J Scott: We Have 1-2 Months Before the Economy Begins to Break

23:42J Scott:And if you're right, if the straight stays closed, maybe that is the thing that finally pushes us into a real recession. Yeah. Keep in mind that when we talk about the economic cycle, economic expansions leading into recession and back to expansion, that cycle that repeats over and over and over, that cycle is typically driven by debt. Yeah. We go through a recession. We come out of a recession. People have had their houses foreclosed on. They've gone into bankruptcies. They've lost money on their credit cards. Credit card companies have eaten those losses. And we basically get to start over with a clean slate.

24:17Everybody has a whole lot less debt. The economy heats up because people can borrow again because they've kind of shed all that debt that they had grown before the recession. At some point, they accumulate too much debt and they can't keep spending. And that's when the next recession starts. Well, if you look at the data, we haven't had a real recession, like you said, since 2008. And debt numbers, debt data is looking extremely concerning. Yeah. We're over$18 trillion in consumer debt with over$1.2 trillion in credit card debt. Just to put that into perspective, in 2008, we only had, Americans only had about$800 billion in credit card debt, which means we have 50 % more credit card debt today than we had in 2008.

24:59Wages haven't grown 50%. So from an inflationary, from a real debt standpoint, Americans are in much more debt today than they were back in 2006, seven, and eight before we went into that, obviously, the Great Recession.

25:12J Scott:And delinquencies are going up. Actually, I did a show on this the other day, but the only place the debt looks fine is with mortgages actually right now in terms of delinquencies. But auto loan delinquencies are going up. Student loan delinquencies shot back up after an artificial low. But credit card delinquencies are going up. businesses saw more bankruptcies last year than in any year since 2010 businesses too yeah so it's not just consumer debt yeah you see what's going on with private credit just yesterday you know some of the biggest private credit funds are seeing redemption rates at like 10 15 you know it's like it's it's not great so one more question on this and then i do want to move on to some of the housing stuff but you know if the straight open today like again i'm just trying to read the tea leaves like everyone else trying to understand what's going on.

26:00J Scott:But it does seem like the fastest path to opening the strait would be to allow Iran to implement a toll. That seems like what they want. And I don't think that's good. I don't think anyone really wants that. But if that were to be the solution, I mean, it wouldn't go up as much as if the straits stayed closed. But then would we just expect higher gas and fertilizer and helium prices like indefinitely? Yeah. So if you actually run the numbers, Iran's been talking about a toll of $1 to$2 million per ship going through the strait. If you look at the amount of inventory, whether it be crude oil or LNG or other stuff that each ship transports, it works out to a few percent.

26:41So it basically increases transportation costs through the strait or cost of the goods on the boats through the strait of a few percent, three to five percent. Will that likely translate to higher prices. Yes. It's not going to double prices, but that's certainly a concern. I don't like talking politics. I'm not an expert on - International negotiations.

27:05J Scott:Exactly. But if you think back to the playbook of the last time we had a major dispute with Iran, it was back in the 70s. And it was basically, there were hostages involved and there were other things involved, but it was also oil. And the strategy that Iran employed back then was they basically didn't negotiate or capitulate until two days after the election in 1980. Basically, Jimmy Carter was in office. They wouldn't talk to him. They wouldn't negotiate with him. They kind of dragged things out for a year and a half. Two days after the election, Reagan gets put into office and the American hostages got released.

27:47So basically, Iran used it as an opportunity to drive political sentiment. And there's talk that there was backroom negotiations with Reagan and his team to basically help him win the election. Whether that's true or not, the reality is that the Iranians realized that they had political leverage despite the fact that they might not have military or actual hard leverage. And who knows? It could be the same thing today. It may be that the Iranians realized that things will get worse both for them and the rest of the world. And that's something that they're willing to settle for if it means basically changing the outcome of the election in November.

28:26And so, again, I'm not a military or geopolitical strategist, but I have been reading a lot of people who believe that it's likely that this isn't going to get resolved before November.

28:38J Scott:All right, everyone, we've got to take one more quick break, but I'll be back with Jay and his advice for real estate investors right after this. Everybody has a space that's sitting there quietly, costing them money instead of making it. A guest room holding random storage and a treadmill that hasn't been used in months. A second home that only gets used a few weeks a year. Or your primary home while you're traveling, just sitting there, fully capable, producing zero return. While you're away, it's actually a great opportunity to list your space on Airbnb and let it start earning for you. And if you've ever considered listing your place, but assumed it would be too much to manage, there's an easier way now.

29:18J Scott:With Airbnb's co-host network, you can hire a vetted local co-host to handle the details for you. A co-host can create your listing, manage reservations, handle guest communications, and even provide on-site support, giving you experienced help to take care of your home and guests without having to manage every detail yourself. So whether your space is empty on weekends, during certain seasons, or most of the year, it doesn't have to sit idle. It can start producing extra income. It's a practical way to make more of the space you already have. Nice when something around the house finally starts contributing.

