Robert Kiyosaki Author of Rich Dad Poor Dad
I was lucky enough to have a long chat with entrepreneur Robert Kiyosaki a couple of days ago.
Robert Kiyosaki is the OG of breaking complex topics down for the average Joe and Jane. A master educator.
“I believe in our freedoms and liberties. What I have seen across the country is so many people give up their liberties for just a little bit of security.” S Dakota Gov Kristi Noem defies orders to shut down state. She has courage. Will she be our first female President?
— therealkiyosaki (@theRealKiyosaki) May 6, 2020
During our conversation, I asked him what most people don’t get about investing and what topics he’d suggest discussing that would provide maximum value to the viewers.
Robert Kiyosaki was nice enough to give me suggestions based on his decades of helping people become financially educated.
In this epic video, I break down exactly what Robert Kiyosaki said he wants YOU to know!!
If you’re interested in inflation, deflation, the stock market, interest rates, or the future of the economy this is a MUST WATCH VIDEO!!
In this Robert Kiyosaki Rich Dad video, I discuss the following:
- How to see the unseen and not subject yourself to excess risk.
- What are economic cycles and why should you pay attention to them.
- Don’t just invest, invest in what you know!
This is What Robert Kiyosaki wants you to know about investing!
The other day I was fortunate enough to talk to Robert for about three hours on the phone. And he said,
“George, I really want you to do a video and explain these three things to your viewers.”
I said, “Robert, no problem. You got it.” So this video is courtesy of Robert Kiyosaki himself.
And of course, I'm going to explain it to you in three simple, fast steps.
Making The Unseen Seen
Step number one, we need to make the unseen seen.
And this is exactly what I'm talking about. Let's dive right in.
We've got saver Steve, right here. He has worked his whole life, worked his tail off, to save a little bit of money. So he goes to the bank because he thinks that's the prudent thing to do. And the bank looks at Steve and says,
“We'll take your cash, we'll take your savings, and we will pay you a whopping 1%.”
And Steve looks at that and says,
“One percent? I was hoping to get a lot more than that!”
So he starts doing some homework. He looks online, he goes to YouTube, he sees all the financial gurus that say,
Steve, what are you doing? Don't go to the bank. You should put your money into a money market mutual fund because it's just as safe as a bank, but they'll pay you twice the interest. They'll pay you 2%, instead of that measly 1% that the bank was offering you, they're just ripping you off by taking your money. They're too greedy to give you a higher interest rate. So you should come right into Fidelity or Vanguard and give them your money because it's just as safe with a higher interest rate.
Well, of course, this sounds awesome to saver Steve and all of his friends are doing the exact same thing. So he gives his money right to Fidelity, right to Vanguard, and sleeps well at night.
So once Steve gives his savings to the money market mutual fund, he knows he's got nothing left to worry about, it's safe, and he's getting the highest return possible.
This is what it seems.
But lets now take a look outside of the box and see what Steve and his buddies aren't seeing.
Should You Deposit Your Money in the Bank?
First and foremost, going back to the bank, we need to realize that the FDIC is a huge failure.
So many people think that if they put their money into the bank, and if they have less than $250,000, they have nothing to worry about. They don't realize that the FDIC only has about $150 billion, and all that sounds like a lot, it's to ensure over $9 trillion in deposits.
So first and foremost, don't trust the FDIC implicitly, you still need to do your homework and make sure your bank is prudent.
But, of course, that's just the tip of the iceberg. Once the money market fund gets saver Steve's money, how do they get the additional 1% return? Well, the bank can only give them 1%, what's the secret?
Is it just the money market funds are less greedy than those banksters?
Well, I don't know. Usually what happens is the funds take Steve's money and go into the dollar funding markets.
Aha! For a little more insight into what happens to saver Steve's money, let's go right to Investopedia!
A money market fund may invest in the following types of debt-based financial instruments:
- Bankers' Acceptances (BA)
- Certificates of Deposit (CDs)
- Commercial Paper
- Repurchase Agreements (Repo)
- U.S. Treasurys
I think you're starting to connect the dots.
Let's go right back to the whiteboard.
So let's do a quick review of the repo market, we've got the fed and the primary dealer banks, A, B, and C. These are all your favorites, that's right. Goldman Sachs, JP Morgan, Citi, all the ones that I know you love so much, the banksters themselves.
