Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to Show No. 82. This is a very casual conversation. I hope you like it. Let’s join in on the interview.
It is New Year’s Eve 2008 and a lot of investors are going to be very, very happy to see 2008 be in the past. It has been a very difficult year in the economy around the world. Virtually no place on the planet has been really immune from this global economic meltdown we’ve been facing. A lot of them are trying to look forward to 2009, but I think that overall it is not going to be a great year.
So we will have in with this show today some good news and some defensive news, and we’ll talk about how to play the game and how to best survive and possibly thrive in 2009 and beyond. We’re going to talk about some of the crazy predictions of last year. We’re going to talk about some predictions for this year, our predictions, other people’s predictions, etc, etc. And I think you’ll enjoy this show today.
I’ve got a couple of guests with me that I’ll introduce in just a moment, but I wanted to start off with a few broad predictions for 2009 and beyond. Now, the reason I say “and beyond” is because it is very, very apparent and very obvious that the things we are predicting will occur, but telling you the exact date at which they will occur is a whole other deal. I’m not psychic, don’t have a crystal ball unfortunately, and predictions are sometimes worth what they cost. So take it all with a grain of salt.
But a couple of them that were interesting for this last year that is now behind us is when Ben Bernanke, our beloved – and I say that sarcastically – Federal Reserve Chairman, he said one of his predictions was, “I expect there will be some bank failures. I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
Well, good ole Ben said that on February 28, 2008, and how wrong was he. And whether it’s Ben Bernanke or Hank Paulson or any of these elitists, I think we know by now that we cannot trust them and we need to act accordingly in this environment of deception in which we all are living.
Now, another one of them was pretty interesting. You may almost recognize this one because it’s been all over the news. The person who said this says, “In today’s regulatory environment, it is virtually impossible to violate rules.” Do you know who that is? Good old Bernie Madoff, the guy who made off with about $50 billion of people’s money, the largest Ponzi scheme in U.S. history. So predictions are a little crazy, of course, and that’s what we’ll talk to you about in this show today.
Catherine Austin Fitts, who I hope to have on the show soon, in her New Year’s letter, basically summed up the title of it with the question, “Where Is the Money? It Just Keeps Disappearing.” There was about $4 trillion or more that disappeared from the U.S. government between 1998 and 2002, along with a pump and dump of internet and telecom stocks and Enron, etc, etc, etc. And folks, for those of us in the general population that don’t play this game at the highest level of our financial system, we’ve got to practice some real financial self-defense, don’t we?
And what’s really scary with what’s going on now is that with all of these bailouts over the last few months, they are pumping money into the system at unbelievable rates, never before seen in U.S. history. Yet the stock market just won’t really take any lift from it, so here are a couple of my predictions. Take them for what they’re worth.
I believe that the Dow – and I predicted this back in October – will hit 6000. I believe that we’ll see about another 10 – 15 percent price decline in real estate in the bubble markets, like California, many parts of Florida, some parts of the Northeastern United States, etc, etc. Now, these are not the markets, of course, we recommend at Platinum Properties Investor Network. We recommend the non-bubble markets and my prediction for those are that some will appreciate from 3 – 8 percent, some will depreciate from 2 – 5 percent, and others will be just flat.
Now, don’t ask me which ones because, frankly, I’m not sure. I think that we’ll see retail properties hit very hard, especially the big box retail stores. Of course, we’ve recently seen the bankruptcies of Circuit City, we’ve seen Linens and Things, and there’s just no big companies coming in to replace these big box retailers and take that space. So a lot of these retail strip malls were overbuilt, these big box centers were overbuilt, and we’re going to see some significant bloodbath there in the commercial real estate market.
Now, the one part of that that I do like and many call it commercial real estate – I don’t – but I like housing. The population is increasing at the rate of about three million per year and I think apartments, I’m very bullish on apartments for the next decade because we’ve got the largest demographic cohort in American history, Gen Y, coming up. And I know that one of our guests today will probably disagree with me on some of that when it comes to population, as he talks about the doubling up factor, so we’ll get to him in just a moment. He’s being very quiet here for just a moment.
We’ll see many states – well, some states, I should say, and many municipalities become insolvent. Many already are, but they just haven’t formally declared any real bankruptcy yet. Of course, my state here in California is a complete financial disaster of epic proportions, slated to run out of money by February.
Now, what’s amazing and disgusting and appalling about many of these states and cities is that even though they are on the brink of insolvency, they’re actually increasing their spending. Imagine that. Only in government can you do that, where it just doesn’t make any sense, of course.
I think that we’ll see in 2009 the credit markets start to thaw, or actually, I should say continue to thaw out. They’ve been thawing out very slowly. We will see a little bit more of this deflationary trend in the first and second quarter and maybe in the third quarter of the year, but I think that we will see inflation come back in the latter part of 2009.
And by the way, it sort of depends what you consider to be inflation. The technical definition for inflation would say that inflation actually is already occurring. But we haven’t noticed it because remember in my Show No. 79 I believe it was, where I interviewed Bob Prector, who heads up Elliott Wave International, inflation or deflation is determined by what I call MS + CS = I or D. That’s my formula for that.
And so if the monetary supply increases, which it has been dramatically, but the credit supply contracts at the same time, what you’re looking for is the aggregate amount of money in the system. So now, that aggregate amount is actually lower and that’s why we’re seeing this temporary spat of deflation. So I think that will turn into inflation relatively soon.
Let’s talk about precious metals. I think gold should be about $2,000.00 an ounce and we’ve talked about this on previous shows, but the problem with gold is, No. 1, you can’t rent it out, you can’t finance it, you don’t get tax benefits. But the biggest problem is it’s manipulated. It’s manipulated by the powers that be, the Central Banks, etc, and how long they can manipulate, well, maybe longer than I can wait on my investment. So if they can keep manipulating for another two decades, I’m in trouble and so are you, so that’s why I’m not a gold bug, although I do think the real price of gold should be higher.
