Mind Pump: Raw Fitness Truth - 2082: Is Your Bank Safe? Chris Naghibi

Starting point is 00:00:00 If you want to pump your body and expand your mind, there's only one place to go. Might, hop, might, hop with your hosts. Salda Stefano, Adam Schaefer, and Justin Andrews. You just found the most downloaded fitness health and entertainment podcast in the entire world. This is Mind Pump Right. Today's episode we talk about the economy. What is happening?

Starting point is 00:00:23 Is it going to crash? How to protect yourself? So we took on this episode an expert, our friend Chris Nihibi. Now he is an attorney. He's also the executive vice president and chief operating officer of First Foundation Bank. He's also the host of an awesome podcast

Starting point is 00:00:38 called the Higher Standard Podcast. Anyway, this guy knows what he's talking about. So we had him on the podcast to ask him everything economics, what's going on? Had to survive it. What to look out for. So we know you're going to enjoy this episode. This episode is brought to you by NCI. And right now, they have this incredible offer. If you want to become a level one certified nutrition coach with them, you can do it over a weekend, over a weekend. You can get certified. Go to NCI-minepump.com-flourtslashweekend for that offer. We're also running a sale this month.

Starting point is 00:01:11 In fact, we got a new program launch. We got a brand new program coming out. Maps, bands available right now. It's a bands-only program. It's advanced, build muscle, burn body fat, and it's for those of you that like to work out hard and like to work out every single day. This is not your typical band based workout.

Starting point is 00:01:28 And because it's a brand new launch, it's on sale, and we got some giveaways. So you can get maps, bands, for $67, that's $30 off the retail price. Plus we're going to throw in two free ebooks, the ultimate bodyweight training guide, and quick meals. This is the first cookbook my pump is put together. So you get those ebooks for free with the $30 discount for the brand new program, Maps Bands. If you're interested, go to mapsbans.com

Starting point is 00:01:54 and then use the code Bans30 for the discount and the free ebooks. First off, Adam speaks so highly of you. So before we knew who you were, we looked at your stuff. I mean, you have the gift of communicating complicated, Adam speaks so highly of you. Before we knew who you were, we looked at your stuff. I mean, you have the gift of communicating complicated, I say complicated to the layman, right, to the average person, complicated topics and issues and ways that people can understand,

Starting point is 00:02:15 which I think is a gift for someone who's, you know, well versus you are in your space. But for our listeners, you might not know who you are. Well, he has the resume, too, right? So you went to school, lawyer, banker, real estate broker. Yeah, what do you do now? Resilience, a little bit of money, kind of, yeah. That's all, most of that.

Starting point is 00:02:33 Yeah, that's for you, Sid. It's a neat title. Yeah, it's working with you. I was actually really terrible in school, and I didn't think I'd be any of those things. Really? Yeah, I was terrible. Okay, wait, you said you went to Yale, didn't you?

Starting point is 00:02:43 Yeah, the last stop was at Yale, but I actually applied sarcastically to Yale. I didn't think I'd actually get it. It was a joke. It was an executive education program thing. And I was like, okay, well, if I get in this, maybe I can segue to a master's or something and later on.

Starting point is 00:02:59 And I'd say, I'll just apply and see if I get it. And they literally got back to me like, you're in and I'm like, what? I was like, oh, and I told my wife, I'm like, do I go now? She's like, you kind of have to go now. I'm like, oh, okay, I guess I'm going this is a several this is like five or six years ago. So I was a little older, but it was a definite Definitely a different visual going when you're older to school and choosing to do it and it really being your money as opposed to like college Where you have a totally different real so tell me I actually don't know in detail your where you have a totally different real. So tell me, I actually don't know in detail

Starting point is 00:03:24 your educational journey. So it sounds like you went to school, got probably your bachelor's early in life then later on, like, what's the, what would that look like? Yeah, there's gonna be several jokes you're gonna make along the way. Oh, okay, that's great.

Starting point is 00:03:34 I'll give you full disclosure. All right, not the best journey. Let's see, I went to, after high school, I didn't know what I wanted to do. My dad, it was typical Middle Eastern parent, right? Gotta be Dr. Alloyer and I'm like, I suck at both. So this is not a good trajectory. My dad would have been a mortgage broker's entire life.

Starting point is 00:03:48 And I'd always worked for him on the weekends and at nights and everything else. And he always tell me he'd pay me, he'd never paid me. So he keeps working. So, you know, love my dad. I mean, we still work together this day. He actually runs my pro bono law firm and we do some stuff together.

Starting point is 00:04:01 But I graduated and I went to junior college. I thought I was gonna play basketball. And I was moderately athletic looking back on it. I probably had the ego of somebody who was very athletic, but I thought I could do a lot better than I did. I played in some pro stuff here and there, but I really let sports kinda get in the way of where I wanted to go.

Starting point is 00:04:17 And looking back on it, I think it was actually a good thing because it gave me the time to kinda figure out what I didn't like. Yeah, matured. Cause we all feel mature as hell when we're 18 or 19. And you look back on it when you're in your 40s and go in like, oh, yeah, that was lucky I didn't die.

Starting point is 00:04:31 But so I had two choices after junior college, which was not mapped out, was I could go to another six months of junior college where I can go to USC. Well, at the time, six months seems like an eternity. So I chose to go to USC and take on a ton of student debt. I got a bachelor's in science, so I thought I was going to be a doctor, right? Well, at the time, six months seems like an eternity. So I chose to go to USC and take on a ton of student debt. I got a bachelor's in science so I thought I was gonna be a doctor, right? Well, I took organic chemistry,

Starting point is 00:04:51 I knew immediately this was not for me. Like the level of complexity, I was like, why am I doing this to myself? And then my friends around me, you're an idiot, why are you doing this? I'm like, I don't know. I came home and told my dad, like, I'm not gonna be a doctor,

Starting point is 00:05:01 I'm gonna go figure something out. Maybe I'll work in finance. And the whole time I'm working, full time at this point in finance and mortgage making. But I only knew the single family side. I wanted to know the commercial side, and I wanted to know how big conduit deals were sold in the secondary market,

Starting point is 00:05:13 and how all these complicated things happened, and honestly, nobody could tell me. Not even my dad had been in the business for 30 years. People get really siloed. They love what they do, and they make money doing it, and they're like, why don't you know about all this stuff? Sure.

Starting point is 00:05:25 So I wanted them more. My dad tells me one morning, he wakes me up super early, hey, you're gonna take the L-Sat, you're gonna go to law school. And I'm like, no. Couple weeks go by, he wakes me up with McDonald's, which I knew was a problem. Gizmi McDonald says you're gonna run an errand. He drops me off at a junior college and gives me a pencil and says,

Starting point is 00:05:41 you're taking the L-Sat, it's over there by. Close the door, it drives off. There's no cell phone or nothing at this time. I walk in and take the LSAT and I know nothing about it. And now I know there's several sections, they're all timed. I'm on the first question of the first section, I tell them there's like 10 minutes left, they're right on the board and I freak out and I take it.

Starting point is 00:05:58 I got my results back and they were very good. Really? But I didn't know what my results like were good. I didn't know the scoring spectrum and none of that. I hadn't really thought about it ever. I was admitted to law school within the week. Wait, okay, wait. Wait, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey You had to be a doctor or lawyer in his culture and I just happened to have the attitude for this. Now how did you know the stuff that would be on that test just through the work that you do?

Starting point is 00:06:27 That's the fallacy. I think a lot of the standard I'm testing for the LSAT. It's not about material that you know. It's just about logic. So if you can use logic and reason to get through things, that's pretty much the test. Now a lot of people study for it because they're trying to improve their score incrementally

Starting point is 00:06:40 to get a tiny bit better, to get into a better school. My dad was actually on the board of a really small, not high-end school called Trinity Law School, which is where I went to law school. I still didn't want to go. My dad actually went to law school the same time I did. Oh, wow. So that was weird.

Starting point is 00:06:54 My dad's like five, four, tells everybody's five, eight, it looks like Danny DeVito, but look what you're doing. Oh, yeah. I'll show you the photos afterward. So it was your mom's son and son and son. I'm trapped. Yeah. And here's the joke so I was looting to earlier, mom's six, four. No shit. Your mom is six, four, and your dad's like Danny's so is your mom said and here's the jokes I was looting to early mom's a mom six four no shit

Starting point is 00:07:06 You're more than six four and your dad's like daddy to be to do it. I walked in on the other ones It was the most messed up visual you'll ever I want a picture for the YouTube channel. We're gonna get a picture of mom a dad's in my brain Wow, there's like a foot difference. Yeah, they're very for 27 years. They're not divorced and they've moved on and everything else. But yeah, that was my life growing up where people would be like, that's not your dad and they go, oh, oh yeah, okay, I get it now. Wow. You're not walking the world to wild.

Starting point is 00:07:33 That's wild. So you go, you guys go to law school together and you're like stepping together and stuff with your dad. God, it was so awesome. Throw spit wads at your dad and say that every possible bad thing you think could happen about going to school your dad happened to me I was show up to class late or I'd be hung over and my dad to be in there all preppy and a tie because he went to work that day We're both working in finance from the day and going to law school at night

Starting point is 00:07:54 And he's like yeah my son's an idiot and let me let me do that and we answer that for you like in the middle class Did he really do that? Yeah, and then everywhere, and everywhere you walk in the school, they're like, oh, I think this goes to like the cute father inside. And when I was like, yeah, I had my son, the moron, it wasn't belong here.

Starting point is 00:08:11 Like it's a whole thing. You had to answer questions for you. Yeah, like, that's like a sitcom waiting to happen. Oh, yeah. It's funny until it's in your actual life. That is a sick, that is a sick comedy to happen.

Starting point is 00:08:19 And then I imagine you're getting your dad getting better grade than you going, I work full time. I pay all the bills and this is the things I get. And you're just like, I I was drunk I don't know So you did that and then what you graduate and take the bar and so I took the bar the first time I failed I failed by like seven points and if you don't know when you take the bar someone actually Physiologically sits down when you get that close to passing and they go okay this person

Starting point is 00:08:41 An it's a person attorney or not so someone makes a decision discretion an, is this person an attorney or not? So someone makes a decision discretionary if you should be an attorney or not and somebody decided that I wasn't there. Looking back on, I was really pissed off but they were probably right. Well, explain how that works. So if you're that close, they can decide to let you pass. Yeah. So back then it was a three day exam.

Starting point is 00:08:56 I think now it's two days, but back then it was a three day exam and you sit down, you do the whole blue book thing and there'd be a lot of like written material. So it took a lot of time to go through it. And because some of it is subjective, based on somebody reviewing your written essay, as opposed to multiple choice questions. That's why, okay.

Starting point is 00:09:09 Somebody would go, okay, in the cumulative numbers here, this person is within like 10 points of passing, should this person be an attorney, yes or no? And then it would be like a no, and then you get your blue books back later on if you failed, and if you passed, you never saw it. So I imagine that's only if you're within a range, right? If you fail, miss your point.

Starting point is 00:09:23 I'm talking about 10 points, I think it's okay. So there's like a little buff for points, I think it's okay. So there's a little buffer there because some of it's subjective. Yeah, so I actually never intended on being an attorney after that. And I, actually, if the time I was clerking for a law firm at night, I was working

Starting point is 00:09:35 to finance for the day, clerking for a law firm at night. This point, I've now moved on to commercial real estate and I'm trying to figure out as much as I can about, you know, retail and office buildings, and all this stuff. And the attorney that I'm working for is, Hey, you're doing such a great job. Clarking for us, we're going to hire you as an attorney when you pass the bar. We know you're going to pass the bar.

Starting point is 00:09:50 Well, oops, he was wrong there. But you got this whole salary negotiation thing. So I come in one day in the middle of the day at lunch, leave my other job and I go there. And he offers me $55,000 a year, the starting salary. And how old are, like, how long does this, this is- I was, see I graduated law school at 23. I think this was around 24, so- A decent money at that time.

Starting point is 00:10:14 Yeah, I mean, it's not terrible, I'm not falling. But I was making three times that in commercial. I was just gonna say, that's not much if you did, especially after you went to law school and all that. Yeah, so I was actually believing in not the hardest part about me getting hired in commercial real estate is that people saw me having a lot of agree in my resume and they're like, oh, he's just gonna pass the bar one day and he's. Yeah, so I was actually believing or not the hardest part about me getting hired in commercial real estate is that people saw me having

Starting point is 00:10:26 a lot of agree in my resume and they're like, oh, he's just gonna pass the bar one day and he's gonna leave, so nobody would ever hire me. Oh, I see. It was a huge, I actually took that off my resume. Cause they thought you were just gonna balance this. Yeah, I thought you were gonna be gone. Oh, interesting.

Starting point is 00:10:36 So the only reason I actually got hired true story was because when I took it off my resume, I went in for this interview and the girl who interviewed me who's still a great mentor of this day, I, she could tell something was off and what she knew and I didn't tell her but until afterward when she asked it was going on, I didn't know anything about commercial real estate but I really wanted the job. So I went out and found a book at the local Barnes and Noble was an MBA book on commercial real estate. The thing covered a cover the night before it didn't sleep. Went in for the interview and lied my ass off the entire time. I was like, oh yeah,

Starting point is 00:11:03 I know how to do that. Yeah, I just brought my can do that. I can do all that. I know, yeah, sure, that service, sure. Buying properties, yeah, if I can, yeah, rent roll, yeah, I got that. And she closed the door and she asked me to check it. That was a really good attempt. And all of that was bullshit, but you're lying. And I go, yeah, oh, you give it up.

Starting point is 00:11:19 Her daughter had gotten a lot of agree and had to move to Australia to get a job because she had the exact same pressures that I had and that was the only reason that she hired. Oh, so she empathized with you. She empathized with me because of her daughter. But I mean, how small and weird of a world that that would have worked out. Right. But at the time I was making three times as much there than I was in an attorney and at

Starting point is 00:11:38 that point I decided, you know what, I'm just never going to do this again. So I just went full into commercial real estate and that was my focus for years. Years. And then you decided to go back to, or go to Yale at some point. So I got really, really, working in corporate American become very easy to get complacent, right?

Starting point is 00:11:57 You do your thing, you go home and like, you live your life. You pay check and stuff. Yeah. For a while, I was very much addicted to the gym. Like, go to the gym after work and I would, I would, I would, I would lift like a bodybuilder every single night, like that was my thing. But I want to say more.

Starting point is 00:12:08 It was mid 20s, we're talking about right now. Like mid late 20s. Okay. Like probably closer to late 20s. I wanted, I wanted a little bit more, right? So at about 26, yeah, 26, October, no, 27. So October, 2007, we started the bank. So the company that was at, that was working as an underwriter,

Starting point is 00:12:25 they had closer doors. You're the height of the great recession in 2007, and we worked for a company that was a commercial arm of a single family resident shop, and they were very much impacted. They went from trading publicly down to the pink sheets and then eventually delisted. And as a result of that,

Starting point is 00:12:40 they gave everybody in our group a division of 60 day war notice. And 60 days, something changes, you're unemployed. So for 60 days, we went over like resume building workshops and trying to network and get everybody to change. Just getting a change. This is a huge process. Yeah, you're not going to change, but the writing was in the wall, we kind of knew, which

Starting point is 00:12:55 is ironically very similar and scary what's going on today on the economy, but we'll get there. Yeah, we'll get there. But in 2007, we start the bank and I've been working 16 hours a day. I want to do something different. I decided at some point that I want to go back and take the bar again, but I'm working full time and this is a start-up institution. So I decide that I'm going to study for six months and I was getting to the office two

Starting point is 00:13:20 hours before we opened the doors and I was staying to 11 p.m. This life I was super in my desk and studying and then every weekend for six months straight with no breaks, like I didn't do anything else. That was all I did. Took the bar, passed the bar. Only because I wanted to have it on my resume and I knew that my wife and I were probably gonna have kids

Starting point is 00:13:34 at some point. So I figured if I got out of the way, my son could never look at me and say, Dad, you didn't finish that. And it really came down to something as stupid and trivial as that. And then I thought, okay, well I passed, I'm gonna use it for something.

Starting point is 00:13:44 So my father and I decided we would start at pro bono law firm where we do most of, most of what we do is freeze. We do some stuff to cover bills that might have some, you know, small financial benefit for the company, but it's usually just to pay for other people's freely. What was the motivation to do pro bono? Just, is it just to help others? Was there a voluntary aspect? Like, what's the, in the beginning, I thought it wasn't talented enough to represent people.

Starting point is 00:14:05 Oh, so you thought it was gonna practice? It was gonna practice. It was gonna be simple. I'm just gonna practice for over the people. It was a lot more fulfilling than I thought it was gonna be. Frankly, doing it is, I was like, you know what? If I can help people and it feels this good, like why not just keep doing it?

Starting point is 00:14:18 So I said, I wouldn't do family law, I wouldn't do bankruptcy, and I wouldn't do criminal law. Other than those three, I'll do anything that if it helps people. But now I'm at the point in my career where I needed more. But I didn't wanna have law. Other than those three, I'll do anything that if it helps people. But now I'm at the point of my career where I needed more. But I didn't want to have an income thing on the side, income money making thing on the side because seven or eight years after we started the bank,

Starting point is 00:14:33 we took a public. Now I'm an executive at a publicly traded company. Now there's scrutiny on everything that I do. And now my outside endeavors could be looked to be a conflict of interest. So I look at it as, now to get into that for someone listening right now, because we have listeners who aren't familiar with that space,

Starting point is 00:14:49 because you work currently in one of the most regulated, scrutinized spaces, that basically that exists. So you're an executive at a bank, you're doing pro bono work, you could potentially do pro bono work for someone as a favor, who may do a favor for you. So this is the whole thing. They're watching everything, so you have to be very, very, I have family that lives in finance.

Starting point is 00:15:10 It's like, I bought them a gift card from Stockpile for their kids. They couldn't even use it because they can't use the stockpile because they have to get approval from this and that. And I'm like, my God, you guys really? Yeah. So heavily regulated. You're super, everywhere regulated. It's a problem. Yeah. So that's why for someone listening right now, it's like, my God, you guys really? Yeah, so heavily regulated. Super, everywhere regulated, it's a problem.

