We Have 1-2 Months Before the Economy Begins to Break

Dave:
Are we screwed? I know it’s just a blunt question, but it’s worth asking, right? Is the economic picture in the US worse than the media is letting on? My guest on the show today, real estate investor, analyst and friend of the show, J Scott, thinks so. He thinks there is trouble lurking in the economy right now that could lead us into a global recession. But at the same time, he remains bullish on real estate and the value of holding onto hard assets through good times and bad. J is one of the smartest investors I know he is up to date on the entire global economy and he offers great insight into what’s happening right now. And in this episode, J and I discuss how the conflict in Iran has only started to hit our economy and prices, how rising prices could ripple across the globe and of course what we should be doing to not just protect ourselves, but to continue to grow and prosper.
This is On The Market. Let’s get into it.
Everyone, welcome to On The Market. I’m Dave Meyer. On the show today, we have a frequent repeat guest, J Scott. If you don’t know J, he’s written several books for bigger pockets on flipping on negotiating on recession proof real estate investing. And of course he is the co-author of one of my books, Real Estate by the Numbers. J has been investing for more than two decades in both residential and commercial real estate and is just an excellent student of the global economy. And today on the show, we’re getting his take on what’s going on right now and what you should do about it, because I’ll give you a little bit of a spoiler. He’s not thrilled. He thinks there is a lot of trouble coming to the global economy, but he still is excited about real estate and he’ll explain why and he’ll also explain what he thinks we as residential real estate investors or retail real estate investors should be doing about it.
So let’s jump into my conversation with J Scott. J, welcome back to On the Market. Thanks for being here.

J:
Thanks for having me, Dave. Always love coming back.

Dave:
Yeah, always a pleasure. Well, I want to just jump right into it. I saw on social media the o day, you were on someone else’s podcast. I’m not sure who it was, but the clip was you just saying, “I think we’re screwed.” And then you went on to give a very intelligent explanation as to why you think we’re screwed.

J:
I don’t think I used the word screwed, but something a little bit similar

Dave:
To that. I don’t want him to bleep it out. So I’m trying to give the feeling of what you were saying, but whether you call it screwed or something a little more profane, is that really how you feel, I guess about the economy or were you talking about the housing market? Maybe elaborate a little bit on that.

J:
I’m specifically talking about where I believe the economy and not just the domestic economy, but the global economy is headed based on what is currently going on in the Middle East. I’m a little concerned that Americans kind of have their head in the sand and I’m not saying that this is anybody’s fault other than potentially the media because we’re not really being given any information that should lead us to believe that anything bad is likely to happen other than what’s already happened. We’ve already seen prices start to go up, a little bit of inflation. We’ve seen gas prices go up a good bit, but there’s no indication that things would necessarily get worse based on reading mainstream media or just kind of following social media.

Dave:
What are you seeing that is not being reported in the media that has drawn you to the conclusion that things are going to get worse?

J:
Yeah. So everybody’s probably at this point familiar with the fact that we’re in a little bit of a tiff with Iran in the Middle East and this little body of water called the Strait of Hormuz is basically being closed down half by the US, half by Iran, but essentially there’s very little ship traffic through that straight. What a lot of people probably also know is about 20% of the world’s crude oil goes through that straight. So the fact that it’s shut down means that we’re losing about 20% of the world’s crude oil. What a lot of people don’t realize is it’s not just crude oil that gets shipped through the straight. And while that may be the big ticket item that we think about when we think about supply chain issues, the rest of the world relies on a whole bunch of other things and we rely, frankly, on a whole bunch of other things as well.
One of the big things that goes through the straight is liquefied natural gas. So basically another form of energy. We don’t use a lot of it here. We actually export a lot

Dave:
Of

J:
It from the US, but much of the world uses LNG more so than crude oil for their energy needs and for their manufacturing needs. And so the supply chain issues with LNG are not just going to hit their energy supply chains and demand for things like gasoline and car power and that stuff, but it’s also going to hit their manufacturing, which means it’s going to hit us because we import a lot of stuff from Asia and Europe. Secondarily, there are things like sulfur, nitrogen based fertilizers, which go into food. Basically if fertilizer is not shipping through the strait, that means that any crops that are going into the ground over the last couple months and the next few months likely aren’t going to get the fertilizer and the nutrients they need to form strong crop yields

