Russell Gray on Protecting Your Wealth with Cash Flow Real Estate – EP 75

Interview with Russell Gray

Russell Gray on Protecting Your Wealth with Cash Flow Real Estate

Today, I’m speaking with Russell Gray. Russ is a financial and business strategist, real estate investor, and co-host of The Real Estate Guys™ Radio and TV Shows, which has been broadcasting weekly since 1997.

The podcast version of the show has thousands of episodes and has been downloaded over 15 million times.

Russ is an expert on the subjects of investment strategy, finance and real estate investment planning, and has consulted with hundreds of investors on their personal financial strategies.

He’s also the co-author of Equity Happens: Building Lifelong Wealth with Real Estate.

In this episode, we talk about Investing in cash-flowing assets that protect you in a down economy, the differences between (inflation, deflation, stagflation, and shrinkflation), and why our current financial system is so broken!

Featured on This Episode: Russell Gray

✅ What he does: Russell Gray is a financial and business strategist. With over three decades in sales, marketing, and financial services, Russ has written several business plans and consulted with hundreds of investors on their personal financial strategies. Russ also co-authored The Real Estate Guys™ highly-rated book Equity Happens and taught real estate finance for the California Associations of Realtors® GRI program.

💬 Words of wisdom: “History shows that no currency stays the world’s reserve currency forever. At some point, history says the dollar will be replaced.” – Russ Gray

 🔎 Where to find Russell Gray: Facebook | Twitter | Instagram | LinkedIn | YouTube

Key Takeaways with Russell Gray

  • How Russ got started in real estate investing.
  • The difference between value investing and speculation.
  • Why cash flowing assets are the best way to protect your wealth.
  • What makes our financial system so fragile right now.
  • What is stagflation?
  • What is shrinkflation?
  • Will the U.S. dollar lose its place as the world’s #1 currency?

Free Gift from Russ!

Give #1: Get access to the 1st video in Russ’s Future of Money and Wealth video series. The full series will help you discover the opportunities hidden inside a FRAGILE financial system… and how to HEDGE against inflation, deflation, and even stagflation. 

Give #2: Get Russ’s free report, Real Asset Investing: How to Grow and Protect Your Wealth from a Falling Dollar

To get access, please email and request your freebies! 

Russell Gray – The Difference Between Value Investing And Speculation

Russell Gray Tweetable

“History shows that no currency stays the world's reserve currency forever. At some point, history says the dollar will be replaced.” – Russ Gray Click To Tweet “Better to be prepared and not have a crisis than have a crisis and not be prepared.” – Russ Gray Click To Tweet


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Read the Full Transcript with Russell Gray

Justin Donald: Well, hey, Russ. So glad to have you on the show. Thanks for making it.


Russ Gray: Glad to be here. Thanks for having me.


Justin Donald: Well, this is fun. I always love when I’ve got just guests that we have mutual friends. And so, in this case, we have Ken McElroy’s mutual friend. I’m thrilled because I listened to a lot of your podcasts, and I just think that you’ve got a lot of brilliance. And for those people that don’t know you, you’re like one of the original kind of influencers, real estate influencers before podcasting was really big, before a lot of today’s mediums are what they are, and so I’m glad to have you on. You are a wealth of wisdom.


Russ Gray: Yeah. It’s a nice way of telling me that I’m an old man but I know that so it’s okay. Yeah. Robert and I have been kicking around for a long, long time.


Justin Donald: I love it. So, you’ve got an incredible story. I’m so excited to dig into it. But as we kind of embark on our time today, I’d love to hear how you got started in the world of finance and investing and kind of how did you get to where you are today. You’re a very well-known expert in all things, let’s say it, real estate, finance. You know, we’ll talk about financials, interest rate, Fed, all kinds of stuff. But how did you get to where you are today?


Russ Gray: Well, to go way back, my dad is a Filipino immigrant. He immigrated from the Philippines just after World War II. So, he lived in occupied Philippines when the Japanese occupied it. I’ve heard some horror stories about some of the atrocities that occurred during that Japanese occupation. So, my dad loves the Constitution, he loves freedom, he loves American liberty, and I kind of grew up in that environment. And so, then I’m of the age where I saw the silver come out of the coins. I was a coin collector as a kid. I watched Richard Nixon take us off the gold standard on television when I was 11 years old. I experienced 70s style inflation firsthand. I got my driver’s license in the 70s and I was out there trying to buy gas odd-even days. I had been told about existential threats like the swine flu, the AIDS, climate issues. We were going to have a new Ice Age fossil fuel issues. We were going to be out of fossil fuel by the year 2000. So, I began to become a little bit suspicious of some of the news feed that I was being given, even as a young man. And then I got out into the real world and I needed to try to figure out what to do with my life, and I didn’t have the patience to go to college. My uncle took me under his wing and taught me outside sales in Southern California, so I learned how to hustle. I learned how to go out there and make stuff happen. He convinced me to buy my first house when I was, I think, 18 or 19 years old.