Starting point is 00:15:25 Yeah, so that's why for someone listening right now, it's like, and it goes beyond that. So like, let's think about it in the context of if someone comes into my office and they say, Hey, Chris, you're my friend, can you represent me and they happen to be an employee at the bank? If I don't take your money, I don't think anyone has a problem. They look at it and they go, okay, you know what,

Starting point is 00:15:40 he just did this out of the goodness of his heart and he took his time and did it, it's all good. The second I take your money, it now becomes, is it a conflict, did you disclose it? Is it on the public filings, the proxies? You know, should the shareholders be aware? Because my main fiduciary responsibility is to protect the shareholder, right?

Starting point is 00:15:56 And that are people who buy and sell the stock who I need to never may have met. So I need to do the right thing for the company as a fiduciary at all times, which can be a lot more complicated than it sounds. You really have to be vigilant over the types of relationships that you currently. If it wasn't for you guys, truthfully, I probably wouldn't even be here today because of what's going on in the banking sector. But, you know, I love you guys, and I'm a huge fan of the show, so I'm not really worried about the scrutiny.

Starting point is 00:16:16 But right now, everything that a banker does is, okay, is there stock going to go down? Is it not? There's a lot of regulatory concerns that are going on, and it's been the business has been that way for as far back as I can remember. And I would have gone worse. I would imagine that you've probably gone through some shit trying to start a podcast. Oh, yeah. I would just got through depositions on a separate matter where during discovery, me having a podcast came out and the number one question right out the gate is, is it monetized?

Starting point is 00:16:41 Yeah. Oh, and I was like, no, it's not. And they, oh, what is it about? Well, it's about financial literacy. Now, I didn't mention the phallic jokes and the fat jokes and all of a sudden they make on the five-guests, but they had transcripts of the show ready to use against me to say that I was unfit to do the job.

Starting point is 00:16:56 Yep. Wow. Yeah, it's crazy. It's not easy to do. What's your position now at the bank? What do you do there? I'm currently executive vice president chief operating officer. I recently changed from what was the chief credit officer before.

Starting point is 00:17:09 So typically speaking, the chief credit officer is responsible for the deploying of capital and the rules and regulations around doing so in the form of loans. So if you go in, you get a loan, all the guidance on all the stuff that's determined that would usually be under me. And my job is to manage kind of the macro risk

Starting point is 00:17:22 of the portfolio. To make sure that our assets don't go bad, because prior to this particular time in the economy, they only really took banks down with bad credit. Now that we've had a pivot, we've seen that deposits leaving an institution fast can bring a bank down. Yeah.

Starting point is 00:17:36 And I thought that kind of with the management change we were making anyway, that that seemed like a good pivot for me given that I've had such a strong track record on the risk side. Well, so we're gonna get there, but there's always, I've always want to ask someone in your position, this particular question, do lizard people run the banking industry?

Starting point is 00:17:50 Just kidding. Or aliens of some type, I'm sure, yeah. No, so, okay, so, all right, all joking aside, is how big of an issue are the rules and regulations, or should I say, what role do they play in some of these economic crisis is how big of an issue are the rules and regulations? Or should I say, what role do they play in some of these economic crisis that we happen? Because I know it gets put on the banking industry quite a bit.

Starting point is 00:18:13 I remember in 2008, how they put it on, you're giving out these loans, you're not supposed to give, you're packaging together and these type of assets, people are buying or whatever. But I remember, and I learned basic economics just through fun because I enjoy it. I remember looking at what was happening. I'm like, you're actually creating massive incentives

Starting point is 00:18:32 for banks to do this. And then you're telling them that you're gonna cover them if they don't, if something happens anyway. It's like giving someone 10 grand, saying go to Vegas, if you lose it all, we'll give you the 10 grand back. And here's the games you could play, play the riskiest games type of deal, we'll give you more money. And it's like, well, yeah, that you lose it, I'll give you the 10 grand back. And here's the games you can play, play the riskiest games, type of deal, we'll give you more money.

Starting point is 00:18:46 And it's like, well, yeah, that's kind of what's gonna happen. Am I kind of hitting the nail on that? I'm not upset. Yeah, the system is built that way. I think people demonize bankers. And again, I have a bias because I am a banker. So I'll fold disclosure there. But if I recall, you're a fan of Milton Friedman, right?

Starting point is 00:19:01 Yeah, huge. So Milton Friedman had two kind of core concepts to his monetary policy theory, which ultimately won one of the Nobel, I think in Friedman, right? Yeah, huge. So Milton Friedman had two kind of core concepts to his monetary policy theory, which ultimately won one of the Nobel I think in like 76, right? One that businesses and consumers left on their own should really do the right thing for the economy if given enough time. Government intervention is not always necessary and it's usually not the best thing. And the second part of that is really if the government's acting, they should really

Starting point is 00:19:25 look at the data of what's happening versus the intention. That was kind of the second part of his monetary policy. And I'm doing a terrible job phrasing it, but essentially that's what it is. I think that's why you hear people like Jerome Powell in the media right now saying, we're going to be extremely data dependent, we're going to be extremely data dependent because he's a big fan of Volker and Volker was also a big fan of Friedman and they had a lot of ties there. The banking system has been set up for such a long period of time with protocols and regulation in place to stop banks from failing. But the problem is that's

Starting point is 00:19:54 a perfect storm meant for each recessionary economy, but every single recessionary economy is like a snowflake. They've all had a different impetus that started it, right? Milton Friedman's classic example of the Great Depression was that the government really did that. They overspent, they created the inflation that brought down the economy and they're the ones who drove us into depression. And he wasn't like anti-government, he was very much a capitalist. But the argument can be made that the regulations put in place are always reactive to the economy that preceded it, but recessions are never the same. And yet we expect these rules and regulations to stop what happened before, to happen

Starting point is 00:20:26 could happen. Next, that's exactly why we're seeing this not work right now. Yeah, so like to just to put it in plain, and again, I love that you're here because I love you to correct me, but if a bank's job, like any business, is to make money, and part of the way that they make money is the SS risk. If I'm going to loan you money, I have to assess the risk of you potentially not paying me back. And then that's gonna determine the fees and the rates that I'm gonna charge you.

Starting point is 00:20:50 If you're higher risk, I'm gonna charge you more, if you're lower risk, I'll charge you less. And that's just the way it works. But if government comes in and says, hey, all these people owning a house is like, that's the American dream. We need to guarantee everybody owns a house. So you, Mr. Banker,

Starting point is 00:21:04 you're required to give these people loans. And here's the rates that you we need to guarantee everybody on the house. So you, Mr. Banker, you're required to give these people loans, and here's the rates that you have to give them at, and you can't necessarily adjust them too much because it's not fair, and oh, by the way, because then you come back and be like, well, what happens if they don't pay back? And then the government's like, well, if they don't pay back, then we'll cover that. Yeah.

Starting point is 00:21:20 Like, that sounds to me like a terrible, like a perfect storm. It is. And so let's break it down real basic, because I think a lot of people think they understand banking until they start getting the nuances of it. And it gets a little bit more complex as you layer in the challenge, right? So banks primarily make money on net interest margin. The difference between what they're making on the loans

Starting point is 00:21:38 that they put out versus what they're giving you on your deposit rate. So if they're giving you 5% of your deposit rates, but they're making 7% on average in their loans, that 2% difference is their profit margin. Would you, wouldn't you multiply that by 9 because they can go 9 times the money that's in there, though? Right. We're just re layering the idea of secret season. That's absolutely what happens. And a great example of that is, let's say I've got a loan to you on your home and it's a million dollar loan. Right. I could then turn around and take that loan that promise or

Starting point is 00:22:01 note and pledge it to the federal home loan bank of San Francisco for here. And they would give me, call it 50% of that value to now use and redeploy as capital. So now I've got 500,000 on that million dollar note that I can now redeploy as additional money and make more interest on that loan, which is already making interest. And then it goes again, and it can go again, and it can go again, and it can go again. Now, there are regulations and limits to how many times you should be doing that. And that's usually, usually done by leverage ratios and capital ratios that banks have to stay in compliance with. But it gets very, very murky. At its core though, the difference between those two though, deposit, weighted average coupon, the rate, and loan weighted average coupon, the rate is how banks make money.

Starting point is 00:22:37 There's all the other things like fee-based money or like Silicon Valley bank that we saw, they had venture capital stuff, stuff they were putting in that's really kind of hybridized stuff, or even private equity, which you guys know really well. They were putting money into those things because they were going to hope to get big, big returns. When the tech sector takes a dive, they don't get those big, big returns, and their primary income stream is now strained, things can change pretty quickly. So yeah, the sector can be very, very complex, and things can get very, very out of hand very quickly because of the leverage that's allowed.

Starting point is 00:23:05 But that's how capitalism works, right? The banking structure is built so that banks put out money so people have more access to cash just to run their businesses, to leverage up, to have working capital for lines of credit to buy homes. And now when you start doing things like quantitative tightening and pulling that out of the markets, people are calling this a credit tightening cycle. It's not though, not yet. Right now, we're just seeing banks say, okay, if I put out money today and the Fed is in

Starting point is 00:23:29 an interest rate increasing cycle, I'm going to lose money because that rate could be 25 basis points or 50 basis points higher if I just wait. Right. At the same time, they're saying, okay, and we also don't know what's happening. The economy is a recession looming. Are these credits for making now? These loans going to go bad. Do we wait?

Starting point is 00:23:46 So banks right now are just holding back. A lot uncertainty. A lot of uncertainty. So it's not a credit tightening cycle yet, what you're seeing in the news. What you're seeing is banks are pulling back saying, I'm gonna wait to put this money out because every dollar I put out

Starting point is 00:23:56 when the Fed's done raising rates is gonna be worth more than a dollar I put out now. So what's the different, what will a tightening cycle look like and what will be different about that than what we're experiencing right now? Well, as a consumer, what will I see different? Yeah, access to money in the markets will become very difficult to come by. So the first part of it we're already seeing, right, businesses that have run for the last 14 years in a very artificially low and straight environment now have index plus

Starting point is 00:24:21 margin pricing. So their loans are based on an index plus a margin, and that changes as interest rates rise. And the Fed has increased rates at an unprecedented cadence. They've never done it at this cadence, at least not that I can recall. And certainly we haven't. What about during Reagan's, they raised rates quite a bit there to crush the question.

Starting point is 00:24:37 They did, but I don't think it was in a year though. I think it was a little bit longer. Yeah, not this, not this many in a row. Not short of period. And that's actually the biggest problem that we're seeing now. So the, the Fed going back to regulation, right? They have a, a severe adverse case scenario of how banks are supposed to stress

Starting point is 00:24:55 test their, their balance sheets, right? And basically what it says is if rates go up and I think they're fed severe adverse case scenarios, 4%, if interest rates rise, 4% and% in a given year will your bank still be quote well capitalized? Okay, except the fed increased rates in a single year 5% oh So beyond the stress test that they've been you beyond their own severe adverse case scenario and even in their own Baseline scenario and some of the things that they thought were gonna happen. They were way off and okay We were all way off on our predictions moody's everybody who's predicting numbers. I mean, economists all over the country were wrong. That's fine. I mean, we, nobody plans for recession, nobody plans for big changes. But the fact of the matter is the

Starting point is 00:25:32 Fed didn't have to increase rates of the cadence they did. They could have done it over a year and a half like in Reagan's generation. Wow. They chose to do it in this truncated period. I think there's a little bit of stigma and pressure on them because the general consensus is the Fed acted a year too late. Let me ask you questions, not super off-top off-topic, but if this was completely market-based, interest rates, banks, and consumers deciding through working with each other and trade, what rates should be? Do you think that we would be in an issue like this, or do you think it would have reflected more accurately what's happening in the market and where rates need to be? I think it would have reflected more accurately.

Starting point is 00:26:08 I think where... Because you mentioned you said artificially low interest rates for a long time. That's because there was stuck there controlled. So I have this conversation with a lot of... So on our show, we talk a lot and is most colloquial languages we can because I want to break it down. But sometimes people will ask us questions coming from a place of arrogance without realizing it. A lot of younger entrepreneurs will say, I am successful. I ran a business for 10 years. I can do this. And you're like, okay, you

Starting point is 00:26:33 are successful. Congratulations. You've done well for yourself. But you aren't tested. And that part really bothers me. Did it when most people were winning? Access to capital, access to money for the last 14 years has been in an unprecedented availability. 14 years of artificially low interest rates meant that there was tons of free cash flow. We had quantitative easing versus quantitative tightening, and the Fed was just pumping money into the system. This reminds me of pre-2008. I had family members, blue-collar workers, in the Bay area, where it's expensive, we owned four houses, because you go get a loan, and they were like, how much money do you make?

Starting point is 00:27:05 Eh, this much, here's your loan. So everyone's like, I own houses. Yeah, you do because at the time, anybody could get a loan for whatever, and they do the adjustable rate and they think they have their house. Prices were going up every single year, so. 100% and we saw the fallout of that,

Starting point is 00:27:20 is it lines up becoming a house of cards that gets pretty easily knocked down. Right now we're at the highest non-household debt that we've seen ever in history. So your credit card, your auto loans, all that cumulative debt outside of your home is the highest level and aggregate we've ever seen. And now we have scarier things that are on the horizon.

Starting point is 00:27:36 We have buy now pay later. One in five Americans have used buy now and pay later services. They're even using it for food and groceries. Oh, wow. Sayyed McCoy, and I on the show have talked about how there services. They're even using it for food and groceries. Oh, wow. Sayyid Mikoost and I on the show have talked about how their stories, where people are using it to bridge the gap of their credit cards being maxed out

Starting point is 00:27:52 and buying groceries for their family. And it's terribly sad and tragic, but this only prolongates the problem. It doesn't allow us as a society to pull back from consumer discretionary spending. Do you think that's because we're also at a time, I think it record highs of equity too. I think we, more because we're also at a time, I think, it records highs of equity, too.

Starting point is 00:28:06 I think more people have more equity or quote unquote, save you. Feel richer than the army. Right. So because they feel richer, they feel like, oh, I can go ahead and run this credit card. Did I could do this stuff? I'm sitting on $300,000 worth of equity in my home. Yeah. That's the number one source of most people's net worth still to this day.

Starting point is 00:28:22 And over the course of effectively prior to this year, 2023, the last two years, home prices went up across the country on average about 42% in some areas, 42% in two years. So I was getting a lot of pushback from people saying, so I still believe we've been in recessions since January 1 of 2022. The traditional definition of recession has been two successive quarters of negative GDP growth, right? So June 30, 2022, if you recall, was when the White House started putting out statements saying, two successive quarters of negative GDP growth is not a recession. Well, that's been a recession for the last 10 recessionary economies. But I started saying then that I think we're going to see a home value correction of somewhere between 15 to 25% across the country. And we've gone back and

Starting point is 00:29:00 forth on it, but we've always thought that July of this year would be the inflection point where you really start to see it more and more. The data's already pointing that some areas are already moving and pivoting from that, but even then, if it goes down, let's say 25%, compared to the last three years, that's not even taking away half in some areas of your value.

Starting point is 00:29:16 Yeah, yeah. So this is all very interesting, and a lot of people don't understand the ramifications or implications of kind of what we're talking about. When you have money that doesn't reflect real services or products or innovation, it's just artificially, you know, it's artificially interest rates are low, they're giving it out

Starting point is 00:29:39 very easily. You get misallocation of resources. So money, people think money's money. No, money represents something. And as a species, we have to be able to allocate it effectively and efficiently. Otherwise, we create bubbles and weird shit happens like I don't know, people buying baseball cards

Starting point is 00:29:58 during the pandemic. And we're making money hand over fist. Poke my cards. Yeah. And you get this misallocation of resources, it's basically us wasting our productivity on stuff that we shouldn't be wasting it on because the market is so skewed.

Starting point is 00:30:15 And this is a problem because you can only skew a market for so long before the shit hits the fan and the longer you skew it, the more shit that hits the fan. And so we saw that in 2008. I feel like what they did after 2008 was, you know, it's like cocaine party, uh-oh, hangover, more cocaine, and now we're here. Am I, I mean, do you think that there's some truth to that? Oh, 100% there's some truth to that. And so in cocaine party is actually a solid reference because the Wolf of Wall Street and Jordan Belford

Starting point is 00:30:44 and that whole story was the East Coast version we saw on the West Coast, which was mortgage guys doing what the traders were doing on the East Coast. And it was very much the same lifestyle. It ultimately led to what we now know as the Great Recession. And then in 2008, Senator Dodd, Senator Frank

Starting point is 00:30:58 got together for the Dodd Frank Reform Act. That was implemented in 2013, but then scaled back during the Trump administration in 2018 to where it only affected larger banks over, I want to say, 250 billion in above, which is why Silicon Valley bank, even though it had creeped up above 200 billion, weren't actually applying Fed stress test yet. But we set all these things in place and all these stress tests in place, but they weren't really applied. Meanwhile, the economy's gotten super frothy. And sure, we're not making stated income loans to the extreme cadence or at least the type that we were back in the day.

Starting point is 00:31:30 We're not doing no income, no verification loans. Everybody was getting homes back then. But this is also not a credit crunch cycle. What happened now, which has never happened really that I can recall, is that you have outside factors saying, hey, you should pull your money out of that bank because of X, Y, and Z. And usually the X, Y, and Z has nothing to do with how stable or strong the bank is.

Starting point is 00:31:52 A great example is Peter Thiel told everybody, including Y, combinator, who were the largest depositors at Silicon Valley bank to pull their money out because he had fears the bank was gonna fail. So let's talk about that for a second. Why, what is a run on the bank? and why is it so dangerous for a bank? People have their money and they're like, can't they just get it out? Right.

Starting point is 00:32:11 Going back to the net interest margin example, right? Your money comes in in the form of deposits. Banks have a primary responsibility to bring in deposits in their primary lending area. Every place they have a physical branch, they take in money and to deploy that capital back out in the form of loans in that area. And the reason why is you don't want people taking it from a less high net worth area and putting into more high net worth area

Starting point is 00:32:30 because they perceive the risk to be less there. So they're gonna constantly put out that money. So the banks, their source of money to make loans are your deposits. They're taking your deposits and they're lending it out. And the reason why that makes sense for them is that arbitrage, that net interest margin, is how they make their money.

Starting point is 00:32:45 Now, they're only required to hold certain amounts of your deposits in the form of cash on their balance sheet, or they buy securities with them. In the case of Silicon Valley bank, they bought securities that went way, way down in value, as the Fed took an unprecedented step in increasing your interest rates. So not only do you have a percentage of what people give you,

Starting point is 00:33:03 but now it's even worth less because of securities when they out. How did we come up with that percentage, that number that we have to keep in? Was it just something that they just took them, did the math over? Is this fractional reserve banking? Is that what we're talking about? It is fractional reserve banking, and it does vary based on regulator, the types of, so the FDSC is one regulator, the OCC is one regulator and the Fed are another regulator. Okay. Mostly we don't know that even though Secretary Powell comes out and speaks about Fed monetary policy and unemployment and jobs, the other responsibility is they have their several. One of his data aggregation and other one is bank regulation.

