George Gilder is Publisher of the Gilder Technology Report, Chairman of the Gilder Group, co-founder and Senior Fellow at Discovery Institute, an original pillar of Supply Side economics, and author of, “KNOWLEDGE AND POWER: The Information Theory of Capitalism and How it is Revolutionizing our World.”
The information age is changing our country’s economics. Gilder explains his new paradigm for kick-starting economic growth and how companies outside the tech sector can benefit from Silicon Valley-style information flow. Gilder believes the risks inherent in free enterprise relate to accumulation of knowledge. Gilder also discusses the drivers that lead to poverty as well as the most efficient ways to eradicate poverty.
Female Voice: 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 then you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk but walks the walk.
He’s been a successful investor for twenty years and currently owns properties in eleven states and seventeen cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman: Welcome to the Creating Wealth Show. This is your host Jason Hartman and this is episode number 324, and we’ve got some great stuff for you today and some great stuff coming up on future episodes as well. I recently recorded an episode with Meredith Whitney, the banking analyst and we may play her next for 325. Not totally sure but she’ll be coming up soon, and if you don’t know her name, she’s rather famous because she basically called the banking crisis when a lot of people were unwilling to admit it back in 2007. She looked at Citigroup pretty closely and said this company is in trouble. And she’s a frequent commentator on all the news media outlets, Fox, CNN, CNBC, etcetera. So we will have her on real soon, but on this episode, we’ve got a fantastic guest as well and that is the very famous George Gilder.
If you haven’t heard of George Gilder, you’re missing out because this guy has written about twenty books and I had the pleasure of meeting him on a Forbes investor cruse in Scandinavia and Russia several years ago, about twelve years ago or so and have been following his work and he’s just really got some phenomenal insights into technology, economics and social issues, oddly. He’s got a few books on that subject as well.
So, we will have him here in a little bit but first I’ve got Michael here to help me with the intro portion of the show and we’ve got a few things we want to share with you. Michael, how are you doing?
Michael: I am awesome.
Jason Hartman: Good.
Michael: I’m really enjoying the beginning of summer. I’ve been out fishing with my brother-in-law that you met when we went to Belize.
Jason Hartman: That’s right, yeah. He got a new boat, huh? A hole in the water you throw money into.
Michael: Yeah, absolutely. Gas is very expensive. We go out at San Diego and we go down to Mexico for full days and it’s pretty pricey, but the yellow tail have been really good and we’ve had some great days. It’s been really fun.
Jason Hartman: Well you know what they say, the one thing better than having a boat is to have a friend with a boat.
Michael: Or in my case a brother-in-law with a boat, exactly.
Jason Hartman: Absolutely, it’s a pretty good deal. I gave Sarah a really hard time on the last episode because you may not know this because she bought a boat too.
Michael: Oh, I didn’t know that.
Jason Hartman: And I’m like you know, as soon as everybody’s making some money they look for ways to throw it away, and I’ve been there and done that, and I promised myself I’m not going to do it again the next cycle around. But that’s kind of just human nature. It always goes that way.
There is some really interesting stuff happening in the real estate market. We’ve talked with you and with other guests that I’ve had on the shows many times about hedge funds and their role in the housing market and you know, how they’re influencing it in a good way and in a bad way and ultimately what I think will happen is they will get out of our business and they won’t like it.
We do have some of these hedge funds as clients of ours and Steve is working with a few of them and he’s been acquiring properties for them through our network and it’s just kind of interesting to see how they behave and how they act. And there’s a recent video on Fox Business with real estate consultant, John Burns and I know John personally. I’ve had him on the show before way back to like episode — I’m going to take a wild guess here, episode number 133. You know I might actually be right on that. That’s a total guess, but it was obviously a long time ago because we’re on episode number 324 here with George Gilder today.
But John Burns, you really published us some good stuff and there’s an interesting video that I know you’ve looked at and I wanted to share the sound track of it with our listeners today and I know you and I will have a couple of comments on it. So, why don’t we do that now and then we’ve got a few other things we want to talk about as well. Are you ready?
Michael: Yep, ready.
Jason Hartman: Here we go.
Female Voice: Keratin Holdings was one of the early investors to pump money into the U.S. rental housing market and now with more investors on the rise and more investors jumping in, the hedge fund’s actually calling it quits on the landlord business. But what does this tell us about the housing recovery? Joining us now John Burns CEO of John Burns Real Estate Consulting. John, I’m glad you’re here because I think this is a really interesting angle to the story that hedge funds that got in early are now starting to pull out. How come?
John Burns: Well, this isn’t an investment for everybody. First of all you need to be a real estate expert and not all these funds are real estate experts and —
Jason Hartman: Well, that’s good advice, be a real estate expert. See one of the reasons I knew they wouldn’t stay in the game, right Michael? I just had to interrupt it right there for that comment. Here we go.
John Burns: — some groups aren’t willing to place their bet on home rise appreciation and I think that’s the right bet but some folks just aren’t willing to do it.
Female Voice: But part of it too is they’re not getting the rental price that they thought they were when they got in, right?
John Burns: Well that’s right, so if you think this is just an easy income property and it’s a lousy return from that and you’re trying to earn a fifteen to twenty percent annual return which some of these hedge funds want, this is not the investment for you unless you’re willing to bet on home price appreciation.
Jason Hartman: And see, so what he’s referring to here is some of the hedge funds investing in some of the more speculative markets and later he will give the geographical areas and one of those of course is California where you have some pretty good appreciation actually, but the rental yields just never work in a market like that. And for our regular listeners of course Michael, they know that what we’re interested in investing is rental yield cash-on-cash return and overall return on investment, dictated by income because income is so much more reliable than appreciation.
But hey, appreciation when it happens is the icing on the cake and that is darn pretty good icing, especially when you combine it with leverage and inflation induced debt destruction. So any thoughts on that before we go on with the video?
Michael: I just think it’s interesting. He’s saying they’re not getting the returns that they’re looking for and we are at record high rent levels, in simplistic terms, you know nation wide. So what calculations were they making when they were guessing what kind of returns they were going to get?