And then a funny thing happened to me. Equity happened to me. I ended up with equity in a business that we started together. I ended up with equity in the property, and I realized that I made more money on the equity and those two things than my wife and I did both working full time in that same period of time. So, that brought me from Southern California back into Northern California, where I was born and raised, and I got into outside sales corporate America and I started making a lot of money. I bought my first rental property I think when I was 24 years old and I said, “Wow. This is great. I got a property and somebody else is paying for it.” And of course, the property went up in value. It’s ironic. I bought that property for 130. I sold it for 189 or 190 and thought I scored. That’s a $1.5 million property today in Silicon Valley. So, I left a whole lot of equity on the table, but I was learning as we went along. And so, I had a really interesting experience. As I started really making a lot of money in corporate America, I started paying a lot of tax, a lot of tax. And I remember one year I made enough money that my tax bill was bigger than my dream income was when I started my career. And I thought, “Wow, that’s crazy.” So, I decided to dedicate a couple of years to trying to figure out tax breaks and that led me in a couple of weird, different directions.


I kind of discovered the tax protester movement, which was really interesting and I also discovered real estate and depreciation and Section 179 and all that stuff. And I started really kind of understanding there were ways inside the code to avoid taxes as our mutual friend, Tom Wheelwright, teaches. But there was also this whole movement of people that just said the income tax was unconstitutional, immoral, unethical. And I ended up at a freedom conference in San Jose, California to go see a man named Irwin Schiff, who’s Peter Schiff’s late father. And I didn’t know Peter back then but Irwin had written all these books, and he ended up becoming a convicted tax protester, and that’s a whole interesting story. But at that conference, I bought my very first copy of Creature from Jekyll Island by G. Edward Griffin. And I read it, and I was probably about 35, 36 years old and I realized that we had a system that was all based on debt and that inflation was baked into the system. There was no way to avoid it. And I’d watch the politicians come and go and everybody talk about the problem, the debt. We have this debt. We’ve got to balance the budget. And nobody either side of the aisle, it didn’t matter who was in power, Republicans, Democrats, didn’t matter what the mix was of the House and the Senate and the presidency, at the end of the day, the debt grew. And I realized that the system was faulty and that if we were going to try to apply sound money investing principles, get out of debt, save money, that you were going to get destroyed.


And so, I decided to get into the debt business. And in 2000, I formed a mortgage company based on a simple thesis that we were going to have the Baby Boomers reallocating their portfolios, moving from equities into bonds. And in the process of doing that, they would make a lot of money available in the bond market, which would push interest rates down and it would be a great time to be in the business of selling debt originating loans. So, I started a mortgage company in 2001. I went out into the world and I started looking for strategic relationships, and that’s where I met Robert Helms. That’s where I discovered The Real Estate Guys Radio Show. I wasn’t the original co-host. There was another guy there. I didn’t become the co-host until 2004, even though Robert started the show in 1997. And then we just went on this wild ride. We started an investor mentoring program and we started a brokerage and we started a development company. We got a TV show. We wrote the book. Everything we did turned to gold right up until 2008, where everything we had turned to crap. And then I got a big, big lesson. And that lesson was that I had single-point failure across everything I was doing, and my entire life and portfolio depended upon healthy credit markets, and I didn’t understand credit markets.


And so, from 2008 until today, I just became a ravenous student of the economic system, of the Fed, of the bond market, of how that interacted with Main Street because I just ignored Wall Street, and all of a sudden I realized the games they play on Wall Street trickles down onto Main Street. And so, that’s kind of how I became so obsessed with it. And then I think my mission in life is to kind of take that macroeconomic perspective that most people listen to in their paper asset investors and bring it back to Main Street real estate investors and help them understand how these things impact them and to help them avoid the problem that I had because I didn’t understand those things back in 2008.


Justin Donald: Yeah. That’s such a really cool story, and it’s neat to see how someone can be just crushing it in business, life, investing, and then all of a sudden it dries up. And a lot of people learn that lesson the hard way. But so many people now did not go through that and don’t understand that lesson. And so, I think it’s really smart to listen to wise counsel who has the experience. So many people that are making fortunes right now, in my estimation, we’ve got some very undisciplined fortunes being made and some very risky fortunes being made. And I’ve got to say The Creature at Jekyll Island is one of the best reads for me. It really opened my eyes. It’s one of the books that I list in my book references because of the impact that it had really just learning kind of what the Fed is and how it operates and that it’s different than I thought that it was. I mean, very eye-opening. And we’ll explore more of this, for sure. But just for clarity, can you elaborate on what you mean by Main Street? Because you talked about Wall Street and how you didn’t really pay attention to Wall Street, but Main Street is really where you spent most of your time. Can you elaborate?


Russ Gray: Well, sure. So, in the mid-80s, I ended up in the financial services business, became a registered representative. I was out there selling mutual funds and selling paper assets, doing the dollar-cost averaging, buy and hold for the long term in a well-diversified portfolio. I bought into all that in 1986 and 1987. Well, I think if you recall at the end of 1987, we had Black Monday and the stock market crashed and my father lost an eight-figure fortune. And I watched this brilliant man who had founded a company and taken it public in Silicon Valley in one single day lose everything. And I thought, how in the world could a man be so smart and so capable and so disciplined and surrounded by professional advisors and lose everything in a moment? And so, I really looked at that and I said, “I don’t know that Wall Street can be trusted. I don’t understand it.” And I really started looking at the difference between the way investments worked there, and a lot of it was speculation. You know, you hear all the time investing 101 is buy low, sell high. I’m here to tell you that’s not investing. That’s speculation. That’s gambling that there’s no value being created. The value in anything is being created by the cash flow. Now, a disciplined value investor like a Warren Buffett – and by the way, how in the world did you get Entrepreneur Magazine to call you the Warren Buffett of lifestyle investing? That’s amazing.