Dave:
This

J:
Year. And when we have smaller crop yields, what does that do? It dries up the cost of food. So I think we’re likely going to see food inflation over the next six to 12 months as those crops that should be yielding large supplies of food are yielding much smaller supplies of food. Then we have things like helium. A lot of people are probably concerned they’re not going to get their balloons for their birthday parties, but it’s actually worse than that. We use helium for a lot of our silicon manufacturing for a lot of our data center development. And so not having helium supply is going to hinder the technology sector tremendously. And keep in mind, we do have some inventory of these things sitting on the shelf. So there’s a couple months generally of inventory of things like sulfur and aluminum and helium and fertilizer.
But once we work through what’s sitting on the shelf, once we work through our reserves, again, like oil, we do have strategic oil reserves. So we’re able to kind of keep filling this leaky bucket to a point where we don’t really necessarily notice the upcoming shortages, but at some point we’re going to work through all of the excess inventory that we have. We’re going to work through all of our strategic reserves and at that point there’s going to be nothing left. And we’re going to go from having a little bit of inflation, a little bit of gas price increases to seeing severe shortages that could cause a significant spike in both of those things.

Dave:
I think what our audience should hopefully understand is that even though Americans are somewhat insulated from these things, right, a lot of the fertilizer we use in America might not be passing through the strait of hormones, but we import a great amount of food that is impacted by that fertilizer shortage. And so just as an example, fruits and vegetables, fast fruits and vegetables, a lot of them are imported from countries that might be impacted by this shortage of fertilizer. I think just yesterday there was an article in the Wall Street Journal that said our strategic petroleum reserve is at the lowest it’s been, I don’t know, in decades, in a long time. Since

J:
1983.

Dave:
Since 1983, there you go, 43 years. So those things, you read them and you’re like, right now, we’re what, three months into this situation with Iran, normal life hasn’t been impacted that much. So what’s the delay and why haven’t we felt it as much as you think we will in the future?

J:
Well, keep in mind that for anything that’s going by boat and all the stuff that’s going through the straight, we’re not measuring time in hours or days. It’s not like throwing stuff on an airplane and when the airplanes stop, your supply stops overnight. It takes from the day that a ship is loaded in Iran or Qatar or Saudi Arabia or wherever it is and sent through the strait, it takes about six to seven weeks for that boat to actually hit some piece of land where that raw material, whether it’s again, crude oil, LNG, sulfur, whatever it is, is unloaded sent off to refineries if it’s crude oil. If it’s sent off to refineries, it’s going to spend between one and three weeks before actually getting through the refinery getting turned into some type of fuel that we actually use, whether it’s gasoline or jet fuel or some other type of energy that we actually use, then it might get shipped somewhere else and then it ultimately gets used.
So we’re talking about from the day the straight shuts down to the date that we actually start seeing supply chain stoppages, could be two to three months, could be even longer than that. Generally speaking, the last boat that docked after leaving the straight docked on May 5th.

Dave:
So we’ve really only had a month of disruption at the point of production

J:
We’ve had a month of disruption at the refineries.

Dave:
At the

J:
Refineries, yeah. Or at the point of transport for other raw materials that don’t go through any refining stages. And so how long does it take between a boat docking, offloading its raw materials and that actually getting in the hands of a manufacturer or a consumer that needs to use it? We’re probably talking another four to 12 weeks. And so the general rule of thumb is we’re probably okay until somewhere between July and September, depending on the expert that you listen to. It’s somewhere between July and September that we start to see significant shortages much greater than what we’re seeing now. Estimates are that the strategic oil reserve in the US sometime in early to mid July is going to hit that point that the government declares a critical shortage of crude oil at which point they can’t keep sending oil out from the strategic reserve.
They have to keep some for some major catastrophe. So at some point, probably in early to mid July, we’re going to see the US who is now currently, and in general is, but by far the largest producer and exporter of crude oil right now basically have to stop supplementing that crude oil with anything from the strategic reserves.