Interest rates, I think we’re going to see continued softening in interest rates during this deflationary period, and then later, we’ll see much, much higher interest rates, making the opportunity to lock in a very cheap, below cost, I should say, 30-year, fixed-rate mortgage. That will become a very coveted asset.
Unemployment and this will be my final point before we open it up to our distinguished panelists here. Unemployment, I think unemployment rate is manipulated, just like the consumer price index is and many other government numbers. I don’t think it accounts very well for what’s really going on in a modern economy like we have now. And whatever the official unemployment statistics are, I think you can probably add safely about 5 percent to them to get the real number.
So I think we’ll see the official unemployment stats come up above 10 percent in 2009. That’s not good news obviously, but what does that mean? That means the real unemployment rate will be above 15 percent or about 15 percent.
Now, if you invested in rental properties over the past year, congratulate yourself. In the middle of a bad economy and a bad real estate market, and especially if you were in the wrong markets, you got hurt. But if you were in the right markets, the non-bubble markets, the markets we recommend, you actually did okay. In fact, when you consider it and compare it to any other investment that was available to you – now, when I say investment, I have to give you the proviso that I am excluding CDs. My friend John, one of our panelist friends, John is the genius investor of 2008 because he’s a CD investor and better than most.
But I’m excluding CDs, bank accounts, money market funds, etc, as an investment because those really aren’t investments. But you compare it to stock markets, which in the U.S. and around the world are down between 40 and 60 percent in the last year, and if you invested in non-bubble market real estate, you maybe saw a little bit of softening of under 10 percent, maybe 5 percent, 6 percent, that kind of thing. Some markets actually appreciated. Many, many markets were flat of these just linear, sort of non-bubble markets.
So I’ve made a lot of controversial statements there. Let’s open it up to our guests and let me tell you how much I appreciate them being here. First of all, you’ve heard from both of these before. Our client, Gary Halmbacher. Gary, welcome to the show.
Gary Halmbacher: Hi, Jason. Thanks for having me. Just wanted to make one correction to your statement and that was that Birney Madoff has perpetrated the largest Ponzi scheme of all time and, unfortunately, that is a mere $50 billion. That’s with a “b,” which is one thousand million. The federal government is actually the largest perpetrator of these schemes and the Social Security plan is actually about $50 trillion, which is $50 thousand, thousand millions. So it’s about 1,000 times worse than the Bernie Madoff rip-off.
Jason Hartman: You know in the last year, Gary, a billion, a trillion, it all just doesn’t seem like much money anymore, does it?
Gary Halmbacher: There are amounts that are beyond belief, but again, thank you for having me here.
Jason Hartman: All right. Good to have you. And our next panelist is Dr. Mark MacVay. Mark, welcome to the show. Great to have you here.
Mark MacVay: Thanks, Jason. Thanks for having me.
Jason Hartman: Any thoughts on my statements from either of you?
Mark MacVay: Well, I tend to agree with the majority of what you said. Obviously, when you say that Gen Y will come along and mysteriously save our economy, I tend to take exception to that.
Jason Hartman: I don’t think they will save our economy. I just think that they will provide a lot of demand for rental housing over the next decade. This is the largest demographic cohort in American history. It’s 80 million, whereas the Baby Boomers, which were the second largest, was 76 million people. And granted, in a bad economy, as we have discussed before and I believe you’re right about this, people will double up, more people will take on roommates, Gen Y will live at home, but certainly, some of them will move out and some will rent housing and there will be demand for rental housing.
Now, we’ve got this giant hangover of inventory in the housing market that we’ve got to contend with, but that’s starting to get gobbled up ever so slowly.
Mark MacVay: Perhaps I think it’s a question of just how slowly it will be gobbled up. In many markets, there’s a huge oversupply. That may take years and years to equilibrate.
Jason Hartman: Absolutely. So any thought on which markets are hardest hit with the oversupply and inventory hangover? The reason this is all sort of just a big discussion because it’s very hard to find really empirical statistics on a lot of this stuff. A little builder in the South, as there were so many of these small builders, builds four four-plexes. There’s all these sort of small developments and things like that. You really don’t know what the demand is. Economics is a field that sometimes makes astrology look respectable.
Gary Halmbacher: I’d like to make one point and that is, as you mentioned and I am one of your investors, so I’ll make that disclosure, but again, if you look at the raw, hard numbers, which I do as an engineer, on average, stock-type investments are down about 40 percent this year. But as we go through our list for the non-bubble markets, they’re down between 4 and 15 or 20 percent, which isn’t great, but hey, if you lost less than your neighbor, that’s not a bad deal. And what I find interesting right now is with some of the properties on the markets, they are what I would estimate to be below construction costs. And that has to be kind of a good trend and –
Jason Hartman: Because it means no one’s going to build if they can’t sell for above construction costs until the supply dwindles.
Gary Halmbacher: And if you buy those homes, when they do go back to building and we’re not sure when that is, but when they do, your investment is automatically going to have to take a jump in price. So the question is how many people do double up and triple up?
Jason Hartman: And that we just can’t tell because nobody knows.
Gary Halmbacher: We just don’t know.
Jason Hartman: Nobody knows. But Gary, one more thing before Mark takes over. We’ve talked about before, which I found interesting, all the people that invested in the stock market lost their shirts, of course, just a very bad deal. We talked about one of our fellow friends and clients here that invested in a bunch of GM stock. One of the statements you made, which I thought was really interesting was you can’t get a loan modification on your stock and if you buy rental properties and use as much debt as they will give you, you can always go back and, in essence, re-price the investment.
Of course, I’ve made my point about my opinion of the ethics of this whole thing, but the fact is the opportunity to sort of save yourself later, if you run into hard times, is available when you’re doing the rental property thing the right way, right?
