PUT YOUR MONEY TO WORK | Meet Kevin PT II

You know, there's a reason that after seven years, fifty percent of unions, uh, fall apart. It has nothing to do with infidelity; most marriages can survive that. But it has a lot to do with financial pressure. When we, when they bought a house, it was for life; that's not how people think today. When they buy a house today, it's for 36 months. They're going to move; they're going to raise a family, whatever it is. Don't fall in love with real estate.

Now, I want to ask you a specific question on real estate. There, uh, one of the ways I started, well, the way I started was, uh, I bought a house putting three, uh, three and a half percent down as a fixer-upper. My girlfriend at the time, she put half of the down payment in, and I put down half, so we each put down about, uh, six, seven thousand dollars, plus some closing costs and that. And one of the things that we found that was so beautiful about that was we were now able to buy a 300,000 asset that needed some repairs. So I could put my own sweat equity into it.

We were able to control a 300,000 asset having a net worth of 9,000 each. And so we were able to do that with a monthly payment of about 2,000 bucks a month. And the beauty about that was, worst-case scenario, if we needed to, we could move and rent it out for that, you know, even putting money aside for repairs and that, uh, yeah. Or worst-case scenario, we thought, hey, if we can't afford the payment, we'll rent out rooms.

Isn't that potentially a way that people can start house hacking or renting out rooms or buy a duplex, rent out another room, just to be able to leverage up their wealth maybe quicker than they could otherwise?

Yes, it is. And I did the same thing with the exception that I don't think it's a good idea with a random girlfriend. You should enter into a financial relationship called marriage if you're going to do that because that asset becomes very, very valuable; it becomes part of the couple's financial stability. Every time I've heard of people that have— and I've got plenty of examples of this— you fall in love, it's euphoric, you buy a house together, you're not married, then poopoo happens. Fifty percent of unions fall apart for a lot of different reasons, but then you've got this horrific litigation trying to solve for liquid, you know, liquefying the house or one side buys the other half from the other. It's a mess.

And so I always say to people, look, I did it on my own. I borrowed ten thousand dollars, and I was able to buy a house, and I rented every room out. I lived in the basement. But I, over time, built a lot of equity up in that, just as you said. But I didn't do it with my girlfriend at the time because I don't even know where she is anymore; I did it myself. So unless you're getting married, I wouldn't do it that way.

Okay, well, fair correction there. I will say knock on wood, but Lord and I, we are happily married now and have two kids. Maybe we were the other 50. But I— no, that's a great story. I mean, if others listening, I really, you know, I wrote a book called "Men, Women, and Money" exactly about this, and I'm very proud it became a bestseller almost overnight. But it deals with topics like this, and it really talks about the reality of, you know, where money fits in love.

And, you know, there's a reason that after seven years, fifty percent of unions fall apart; it has nothing to do with infidelity. Most marriages can survive that, but it has a lot to do with financial pressure, and that's why when I did a lot of research with divorce lawyers, they said it's always the money. It's always the money; one couple outspends the other and drags everybody into debt, and finally that just takes over. The only reason they're together is fighting about debt. Terrible.

Yeah, that is terrible; that's unfortunate. Uh, okay, interesting. So, a potential way to start, yeah. And what we are seeing, though, uh, with home prices going up, I have this thesis I want to run by you. I believe that potentially, as home prices continue this sort of course that we're on, lack of supply, lack of new construction, coastal cities going incredibly high, especially in the suburbs, if this continues, at some point investing in real estate for a normal person becomes unaffordable.

Is it possible that America turns into a renter nation where maybe the top 10 percent own houses and ninety percent don't and they just rent?

Yes, but this thesis has been tested multiple times in the real estate market over the last hundred years. Prices get excessively high in certain regions; people can't afford them; they move to other jurisdictions. It has a natural tendency to resolve itself, or the economy has explosive growth, and salaries go up to match the cost of rent or purchase or ownership. It tends to balance itself.

We're in an extreme period right now; we've never provided 1.9 trillion dollars of free money to the economy ever before, and we're about to maybe put another trillion in infrastructure spending, which is going to support all kinds of different jurisdictions. This could be the new golden age of America, and always, you know, when you think about the gold roaring 20s or the early 50s, real estate was part of what was coveted and still is today by every American family; you want to own that home.

