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2021-06-10 11:56 by Karl Denninger
in Interviews , 275 references Ignore this thread
RLI Interview - Come And Get It!
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Another excellent discussion with the folks at RLI on all things economic.

These folks are always worth listening to, and these segments are no exception.  Dennis is fantastic.

Come on over and check it out!

Rent moratoriums are coming to an end.  What will this mean for the real estate market and the economy in general?  According to this week’s guest, Mr. Karl Denninger; “it's going to be catastrophic, and I don't see how the government gets out of this”. 

 

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Poorsaver
Posts: 437
Incept: 2008-05-20

Sunshine Tax State
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Another great interview. Karl, could you briefly explain why you think the Medicare advantage plans are no good? I currently have a supplement plan, or medigap as they call it. So Im not limited by HMO and all copayments are covered. The only downside is the premium for the supplement plan which is about $200 a month. Add that to the $148 for Medicare part B, plus $12 for part D, and Im paying roughly $360 a month to be fully covered. I never liked the Advantage plans because of their HMO restrictions, even though they have zero premiums. Your thoughts?

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"I'm going to need a hacksaw"----Jack Bauer
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Cmoledor
Posts: 60
Incept: 2021-04-13

Akron Ohio
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Always good to hear you speak. So what youre really saying is like what David Gilmore said. Theres no way out of here.

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The whole world is one big ****ing scam
Veeger
Posts: 109
Incept: 2013-02-13

Washington state
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4 or 5 years ago, I learned the absolute reality of the 'benefit' of having insurance. It was exactly as Karl describes. Price-negotiated discount= fraction of original price. I had a brush with lymphoma. The bills were 10's of thousands. Insurance (not even medicare) only paid 20 or 30% of the 'bill' and my balance was my deductible or co pay. Had I not had insurance, I would have paid 'the price of a couple new cars' for my treatment. It would have been multiples of my premiums for the year, plus deductible, plus, the out of pocket payments. My lesson? Insurance was mandatory or else bankruptcy. Now, paying $20k a year in premiums wasn't very attractive but at least it was $100k. Oh, and yes, it was two annual deductibles because the treatment rolled into the next calendar year... oh... yay... not!
Colreb
Posts: 3
Incept: 2020-01-23

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For a large percentage of the population, the ending of the rent moratorium will just
mean theyll skip out. You would not believe the percentage of the underclass who are
basically on the run full time.
Jazen
Posts: 4267
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****cago
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Good stuff Karl, like always

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I hate our Government, but I still love America.
Jesjohn94
Posts: 312
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Atlanta
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I don't understand the bond market. TG talks about a hypothetical change in 30 year treasury from 3% to 6% in his interview. That isn't exactly an apocalyptic change that would indicate the end of the world. If you had just bought the bond you'd be looking at a loss of 90%. Why isn't anyone getting scared by that possibility which seems like it has a real chance of happening?
Fumei
Posts: 2061
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Online
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I am disappointed that the RLI was not the Rhodesian Light Infantry.
Whitehat
Posts: 4991
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Elsewhere
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We got something for DAT!

 


Forwarded to me by a very mad working person who busted his ass after his original employer's business went under due to the mess. He was never late with one payment to his landlord the entire crisis, nor in his life ever took a dime of welfare directly or indirectly. The job he lost was working outside in a junkyard. Then he got a job working for a landscaper at half of his original take home pay for longer hours just to be responsible along with shifts at another place to remain unmentioned.

Guaranteed that the big real estate interests in NYC and elsewhere pulled some strings to get this one done. Where do you think that the money is going to come from? Somehow, someway, directly or indirectly, it is coming from the greater country. So go ahead and have that libertarian/conservative haven someplace while you still support the cancer of the left wing urban centers. Until the cities are reformed, nothing changes. Cities are the cultural centers of any white civilization. They are the example of morals, values, law and aspirations. They are examples to outsiders as to what a country is and values.

Seems like they are doing a good job showing what we are all about.

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smiley

"Better to reign in Hell, than serve in Heaven," Satan's monologue in the first book of John Milton's Paradise Lost
Njca
Posts: 100
Incept: 2018-10-16

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Let's see, if I am self-defeatingly short-sighted, lack constructive impulse control, and if I don't have to pay rent, get free gubbmernt monies, and can do some off-the-books side gigs, why, oh, why, would I want to have a real job?
Ktrosper
Posts: 4478
Incept: 2010-04-06

ft collins co
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@22 ish minutes you talk about forcing both adults into the workplace and how we've now already shot that bullet.
We're forcing 3-4 into the workplace now- where kids in the basement are turning into long-term tenants paying rent, etc.
This is like the Mexican model, where several generations live/support/pay per household.
Will this become the norm or will we push back in some way? Who eats that inflation that has caused this over the years if we do push back?