Gary Halmbacher: And while we didn’t know that at the time, you make a good point on that. And again, it goes back – well, the heart kind of says don’t leverage; it’s a bad thing. When the government is pumping the money supply like they are and you have very little to lose in your properties, you have the power to go back to the company because what do they do? Who are they going to sell that house to if they take it away from you?
Jason Hartman: You mean your lender.
Gary Halmbacher: I’m sorry, yes. When you go back to the lender and say I’m not going to pay you anymore, they have limited options because, again, who do they sell to if you decide not to buy it. Whereas, a stock, hey, you spend 100 percent on it. Sorry, the money’s gone. In the case of our friend that invested in GM, basically I can roughly equate the loss of his money to him paying overpaid union workers for an extra two years. Basically, he subsidized their wages for two years with the loss of his stock price.
Jason Hartman: And the executives, too, yeah.
Gary Halmbacher: Yes. Boy, the executives are really a drop in the bucket. Again, disclosure, I am a former GM employee and while the executive bonuses might be excessive, they’re a drop in the bucket when you look at the –
Jason Hartman: Compared to the many rank and file union workers, yeah.
Gary Halmbacher: And it’s not even the wages anymore. It’s really the pension funds that were negotiated more than 30 years ago. I know it’s a little off-topic, but it’s just a lot of these pension funds, a lot of the investments are just coming due right now.
Jason Hartman: Yeah, interesting point. You know, Mark, I know that you’re not a fan of bailouts. Tell us how you feel. We’ve had a lot of bailouts and we’re going to see a lot more. And I think the big trend we’re going to see in 2009 is we’re going to see bailouts of municipalities and maybe the state of California and a few other states, right?
Mark MacVay: Right and I would ask where does it end.
Jason Hartman: It never ends.
Mark MacVay: If we’re truly a capitalist society, then we need to take our losses when they occur, rather than propping up failed organizations.
Jason Hartman: Yeah, the losses get the excesses out of the system and they show – I mean how are you supposed to know in a free market system what company is a bad company, where municipality is running things poorly, if they can’t fail?
Mark MacVay: I couldn’t agree more. It’s almost gotten to absurd levels that we’re bailing everybody out, everybody and their cousin.
Jason Hartman: So I can’t wait to get my bailout. Maybe they’ll put a form on the federal government website, like fedbailout.com or something, or .gov, and you can go and fill out a form and tell your hardship and your tale of woe and how you spent too much money the last ten years, and went on lots of vacations and bought lots of gizmos and gadgets and a house you couldn’t afford. Maybe they’ll just bail you out directly. What do you think?
Gary Halmbacher: I’ve got one question. It’s a little bit –
Jason Hartman: I’m being sarcastic and snarky, of course.
Gary Halmbacher: Yeah, it’s a little bit off topic, but let’s say the governments do fail. What exactly does that mean? Does that mean a bunch of the widows and the orphans that have invested bonds, I mean they’re just out the money, or what will that look like, I wonder?
Jason Hartman: Well, we talked about before how our governor here, good ole Arnold, Arnold Schwarzenegger, he got on the radio and he was promoting “buy California bonds” and I hear those are already trading below what you bought them for. It’s a terrible deal. I don’t know why anyone would ever buy bonds. I think bonds are one of the worst investments ever because you have default risk. Are they just going to leave the bondholders holding the bag? I suppose they are, right? I don’t know.
Mark MacVay: Or ultimately pay it back with worthless currency.
Jason Hartman: Oh, yeah, good point. So in other words, it’s kind of like, Mark, when we interviewed Peter Schiff, Peter Schiff says well, the FDIC insures your money; they just don’t insure what it will be worth when you get it back, i.e. inflation.
Mark MacVay: Exactly.
Jason Hartman: Good point.
Mark MacVay: As I listen to this conversation, I have to agree with you. There will be two ways the bonds are paid back. One is with evermore worthless currency and, Jason, as you pointed out, I believe the average California bond right now is selling for something like 79 or 80 percent of its face value, which means the effective interest rate has gone up, but for someone who bought that bond, they’ll never see their principle back.
Jason Hartman: Right, so if you need to trade that bond and sell it, then you’re completely at a loss there. Yeah, very bad deal.
Mark MacVay: And possibly the third way is they just raise taxes and raise and raise until people can’t go anywhere else or just refuse to work.
Jason Hartman: That’s absolutely right. Well, maybe we should talk a little bit about deflation and inflation. I mean it’s pretty apparent that we are in a deflationary period at the moment. I think that period is temporary. I mean one of the things we were reading as we prepped for this talk today is that healthcare costs are predicted to increase by 10 percent next year. We’ve got the price of oil, which, by the way, I don’t think I mentioned my oil prediction when I was reading that off, did I? Well, I skipped that. Let me just mention that and go on record with it.
I think we’ll see oil fall into the mid-$20.00s and then I think we’re going to see it head back up toward $100.00 a barrel. So don’t fall for the sucker punch of buying a big SUV. That’s my advice to our listeners.
Mark MacVay: What’s your timeframe for that?
Jason Hartman: Well, 2009 and beyond. Could you please be a little more – no, I think by the end of ’09 we’re really going to see oil creep back up there. A lot of this stuff, in my opinion, is fairly temporary because various investment funds have had to unwind positions, sell off assets. It’s sort of been a shock to see how China has slowed so much. A lot of demand for oil there. But the fact of just pure demographics is undeniable. Granted, people could continue to have lots of babies. The population could expand by another 100 million in the U.S., as they say it will in the next 31 years, another 3.5 billion, or so around the world by 2050 and maybe they just won’t consume much at all. But I think the trend, if I have to bet, is toward massively increased consumption of commodities, of resources in general, oil, energy, assets.
Gary Halmbacher: Just going back to your oil and I’ll preface what I’m going to say with my prediction earlier in the year where it wouldn’t fall below about $90.00 a barrel.
Jason Hartman: You may not want to admit that, you know.