With the change now that some people, particularly as we have an older population, are preferring different kinds of housing, condominiums, in where I am here in Miami, have become very, very popular because of ease of use. And yet, their pricing per square foot is much more than a home, which makes no sense at all because you don't own any real estate; you just own a box of cement. Yet, you know, the pricing here is four thousand, five thousand dollars a square foot for some very premium condos.

And I tracked the condo index in pretty well every geographic region of the U.S. as a way for me to keep an eye on inflation and housing prices, and right now, we're really stretching the limits.

Yeah, does that mean you believe there's a potential correction in store for real estate?

No, it doesn't happen that way. And again, using Miami or Boston as a market or Austin, Texas, is another good market to index. You know, there's so much activity of moving out of high tax jurisdictions into low tax, so that's why Texas and Florida have this renaissance occurring. But generally, what happens first, and you're starting to see it now, is the bid-ask.

Condos are the best way to do it because you can always index each unit. So let's say there's one I'm looking at here; I was just examining the date on it last week. The last time it's—it's a three-bedroom, 2800 square foot condo; there are probably 30 of them in the building that are identical, and the only difference is what floor they're on because if you clear obstructions, you generally get a 25 premium.

And so on the twilight floors, where you're half obstructed, it's a perfect market in that sense. The last time one of these condos traded, it traded for three million one hundred fifty thousand; the owner of one of them now with an obstructive view is trying to get four point six million. Now, that's not going to trade; that's not going to trade, and it hasn't traded.

And so what happens is it sits there, and I'm just now speaking about the whole index; these condos sit on the market for generally up to 18 months. People that put stuff on the market are willing to wait a year and a half to see if they can—if somebody hits the bid, and if it doesn't happen, the prices start to fall. So where we're at now is we're three months into the wait and see because the volume of trading is slowing at that high end, which always tells me a potential 20 correction coming.

But you just don't know when or what the black swan event is going to be that triggers it because if you look at the history of Boston, Miami, Austin, you get tremendous volatility, particularly Miami. There's no market more volatile than Miami.

And so, you know, if you're if you're an indexer like I am in, you know, buying multiple units potentially, you really want to catch it on when it starts going down, and we haven't seen that yet, so I got to wait 12-18 months.

Would you be buying individual condos as investments and then renting them out?

Yeah, absolutely, absolutely for sure. But you wouldn't do it now because the economics don't work. That's another trigger. Um, if you, if you buy a condo for 4.6 million, then put 400,000 into it, so now it's 5 million being prepared for rental, and all you can get is 18,000 a month, which is pretty well the limit right now, um, that's a really bad investment. And so that tells you that the unit price is overvalued; it has to come down about 30 percent when that happens, nobody knows.

Right, right. Now, uh, what about, uh, residential multifamily buildings? Would you just go buy a large building or why don't you just go to Austin and buy a hundred unit building because the cap rates are below four percent. And so, um, having been in real estate my whole life, I don't buy when cap rates are sub four percent.

When I first got involved in climate-controlled storage, it was 11 cap rate; now it's trading at under 5. So, you know, and I sold at a 7 cap, which meant I left 20 on the table. You can't ever catch the top or bottom, but going into real estate at sub-four percent cap rates when right when rates potentially could rise is a very bad outcome and a real money loser.

So that's why I'm just sitting on my hands; I have capital to deploy in real estate, but I haven't seen anything that attracts me yet. You know, people show me, uh, 3.2 cap multi-family; no thanks.

Got it. Yeah, I've got this rule, uh, rule of thumb that if interest rates go up one percent, prices come down 10 percent, almost this one to ten ratio. And hey, if we get a two percent bump in rates, uh, there's your twenty percent pretty quickly. But then the afford— but then it becomes unaffordable again because the rates are higher, so how do you balance that?

Well, then the rental market kicks in. I mean, the great thing about real estate is it does have all kinds of pressure valve releases. Uh, rental becomes more attractive. Remember, you're— what I tell people, there used to be this philosophy back in the 50s and 60s, and my parents used to tell me, when we— when they bought a house, it was for life. That's not how people think today; when they buy a house today, it's for 36 months, maybe five years maximum; you know, whatever they're going to move; they're going to raise a family, whatever it is.