So the banksters go into the repo market because they have excess cash. They have those bank reserves we always talk about.
There are some financial institutions and hedge funds, and maybe sometimes the banks themselves, that need cash overnight, or for a specific term, maybe it's 20 days, maybe it's 40 days and they have collateral.
Usually, the collaterals are U.S. treasury bills or MBS (Mortgage-Backed Sausages), and lately, it's becoming more and more of the mortgage back sausages, but that's a completely separate video.
The hedge funds and the financial institutions take their collateral, they put it into the repo market and the banks give them the money they need overnight for 20 days, for 30 days, whatever the term of the repo is.
Technically a repo is what they call a repurchase agreement.
So on paper, and it doesn't really work this way, but technically what is supposed to happen is the bank, the primary dealer, is buying the collateral from them and at a later date, the counterparty is buying that collateral back at a slightly higher price.
And that's what motivates the bank to give them the money in the first place!
Insert the money market funds, they come into the repo market and say,
Hey, hedge fund, hey, financial institution. We've got a lot of money that we can give you overnight or for a specific term as well. You can just give us the collateral, just like you gave it to the primary dealer banks, and we might even give you a little bit better rate. Because we've got saver Steve's money and we only have to give him this 2%. So we might be able to charge you a little less for the money than the primary dealer banks.
So the hedge funds and the financial institutions look at the money market fund and say,
“You got it. Here's our collateral. Now give us saver Steve's money.”
And the money market fund is just getting warmed up!
After the repo market, they go straight into the commercial paper market, which are corporations issuing short term debt into the market for the cash, the liquidity they need to get by on a day-to-day basis because they have all these assets.
They don't want to sell those assets. So they need some cash to pay their employees, pay their rent, who knows what the corporation needs money for, but just like the hedge fund or the financial institution, they need cash and they need it quick.
So the corporations issue debt that the money market funds buy with saver Steve's money.
So the question then becomes, if Steve saw the unseen, what's behind the curtains, do you think he would still give his money to that money market mutual fund?
If you said, “Hey, Steve, would you like to loan your money to Deutsche Bank? Or how about HSBC? Or even better, how would you like to lend your hard-earned savings to American Airlines?
Or how about Boeing?
Do you think Steve would look at those gurus on the internet and say, “What on earth are you telling me to do?
All you have to do is look slightly behind the curtain. And I see I'm taking a thousand times more risk than I ever wanted to just for that additional 1% in interest.”
This is the difference between the seen and the unseen courtesy of Robert Kiyosaki.
Oh, but wait, there is more, of course, the naysayers will say, “Yeah, George, but the money market funds, they're getting all that collateral and that's just as good as cash. So it's still safe.”
Okay, well, let's check out a couple of things.
First and foremost, rehypothecation, what is rehypothecation?
What is Rehypothecation?
That's when the hedge fund doesn't really own the collateral they're putting into the repo market.
So let's think this through, the hedge fund goes to one of their buddies at one of the primary dealer banks at lunch and says, “Hey, listen, we need some collateral because we need cash.
But all the collateral we have right now is complete garbage.” It's asset-backed securities, credit default swaps, who knows what type of toxic sludge they have on their balance sheet.
So the hedge fund guy says, “Listen, I need some pristine collateral, how about one of those treasury bills that you have on your balance sheet? Just let me borrow it for a few days.”
So the primary dealer bank says, “Okay, fine, here you go.”
They give the hedge fund, the collateral, the treasury, the hedge fund puts it into the repo market, that goes onto the balance sheet of the money market fund. So the collateral that the money market fund has to back up the money, or to backup saver Steve's money, they gave the hedge fund as collateral that the hedge fund doesn't even own!
So if the hedge fund goes bust, the money market fund, they won't have any rights to the collateral at all. And in the very best case, it would be a huge legal battle.
Again, do you think that's something that saver Steve wants to be a part of? I don't think so.
And taking it to the next level of insanity. I'd like to point out that the collateral actually stays on the books of the borrower.
Legally it doesn't go onto the books of the money market fund or the primary dealer bank.
It basically happens with just a wink and a nod and a handshake at best, that if the borrower goes bust, the lender will get the collateral, but it doesn't always work that way. Especially in market conditions like we have today with the virus that is extremely volatile.
