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Invest Next PDX: The Fed’s New Inflation Policy

We should all be aware of the Fed’s decision to keep interest rates at close to 0% for the next few years. What will that mean for our National Debt and US Dollar? How will that affect Inflation? What should we be considering as we save, invest and pay taxes over in the next decade? We were joined by Mike Nuss of Investor Lab and Sergio Altomare, CEO and Co-Founder of Hearthfire Holdings and a former technologist with the Federal Reserve System. We geeked out on the data so that you can be informed and invest well.

Transcript:

Tyler Combs:

Okay. Okay. It looks like we are alive. Welcome everyone to another invest. Next PDX. This is a collaboration between Northwest Private Lending and investor lab, where our whole focus is collaboration over resources and information, and trying to get the knowledge out there. And we really aligned with Northwest Private Lending in this aspect where they just want to help investors make wise decisions with the information they have. The goal of this is not to sell anything. The goal is to focus on getting information out there that we think you need to know. And we want to have a discussion about it. This is not just a class where we’re just giving information. There’s going to be a lot of banter and discussion about what is going on this week. It is the Fed’s new policy, what that means for inflation economic and our investing decisions. So let’s bring up our guests today.

Tyler Combs:

We got Mike Ness, that works at Investor Lab as one of the co-founders and also with Rivard Real Estate, doing investing property management and brokerage. And then we also have here, Eric, we’ll just leave that all everyone up for now. We got Eric Larson out from Northwest private lending who is doing hard money, in the Portland area. And then we have Sergio Altomare, the CEO of Hearthfire Holdings, a real estate syndication and advisory and property management service. And so we are glad to have everyone on this call and we are excited to, take some questions. If we don’t get to your questions during this call, then we’ll try to take it offline and answer those questions or add it to the next session. If we think there’s enough there to have another topic. So let’s start with Eric.

Eric Larson:

I am really excited about this. This is something that I think in the, in the world of real estate, the most important things are supply and demand followed by interest rates. And there’s nothing that dictates interest rates more than the federal reserve. And so we talked a lot about this. We’ve talked about debt as we talked about inflation and I think kind of tightly squeezed together. So we as investors can make practically good decisions. We first have to understand the rules of what’s going on. And I think the rules of our economy are changing and they’re changing quickly. It’s really important that we, get people’s perspectives that we ask a lot of questions. I’m real excited to be working with Mike. He’s presented a ton on the economics of real estate here in the Northwest market. I’ve appreciated him for many years, and I’m really excited have Sergio who spent 22 years at the Fed. Uh, so you kind of understand actually what’s going on and how those policies actually affect us as investors.

Tyler Combs:

Why don’t we start out with Sergio, do you want to just explain your background real quick and then tell us, for everyone listening, just a baseline, a definition of What is the fed and its function?

Sergio Altomare:

Sure. So first, thanks guys for having me, really exciting, to be joining you, especially considering I’ve transitioned from my days at the Fed. And that has actually allowed me to talk about it more, working for the federal reserve. It’s not something that you’re permitted to go out and, and, you know, endorse, provide any kind of thoughts, because that is an institution that is very much, highly regulated. So, I did work for the Federal Reserve. I left in 2017. In the 22 years that I’ve worked there, my primary role was in information technology, national information technology to be specific. And in that time I’ve worked with just about every business line that makes up the Federal Reserve. If you’re not familiar with Federal Reserve system, it was based on the Federal Reserve Act passed in 1913 and the federal reserve act basically established the Central Bank. The Central bank is made up of 12 districts and the board of governors, governors is in DC. The other 12 regional federal reserve districts are scattered across the country, each positioned to basically cover different geographic parts. Iin terms of industries, that may be in any part of a given area. The Philadelphia market, for example, where I worked for many years, it’s a lot of regional economics centered on decentralized businesses, whereas if you went more towards the Northeast, there was a lot of heavy focus on the auto industry at the time, New York, Wall Street, the financial banks, the Federal Reserve is, although it’s got the word “federal” in it, it is not a federal institution. The only part of the federal reserve that is federal government is the board of governors, which is in DC, which oversees the entire federal reserve system. The Federal Reserve system is comprised of, has two main components to the federal reserve act that they’re looking to control and that’s unemployment and inflation. And if you’re not familiar with inflation, inflation, you can look at it two different ways. One is the cost and prices of goods and services going up, or the value of the currency going down. The actual definition of inflation is the value of the currency going down. Therefore your buying power in goods and services is being reduced. So otherwise, I’m happy to share and talk about all things, inflation, Federal Reserve policy, but the two components again are full unemployment and control of inflation. And the Fed uses a number of different–what they call “tools and instruments” to try and do that. You’ll hear a lot of conversation on different financial services on what they are, whether it be quantitative easing, whether it be asset buybacks, so on and so forth. So I’m glad to be getting into it. Thanks again for having me guys.

Eric Larson:

I think it’s also good to note that the Federal Reserve is, is a private owned bank. Northwest Private Lending is a private bank. We lend our money to people, and that’s great in, you know, private money situations, but as a federal bank deposit, it’s important to know that it is, it is private individuals who own the fed and make those decisions ultimately.

Sergio Altomare:

Yeah, yeah. It is. Each district is essentially a private entity that has shareholders. Those shareholders are regional banks. They’re not fully disclosed, but that’s the general makeup of how the system is organized.

Eric Larson:

So what do you guys want to talk about first? I think a question that’s I get a lot: what is the inflation rate? And, you know, cause we hear things like the Fed and the inflation rate is, you know, it’s been very low, we’ve had very low inflation, but as a real estate owner and a guy who is sending his kids to college and the person who has to get healthcare from time to time, the prices of things are going up dramatically. And so I guess the question I’ll put you guys first is, is the inflation really less than 2% or are we, do we see inflation and higher in a lot of other spaces?

