3.9.23 AJO Fed Unemployment v1

Welcome everybody to the AJ Osborne show where we focus on our core tenets, impact, freedom, and progress. Join me and others as we grow through education and discussion. The government is firing or trying to get 2 million people fired. Actually technically it’s over 2 million people. So what is going on? Why is this important to you aside from the fact that you don’t want to be one of the 2 million people getting laid off? Now sparks were flying on Capitol Hill as Congress and I believe the Senate were quizzing the Fed and asking them why are you doing what you’re doing and why are you trying to make it that over 2 million people will lose their job in the United States. And a lot of people are upset saying that we are only going to lose jobs because of the Fed’s actions. So the Fed is forcing employers into a situation where they’re going to lay off all of these people. So first of all how is that happening and is this an accusation? Does the Fed agree with it? The Fed 100% agrees with it. In fact it was their number that they came up with. Now this tells us a lot about the market cycle that we’re in, where we’re at, and it tells us a lot about what’s going to happen over the next couple years. Now a lot of people don’t understand why. Why is this happening? Why would the Fed do actions that would put millions of people out of work? Now we first need to understand that it is not rising interest rates and it is not the Fed that will cause the over 2 million people to lose their job. It was the government that printed trillions and trillions of dollars. The Fed job is to control money supply. So the Fed printed money, the government did mass handouts and bailouts, and they sent money just swirling through the economy after COVID. They shut everybody up in their houses, wouldn’t let people work, wouldn’t let businesses work, and instead they just sent companies, individuals, banks, and everybody in between huge piles of cash. That resulted in Americans having the largest savings rate and the most money on hand that they had had in like over 40 years. Companies were flushed with cash. Big companies. Small companies went under, but the big companies received huge, huge incentives and the government let big companies stay open while they made small companies shut down. Now this was crippling as an understatement. It had a weird effect where it created mass concentration of capital amongst the wealthiest. Now they sent money to everybody, but the moment they sent it, everybody went out and what did they do? They spent it in the areas they could. They bought RVs, they spent it with Apple, and they started to buy those things, do things at home. Storage was a huge benefactor of this. Big time. Storage exploded to areas, to hit highs that we had never seen before. Like not even close. Why the reason being, consumption was rising, but you couldn’t go out, you couldn’t go to stores to buy it, so they were buying RVs, they were buying toys, they were expanding homes, they were moving because of low interest rates, and this money was sloshing around like crazy. Well I’ve been saying this for a while on the podcast and ticked a lot of people off, but rising interest rates is caused from inflation, and inflation was not due to supply chain issues. I know, it’s crazy, I don’t care how many times you’ve been told that, that was just made up. Now you can see that that was made up for a few reasons. Now were supply chains a problem? 100%. It’s not that they weren’t, but you also have to realize that the supply chains were the problem because you have increased demand while you also have an economy that is acting like it’s in a recession or a depression. Supply chains are not meant to handle that, of course, it’s not built that way. Supply chains were overloaded in a time when they couldn’t service the overloaded demand. Now with that though, after COVID, which we are in now, even with supply chains fully functional, inflation is not going away. Inflation is due to money supply. So you have inflation when there’s too much money, and there’s too much money chasing goods, services, and everything else under the sun. So you have to get rid of that pool of money that is sloshing around. So the Fed came out and said our number one priority is to tame inflation. Now inflation can destroy, absolutely destroy an economy. And it’s important to realize that inflation hits those that are less fortunate the hardest because they can’t bear the rise in cost for staples, housing, food, gas, everything else. And even when we say, oh, well, inflation is at whatever, 8%, it’s not that high. Well, look at that over a long period of time. And most staples are much higher than that. We’ve seen prices double in a lot of categories. So the average working American, this is devastating too. Now if not controlled, it will ripple through the economy and it will cause absolute chaos. So the Fed has to stop it before it destroys and really hurts so many Americans. They do that by shrinking that money supply, everyone. So how do you shrink money supply? Well, after you’ve had run ups, so after you have like bull cycles, you have debt that’s compounding on it, you have buyers that are going out and buying, right? Money grows through expansion of debt, through expansion of services, everything else. So those up cycles are expansionary periods. They get overrun and overdone too much debt, too much money recessions come and then they shrink that money