Jason: Welcome to the Creating Wealth Show, this is your host Jason Hartman Episode #249 and I’ve got several things to talk to you about. Today it would be, before we dive into all of that as you know we’ve got our Meet the Masters event coming up.
We only do it twice a year, and I have got our very renowned speaker [Mark Cohen 0:01:13] here with me and he is going to cover four or five good topics in a very short talk. This session of Meet the Masters is coming up this Saturday, and I wanted to just have Mark on to talk about what he is going to talk about. Mark, how are you?
Mark: I’m awesome, and thanks so much for having me. I think we are going to be talking about our bracketology for the big dance and the [March menace 0:01:32] is that right?
Jason: No we are not going to be talking about, but we already talked about financial topics.
Mark: Sounds good.
Jason: Non-professional sports, and we are going to talk about the sport of real estate investing. Mark, I really like this first topic, Scams, the big scams that are going on out there on the marketplace now, and how to avoid being scammed as a real estate investor. Tell us what you are going to talk about there?
Mark: You got and I love it. And Jason, you are — I love, and I’m so excited to come to the event. Yeah this is a huge topic in our — as a CPA and an attorney I get clients come in all the time asking Mark it’s the real or this strategy or that strategy and what can I do in this situation, am I getting taken advantage of? And there is so many different scams out there that would, I want to cover that I know alone can save you thousands of dollars in just the loss tax strategies or terrible losses, and so it really will covers up four or five that are just and the new answers of them, and I just wanted to make sure everybody walks away with more protected when they go out to the investment world.
Jason: Yeah you know no question. I just got off the phone. I just had a 40 minute conversation with an investor who got scammed on a property with a wrap around mortgage. Well, actually several properties that this investor bought with under wrap around mortgage guidelines and the promoter of that just really it looks like, it looks like they got really, really burned, really scammed. And you know folks the most expensive seminar you ever attend is the real life seminar.
This person that I mentioned lost, it looks like they are going to lose probably about a $160,000 so again come to Meet the Masters and learn how to avoid this stuff. It is the cheapest seminar you will ever have. Mark, you are also going to talk about scams that relate to entities, Nevada corporations, ponzi schemes, things like that. But then beyond the scams and the kind of negative stuff there you even talk about how to use once HSA or Health Savings Account not just their IRA to invest in real estate, right?
Mark: Exactly and see not only can this scams hold us back from investing in real estate or really, going on doing much more with our American dream that we all have for ourselves. It can hold us back from real strategies that actually work and I want to break down Obama chair as it stands right now, and what strategies work best for small business, owners and investors, and this help savings accounts, and it helps reimbursement arrangements and how I can write up my health insurance, and how does real estate give me more opportunities for healthcare planning.
Many, many people are amazed with us Jason. So we will have a few minutes to break that down and point people in the right direction too.
Jason: Yeah and then you are also — you are really going to cover five topics and then the next thing you are going to talk about is some of the new ounces of the real estate professional laws now that that has been around for several years and people are going through audits and there is — there is just a lot of new ounce there, and of course we’ve talked about it at every Masters event.
However, as more audit dictates tax policy there are some new ounces that people need to know so its — so there is constant updating on this topic of this great deduction where people can get the best tax deduction in the world, income property the most tax favored asset class, deprecation being non-cash write-off. Tell us more about that.
Mark: You bet. A lot of people are really surprised to find out that their CPA doesn’t understand this. And if you are trying to figure this out on TurboTax, it can be a nightmare. And not every CPA understands by any means the new ounces of an active real estate investor, a passive investor, a real estate professional, what is active versus material participation just like well [see your 0:05:21 score] have to play a role, do I have to have an entity?
All this plays into it, and I’m going to give you the perfect equation so that you can determine if your tax advisor really knows what the heck he is talking about.
Jason: Well, and that is so true. You know the problem is we are liable for the mistakes our professionals make, so that’s critically important, and you know good old TurboTax Timmy, the head of the Treasury Department, he couldn’t figure out TurboTax himself, so he says [laughter] so don’t fall victim to that.
You know the other thing Mark is you are going to talk about hot deductions. And every year this changes and may be some old deductions that you can use in new ways, but also some new deductions that are available to us as real estate investors. Anything more in hot deductions you want to mention right now before Saturday.
Mark: [You bet 0:06:07] and this is one where you can walk away with some real strategies again that are going to save you money, come Monday after masters because been a real estate investor opens the doors to a lot of tax write-off. The average American can’t take advantage of. We are going to get home office, travel, [dining 0:06:24] entertainment, real estate education expenses. I want you to know how to write-off your master’s event and your travel varied your lodging and we may even talk about throwing your kids on payroll.
There are all these different things are the hottest deductions in 2012 to save taxes. And if you are going to be a real estate investor, you want to at least know what they are in general, even if we don’t dive into all the detail, you are going to have a great checklist to go work with for the rest of the year.
Jason: Taxes are the single largest expense any of us will have in our lifetime, and we have got to learn how to save on taxes because that is our biggest life expense. No question. And then lastly you know Mark, my grandmother long time ago said to me, Jason the hardest ship to sail is a partnership [laughter] and you know I agree with her. That’s true, and it’s especially true in business and thing that are really complex with a lot of moving parts.
But you know in real estate I’ve had really good partnerships, in real estate because the asset is arms length. It’s pretty simple. It doesn’t have a lot of moving parts, and for those of you who are interested in joint venturing, if you are interested in partnering with other people, you are going to talk just briefly on how to create the perfect joint venture agreement, right Mark?
Mark: Yes and of course as many you can imagine. It’s a huge topic. We could do a whole days workshop on this, but there is some certain things everybody needs to know because like you said Jason, a partnership thing can be the best thing for your business, or can be the worst thing for your business because I want to talk about some basics what to work out for, when partnering with others, what type of agreements you should have and folks its not a [napkin 0:07:57] at Denny’s in the middle of the night. That’s going to cut it, so we are going to need a few of those points.