Gary Halmbacher: Well, I know. That’s why I want everybody – we talk about the whole grain of salt thing. At least I wasn’t Bernie Madoff in his comment. But I believe oil will probably stay near $40.00, but if you look at it, oil went to about $140.00 and now it’s at $40.00, and I believe that the real price, as you mentioned, is near $100.00, maybe $90.00. The Saudi’s have said $75.00. So that is probably the real price. Now, when does that happen? I think 2009 will be a tough year, but ultimately, you’re right. That oil is a commodity, plus the other commodities you mentioned, the ultimate direction of price on all of those things is up, especially as inflation kicks in because we’ll be paying for those things with evermore-worthless dollars.
Jason Hartman: One of the things that you had sent me, Mark, was the newsletter, Chris Myers newsletter I believe, it said that basically, it costs about $70.00 – $80.00 a barrel to produce oil, so it’s being sold for much less than it’s worth.
Mark MacVay: Yeah, Jason. I find it interesting that even at $140.00 a barrel, the destruction of people allegedly driving less is relatively small, implying there’s a concrete – not to use the term – but a substantial need for oil throughout the globe. So I can’t see the argument that there will be less demand going forward due to a higher oil price. We simply need it to exist in our current world.
Jason Hartman: Yeah and more economical cars and driving less, that’s just a small part of the problem. Of course, we’ve got the petroleum products that make all sorts of plastic materials and things like that, so yeah, absolutely.
Gary Halmbacher: One thing I’d like to mention about the price of oil, what you’re talking about is the average price to produce a barrel of oil and what you need to look at is there is a whole range of costs to produce oil. The Saudis basically turn a spigot on and it comes out, so it may be $3.00 – $4.00 a barrel of oil. The tougher places where they have to use steam extraction and things, it could be $100.00 a barrel. So the cost is really what is the cost of the incremental or next barrel of oil and what happens is in a time like this, the people whose oil is more expensive, they just leave it in the ground. And the sad fact of all this oil issue is we have 300 years worth of oil at current use in America. We have ten times the reserves of the Saudis in the oil shales in the western part of the United States and we choose not to use it.
Jason Hartman: Well, you’ve got a constant battle with the environmentalists who want to preserve land that nobody ever goes to or nobody ever sees. I’m talking about Anwar here, of course. Yeah, you’ve got that as an issue, of course, and the oil sands in Canada, it’s not even economical to start creating oil out of the oil sands up there until you’re at least $50.00, $60.00, $70.00 a barrel from what I’m told. So it’s an interesting point.
What other thoughts do you guys have on the New Year, on investments, on financial self-defense, and we are planning a new show that maybe we’ll mention here as it’s New Year’s Eve 2008. We are going to do a new podcast on sort of an overall security topic, like holistic security, where we’re going to talk about how you can protect yourself financially, your assets, your rights, even preparing for civil unrest, natural disasters like Katrina, etc, things like that. So look for that show in the New Year because we’re going to be publishing a new show. We got some really interesting ideas behind that.
What else do you see happening out there, guys?
Gary Halmbacher: I guess everything flows from the governments. Like it or not, we have to react to what they do and as we know, the government – Jason, you’ve talked about it, Mark, you’ve talked about it – the government is moving into unprecedented, unknown, and very dangerous territory. And I believe it was Mark that sent me a graph and from the beginning of America to September 24 of this year, the government had created $1 trillion in the money supply, and since September 24, they’ve created another trillion.
If you looked at the graph, you swore your printer broke because you get this very nice linear curve and all of a sudden –
Jason Hartman: It’s a hockey stick.
Gary Halmbacher: It’s not even a hockey stick. It’s like the printer went nuts and the red ink started spilling out. So clearly we have that and I’m a big believer in Milton Freeman and he won a Nobel Prize, when Nobel Prizes meant something, and he pointed out that any creation of money in excess of productivity gains ends up as inflation, and he showed that it took about two years. So while I agree with your inflationary predictions, I believe they’re not going to become really obvious until about 2010.
Jason Hartman: Well, the money supply was increasing dramatically before the bailouts, too. Don’t forget that. The bailouts made it totally radical, but we were already – I mean we’ve been complaining about inflation and Dr. Mark over here has certainly been the ultimate inflation bug, I’d say, for five or six years now. I mean it’s been a bad trend for decades, really, since we went off the Gold Standard in ’71.
Gary Halmbacher: It was still a linear graph. They were clearly pumping the money supply, but it’s just flat out scary. They literally doubled the money supply. In other words, what it took 270 some years – excuse my lack of history – but in the span of six months, we’ve created as much money as we have in 200 years. That’s very, very spooky.
Jason Hartman: Sure is. Mark?
Mark MacVay: I completely agree. I think in 2009, maybe early 2010, you’re going to see the dollar take a major dump, maybe 10, 20, even 30 percent. Of course, among everything else, I think you’ll see gold prices rise into the mid-thousands, $2,000.00s as well.
Jason Hartman: So if the dollar dumps by – what did you say – 10 – 20 percent? That means if I have $1 million in debt on my rental properties, the value of that debt is going to decline by $100,000.00 to $200,000.00. Boy, I love inflation. You know how the primitive cultures used to have a rain dance so they could grow their crops? Let’s have an inflation dance. Oh, wait, Bernanke and Paulson are doing that just fine for us.
Gary Halmbacher: And for those that don’t believe in Mark’s prediction, bear in mind that the dollar went from 2006 from about $1.24 to $1.63 per Euro in about a year, so what he’s talking about can easily happen. It already has in the last year.
Jason Hartman: Yeah, absolutely. Let’s look at a couple of these other predictions from last year. So here’s one. It says, “A very powerful and durable rally is in the works, but it may need another couple of days to lift off. Hold the fort and keep the faith.” Richard Band, editor of Profitable Investing Newsletter, on March 27, 2008.