supply. Why? Because they restructure debt. People lose money, they lose businesses and debt is money. So then you have restructuring going on and that money pool, that money pool shrinks down. And that’s a natural way that an overheating economy slows down and gets back in line. Well, we did the opposite when we had the recession, air quotations, due to COVID. In fact, it was so much the opposite, they actually pumped more money in than was previous. So there was no contraction, even though supply chains and working the economy was acting like it was in a recession. These are things that to some people do not sound important, but these things are connected to the livelihood. We’re talking pensions, we’re talking jobs, we’re talking working class families, we’re talking school teachers, the works. These are attached to all of these people to live a normal, healthy life. And that was turned upside down. That obviously creates a lot of social chaos, and it really made the rich richer. All the government actions and two, generally speaking, government actions at this scale always only help out the rich. They’re pumping money into the economy. Who do you think they’re pumping it to? Right? Amazon, Apple, they’re the ones that get all that capital. So then you have even worse social anxiety. Now, you throw in politics to the mix is what we’re seeing now. The Fed’s sitting there and they’re saying, we are going to rise interest rates because there’s too much demand in the economy. The economy is overheated. Last quarter, it did not slow down. So inflation is not stopping. We’re still overheated. So we’re going to continue raising interest rates until we shut it down. They are driving the United States into a recession. So many people don’t understand that because it doesn’t make sense. Why would the Fed want us to go into a recession? Well, we were supposed to go into a recession and we didn’t. Instead we had surpluses and now those surpluses won’t go away. So they will do that through interest rates. Interest rates means they rise interest rates. The cost of debt is higher. So I can’t borrow. Nobody else can borrow. Debt is money. And the more debt issued, the more assets and the more money is in the economy. So by limiting and increasing the cost of debt, debt shrinks, less people borrow, less people buy, less people move, and the money pool starts to shrink down. Now they’re doing this very carefully because they’ve been trying to avoid the opposite, which is deflation. Deflation is the opposite of inflation. Deflation is when assets start cycling downward. They get in a perpetual down cycle of cost because nobody wants to buy them because they’re going to be worth less in six months. And then they crater and collapse. Think 2008. Think the Great Depression. Those were deflationary cycles. You don’t want deflation, obviously, because if assets are worthless, you fire everybody. If a company loses half its value, it starts firing everyone. And then you have all sorts of issues and it’s self-fulfilling. It just keeps going down. Very, very difficult to stop that. Inflation is the other way and it goes up and it’s very difficult to stop that. In my house, in my office, I have above my desk at my home a framed picture. And that framed picture is rubles and hais. Now the reason why I have that is when I was in Brazil, when I used to live in Brazil, when I was living in Brazil, I could walk around and I could pick up thousand dollar bills. And they were trash. They meant nothing. Why? Because Brazil had hyperinflation and it lost its currency value to a point where they had to get rid of it and start a whole new currency, the hais. So when you look at that, I’d never been an American. I’d never seen that before. And so it always, since that day, it caught my interest and I couldn’t stop thinking about it. Well, essentially that’s what the government’s trying to prevent. We’re trying to prevent the total loss of our money and it means nothing within society. Inflationary periods can drive up the cost of goods. We know these problems. So when the government is trying to get these things to stop, it has consequences. Those consequences are that when you’re in a recession, people get laid off. Now people getting laid off is actually the best solution to inflation. Why? Because when people don’t have jobs, they stop spending. Now that is not a fun truth, but it is a truth. And normally we should see market cycles take care of these things kind of by themselves. Now short term cycles, everyone are always controlled by the feds. The feds monitor the money supply through interest rates. The business cycles are made up of the cost of money. The longterm debt cycles are when that gets out of control. We are still experiencing the overall repercussions of 2008. That’s why COVID is so scary and most people don’t connect those things because they think that was 10 years ago and they think maybe that’s a long time. It’s really not. But what COVID did on top of years of propping up the financial institutions in 2008 was very different. And let me explain how. A lot of people have said, well, they did this in 2008. They printed money, right? And we didn’t have inflation. So why would it during COVID? Well, first of all, 2008 was a debt crisis, meaning that debt was restructuring. That meant the money was evaporating. The money was leaving the system and it created a crater, a hole that was like a sinkhole eating everything up. The whole economy, it was taking it with it. In