Justin Donald: Yeah. That was a nice tag. I hope one day to be able to live up to even a fraction of that, but it’s a very, very kind, I guess title of an article.


Russ Gray: Yeah. I look that up. Wow. That’s impressive. But you know, Warren Buffett is known for being a value investor. He goes out. He looks for companies that sell real products that generate real profits that are well-managed, that are well-positioned against their peers, and that have some upside potential. It’s kind of like a value-added investor or a value investor, cash flow investor. Cash flow is your thing. There’s a big difference between cash flow and equity. And so, I was in Silicon Valley in the late 90s and the dot-com boom and I was watching millionaires being printed daily. We were producing 60 new millionaires every single day in Silicon Valley. And of course, it was showing up in the real estate prices because people could bid these things up to ridiculous levels. Back then, I didn’t understand how money made its way from the printing presses and from outside the area through the industries that are there and pushed down to real estate. I just could see the prices happening and equity happening. And so, I really began to try to understand the difference between value and cash flow, which is value and just appreciation and just speculation. And when you really look at, as an investor, if you want to grow real stability, you have to invest in value because that’s going to be resilient. Warren Buffett famously said when the tide goes out, you get to see who’s swimming naked. Well, what does that mean?


It means they’ve bought things that are speculative. They bought things that don’t have any legs. They bought things that don’t make sense. If you’re old enough to remember the PalmPilot, that stock was trading at 400 times earning. It earned like a penny a share, and it was trading at like $40 a share. The valuations made no sense. Tesla today, the valuations make no sense. I’m not saying Tesla is not doing a good product or not generating revenue. I’m not saying that. I’m saying the valuation of the stock relative to what the company is doing it’s just way out of whack. I mean, it would be like an apartment investor buying an apartment at like one basis point, just ridiculous. It doesn’t make any sense. So, the amount of rent growth you would have to have that finally makes sense is just it’s not real and people don’t understand that. They just think buy low, sell high. No. Buy cash flow, buy earnings, buy real businesses producing real products in the real world. And that’s Main Street. Now, you can do it as a stock investor but it’s a lot easier for the layperson, if you will, to understand the basic of something as simple as real estate. You know, I’m not smart enough to be Warren Buffett. I can’t underwrite a company, a management team, those sophisticated financials, or even really understand the sector and the competitive pressures that a company faces. I’m not that smart but I can understand an apartment building or a mobile home park or even a single-family home rental.


Justin Donald: Yeah. That’s a great breakdown of it, and we share the same view of how manipulative Wall Street is and really just the financial industry in general. It’s not what it appears. The returns that are projected are not really what happens. You have people that they don’t maybe think for themselves or just trust that this is how it’s going to work out. And then they get to retirement and the numbers don’t even come close to what they thought because there are so many factors that are not accounted for. The stock market doesn’t perform the way that it’s modeled out. And you just find so many people that are at a fraction of where they thought that they would be, come retirement. And you’ve got this whole strategy of kind of like aggressively save, don’t live life, put off life and lifestyle now so that you can have a nice retirement. But when you retire, you may not even have anything nice and you might retire into a stock market crash. Who’s to say? And so, I just love the idea of buying assets today that have some sort of intrinsic value that these things can’t go to zero. They’re always worth something, right? Maybe you lose some money. Maybe you make some money but you’re not losing all of your money. And then on top of it, if you’re buying them to cash flow, it doesn’t really matter what it’s worth in any given moment because it produces income that you can live your life on. You know, something that you and I talked about prior to starting the podcast was kind of this whole idea that equity is fickle and it’s fake but cash flow is real and it’s tangible, and it has utility today and in the future. And I’d love to get your thoughts on that.


Russ Gray: Well, this is where I think a lot of people get confused. And so, the way I illustrate to people is I just create a very simple economy. You got a million dollars of capital in an economy that’s total amount of capital available, and you’ve got 10 properties that are all 100% uniform down to the last stroke of paint, last nail, they’re perfectly identical. On average then, each house is worth about $100,000 because a million dollars divided by 10 is 100,000. But in this economy, people are doing business to some enterprising person accumulates $200,000 and a house goes up for sale. They decide they really want it and they buy it. They pay $200,000. Well, based on the comparative method of appraisal, of pricing, those other nine homeowners all believe their property is now worth $200,000 and, of course, the one that sold for $200,000. So, now, you’ve got 10 properties valued at $200,000 on paper. But how much money is in this economy? Only a million. And so, it’s fake. It’s not real. There isn’t enough money in the economy. When you look at like an Apple computer valued at a trillion dollars, is there really a trillion dollars of cash available to buy Apple Computer? You know, maybe if everything else sold, right, but not in the real world. So, if like, for example, if there’s 100 million shares of Apple stock outstanding and somebody sells a thousand shares, then all those other people, all those other 100 million shares all think their share is worth whatever the last guy sold for. But that’s not real.


