Why the economy is rigged (and how you can still win)

0:00Have you ever wondered what successful property investors actually do? Well, after more than a decade of helping thousands upon thousands of people invest, we found that actually it's really simple. The investors who do the best are just following some basic principles and sticking by them. So we put together an entire guide that sums up these principles, an investment philosophy, if you like. And you can find that for free at propertyhub.net forward slash strategy. Hey everyone, Robby here with Rob D and you are listening to the Property Podcast. This week we're going to give you a topic that if you understand will change your financial life forever.

0:44If you don't understand, you'll be punished forever. I promise you the claim is true. Make sure you get a pad and pen ready. This is a big episode.

0:59welcome to the property podcast thank you for joining us in case you don't know we run a business that buys more than 100 million pounds worth of property every year for our clients you can find out about that at propertyhub.net slash invest and in today's episode we'll explain why you've got to do something different because what's worked in the past does not work anymore so all of that coming up and make sure you stick around because we're going to end the show in possibly the most unexpected way ever it's time for our new story of the week now and this week the new story comes courtesy of the guardian and a new story that we are referencing has been written by sean berry if that name sounds familiar she's from the green party the co-leader and the headline reads should labor buy the supply of housing from landlords and what sean is getting at is that while she may not be a fan of landlords, if landlords want to get out, then Labour parties should be looking at buying up those properties from landlords and putting them into use as social housing.

1:55Now the chances of this happening are slim to none because the whole process would be a nightmare to put together. They'd probably take years to even process this through. So I do not think this will happen. But the government buying up new build property for for example, to then put out to the market as social housing could be a good idea. And I'll tell you why. The reason why I think it could be a good idea is because the government is actually buying assets. The reason why we do this is because property is an asset. The government wastes money in so many different ways, but this could be a way for them to own assets that then also provide social housing.

2:31And in the future, maybe they can recycle that stock, sell it off, they've made money while i don't agree with what sean is proposing the overall concept of the government buying social housing may not be such a ludicrous idea but hey whenever we touch politics people get a little bit edgy so what do you think am i way off the mark here or is there something in it do let us know you can always comment via our social channels property hub uk this is an important episode because the rules of money have changed and i think most people haven't noticed yet, or at least haven't fully internalised yet, just how much the world has changed and how you now need to do something different.

3:10Because for a long time, it was simple. You work hard, you save cash, you maybe buy index funds, and that would get you to where you want to be. But recently, the signs have been all around us, if you know where to look, that we've entered a new era. A new era where the size of government debt determines everything. It's going to determine how much everything costs you, and it's going to determine how all your investments perform. so in this episode we're going to tell you why this is absolutely guaranteed to happen we'll show you the signs that it already is happening but most importantly we'll tell you what to do so you're not punished by what's happening but you can actually position yourself to benefit long time listeners the podcast will know rob that i've often said that the game is an unfair game but if you know the rules of the game instead of being punished by it you can take advantage of it and that's what we'll absolutely do but something else you can take advantage of is rob's book the seven myths about money.

4:01One of the reasons why we're doing this episode today is in celebration of the fact that the book is now available in paperback. So you'll probably see it in your local major bookshops. If you're traveling through an airport or a train station, you'll probably see it there as well. So do make sure you take advantage of it if you haven't already. Pick up a copy and recommend it to others as well. Who doesn't want to see Rob D do well? I certainly do. We also want to see you do well. So Rob, let's get into this because this is so important. We want people to understand this because the game is rigged and you really need to understand why.

4:34That's right. As I mentioned in the introduction, it all comes down to debt. Debt is the defining feature of the world that we live in. And it makes comparisons with the past really difficult because everyone goes back to the 70s and goes, oh, this happened, that happened. But the world was completely different because governments, corporations, individuals, everyone, especially governments, didn't have anywhere near the amount of debt that they do now. And this is a trend that's played out over the last 50 years. The amount of debt has just been going up and up and up. And there are three major events that have driven that.

