How to Hedge Against a Recession w/ Russell Grey (Part 2 of 2)

0:10
Lane. Did you ever get a copy of the report we did called real asset investing? I think I did. I gave that presentation at the New Orleans investment conference in 2013. And I wrote the report shortly thereafter, and I chronicled first three or four years from China from 2009. To the time I wrote the report at the end of 2013, I chronicled all the moves that China had made to supplant the dollar to de dollarized the world to unseat the dollar as the world’s reserve currency. And they’ve solicited a lot of partners. Russia has sold all of its treasuries and bought all gold. There’s a reason we’re upset with China and Russia all the time. They’re anti dollar. So you and when you understand gold oil and the dollar, then you will understand geopolitics and all of this stuff about human rights and nuclear weapons and all that stuff, which doesn’t ever seem to make any sense gets thrown into the car. I’m not saying those things aren’t valid, but I believe that 90% of what we do geopolitically has to do with gold oil and the dollar. And when you look at it through that paradigm, you’ll you’ll see it and so then in 2018, at the future of money and wealth conference, I did a follow up presentation where I kind of updated that real asset investing report and talked about everything that China had done up to 2018 and how vulnerable the United States was becoming to having the dollar unseated. Well, now we’re teed up and so I think that the the challenge is if it was anybody except China, who’s completely vilified right now, and maybe justifiably so I’m not saying that the vilification of China is unjustified. I’m not here to defend China by any stretch of the imagination. But Kiyosaki taught me that there’s always more than one side to the story. And so all I know is that China is the best position to knock the dollar off, but I think right now they’re a bit of a pariah. And I I don’t know that people would be willing to trust China at this stage of the game, but they would be willing to trust gold if somebody, anybody if a coalition of countries came out and were to issue some form of a currency and backed it by gold, I think you would see the dollar collapse almost immediately. And I think any investor who understands what’s going on at the macroeconomic level and understands history, and that this aberration of history we’ve been in since 1971, where gold wasn’t behind paper currency realizes this is an experiment that probably isn’t going to end well. And the rest of the world is already used to navigating around the dollar. But Americans mostly only think of life net worth business, everything in terms of the dollar and they have no plan B and I think now is the time for Americans to start studying and to start really considering a plan B. And the good news is real estate investors are in an excellent position because they’ve got a big part of the equation figured out they know how to do the real estate component. They just need to learn how to add the gold component and now you can hedge against both inflation and deflation and and if nothing happens, you know worse off. And if something horrible happens you’re going to be in better shape than most

3:12
of your body it is is pretty much a fixed is a commodity, it’s packaged. Come on, it’s a lot of different commodities on one hand cash flows.

3:18
Yeah, Real Estate’s great. The challenge with real estate right now, where you have to be careful is that there’s a lot of error in the pricing. So I have a saying that says unrealized gains aren’t really real. They’re not right. I mean, the market gives you equity the market takes away we wrote equity happens, which is all about the price of properties go up denominated in dollars because the purchasing power of dollars fall over time. But if you purchase property with debt, then you actually make a profit over time because you’ve shorted the dollar with debt by bringing dollars from the future into the present and buying an asset and then you get to pay back later with lower dollars. You know, over time the rents go up over time the equity grows so how can I pay my house off fast buy the house now. Next Door using interest only loans on your house and the house next door, wait 10 years and at 7.2 annual appreciation, your house is going to double in price, sell the extra house and pay off your house and you never have to amortize one penny,

4:13
I’ll kind of summarize that in a different way for folks. I mean, people always ask like, well, should I do a 15 year mortgage or a 30? I’m like, well, you take as much debt as you can, because that’s the whole point of why you’re doing this

4:24
with the lowest required payment possible. Because you can always accelerate if you want to, but you just you lose control of the property. If you lose control of the cash flow. And the bigger the payment, the harder the cash flow is and if you know what’s the point in putting any more equity, I love interest only loans when you can get them and I love long term amortizations which mean your amortized loans have lower payments.