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The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero
I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D.[/FON
Purplefang
Posts: 330
Incept: 2010-03-28

Oklahoma
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I believe in free markets. Monopolies and government are the enemies of free markets. I hear people say we don't need workers any more because of technology. Every time I need something done technology is missing in action. I have not been able to find a wall oven for 6 months. Can't technology just print me an oven? I need loads of work done on my old house. Technology isn't doing anything. All I see is many hours of manual labor. Seems to me if you want the economy to function more effectively we should remove disincentives. If we are all sitting around waiting on government stimmy checks nothing is getting done. The tax man is an *******.
Redjack
Posts: 566
Incept: 2018-01-29

Iowa
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Had a kid in the NICU 7 years ago.

Decent insurance, but I am still digging out from it. Cashed out much of my 401K.

What made me angry is half the floor was Amish, and they paid... 0.

Great people, but they will cheat the system as much as anyone. Which made my costs skyrocket, and my then employer's too, which ended my career in that field.

Worked out for the best but while I disagree with .gov medicare for all, I get the reason so many are for it.
Smacktle
Posts: 4870
Incept: 2009-01-20

Texas
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Very good work Karl. Greatly appreciated!

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It's always something. Forever till you die.
Radiosity
Posts: 642
Incept: 2009-03-05

Sunny UK
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@Whitehat "Cities are the cultural centers of any white civilization. They are the example of morals, values, law and aspirations."

Cities are where those things go to die.
Mannfm11
Posts: 7013
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DFW, Tx
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@Jesjohn94, financial valuation is dividing a stream of income by compound fractions. If you were getting an annual coupon on a bond paying $30 (3% on $1000) and the required yield was 6%, you would divide the first coupon by 1.06. The second would be 1.06 squared (1.06^2). The third, 1.06^3 and so forth. Summing all these payments, gives the discounted value. The last payment would be a coupon plus the corpus or $1030.

In this case, the final payment would have a PV of $179.33. If you used a discount of 3%, the figures would add to $1000.

I used to play with these numbers, because I did mortgages and studied them. The lower the beginning interest rate, the more the value of the stream of income is affected, by a 1% increase. Going from zero to 1% would be an almost 26% loss, because there is no stream of income to reward lending the corpus. At 1%, the corps is worth $741.92. At 2%, the corpus is worth $552.07. A 1% coupon bond would pay $10 per year, the last payment being worth $5.52 rounded. The 29th coupon 102% of that or 5.63 and so on. Using an average around $8, those 30 coupons are worth around $240, making that bond worth in the range of $790. Note the cost of 1% increase on a coupon of 1% discounted at 2% results in a loss of around 20% over 30 years, compared to 26% going from zero to 1%.

The main point of this illustration is to show the devastation of inflation on a low coupon bond. You don't lose 90% going from 3% to 6%, because you aren't waiting 30 years for all your money and the effect is regressive, meaning you are taking 3% off a reducing value annually and being compensated half the required annually, which beats nothing. Either case, the reduction in the corpus would go from 1.03 to the 30th power to 1.06 to the 30th power. The loss there is illustrated by the 3% corpus being worth $411.98 to the 6% being worth $174.11. The last $30 coupon would be worth $5.22. Just guessing, because I don't want to do the math, using a midpoint around $18, (18X30)makes that bond worth around $700. So instead of a 90% loss, the loss is around 30% If rates stay at 6%, for the remaining term, the value of the bond will regress back toward par, as the cost of the discount of the stream begins to vanish. (Dividing $1000 by !.06^29 produces a smaller discount of the corpus than 1.06^30)

There is one thing that doesn't change in a discount, the value of the corpus. If I discount a 3% coupon to yield 6%, or a 6% coupon to yield 6%, the value of the final payment is going to be the same, $174.11. The corpus at 3% is worth $411.98, a difference of roughly $237.

This is an important factor, should you ever take back a real estate note to facilitate a transaction. You need to understand this factor, because, if you ever need to sell the note, what looks like a good deal now, lets say 6%, might require a yield of 10% to find a market. That might be with no change in the current market, because the paper has no standards behind it. The guy who buys it falls in the same boat as you.