Starting point is 00:33:33 So there are also a bank primary regulator as well. And there are several different variables in how you regulated a different size as an institution. Why was Frashel Reserve Banking even created? Was this during the creation of the Federal Reserve or did this exist before that? I think in a lot of ways it's always kind of existed, to be honest with you, was this during the creation of the Federal Reserve, or did this exist before that? I think in a lot of ways, it's always kind of existed, to be honest with you, but I think the Federal Reserve really played a key role in that creation of it. But truly, I think we kind of sensationalized the big words. The fact of the matter is, is banking exists in this form today because it's the only way

Starting point is 00:34:00 to really deploy a capital out at the cadence that we need is a side to use. Yeah, I'm glad you said that because fractional reserve banking gets demonized. It does. But if we don't have that, then you could, basically there's no loans. And the only way you could build a business is earning money and saving it.

Starting point is 00:34:14 And that would crush growth. That would crush growth. And what's most important is scalability for companies and for banks alike are all the same. In order to grow in scale, you need access to capital. And the problem that you see most companies fail when they scale too fast is they've deployed too much capital

Starting point is 00:34:30 and can't get more because now they're not making enough money to pay down their debt. So scale and growth all have this natural, symbiotic relationship and banks play a huge key role in that. Again, I have my biases of banker, but you're right. The system is designed to work this way. And if you take out the fractional banking concept, it doesn't work anymore.

Starting point is 00:34:47 Well, take every business in America and eliminate all the ones that require getting capital through alone. You're gonna cut out probably a majority of companies and businesses. Well, for sure, right now, right? They'll be gone. And a lot of younger kids will tell me,

Starting point is 00:35:00 well, let's just give it a banks, we'll go to the Fintech route, and then I go, okay, where are they getting their money from? They start talking about companies like the Robin Hoods of the world or even Apple. They're all using banks as the backbone of their infrastructure. And you don't have to take my word for it. You can go to their public filings,

Starting point is 00:35:13 which are available on the SEC's website or you can go to Yahoo Finance and you can pull them down and you can get the income statement and balance sheet for any company you want that's publicly traded in the world. So in a nutshell, a run on the bank is when too many people show up wanting all their money, the bank doesn't have the money.

Starting point is 00:35:28 We have to shut their doors. Well, ultimately that's what would happen is it would, in theory, shut their doors, but typically speaking, the FDIC will step in and seize the bank to protect the positives. The FDIC is the Federal Posit Insurance Corporation. Their primary job is to ensure and protect the depositors. And the limits of $250,000 per investing on the accounts,

Starting point is 00:35:44 which we can get into later if you want. But the fact of the matter is, they don't just fail and shut their doors. What happens is they usually get taken over typically on a Friday and by Monday, the FDSC's operating them or they arrange a sale. Kind of what would happen with first for public bank where they were closed on effectively a Friday,

Starting point is 00:35:58 the FDSC stepped in. It was not transparent to the public and by Sunday they had announced that JP Morgan had bought them. Now often, is this true that often historically, run on the banks were because of fear, not because of actual fear? I was just gonna ask that, is it normally because something breaks down systematically

Starting point is 00:36:16 or is it normally from, you know, well, nowadays, social media, fear of... Oh, get your money out, you're not gonna be able to get it, type of deal. So this is my main beef of what's happening now in the news. I'll watch CNBC all day long and I watch the ticker primarily on the television on mute

Starting point is 00:36:34 and then I'll look at Adam's photo three or four times a day. But in between, what I'll do is I'll look at the prices and valuations and some of the rhetoric that's going on and it's so fear driven, It's a very parasitic cycle. And it's the news will say, hey, this banks in trouble. Or Peter Thiel made this comment and report on his fears,

Starting point is 00:36:51 which is them kind of casually suggesting that you should be afraid to. That's my proxy, right? Then you get Reddit, you get Twitter, you get all social media that goes ablaze with this and then the retail traders come in and kick in. I think people take retail traders and demonize them. I'm not mad at retail traders

Starting point is 00:37:05 trying to make money with short selling values down by betting that stock prices will go down. Yeah, but that just as a confirmation bias to a depositor because now I'm seeing your stock drop also and I'm like, oh, it's true. I better go get my money out. And then the parasitic cycle kicks off all over again because now the news is going to report on your stock being down a great degree in a single day and the trading volume and then guess what? Back on social media, back to the short sellers and it just goes over and over again in this path. That recently happened in Pac-West and it crushed their stock.

Starting point is 00:37:31 And you can see it in after hours trading where they traded below, almost 60% down the day that some press came out. Now that press is turned out to be false and they've come out since challenged it but the retail traders don't care. Doesn't matter. The damage doesn't care.

Starting point is 00:37:44 And I think that's where we're at a really dangerous inflection point with the banking sector. And a lot of people that are with the SEC, for example, are suggesting, should you stop short selling on banks? Because of banks, unlike a company where your capital may be based off your stock, banks are based off their income statement and they're balance sheet, but that's your deposits.

Starting point is 00:38:03 You trading the value of the stock doesn't change the deposit situation. That sounds like a logical idea. Why would that be bad about idea to do that? To just say you can't short sell banks anymore. That way the retail trader cannot affect the stock price. Then if the stock price is normal, you're going to be based off of cash flow

Starting point is 00:38:21 and how profitable, how good the bank is doing. Yeah, I would imagine there's downstream potential effects of that, right? Because you could reduce, I guess, investments, money, flow, like that might also cause other negatives, right? It certainly could, and I've got very mixed emotions about it. What I would say is I'm always one to, I'm more of the Milton Friedman type, like let businesses and consumers determine the market, like that's not limit their ability. If you want a short sell, somebody, short sell somebody.

Starting point is 00:38:45 But I draw a line when I say, okay, let's look at GameStop. Let's look at some of the bad bath and beyond stock where retail traders have jumped on. I think we can all healthily say those companies were troubled for years. Yeah. And on the fringes of bankruptcy, if not already filed bankruptcy and came out of it, right?

Starting point is 00:39:00 These banks were otherwise healthy. I know people want to demonize Silicon Valley bank and first republic bank. I'll use first republic as an example. They were a very good bank. I don't care what anyone says. They just ran a very low profit margin business, meaning that their loans were not at the super high rates.

Starting point is 00:39:14 They gave their clients, which are high net worth individuals, relatively low loans compared to the market pricing, and they gave out pretty healthy deposit rates. So they only had a small one to two percent margin of profitability. But they worked with super low risk depositors. So, yeah. And but the Fed destroyed their profitability.

Starting point is 00:39:28 And yet, here's what happens. During the last earnings call, they actually beat earnings expectations for the street. They did better than the street thought they were going to do. But it didn't matter. They're just stockers going to get traded down because the impacts of retail traders. You want to take the game stop down.

Starting point is 00:39:42 You want to take Baybathe and down, a troubled company, fine. But what people don't realize is, there are employees there who are scared for their job. I don't care if you wipe out the executives, you wipe out the compensation, but you shouldn't be wiping out the stockholders. Yeah, you know what the argument is? The argument is that these kids are getting together,

Starting point is 00:39:59 organizing their power on Reddit, and they're like, now we have power like the big traders. And so this is just equalizing things, and we're making money the same way they do. They do? Yeah, so that's the whole argument, right? And I don't look, I don't begrudge them that. That is what the system allows them to do. A long time ago I had a conversation with Lod at Robinhood and and this was kind of in the the pivotal period of their very sensitized and they were all over the media. He had an interesting take on democratizing the space, breaking something down and making

Starting point is 00:40:30 it available to everybody. I think whatever you think or feel about that model, they accomplished that goal. I think more younger people and more retail traders are now involved in trading and can do these things. You know what, more power to them. My question is more on the macro is, do you want someone to have a million followers on Twitter be able to single handedly take a bank down

Starting point is 00:40:51 by creating a false narrative of contagion? No, but that's to see that. Now that's already regulated, but not in that space. That's regulated for other, they would call it insider trading or pump and dump. So they just haven't regulated people with this kind of power because it's kind of outside the regional range. It depends if you trade it though.

Starting point is 00:41:08 So for example, if I say on Twitter, hey, that banks are gonna fail, you should get your money out of there. But I don't own any stock and I haven't had any stock price manipulation benefit from it. You really probably can't sue me for that. I get it, okay. But if I'm doing it to directly buy and trade that stock,

Starting point is 00:41:25 then that would be illegal. But legality becomes a very murky thing here. I guess my question to the kind of the macro system is, do we want to build in safeguards to prevent stuff like this from happening? Or do we want to let the free market determine that and expect that this is a natural and logical consequence of things happening?

Starting point is 00:41:44 And I will say, look, as much as I want to blame retail traders, it's not them. They took advantage of the Fed taking unprecedented steps, which they probably did at way too fast of a pace. The question will never have the answer to is why. So if we leave it up to the free market, then how do the banks in the future potentially protect themselves from a contagion like that? Well, I think we could probably see some regulatory changes as a result of this, which will require banks to keep more capital.

Starting point is 00:42:07 So, typically speaking, as a bank, you wanna keep as little money on your actual balance sheet cash on your balance sheet you can, because you wanna put it to work, right? Every dollar's on your balance sheet, not earning interest, you're losing money on. Yeah, let me answer that. And again, as someone on the outside,

Starting point is 00:42:20 and again, I would love your opinion, you're the expert on this. But I think that if they did that, what would happen is banks would look at the risk and they'd say, okay, we need to keep more money on deposit. We still need to make money. So now we're going to charge higher fees. Right. Right. And so that's what it's, that's the new model. That's what the model is going to end up looking like. Which isn't necessarily bad. Is it? I mean, when you're coming, we're coming out of it. That's a more response. Yeah. You know, we got to do this to protect ourselves and prevent what's happening. We still got to make

Starting point is 00:42:44 money. So now you want to have a savings account. It's $200 a month. You want this. It's $100 a month. And, but we have to keep more money on our balance sheet. So the problem is not necessarily the analysis. It's in the market. And the reason why is if you want to have

Starting point is 00:42:58 a small community regional bank, you can't compete on fees and build a business like JP Morgan Chase. You can't grow and scale that business. The same way small, middle size businesses need to have cash and capital to grow and scale. Banks need to too. So typically speaking, these banks have filled the space of commercial real estate. 80% of commercial real estate is made at the community bank level.

Starting point is 00:43:19 So the larger conduit, bigger structure stuff is usually done by insurance companies, but most of that is that banking space. So what you typically get is you get, call it your small, medium-sized businesses that go to community banks, they want customer service. That's the, there is nothing proprietary about banking anymore. Everybody's doing the exact same thing.

Starting point is 00:43:36 The only difference is your value proposition of service. Right, how good do you treat your client at the end of the day? Those junk fees, that's a big service negative for most people. They're like, wait a minute, I'm getting like a $3 fee on a first statement, like why do I have that? So if you're a small community bank, you do have to make loans at a lower rate

Starting point is 00:43:52 and you do have to give higher deposit rates and you do have to have less fees in order to compete with JP Morgan Chase. Because here's exactly what's JP Morgan Chase gonna do. And this is not a knock on them, they're just one of the globally systematic important banks. You know what, we're not gonna give you as high interest rate, but we're JP Morgan Chase, we're never gonna fail,

Starting point is 00:44:06 you're not gonna worry about us being in this. You're interest rates 3%, not 5%. Take it or leave it. And most people are gonna leave it. Yeah, yeah, yeah, yeah. Interesting. Okay, so let's talk about, I love the analogy you gave, by the way, of how you explain banks seeing that these

Starting point is 00:44:22 interest rates are going up, don't want to loan out money because they're losing money. This is kind of how, I guess it is how runaway inflation can happen, where me as a consumer, when inflation starts to get really crazy, I'm going to go out and buy as much stuff as I can because I know that that refrigerator next week is going to be, you know, 13% or 10% or 50% more expensive than things get crazy. So I'm gonna buy more stuff which just drives inflation up even more. So right now we're seeing inflation. They're trying to lower it. Doesn't seem to be working.

Starting point is 00:44:54 What do you think is going on or do you think that they haven't waited long enough or do they need keep, do you think they need to keep raising rates or is that just gonna cause more problems? So this is an interesting question and I believe it or not, my best analogy for this is body fat. When you start losing fat, it's really easy in the beginning. If you keep the work in and you start doing it. But the leaner leaner you get, the more difficult it is to see a difference and the more critical you get. It becomes almost exponentially harder the leaner you get as you get there. Sure. So, the inflation moving down from 9% down to what we're at currently, in my mind, is not the hard work. And I've said this over and over again on our show that the pain for the consumer is not

Starting point is 00:45:36 going to be in the raising rates, going to be the holding rates. It was both a freeman and vulcour who had the underlying supposition that in order to bring inflation down to the 2% to 3% target, which has only been an official target since Ben Bernacchi. So it was Bernacchi, Yellen, and then I believe Powell, correct? So Bernacchi was the one who made it official, but it'd always been approximately 2% to 3% before then. In order to get it down to the target rate where you want to get it, so you typically had to raise your Fed funds rate above your inflation rate.

Starting point is 00:46:04 Yeah. So we have to be like, 90% right now. Yeah, you have to be, well, actually right now you'd probably have to be closer to call it five and a half, five, six percent is probably what they're pushing to. But we just had a bad jobs print. Jobs, we actually went back down to 3.4% from 3.5%. And then every time somebody hears a low number of unemployment, they go, okay, well, that's a good thing. It's not.

Starting point is 00:46:24 MultifreeMint talksy lot about this as well. A healthy unemployment number is somewhere around 5%. And the reason why is you want transitory migration, people hopping from job to job, because they can get more money or they got a better opportunity here or there. Having a super low unemployment rate is actually not good for the economy,

Starting point is 00:46:38 and it's not good long term. I mean, people are afraid to do anything, they're just people are afraid to do anything, they're staying in their jobs for too long, or there's too many jobs in the market, not enough workers. And what you're going to see now, and it's a byproduct, it's not directly the intention of the Fed, is as they increase their Fed funds barring rate

Starting point is 00:46:53 and hold rates, unemployment numbers are going to rise and wages will come down. That is just a natural byproduct of what's happening. You've seen all of the redder, all the redder. Do they say that that's part of their goal? It is part of their goal. They explicitly said we want this to happen. They're trying to set expectations

Starting point is 00:47:07 is what I'm trying to do. Oh, okay. It's a natural byproduct. They're not saying we want this to happen, but they're saying they know it's going to happen. And I think that's probably a healthy thing. But now what's crazy to me to think is you've had the tech sector hit,

Starting point is 00:47:17 you've had the banking sector hit, massively off some of both of them. In the lending sector, I'll single-family residents, lenders across the country, non-bank lenders, and people are going, okay, well, you know what, I'm in this industry, that industry, I'm okay. The title wave hasn't come. We're seeing the tsunami kind of pull out right now, and the title wave is what comes next after they're done with their interest increasing cycle.

Starting point is 00:47:35 And I think that we're just going to become most visible to the consumer is July. So January, February, March, your report earnings for Q1 in April. April, May, June, your report earnings for Q1 in April. April, May, June, your report earnings for Q2 in July. These Q2 earnings will be reported by companies in July, and I think you're going to hear more about layoffs as those July reporting comes up. You're going to hear more about less profits, because really only two things a company can do to make more money as it... The expectation is for all public-traded companies to make more and more money over time.

Starting point is 00:48:04 You either increase the money you're making, top revenue or you can manage your expenses and right now We're entering an economy with the only way to do it is you're not gonna increase your revenue You're gonna stop being able to spend as much as they start losing their jobs and make less money They're not to manage expenses and the primary way to do that is human capital unfortunately. It's reductions in force So all these things will son will kind of coalesce into where I think I told you Adam a long time ago was, I think you see July being that pivotal moment for like housing prices and for the market,

Starting point is 00:48:32 because consumers gonna have to sell their home to tap into the one thing they have that still has money in it. Do you think that, because, and this is more of a political question, but do you think that what they're gonna do is just say, hey, acceptable inflation is now 4%. This is what we want. We want 4% 5% because trying to get it down to the old number of 2%, 2% painful, maybe not politically expedient, people are

Starting point is 00:48:56 going to get mad at it, whatever. Do you think they might change that? Oh man. So the National Bureau of Economic Research is primarily the one who has the obligation to declare recession. The White House may say whatever they want and everybody else may have their commentary, but it's the National Bureau of Economic Research whose job it is to come out and say, hey guys, this whole thing we've been living through, that's a recession. And they typically do that a year, year and a half afterward. Well, if we believe that a recession started in January 1, 2022,

Starting point is 00:49:21 and we've been living through it since then, you've not heard a single word from the National Bureau of Economics since January 1 of 2022. Nothing. Like, there's an other sound. Why? I think if I were to guess, they're looking to look at this holistically and say, okay, did we have a double-differcession of sorts? What is the characteristics of the recession?

Starting point is 00:49:38 A typical recessionary economy lasts seven to ten years from peak to peak or trough the trough, right? That's kind of like the window of the sine wave, if you will. We just lived through 14 years of one of the most prosperous economies in modern history. Why do we expect a normal length or a normal recession to happen after that? It should be more pronounced, right? Yeah. So I think what they're doing is we're going to look at things and say, okay, let's look at things on a macro and say a little more time to be thoughtful and pragmatic about it. But we have a looming November 24 election cycle.