4:45
And this is why we’ve been brainwashed that you know that’s bad because the banks want us to pay off the debt. And actually if you want to hedge yourself or something that’s coming in the future, you want to take as much debt now so that when inflation’s happens it’s worth barely nothing.

4:58
Yeah, banks don’t want you to pay off the debt, they want you to roll it over. They want you to stay in debt because that’s how they acquire streams of income right? investing isn’t about buying low and selling high investing is about acquiring streams of income, what I call acquiring the efforts of others, you start a business not so that you have a lot of work to do every day you start a business so that you get a lot of people to go to work for you every day, and you make a profit on their efforts. The more people you have working, the more profits you make. If you have a sound business model, when you go to invest in real estate, I’m not interested in owning a property that goes from 100,000 to 200,000. I’m more interested in having two $100,000 houses that have two tenants instead of one because now I have twice as many people working for me right it’s you accumulating the efforts of others will debt is a way for bankers who don’t want to get their hands dirty to accumulate the efforts of others. So they want to lend but they use amortization schedules where all of the interest is front loaded if you pull up an Excel spreadsheet and do the loan amortization template that they have in Excel, and just Play with the numbers, look at how much what percentage of your monthly payment in the first five years is interest, most of it. So that’s all free money to the bank, it’s all profit. And if they can convince you five years later to refinance, they start that all over again. And so you know, it’s not that they want you to pay it off. They don’t want you to pay it off. They want you to roll it over, they start the loan over again. So interest rates go up and down to entice you to continually roll the debt over and start your amortization schedule over again.

6:30
They can pick up those origination fees for that.

6:33
Well, and then of course, yeah, the origination can mean I was in that business. You know, you make money on the church or the sound money world. You don’t want to be in debt. You want to be a lender, but in the world we operate in because our money itself is dead. If you pull out $1 bill or a $20 bill or $100 bill, it says right across the top Federal Reserve Note, well, we all know what a note is, are you when you buy a property and get a mortgage, you’re signing a promissory note, which is a promise pay a note in financial terms is a promise to pay. A Federal Reserve Note is a debt the Federal Reserve owes you money when you get that they owe you money. That’s why their balance sheet expands with the debt they’ve accumulated. That’s how much money they’ve printed. The problem is there’s no way to pay it off. It’s irredeemable. All you can do is trade it with other people that are locked in the debt aquarium, we all live in an environment of debt, there’s no way to get out of debt. So being debt free doesn’t work in a non sound money environment. I know a lot of people have a hard time getting their mind around it. But really, the key is to use debt strategically to outpace the devaluation or the inflation as the currency loses value because they’re printing it, you have got to be invested in something that is going to increase your purchasing power faster than you’re losing. And that’s why you have to use vehicles like leveraged real estate and for your liquid, you have to incorporate things like precious metals which hedge against that decrease precious metals are not an investment. It’s just an alternative to cash. That puts you outside the dollar and protects you from the dollar falling. But you have a highly liquid investment and you can go back into dollars whenever you want. You can borrow against your gold the same way you would against your property if you want except you don’t have to qualify, you can pivot into any currency you want. I mean if all of a sudden somebody came out as they suggested and say China announced a gold back, you won and all sudden you one way up in value and the Dollar fell. If you’re sitting in gold, you don’t care. You can trade your your gold for you want, but if you have dollars you just lost. It’s like the people in Venezuela that had dollars when the bulevar collapsed, they weren’t hurt. The people that had gold and dollars, which were considered safe forms of money in Venezuela weren’t hurt. But when the bulevar collapsed, those people were destroyed because it took a million bolivars to buy a roll of toilet paper.

8:49
So the way I personally play that is look at my checking account. It looks like them for I don’t have very much liquidity or cash ever. As soon as I get enough money, I put it into real estate right away.