All of these people on Wall Street and the predictors of it, they just seem to me like a bunch of shills that just want to get people to take their money, and there’s such a giant industry behind it. There are so many entrenched interests that want to see middle class Americans stick their money in the stock market. And I mean Wall Street, as Bill Bonner says, and I love the way he says it, he says Wall Street does what it does best, separates people from their money.
Gary Halmbacher: I’d like to make a comment about that. I’m a big fan of the movie, “Animal House.” And for those of you that are fans out there, there’s a scene right at the end of the movie when all hell has broken loose, and the Deltas have gone and wreaked havoc in the city. And Kevin Bacon plays ROTC person, and he’s shouting to the crowd as they stampede, “All is well. All is well,” just before he gets stampeded. Whenever I hear a statement like that, all I can think of is Kevin Bacon in the movie, “Animal House.”
Jason Hartman: Good point. So here’s another prediction for you. It says, “AIG could have huge gains in the second quarter.” So that was Billings Ramsey on May 9, 2008. AIG wound up losing $5 billion in that quarter and $25 billion the next. It was taken over in September by the U.S. government, which will spend $150 billion to keep it afloat. Mark?
Mark MacVay: So they did gain. It’s just that it was at our expense.
Jason Hartman: Oh, that’s a very good point. So the gains really did happen. They just came from the government rather than the market itself. Very interesting.
Gary Halmbacher: Can I point out that the government is really us, anybody that pays taxes? We always talk about the government like it’s some –
Jason Hartman: Foreign entity.
Gary Halmbacher: – fabulous, yeah, entity, and they’re literally taking money out of our wallets and our bank accounts.
Jason Hartman: And I just want to mention something, as I’ve mentioned before on the show, that it’s not just about taxes. It’s about the hidden tax of inflation, the devaluation of the dollars in your bank account, in your wallet, or your debts, and that’s the good way that it happens, of course, that we talk a lot about on the show, is how inflation benefits us as investors because it basically pays off debt. So it’s coming.
Gary Halmbacher: And let’s point out that the government cannot possibly pay all of these debts just with the income taxes they get from us because people are making less money. So the government has to actually confiscate our assets and they have to do that through what you said, the hidden tax of inflation. Just taking money from our salaries is not going to do it. They have to go after the assets of people that have them.
Jason Hartman: Hey, Mark, I think you’ll really like this quote. It’s from good ole Barney Frank. I know you’re not a fan and neither am I. He says, “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under. I think they are in good shape going forward,” Barney Frank, Democrat of Massachusetts said on July 14, 2008. Just two months later, the government forced the mortgage giants into conservatorships and pledged to invest $100 billion in each.
Mark MacVay: Well, I completely agree with you about Barney Frank. In fact, I think the average person on the street has more economic intelligence in their pinky finger than Barney Frank does in his head. And he’s a pox on his constituency. I don’t know why they continue to reelect him, but he’s probably done more to maintain the fiasco, that is Fannie Mae and Freddie Mac, than anybody else out there, and he should be recognized as such.
Jason Hartman: Absolutely right. Here’s another one. “I’m not an economist, but I do believe that we’re growing.” Good ole George Bush, July 15. And then here’s the corollary, the answer to it: “Nope, Gross Domestic Product shrank at .5 percent annual rate in July – September quarter. On December 1, the National Bureau of Economic Research declared that a recession began in December of 2007.” Gee, the year where they finally recognized it.
Gary Halmbacher: You know in this age of YouTube, with comments like Barney Frank and Maxine Waters and even George Bush, it’s like where are the politicians that are just going to tell the truth and get on and have a screen behind them, and just play these idiotic comments these people made, and get some accountability. I just don’t get it.
Jason Hartman: They don’t get elected; the honest ones don’t get elected unfortunately. We’re never going to see a Ron Paul as president because he tells it the way it is. Here’s one for you. “I think Bob Steele is the one guy I trust to turn this bank around, which is why I told you on weakness, it’s time to buy Wachovia,” good ole Jim Cramer, CNBC Mad Money commentator said on March 11, 2008. Two weeks later, Wachovia came within hours of failure as depositors fled. Steele eventually agreed to a takeover by Wells Fargo. Wachovia shares lost half their value from September 15 to December 29.
Well, I’ve never been a fan of Jim Cramer. Any comments, Mark?
Mark MacVay: Well, Jim Cramer is known notoriously for supporting I believe it’s Bear Stearns, saying that they are solvent, just a few days before they went belly up. So his credibility, at least in my mind, is shot and should be shot for the majority of Americans out there.
Jason Hartman: But isn’t that amazing, though, that he has such a popular show? On one of our previous shows, by the way, for listeners if you haven’t heard it, and I don’t know which podcast it is, but you can just go to www.jasonhartman.com and type Jim Cramer in the Search Engine. There’s a little Google search bar on our website. And you’ll find the transcript of the podcast where Jim Cramer is bragging about manipulating the stock market and committing fraud, and I heard that after that, the SEC investigated, but somehow it went nowhere.
Mark MacVay: I’m beginning to wonder whether we should be trusting anybody that’s even remotely associated with Goldman Sachs. I mean look at our current secretary of the treasury, Jim Cramer, the list goes on and on.
Gary Halmbacher: Is this the same SEC that investigated Bernie Madoff’s fund and found that it had been okay for decades? Is that the same organization?
Jason Hartman: Same organization.
Gary Halmbacher: Okay. And just one comment about your banks, my question is B of A absorbed Countrywide; they were hours from going broke. Washington Mutual got absorbed, all these supposedly well-run banks that absorbed all these other companies with debt. My question is how solvent are the banks that have absorbed all the other banks? That’s my real worry for 2009. Are they really as solid as we’re being told? And I just don’t know that – I don’t either.