Sergio Altomare:

So I’ll start by saying, uh, the one thing to know is how, inflation is calculated and there’s a number of different ways that it’s calculated, but the CPI consumer price index is one of the primary ways. There are a number of statistics that you’ll see. I use an app called, investing.com, which basically gives you a lot of news and, and calendar information of when things are announced. So right now consumer price index is generally 1.9 1.8 is what they claim. Now, the one thing to know about consumer price index is, similar to the way NASDAQ and Dow Jones are comprised of certain stocks. Consumer price index is a basket of goods and services that they use to monitor what is inflation. So for example, a good example is, uh, oil energy is not included in calculating CPI. And the reason for that is they say that it’s, you know, they’re too volatile. Um, however, if you’ve been around long enough, you’ve seen how the price of oil is generally used to justify the price and increasing of, goods and services. A good example that I always like to use is during 2007 and 2008, when airlines started charging baggage fees, they said it was because of the price of oil has gone up dramatically. Oil is obviously the fuel that they need to actually fly the planes. However, as of today, we’re still paying those baggage fees. So the value, the the inflation happens subtly over time and it can be in a number of different ways. I think what we’re seeing right now is we’re actually seeing that inflation is coming in a number of different ways. It’s coming in the form of, we’re still sitting in a housing boom in a lot of different markets, really cheap debt. And you’re seeing a reduction in services. Um, I’m going around and I’m finding what, what, uh, service provider, whether it be a restaurant, whether it be a hotel which services are not being provided, you’re still paying the same amount.

Eric Larson:

If you have kids in schools that obviously is resonating now. So now you’re paying the same amount for whether it’s college, whether it’s property taxes, and now you’re getting Zoom, you’re being homeschooling your children. So there’s a reduction in services that buy it up and out of itself while the federal reserve may not consider that inflation, there is a reduction in the power of your dollar. Um, one can look at a good example of what real inflation looks like is a website called the Chapwood index, C H A P W O O D. And basically the Chapwood index measures 500 of the most common goods and services that make up most consumer spending where CPI is comprised of a core set of goods and services that are, you can swap one in and put one in, swap one out and put another one in. So if I’m looking at right now, the first half of 2020, the number one inflation rate, and we’re actually at the top, it looks like top six are all in California, Sacramento, Oakland, San Francisco, Fresno, LA, and San Jose with the lowest inflation rate in those cities of 12.8%.

Eric Larson:

So if you’re going around and you’re saying, okay, the price price of beef is going up. The price of this is going up and it’s not one, two, 3%. It’s really a lot higher. You’re not crazy. You’re basically just seeing things for how they really are. So inflation is really based on what your goods and services you consume is how the prices of those are being affected by the current economic conditions and supported by your income in your day to day jobs.

Eric Larson:

I think it’s a really good point. If, a great number of people in the United States live in mobile homes and make on average, a family four makes $54,000 a year. Uh, those homes may not be going up in value at the same price as the real estate in the bay area. And so really the, the question when people ask me is, is inflation really 2%? I don’t think so. I think it’s really related to the market that you live in and the things that you buy. Cause I’ll tell you what my houses that have, that are in the area here in the Northwest are real estate. It’s gone up significantly more so. And if you, uh, if you decide to go to a community college, the price of college has not gone up nearly as much as if you’ve gone to a private school or, uh, an institution, those costs have gone up dramatically. So inflation is not as easy to, to put your finger on, but it affects us greatly because inflation really is a tax. If I have a hundred dollars in my pocket today, and inflation is going up 12%, next year. I won’t have a a hundred dollars. I’ll still have a hundred dollars. It just won’t buy me a hundred dollars worth of goods will buy me $88 worth of goods.

Eric Larson:

I’m getting taxed because my, as, as the government prints money and as the fed creates currency or debt, um, it takes buying power away from those who have dollars or have savings. And that’s a really big deal. 2% inflation compounded compounds in a very different curve than a 12% inflation curve. So we in the industry called a rule of 72. If I’m able to make 12% on my money and I divide 12% by 72, that’s how it’s how many years it will take for my money to double in the same way. When it comes to inflation. If you use a rule of 72, it’s how much time your money gets taken, how long it takes for your money to get cut in half. So a 12% inflation rate is significant, and you must invest differently with that kind of inflation rate than if it’s at 1% or 2%.

Sergio Altomare:

I think it’s also worth noting–all great points Eric. It’s also worth noting that the reason why CPI is calculated, um, and why there are reasons to not say, um, you know, let’s look at everything and make it all inclusive. Is there are a lot of, uh, things that are tied to CPI. A good example is if you’re on social security, right? If the real inflation rate was 10% and every year you’re getting a, cost of living increase to social security income, they keep raising social security income by 10% a year. Well guess what? Social security would have been gone years ago. So they really made that change over time when they say, if we, if we tie the increase to government subsidies and services, um, and that number is not reflective, is not controllable, things can spiral out of control real quick.

Eric Larson:

Absolutely, but the opposite is true, is that if inflation is going up at 10% and you’re only paying people on social security, 2% raise, you’re seeing people who are having harder and harder time staying in their homes.

Eric Larson:

And so this idea people kept asking us, you know, a couple months ago, what is it going to be a V-shape recovery? Is it a U shape recovery? And the new term that’s come out is the K shaped recovery, which is the idea that for some people, this recovery has been really great. If you’ve owned stocks and have, uh, uh, a 401k which only 20% of Americans do, their recovery has been amazing. They’ve seen the stocks go back almost to all time highs. If you don’t own stocks and you are renting, your rent’s gone up, your wages haven’t, if you still have a job, and there’s a ton of people who are going down and they’re losing their, their tails right now. And so it’s very, it’s a tale of two stories. This, this recovery,

Sergio Altomare:

yeah, I’ve got another, another good way to look at, is a lot of people say, I mean, nowadays having a family of four, maybe five is considered a large family, where if you go back forties, fifties, sixties, eight, even 10 people on a family was considered normal. And generally it was one spouse that was the breadwinner and going to work. Well, the reason why that’s no longer sustainable is because the purchasing power of the dollar. Now it requires multiple, both parents to go to work. And in some cases, now it’s going to require children to go to work, to support a household. So that’s another way that it subtly happens over time.

Eric Larson:

Right. Um, Kim Haley, can you throw up slide, um, number six, please. I’d love your Sergio and Mike, your input on, on this, but, uh, I’ve been calculating inflation because I haven’t believed the Fed’s rates for a long time, but basically I always go back to the price of a stamp because the price of a stamp to send one piece of mail from anywhere in the continental United States requires people, cars, real estate, trucks, oil, gas, there’s all sorts of commodities that go into shipping a piece of mail, right?