Don't fall in love with real estate. The only argument you could make for long-term is waterfront property in various regions of the world where it's extremely hard to replace it. And so I— I tend, you know, when I purchase waterfront property, I value it based on how many linear feet it has on that, and more, you know, obviously people really covet privacy. But you look in Lake Tahoe or regions of Maine or Cape Cod or, you know, Nantucket, those prices have very, very little volatility because they're based on access to waterfront.

Wow. And, uh, are you worried at all about rising sea levels in Florida?

I think what— you're Miami Beach?

Yeah, I definitely. I mean, you— if you bought right now on the sunset aisles of Venetian Causeway, another index I track, um, what used to cost, uh, four million just five years ago is trading for 22 million. And so when— when you try and buy, um, hurricane insurance, you can't get it; you have to self-insure. So you know, if you really thought, uh, the ocean was going to rise 18 inches, well, you'd be writing off 22 million dollars.

But most people feel during their lifetime that won't happen, but that doesn't mean it won't. I mean, it's sort of a really interesting dynamic when it rains hard in Miami, here in Miami Beach on Collins Avenue; it floods by two feet, and so—and then you've got to wait, you know, sometimes 18 hours to get rid of all the water. It's a really interesting dynamic of bringing up there.

But again, right now, the markets are so buoyant, so, so stretched that people are not considering that. But when you do go talk to the insurer, look, I'm going to buy a 22 million dollar house, they say, "Good luck; we're not going to insure it."

Sure, sure. It just seems like— fortunately, though, the hurricanes in Florida, it's been— gosh, it's got to have been at least 30 years since we've had a cat five in Florida, though, huh?

It's been a while.

No, it has, and that's exactly the kind of thing you should say when the cat eight comes. You know, it's— that's— why do you believe that?

Well, I do not take anything for granted on climate change. Right now, I ju— you know, I'm a very, very big— I have a very big business in the wine industry. You should be aware this morning it is snowing in Bordeaux and the DRC region and Burgundy; the loss of this crop is going to be catastrophic. That— and we're getting hail in Geneva; we're getting freezing rain in the Jura in Switzerland where the white wine is made. And these are— this is where I source my juice, and, um, we're going to get wiped out this year. That's climate change.

I mean, I'm talking about snow in, you know, late April in Bordeaux; like you don't see that too often. Do you have crop insurance there?

No, you can't do that. I mean, it— it doesn't matter because what the challenge— they're going to save probably 18 to 20 percent of the crop. Last night, we were using water to spray on to the berries; there's all kinds of strategies you're talking about.

Um, you know, you take Montrachet in Burgundy— people think it's a giant region; it's the size of a parking lot. It's worth a billion dollars a row almost; it's— it's insane. And so it trades at crazy prices; LV LVMH is a corporation buying one row of grapes at a time. So when you have that kind of an investment, you can afford— you'd think to be able to intervene; but the rules of the DRC, that the multi-hundred-year rules, do not allow you to do that.

You lose your passion if you're caught putting fertilizer up your pant leg and walking the vines or using some kind of a device to put water on it from your pant leg. Those are— those are tricks that have been tried by farmers for hundreds of years; it's forbidden. And so this is the kind of thing you deal with in the wine industry. That tradition is why a bottle of Montrachet is worth a thousand dollars when it's a good year, and it won't be a good year in 2021.

Oh yeah, yeah. Well, I'm sorry to hear that; golly.

Yeah, so climate change. I mean, what do you think, though? But like the Federal Reserve's starting to talk about climate change. Uh, Kathy Wood kind of suggested that the Fed seems like maybe they're getting a little distracted and they should be focused on the economy. Is the Fed right to be concerned about climate change to the extent there's an economic cost?

I mean, I think, you know, if you believe that burning, uh, huge amounts of coal is detrimental— and I do— I mean, I just can't think that's a good thing— um, you should stop buying Bitcoin from the Chinese, for example, because that's what they do. They have 64 of all the coin mined. I have made a choice not to buy their coin, and frankly because institutions have the sustainability committees to answer to now and ethics committees, and they won't buy China coin.

So my thesis is to start to invest in companies that make sustainable coin, green coin. Yeah, and I ran a— this is interesting because you're indicating it's institutions. So I asked on Twitter, which is mostly going to be retail, 6486 votes here— 76 percent of people who replied to my poll, when I asked whether or not they care where their Bitcoin or crypto is mined, 76.5 said they don't care, uh, and only 10 said yes, they care, and they'd even pay more.