Jason: It’s got to be a little more involved than that. Well, good hey Mark, we look forward to see you on Saturday, and we are going to have a great Meet the Masters event. For those of you who haven’t registered yet, do so at jasonhartman.com, click on events, and you can still get the very last of the early-bird pricing if you register really, really quickly at jasonhartman.com. Mark thanks again. I will see you Saturday; look forward to your talk.
Mark: Thanks. I will see you then.
Jason: I hope you found that interesting. We’ve got a great Meet the Masters coming up. And if any of you sign up this week, you will still get the last of the early-bird pricing. It has escalated a bit. But in order to offset that, I will tell you what I will do for you; I will throw in to anybody signing up this week to join us. I will throw in a free Creating Wealth home study course in the digital version that’s $297 value, and I will throw that in for you for free if you already own that course, we will work something out and give you a $300 credit in the store for something else at jasonhartman.com, so we will have our guest here today in just a moment.
But you know I got to tell you, I talk about it all the time [unintelligible 0:09:05.9] about Wall Street and Goldman Sachs, and all of this stuff, but two of our listeners Rubin and Rodney, both totally separate parties in separate parts of the country sent me an interesting article about a Goldman Sachs executive who resigned and you may have seen this rather [scaving 0:09:22] in public letter. It was published in the New York Times and other places by Greg Smith, and thank you again Rubin and Rodney and if anyone else send this to me also thank you as well, and pardon me for not recognizing that, but I get a lot of articles from a lot of people, and I love that, I appreciate that, so keep that sending them on over to me in many times, I will talk about them on the show.
Many times I will just digest them for my own edification and bring them back to you in some other form on the show in terms of good income property, investment, advisory, economic advice. But you know this is really telling, and I just recorded an interview today that will be broadcast on a future show.
[Gay 0:10:00] who is the founder of site called Investor Watchdog and you know he talked about all the fraud and the antics on Wall Street. You know he is been on the financial services industry for over a couple of decades, and it’s just amazing, but I just thought I will share this with you, and again this is the resigning executive from Goldman Sachs. It happened just last week, and this doesn’t sum up not just Goldman, but the culture of Wall Street in general, and why we need to be direct investors, so that we follow commandment number three, and we owned, and we control our own investments and we don’t relinquish our financial future to anybody else that’s why income property investing, trust deed investing, private lending, hard money lending is the way to go, or running our own business.
Those things we don’t relinquish control, so I will just share this with you if you didn’t catch it in the media or even if you did, it wouldn’t hurt to hear it again. It’s not too long. It says, ‘Why I’m leaving Goldman Sachs by Greg Smith’.
Today is my last day at Goldman Sachs. After almost 12 years at the firm, first as the summer interim well at Stanford then in New York for 10 years, now in London. I believe I have worked here long enough to understand the trajectory of its culture, its people, and its identity.
I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in its simplest terms, the interest of the client continued to be sidelined by the way the firm operates, and thinks about making money. Goldman Sachs is one of the largest and most important investment banks, and it’s too intragold to global finance to continue to act this way.
The firm is weird so far from the place I joined right out of college that I can no longer in good conscious say that I identify with what it stands for. It might sounds surprising to the skeptical public, but the culture was always a vital part of Goldman Sachs success. It revolved around team work, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made the place great, and allowed us to earn our clients trust for 143 years.
It wasn’t just about making money. This alone will not sustain a firm for so long, but it had something to do with the pride and belief in the organization. I’m sad to say that as I look around today, and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride or the belief, but this was not always the case. For more than a decade, I recruited and mentored candidates through our grueling interview process.
I was selected as one of ten people out of the firm of more than 30,000 to appear on our recruiting video which played on every college campus we visit around the world. In 2006, I managed the summer interim program in sales and trading in New York for 80 college students who made the cut out of the 1000s who applied.
I knew it was time to leave when I realize I could no longer look students in the eye, and tell them what a great place this was to work. When the history books are written about Goldman Sachs they may reflect the current Chief Executive Officer, Lloyd C. Blankfein, and the President Gary D. Cohn lost hold of the firm’s culture on their watch.
I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long time survival. Over the course of my career, I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia.
My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs, another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example, doing the right thing. Today if you make enough money for the firm, and are not currently an axe murderer, you will be promoted to a position of influence.
What are the three ways to become a leader? A) Execute the firm’s access which is Goldman’s speak for persuading your clients to invest in stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. B) Hunt elephants. In English, get your clients some of whom are sophisticated, and some of whom aren’t to trade whatever will bring the biggest profits to Goldman. Call men old fashion, but I don’t like selling my client’s product that is wrong for them. C) Find yourself sitting in a seat where your job is to trade any ill liquid opaque product with the three letter acronym.
Now just my commentary you know he is referring to CDOs and all of the other acronyms we all are in right after the financial crisis hit on with the letter here. Today many of the leaders display Goldman Sachs culture creation of exactly 0%. I attend derivative sales meetings where not one single minute is spend asking questions about how we can help clients. It is purely about how we can make the most money off of them.
If you were an alien from Mars, and sat in one of those meetings you would believe that the client’s success or progress was not part of the thought process at all. It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors referred to their own clients as ”muppets”.
Sometimes over internal email even after the SEC, Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids, No humility, I mean come on integrity it’s eroding. I don’t know that any illegal behavior, but will people push the envelop and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones mostly directly aligned with the client’s goals absolutely everyday in fact.
It astounds me how little senior managements gets the basic truth if clients don’t trust you they will eventually stop doing business with you, and it doesn’t matter how smart you are. These days, the most common question I get from junior analyst about derivatives is “How much money did we make of the client?” It bothers me every time I hear because it is a clear reflection of what they are observing from their leaders about the way they should behave.
Now projected 10 years into the future, you don’t have to be a rocket scientist to figure out that a junior analyst sitting quietly in the corner of the room hearing about “muppets” or “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first year analyst, I didn’t know where the bathroom was, or how to tie my shoe laces. I was taught to be concerned with learning the ropes finding out what that derivative was, understanding finance, getting to know our clients, and what motivated them. Learning how they defined success, and how we could help them get there.
My proudest moments in life getting the full rights scholarship from South Africa to Stanford University being selected as a Rhodes Scholar and national finalist wining a bronze medal over table tennis at the Maccabiah Games in Israel known as the Jewish Olympics have all come through hard work with no shortcuts.
