Doug and Jason discuss the impact of interest rates on the housing market and the impacts that will unfold when interest rates inevitably begin to rise.
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Welcome to the terminal value Podcast where each episode provides in depth insight about the long term value of companies and ideas in our current world. Your host for this podcast is Doug Utberg, the founder and principal consultant for Business of Life, LLC.
Doug: Today's episode of the terminal value podcast is being brought to you by Podcorn. So for those of you who don't know, podcorn is a platform that aligns podcasters with sponsors so that people who are looking to get the word out for their brand can sponsor podcast episodes and so that podcasters can start to monetize their podcasts. And this is actually a really great pairing because the platform is super easy to use and it helps podcasts get themselves off the ground by offsetting your production costs and helping to pay to promote your podcast. What podcorn is really doing is getting the word out for independent voices such as myself and possibly such as you. If you've ever thought about getting your own podcast going head on over to podcorn.com and check it out. It'll be worth your time. So now onto the show.
Doug: Welcome to the terminal value podcast. I am Doug Utberg and I have Jason Hartman on the line and this will also actually be on the creating wealth podcast which is Jason's podcast that has far more listeners than mine does at this current juncture. Of course Jason also has about a 13-year head start. So I've actually.
Jason: Actually 15 years. Yeah so, so don't feel bad Doug nobody listened to my show in the beginning either.
Doug: Yeah, exactly. Yes, he's a 15-year overnight success in the podcasting.
Doug: But I've actually known Jason for a really long time. He runs an extremely successful investment real estate company, but he does it a little differently because a lot of people like to invest in real estate in their own state but he you know. He but when he started the company he was in California and everything in California was ridiculously expensive. So he came up with the idea of investing out of state for cash flow in areas that have much more reasonable prices and much more. I guess you'd say rational relationships between rent and values so that you could get decent cash flow. Jason let me stop talking for a second and let you introduce yourself to the audience.
Jason: Yeah, good stuff thanks Doug and it's great to talk to you and we'll do this as kind of a co-interview. You've been on my show many many times over the years and we've talked about a lot of interesting macroeconomic concepts and you always have really interesting views and angles on things so anxious to dive in and talk about the market, the potential bubble, that some are talking about and just some macro issues and real estate and how they all tie together.
Doug: Yeah, absolutely. Well and because I think the thing is right you know in my heart I'm a value guy. You know I'm a kind of born contrarian right. You know I'm an ardent believer that over the long term the hurt is always wrong. The problem is that long term can take a while to show up and so because you know. I think as you've said right with the current low interest rates. Just the there's basically a bull market that's happening in everything right. You know the equities are going to the moon. Real estate's going to the moon. You know, my you know my intuition is that this can't last forever but it probably will last a few more years.
Doug: Which it's you know it would and and incidentally that's actually one of the reasons why you know, why bears tend to do really bad is because you know what what bears will almost always say or like what contrarians will say is they'll say hey the market's overvalued and they're right and then it goes up another thirty percent.
Doug: Let's say the market's over even more over value.
Jason: And they keep missing it.
Doug: And it goes up another thirty percent and by that point they're wiped out.
Doug: And then when the inevitable correction comes and it's you know and the market goes down by 60 or whatever they're, they're out of the market .
Doug: Because they were you know because they were betting on the decline and you. It's just so hard to call a top.
Jason: And of course.
Doug: I know everything's high but I have no clue where the top is going to be.
Jason: Yeah. Market timing is a fool's errand and you spelled it out perfectly. You know the people that who win are the people who embody the value investing philosophy and they buy good assets regardless of what the type of asset is we can talk about that of course.
Jason: And they hold on to them. And they just manage them and they keep them and they watch them grow over time and those are the people that succeed.
Doug: Yeah well one of the things I think that you and I have talked about a few times to either conferences or whatever you know in the in the mainstream media everybody likes to talk about you know stocks bonds. You know kind of stuff that you mutual funds you get through your financial advisor. You know that that's a way that you can amass some assets but the way that people become really wealthy there's really only two ways and that's either through real estate or through a business that they you know that they start and grow and then it grows at just a meteoric rate because you know you know most businesses either fail or they grow rapidly. And so I think that's one of the other things to think about. Also just you know one of the things I think about macro wise is that right now you're actually seeing a lot of concentration in kind of the technopoly. I know this is one of your you know one of your hot buttons is you know is big tech and just how big tech is getting just so much bigger. And a lot of small businesses are just really suffering.