8:58
No, I think I think this is a time To be liquid, I was playing that game running up into 2008. I was on the tail end of of what you’d call a real estate Bull Run. And then when the crap hit the fan, which it’s about to do, I was liquid, what I would be doing right now is looking at your portfolio and looking at everything, looking at your markets critically and asking myself, hey, if we have a severe economic depression, if this thing really is protracted, how is my market positioned? Is it a low cost of living? Is it a low tax? Is it going to be the kind of place that would be attractive for businesses and people who are trying to survive a recession? Are they going to move there and put upward demand pressure on prices? Or is it going to be a place that people are going to be fleeing? Once you’re inside the market? You have to ask yourself, what product niche Am I in? Am I catering to people who are getting weaker economically or my catering to people at the top of the market? And then if you’re at the top of the market or whatever price point you’re at compared to your competition, are you at the very, very top In the market, you always want to have enough people above you in a downturn so that as they become economically weak, they can move down and put upward demand on that spot where you’re at. And then the what happens is when that pressure from above comes down, it pushes the poor people at the bottom right off the bus and into the street. So you know, as those people start to fail, they get angry, they tear up your property. I’m not a big fan of D class for those reasons, especially an environment like this, because I’ve been with respect, but desperate people do crazy things. And when they don’t understand what’s happening, they lash out at people they perceive are victimizing them. And when you’re being evicted from your home, the landlord is the bad guy, and they’re going to destroy the property and pour cement down the toilet and tear out your air conditioning and sell your appliances. I mean, and we’ve had people do some of that stuff, right? So I’m not a fan of that. But if you can be in that spot where in good times people are moving up from below you and in bad times and also in good time. All the new build competition is happening at the top of the market. in bad times that people who are above you are coming down to the middle. So that middle market, middle product, niche, middle price point all the way across the board. And then where you have a great team. So if I’m if I’ve got the right market, the right product niche where I’m serving the right demographic at the right team, then I’m going to really fortify my focus on those properties, make sure that they’re operating really well that I’ve got good long term financing in place. If I have equity, I’m going to extract as much of it as I can get before the market takes it for me. And then I’m not going to roll that right into more real estate, I’m going to be liquid, I’m going to get some dry powder ready, because there’s going to be distress coming in this cycle. And I want to be prepared to take advantage of it. Anything that I have that’s marginal, I’m probably going to try to get rid of marginal markets, things run by marginal team things where I’m in a product niche that I think that group is going to be marginalized and then I’d start you know, looking for you Emerging markets like I talked about at the top of the show, where may or maybe we’re doing this pre mic. But you know, one of the areas that I think is really intriguing is how human behavior changes in the wake of a crisis. So you’ve got people that have just discovered that I don’t need to live in a 3000 or $4,000 a month house or apartment close to the work center, because I don’t need to go to the office anymore. I can actually move out of state from a high tax state to a low tax state, I can go from a high cost of living state to a low cost of living state, and I can go to my employer and they can pay me 10 or 20% less when I can have job security. And yet my my purchasing power, my true living standard goes up. I’ve been reading articles and I’m sure you’ve seen them as well, that demand for properties in rural areas is booming right now. And the cities are struggling. And I think that some of this behavior is temporary, but some of its permanent. People have discovered that they can shop online people that maybe were hesitant Didn’t to do that or didn’t like to do it or the habit of going shopping now haven’t been able to, I think retail is going to change, and it’s going to be a bit of a permanent change. I think a lot of businesses aren’t going to survive, they’re not going to come back. And risk capital is not going to be willing to try it again. So I think, you know, there’s going to be communities that are going to change. I think that manufacturing we just discovered, and I think we talked about this pre recording, you know, we just discovered the United States that we manufacture some critical meds, or we have critical meds and we have critical medical equipment that’s manufactured in a country that wasn’t on our side when we were in a crisis that were hoarding for themselves. And we realized that you know, our critical supply chain items, maybe need to come home. Well, when those factories come home. The question is, where are they going to go because they’re going to bring jobs, they’re going to bring demand for working class real estate. There could be some really affordable markets right now that are being overlooked. You know, when you have plenty of time, but when that starts to manifest the people who are brave and bold Aware and prepared and part of being prepared is being liquid and having boots on the ground teams ready to go, then you’re going to be able to move into those markets ahead of the curve and ride that wave up. So I think there’s going to be lots and lots of opportunity, but I would not be spreading my equity thin across a portfolio with high ltvs, even though I can get great interest rates, because all growth is at the margin, but all recession is at the margin. So if you’ve got an 80% loan to value on a property, you got 20% equity and the market receives it could receive 20%. And now you have no equity. So if you say I’ve got really tight control of the cash flow, and I don’t care that I have negative equity for five years, because I care what the property’s worth in 10 or 15, then then maybe, I mean, if you buy right, but I would think right now would be a time to be thinking about developing some liquidity and I would divide that liquidity up but and of course, I’m not giving anybody investment advice. I’m just a guy with opinions, but I’d be thinking about giving some of that liquidity up Between precious metals and dollars.

