financial crisis

Opportunity In Crisis: What Real Estate Investors Need To Think About During This Crisis With Russell Gray

TWS 47 | Financial Crisis

 

There’s no getting around the fact that we are going to experience a crisis in the financial system, and no amount of government efforts to introduce liquidity is going to solve it. How can you survive, nay, thrive amid a crisis of this unprecedented scale? Joining Patrick Donohoe on the podcast today, financial strategist Russell Gray thinks this is the best time to focus on our personal investment philosophy. Russell is a co-host of The Real Estate Guys™. He has been a financial strategist since 1986. The financial system is going to behave as it will, and we hardly have any control over anything that goes on within it. Robert sees this time as the perfect opportunity for real estate investors to educate themselves and build their networks to be at their best form for whatever comes next. In every crisis, there will always be winners and losers. Listen in and learn about the things you have to consider if you are to thrive in the REI business amid a crisis.

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Opportunity In Crisis: What Real Estate Investors Need To Think About During This Crisis With Russell Gray

I’m excited for you to read this interview with a good friend of mine, Russell Gray. Russell is one of the Real Estate Guys Radio Show that I believe is still the longest-running real estate investment show. They’ve been on air since 1997. I got to know Russell back in 2010. I was invited to be a faculty member on the Investor Summit at Sea, which is more than a week-long cruise where investors from all over the world get and learn together. It’s an interesting dynamic. I was a faculty member there for nine years and there were other famous speakers as well. Robert Kiyosaki has gone on their multiple times, G. Edward Griffin, Peter Schiff, Douglas Duncan, who is the Chief Economist of Fannie Mae, Chris Martenson, and countless others. There are some experiences that changed my life. I did record podcasts when I was on the cruise.

I’m going to cut to the interview. Before that, thank you for the support of comments, questions, likes, shares. It’s been awesome. We’ve definitely had a tick-up in awareness of the show and the subsequent episodes. We’re active on Instagram and Facebook. Make sure you’re following us there, as well as a subscriber to the email list. We’re actively sitting on messages there and head over to TheWealthStandard.com. The resource section that I’ve spoken about. Specifically, a program that Mike Dillard has for entrepreneurs, that’s all life. You guys can check that out the resource section at TheWealthStandard.com. Finally, at the end of the interview, I’m going to do some Q&A, some commentary based on the crazy events that are going on. I hope you enjoy the interview with my good friend, Russell Gray.

Welcome to this interview with an incredible guest, and he is no stranger to the show as well as other mentions in writing, blogs, newsletters. He’s a good friend of mine. His name is Russell Gray. He’s mentored me, I think it’s been several years.

We met each other in the wake of the 2008 crisis. We were both in rebuild mode.

Through the experiences of seeing how the Real Estate Guys Radio took off, how you guys have expanded your network to all ends, it’s been impressive. I appreciate it. I’m grateful for the mentorship you’ve provided me for many years. I’m excited to extract out of you some of your insights into what’s going on with this new world and the new economy. On the thick of it, at the same time, there are some signals that would lead us to potential conclusions. I’m grateful for your time and grateful for your expertise. I would also say that the RealEstateGuysRadio.com is an incredible resource, subscribe to their podcast. Russ also writes personally a newsletter. It is well-written, full of good insights. His mind took off after 2008, 2009, in my opinion. He became an incredible writer. That being said, I welcome you to this interview.

It’s great to be here. They can decide after they’ve heard me ramble here a little bit if they think I’m worth somebody they want to listen to more, but let’s get into it.

TWS 47 | Financial Crisis

Financial Crisis: The health crisis is going to create an economic crisis, not because of the health crisis itself, but because of the reaction to it.

 

The consensus of our audience is on edge in a sense where things have been disrupted in all sectors. We’ve been hit with a black swan that no one anticipated, especially the response of the government to it, which I believe is a big earthquake. It’s going to have some ripple effects. First off, because we haven’t connected in a while, how are you processing the last couple of months when it comes to the economy and your role in providing guidance, insight, and wisdom to a broad audience?

To understand the answer, I’m going to tell a bit of the story. Back in 2008, it’s no secret. Going into 2008, I was in the mortgage business. I had accumulated a lot of properties all over the place. I was levered to the hilt, but I had great cashflow from my mortgage business. I was in the hottest industry at the hottest time. I looked like a genius, then all of a sudden, what happens is life hands you a bunch of humility, but I realized is that I was only structured for sunshine. When the mortgage industry imploded, it took my income with it, which was supporting this huge portfolio over-leveraged properties that were in many cases sitting empty.

I was speculating on real estate asset prices instead of focusing on investing in the production of income, which seemed boring at the time. Equity was easy money and I still believe in equity, but equity is a byproduct. Cashflow, not just rampant speculation, so there is a difference. I didn’t understand that back then. Coming out of that, I dedicated myself to understanding how could a guy like me that is relatively attentive, studious, not see such a disaster calming when I was in the epicenter of it. The net result of it was I had my nose too close to the ground grindstone. I was myopic.

We went out on a search and we started looking for people who had accurately predicted what had happened and got it right for the right reasons. One of those people, Peter Schiff, who we became friends with. He’s always been a part of our Investor Summit at Sea since 2013. Peter was a guy who began that process of explaining. I’d already read G. Edward Griffin’s book, The Creature from Jekyll Island, somebody else that we’re mutual friends with and whose book that we’ve read and it changed our lives. It began to understand the way the financial system operated and what it meant on a human level. That’s one thing to understand is how the system operates.

You may not like it. You may not think it’s great, but at the end of the day, it doesn’t care what you think of it. It’s going to behave the way it’s going to behave. Sometimes we have to set aside our political or economic proclivities and accept it for what it is and try to navigate it. When this thing hit part of that 2008, the recovery process was building out our network of smart people that we were around. Robert and I were always among the smartest people in the rooms that we were in going up to 2008. After 2008, we made it our mission to be the lowest guys on the totem pole to be around people much smarter, better connection, much wiser, much more efficient, and much more articulate than we were. It cost us a lot of growth.

Two of those guys were Chris Martenson and Adam Taggart at Peak Prosperity. They were at the forefront of understanding how bad this Coronavirus crisis was going to become. I was on the phone with Adam and he told me. I started to pay attention to. I was less concerned about the health crisis component of it. I was more concerned about the economic crisis component. What I was interested in was the chain of events. You asked me the question, how did I process it? I’m a big believer that before you can process a lot of content, there’s a lot of noise, a lot of information, a lot of opinions coming at you from all angles, I needed to set a context.

The context for me is looking at what happened. He said, “The health crisis is going to create an economic crisis, not because of the health crisis itself, but because of the reaction or arguably the overreaction to it.” Whether you think they were handling it responsibly or whether they went way over the top or they’re not doing enough, it doesn’t matter what you think. They’re doing, what they’re doing. It effectively has shut down the economy. It went from a health crisis to an economics crisis. What is an economic crisis? It’s a cessation of commerce.

That means no revenue to businesses, no paychecks to employees. What does that mean? It means that debts can’t be serviced. It goes from being at an economic crisis. It has the potential and arguably is going to metastasize or spread into a financial system crisis where it threatens both the banks and the bond markets. The Fed, in anticipation of that, is printing money like nobody’s business, trying to prop up the lack of economic equity activity. It’s like having a heart attack and your blood stops pumping by injecting a lot more liquidity, which is like giving somebody who’s had a heart attack a transfusion and hoping the pressure alone will force the heart to start to beat. It’s not going to happen.

The financial markets are in trouble and that’s what triggered the 2008 crisis. The job loss of 2008 was a byproduct of the collapse of credit markets, which caused a cessation of commerce. Here, the job market, which was the cessation of commerce created the financial crisis or is going to create the final answer crisis, in my opinion. That will reinforce the economics. In order to prevent this correct, what Peter calls, “The real crash,” which is going to be much bigger than 2008. The Fed is approaching it by printing trillions of dollars at a rate that is impressive, it’s not even funny. I have a question in my mind then is, can the dollar survive all of the pressure that is being put on it to prop up the system? I don’t know the answer to that, but that’s what I’m paying attention to. The context for me is understanding from health crisis to economic crisis to financial system crisis the dollar crisis. How do I see that coming? How do I position myself not just to survive it, but thrive? The flip side of all chaos is going to be an opportunity.

Let me unpack this. You established some good bullet points that we can address. Let me unpack the first idea, which is important to identify. The system is going to operate the way it’s going to operate. As much as we think that things should be this way or should be that way, the economy, and society, it is what it is. There’s only so much you can influence. Back in 2008, 2009, whether things should have been set up a different way or shouldn’t have, that’s beside the point. It comes down to what are you going to do with what happened? There’s a similar environment where there’s a lot happening that’s outside of your control.

There is a lot that maybe could have been done to prevent it or should have been done, whether it’s from health or an economic standpoint, but that’s beside the point. It happened. You don’t have any influence over it. What are you going to do now? You led to what happened was people stopped, period. School, work, spending, the list goes on, the economy is based on spending. Businesses need money and revenue from spending to pay their bills, to pay their taxes, to pay their employees. That disruption has created a void, I would say, of capital enough to pay bills, service debts.

The Federal Reserve has stepped in and it’s been around the world too. Central banks have filled that void. Because they filled that void, things are continuing on. Hopefully, things open up and so forth. At the same time, there are some fundamentals that I don’t think most people are aware of. As we look at leadership and how our education system is to teach us that there are those that are smarter than us that we should listen to. I believe that there are a lot of, why is people at the head making certain decisions? Most people are just following. Let’s talk about the unintended consequences or what could potentially happen because the void is being filled with artificial money, artificial resources.

You talked about unintended consequences. You could leave off intended or unintended because it doesn’t matter, it’s just consequences. It’s cause and effect. About the financial system, I think of the old game I played when I was a little kid called Mouse Trap. In Mouse Trap, a chain of events would happen. You put the little marble in the chute and it would go down. It would hit the boot that would kick the thing and another marble would go. Anyway, it went through this whole convoluted process, cause and effect, until ultimately the trap came down on the mouse. When I look at the economy, it’s that way. One of the things that I spent a lot of time doing was understanding the way the system worked so I could begin to anticipate when I saw a trigger event, I could follow it up through the chain and have more advanced notice on what I thought was coming.