Starting point is 00:50:08 You've got a very interesting political climate now where bankers themselves are politicians. Jamie diamonds a great example of that. But in order to win, you have to be an extremist. You have to be an extreme laughter, extreme right in order to win now. There's really no in between. And if you're in between, you're just not going to have the base. So I think you're going to see a lot of this as fodder for the redder, fodder for the news. And perhaps that's what Jamie Diamond and the FOMC and the seven voting members and the

Starting point is 00:50:31 12 members in total are considering when they're trying to do this in an expedited fashion. Maybe they're saying, let's try to get this handled as quickly as we can before the election, because we don't want the election pressures to stop us from going to 2 to 3%. And that could very well be true. But what I'll say is the president, and well, the Senate names, I believe, and I think the president confirms the FOMC. Don't quote me there,

Starting point is 00:50:52 it's been a while since I've looked at how they get named. But there is some political legions is there, because the political party that's in power will put them in the place. So you have to wonder if the Fed presidents have some of that in the back of their mind is, let's handle this now, because obviously the year before, which is now we're already starting to see people say hey, I'm running for president again

Starting point is 00:51:08 I've included and And I think you're gonna start to see some of that rhetoric pick up because now once one of these people's sides What does the American people what are they afraid of they're worried about the job? There were about money How do we how do we get more precious coverage? Well, we're gonna talk about Stopping the Fed from doing this so that we're looked at as a good guy and we're, you know, we're in favor of the people. And it winds up coming this vicious cycle of putting pressure on the Fed. I think that's why you've seen Jerome Powell come out so stoic. We're looking at data. I'm not promising

Starting point is 00:51:35 anything. This is what we're doing. There's obviously some influence. Let's go back to your July predictions and your theory on why we'll see that with, so based off of your theory, should we not see a significant influx of homes going up per sale? That remains to be seen, although there has been some really interesting indicators come up in the last couple of days. So institutional buying was widely criticized in the last couple of years as being what propped the market up

Starting point is 00:52:01 and drove value so high. I saw that graph in fact, I think you're scratching. Yeah, forging baby. Yeah, we're in fact, I think you're screwing it up. Forging baby. Yeah, we're actually what, at the record low right now, institutional buying has now hidden inflection point where their net seller, not a net buyer. These are companies that buy properties

Starting point is 00:52:17 and make money off of them. So, and mass, and historically are always net positive. And for the first time, net net seller. So to the first time, net negative. Net sellers. So to give you, to give everybody kind of a better background is typically speaking larger companies

Starting point is 00:52:30 that want to put money into real estate and invest want to go into multifamily apartment complexes, right? Well, recently cap rates, capitalization rates, which is a method to compare one investment to another investment in different sectors to figure out how they pay versus one another have gotten very, very low. And to give you an idea of what this means is, if you were a buyer of a multifamily apartment

Starting point is 00:52:50 complex and the cap rate was 2%, you were going to make about 2% in profit on that property, right? But if you're rate on the property, even a low rate was 3.5%, that meant the bank made 1.5% more on that property that you own with you paying a mat than you did own in the property. So it gets to this really, really interesting place where properties were still trading the last couple of years. People were like, you know what, I can buy this property and it'll go up in value. Vogues were going up, right?

Starting point is 00:53:13 Well, some companies got smart and said, you know what, we're not going to play this game. We're going to buy single family residences, but we're going to buy them in massive quantities. So it's like owning an apartment complex just spread out over land. And they went to the sunshine state. So I think California, all the way down to Texas, all the way to Florida, kind of that sun belt region, if you will, and they weren't building up. They were building out.

Starting point is 00:53:32 Most people in those areas, and that's why I like for my investment properties, Oklahoma, and Adam, I talk all the time about investment properties in Midwest. Homes are really, really valuable there, because people want a front yard. They want a place for their dogs, they want room for their kids,

Starting point is 00:53:44 and that's their priority. Whereas in major metropolitan areas, I just need a place to live. You can put me in a box in a sky, and it's fine. And because of that, they started driving prices up in some of the non-traditional major metropolitan areas. Think Oklahoma, think Arizona got bumped up pretty high.

Starting point is 00:54:00 Las Vegas again started to rise pretty significantly. Florida's seen an unbelievable growth. Yeah, boys, you've seen a great one. Michigan, Cleveland, this is great areas, right? But all these institutional companies started buying and mass quantity from them. At the same time, you have companies like Open Door, who are I buyers. They're buying site unseen. You just go online, you want them selling your house, they're not a real estate agent, they buy your house and they turn around and flip it. That model works great when value is going up. Model doesn't work so well when value is going down.

Starting point is 00:54:26 Yeah, and what happens when the market drops with someone like that, you're not just losing one buyer, like I'm going into buy a house, I'm not gonna buy anymore, they were buying a lot. So now it's a huge, it's like a negative feedback loop, right? You get just huge declines and purchasing. So, and that's exactly what's happening now, but you have a bit of a stalemate

Starting point is 00:54:46 and how this ends, nobody really knows. So now if you're somebody who owns a home and you've got a super low interest rate, do you refinance your property? You don't want to do that. Do you want to sell it? Where are you going to go by? Your interest rate's going to be twice as much.

Starting point is 00:54:58 So it's a bit of a consumer stalemate, but now that institutional money has said, you know what, we see a recession coming. That's effectively what the graph that I showed you shows. It basically says, based on their behavior and their own kind of economic activity, they're sensing a recession on the horizon, which I think at this point,

Starting point is 00:55:13 whether you believe that we've been in recession for a year or not, you have to look at the next couple months and say whatever comes next ain't good, right? And they're saying that, based on their buying activity, they're gonna wait. They're gonna wait and see what happens. So they've always sold some properties back into the market, but now they're selling a lot more than they're buying,

Starting point is 00:55:28 and that has been a huge pivot, and I think the transactional volume will be impacted. And I guarantee you, there's somebody listening right now saying, you know what Chris, in my area, home values have gone up. Yes. The average across the country, believe it or not, is going down though,

Starting point is 00:55:42 and has started to go down at least for the last two or three months. And we'll see, home price in home sales, it's an interesting thing, but I always put in perspective for people like this. About 34% of inflation is rent or rent equivalent, right? So unless rent or your mortgage payment vis-a-vis your home price, your purchase goes down, you're never going to get inflation to the two to three percent target rate. Because 34% of that is rent or rent equivalent. Oh, I see.

Starting point is 00:56:08 Because it's a huge part of that. And that is for me. You lost me there a little bit. So inflation has made up a several different factors. It's basically an average of the rising cost of all the things across the economy. Okay. Like one of the largest rising ones

Starting point is 00:56:19 recently had been traveled. So like airline had gone up like 26% for airline fees in a recent year. So the biggest chunk of inflation, however, is 34% of that is made up of rent and rent and rent equivalent. And the reason why is most consumers spend the most of their money on rent or their housing. So unless that goes down, unless that goes down, to get inflation. And that's why it gets sticky as you go down, like your body fat, as you go down, it gets harder and harder to lose. So right at this point, everyone's like,

Starting point is 00:56:45 oh, the inflation's been going down pretty steadily from 9% to where we're at today. Well, here's a problem, okay? It's gonna get harder and harder and stickier and stickier as we go down. And that's why the Fed is so hesitant to say we're done raising rates, because they know it's gonna be more difficult.

Starting point is 00:56:59 And we just had that bad unemployment, unemployment print, so they're going, okay, we haven't seen enough action, even though in it's gone down, we're not making a big enough dent. So and everybody's like, you know, the realtor's that are out there listening to the show, and all the people that are in the space, it's very easy for them to say, hey, look, in my area, values haven't gone down. And that's true.

Starting point is 00:57:17 In some areas across country, Florida is a great example though. There's some areas that are booming, Orange County where I'm from, booming in some areas, they're not going down. But in other areas. They're not going down, but in other areas they are. The average across the country is coming down. You're gonna see the impacts and you have to see them. And if you don't, I worry greatly for the economy. Let me ask the selfless question,

Starting point is 00:57:35 because I just had this conversation yesterday with Justin's wife, Courtney, who kind of manages and oversees a lot of our tenants and properties that we have. They will always loop me in when we're getting ready to resign a lease and they'll ask me, Adam, where do you wanna go with price? Do you wanna bump them 3%?

Starting point is 00:57:50 Do we wanna keep them the same? Do we wanna encourage them to lease for two years and give them a deal? And historically over the last five years or what about that? We, three percent or so, we kinda move everybody up as time goes on. But I've been worried about this influx of potential houses being sold and outdable the rent,

Starting point is 00:58:10 that it's eventually gonna drive rents down. And so I would prefer that we lock in for a longer period of time at the current rate that we have, than trying to make an extra 25 or 50 bucks on a rent for maybe a one year lease. What is your philosophy on that? And if you were in my position where you've got leases coming up every other month

Starting point is 00:58:28 that I have an opportunity to sign them for a year, two years or more, what would be a smart strategy knowing what you know with the landscape? So I obviously own a lot of single family residences myself. I own some commercial, but largely single family residences and that's just because when I started buying, it's all I can afford.

Starting point is 00:58:45 And it wound up being a good strategy for myself and my sister probably managed everything for me there. I've always kind of leaned into the two-year longest term possible just because it's less of a headache. And the way I look at it is for guys like you, you've got a primary business, you've got other things you've got to do, you've got families, you want those things

Starting point is 00:59:00 to be your priority, you don't want this passive income to be less passive than it should be. Right? So I've always looked at keeping long-term leases in place. Yeah, you're going to have some maintenance, but you should be paying a property manager have somebody to do that for you. So it shouldn't be your headache. It should be, I'll come down to contractual arrangements.

Starting point is 00:59:14 It's been up to $250, anything. I hired that, you call me. I have great fears over short-term rentals, and I know you guys are in that space, but here, I'll give you some data you can do with it, which will. This year more than any other year in history, we're going to have more luxury multifamily apartment units coming online. So we came out of call it 2020, the pandemic era, and all the home builders had all this pen up, money to spend, and they were freaked out a little bit during the pandemic. They couldn't build, building costs went up, lumber got really expensive, and they couldn't find labor

Starting point is 00:59:45 because nobody wanted to work with COVID out there. So what happens? They decide, well, you know what, values are going up, craze like crazy, 2020. Rents are going up like crazy. Let's build banks gave them loans. The typical life cycle is somewhere between called 18 to 24 months for these bigger complexes.

Starting point is 01:00:00 And now they're all coming online. So they're all gonna hit the market. So I think the apartments, the high and luxury apartment community, that's where you're gonna see a lot of rental pressures down. Oh, interesting. I don't think you're gonna see it in the areas that you guys are at.

Starting point is 01:00:14 If you're in a good vacation destination, I think those are still there. Consumer discretionary spending will pull back for sure. So people who bought Airbnb's in places that are not exactly what I would call a desirable locations, they're gonna see some pain. Yeah, especially in very dense areas. But as far as I'm concerned, when it comes to your longer term rentals, always go as long as you can, even if it's a sacrifice, 20, 500 bucks. You know, you sound like you sound like us when we talk about health and fitness, because people will ask us,

Starting point is 01:00:40 what's the most effective way to burn body fat? And we always go back to the lifestyle. This is the one that you can maintain. That's essentially what you can maintain. That's essentially what you're saying. 100% more. You make a little more money if you do it this way. This is a much better way to maintain it and not give yourself a headache. I love what you said.

Starting point is 01:00:52 Make your passive income more passive. I mean, it's supposed to be right. There's so many people who love fitness myself included who's wind up obsessively, like, especially compulsively, like, doing everything they can. And it becomes work in not their passion anymore. And it's like, once you cross that bridge, it's not as fun.

Starting point is 01:01:07 No. So then what are your concerns then with the short term renting strat? Like in terms of like if you said that like the vacation spots are still going to have somewhat of relevance, these people are going to start tightening up and not venturing out and going on vacation or I think consumer discretionary spending will pull back. Well, it's already in that in that space It's already been hit why forgot the last article I read on how much the vacancy rate on short-term like Significantly went up in the last 12 months. Yeah, and I'll say it's it's again

Starting point is 01:01:37 It's not your variant of doing it the the number one problem that I have in the space is some that there's been thrown around a lot air B&B arbitrage It's the new sexy turn. They're taking a normal piece of English and throwing it together and making it something new and sexy, but it's not new and sexy. Everybody's been selling on social media lately where you effectively rent a property and then you sublet it out as an Airbnb, which in many leases is illegal. But nonetheless, you can get a corporate lease if you want to and if the landlord lets

Starting point is 01:02:02 you do that in a smaller building, you can do that. I think those are going to be very much impacted because you're not going to be able to get the same daily rent that you once did and you have a little bit less there. And keep in mind too, you guys are probably a more sophisticated buyer in that space than I think most people are. Some people are getting in with FHA loans saying, I'm going to live in this property, right, but 3% down. Yeah, their mortgage payments higher. And then what do they do? They try to rent it out while they live in an apartment still, and they try to cash flow it to make incrementally more money. I would say if that's what you're planning to do, then let's get out of the logical fallacy. Go buy in the Midwest, go put 10 or 15 percent down, save a little bit more, and make $400 a month in a guaranteed two-year lease.

Starting point is 01:02:40 You should go have some RNM and remain in some repair and everything else, but if you buy a property built after 2003 You shouldn't have a whole lot there So I think people they're looking for short-term gains and people that did that and jumped in really quickly and leveraged because they wanted to scale And they didn't have access to stuff like bank loans because they didn't have a history of doing it They're gonna get crushed in that short-term middle space and that they're flooded with that Yeah, I agree with that. I think that we're gonna see, I think actually short-term rentals and then the car, you know, leasing space,

Starting point is 01:03:08 like the Toro type game. Oh my God, yeah. I think those two are, I think we're gonna be two of the first big fallouts that we're gonna see. I think so many people I know that don't even have that much capital of now have two or three Airbnb's

Starting point is 01:03:20 or don't even make that much money and they've got four or five, you know, high-end luxury cars that they're doing this whole Turo game. I don't see that lasting through this. Because they've leveraged themselves. And that's why I say, like the last 14 years, if you had a model last 14 years, you made money, fine.

Starting point is 01:03:36 But now is where you really start to see the stress of that impact you. And that right there, the Turo stuff, the exotic car rental stuff that's really leverage on leverage. If you have equity skin in the game and your payments are low, you can survive in almost any business. But most people who are young and ambitious want to scale fast. And trust me, I want to be rich overnight too.

Starting point is 01:03:54 I get that, but that's just not the way you have longevity. Yeah, they push the limits. So how at risk is the banking industry at large with these rate increases? And if not now, how many rate increases do you think would make it like, oh, this is not looking good? Well, I don't really think that the banking sectors had risk for that at all, frankly, but it's self-serving to me to say that.

Starting point is 01:04:15 So I'll explain. All banks across the country are now making less money than they were making before. And the reason why is, let's say I made $10 billion in loans in the last 14 years at an average interest rate of 3.5%. Right? Unless you have the Fed, it's now move rates up to 5%. You say, well, Chris, now you can go make higher rate loans. Yes, but to move that weighted average of $10 billion up that I made over 14 years would

Starting point is 01:04:36 take another 14 years just to get to a blended rate that's higher. So I could sell off some of those assets, but those assets that I would sell off, those loans, if I wanted to sell them to somebody in the market who wanted yield or some return, they wouldn't pay me a dollar for dollar what the loans are because they would say, hey, Chris, I can go get higher rate loans today myself if I originated them. I'm going to buy your loans that are paying less than market rate. I'm going to give you 95% of what that dollar balance is. So all banks are dealing with that kind of juxtaposition, if you will. Does that mean they're weak? No. The only risk for banks that I've seen so far is deposit outflows and the unrealized losses

Starting point is 01:05:09 like people like Silicon Valley had. They had mood-other cash and securities to make more money, which was a prudent strategy in banking until the Fed took this move. They had about a billion dollars, well actually the more than that, in unrealized losses. When they sold their securities because they had to give the depositors their money back, they had to take the loss because those had gone down in value. They sold them underwater. Loans and securities are no different. We've spent all this time in the media focusing on, oh, these unrealized losses and securities that portfolio is, they put their money in the treasuries and treasuries values went down. Even JP Morgan Chase has billions of dollars of loans that are less than today's market rate. Those loans are not worth one to one that dollar that are in the

Starting point is 01:05:46 them. You couldn't sell them. You couldn't sell them for that. But the JP Morgan Chase, they don't need to sell them. Mm-hmm. I don't think the stress for the banks is going to be, is going to be really this contagion fear that's out there. I think if anything, it's controlling the rare, the rhetoric and the narrative and making sure the depositors know that so far, the FDIC has propped up and worked out every single depositor. From my understanding, Silicon Valley Bank, signature bank, first public bank, everybody

Starting point is 01:06:11 had access to their money on Monday morning. It may have been some temporary inconvenience in some uncertainty, but everybody was well taken care of. The Fed hasn't come out and said, we're going to backstop every bank because the Fed can't do that. The Fed and the FDSC are not the same company. They're different regulators with different purposes. That's why you saw Jerome Powell when he was asked this question about,

Starting point is 01:06:29 do you feel bad about selling first republic to the largest bank in the country, JP Morgan Chase? He said, that's not my job. The FDSC arranges a sale and their job is to do the best they can for the depositors. Right? Because the taxpayers pay for it. So JP Morgan Chase had the highest offer. That's what they sold it. That's the best deal. And that's what it is. What he really suggested was, and the interview is that if you wanted this to change, you need an act of Congress. And I do think there'll probably be some

Starting point is 01:06:55 rhetoric around that. As we approach election time, everybody has a political agenda. I want to be the party that offered up this bill, or possibly a bipartisan one, where we say we can bail out banks to some form of fact. So, let me ask you this this on the political side you I've always a lot of people There's a lot of confusion around this and even I have a tough time understanding this we hear a lot about our Our national debt And how much money the government spends oh my god the debt is too high the debt is too high who the hell do we owe money to like this the government? Who what happens if we don't pay it? Like, what's going on here? Explain it so that the average person can understand.

Starting point is 01:07:27 So, the running, I think, synopsis is somewhere between June and August, the government will run out of money to pay its debt obligations. We have borrowed money as a country that we have to repay. And who are we borrowing it from? Well, I think at this point in time, it's largely China, right? I mean, I don't know the entire makeup of the national debt. We borrowed money from other countries during times of necessity. China is the number one.

Starting point is 01:07:51 I think it has been a while. Actually, Cygnet, we're having this conversation on our show last night that we want to do more of an international look at the economics and the implications, and my reason was what will I do it? We got a bit of this back and forth debate, or I said it doesn't really matter. Now, I'll give you the same answer. It doesn't matter because here's what happens and most of you won't realize.

Starting point is 01:08:08 As the Fed increases interest rates, it increases the payments on our national Fed. So we're increasing payments on the government. So the Fed, believe it or not, is working against the government in increasing its cost of its payments because index plus margin price, the same way any other small business would be, right?