Dave:
And that’s what’s keeping gas prices where they are right now, right? We’re releasing supply onto the market from strategic reserves to keep gas prices relatively low. And I know they are high, but they would be higher if we weren’t doing that. And so we might see, according to J, and again, no one knows the exact date, but sometime over the summer should the straight remain closed, which we’ll talk about in a minute, we’ll see gas prices probably go up, probably going to have negative impact on the stock market. That starts to cascade a little bit. All right, everyone, we got to take a quick break, but J and I will be back right after this. Welcome back to On the Market. I’m here with J Scott talking about the global economy. Let’s jump back in. In the US though, J, from what I’ve read, it does seem like we are a little bit more insulated than the rest of the world because we are producers of LNG.
We are producers of crude oil. The United States has come a long way in terms of energy independence over the last decades. And so are we going to start seeing other countries start to see these shortages sooner?

J:
So certainly we’ve already seen that. If you look at certain refined crude, so specifically jet fuel, Europe is already canceling a significant number of their commercial airline flights because they’re out of jet fuel. It was, I believe, either Japan or Vietnam that has gone to a four day manufacturing week because they don’t have the raw materials and the energy they need to be at full production on manufacturing. And so yeah, Europe and Asia are already getting hit. And again, the delay between the time they get hit and the time we start to see the impact is generally weeks to months because a lot of their stuff is shipped over here by boat. And so we’re not going to notice it necessarily right away. Now in terms of the US’s oil needs, we use a significant amount of oil. We do produce enough oil in the US almost to cover our own needs, not quite.
Even if we could use all the oil that the US produces, we’d still need to import some to fully cover the demand in the US, but the bigger issue is that keep in mind the US doesn’t produce oil. The US doesn’t sell oil. Private companies produce and sell oil. And so unless the government were to step in and say, ExxonMobil, you need to start selling your oil to Americans at some regulated price. What’s ExxonMobil? What’s BP? What are they going to do? They’re going to continue to sell oil to the highest bidder. And historically, the highest bidder are other countries. And so if ExxonMobil isn’t forced to sell in the US, they’re going to continue to export. 70% of the oil that we use or that we refine in the US that turns into gasoline that we use in the US is coming from the Middle East because our refineries are designed to refine basically this type of crude oil called heavy sour crude and that’s the stuff that comes from overseas.
It’s not designed to refine the light sweet crude that we produce in the US. Could it? Certainly it could. If Exxon wanted to take all the crude oil coming out of the US, put it through our refineries to refine it to the type of gas that we use in the US, they certainly could, but there’s little incentive to do that because they’re going to get a higher price elsewhere. And secondarily, those refineries are going to be much less efficient trying to refine that type of oil so the yield that they’re going to generate, the cost to generate that oil is going to be significantly higher. So are there things that we could do that the government could do to basically ensure that we don’t have the types of gas shortages we saw back in the 1970s? Certainly, but it would spike prices because we are seeing less efficient refinery capacity and it would also require the government to step in and tell private companies, “Hey, you’re going to be forced to sell domestically even if it means hurting your profit margins.”

Dave:
So it does look like prices are going up for gas and for energy. And as everyone knows, energy goes into everything. It’s an input cost for pretty much everything, manufacturing, construction, plastic, whatever it is, right? Those costs will go up if energy costs go up. Now, J, obviously the trillion dollar question here is, does the strait of hormones open? And although I’m tempted to ask you to forecast, we just don’t know. It’s impossible to know. So let me just ask you this. If the straight of hormones opened today, do you still think we’re screwed or do you think there’s still time where things could get back to normal working order and we can avoid the type of global recession it seems you’re indicating could happen?