Jason Hartman: I wouldn’t believe anybody else. I mean Bank of America, how much junk can they absorb? They absorbed Merrill Lynch and Countrywide and what just gets my goat is that these institutions like Merrill Lynch, okay, these are the people that we’re supposed to trust to invest our money, and they can’t even manage their own business. They can’t even invest their own money in a way that makes it profitable for themselves. What makes anybody think they can do it for us?
Mark MacVay: I think this harkens back to what you and I have spoken about several times, regarding that book by Edward Griffin, Creature from Jekyll Island, which basically, in a nut shell, the banks are running our country. We have sold out our interest to the banks and I think 2008 is a classic example of proving that.
Jason Hartman: And I think it’s definitely true and obvious that Washington, D.C., has been hijacked by Wall Street, New York. And for the regular investor, the everyday person, you’re not under that inside game. Stop relinquishing control to these people. They are out for themselves. They are out to impoverish the middle class and the next way they’re going to try and do it, after creating this bubble and then the bubble popping, and then all these frauds, and then they’ll have a couple show trials just to act like they’re doing something, but it’s really just a big scheme, a big game.
The next way they’re going to do it is through inflation and that inflation is going to impoverish most, but our listeners are going to become rich through that inflation. It’s going to make them wealthy, so if you’re a new listener, be sure you go back and listen to the old shows where we talk about this in depth.
Gary Halmbacher: Here’s my, kind of, comment, question, and that is we’ve turned Bernie Madoff into the devil personified, the Ponzi scheme.
Jason Hartman: He’s just one of them. There are many others we haven’t discovered yet.
Gary Halmbacher: Well, here’s my comment. He lost 100 percent of the clients’ money. Wall Street only lost 40. So why are they any less of a Ponzi scheme than anybody else? So they only took away 40 percent? In other words, people, for the last 20 years, have made nothing on Wall Street. All that’s happened is they paid for their big buildings and their secretaries and their big screen TVs –
Jason Hartman: For the Wall Street firms.
Gary Halmbacher: Sure, for the Wall Street firms and the investment bankers.
Jason Hartman: And our friends at the coffee shop, their Mercedes and their Porsche, while they put all the people into crappy annuity investments.
Gary Halmbacher: Right. All that’s happened is if you take the 40 percent of loss and ratio that over the last 10 – 15 years, you’ll find out people haven’t really made anything, and what’s happened is Wall Street has either taken money off the top or just eaten into the principle to support themselves. Why isn’t that a Ponzi scheme? Why isn’t anybody talking about that?
Jason Hartman: It is because the whole system, the whole financial press, CNBC, etc, is designed to bring in new investors so that the old investors can be paid off. So that’s why they’re trying to combat this deflationary trend in the stock market is because it’s a Ponzi scheme, literally, like by definition, it is. You’ve got to prop it up so that the old investors that have been in the game a while don’t lose money and so that we can attract new victims to the Ponzi scheme.
Gary Halmbacher: Can you imagine where the stock market would be right now had they not dumped those trillions in? It would be getting down into the 6,000 or lower. To show how bad this was, the only reason the market is staying where it is is because of the trillions they’ve pumped into the market to disguise the real decline in value.
Jason Hartman: Oh, yeah, no, the real value of the Dow, sans bailout, in other words, if you didn’t have the bailouts, if you didn’t have the discount window opening, if you didn’t have all these other credit facilities and monetary facilities creating fiat money, fake money, if you didn’t have that happening, I bet the Dow would be at 3,000. So when I make my Dow 6,000 prediction, I’m putting in some bailouts in there and the ones that have already occurred. Mark?
Mark MacVay: And that would be fine if the Dow were 3,000. We’d take a big hit, but at least we’d purge the rottenness out of the system much quicker and then we’d be back to being productive and growing at a steady rate.
Jason Hartman: At a faster pace. And what they’re doing with all of these bailouts and so forth is just prolonging the agony, aren’t they?
Mark MacVay: I believe so.
Gary Halmbacher: And I believe – the only reason I don’t believe your Dow 6,000 comment is because the Dow probably should be falling to more like 3,000 or 4,000, but I believe they’ll just keep pumping the money supply and pumping it and pumping it to try and hold this 8,000 level. I don’t know if it can hold it, but I think before the Dow drops, they’ll dump another trillion dollars into the market.
Jason Hartman: That’s the problem with government interference in markets is that you just don’t know because you don’t know what they’re talking about now and what they’re thinking about doing next. And they can just come in and completely change the value of your holdings, of your assets, of your stocks, of your precious metals, and that’s why I don’t like these investments that are so subject to manipulation. Mark?
Mark MacVay: Well, I sort of counter that. One of the things, if you don’t like control of our investments, one of the things I get concerned about with rental properties is rent control. I mean who’s to say they can’t institute rent control on a national level.
Jason Hartman: Fair enough. I guess they could, but then the supply of landlords will certainly dwindle as they did in Santa Monica and what always happens in those rent control markets is a gray market or a black market. There’s an episode on Seinfeld, one of my favorite shows, where Jerry Seinfeld’s neighbor, I think upstairs or something, died and Elaine got excited that – I think it was a lady – this lady finally died. She was so happy because then she could move into this rent controlled apartment. And there were all kinds of deals where the landlords were getting paid off, the prior tenants were getting paid off.
I had a friend of mine who had a rent-controlled apartment up in the People’s Republic of San Francisco and he had moved down here to Southern California. He was living in Orange County and he put a friend of his in his rent-controlled apartment, and basically, illegally, subleased it. The rent was much cheaper. It was below market.
I have another friend of mine, who’s owned some rent-controlled apartments in the People’s Republic of Santa Monica, and in Santa Monica, he’s got in the same building, the same exact unit rented for $850.00 and the next-door one, $2,400.00 because one is under rent control, one isn’t. And they’re neighbors. Can you imagine how that perverts the market?