Eric Larson:

And so from 19 or 1863, all the way to 1932, almost a hundred years, the price of stamps went up 1 cent. And since the federal reserve is enacted, it went up to 3 cents, 1958 it went up to 4 cents. But since then we are on a curve right now, and this is bad data because the price of a stamp now is 56 cents. Uh, we are on a curve here that is not like any curve we’ve seen over the last couple of hundred years. The problem is, is that most of us were born or started working after 1960. And so we’re not familiar. Our information bias just tells us that things were expecting, I’m expecting the price of stamps to go to 60 cents or 65 cents. I’m expecting my house to cost more 10 years from now, um, because I’ve gotten so used to a higher rate of inflation than what is normal.

Eric Larson:

And so I just, uh, there’s a slide here that this breaks out just different inflation rates. So households, uh, hospital services have inflated 200% over the last 20 years. Uh, college textbooks and tuition have gone up almost 200%. So housing has gone up 50%. Um, so when you ask what is inflation, it really depends. Well, do you own a house? Are you sending your kids to school? Uh, do you have medical expenses? And these types of things I think are really important to understand, because I think the misconception is that our inflation is very low and we make investment decisions based on that. But if that’s not true, then we should be making different decisions. So I’m curious what you guys think of that.

Sergio Altomare:

So first reaction I have is, uh, looking at the price of stamps. There’s the hockey stick effect really starts, uh, in the, in the late fifties and then through some of the wars that followed, but also coincidentally, when we officially moved away from the gold standard, right. And that’s, that’s a big component. That’s where that real spike is. And that happened then while at 68, 73, right. Mixing up the gold standard in 73, it was either late sixties, early seventies year around there. Yeah, for sure. And that’s where you see the, the constant spike there associated with it. Um, and then on the right, if you look at, if you, if you create the basket to measure inflation, um, if you create that basket with a strategic number of components from the items in blue versus the items in red, sure. You can get any number you want out of it. Right.

Eric Larson:

Right. I, I only buy, I don’t buy that many TVs, but I go to the doctor more often than I buy TVs. So, uh, it does it doesn’t always weigh out in the pocket book. I think people feel that. And I get that question. I probably talk about this more than anything else. It’s just, I hear these things on the news, but I feel this, which is true. And so I’m not trying to, does it benefit me one way or the other does to have an opinion? I just want to know what is true. So yeah. So if yeah, great question. So we’ve got a question here. What are the new fed policies? I think this is really important. A couple of weeks ago, the fed came out with some new policies and I’d love to talk about that because I think they really affect things going on here. So Sergio, do you want to take that or Mike, do you ever, okay. I can take us down unless Mike, you want to take us down?

Mike Nuss:

No. Why don’t you do that? And then I’ll talk about more why, and then some stuff we can like add on why, what, what this sets up for the future of the fed and debt.

Sergio Altomare:

Okay. So, so typically the fed measured inflation, they had a, they had an inflation target, right. And so maybe it was 3%, two to 3%, um, for any given point in time. Right. And so what they’ve said now is they’ve changed. They’ve made it, and it’s a broader stripped in strategy than it is. Um, and when they say policy, it’s more of how they’re evaluating monetary policy and what’s dictating, uh, their, the controls that they’re putting in place, whether it be quantitative, easing, asset buying, uh, interest rates. So on and so forth is that they said is that now they’re going to look at and measure inflation over a period of time. So what that means is if, instead of looking at an inflation target of here, we are, we’re at 3%. Now we’re going to evaluate it over time. So maybe it’s 1% early, 2020.

Eric Larson:

And, um, and I’m not going to get into the calculations, but then it’s 5% at the end of 2021 over time. If you average it out, maybe it’s 3%. So they’re allowing it to inflation to get hyperactive, if you will, and run hotter than they normally would for a sustained period of time, this way they can effectively continue to keep interest rates low and continue to stimulate the economy by maintaining these policies. So can I say that in just, uh, in a more simpleton way before the fed used to have a rate of interest or a rate, a rate of inflation, that if it got above a certain rate, they’d say we’d start raising interest rates because we don’t want to have too much inflation. And the way we combat inflation is that we’re going to increase interest rates. We’re going to slow the economy down.

Eric Larson:

And, uh, what they’ve done is they have reduced the basket of goods to make the inflation rate look much lower than it actually is for, for many people. And the youth have calculated on an annual basis, and now they’re taking an average. And so if they’ve said, well, the last 20 years, the average inflation rate has been 1% we could in 2021, 2020, 2022, 2023 have have inflation of 5% or 6%. And we still will not raise interest rates because on an average, it doesn’t hit our metrics. It’s basically, they’re just, they get to create their own rules under which they do, their monetization. And they’re changing the rules to say, we’re not raising interest rates for the next three to four years. It basically came out and said for the next until 2023, don’t even expect a rate hike. Inflation is going to stay low for the next couple of years. Now that is in some ways, very bad, but in some ways, very good because at least I have a sense as an investor, what the, what the Fed’s going to do. And I can make decisions now based on what they’re telling us, if I don’t know if the interest rates are going up, if I thought as a real estate investor, real interest rates can go up to 6%. I’d be scared as hell, right? 6% interest rates versus 3% interest rates. It’s going to take a real drop in housing prices. I know real interest rates are going to stay low. I generally can believe that it, that the price of real estate is going to stay pretty consistent if not go up with these low interest rates. So whether it’s good or bad, I think people get in the weeds on that. It’s not about being good or bad. It’s just what it is. And then making the right decisions for you.

Mike Nuss:

Mike, what do you think? Yeah, no, I, 100% agree with that thought process. I don’t look at, I rarely look at influence as good or bad. I look at it as this is the influence and it’s our job to strategize around that. Right. It’s not to editorialize or quantify it. It’s just, what is it? How does that affect what I do? How does that affect the economy in the market? And then what steps do I take to take advantage of it or reduce the risk that’s associated with that policy?