Jason Hartman: Well I mean, think about it. That’s a great question and why I made the comment is because I’m sure a lot of our listeners were dissecting this a little bit. They were thinking that same thing. Well, if they’re investing in a California property with the rent to value ration of point three or point four or maybe even point five, that’s not nearly good enough. They’ve got to get an RV ratio of point seven, point eight, one percent or above that one point one, one point two percent. You know in a typical deal on a California property would be — I mean you may know more about this than I, but you recently were selling traditional real estate in Newport Beach and the surrounding cities in southern California, and if we just look at an inexpensive California home outside of one of these prime coastal areas and say that property is five or six hundred thousand dollars and it rents for only twenty five hundred or three thousand dollars, which would be a point five percent RV, half a percent, not good enough in my — in our opinion. And compared to the markets we’re in where they can get one percent or better, of course they’re not getting a rental yield. They’re in the speculation game. They’re betting almost entirely on appreciation, aren’t they?
Michael: Yeah, that’s — we never brought it up but remember I sent you that — and here I’m looking at it again, that apartment building in Newport Beach that a broker sent me that they just closed nine units for three point two two five million, and there was a three point seven five percent cap rate in Newport Beach.
Jason Hartman: Oh my God. I mean listen to that. So that’s nine units for three point what million?
Michael: Three point two two five.
Jason Hartman: Okay so, three point two —
Michael: Just under three and a quarter.
Jason Hartman: — so that’s about three hundred thousand dollars a door.
Michael: Three hundred sixty thousand, almost.
Jason Hartman: Oh my gosh. Oh yeah, because it’s nine units. I’m just doing a quick math divided by ten.
Jason Hartman: Three hundred sixty thousand dollars a door and I bet you the average rent per door is about fifteen hundred bucks, right?
Michael: I mean I guess we’re just guessing. I don’t know what the rents are, but you know when this email came out —
Jason Hartman: That just doesn’t work.
Michael: — I thought is the broker bragging to other sellers that look at how low I got cap rates, which means look at how high of a price I got?
Jason Hartman: How much I got the buyer to overpay for the property.
Michael: Yeah. Because I was thinking, there’s no way he represents the buyer on this because you wouldn’t want to advertise that.
Jason Hartman: Well though, you know what if you have the corrupted California or New York City or you know any high flying expensive area mindset, you might be bragging to buyers that that was a great deal. I mean there’s no shortage of people that just don’t know what they’re doing. They think things are a good deal that’s really a bad deal and then at the same time they’ll think something is a bad deal when it’s a good deal. And this largely stems from myopic thinking that’s very provincial and based on these geographies, the whole concept of oh this is Newport Beach, people will always want to live here. Well maybe, but at what price that’s the first question, and then this thinking that people don’t understand that every indicator, every percentage should be looked at on a relative basis. And so when you look at the relative basis, when you look at things like an RV ratio, it just simply doesn’t work.
We don’t use cap rate much as a metric because it’s faulty in some ways, it doesn’t include enough information for my taste, but that’s a terrible cap rate okay if you’re looking to cap rate.
Michael: Yeah, and just to bring it back, it’s funny that the hedge funds aren’t getting the returns they want. I mean this is what happened to every “investor” during the bubble that had to declare bankruptcy and you know foreclosed everything. They didn’t get the returns they thought they were going to get. Obviously the hedge funds are going to do a lot better because they’re actually going to make money, just not as much as they hoped. They’re not going to get wiped out like in the bubble, but they’re kind of following a amateurish mistake of miscalculating the anticipated appreciation.
Jason Hartman: Well I think the other thing with the hedge funds is with any fund and you know one of the reasons I say pools are for fools and I recommend to everybody be a direct investor and own and control things directly. It’s commandment number three, thou shall maintain control is because you know it’s not their money. People — of course a hedge fund manager or a mutual fund manager or any manager of any kind of deal or fund or general partner, you know of course they want to get the highest possible return, but it’s not like they’re losing sleep over it. It’s not like their whole life is at stake over this because it’s not their money. It’s somebody else’s money. We’ve noticed the behavior of hedge funds in the market that a lot of times will just overpay for properties. Why wouldn’t they, it’s not their money. You know when our clients invest, they’re spending their own money. When these funds invest, they’re spending someone else’s money.
Michael: Yeah, and it’s a different — I mean I guess we’re using hedge funds in a general term to apply to some of these institutional investors. So you know like Blackstone and Colony were really private equity that have now gone —
Jason Hartman: Good point.
Michael: — and created public funds, so when they were in the hedge fund like my brother works for, they pride themselves on their track record of return. The second a company goes public, sure your track record matters but you don’t have the sophisticated investors anymore scrutinizing the returns you’ve generated over a period. You just have people throwing money in and now they have just hundreds of millions of dollars without the same —
Jason Hartman: Same kind of scrutiny, yeah.
Michael: — yeah, yeah and even if they’re private equity, they have minimum returns that they have to give back to investors if they want to get the promote, which is that bonus that the private equity companies get on deals.
Jason Hartman: The bottom line is be a direct investor.
Jason Hartman: That’s my advice. Hey, let’s get back to this video.
Michael: Let’s just go.
Jason Hartman: We’ve just got a couple of minutes of this, okay.
John Burns: And not everybody’s willing to bet on it. My personal view is that we have a lot of home price appreciation going on and if the fed keeps rates the way they are, we’re going to see a lot more.
Female Voice: So then it’s getting harder and harder to buy cheap properties. That’s part of the problem with these hedge funds, right?
John Burns: Well it’s such an almost obvious bet at this point that everybody’s piling in —
Female Voice: Yeah.
John Burns: — and we’re seeing mom and pop there, we’re seeing flippers now in the market. Good God, you only own the home for a couple of months and make a profit. You know I don’t think we’re in a housing bubble yet because prices aren’t out of line in relation to incomes, but I think it’s time to start the conversation to make sure that we don’t end up in another one.
Female Voice: But you know the flippers are in and you know you hate to say you know, Joe Main Street is in, does that mean it’s a bad — it’s bad. It’s going to get to that point where they’re in too late, the money’s been made and they’re behind the eight ball.