15:02
What about what about life insurance? A lot of guys like to do the infinite banking.

15:06
Yeah, so I actually just did a boots on the ground interview yesterday with Patrick Donahoe mutual friend. And we were talking a little bit about that. And what I like about that is that once again, it’s a place where you can have equity equity in these policies in these annuity writers, and you can borrow it back out without having to qualify or being obligated to make a payment. So if I could pull equity out of a property and sequester it from the property, especially properties with non recourse loans, you know, if the crap really hits the fan, then I’ve got the money out, and I may lose the property, but at least I have the equity. So insurance policies are private, I would definitely have assets outside the banking system. I think counterparty risk is another major thing. I asked Patrick to do some work for me and get back to me, I want to really understand counterparty risk, you know, what kind of shape are these insurance companies really in? I know the banking sector. system is in bad shape, but they’re backed by the FDIC insurance companies aren’t but they have stronger balance sheets. Okay, well, anything over $250,000, I would rather go with the insurance company’s balance sheet than the bank’s balance sheet. Because once you exceed the FDIC insurance, I don’t think banks are a very good place at all, to be lending money, because effectively when you deposit money in the bank, you’re lending them money and you’re an unsecured creditor. And I think a lot of people think money in the bank is safe and secure and it isn’t.

16:26
And so that strategy that we’re kind of talking about you guys want to read out more about it simple passive cash flow, calm slash banking, but just to kind of wrap things up here, Russell, just looking at your crystal ball, we’re gonna see some negative rates coming up.

16:39
Well, here, here’s the challenge. They don’t want to go negative. They’ve said they won’t go negative, but what they say in what they two are two different things. I think interest rates are in a black hole and they’ve crossed the event horizon. So if you’re familiar with that black hole is intense gravity. It pulls in everything so much at the event horizon, even light cannot escape. In other words, there’s no No escape. Once you cross the event horizon, you cannot get out

17:03
or in this case, the magnitude is so big your debt payments are just going to engulf itself at some point.

17:08
Yeah, exactly. So if interest rates were to go up, then the system would collapse because of the inability to debt service and the debt would go bad. Now, we’re papering over a lot of that right now with printed money. And so the big challenges we discussed earlier, and something that your listeners, I encourage them to spend some time studying and thinking about and learning to understand is that to save the banks and the credit markets, the Fed appears to be willing to sacrifice the dollar. And if you don’t have a hedge against a failing dollar, you’re vulnerable to one of the more probable outcomes. At some point, it might be a year it might be three years, it might be five years, but this is the path we’re on unless something substantial changes. We’ve reached the end of a 40 year cycle of falling interest rates. Paul Volcker raised rates up you know into 21% Prime in the early 80s, that was the big reset. So we went off the gold standard in 71. The dollar collapsed. Gold went from $35 to 850, hyperinflation and stagflation and sued, people dumped dollars. And in order to save the dollar, we took some extraordinary measures we’re paying the price for right now, one of which was we exported a lot of our jobs to china to take our labor costs out of our products and hide the inflation. But it came at a very, very big cost American prosperity. We replaced productive prosperity with that. That’s the consequence of what we did in the 70s and 80s. We jacked the interest rate up to 80 to reset the system, and then we’ve been systematically lowering interest rates ever since as we’ve been expanding debt. We are at the end of that we were bouncing off the zero bound for seven or eight years before they finally tried to raise them and they were only able to raise them a half a point before they had to abandon and go back to zero rates. We are absolutely 100% on life support and that life support is coming at the expense of the dollar. So I don’t think interest rates can rise, will they go negative, I think we’re probably going to get a system reset. before that happens. I think we’re in the process of setting the table for that right now. And I think that it’s probably going to come a lot sooner than all of us recognize. So if this is your first time hearing all of this and really getting your mind around it, welcome to the club. You have a lot of homework, but you definitely not business as usual. You definitely do not want to listen to the talking heads on mainstream financial news. They don’t understand real estate investors. They don’t understand real estate investing. They never talk about counterparty risk. They seldom talk about the danger of a complete collapse of the dollar. And all of those things are the things that are more likely my opinion and worth exactly what you paid for it, but it’s my opinion than some of the other risks and I definitely would not be feeling safe with any amount of cash in a bank beyond the FDIC limit.