Goldman Sachs today has become too much about shortcuts, and not enough about achievement. It just doesn’t feel right anymore. I hope this can be a wakeup call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact you will not exist. Weed out the morally bankrupt people no matter how much money they make for the firm, and get the culture right again so people want to work here for the right reasons.
People who only care about making money will not sustain this firm or the trust of its clients for very much longer. Greg Smith is resigning today as a Goldman Sachs Executive Director and head of the firm’s United States Equity Derivatives business in Europe, the Middle East and Africa. Well, folks there is an insider saying it for himself, and its really interesting because I’m going to get my guest booker on the show that books all of the great guest for the show, and I had an interview set up with an author who is a former Goldman Sachs employee about a week, may be a week and a half ago now, and it was booked and I called them, and he didn’t answer the phone.
And I called again a few minutes later thinking he might have been on another line before our interview, and he didn’t answer the phone, never returned my call. I called my guest booker, and she said well, he was kind of hesitant when he committed to the interview, and he said, he wasn’t going to criticize Goldman Sachs or answer any tough questions about them, so I’m actually going to have her come on and just talk about that experience, but the moral of the story is be a direct investor.
Wall Street is the modern version of organized crime. It’s the new mafia folks, so there you go, but you probably already knew that if you are a regular listener. One more thing before we get to today’s guest one of this other investment clubs out there had a property and they happened to have the same vendor as we do in one particular market, and its interesting because they are using the same software we are using too.
And our pro forma for the same property, the same software, but different numbers because we are more stringent about the numbers we make our local market specialist, our providers of inventory use, when doing this performance. We are more conservative.
We put in numbers that make the investment look inferior to what our competitor is doing, and here is an example. This is their pro forma, and I won’t tell you the exact details because its too easy to figure out who it might be, and what the property might be, but I will just tell you a couple of things.
Their pro forma shows this property. By the way its four blocks okay so you understand why the numbers of the way they are. Their pro forma shows and this is a great property either way, so I said no matter who you buy through them or us, but it’s just the way to see how much conservative we are in this performance.
They show cash flow of being positive cash flow $996 per month or almost $12,000 per year. We show same property, mind you. Cash flow of being positive only $847 per month, about a $150 bucks per month less or almost $2000 per year less on our pro forma for the same property mind you.
We show the capitalization rate at 14.9% damn good no matter how you slice it. They showed it 16.9%. We show the overall return on investment at 46%. They showed it 51%. We show cash on cash return at a whapping 32%, but they show at 38%. And the reason is because the assumptions that they used to drive this pro forma in those numbers now granted.
This is a phenomenal property not all of them are that good, but it is an older property, so the maintenance cost are higher and we pro forma on the property this age a whopping 8% maintenance. They only put in 3% maintenance. We put in a vacancy rate of 8% or one month per year. They put in a vacancy rate of only 5% less than one month per year so there you go folks these are the reasons that you want to be investing with a prudent company who is going to — you know I have always try to live by the motto promise less, and deliver more, and be very realistic about these investments and what they can bring.
Let’s get to today’s guest and we will be back with that in just a moment. Be sure to joining us starting this Friday we’ve got a dinner hosted by us, a very nice dinner at the Hyatt Regency Irvine 7 o’clock, Friday evening at the 6ix Park Grill restaurant there and that will be the start, just kind of fun networking that will be our dinner reception hosted by us. We will drink some wine. We will have a nice meal, and then Saturday morning we will go starting at 9:00 a.m., all day until 9:00 p.m., and then Sunday 9:00 to 6:00 so we will see this weekend and may be one more show before Meet the Masters, but if not we will see it Friday. Hang on we will be back with our guest in just a moment.
Introduction: Have you listened to the Creating Wealth series? I mean from the beginning. If not you can go ahead and get book one that shows 1 through 20 in digital download. These are advanced strategies for wealth creation. For more information go to jasonhartman.com.
Jason: My pleasure to welcome Ken Gronbach to the show. He is a demographer and author of The Age Curve: How to Profit from the Coming Demographic Storm. And you know I think demographics are destiny and I think you will learn a lot from today’s interview, and I read his book a few months ago, and enjoyed it quite a bit and just wanted to get him on the show because I think when you are looking at economic trends and Ken made the disclaimer to me that he is not an economist, but a lot of them are determined by demographics, so Ken welcome its good to have you on the show today.
Ken: I’m delighted and my pleasure.
Jason: Tell us what’s going on in this demographic storm? I mean when you say demographic storm what is that you are referring to.
Ken: Well, there are many, many changes that are taking place. The boomers are beginning to retire. Boomer is born 1945 to 1964. About 78 million of them had [life] [0:24:18] birth in our nation with a little bit of immigration thrown in are beginning to retire so they are moving out of the labor force. We had generation X born 1965 to 1985 is a smaller generation. Wherever they go, they can’t keep up with the consumption or the production or anything of the boomers because they don’t have the critical maths are actually smaller.
And then the most wonderful thing about our nation is we had kids starting at 1985 after the diminutive generation X which is we can talk about 1985 we began the generation Y, and generation Y was born ’85 to 2004. They are bigger than the baby boomers. They are consuming at record levels. They were a very, very exciting group.
But the most important thing about them is the United States is the only Western culture and the only industrialized nation that has a generation Y because we are the only industrialized nation, the only western culture that has above replacement level fertility. We had kids.
EU did not have kids. Eastern Europe did not kids, and especially China did not have kids.
Jason: Well, would it be fair to argue though that we did a lot of that really through immigration?
Ken: Generation Y it doesn’t mater to me.
Jason: Well, yeah okay yeah [laughter]. Fair enough. Its just numbers right as you said before stuff before.
Ken: Yeah it’s just number to me. Sure. I will give you an example. In 1957, we had a record year for babies. 4 million and 300,000 babies were born in 1957, and that record held for 50 years. We broke the record in 2007. It was 4 million 317,000 babies. 25% of which were Latino, so I tell people all the time, I say listen, you had the criticism of Latinos, you don’t like immigrations. I said, without the Latinos, our fertility would be below replacement level, and then 50 years we wouldn’t have a country, and you wouldn’t be collecting social security, so go find a Latino and kiss him on the lips and thank him for coming.