So, when you’re getting your 401(k) statement, when you’re looking at your stock portfolio, when you’re looking at Zillow and what your house is worth, you have to understand that looks nice on paper, but it isn’t real. If everybody went to go cash out, like if everybody chose to retire and this is what Kiyosaki’s book Rich Dad’s prophecy was all about, just based on the demographics that at some point that everybody begins to reposition and sell their stocks, that’s going to create downward pressure. Now, we have the plunge protection team and the government and the Fed coming in surreptitiously, I think, or through proxies, buying up stock to keep things pumped up to give people the appearance of wealth. Because if you have balance sheet wealth, “Oh, my net worth is this or my net worth is that,” then you spend all of your cash flow. You spend your money because you’ve got your balance sheet. The problem is, to your point, if there is something that happens. So, let’s say there’s a crazy global war or let’s say there’s a big oil crisis or a big pandemic, I mean, pick your crisis, then all of a sudden you can watch that wealth disappear. Well, if you’re young like you are, maybe you can wait another 10 years. I’m old enough to remember the lost decade. The stock market went down in the 70s and didn’t come back for 10 years. In the dot-com bust, Nasdaq went from 5,000 all the way down to 1,700. It was 17 years before it got back to even. Of course, it exceeded it recently. But if you go back and look at the chart, it took 17 years.


If you were invested in Nasdaq, it took 17 years to get back to even. That’s a long time. And if you happen to be 60 years old at the front end of that, then you lost 60%, 70% of your wealth at the time when you needed it the most. Cash flow is very different. Cash flow is very, very different. If you look at an apartment building or any community, you’ve got maybe 10,000 rental units, let’s say, and 95% of them are rented, which means that every month there’s a real transaction, a buyer, the tenant pays real money and settles a transaction for rent for 30 days use of that rental unit. That’s not comparative. It’s not like, “Oh, okay, it’s only 10% occupied but I’m going to value every unit the same as if it was occupied just because one guy paid rent.” That’s the same thing. If one guy buys Apple stock, everybody’s Apple stock is worth that. If one guy rents one unit, there’s 10,000 units or all 9,999 units that are empty valued the same? No, of course not. Makes no sense, but people don’t think that way and they get caught up on their balance sheet wealth. And I think to your point, there’s a whole generation of investors that came of age after 2000 or 2010, and they’ve never seen what could happen because our financial system and we can get into that, I can explain to you why our financial system is so fragile is what I was talking about on McElroy’s podcast. People don’t understand how fragile this system is, and if the system, the financial system were to collapse, it’s going to take asset values with it.


What it doesn’t typically take is cash flows, at least not to the same level. That’s what we learned in 2008. Housing prices dropped 40%, 50% in some markets, rents maybe 10%. So, if you’re living off the rents, you were okay. If you were speculating on the prices, buy low, sell high, flipping properties, right, you got killed. You probably know people that had that happen to them.


Justin Donald: That’s right. Yeah. I’ve got a lot of good friends that that happened to. I mean it’s interesting because not only do cash flows kind of protect you in a down economy, but often you’re printing so much money in a down economy that the rents are going up. So, you actually are spending this fiat currency, whatever country you’re in, we’ll just say US dollars, you’re spending these dollars that are continuing to go up because your rent’s going up because there’s more money in the system. And the world of real estate’s different, obviously, than stocks. It’s much more, to me, it’s way safer. You’ve got more control. I just like it. It’s steadier. It’s not as volatile as the stock market. There are so many things to like but you have to be careful because you made an important point that I would like to just kind of even articulate and make sure that everyone caught. And that’s this whole idea of comparatives where you say, “Hey, let me do a comp. Here’s a comp on a home that sold. So, your home is worth this based on the square footage. We’re using the same exact comps.” That’s wholly different than saying the net operating income, the indicator of profit, the formula we used to calculate profit is this and we’re going to buy it based on the multiple of that profit.


And so, you have to be careful even in real estate because you had mentioned kind of the government or the government by proxy buying up all the stocks but the same thing actually happens in the real estate markets where you have these extensions of these private equities, you know, these private equity firms that are really just an extension of the government. They’ve been propped up. The government has given them a lifeline and they’re buying up homes all across the U.S. and inflating prices because when there’s more dollars, it’s got to go somewhere. So, some of it goes to the stock market, some of it goes to real estate, some of it goes to different places. But I think it’s important that when you buy, it’s not just buying real estate. It’s making sure you buy in the right market, you buy the right asset, you’re buying an asset that ideally is under value but at least at a reasonable value. And for me, it’s at an amount that it can cash flow positive.