One other thing, I will add is the central banks of the first world are all loaded up with assets they never held in prior times. In the not so distant past, these banks generally held t-bills, which had durations less than a year. So they were never exposed to their own shenanigans. The ECB has been running a negative rate policy, meaning they have been paying a premium for zeros. People don't understand this, but these banks can go broke. They really have only an interest rate policy to regulate the value of their paper, even though you might think different. They buy or sell securities to adjust the supply of credit. If one of them were forced to sell securities, that would likely move rates, decreasing the value of the securities on their books. What happens, when what is left is significantly below market? I propose they are broke. The governments could bail them out, but the banks have already bailed out the governments, so the entire matter becomes a sham. Who, in their right mind wants to hold this crap? If the USA had to pay 10%, there wouldn't be much left of the rest of the taxes, once that became absolute. In the meantime, holders of their debt would take a valuation bath.

We are in the same mess that created the 1930's depression, only that China has replaced the USA as the expanding exporter, financing their trade. Consumption in the USA declines, due to debts, the entire China model falls apart, imploding demand for their mineral imports and capital goods industries. There was always the nonsense they would dump out bonds, but that would be suicide by attempted murder. But, the Chinese have been starving for centuries and managed to survive. Deprive a snowflake of their Starbucks, cell phone or Cola and watch what happens here. We are in a **** hitting the fan situation and evil people are running things.

What happens, if one of these things goes wrong? They are pushing a potentially dangerous drug, in the form of shots, on the world. They called something a pandemic, which was a total fraud. What happens, if the shots are the pandemic and a billion people die or encounter health or fertility problems. We have been told there are too many people. What if we find ourselves with not enough? All of us are collateral in this game, like it or not.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Wayiwalk
Posts: 133
Incept: 2016-11-09

New Yersey
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Whitehat - New York got $360 Billion dollars from the stimulus bill. Now we all know that the $ will be pissed away furiously and the state be back in the red in two years, but it is where they'll get money for these programs....and thus you are correct, for the whole nation.

Amazing to me that the creep of a governor is still there. Imagine a future in this country with 50 governors as corrupt, confused, and criminal....

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The Lockdowns Will Continue Until the Morale Improves!
Cmoledor
Posts: 60
Incept: 2021-04-13

Akron Ohio
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Seriously though. What the hell do we do about this? Seriously. I have no idea. Other than fight like hell when it all explodes. But man Im tired of waiting for that too. Just bring it already and lets dance.

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The whole world is one big ****ing scam
Cmoledor
Posts: 60
Incept: 2021-04-13

Akron Ohio
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Also. If I may ask a question. I was considering a HELOC of about 10k to fix some stuff around the house. Prime minus .25%. Rates are low now. But when will they increase? Im not in a position to pay cash due to my own bad decisions in life. I can write that off on home improvement write off. If anyone can answer Id be grateful. Thank you. Bad idea or no?

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The whole world is one big ****ing scam
Handyone55
Posts: 276
Incept: 2010-07-06

Ceciltucky, Maryland
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Great podcast ! Could our rulers kick the can a little further by extending the rent and eviction moratorium another year? This will complete the destruction of Mom and Pop landlords and allow Blackrock to Hoover up property for 10 cents on the dollar. The Supreme Court seems to be captured and will render whatever verdict they are ordered to.

Mannfm11
Posts: 7013
Incept: 2009-02-28

DFW, Tx
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Whitehat let the cat out of the bag. I have one tenant who hasn't paid a dime, since around June last year. At the time, you had to be 3 months behind, which is really 62 days or so to reply. He is paid through the end of the month and going for another helping.

I just received $25,600 for a tenant, and have a little over $9,000 coming for another and $14,000 coming, for another. And, I'm likely to get around $11,000 for another. Only the $9000 guy and the last one really deserve to get the money, though I can't deny the rest were impacted, by government decree.

Before all of this, I reduced the amount required to stay current. It was generally 20% of the rent. I knew the chance that I would ever see any money, might be slim, so 80% of something is better than maybe getting nothing. All those tenants applied for the program, so I billed for the deficit. The purpose of the program is to pay me, not them and at least one has this purpose confused, thinking this is their money. Had we followed my plan, I wouldn't have asked them for the shortfall, but it was due under the terms of the lease and I reported it as such.

One place I will disagree is that Nixon caused the 1970's. A whole lot of things caused the 1970's, I recall my step father cursing Burns, but I believe it was because he was too tight in 74 and 75. You might read a collection of papers written by a monetary economist named Jacques Rueff, entitled The Monetary Sins of the West. These papers began in the late 1950's, warning we were headed toward monetary disruption, because the US was flowing too much paper overseas and we were headed toward a break in the gold standard and fixed exchange rates. Nixon closed the gold window and the markets went wild. A cheaper dollar was a reflection of a price differential that had failed to be reflected for 25 years, almost all at once. Regardless, of your opinion on gold, you might compare the current price of gold, or even the price, in late 2014 of around $1050, to see the devaluation, since Bretton Woods. The 2014 low was around 30 times the $35 fix. Not all of that occurred after 1971, likely 30% of it prior.