John Burns: Well that’s right. At some point we’re going to have a recession or something bad is going to happen and they’re going to get stuck. But for right now, they’re getting in at a pretty decent basis. They’re not getting mortgage financing at least from federally insured banks, but you can see that starting to play out in the next couple of years, is my view.
Female Voice: Say what you want I guess about the hedge funds and whether or not they belong to the market to begin with, but they did sort of set a floor on home prices, didn’t they?
John Burns: Oh, these guys have absolutely saved the housing market. They came in, they cleaned up some neighborhoods, I mean they’ve done a huge social benefit and at the same time they’re going to make a great return for themselves.
Female Voice: Okay so, how are you consulting your clients? Where’s this housing market right now?
John Burns: Well we’ve been helping them pick the geographies around the country and so early on it was Arizona and then it was California, Nevada. Now it’s Atlanta, Florida and the next game is the Mid West. And three and a half to four percent interest rates will cause rising home prices everywhere and then at some point you’re going to get — affordability is going to get out of whack and then that’s when you want to get out.
Female Voice: I’ve heard that more and more that banks are loosening their standards a little bit so more and more people are available to get some money. That will kind of set the ball rolling, won’t it?
John Burns: It will and I don’t think it’s going to be the big banks. They’ve got fined heavily this time around. I think they’re going to be conservative. It’s going to be start up banks. You know the former execs from subprime companies are out there and they know how to play this game and I think that’s exactly who we’re going to see play this game all over again.
Female Voice: Yeah, and then it’s de javu all over again. You didn’t mention the northeast at all. Where do we fall into this, because I feel like we’re kind of behind the eight ball too in the recovery process.
John Burns: Yeah, the northeast is — as I said, it started in the west, worked down south and then is coming up to the northeast and mid-west, so I think you’re next. Good news.
Jason Hartman: Good news, except you can’t get any rental returns in most of those areas, that’s the only problem. But good and interesting stuff. Any closing comments on that before we move onto the next article?
John Burns: No. You know I think John sums it up really well. The reporter or newscaster kind of touched on though still kind of a uneducated view though. She made a comment about investors potentially getting burnt coming up, which to me just shows she only has a single dimensional mindset that people buy for appreciation and wasn’t really looking at the other dimensions of real estate that we chose to invest for.
Jason Hartman: Right, right and I will say it’s a multi-dimensional asset class, so that’s one of the great things about it. But hey, let’s talk about interest rates for just a quick moment if we can. We’ve got to get onto George Gilder here, but on the interest rate thing I mean rates are bumped up a little bit. What are you seeing out there and then you also what is the feedback from clients you’re getting if any so far?
Michael: Well we know interest rates — we’re seeing some news events all over the world right now and there’s definitely some market sentiment world wide that risk has not been appropriately been priced into the risk of investment. So just to keep it simple for the audience, basically the fixed income markets which are the bond markets have been in record low yields especially junk bonds, and people are finally starting to realize is that we need to bump up the interest rates a bit because it’s not really truly reflecting the risk and we need to make people more aware of the risk that’s out there.
So we’ve seen even like China bumped in trading or lending rates quite a bit, like from two and a half percent to thirteen percent in a month, a huge increase, and you know we’re seeing it here that the federal reserve is being a little more optimistic on the economy, which means they’re going to be a little lesser on the quantity of easing. And in the last two weeks we’ve seen interest rates go up about a half a percent, so we’re seeing most loans now, where we were you know a couple of months ago at like four and a quarter for investors. We’re seeing those at four and seven eighths to five to five and an eighth depending on the terms of the loan size, etcetera.
Jason Hartman: Still incredibly low rates by historical standards and now this is the first time in history that we have very low rates and very low prices by historical standards and of course the adjustment for inflation even lower at the same time. It’s like you never get both of those at once. You either get low rates and high prices or low prices and high rates. You know they always say you can have one thing or the other. You can have price or you can have terms and now you have both actually, but that may be disappearing. We’re seeing prices inch up, we’re seeing interest rates inch up and the urgency is definitely there.
Now ultimately, there’s always an equalizing factor to all of this stuff because rents will eventually follow and adjust to this but there’s a lag time and that lag time could be a few years easily because rents inch up rather slowly compared to prices and of course interest rates can be very volatile.
So the bottom line out of everything Michael said and out of everything John Burns said is urgency. Get off the fence and make decisions and do more buying because there’s some very favorable things. Of course they’re not as good as they were a year and a half ago, and they’re probably never going to be again. That ship has probably left the dock, but still pretty good.
Michael: Yeah. So that’s exactly it. You know we’ve been trying to harp a little bit on people that they always want the deals of yesterday and this is just another reminder that you know we’re probably not going to return to those record low mortgage rates of 2011. We probably could stay in this range for six months or even longer, but people just need to be mindful that a big part of our game is locking in low rate, long term fixed debt and every little bump is going to eat away a little bit at your return. So, if it looks good today, don’t hesitate, make that move.
Jason Hartman: Yeah, absolutely and one of the important things is managing our own psychology and managing our own mindset. And with that, when you look at a situation like your expectations as an investor, the expectations are always back to yesteryear, back to the time I could have, should have, would have, and you don’t want to be that could have, should have, would have person. You’ve got to adjust your expectations hopefully before the market so you’re seeing what’s going to happen in the future. You look at all the indicators, you look at all the facts, you look at the dynamics of the economy and you think gosh, we’ve got Generation Y, they’re going to be forced to rent for quite a while. They’re family formation’s going to be later. We’ve got retiring baby boomers that are moving to a lot of the markets that we recommend those some type markets with low cost of living. We’ve just got all these things that are at play together. You’ve got the un-funded entitlements coming which are largely inflationary in our opinion and just a whole bunch of factors coalescent.