Russ Gray: Well, I mean, the other big advantage in real estate, Justin, is that real estate is not an asset class. People think it is but it’s not because it’s not a commodity. In other words, a share of Apple or an ounce of gold or a barrel of oil, it’s pretty much the same price anywhere all around the world. It’s fungible, right? One is the same as the other. Properties aren’t like that. Markets aren’t like that. It’s inherently inefficient, which means that if you know just even a little bit about what you’re doing and you’re paying attention, you’re going to be able to go find a property that maybe only a handful of people even know is available on the market. And if you are in the right market and you find the right property and the right don’t wanter situation with the seller and you’ve got a plan for being able to rehab that property and bring it up to its market value or manage it a little bit better, you have a lot of control over creating that value. You have very little competition for that asset. So, when you listen to mainstream TV, financial media and they’re talking about real estate or they’re talking about what’s going on, they always look at national averages. Well, I mean, my buddy Robert Helms says this all the time, “Averages are useless, right? If you have one foot in boiling water and one foot in ice water, on average, you’re comfortable. In the real world, you’re in agony.” So, you have to understand there’s hot market.


Look at California, Illinois, and New York. They are hemorrhaging population right now, whereas you look at Arizona, Florida, and Nevada and they’re growing. Right? Seattle and Western Washington has been hemorrhaging people. Idaho has been growing. And so, you understand that people are going to move from a high priced, high taxed, high cost of living area to where they can go have a better quality of life. And if you can anticipate some of those migration trends and you get on the right end, the movement, the path of progress, you can do really, really well in real estate. None of that exists in stocks. I mean, maybe you can say, “Oh, this company is going to get hot or this technology is going to get hot or whatever,” but again, you have to be extremely sophisticated to play that game well. And if you just turn your money over to a fund manager, an index fund, you’ve got to realize there’s probably a dozen stocks that everybody owns. And it’s just like the herd going up and down with the wave of those few stocks. I just feel like that’s a dangerous way to play. I’d much rather have things that are closer to home that I understand. Personally, I have a moral problem with patronizing any institutions that are playing a game where they take all the upside and then they hand the taxpayers all the downside. I’m not a fan.


Justin Donald: Yeah. And this is coming from someone that was in that business, in financial services. And so, that speaks volumes. I have a lot of friends that exited financial services once they realize kind of what’s really happening. You know, there’s one story that’s being told but then there’s the reality that is totally different. There are so many different things to consider. I mean, if you really think you can get an edge in Wall Street or in the stock market, just read Michael Lewis’ book, Flash Boys, and you will learn that the algorithmic trading and all the things that these supercomputers can do that humans have zero percent chance of beating or timing or outperforming, you will realize really fast your advantage is not there, and you need to shift somewhere else like real estate, like private equity, where you can find an advantage, where there’s no competition or little competition, or there’s pricing based on what people want, not based on necessarily what something is worth. You’ve got a lot of baby boomers that are retiring right now. And this, by the way, Russ, gets to your point earlier, we haven’t seen this many people retire all at one time. So, this will be very fascinating to see over the next 10 years but you have people that want to sell their business and they just have a number that they want to sell it for.


And that number will make them comfortable or it will make them happy. They’re not trying to maximize. And in some of these cases, these people may not even sell their business. They may just close it and retire. So, you might just time it right to be able to buy it in time when they weren’t even planning to sell it. So, there’s so much opportunity. It’s incredible. But what I would love to do, you said earlier that if we wanted, we could talk about why our financial system is so fragile. And I think that is so important, especially right now, especially in this season, this economic season that we are in. So, I’d love your insights.


Russ Gray: So, I think most of us understand banking. Banks collect money in the form of deposits, which are IOUs to them. It’s a liability to the bank and an asset to the depositor. And so, there’s counterparty risk, obviously, if the bank fails and there’s outside of the FDIC insurance, you’re at risk. But it’s a form of a bond, if you will, and they give you a promise to give you your savings back and so you’ve lent them the money and then they take and they lever that up, fractional reserve banking, and they go out and make loans. So, you put in $100 in a bank and now they have a thousand dollars they can lend and they lend it out at more than they’re paying you and magnify against the leverage. Even if they make a three-point spread on the money times 10, they’re getting 30% on the money. So, there’s a lot of leverage in the banking system. Well, the bond market is the same game on steroids. When you’re a major money player, you don’t save your money in the bank. You save your money in bonds and treasuries issued by the federal government backed by the printing press of the Federal Reserve. And the taxing power of the United States government is the foundation of the global bond market. It’s deemed to be the safest investment from a protection of principle.


Of course, nobody is to say what the dollar is actually going to be worth when you get paid back. The big risk you take is inflation. But people buy those bonds. Well, we had an inflation problem back in the 70s after Nixon took us off of the gold standard because the dollar basically collapsed and gold went from like $40 an ounce up to over $800 an ounce and then-Fed Chair, Paul Volcker, in the Reagan administration had to come in and jacked interest rates up to 20 something percent. That first renter property I bought back in 1985 or 1984 or whatever it was, my interest rate was nearly 13%.


Justin Donald: Wow.


Russ Gray: And it cash flowed.


Justin Donald: Wow. That’s incredible.


