know, we would like to use that term. You don’t risk billions of dollars like you’re betting in the casino. High frequency trading because you’re working so quickly. You can actually see it before it happens. You know the outcome when you’re designing a security that’s designed to fail and you’re betting against it. You know the outcome when you are placing rumors, you know, false rumors to your colleagues, let’s say NBC. You know the outcome when you have insider trading. Each one of this is the efficacies of gambling. When you corner a market [INDISCERNIBLE] you know the outcome before you do it. So, that’s the key to success to hedge fund strategies. I used to think it was just that they had great models predicting the future about the facts. Now, it is trying to figure out the end of the horse race before – who is going to win the horse race before it ends and knowing for certain. Otherwise, why go to the risk of putting in the dollars? You just wouldn’t.
JASON HARTMAN: I think that it is the casino for all the traditional investors, the right investors, yeah.
LES LEOPOLD: Yeah, for the rest of it, yeah, right.
JASON HARTMAN: But for the big wigs, it is a rigged game. It is funny that people defend Wall Street as though it’s this capitalist tool that is a great thing. That it is a free market and this big player should be defended because you are attacking business. No, you are not attacking business. You are attacking fascism. These businesses are so embedded in the system that they control outcomes. It’s not like it’s a free market capitalist system as people may think. It’s just not that way anymore. It may have been that way one time but it’s not that way anymore. Okay. How do they claim that limits on speculation will kill jobs? That’s another way to think- .
LES LEOPOLD: I thought it was a mind boggling –
JASON HARTMAN: Yeah. That’s another way. They create this like fascist system. They get the government on their side to do their schemes, right?
LES LEOPOLD: Not just on their side. They get a tax rate. They have their own special tax rate called carried interest. That 20% you talked about, if they get other profits.
JASON HARTMAN: Uh-huh, the 2 and 20?
LES LEOPOLD: The 2 and 20. The 2 is taxed at the regular marginal tax rate, so that’s 39% now for this [INDISCERNIBLE] brackets. The 20 is the tax for capital gains, 20%, so they are paying half this much, most for their profits as they go. The alliance share is 90% of the money that they are earning. It is their money they are earning, right from their supposed investment strategies, which is their fee. They don’t pay anything, and so that is a special tax privilege the people who support that tax privilege claimed, but if you took that tax privilege away, if would cost American jobs, and that is the most ridiculous thought I ever heard anybody make, but they make it with straight face, and guess what? Most Democrats in the public made that claim. Even liberal Democrats have made that claim, and not because they are scared to death. They can’t think it out. They don’t want to mess with the hedge fund. There is too much money there and, in fact, there is another issue. When you touch the fund [INDISCERNIBLE] that I think is absolutely essential, which we have an oligopoly in finance now and I don’t think you are going to have free market capitalism and the financial oligopoly at the same time and tell the people who really care about free market capitalism they should be up on what’s going on in Wall Street right now. That’s one point I think you were getting me to think about by your last comment.
JASON HARTMAN: Oh, no question about it, you know.
LES LEOPOLD: The other one is the problem we equate wealth with economic value without even asking. So if somebody is rich, they must be smart, they must be producing something valuable in the market as they would have not gotten rich in the first place. It becomes the totality, so the hedge fund guys are looked up to like they are geniuses, that they’re just really super smart investors. All these negative stuff I’m talking about, people are paying no attention to that in the highest circles. value.
JASON HARTMAN: Right.
LES LEOPOLD: Now, that – [INDISCERNIBLE]
JASON HARTMAN: And unless, by the way, I want just to have mentioned something on that. I think that it is generally true in the world of real things, the problem is –
LES LEOPOLD: Well –
JASON HARTMAN: This is a world of smoke and mirrors. There’s no real value necessarily being created. I mean there may be occasionally a fund, funds and investments and the investment does good for the world like farm land that provides food or something like that. I mean that certainly happens but in large [LAUGHING], lot of these are just making money by moving things around and manipulating them. It’s a game of smoke and mirrors. This is what I call a smoke and mirrors economy versus the real economy. The real economy deals in real goods and services.