Jason: Well because you got to have, and then what you are pointing out there is you got to have the younger workers there to support the older ones who are on social security and so forth and that is the big problem that Japan and Europe face. They just don’t have the fertility. Russia too, you know I mean you look at Russia I mean that’s just a dying country literally by demographically its going out of business.
Ken: My perspective you nailed it, and that is you don’t have children when you don’t — I will put it this way. Every nation needs heavy lifters. You know the heavy lifters, I don’t care if your [colonies amount 0:26:45] with 10,000 people or you are the United States. There is a part of your population that cares for the elderly and cares for the young because they actually kill more than they eat. They produce more than they eat.
The heavy lifters, heavy lifters in our country are essentially the type by the Bureau of Labor Statistics is being between 40 and 60. To find it even further it would be, if you want to narrow it down, 45 to 55.
Right now we have baby boomer super imposed over that age group, and we have a really good body of heavy lifters, so that so we made a recovery from 2008, but the boomers weren’t in the heavy lifting stage during 2008 we wouldn’t have recovered. What’s going to happen going forward is generation X born 1965 to 1984, 11% smaller than the baby boomers it’s going to be super imposed over the heavy lifting stage, and we are going to have issues.
Jason: So yeah generation X I remember taking a marketing class at UCI, and its interesting that we both had you know lives in California at various times. And I was taking this marketing class, and I remember generation X was such an odd ball generation and I’m a Gen Xer as well, but they divided it into like that cohort into six segments. I mean tell us a little bit about Gen X, and by the way my understanding was Gen X was only like, and I know all this depends who you talk to, but only like 46 million, so really small.
Ken: So Gen X is thinking that 69 million, I don’t have it in front of me.
Jason: Oh okay.
Ken: No it depends on — again it depends on not on who you talk to because the census data is available and it’s very accurate.
Jason: It just depends where you do the cut-off for the years, right?
Ken: Yeah. If you — you know and you essentially tipped your hand when you said people divided into six categories. Well, what’s that? If you read it closely, it’s probably all about personalities. And that’s crypto graphics. And I’m sorry, but crypto graphics from a demographer standpoint is subjective and somebody dependent.
Jason: Yeah, right.
Ken: Yeah somebody made that up. Yeah I — you can’t make the numbers up. When you — either that the babies were born, or they weren’t, and between 1965 and 1984 we started a trend based on an attitude in this country called Zero Population Growth anything that was that people were the problem.
Jason: ZPG yeah.
Ken: And all we had to do is it reduced the number of babies born, and we could solve all our problems, so if you go from 65 to about 74 and then backup to 84 and [unintelligible 0:29:18] versus [weight]. We had from the peak of the rumors to the bottom of generation X about 1974, 25% free fall. We were producing babies, so it — how is their personality shaped by you know when they were born, and then in demand, absolute demand since they were born.
Jason: Well, you know that’s an — that was a really interesting thing you just said. I mean [unintelligible 0:29:40] abortion how much responsibility do that take for declining birth rate, or was it just the sort of the liberal ideology or ZPG or Zero Population Growth and environmentalism and about whole people are the problem thing which by the way I don’t subscribe to that because I think its scary. I think that’s they are reminiscent of Nazism, but —
Ken: Thank you very much. I think you said that is exactly what it is. It is downright frightening. Jason, if you — the — if you take a look at, and this is a little bit of aside, but if you took at global warming you know what the ultimate solution for global warning.
Jason: Well, less people, let’s just kill everybody.
Ken: Yeah it is a worldwide one only policy and you know what that is, that’s the end of mankind. But you can’t do that. So back to generation X where we wave, we’ve aborted about one million babies a year ever since, so we — it’s a significant number in the last in almost 40 years.
Jason: Yeah it sure is. I mean —
Jason: I mean if the birth rate, if the highest birth year you said was what four million or seven million?
Ken: That was four million.
Jason: Four million.
Ken: 4 million 300,000 in 1957 and it dropped to around 3 million, so was it, it was a significant factor, but [Roby 0:31:01] remember [Robey 0:31:03] labels 1973, and then in 1974 we hit the bottom, but then it started to creep back up as the baby boomer started generating babies. So did [Robey] weighed crippled in the United States?
No, I don’t think so. I mean I wouldn’t support it because demographers would not support anything that artificially influence a birth rate. Its just you know that’s what we eye. We are just numbers people, so that will be weighed, I think [Robey] weight was traveled by more of a contraception than it was a birth control, and a total birth control so I don’t know.
I look at it. I draw conclusions, but my conclusion simply are generation X is 11% smaller than the baby boomers, and when it comes to producing i.e. income, and then taxes, owning big homes, and then the paying taxes they are not going to be able to do it at the level of the boomers its impossible, but there are — there is a silver lining to that, and that’s the Latinos and a couple of other things are going until.
Jason: You made the disclaimer that you are not an economist just really quickly, it may sound but really simplistic, but what’s a demographer?
Ken: My daughter is in the backseat of our car. I’m driving. Her friend leans over, and says to her what is your dad do? And I can hear. And my daughter says he is a demographer. And her friend thought for a moment white kid, and says is that like an economist or an accountant? And I could see my daughter she is thinking, and she said no.
An economist and accountants count money and stuff. My dad counts people, and people are more important than money and stuff, so that’s my basic explanation. When I because I share the platform routinely with economists and I tell people selfishly that demographics precipitates the economists its not the other way around we were first and then money.
Jason: Okay yeah make sense. In your background it’s in marketing though I mean —
Jason: When you got hired at a college at Volkswagen Porsche Audi that was a marketing position right?
Ken: Absolutely. What I did is when I bailed out of California just like you specifically, I came back to Connecticut, I married a wonderful girl in California, and we just packed up and came here the day after our wedding. And a few years later, we started an advertising agency and ran for 20 years.
