In this episode of the Creating Wealth podcast, Jason Hartman welcomed Macro Watch’s Richard Duncan back for a look at fiscal policy, today’s interest rates, and the shrinking money supply. The pair discussed how the trade imbalance with China has enriched the nation and brought millions of Chinese citizens out of poverty. They also covered how the general public has no idea how much the Fed is tightening and the impact it will have on interest rates.
Before this, Jason Hartman reminded listeners that they are valued and appreciated, and that if they missed out on any of the five episodes published the week before last Christmas, he encourages them to go back and check them out. He also mentioned the Venture Alliance Ice Hotel trip and the upcoming Jason Hartman University event in San Jose.
Adjust Your Strategy
Jason Hartman begins the episode by reminding his listeners that he appreciates and pays attention to them. Recently, a listener requested that Richard Duncan return for another discussion, and he is on the show today to cover the topics of interest rates and the shrinking money supply.
Hartman also states that there were five episodes of the podcast published the week before last Christmas and he encourages listeners to go back and make sure they didn’t miss any of the extra episodes. Regular episodes are published Mondays, Wednesdays, and Fridays.
Hartman notes that Richard Duncan seemed a little gloomier during this interview compared to other visits. He’s experienced and has great material on Macro Watch, though his views are a bit cansian. Hartman admits he was surprised that Duncan was a little more pessimistic this time around, though he explains that he isn’t a Pollyanna optimist himself.
He explains that as investors, it’s important that we adjust our strategies. We can either aim for capital gains, increasing our income, or an acquisition strategy. There are always ways to adjust your strategy in any economic environment.
There are a lot of events coming up in the near future, a lot of chances to come and hang out with Jason Hartman. On March 3rd in San Jose, the Jason Hartman University event will be held. It’s designed to cover the math of real estate, self-management vs property manager techniques, and market evaluation. For more information on this event, visit www.jasonhartmanuniversity.com.
The Venture Alliance Ice Hotel trip is coming up as well. Non-members can join the trip too, and there is a new page covering the event to be released soon. Hartman notes that he personally can’t wait to see the hotel with his own eyes. Ice is lovely when sculpted. For more information on this event, visit www.jasonhartmanicehotel.com.
The Venture Alliance Mastermind trip to New York is scheduled to take place in May, and for more information on that event, visit www.venturealliancemastermind.com.
Asset Inflation and Millennials
Hartman introduces Richard Duncan to discuss the shrinking money supply, who has appeared on the podcast three or four times in the past. He is an economist and author of Macro Watch, which contains videos and websites on his views of the economy. At one time he worked with the World Bank and IMF, so he has a very impressive resume. He lives in Thailand, so it is 8:00am at his location and 5:00pm in Las Vegas at the time of the interview.
A theory that Hartman mentions having is that we have had low inflation over many years, which has been the result of globalization. When products are made overseas, there is the opportunity to get better prices for those products. Technology has been deflationary and with Central Bankers pumping money into the economy, there has been some quantitative easing as a result. There has been a battle between bad fiscal policy and technological deflation.
He notes that there has been massive asset inflation though, and that with it there are classes of people in the US, Generation Y with 80 million strong, that are going to be largely left out of the investor class. If this is projected forward ten years, and this generation doesn’t join the investor class the way other generations have, what does it mean? He explains that there are a lot of underemployed people in the US, and that things are not the same as they once were. Young people used to be buying homes in nice areas.
Duncan agrees, stating that young people can’t buy like they could in the past. Some people may have lost money in Bitcoin, he jokes. He also explains that projecting this ahead is hard to see, but for now it’s an issue that doesn’t look like its going to go away anytime soon.
Bright Future from an Asian Perspective
Hartman mentions that young people are able to take advantage of more of the technological developments, with devices and cars being better than they once were. There is also a lot of Gen Y participation in the sharing economy, which is also deflationary. Now, people don’t have to buy their own cars or homes.
Duncan explains that he has spent the last thirty years in Asia, and that if this is looked at from an Asian perspective, it’s a brighter situation than if it is looked at from a US perspective. Trades that started in 1980 have led to some weakening in prices due to buying from low wage countries. This has led to lower interest rates and lower costs of goods. In the US, it has brought about de-industrialization, resentment from US citizens, and less jobs.
From an Asian perspective, these trades have pulled millions of people out of poverty over the decades. From their points of view, this is a good situation. It’s been very good for China, as their economy has become huge. A transformation has happened because of the arrangements with the US at $1 billion per day in trading.
Who Benefits Most from US/China Trades?
Hartman mentions that President Trump made a point on this situation, debating who is getting the better deal from the arrangement, the US or China. The US ships fresh dollars to China and we get the benefit of the goods here. Though there are benefits, the middle class in this country has been hollowed out.
Duncan states that China does have the better end of the stick, and though we have done well, we still do have some people who have lost out. China is getting 1/3 of a trillion dollars from the United States. It has been an economic boom for their whole country, with many jobs being created for Chinese citizens. There has been development of a middle class in China, which is so different from what it was in 1980. The US, however, is stagnant.