Way before the Coronavirus crisis happened, I go back to my friendship with Chris Martenson and Adam Taggart. Back in September of 2019 in my daily perusal of the news. I was looking for what I call clues in the news. I saw this thing happening in the repo market. I wasn’t that familiar with the repo market, but I saw that the Fed was injecting hundreds of billions of dollars into this thing called the repo market. I said, “I don’t know what’s going on under the hood, but there’s a heck of a lot of smoke coming out. Something’s going on down there.” I did a little homework on it. To keep it in layman’s terms, in short, the repo market is like a pawnshop for banks to take their treasuries, which are their assets, like you hocking a watch or a piece of jewelry when you’re short on cash.

They show up at the repo market and they give the pawnshop, the pawnbroker the treasury and they walk away with their cash. They go put their cash fire out and then they come back and buy back their assets. They don’t have to give the asset up. They don’t have to write it off on their financials, which is what that’s all about is doctoring their financials so that their insolvency it can be hidden. We could talk about mark to market and all kinds of things that they changed in order to hide. There are many things in the accounting system they use to hide the weaknesses in the financial system. You don’t know what’s going on, but if you watch for these clues, so that happened.

We called Chris and Adam up and said, “I don’t know what this means.” They said, “We don’t know what this means either, but there’s clearly something wrong.” There was a cash problem brewing. There was a banking problem brewing in September way in advance of this. My antenna was up at that point and we wrote a few newsletters. I talked about it and did a couple of shows on it. I’m not being an expert but encouraging people to pay attention to it. It started there. The other thing too is after going through reverse-engineering the implosion of the 2000 financial crisis, one of the things that I became aware of was the hypothecation of bonds and what derivatives were.

Warren Buffett famously wrote in his Berkshire Hathaway letter to his investors that he considered derivatives to be weapons of mass financial destruction. This was back in the late ‘90s, it was oppression. With that said, what it means is that people who are speculating in the bond markets, and the bond market is the largest market except maybe the currency market, but the bond market is ginormous and much bigger than the stock market. Everybody pays attention to the stock market. Few people pay attention to the bond market unless you’re a financial geek. In the bond market, prices of the bonds, the value of the bond is inversely correlated to the yield on the bond.

If I want to drive interest rates down if I’m the Fed, then I’m going to bid up the price of the bond. For real estate investors, that’s like bidding up the price of an income property lowers the capitalization rate. It lowers the yield on your investment. It’s the same concept. When you understand that people don’t buy bonds for the yields because the yields are nonexistent, in some cases worldwide, they’re negative. Why would anybody buy that? They’re speculating on the bond price because they know that the central banks are committed to driving interest rates down.

They’re front running the Central banks, knowing if I can buy a bond before a Federal Reserve bond-buying program, then I can turn right around and flip it to the Fed at a profit. You say, “Why would the Fed continue to push interest rates down?” It is much bigger than simply stimulating the economy, making it easy for already impoverished borrowers to borrow more. It’s more than about making money available to corporations to do stock, buybacks programs so that they can go to the stock market. It’s even greater than trying to simply supply and overspending federal government with gobs of money so that they can buy votes, pay for programs, and do whatever legitimate activities that they do.

At the end of the day, they are holding together the financial system. Here’s how that works. If I have a bond on my balance sheet, it’s my asset. If you’re the bond issuer, it’s your liability. It’s the same relationship people have with their banks. If you have a bank account, it’s your asset on your balance sheet, but to the bank, it’s their liability. They owe you the money. That gives you something called counterparty risk, which is rife in this system. You’ve got this asset on your balance sheet and you decide, you need some liquidity. Whether you go to the repo market or anywhere else, you can borrow against that. When you borrow against it, you do it using margin. Now I’ve borrowed against that bond on the margin the way you could on your stock portfolio. The problem you have is if the bond price goes down. Why would it go down? If interest rates go up, you get a margin call.

The margin call means that you either have to post more cash, which means you have a cash crisis, or you’re going to sell the bond at a loss. Take the loss on your balance sheet and show your insolvency. You’ve got to find a way to raise cash. A repo market is a place that you can do that. That activity in the repo market was like a warning sign, a canary in a coal mine that there were things going on in the bond market. The Fed is obligated to try to continually keep interest rates suppressed in order to prop up the bond markets where they get a repeat of 2008. The difference is the number of bonds, the amount of debt, and the number of derivatives in the system dwarfs what we had in 2008. Therefore, the impact of losing control of that would dwarf the impact that we felt in 2008.

I don’t have any way of knowing this for sure, but I suspect a lot of what’s going on is trying to figure out how to keep the bond market going because when they tried to raise interest rates, Peter Schiff predicted they’re not going to be able to do it. They’re in the monetary, “Roach Motel,” as what Peter calls it. The good news is especially for real estate investors, it means you’re going to be in an environment of low-interest rates for the foreseeable future. You need to be able to use debt to make money. That’s a whole investment strategy in and of itself.

It means that if you’re a saver if you’re investing in hoping to get a yield on your savings, probably going to end up being a loser. It’s why Robert Kiyosaki says, “Savers are losers.” There’s a lot there. The main concept to understand is to pay attention to the bond market, understand the inverse relationship between interest rates and bond prices. The pressure on the Fed in many areas, but mostly in propping up the financial system. It’s got to keep those bond prices down or bond yields down to keep the bond prices up. They have to print money to do it. A lot of pressure on the dollar.

TWS 47 | Financial Crisis

Financial Crisis: Residential real estate is a great place to be because people will always need a roof over their heads.

 

This is a worldwide phenomenon. It isn’t just the United States problem. Some of the reactions and that impact on real estate in general, which I think is the only tool that the governments have which is to continue to push liquidity into the system, money into the system. It’s in the form of a stimulus check to people, so they can pay their bills. That’s most likely going to continue with multiple stimuli. If that’s the case, interest rates are going to stay low. At the same time between mid-February, March maybe, going into the summer, the disruption caused many businesses to struggle as well as people. That impacts whether they’re rents, mortgage payments. Let’s talk about how the disruption it has caused some challenges when it comes to people being able to serve as debt or to pay landlords. It ultimately is going to impact real estate prices and create opportunities, but also some reshuffling of resources where some real estate may not be as valuable as it once was given the disruption.

There’s a ton there when most people think of real estate, especially people who aren’t in real estate as investing. They think about houses and apartment buildings. That’s the easiest thing to talk about to start with, but retail was already in huge trouble with the Amazon effect. Things going on there, it was a boon to industrial with warehouses, distribution centers, and markets that supported that. There are always winners, there are always losers. There are shifts sometimes. When you look at residential, it is a great place to be because people will always need a roof over their heads. Either they’re going to own the property or someone else is going to own the property. These people get poorer, the probability is that someone else is going to own the property who’s less poor and going to have some mechanism by which to generate income, getting a share of that worker’s productivity.

Rental real estate, income-producing real estate, residential real estate, all are predicated on jobs. I had the chance to interview Donald Trump, I only got a chance to ask him one question. When he was running for president, we were at Freedom Fest. I asked him, “Mr. Donald Trump, a lot of people look at what happened in 2008 and the financial crisis lay that at the foot of the Fed, monetary policy and government policy. What does a healthy housing market look like in a Donald Trump administration?” He gave me a one-word answer, “Jobs.” When he got into office, that was what his emphasis was on jobs. That was his big claim to fame was jobs, “I’m going to bring manufacturing back to America.” Every rally was jobs. We just lost 30 million-plus jobs. To your point, some of those are never going to come back. Human behavior has altered permanently. People have discovered they can work at home. If I can work at home, why do I want to pay $5,000 a month for a 400-square-foot apartment in New York City, if I can go live in Central Florida in a nice house, on the beach, in the sunny weather and do the same job?

There are going to be markets that are winners and losers. Landlords that are going to be winners and losers. One thing about real estate is it’s not an asset class, it’s not a commodity. It’s not like gold, currency, or oil where there’s one price for the same product universally around the world. Every property, neighborhood, ownership, and financial structure is unique. Because of that inefficiency and uniqueness, real estate is a lot more art than it is science. That’s what makes it fun. There are going to be gobs of opportunities, but there are also going to be problems and it’s all going to be predicated on the disruption of income. We have enhanced unemployment. We have helicopter money, direct infusions of cash, although you’d make the argument it’s not much. You have the Paycheck Protection Program, which is designed to keep people employed and cashflowing in that regard.

Forgivable loans and all the bad debt now with the Fed stepping in buying local bonds, muni bonds, and ETFs. In addition to treasuries, a whole lot of other things they’ve been buying any way through proxies behind the scenes cropping up the stock market. Mostly for optics because a lot of people look at the stock market as a proxy for the economy. The stock market isn’t bad, therefore, the economy is not so bad. That’s not true, but that’s the way people feel. The people in power understand how to manipulate the optics to create the scenarios they want. In this day and age, because of technology and guys like you and me being able to get out there and have a conversation whose voices would never ever be heard.

The financial system is going to behave the way it’s going to behave. We have to accept it for what it is to navigate it. Click To Tweet

If it was mainstream financial media were our outlets, there are more people informed about what’s going on and alert. It’s harder to manipulate the optics, but you do have to avail yourself of what’s going on. Residential real estate is going to get a lot of attention from the government. Protect the resident level forbearance agreements. Last time in 2008, when everybody started to default, the banks are dragging their feet. Nobody wanted to take the hit. They were all afraid. Now, there have been many changes made to the way the banks report from the market. I talked about that activity, the repo market, and the Fed overtly. We’ve got your back, we’ll buy anything that you have so you can stay solvent.

It means that the banks are okay, and the government is stepping in right away with forbearance, anti-eviction, providing a paycheck, subsidies, subsidizing loan servicers, and propping up everybody in the food chain from Main Street to Wall Street. That even though it’s scary and you have to pay attention, there are going to be disruptions. You also, to a large degree, have the wind at your back when it comes to residential real estate because people always need a place to live. Politicians, industry, and bankers are all highly motivated to prop it up. I don’t even know exactly what that’s going to look like. To your point, they don’t always hit what they’re aiming at. However, you can be assured that you’ve got a lot of folks on your side if you’re in that space.

It remains one of my favorites in this environment. You’ve got to look at the specific deal, feel the specific market, specific management team, specific financing structure against the backdrop of your own specific financial situation and how much risk you can bear. There are going to be some bargains available in the next many months and years. It’s a good time to be aggregating capital and building your team and your knowledge. Whether you’re going to be a hands-on direct investor where you’re going to look at properties, cut your own deals, or work through your team. If you’re going to be a passive investor, buying into portfolios that private syndicators put together, which is like buying a mutual fund of properties, but you’re not buying through Wall Street. You just buying through private individuals. We have a lot of people in our world that do that. We think it’s one of the great business opportunities in all of the business, but especially in real estate.