So yes, you’re right. They could make some radical national rent control law, but I really doubt that would happen. But the thing I’ve always got as a back door in a devastation scenario like that is I just go to my lender and I say hey, this investment no longer performs. Help me out. And unfortunately, that’s what half the country is doing right now. Loan modification, baby, that’s what they’re doing.
Gary Halmbacher: Yeah, you just made the point I was going to make. That is, again, while it goes against my financial head, if you have only 5 or 10 percent cash invested in the property and you have rent control, you go back to the lender and let the bank fight the local city council or whoever instituted that.
Jason Hartman: Well, that’s a good point, actually. The banks would be very much against rent control. That’s an interesting point. So you have a lobby. See, whenever you borrow money, your lender becomes your ally, your partner, and they become your advocate because they’re in it with you. In fact, they’re way more in it than you are. You’re only 10 percent, maybe 20 percent in the deal, and the lender’s 80 or 90 percent in the deal.
Gary Halmbacher: And I suppose as a person, I’m in my 50s now. I have to be very careful with what money I have, and I’ve always been the kind of person that pays everything off. But Jason, you and I have had numbers of conversations, and when you see the government destroying the money, the value of our money, you have to look at the only way you can really protect yourself is to get some fixed debt that the government is subsidizing. They effectively own Fannie Mae and Freddie Mac, so the idea is to get as much of that debt as you can. And then, when inflation inevitably hits, and I think of all the things we disagree on at this table, the one thing the three of us agree on is there will be inflation, it’s going to clearly be in the double-digit areas. And we will be incredibly lucky if we don’t hit hyperinflation, and I would class hyperinflation as over 40 percent a year.
And the only way – I said I hope we dodge that, okay, but if you believe Milton Freeman, and I do, 15 percent would not be out of line, 15 percent a year by 2010 and 2011. And the only way you’re going to protect yourself by the government destroying your assets is to get your own personal bailout, which is long-term, fixed debt that the government is subsidizing.
Hey, try and go out and get a 10-year loan right now and see what the rate is. But the government’s going to give you a 30-year loan for 4.5 percent and people think that’s not subsidized? I mean give me a break.
Jason Hartman: Of course. So what you’re referring to, Gary – let me just kind of clear that up – is the comparison between the real lending market and the fake lending market, the government subsidized lending market. So for example, if you get an auto loan or a line of credit on your business or any other type of financing, other than like a government subsidized student loan or a loan for property, for real estate, which is also subsidized by the government, obviously, the government now basically owns Fannie Mae and Freddie Mac essentially. So these are government-subsidized loans and the rates are just phenomenal and that loan is going to become a phenomenal asset in the future, in our opinion.
So we do disagree when inflation will come, but we all agree that it’s coming and it’s going to come with a vengeance.
Gary Halmbacher: And we used to talk about the Soviet Block nations providing government housing. Well, we’re just de facto doing the same thing in this country because, as you’ve just pointed out, the government effectively owns Fannie Mae and Freddie Mac, and these loans, the real rate on a 30-year loan, should probably be like 10 percent, maybe 12, when you –
Jason Hartman: It’s 30 years, I wouldn’t want to loan money at even 8 percent for three decades. That’s crazy. You don’t know. If inflation is 15 percent, in two years or three years from now, and you’ve got loans at 8 percent out there, you’re getting killed as the lender. As the borrower, you’re getting rich.
Gary Halmbacher: My building, I only got a 10-year loan on, which was again private money –
Jason Hartman: Your office building.
Gary Halmbacher: My office building, yes, and that was at 6.8, I believe. So the difference between the 6.8 for ten years and this 4 percent for 30, that’s the government, which again, as you and I and Mark and everybody sitting here –
Jason Hartman: Perverting the market.
Gary Halmbacher: Yeah, just stealing the assets of the people who have them and handing it to people who don’t and effectively providing government housing for the population.
Jason Hartman: They’re just redistributing wealth, as Obama is going to do a lot of, as we see him come into office in about 21 days, right? Mark, what do you have to say about that?
Mark MacVay: Just around the corner. I think he’s already made overtures toward producing a $1 trillion stimulus, which is just – obviously, we’ve talked about this before – it’s just absolutely crazy. So he’s throwing fuel on a fire.
Jason Hartman: That’s the way you put a fire out. You just throw more gasoline on it.
Mark MacVay: The solution to accumulating too much debt is to have more debt.
Jason Hartman: Yes, well, that’s from a country perspective, yes, and that’s crazy. So let’s just do a little recap of the last year in the markets real quick and we’ll kind of start wrapping up here. Dow Jones Industrial Average down 35 percent, S&P down 39 percent, NASDAQ down 42 percent. I mean these are huge losses. Dow Jones Financials down 55 percent. AMEX Oil Index down 38 percent. Germany, the DAX, down 40 percent. FTSE 100 down 32 percent, the Nikkei Japan down 42 percent, Shanghai Composite down 65 percent, Mexico’s IPC down 24 percent, Brazil down 41 percent.
I mean this is unbelievable. This is a global stock market meltdown. Equities do not work. Even in good times, they weren’t so good.
Now, you look at gold up 4 percent for the year and you look at the dollar index kind of came up and we think that’s massively manipulated, of course, up 5 percent. The pound versus the dollar down 27 percent; dollar versus yen up 19 percent.
So it’s just obvious the manipulation is going on in these markets and that you should not be relinquishing control of your money to anybody else. And even if you have a rental property, where say you’ve got a 90 percent loan on that property, if that goes down 5 percent, for example, you’re not in that much of it because if you have inflation at the same time, you can actually make money by losing money.
Now, if you don’t have inflation at the same time, then my answer to that is you have a stabilized investment and you don’t get a “margin call.” So you just buy and you hold it. It’s rented; it’s stabilized. The population is increasing. Granted – and I’ve addressed this on previous shows – that I think we’re going to see more people occupying our rental properties over the years. So for example, if you have a little single-family house that’s 1,700 square feet and now it might be occupied by a single person or a couple or maybe a couple with one kid, you’re going to see the mother in-law living there.