I'd give you the example of Lehman Brothers, back in 2008.
Lehman Brothers couldn't access the dollar funding markets, they couldn't get liquidity from the repo market because none of the primary dealer banks wanted to take on the counterparty risk.
Because they knew Lehman's balance sheet was terrible and they were on the brink of going bust.
So Lehman couldn't access the repo market, that's why they went out of business.
So the takeaway for the average Joe and Jane is whenever you're considering putting your money into one of these investment vehicles that promise a safe return with a higher rate of interest, remember, they're usually taking a lot more risk than you would like them to take with your money.
There's never a free lunch.
So always analyze the unseen and know the actual risk-reward you're taking with your hard-earned money.
One suggestion I might give to you is to do what Warren Buffet does.
He's got billions in cash, almost 140 billion right now, most of that isn't in the bank, it's not in a money market mutual fund that he learned about through NerdWallet or on YouTube, it's in short term U.S. T-bills, the exact same pristine collateral that the primary dealer banks want in the first place.
Would you rather have your counterparty risk, Deutsche Bank, HSBC, American Airlines, or just giving it to the government for three months? I know, I don't like giving my money to the government either but left with all the alternatives, I think it's the best choice.
I want to give you a bonus actionable takeaway before I move on to step number two.
And we go over to fast Eddie, the financial planner, and he's probably the same guy that told you to put your money in a money market mutual fund.
But fast Eddie always uses an average return.
He says, “Listen, if you put your money into the market right now, over the last 30 years, your average return would have been 12% or 13%, 10%, whatever it is.”
But what fast Eddie isn't telling you is you shouldn't measure return based on an average, you should measure it with something called a compound annual growth rate.
Why is that George? That sounds too difficult for me to understand.
It's not. Check this out.
Let's say you start with $100, the first year your investment goes down by 50%. In the second year, it goes up by 60%. So your total would be a loss of $20.
But, if you combine a 50% loss, with a 60% gain, that's 10%, you divide by two years and you get a 5% average return. So fast Eddie would tell you that you're going to get a 5% average return, but you just lost $20 of your investment.
That's why you always want to pay attention to the CAGR, Compound Annual Growth Rate, and ignore average returns.
Also, whenever you're looking at the return from fast Eddie, make sure that you have him adjust for inflation and go further back than 1981.
When you do those two things, you'll see the market doesn't always go up over time. And it definitely doesn't go up at a rate of 10 to 12%.
Extremely Important Economic Cycles
Let's dive into Step number two. Now let's discuss some extremely important economic cycles.
When I was on the phone with Robert, he said in his experience dealing with the average Joe investor, this is the biggest mistake they make. They ignore these huge macrocycles, and as a result, lose a lot of money.
Let's start by looking at Ray Dalio's chart of the long term debt cycle, along with the short term debt cycles or the business cycle, if you're looking at it from an Austrian standpoint,
from Ray Dalio's view, he sees the long-term debt cycle lasting 75 to 100 years. It starts at a low point and goes up above the rate of productivity. And during this time, the smaller credit cycles are going up and down and up and down, but they're nowhere near as dramatic as the 75-year debt cycle. These are just recessions like you'd normally see, going up, down, up, down.
This is what you read about in the textbooks. But notice the green line is productivity. It's gradually increasing as time goes on in a free market economy.
There are many things we need to understand when we're looking at these debt cycles, first and foremost, what would happen if there was just no credit in the system whatsoever, it was just this green productivity line?
What would happen is the only way spending or consumption could increase in the economy is if we had an increase of productivity, doesn't sound too bad, does it? But we also have to remember that one person's spending, is another person's income. So as credit is extended in the economy, spending can increase greater than the rate of productivity.
Well, if one person's spending, is another person's income, that also means that incomes can rise faster than the rate of productivity.
So what happens when you borrow money or you're issued credit, you spend the money. You're basically borrowing from future spending that you would have had. So you're borrowing from yourself in the future. So spend more today, but you're going to be spending less in the future.
Basically, that's what debt and credit is, especially if it's used for consumption. The problem is the debt always increases faster than the incomes. And of course, we need the income to pay back the debt interest plus principle. So at a certain point, you just can't extend any more credit. The entire system or cycle is maxed out.