J:
Yeah. Well, let me start with, I’m certainly not an expert on global supply chains of energy and other things. So a lot of what I’m saying is coming from what I’m reading from those who are experts on those things as well as economists who kind of forecast what the impact on the economy is likely to be. General consensus is that if the straight open today, we’re probably at least through 2026 before we start to see supply chains normalize and prices come down, that being energy prices and commodity prices, general inflation. So we’re likely going to see higher inflation and high gas prices at least through the end of the year into 2027, even if things were to resolve today. That said, if things were to resolve today, we likely wouldn’t see the cliff that we are likely heading towards again, sometime between July and September.
But if we don’t see the straight open in the next couple months, we are likely going to hit that cliff. And instead of seeing kind of a linear increase in gas prices, a linear increase in inflation, we’re likely to see a step function increase. We’re likely to see a big jump in input costs, a big jump in export cost, a big jump in import costs, and a big jump in commodity and energy costs. So I think we have a month, maybe two months before we get into a situation where we are almost certain to see a global downturn, a global recession. If we can get things open in the next month or so, I’m not precluding a global recession. I think there’s still a very real possibility that we see a global downturn, but we probably won’t hit that cliff. We’ll basically just see another year of high costs.

Dave:
I got it. Okay. So if the straight were to open today, we’d have a gradual increase in cost that could drag on the economy, maybe tip us into a recession, but maybe not. We’ll see, but straight stays closed for another month or two, probably a global recession. What does that look like? How does that play out across the economy? A lot of people my age, I’m a millennial. The last real kind of big recession we had was 2008. That was a big financial crisis. That was a global recession that hurt. Are you talking about something like that or does this look a little different?

J:
I think it looks a little different. I think it looks closer to what we saw in 2020.

Dave:
Okay. That supply shock kind of thing.

J:
Yeah. Now that supply shock was a little bit different. We actually had too much oil. We saw a major decrease in oil production, which led to the shutting in or the closing down of a lot of oil wells that led to higher energy costs over the next couple years. So it’s a little bit different, but it was the same type of supply and demand shocks that we saw in 2020 that basically is going to lead to shortages in certain things. We saw in 2020, you probably remember we had shortages of things like, and they might have been artificial shortages, but they were shortages of things like toilet paper and certain food supplies. I think this time around we would see something similar, but they wouldn’t be artificial shortages. They would be real shortages. And the bigger question isn’t so much how badly do the supply chains get impacted, but how do Americans respond to that?
For those who remember the 70s, and I was very young, but I have a slight recollection of the 70s of sitting in car lines and gas lines for hours on end. My parents still tell me about how we were allowed to get gas on Tuesdays or Thursdays and other people were allowed to get gas on Mondays and Wednesdays and back then it worked itself out. I’m not convinced today that we are in a cultural place where those types of shortages and those types of strains on the system would be received as well as it was 40 years ago.

Dave:
So what does that mean? Just like you mean societal unrest or just that people stop spending?

J:
I think it could be a little of both. Certainly everybody talks about, are we heading towards $200 a barrel gas or gas prices likely going to 10 or $15 a gallon? I actually don’t think that’s the case. I think what we’re going to see is demand destruction long before

Dave:
That.

J:
And by demand destruction, I mean people stop filling up their tanks. People stop traveling, people stop spending money on anything that goes up significantly in value because they simply can’t afford it. And that’s what pushes us into recession. I think globally we’re going to see this demand destruction again around oil and around a lot of other commodities that lead to a global recession simply because people can’t afford the prices, wages aren’t going to grow fast enough. And then you have to think about what are the second order effects there. You think back to what happened in 2020, we had to print a lot of money to basically keep people alive, to basically keep people from starving and not being able to pay their bills. If we see something similar here, we could see another spike in currency printing, a spike in the M2 money supply, which ultimately is going to hurt the country in other ways over the next five to 10 years.

Dave:
I mean, that’s a little scary. And I guess the thing I was thinking about as you were saying this, J, is like it’s not like the US economy is great right now, at least in my opinion. I’ve done a couple of shows on this recently, GDP useful number, but doesn’t really reflect what’s going on with ordinary Americans. If you look at what’s going on, real wage growth is now negative, meaning that inflation is growing higher faster than wage growth. So people spending power in general already going down today that is happening. Savings rate just took a big no stive recently and unemployment data came out today. Labor market’s looking relatively strong, but you see consumer sentiment, lowest it’s been in 70 years. I think people are just tired of inflation. It’s not the worst economy we’ve had in 70 years, right? Certainly not, but people are upset because they’re worn down.
And I just think another inflation shock, like you said, could be just really detrimental psychologically. And is that the thing that finally gets people to stop spending? Maybe because consumer spending remains resilient. People keep spending, but delinquencies on credit cards are going up. Some cracks are starting to show and if you’re right, if the state stays closed, maybe that is the thing that finally pushes us into a real recession.