29:53J Scott:Find a co-host at Airbnb.com slash host. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy? Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45 % more applications than non-sponsored posts. The best part, no monthly subscriptions or long-term contracts.

30:29You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed Worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of the show will get a$75 sponsored job credit to get your jobs more visibility at Indeed.com slash rookie. Just go to Indeed.com slash rookie right now and support our show by saying you heard about Indeed on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring indeed is all you need.

31:04J Scott:Billion-dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes, thanks to the Fundrise Income Fund, which is more than$600 million invested and a 7.97 % distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit Fundrise.com slash pockets to invest in the Fundrise Income Fund in just minutes.

31:42J Scott:The fund's total return in 2025 was 8 % and the average annual total return since inception is 7.8%. Past performance does not guarantee future results. Current distribution rate as of 12-31-2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. Most investors only think about insurance when something goes wrong. A tenant injury, storm damage, loss of rent. Then suddenly, the cheapest policy doesn't feel like the best one anymore.

32:13J Scott:That's why a lot of BiggerPockets investors use steadily for landlord insurance designed specifically for rental properties. Whether you own one property or a growing portfolio, they make it simple to get covered properly. And BiggerPockets Pro members get an extra 5 % off their landlord insurance premiums. Visit BiggerPockets.com slash landlord insurance to get a quote today.

32:40J Scott:Welcome back to On the Market. I'm Dave Meyer. I'm here with Jay Scott today talking about the situation in Iran and how the impacts of the closed strait of Hormuz could ripple throughout the global economy and even impact real estate here in the U.S. Let's get back into our conversation. All right. Well, let's turn now, Jay, to talk a little bit about real estate. And let's just assume for now we go into this global recession. Again, an assumption we don't know for sure. But if the straight state is closed, I think it's a reasonably likely scenario, right? What does that do to housing? Let's talk about residential first, then we can go to commercial.

33:16So it's not unprecedented for a big recession to impact housing. We saw it back during the Great Depression in the 1930s. We saw it after 2008. But historically speaking, and you and I have discussed this before, we've had 36 recessions in the US in the last 160 years. 34 of them have not impacted housing. 34 out of the 36, real estate either went up, stayed flat, or went down no more than 1.5%. So there are only two cases where that happened. Whether it would happen this time, whether we would see a major hit to housing values this time? I don't know. But statistically speaking, housing is more tied to inflation than it is to recession.

33:59As long as we're seeing inflation, we tend to see housing prices in this country go up. And if you kind of map those two lines next to each other, there's a very, very clear trend over the last 125 years that says housing values track inflation. And so the bigger question for me isn't, are we going to have a recession? But are we going to continue to have inflation in this country? And if the answer there is yes, if we're likely to see inflationary pressures over the next five to 10 years, I think it's safe to say that housing isn't going to collapse. Is it going to grow significantly? I don't know.

34:31I don't think for the next few years, we're likely to see significant growth in the housing market. We still have affordability issues. That trend line for housing values is still a good bit above the trend line for inflation, But I don't see a major collapse coming in most scenarios.

34:47J Scott:Yeah, I tend to agree. I did a show. I went deep into this about inflation and housing prices and how they're related. If you want to go, you can go check this out. I think this released in April. There's different types of inflation in the US, right? We have supply side inflation, which is kind of what we're seeing now, which is less correlated with home price increases. It doesn't mean that it's negatively correlated and that they go down, but it doesn't necessarily drive prices up as much. Demand pull inflation is really what we see when there's a really hot economy. And so that's why personally, if there's a recession, I don't really see prices going up unless we see money printing.

35:31J Scott:Like you said, if we get in this scenario where the economy is stagnating and we need to either do some sort of infrastructure spending or government spending and they're going to print money to do that, whether we see it in the form of stimulus checks, I don't know. But if that M2, just so everyone knows, M2 monetary supply is just a way to track the amount of dollars circulating in the economy. If that goes up again, asset prices will go up. Like there's a very strong correlation for that. So that's where I see the big thing to watch for if you're curious about housing prices is like, do we either see A, money printing, or B, another form of money printing, which is just quantitative easing?

36:14J Scott:Like if we start seeing the Fed buying mortgage-backed securities again, we'll see housing prices go up. The way I think of it, and I agree with you, but the way I think of it that might be helpful to some people. And for anybody that wants to dig in more, go read Milton Friedman, who was an economist back in the 70s and 80s, who very much espoused this belief. Inflation long term, not day to day, week to week, or even year to year, but inflation long term is driven by one thing, and that's the money supply. If we print more money, we're going to see inflation. And the reason why I say it doesn't necessarily correlate day to day or year to year is, Just as an example, 2008, we printed a ridiculous amount of money in 2007, 8, 9, 10, QE, stimulus.