Starting point is 01:08:22 Which is why the President of the United States is really like a business operator. So everyone's freaking out, and it's all over the news, and it's getting sensationalized and inside it's like, well, why don't you care? And my answer is simple, it's because the last 78 times we've hit this,

Starting point is 01:08:35 this juxtaposition, this problem, we just raise the limit. Yeah. And it allows us to continue to take on more debt as a country. So for us to sit here and think that anything we do from a political standpoint is gonna shut down the government. Yeah. And allows us to continue to take on more debt as a country. So for us to sit here and think that anything we do from a political standpoint is going to shut down the government. No. Now, you'll hear some theory thrown out by the government saying option one will

Starting point is 01:08:53 be the government can pay some bills, but not all option two is government will just not pay anybody until they have all the money to pay all their payments for that month. But the reality is we're going to raise a debt. Yeah, it's political chicken is what they do. And you want to hear that the sad part is the real pressure on the reality is we're gonna raise a debt ceiling while the four is political chicken is what they do. And you want to hear that the sad part is the real pressure on the government is right now is that the House and the Senate both have vacation periods coming up towards the end of June in succession. So they have to hurry up and figure it out. So okay, so okay, but back to like if we don't pay back our debt, let's say what if the government was like,

Starting point is 01:09:19 you know what, we can't afford to pay the centric, we're just not gonna pay the debt back. What happens? Is this just mean that like we're not paying China back now? It's a strong arm like crazy political like International pressure could cause you know several or ties with other countries or is it like you know Just we're making up numbers and we so well we'll pay back I there's an argument that we've already severed our ties with other countries and the national debt is being weaponized Against us as a form of controlling that in states. It's a bit of an extreme kind of conspiracy theory statement, but China right now is working with Russia, especially with oil. I can ask you about this to explain to a dummy what's happening with these connections between Putin and Malino.

Starting point is 01:09:58 We're effectively depacking the dollar as being the main currency across the world. the dollar as being the main currency across the world. And I think we've been, since the 1920s, I think we've been like the number one currency and we've used this as a weird way to have a bravado. And again, on the argument we had on the show last night was, okay, let's just say the US dollar is dethroned as the main currency. Wouldn't that be like the worst fucking thing that could possibly happen to us? Wouldn't really though. I feel like the only thing that saves our ass to be

Starting point is 01:10:25 on the run of a ridiculous debt like this all the time is the fact that everybody bases their economies off of our. So if we would now, everybody goes down. It would be a problem for a national debt. And at some point in time, we'd have to figure out a way to repay our debt obligations. But the world's so interconnected. So it turns into the pace or what?

Starting point is 01:10:39 It's going to be pay for God's something. Exactly. So let's go back here. I've been to France many times. I've been to Europe other countries, I mean, you guys have all traveled, right? I like we don't use the euro as a primary currency and now you got London doing what they're doing. It seemed like a pretty cool country to me. It seemed like they were crumbling. It didn't seem like they were like a third world country.

Starting point is 01:11:01 You know, so I mean, I've been to Japan. I've been to the Philippines. I mean, granted some of these countries are not as nice, but so what are the US dollars in the main currency anymore? Well here, let me throw a wrench at this. I don't think that's the risk. I think the risk is that, and I don't think that this risk is gone

Starting point is 01:11:15 because we have the reserve currency. The risk is that we're gonna devalue money to the point where it's almost worthless, and then we're gonna have to figure something else out. I mean, these currencies aren't really tied to anything to anything right? They could just they're fiat They could just they used to be the none more what are they what they connected to now? They're not an nothing We can as much dollars if we want it used to be printed it used to be can tie to gold But we went off the gold standard and I think a lot of what we dealt with is the outcome

Starting point is 01:11:39 But look at NFTs in cryptocurrency as a proxy for an Unregulated you know market trying to usurp the US dollar. The US dollar still remained there. The currencies are effectively digital now. So I look at, again, let's say that the dollar goes down and it's, did you travel in like the 80s to overseas? I was so, I mean, I did, I don't know what the, everything there cost so much more money.

Starting point is 01:12:00 Sure. Everything was way more expensive, right? Like it was just, like the US dollar did nothing in Europe. It was just like, oh, you have a dollar, it's cute. Yeah. It was a joke. So for us being worried to devalue the dollar, I mean, I guess I understand that there's some ramifications in that us as a country would look weaker possibly.

Starting point is 01:12:15 But do I think it's as bad as we've manifested? No. It's an untested monetary policy theory, and I'm sure there's plenty of economists out there who would disagree with me. But I'll give you a great example of how the best laid plans of Mice and men are different. It was Milton Friedman who helped structure income taxes we know it today during World War Two. He regretted that decision deeply and said it was one of the worst things he ever did because now everybody in the country pays income taxes all the time. It was supposed to be a war time

Starting point is 01:12:42 only thing to pay back the war and take it off. Pay back the war and take it off. They never do that. And yet, yeah, they never did that. They're just like, oh, you know what? We like this. It's good. Let's keep this. So I look at stuff like this and think to myself,

Starting point is 01:12:52 okay, we have demonized the idea of not being like the number one currency in the world. I think capitalism will find a way. Okay, well here, let's put our tinfo, fo hats on because when I look at the whole thing, so I'm gonna, I'm gonna, here we go Let's put them on right now. I look at the whole thing and I go man Uh, if they really wanted to control yes, where every dollar went how it was spent and controlled how you spent every dollar Wouldn't it be great if we just got rid of all like physical currency and just made it all digital

Starting point is 01:13:23 if we just got rid of all like physical currency and just made it all digital. And it was all managed and controlled. And God, it seems like they're trying to destroy the currency so they can replace it with digital currency. Am I sounding crazy? Well, yeah, and one quick anecdote. I was just in Arizona and they didn't accept cash anywhere. Like I had to pay credit card.

Starting point is 01:13:39 Like I'm like, is this just a new COVID policy that they enacted that they just never got rid of? Like why would they not accept cash? And then this just gave me kind of like that forced foresight into like, what if, you know, everything is just digital and then, you know, and I'm only allowed to spend it in certain places. So let's go down the rabbit hole.

Starting point is 01:13:59 Oh man, this is gonna get interesting. So they, so that largely companies started doing that because there were about theft, right? Like you have employees, you're not there, you're an absentee owner. Easier to control. Yeah, you can control theft. That makes sense. That's anything. You can't control like sealing your products, but at the end of the day, it's a lot better to sealing your cash. But the NFT crypto thing, I went down the rabbit hole in Web 3 a long time ago, and I deeply regrets spending so much time on it. But I wanted to know more about it. I bought NFTs, all the stupid

Starting point is 01:14:24 rabbits off and pictures of stuff and all this stuff that had a legit utility. And I went down that path for a long period of time. No board apes though, right? Huh? I said no board apes though, right? Well, yeah, no. I mean, if I did, I probably would have sold it all and moved to Puerto Rico like everybody else did, but I do have some interesting nodes from some project that I can't remember, but whatever. But, you know, so I look at this and I think myself, okay, well, we're assuming that the currency isn't primarily digital now.

Starting point is 01:14:53 How often do you really use cash now and how often do you really fly under the radar with how much money do you make? How many? How much money do you make? Think about it. You put your money generally speaking in your bank, right? Yeah. It's effectively digital. When you log into your app, it's one that's not the issue though. I get what you're saying. Yeah. I get that. Like none of us really, you know, we don't sell

Starting point is 01:15:14 drugs or by drugs or anything. Or at least that's not the big, big difference. But, but, but this, that's not my issue. My issue is this. My issue is the ability because they've already kind of floored it this. They floored it this with COVID and you saw ability because they've already kind of floored this. They floored it this with COVID and you saw a little bit of this kind of control. And then they're talking about like these climate emergencies or whatever where they might be like, Hey, you've used up your carbon credits. You're not allowed to buy gas for the next week or you're not allowed to buy red meat. That's where I get my worry. Not that I'm not paying taxes on cash. I'm collecting all of our everything we sell is digital, so I don't make cash.

Starting point is 01:15:45 And not that I'm buying things in the black market, I could care less. It's really the like, then they have their hands on everything and where it's moving and they can stop you from spending or stop you from spending here or control you there. That's why I said put your Tim Foyl on that.

Starting point is 01:15:57 The Uniflation Reduction Act, brother. We're giving billions of dollars, the IRS, to hire thousands of employees to audit more people. I thought they pulled that. They stick to that. They're still doing it. Oh, they are. Oh, I thought they pulled back on.

Starting point is 01:16:14 You got to get all these people man. Yeah, they're still doing it. You got to get all those Venmo, you know, all those people spend all of a sudden. They pulled back on, but certainly not the hiring people to audit you and me and everybody else. Yeah, so that's still gonna happen, but look, you're gonna, okay, so this is gonna go left, but bear with me. Quantum computing is a thing now, right?

Starting point is 01:16:33 And because of quantum computing is a real thing, and we can do it on an atomic level. All the security protocols that we have in place on your phone, your encryption, they mean nothing. We are going to get to a point in society, and I'm not second like now, maybe a hundred to two hundred years from now, where your life is just out there. You're spending, your habits.

Starting point is 01:16:51 No matter what. No matter what. We can fight that, or we can accept the fact that as time goes by, the idea of you having a password will be laughable. Yeah. What security you're going to have with your password and your text message when a quantum computer can crack that in seconds. And I know this sounds dark and weird, but no, that's right. Five years from now. No, that's true.

Starting point is 01:17:12 Mitchell Kaka was just on. Yeah, he did a great breakdown of that. He talked about, and we've done the rabbit hole to me else. He said about more of a, like, even better computing than that and how far down the rabbit hole you can go. But yeah, he did a great, he's a great example of what how scary this could ultimately be for everybody else. So Google built, I think the first one that was privatized, that was publicly known, it was a size of a refrigerator

Starting point is 01:17:36 and the actual cooling thing was this huge piece that I'll tell you the building. And they were able to break their own encryption in seconds. Can you imagine if you were to like, so your point basically is like, it doesn't matter. It's gonna happen anyway. It's zero sum game trying to fight it.

Starting point is 01:17:53 Right, the only way to win is not to play. So we have to, that's why we're moving out of the armature. Yeah, I'm pretty sure the other share are gonna be monitored too. I mean, they can see you in space, man. I mean, praise the digital, the digital division.

Starting point is 01:18:04 So, but it comes down to the fact that you can only play the game with the rules that we have in place now in this hypothetical of, let's say the government does default in the debt. Let's say something like that happens. Our only choice is entrepreneurs to deal with it and continue to try to find ways to make money. Yeah. Protect your family.

Starting point is 01:18:19 Outside of that, I really don't care whether it happens or it doesn't happen. The only I care about is that I know what I'm making decisions based on what's real versus what I'm being told, right? And it's as simple as that. So I don't really look at stuff like this and think to myself, like, okay, what if the US dollar is devalued overnight, we'll find a way to deal with it.

Starting point is 01:18:35 Yeah, that's a great answer. I appreciate that. Very, very level-headed. You actually call me down a little bit because I'm right. And it's can't control it. It's gonna happen no matter what. So all right, so let's more fun questions.

Starting point is 01:18:48 We talked about Robin Hood. We got retail traders coming in, influencing the market, not because they have a lot of money, but because there's a lot of them who have a little bit of money. Do we actually have, do we actually have like an idea? I've heard numbers thrown around.

Starting point is 01:19:01 I've actually heard like a huge range. Do we actually even have an idea of like how much those retail traders are affecting the market? Well, not directly. So on the Thursday that PacWest drops 60% in value, that single day retail traders made about $380 million in puts just on that day alone. Yeah, it's really their ability to organize.

Starting point is 01:19:23 It's what it's worth. They're ability to organize, yeah. They can operate like larger institutional investors on that day alone. It's really their ability to organize. They're ability to organize. Yeah. They can operate like larger institutional investors who had computers buying in massive scale with just humans doing it at the same time. The reason why I ask this is because one of the theories I have on why we've seen the stock market run that we've seen in the last, you know, 19 years, of course interest rates and all that stuff affects everybody has more money or whatever that is winning all the

Starting point is 01:19:44 time. But I think because of things like Robinhood and this ability for these retail traders Ten years of course interest rates and all that stuff affects everybody has more money or whatever that is winning all the time But I think because of things like Robinhood and the stability for these retail traders to come in I think there's a way more of them influencing the market than I think we realized Well, yeah, and Wall Street doesn't want to acknowledge that right there used to being you know king of the street Yes, you know and now and now you you've literally democratized space You just spurs the power amongst all these people. They have free trading on almost every platform now, which Robinhood really pioneered.

Starting point is 01:20:09 They have changed the landscape dramatically. And anybody at any point in time, not as any front of a computer, on their cell phone can go, oh, you know what, I like that company, I'm gonna buy that. Is there getting a bunch of, and everybody's organizing that?

Starting point is 01:20:19 Don't you guys think that like Tesla is a perfect example of this? Like logically, like if their numbers don't make sense on what the stock trades at, it's purely off. Like those aren't big- People are betting on Elon. Yeah, those aren't big institutions.

Starting point is 01:20:32 Have I ever told you my theory on Elon and then whole like Tesla stock price manipulation? No, no, tell me. Okay, so remember when he bought like a bunch of doge or something like that, whatever he put on his balance sheet? So I think he was getting criticism from the FDC and the SEC for stock price manipulation, and he's a smart bastard. So what did he do? criticism from the FDC, the SEC for stock price manipulation,

Starting point is 01:20:46 and he's a smart bastard. So what did he do? He said, okay, I can't manipulate the stock price. Okay, screw you. I'm gonna buy a bunch of this cryptocurrency, put it on my balance sheet. I'm gonna manipulate that price, and that's gonna change my balance sheet value.

Starting point is 01:20:56 I'm gonna sell it. So he's still got to manipulate his balance sheet and manipulate a stock price by the holdings that his company had. So he basically showed the SEC, oh, you're so mighty and powerful. Well, guess what? Now I'm gonna go manipulate this,

Starting point is 01:21:08 which is on my balance sheet, it's unregulated and it's gonna change my price and you can't do anything about it. I think that's what he was really doing. So the question I wasn't have is on, and I know that computers do trading for people now, and I know that's been scrutinized. Accentrating.

Starting point is 01:21:22 Yeah, that could cause, because they're react so fast, it can cause the market to move in crazy directions. What about AI? What about AI in its ability to read the market or potential to read the market, trade for people, and people giving AI machines money and saying, make it happen, and it can read the market

Starting point is 01:21:40 faster than any human could, and just trade and sell at lightning speed. What do you think about that? You're still going to prevent that? That's already happening. Bridgewater Ray Dalio pioneered a lot of that by hiring engineers really early on. He geeked out on the technology well before everybody else was. That's already happening on some level.

Starting point is 01:21:58 Now, I don't think it's not like chat GPT where you're typing in queries and letting it run. It's not retail. It's not retail. But it's an algorithm and an algorithm with AI learning. Yeah, it's 100% happening. Okay. Now is it happening to a small bank regional stocks? No, there's not a trading volume there

Starting point is 01:22:13 for a lot of these companies to make sense of it. Okay. But is it happening on a large scale at larger companies? Yeah, all the time. And that's why controlling the narrative of the media is so important for some of these companies. That's why you see Jamie Diamond looking more like a politician or you see Tim Cook out there

Starting point is 01:22:27 being very measured in his responses because they know some of these things can automatically impact something because as soon as the news cycle picks it up, AI will pick this up, but the retail traders will point at it and now you're getting people making bets on your stock. So that's already happening. And it's only gonna get worse as AI gets better and better.

Starting point is 01:22:43 Well, do you think that the way out, because I look at all this, I'm not even close to as well versus you are, but I look at everything and I look at, okay, debt, inflation, there's a lot of malinvestment, governments can have to raise taxes like crazy to cover certain things,

Starting point is 01:22:59 or we're going to see, and we saw this with the internet, where a lot of what has us, what has saved us in the past is innovation. We just massive improvements in efficiency. So even though shit was like whatever, because we became so much more efficient because of technology, it just,

Starting point is 01:23:16 it took care of those problems and then some, do you see that as like a silver lining? Like maybe we're just gonna innovate our way out of all this craziness. Yeah, but you ever see as like a silver lining? Like maybe we're just going to innovate our way out of all this craziness. Yeah, but you ever see the movie Prometheus in order to create you must first destroy. Yeah. That's a lot of what we're going through in the life cycle right now. And I think that a lot of the way we think about banking is going to change. And a lot of the way we think about jobs is going to change too. You've seen the rhetoric on social media, oh my god, chat GPT can pass the bar.

Starting point is 01:23:43 Yeah. Well, good for you, I'm glad you can, because I sucked at it, trust me, it took it a couple of times, you know? Like that's good, but is it gonna destroy jobs? Certainly, yeah. But when the internet destroyed jobs, it also created other jobs, right? So we have this, as humans,

Starting point is 01:23:57 we have this natural survivor mentality where we look at things as a threat, we don't look at it with this rosy sense of optimism, just going in and hope I don't die. You go in trying to protect your life, right? And that instinct applies everything that we do. We're afraid of losing our market. We're afraid of our family not having money.

Starting point is 01:24:10 We're afraid of losing these jobs. All this stuff I look at it and I think to myself, okay, the fears that are there, like the devalue and the currency or changing the job market, so like that, these things are gonna happen. I think the problem that we're seeing now is that we haven't accounted for these changes and they're impacting us in a way

Starting point is 01:24:25 We never really thought through and as a result things like social media having a platform and retail traders and AI And all these things that are out there are really impacting us in a tangible financial way And they're scaring people like what if my job's gone away? Instead of them going okay Let's innovate through this and try to find the next thing to do So let me support you, but then I'm also gonna clear where they're going. Yeah, and I'm also gonna counter you. So I'm gonna support you

Starting point is 01:24:48 because this has always been the criticism of capitalism. Mark's, this was like his big thing, right? The father of communism, he said, eventually everything's gonna get so cheap and workers are gonna be like slaves and the only people making money will be at the top and all that stuff. And that's never happened.