So, you’ve got to see the market realistically as it is today and be willing to jump in and make decisions based on reality not what you were looking at when you started getting interested in this two years ago. That’s when of course you should have bought as much as you could. But if you didn’t do that, adjust the expectations for today and for the future so that you’re looking forward. You can’t do anything about looking back. Looking back is just a cancelled check. It’s done, it’s over, it’s a memory, it’s nostalgia. Today and the future is the only thing you can control. You can’t change the past as we all know.
And speaking of this relative philosophy, you posted an article in our inside forum here, the one that we use inside the company about how appreciation shifting from cap rate compression to the real growth. And this largely applies to the commercial real estate market that was published by a company called Costar and the Costar group is you know like a research and MLS for commercial real estate I guess is a proper way to put it, but tell us a little bit about your thoughts here.
Michael: So they’re highlighting that most of the gains at property prices, specifically commercial prices, in the recent years have really been because of cap rates being compressed. So you know when I talk to my brother-in-law who’s a big — what is it, he’s a big retail commercial agent, he leases out shopping centers. The main thing, there’s a lot of people with a lot of money in bank accounts, interest rates were virtually nothing. They had nothing to invest in. So you know people would say I have five million, I’ll go buy a shopping center. Well all that money started chasing all these retail properties specifically and drove the prices up and the cap rates to record lows.
So it wasn’t like there was any other real reason that incomes weren’t taking off on these properties, justifying increases in purchase price, it’s just said there was a lot of money on the sidelines and no other better investment options. So it came in. So they think that there’s kind of an end to this now in terms of compressing these cap rates down and that we should see real growth for real reasons in these commercial properties.
Jason Hartman: And that’s the concept of TINA. TINA is an acronym and you just alluded to it. TINA, T-I-N-A means there is no other alternative. So that’s what money does, it goes to where the best alternative it can find. And so that’s an important thing to understand.
Michael: But that’s exactly like that Newport Beach apartment building.
Jason Hartman: Right.
Michael: Somebody’s getting a quarter point on their checking account while even if they want to pay cash for that building and get three point seven five cap rate, to them they’re like hey I’m up like three and a half points of what I would have gotten from the bank —
Jason Hartman: Right.
Michael: — so I’m actually doing quite well.
Jason Hartman: And what they really up when they’re looking at that is they’re up about six hundred percent over the bank okay —
Jason Hartman: — when you look at it in relative terms. In other words, if they’re getting half a percent at the bank and they’re getting three and a half there, they’re up about six hundred percent, right?
Michael: Yeah, yeah.
Jason Hartman: So, about six times better than the bank, so that’s how you have to look at it. So the cap rate compression occurs because the problem with cap rate it doesn’t account for appreciation or financing, and you know as we talked about this article a little bit before we started recording today, what does that mean to investors? It means that as there’s less money chasing every deal because financing costs increased a little bit, as there’s less money chasing the deal, that means the price has softened a little bit and the income is probably about the same because the income again is fairly reliable, it doesn’t change that quickly. But that means the cap rate does what, Michael?
Michael: Cap rate’s going to go up.
Jason Hartman: So if you pay less that means you get a higher cap rate based on the income, but that doesn’t mean the property became a better investment because your financing costs have changed. It may be the same, it may be equal, it may be better, but it’s probably worse.
Michael: No that’s — and I think this is our take away from this article being mentioned that cap rates really only make sense in terms of a cash investor. Since we always push using leverage and financing — let’s say interest rates keep ticking up, that might cause prices to come down, cap rates may go up but our cash-on-cash returns may go down because it’s more probable that interest rates will outrun — interest rates will increase more than cap rates yet to prepare — sorry, more than prices go down.
Jason Hartman: Yeah, I got what you’re saying, totally there.
Michael: Yeah, yeah.
Jason Hartman: I hope the listeners did. In other words, the lag times doesn’t happen. The adjustment in the market doesn’t happen fast enough to make that offset. So there’s always a lag time and this is what either causes investors to win big or it kills them, is that lag time because they can’t wait it out if it’s on the bad side.
But you know speaking of all this, let’s look at a property. You pulled up a great property in Atlanta. Undoubtedly this will be gone by the time listeners hear this. Remember things are moving very quickly, folks but this one wow, what a nice looking property. Boy I tell you, this is in Decatur, Georgia and eighteen hundred sixty square feet, only thirty six dollars a foot, approximately —
Michael: Isn’t that incredible.
Jason Hartman: — maybe one third cost of construction there, you know give or take, but tell us more about it. I mean you can get this one for about sixteen thousand with twenty percent down subject to qualifying.
Michael: I mean this — to me in California, this is crazy. This is eighteen hundred and sixty feet for sixty seven thousand dollars. I mean just that right there is mind blowing.
Jason Hartman: And don’t forget this is a beautiful two story southern house with columns in front and a double door with a palladium window on the top okay. I mean this is a really nice looking property.
Michael: I know. So we didn’t hit the returns yet, so —
Jason Hartman: No, we didn’t. Let’s look at the pro forma now. Of course all this stuff we talked about, there’s always a projection unless it’s got the tenant in it already, but here, I mean this is just phenomenal. Sixty seven thousand, the projection rent is nine hundred thirty dollars per month. So right there you’ve got almost a one point five percent RV ratio and tell us about the overall returns here.
Michael: So we’ve got a cash-on-cash return of twenty two percent which is I think pretty astronomical. I actually was kind of laughing to myself because I had somebody come to me that said they wanted twenty four to thirty percent cash-on-cash —
Jason Hartman: Cash-on-cash —
Michael: — back.
Jason Hartman: — they’re out of their mind. They’re smoking crack.
Michael: I thought they’re out of their mind and then we saw a couple of properties, I think one of them was twenty four percent.
Jason Hartman: This is just crazy. This is almost like too good to be true and you know every deal is not this good, okay. But the projection here, twenty two percent cash-on-cash and what this means is look, you put in sixteen thousand dollars and you’ve got three hundred a month almost positive cash flow, almost thirty six hundred dollars a year positive cash flow, and this has got your vacancy in it. It’s got your property management. It’s got a six percent maintenance percentage, which is higher. Of course it’s older, built in ’63, but look at Michael I’ll let you do the honors. Tell them the cap rate because you just talked about that property that nine unit in Newport Beach.