37:01But we had exceptionally low inflation through the 2010s. And it surprised a lot of people. A lot of people said, how do we print this much money and not see inflation? Well, the money printing is going to lead into inflation, but that could take 5, 10, 15, or even 20 years. So long term, if you want to see the trajectory of inflation, you look at the M2 money supply. And you can see based on how much money we flooded into our economy over the last 20 years since 2008, we're going to see a good bit of inflation through the next 10 or 15 years at least. But that inflationary trend is going to be more linear.

37:40We're not going to see – again, we're not going to see big spikes. You print a lot of money in 2008, it doesn't cause a big spike in 2010. It just causes inflationary pressure over the next 10, 20, 30 years. But from that trend line, that kind of linear flat trend line upwards, we're going to see a lot of spikes. And those spikes are being generated by the other side of inflation, what you mentioned, the supply side of inflation. So we remember 2021, 2022, 2023 when we saw a big spike in inflation. A lot of people like to think that that was from the money printing. Don't get me wrong. All the money we printed in 2020, 21, 22, 23, 24, till today, that's going to impact inflation.

38:22But the big inflationary spike that we saw in 2021, 2, and 3, that was related to supply chain pressures. The inflation that we're seeing today, we're printing a lot of money today. We're going to continue printing a lot of money. But that's not what's leading to the inflation that we're seeing today. The inflation we're seeing today is supply-based inflation. And so at the end of the day, the big spikes that we see are related to supply chain issues. It might be related to short-term demand issues. But long-term, the inflation that we see is going to be related to the money that we print. And the fact that we've literally doubled our money supply, doubled our national debt over the last 10 years, means that long-term, regardless of what we see today, tomorrow, next year, five years from now, over the long-term, we're going to see significant inflation in the future.

39:11country, which leads me to believe that in the long term, again, 5, 10, 15, 20 years, we're going to see real estate prices continue to trend up in a healthy way. Interesting.

39:21J Scott:A couple of things there. One, for people to try and understand, I agree with you, Jay. I think the money printing in COVID absolutely contribute to inflation. But think about cars, right? Car prices went up so much during COVID. Used car prices were as expensive as new cars. And it's because of the chip shortage, right? Like manufacturers did not have enough chips to create new cars that created less supply. People were flush with cash. They wanted to buy new cars. They wanted to buy used cars. And so they bid up the prices of cars. That's like how a supply shock works. It's too much money chasing too few goods.

39:58J Scott:And so that is what we can see. One thing, Jay, I've been thinking about is like your point about printing money and how it impacts inflation for the long term is well taken. And you said, you know, we had low inflation during 2010. One thing I keep thinking about is the way we track inflation in the United States. We have two measures that we usually look at the CPI, the Consumer Price Index, the PCE with personal consumption expenditures. They don't measure asset prices, right? They do not look at the stock market. They do not look at housing prices. They do not look at Bitcoin. I understand why they're tracked separately.

40:32J Scott:But could you say, because when I look at the 2010s, in retrospect, I did not realize this at the time, but I look at this in retrospect, could we just see that the effects of the money printing from the great financial crisis is that money just poured into asset prices and that's why assets are so expensive right now? Yeah, I don't have the exact date on me, but in the last few years, I've seen a number of empirical studies that have basically concluded that the vast majority of money that has flowed into the economy over the last 15 to 20 years has gone directly into asset prices, that you can see a very, very strong correlation.

41:10Again, I'm not claiming causation or that they're the exact same, but very strong correlation between the amount of money that's been printed and the value of our equities markets, our stock markets, and other hard assets going up. And so there are a lot of people out there, a lot of smart people out there who believe that essentially what's happening is we're printing all of this money. It's circulating through the economy. At some point, it's getting into the hands of people that don't need that money for everyday expenses. They don't need or care to be spending that money and they just sock it away in investments and hard assets.

41:43And that's kind of the problem is that all of this money may be going to the lower 80, 90 percent, but eventually they're spending it, eventually it gets into the hands of the top 10 or 20%. And those top 10 or 20 % don't need that money today. So what do they do? They put it into the market and they basically pull it out of the economy. It's still in the economy in theory, but it's not being circulated. We don't have that M2 velocity of money through the economy, which is really, really bad for those in the lower 50 % or even the lower 90 % these days, because it means we're not seeing as high wage growth.

42:22We're not seeing basically that money being recirculated down to them so that they can continue to spend it. It's just being pulled out of the economy. And that's why the rich are getting richer and everybody else is suffering these days.