Starting point is 01:25:03 Like wagon wheel makers went out of business, but now they make car tires and so on and more jobs get created. We're obviously better off than we were 100 years ago, even though 100 years ago, those jobs almost all of them don't exist anymore, right? Now, here's where I'll counter you. I don't think we've ever been in a position

Starting point is 01:25:18 where there's been a technology that potentially could do everything. Like everything and not only everything, but innovate and create. So I don't think we're gonna be in this like jobless future. I think we're gonna be in this future, that's jobless, but we have money. So people are just wandering around,

Starting point is 01:25:32 not having the purpose and getting whatever they want. And that is my fear. So, well, I would say Mark's wasn't wrong. If you go to Lithium mine somewhere overseas and you'll find all these workers that are working for Lithium, which is toxic to their health, that go into our battery. If you go to a lithium mine somewhere overseas and you'll find all these workers that are working for lithium Which is toxic to the health that go into our battery. So in some ways he wasn't wrong I would say the problem with all of the early economist perspective on this was they ruled out the evolution of humanity

Starting point is 01:25:56 I Think you're right that there will be a different way of managing wealth They're looking at wealth and maybe it'll be something like that where people don't work in the same capacity But we're eventually into a point where we're truly a type one civilization. We have the power to destroy ourselves and we also have a united culture across the world. It makes no sense when you think about it from a logistics perspective that we speak more than one language. But we as humans are tribal and we want to stick to our tribes. But look at my son. My son is like 15,000 different cultures and ethnicities. He's going to be a very confused kid growing up, right? But that, but he's a child of the

Starting point is 01:26:28 world at this point. And, you know, I love him for everything that he is, but he certainly doesn't look like every kid who walks on the street. And that's fine. But we need to get to a point where like the idea of racism is so funny because we're one culture. And I know it sounds like all high and mighty, but as you get to a type one civilization, we work collaboratively. It becomes less about classes and more about how can we get to the next life. Because at some point, this planet away from the star will die. Yeah.

Starting point is 01:26:53 And this is already evidence of that. If you go, like my family's from Italy, it's very old culture. There used to be lots of different versions of Italian, Italy, dialects, right? But now there's one Italian, same thing with France, same thing with other old countries. Eventually they all start to speak the same language. I think that's gonna start happening worldwide, especially with AI translation.

Starting point is 01:27:15 I think that's not gonna be an issue anymore. You know, you're common about the lithium miners. Eventually what happens, and you'll notice this with outsourcing, it used to be here, right? So this is something in the desert in Palm Springs. Right. But the really the question isn't necessarily to compare those people to our standard.

Starting point is 01:27:31 It's like why are they working in those lithium is better than the other options that they have. And eventually they're going to be where we are and they're going to have the outsource. And maybe there's not going to be any places to outsource that kind of labor anymore because the whole world has come up. And that's just progress. That's just how we progress. So I agree with you on that sense.

Starting point is 01:27:46 So it comes out of this. I think all the economists were thinking about the world through their opus at their time, right? Mark's freedmen, all these people were living through different types of economies and different types of recessionary periods. And I think the problem for a lot of them was that they never took humanity up a notch.

Starting point is 01:28:01 And I think we're on the inflection point, frankly. And I know it sounds very star trek-like, but ironically, star trek was the type two civilization and then star wars, your type three civilization where you can use it, wormholes and anything else. But the civilizations, I think, are really important because what we're going as humanity as an inflection point is moving so fast.

Starting point is 01:28:20 We look at things like currency, say, ooh, digital currency bad. Well, we're really a worldwide digital currency now. Yeah. We have some bump stops in the way of how the symmetry works, but we've also proven that unregulated or deregulated and uncentralized things don't work. We didn't work together.

Starting point is 01:28:37 At some point in time, there will be a worldwide way to do this with much more symmetry that we have. Now, I'm possibly web through the way, but humanity will get to a point where the capitalism that we experience will be a very different concept than we know now. So for us to look at AI and be scared of it, I think is, again, in the making world,

Starting point is 01:28:58 I keep telling people, stop worrying what the fed's gonna do. I can't control what decisions they're gonna make in the room in those seven people meet. I can only respond to it and do the prudent thing for the shareholder now. And I think that's the same thing when it comes to a lot of these fears, right? I'm not going to worry about what AI is going to do. I'm just going to be prepared to adjust and pivot because it's going to happen. There's no stopping that train. And there's no stopping a lot of these things that are going to happen. Do you think that because the reason why markets and

Starting point is 01:29:22 capitalism has always been so dominant is because the price system reflects, you know, supplying demand more accurately than any bureau ever could before. But do you think that AI will replace that pricing system because it's gonna have its, you know, it's like for lack of a better term tentacles into everything. I don't mean to make it sound evil, but it's gonna have, it's gonna have its pulse on everything,

Starting point is 01:29:46 be able to read everything in like real real time, faster than prices could even reflect. And then it's gonna change the price every minute or whatever to reflect, supply and demand. Do you think it might be something like that? It could very possibly be, but there will always be desires. Humans have desires to have more of something or less of something. And that's really what things trade off of.

Starting point is 01:30:04 And a machine will never get that. if I need steel for my steel business and I have a desire for that more than than you I'm just gonna bid it up and I don't know that AI will ever be able to compensate for that other than they might go out to market In bid the best price per you know for for item that you're looking for But at it's very core. No, I don't think that's what AI will be use the impact I think what it'll do is it'll displace a lot of the logic and thinking that we have. Like a lot of analysts will be moved around like I'll use a great example and don't use this against me. But I had to write an email the other day and I had a bit of writer's block.

Starting point is 01:30:35 And I was like, you know what? I'm just suffocating on my wife. I want to get to my son's swimming lesson. When his chat GBT, write an email that says this, came out brilliant. Really? It's like, this is great. I put it in my own language, and I send it out company-wide. I don't know what it sounds terrible to say, but in actuality, what's the difference?

Starting point is 01:30:51 If a PR department drafted it for me, and I send it out based on their, or my comment department, it is. You're still responsible for it? I'm still responsible for it. I'm still curating the message on some degree. That's how AI will roll out to the masses now. But in like 50 years, will there be Jobs completely wiped out because of it 100% You can go to legal zoom right now and replace half of the test of a typical attorney did. Yeah, is that a bad thing? No

Starting point is 01:31:13 Yeah, I think the most interesting that we'll see and we'll see it in the near future is the first company that's ran by AI Yeah, I mean, well think about what I'd shut the job of a you know an executive is. A CEO of a company is to be able to forecast things, make decisions based off of what's going on in the current the market, foresee what other things that are competing with it. An AI tool that actually makes a lot of those decisions for the company is actually a CEO of a company. I think we all find that department for sure too.

Starting point is 01:31:41 You know, you see finance departments that are running that way. Hey, I need my public filings. Instead of waiting for all these groups to work together to get the analyst and talk to your treasure and get to, I think it'll just be, here you go. Done. All right, so knowing what you know and obviously with your expertise, where does a smart money go now? Somebody wants to invest or should they save, should they hold tight or should they invest in property or in, you know, securities like like where does smart money go?

Starting point is 01:32:05 Crypto. Crypto bro. Get an NFT. As long as it's shaped like a rabbit. The unorthodox advice we've been giving people for last, call it four or five months, is cash traditionally is not something you want to hold, right? Don't hold cash because you're losing money

Starting point is 01:32:19 and not investing in. Actually, last year, cash holding cash was one of the best investments you could have made. Hold in your cash and keeping it into a high yield savings account, probably with the best investment you could have made last year, cash holding cash was one of the best investments you could have made. Hold in your cash and keeping it into a high yield savings account, probably with the best investment you could have made last year. So we're still sticking by that. And what we're saying is, is try to keep as much savings much money as you can. And I know saving versus investing has never, it's got a bad connotation.

Starting point is 01:32:37 Save as much as you can right now. Go into a high yield savings account somewhere between 4 and 5% of this current market, right? Maybe if you get a little better than that, some places. Adam. I knew it was coming down. I knew the job, I knew the job was coming sooner or later. But if you can get a little bit on that. But somebody asked me that question when I had a live play,

Starting point is 01:32:53 I was like, fuck them out the post, it's like no crispy watching my shit right now. Oh, I saved it, screenshot it. Zoomed in on your physique body, showed my wife while we were at Disneyland this. Oh. Yes, put it Oh, yeah. Yes, put it in the account. We recently sent you a text message.

Starting point is 01:33:09 He's buying baseball cards, everybody. Yes, okay. I bought him a pair of ugly shoes. I was like, where is this one? But, yeah, hold cash, at least until call it July or August. And see what the market gives you. I think the easy thing to do is to fall into the temptation.

Starting point is 01:33:23 I've got to put that money to work now. No, you've got time. Right now, savings are high. I mean, if you want the treasuries right now, treasuries are paying you almost the same thing as how you'll savings accounts are. So like, just put your money into something. You don't have to worry about pulling out.

Starting point is 01:33:36 Put it with a bank that you feel comfortable with. Do you think, Dick? Do you think that, because this, that we're talking to this bank, we're talking about right now, actually increased me another half percent just, like, three days ago, are we going to see that? Are we going to see the banks incentivizing, especially with all this news going on, the potential run of banks, I would think that a lot of banks would start putting out some, which, what was the last time, like the early 80s, maybe your 70s,

Starting point is 01:34:05 when you used to see like these great interest rates and banks, we haven't seen that in a very long time, right? When we were seeing five, six, seven percent interest on, let's say it's been, it's been probably 30, 40 years and it's like that. But you're gonna start, there's a dual edged sword for banks to do it though. So grain of salt here.

Starting point is 01:34:22 If you're a bank and you come out with a high rate right now, the market goes, ooh, they need deposits, ooh, they're having trouble. Oh, I see. Yeah, should we trade them down? Ooh, yeah. But if you come out with like a great example, Apple has their now savings account. You have to have an Apple card to get their savings account. And it's brilliant UI. You literally log on if you have an Apple card. It's like three button clicks, two minutes, you got a high yield savings account. It's 4.15%. But they're you got a high yield savings accounts, 4.15%. But they're Apple. They're like, we're 4.15%.

Starting point is 01:34:48 Do you want it from Apple or not, right? And you open it up and you do it. So I think that's probably the range, four to five percent is probably most people will wind up. And every time there's a Fed interest rate increase, banks don't necessarily just bump you up. They're gonna incrementally go up

Starting point is 01:35:02 depending on what their costs are. And give you an idea of a proxy, I'm giving away inside secrets now, so don't use this against me. And I know you of all people will, which messed up. Okay. If you go to the federal home loan bank and borrow right now, the cost of borrow with the federal home loan bank is about 5.25%.

Starting point is 01:35:15 So if I wanted to use that, that fractionalized banking system, I wanted to lever up and get money from them as opposed to getting it from you and a positive, I'm gonna pay 5.25% or I can get it from you and pay you for 1.5% or 5% and I'm still making more money than I would have made if I went into a higher interest environment. And that's really all banking is about, where can you put your money and earn the most

Starting point is 01:35:38 and spend the less, the least? That's really what it's about. What do you think about, I don't know if this has actually happened or if this has proposed, where if you have like a credit score above 780, That's really what it's about. What do you think about, I don't know if this actually happened or if this is proposed, where if you have like a credit score above 780, you're going to pay fees to get a loan to subsidize loans for people with shitty credit. It's 740 and that has started, hasn't it?

Starting point is 01:35:56 It started as a May 1st, but it was over-stigmatized. Myself included, I had a full expedited field rage on social media and I think it popped a vessel. But the truth is that's an FHFA product, right? And FHA, which is not the same thing, is still better rate even with 3% down. So for most people, like 98% of people

Starting point is 01:36:15 that's not even gonna be an impact. And I think the way it was worded was wrong per se. It was not you're gonna subsidize directly, there was gonna be added fees for somebody was a little higher than that. So it was way overstigmatized. But yeah, that's a thing. And I could go off on a narrative,

Starting point is 01:36:30 which is probably not ideal for your fan base about how extremism in this country has gotten really weird and woke cultures part of extremism. And that is a perfect example of, we're now trying to find ways to give people opportunities they didn't earn. If your credit score is bad, I feel for you.

Starting point is 01:36:48 I had bad credit one point time. I made some bad decisions. That's part of the reason I ultimately became a chief credit officer. I want to learn how to have some big bad decisions, right? I had to work my way through it. It took me years to fix things to get above my current scores of 800 and to get to where I'm at. But you earn that over time. That is a reasonable approximation

Starting point is 01:37:06 for the relative credit risk for you. It's not based on race, it's not based on auth, opportunity or ethnicity. It's just based on your track record. And if you have bad circumstances, improve your circumstances. Also, I'm gonna add to that.

Starting point is 01:37:16 There's two things. One, a good credit score doesn't mean you have a lot of money. So a lot of people think, oh, we're gonna have rich people pay more of these fees. No, my parents had great credit. They were poor immigrants. They just paid their debt. They just paid things on time.

Starting point is 01:37:29 The second part of that is you actually screw people who with low credit scores because you give them money that they are at high risk of paying back and you get high percentages of default. So, like, for example, during the home crisis of of 2008 who got hammered the most Mm-hmm people in these communities that they were out saying we're supposed to help yeah, it's not great It would be like taking me and be like we got to give you an opportunity to play in the NFL Cell here you go and they go out there and get killed literally die I feel like you could do okay, and then yeah exactly I'm grateful. Thanks for the opportunity. I'm paralyzed now, right? So I don't think it helps anybody. That's that's just my strong opinion. It doesn't, and that's where a lot of the politics

Starting point is 01:38:05 get in the way of I think what would otherwise be a good capitalism driven system. There's nothing wrong with saying, hey, your FICO scores 800, you get a little bit of pricing because you're considered less of a relative risk. Or hey, you have more money to put down, so you're considered less of a risk

Starting point is 01:38:19 because you have more skin in the game. Sure. But we've now taken the system and we've spun the narrative, like, okay, now we're saying these people don't have, you know what, if you want to classify people as having an extra need, there's tons of program about there to do that. Like a great example, we work a lot with Habitat for Humanity. We treat Habitat for Humanity buyers like we would anybody else who walks in the door with good credit. We give them the same rate, the same treatment, everything else. Because I get it, you come from a different background,

Starting point is 01:38:41 you went through a program with them and you've earned a house. It's the same thing. It's not a FICO score, but it's the same thing. So we don't care what your FICO score is, and we don't care what your down payment is. It's about getting you the opportunity. There are programs out there that serve that type of community very, very, very well. But to try to rob and hoot it, if you will,

Starting point is 01:38:59 or take from the rich and give it to the poor, is not a good lesson for anybody. No, you end up hurting people in the long run, hurting the very people that you think you're helping. Just like, I mean, you look at the dropout rate when they, you know, tried to create programs to let certain people into colleges that they maybe shouldn't have

Starting point is 01:39:14 and they drop out at high rates because now they couldn't, they shouldn't have gotten there in the first place and they missed other opportunities because they were trying to get into this other college type of deal. And then you end up hurting the people you're trying to help.

Starting point is 01:39:25 And there's no perfect system. But I will say that story doesn't have anywhere near the impact as people thought I did, including myself. When I first read it, I was really pissed off. And then I started to kind of like logically go through it. It really doesn't impact that big of a cross-section of the country at all. So in, in OA, we learned from the old, you know,

Starting point is 01:39:40 subprime loans, neg-gam loans, stuff like that, banks decide we're never going to go back that way going forward, 20% down, good credit also with that. So we learned from that big mistake and what happened in the Great Recession. Now we are starting to pay for this artificially low interest rate for a decade. Do you think that we are never going to see sub four or five percent loans ever again? Well, I mean, it's a big hypothetical based on a lot of the actions of people that are somewhat irrational at times, politicians, fed secretaries. I think it's unlikely that we will

Starting point is 01:40:19 see it during our lifetime, frankly, but you never know what might happen. I would say given the trajectory historically of what happens after recessionary economies at least, for whenever this recession is done, or starts to when it's finished, it'll be a call at seven to 10 years at a minimum, somewhere in there, right? It'll be a low economy. Then you'll have seven to 10 years

Starting point is 01:40:37 of a prosperous economy. But being as how this was the catalyst for the most recent prosperous economy, and what we've seen with recessionary economies is that they fix what caused the previous one. I don't think you're going to get the overinflation that you saw like this during our lifetime.

Starting point is 01:40:52 It'll take several decades, probably 40 or 50, before you see the openness of monetary policy like that again that got us where we are at. Give me a mind, there's also a pandemic there with unprecedented fiscal stimulus to people that really, really took this up a notch and also delayed the FOMC coming in and handling. Now, you are speaking logically, but politicians often don't act logically. So recession, it's real tough, new person gets elected, hey everybody, free money again. We're going to give you free money to help you out. Like that is a ranch that could potentially blow up

Starting point is 01:41:27 another bubble and cause things to happen again. A hundred percent. And I'll tell you that that's why I think you're seeing this stoic Jerome Powell come out, is I think he's trying to get in front of exactly that, right? He's gonna come in like, I'm, this is gonna sound terrible, but I said he was emotionless in the way

Starting point is 01:41:44 that he didn't care about the consumer. I don't know that's a true characterization of him, but what I will say is, is he's trying to present, I don't care about politics, the banking stress, the system is fine, I am focused on just getting these numbers to where they need to be to have a healthy monitor. It's poker, it's like playing poker, like 100%.

Starting point is 01:42:03 Everybody is, they're listening to his words, but they're watching him as well. But can they influence him? That's the real question. Right, right. In theory, no. In theory, he should be truly independent. He also idolizes Paul Volker,

Starting point is 01:42:17 who caused a double dip recession during his era, where he raised rates, and then raised him even more, causing the recession to become even worse. It would not surprise me in the slightest if what we ultimately classify this period is as a small, double, a small dip and then a massive dip if what happened

Starting point is 01:42:32 because there's a whole awakening and commercial real estate that's on the horizon as well. Yeah, I really, I mean, I was wrong on my predictions. I would have thought that we would have seen a much bigger dip in real estate, granted considering how much it got inflated and where rates, where everything is at, I thought for sure we would see the housing market take a bigger hit than what it's taken

Starting point is 01:42:52 already. We still might, and I think you still will see that in time, but not to degree that we saw in 08. Yeah, I think where the biggest opportunities for investors like you will be, will probably be in the multi-family real estate side on the other side of what happens. So typically speaking commercial real estate, they don't get 30-year, 15-year fixed property loans. They get 3-5 or 7 in some cases, 10-year loans, and a lot of them are interest-only.

Starting point is 01:43:14 And the reason why is they're interested in maximizing their cash flow. How can I keep my payment the lowest, and then refinance every 3-5, 7-years, pull out any equity that I may have gotten, and then go buy another property. It was you who totally shifted our idea on that. I mean, when we... I love you too. Yeah. I mean, I was really interested.

Starting point is 01:43:31 I know Doug was too. I remember him and I talking a lot about, oh, we want to get this complex, you know, 10 unit. And then when we had a great conversation one time and you really broke down to me, how those loans are structured, how most of the investors are using it to leverage to buy more. It's a great way to rapidly grow your portfolio or your net worth, but for somebody like us with that's not our main thing.