We did consumer and retail based advertising which is kind of unusual, so and one of our clients who was American Honda motor cycle, and we had a 140 dealerships in the northeast that we were responsible for. And we printed money and American Honda was a wonderful client.
It was going along swimmingly for years, and then in 1986 suddenly the bikes stopped selling and American Honda couldn’t figure it out, and it was the same for Kawasaki, Suzuki and Yamaha. No one could figure it out. By 1992, the sale of Japanese motorcycles had fallen 80% and they close all the dealers. All the dealers closed with the exception of those that carried loan borrowers or upward motors, and no one knew why.
And it wasn’t until 1996 that I made a discovery and that was a meeting about the political involvement of generation X in an editorial in a major newspaper, and the gist was that generation X for 1965 to 1984 was a bunch of lazy slacker couch potatoes and they weren’t kind of involved themselves in the political process, and what’s the United States going to come to if this is our future?
They said they didn’t vote the level of the boomers. They didn’t give money of the level of the boomers. They didn’t run for office of the level of the boomers, and they didn’t get the time of the level of the boomers of the political process, and I said you know and I have 40 people working for me in the ad agency, and I don’t — and 30 of them are Gen Xers. I don’t have any lazy people so I called in a research department, and I said find out everything you can about generation X because there is something missing here. This is not correct, came back a couple of days later and he said it’s true. I said, so they are lazy and he said no.
He said there is 11% a fewer of them, and I did some math. And I’m thinking to myself 11% and so when the boomers pass through the market, motor cycles we knew we sold to men 16 to 24 years old that was it. 25, we sold the bike bought a ring, got married 26 that was the macro assumption you could make accurately, so I’m looking at this and I’m thinking the baby boomers passed out of the motorcycle market, and along comes the generation that’s 11% longer, and we are working with businesses that run on 5% after tax profit.
I said this would have raised any business. So, we started doing. We did our homework on generation X. We found that they shutdown the [community wards 0:35:50] that they closed toy stores, that they shutdown 30% of the public schools.
They didn’t shutdown colleges because they went to college at a higher rate than the boomers. They shutdown the motorcycle on the street. Detroit couldn’t figure out how to sell enough cars to them so that they punished Detroit and in 2008 when it was the turn of the baby boomers to sell their homes to the generation right behind them for every eight homes, they were — excuse me for every 10 homes there were only 8 buyers. And I know what was a lot of — and certainly a lot more complexity that went on in the decade before, but that was certainly a tipping point for the financial crisis or the housing crisis, so how about that?
Jason: Yeah well that’s —
Ken: That’s generation X.
Jason: Sure yeah that’s part of it. One of the other things, and I know you count people. Do you count their status in terms of married or single because there are more single people than ever in nowadays. I mean literally half the country is single, and I think the politicians are just starting to understand that this is a demographic group is well even though it spans different ages and socio economic levels.
But I notice that it’s making a real difference in real estate investing. I mean years ago for example as a real estate investor you wouldn’t want to buy a one bedroom property very much because you know you would consider that to be a really transient tenant and its still is a more transient tenant no doubt, but less so more units are actually more popular nowadays because you got so many singles. Do you have anything to say about the singles market?
Ken: Yeah well, I can tell you this, and that is the generation Y is currently 8 years old to 27 years old, and they are just now bumping against the age where we historically have our first marriage, so you are going to see the number of marriages or the number of couples increase dramatically because Generation Y is significantly bigger than the generation who got married in front of them.
And then you had the baby boomers of course that literally and I had to bet this on almost on a bet, but baby boomers suffered 50% divorce rate, so that’s probably the answer, but I think you are going to see the number of couples increase dramatically as Gen Y starts to marry because it’s a huge generation.
Jason: Well, yeah okay so what you are saying there is that because it’s the largest demographical vote ever in American history and that’s Gen Y that is now the oldest Gen Yer is now 27 years old, so they are bumping right at the age where they are going to start to couple up, but you still got baby boomers with very high divorce rate. What about Gen Xers? What did they do in terms of marriage?
Ken: It’s kind of a mystery group. I believe they had the same problems as the boomers. I don’t have those statistics in front of me, but I do know that one half, and it’s a bit current, and it’s the census data, one half of the first time of their all marriages and then divorce a half.
Jason: Yeah so it’s not necessarily and by the way its kind of interesting to compare that with, and supposedly the highest divorce rate country in the world is Austria, and Austria has a 69% divorce rate. I remember reading about that about two years ago, so ours is 50%. We are not doing so bad.
Ken: Yeah but in Germany, Austria — Germany I believe the statistic actually recently is one in seven couples get married, so we have certainly the world is changing.
Jason: Well, you mean one in seven people get married not couples.
Ken: That’s right.
Jason: Well, yeah I guess new couples before they are married.
Ken: Yeah no I think that’s accurate one in seven couples. Jason, the world is changing. The EU has stopped having children. Eastern Europe has stopped having children. Things are changing dramatic. Things regarding the breeding of human beings is changing significantly, but in the long term that goes very well for this continent because I believe that people are going to bail out of Eastern Europe, out of EU, and out of Asia, out of Africa and come here to this continent, and bring their brains and bring their money. And I think the economy of this of the Americas is going to go straight up.
Jason: Yeah. Well, you know that’s interesting that you say that you think our best and brightest days are really ahead of us, and that’s because the U.S. although its becoming more you know its geopolitical statement here, but its becoming more socialistic many would argue, but less so than Europe for sure, and so people have always viewed. I mean as long as I can remember and you know I’m not old enough to know everything, but they have always view the U.S. is having far more opportunity than any European country.
I mean there is no ceiling in the U.S. is to what you can achieve. You look it all of the incredible entrepreneurs and innovators that this country has generated, and all the wealth is created still that way people won’t argue that China even as more capitalistic than the U.S. and there is more opportunity, I say “Bah! Humbug!” I think still the U.S. it’s a bell curve. Its comparative, yes there is a lot of things wrong with the U.S., but man I compare to what? [Laughter].
Ken: Well, here can I give my perspective on that?
Jason: Sure yeah.