LES LEOPOLD: Exactly. I think a way to make it a clear-cut comparison is we’ve forgotten what the bank really is or what an investment vehicle really is. You just described it. It’s supposed to take our savings and then transform savings into investment. Community banks will take in peoples’ deposits and then loan it to businesses in the form of mortgages or in the form of investments in business. And that’s what fosters economic development and it’s – we need it. The Bank of North Dakota does that, a public bank, and does well. It is when banking and investment become hedge funds inside the bank, it is called improper trading.
JASON HARTMAN: Yes.
LES LEOPOLD: And outside it’s called a hedge fund but basically it becomes a vehicle to suck profits from everybody else. They don’t care about investing anymore. They care in terms of doing real investment in an economy. It’s the money that they’re not investing in a real economy. It’s the money that they are putting in and out of markets to gain advantage and to basically siphon off the general capital of the economy as a whole. This is something that we virtually put a stop to during the Great Depression and it basically didn’t happen all the way from the 1930s up to about the 1980s.
JASON HARTMAN: What are real changes? I mean, you are probably going to say [INDISCERNIBLE] was one of them, but please outline how it changed back in a bad way, in a negative way.
LES LEOPOLD: Yes. Okay. What happened was virtually every form of the regulations set in, so one that we mentioned was the allowing, it used to be that investment banking and this what we called gambling, although it’s not really gambling but that kind of speculative stuff within one kind of bank. Our insured deposits were another kind of bank, so that meant that if they lost their money and they went under, it wouldn’t affect the taxpayer. Well, that changed. We got the Glass-Steagall Act and they basically can co-mingle the institutions and, of course, we saw how well that worked out. That was just one of the many. This fancy instrument, like the ones that were designed to fill these mortgage securities are called derivatives. I try to take people through that very carefully in the book, ah, how it works? But they were deregulated, so what happened was they could bet on anything. Look, for example, in housing. You can’t take out an insurance policy on your neighbor’s house. They figured out 800 years ago that if you did so –
JASON HARTMAN: You’re going to burn it down. Right
LES LEOPOLD: That house is likely, right, yeah, it’s likely to burn down.
JASON HARTMAN: It’s a conflict of interest. Yeah [LAUGHING] All right, is that –
LES LEOPOLD: Well, we allowed that to happen all over finances, now, to a hundreds of trillions of dollars that are taking place, and it’s not regulated so something goes wrong. It goes wrong really big time and is now a major contributor to financial crisis. Simple things like credit card interest rates were deregulated. The savings and loan industry was deregulated until it obviously totally imploded and wiped out saving institutions as we know them. The idea of letting banks get bigger and bigger, ah, we threw out anti-trust regulation on banks. Right now, you know, the top five banks have 60% of all the banking in the country.
JASON HARTMAN: Well, yeah, but what really is the anti-trust rule? I mean, if Bank of America tried to buy – not that they be suitable – [LAUGHING] but you know, or say City Bank tried to buy [INDISCERNIBLE] and Wells and Chase, right, that would be something I would consider a monopoly. I mean, you do have a choice going [INDISCERNIBLE] trust point yet, are we? I mean, agreed that the banks are too big –
LES LEOPOLD: Oh no.
JASON HARTMAN: And they’re [INDISCERNIBLE]
LES LEOPOLD: So far – no, no, no. We are so far behind it. Oh my God! Because look, there are so few banks that they literally can rig all the basic interest rates, so the [INDISCERNIBLE].
JASON HARTMAN: Yeah right, every one.
LES LEOPOLD: At least 15 big banks that set that rate, so they got together included, ah, because there’s only 15 banks of the international banks. It is easy to do it. I think there’s [INDISCERNIBLE] lot to consider these 19 systematically important financial institutions now in the United States. [INDISCERNIBLE] mortgage rates as low they are, they are higher than they should be. They get money at zero from the federal government and loan it out at a rate, if it was a truly competitive market place that there were many, many institutions doing it, they would be lower. It’s just harder to achieve when you have more institutions competing for the business. You know size matters and the argument always was well, maybe they’re big in this country but it’s what you need internationally in order to compete with other banks. You need giant banks to go along with giant corporations and I think they definitely [INDISCERNIBLE] problems, but I think there is a bigger problem. The bigger problem is that I’m not – this is weird to say – but I’m not sure private enterprise works in high finance anymore. I think the model, it’s very interesting that in North Dakota, one of the most conservative states on the planet, has a publicly owned bank. It’s a wholesale bank, so it’s more like a Wall Street bank if it was much smaller. Most people don’t know this –
JASON HARTMAN: It’s the only state unless they were, they were even considering –
LES LEOPOLD: Right.