J:
Yeah. Keep in mind that when we talk about the economic cycle, economic expansions leading into a recession and back to expansion, that cycle that repeats over and over and over, that cycle is typically driven by debt.
We go through a recession, we come out of a recession, people have had their houses foreclosed on, they’ve gone into bankruptcies, they’ve lost money on their credit cards. Credit card companies have eaten those losses and we basically get to start over with a clean slate. Everybody has a whole lot less debt. The economy heats up because people can borrow again because they’ve kind of shed all that debt that they had grown before the recession. At some point they accumulate too much debt and they can’t keep spending and that’s when the next recession starts. Well, if you look at the data, we haven’t had a real recession, like you said, since 2008 and debt numbers, debt data is looking extremely concerning. We’re over $18 trillion in consumer debt with over $1.2 trillion in credit card debt. Just to put that into perspective, in 2008, Americans only had about 800 billion in credit card debt, which means we have 50% more credit card debt today than we had in 2008.
Wages haven’t grown 50%. So from an inflationary, from a real debt standpoint, Americans are in much more debt today than they were back in 2006, seven and eight before we went into that, obviously the Great Recession.

Dave:
And delinquencies are going up. Actually, I did a show on this the other day, but the only place the debt looks fine is with mortgages actually right now in terms of delinquencies, but auto loan delinquencies are going up. Student loan delinquencies shop back up after an artificial low, but credit card delinquencies are going up.

J:
Businesses saw more bankruptcies last year than in any year since 2010.

Dave:
Businesses too. Yeah. So it’s not just consumer debt. Yeah. You see what’s going on with private credit just yesterday. Some of the biggest private credit funds are seeing redemption rates at like 10, 15%. It’s not great. So one more question on this and then I do want to move on to some of the housing stuff, but if the straight open today … Again, I’m just trying to read the tea leaves like everyone else trying to understand what’s going on, but it does seem like the fastest path to opening the straight would be to allow Iran to implement a toll. That seems like what they want and I don’t think that’s good. I don’t think anyone really wants that. But if that were to be the solution, it wouldn’t go up as much as if the straits stayed closed, but then would we just expect higher gas and fertilizer and helium prices indefinitely?

J:
Yeah. So if you actually run the numbers, Iran’s been talking about a toll of one to $2 million per ship going through the straight. If you look at the amount of inventory, whether it be crude oil or LNG or other stuff that each ship transports, it works out to a few percent. So it basically increases transportation costs through the straight or cost of the goods on the boats through the straight of a few percent, three to 5%. Will that likely translate to higher prices? Yes. It’s not going to double prices, but that’s certainly a concern. I don’t like talking politics. I’m not an expert on-

Dave:
International negotiations.

J:
Exactly. But if you think back to the playbook of the last time we had a major dispute with Iran, it was back in the ’70s and it was basically there were hostages involved and there were other things involved, but it was also oil. And the strategy that Iran employed back then was they basically didn’t negotiate or capitulate until two days after the election in 1980. Basically, Jimmy Carter was in office, they wouldn’t talk to him, they wouldn’t negotiate with them. They kind of dragged things out for a year and a half. Two days after the election, Reagan gets put into office and the American hostages got released. So basically Iran used it as an opportunity to drive political sentiment and there’s talk that there was backroom negotiations with Reagan and his team to basically help him win the election. Whether that’s true or not, the reality is that the Iranians realized that they had political leverage despite the fact that they might not have military or actual hard leverage.
And who knows, it could be the same thing today. It may be that the Iranians realize that things will get worse both for them and the rest of the world and that’s something that they’re willing to settle for if it means basically changing the outcome of the election in November. And so again, I’m not a military or geopolitical strategist, but I have been reading a lot of people who believe that it’s likely that this isn’t going to get resolved before November.