Ken: Well, just quickly last year 2011, I recently saw the statistics that about 21,000, 21 so its you know in the tens of thousands high net worth Chinese have moved into the country, and where they have moved they actually began in Western Canada at Oregon, Washington, Northern California. Chinese are flooding into this country. Why wouldn’t they one they worked hard, they achieve some wealth, and they would like to raise their family, and that those are two things you cannot do in China, so China has 1.3 billion people.
China also has under 30 years old the deficit that they have created through an artificial birth control system called the One Child Only policy. They have a deficit of 400 million people which means they have —
Jason: Yeah. In about 20 years, I mean China is going to be in big trouble, right?
Ken: No it’s less than that.
Jason: Less than —
Ken: No it’s starting already because it doesn’t take — once you start artificially tampering with your population you will create enormous problems. Yeah they are not going to have a labor force. They are not going to have taxpayers. They are not going to have producers, and they don’t have social security, so they are going to have in 15 years a half a billion elderly with nothing to fall back on because they have literally and literally with the family.
Also China does not have an organizational structure in their corporations like the United States. They run corporations literally on family and they destroy that. My take on China that they have 10 years before they have very serious economic issues and then 15 years they are not going to [feed 0:42:52] themselves.
Jason: So what does that mean geographically, yeah what does that mean for us?
Ken: I will you what it means from. Again from my perspective, I look at the globe, and I look at Canada, United States, Mexico, Central and South America and I look at the fact that it’s surrounded by water. And I think of the fact that we have the biggest navy in the world bigger than all the rest of the navies in the world combined and I think that is for a reason because we don’t have stupid people running the CIA, so I believe that what’s going to happen is the best and the brightest are going to bail out of the EU because the EEU will be Muslim [unintelligible 0:43:30] with the Muslims, but the Muslim culture and the Western culture are not homogenous.
Anybody with half a brain that enjoys the Western culture is going to leave the EU. Eastern Europeans, that’s a disaster. The average, you know the average age of Russian male rise now its 58.
Jason: It’s the alcohol problem in Eastern Europe for Russia. Yeah I mean really Russia and Ukraine I should say its not, I don’t know that its fair to throw a stony and that would be in there and I’m not sure, I don’t think it is. But Ukraine and Russia just that alcohol has just destroyed those countries.
Ken: Exactly that is various good observation and then when you take a look at what’s — and you know that in China that between the ages of 20 and 30, their numbers they have 30 million more men than they have women which means these men cannot find mates, and young men who cannot find mates is cranky.
Jason: Well, yeah okay tell us what —
Ken: Like a nuclear weapon.
Jason: [Laughter]. Yeah may be I’m a little cranky because I can’t find a mate either so.
Ken: Really are you single?
Jason: I’m single. Yeah but you know I got to tell you something funny about that because one of my friends and I have said this before on the show, so I hate to kind of people mentioned here but its just an interesting story.
He is got a company, so he is a client of ours of my real estate company, and he is got offices for a couple of different companies that he owns. One in Southern California and Orange County, another in Ireland, and he just opened one in China, and you know they all sort of do similar things, and so different parts of the market, but he loves China.
He is literally spending like all his time there. He goes past his six month allowance every time, and has to get like special clearance from immigration over here because they actually pay attention through immigration. [Unintelligible 0:45:16] and he loves it. And he is an older guy, and he is always saying oh yeah there is all these gorgeous young women, you know I mean he likes Chinese girls, but he just loves it. He thinks single life is awesome over there.
And I have heard that about the shortage of females and so I sort of wonder you know I guess they just like American guys I don’t know.
Ken: May be so I mean that’s but there — if you take a look at demographically, the shortage of women from the age 0 to 30 years old, you are talking about a shortage of 90 million girls.
Jason: Out of 1.3 billion people it may not seem that bad, but you got to realize is that when you segment that by age it becomes hugely significant, right?
Ken: Yeah and the bottom line is you don’t want to do that. you just simply do not want to do that, and when it comes out, and I think it would probably come out if, I’m certain that Obama is going to win because demographically he cannot lose, but if Romney gets in a position of power, and it takes on the Chinese over the One Child Only policy it will come out exactly what the One Child Only policy is, and it is a heinous process, totally heinous. You don’t want to know about it. It’s really very interesting.
Jason: Do you want to expand them? What do you mean? I mean I’ve heard stories of peasant farmers killing their daughters and so forth, and all that is really ugly stuff.
Ken: Jason, sonograms are really ugly in China. So, if you have 90 million extra men how they know they are men. Sonograms are illegal.
Jason: Okay so they —
Ken: The answer is —
Jason: They are killing [unintelligible 0:45:16].
Ken: Yeah. And so our research is showing is that China sees no difference between infanticide and abortion, and their argument is what’s the difference. You kill millions of babies in the United States through abortion. We kill them as they are born.
Jason: Well, and you know I mean Obama I guess is in favor of personal birth abortions. So you know there is a fine line there. But boy that’s, that’s just really ugly scary stuff. When governments get in they position where they just do not respect human life. You have in my opinion a recipe for all kinds of just heinous ugly things, and that’s just really sad here. It really is.
Ken: It’s beyond sad. If you are a young couple and you have a child, and your wife discovers that she is pregnant, and the state finds out about it, and will forcibly abort your child and sterilize you.
Ken: And then beyond that they will give the dead fetus because you are responsible for disposing off it. Now, I don’t, I just, I can’t comprehend that, I don’t have any place to log that. What kind of system can do that?
Jason: Well, that is disgusting of course, but you know I heard that that really wasn’t the case anymore. I mean this Chinese must know that they’ve got this demographic problem quickly approaching. I mean are they really limiting births the way they used to? I know that’s the olden days, and by that I only mean 20 years ago, but —
Ken: Jason it’s too late. You can’t fix it. That’s impossible. In fact if you started to having kids right now so China back in the 60s was producing 40 million babies a year, and then, and now its down closer to between 10 and 15 million a year. Well, that’s a 65-70% reduction in your fertility. You can’t do that.
It simply means that over the last 30 years they have this 400 million person deficit when it becomes to turned of that group to do the heavy lifting in the country they don’t have the people, they don’t have labor, they don’t tax payers, they don’t have producers.