What’s your litmus test for making a decision? Because we have biases, we try to gain a lot of insight and information to reinforce that. Everyone has a blind spot. Feasibly, the Fed could continue to print around the world and we can get back on track. You look at that being another perspective and bias. When it comes to what you had said, which I agree with, that the shift in employment where businesses are learning how to work remotely and they were forced into it. I would say experiencing a lot of success.

Some success, from what I’ve heard, and that is going to put in jeopardy potential, local markets, especially when they’re not climate-friendly. When you have harsh seasons where you can potentially move to a nicer climate. With all that being said, there are many different variables that could lead to potential opportunities. Is there a litmus test that you use to identify an opportunity and then subsequently do due diligence in a specific way, to ensure that what’s being pitched to you is in fact as much truth as possible? Their truth is to sell you the deal but to have enough truth in there, enough details, facts for you to make a wise decision.

I don’t know if I have a litmus test. I have a methodology. Robert is the host of the Real Estate Guys Radio Show. We teach a lot together. We’ve invested quite a bit together over the years. Our basic approach, number one is you need to develop your own personal investment philosophy. You have to figure out what it is you are trying to accomplish, what you’re willing and not willing to do in order to get there. That’s done based on your life experience. It’s done based on looking at other people who’ve had success and failure. I learned a lot more through my 2008 failures and all my successes leading up to that. It’s interesting because I forgot. I had mentioned my one question of Donald Trump, but I had a chance to interview him the first time in Iowa before he was a candidate. I asked him that exact question, “Mr. Donald Trump, you’ve seen good times and bad times. What did you learn in the good times? What did you learn in the bad times? If you decide to run for president, how will that help you?” He didn’t answer the last part of the question, but in the first part of the question he goes, “I didn’t learn anything in the good times, but in the bad times, I learned it’s always good to have a little cash.”

I took that to the bank literally because it is important always to make sure that you have a little cash. Anyway, you come up with your personal investment philosophy, “Am I looking to grow my capital? Am I looking to preserve my capital? Am I looking for the production of income? Am I looking for tax breaks? Am I looking for privacy? Am I looking for lifestyle?” There’s a way to invest in real estate for lifestyle. You can buy properties that you’d be happy to live in, vacation in, and rent them out when you’re not using those. There are lots of ways to approach the game of real estate. That’s number one.

Number two is whether you want to be hands-on or hands-off. That’s an important decision to make. Regardless of how you choose to do that, once you’ve got it figured out economically, you’re looking for geographic marketplaces, first of all, product niches, and then demographics. When I say the word market, I don’t just mean geographies, I mean product niches and demography also, in other words, people. For example, if you believe in the Baby Boomer generation and you’re like, “The Baby Boomer generation has been an economic driver for all kinds of industries as they’ve gone through the cycles of life.” That begs a big question, “What cycle of life are they in now?” It’s healthcare.

We have a mutual friend who teaches people how to create residential assistant living facilities, nursing homes. Not big ones, little ones, in homes. If you followed what’s been going on in the news, all the big homes are coming under attack and they were being told it’s safer because of this virus to be in smaller homes. If you’re investing in the big boxes, that’s a loser. If you’re investing in the small ones, that’s a winner. Winners and losers always. There’s a lot of people look at the Millennial generation, which is even bigger than the Baby Boomers. I want to cater to that generation. They have challenges with student debt and jobs things like that. If you focus on affordable housing, a certain lifestyle type housing that appeals to Millennials.

You get the idea, so you’re going to figure out your market. You want to figure out geography where you are going to have good economic drivers more than one. Back when shale oil fracking and all that was the rage before we overproduced and oil prices crashed. It was not oversupplying, it was a collapse of demand because of the shutdown. Be that as it may, the markets that are primarily dependent upon oil and oil production, as the oil prices crashed, they didn’t have another leg to stand on. They were a one-legged stool up in North Dakota and places like that. We never got involved in those markets because they weren’t diverse enough for us.

You look at the market next, then you look at the team. If you’re investing in the production of income over a period of time in a market, the most important person on your team is your property manager. That’s the person who’s responsible for producing the income and whose income, if the compensation structure is correct, is directly indexed to the performance of the property. Now you have aligned interest. You don’t have a broker who’s trying to sell you a hyped-up, glossy pitch deck and get you to buy. Then they move on with their fat commission and you’re left holding the bag.

I liked to work with property managers. Once I picked the niche in the marketplace, I work with property managers to try to figure out who I am going to hire to manage the properties. I ask them what markets and specific neighborhoods I should be in. I had them help me find the property. Now, I’m getting someone. I can always find it a broker to represent me. A lot of times they’ll have relationships, but I think property managers. There’s a lot of talk about unsung heroes of frontline heroes in different industries after 9/11, it was the first responders.

The Coronavirus, it’s the healthcare workers. In real estate, it is the property managers. They’re the unsung heroes. You focus on that. That’s the approach. The financing approach in nowadays environment. Could interest rates go lower? They could, but I don’t think they can go lower. Locking in long-term financing is a smart move. If you borrow long and cheap to control an asset, it’s likely to be the beneficiary of inflation, we may get a little deflation to start with. It may drop before it goes up. The long-term history based on the economy is built on and the way it’s operating. The people are pulling levers. Like the book says, “Equity happens.”

Over time, prices are going to go up. If you fix in that dollar for the long haul spread between what it’s worth in dollars, nominally worth, not in utility. It’s still going to be a three-bedroom, two-bath. Nothing’s going to change in terms of how useful it is, but it could go from $50,000 to $500,000. If you bought that with a $40,000 mortgage, the inflation makes the debt atrophy. It makes it go away. People don’t realize that when it comes to a potentially inflationary environment, the safest best investment you could make is leveraged real estate because you acquire a cheap long-term debt fixed. You secure the rental income to service the debt. Tax breaks to mitigate especially with nowadays’ Tax Code and the bonus depreciation.

You only have a fraction of your own money, maybe 20% 30%, which means you could endure a lot of deflation before you take a hit, as long as you don’t lose the property. Even if you bought a property for $100,000 now, 30 years from now, it was only worth $50,000. If you put $20,000 down and the tenant paid off the mortgage, at the end of the day, you still own a $50,000 house in 30 years. You’re up in dollar terms. More importantly, in any environment at whatever price point, a home that’s paid for that’s generating rent is a real valuable asset. Real estate works in this environment, but you do need to be careful in your market selection especially in your team selection and your financing structure.

TWS 47 | Financial Crisis

Financial Crisis: Think about what you want to do with your capital and decide on your personal investment philosophy.

 

The philosophy of three-bed, two-bath goes to three-bed, two-bath in a home office. That maybe is a point for another conversation.

There are a lot of opportunities in that regard as you could make the argument in some neighborhoods. There’s a lot of opportunity in one-story houses because Boomers can’t climb stairs. This is you get to understand how your customer uses property and what they need from it. Giving them what they need. To your point, from internet connectivity to workspace or workout space. I live alone and I have a five-bedroom house, but I have a studio in one room, an office in another room, a bedroom in another room. I have a den or reading room, and then I have a guest bedroom because I have a family that comes to stay with me. Then I have a big loft area where I have a gym. I can live a lot of my life productivity in my own home. It doesn’t feel like it’s a big house for a guy living by himself. There are a lot of things going on it. There’s going to be more demand for folks to have more space, which is a trend is shifting, a little bit from where we were headed prior to the Coronavirus.

All real estate is appeasing demand. Demands, tastes, preferences, they’re always changing. Keeping a pulse on that is important. One thing I wanted to pick your brain on. Going back to 2008, 2009 and I’m assuming that some people that are reading now, there are properties they do own that may not be able to weather this storm. Even though there may be liquidity in the bank account of the investor, how do you approach vacancy? How do you approach when you decide to either supplement the mortgage with your income, with liquidity, or maybe the property is it’s time to let it go? I’m assuming similar decisions are going to be made now. What would you have done differently if you were to go back during that period? What would you recommend based on that experience to those that are going to potentially face out in the future?

First of all, you want to make sure you have adequate liquidity. I had none, I was 100% dependent upon healthy credit markets across everything. I brokered debt to generate income. When credit markets collapsed, I had nothing to sell. I operated my business on my credit lines. When those credit lines got shut off through no fault of my own, just banks limiting their risk and a collapsing credit, all of a sudden, I lost operating capital. That limited my ability to shift the focus of my business and develop income streams. On a personal level, I had a lot of credit card debt. I was carrying a lot of debt because I felt like paying it off. I had higher-yielding uses of capital. Putting it in a business, putting it into properties. It all penciled on paper. Businesses do a thing called a SWOT analysis: Strengths, Weaknesses, Opportunities, and Threats.

Every prudent investor should do that. It’s one of the things that I learned and would have done. I wished I would have done is looked at everything I was doing and do a SWOT analysis. It would have helped me see the things that I had to work on with, so that when the stuff hit the fan, instead of being in panic mode. Blair Singer says, “When emotions run high, intelligence runs low.” When you’re panicked, your brain freezes. I could not see all of the resources I had available. All I can think about is what I didn’t have and what was going wrong. By the time I woke up out of the fog, some of my assets had atrophied or been completely lost. I wasn’t able to react, not because I didn’t have things to work with, but because I didn’t have the mental capacity and the emotional strength or the right advisory team to help me see it, so strengths.

Weaknesses, you always want to be aware of your weaknesses. You want to be aware of your individual weaknesses as a person. Your weaknesses in your personal financials and your portfolio. If you have your own business and if you have a job, that alone is a weakness because you don’t have control. One of the most resilient things you can do is at the least create some type of side hustle. Give some serious consideration in figuring out of how to start a business that you want to control or more than one. That is a whole art unto itself. Be aware of your weaknesses. You want to do that for each and every property on an individual basis. You’re going to look at the market, you’re going to look at the team, you’re going to look at the demographic you serve and you’re going to look at the financial structure. Ask yourself, “Is this a strong property? Is it a marginal property? Is it a dangerous property?”

The flip side of all chaos is opportunity. Click To Tweet

You want to know to clear the deadwood. You want to, in a market like this, jettison your marginal properties and then reinforce your stronger properties. Better to only maintain 20% or 30% of your portfolio than try to hold onto 100% of it and lose 100% of it. That was one of the other things I did. I tried valuing to hold on like a lot of stock traders do. I traded stocks for a little while and studied stock trading. I don’t advocate it as a way to make money or to maintain certainly. It’s great for understanding investor emotions and experiencing investor emotions. I had 37 straight consecutive winning trades, but the 38th trade I could not take the loss. I could not admit that I made a bad trade. I wrote it all the way down to the bottom. I lost way more money than I should have. It was simply because of my own pride and unwillingness. As long as I don’t sell, I haven’t taken the hit. Robert calls this zero-sum thinking.