This takes us to the longterm debt cycle peak, which is where we are right now, I've got an arrow, you are here. And of course, you know what time it is when you are right there at the top of the roller coaster ride, that's it, it is properly stiff drink time.
The government only has four options to try to ease the pain and avoid a massive depression and de-leveraging of all this excessive credit. Just to show you where we are right now in the United States, that we're at the top of this roller coaster ride, editor, go ahead and throw up the chart, and you can see that our debt, our total debt within the system to GDP is over 350%.
Look how it's just grown exponentially over the last couple of decades. Obviously, this is totally unsustainable based on the level of productivity we currently have, and based on the incomes we have. We can't extend any more corporate credit, we can't extend any more consumer credit because we're just maxed out.
So the government and the fed and your dreams drunk insolvent uncle Sam, only have four options.
Number one, they can choose austerity, where they tighten the belt, they spend less, they increase interest rates, but usually, they want to try to avoid that, especially in today's day and age, with Keynesian economics being the prevailing narrative throughout all politics and central banks.
You could also restructure the debt, but then the creditors, the banks that have issued all this credit, then they take a haircut and we know darn well that if the politicians and the feds protect one group, it's definitely going to be the banksters.
We could also see defaults with the government and the private sector, where the government could just choose not to pay back the debt and of course it might not be an option for the private sector.
They might default, regardless. Usually the government, the fed and you're drunk insolvent Uncle Sam will take the path of least resistance, which of course is inflation and usually higher taxes. That's definitely what I see coming down the pipeline.
I also want to add a warning that David Einhorn made in a recent investor letter, when he said he thinks inflation is coming rather quickly. He stated the supply shock that we're having as a result of people having to stay home because of the surveys of sickness, that's reducing the amount of goods and services. And of course, the counter-argument is, demand is going down as well, but he thinks demand will be propped up because there's going to be social unrest. People can't afford to buy groceries, they can't afford rent, energy. If they can't go to work, they can't get the money they need to pay their bills.
So he sees the government coming in with helicopter money, MMT, UBI, whatever you want to call it, but he sees the government printing money, or maybe the federal reserve, of course, they're not doing it now, it's against the federal reserve act, but they may do it in the future where they print funny money, get it into the real economy, into the back pockets of the average Joe and Jane, to ease this social unrest. Of course, that would keep demand higher than it otherwise would be.
So he sees supply shrinking at a faster rate than demand, therefore, inflation going up.
If you believe the government and the fed is going to try to create inflation to get us out of this debt problem and you believe Einhorn's warning, the actionable takeaways from this step need to be, one, if you have a mortgage, make sure it's 30 year fixed rate.
And if you've got a mortgage on rental property, same exact thing. Hopefully, it's cashflow positive. If you have a cashflow positive asset that has 30-year fixed-rate debt tied to it, what you're basically doing is you're getting paid to short the United States dollar.
This is a good thing, and I know that confuses some people, but basically, if your interest rate is 2% and the rate of inflation is 4%, that's a transfer of wealth from the lender to the borrower, in other words, from the bank to you, that's what you want.
Just think about it this way, interest means that you're paying back more money than you borrowed or more purchasing power, but the rate of inflation means you're paying back the loan with less purchasing power.
You see? So if the rate of inflation is higher than your interest rate, there's a transfer of purchasing power from the lender to the borrower.
I also want to make sure I point out gold, silver and Bitcoin could be very crucial, not only as insurance on the gold side, but potentially a great speculation on the silver and Bitcoin side.
But all of this is most likely a good hedge against inflation. Also, have a lot of dry powder, when we're at the top of a cycle like this, there's nowhere for asset prices to go, except for down, in real terms, it could go up in nominal terms, but in case they go down in real terms, such as housing from 2006 to 2012, you want to have some dry powder.
And I know it seems counterintuitive if we're talking about inflation, but we just don't know exactly how it's going to play out. And as I always say, inflation and deflation, very, very nuanced.
So it's always a good idea to have some inflation hedges for the long term, but have some dry powder to take advantage of what may happen in the short term.
Also, and this is probably the biggest takeaway from Robert, is don't rely on your pension or social security.
I've said it hundreds of times in my videos, especially with social security, but the way they calculate the inflation rate for the checks you get in the mail every single month is they use a measurement that's lower than the actual rate of inflation. So over time compounded, you're going to get a lot less purchasing power from social security than you think.