Michael: This is a ten point two, so it’s almost three times better than that other property.
Jason Hartman: Wow, yeah phenomenal. Ten point two percent cap rate and an overall return in investment projected at?
Michael: I feel like the feds are going to kick my door in —
Jason Hartman: Yeah.
Michael: — fifty three percent. I mean it’s unbelievable.
Jason Hartman: Yeah, it really is, it really is. But this is the kind of stuff that can happen to you in real estate and I’m always saying you know if it’s only half as good as this, you’ll still do incredibly, incredibly well. And you have to pardon my laughing, my dog just jumped on my lap. Get down, Coco. I think she wants to go for a walk, so —
Michael: She is so fun.
Jason Hartman: Yeah. But anyway no, in all seriousness, it’s phenomenal.
Michael: Yeah, so each one are — this local market specialist, they also based on the pro forma, hopefully it’s going to do quite a bit better because this local market specialist makes sure that it’s leased before they’ll sell it, so you’re going to avoid both the first year vacancy loss, ideally and the lease up fee for the first year.
Jason Hartman: Yeah, so they’ll put a tenant in it for you before you close the deal. Well good stuff. Hey, so check out those properties at Jasonhartman.com, click on the properties section and be sure to check out our blog too. We’ve got a bunch of interesting stuff there and we’ve got some new shows that we published. You know I don’t know if I’ve even mentioned this, we’ve already got a bunch of listeners. I don’t think I’ve even mentioned it, but we’ve got some blog cast shows and those are really short. They are basically an audio version of our blog at Jasonhartman.com. So you can just go to iTunes and subscribe to those too. Those are just little three to five minute blog cast shows. We have them professionally narrated and I just thought we’d give you our blog in another format. So, check that out on iTunes. Well yeah, it’s on iTunes is where you have to go for that one. It’s not on our website but the properties definitely are on Jasonhartman.com.
And Michael, thank you so much for joining me today and talking about these very important things and let’s get to our guest the world famous George Gilder. He’s got some great insights for us and we will be back with him in about sixty seconds.
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Jason Hartman: It’s my pleasure to welcome a name you have probably heard of and that is George Gilder. He is publisher of the Gilder Technology Report, Chairman of the Gilder Group, co-founder and Senior Fellow at the Discovery Institute and he has just got a huge body of work talking about technology, information, economics and much to my surprise recently social issues. And it’s just my pleasure to welcome him. I’ve been following his work for about twelve or thirteen years since I met him originally on a Forbes investor cruse in Russia and Scandinavia many years ago. So George Gilder, welcome. How are you?
George Gilder: I’m fine. It’s great to be here.
Jason Hartman: Well, it’s good to have you. Thanks for joining us. So first of all, your latest book really sums up a lot of your work. It’s entitled Knowledge and Power the Information Theory of Capitalism and how it is Revolutionizing our World. Tell us about the book.
George Gilder: Well, it’s a new series on economics. After writing Wealth and Poverty thirty some years ago, I felt I explained economics very well at a large supply size theory and focused on entrepreneurial creativity. But I had a vague sense of incompleteness and nagging sense that the theory was not altogether consistent because I ultimately accepted the economics of Adam Smith and the Invisible Hand and Friedrich Hayek in spontaneous order and all these equilibrium series of economics, and yet my focus was on the creativity of entrepreneurs and equilibrium and order is not consistent with the disorder and disruption and creative destruction and turbulence that economic change produces led by creative entrepreneurs. But I never resolved that conflict and went off and wrote about Silicon Valley and the Microchip and Fiber Optic Line and all these books about technology led me to information theory, which is the theory developed by Claude Shannon on which all the internet and information technology and telecommunications all rely and for calculating the capacity of liars and how they interconnect networks, and how much redundancy you need and a code in order to have a reliable signal. And you know just its information theory. And then it occurred to me that information theory resolves great conundrums that I had about wealth and poverty, the conflict between entrepreneurial disruption and creativity and equilibrium of invisible hands and ordered markets. And because Claude Shannon who invented information theory showed that information itself is defined as surprise, as unexpected myths, as creativity always comes as a surprise to us and here was a theory with an elaborate mathematical apparatus that was based on surprise as its center.
So what I did was I wrote a new economics series in which the entrepreneurial inventor and innovator was the central figure.
Jason Hartman: And no doubt they are. It’s amazing to me George, how inexpensive it is to start and run a business now days in the world of information. I mean the cloud based tools are free or nearly free. A friend of mine has a philosophy about starting a business for one hundred dollars and how you can virtually do everything for free or almost free. And that really is an empowering thing isn’t it? I mean that just changes the game dramatically.
George Gilder: Yeah, well back in a book call Microcosm I wrote years ago, I said that the microelectronic revolution would give a single man at a work station the creative power of an industrial magnet of the previous era and I think that’s come to pass. With a single person at a work station linked to the internet, has as much creative power and potentiality as Henry Ford with his River Rouge plant, car manufacturing facility.
Jason Hartman: Right, right. Yeah. So in terms of kick starting economic growth in the U.S. and around the world, how can people take advantage of this and what does it portal about government policy and interacting with government policy?
George Gilder: Well a key principal of information theory is that it takes unsurprising, they call it low entropy predictable carrier to bear surprising high entropy as they say information and in economics that low entropy carrier has to be predictable laws of reasonable taxation; contract; security; defense; stable families; long time horizons; all of those components represent the stable carriers that are necessary to bear unpredictable imperative information. And the reason that is in telecommunications is its carrier changes then you can’t tell the contents from the conduit at the other end of the line. It’s called noise and government unpredictable, intrusive, complex government is noise on the line. And what happens when you have a noisy line is that you can only communicate short distances and the time horizons of the economy shrink and you have a hypertrophy of finance with all the profits gravitating to short term arbitration, short term trading and financial hustles and maneuvers rather than long term investments and inventions.