When you look at your portfolio, whatever you’re doing, you say, “If I didn’t already own this, would I buy it now? If not, then why are you keeping it?” Sometimes you are holding a position because you say, “It’s going to come back.” The shortest path to coming back might be a different property, a different market, maybe a completely different investment or investment strategy. You got to keep an open mind to using what the market will give you. Strengths and weaknesses, that transitions into opportunities. Opportunities are a combination of what the market is giving you and what you have to work with. That’s how you do strategy. What’s available to me both that I have control over and things that are available to me that I can get in the marketplace?

Threats are things that are directly glaring up. I have a process when threats rear their ugly head. The first step is triage. I’ve got to stop the bleeding, nothing matters. It’s urgent. The first priority is anything having to do with survival. The next thing is rehab, which means I’ve got to patch things up and get a stable base. I can’t get stronger until I reinforce what’s going on. I got a property, for example, that’s bleeding out. I’ve got negative cashflow. I’ve got tenancy issues. They’re trashing the property. I’ve got a big problem. I got to go in and step in right away. I got to get the problem tenant out. I’ve got to patch up the property right away and secure it to make sure that I don’t have squatters or anything going on. I got to do rehab, which is, how did my property manager let this happen? I got to replace that property manager.

Now I can get to phase three, which is strength and conditioning. If you’re strong like with this Coronavirus if you’ve already been paying attention to your immune system, your nutrition, your health, and you’re a sanity protocols and whatnot, you’re a lot less at risk than a person who hasn’t paid attention to any of those things whose lifestyle is inviting of health issues. I hope a lot of people will be cleaning up both their financial areas as they go through this, as I certainly did after 2008. The others are also going to clean up their health issues. We’re learning a lot of lessons. That’s one of the things that I would have done differently and I’m doing differently now.

It’s interesting the relationship between opportunity and emotion. In many respects, there’s an inverse relationship where the biggest opportunities come from when there’s the greatest amount of fear. The most amount of euphoria or excitement is when there’s the least amount of opportunities. It’s an interesting relationship. I would look at it of unpacking one of the things that you said, which is during that period of time, there’s going to be an emotional reaction. Oftentimes, emotion leads to bad decisions and increasing information, education, as well as perspective will help mitigate poor decisions. It goes both ways because there may be those that have liquidity going into this a downturn and there are going to be opportunities that present themselves.

It could be a retail strip mall they’re trying to sell for $0.10 on the dollar. Because it’s $0.10 on the dollar doesn’t mean that you should invest in it. There are going to be opportunities when it comes to making good decisions with current investments that may go sideways, but also opportunities to pass on a deal. Even though on the surface it may seem a good deal based on principles and variables of the past. Do you also see that potential coming where I saw a lot of people make good decisions in 2010 and 2011? What an incredible time to buy. I also saw a lot of bad decisions.

If you study failure, which I think you need to, then you begin to understand how those things happen. Nobody sets out to fail. I certainly didn’t. Nobody constructs a life to be weak and vulnerable, but yet people do it all the time. They don’t take care of themselves, don’t take care of their finances, don’t take care of their relationships, don’t take care of their business, don’t take care of their property. The list goes on. I’m guessing the type of person who’s read this far into a program like this is probably not in that camp. They’re investing time. Pay attention to what’s going on. The two investor emotions are greed and fear.

If you’re driven by either one, a greedy person will charge in and they will see nothing but sunshine. They will go after the opportunity with reckless abandon. That’s the operative word of a reckless abandon. End up getting in over their head and having a problem. A fearful person will sit on the sideline waiting for everything. Conservative people tend to be that way. In some ways, that’s the greater danger because it’s easy if you get in over your head to find people who can help you. It’s scary but you can find people that can help you. There are a lot of fixers out there. A lot of times, the problems you’re having seem overwhelming to you because of your lack of experience or access to resources.

Whereas an experienced investor would come in like, “We can handle that.” Remember the first time I was having a financial meltdown, my dad came and he looked over all my finances and he’d already gone broke in the 1987 stock market crash. He says, “You still have a lot to work with.” It was just a perspective. I couldn’t see it. I was hitting the panic button because that stock trading trade I did was a big one and I got it all wrong. I thought I was going to have to sell my house. I freaked out. When you are in over your head, you can get help. The challenge about when you’re sitting on the sideline in isolation, there’s a lot of that going on now, waiting for the smoke to clear, there’s nobody available to help you.

There’s nothing to fix except what’s going on between your ears. You won’t know that you’ve made a mistake until you go out and you can’t buy anything that’s worth buying because all of the buyers have already done what they do. Here’s what’s going on. The way a bottom gets put in a market is the brave and the bold, the aware and prepared, the experienced, and equipped. The people that have the right teams, step into the market and they begin to go bargain shopping. The act of snapping up those bargains bring the stability that you’re waiting for. By definition, it means all the bargains are picking over by the time you get there.

Warren Buffett famously said, “Buy when there’s blood in the streets.” You’re not being a vulture. You’re being a white core puzzle. The problem exists with or without you, you’re not capitalizing or victimizing someone. You’re often solving a problem because people who were selling because they don’t want or can’t handle the property for whatever reason, it could be mental, emotional, relational, financial. It doesn’t matter what it is. Their problem becomes your opportunity. Some people are wired that way. This is not easy.

The only tool the government has against this crisis is to continue pushing liquidity into the system. It’s not going to work. Click To Tweet

You can’t sit in your crib with your trading app and just order up real estate. Even though people are building online marketplaces, one of the biggest mistakes is taking a look at a property on an online portal. Having never met the market, not knowing anything about the team, buying it because the numbers make sense based on some YouTube video. They will watch how to do a financial analysis and then they buy it. They go looking for a property manager. They start trying to understand the market that they bought in. They do everything backward.

It starts with personal investment philosophy, market, team, property. A lot of people start with the property and then figure out the rest. The problem is by the time they get the first personal investment philosophy, they’re there because it’s been painful. They’ve discovered all the things they don’t like and can’t stand. Sadly, a lot of people will walk away from real estate. I have to confess after 2008, I was a little sour here. I’m a real estate guy, wrote a book on it, Equity Happens, and how great real estate is. I went and reread the book, making sure that we weren’t pitching snake oil, but it’s still penciled after the fact.

My problem wasn’t what we wrote. It’s what I did knowing what to do and doing it. There are lots of people who aren’t at their idea of weight. It’s not because they don’t know what to do, it’s because for whatever reason they aren’t doing it. It was the same thing as me. I knew what to do, I for whatever reason wasn’t doing it. That largely had to do with split focus and arrogance and thinking that I could make more money and in business than managing my properties. Anyway, the mistake is to sit on the sidelines. Now are the time and I commend everybody who’s made it this far into this monologue or this epic discussion.

It’s good. Now is the time to be investing in your education. It is time to be investing in your network and getting plugged into people who are already doing the thing that you want to be doing. There are clubs or mentoring programs you can join. None of those things should cost you money. They should make you money. You might have to front a little bit of money till you get up to speed and get going. Their investments like any professional education, the intent is that you’re going to make money, but this is a relationship business.

Once you’re plugged in and you have your finances in order, you’ve worked through your investment philosophy and you’ve got your team in place, and you’re starting to understand markets and product types and all that stuff. Your relationships are going to be the people that are going to get you into deals. You’re going to be active. You’re going to need more education and a different kind of education. If you’re passive, then you need to understand what it is to be a passive investor. You need to start looking at some offering documents. Understand how to understand the risks. They’re all in the prospectus. A lot of people buy stocks and they can handle prospectus. Both of us know, nobody ever reads them, but they should.

When you get a private placement, a real estate syndication, for example, you’re going to get handed a subscription agreement. Part of that in the subscription agreement, in your offering documents for private placement memorandum is going to be sobering, explanation of all of the potential risks. Remember, you’re not looking for a reason not to do the deal. You’re looking for reasons to do the deal, but you want to go in there, eyes wide open. Sam Zell is one of the most iconic, real estate investors ever, much bigger than Donald Trump and not a controversial figure, at least not in the same way Mr. Trump is. Sam Zell wrote in his book, Am I Being too Subtle?, that the thing he attributed his success to was not his ability to see the upside. He goes, “Everybody sees the upside. It was my ability to see the downside and still move forward.”

The marketplace is showing everybody a lot of the downside. Your ability, my ability to be successful isn’t going to be to sit on the sideline and wait for things to stabilize. It’s going to be to see the opportunity and the risks and find a way forward. You’re going to do that through education and other people. Don’t camp out on the internet while you’re sheltering in place. Try to find ways to join virtual or God forbid, risk your health and go out and get in some real-world conversations, get together with some folks and get connected. It’s a fun community. If you get into the right tribe, we build those. I know you put on events. You’ve been at many of our events. The kind of people we attract and what we do. We’re not giving up on the event side of our business or getting people together.

We’re taking a time out and we’re doing more virtual stuff, but the concept of tribe is super important. That’s the season we’re at now. There’s a lot more to learn, but you got to pay attention. This is a slow-motion train wreck. It doesn’t mean you have to be run over by it or injured by it. You need to know what’s happening because when the collision occurs, there are going to be parts and pieces and things flying all over the place. You want to make sure that you’re not in the path. A few treasure chests are going to crack open and you can go bargain hunting too. That’s part of the reason we like to pay attention.

TWS 47 | Financial Crisis

Financial Crisis: The shortest path to coming back might be a different property, a different market, or a completely different investment strategy. Keep an open mind to using what the market will give you.

 

Your mission statement is, “Education for effective action.” You look at the environment in which we operate, summarize what we’ve been talking about. It’s an environment that we can’t control. There are lots of things that are going to happen. Ultimately, we can control what we do, our actions. I look at something I learned but understood it didn’t necessarily implement. There’s no such thing as a perfect deal and pass a certain point, trying to get more information and have more, “This detail has to fit,” only increases the benefit marginally. It comes down to having more pros than cons.

Also having multiple perspectives, which is a good benefit from having a tribe, having a network and having different perspectives in this information age. Let’s end with that. How do you balance your perspective? You’re in the thick of real estate. You have the longest-running podcast radio show focused on real estate investment of anyone. You have a certain perspective that has been added to by multiple perspectives. Who do you continually follow and pay attention to that helps you have a different supplementing perspective that helps you grow and learn and be clearer about what’s happening so that you can take effective action?