He also points out that it’s important to consider which American perspectives are being impacted. The banks have done well, as have corporations. Their profits are expanding due to the new low costs of labor. They’re doing great, so this has been a bonus for the higher ups.
Ordinary citizens are going deeper into debt, and it benefits leaders and the government. When China’s trade sells goods to the US, they’re paid in dollars. China then takes these dollars and buys US government bonds and US real estate, which has pushed up real estate prices in the United States. Duncan explains that certain classes benefit, but the middle and lower-middle classes have lost out. The high-paying jobs in factories are gone now, and wages have become stagnant. These classes are not pleased, and it is easy to see why. There used to be a lot of access to credit, so that people could refinance their homes and still do well. Now, that option isn’t as easy to obtain.
Economic House of Cards
Hartman notes that there has been a lot of distortion in the market, with factors like government programs skewing the numbers. He states that he wishes there was a real wealth gauge, because at this point the whole economy is built on smoke and mirrors. We saw in the recession that our economy is a house of cards. Pulling away one card causes the whole house to fall.
Duncan states that the house of cards fell in 2008 and institutions in the United States were on the brink of failure. The economy has since re-inflated and wealth is now 1/3 higher than it was in 2007.
Hartman questions how much of this wealth is real wealth and how much of it is levered or credit-based wealth. He notes that if your real estate portfolio is worth X and other assets are worth X, when destruction of credit happens, those things are taken down. He explains that this is why he advises against investing in condos. When there is trouble in the developments of condos, a lot of things can go down. Financing can disappear, and the swing is severe. Many factors are based on credit.
He also mentions the Fed and asks if they’re tightening more aggressively than we’ve noticed. They’ve already announced that they plan to raise the rates a few times this year.
The Fed is Tightening More Than People Realize
Duncan explains that credit is growing a lot faster than the economy. Since 1980, the ratio of total debt as a percent of the GDP was 150% and now it is at 370%. He notes that this has happened because interest rates have fallen. The government bond yield was 15% in the 1980s and now it’s at 2%.
People were at once able to borrow more and buy more things, but now the Fed has started tightening and it’s reversing quantitative easing. During the financial crisis, there were three rounds of quantitative easing, and the Fed created $3.5 trillion out of thin air and used it to buy government bonds.
They created money, pushed up bond prices and pushed down yields. It brought the economy back, but now they’re doing the opposite, destroying money. Duncan explains that creating money caused asset prices to go up, and destroying money is going to cause asset prices to go down.
Hartman questions whether this should happen, or if it’s really a bad thing. He points out that the Fed is always trying to engineer the economy, when the market should do that. He asks whether we truly need the elite class handling the economy, or if we need the adjustment.
Duncan explains that the Fed wants to slow the stock market down, because it is going up too rapidly. Another bubble is likely to form, then pop and create another crisis. They want to see it slow down. On the other hand, he says, a main driver has been inflating asset prices. As people have had more credit and bought more things, it has boosted consumption, economic growth, and jobs. The Fed does not want a crash.
Hartman points out that the goal of the Fed is to have gentle swings and adjustments in an ideal scenario.
Destroying $10 Billion Per Month Since October 2017
Duncan agrees, and mentions that starting in October of last year, the Fed started destroying $10 billion per month, until this January, when they increased to $20 billion per month for three months. He notes that as of now, most people have enjoyed the market booms, and now the Fed is tightening. In April, they are going to destroy $30 billion per month. In the next quarter, it will be $40 billion. By October, the Fed will start destroying $50 billion per month.
This will cause interest rates to rise significantly if they carry on with this. Mortgage rates will also climb, and the stock market might fall a bit.
Hartman asks his common question, compared to what? He asks about the total size of the pie to understand what we are truly dealing with.
He also explains that on properties, he divides the real estate markets into three types: linear, cyclical, and hybrid. He recommends linear, or boring markets, not the big markets in large cities like New York or Los Angeles. He asks if the money destruction is going to be very pronounced in those markets.
By the End of 2019, the Fed Will Have Destroyed $1 Trillion
Duncan states that by the end of 2019, the Fed is going to shrink the size of their balance sheet by 23%. This means that they are destroying 23% of base money, and it’s a huge amount that will push asset prices lower.
He states that in terms of housing, his family is in Kentucky and over the years they have experiences quite a bit of appreciation over the years.
Hartman asks if the Fed is going to make course corrections along the way, and Duncan thinks that they will. He states that they’re concerned with stock, being that it has taken a tumble at only 41 days into the year. Stock had a good January but this month, the gains are gone.
He states that the reason that stock fell so sharply was because tenure bonds fell from 2.3% to 2.9% at one point yesterday. Money is being sucked out of the economy to push interests higher, and tax cuts make the budget deficit larger. The government has to borrow more, and it pushes interests even higher. Rates increase across the board.