Jason Hartman: Well that is a very good point. That’s just the culture of Wall Street for the past couple of decades and it seems like it’s just getting worse and worse every day that you know, everything is —
George Gilder: It’s not Wall Street that causes it, its government that causes it and if you change government policies you can change the economy over night. This is shown over and over again in history. Because the economy is not a material system, it’s not even a chiefly incentive system because it’s a knowledge system it can change as fast as people’s minds can change. And I show in my book, for example after the second world war, the U.S. elected a republican congress in 1946 and it decided to reduce government spending by sixty one percent over a two year period. It dismantled the entire regulatory apparatus of the war time price and price controls, it laid off one hundred fifty thousand regulators and close to a million government employees, and it cut tax rates by about half by creating the joint tax return for families and it just drastically reduced government involvement in the economy.
All that changed in economist is said that a sixty one percent drop in government spending would cause the worst depression in the history of economics, those are the words of Paul Samuelson. Instead, the economy turned around on a dime. We had within two years it was ten percent economic growth. A net seven million new civilian jobs and we launched a period of economic growth that’s now remembered nostalgically as the golden age. And that’s the United States and I have examples from all around the world from the book that I tell from New Zealand and Canada to Israel which is one of the most spectacular.
Jason Hartman: Yeah, I want to ask you about Israel during this interview, if I can but what people don’t realize you know when you look at the government spending and the people who think that government spending is actually — creates economic growth. I think I heard Nancy Pelosi say something about food stamps actually created growth. I mean these theories are just nuts, really is what they are.
George Gilder: That’s right, they’re nuts but really this theory is the first theory that really explains why they’re nuts. The all economic growth is accumulation of knowledge. We have the same economic resources that the Neanderthal in his cave had the same economic resources in material terms as today.
Jason Hartman: In terms of raw materials, sure. Yeah, and maybe more or so [voice over].
George Gilder: All the growth is achieved by expansion of knowledge and learning and when the government substitutes government power for knowledge, it destroys wealth.
Jason Hartman: Well and the other point I wanted to make about that government spending issue just before we totally leave that is that the government spending comes with so many strings attached that it forces people to reuse their time in unproductive ways. For example, you look at Obamacare, I mean the doctors just — it’s just red tape, red tape, red tape. Oh, how do we work the system better where suddenly people’s attention is diverted into well, how do we work around it, how do we get more, how do we leach off the government more or how do we minimize the impact of this policy? So it’s not just the money flowing theoretically into the economy which is usually money created out of thin air, but it’s all the strings attached to it that cause people to use their time in unproductive manners. Applying for government aid, fighting with the government about the aid, waiting in line at the unemployment office, filling out paper work, it’s just a complete distraction.
George Gilder: You’re completely right and the reason for this is that knowledge in an economy is disbursed in all our brains, all our heads. It’s in people’s heads and people are disbursed all around the world with different perspectives, different knowledge, different skills, different potential contributions and economies work best when power is also disbursed. It proportions as a disbursal of knowledge but today we have a gap with power increasingly concentrated at the center in Washington and knowledge still distributed through the population but instead of an alignment of knowledge and power that yields growth and profits, instead we have people responding to government interventions as you described so elegantly.
Jason Hartman: Yeah. You’ve got a chapter in your book about California and that’s my home state. I spent the vast majority of my life in California until moving to Phoenix about two years ago and it’s just a sad, sad state of affairs what has happened to the once great state of California. I like to say California is the new Michigan and I don’t know if you agree. I really have no idea of what you think about California but you do have a chapter in the book about that and I just thought I’d ask. What are your thoughts?
George Gilder: Well I’ll tell you I mean it’s really sad. I mean California has been the center not just of American economic growth but of world economic growth. And today as I say in the book, the great venture capitalists in Silicon Valley are sick leaned over by a pale cast of green goop. They’re all dominated by climate cranks and weather wars. They’re angling for government subsidies rather than generating new revenues for companies and the public. It’s a sad distraction. And a lot — because of all the regulations to which they’re responding these mandates to cut back on CO2 emissions by eighty percent over the next thirty years that would — if you did that all around the world, you’d reduce CO2 to a level that you couldn’t breathe, the plants wouldn’t produce enough oxygen for us to breathe. I mean it’s just really bizarre. But anyway I tell that story in Knowledge and Power and it’s a case where the elites take over and try to substitute their power for the knowledge of the people and they’re committing the state to the pursuit of perpetual motion machines and archaic committee evil energy sources like windmills and the sun.
Jason Hartman: Right, and I just — and those energy sources simply do not pencil out. You cannot get enough energy out of sun or wind with wind being the bird guillotines in the sky. Nobody ever talks about all of the environmental damage created in the creation and manufacturing of solar panels or the destruction to birds from windmills.
George Gilder: And the basic point is that this scarce resource is the surface of the earth, really arable land on the surface of the earth is the scarce resource in the world. And all these alternative energy sources consume the surface of the earth at vast acreage at huge costs to the environment while fossil fuels can actually be extracted from very small acreage and once you’ve extracted the fossil fuels you remove the well well or the other facility and the land returns to its previous condition.
Jason Hartman: Solar and wind have to be there forever over —
George Gilder: That’s right.
Jason Hartman: — and as soon as you take them away, they stop working. Yeah, good point.
George Gilder: Right.
Jason Hartman: Yeah, good points. Let’s talk about banking for a moment. How can banking be done right? You know we look at this last financial crisis and I had Meredith Whitney on yesterday and she’s of course a banking analyst and she called the Citigroup debacle before it happened and took a lot of flak for that before people really knew, but how can we fix banking?
George Gilder: Well the real issue is the incredible volatility of currencies around the world and that focus of banks on government policy just like everybody else is oriented towards the exercise of power and Washington rather than concentrating on expanding their own knowledge of the immediate opportunities and long term opportunities in the world. And these banks are really extensions of government. Their deposits are guaranteed, their sources of funds are guaranteed by the feds. Many of their investments are guaranteed by Fannie and Freddie and a hundred of other government programs, Fannie Mae and Freddie Mac. It’s just — these banks are not functioning as capitalist institutions. They’re functioning as extensions of government and as such they aren’t taxed less, they’re crony socialist bodies and their enrichment during the last decade is really outrageous. I mean they — the fabulous returns they gain, they were not really earned. They actually increased the volatility of the economy and increased and reduced the time horizons of investment and depleted the knowledge on which future growth detests.