Eric Larson:

Yeah. So when we talk about low interest rates and we talk about higher debt in the creation, in order, in order for our government to function, we have a certain amount of spending and, uh, that’s all the separate spend money on. And we take a certain amount of income in and that’s tax revenue. So if we make a tax cuts and we take in less tax revenue, then we’re going to make the same amount of spending. We’re going to have a larger deficit, which means the fed is going to go print more money, slide number five. And I just, I appreciate you guys being in here because I talk about these things. I want you to poke holes if I’m telling people the wrong thing, I want you to say. So, uh, but slide five. I’ve talked about a bunch about, because a lot of people have been asking why, even though we have a huge amount of unemployment, somewhere between 15 and 18% unemployment, our GDP is way, is way down for Q2 Q3 and probably will be down for a while. There’s way less businesses being opened up. Why is the stock market going to the moon right now? It feels very disconnected from the real world. And so I put that number on here. It’s yeah. Early seventies. When Nixon got off the gold standard, this is the Dow Jones industrial average over the last hundred years, there’s a great depression right there, up and down, and the great depression.

Eric Larson:

And here’s where we are today. This is the.com bubble. This is the housing bubble. This is the current bubble that we’re in. And I used to call them bubbles. And I don’t know if they are anymore, because if you take the U S debt over here, which is, you know, used to be very, very little before, uh, world war II, when became the world reserve currency. And then we got to get a bunch of, we’ve got to take on a bunch of debt after, after world war II. And then after that, we got the gold standard. We kind of went to the moon. Now this data is actually bad. This thing shows our debt at $24 trillion. Our debt’s actually a $27 trillion. And, but the point I’m trying to make here, and I want your input on is if I take this debt curve and I just slide it over here and make that, that red line is that exact same debt curve. It’s really highly correlated to the Dow Jones industrial average or the stock market. So I’m curious what your guys’ perspective is. And the truth is, is that this curve is very also correlated to real estate. What do you think about that? Can, can, if the feds can continue printing trillions of dollars, can the stock market tumble down terribly or it does it? Is it just being artificially propped up or am I completely missing the point here?

Mike Nuss:

No, I think you nailed it. Um, I’ll speak onto this. And then, um, we can talk more about financial repression, but when the fed prints money, they’re not, they’re printing credit. Right? We talked about this earlier, which is essentially we’re making money available to those that can borrow it, right? That’s what credit is. Well, who can borrow people that shown the ability to borrow wisely that typically our investors or people that have net worth. So they have balance sheets, they make banks comfortable lending money to, well, then what do they do?

Eric Larson:

People who already people who are already rich, basically

Mike Nuss:

Credit worthy, right? So they lend to credit worthy people. And then what are those credit worthy people? Do they buy assets, they buy businesses, they buy stocks, they buy bonds. And so effectively by creating credit and then giving that credit to the people that do something with it that then inflates the value of assets, right? So that’s why we see real estate going up. That’s why we see the stock market going up. Um, so there’s definitely that, I mean, that slide just shows the correlation between, um, our debt increasing, which means more credit increasing for borrowers. And then those borrowers taking that money and putting it into assets.

Sergio Altomare:

The other, the other components of that is that, um, what we’re seeing now, when it comes to the stock market and companies is a couple of things, right? Is one is they’re able to use all kinds of creative means to buy back stock and basically artificially inflate, stock prices, uh, change accounting practices. Um, in a lot of cases, there are companies, you can look at a company like Tesla, for example, that’s worth more than all the other us, uh, automakers combined based on, on what, right based on speculation, based on where things were we see the future, you have a company like Netflix, that’s really based on, uh, their stock moves based on the number of new subscribers that they get or don’t get, right? So there’s a lot of, there’s a lot of, um, views that the stock market is less risky because it’s going to be kept propped up.

Eric Larson:

And at the same time, the, the number of companies that are doing really well have access to a lot of debt and have access to a lot of government resources, you know, the bailouts, whatever the case may be. So there’s a lot of money that’s shifting hands through all of that debt being moved around and basically profit.

Eric Larson:

So where, so where does this go? Um, one of the quotes that Ray, you asked Ray Dalio is a guy I’m a huge fan of Bridgewater Capital. He talks about long-term and short-term short-term economic cycles. Long-term economic cycles being measured in lengths of currency. Uh, how long does a currency last? You were saying Sergio, all Fiat currencies go to zero. They’ve all had the same story is as does the dollar. And the short term economic cycles are the periods of credit expansion and credit retraction that we call periods of expansion or periods of recession. So we have lots of periods of expansion recession tracking along, uh, a longer-term cycle, which is how, how healthy is our currency that we’re using and when will it not be healthy anymore. So, uh, what is the Fed’s us long-term plan concerning national debt? Is it somehow to find a way to pay it off or to ride it off until the wheels fall off? I would love, this .

Mike Nuss:

Is a great spot to get into financial repression. So Haley, if you want to throw up the slides that I’ve got, um, so essentially there’s four ways, four, four ways, um, to pay down debt there’s austerity decades of austerity, which is higher taxes, less government spending. That’s going to be felt with a lot of pain, both from the politicians and from Americans. So it’s not typically going to be a chosen route. Another way to pay down the debt is just government default. We simply just default on the debt. Well, when you’re the world world currency, you can’t just simply default on your debt. That’s going to have ridiculous ripple effect throughout the, and not just our national economy, but the world economy as well. The other way to do it is to inflate a way the debt, right? So the value of the debt is reduced by slashing the value of the dollar, but then you get hyperinflation that then creates, we saw what that did in the 1980s.