Is this going to be something that starts from institutions and then people start caring? Is that why you're focused on that?

My experience was rather interesting. I first bought Ethereum and Bitcoin in 2017, but because I work in a highly regulated environment; I have many investments and have some chairman roles in certain financial services companies, I have to be compliant to institutional standards.

And so when I announced that I had, uh, you know, finally—so, you know, regulators, uh, all around the world were very negative in 2017 on any cryptocurrencies; I don't care what country you're in. And then all of a sudden in Switzerland, in Germany, France, England, Australia, New Zealand, and Canada, uh, the regulator opened up; in fact, there's now ETFs in the Canadian market where you can buy an exchange-traded fund that only owns a Bitcoin.

And so I decided to increase my weighting and went public saying that I've reduced my portfolio allocation for 2021 to 70 equities, 22 percent in fixed income, which is a massive reduction from a year previous. It used to be 50-50, a 5 gold of which half is stored, and the other half I'm balancing with GLD. And then finally, a three percent in Bitcoin.

Now, I didn't expect to get any kind of feedback from that; it's just a reallocation. I did it in the last weeks of January.

You got a lot of feedback.

Oh my goodness, I was inundated with institutions calling me from all around the world and sovereign funds saying, "Wait a second, where are you getting this coin? You're complying, aren't you?" I said, "What do you mean?" Just like 70 percent of those polled in your poll, I said, "Why would I care?" And they said, "Are you aware that 64 percent of this coin is coming from a country that burns coal to make it and has alleged human rights violations and is under sanction from the United States? That's China."

And I realized that I had the reason these institutions are not participating in allocating Bitcoin has nothing to do with just the regulator, although they do consider it. But regulators are opening up. What they're concerned about is their ethics committees and their sustainability committees that sit above the investment committee on a large institutional mandate.

So before they can allocate any asset class, any asset class, point of origin of the asset, where it jurisdiction is, how it was created, these are all questions that have to get approved by their committees.

And so what I found occurred was I immediately said, "Okay, I'm not going to buy a blood coin from China; what I'll do is I will go to the mining community, the pools in Europe and the pools in the U.S., and I will basically fund their expansion."

I can— you know, if they're looking for 20 million dollars to expand, uh, facilities and become more productive, I can help them finance that, and in exchange, I want a royalty paid in virgin coin where I know the provenance.

And I found a tremendous amount of institutional interest in that, uh, to join me— you know, beside me doing it. It solves their problem too because they can go to their committee and say, "This coin I own in a wallet that has never traded; it's our coin; it's property; it's virgin; it's compliant; it's sustainable; there are no ethics issues with it."

And I believe over time, as institutions start to really get involved in crypto, that you will see a premium. You'll have the discounted blood coin from China, and you'll have the premium virgin coin with provenance— no different than blood diamonds; same thing.

Sure, sure.

Now, is this something that— look, as an example, Delta Airlines; they have a partnership, I believe it's Delta with Gevo to supply a certain amount of their fuel with biofuels. I think it's enough for like a hundred flights a year; it's a drop in the bucket, right? But I feel like they do it so they can market and give the little green badge, "Hey, sometimes we use biofuels," right?

Is that going to be the same thing? I mean, is it just something where you put a little bit in your portfolio that's clean, and the rest is whatever? Because whatever, then you can put the little green check mark on?

Yeah, I know what you're saying. I mean, for years, companies would do that sort of, um, to get the aura of sustainability and that they cared and they were green; it was a marketing stunt.

But that is not what's occurring, uh, today in terms of the consumer; they smell a mile away because they have the power of social media to vet out anything, and they do that.

And so what I'm finding now in my own investment philosophy— let me give you an example. Here's a company that I'm in a joint venture with Comcast in; this is called Blueland. Their mission— very simple mission statement is to eliminate 50 million plastic bottles out of the environment a year globally. Very simple.

I haven't found anybody that doesn't think that's a good idea. And so when I was pitched, they said, "We have found a way to crystallize cleaning fluids, a patented way. This is a— this is a full bottle of surface cleaner, toilet cleaner; they give you a sustainable bottle. They ship it to you direct; you drop this into the bottle with water, and now you've got a full month's supply of surface cleaner and no plastic bottle throw out."

