In early Spring, we felt as if an old game had ended and a new one started. No longer were Frank and Ian guessing where we were in the last cycle. Something new and much less forgiving was beginning. In this episode, our hosts talk about the phases of a recession and how the dominoes tend to fall. How can you prepare and what actions can you take to end up stronger on the other side of this ugly economic cycle?
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Are You Ready For This Recession?
Lessons From Past Downturns And What To Expect In The Next Two Years
You Italian son of a bitch. Don’t you fucking duck me. You know I’m calling. I’m calling to tell you that you are not the fucking man I am. You come to fucking Fantasy Football. Ian Mathews is more of a man than I am that comes to fuck the Fantasy Football. That guy, the fucking Ian Mathews, he fucking knows way more than I could ever know. Honestly, say it, “He knows more than I could ever know about Fantasy Football. That guy has learned it.” He has learned about fucking Fantasy Football and honestly, I’m happy to be in his league because I’m learning from him. I learned from Ian Mathews. Every fucking week, that guy, he puts together his fucking line up to win. He’s a winner.
I’m so glad I’m friends with Ian Mathews because he’s a fucking winner. Fuck, I’m in the wrong lobby. I’m in the wrong elevator. I’m not the winner. I’m back. I’m fucking waiting again. I’m good like fucking 4 or 34, something like we stopped at floor four. What are you supposed to do? Are you supposed to just know all that shit? Being in a Fantasy League with me for many years and losing every fucking year, you have not won one championship. I hope that you’ve learned a few things from me, and I know you look up to me, but I hope that by being a league with me to getting better. It’s because, from my perspective, you don’t look like you are much better. You look like you still suck at Fantasy Football.
I got through with Memorial Day weekend. It was in Myrtle Beach. I drank a lot of tequila with the parents of my travel baseball team. It was a good time
It looks like he did wear sunscreen. On the other hand, I am still bronzy from my trip to Miami for the IMN conference, where I conducted business at my sexiest, which is water level up to my nipples, and got a lot of business done there. It was very nice.
I have a very good coach’s tan going if you can’t tell, it’s good. That’s what a coach looks like right there. I got the red neck and forearms. I had the jersey on all weekend. It’s pretty intense. I’ve got to get my butt into a pool without sunscreen on so I can get rid of this coach’s tan. We are recording this on June 1st. It’s been an interesting 2022, to say the least. A lot of news and back and forth. A lot of panic, if you are an owner of stocks, specifically tech stocks, but all stocks. It has had a rough year.
Even more panic if you are a crypto advocate and owner specifically. Panic is seeking into the startup world where venture capital is prevalent. Not so much panic if you are in the real estate market. In the real estate market, at least the clients that I work with, I do coaching with a couple of home builders, they couldn’t be busier. They are trying to still find people trying to hire, and you and I talked about it that real estate tends to be the tail of the dog. It’s the last to know when there’s some bad stuff going on in the market.
In this episode, we wanted to talk about some big things that we have been reading in the news that feel like indicators that we are probably already in a recession right now and it started. We want to talk a little bit about your trip down to Florida and what you are hearing from different real estate owners. Do you think there are any indicators that you’ve seen in the past that should be making us a little bit nervous?
There’s a combination of things that play here. Ian and I are having this conversation. I went and saw Top Gun: Maverick, which is fucking awesome. Some friends of ours that we went to see it with are a little bit older. One of the guys like, “What do you think of the world right now?” I went into a specific strategy about how I’m repositioning myself some debt, trying to free up some cash and do some stuff. He’s like, “Thank you for that. Thanks for being so honest.” I was talking more globally. He’s like, “Monkeypox, Ukraine, the economy, inflation.” There is a lot of scary shit going on in the world.
Ian and I are pretty realistic with it and we are also pretty early. I was having a conversation with somebody and they were like, “When the banks dried up last time, there was a housing downturn in 2008.” I’m like, “2008 was late. The housing market started to show signs of problems in 2005 if you are paying attention. You had three years of being able to do things.”
I have most of my holdings in real estate and now is a good time to make sure you are heavy in cash, even though we are going into an inflationary period. Ian and I, as we go through the week, we text back and forth. He saw something in the news and I pulled up CNBC in case I needed it for the fall we are in here. The headline on CNBC right now says the following, “Elon Musk tells Tesla workers to return to the office full-time or resign.” We didn’t have that on our agenda week, but we have a couple of very similar stories because the market’s changing. The sentiment of overpaying for talent to get them in the door is no longer the case because we are in the teeth of something new.