Dave:
All right, everyone. We’ve got to take one more quick break, but I’ll be back with J and his advice for real estate investors right after this. Welcome back to On the Market. I’m Dave Meyer. I’m here with J. Scott today talking about the situation in Iran and how the impacts of the closed strate moves could ripple throughout the global economy and even impact real estate here in the US. Let’s get back into our conversation. All right. Well, let’s turn now, J, to talk a litle bit about real estate. And let’s just assume for now we go into this global recession. Again, an assumption we don’t know for sure, but if the state stays closed, I think it’s a reasonably likely scenario, right? What does that do to housing? Let’s talk about residential first, then we can go to commercial.

J:
So it’s not unprecedented for a big recession to impact housing. We saw it back during the Great Depression in the 1930s. We saw it after 2008, but historically speaking, and you and I have discussed this before, we’ve had 36 recessions in the US in the last 160 years, 34 of them have not impacted housing. 34 out of the 36 real estate either went up, stayed flat, or went down no more than 1.5%. So there are only two cases where that happened. Whether it would happen this time, whether we would see a major hit to housing values this time, I don’t know, but statistically speaking, housing is more tied to inflation than it is to recession. As long as we’re seeing inflation, we tend to see housing prices in this country go up. And if you kind of map those two lines next to each other, there’s a very, very clear trend over the last 125 years that says housing values track inflation.
And so the bigger question for me isn’t are we going to have a recession, but are we going to continue to have inflation in this country? And if the answer there is yes, if we’re likely to see inflationary pressures over the next five to 10 years, I think it’s safe to say that housing isn’t going to collapse. Is it going to grow significantly? I don’t know. I don’t think for the next few years we’re likely to see significant growth in the housing market. We still have affordability issues. That trend line for housing values is still a good bit above the trend line for inflation, but I don’t see a major collapse coming in most scenarios.

Dave:
Yeah, I tend to agree. I did a show, I went deep into this about inflation and housing prices and how they’re related. If you want to go, you could go check this out. I think this released in April. There’s different types of inflation in the US. We have supply side inflation, which is kind of what we’re seeing now, which is less correlated with home price increases. It doesn’t mean that it’s negatively correlated and that they go down, but it doesn’t necessarily drive prices up as much. Demand pull inflation is really what we see when there’s a really hot economy. And so that’s why personally, if there’s a recession, I don’t really see prices going up unless we see money printing. Like you said, if we get in this scenario where the economy is stagnating and we need to either do some sort of infrastructure spending or government spending and they’re going to print money to do that, whether we see it in the form of stimulus checks, I don’t know.
But if that M2, just so everyone knows, M2 monetary supply is just a way to track the amount of dollars circulating in the economy, if that goes up again Asset prices will go up. There’s a very strong correlation for that. So that’s where I see the big thing to watch for if you’re curious about housing prices is do we either see A, money printing or B, another form of money printing, which is just quantitative easing. If we start seeing the Fed buying mortgage-backed securities again, we’ll see housing prices go up.

