Welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli. So today I have an interesting guest. It’s a little bit focused on the economy and economics to some degree, but our conversation’s gonna touch on inflation, deflation. Are we in a recession? What’s going on with debt? Why do we continue, quote, unquote printing money? Is it even necessary? In fact, is is inflation even necessary? My guest is a very interesting guy, David Stockman. He worked under President Ronald Reagan for a number of years. He’s got over 20 years experience on Wall Street, and he publishes some regular content through his newsletter that is a little bit contradictory to what you normally hear out there, especially from the talking heads in the mainstream media, which is a refreshing take because there’s all these questions, you know, are rising prices are, ask Asset is important. Is it good, is it bad?
Who’s getting hurt? Is, are it the savers? Is it the people who are stacking assets? He just released a new book, interesting title, it’s called The Great Money Bubble. I even asked him, you know, what exactly is a money bubble? Anyway, so I had an interesting conversation. I could have literally gone for hours with him. I didn’t out of respect for his time. In fact, he told me he’s got 40 minutes and I think I dragged it out. So once we do some trimming and editing, it’ll probably cut it down to about 40 minutes on this episode. But yeah, I kind of forgot to ask him one question, but I, I’m gonna put it here in the intro for you. I wanted to ask him to talk about his four step strategy to protect your savings and your portfolio. We just ran out of time, however, it is covered in his book, his new book, which just came out, oh, I don’t even think three weeks ago.
It’s, it’s got a red cover with a dollar bill on it. It’s called The Great Money Bubble. So you can look that up there. I guess the other thing I wanna mention is that, you know, he’s somewhat more bullish, or excuse me, more bearish about real estate and the housing market than most anybody I talk to. And, you know, he’s got his reasons for that. And that’s all well and fine. I think what we all agree on is that there is a correction going on and it will continue for a little while. And of course that’s very much market specific. Every market is different, as they say in real estate, all real estate is local. And when you’re talking about a country that has over 500 metropolitan areas and then literally thousands of smaller micro markets, you can well imagine that what happens in one area is gonna be completely different than what happens across the tracks or across the river or across the country in another market.
We didn’t get that granular in our conversation. We were just talking at a very, very high level. But with rising interest rates, rising mortgage rates, and with, you know, kind of a recession looming on the horizon as well as a lot of markets being somewhat overpriced with sales, slowing down naturally. You know, it’s just simple economics 101 prices will cool off in many areas, but that just leads to more opportunity as a real estate investor. There’s gonna be more inventory, more deal flow, more options for you. The numbers might be better in terms of pricing coming down, even though mortgage rates have gone up often, that just lends itself to a better deal. But again, it’s all math. It’s not emotion. You just run the numbers and see if the deal makes sense. But there are always opportunities out there. Like I say, it’s not a matter of when to invest, it’s a matter of where to invest.
And when you have a country as big as this, with as many markets as we have, clearly there will always be opportunities. And, you know, if that’s something that we can help you with, certainly let us know. Just contact my team here. Alright, without any more delay, let’s jump into my interview with David Stockman.
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If you missed our last episode, be sure to listen to How to Beat Inflation
Well, it is my honor to have David Stockman on the show. David began his career in Washington as a young man, and quickly rose through the ranks to become the director of the Office of Management and Budget under President Ronald Reagan. He was the youngest cabinet member in the 20th century, which is absolutely amazing. After leaving the White House, he began essentially a 20 year career on Wall Street, and he later became a partner of New York based private equity company, the Blackstone Group, if you know much about them, I, I’ll let David talk about that a little bit later. He’s the author of numerous New York Times bestselling books. I think I own every single copy. He also provides private research and analysis to professional investors and firms globally through his newsletter called David Stockman’s Contra Corner. And I think it’s more than a newsletter. But with that, David, welcome to the show.
Happy to be with you.
Well, it’s an honor to have you on the show. I love your material, your research, your analysis, everything from, you know, the economy to the fed, to housing, to whatever you want to talk about. So it just kind of helps me keep track of the global backdrop and, you know, what is going on in this country economically speaking. Before we kind of dive into that stuff, which I find very, very fascinating. Tell us a little bit more about yourself. Cuz you’ve got a very interesting past. You’ve worked with President Ronald Reagan at the time. You had a very important position. You’ve spent 20 plus years on Wall Street. I mean, you have a lot of experience.