I’m a student first. I have a huge library and I read every day. I budget an hour every morning, from 5:00 AM to 6:00 AM to read. I do that when I have an uncluttered mind. Enjoying my coffee gives me an excuse not to have to get up and get going. That’s part of it. I listen to podcasts, many of the people that I’ve become friends with because I find people through different mechanisms or books or podcasts. We then seek them out. We leverage the fact that we have this show, as you do, to talk to people. We both host and participate in mastermind groups, on various topics both business and investing. We do our annual Investor Summit. We’ve been doing it now. This will be the eighteenth year. Normally, we do it on a cruise ship. We’re not sure that’s going to happen this year. We’re still cautiously optimistic, but it’s uncertain. We’re supposed to be leaving in a few weeks. I don’t know, we’re going to see. Somehow, someway we will get together.

I was on a call with a mutual friend, Richard Duncan, who wrote the book, The Dollar Crisis. We were talking about life from his perspective. I’m going to be on the phone with Brian London, who’s a gold expert and runs a New Orleans investment conference. He’s a plugged-in guy. I’m sitting here talking to you and you have a perspective, I mentioned Chris and Adam, I’ve done webinars for them. We do some joint stuff together. They have a way of looking at the world. It goes back to using what you have, whatever you have. It could be the ability to write a check and pay to be part of a club. It could be if you have a show or some outlet where you can talk to people if you have time to read.

Most of us have something we can work with. Try to find a way to put good ideas in your head and then try to get into conversations with other people that are interested in the subject matter as well. Even if it’s the blind leading the blind, concentrate on what the author, the podcaster, or the video host is saying. Talk about it and process it. That’s a way to learn. If you can get somebody who’s got some professional expertise or real-world experience or whether it’s a CPA, an attorney, a 1031 tax-deferred exchange guy.

In bad times, it’s always good to have a little cash. Click To Tweet

Somebody that does infinite banking or mortgages, bring them into the conversation whether those are conference calls or Zoom calls. Eventually, you could start your own investment club. We did a white paper. You send an email to Club@RealEstateGuysRadio.com. We’ve been putting together investment clubs for a long time. We’ll send you a free white paper. You can look at it and figure out how to start your own investment club. Tips and tricks from guys that have done it on how you can start one on the cheap. Grow it, have it be successful and begin to attract people into your world.

The point is to do what you can do. I have a saying, “My dedication is to be diligent about doing the things that I can do so that I am best prepared to handle the things that I can’t control.” In other words, be diligent to control the things you can control so that you are in the best position to react to the things that you cannot control. There are so many things that you cannot control. There are only a few things that you can control. The good news is if you focus on them, you can control things. The idea is you put in your head the people you hang around with, your self-talk, and your emotions.

What happens on your balance sheet, in your physical body, in your environment, you can control all those things. Those things will help you react better when there’s a Coronavirus crisis, an economic shutdown, a financial market collapse, a banking crisis. The list goes on and it will never end. This is not the last crisis. Certainly, not the first. It’s going to continue to happen. It’s part of being alive going from crisis to crisis. Don’t withdraw, lean in. There is an opportunity on the flip side and going through all these problems. Your mission is to try to figure out which opportunities are for you. Who you need on your team, what you have to work with to make it happen, and then never to put all your eggs in one basket? It’s to take reasonable risks that you’re aware of the threats.

TWS 47 | Financial Crisis

Equity Happens: Building Lifelong Wealth with Real Estate

You have a mitigation strategy so that if we have a fire, I know to run out this window or this door. If somebody breaks in the house, I know where the phone is and how to call 911, or maybe where the weapon is or however you choose to defend your home. Have a plan A if everything goes great. Have a plan B in case certain things go wrong. Try to anticipate as much as you can. To your earlier comment, understand there will always be an unexpected event that nobody saw coming that you couldn’t plan for. The best you can do is have some liquidity, have a great tribe, have some stability in your financials especially avoiding counterparty risk is one of the things that I’d be concerned about.

That way you may lose a piece of your portfolio, but you don’t lose a whole thing. Be ready for inflation, be ready for deflation, be ready for a banking collapse, be ready for hyperinflation. Be ready for high taxes, be ready for high-interest rates. None of those things may happen, all of them may happen, we don’t know. Something’s going to happen. Think it through, be ready, and have people on tap that you can tap into when you’re not sure what to think. If you make those investments now, then I think your future is bright come what may. I encourage you to do that.

There’s been so much we’ve covered. Russ, thank you. It’s always amazing talking to you and I definitely learned a lot.

I appreciate it. I’ll make it easy for everybody and makes it easy for you. They can send an email to WealthStandard@RealEstateGuysRadio.com. You get a quick autoresponder with the latest copy of our newsletter and links to everything that we do. That is if you’re interested, if not, then unsubscribe and no harm, no foul.

We’ll have to do a follow-up as things unfold.

I look forward to it.

Thank you for reading my interview with Russell Gray. He is an amazing guy and hopefully, you can follow the Real Estate Guys Radio Program. It’s an incredible podcast. They have awesome guests on. They’re insightful in the way in which they analyze things. You will get much value out of following them. Russ also writes his newsletter, which is also incredibly insightful, somewhat comedic. It’s informative and I believe you get a ton of value from it, plus it’s doesn’t cost anything. That’s it for now. Thank you for your support.

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About Russell Gray

TWS 47 | Financial CrisisRussell Gray is co-host of The Real Estate Guys™ Radio and TV Shows. He has been a financial strategist since 1986. As a faculty member for the California Association of Realtors, Russ taught Real Estate Finance to Realtors® pursuing the prestigious GRI designation. He is a popular speaker and author.

Robert and Russ have co-authored the very highly rated book “Equity Happens: Building Lifelong Wealth with Real Estate.”

 

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Top 5 Financial Actions You Need To Take During These Times Of Crisis (Part 2)

TWS 46 | Financial Actions

 

While nothing in this world is ever permanent, the current situation we are living in is definitely more than the change we have been expecting to see. The COVID-19 situation is becoming more felt by the day, challenging our financial capacities. Continuing from the previous episode, Patrick Donohoe reveals the rest of the top five financial actions we need to take during these times of crisis. These times may be shocking, but why not use that shock to snap you out of the situation and be in a position to adopt some new habits and new behaviors that will undeniably come in handy in another unexpected crisis? It is prime time to do that, and Patrick helps you kickstart with this series.

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Top 5 Financial Actions You Need To Take During These Times Of Crisis (Part 2)

Thank you for tuning into this part two episode of the Top Five Financial Actions to Take During Times of Crisis. I hope you enjoyed the previous episode. If you haven’t read it, definitely go back. It sets the stage for these more practical things to do. Go to TheWealthStandard.com, there’s a bunch of links as well as our Resources section of the website. I’m here doing part two, and this is where the rubber hits the road. For those of you who have been reading for a long time, I’m big being in the right mindset because I believe that is a precursor to the best decisions and the best actions to take, which ultimately leads to the best results. We live in very different times. We live in times that can throw us off-kilter and times that we’ll look back on and either celebrate for how much we benefited from them or on the contrary, we look back on times that destroyed us.

I go back to 2008, 2009 and I know families, people, and friends who have still not recovered, and this is years ago. Because they are telling themselves a story about what happened and why it happened. Typically, it relates to them. Not necessarily what they control, but it relates to the blame that they’re placing on others and also not using those circumstances to learn valuable lessons and do something about it. I believe these times are going to create those same exact two camps. The camps, the smaller one that capitalized on the environment, and then the one that tuck tailed, ran, blamed others, and played the victim.

I understand where people are at. I understand that there are so many that look at life happening to them, and that they should get this treatment, benefit, and people essentially serving them as opposed to them, figuring out how to properly serve others in order to serve themselves. That’s where I’m at. This episode is going to be interesting because we’re going to get into some very practical things. They’re things that very few people have done. I have had the opportunity to advise thousands and thousands of people and collectively with my team, more than that. We see the same things. It’s seldom we find these outliers and anomalies when it comes to how they manage their finances.

There are definitely signs of what has worked for people, will work for you. Now is the time to essentially use the shock that you’re getting based on what’s going on in the environment and use that shock to snap out of it and be in the position to adopt some new habits and new behaviors. It’s a prime time to do that. First was a state of mindset. Those two equations, state, stories, strategy, and principles, processes, products, in those sequence. Not executing a strategy until state and story is in line, and then not buying a product, creating a product if you’re an entrepreneur or business owner, or even like yourself as a product of service. It’s the principles first. What are the principles? Where’s their value? Where’s their exchange?

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What’s the process that you use to deliver that? Finding those two out first, before you start to look at ways in which you can tweak the product, whether that’s yourself or something you buy as a product, investment product, financial product, or any other product. This comes down to the investment decisions that you make as well. It may be into a company that produces a certain product, but knowing the principle and knowing the process of that business is way more important than the product. Most people are infatuated by the product. That’s most important. State and mindset. The second is structure. It’s the routine that you established for yourself. Your morning, meditation, visualization, and spiritual routine. How you reach structuring your day using Craig Ballantyne’s Perfect Day Formula.

Another thing that I failed to mention in Part one is Tony Robbins’ Priming Exercise. These are ways in which you can establish your day. You don’t even have to think about it. It’s preprogrammed. You don’t have to spend energy on it. You commit and you do it. What that does is it positions you to make the right decisions and take the right action. The first action is cash and cashflow. The first thing is, you need to know where your expenses are. Know your money in, money out. There’s so much to buy these days that people are just that crazy about buying and subscribing to this little thing. Now is the time to slim down and trim the fat. There’s an awesome app that I use called You Need A Budget. It’s so simple and easy, so you know where your expenses are. Here’s what’s cool. You can start to use this app to figure out ways to reduce your expenses and to be frugal, which is going to be necessary.

The way in which we’ve consumed in the past is going to change. Supply chains are completely disrupted. You’re going to find that the goods that were expensive are cheaper than the goods that used to be cheap. Looking at how supply chains work, because of how clunky it is now, things are going to get stupidly expensive. I would do two things. Number one, you’re going to want to get a handle on where the money is coming from and where the money is going. Establishing that budget and then starting to trim down. The first thing I would do in trimming down is to prioritize because there may be some situations where you don’t have income for a couple of months. You need to know where to cut and what to cut. Instead of making a decision then, in the emotional frenzy, it’s determining what are the priority of your bills right now?