Russ Gray: Crazy. But we’ve had a situation where bond yields have been falling steadily. I mean, it’s been up and down but they’ve been falling steadily for four decades. Well, if you understand apartments and cap rates, you understand that falling cap rates mean rising values. So, if a cap rate is falling and rents are staying the same but the cap rates are falling, then investors are paying more for the same cash flow. And so, when you have an environment where interest rates are falling, the investments that were made at the prior interest rate are going to go up in value. It’s true with bonds. And so, people say, “Well, why would anybody buy a bond that pays only 1%?” Because they’re betting that the Fed is going to take the interest rate to three-quarters of a percent. In other words, the bond value, they’re trading the bonds. You’re creating equity in the bonds but you have to understand that basic principle. And then just like the banks, they have to magnify those little gains with leverage. So, a bond is an IOU, just like a passbook savings account. So, if I buy a bond from someone, I’ve lent them the money. They give me their IOU. But the IOU is a negotiable security, and I can trade it just like a stock. And depending on which way interest rates go, I could make capital gains trading that bond. I can magnify those capital gains by borrowing.


So, if I have a bond on my balance sheet as an asset because you owe me the money, it’s your bond, I can pledge that very same bond as an asset on my balance sheet to somebody else to borrow more money. And then they put it as an asset on their balance sheet and then they can lever it. And if you understand how much leverage gets baked into the system that way, you realize that if interest rates were to rise even a little bit, all of those bond values would fall. And when you have leverage in the financial world, unlike leverage in the real estate world, you get a thing called a margin call when the equity disappears. So, in other words, if I have a $100,000 house and I have an $80,000 loan on it and the price of the property drops to 80,000, my equity has been eliminated. I have an $80,000 asset and an $80,000 liability, I have no net worth. I’m at zero. But I don’t get a margin call. Nobody’s asking me to come in and bring $20,000 in cash. They’re not going to force me to sell that property in order to meet that call. But in the bond market, they do. And so, you can see that if with trillions and trillions and trillions of dollars of hypothecated debt, meaning pledged to debt, margined debt, if interest rates were to go up, those margin calls start to come. And that’s what happened in 2008 and everybody started selling, there were no buyers.


Do you remember the 10 houses? If everybody sold in those 10 houses, those houses were going to come back down to 100,000 because there was only a million dollars in the economy. And this is what happened in 2008. The things that were wrong in the financial system, the frailty that we had in 2008, where just a handful of subprime borrowers and some obscure little part of the market, they defaulted at a very minimal percentage, but it was above the underwriting so it caused the bond, those mortgage-backed securities, the bonds issued against those securities to drop in value. And when it did, it triggered a chain reaction of margin calls. And the insurance company, AIG, that had issued the credit default swaps which insured against that event, it went broke. It needed an $80 billion cash infusion to save it. Lehman Brothers, it was part of that. They were let go. Goldman Sachs got saved because I think Henry Paulson came from Goldman Sachs, so he let Lehman Brothers go and he saved Goldman. So, it just gives you an idea of some of the stuff that goes on up there on Wall Street. But this is the thing people don’t understand.


So, if you listen to Peter Schiff, it’s like the Fed can’t raise interest rates. They cannot raise interest rates. Not only can they not raise interest rates but they can’t allow the market to let interest rates go. So, the idea would be if interest rates really started to move substantially, the Fed is going to have to go back to quantitative easing. They’re going to have to go back to printing and buying bonds, which is flooding the market with money. The problem they’ve got is they’ve already done so much of that that we’ve got inflation at the Street level. The voters know it, people are pissed, they’re feeling it at food, in energy, and wages are not keeping up. We’re getting inflation in wages but not enough to keep up. So, they’re in a real catch-22 and this is kind of the stagflation that I talked about on Kenny’s show that a lot of people just don’t understand how you can have rising prices and stagnant economic activity, but that’s what we’ve got.


Justin Donald: Yeah. And so, it’s interesting. You’ve got a lot of people talking a lot of different directions. So, stagflation, obviously, being one of these possibilities but you also have just inflation and deflation. So, we now have experienced the highest inflation that at least the government is willing to track. It’s way more than what they’re saying but 7% in the month of January is the most it’s been in 40 years, over 40 years. That’s an incredible amount of inflation. But one of the things I’ve heard you talk about is how you can actually have inflation and deflation at the same time. And I’d love to hear your thoughts on that.


Russ Gray: Yeah. Well, I mean, a lot of people think inflation is just rising prices, and so people think deflation is just prices going down. But if you look at deflation as purchasing power or the dilution of purchasing power, so you’ve got inflation going up so, nominally, the numbers are getting bigger. But people can afford to purchase less, which puts downward pressure on the pricing. And then what ends up happening is there are three components that either inflate or decrease the money supply or prices. So, you’ve got supply and demand. Obviously, we all understand that. If something is in high demand and low in supply, the price is going to go up. Conversely, if it’s high in supply and low in demand, it’s going to go down. They’ve been blaming a lot of the inflation on supply chain disruptions, which are decreasing supply in the face of everybody getting Stimi checks and having a lot of purchasing power. So, obviously, you’re going to get inflation. The hope is they’re going to get production back up, we’re going to get more supply coming online, and this is transitory. Well, the Fed finally had to confess, “This isn’t transitory. This is a real problem,” because there’s way too much money in the system. So, that’s supply and demand. Inflation or deflation is just how much money there is relative to goods and services.