Jason: Yeah. It's really an unfair system we have. We have this winner take all system listen you know. I don't expect it to be fair. I said fair and that's probably the wrong word we have a system that is essentially a scam. It's a winner take all system, where big giant evil tech companies are the new dictators, they're the new censors and they have armies of lobbyists, lawyers, accountants to you know manipulate the law in their favor. pull the wool over your eyes, fight you in court. You're just not going to win the end .
Jason: And there is some hope because finally the government and I'm no big government fan but finally the government appears to be doing their job. The job they should have done 15 years ago and filing antitrust complaints against these companies because they are just totally abusive. It is ridiculous. No matter what side of the political aisle you're on, you should be very scared that we are living in this Orwellian disaster of a world. Doug it's like and and we've talked about these concepts over the years but we're living in a world of not only Orwellian 1984 but also a brave new world. Aldous Huxley's book and Iran's atlas shrugged and you know. I don't know a bunch of others. It's, it's just a dystopian disaster. We're living under with these big tech companies.
Doug: And by the way I'm just going to say for any younger listeners what we're talking about here let me get you we're talking an example thing it's called a book. It's made with paper and glue. They have them in these buildings you might drive by them every now and then. It's called a library if you.
Jason: Yeah because.
Doug: A lot of it are in there.
Jason: You have to drive by the library and you can visit all the homeless people that live in the library because you know that's a whole problem. That's absurd, it was created by the government but yeah it's a whole other discussion, No these big tech companies, it's awful and you know we agreed on something a long time ago Doug that real businesses make money.
Doug: Make money.
Jason: You know and and we've seen with you know a whole new slew of IPOS. These basically zombie companies that the way they make money is by raising money. That's all they do. They don't have real businesses. It's absurd.
Doug: And I sure you know disclaimer alert right. I'm not giving investment advice but I mean that, that's basically what tesla did. And at least in my view I don't think they're really making money now I think they're just cooking the books to make it look like they're generating profits.
Jason: Master of financial manipulation.
Doug: Yeah all the equity on their balance sheet is because they sold convertible bonds the stock went up they can it converted to stock. But you know that they don't have any retained earnings. They have no retained earnings but anyway that's that's another topic for another day. One of my many many rants.
Doug: But the thing that I think is actually particularly dangerous about the big tech. Especially like Facebook, is just the utter and complete destruction of people's ability to have civil conversations and to focus. I don't know fantastic book I read recently deep work by Cal Newport.
Jason: Yeah. I had, I had Cal on the show to talk about that book.
Doug: Oh outstanding, outstanding. Yeah it's a wonderful book. I've read it a couple of times and every time I read it, it just really makes me think about how important it is to really be able to focus and avoid getting distracted because it's just so easy. It's like I mean it's I don't think it's any less addicting than like tobacco or anything. I would say that the kind of the information addiction is probably even worse than a lot of substances. And but it just kind of gets ignored. And I'm actually really concerned that you know .The social media and the kind of the online technology is just really deteriorating people's mental health. I mean you're already seeing it suicide rates are just going through the roof. Not that anybody's talking about it.
Jason: It’s terrible. Yeah.
Doug: It the only thing they're talking about is the, it's the mortality counter for Covid. You know but you know there's a way bigger problems that are that are brewing under the surface and just totally ignored.
Jason: Yeah now I know. You're absolutely right. It's really a dystopian world we live in. You know at the same time there's a lot of opportunity. So, if we want to circle over to like the direct economic issues.
Jason: You'd probably agree although we haven't talked about this Doug but you probably agree with the concept of the k-shaped recovery right. I'm guessing you would.
Jason: And so, it’s very, it's very uneven right.
Jason: Some people are really suffering and some people are just killing it and there's some are in between. The ultra wealthy are killing it right. Now they've become insanely rich. That's just part of the winner take all world in which we live and it's unfortunate because it's not democratic. It's very anti-democratic. It's not capitalistic, it's crony and it's too bad we can complain all we want we're not going to change it. The thing we have to do is align our interests with the most powerful forces the world has ever known and I've always said those are governments and central banks. And so let's talk about that because we've had endless conversations over the years.