Going back to my 2008, 2009 experience, I prioritized my finances. I knew what I could get away with not paying and I knew what I had to pay. The biggest priority for me was my contributions. Contributing, whether it’s tithing or charity for you. The second thing became my family. It was the home we lived in and our transportation. I had a car repossessed during that time because we didn’t need two cars and there came a month where it came down to my priorities of bills and I chose those priorities, but I determined that in advance. I defaulted on quite a few business loans that I had because they weren’t a priority. Obviously, since then I paid everything back and got everything cleaned up from a credit standpoint, as well as the relationship I have with creditors, my credit score, and so forth. I’m fine now, but during those times of crisis, I had everything prioritized. Do that. Prioritize your bills. Know that if it came down to it, and you only could pay a few, which ones would they be? Knowing that in advance is huge.

TWS 46 | Financial Actions

Financial Actions: Sell stuff, get some capital, and donate.

 

It’s also a nice time to negotiate. This could be negotiation with your landlord. I’m doing that. The office space market is going to get hammered and cleaned out. I would be willing to bet that the way in which we office and work is going to completely change because of the experience of remote work. As well as having stringent finances and realizing that, “There’s a lot of expense that goes into my rent.” I have several months left of a seven-year lease on this building, which is a big building and way more space than I could ever use even when there are people here. We’re renegotiating because the lease is up and I know that then is going to be a different environment than now. I’m figuring out ways to cut there.

You also look at your cable bill and negotiating with that, finding new deals. I guarantee most service providers are figuring out ways to cut because so many people are canceling. They’re trying to figure out ways to discount this and discount that. If you don’t call, you’re not going to get it. They’re not just going to call you up and say, “We’d like to discount your internet bill, or we’d like to discount your phone.” These are times which you can start to negotiate, find deals, and cut your expenses, but still get the same services and goods.

Also, managing your credit. Most credit cards now give you a credit score for free so monitor that if you start to get credit dinged. This is going to be an environment where it’s going to happen potentially. You need to have the resources to be able to improve it. Lexington Law is a company that I’ve used personally for years and it’s an easy service. Most of it is automated and all online. This is also a time where I’ve seen some reports where you have a lot of people paying down credit. From a low credit standpoint, this is a time to not pay off your low-interest debt. I remember back in 2008, 2009, this is when banks were cutting credit lines like business credit lines and home equity credit lines. I had a big home equity line against my house and I drew 100% of it. I didn’t spend it but it’s in cash and it has a low interest.

I look at the banks closing that down, versus me having the cash and paying interest on it. I’m going to take the low interest on it every single day of the week. It’s going to position me for making better decisions and taking some action that I can take now that I may not have been able to take if I didn’t have access to cash. Evaluate your debts. If it’s a low interest, do not pay them down. Keep cash. Cash is way more valuable than paying off something that you can’t sell or getting the credit line completely cut and not being able to use it.

The time between depression and despondency is the ideal place to make a decision. Click To Tweet

Also, check out TheOrganicPrepper.com. They have a whole section on their blog about being frugal. Where you can cut how to grow your own vegetables. A lot of ways in which you can learn to cook. There are some things that you can teach kids, start to study, and also find opportunities to have fun that don’t require going to Disneyland, Disney World, or a vacation. Also, start to understand bartering. This is going to be an environment where I would say trade is going to be way more prevalent than it had been in the past. If somebody needs this, you can provide that. I believe this is the time to look for those opportunities.

Those are three for cash and cashflow. You want to have cash. This is where the dry powder idea comes from, which is number four, financial actions. Keeping liquidity in areas that provide interest but are susceptible to being taken. With my other company Paradigm Life, we specialize in insurance products and how they play a role in personal finance. I have pretty much all my cash in these vehicles and in well over a dozen different insurance policies. Insurance companies are contractually obligated to lend you that money. It’s one of those circumstances where I know that I have a tremendous amount of dry powder so that when opportunities do present themselves, I can capitalize on those quickly.

I earn good interest on what the insurance company pays me as opposed to what a bank pays me. Diversify your liquidity. There are a lot of emotional decisions that go into buying metal like gold and silver. These are the crisis investments, the crisis assets, and I have a lot of gold and silver. If you don’t have any, I would definitely encourage you to look into that physically. Tom Dyson, who was a guest a few months ago is writing postcards from the fringe. He talks extensively about gold and its role in history as far as how it has been used as the benchmark for money and is continuing to do that during this crisis.

It’s an already established rule. Despite how digital things have gone, it is already an established habit that people have as far as what is safe during times of crisis. If there’s ever an end to the long-term debt cycle, which we talked about with the Richard Duncan episode. Gold is typically the place to be because most likely the new long-term debt cycle is going to start with potentially a new reserve currency. Who knows? It is one of those assets that you know is safe during times of crisis. Remember, you need to be smart about this. Consult with a wealth strategist and a financial advisor in order to make the right decision there.

TWS 46 | Financial Actions

Financial Actions; Right now, people are heightening their game when it comes to selling, so put yourself in that emotional state where you can operate the three sides of the coin: heads, tails, and the edge.

 

I would also separate your dry powder from your general expense account. Create a savings account. Create something that you have rules attached to. I have rules attached to three accounts that I have where no money is spent out of those accounts and they don’t pay bills. They don’t pay off a credit card. They are not used for any expenses. They are used for opportunity. Create some side account or repurpose an account you already have as your side account, your dry powder account. Sell things during this time. Donate them to charity and get the charitable deduction, or sell them. Facebook Marketplace. You have local classifieds that are still widely being used. I have a friend I used to work out with, and he works for a classified section of one of the local news organizations and they’re blowing up.

Number five is investments and assets. It’s going to be a really interesting time because I remember back 2008, 2009 so many people got into investments, this deal, that deal because they were so emotionally vulnerable. It was crisis, fear, “I’ll buy it.” “I’ll subscribe.” “I’ll do this.” I’m starting to see a lot of it especially when it comes to gold and silver. It comes down to the dollar as the reserve currency is going to end. The story there is so emotionally driven that it leads people to make poor decisions. I’ve made them in the past. I bought a ton of gold and silver, because of these things, and I realized that it probably wasn’t the best decision I could have made relative to the other decisions that I had. You’ve got to be smart here because the sales acumen of businesses is going to go up a lot.

I’m not saying that sales is bad, part of my business is sales. What I’m saying is that, people are heightening their game when it comes to selling. Be aware of that and put yourself in that emotional state where you can operate the three sides of the coin. Heads, tails, and the edge. A salesperson is never going to tell you not to buy what he’s selling. He’s always going to tell you to buy it. That’s one perspective. What’s the other perspective? Most people don’t go to the other perspective. Go to the other perspective. What would the opposite of what he is saying be? Who would say it? Find a person that is somewhat credible that is saying not to do whatever you’re being sold.

Now you have the two opinions, you can sit on the edge and make the best decision. That comes down to seeing both sides, getting more information, educating yourself and now you’ve positioned yourself to make the best decision. That’s one thing to be aware of. Also, I would revert back to this emotional cycle. During the times of euphoria, it’s the biggest financial risk that exists. The time between depression and despondency is the ideal place to make a decision. It’s right at the very bottom where everybody’s saying not to do something. Blood in the streets is often the quote that’s used. When there’s blood in the streets, even if it’s your own, that is when you should buy. That’s not right now. That’s why dry powder or liquidity is vital.

Deals happen in disruption. Click To Tweet

We’re going to be going down through these emotional stages. Anxiety, denial, fear, desperation, and capitulation. “This investment is not for me, I’m getting out and never getting back in.” You’re going to see this. There’s so much money tied in the capital markets. There’s so much money in pension funds, 401(k)s and IRAs, it’s insane. There’s going to be a lot of selling because of what type of tsunami is going to hit. Whether it’s GDP, second-quarter earnings, or third-quarter earnings. It’s going to be crazy. At the same time, that’s one perspective. You’ve got to know the other perspective and when you sit on the edge, you can now analyze the additional information which is emotional states. That will help you start to buy in the right environments.

That’s where I would say a lot of the investments are going to come from. It’s during that stage, but at the same time, you know that I’m always big on business, that’s my biggest investment. I’m my biggest investment because I’m not meant to be a trader. I have a lot invested in real estate. I sold more than half of my real estate in 2019 because I knew we were in this bubble place. For me, I look at the biggest opportunity and it’s in business. That’s what I often communicate through this even though I do make investments. If you love investments and that’s a passion of yours, make it a side business of yours. That passion is going to give you information, expertise, and hopefully a lot of these ancillary things as far as your emotional state and the structure of things is concerned, the philosophical things and psychological things. That will help you be a better business person.

How I look at businesses is, leadership is number one. What leaders do is they serve. Whether you’re a leader or not, it doesn’t mean a leader in the formal terms, whether it’s a manager, an executive, or a director. I’m not saying that. Leader is an archetype, it’s a persona. That persona exists in you, it is inside of you. That king and warrior inside of you, male or female, it’s there. You just have to know what that is, identify it, and figure out how to bring it to the service you provide others. People gravitate toward leaders. They’re attracted by leaders. They follow leaders. Honing in those leadership skills allow you to leverage that, and then help and help a lot more people because doing it by yourself, is single-dimensional, and you’re only going to get a certain amount of output from that.

Make some investment in yourself even if it’s just time. Finding opportunities to serve and do it without the expectation of pay. If you think there’s something that would be valuable for a person, or valuable as a business, try to do it for free to see if it is valuable. Do more than what’s expected. Go out of your way to help people. Build and enhance relationships. These are things that don’t require any money but they do require the right state and mindset and also an identification of that leader inside of you. I would say this is a time that you’d want to double down. Do the things you’re most afraid of. Do the things that give you the most anxiety. Do the things that you were afraid to do in the past. Make the commitment and do it. The fear that exists is all mental. It’s all mental fear, but that experience will teach you some tremendous lessons and help you to identify opportunities, both in the short-term and in the long-term.

TWS 46 | Financial Actions

Financial Actions: If you can keep your head straight, keep yourself liquid, keep yourself lean, mean, and efficient, then you’re going to crush it.

 

Two more things when it comes to investments and assets. First, it’s the idea of asymmetric risk and reward. That’s where making small bets but getting huge upsides, or multiples of those bets. These are not the times that getting the standard long-term interest rate is relevant. Now is the environment to find deals. Deals happen in disruption. Don’t settle for small interest rates as far as your investments are concerned. Try to find the highest interest rates as it pertains to your tier one security guaranteed bucket. Your cash liquidity. When it comes from an investment standpoint, these are the times in which you can get multiples. You can get deals on them.