Yeah, well, but there’s one wag said after 50 years in Washington and on Wall Street, I still have no usable skill <laugh>. So, you know, in terms of the productivity of our private economy. But I think it is an unusual blend. And in my current book, the Great Money Bubble, and in my daily newsletter, I try to bring that together, that perspective. What I learned 30 years or 25 years in Washington, another 20 years on Wall Street, I think is pretty unique. And it gives me an angle that’s different than a lot of other commentators in one of those angles is to understand the interaction between politics on Pennsylvania Avenue, both ends, Capitol Hill and the White House, and the actions of the Federal Reserve that obviously impact in a huge way. The wall Street and then the broader economy from there.
So, you know, and what we have right now is a great money bubble that’s coming to its demise. And I, by that I mean not just inflation of goods and services, gasoline, grocery prices, the highest, you know, levels in 40 years, but inflation of everything. We’ve had an enormous inflation of debt. We’ve had an enormous inflation of stock prices you know, from normal industrial stocks all the way through the tech stocks. Real estate has been vastly inflated because of the cheap interest rates and easy debt that’s been available. And it all starts in my judgment at the Fed because the Fed mm-hmm. <Affirmative> has been the greatest inflater of all, you know, turning point in my view was 1987 when Greenspan became chairman of the Fed. The balance sheet of the Fed at the time was 200 billion, a big number.
It had taken them 74 years to get there from the day that the Fed opened. Remember, the balance sheet is just a cumulative record of money production, money printing credit, you know emissions by the Fed. So 74 years, they got to 200 billion. Well, recently it peaked at 9 trillion. So in just that, you know, 35 year period, the balance sheet of the Fed is exploded by 45 times during a period when GDP was up maybe five times. So you can’t have money in the system. Mm-Hmm. <affirmative>, and he had credit in the system growing at nine times the rate of the economy over a half century practically, or 35 years anyway, and expect good things to happen. <Laugh>, what you get in that unbalanced equation is what I call the great money bubble. The massive inflation of everything that we’re now being forced to confront even the Fed as it desperately raises interest rates trying to catch up with the inflation curve, which it’s way behind.
Yeah. You kind of answered one of my questions. I was wondering why did you call it the great money bubble, you know, to dumb things down a little bit? You know, what is a quote unquote money bubble? Are you referring to just inflation or the Fed’s balance sheet or something else?
Yes. I’m referring to the Fed’s balance sheet, which I just described right at 9 trillion. I’m referring to the manner in which that filtered through the economy. First it inflated Wall Street. That’s why we’ve had this stock market boom mm-hmm. <Affirmative> for the last several decades. But to give one statistic on how excessive that was, let’s just go back to December 2 0 8. That was after the great financial crisis and Lehman Brother Brothers bankruptcy. And you know, the panic in the fall of 208 mm-hmm. <Affirmative>, well about the sta the NAS 100, which I think is the leading edge of the more speculative stock market. That’s all the tech stocks the big guys from Apple all the way to Facebook and Amazon and everything in between anyway, and this is startling, but the NASDAQ 100 rose by 1250% from that point in December oh eight to the peak last fall, while the GDP only rose by 55%.
Now again, how in the world can stock values and, and that’s just the discounted present value of expected earnings in cash flow. How can stock market values rise by 1250% when the economy where the profits have to come from? The earnings have to come from expanded by only 55%. And that’s in nominal terms, including all the inflation that we’ve had since 2 0 8. In short, it doesn’t work. We have an equation that is so out of kilter, so out of balance that we’ve now reached the point where even the magicians at the Fed are out of dry powder, so to speak, and are being forced. And this is startling to raise interest rates rapidly and to drain the bond pits The very opposite of the QE. They’re, as you probably know, your listeners know they’re in QT quantitative tightening mm-hmm. <Affirmative>, whereas they were buying 120 billion of government debt and securitized mortgages a month during that whole period after March, 2020.
They are now selling, in a sense, letting mature, but that’s the same thing as sell. They’re selling 95 billion of their balance sheet government debt per month. So it’s the opposite dynamic. Before they were adding, you know, false demand, fiat demand to government securities that kept interest rates down, now they’re doing the opposite. They’re dumping bonds back into the bond market in a desperate effort to bring inflation under control. That’s gonna have a negative impact, obviously, on interest rates. And the interest rates in turn will filter through the entire economy, housing markets, business, investment, household balance sheets you know, credit card debt and all the rest of it. So we’re at a turning point the party’s over and as I say, the great reckoning is now underway.