Mike Nuss:

So that’s not a great way to pay down debt either. So the fourth option that, that leads us with, which is financial repression. And now you can go to that first slide, Haley, where we started financial repression. And it’s funny, it all correlates back to going off the gold standard when Nixon was in office. But, um, the other slide that I sent last Haley that shows us debt. Um, so this line here, so you can see on the far left, I think that was 1970 or 19. Um, no that was in the 1940s. So after world war II, we’re at a point where our, our debt was at a hundred percent of GDP. And then from the 1940s down into the early 1970s, we used financial repression, which is a combination of low interest rates and higher inflation to then wittle that debt down. Um, and so financial refreshing is not very well known. I just learned about it within the past year. Um, Daniel Ammerman, so Daniel Ammerman.com is a great place to research this. He has an excellent definition of what financial repression is. Um, so it’s used five tools together to create a combination of very low interest rates and somewhat higher rates of inflation that effectively uses private savings to pay down public debts in a matter that is complex enough that the average voter never understands it and never understands how it works, thus allowing governments to use this potent, but subtle method of taking vast sums of private wealth year after year, decade after decade with almost no political consequences. So this is the way that a politician can continue to print money, continue to buy votes, but then secretly pay down our national debt. So Haley, do you want to go through the next slides? He has some really good slides to show how this happens, and then when we get into it, this is my opinion why, you know, the fed came out last week and just essentially said, we’re going to keep interest rates at zero, the fed rate overnight rate at zero until the end of 2023. I think that’s also a short-sighted. I think interest rates are going to be lower beyond 20, 23. And by now having a new fed policy that allows inflation to run higher, it just feeds into what financial repression is. And so at this slide shows is it shows, um, the effect of inflation on a normal yield. So historically, a normal yield we’ll talk about, we can talk about yield later, you know, a 5% yield was normal. So you can see that after 20 years, the value of a hundred thousand dollar investment is $265,000 based on a 5% yield.

Mike Nuss:

If you add in 3% inflation and that lowers it to 146,000. So inflation is actually less than the yield rate. So that erodes the value of what that yield should be over 20 year period of time. Then if you go to the next slide, it shows in what we are now. So historic yield 5% was common. We could achieve that with low risk investments currently with the quantitative easing and the fed buying its own assets or buying us debt. We put downward pressure on yield. So a good example of that is the ten-year treasury note is what mortgage rates tie closely as to in 2008, the yield average year for 2008 on a treasury note was 3.66%. The yield on a 10 year treasury note now is 0.67%. So they’ve gone to a place where they forced really, really, really, really low yield.

Mike Nuss:

And then you can see what this does to a saver, right? So that a hundred thousand invested at 5% would be 265 at the end of 20 years. But at 0.5% percent, it’s only what 110,000. So that doesn’t mean that’s, that’s not inflation adjusted. Now, if you go to the next slide, Haley, and now you add in 3% inflation and then adjust that for inflation. So now you look at the red, a current yield for us around a half a percent, right? You’re going to get less than that. If you put in a bank, you’ll get a little bit more than that. If you put it in a ten-year treasury note, now you throw in 3% inflation. So now that low-risk investment, your a hundred thousand dollars goes down to $61,000 over 20 years in time.

Eric Larson:

So guaranteed loser,

Mike Nuss:

It’s a guaranteed loser. And so essentially what the, what this is doing is it’s saying those of you who saved money, those of you put money in the bank and get low yields. You’re going to lose to inflation. And what we’re doing is we’re taking your deposits that are really, really low rate of return. And we’re going to take all that money. You lose your inflation adjusted losses, and that’s how we’re going to pay down the debt without anyone even knowing that. So when you look at the Fed’s latest policy, which says, Hey, we’ll let inflation go to 5%. Now, if you did that slide and you threw it at, um, a half of a half, a percent yield and 5% inflation now, it’s even now, it’s probably even more like 20 or $30,000. So you’re eroding your savings over a period of time. So what the, what this does to the marketplace is think about who actually saves money. Very few Americans actually saved money. Um, you know, the lower income Americans, they just live paycheck to paycheck. They will never have a chance to, save money. They’re not going to pay down our debt investors. You know, people that are more on this phone call, where they take money, they save it, and then they invest in assets. They’re also not going to be paying down the debt because they’re actually using those savings to then leverage debt at a low rate to buy an asset, which will then hedge against inflation. So the people that are just taking their money, putting in the bank that is who’s ultimately going to pay down our debt. And when you talk about, um, we have $27 trillion in debt, and, I think that’s going up to over $50 trillion at some point in time. How do we have to pay that down? It’s always set up that way.

Eric Larson:

If you go onto the irs.gov or the IRS debt clock, you can see our current debts ticking along at almost it’s almost $27 trillion. And if there’s a button at the top, right. And it just, I didn’t notice this before Sergio, because it’s, I didn’t know if this happened when they, when they, when the fed changed their policy, but you can always go backward in time and see what the debt was back in 1980 in 1970. And I’d never seen it before, but they had a forward-looking debt clock. That was to 2024 where the IRS is estimating what the debt will be. And it’s at $54 trillion. I’d never seen that before, but these types of things, when they happen, a lot of times really important things happened subtly, and being aware of the subtle changes and the impacts, because the truth is, is that nobody wants their dollars to get worth less. They don’t want their savings stolen from them. So you don’t want to publicize it super loud. But that is exactly what’s happening. I appreciate the graphs a day. That was fantastic, but yes, make no mistake about it. We’re not paying this debt off, we’re increasing it. And we’re going to be paying for it with, with your, the value of your currency and your purchasing power as Americans and people who hold dollars.

Sergio Altomare:

You look back on from 2008, when, um, when we had the great recession and where the quantitative easing started. Right? So at some point, and, and I can tell you that not even the federal reserve has a crystal ball, they have no idea what’s going to happen. They have no where the debt’s going to go, how it’s going to be paid off. And they just keep trying to kick the can down the road. So 2008, they said, okay, let’s get the economy back on track. Let’s get things booming, let’s get things going. And then otherwise try to monetize it, trying to get, you know, reduce our balance sheet. But then you get to 2020. And it actually late 2019, cause most people don’t know that there was another round of quantitative easing in 2019, right before COVID right. So the economy was slowing down in a lot of different ways. So they said, okay, we’ve got to keep this thing going because you know, there’s nowhere else to go. And now COVID hits. Now the train is going on a steep, downhill decline. And unless we have some sustained miracle of 30 consecutive years of growth, where they can kind of fudge things around, that’s where, that’s where the acceleration happens for the currencies to really, you know, go to way of Zimbabwe and Venezuela and whatever. And so now what we do have is we are still the world reserve currency, we still have the military might. Unfortunately, if you look back through history, a lot of situations where there was huge debt cycles, huge, currency battles that ultimately world wars triggered, right? I mean, because there’s a lot of money in play relative to there. So I hate to say that there’s, there’s a lot of foreign uncertainty when I’m watching some of these war games played in the China sea and all these different areas, and you hear Russia, China, and all that. There’s a lot of strategizing that goes beyond just, uh, trade deals and whatever. There’s a lot of play in terms of currency reserve status. And, you know, you’re seeing the central banks buying all this gold over these last few years. So a lot of shuffling as we speak well,