Jason: I got you there. I totally get that. But what I am saying is —
Ken: And you can’t fix that. How are you going to fix this?
Jason: No, no. I know it can’t be fixed. And I know these things can’t be fixed. What am I asking you is do they still have those same policies today are those occurring?
Jason: Those are contemporary things you are talking about.
Ken: I’m talking about we — I have a research team in Nova Scotia and we are on, but One Child Only every single day we read everything we can possibly get, and noting is changed. Whenever there is a scare about this being public then you hear about policies are in some stages of discovery where they — you know they are thinking about it, but they don’t do it.
You see what they have done. It’s called the demographic dividend. There is a — you heard of the term DINK.
Jason: Yeah Dual Income No Kids.
Ken: Dual Income No Kids, what’s the benefit of that? Well, the benefit is you don’t have to raise them, you don’t have to feed them, you don’t have to educate them, you don’t expose them. And those of you can work; well the Chinese did that on a monster scale, on a huge, huge scale.
And economically this is been a boom, this is been a huge thing for their economy, but now they are going to pay the price because it was a short term decision. I mean that’s all.
Jason: Let me take a brief pause. We will be back in just a minute.
Introduction: Now, you can get Jason’s Creating Wealth in today’s economy home study course. All the knowledge and education revealed in a nine hour day of the Creating Wealth boot camp created in a home study course for you to dive into at your convenience. For more details, go to jasonhartman.com.
Jason: Now I want to talk about two potentially contradictory things depending on what side of the political —
Ken: Jason, now you are agreed, no hard questions.
Jason: Yeah, no hard questions, but you already alluded to these so these are easy. I want to talk about two contradictory things depending on what’s side of the political spectrum one finds themselves. First of all you say Obama can’t lose demographically so he is going to win in November.
Now if you ask me I think that goes poorly for America because that means too much spending. It means too much debt; it means inflation, all of this kind of stuff. But then you talk about how America’s best days are ahead of it because we are going to just attract all the best and brightest minds around the world really as we always have.
And I’m so glad to hear that you think that’s going to continue, but tell us why Obama can’t lose. Could you get into that more? You alluded to it.
Ken: Okay, this is my daughter. I have a doughtier 19 who is, who wants to be a CEO for a major corporation. And she is an amazing kid.
Jason: Ambitious kid.
Ken: Yeah, and just wonderfully ambitious. She is a capitalist. And she is also a Republican. And she just looked at me, she said, dad when are we going to start putting up [all that 0:52:04] white man with short ties?
Jason: [unintelligible 0:52:08].
Ken: Yeah, so I said I’m sorry, but I really don’t know the answer to that question but its true looks like we are headed that way. She said the kids love Obama, and she said that the kids in college love Obama. They love their topic.
Jason: But they love Ron Paul too.
Ken: What’s that?
Jason: They love Ron Paul too.
Ken: Yeah, maybe so but he may not make it to the election, so what’s happening is kids are becoming voters at the rate of get this one every eight seconds. One every eight seconds that means that in a macro sense and kids tend to vote liberal. And they tend to vote from a subjective place. They are not protecting their assets because they don’t have stuff yet.
So Obama in the last four years has picked up a significant base, and I will give you the actual number, but I want to tell you about Republicans. The Conservatives are losing voters because elderly people tend to vote conservative one every 16 seconds, so when you do the math Obama has picked up a differential over 2008 of about 24 million votes, and I don’t think you can overcome that.
Jason: No, that’s very interesting, yeah.
Ken: Yeah, so that’s — no that’s being said I’m certainly I’m a conservative, and I’m not a Republican Party leader here in Connecticut which makes me a real person and the place here.
Jason: I have to comment on that because in reading your book a couple of months ago, I didn’t really think that. I thought you were left —
Ken: Left on the middle of the road?
Jason: Yeah, well I don’t know the middle of the road so yeah we were left, left some of the things you said. We were glad. I don’t know what I was in for today.
Ken: Well I’m a Republican leader but I believe in the Republic. I believe that our nation is extremely stronger. I believe that our forefathers in structuring our government, the way that they did with the political parties, and with the factions that flapped continually did so knowing that this is what it would make our country strong even than politics.
The politics right now — see we seem to [remire 0:54:14] in politics and things are bad, but we didn’t invent politics. Politics was here at the very beginning, and our system deals with it. So I don’t think any one President including President Obama can bring a nation down. I believe the nation is the nation, and the system is the system, and it’s very strong and we will be fine. He may cause the pendulum to swim in the wrong direction for another four years, but it will correct.
Jason: Yeah well I agree with that, whenever I talk to all my friends who you know are that kind of Obama haters, and government haters, and they are complaining about Nancy Pelosi, and the whole gang, and Harry Reed. I don’t disagree with them, okay.
I pretty much agree but how much better was really the prior administration anyway I’m not sure. There was much of a difference to tell you the truth. I think its two sides of the same coin, but I will say that America has an awfully long way to fall before I whatever lose faith in it.
I think it is an incredible country. It’s got an incredible system. And the thing like I do another show that you may not even be aware of call the Holistic Survival Show. And I always say to people jokingly you know if you suffer from depression, please don’t listen to that show because it’s very negative.
And I hear all these disaster scenarios and interview all of these people about that, but I think there is certainly possibility to be pockets of that you know like the LA riots and various occupied Wall Street locations and such. Yeah, of course we are going to have that, that’s just part of human life in any culture.
It happens all the time or everywhere, but what’s interesting is that people paint these really ugly pictures of America’s future sometimes, and one of the reasons that I just don’t think it’s possible it’s more than just our system it’s that implanted in the minds of the population is this deep down, and I don’t know that this really exist in other countries, and I have been to 64 countries, and I haven’t noticed it like I have noticed it here in talking to people that live elsewhere around the world.
There is this deep down like ingrained ideal fairness and democratic ideologies. And I just don’t see things falling apart the way some people do. I think there will be problem certainly, but I don’t know. I’m not quite that pessimistic.