There’s a lot to unpack there. Yeah. I almost don’t even know where to start. But let me begin with kind of a very broad question. There’s different schools of thought out there about, you know, the Fed and the necessity for having a nominal amount of inflation and all that. Do you believe that we have created an economic system that relies on a small amount of inflation all the time in order to keep the wheels on the bus, so to speak?
Well, I, I understand that view. That’s why the Fed adopted this 2% inflation target. But I think it is completely wrong. And I think history proves there is no magic in a positive inflation rate, 1%, 2%, or 5% for that matter. And that the Fed is used at as an excuse basically to print money, print money at these fantastic rates for the last few years. But even the, the last couple of decades. Now, I have in my book one example of why I think history proves that you don’t need a little bit of inflation or 2% inflation, and that it’s just an excuse for money printing. If you look at the end of World War I, after the war finance ended in the big inflation at the very end of the war worked its way through the economy. So from 1921 through 1946, which is a quarter century period, you know, encompassed the great the Roaring twenties, the Great Depression, and then the great revival of World War II, you put all that together, and here’s what you had the CPI at the beginning and at the end was at the same level for 25 years.
There was zero net inflation at the same time. The real GDP practically tripled during that period from the early twenties to the end of World War 2 19 46. Now, there you have a juxtaposition of no inflation over a long period of time. And the, that, that growth, that tripling amounted to 3.8% per year, GDP growth, real GDP growth over the period. And as far as I’m concerned, that’s pretty powerful proof that it doesn’t take inflation, it doesn’t take 2% magic fed target to get the economy to grow. The economy will grow because people, one of their circumstances. And so they will invest, they will speculate, they will invent, they will innovate, they will work harder if given the opportunity. That’s where economic growth comes from, the private economy workers and businesses and all the rest of them.
It doesn’t come from some idiotic inflation target at the Fed. So I’m very firm in my views that that target is at the heart of the great inflation problem that we’re facing today. They were just flooding the market with fiat credits. It took a while for that to work through the financial system and then travel around the globe. Remember, we’re in a global economy, we import half of what we consume. Right? And so it took a while for a to lead to B, but it did. And here we are you know, with 7% plus inflation as the b l s measures that been probably double digit if you were to look at it, honestly.
So do you think, I don’t want to make assumptions here or try to read between the lines, but do you think these inflation targets are an excuse of some kind to continue to print money because it’s politically favorable, the spending’s outta control. We have all these programs to fund, so we need a way to fund it. And you’ll never, ever get it through taxation. You could tax everybody a hundred percent of their income and still not be able to cover the debt and social programs. So where do you turn to you, you know, it’s the, the lender of last resort, the Federal Reserve. So it just becomes an excuse to continue to print to fund all these programs?
Well, I don’t know. You can say it was the intent, but it certainly was convenient. Okay. Right. Cause you never would’ve seen the federal debt grow from 1 trillion where it was when I was budget director with Ronald Reagan. Right. The 31 trillion. It just couldn’t have happened without an interest rate crisis without massive conflagration in the bond markets private sectors borrowers being crowded out and so forth without all that money printing by the Fed. So it enabled Washington to have a 30 years free of big spending, as I call it. And this massive amount of public debt creation. But even that now is reached its limit because as I said a few moments ago, the Fed is now shrinking its balance sheet, dumping box into the bond pit, not buying them up. And you know, we’re kind of having to unwind all the fun and games that were created especially in the last three years.
So it’d be interesting to hear what your thoughts are. My personal thought or prediction is that sometime within the next six to 12 months, the Fed is gonna take their foot off the brakes, stop pumping the brakes, and maybe start pushing the gas pedal a little bit again. So they’re gonna transition from quantitative tightening to easing again, because they don’t, at least, least unless they’re insane, they don’t want to collapse or crush the US economy or even the world economy for that matter. Do you believe that as well?
think everybody believes it, but I seriously doubt it because I think what we’re in is, we’re in the midst of a severe stagflation, the worst in history mm-hmm. <Affirmative> in which the choices confronting the Fed are all bad. Now, if, if we look at the underlying dynamics, the internals in the inflation indexes CPI, PPI and so forth, it is pretty evident to me that they’re not gonna get the inflation rate much below five or 6% because on a year over year basis, because that’s what’s happening right now in the wage economy and in the services sector, which accounts for more than 60% of the weight in the CPI. Now, if the fit is faced with inflation that is that sticky and stubborn and is hanging up there in the five, six, 7% range, which I think is going to happen, they are not going to be able to take their foot off the brake and pivot to this renewed cycle of ray cutting and ease that wall Street is praying for.