Is the price adjusted dollar 1/30th or 1/50th of the 1933 price? I think a case can be easily made for the first figure, as I was told, in the late 1960's that a dollar was worth a quarter, based on 1933. There is a lot of valuation decline hidden in the massive increase in potential labor productivity, over the last 90 years, which brings the 50X or higher gold price into play, as being real. The price index, on real terms, should have fallen, not increased, if the value of the dollar had been stable, productivity being reflected as lower prices.

To put this all on Nixon and Burns, contains a flaws. For one, the break, from gold created worldwide revaluation of currency. Rueff had warned of this since the late 1950's. I don't know that higher interest rates, as fixed, solve inflation. Inflation causes inflation. Higher interest rates, serve only to increase the cost of living, and the cost of expansion. The Fed could have solved this problem by merely floating rates and refusing to buy any more T-bills. I think Volker kept rates too high for too long, but what I propose, might have done the same thing.

The trend, in government spending created the 1970's, along with breaking the link of international valuation. LBJ dropped a bomb on the country, with Vietnam and the great society, along with Medicare and the continual recognition they underfunded Social Security. Carter didn't help matters, opening up 2 new bureaucracies. Plus, Carter had an extremely left wing Congress, the remnants of which we see today, with Kerry and Biden. I believe he accomplished something, because years ago, I did a trend projection of spending and receipts between 1964 and 1975 and it produced trillion dollar deficits by the early 1990's.

What we are seeing today is what would otherwise be a collapse in demand and prices. There has been too much nonsense pushed around the world, for there to have otherwise not been hyperinflation. We are witnessing demand for what has not been produced. The government is looking to spend what otherwise has to be extracted from the pool.

How do we get to deflation? By inflation. There is a topic on this. Inflation will force returns higher, whether the Fed raises or not. People will refuse to hold dollars and globally, that is a trigger, on its own. The normal pricing mechanism for financial assets revolves around a real return, plus risk. Stocks can kind of get around this by the fact inflation will show up in the future price of their inputs and outputs, but they can't get around higher risk or the risk free rate of return, which has been set extremely low, by Fed bond buying. If it ever gets out the Fed can't mark to market, by a significant amount, it is bankrupt. Its paper must be discounted, maybe by an accelerating degree. This will depress significantly, all financial assets. The long bull market has ridden a long term reduction of rates and leverage.

I don't believe this is transitory, but going to be a long term problem. The reason why is the supply lines are in a position I don't believe can be caught up to enable a real expansion. This was an artificial recession, meaning there wasn't a real rebalancing. In a normal recession, faulty investment is reversed and liquidated and supplies of goods rebalanced. There was no rebalancing. Things stopped while time went on and relief and stimulus checks allowed the band to play on. You can't continue to meet demand with a closed factory or mine. You can't open a factory without parts. Pent up demand cannot be filled with no goods. As Trump said early, the cure was worse than the disease. We still haven't seen how screwed up it is. Lets just move another chair to enjoy the sea breeze.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Mannfm11
Posts: 7013
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DFW, Tx
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Whitehat, that was nationwide. Had that guy rented from me, I would have taken a discount and had he found it necessary to file, asked the government for it. Otherwise I would have eaten it.

Maybe I am not ruthless enough to be a landlord, but I know what happens in eviction. People don't generally quit paying rent, because they are freeloaders. They quit paying, because they have run out of cards. You get 3 things, when you evict someone, a homeless person, an uncollectable lien and an empty house. All three of them are negatives. If not for taxes and insurance, I might be more forgiving.

Your friends landlord should have taken a cut to get to the end of this. I would have. Likely, he could have gotten my money back and 3 extra months paid. Maybe we could get Gates, Bezos and the others to pay for this, forcing a special classification of tax status of IPO ownership of their companies and making it regular compensation. They in fact maintained this fraud on the public and cost us ten trillion dollars. This entire matter isn't about China, but the pandemic fraud itself, created by the Davos oligarchs. Their money or their hide.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Wayiwalk
Posts: 133
Incept: 2016-11-09

New Yersey
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whups...correction, New York got "only" $100 billion....

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The Lockdowns Will Continue Until the Morale Improves!
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