If we’re out in the desert and there’s one bottle of water available and we get 10 people all bidding for it and everybody has $1 and only $1, they’re going to bid all the way up to $1, but that’s all the purchasing power they have. So, that bottle of water is going to be worth $1 in that market based on supply and demand. It’s most anybody could pay. But if we just whipped out a printing press and gave everybody $10 and all of sudden, people could bid $10 so the water bottle went up ten times in dollars, but it doesn’t satisfy anymore thirst. In real value, it’s no more valuable than when it was $1. We see this in real estate all the time. A house that was worth $50,000 in 1970 three-bedroom, two-bath is worth $500,000 today. Still, a three-bedroom, two-bath. It still only sleeps three people. In terms of real-world utility, there’s no difference. It’s just that inflation let too much dollars pursue that versus relative to housing. The only way to do that would be to make a whole lot more housing so that all the extra dollars would be diluted across more production. So, you’d have to use increasing production to offset that. But strictly speaking, inflation is just too many dollars chasing too few goods. Deflation is too many goods and not enough demand or dollars.


Okay. The third one, real estate investors should be very familiar with is leverage. So, if I can bring future dollars into the present, I can bid more. There’s a reason why everything the government tries to make affordable gets more expensive. It takes student loans, right? College. College, you paid cash and it was a price, right? When they started introducing student loans to make it more affordable, you started giving people the ability to turn a stream of monthly payments into a big lump sum of cash to bid up the price of the college education, and so it made it even more unaffordable. And so, this is the same thing that happens in real estate. When they lower the interest rate and your cash flow can get a bigger mortgage, the prices of real estate goes up. Conversely, when rates go up or lending titans, you can’t bring those future dollars into the present to bid up. It goes down. So, prices going up and down are generally part of these three things all in a blender. And when you’re trying to analyze what’s going up or down in pricing, you’ve got to try to parse. That’s like trying to figure out the ingredients in a smoothie. It’s not an easy task. It’s like once it’s blended, it’s blended and it’s pretty hard to tell. And so, people are able to spin what’s going on. But we definitely have had inflation by definition because we have the Fed’s balance sheet increased from 800 billion going into 2008 to something like close to 9 trillion right now.


And you know, they say they’re going to taper. What is that? It’s not shrinking the balance sheet. It’s just slowing down how fast it grows. So, you’ve got these things going on right now that create dynamics for people that they have to try to navigate. And then you add to that now the stagflation component, and this is the part that people don’t understand, and that’s where the numbers are going up but the real-world wealth is going down. It works like this. If you’ve got a company that makes, I don’t know what, a million widgets a year at $100 a widget that’s $100 million a year company or $100 million a year economy or whatever you want to call it. If inflation drives that up to $120, now the company is a $120 million company. And let’s say their cost went up or then let’s say that when they had to raise the price to 120, the number of people who could afford to buy it decreased. So, instead of making a million widgets, they’re only making 900,000 at 120. If you do the math, that’s 108 million in sales. So, the company went from being a $100 million company to $108 million company. That’s 8% growth. Yay. But they are only producing 900,000 widgets instead of a million. So, the world is getting less product, less real wealth, less real production. The number is bigger, inflation, but real wealth is shrunk. Deflation or just, in this case, stagflation, right? That’s what stagflation is, the real number goes up, the nominal number goes up and the real production goes down.


And then you add to that, if the company needed a thousand employees to make these widgets, now, they only need 900 because their sales went down by 10% in terms of units produced, even though their dollars went up. So, now you’ve got a $108 million company that grew by 8%, employing 10% less people, and producing 10% less goods and services. So, you have to ask yourself in an economy, what’s real wealth? Is $108 million in sales real wealth or is having jobs and having real product? So, if you look at things in terms of real wealth, the jobs and the product is the real wealth and the number can fool you. It’s called nominal confusion. You look at the number, you go, “Oh, we’re growing.” But in the real world, no, we don’t have jobs and we don’t have product. And so, if you look around, what do we don’t have? We don’t have jobs, we don’t have product, but we have big numbers. That’s stagflation.


Justin Donald: Yeah. That’s such a great way to kind of define that as an example, and I like that. That’s very applicable. You know, it’s interesting, in your one example you talked about the government college debt or just what it costs to go to college. And what a lot of people don’t realize is that one of the number one, top three asset on the government’s balance sheet is college tuition.


Russ Gray: Student debt. Yup. So, it’s modern-day slavery.


Justin Donald: It’s getting rid of this. I mean, there are just so many different ways that we could go on this. I mean, we could have a whole nother hour just on that or just on the Fed. I wish we had more time to dive into it. But while we do, I think the one thing that makes sense since we’ve talked about inflation, deflation, stagflation is shrinkflation. Can you share a little bit on that?