And every time there’s a slight nuance re change in the CPI increase they say is certain to happen. Well, I, I just don’t think it is because these people actually believe that they’re what I call mechanistic keynesians, and they actually believe in their targets, and they do believe in this 2%, I think is totally wrong, but they believe in 2%. And when you’ve got 6% inflation on a running basis, not just one month, but year over year or three months annualized or whatever, they are not gonna be able to rationalize going to ease. They may keep it on pause, you know, for an extended period of time, but they’ll keep it on pause with interest rates even well higher than they are today. Because there’s one thing that even Powell has hinted at that I think is crucial to the whole discussion, and that is, you are never going to get inflation down if you have negative real interest rates.
You have to get a positive yield after accounting for inflation. Well, look at where we are right now. Three and a 5% yield on the 10 year inflation running at seven 8%. So you’ve got a negative real yield of three or 4%, and you have to get into positive territory. Now, I was around back in the late seventies, early eighties when Volcker faced the same kind of challenge, right? Right. And when he became fed chairman, the real yield on the 10 year bond, which I think is the great benchmark to take a, a look at, the 10 year treasury note was about negative 2%. And he said, this can’t be, we’re never gonna get out of this inflation spiral of rising prices, wages, costs, and more of that again, unless we get interest rates solidly and positive territory. By mid 1981, that negative two had become positive nine.
Okay. He raised the interest rate and the nominal yields dramatically, and by huge amounts in order to break the back of inflation. Now, I’m not sure they have to go that far this time, but they sure as heck are gonna have to go well into positive real yield territory, which I think will take interest rates well above where we are today before they bring inflation even, you know, into the zone of their 2% target. So there’s a lot of wishful thinking going on. Now, wall Street basically doesn’t care about earnings or economic fundamentals or, you know, the profit outlook for the economy. The only thing they want is easy money from the Fed. And every time someone can interpret a new set of release of data as indicative that the ease is finally coming, the pivot is around the corner and they start buying the stock. Well, that’s ridiculous. They’re not doing their job because the Fed is essentially turned the stock market into a gambling casino. You know, they’re, it is not a mechanism for discounting the real earnings prospects Yeah. Of the companies in the stock market, but simply a venue for gamblers to bet on what 12 people on the federal open market committee might do next time they get together. And that is a hell of a long way from free market capitalism.
So if Wall Street wants ultra cheap debt, and the housing market would ideally like to have continued cheap debt, then it becomes, you know, a want and maybe it’s politically favorable. So do you not think we’re gonna get back to that point maybe sooner than later, but at some point I’m saying it’s gonna happen sooner than later. I hear you saying it’s gonna take longer than we all expect. Yeah. But we’ll ultimately get back to that same place.
I doubt it. You know, I think we’re not gonna give back to negative real interest rates for a long time. And what fueled the real estate boom was that you had exceedingly low mortgage rates and exceedingly low yields on commercial debt commercial mortgages that allowed investors and or speculators to bid up the price of real estate. Because essentially in the long run, real, the price of real estate is an inverse function of the yield <laugh> on debt because real estate is essentially debt financed overwhelming. Mm-Hmm. <Affirmative>. So I think the real estate market is just one more sector of the economy that was badly distorted and inflated by these years of money printing. And now, you know, we’re gonna <laugh> face the music.
Yeah. Well, and you could argue that we never had a free market, you know, it was a manipulated market driven by, you know, cheap debt.
Right. That, that’s the point. Exactly.
Yeah. So if what you’re saying is true, if that is what will unfold, it’s gonna be a long drawn out correction, if you will. What does that mean to two main markets, the equities market? And for my listeners, the housing market in general?