2010 was the best time after the financial crisis of 2008, 2009. Everyone said housing had crashed and nobody should get into the housing market. I got a few deals during that period of time. I know people that cleaned up because of buying during that time. Now’s the time that there’s going to be tremendous disruption and opportunities to make some good investments that give you this asymmetric risk-reward type of return. These multiple returns. Finally, it’s the identification of assets when it comes to cashflow. In the end, capital gains is going to become income. If you buy low and then sell high, that money is either going to be income or it’s going to have to go into another investment. Who knows what the investment environment is going to be then?

That’s where focusing on your tier two and tier three assets. As I talk about my book Heads I Win, Tails You Lose, these are assets that produce monthly or quarterly income. This is income that’s going to be consistent for a really long time. A perfectly leveraged income. Here is when more education and information is required on your part so you can make those right decisions. I’m not saying the capital gains isn’t necessary, but in the end, what gives true lasting wealth is income. Property values are going to tank, in my opinion. At the same time, those that bought for cashflow are going to be just fine. There’s maybe some slight disruption to rents but people need a place to stay. There could be some months between stimulus in responses by the government to help tenants and also help landlords where you may not get a month or two of rent.

At the same time, it’s going to be there especially if you bought in the right areas. Cashflow investments, there’s going to be a ton of those. There are always going to be people that have gotten in the game in the last couple of years, and it may not have been the right time. The reason why I sold my properties is I would never pay those prices for them. It was at such a high level and the cashflow wasn’t justifiable. The values were too high. I decided to sell. I don’t know if selling is appropriate, probably not. At the same time when it comes to the decisions you’re going to make in the years to come, that is where you want to get into investments that obviously produce a high amount of long-term cashflow as well.

That’s what I wanted to cover in this two-part series. These are some of the core financial decisions to make during times of crisis. I’m going to speak a lot to this as the months start to transpire, and the topics from guests as well. I believe that if you can keep your head straight, yourself liquid, lean, mean and efficient, you’re going to crush it. There’s a tremendous opportunity coming. I believe that if you guys continue to read, continue to implement what I’ve talked about, this is going to be a prime environment to establish personal wealth beyond your expectations and beliefs before. At the same time, you’re going to be able to help a lot of people. They’re going to need it. I mentioned tons of books, lists, graphics and terms. Make sure you also subscribe to the newsletter. Give me your feedback. I’d love to hear from you, Hello@TheWealthStandard.com. Thanks for reading. Thanks for your support. You guys are amazing and we’ll talk to you next time.

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Forecasting The Next Financial Crisis with William D. Cohan

TWS 6 | Financial Crisis

 

Wall Street guys are always going to be able to outrun the regulators, but the regulators are still going to have the last word. A former senior Wall Street M&A investment banker for seventeen years, William D. Cohan shares his wisdom on the relationship between Wall Street and the entrepreneur. The New York Times bestselling author of three non-fiction narratives about Wall Street, he reveals the risks in investing in initial public offerings and the lessons learned from the financial crisis of 2008. Learn from William’s insights on the regulation of the capital markets today and bond markets as the probable solution for the economic turmoil.

Listen to the podcast here:

Forecasting The Next Financial Crisis with William D. Cohan

We are talking about entrepreneurship. This is going to be a different angle on it. Follow us on social media. I’m going to be doing a YouTube review of my thoughts in regards to my guest now and what I wanted to learn from that. Make sure you go and check out our YouTube Channel, YouTube.com/paradigmlife. Let’s get to my guest, William D. Cohan. He is a columnist for Bloomberg View and Vanity Fair. He is the author of several books. He has a new one coming out. The books that he has available is Why Wall Street Matters and also The Last Tycoons, The Secret History of Lazard Frères & Co. He also wrote the House of Cards, A Tale of Hubris and Wretched Excess on Wall Street and also The Price of Silence: The Duke Lacrosse Scandal, the Power of the Elite and the Corruption of Our Great Universities. You can imagine this is going to be some awesome dialog and conversation. With further ado, I welcome my guest, William Cohan.

William, welcome to the show. My first question is given your experience with Wall Street, what is the relationship between Wall Street and the entrepreneur?

Some of these tech companies, these so-called unicorns, a lot more tech companies are able to obtain capital that they need in other ways besides going public from hedge funds, venture capital firms, private equity firms and funds from all sorts of sovereign wealth funds. There are all sorts of new and different ways. There are also other exchanges and other private capital marketplaces that have started to provide companies with capital that they need, in ways that are new and different than their existing core delaying the inevitable IPO. You’ll see Uber, even though it didn’t achieve the lofty goals that underwriters and the company may have hoped by being valued at something like $100 billion. It still was valued at $74 billion, which for an IPO and raising more than $8 billion in an IPO is still one of the largest of all times. The consequence of companies getting capital elsewhere and being able to delay what used to be the only way a company could get the capital it needed is that these IPOs are bigger and more of an event that they used to be in the past. Which unfortunately can allow for the process to be manipulated and retail investors taking it on the chin often happens. The dynamics on Wall Street in raising capital have been changing for some time. With the internet, I’m sure they’ll change even more.

With Uber specifically and I can’t speak to the more recent ones, but I know that there were a number of articles written after the IPO where Uber was losing money. They weren’t profitable and they required more and more rounds of funding. The IPO became a necessity in essence because I know that there were some end investors, there are some articles written about end investors not necessarily getting their investment back yet. With that as something I see in smaller companies that are raising capital, it’s more for not necessarily to be profitable right away but down the road. Is that an occurrence that’s happened in the past or is that more of a recent phenomenon?

It often becomes about the story and the industry that you’re in. You may be too young to recall one in 1999, 1998 but a lot of companies were trying to go public that had no business being public and were far from profitable. They were able to do it because investors couldn’t get enough of that company at the time after the collapse of the tech market and the tech bubble in March of 2000 combined with 9/11. A year and a half later, the capital market dried up for that risk. It’s like Rasputin, it came back from the dead. It keeps coming back and investors are willing to suspend their disbelief.

Nobody rings a bell at the top of the market. Click To Tweet

You’ll have an example of Amazon where it had years and years of losses and investors kept having faith and bidding up the price of the stock. Now, it is profitable and increasingly profitable. They’ve got other business lines like the Cloud business that they have, AWS that drives a lot of their profitability. Sometimes investors get rewarded for this blind faith. Other times, they get their head handed to them. By and large, the tech companies that are coming public now are older and are closer to profitability, and are bigger and more substantial than what was going on many years ago. That doesn’t mean that there aren’t risks for investors. Investing in IPOs is a risky thing to do. The Wall Street underwriters make it seem tempting and delicious, “You have to buy Lyft, you have to buy Uber.” That’s their job. They’re expert salesmen. It’s an investors’ job to be the caveat emptor, to be wary of what these guys are selling because ultimately, they’re benefiting themselves and their institutional investors and the early investors and not the people who are buying the IPO.

I know you’ve talked quite a bit in your books and also interviews you’ve done regarding how Wall Street is set up and one of the primary reasons why 2008 happened. Do you see the regulation of the capital markets changing as it relates to how they’re raising capital, the leverage that they’re using and the risks that they’re taking?

After the financial crisis in 2008, there’s obviously the regulatory environment tightened up considerably. We went from relatively Laissez-faire regulation to Dodd-Frank Laws, Volcker Rule and also some new regulations that were implemented. Basically, that all ended with the election of Donald Trump and now it’s pretty much being rolled back. It’s not exactly clear how it’s being rolled back but there’s the sense that there’s much less regulation now and deregulation is the way it’s going to be for the time being. Companies are taking advantage of that as best they can. On Wall Street, the Fed is the new regulator of all these Wall Street banks, the big ones, and the Federal Reserve. They’re not allowing any mergers. None of these big firms can do transformative mergers.

They haven’t been able to do that for more than ten years now. This is probably some pent-up strategic demand among these Wall Street firms for how they’re to potentially compete going forward. Until the fed allows them to do these mergers, they are not going to be able to. Other regulations are being loosened. Some capital requirements, the kinds of business lines they can be in, all of that is being loosened up to some degree. If you ask people on Wall Street, they say, “That’s great. It’s about time.” The post-financial crisis regulations were too restrictive. You ask good politicians like Elizabeth Warren and Bernie Sanders, they want to know do more. They don’t want to loosen these restrictions and these regulations. There’s always a pendulum. It was too loose before the financial crisis. Now that has to be tightened up so that “never happens again.” Now you could argue that it’s too loose again, that it was too tight. Wall Street types are never happy with any regulation.

If you were speaking on behalf of the typical investor, would you say that the lessons that came from some of the turmoil in 2008, 2009, the dot-com crash or earlier, aren’t necessarily an issue? That we’ve learned those lessons and that the growth that deregulation often creates is sustainable and there aren’t any unintended consequences?

 

TWS 6 | Financial Crisis

Financial Crisis: The dynamics on Wall Street in raising capital are changing and have been changing for some time. With the internet, they’ll change even more.

 

I don’t think either investors or bankers or executives at banking firms ever learned their lesson about the financial crisis. They’re all in the business of trying to make as much money as they possibly can all the time. Whatever the capital markets permit, the regulatory environment permits or the business environment permits, they will push it to the max to try to make as much money as they can. I’ve written extensively over the last years about how frankly I see the problem repeating itself. The problem that got us into the financial crisis in 2007 and 2008 is being repeated now several years later. You can write about it until you’re blue in the face. Frankly, investors are buying up securities that are too risky and not getting compensated enough for the risk they’re taking.

That’s unfortunate, the way it all starts all over again. That’s part of driven by the Federal Reserve’s policy of keeping interested rates very low for a long period of time which was probably a strategy that made sense when we were in the peak of the financial crisis. Now, all these years later, unfortunately, it drives investors to take risks they’re not getting properly compensated for. That’s exactly what happened last time around several years ago and here we are doing it again. Do people learn lessons? No, they don’t. Will the next one happen exactly the way the last one did? No, it won’t. Will there be another financial crisis? Absolutely, you can bank on. It’s probably sooner rather than later.

I’m hearing you say that this is more a regulatory issue than anything else because obviously if there are certain rules and you have incentives of the Wall Street bank. They want to receive compensation and be rewarded for their efforts. They’re following rules to the best of their abilities. The regulation side of things is where the lynchpin is or am I misinterpreting that?