Starting point is 01:43:55 It's like, we much rather take something that's lower risk, slower, makes a little less money and is more conservative. It really changed my idea on investing for us. I completely went away from that after. Because it's certainly this phase in your life cycle. Yeah, absolutely. Commercial real estate is interesting right now, because there's vacancies like never before,

Starting point is 01:44:15 like San Francisco I think is like 30% for office space. Office space. People are not going back to work like they thought, is that gonna continue to change? It looks like there's more remote forever. That is very interesting. I feel like that market has dropped and it's just gonna keep going.

Starting point is 01:44:33 Yeah, and I think that that's gonna be impacted for a long period of time to come. Well, are they independent of each other? Would you still, because that's still commercial real estate also would fall into the category of 10, 15 units also. Yeah. So, so that all falls in the same bucket.

Starting point is 01:44:47 So, yeah. So, would you, I mean, are they going to affect each other or do you look at them independently even though they do fall in the same bucket? Ah, the, the question I find myself answering for even the most sophisticated investors the most consistently. And this is widely misunderstood. So let's start with the basics, okay? So anything is a multi-family or an apartment complex?

Starting point is 01:45:10 Love section. Is typically defined in the lending world as anything above five units and above. Even though one to four units is still finance like single family and it does have multiple units, truly five units and above for the purposes of regulatory definitions is considered a multi-family apartment building.

Starting point is 01:45:24 Yes. Multifamily apartment buildings, office buildings, industrial space, warehouse space, special use, think of like movie theaters or any kind of special use property. Those are all broadly defined as commercial real estate and regulations.

Starting point is 01:45:36 So they all carry very different risk profiles. If I said I had a big box bedbath and beyond right now, you'd be like, yeah, yeah, that's why. If I said I had office building in San Francisco, you'd be now, you'd be like, yeah, right. Yeah, that's why. Right. If I said I had office building in San Francisco, you'd be like, how's it working out for you, chief? Yeah. You know, but if I told you I had an apartment complex in Los Angeles next UCLA,

Starting point is 01:45:52 you'd be like, oh, nice. Mm-hmm. So there's very different risk profiles. So I don't think they're going to affect one another quite the same way. Okay. But I do think the work from home thing might have parallels, right? So I do think it'll prop up multi-family in some ways, because people can be working from home. They want more space, they're willing to pay a little

Starting point is 01:46:06 more for rent, because they're not commuting as much, right? Because they're going to be at home more, working from home more, they want more space. So I think that's where that high-enluxury thought process really came in, that you're going to see that flood the market. But office is going to be forever changed. My own team sent around a message where I said work from home on one of my social media posts was going to be forever in as part of the environment. Meanwhile, we're bringing all the employees back, saying, sitting behind me right now is very grumpy about it. But that being said, I do think there is a hybrid world that makes a ton of sense, but we're losing productiveness with people working from home. They showed that. Yeah, it's absolutely real.

Starting point is 01:46:44 I've seen it. People, it's absolutely real. I've seen it. People don't predict that we're working well. Even considering how much has come back, we're still at 50% of what it was pre-pandemic. I think that's crazy to me considering all the stuff that's came out that said it's, we're less than-

Starting point is 01:46:56 Keep in mind the growth in some of those sectors was so like just massive that they had too many employees. And right now, even with what's going on, if they had brought everybody back, they still have to do that expense management we talked about. And that would still be a great choice. That's an interesting point.

Starting point is 01:47:09 So that's factored into that number also. So if Twitter has 2000 extra employees and they're half, okay, that makes... And they've wiped out some of those employees. So now they have employees working from home, they have way less employees. It's super impactful. And in San Francisco, I don't know if you guys have been there recently,

Starting point is 01:47:23 but it's not the glory days of what it once was, just from a walking around. I'm afraid to take my son there. One of my wife and I first get away as was the San Francisco we loved it. We spend all the time, we fly up and do our thing, right? It's great. I'm afraid to take my son to the city to see what it's going.

Starting point is 01:47:38 It's a home situation, it's terrible. And it's not really a knock on anybody in the city. It is what it is. And then you layer in the mass exodus of tech from the space. And it's gonna be, it'll be a great market still in the years to come, but it'll take several years to rehabilitate. It's just, it's just, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's At one point was like the shining beacon of American cities. Motor city man. And then all of a sudden they just went down, down, down.

Starting point is 01:48:08 And I told them I said, it looked like San Francisco needs to change some of the strategies and policies because it could potentially become Detroit. And it's starting to really creep down to Los Angeles too, in a way where I've had friends move from Santa Monica to Texas and Florida now because they'll wake up in Santa Monica and then ultimately in our home and they'll be like a homeless person in their front yard and they'll be like, okay, well, how did you get here?

Starting point is 01:48:29 And they'll have these conversations and they're just dropped off there. Someone said, oh, we just dropped them off or like the police will bust them someplace else and they'll get bust back around. But they just, there's really not a solution for it, but it is becoming significant in the state and with the people leaving the state of California in addition to that, to better tax havens, it's becoming a situation where, okay, now you with the people leaving the state of California in addition to that to better tax havens It's becoming a situation where okay now you've got wealth leaving the city because of the tax implications You've got businesses that are downsizing because of their sector implications What's left in that space?

Starting point is 01:48:55 What's left in San Francisco? What does it look like? It'll have to be the rise and prominence of another sector at some point in time to really pick up the slack But it remains to be seen what that will be so the life of a banker sounds like mostly boring and then super stressful. Is that accurate? I don't know that it's boring. I think. I mean, like, calm, cool. That's all good. And then, oh, shit. No, I have expedited field rage all day long. Oh, you do. I am a true story. I used to be, I'm ex-buddo field rage all day long. Oh, you do? Oh yeah, all day long. I am a true story. I used to be, I'm 42 for what I do, what I do I'm pretty young, but I started off,

Starting point is 01:49:33 immature as shit, it bad. I once drove a woman to chain smoking because I was so happy all something had happened in the day that I stood up on a cubicle next to hers, put my arms out and screamed that I was Jesus. Wow. I didn't know that I was Jesus. Wow. I didn't know that she was devoutly Catholic and it stopped smoking. She started chain smoking again afterward.

Starting point is 01:49:50 She, a poor woman, but I've learned to keep my emotions under her in check. But I can see why you and Adam are such good friends. Yeah. You like the finance Adam? Pretty much. Yeah. Bad and we hold hands. You know, the finance Adam. Pretty much, yeah. Yeah. Bad and we hold hands, you know, it's fine.

Starting point is 01:50:05 But so yeah, it's, it's, it can be kind of boring at times, but I like the people that we work with. I like the family. It's a big, big family now, you know, but you know, probably a little under 700 employees at this point, but I also keep myself as a little of the things too. So I think if you're in banking and you're trying

Starting point is 01:50:23 to be creative, it's hard. That's what all the other outlets are for. Well, what's the most rewarding thing for you about banking that he's in the back counting is gold coin. Yes. I get very rich. We'll see. We'll see. You're all the deposits.

Starting point is 01:50:39 Yeah. I would say it is taught me so much about money. And to think about it so differently than I ever have ever been raised. I can say that being taught me so much about money and to think about it so differently than I ever ever been raised. I can say that being a really cool person. And the reason why I got into it ironically, and it was really kind of drawn to it, wasn't because I liked this career. I would have never guessed in a million years

Starting point is 01:50:54 what we'd been doing that's be like me and my moron. Why would you put me in that position? But I'm here, said, say, I think what drew me to it was I got an opportunity to look at tax returns, I would start off as an underwriter. So I would look at people's tax returns of financial information and figure out how they got wealthy. And you start seeing the same pattern

Starting point is 01:51:10 and practice over and over again. And it wasn't me on social media going, ooh, tell me how to air be in B. Arbitrage. Yeah, yeah, yeah. It was me actually looking at wealthy people and figuring out like this is how they did it. Yeah. This is what I need to do in order for me to make money.

Starting point is 01:51:22 Share that, share that with the audience. Like what are the things that you learned in your journey of looking at so many of these things that you're underwriting, like what are the most common things? It was stood out amongst the wealthy. Man, okay, so I'm gonna say this is general advice. Do it with it, which will. As much as taking a company public

Starting point is 01:51:39 sounds sexy and sensational and it's a great liquidity event, that is not the path to long-term wealth for your family. And if you're interested in just an exit for money, and then you're gonna deploy that money somewhere else and do something with it to continue to build wealth, then fine. But for most people, you're generally gonna have more legacy wealth for your family over time

Starting point is 01:51:57 if you build a business and keep that business private, not public, and continue to pass it on through generations. Now, typically speaking, the second and third generation will not manage it as well. And that's why you see a pivot from generally some money making business to real estate. It's very rare that that really makes the money, keep the money, and have the money make the money for you. Right. And I think we look at some of these wealthy families, the Vanderbilt, the Rothschilds, over

Starting point is 01:52:23 time as, oh, they did all these things, they took advantage of people. No, they made a ton of money, right? The second and third generations were not the ones that were going to the company business, and sometimes they were. They ultimately pivoted into other assets, largely real estate, and there's a lot of benefits to real estate that I think most consumers are recognized. You get the depreciation and amortization write downs. You can effectively take your LLC, which owns your piece of real estate,

Starting point is 01:52:45 if it's a commercial piece of real estate or not, your home, and then you can write down your expenses before you pay taxes, as opposed to you get your taxes taken out when you get your paycheck from a W2 employer. And you start to look at the relative taxes that wealthy people are paying, and you start to go, okay, this is not fair. Once you get past the fair, not fair, it's legal.

Starting point is 01:53:03 And you start saying, I can't challenge the system. I can only adapt how I do things that I fit in the system. You start to accept that you need to have a healthy world where you're making money and something that you're doing. In my case, it's this, the making industry and some of the other things that I'm doing inside, the law firm and everything else is fun. But it's this, right? And then you take that money and you live on a lower amount and deploy that money into something that you can invest in and you do it over time. People who say, I own 30 or 40 units.

Starting point is 01:53:33 This only happens one of two ways. You got a ton of money from somebody, right? Or you made a ton of money somewhere and you deployed that capital or you've been in this business for a long time buying over time. So that's why you see these guys on social media saying, oh, I own 240 units, oh, I own the 45 units.

Starting point is 01:53:47 But they own is they own syndications. They bought into somebody's portion of somebody's real estate and they're saying they own all the units. It's very much a discipline and a skill, similar to fitness. Like if you ask me how does someone get in shape, like they work out consistently, they do healthy consistently.

Starting point is 01:54:01 Now the nitty gritty is what works for you, what helps you stay consistent, what do you enjoy, what is your tolerance for, just like- Delayed gratification. Yeah, just like investment, like okay, you know, like a good investment advisor, when you ask them, we're sure I put my money, they're going to ask you questions like, well, are you risk averse, what do you want this money to do for you, or is it okay for risky with it? How much do you want to use this money?

Starting point is 01:54:22 A little off of- Yeah, so that's where you get to the nitty-gritty, but what you're saying is like, 100% basic, and people think, and I think it's because we hear, there's two reasons, one, and you're a dad, so I'd love your opinions on this. One is you hear the occasional story

Starting point is 01:54:37 of the person that made millions of dollars, you think. Oh, that's how you get rich. Two, we learn none of this is school. We don't learn anything about debt. We don't learn anything about savings. We don't learn anything about how to get rich. Two, we learn none of this in school. We don't learn anything about debt. We don't learn anything about savings. We don't learn anything about how to build wealth. We learn how to become employees and that's it. And that, we end up, we go out into the world,

Starting point is 01:54:55 totally financially, illiterate, completely, not knowing how any of this stuff works. So I think those two things are why people are screwed. Oh man, I think we just became best friends. So I started a book a while ago and I finished it and then a little bit of the last couple of years happened and I started to pause. And the book was all about financial literacy and because we get out of school not knowing these things, but it was done to us.

Starting point is 01:55:18 It wasn't just happenstance. When you go back to when the government was curating the program of education that we currently have in place to this day, sad as that is, they went to these wealthy families, the Vanderbilt and Rothschild families and they said, hey, you guys are the largest corporations in America. What do you need from your employees? What do you want? I want somebody who's going to sit in the chair, raise their hand, answer questions, and I want somebody who's going to want to work their way up the corporate ladder who wants

Starting point is 01:55:41 a steady pay. The entire educational system was built to give them what they wanted. And so that's how we actually started the podcast. We were joking that we wanted to be like you guys in the finance world and teach people that education doesn't matter. I did not get to the position I'm in today because I'm educated. That had nothing to do with my financial position. And anybody who's went to a great school,

Starting point is 01:56:05 that's not true. It might be the network that they met while they're there. The connections that they might have had that have gotten them to that school, but education means absolutely nothing. And anybody who tells you otherwise is living in some kind of fallacy. It is really comes down to what you can do

Starting point is 01:56:17 with your skillset and apply it. And the more and more I look at the financial system and the way it's structured, we are putting kids in the worst position possible. Totally. In today's culture as a dad, my wife doesn't work, and I'm blessed, and I recognize that I'm blessed that she doesn't work.

Starting point is 01:56:32 She's a nurse, and I loved it when she worked because it gave her a sense of fulfillment, and it was a very tough decision for us for her not to work. But we also knew these were times we would never get back with our son, and you really only get 18 summers with your kids, and after that, if you did a good job, they may wanna stay with you and you're lucky

Starting point is 01:56:47 if you get 18. Right. You know, and we wanted to spend our time focusing on that. But for most families, they don't get that luxury because they've got expenses to pay, their mom has to work, the dad has to work, and then when you're gonna teach your kid about how to make money, you're trying to survive.

Starting point is 01:57:02 So, so much that the system is built against our children. Yeah, I'll give you a personal example. So my parents are immigrants, uneducated. So my mom came here when she was four, high school education went back to Sicily, met my dad, stopped going to school in fourth grade because he was super poor, had to work, came here, and I learned my initial financial literacy from them,

Starting point is 01:57:24 which was very minimal. What did I learn? Save your money, make money, don't spend it on stuff that you can't afford. That's all I learned, okay? Now I was 19 years old making six figures back in 1998 running gyms. What did I do? I saved it and I spent very little of it.

Starting point is 01:57:39 I drove a Volkswagen Golf. I was making six figures, 19 years old, this back in 90s, it was a shit ton of money for a kid. Over 100 grand in the count. Yeah, and I saved my money. Now, I wish I had better financial literacy because I had my parents known more, aside from saving, I might have invested

Starting point is 01:57:57 because I was in a great position to do so, could live with mom and dad, I could have bought properties, I could have bought this, and I would have been better off. But I just learned the absolute basic basics. People didn't learn that. None at all, no. And this ad part is, is that's true.

Starting point is 01:58:10 But I would say that the best lesson you could have gotten wasn't the financial literacy, it was the adversity that builds character that you got from your parents. You saw the adversity that they overcame to get here. The character they instilled on you is what gives you that perspective. And there's a lot of people who grew up with a lot of money, and I've seen this too, and I look at people's underwriting,

Starting point is 01:58:30 I look at people's financials, and you can tell who inherited money almost instantly. Really? You, oh my God, when you meet people, you can tell, and there is a kind of... Like he earned it, or he, he, he, he, he, there's a crude economy if people who have earned it and people who have been giving it.

Starting point is 01:58:42 Is it the way they talk to you, or the way they talk about their money? It's the way they talk about their money, it's the way they carry themselves and it's absolutely just their overall demeanor. Like the conversation that you and I have as two guys who didn't know each other, we're so friendly, you could tell the university was there.

Starting point is 01:58:58 Whereas there's conversations I've tried to reach out to people who I know have been given money and I know I'm worth more than them and I'm having conversations with them and they will big league me all day long because I don't wear a Rolex or because I dress like a hobo half the time. I get it. But your perspective of me being part of your like echelon doesn't necessarily mean that it's true.

Starting point is 01:59:17 And you can absolutely tell the sad part about the system that we're in right now and the impacts to the families is that these kids aren't given an opportunity to create legacy wealth for their families. And so, few of us are blessed to do the things that we've been able to do to be able to pass that on. I spend more of my, when I was a kid, I dreamed about exotic cars. I wanted a Ferrari Lamborghini. And now that I can afford one, I I would never in a million years What I want is the opportunity to give my son a better start than I had And that's the hope that everybody can give their kids is that if we do our jobs right in our lifetime Our legacy legacy in law really meant family our legacy will be giving our family a way better start and imagine all the stuff You could teach your kids about financial literacy,

Starting point is 02:00:05 about starting a business, about all the things you did to overcome adversity to get to where you are today. Yeah. Yeah. My oldest is about to go to college and I could afford and I could afford to pay for it and a lot of stuff. But we sat down and I said, look, you're lucky that your dad can afford to pay for your college, but I'm not going to pay for a degree that has no market value. There you go. So let's talk about what you wanna learn. If you wanna learn art history, no problem. You're gonna go learn on YouTube. You wanna get a degree in engineering?

Starting point is 02:00:33 Okay, maybe I'll pay for that, depending on where you go to school and what type of engineering. So we had this conversation because I felt like, rather than go get whatever degree you want, they're all, that's not the case in the real world. Some degrees have market value, some don't. A hundred percent? And I'm not gonna pay money for real world. Some degrees have market value, some don't. A hundred percent. And I'm not going to pay money for one that's worth nothing in comparison to the amount

Starting point is 02:00:48 I spent. So we had that conversation. And that's what we decided. We picked a one that has market value. That's valued more potentially than the money that I'm going to invest. What did you pick? And he's going to be a computer science. Ah, yeah.

Starting point is 02:00:59 Yeah. Okay. Yeah. If you go back and do it all over again, if you had to pick a degree, what would you get? Oh, if I had to pick a degree. Yeah, if you had to pick, if you had to go back all over again, if you had to pick a degree, what would you get? Oh, if I had to pick a degree. Yeah, if you had to pick, if you had to go back and get a degree and you had to pick one now,

Starting point is 02:01:08 would you based off of fun or market value? Just, what would you get? Whatever you want. Oh gosh. I think riding code is gonna be extremely, like that'll stay. Okay, yeah. I can't see you right in code.

Starting point is 02:01:16 Oh, I would never say, you're not, you're not. If I could go back and do it all over again, I wouldn't do any of that shit. I wouldn't waste my time in going to school at all. If I, if you made me go to school and I had to go to school, you have to get a degree, you're my son's, all three of you handsome fellows. I like to. Yeah, I think writing code.