Well, for the equities market, I think it means we got a long way down yet to go <laugh>. All right. You know, the interest stock prices, the indices have corrected a little bit 15, 18%, but I think it’s ultimately gonna be more like 40 or 50%. The s and p 500 is going to get back to 3000 or less. It’s not going back to 5,000 or more where it was at the peak last fall. And it’s already beginning to show up in the most speculative quarters, but it’s gonna spread to the entire market. Some people would be shocked to know that, for instance, a favorite, like Facebook had a market cap of 1.1 trillion last fall. It’s now 300 billion <laugh>. Mm-Hmm. <Affirmative>, they’ve shed 800 billion worth of market cap because it was based on a predicate that wasn’t true. And that is that the advertising migration to digital, which they were benefiting from, would go on forever, when in fact it’s almost over.
And you know, their costs are outta control and their revenue is now hitting the flat line. So the market finally caught up with that and said, mm-hmm. <Affirmative>, you know, this isn’t growth forever. And the stock got walloped pretty hard. Now, that’s just kind of a leading indicator of what I think is coming in a lot of sectors of the stock market. As to the housing market housing, I think, unfortunately people got caught up in the second bubble. You know, if they either refied at low interest rates based on high property values, or they bought a new property based on where the market has been in the last year or two, there is going to be at least paper losses. If you don’t move and you stay there until they move you out then I guess in your own or have a modesized mortgage, I guess you’ll be okay.
But if you’re in the real estate speculation business, including the house flipping business, I think there’s some pretty hard times coming because mortgage rates have a long way to go up yet, you know, they, they already touched on 7% on the 30 year mortgage not too long ago that come off from that a little bit. But when you have 7% inflation, that’s not a mortgage rate <laugh>. So, right. The mortgage rate’s gonna go up a little more e even more. And you know, we’re already beginning to see the impact in real estate there. There’s an old saying that says volume leads price, and we’ve had a huge volume decline in real estate transactions both commercial and residential. And it’s only a matter of time before sellers finally capitulate and realize that they’re not gonna get the prices that were on the radar screen a few months mm-hmm. <Affirmative> a year ago. So yeah, I think there’s a big decline coming in the household real estate value.
Yeah. Well, we’ve already seen corrections across many markets around the country especially the larger tier one markets. In fact, some markets have corrected beyond 10%. The expectation in many markets from data and research I’m looking at is showing, you know, a 20% correction in a lot of the markets. But that’s, it’s needed. It’s due because there’s been such rapid price gains in a lot of these markets, partly due to, you know, cheap mortgage rates, but also because of lack of supply and strong demand. It’s just, you know, you’ve got that price appreciation, you have inflationary price appreciation, it’s all, you know, coming to a head. But now we’re seeing that correction. It’s always interesting to hear other people’s opinions and perspectives because you get all kinds of different predictions, if you will, about what the housing market will do over the next 12 to 24 months.
So I think everybody’s in agreement that we’re gonna see price corrections in most markets around the country. But to the extent of how far that will go, how long it’ll last, and how much the correction will be, it varies pretty widely. Kind of a general question about inflation, this is almost like teeing up a question for you, maybe a little bit loaded, but, you know, some people ask, you know, is inflation good? And is it even necessary? And I think your argument is that inflation is not necessary. But I kind of curious if you can just drill a little bit deeper on that.
It’s really amazing to me how this argument that inflation is helpful to growth. It’s necessary that it’s a prop to prosperity where that comes from. Because if we look at the most dynamic sectors of the economy today, the tech sector, what was pricing doing in the tech sector for the last 30 years? It was going down <laugh>. Okay. Big time. And that didn’t, you know, the theory is, well, if prices are going down, people won’t invest or spend, they’ll just wait for lower prices. Well, let’s prove unequivocally in the tech sector that that’s not true. I mean, cuz if it were true, no one would’ve bought a television set. No one would’ve bought a computer, no one would’ve bought an iPhone, because even the price of iPhones you know, have gone down on a net basis over time since they’ve been introduced.
So that pretty much is proof in the pudding. I cited a little while ago, the 25 year period when we had zero inflation and a tripling of the real size of the economy, not nominal GDP, but the real GDP from mm-hmm. <Affirmative> 2021 to 1946. So that’s just wrong. And it’s something pedaled by Keynesian economist who were always looking for a reason to meddle in the economy and to stimulate fiscally, or especially now at the federal Reserve. And, you know, that became the argument of first resort at the Fed. You know, I I just posted the other day in one of my daily newsletters, a big interview with Lele Brainard, who’s supposedly one of the big thinkers on the Fed and was in line maybe to even become the Fed chairman one of these days, January, 2020.