Doug: Exactly, exactly. Well and one of the things that I think is actually really, really unique about the investing model that you put forward is you know is the idea that you know your asset when you have a rental property is really that you have a you know basically a item of universal need right a house you know, place for someone to live where the rent offsets your debt service so then in that case what you're ultimately doing is over the long term. You're just levering inflation. You know so then you even if inflation is the reported three to four percent which of course it over the long term with the amount of money that's being printed now that's nonsense. There's going to be inflation at some point. You can't not have it. We've been saying that for 10 years but it's going to happen eventually and yeah just.
Jason: But it has happened. You know, I mean I mean there's a lot more inflation in the system than the government would say yeah. It's just, it's just ridiculous.
Jason: You know there's much more inflation in there. So go ahead.
Doug: Oh yeah and so but I was gonna say even if there's only that three to four percent inflation you know if you if you're at a four to one leverage race ratio right you say you have eighty percent loan to value borrowing four dollars for every one of your dollars that's in there and then your cash flow is offsetting your debt service then over time as the value inflates. You're just gonna get you'll end up getting a net multiplier on whatever that increase in value is. I mean and the thing is right you don't know in advance what's going to go up so that's what you so what you do is you just say okay you know I'm going to spread my bets across the board and you know over time. I know that rising inflation tide is going to lift the nominal price of all the boats you know but you know but the thing that's really valuable is actually that fixed rate loan because that's what gives you that cheap money that you know where your debt service stays flat but the nominal value of your asset goes up. And it really gives you a chance to lever inflation in what I call a real way right. You know, you're not depending on the inflation. It's just inflation's inevitable and you're, you're just aligning your interests with it.
Doug: You know and that's I think that's one of the things is because yeah the equity markets can't won't grow at 20 percent forever. Like I think the 80, 90 average is something like eight percent a year. And a lot of people don't know this but, the biggest peak to valley drop of the s p 500 in history was of course you know after the 1929 crash. But that was 86 percent and if it has happened before. It can happen again.
Doug: People always say okay buy the dips because it always comes back. Not necessarily, somebody should look at the Nikkei. The Nikkei has never come back and they get peaked in 1990 and I think it's only like 60 percent of that peak value.
Doug: You know, you're just cause something always has happened doesn't mean it always will.
Doug: That's something that a lot of people really have a hard time wrapping their head around.
Jason: No, no question about it. The stock market is a two-dimensional asset class at best and many times just a one-dimensional asset class but income property is a multi-dimensional asset class. So you make money in several ways. You earn your return in several ways and the sad thing about it is that so many people just don't know how to do the math. They could have had income properties over the years in the past and they just didn't think it was that great for whatever reason or they're looking at it now and they think and they listen to Kramer or some liar who's saying well you know the S&P will typically do eight percent and property only goes up at about six percent but that's not the the reality of the situation. The reality of the situation is because you earned so many forms of return on your income property, it's a multi-dimensional asset class. You know a six percent appreciation all In on a good income property turns into a 25 or 30 percent annualized return on investment.
Doug: Yeah, it is.
Jason: And by the way you can see these performers at jasonhartman.com in the properties page for details because some of you may not believe those numbers but they're they're all spelled out and I've got a video on the front page of my website that spells it out so go ahead.
Doug: I know it's good video. I mean and I think that's just it is that you know especially because yeah when you're talking about like the S&P 500 but what people don't understand is that nobody buys property for cash. I mean you know actually even the hedge funds don't buy it for cash what they do is you know they just underwrite it with bonds on the back end. At least the thing that is appealing to me is that I think it's very much a main street way of doing business right you know it's which is you know buying real property with bank financed loans that's you know people been you know that's never going away. That is you know that that's one of the oldest lines of business for every bank because you know banks will underwrite real estate all day long because they like writing debt on real assets.
Doug: And at some point in the future people are going to get more picky about what kind of debt they underwrite. it obviously isn't happening now but it's going to happen at some point. And you know but I think you know just the idea that you know not being...