Now I would have thought that company would have a hard time growing; it is one of my most successful companies. Why? Because the constituency, the buying constituency doesn't want marketing; they want a real solution. And this company has a mission, a real solution, and it works.

And so that's become part of the metric of what those consumers are buying: is it sustainable? That's part of my mandate; that's what I want. I'll support this company; I'll go out of my way to support the company; I’ll buy direct from them, and, uh, it's— it's, you know, the growth rates on this thing are going through the roof. It'll hit 100 million dollars in sales very soon.

And so back it— it could be SPAC, but frankly, I'm not a big fan of SPACs. I feel it'll be bought by a strategic; that's what will happen when you get to 100 million in sales. You get the big guys knocking on your door.

Yeah, and that makes a lot of sense. You get like a Clorox or something to come buy that product from you, and, uh, patent it.

Well, I'm sure it's already patented by your IP. Why— um, why no, not a fan of SPACs? Is it just because of loose SEC regulation and those, uh, those ridiculous investor presentations that are mythical projections that they give?

Well, no, actually I do have about 20 SPACs in my portfolio right now, but only from, from operators that I know. You know, the SPAC is no different than private equity, and so I need to know the team that's actually backing the SPAC has actually done deals before and knows how to buy at the right multiple and knows how to operate.

And so if you— you know, you're talking about the Gore's brothers, or you're talking about Bill Ackman, or you're talking about teams like that, I buy their SPACs, and I own them right up to when they de-SPAC. Then I look at what they've bought and say I look at it as a public company.

In fact, my wine business is in the middle of a SPAC conversion right now. And so, you know, obviously I'm very excited about it. Now we're going to go public that way through SPAC.

So I'm not against SPACs; I'm against celebrity SPACs. The idea that some celebrity knows what they're doing in private equity I think is a joke. I mean, you have to spend your career learning how to do that stuff, so you know, sticking some celebrity on its back and saying, you know, give me 250 million dollars, another 500 million dollar pipe— I avoid those like the plague; I think those are going to go to zero.

Wow, wow. Go to zero! Oh my goodness!

You mentioned the Gore's brothers; are you in Matterport?

No. What Gore brothers?

I got to know, uh, way back, you know, 20 years ago; I have a tremendous amount of respect for their philosophy and how they operate, and some of the people that used to work for me did go and work for Gore's and said nothing but good things about them.

I like Alec; I really do. You know why? Because he's a cash flow guy; I'm a cash flow guy. He respects cash flow; that's what he understands. He understands cash flow; he doesn't understand future cash flow; he understands cash flow now, and then he tries to grow it.

He doesn't price businesses off, "Maybe they'll be profitable, maybe they'll have cash flow." He looks at existing cash flow on the stability of that cash flow, and he makes economic and leveraged decisions based on what he knows is factual and his historic data from—that's the kind of operator I like to invest in or beside. And, you know, it's just a philosophy— but you know, his track record is impeccable.

That's great. Well, I mean, that's great to hear. Yeah, a lot of us watching right now, we, uh, we're in, uh, one of the Gore's SPACs, uh, and it's the Matterport 3D scanning business for real estate— 3D scans.

So you mentioned that you're heavier on cash now than you've been. How heavy is heavy?

Well, it's primarily because of the reduction from 31 to 8 percent on commercial real estate. And you know that— that started last year, January, and then we did do some selling during the pandemic period, March, April, May at more depressed prices.

Well, right now the cash is about 38— 38. We just looked at it this morning, which is extremely high; it's extremely high. And so we are deploying— uh, we have done some deals; they're mostly private.

Um, you know, I have— and I also, uh, stepped up, and when I did the reallocation down from 50 down to 22 in fixed income, we did deploy into large cap equities. But, you know, that's a big dislocation when you take an asset class from 31 down to 8; I mean, it's going to take me a year or two to get put that money back to work.

And, um, you know, yeah, that’s why they call it work. I mean, you know, we look at it and say we're getting zero for it when I say cash, I mean cash; I don't put it in mutual funds, you know, or short-term bond funds. I mean cash; cash is cash.