Eric Larson:

I think it’s, I think it’s a super good point. The last time the world’s reserve currency status changed was after world war II. I think the goal that the United States had because we had funded both of world war one and world war two, we were making a lot of the products that went over there and we got paid in gold. And by the end of world war II, whether it was through the Bretton woods agreements or the end of the war, we had 70% of the world’s gold supply. And if we were able to take over as a, what was our currency status from the British Sterling? That was 1940, it’s almost 80 years later. Yeah. 80 years later. And that’s about how long currencies last. People are making plays right now for the next global reserve currency. And I’m curious, what do you guys think? And I’m not saying this is going to happen tomorrow or next month, but in our lifetime, uh, what do you think is the dollar? What is the dollar going to look like? I remember, uh, going to Europe and having Italian Lira and French Franks, and now we have the Euro, that’s a currency reset. They, the currency to the Euro. What do you think the dollar, uh, in this new world, do you, do you imagine a world currency, do you imagine a regional currency of, you know, US and Mexico and Canada, do you, where do you see when a currency shifts like this? What do you see happening? Because you’re right. That occurred cannot last forever. Yeah. So I would say, I think the Euro, uh, the European union and the Euro was that experiment to try and get to a, more of a global currency. And we’re seeing that that’s failed miserably, right? I mean, Brexit and, you know, Greece and all the other players. I don’t see that happening. But when I look at, um, you look at Russia, China, um, you know, some players in the middle east now trading in their own currencies oil right there, they’re already making plays. So I think that there’s, um, there’s an effort to go digital, right. Digital currency throughout. And, and, but every other, every country that’s a major player in this is really trying to be well-positioned. I mean, Russia and China are heavy players in this. Most people will say, nah, no way, no way to the U S will let that happen. And I think that that’s more likely the case, but ultimately, unfortunately I think it doesn’t end in a, um, in a summit. I think it ends in some form of, or may not be conventional. I mean, because there are so many different, um, different ways of playing it, whether it’s through the internet, whether it’s, um, you know, bio, you know, whatever the case may be. There are a lot of wars being played in a lot of different ways. So I think ultimately it’s going to play itself out that way, um, being a, an American and, and really believing strongly in what we stand for, I don’t think that, um, I don’t think that we are going to ever, we will will still be the world reserve in one way or another.

Eric Larson:

What do you think? So with, with this new world, how, how do we invest in how shout, what are a couple ideas of things that people who are watching should do, what can we do to protect ourselves? What are the things that we should do.

Mike Nuss:

Let’s look at asset prices. And I think the easiest way to take a look at asset prices is, um, so I do believe we’re going through a new debt cycle. Um, I think it really started back in 2008 and then it’s going heavily now. Um, so we’ll look at 2008 compared to 2020. Um, but on that point of starting a new debt cycle. So last week we crossed the record of 392 billion, of junk bonds being purchased. So that is a resetting of corporate debt. So junk bonds are just not AAA rated corporation, corporate debt. So we’ve got a record of junk, junk bonds being purchased. We also have a record of AAA debt being purchased. So corporations, since 2008 have been increasing their debt loads because interest rates are low and again, sophisticated buyers and understanding how to borrow at a low rate to invest at a higher rate.

Mike Nuss:

So it makes sense for corporate debts increase and now they have the option to now sell off all that debt and then restart a new debt cycle there. So that’s one factor, but what I really like to look at for asset prices is let’s go to a mortgage payment in 2008. So in 2008, this time September of 2008, August of 2008. So looking at Freddie Mac interest rates were 6.48% in 2008. So a $400,000 mortgage came with a $2,523 mortgage payment. Right now, since interest rates for Freddie Mac are down to 2.94%, that same $2,523 payment, instead of buying $400,000 of debt in 2008, it buys you $603,000 in debt now. And when you look at assets typically, how do people buy assets in, in most people, they buy it off credit, whether it’s it’s in real estate, you can get a mortgage and it goes directly to it.

Mike Nuss:

Or if you’re borrowing somewhere else to invest it somewhere else, that that effect on lowering yields, quantitative easing putting downward pressure on yields across all asset classes now allows us to borrow a lot more money to then buy real estate. And so to me, that’s the easiest way that it shows up in asset classes. And obviously I’m a real estate person, but it makes me want to double down into buying more real estate rather than less real estate, because that’s the new debt cycle that we’re going to be on. And, and the feds already told us their playbook, right? I mean, at one point when we had the fed come out and say, forget this target rate, we’re just going to let it go hot. So we can look at this target over a period of time, rather than looking in short windows and trying to adjust accordingly. We’re just going to look over a larger window that says, Hey, inflation’s here. We’re going to let it continue to be here. Um, to me that go buy your assets and, and lock in really, really low debt. So, right. Think of it this way. If you can get a mortgage at less than 3%, and we know inflation is going to run hotter than 3%, that’s just a no brainer decision to then borrow that debt.

Eric Larson:

Yep. I think that’s a, I think it’s a very good takeaway. I think, uh, if I, when people, I talk to people, I try to do things in steps and you don’t have to do is in order to borrow money, you have to have a job. And so if you’re not working, working at a job in generally banks, in order to borrow money, 3%, we throw these numbers around, but it’s not easy actually to borrow at 3%, the interest rates are very low, but not very many people can qualify for those rates, which, which is creating a lot of the turmoil. We see, I think one thing it’s another topic, but just the political disparity, the disparity amongst people, We’re starting to feel very divergent from our neighbors these days, because we’re are, our lives are feeling very different. If you can borrow money, at 3 percent people are throwing it at you, but most people can’t get it.