5:04There was coming off the gold standard in 1971, which is what set the stage for this and actually made it possible in the first place. Then the next big event was a financial crisis in 2008. The amount of debt absolutely exploded then. And then we had COVID in 2020. Same again, even more debt. And when you take on debt, whether it's as a government or an individual, you're effectively borrowing from the future. and there's a version of that that makes sense like if you take on debt to go to university so you can get a better paying job you know you're going to have to pay it back with future money but it makes sense because you're going to be earning more money as a result of making this investment and at government level it's the same for a long time it seemed plausible we'll borrow all this money but we'll get so much more economic growth as a result of doing this that it'll all work out but the problem is rob that's not the reason we're borrowing anymore and it's not even that governments have got a choice about it this is something that really frustrates me rob when I've moaned on budget podcasts in the past a theme for me is the lack of investments into major projects and infrastructure that could actually lift the economy and the lack of ambition there and one of the reasons why not the only reason one of the reasons why is they spend so much of the debt already on stuff they're pre-committed to so 70 percent is committed to health care pensions debt interest just paying off the existing debt it's a huge number huge number so when you add that all together on the amount they already borrow with there isn't that much left now the argument could be we'll borrow more and actually do what you intended to do and put it into stuff to invest with but you have to trust the people who are borrowing to make the right decisions and we don't always trust those individuals to make the right decisions because we've got a big track record of failed projects or overspends and so on so you could say instead well let's tax more then let's bring in more that way but in the UK tax is at a post-war high tax is really really high in the UK and you have some simplistic views from major commentators out there who say well just tax the rich but the rich just leave if tax is high the world's very mobile these days rich people don't have to stay in the UK so the simplification of just taxing more whether it be to everyone or the rich doesn't work because tax is already super high and the rich can just move on many have there's a massive exodus to the uk but that's for another episode so governments are locked into running these huge deficits they're pre-committed to using the majority of that debt for things that are already in place and debt is increasing year on year unfortunately consistently faster than the economy is growing.

7:38Rob, we're depressing people here, but it's important that they really understand this is the state of play. Yeah, it's not a good thing, but it's important to know about and it can actually be helpful for you. There is a good side to this, which we will get to. But the result of all this is, as you've seen, we're in a choice where governments have no choice but to keep borrowing. They have to keep borrowing money. They can't tax enough to pay for their commitments and the promises they need to make to get elected. so they need to keep borrowing more and more trouble is if you keep borrowing more and more at some point the people lending you the money go hang on a minute are you actually going to be able to pay this back and debt as a proportion of GDP so the amount the country has borrowed compared to what the country produces is already scarily high they can't let that keep going higher otherwise people will either stop lending the money completely or they'll start demanding higher interest rates to reflect the risk and of course that means interest payments go up which means they have to borrow more just to cover the interest payment and the whole situation snowballs.

8:34So they don't really have a choice in what they do. They have to keep interest rates lower than the rate of inflation. When you look at the numbers, it's really quite amazing. And it's one of these things where it happens slowly so you don't realise for many years just how powerful that is. But if you work out, if you have inflation of just 4%, so inflation over the last 20 years or so has averaged about 3 % even though it's meant to be 2%. So saying that it's going to go to 4 % when they need to deliberately devalue the currency. I don't think it's particularly aggressive. So say inflation averages 4%.

9:05Then if you borrow£100 ,000 and you don't pay off any of it, then after 10 years, that'll be the equivalent of£67 ,000. And in 20 years, it'll be the equivalent of£45 ,000. Like Rob said, this happens while the value of your asset is going up, while your rental income is going up, while everything else is going up. And the objection you get to this, which is not an unreasonable one at all, is, well, it's risky because you take on all this debt and that's great. But what if interest rates spike? Then you're in real trouble. And yeah, of course, having debt is more risky than not having debt at all.

9:35But as we covered earlier, interest rates just can't go up that much. I'm not saying they can't be higher than they are today. Of course, they can be. You'd need to stress test. Your bank will stress test you anyway. But 10 or 15 % interest rates, which happened in the 70s, structurally can't happen now. So that's why I think understanding all this background is so important because even though it all sounds quite doom and gloom and yeah for the world at large it is not a good thing it can actually make you feel much more confident in what you're doing because you understand the reasons that that should work you understand the world that this is set up to work within and how that world is inevitable and you understand the risk that you need to control for that is a world away from doing what most people do which is just buying property because all property prices always go up if you understand how and why all this works you'll be so much more likely to take action and you'll be so much more committed to sticking with it even when things get a bit tough as they always do.

10:27If they manage to do that, if they keep interest rates lower than inflation, then over time the debt is inflated away. So even though they owe the same number of pounds, thanks to inflation, GDP has gone up. And so therefore, as a proportion, it looks better. So they absolutely have to do that. There is no other way. And contributing to that, they can't let interest rates go up too much because you might think, well, you've got inflation. What you do when you've got inflation is you put up interest rates. Well, they can't put up interest rates too high because otherwise, as we've said, they've got so much debt, they'll owe more interest in all this debt and the whole thing won't work anymore.

10:56So when people talk about the inflation of the 70s, oh, well, if we get inflation, it'll be like the 70s, interest rates will go all the way up and it'll be 15 % again. No, interest rates can't be much higher than they are because unlike the 70s, we've now got all this debt to deal with. And because interest rates have already gone up over the last five years, this is already becoming a bigger problem. In the US, debt repayments cost more than the defence budget. In the UK, it's comfortably more than the education budget. We're already spending a huge amount of money and because every year older cheaper debt is being refinanced onto newer more expensive debt this is already becoming a bigger and bigger problem even with interest rates where they are today.