You’re going to see people doubling up. You’re going to see even couples taking on maybe a roommate to rent a room to and you’ll see more of that as the economy worsens and you’ll hear more stories from your tenants about how they used to live in a much nicer, bigger home than they’re renting from you, but they still gotta live somewhere.
So the standard of living will definitely reallocate, but people still need to live in a house. Thoughts on that, Mark? It looks like you’ve got something to say about it.
Mark MacVay: Well, just to add to what you’ve already said, I saw an article recently. I believe it was on Market Watch and the essence of it was that it’s much harder for people to get divorced now and then because of the economy, and husbands and wives are staying together out of financial necessity rather than out of true love. So it echoes what you just said.
Jason Hartman: Well, the one thing about this very difficult economy we’re in and we’re going to continue to be in is that I think it does redefine priorities to some extent for people and sort of redefining a little bit about what’s important in life. So I’ve heard a lot of stories about that. It’s sort of interesting.
Mark MacVay: You’ll get to know your in-laws much better when they move in with you.
Jason Hartman: Yeah, that’s not a priority, but then again, I’m single. Gary?
Gary Halmbacher: And as somebody who’s playing with house money as far as age, let’s remember even at the height of the Great Depression that somewhere between 70 and 85 percent of all the people out there were still working. So we have that and for me personally, I saw the sunrise today. I’m looking at it come close to setting. You can do things like, hey, pick up something called a book and actually read it. You don’t have to go to the mall for all of your entertainment. You can take a nice hike somewhere and there are a lot of things that you can do that, again, don’t involve going to the mall and buying thousands of dollars of crap from China.
Jason Hartman: The China comment was kind of funny there. Okay, well, let’s wrap this up. Any final thoughts, gentlemen? Mark?
Mark MacVay: Well, in conjunction with worsening financial conditions because people have so little cushion to fall back on, I’m sort of concerned about increasing civil unrest and even riots breaking out, something we haven’t addressed yet.
Jason Hartman: Well, that’s why we’re going to start this new show about holistic security. We’re going to talk about civil unrest. We’re going to talk about civil disobedience, too. We’re going to talk about security. We’re going to talk about food storage. It’s going to edge on a little bit of the survivalism-type talk, which I do not think is crazy. I think that it is just simply prudent.
For a few hundred bucks, anybody in America can make themselves better prepared and when you look at something like Hurricane Katrina from a few years ago, you just saw how completely unprepared people were, and they were expecting another type of bailout. They were expecting the government to provide everything and you know what folks? We have to provide for ourselves. We know that we cannot put our financial future in the hands of Wall Street. They have a completely different agenda that is counter to our agenda. We cannot put our hands in the hands of the government. The government cannot be trusted to bail us out. Wall Street cannot be trusted with our financial future.
We need to take responsibility for ourselves and our own lives. That’s the thing. Someone once said that in San Francisco or L.A. Harbor, there should be a statue of responsibility to be the other one that corresponds with the Statue of Liberty in New York Harbor. And you cannot have liberty without responsibility, so we gotta move back toward responsible behavior in this country and I think that’s one of the good things that comes out of hardship.
Gary Halmbacher: I’d like to make a comment regarding Katrina. Katrina, when it hit Jackson, Mississippi, which was 90 miles inland, was still a Category 3 hurricane. That’s a very strong hurricane. So Mississippi was hit substantially harder than New Orleans was, but Mississippi, which coincidently had a Republican governor, followed their emergency plans and you didn’t hear much about Mississippi. It wasn’t in the news. Why? Because people got out there. According to my friend, they directed traffic, they got their own chainsaws out, they cut their trees, they helped people at the gas station, they helped people get to the hospital. In other words, they were self-reliant and they took care of themselves.
New Orleans, which again, had interestingly enough, a Democratic mayor and a Democratic governor, did not implement the plan they had in place, so they lost all of the school buses that were supposed to evacuate people, and most of the people that were in trouble had been on generations of welfare and were totally helpless. That’s why they were in the news all the time and they knowingly lived 13 feet below sea level. They used to brag about it.
So going back to the new show you’re going to do, there’s a lot to be said for personal responsibility. The people in Katrina that were hit much, much harder than the people in New Orleans, while they were hit and they lost many things, they faired much better to the point where they didn’t make the news, and all the success stories were not talked about on the news. Only the stories of failure.
Jason Hartman: Yeah, we need that statue of responsibility for sure, so we’ll talk about that next year. This has been kind of just a very casual conversation today. I guess we’re ready to wrap it up, guys.
Mark MacVay: Well, I was just going to say that Thomas Friedman always talks about globalism and how the world is flat, but given the current economic conditions, I think he may want to reevaluate that. I think the world is becoming rounder and rounder.
Jason Hartman: So are you referring to the decoupling aspect that Peter Schiff talks about when you say that?
Mark MacVay: Indirectly, yes.
Jason Hartman: Okay, good. Well, we’ll talk about that on a future show, too. Thanks so much for listening everybody. Happy New Year. Let’s make sure that in 2009, we don’t relinquish control to other people in our lives; we don’t invest in Wall Street; we don’t invest in these various schemes and these overly complex financial products. Let’s simply own some rental housing. Let’s manage it well. Let’s be responsible. Let’s make a difference in our own lives and by doing that, we don’t need to change the world. The best way to change the world is to change our own corner of it, make it a better place for ourselves, our family, our friends, and our community.
And I want to wish all of you a very, very happy 2009. It is going to be a year with some definite challenges, but we will be here with you on a regular basis to address them and help you through them, and we want to thank you again for listening. Be sure to go to www.jasonhartman.com and join as a member so that you get some of the free stuff we’ve got there in the Members Only section. And we will look forward to talking to you next week. Thanks again and Happy New Year.
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Duration: 61 minutes