Ken: Look at the immigrant gee, look at who we are. One of the questions I ask when like you know when I look around at audiences. I just recently spoke to a group that was 300 people. I said any Native Americans here, raise your hand? I got one. One person was a Native American. I said we are nation of immigrants, and we always complain about the last people which is why we are complaining about the Latinos. And at one point it was the Irish, I mean they turned out pretty well.
Jason: And the Polish and you know.
Ken: Yeah and the Italians, but I said we are a nation of immigrants, think about what our ancestors went through to come here, We are an ambitious people, we are hardy people, we are a fearless people. And genetically we are quite frankly the best people on earth, and we have congregated here.
It was all of our faults. This is the best place in the world to live. I wouldn’t want to live at any other place. And if you want to enjoy life, and enjoy freely our religion, and enjoy your family, and enjoy your wealth, this is it.
Jason: Yeah, and I want to make a comment about what you just said. When you said we are the best people on earth that is not braggadocios because it doesn’t mean that we are — it’s that we have attracted so many of the best people from around the world.
It’s we have created — you know our founders created the system, and it’s been perpetuated at least to some extent that is brought those people here. It’s not that they are from here. There you know just like you said, one Native American in the audience you know exactly.
Ken: You are pretty smart for a commentator.
Jason: Thank you.
Ken: You really are. I again had to tell you, I’m not stuck in up to you because there is nothing in it me but —
Jason: I will still let you give out your website, but go ahead. Tell me once more again.
Ken: [Laughter]. Are we done?
Jason: No, we are not done, go ahead.
Ken: Oh from my website?
Jason: Yeah — no, no. I just want to hear how smart I am.
Ken: [Laughter]. Oh you want me to continue.
Jason: Yeah. Well, you are going to —
Ken: You have a handle on it, and I appreciate that very much. And the best days for the United States that had back to a more micro issue. As soon as we clear the roughly 6 to 9 million bad mortgages that we discovered in 2008-2009, housing market is going to come back, and the housing market right now is setup for what I call the perfect storm because you have paint up boomer demand, because boomers want to retire.
Did you know that in 2007 the feds tell us that we had $14 trillion equity in our homes, and in 2011 we had 7?
Jason: That’s amazing, that equity.
Ken: That’s how bad it is yeah.
Jason: That was largely vapor anyway so you know it wasn’t there in the first place.
Ken: Correct. Yeah and I would buy that but it’s going to return. What is going to have there is once we clear the foreclosures and I’m very sensitive to what’s going on. In Arizona I also speak a lot in Michigan. You should see Michigan.
Jason: Oh, what a disaster, yeah.
Ken: Yeah, having build those houses and then houses that you know five or six years ago sold for over half a million dollars but we really get a handle on that and once we take the foreclosures off the market, and prices start to go back up and boomers start selling their homes and move south because they don’t want to be up here in the north.
Place like the Carolinas Florida, Georgia, Alabama, Mississippi, Louisiana are all going to see a huge influx of baby bloomers, and that would boost their economy, and for every house itself essentially you create a job. For every house you build, you create four.
You have a whole new crop of generation why people are going to be buying houses, you have a whole new crop of Latinos that are going to be buying houses because they are socio economically, they are advancing very rapidly. You have the African-American that’s off the bottom run, and finally, finally the whole bigotry thing is being put to bed by generation Y. So there are so many good things ahead I mean I could just go on and on.
Jason: Yeah that’s really inspiring, and it’s great to hear that, so do give out your website and tell people where they can buy the book.
Ken: Okay well they can buy a book on an Amazon, and it’s called The Age Curve: How to Profit from the Coming Demographic storm. It’s available, it really, you can get at any number of place, you can get it to a local book store, if they don’t have it, they will order it.
Jason: There is some great stuff the way you divide up the table of contents. You talk about silent virtues, case studies and the graying of American why that’s a myth. I think that one has been over played because I get a lot of people that want me to invest in like assisted living facilities, and I think we have built for that. I think where the demand has been mad, that’s just my very anecdotal perception, but if you want to comment feel free.
Ken: No like just our research group just put a white paper on it for somebody that has 27 facilities in the United States and I can’t go into who obviously, but we looked very hard at the assisted living business, and my advice is that you don’t want to be there. Yeah it’s not like that because their average customer, the best customer is an 83 year old woman.
And instead of us saying the graying of America right now the elderly people in United States is being supplied by the smallest generation of the last 100 years. And a lot of demographers miss that for some reason. They just [thought that these numbers 1:01:53] would certainly age and they didn’t.
Jason: Well you know one thing I didn’t ask you about, and I know this isn’t your specialty, but you probably have thought about it, and that’s the whole thing of longevity and the fountain of youth and I’m just kind of been interested in the subject because the problem people are going to have nowadays they are just going to out live their money.
And with mapping the genome, I have read articles, and heard people talk about how we are like eight years away from discovering immortality not really but major life extension. Any thoughts there and the impact of it?
Ken: You know we are still majority of us still die between 70 and 80. The average age has no depth, and the average age we die is probably around 77 years old. If you look back in biblical times it was three score and ten, now that’s 70 so we have removed a great deal, I don’t know.
Jason: Well, yeah. I’m just saying that if you look at the typical 40 year old nowadays, so how long can they are? They are going to be 120 or —
Ken: No, I don’t think, and what’s going to happen is the average age that we die is going to drop like so, and the reason for that is the baby boomers are just now a bumping up against the dieing age. We get the early diers, and the people are dieing early and making up 10-15% of the people that die up roughly 2.5 million people are dieing per year.
And so once the baby bloomers start to die, and that’s going to be about 2050 when they will start. I think you will see a lot of the boomers will die early because they just didn’t take care themselves.
Jason: Well there is certainly a lot of obesity, diabetes, health problems, yeah related to that, no question about it, so interesting. Well Ken this is been a very interesting conversation. Again everybody the book is The Age Curve: How to Profit from the Coming Demographic Storm and I agree that a lot of good stuff ahead.
Ken: My website is kgcdirect.com.
Jason: Fantastic, Ken Gronbach thanks so much for joining us today.
Ken: It’s my pleasure, my friend, take care, bye.
The Jason Hartman Team
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