Starting point is 02:01:31 What would you get a degree? If I had to, it wasn't too much about money or whatever, psychology or history, both interesting, quite a bit, yeah, both, not very long. History, arguably useless. I wouldn't pay for that, sir. That's true. I probably pay for psychology.

Starting point is 02:01:44 I like psychology. Let me back you up on, I like psychology. I like psychology. I actually probably would have went to those classes. And we're getting so fucked up as a society. I think we're going to need more or therapists. It's like college is out there to navigate this weird AI world, world, world, world, world, world. So that'd be a viable career, I like that.

Starting point is 02:02:01 Or, or, or, or some, some science, or, you know, maybe neuroscience, or even medicine. Justin, where you at? You see the science, or, or I some some science or you know maybe neuroscience or even medicine. Justin, where you at? You see the science or I was going to go to the opposite direction and go and trade school like a more industrial arts just because of the skill. I feel like it's a dying need that you know amongst all of our innovation everything. There's still going to be people that need to fix it. No, there's a to support. There's a theory out there that those those will be the last jobs. Those will be the last jobs to go from AI.

Starting point is 02:02:28 Yeah, tradesmen and will potentially be some of the highest paid people in the next two decades. But he actually has them everywhere. So he did go to school. Must be where the guy is. You know, Doug, what would you go back for? Architecture. Wow, you're not see that one coming.

Starting point is 02:02:41 Yeah, did not see that coming. That would be a waste. Yeah, I'm not sure. I'm not sure. I got a business degree. I'm just kind of wasting. I'm just wasting my printers already. Yeah. Airea, I'm just gonna be a scientist.

Starting point is 02:02:52 Designed me a house that looks like this. Yeah, true. I think I'm gonna go back for accounting. I'm gonna say all the things that I do on a daily basis that could be applied to work or my personal life. I think the one thing that had the most universal appeal was if you understood something is boring and is painful as accounting,

Starting point is 02:03:08 you could run your personal finances, you could run your family's finances, and you could run your business. That's what I've studied. Yeah, that's what I've really. I knew you were sexy for a reason. Yeah, all they said is that. And it's very much so has served us

Starting point is 02:03:19 in this business for sure. I've done that. Now, don't you think that'll be one that'll put you in place by AI though? Maybe, but you need to understand what AI is doing. You have to know enough, right? You have to know enough to be able to weaponize again. And into this day, I'm still on some calls,

Starting point is 02:03:33 well, like an investor will call me up and I ask me like a really technical account question and I'll go, yeah, yeah. And I won't have like an, I have to think it through because I'm like, that doesn't make a whole lot of sense and I wish I knew more about this topic. I can't say that. What's been your, for you personally, I don't know if you can answer this or not, but what's been your biggest money maker for you with your investments and what you've done? Well, so there's a couple of different paths to becoming a millionaire, right? Like saving, right?

Starting point is 02:03:58 Starting a company and being an executive at a public-traded company can do that for you. And I've made good money there. So I made a really dumb decision that turned out to be a really good decision. So again, there's a common thing of me being a moron that you guys will run to this whole story. I, you play that by the way, very well. The being moron? No, like I am a moron, but you're not.

Starting point is 02:04:19 No, I am. I'm not that smart of a person. It's smart enough, bro. Yeah, I've got it. Hair transplant makes you look smarter than you normally would be. Um, so I, uh, yeah, science, yeah, science, right? Elon Musk.

Starting point is 02:04:31 He's set it up for everybody. Everybody's got a hair transplant now. And I can say I'm a transplants driver. Um, so I took stock out of the company and I sold my stock, um, thinking that I was gonna leave banking like about probably five years ago. And I thought, okay, I'm gonna leave banking, like about probably five years ago. And I thought, okay, I'm gonna leave banking, and at the time I had gotten to this point

Starting point is 02:04:49 where my first property that I bought was a single family home, and about, I bought it for, I was like, a hundred and, I wanna spend so long now, I wanna see if it was $140,000, $150,000. I put about 25, 30% down somewhere in there, and it cashed about 400 bucks a month. After taxes insurance, I am pounded for everything,

Starting point is 02:05:04 so I pay principal interest taxes and insurance and then after the rent, I made about $400 a month. At the time, I was like, that's great. I don't need to live off of this awesome money. It went from buying one property year to buying two properties a year and I was like, this is good, like I'm making like an extra $800 every single year by doing this.

Starting point is 02:05:20 And then I was like, okay, well, I don't know that one would be banking for much longer and I thought, okay, you know what, maybe I'm gonna leave. Maybe I'll leave the company. And I sold a bunch of stock over the period of, call it a year and a half, two years, and started buying a ton of real estate. And I actually sold the stock price was high

Starting point is 02:05:37 without knowing where it was gonna be today, and the period of life that was gonna go through. And I went up buying real estate at a relative low, and kind of building out something that I didn't think was gonna go through. And I went up buying real estate at a relative low and kind of building out something that I didn't think was gonna be there. And I would say that real estate in my investments also the company had really made me the most amount of money as far as the net worth goes.

Starting point is 02:05:54 Now I don't look at myself from the perspective of like a net worth and say, oh, I'm worth this. I think that's anything that's sexy. I look at myself solely from cash flow. I don't care what I'm worth. It goes up, it goes down, it doesn't matter to me. My cash flow is really what drives my world and my wife's American Express spending. But,

Starting point is 02:06:10 which has been highly, but we talk about this a lot on our show too, where people put this emphasis on what's made you the most. Do not confuse net worth with success. There's a lot of people who have a high net worth that don't make a lot of money because they have like private planes and they spend all this money and everything. It really comes down to how much do you make every single month and how much do you free cash flow after your expenses? That's true freedom. That is the only thing that matters.

Starting point is 02:06:33 Everything else makes your ego feel good about yourself. So I would say that most of my cash flow now comes from the rental properties. By sheer happenstance and luck of decision making and timing, but it worked out really well. Now I live off my salary predominantly from the bank and for those of you who don't know, the way banking and executives at public trade companies work, you see these big salaries for executives like, oh, God, that got me a lot of money. Well, typically speaking, there's a much smaller cash component which you get in the form of a W2 paycheck. Then you get a bonus, which is usually some type of percentage off of your salary, usually like 150% or whatever it might be.

Starting point is 02:07:03 In some cases, Jamie Diamond, it's like 10 billion percent bastard. But it's paid usually out over stock, not in cash. And you get it paid out over the course of three years. You get one third up front and then a third and a third. But you still got to pay taxes on all that. That's why you see these guys selling off their stock. It's not because they want to take all this money and go live like a lot of them.

Starting point is 02:07:20 You still have to pay taxes on the stock that you received that year. If you don't catch it out. You have to pay taxes on the stock that you received that year, even if you don't cash it out? You have to pay taxes on the, well no, so you'll pay taxes on the relative stock that vests plus your cash component. So keep in mind the way it comes through is, my bonus is effective, so here this is the messed up part two.

Starting point is 02:07:37 My W2 is tax like anybody else is W2, but because my compensation is in the highest bracket and this is not me complaining, but this is me going to logistics, my bonus, let's say it's $400,000. I'm taxed 58% in California off the top. I will take home about 42% of that. So that big number is more than half gone right off the top. So that's the taxes there, but then anytime you sell stock,

Starting point is 02:08:00 you're paying a decent amount of taxes. Well, no, of course I know that, but I thought maybe you were saying that when you, with, like, you get the stock, you have to to pay the tax no, no, I don't know Okay, that was But typically speaking I'll pay I'll sell down some stock throughout the year leading up to tax season to pay down my taxes for the rest of the year But most of my tax position is pretty well insulated because mostly real estate now right right smart So I'm gonna go back to because we're all fathers

Starting point is 02:08:21 Um, and you did you did say something that I think about a lot, right? Which is this, a lot of what motivates me too is like making sure that my son can have a better start than where I was at, right? And hopefully he can compound on my knowledge experience and then take our family further, right? How do you wrestle with giving him a better start, but not so much of a good start that he's a lazy fuck

Starting point is 02:08:47 or he's entitled, or like, I mean, I wrestle with this all the time on what that's gonna look like when that time comes. Like in a reading a really good book, just recently called Die Was Zero and it has an interesting philosophy even on how your kid inherits money. Like the average person inherits money at like 65,

Starting point is 02:09:05 when like 90% of the people say that when they got that money, it was, they didn't need it. And the average age when people need it is between 26 and 35. So if you were thinking about giving your kid money and you're working towards to put them in a better start, then wouldn't it be smarter to help them out in that age time?

Starting point is 02:09:19 And so like, even that's got me thinking different about how he'll inherit what I have created or what that. How do you reconcile that and what are your thoughts on how to help him but not help him too much. So a big fan of that book number one largely because that's exactly how I live my life right now, but I've seen so we have a several billion dollars of wealth assets, assets under management from a wealth advisory firm side of our institution. And I've seen legacy wealth and it builds up and builds up and builds up. One of my friends growing up and we're not very close anymore

Starting point is 02:09:50 but he inherited a pretty significant amount of money when he turned 3035. And when I asked his father who was a very well-known attorney and sports agent and tried the case that brought athletes go from college straight to the pros and he was very, very big. I actually studied his cases in law school but could go home and talk to him which is very weird. I asked him why one day and he's very, very big. I actually studied his cases in law school but go home and talk to him which is very weird.

Starting point is 02:10:07 I asked him why one day and he was very forthcoming. He's a New York, like tough nose Jewish guy came up in the prison system while he was going to law school. I mean, the guy is brilliant. He's a stud by all traditional measures. He said, look, I don't want to be dead when my kids enjoy the money. I didn't work this hard to not see them thrive,

Starting point is 02:10:25 but I also wanted them to get far enough in their life to where they knew what it was like to go out there and get a job and learn on their own and have to plan. So I didn't tell them this. I gave it to them on their birthday when they hit an age and when they were all the same age. I mean, some obviously had siblings over older.

Starting point is 02:10:42 It was interesting, and the more I thought about it the more I was like, because this is different, because everybody I see on the Walth advisory side, they get to a certain age, their kids are living a lifestyle underneath their arm, and they're kind of always underneath mom and dad's arm, they're never really learning to be independent on their own.

Starting point is 02:10:57 When it came time for our son, instead of starting a 529 college plan, which a lot of parents do, is they put together this college plan if your kid uses it for college, get some tax benefits, I thought, what if my kid doesn't go to college? I gotta be honest, I truly don't feel like my education got me where I'm at.

Starting point is 02:11:09 And I truly don't know that if my son came to me when he was college, I just said, hey dad, I want to go into this business, I feel really comfortable with it. I'm good at it. Here's my plan. Here's what I want to do. That I would say no. I might say, hey look son, I believe in you. Here's the money. It's yours to lose, but go take a risk that no one ever gave me the opportunity to take. Yeah. So instead of doing that, we put his money into a traditional investing account and it's traditional stock and investing. And we continue to invest that.

Starting point is 02:11:34 And the idea is when he becomes college age, that'll be his decision, not mine. Yeah. It's his money to lose. But my wife and I started with this a lot. So I do travel well. I travel a lot. And when I do travel, I usually travel first class, not uncommon for us travel private. We do all those things, right? My wife and I, and I told my wife, you the day, we had just flown to Hawaii and then to Disney World. We spent a lot of time at Disney, which is like

Starting point is 02:12:00 hell on Earth in moments and great in other moments. But my son has been on more first class flights at the age of four than I had been in my entire life before I made money. Like how messed up is this kid's perspective going to be when he gets the school, right? Like, he's even got, I mean, he's four, so he's not going to know. But then at the same time, we were like, okay, but we're so happy. We live in an 1180 square foot three story attached townhome. It's not like Subaru of the top luxurious. My wife drives a 2018 Tesla, I drive a 2015 G. I do have some project

Starting point is 02:12:30 cars, but those are not in the house. You can see those. It's a subtle balance. And I don't know that there's an answer for it, but the intention is my wife and I are going to live the luxuries on things like vacations because it's not everyday reality, and we're going to spend the money there. But we're not gonna upgrade our life to a lifestyle until he's old enough to see us do it and remember it. Yeah, so I've talked to a few people about this. The best answer that I, because I grew up very different than my kids are gonna be growing up. 100% right? I like what Steve Harvey says. I was a Steve Harvey where his kids are like, are we rich dad? He's like, I'm rich. You know, you know, the shacks as that. Oh, yeah, yeah. It's not killing you.

Starting point is 02:13:06 Steve, I had a famous meme on TV. Yeah, no, the best answer I got was have your kids volunteer a lot. That's one of the best ways to teach them perspective, to give to others, to, you know, and other places. So you could pay for them to, hey, do a year over here, go volunteer, and go see what it's like. And that, that, do a year over here, go volunteer, and go see what it's like. And that was the best answer that I could get. Because when you buy volunteer, walk me through it.

Starting point is 02:13:29 Like volunteer, like go build houses. Like missionary, or yeah, volunteer work for, you know, Peace Corps or something like that, right? I'm giving you just general, but volunteer work. Volunteer work where you're serving others. You could see some perspective and what things are like. Because to be in a position of wealth, you have, and I heard this, this is how it was explained to me, you also have, you're also in a potential position of responsibility where you can actually, you know, help people.

Starting point is 02:13:55 Oh, yeah. So that was the best, the best answer that I got. I think what you said is actually, first time I heard someone say that, I think that's a really interesting, like your kids won't know, right? Yeah, well, what, I mean, I like this idea of, because you're right, someone say that, I think that's a really interesting. Like, your kids won't know, right? Yeah, well, I mean, I like this idea of, because you're right, and I think the same thing, and I have the exact same story with the whole first class thing with my son, like, 100% that didn't happen for me until I was an adult, that's all he's flown,

Starting point is 02:14:16 like, so I definitely have that same feeling. But that doesn't happen every day. Like, that's, you know, happened a handful of times in the last year or two, so his memory of that will probably be vague in comparison to his house, his toys, his room, the things that he's got every single day. And so trying to, you know, live a more minimalist life day-to-day in front of him until he's an old enough age to see, like, maybe the more lavish things is not a bad strategy. I've never thought of that like that.

Starting point is 02:14:45 I think that's kind of a cool perspective. And when you think about it, as much as it sounds like self-sacrifice, it's really not. It allows my wife and I to invest for longer. So my mortgage payment right now at our house is $1,700 a month before our H away, which I think it's an LH crazy.

Starting point is 02:14:57 It's like $2,200 a month. It's nothing compared to like what it could be, right? So it allows my wife and I to have really strong cash flow for prolonged period of time. It also is small enough house to where we have a fight. We're there together. You're not getting away from me. I'm like, you can't go to the West Wing. And you go, yeah.

Starting point is 02:15:14 I mean, when she had a postpartum depression and she would get upstairs and she would go away, like I'm always in close proximity. It actually worked out really well for us to work through that together as a family because we were always there. And I know it sounds like sometimes people need space and I understand everybody's different,

Starting point is 02:15:27 but there's something to be said for maintaining humility as your family and earning it together. And unfortunately, or unfortunately, depending on how you look at it, we have a four year old, and he needs to learn that humility and earn it with us over time, which means delayed gratification for all of us. But that gives us so much more time for investments

Starting point is 02:15:43 or activities. My dad, by the way, said that. So my dad grew up very poor and he says, I don't like big houses and I said, well, why, what do you mean? And he goes, because my kids I'll go to the room, I'm over here, I don't get to see my kids, he goes, I grew up in a house so small,

Starting point is 02:15:56 we're always together all the time. He used to say it to me all the time when I was a kid and I didn't really understand until I had my own family. And it makes sense to me. So I have two step sisters and a step brother, right? And they are my brother and sister. I love them today. I have a full sister who lives in Oklahoma.

Starting point is 02:16:09 She's one adamant management, property management company, and it has a real estate out there. The three of them that are here, they grew up in a much bigger house and lifestyle. They, I mean, there was a five bedroom, four and a half bath that my dad's still living in today with my step mother. And I think one of the kids, the youngest one lives there. They are very different than my sister and I who grew up in a much smaller house and a much different environment. And the relationship between my dad and my stepmom is not

Starting point is 02:16:34 the same as the relationship between like my wife and I where much like she is my best friend. Like we are that core unit and it's I think it has something to do with proximity. I think it has something to do with being, when we were kids, we grew up. Now I saw my dad make a ton of money and lose a ton of money, which is part of the reason why I knew I wanted to know so much more about, like other businesses growing up. Like I wanted to know more about commercial real estate.

Starting point is 02:16:58 I wanted to know how much more. But I learned so much through adversities and watching my dad's like overleveraging real estate going into the great recession where he lost all of his investment property. I learned so much through adversities and watching my dad's like over leveraging real estate going into the great recession where he lost all of his investment property I learned so much from that That I began to shift my value like my value shifted from I want to be make money and would be rich to I don't ever want to be poor again And I know how gentle that balance can be between good investment and bad investment when the market changes look at first Republic bank they were a well-run bank and they went from a well-run bank to

Starting point is 02:17:27 oh my god get your money out of there. The sky's on you know gonna explode above them and you know it's gonna go to hell on earth. Well that's how that's how subtle wealth is and you have to be pragmatic and thoughtful and think the long term. So I look at our family and I look at the things that we're in now and I'm thankful for all the adversity I had growing up because I can now I I can now feel comfortable just being me being in a t-shirt and and shoes and And I you know have subtle things that I like that are little luxuries and not have to worry about impressing anybody

Starting point is 02:17:57 Because I know when I go home like my best friend at home with me I got a son who I'm trying to you know build the best life for and everything else winds up being secondary Hmm excellent. That's a great place to end right there. Yep. Chris, thanks for coming on the show, man. Thanks for having us. Before I say goodbye, man, you guys are great. You guys are such a huge impact on my life. I listened to Mind Pump early, early, early on and the three of you, actually, four of you, sorry,

Starting point is 02:18:17 look, we're so huge in shaping the way. Like, I learned to do things and our podcast wouldn't even be here if it wasn't for you. And especially out of man and you've been amazing. So thank you guys. Yeah, yeah, yeah. In your podcast, we'll make sure we mention it in the in the in the intro. So people can come listen.

Starting point is 02:18:32 Yeah, good advice. Thank you. Thank you for listening to Mind Pump. If your goal is to build and shape your body, dramatically improve your health and energy and maximize your overall performance, check out our discounted RGB Superbundle at MindPumpMedia.com. The RGB Superbundle includes maps and a ballac, maps for performance and maps aesthetic,

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Mind Pump: Raw Fitness Truth - 2082: Is Your Bank Safe? Chris Naghibi

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