J:
The way I think of it, and I agree with you, but the way I think of it that might be helpful to some people and for anybody that wants to dig in more, go read Milton Friedman, who was an economist back in the ’70s and ’80s who very much espoused this belief. Inflation long-term, not day-to-day, week to week, or even year to year, but inflation long-term is driven by one thing and that’s the money supply. If we print more money, we’re going to see inflation. And the reason why I say it doesn’t necessarily correlate day-to-day or year to year is just as an example, 2008, we printed a ridiculous amount of money in 2007, eight, nine, 10, QE, stimulus, but we had exceptionally low inflation through the 2010s. And it surprised a lot of people. A lot of people said, “How do we print this much money and not see inflation?” Well, the money printing is going to lead into inflation, but that could take five, 10, 15, or even 20 years.
So long term, if you want to see the trajectory of inflation, you look at the M2 money supply and you can see based on how much money we flooded into our economy over the last 20 years, since 2008, we’re going to see a good bit of inflation through the next 10 or 15 years at least. But that inflationary trend is going to be more linear. Again, we’re not going to see big spikes. You print a lot of money in 2008, doesn’t cause a big spike in 2010. It just causes inflationary pressure over the next 10, 20, 30 years. But from that trend line, that kind of linear flat trend line upwards, we’re going to see a lot of spikes and those spikes are being generated by the other side of inflation, what you mentioned, the supply side of inflation. So we remember 2021, 2022, 2023, when we saw a big spike in inflation, a lot of people like to think that that was from the money printing.
Don’t get me wrong, all the money we printed in 2020, 21, 22, 23, 24 till today, that’s going to impact inflation. But the big inflationary spike that we saw in 2021, two and three, that was related to supply chain pressures. The inflation that we’re seeing today, we’re printing a lot of money today. We’re going to continue printing a lot of money, but that’s not what’s leading to the inflation that we’re seeing today. The inflation we’re seeing today is supply-based inflation. And so at the end of the day, the big spikes that we see are related to supply chain issues. It might be related to short-term demand issues, but long-term, the inflation that we see is going to be related to the money that we print. And the fact that we’ve literally doubled our money supply, we’ve doubled our national debt over the last 10 years means that long-term, regardless of what we see today, tomorrow, next year, five years from now, over the long term, we’re going to see significant inflation in this country.
Which leads me to believe that in the long term, again, five, 10, 15, 20 years, we’re going to see real estate prices continue to trend up in a healthy way.

Dave:
Interesting. A couple of things there. One, for people to try and understand, I agree with you, J. I think the money printing in COVID absolutely contribute to inflation, but think about cars. Car prices went up so much during COVID. Used car prices were as expensive as new cars and it’s because of the chip shortage. Manufacturers did not have enough chips to create new cars that created less supply. People were flush with cash. They wanted to buy new cars. They wanted to buy used cars and so they bid up the prices of cars. That’s like how a supply shock works. It’s too much money chasing too few goods. And so that is what we can see. One thing, J, I’ve been thinking about is your point about printing money and how it impacts inflation for the long term is well taken. And you said we had low inflation during 2010.
One thing I keep thinking about is the way we track inflation in the United States. We have two measures that we usually look at, the CPI, the consumer price index, the PCE with personal consumption expenditures. They don’t measure asset prices. They do not look at the stock market. They do not look at housing prices. They do not look at Bitcoin. I understand why they’re tracked separately, but could you say, because when I look at the 2010s in retrospect, I did not realize this at the time, but I look at it as retrospect, could we just see that the effects of the money printing from the great financial crisis is that money just poured into asset prices and that’s why assets are so expensive right now?

J:
Yeah. I don’t have the exact date on me, but in the last few years, I’ve seen a number of empirical studies that have basically concluded that the vast majority of money that has flowed into the economy over the last 15 to 20 years has gone directly into asset prices that you can see a very, very strong correlation. Again, I’m not claiming causation or that they’re the exact same, but very strong correlation between the amount of money that’s been printed and the value of our equities markets, our stock markets and other hard assets going up. And so there are a lot of people out there, a lot of smart people out there who believe that essentially what’s happening is we’re printing all of this money, it’s circulating through the economy. At some point it’s getting into the hands of people that don’t need that money for everyday expenses.
They don’t need or care to be spending that money and they just sock it away in investments and hard assets. And that’s kind of the problem is that all of this money may be going to the lower 80, 90%, but eventually they’re spending it. Eventually it gets into the hands of the top 10 or 20% and those top 10 or 20% don’t need that money today. So what do they do? They put it into the market and they basically pull it out of the economy. It’s still in the economy in theory, but it’s not being circulated. We don’t have that M2 velocity of money through the economy, which is really, really bad for those in the lower 50% or even the lower 90% these days because it means we’re not seeing as high wage growth. We’re not seeing basically that money being recirculated down to them so that they can continue to spend it.
It’s just being pulled out of the economy and that’s why the rich are getting richer and everybody else is suffering these days.

Dave:
Yeah. Well, super insightful, J. Thank you. What do you do about it? We’re all real estate investors trying to figure out just how to help our pursue financial dependence, secure our nest egg. What’s your advice?

J:
I think my advice is the same whether we’re going through the best of economies or the worst of economies. Buy as many hard assets as you can and hold on because long term that’s where the value is. I’m a big believer that real estate is the best risk adjusted investment on the planet. You can make the case that the S&P 500 is pretty good if you look at all the data through today.