19:59
Do you own Any paper assets stocks, mutual fund, I don’t

20:03
talk a lot about what I own only you can make that a policy. But if I were to own paper stocks probably would be mining shares. In other words, what I’m interested in, when you’re buying stock, you’re buying ownership shares in a company and their asset is usually their brand and their customer list and their goodwill and their productivity. But businesses are being disruptive right now. So I’m interested in businesses whose core business is very insulated from being disrupted. If I go buy shares in a mining company, I’m buying a part of their assets is the metal that they have in the ground. And of course if I buy it when gold is 1700 dollars an ounce and gold goes to $3,000 an ounce like Bank of America thinks it will then all sudden the value of that company goes way up because their inventory just went way up. And I know there will always be a bit on gold agriculture’s and other thing that I like if I found a publicly traded company or even a private company where I believed in the management and I was buying land productive farmland with a good team in place, I think I’d be interested in that I’m not a guy that is like a tech stock guy. I’m not a momentum guy. I don’t believe in buy low sell. Hi, I’d be looking for companies that have proven track records of making profits and paying dividends, kind of the Peter Schiff mo but definitely not a fan of buy low sell high. I think that that is a false strategy that was created to serve not the investor because when you buy low you generate a commission. When you sell high you generate a commission and a capital gain, which means you pay tax and then you create cash temporarily but it creates float in the banking system. So who benefits Well, the brokerage gets the entrance and exit mission. The government gets the capital gain tax and the bank to use and lever the money in the float. What do you get from cash to asset to cash at the end of the day, you didn’t have up with any more cash, which they’re printing so to me by Lowe’s hi is with him and you’re being suckered into feeding the varying that’s that’s robbing you blind accumulate the efforts of other accumulators of income at lawns, buy rental property and keep your liquidity and for convenience sake, most of it outside the banking system for safety sake, and some of it is the dollar to hedge against what could be a collapse. The dollar is the strongest currency in the world right now. But it also has the farthest to fall. If it gets knocked off. It is a long fall and I don’t think I don’t think enough people understand the potential for that risk or how to navigate it.

22:40
All right, well said Russell, appreciate you coming on, check out the real estate guys Radio Podcast. If people want to get a hold of you guys, what’s the best way to find you? Oh,

22:49
well, I mean, you mentioned the newsletter at the top. So if they’re interested in getting on that, it’s easy. Just send an email to newsletter at Real Estate guys. radio.com. I also mentioned the real life asset report if you’re interested in seeing that if you send an email to real asset at Real Estate guys radio.com you’ll get a copy of that otherwise you know where easy to find real estate guys radio.com we put out a weekly podcast we are starting to move into the 21st century get our website updated and or relaunch our YouTube channel with a lot more content but right now primarily the podcast and our website got a big special reports library so love to

23:23
have people check us out All right, guys. Well, it’s not all doom and gloom, just simple passive cash flow pick up deals at cash flow and it’ll be all right yep, make it easy.

23:30
Yep, keep it simple.