11:31Now this all hinges on everyone believing in this system and most importantly trusting this system but there are signs that trust is starting to be broken. Gold is surging to record highs for many reasons, but one of them is the lack of trust in this system and the ability of the US and other nations to actually handle and pay back their debt. Interestingly as well, though, world banks are following suit. Gold is now the most dominated asset held by non-US central banks, replacing US bonds. That's huge. That's not the type of thing that you read about on the front of a newspaper, but that is really big, the fact that countries are moving away to gold.

12:11thank you Gordon Brown for selling the UK reserves off at record lows but most countries have bought into gold and again another reason why the gold prices are pushed up with all that said it's important to understand that this is inevitable it's not something that is temporary it's not something that will go away next year it's been around for decades and it will continue because it has to continue and everyone's incentivized for it to continue but that is useful to know because what it tells us is the world that we will be investing in for the short medium and probably the long term exists with this model and if you understand what model is in play then you can take advantage of it but it's also important to understand what doesn't work with this model and we'll cover that really quickly.

13:02So yeah, so let's talk about what did work but isn't working anymore and to do that we need to understand what it is that investors are trying to achieve in the first place. So one of the core models from my book is that investors have three motivations at the same time and they have to balance between these motivations and different assets and different types of investment are geared towards one of these three motivations. So we're trying to protect ourselves, we want to make sure that we survive if we lose our job or something goes very wrong. We want to maintain our lifestyles while working less, both now and then of course in retirement.

13:32But we want our assets to work for us so we don't have to work as much. And that's where you may be looking at things like bonds and index funds. And then we want to improve our lives as well. We want to have a better lifestyle than we do now. And that's when we get into starting businesses, stock picking, using leverage. Things aren't just going to keep you where you are, but are going to really propel you to better things. And everyone has all three of those motivations. They just have them in different proportions. So you need to figure out how to invest to balance those three. So most people, yeah, they'd like their life to be better.

13:58They'd like to be better off than they are now, but they don't really know how to do that and they're scared of something going wrong. So they're weighted towards protection, which is cash in your own home, and maintenance, which is your bonds and your index funds. Now, it just so happens that over the last 20 years or so, this has worked out really well. If you have just been invested in index funds and government bonds, while this process of building up all this debt and interest rates falling has been going on, that's worked out great. You could have been making a return of 10 % per year or more just from holding these pretty safe diversified investments and not really doing anything.

14:30The problem is this has now come to an end. This has happened because interest rates have been falling and all this debt has been building up. Now that's not going to happen anymore. Bonds are guaranteed to lose value in real terms. We've already talked about how that's part of the plan. It has to happen. So bonds are not going to perform well. And then you've got stocks. You could say, well, the US stock market in particular has been performing really well. And it has. But the problem is it's performed so well that prices are now really high. Prices are now at a level where if you go back and you look at what would have happened if you'd bought in at this level in the past, if you bought in at this level in the past, over the next 10 years, your return would have been zero.

15:08You would have made no money because you bought in at such a high level. So what that means, Rob, is we had a situation where by investing in both of those things, you would have done really well. But now both of those things are likely to start performing far more poorly than they have done. So you could be in a situation where your bonds are losing money, your stocks just to pluck a number out of the air, making a return of 5 % a year before inflation, but then inflation could easily be 4%. So this same type of investment that's been doing so well for the last 20 years could start doing pretty much nothing at all.

15:42That's not to say, forget about your pension, plunge everything into Bitcoin, but it's saying that you need to start doing something a bit different. So you have to make a change to have just even a comfortable life in the future. And you'll either need to earn more, that's one option, save more, you could go down that route, or take more investment risk. Invest and invest the right way. And investing in the right way can be done in different ways. One of them, you could probably guess quite quickly. But you could do it via business ownership. That is one way you can within this system in this world not for everyone appreciate and a lot of hard work and more businesses fail than succeed you could go for concentrated bets so stock picking picking your own stocks not recommended for the majority of people something i personally like to do but that's because i'm a control freak and a bit of a geek so i like to do that myself but the majority of people the advice that's given out over and over again is you know don't do that so for the majority of people listening that's probably not going to be the right avenue or and probably the reason you're here listening to this in the first place is you could take on leveraged assets now we've covered on the podcast over and over again the property logic formula being our most popular concept around this is take advantage of leverage but what we've done in this episode today is explain why so it's fine if you believe it as a concept and we could demonstrate that with the numbers and the power it holds.