Now, that’s not that long ago, right? It was on the eve of this great inflation waiver we’re in now. Right. Talking about the Fed needs to find new tools and new measures to get inflation up higher where it needs to be. That’s that, you know, that’s what they were thinking in January, 2020. And for at least eight years before that, because the inflation rate, nominal inflation rate was running just under 2%. But for reasons these people weren’t even looking at, and I’ve laid this out in my book in quite detail. It was a split screen inflation over the last seven or eight years, going back to 2012, when the Fed began actual inflation targeting the 2% officially in January two 12 when Bernanke pronounced it, you know, the magic Oman that was gonna make everything better. But if you look at it, these numbers are startling, but durable goods, which were mainly imported and reflected the one time gains of shifting the supply chain as painful as it was from high cost American production to low cost production in China, Vietnam Mexico, and so forth.
That one time gain resulted in a startling decline in the price of durables from 1995 when the China export machine really got going to 2019, the price mm-hmm. <Affirmative> of durables in the PCE deflator or CPI dropped 40% <laugh>, and I, I have to repeat it, 40%, the price level went down at a time when the service index was going up two to 3% a year, year in and year out without hesitation. So the only reason they were at or under target was there was a one time windfall of cheap foreign goods coming into the, the economy that held down the overall index the overall deflator. But that was one time, you’re not gonna have 40% again in the next couple of decades because that would mean durable goods have zero price, which is ridiculous. Okay. In fact, right now we’re, you know, facing the supply chain disruptions, the soaring cost of commodities and energy, which ends up in durable goods and manufacturers sourced abroad.
And so that, you know, that headwind against inflation has already ended. I mean, Darrell, mm-hmm. <Affirmative>, dural risk prices are still like 15% above where they were a year ago. So my point is that this is all wrong. This inflation is good for you. 2% a year is necessary and the minimum, and we should print money. I mean, the idea, I’ve been at this quite a while, as we discussed, I started in 1970 on Capitol Hill, but the idea that anyone would be talking at the Fed about inflation being too low, low inflation about the Fed, finding ways to increase the level of inflation, the price level is, was unthinkable. <Laugh>, you know, no, everything was always about keeping the price level reasonably stable and the purchasing power of money as solid as possible. That’s what we used to think. Now we’ve got all these keynesians led by Bernanke and then, and Paul didn’t know what the hell he was doing, but he just adopted the same theory. You know, have, have really saddled us with a very destructive idea that needs to be purged from the Yeah. Yeah. Les building or we’re never gonna get out of this mess.
Well, one of the leading arguments for having inflation, perpetual inflation, and I know you’ve heard of this, I know you know this, is that our national debt keeps growing larger and larger. It’s beneficial for the government to be able to pay off that debt or service the debt. Shouldn’t say pay it off. Cause it seems like it’ll never be paid off. But to service that debt every year with cheaper and cheaper dollars, meaning inflated dollars, so that way they can, you know, more comfortably if you will service that debt. That seems to be a leading argument for inflation.
Well, it’s a leading argument, but it’s a really dangerous and false argument because if the government benefits and they find it very convenient, sure. The savers are going to be savaged. Okay. Oh,
They’re destroyed.
Pardon?
You know, they’re destroyed and they have been for…
For many, many years. Exactly. Yeah. But when you look at the mechanism of capitalist prosperity at the end of the day, you need private savings of a healthy hefty level in order to fund the new investment in productivity and capacity expansion and in labor force improvement. And if you don’t have the savings, you’re not going get that basic ingredient of prosperity and growth. Now, some people say, oh, let let the fed print the money. Well, the fed prints the money sooner or later. It’s, it comes out as inflation. It doesn’t come out as savings, it doesn’t come out as Right. Real prosperity living standards. So, you know, we need to call them to account for all of this economic malarkey. The idea that inflation is good because it’s gonna make the debt service cheaper, is one of the most insidious arguments I’ve ever heard.