Eric Larson:

Or a lot of people can’t get it and they’re not able to take advantage of it. And for one of the things as a takeaway is I think doing something well or getting paid to do it is one thing that’s really important that any of us can go do, what should I do now today we’ll do something you’re doing well and be great at it and do it for a period of time, pay your bills and be financially solvent yourself. You have to be able to make your own ship work and float before anyone else is going to lend you money to do it. If you are able to do that, uh, borrowing money at basically what the inflation rate is, is I agree with Mike, it’s a, it’s a pretty smart move, but the question I always ask people as a lender is how much debt can you service? If I could borrow $20 million at 3%, it would be very cheap money, but if I don’t do anything with that money or I can’t service, if I can’t make the monthly payments on that debt, it is just a weight on me as well. So I am a big fan of Dave Ramsey. He says, don’t be in debt. And I encourage people towards peace. And I don’t want people even as a lender myself to not be overindebted. But I think that as you look at borrowing money cheaply do so in a way that you can service that is in alignment with your family’s income and your spending, because debt in and of itself is always a weight. It is always a burden. The debt makes the debt holder a slave to the lender. And so even as a lender myself, I, I encourage people to not do it, to borrow as little from me as possible. And, uh, if you have a really good opportunity to buy assets then to do so, cheaply, I think is, is smart. I agree with you.

Sergio Altomare:

Yeah. I would say that, you know, I look at it as, um, there’s obviously good debt and there’s bad debt. Right? Good debt to me is leveraged, right? How do I, how do I leverage, like get a 3% loan or whatever, if I can get a 3% loan and I can get a six return on that money. And without, with limited risk, being able to making sure that I can cover that debt service, then I’m going to be on the positive side. Right. And so that I think is there, there are key ratios to look at when it comes to look at how and what to buy. I’m very particular about asset classes, even within different types of assets, whether it’s gold and silver, whether it’s a real estate and looking at a commercial industrial multi-family, you know, whatever the case may be, we personally are investing in self storage right now, um, versus, you know, pick whatever type of even cryptocurrency. You have to be really particular, even within different types of asset classes. I’m of the opinion that where we’re at right now, in terms of, uh, economic positioning that we are really kind of in a holding pattern. And what I mean by that is we saw this quote unquote V recovery. Um, but to me, if that’s all artificial, because there are, you know, the stimulus out there, the unemployment on steroids, all of these different mechanisms to support people as we try and open up from COVID and everything. So I think right now there is, we are in a debt cycle reset. Uh, we are actually personally our personal investments. We’re selling off some assets that we bought years ago, taking advantage of higher asset prices, a lot of interest in, in purchasing. And then when we regained them, we get our capital and recapitalize for a next run. It’s looking at strategic investments where we can force equity into and get that appreciation rate at a much higher rate than just getting an interest rate on the return on your money. So what I mean by that is, you know, I look at it as we’ve talked about the chaplain index. I thought I’m not making 10% or more on my money, or my wealth has not increased by 10% or more. I’m getting poor, not, not more, not more wealthy. So I’m looking at is what are the assets? Where do I, where do I deploy capital? How do I get an edge on other people that are also looking to deploy capital? How do I make sure that I am responsible with debt? And how do I maximize? We’ve landed on self storage, just self storage has been considered more of a recession resistant asset, uh, just because it did very well. It does very well during market up, uh, going up and market downturns. So I think that there’s when it comes to debt, it’s about being responsible. It’s about taking advantage of the leverage that you can, but making sure that you’re positioning yourself, you’re not speculating, but investing responsibly.

Eric Larson:

All right. One of the things that I think that’s important that we all forget: inflation is something that steals our wealth. Uh, and I’m not, this is not a political statement, but besides there’s nothing more that you will spend more money on the taxes. And so taxes are historically low Haley, can you throw up slide nine, uh, real quick. And we’re getting towards the end of our time, but I want to bring this as a point for, as people making investment decisions, because it’s not just about how much money you make. It’s how much tax you pay when you make it. So this is a chart from 1926 to 2016. So it’s a little bit old, but what it shows is it shows the highest tax brackets in the United States is in the dark green and then the lowest tax brackets. At some point in time in the seventies, there was a, you know, if you made a certain amount of money, you paid no taxes. Uh, and, and that actually is a little bit today. If you, if you don’t make over a certain amount of money, or I think it’s over $50,000 a year for family of four, don’t have to pay taxes on that first 50,000 bucks. Uh, but these are the minimum tax brackets, but right now the maximum tax bracket you’ll pay in America for the highest income earners is about, I think 30, is it 37 and a half or is it 39 and a half? I can’t, I think it’s 37 and a half percent, but that’s exceedingly low because back from 1926, all the way through 1975, they had a max tax bracket of above 65% for federal taxes. It went up as high as 90%, back in the late thirties. That’s not counting state taxes so in the state of Oregon, you have a 10% state tax in addition to your federal tax brackets. So as you think about, um, the currency, uh, one of the things I’ve heard, uh, some of our financial planners say is that if you can pay your taxes now, the idea of converting your 401k to a Roth and paying your taxes now. I’m curious what you guys think about that as a tax strategy, uh, because we’re going to have more debt. We are going to have more inflation. Do you guys think we’ll have higher taxes as well?

Sergio Altomare:

The way I look at it is, um, and this is what I, the conversation I have with my CPA, when, when we have, when it comes tax time, it’s all about to me, it’s about tax strategy, right? There’s income tax, there’s state tax, whatever. But when you look at, um, how many times you can tax the same dollar, right? I mean, it comes out, it gets tax coming out of your paycheck, right? It gets taxed when you buy something, it gets taxed. If you go to sell something, so you’re keep taxing, taxing, taxing. So I look at it and when my conversations are, what is my income, wealth and pack strategy and combined, right? Obviously you want your income to keep going up. You want your wealth to keep going up, and you want your tax, your effective tax rate to keep coming down. So I think ultimately that, um, ultimately I think we’re going to get, come back to reality and understand that you stimulate more by reducing barriers for people to entry and to enter in buy into different markets. So I believe that lower taxes ultimately will generate more wealth. If you look at what’s happening in California from a corporate level and individual level, there’s a max exodus, the more you tax, right? So I think that that formula has proven to be faulty. Um, I’m a firm believer in just watching my local trends, uh, even from my, my immediate municipality. Are they doing well? Are they, um, spending wisely? Where, where do I see my tax dollars go and then implement a personal strategy? But otherwise I don’t, I’m not a believer in government sponsored programs, 401k, I’d love it up until the employer doesn’t pay my matching. Otherwise I wouldn’t have full control of it. I want to implement my own tax strategies, business strategies. And ultimately I’m not worried where the overall tax environment goes.