17:08But this episode now has given you the economic education to understand why not only can it help you, but why you must do it. Why you have to take action. Because if you don't, you're just automatically going to be punished. But if you do, you take advantage of the system because you are using debt as a tool. You are using the same techniques as the world's financial system to get yourself ahead. You buy a property, you leverage it, normally to 75%, but whatever level, you leverage that asset. That debt is paid by somebody else when you own that asset. And what's beautiful is that debt is being devalued year on year because inflation is guaranteed to happen.

17:53So you take out that debt and it's being eroded. So the asset you're buying is being increased because of inflation and you understand now why inflation is guaranteed to happen. So inflation is going to happen, your assets going to be worth more, the rent will increase over time and your debt that you are holding is devaluing as well. So everything is going in your favour. It's pulling down in one direction which is your debt, the value there and it's pushing up in another the assets you own. When these two things combined come together. It makes property over the medium and long term irresistible.

18:30But only if you use debt. To our cash investors out there, and there are many of you, go back and listen to this episode again. And if it hasn't landed, go back again. If you think debt is risky, I'll tell you what's riskier, not using it. To your financial health, I'm not saying you need to leverage yourself up to the eyeballs. I do not own a mortgage broker. There's no self-interest here. it's to help you. It's to help you as investors. By all means, buy cash and leverage later. That's okay. But the leverage part is critical. If you are buying property cash, you may as well just put it in the bank because it's a lot easier and the returns that you'll get over the long term won't be that different.

19:11But if you leverage, the returns are wildly better because the system makes it so. If you understand what is happening, and hopefully now you do, but if you don't go back and listen again and then buy Rob's book if it still hasn't landed. But if you understand what is happening, then you put yourself in an incredibly powerful position, a position that most people don't understand. So please do share this podcast. Help others understand what is happening. Not just that property is a good thing. Some people will buy that and some people will go along with it. But when you understand that leveraged investments are the only way to really create wealth if you don't want to start a business or do something else that's extreme risk then it's critical that you take advantage of it so please if inverted this way of thinking already make sure you take advantage of it but just as importantly share it with others not everyone will want to listen to a property podcast we love that you do you are special people but at least share this episode help people understand what is going on if they prefer reading then give them rob's book they'll understand then but it's important that people understand that this game is an unfair game but there is a way to win okay well let's see if we can leave you on a little bit of a lighter note with hub extra and hub extra is not my book even though it is out now but hub extra is suno.com they probably won't remember the name because i'd forgotten it but long-time listeners of this show might remember that some amount of time ago i used to know which is an ai music generator to make a rap about the property podcast i'm still only just getting over that wrong exactly well just you wait buckle up we played out in the show and it wasn't that great i don't hold myself up as any kind of great rap expert but it was a novelty it was all right but it wasn't that special things have moved on i went back and played with it again the other day and the leap in quality in what you can do is absolutely unbelievable i listened to a load of the things that people have created with it and unless you really really know what you're listening for you would not be able to tell that it was ai at all the leap in such a short space of time is incredible and to prove it rob i've done it again i've written another song

21:25i love the rage of this podcast from like hardcore economics to what is it rap again what have you done no no no so this time my prompt was write an 80s radio rock song about the debasement of fiat currency oh okay of course there is a link there is a link first thing that popped into my head so that was it that was literally the prompt and it wrote a song it's called paper money heart and it's really good we'll link to it in the show notes maybe producer dan will play a bit i don't know but that one prompt this is what it came out with i think it's unbelievably good i think we've got a play out on it rob let's just do it let's listen thanks everyone see you next week bye The paper feels the same in my hands.

22:14Groceries on the counter. There goes all of my plans. Pidgets on my paycheck. Climb a little each year. But the price tag's laughing right into my ear. Yeah. You keep bringing it on and on and on Till the ink runs through my veins Paper money hard Beating out of tune While you feed me pocket chains Turn my labor into vapor Watch it vanish in the dark You keep turning wheels I can't see Crushing this paper money hard

23:20Granddad saved his quarters Kept them heavy and real Now it's numbers on a screen Tell me how should I feel You say everything's fine now Look, the charts only rise But my tank's right in empty Through your paradise

23:51You keep bringing it on and on and on Till the heat runs through my veins Paper money hard Beat it out of tune While you feed me pocket change Turn my labor into vapor Watch it vanish in the dark You keep turning wheels I can't see Crushing this paper money hard You call it progress Call it growth Dress it up in your reports But I'm counting out my change at night While you're changing all the scoreboards How long can we fake it? How long till it blows apart? When every promise that you're printing Stamps another fragile heart

25:05guitar solo

25:27Paper money hard Beat it out of tune While you feed me pocket change Turn my labor into vapor Watch it vanish in the dark You keep turning wheels I can't see Crushing this paper money hard

26:06We'll be right back.