Because what it’s doing is telling politicians, don’t worry about a 31 trillion debt, which I think is headed to 50 trillion. It’s just built in, you know, we’re borrowing 2 trillion a year. Absolutely. So you know, in 10 years you’ll be at 50. You you’re taking away the one discipline that actually still existed back in the seventies and eighties when I was in the middle of this. And that is, that was before Greenspan. That was before the Fed went into monetization of the debt in a big way. And people really did worry, politicians worried that if we overdid it with spending and borrowing that they would hear from the folks back home. Okay? Because interest rates would go up, home buy home buyers couldn’t get a mortgage at a rate that they could handle. Right. the car dealer couldn’t finance his floor plan because interest rates were double digits.
The local feed mill, et cetera, couldn’t finance its inventory. The local factory couldn’t finance its expansion. All of these things created political opposition at the grassroots that kept politicians reasonably honest in a real debate about federal borrowing. But after 1987, when the Fed began to become the printer of last resort, the funder of the US treasury of last resort, you know, all bets were off one by one. All the old what I called the stalwart, you know, fiscally responsible politicians either died off defeated or retired right in court parties. And we ended up with a generation of, of politicians now in Washington that had never really had to contemplate soaring interest rates due to what they’re up to, which is spending and borrowing.
Yeah. If we take that question of, you know, whether inflation is good or even necessary, and flip it around, the kind of the opposite question is, is deflation a bad thing? Cuz cuz we talk about deflation as being this bad thing, this taboo thing. You never want to get into a deflationary environment because, you know, the economy will unravel, A wheel will come off or something. I mean, what’s your thoughts on deflation being good or bad or necessary?
Yeah. Well, I think that’s a great question and I, you know, I don’t think deflation is any particular kind of evil, okay? If the economy is growing on its own two feet, and if investment is strong and productivity is expanding and you’ve got sound money at the Central Bank, it’s very possible that you’ll get deflation. We’ve had periods of deflation before from the end of the Civil War to 1912. We had spectacular economic growth, and yet the price level actually went down during that period on that it was a deflation. And as I cited in the twenties and thirties, forties on net, there was no inflation. So the idea that deflation is a terrible thing, that the economy will go spinning into a black hole if the price level goes down, is just nonsense. It’s stuff made up by the Keynesian economist who believe in the Phillips curve and the trade off between inflation and growth, and the idea that the economy’s like some giant bathtub and it’s their job to pump it full of demand right up to the brim in order to
<Laugh> everything ideal. Well, you know, the, the thing I might say here is that my book, the Great Money Bubble, addresses all of those things, the exact questions that you’re raising that have justified this nonsense that we’ve had outta Washington for several decades now, our address, and I think one by one, I refute these hory myths.
A good strategy would be to send a copy signed by you to every single politician <laugh>. Yeah. Yeah. And hope that they read the book.
If I thought they would read it and it would do any good, I would gladly send, send them all 10 copies and pay for it myself. But, you know that’s the only thing that really wakes up politicians is a lot of noise from back home. And I think we’re starting to get that. So I have a little bit of hope, I’m not a total pessimist about this. I, I remember 1980, no one said Ronald Reagan could win. You know, he was way off the spectrum and the public would never fall for, or, you know what he was selling. And he won big time because inflation peaked around 1980. And the people said, enough of this, we can’t live with this kind of Jimmy Carter economic policy of no growth soaring cost of living and very little hope about the future.
Now, maybe that’s where we’re heading in 2024, a referend a kinda great realignment election. At least you can hope that may cause policy to finally get rectified. Yeah. You know, I think it’s too early to tell exactly if that’s plausible, but at least there, there’s a, there’s a window because we have history and history. Yeah. Basically proved that you can only beat up the public so long with what then was stagflation, the growth was weak and the inflation was strong. That’s the same thing we’ve got now. You can only do if we’re gonna have a recession big time next year. So as we go into 2024, the public is gonna be black and blue first from the inflationary wave, and then from the recession that became inevitable. And maybe that’ll cause things to be you know, redirected in by the electorate in 2024.
Yep. That’s a good argument. So, as we wrap things up here, I wanna ask you two final quick questions here. I have a large audience of investors and so they’re gonna obviously be interested in this. I don’t know if I like your claim here, I, but I’m pretty sure you said in your, somewhere in your book that real estate is no longer a guaranteed inflationary hedge. Were those your words? And if so, why?