So, banks have to — the job of banks is to manage risk and they catastrophically failed in their single role and now they’re being nationalized in a peculiar way by this monstrosity that Dodd-Frank Bill two thousand — two hundred twenty three pages of open ended regulations and new government bodies like the consumer protection agency that has almost unbounded powers and no real supervision even from congress.
It’s an amazing kind of dereliction by congress this Dodd-Frank law and again it’s all government power — effort to substitute government power for entrepreneurial knowledge.
Jason Hartman: And that always leads to disaster. You know a friend of mine sent me an email yesterday and this is not fact checked mind you but I believe the concept is almost undoubtedly true. It just makes me wonder if we’re heading for a real banking crisis, you know another round of this, because you look at what happened in Cypress and maybe something similar is coming to the U.S. He said that the FDIC reserves are twenty six billion dollars and the total insured, meaning under two hundred fifty thousand deposits are nine trillion dollars. So looking at how completely out of balance that is, I mean is there a possibility of —
George Gilder: Yeah, you know I —
Jason Hartman: — a real —
George Gilder: — I think these accounting analyses are interesting but not really important. What’s important is our policies and today we have policies that cripple venture capital by nearly abolishing the initial public offering but that suppress energy production, which is absolutely vital to the future of the United States and crucial to our foreign policy that cripple small businesses with incredible mazes of regulation and the new Obamacare bill creates more than sixteen thousand new IRS agents that no more doctors or no more health and imposes vast new taxes on small businesses and on medical instrument suppliers that offers no new medical resources at all. Our whole pharmaceutical and biotech businesses are paralyzed by the FDA and its endless regulations that haven’t been modernized at all to take into consideration the new discoveries in biotech.
And Nanotech – I’m in the Nanotech business. I have a number of investments and the EPA has just about banned Nanotech. You remember we used to talk about Nanotech —
Jason Hartman: Oh, sure.
George Gilder: — is a great prospect for the future? Well EPA believes Nanotech is the new asbestos and it’s just completely untenable thesis that because these Nanotech devices are very small and if you eat them it’s bad for your — if you eat them or breathe them in volume, they’re bad for your lungs. So what else is new? Lots of things are bad for you if you breathe them in. You can drive a car if you breathe in the exhaust. You know but they’re halting Nanotech in its tracks and energy tech in its tracks and new ventures in their tracks. These are the problems. The debt is irrelevant. It’s almost irrelevant that we can pore over our liabilities for the rest of the century and not make any gains unless we dismantle the suppressive effort to substitute regulatory power for the knowledge of entrepreneurs.
Jason Hartman: Okay so your basic premise then is that the government regulations are much more stifling than the un-funded entitlements coming our way and the debt? If the regulations lifted and entrepreneurs were allowed to exercise their power in the economy, we could overcome all of the other problems in terms of the balance sheet?
George Gilder: Yeah well imagine everything we’re kind of doing today kind of — imagine Reagan. Reagan increased government spending by about a trillion dollars in order to win the cold war, but meanwhile private sector assets increased seventeen trillion dollars. So private sector assets increased seventeen times the increment in government debt and we watched a boom that eventually created some sixty trillion dollars more private assets.
Under the Carter administration we essentially had balanced budgets but the whole private sector was in the red. And so you know the balance sheet is critical and what we have today is an unhealthy preoccupation with liabilities with the debts of America. But what makes the debt unsupportable is the crippling of the asset. And if we un-leach our entrepreneurial assets we can eventually dwarf the debt. You know to most of the industrial revolution and the rise of Britain was accompanied by public debt two hundred fifty percent of GDP. That’s two and a half times of what our public debt allegedly is.
So I mean I just think we’ve got to focus on realigning knowledge and power so entrepreneurs have the power to pursue their opportunities rather than giving government more ability to impose complex and self defeating mandates on our economy.
Jason Hartman: I’ve got to ask you about — because a lot of this stuff that we just discussed is pretty negative, pessimistic.
George Gilder: It is and I think the knowledge economy can be turned around in a week.
Jason Hartman: Sure, sure yeah. So that’s an interesting incredible thing. I want to just ask you about two things that I’ve been following that give me some real cause and hope. Maybe they’re small things but I think they’re important. One is 3D printing and the other one is the jobs act and crowd funding, the concept of crowd funding and how you look at things like kick starter and how soon you’ll be able to crowd fund something and actually take equity in it. That just changes the whole paragon of the IPO market and the SEC’s involvement and so forth. I think that’s a pretty big shift, really those two things.
George Gilder: Well certainly 3D printing is an important new form of manufacturing that’s going to be ascended in future years. It’s an extension of the existing computer technology into a kind of solid extrusion of computer rated designs. And that is a very important development that I read about in Knowledge and Power, actually.
Jason Hartman: I mean the way prototypes will be able to be created quickly and inexpensively, a lot of stuff will come out of that. Go ahead.
George Gilder: Absolutely and that’s important. I think Kick Starter and all those programs are interesting and do make some contribution, but capitalism when it’s working does align knowledge and power and it does give entrepreneurs the capital they need. A bunch of entrepreneurs themselves can generate capital if they aren’t inhibited on all sides by obstacles to enterprise and that is — and when you remove obstacles to enterprise as another great example I cite with removing obstacles to enterprise with New Zealand in 1985 they had been before the second world war, they are the third richest country in the world and by 1985 they were above the level of Tunisia. They were virtually sinking in the third world — they’re an agricultural country but they couldn’t even feed themselves. Government represented forty five percent of agricultural income. They owned — much of the economy was owned by government and a labor government took office that decided to completely dismantle the bureaucracies of New Zealand and they abolished the farm programs. They abolished the transportation. They privatized virtually all of the industries. They created zero based budgeting so you had to justify any government programs from scratch. And everybody was worried. The conservatives in New Zealand were worried that such a radical change would produce depression and instead New Zealand went from twenty two years of deficits to seventeen years of surpluses and created the most favorable business climate in the world, became the world’s most successful agricultural exporter with no government agricultural programs.