Also, we go into recession or a depression, most of these pensions are funded through tax dollars. The first thing to go down in a recession, especially if the market crashes, are tax receipts. So pension funds are going to have an even harder time paying you what they promise.
Always Be An Insider When You Invest
Step number three, always be an insider when you invest, and I'll explain that in just a moment by telling you a quick story. But before I do, a recap, we need to always make sure that we are seeing the unseen.
We're looking behind the curtain as to what is happening with our money. Are we taking too much risk by going into an instrument, a financial instrument, we really don't understand. What's the counterparty risk of your bank? What's the counterparty risk of the FDIC?
Should you put all your trust and faith in that financial advisor without asking questions and really thinking through the numbers.
Step number two, we know that we have to understand and realize that the world and the economy consist of cycles. Markets go up, but they also go down.
We've got debt cycles, short term and longterm that Ray Dalio has described very well through his extensive, extensive research. And the prices of assets and consumer goods can go up and they can go down.
We really have to study history, combine all of this knowledge, and position ourselves and our portfolio accordingly, so we can be fully prepared for whatever the future holds.
Another thing Robert said to me, is he said, “George, we're both educators. We cannot allow the general public to be like their friend and family member Fred.”
And I'm not making that up, he actually said friend and family member, Fred. But what he meant is we can't allow the public to just blindly put their faith in the fed and the government. Also, these money market funds, people have to understand what they're investing in.
The financial planners, they've got to take control of themselves, and they have to realize that things work in cycles. The stock market doesn't always go up with time. And if people can see these cycles, they can be better prepared.
And the last thing Robert wanted you to know as an investor is to always be an insider.
What does he mean by that?
Let me tell you a quick story of when I used this advice, how I did well, and then it'll help you paint the picture of how you can implement it in your own investment strategy. So going back to the price of oil, we have a chart 1950, all the way to 2020 on the left.
It goes from 20 bucks all the way to 180, very stable to the 1970s, and it shoots up as we know to 1980 maybe '79 it kind of peaks out and then comes all the way down. We have the Gulf war in '90, it pops back up, it comes right back down.
And then we have the second Gulf war, or the Iraq war, whatever you want to call it. And it shoots all the way up to almost $160 a barrel. Please note this chart is adjusted for inflation. GFC, the price of oil comes crashing down, it goes back up. But the main thing I want to point out looking around 2015, it got all the way down to call it $30, maybe $35 a barrel.
When this happened, I was spending a lot of time in South America, I had studied macro for a couple of years, I didn't know near as much as I know now, but I knew that oil was cheap.
I wanted to go long oil, but I didn't know the first thing about it.
Fortunately, I remembered from my days as an entrepreneur, you have to know what you don't know. And it served me well in this instance, but I knew that the Peso was correlated to the price of oil, I'm referring to Colombian Peso.
During this time I was not in Columbia, but I was in South America. So I looked at this and said, “Okay, well, I want to go long oil. I know the Peso's roughly correlated or loosely correlated to oil. But the only thing I really know a lot about is real estate investing.
So if I go into Columbia and buy real estate, something I know how to do, and the real estate is denominated in Pesos, I'm basically going long oil.”
So this is an example of taking a top-down approach, studying the macro, knowing what's going on. And you don't have to get down into the weeds like a Jeff Snyder or Luke Grumman or a Brent Johnson, just pay attention to what's going on and then asking yourself, what do I know well?
And take action based on what you know. So how did it turn out? Well, I ended up making a lot of money on the real estate, but as you guys know now, oil is down at $20 a barrel. So the Peso has lost value against the dollar over the last five years. But I did so well in the real estate that it more than made up for it.
So again, this is just my personal story and how you can take what I did, the strategy, and apply it to your own life.
So if you're a plumber, if you're a mechanic, if you're a pharmacist, a doctor, a lawyer, a teacher, you have a specialty skillset, you're in an industry, so pay attention to what's going on in the industry, pay attention to what's going on in the macro and see if there are actions you can take, using the insider knowledge you have to be better prepared financially for the future.
For more content, that'll help you build wealth and thrive in a world of out of control central banks and big governments, check out this playlist right here and I will see you on the next video.