So if there's some kind of correction or illiquidity event where these mutual funds break a buck, I won't be part of that. So my cash makes nothing. There is some interesting work I'm doing with my team in crypto where we're garnering for yield using various leverages, uh, USD versus Ethereum versus, um, Bitcoin, but this requires a tremendous amount of technical skill.

And, uh, it's more of a corporate strategy, and it's not something I would recommend to people at home. But I, you know, I have a full-time team doing this, and you can kind of glean, depending on the volatility of Bitcoin, which has been less volatile lately, somewhere between five and seven percent returns. But you are taking risk; it's not free.

And so I've struggled with this. So I've, uh, I did a video maybe about three weeks ago, and I've talked to a few crypto CEOs— BlockFi, Voyager, and so on— about the crypto lending space and specifically the lending of stable coins like the Gemini coin or the USDC. My concern is— and I would love your comment on this— obviously, my concern is you've got thousands of retail crypto investors out there who look and go, "Yeah, I've got this stable coin," and they see that as a savings account.

Uh, they see that as their cash, but they don't realize they've turned on lending. So now they're getting paid six to eight percent on this stable coin, and so when push comes to shove and something breaks in the crypto space, one day people go back to— okay, well, who gets that original dollar that's sitting in the bank vault somewhere?

Well, you're 13 people down the road because this same dollar has been rehypothecated 13 times. Isn't that a massive risk that there could be a lending disaster that comes out of that?

Yes, um, it would be an illiquidity event if you're going to do this.

And I do have employed a material amount of money into this strategy just to, you know, use cash, but I understand the risks. I understand the allocation I'm taking; it is no better than a single C credit. You would never get a triple B credit on this strategy.

And yet there's room in a portfolio like mine to have a single C exposure for yields of five to seven percent. But what I would recommend is— and I don't have an equity interest in them— but there's a company called Circle out there that has some of the— and I've— I talked to all of them.

Um, I've got a whole team talking to everybody that participates in this on a corporate level. So if I have an operating company, uh, which I do with a lot of cash on its balance sheet, I can go to a Circle and say, "Look, I want to open a corporate account and decide that maybe I'll put a five percent allocation into that lending strategy with full transparency, full tax reporting, full compliance," and have my CFO work with them, and that's what we've done.

And so it's sort of— because all of these wallets and all of these retail, uh, you know, apps and all that stuff, they're just laden with ridiculous fees.

And so when you're— you pay us a really stupid price to have a— I'm not going to mention names, but anything you download on your phone, you're in the crypto space, you're going to get whacked with a ton of fees you don't see sometimes, or at least you're not aware of.

And so my attitude is if we're going to do corporate lending, let's set up corporate lending; let's go find providers; let's find, you know, check out their compliance committees; let's talk to their management. You know, it's— I'm very fortunate; it's really great to be Mr. Wonderful; everybody returns my calls, and I'm very appreciative of that.

But, you know, at the same time, I'm doing a lot of work for other LPs that may want to pursue this. And if I go set it up and it works— and I've, you know, I’ve got some very smart guys working for me on this— I’m willing to deploy some capital because I believe the regulator will continue to examine the potential of cryptocurrencies for an efficient way to run an economy.

And if we don't do it, the Chinese will. And I’d be very, very careful, you know, that we stay— as I like to say— oh could "Ant" with what the Chinese are doing on cryptocurrencies, they would love nothing more than to create a coin controlled by their own blockchain that they could basically provide a stable coin to the world to trade of like the American dollar is and then turn it off if some— you say something bad about China.

They could do that, and I don't want to see them do that. So where, as I said earlier, an economic war with them— if any—and if anybody's going to create a stabilized coin for global commerce, I want it to be the United States and have the same rule of law associated with it and the same court system associated with it.

And then, because for me, who does business in Switzerland, in Europe, in England, in Australia with all these different currencies, I get killed when I'm transferring into Euro or Swiss Francs or British Pounds. What a total pain in the butt! Why can't I just use a standardized currency and trade in all those countries?

Right, right. That completely makes sense. Now, you mentioned that this is single C; I mean, isn't that like, you're talking junk level, but these are stable coins? It's not rated, and so it's not even fair to call it single C.

It is what it is. It's exactly as you described; there are inherent risks that most people do not understand. And so when you get into, um, you know, it's— it's— it's like that song "Superstition." You know, when you trade in things you don't understand, that's what happens; bad things happen.

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