order to stop that until the sinkhole took everything, they started to fill that hole up with money and they had to do it until eventually it became whole and it stopped. That’s not what happened in COVID. In COVID, when COVID happened, the economy was on a roar. It was the best we’d seen in forever. It was crazy how well the economy was doing. Then COVID happened and they went immediately to bailouts. They went immediately to spending money. There hadn’t been a hole that was created. There was no contraction of debt restructuring. The year wasn’t mass defaults that was taking assets out of balance sheets. None of that was happening. So then all the money went on top of an already hot economy where individuals had massive equity and wealth, everything from their homes to the stock market. In 2008, everyone had lost their wealth. It was gone. Very very different. So now the Fed has to come in and take care of it. So at the end of the day, they’re just trying to take care of the problem that was caused. The monetary actions of COVID were so overdone, so overblown that we will be feeling the pain from this and it will have essentially destroyed lives for a long long long period of time. Very sad that it was done solely out of fear and without any regard to anything else. Now how does this happen? The Fed did their actions during the fall, so there were rising interest rates. We just got the reports that the economy hadn’t slowed down, so they said what we’re doing is not working. We’ve got to be more aggressive. And then they went in front of the politicians who started to get very upset because they’re literally telling those politicians, we’re going to put you into a recession. And what happens when we go into a recession? Politicians get fired. That’s what happens. So they don’t really care about the economy, they don’t really care about you, they don’t want to get fired. So they’re upset at it. They were definitely not upset though when they were handing out billions and trillions of dollars without regard to then what would happen. And it’s important to keep this all in this context. These are large events that don’t snap your fingers and they don’t get taken care of. We talked about this all last fall. This isn’t going to be over soon. You don’t get to evaporate the largest influx of money the world has ever seen. We have never had an event like what the United States government did during COVID. It is almost unimaginable the amount of money that was printed into our system. You have to get that out now without tanking the entire economy. So you can do that, rip a bandaid off, which then you threaten depressions, everything else like that, because ripping the bandaid off may be really painful and it may reopen a wound. So instead, you’re going to do this slowly. Rise interest rates, keep rising them, and then get in a position where when you need to you can bring them back down to normal. But with such an epic amount of money, that’s not something that happens in a quarter or two quarters. In fact, it’s the opposite. Even after they raised rates, the economy didn’t stop and it hasn’t stopped. So they came out and let everybody know, we’re not only not stopping, we’re getting more aggressive. Now, how long will this last? First of all, no one knows. And what does this mean? Well, it does mean that production, everything else will be slower. It will be a lot slower. And we shouldn’t expect a rebound, a quick rebound, or anything else. Now, generally speaking, when interest rates rise, you are taking capital from certain places and moving it to another. I think of capital in the market and currency as like a blob. And this blob’s floating around and it moves from side to side, up and down, predicated on the circumstances. So when money is cheap and it’s very fluid, then interest rates are really low. Safe assets like bonds, things like that, do not give that money a good return. So what does it do? The blob of capital starts to move over into more risky assets like stocks, venture capital, startups, tech. Now when the blob starts moving again, because interest rates rise, they now have a safe way to make a good return. And they know that that will cause money to go out of the stock market, out of risky assets, which will cause values to drop. So then the blob moves away and money retreats out of those assets and starts to move into safer, secure assets. It’s one of the reasons why we have seen so much demand in money on things like self-storage and multifamily. People are looking for a safe place to put money. But even those assets, of course, are riskier than bonds and everything else. So people start hunkering down and holding onto money, which is counterintuitive. Why? Because your money is losing value at a very rapid pace. But yet it’s better than having it in assets that are spiraling down. So that’s what everybody’s doing. There’s less investment going on, right? There’s less money circulating around. Now at the same time, inflation is cutting away at everyone’s bank account. So we’ve seen this quarter after quarter. Bank accounts are starting to dwindle. Eventually they’ll run out. And eventually companies will have laid off so many people, so much restructuring will happen, so many people will start to eventually will see an asteroid. I can’t talk right now. I’m sorry. We’ll start to see the debt restructuring and we’ll also start to see the tightening of the belt, which we’ve already started. As that happens, we’re just getting money