Eric Larson:

What do they make? What, what’s your perspective on tech?

Mike Nuss:

Yeah, I’m like I’m right in the same boat as Sergio. Um, like 401k matching makes sense, because if you can get a hundred percent investment for what you put into a 401k by a match, they’re an employer. That just makes great sense. But I don’t believe that I’m going to be in a, in a lower tax bracket when I retire. Um, nothing that doing from, you know, buying real estate building net worth, tells me that I’m going to have less income later down the road. And in fact, you know, as I grow a portfolio, I live, you know, I live on very little Tyler and I, we don’t pay ourselves much money because we’re trying to build a portfolio. So I look at it that I’m going to be in a higher tax bracket. So stuffing something away in some type of potential future tax savings, um, in a form of not being in a Roth. Um, I’m just not a fan of that. Um, the other thing is, is like you showed our tax rates are actually pretty low compared to what they are historically, and we don’t control the rules, to the game. So right now, 401k, 401k, if you retire makes sense, because you’ve got good tax savings there, but they can change the rules overnight. They can take those tax advantages away. And then a you’ve been saving. You’ve been having your savings erode over inflation, typically a 401k, you know, most people putting money in those types of, um, programs. Aren’t investing at high rates of return. So you’re losing a way to inflation. So I personally am not a fan of it for those reasons, other than the matching portion, because you can get a hundred percent return just by a match from an employer,

Eric Larson:

Sergio good. This is I’m going to put a tinfoil hat on. Do you think that the fed or the government would ever remove those? So someone paid taxes on a Roth IRA. So you’re putting in post-tax money, it grows tax free, and you can take it out. Tax-free you ever see a time where they take some of that away? Absolutely. I mean, it won’t be, it won’t be as obvious, right. But it’s, it’s going to be in form of some new program. Right? I mean, when, when it comes to like social security, they just like retirement ages what 62 to 65, then at 67, right. What’s it going to be? Right. So they just changed the rules to where the math doesn’t add up in your favor. So I think that absolutely is going to be the case. And that’s why I’m a big proponent of letting me control my money, let the individuals be responsible for their own investments and provide education. What we don’t do, whether it be in school or in general is provide broad, strong investment education, which is why I appreciate, you know, being on something like this, because to the typical person, their investment options are 401k IRA, blah, blah, blah. When in reality is there are so many different vehicles out there. I’ve been afraid to tell people as if they can’t be responsible with their own money. And Amazon has thousands of books could give you an education on you. Don’t have to go to college for it to get an education or financial literacy, all the investment options, be it, you know, running a business, um, you know, just strategically, you know, understanding the tax code, having a strategic partner, not just the guy that’s going to complete your taxes. So I’m a firm believer that they can and will change the rules. So therefore you got to take advantage now.

Eric Larson:

So last, last question. What’s one video series, one book that you would recommend people to listen to right now, Mike?

Mike Nuss:

Uh, easy for me, Ray Dalio, economic principles dot org, and he explained, you know, what a short term debt cycle is launching debt cycle. That’s the easiest way to get a good understanding of what we’ve been talking about.

Eric Larson:

Yeah. What about you Sergio?

Sergio Altomare:

Uh, two, two books: Think and Grow Rich and, um, and, uh, oh, geez. Um, uh, Think and Grow Rich and, uh, Robert Kiyosaki, um, help you guys. What was it? Rich Dad Poor Dad. Um, and also listen to bigger pockets, um, economic contributor on bigger pockets, a lot of great information there and that a couple of guys to follow. Uh, my Fed friends won’t like this, Ron Paul and Peter Schiff.

Eric Larson:

Yeah. I knew you were going to say that. I love a guy who worked at the Fed who likes Peter Schiff. That’s a, that’s great. Well, it’s been an hour. This has been an amazing conference. I love talking with you guys. And, uh, just to be able to, for us as the three of us is to get together and have a conversation ourselves on what is true. And what could we do is, is how anyone finds success. Not, I don’t have all their ideas. Nobody has it all figured out themselves. And so if for you are listening, do this yourself, talk with people, you trust, talk with people who are smarter than you and, and, and read books, grow your education, learn what it is that you can do to better yourself off, but the rules are changing. And so my encouragement to anyone is don’t play by the rules that were successful 20 years ago. They’re not the same rules.

Tyler Combs:

And Eric, you asked the question, but you didn’t give the answer. What is your number one resource

Eric Larson:

For education? One book is Ray is a, uh, Robert Kiyosaki’s Rich Dad, Poor Dad. My dad gave it to me. I was 14 years old. It’s still as good and valuable today for someone who’s trying to learn basic financial, what is an asset? What is the liability? How do I save and invest rather than buy liabilities and Ray Dalio’s How an economic, How The Economic Machine Works, I think is the number one video I would tell people about, uh, about just what’s going on with the economy. Uh, long-term short-term economic cycles and the de-leveraging cycle that I think that we’re going into.

Tyler Combs:

And the video that, uh, Eric’s talking about is on YouTube for free and has a lot of animations to help you kind of grasp the concepts that are in his book. So I do recommend that as well. Um, all right, well, thanks guys for coming. Uh, the, in the investor lab is all about communication. That is in collaboration. That is the whole platform of our community is to generate discussions like this. And hopefully we’re going to continue this discussion about what the economic, uh, what kind of fallout is there going to be from these policies and what pivots can we make to, to be smarter investors. So, uh, check out investorlab.com and, uh, and checkout, uh, the, the communication and the, the comments that are going to be going on. And then for this video, it’s going to be recorded and, uh, and up on our website as well. So, um, thank you guys for coming. And then in, I believe we’re going to continue that tax conversation over 13th. If I remember right, is going to be the next panel that we have is going to, we’re going to bring Jared Siegel back on, uh, who is a CPA and we’re going to be digging right into the taxes, uh, and what we can do, um, for pivoting in 2021 and beyond there. So, uh, stay tuned for more communication about the details on that. Uh, but we are, ah, there we go. October 13th. Yeah. So we are, I’m going to call this a wrap and, uh, thanks again, gentlemen. We will see you soon. Thanks everybody. Take care.