Well, welcome
back to the U.S., where we have high interest rates and a strong dollar.
One of the things that you told me yesterday,
which I thought was very interesting, is that you are getting paid in U.S.
dollars.
You make a lot of money in U.S.
dollars, and then you're paying your salaries in in Colombia.
All my expenses.
Yeah.
And I thought that was an interesting perspective.
Can you chat a little bit about that and how the difference of what's going on
in our economy right now with these bad increases and high inflation?
Yeah.
Most people look at this from a standpoint of their expenses
being denominated in U.S. dollars.
So they look at the ten year Treasury as an example and they say, oh, my gosh,
you know, who would buy that at 4% when the CPI is at 8%?
Because you're guaranteed to lose 4% per year in purchasing power.
So no one would buy the long end of the curve. Right.
But what they don't understand is
the dollar is appreciating so significantly against
other currencies that for foreign investors, that makes a lot of sense.
Right.
So like in my case, most of my expenses are denominated in pesos. And
over the last
maybe six months, the pesos gone from,
what, 3600 to 5000?
Yeah, that's $1. $1.
So my payroll, although I have more people working for me,
has actually gone down significantly.
I mean, you know, I go off to dinner now, I got all these things
and it's always been extremely cheap.
Yeah, but now it's laughable.
So what's weird is we're living in a world that's experiencing inflation
very similar
to what we saw in the United in the 1970s because not necessarily a U.S.
phenomenon.
We see it in Europe, we see it in Japan, we see it even in Colombia
and all these other places.
But yet I'm in this weird position and you can engineer this
if you have the resources to do so.
We're you're living in an inflationary world, but yet in your own
particular circumstance, you're receiving the benefits of deflation.
Well, and, you know, we hear a lot about them trying to fix inflation.
Right.
And if they can't get these oil prices and energy prices down,
no matter how much they hike rates, we're still going to have an inflation issue.
Is that correct?
That's a very complicated question
because you got to look at it through the lens of Milton Friedman.
And in the 1970s when he came out, says inflation is always an everywhere,
a monetary phenomenon.
So you're correct that oil or fossil fuels
is pretty much an input every single thing that we buy.
But if you don't increase the money supply, you're robbing Peter to pay Paul.
Right.
So you've got some things that you buy where the demand is very inelastic.
Let's just say the things that you need.
And then there are some things that you buy that you don't need.
So you could go into this world, I call it inflationary deflation,
where the stuff that you need is going up in price,
but the stuff that you don't need goes down in price,
you see, because even though those input costs are higher,
you're just getting all these businesses that are going bust
because people just flat out don't have the money.
Now, does that does that create an environment
where the prices come down, an aggregate total?
That's where your question gets very, very complicated.
I mean, we just were talking yesterday about how the builders,
you know, that you guys are talking to, they've got a lot of deals
in the pipeline, but after that, they're done.
Right. You see, and they've had to. Right.
Raise their prices because of their input costs.
So if the people, their future customers can't afford their higher prices,
they can't lower them because their input costs are what they are.
And so they just can't do the deals have to fire everybody.
And so does that create the prices coming down
or does that mean that there's fewer businesses that are providing that service
to a smaller group of people that can still afford to pay the higher prices?
See, that's why I'm saying it's very nuanced, because.
I know yesterday we were talking, George, about,
you know, everybody's concerned about these
rises and this interest rates.
We had six now since March and we've got another one potentially in December.
And they even more in 2023.
You said something very interesting.
You said that doesn't mean that you're still going to get a loan.
All right.
In other words,
when when rates maybe go back down, which is what everybody's waiting for,
there are other issues and other things that people don't think about.
Can you talk a little bit about that?
Sure. Are you going to ask why are the rates going down? Yeah.
You know, people just assume that the rates
are going to go down because we've had this nice soft landing
and the Fed's going to just magically find the right number for interest rates
and the CPI is going to go from 8% to seven to 6 to 5, right back down to 2%.
Smooth sailing. And we're off to the races again.
But what you see historically is that's never happened.
Yeah. Or maybe a couple of times. But you know, that chart I had.
Yeah, it showed you going back to 1770s when the Fed hikes rates when they pivot.
You don't just have a nice smooth sailing.
Usually that's when the market crashes because there's a lag effect.
When there was a pause, you said, that's right.
There's a lag effect to the rate rise.
Yeah, I or the rate increases.
It's like my buddy Adam Taggart, you know, someone we knew.
Well, he calls it the pig to the python.
And so that interest rate is that pig going through the python.
And it goes very slowly.
But at a certain point then the impact is felt
by the real economy to a point where it really matters with nominal GDP
or real GDP, and then you get a significant recession.
It could be a garden variety recession, not that the bond market is telling us,
and I would argue the stock market still calms down and residential
real estate, real estate nominal terms probably still comes down a little bit.
Definitely in real terms.
But does that is that this black swan event
that would create an environment where money would be tight?
I don't know.
But you go back to COVID or you go back to the GFC
and we know that they dropped rates right away.
But good luck trying to get a loan on residential real estate.
As an example, in 2009 or 2010, even though the interest rates were super,
super low, people associate low interest rates with loose money.
Yeah, and often low interest rates are an indication of tight money,
not loose inflation.
As a move, they're all and it's been, gosh, whatever, six or seven months now.
Do you feel like next year we're going to start to see that leg kick in?
Yeah.
And you got to ask yourself, what created the inflation in the first place?
So it was too much demand on a supply.
So we say how we fix the supply side issues?
Not really.
I mean, those supply chains that were destroyed globally by all these
lockdowns, though, those those haven't been fixed.
They're not back to where they were in 2019.
And you say, okay,
what was the demand side was all the stimulus checks that went out.
And if you look at the average checking account balance of Americans and,
you know, four or five different income brackets, they each income bracket
still has more in their checking account than they did in 2019.
So you've got more demand.
The excess demand, right.
That has not worked its way out of the system,
even though the stimulus checks went out, what, over a year and a half ago,
because there was a lot on the expense side that they that equaled more money
coming in as far as their, you know, like not having to pay the rent, student
loan forgiveness, all these things, maybe not having to pay a mortgage.
So it wasn't just more money, but is fewer expenses
which lead to a higher checking account balance.
And that higher checking account balance has gone down and down and down.
Down.
The problem that you have there is at some point you will get back
down to where you were in 2019, but unfortunately, it won't stop.
The checking account balance will continue to go down. Why?
Because we've had significant inflation and wages have not kept up with inflation.
So the purchasing power, even though their wages
are higher today than they were in 2018, they have less purchasing power.
So their checking account balance is going to get down to where it was
and they're either going have to tighten their belt
and spend less than they were in 2018
or their checking account balance is going to get down to zero.
And that's when you have a real contraction in aggregate demand,
which would most likely be, you know, push prices down.
That's not to say that we have deflation,
but it's to say that we have disinflation.
So if we're running at 8.3 now, then it goes down to seven two, 625,
something like that. You say, Well, great, that's what the Fed wants.
Yeah, it is.
But that means that we're going into a very, very significant recession
when you see the unemployment rate go from 3.7.