JASON HARTMAN: There was even a bill in North Dakota last year, you know, keep in mind North Dakota is a rich state, you know, [INDISCERNIBLE], okay so it’s [LAUGHING] so a little bit different –
LES LEOPOLD: It has been oil rich since 1919.
JASON HARTMAN: Fair enough.
LES LEOPOLD: For the bank.
JASON HARTMAN: Fair enough, but the other thing is, you know, they actually had a bill to eliminate property taxes there. I think property taxes are a ridiculous concept. You pay taxes on the money to buy the property and then you buy it but never really actually own it because there is a perpetual lien against the property through taxes, which just encourages people never to pay off mortgages because they can’t really own it free and clear. Again, it’s the government creating malinvestment but it didn’t pass in North Dakota, so you still do have property taxes but was just interesting. That state is well-managed enough to have that possibility.
LES LEOPOLD: The top bank officers of that public bank average about a $130,000 a year, that’s with the –
JASON HARTMAN: Oh you mean –
LES LEOPOLD: So forth.
JASON HARTMAN: You mean they don’t get like $70 million?
LES LEOPOLD: Right, they get –
JASON HARTMAN: [LAUGHING].
LES LEOPOLD: They get less than the Wall Street bank. Imagine, here’s the other thing. Right now, when you pay your taxes, you pay it for a hunting license or fishing license, where does the money go? Most people think it goes to some – you know in – let’s say capital of Phoenix. No, it goes to a large bank, usually a Wall Street bank because they are the only one large enough to handle what the state needs or cash management. That’s a trillion dollars a year that all of our tax money goes to a Wall Street bank. Except the one place that does not happen is in North Dakota. The tax money and fees go to the bank in North Dakota. If we had 50 state banks, you’d be taking a trillion dollars away from Wall Street. We also could replace Wall Street controller, the Federal Reserve. Those 50 banks could sit on the Federal Reserve board instead of Wall Street banks. That would change the ball game as well. That would be the beginning of change to the financial system that would matter because then you’d be moving power away from the gambling institutions and moving it towards real banks. And the state banks, by the way, don’t compete with the community banks. They support them, so there’s 80 community banks in North Dakota supported by their partnership with the Bank of North Dakota. There’s a great group out in California called the Public Bank Institute. I’m not sure when this is gonna be on the air, but they are having a conference on June 3rd and 4th, or 2nd, 3rd or 4th, in California. People should check them out. They are very, very, smart people who I think are raising some important questions that we all need to look at.
JASON HARTMAN: Oh, Les, give out your website and tell people where they can get the books.
LES LEOPOLD: Okay, it’s How to Make a Million Dollars an Hour. People should be able to get it at any bookstore and get it from a [INDISCERNIBLE], on the internet or from Barnes and Noble or from Amazon –
JASON HARTMAN: And, by the way, on Amazon four and half stars, four and half stars –
LES LEOPOLD: I’m doing okay.
JASON HARTMAN: Reviews, yeah, doing well.
LES LEOPOLD: I thank everybody for that, and right now, the website of my company is under construction but you can find me if you go to the Altnet, if you Les Leopold Altnet or if you go to Les Leopold [INDISCERNIBLE] you see a list of a lot of my articles that I’ve written the last couple of years.
JASON HARTMAN: Excellent. Well, hey, Les just wrap it all up with a quick closing thought if you would.
LES LEOPOLD: My closing thought is this. We have to understand this stuff. We can’t leave it to experts. If you want to be citizens in this country, you’re gonna have to understand something about high finances. We have to know how hedge funds work and I encourage everybody – not necessarily through me, but get yourself an education on it because it really matters.
JASON HARTMAN: Good stuff. Les Leopold, thanks for joining us today.
LES LEOPOLD: Thank you so much for having me.
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Transcribed by Joseph
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