I said that cuz I was thinking about the 1970s and people found that in real estate was a good hedging the seventies. And in some cases you could make a fair amount of money beyond inflation because real estate values went up. There is a huge difference between that. And today I call that your grandfather’s inflation. And it’s very different than today. When the decades started, real estate was fairly or properly valued. Interest rates were real, were positive in real terms. There had been no great long period of speculation and real estate fueled by cheap debt. And so therefore you started with fairly priced real estate, it kept up with inflation and in some cases a little more. Today you’re starting with vastly overvalued real estate in an environment in which interest rates have to go up, which means real estate prices are going to go down. And so even if some, you know, of the inflationary pressure, real estate is able to capture, for the most part, real estate prices are going down. There are not a good hedge unless you’re buying real estate as an income property and never intend to sell it. If you’re investing in real estate, cuz you think you’re gonna have a trade to, you know, flip it three years from now, five years from now, or eight years from now, I would say it’s a very bad bet.
Yeah. And I think you and I are on the same page on that. So for clarity, the people who are listening, what you said in my own words is don’t be a real estate speculator. You’re not buying real estate in the hopes that it goes up or, you know, or just riding on a potential appreciation wave. The property has to make sense, it has to carry itself, it has to cash flow so it can service its debt and over time your equity will grow. And part of that’s going to be appreciation for however that happens, whether through supply and demand and or through inflationary forces, but you also have the cash flows as well as the equity growth. So I think you and I are on the same page on that. It’s just not, I think we’re.
And I I I would just add though that don’t overdo it with leverage or debt. In other words, you want real estate that produces income and cash flow that has a modest amount of debt because it’s going to be a long haul here. And when mortgages turn over or real estate debt turns over the next time the interest rate’s going to be a lot higher than it is right now. And that could become a problem. You think you’re you know, well balanced in terms of cash flow. You go to refi and for years now, refi has been the ticket to lower cost going forward. Refi at term or any other reason is gonna be a ticket to hire costs in less net cash flow.
Is there a piece of advice you wanna leave everybody in terms of how to prepare for what’s coming, whatever that may be?
Yeah, well, I mean, the term I use is hunker down. That doesn’t sound too attractive, <laugh>, but what I mean is the party’s over. And so what people need to do is basically look at their balance sheet and get as rid of as much debt as possible, including have real estate property that is appreciated enormously. I would cash out, if you’ve got tech stocks that are up four or five times, they’re not gonna go up anymore. They’re gonna go down. So cash out, pay down the debt, you know, you’re, you’re gonna have to tighten the belt and people are gonna need to live more modest lifestyles until we get through this storm. Now, eventually we will. Okay. But I think the idea of the storm is gonna be six months and done because the Fed fixed everything is just totally wrong. It’s gonna be six years and running not even longer.
Yeah, for sure. David, I really appreciate all the time you’ve taken today. We could literally talk for hours. This is fascinating stuff and there’s so many other questions that I wanted to ask you, but in respect of your time, let’s you know, continue this another day, tell our listeners how they can follow you, get more information, subscribe to your newsletter. Of course, I think your books are available on Amazon and everywhere else. But just tell you our audience where they can find you.
A lot of these topics we’ve been talking about, I cover on a daily basis in my newsletter. It’s called David Stockman’s Contra Corner, as in contrarian, you know, so you’re not gonna find conventional views that you would read in the Wall Street Journal. It’s a contrarian take on money, wall Street, the stock market Washington Public Finance and the rest of it. And you, you just need to google David Stockman’s Contra Corner. It’ll come up and you can then click onto the site.
Perfect. And I’ll put all that in the show notes. And again, all your books are available on Amazon. I know that Barnes and Noble, they’re widely available everywhere. So David, enjoy New York. Thank you for coming on and I appreciate it.
Happy to be with you.
Well, that is it for today. If you have any questions about real estate investing finance or even a personal question, just shoot it over to me at Ask Marco. Go to passiverealestateinvesting.com and just click on the Ask Marco link. Send that over to me and I’ll address that on one of my future Ask Marco episodes. If you haven’t subscribed to the show, remember to subscribe takes you all of three seconds. Help us share the show with your friends and family. I love the referrals, I love the ratings, and I love the reviews. I read every single one of them. Thank you for all the kind words and feedback. I’m glad the show is helping many of you. Thank you for listening. I will see you all on our next episode.
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