They actually competed in dairy products so aggressively that with constant government, the United States sued them for unfair trade practices, selling cheeses and new forms of butter products in Wisconsin. And they’re just example after example of countries that turned themselves around overnight. Israel did it also around 1985.
Jason Hartman: Yeah, why do you call Israel the info nation, by the way?
George Gilder: Because Israel is — since the debouch of Silicon Valley over the last ten years, Silicon Valley has been reduced to sort of social networking software companies that don’t really entail much new technology. All sort of big gains have come from these social networking place that are interesting and increase economic efficiency somewhat but not major contributions to the advance of the human race. And meanwhile all real new technologies are being generated by Israel.
Israel is crucial to the U.S. defense, crucial to companies like Google, Microsoft, Monsanto had moved all its genetic plant technology to Israel as Johnson & Johnson has many of its most profitable products were invented in Israel. You know we have Intel which is the world’s leading microchip company and America’s Sebastian of microchip capabilities is really largely an Israeli company. Most of its most important innovations come from Israel and then a period when all around the world, cities are subject to attack from rockets and mortars that can be set up anywhere and aimed at major buildings.
Israel has created its iron dome anti missile technology that they deployed in about three or four years against all of American advice and although with some American financial assistance. And that technology’s unique in the world and is really — redresses the balance of power against terrorists who were aiming sixty thousand — still aim sixty thousand rockets and missiles at Israel.
Jason Hartman: Yeah, very interesting. I didn’t know that Israel was really leading that charge and you’re right about Silicon Valley, though. It’s all software now and social media and all those things may be great for —
George Gilder: You can’t — the EPA has ruled that you really can’t manufacture in America —
Jason Hartman: Or definitely not in California.
George Gilder: — it’s just incredibly difficult, and you certainly can’t manufacture in California.
Jason Hartman: That’ number one —
George Gilder: I mean there is manufacturing that continues to go on in the United States, fueled really by the fossil fuel energy discoveries that the EPA would like to suppress but has not been able to because of the federal structure of the U.S. system. You know, we have to — the states have enough power to help resist some of these efforts to suppress new energy production, but horizontal fracking is just a tremendous breakthrough that radically increases the amount of energy that can be produced from an ever smaller footprint on the surface of the earth. So fracking, natural gas fracking technology is the most environmentally favorable technology that’s been developed for decades.
Jason Hartman: Well George, this has been very interesting. I could talk to you for hours and hours. I know you need to go, maybe one last question for you. Tell us about the outsider trading scandal.
George Gilder: Well you know we have always — this maze of regulations that stop insiders from trading in their stock or divulging information to the public. The information has been suppressed from companies what are called fair disclosure laws that require before you can reveal anything you’ve got to vet up with lawyers and public relations, executives and whatever, and release it to the world all at one time. And this has effectively blinded our markets so that they’re much more short term and they no longer carry as much information and the outsider traders, these are people that government essentially — the essential rule that the government imposes is, you can’t invest in anything that you know about. If you really know about it, you’re probably subject to some kind of insider restriction or conflict of interest and this means that rather than insiders who actually know what they’re doing in their investments, you have outsiders trading on the basis of momentum or a technical analysis or macroeconomic indices or the money supply or all these outsider numbers which are almost irrelevant to the real future of the economy.
Jason Hartman: And that creates a whole speculative world doesn’t it by keeping the people who really know about the thing from investing in it, they would create a —
George Gilder: Or talking about it.
Jason Hartman: — yeah, or talking about it, they would potentially create more stability in the investment rather than the speculation based on all kinds of charts and extraneous things that you mentioned, right?
George Gilder: Absolutely.
Jason Hartman: Yeah, well that’s very interesting.
George Gilder: It’s another case where the government suppresses knowledge, which is a source of wealth in the exercise of their power.
Jason Hartman: That is a very different paradigm and a very different way to look at that SEC regulation about insider trading. I’ve got to say, I’ve never thought of it that way and that’s what [voice over].
George Gilder: Fraud can be prosecuted.
Jason Hartman: Yeah.
George Gilder: But manipulation of the stock in order to extort fraudulent gains should be illegal but insider trading should be absolutely permissible. And certainly freedom of speech implies that executives should be able to say anything they want about their companies to anybody they want to say it to.
Jason Hartman: Very interesting point, very interesting way to look at it. Well, that’s what you always do. Your work is so compelling. You have got so many books. How many books do you have now, George?
George Gilder: It depends, somewhere between sixteen and twenty depending on how you count them. There are about three versions of Life after Television and Telecosm and you know, sixteen probably. Knowledge and Power is my sixteenth —
Jason Hartman: Fantastic.
George Gilder: — really new title.
Jason Hartman: Yeah and I’d say also you know I’d love to have you on sometime to talk about some of your books on sociable and social issues like Men and Marriage.
George Gilder: Well, I’d like to talk about those.
Jason Hartman: Yeah.
George Gilder: Men and Marriage is still in print. Men and Marriage is still in print and available.
Jason Hartman: Published back in 1992 and on Amazon four and a half stars and —
George Gilder: ‘85.
Jason Hartman: Oh well this must be that edition then. You know, it’s a different edition.
George Gilder: That’s a paperback or something.
Jason Hartman: Yeah, yeah fantastic. Well good stuff. George give out your website if you would and of course the books are available everywhere but your specific website.
George Gilder: www.discovery.org is a good way to reach me. I’m a founder of the Discovery Institute which is really a source of a lot of these ideas of information theory that are transforming our world.
Jason Hartman: Fantastic. Well George Gilder, thank you so much for joining us today. The latest book is Knowledge and Power the Information Theory of Capitalism and how it is Revolutionizing our World and there are so many other great books that you have. Thank you again for joining us George, appreciate it.
George Gilder: I appreciate it that was a terrific interview. Thank you so much.
Jason Hartman: Thank you.
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Transcribed by Debra
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