That’s right. Essentially, Wall Street is a Darwinian war pit where the battles are played out every day. It’s a zero-sum game. There can only be one winner as we used to say. One of the firms I worked at, “It wasn’t enough for you to succeed. Others had to fail.” Bankers, traders and corporate execs, all of those, they’re going to do whatever they can to make as much money as they can that is legal. The crime as I’ve written about the 2008 financial crisis is not what was illegal about what was legal. There’s this human nature involved. They get rewarded to take big risks with other people’s money. That’s exactly what they’re going to do. I don’t blame them for doing their business, for taking the risks that they take, for using other people’s money to do it, to produce the products they produce. What I think to your point exactly is that if you don’t have a cop on the beat like if there were no speed limits on the highway and no state cops coming after you if you drive too fast, people would drive 120 miles an hour or faster. The roads would be much more dangerous. They drive drunk. Wall Street is no different. Human nature is human nature. There are regulations for a reason. People are required to wear seatbelts. They’re required to drive when they’re not drunk. They’re required to drive and not text. They’re required to drive within the speed limits.

Do some people disregard those laws and get caught for it? Yes. Do some people disregard those laws and not get caught for it? Yes. By and large, most people obey the law and that’s what happens on Wall Street. If you don’t have the laws, if you say, “There is no speed limit. You don’t have to wear a seat belt. You can drive when you’re drunk or drive while you’re texting,” then people would probably do that. There’ll be a lot more accidents and danger. The roads will become weaponized. That’s what is going to happen on Wall Street as we begin to pull back from the 2010 Dodd-Frank Laws and the other rules and regulations that are put in place in the Obama administration. You have to recognize that when you do that, you’re allowing the animal spirits to run free, which allows Donald Trump to make claims about how great the economy is doing, but there are going to be consequences. There always are and there always have been. To think otherwise is historical and people thought that somehow the rules of economics had been lifted in 2006 and 2007. It wasn’t true as we found out in 2008 and we’re going to find that out again.

When the tide goes out, you can see who's wearing a bathing suit. Click To Tweet

There are a couple of things going through my mind based on these awesome comments and insights, which is the entrepreneur, they’re quick and they’re agile typically. They’re coming up with an idea here, an idea here and you look at the speed in which technology is allowing society to evolve. You go to the regulation side of things, it’s hard to catch up. I can’t remember which documentary it was. It was giving a snippet of the regulators. Those at the SEC in certain roles that were essentially over a certain element of Wall Street that was taking excessive risk. There’s one person in that role. I’m sure it’s bigger. The government obviously is renowned for not being able to keep up with how fast everything else is going. Do you think that is a characteristic of what’s going on or is that maybe a misinterpretation?

It’s clear that politicians certainly do not understand what goes on Wall Street. Regulators probably do, but they’re definitely outnumbered. On the other hand, there are a lot more regulators floating around these firms than there ever used to be, especially the big firms. Now that they’re regulated by the fed. There are Fed people who go who have offices at these firms. They can go to board meetings. They could look at loan portfolios. They can pretend credit judgment conversations. This is definitely a new world post-2010. Are some of that being rolled back? Yes. There are articles constantly now and fed comments constantly about whether or not there’s too much leverage in the system where the companies are taking on too much debt, which of course they were encouraged to do by the fed because interest rates were kept so low.

AT&T has $180 billion of debt now. It’s the most indebted company on the planet. Is that too much debt? Maybe if the economy stays strong, it’s not. If the economy begins to stumble, there’ll be defaults on that debt and AT&T could go into bankruptcy. It’s not inconceivable. They have $180 billion of debt. That’s a lot of debt and it’s unforgiving. GE has $100 million to $1 billion of debt. Companies are bulked up on debt in part because of interest-expenses taxed deductible so that means appealing from a tax basis and interest rates are very low and are being kept low by the Feds. Trump is job loaning about interest rates and trying to keep the Feds from raising.

The Wall Street guys are always going to be able to outrun the regulators, but the regulators are going to have the last word. They can party for a while and then they have to come with their head in their hands asking for a bailout or to be rescued or saved as happened in 2008. You’d think that Wall Street would be more contrite and want to change what they do and how they reward people. I’ve written 100 pieces about how the compensation system on Wall Street should be changed, but nobody wants to change it so it doesn’t change. That’s what’s going to lead us down into the well again. It’s not going to end. It never does. It won’t this time either. People can’t see that. Nobody rings a bell at the top of the market. Because in the end, we’re taking the punch bowl and going home. Unfortunately, it seems to come out of nowhere and people will be amazed, yet there are breadcrumbs all along. There have been plenty of breadcrumbs.

They’re seeing in hindsight once it all happens.

 

TWS 6 | Financial Crisis

Financial Crisis: The problem that got us into the financial crisis in 2007 and 2008 is being repeated now, eleven or twelve years later.

 

The smart people who prepare themselves to be safe as Warren Buffett says, “When the tide goes out, you can see who’s wearing a bathing suit.” We’re at the end of all very long bull market for both stocks and bonds. Companies would be wise and investors would be wise to prepare themselves for a downturn.

I appreciate your insight. This has been awesome. You make comments about the bond market and the common thing we saw the last several years, which is essentially companies taking on debt because of low interest rates, buying back stock. It’s essentially propped up in essence stock prices to an extent. Obviously, the consequences, loading the company with a tremendous amount of debt. With that, do you identify the bond market as one of those potential areas that could be the match for this turmoil or do you maybe see other areas that are out of sync or are unease relative to others? I’ve looked at what caused the crisis in 2008, 2009, where it was the mortgage market. Now looking at where we’re at, are you looking closely in the bond market or other sectors and areas?

If you look at the past financial crisis, it’s when the credit markets seize up, that things get bad. In other words, when people can’t borrow the money they need for a car or a house or to build their business or the money markets. If that all seizes up, if somebody throws sand into the gears of the credit markets, that’s when the financial crises are at their worst. I am very worried about that this time around. Bond prices are very high. Yields are very low and have been for close to ten years now. It’s dangerous to invest in the bond market right now. People can lose an awful lot of money even though it seems like it should be safe.

There are all sorts of excesses going on in the bond market. In the loan market, credit markets where investors are so desperate to get a higher yield because Treasury Securities are yielding so little that go, they’re taking risks without getting the proper rewards, as we talked about before. That is a recipe for disaster. The corporate bond market is now something like $10 trillion of issuance. It was $5 trillion in 2008. You’ve seen a doubling of issuance as a result of interest rates being low for so long. Bonds fluctuate in value as risks are perceived to change. Just look at the bonds of Tesla and GE bonds, it goes on and on.

Can companies turn things around and can discounted bonds be a good investment? Yes, but they can also be a bad investment. They can also go the other way and that happens often and repeatedly. I’m not sure what the catalyst is going to be. There are plenty of things that are going crazy now in the capital markets, in the debt markets. Auto loans defaults are at an all-time high. Corporate debt is at an all-time high. Defaults are relative lows and that means they can only go one direction. I’m worried about it. It could be like a broken clock that strikes twice a day too.

If somebody throws sand into the gears of the credit markets, that's when the financial crises are at their worst. Click To Tweet

The signs are out there. There are breadcrumbs everywhere. It’s just it hasn’t happened.

Nobody rings the bell at the top of the market. There are two sides to every part of the market. There’s always somebody every day, every minute. When a trade happens, there’s one person who believes that what they bought is going to go up from here. There’s another person that sold it because they believe it’s going down from here. That happens every minute of every day. The aggregate of all of the trading and all of the thinking and all of those bets is the market.

I’m not sure if you’ve read Howard Marks’ new book. I heard him speak and it was interesting where you had this whole emotion that helps human beings work in an emotional side and a rational side. You look at all the rational things that we’ve talked about. This doesn’t make sense. There’s very little rationale as far as why things continue to grow and not correct. It seems like most of that is driven by emotion and wanting more of this and more of that. Obviously, with the gains that the Primary Index has had since the financial crisis, I would say the average investor is continuing to ride the wave and don’t see that there is a crashing of that wave that is on the horizon. I think the greater the emotion builds, it will be interesting to see what happens this go around because the capital markets are a lot bigger than they were in 2007.

You can bank on the fact that it is going to happen, we just don’t know when.

I know that you’re always paying attention to this and your insight was hugely valuable. What are some ways that the audience can follow you or keep up with the analysis that you’re making on? What’s going on in the economy and in markets?

 

TWS 6 | Financial Crisis

Financial Crisis: Politicians certainly did not understand what goes on on Wall Street.

 

I have a website, WilliamCohan.com. People can follow along there. I have a new book coming out in July. Put Google Alerts up. Wherever it pops up, it will pop up. I’m a believer in organic, not feeding people what I write. If they come by it organically, that’s great. If they don’t, it’s okay. So be it.

Are you on Twitter or social media anywhere?

I’m on Twitter, @WilliamCohan.

Your insight is awesome. Obviously, you have the experience to back up why you think and perceive the way that you do. Keeping up to speed with what you continually see can be valuable for investors.

Thank you for having me. I appreciate it very much.

It’s been a pleasure. Thanks again, William. I appreciate it.

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About William D. Cohan

TWS 6 | Financial Crisis

William D. Cohan, a former senior Wall Street M&A investment banker for 17 years at Lazard Frères & Co., Merrill Lynch and JPMorganChase, is the New York Times bestselling author of three non-fiction narratives about Wall Street: Money and Power: How Goldman Sachs Came to Rule the World; House of Cards: A Tale of Hubris and Wretched Excess on Wall Street; and, The Last Tycoons: The Secret History of Lazard Frères & Co., the winner of the 2007 FT/Goldman Sachs Business Book of the Year Award. His book, The Price of Silence, about the Duke lacrosse scandal, was published in April 2014 and was also a New York Times bestseller. His new book, Why Wall Street Matters, was published by Random House in February 2017. He is a special correspondent at Vanity Fair and a columnist for the DealBook section of the New York Times. He also writes for The Financial Times, The New York Times, Bloomberg BusinessWeek, The Atlantic, The Nation, Fortune, and Politico. He previously wrote a bi-weekly opinion column for The New York Times and an opinion column for BloombergView. He also appears regularly on CNN, on Bloomberg TV, where he is a contributing editor, on MSNBC and the BBC-TV. He has also appeared three times as a guest on the Daily Show, with Jon Stewart, The NewsHour, The Charlie Rose Show, The Tavis Smiley Show, and CBS This Morning as well as on numerous NPR, BBC and Bloomberg radio programs.
He is a graduate of Phillips Academy, Duke University, Columbia University School of Journalism and the Columbia University Graduate School of Business. He grew up in Worcester, Massachusetts and now lives in New York City with his wife and two sons.

 

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