42:36J Scott:Yeah. Well, super insightful, Jay. Thank you. What do you do about it? We're all real estate investors trying to figure out just how to help pursue financial independence, secure our nest egg. What's your advice? I think my advice is the same, whether we're going through the best of economies or the worst of economies, buy as many hard assets as you can and hold on because long-term that's where the value is. I'm a big believer that real estate is the best risk adjusted investment on the planet. You can make the case that the S &P 500 is pretty good. If you look at all the data through today, you can make a case that gold is good.

43:16So I don't care if you're putting your money in gold or the stock market or real estate, but put your money in some hard asset that actually is likely to retain and grow its value. Number two, I'm a big believer that when we have a lot of economic turmoil, the best strategy is diversification. Don't put all your eggs in one basket. If the economy's booming and you want to put all of your money in the stock market, you can make a better case for that. But when it's possible that we could see a downturn, we don't know what's going to get hit the worst. 2008, it was real estate. 2001, it was the stock market.

43:54I mean, different things get hit differently in each downturn. And so just given that the fact that we could see a downturn in the near future, I think diversification is the right strategy. Diversify asset classes. If you're investing passively, diversify with operators, diversify in locations, diversify in exit strategies, durations, diversifying across risk. Basically, just put your money in so many different places that even if something go down, other things are going to hold their value or may even go up and you'll be happy.

44:24J Scott:What about folks who are in the beginning of their investing career and who maybe have one property? How do you diversify or how do you think about it when you don't have more capital to allocate to different asset classes? If you're early on, you just have to be more discriminating. You have to make sure that the purchases that you're making are better deals that are more likely to succeed. One of the reasons I love real estate, active real estate, is because we have some control over it. If things aren't working out exactly the way we want, unlike the stock market where we just have to sit back and 9.30 every morning we log on and see if the market went up or down.

45:01With real estate, if it's going down, what can we do to actually impact it and help our investments? That's one of the reasons I love real estate. Anybody out there that's starting out, find that next great deal. Manage it closely and grow your portfolio over time. And keep in mind, the one thing I love about real estate is as long as you're not going to lose that property, there's never been a 10-year period in the United States where single-family real estate values have gone down. So statistically speaking, it's pretty certain that if you don't lose your property over the next 5 or 10 years, you're going to make money on that property.

45:37So that's my advice. If you're starting out, don't stop. Too many people think this is the wrong time to be investing, but investing when everybody else is terrified is the best time to be investing.

45:49J Scott:Yeah, it is. Yeah. And you can still do it conservatively. We talk about this on the show frequently. To Jay's point, hold on to it. It requires cash flow. It requires cash reserves. And ideally, it requires buying below current comps, like making sure that you're buying with some built-in equity. Those are the ways that you protect yourself. And you will make money on that if you can just hold on to it. And so I think it's just about buying strong, fundamentally sound assets. And the good news, in my opinion, is better assets are coming on sale. And so you can find better things to buy. You just have to be patient and persistent.

46:25And there's less competition these days, which is a great thing. My business partner mentioned yesterday something that we don't think about enough. Not only is there less competition, and we normally think of this as a bad thing, but the competition that we have these days is stronger than it was a couple years ago. And we normally, we don't like strong competition, but the reality is there's some benefit to weeding out the weak competition. It was the new investors, the ones that didn't know how to underwrite deals, that were offering ridiculous amounts on properties. Yep, that's right. Properties that we just, we couldn't touch because people who didn't know what they were doing were offering 10, 20, 30 % over what we were willing to offer.

47:01So there is some value in the weaker competition getting weeded out and being stuck with the stronger competition because those are the folks that are reasonable that you can potentially beat out for good deals.

47:13J Scott:All right. Well, Jay, this was a lot of fun. Thank you so much. I really appreciate you being here. Any last thoughts here? Keep up with the economy. Keep up with the data. Don't get too comfortable because things could get rocky over the next few months. Stay disciplined. Stay focused. Invest in hard assets, good assets. and no matter what happens, I think we'll all come out the other side a lot better for it. Thank you so much, Jay. If people want to connect more with you, where should they do that? You can go to jscott.com, letter J, S-C-O-T-T.com. I do a couple times a week economics newsletter that you're welcome to sign up for if you want to track the economy and what's going on there.

47:51J Scott:Awesome. Thanks again, Jay. And thank you all so much for listening to this episode of On the Market. We'll see you next time. You can't reason with the sun. Trust us. we've tried this summer it's time to put that angry ball of fire on mute colombia's omni shade technology is engineered to protect you from the sun's harsh rays that can burn and damage your skin the sun is relentless but so is our gear level up your summer at columbia.com to spend more time outside and less time slathering on aloe lotion you're welcome columbia engineered for whatever.