out of the system. That will put inflation back down and then the Fed will lower rates and we’re going to start the cycle again. So this will take time. It’s one of the reasons why I’m a long-term investor and why I don’t invest on things like external value, meaning I look at internal versus external, okay? Extrinsic versus extrinsic as we look at it. Extrinsic is the price. It is the trading price of the asset in the market. So people think that they’re worth more because an asset is suddenly worth more, but you’re not worth, you don’t have that money unless you exercise and sell it at that price and take that money in, right? So all of a sudden as assets are rising, people feel rich as they start coming down that external price like stocks and everything else, they feel poorer, right? So those fluctuations will happen all the time and they may have effects on things that have nothing at all to do with the assets value. Let me share an example. There’s an asset that went on the market for 8.8 million, right? Which would have totally traded for that literally six, seven months ago. We have it under contract today at 6.5. Now nothing changed with that asset. It still makes the exact same amount of money that it did last summer, but the price changed. Why? Because the cap rate or the valuation of the asset, less money, less people chasing, they expect more risk and the cost of their money is more. So it rises because they can’t pay as much. So the intrinsic valuation goes up because the price is going down, that extrinsic. This is the time I love to buy. I love when intrinsic value doesn’t change, but extrinsic does. This is what we did after 2008. Intrinsic value was solid, but extrinsic values had finally changed. It’s worse to say intrinsic value is tapped out and extrinsic value is really high. That’s been the last couple of years. So people bought assets that had nowhere to go. They paid extraordinarily high prices. That meant there was only downside. That’s why when we look at it, we look at intrinsic value, money on the table. That means improvements, things that we can make that make our overall basis in that asset rise a lot. So maybe buying it from a six cap and ending up with a 10 cap, right? That gives me a margin of stupidity. This gives me a safety that that extrinsic value can go around up and down and it doesn’t matter. I’m okay. I don’t ever want to depend on extrinsic value. Hence the reason why almost two years ago now, we locked in almost all of our assets. I think the next interest rate that we have to do is like 2029. The reason being is that affects the extrinsic value that affects you can lose assets due to those types of events when the market is not good. So meaning you bought it at a five cap and then all of a sudden you have to refinance it and the bank’s like, it’s not worth that anymore. It’s worth a seven cap, even though the money is the same, you’re the bank’s placing a different value and now you don’t have enough equity in it. Those are dangerous games to play. Now I’ve been through these cycles. I don’t play those games. And that’s why not only were we okay, we’re buying like crazy. I’m buying deals. We have meetings with bank, uh, developers that are going bankrupt. We are out there trying to get these assets. So right now is one of the best times to be buying. And I think it will be for the rest of the year, this fall fourth quarter. If I’m predicting anything, I think we will probably buy more than we bought in any quarter. Now it, there’s a tail end to this. A lot of assets, it takes time for this stuff to happen. It takes time for them to lose value and it takes time, but intrinsic value starts to get hit. Meaning that the amount of money that they’re making occupancies drop, rental rates drop because the overall demand is going. And then those sellers feel the pressure. They’re not, they know they can’t wait around for just another cycle. So then they have to sell it and they have to just take the hit, right? That’s what we’re doing. That’s what we’re waiting for. And that’s what we’re buying right now. And that’s why I think over the next year, they’ll have been hit for multiple, multiple quarters. They’re about to go into another year only to realize things aren’t going to get better. And if I’m going to, uh, if I’m going to exit, I need to get rid of it because they’re worried about things like deflation, meaning that the assets just get worth less and less. That’s when I want to come in and buy them, buy them at the right price with great intrinsic value. I hold for the longterm. I fix them up, turn them in, have my margin of stupidity. We make a lot of money with very, very little risk. That’s what these cycles mean to me. And that is why I’m so interested in them. They tell me a lot about opportunity that has very little to do with the individual asset and more that the market is screwed up and that’s putting everything on sale. Now you got to be careful just because it’s on sale doesn’t mean it’s a good deal. And this is the number one reason people get scared. But as long as you know what value is and you can really understand that intrinsic value, you can buy and get great, great deals. You just don’t want to buy a deal that is not a good deal in a bad time. So fundamentals right now will make you wealthy. I hope that explains what’s happening and what our strategy is, how we’re taking advantage of it with that. Thanks everybody. Talk soon.

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