Russ Gray: Well, I mean, it’s pretty straightforward. I mean, if you go buy a 16-ounce box of cereal and it costs $5 and now you go buy that same box of cereal and has got 14 ounces in it for $5, you feel like, “Oh, $5 for a box of cereal. Prices haven’t gone up.” Yes, but you’re getting less product. It’s no different than the illustration I just gave with the companies. It’s a $108 million company with 10% less jobs and 10% less real product. The difference is it’s just the product itself has 10% less product in it or whatever the number is. And so, companies have to be creative because they know they can’t push the price on the consumer, so they have to deceive them through this. And so, smart shoppers were always doing the math. You’re taking whatever the price of the product is divided by the unit and finding out what you’re paying per unit. But shoppers who aren’t that sophisticated, which sadly is most of them are able to have that passed over on them. And of course, in time, it gets to be so bad. It’s like the clipping of the coins in the old days. At some point, gee, half the coin is missing, right? That thing’s been it’s only 50% of the metal that it was when it was minted. Well, that’s because people have been taking a little bit along the way. It’s the same thing. It’s just another way of hiding the rip-off that inflation is and all of the responsibility for that falls at the foot of the Fed and it’s a faulty system.


Go back and read Creature from Jekyll Island. If you’re out there listening to this, you don’t understand what we’re talking about, read that book. It will explain the system to you. Once you understand the system, then you understand how you need to invest in a system that requires exponential growth of debt and inflation. It requires it. If they can’t grow the debt and they can’t inflate, the system implodes and we’re at the end game because they’ve been playing this game for 40 years. And I think that’s why you hear all this talk about the Great Reset. I think a lot of the geopolitical turmoil we hear, see, and some of even the crises that we face here domestically in the United States has been about creating some cover so that they can implement this great reset. I could be wrong, but I’ll just say it wouldn’t surprise me if that’s what’s going on.


Justin Donald: Yeah. And so, based on that, I’m curious what you think about the dollar remaining the world’s reserve currency or does that shift? And what do you see coming in the months ahead?


Russ Gray: Well, look, I mean, whether you like Russia or don’t like Russia, Russia is being kicked out of the Swift system. They’re being kicked out of the dollar system. They’ve seen it coming. I’ve been chronicling. I wrote a report in 2013 called Real Asset Investing and I chronicled Russia and China getting together and starting to implement all of the infrastructure to replace the dollar as the world’s reserve currency. It’s not going to happen overnight but in terms of tenure, the dollar is on average lived its useful life. History shows that no currency stays the world’s reserve currency forever. At some point, history says the dollar will be replaced. Are we getting close to that? I think we are. Does that mean another country’s currency? I don’t know. I think the people who control all that are trying to make it a global currency. If you’ve read Jim Rickards’s books, Currency Wars, Death of Money, all of those books, he talks about the IMF and the SDR. IMF, International Monetary Fund, SDR, Special Drawing Rights, is kind of becoming the world’s reserve currency, and then the dollar just being relegated back to sovereign currency like any other currency around the world. I think as an investor, I’m not going to say it’s going to happen. I would say that there is a possibility, maybe even a probability it will happen in our investing life. The question is, are you prepared for it? Do you even understand it? If not, now’s the time to start preparing because better to be prepared and not have a crisis than have a crisis and not be prepared. That’s what happened to me in 2008. And to the extent that I’m able, it’s never going to happen to me again.


Justin Donald: Yeah. That’s great commentary on all this. So, this has been an awesome session, man. I feel like we could spend hours together, and I just love the way that your brain works, the education that you’ve done. You’ve got such real-world experience, not just book knowledge, but you’ve got a ton of book knowledge and I think both are really important. And you study very relevant authors and topics so I think that’s really fantastic. Where can my audience learn more about you and more about your show?


Russ Gray: Just go to We put out a weekly podcast. We do a few events. We do an annual investor summit. Our mutual friend, Ken McElroy, will be there. We’re doing it this summer. I think we’ve only got like 20 seats left as we’re recording this, so we’re almost sold out about nearly 300 of all the right people. And so, we have a good time. We just get together and talk like this for an entire week. I mean, I think I’d encourage anybody, listen to a lot of smart people. George Gammon will be there. George just turned out to be a brilliant self-taught student of the economy and the currency system and the financial system. But hang around with smart people for masterminds. Read the news. Don’t just take it at face value but challenge the thesis, the premises, and talk with other smart people. And then try to drill down to how all this macro stuff affects you on Main Street because it does. Whether you acknowledge it or not or put the time in to understand it or not, it does. And the time to get the lesson is before the crisis happens rather than after. And I’m telling you that from personal experience.


Justin Donald: That’s great. Thanks so much, Russ. I really appreciate it. And just so all of my listeners and those you watching know, I got a chance to meet George Gammon a few months ago and had a chance to hear him speak, and the guy is just so impressive. I am blown away by his knowledge, and to me, he was really a highlight of anyone that I’ve spent time with, time listening to here recently. So, great that he’s going to be at your event and I’m excited for all the things you’re doing in the world just educating people. You know, Russ, it’s just great to see how aligned we are in so many different ways, and I appreciate your time. And I just want to leave my audience with the message that I leave them with each week and that is this, what’s the one step that you can take today towards financial freedom, towards a life that is not on default, but a life by design, a life that’s on your terms, and a life that is very fulfilling to live? We’ll catch you next week.

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