Dave:
It’s been very good recently. You can

J:
Make the case that gold is good. So I don’t care if you’re putting your money in gold or the stock market or real estate, but put your money in some hard asset that actually is likely to retain and grow its value. Number two, I’m a big believer that when we have a lot of economic turmoil, the best strategy is diversification.
Don’t put all your eggs in one basket. If the economy’s booming and you want to put all of your money in the stock market, you can make a better case for that. But when it’s possible that we could see a downturn, we don’t know what’s going to get hit the worst. 2008, it was real estate. 2001, it was the stock market. I mean, different things get hit differently in each downturn. And so just given that the fact that we could see a downturn in the near future, I think diversification’s the right strategy. Diversify asset classes. If you’re investing passively, diversify with operators, diversify in locations, diversify in exit strategies, durations, diversify across risk. Basically just put your money in so many different places that even if something go down, other things are going to hold their value or may even go up and you’ll be happy.

Dave:
What about folks who are in the beginning of their investing career and who maybe have one property? How do you diversify or how do you think about it when you don’t have more capital to allocate to different asset classes?

J:
If you’re early on, you just have to be more discriminating. You have to make sure that the purchases that you’re making are better deals that are more likely to succeed. One of the reasons I love real estate, active real estate is because we have some control over it. If things aren’t working out exactly the way we want, unlike the stock market where we just have to sit back and 9:30 every morning, we log on and see if the market went up or down. With real estate, if it’s going down, what can we do to actually impact it and help our investments? So that’s one of the reasons I love real estate. Anybody out there that’s starting out, find that next great deal, manage it closely and grow your portfolio over time. And keep in mind, the one thing I love about real estate is as long as you’re not going to lose that property, there’s never been a 10 year period in the United States where single family real estate values have gone down.
So statistically speaking, it’s pretty certain that if you don’t lose your property over the next five or 10 years, you’re going to make money on that property. So that’s my advice. If you’re starting out, don’t stop. Too many people think this is the wrong time to be investing, but investing when everybody else is terrified is the best time to be

Dave:
Investing. Yeah, it is. Yeah. And you could still do it conservatively. We talk about this on the show frequently. To J’s point, hold onto it. It requires cash flow. It requires cash reserves and ideally it requires buying below current comps, like making sure that you’re buying with some built-in equity. Those are the ways that you protect yourself and you will make money on that if you can just hold onto it. And so I think it’s just about buying strong fundamentally sound assets. And the good news, in my opinion, is like better assets are coming on sale. And so you can find better things to buy. You just have to be patient and persistent.

J:
And there’s less competition these days, which is a great thing. My business partner mentioned yesterday something that we don’t think about enough. Not only is there less competition and we normally think of this as a bad thing, but the competition that we have these days is stronger than it was a couple years ago. We don’t like strong competition, but the reality is there’s some benefit to weeding out the weak competition. It was the new investors, the ones that didn’t know how to underwrite deals that were offering ridiculous amounts

Dave:
On

J:
Properties, properties that we couldn’t touch because people who didn’t know what they were doing were offering 10, 20, 30% over what we were willing to offer. So there is some value in the weaker competition getting weeded out

Dave:
And being

J:
Stuck with the stronger competition because those are the folks that are reasonable that you can potentially beat out for good deals.

Dave:
All right. Well, J, this was a lot of fun. Thank you so much. I really appreciate you being here. Any last thoughts here?

J:
Keep up with the economy, keep up with the data. Don’t get too comfortable because things could get rocky over the next few months. Stay disciplined, stay focused, invest in hard assets, good assets. And no matter what happens, I think we’ll all come out the other side a lot better for it.

Dave:
Thank you so much, J. If people want to connect more with you, where should they do that?

J:
You can go to jscott.com, letter J, S-C-O-T-T.com. I do a couple times a week economics newsletter that you’re welcome to sign up for if you want to track the economy and what’s going on there.

Dave:
Awesome. Thanks again, J. And thank you all so much for listening to this episode of On The Market. We’ll see you next time.