I heard Elon Musk. He was a keynote speaker at the all-in venture capital data, like a three-day summit or conference. He was one of the keynote speakers, but he was talking about early funds. Elon Musk is an awesome guy to listen to because he has been on the verge of bankruptcy more times than Frank and I can even imagine. There are so many different times if you hear a story with PayPal, SpaceX and Tesla. Every business he has ever started, he has been down to two weeks of payroll and figuring out ways to get capital and sliding into home always to beat the tag.
As he was talking to the folks that were at this conference, these are early-stage startups, his advice to everyone is get their cashflow right. He’s like, “I know in the past, you thought about higher, when’s my next raise, and how do I get sales. Get your cashflow right. You want to be in control over the next couple of years. You don’t want to be beholden to your next raise because it might not be there.”
When he’s telling the people at Tesla that, he’s thinking about his company too, because when he says that, he’s saying, “We are not as efficient with you working from home. We are not as efficient with you being remote. We are a car or battery manufacturer. Get your butt to work. We are better when you are at work. We get more done. If it doesn’t work for you, tough shit.” I think that’s a good lead into a lot of things that we are starting to see in the market. Tell me that this environment has already switched to an employer’s market, which has been an employee’s market for many years. A long time and it’s been an employee’s market.
It’s been an employee’s market for a while, but it’s been crazy since 2021. Let’s go backward a little bit. Pandemic happens. Nobody is quitting because everyone’s afraid. Ian and I were sending texts to each other. Usually, the unemployment claims are somewhere between 200,000 and 400,000. That’s normal. There were 10 million in one report in March or April 2020. It’s like, “This has gone up by a factor of 50.” Since the dawn of time, that has never happened.
You had this thing where everybody who had a job was hunkered in and didn’t want to go anywhere if they didn’t hadn’t gotten fired. Then there were some smart people who were like, “I’m working from home. My company’s not good at managing me.” Some of those people went out and found a second job and were half time at two jobs because of the fact they were talented enough to pull it off. That’s 2020.The market's changing. The sentiment of overpaying for talent to get them in the door is no longer the case. Click To Tweet
2021 comes up and it turns into the Great Resignation. That started to happen. The other thing that was crazy was construction people. I own a construction company, manager, people educated, not necessarily people swinging hammers, but people on the other end of the spectrum who manage, they never are in the catbird seat where you can demand. They were in such demand and they have never been there. The way that I look at it, it’s been a nutso market for 12 to 18 months where PTO is up for debate. Salaries are nuts. There are all these crazy things that people were throwing at them. I remember telling you that this is not sustainable. This won’t last.
We are going to go through a number of points that you read the paper every day, you watch the news and rarely does anything stop you in your tracks and think, “That’s different.” We are going to try to touch on a few of those stories that I feel are very different with some big companies, and we are going to try to relate it down to smaller businesses.
Both of our businesses, which we are dealing with right now, things that we are seeing and dealing with. The first one is for me. Anyone that follows Netflix knows that Dave Chappelle had a stand-up comedy special called The Closer. This sparked a ton of controversy both outside of the company and inside the company. In that special, Dave Chappelle pretty much took the gloves off and went after the LGBT community, and mainly, he went after the trans community.
A lot of jokes. He did with comedians do. He made fun of a specific group. This one he went after largely because they came after him and told him he couldn’t. It offended a lot of people within the Netflix organization and rank and file employees, to the point where they wanted Netflix to cancel Dave. They wanted him to take it off. It was offensive to them. They wanted it gone.
The CEO of Netflix, Ted Sarandos, was under a lot of pressure because his first response was blunt. It was like, “That’s comedy,” and everyone didn’t like his response to it. Employees walked out. They had a walkout. They protested. The leader of this walkout went as far as to bring a list of demands that they expected from Sarandos and Netflix that they were asking for. To a large extent, Netflix did everything they could to try to quell the rebellion, to try to calm people down and listen to what they had to say, but they never did take Chapelle off. They never did take The Closer off.
I want to say something really quick. This is relevant. The Closer came out on October 5th, 2021. A lot can happen in few months and last time, the market was still nuts. People were still demanding things and it’s changing.
He retracted a lot of his early statements, tried to listen and appease a lot of different people within the company. He tried to calm them down, but he never did quite take them off, but their approach, I wouldn’t say it was harsh. They are a big company trying to make money, even though they left Chappelle up.
They tried to prioritize the employee. They were not dealing with fascist Germany. They were very much in a way of, “We want to satisfy people here, job security or quality of employment,” that type of stuff that matters at that time.
They were sensitive to their employees’ demands. At least sensitive to the way they felt. We hear you. We’re listening. They did a bunch of town halls. They did some sessions where people could give direct feedback to the executives in the company. They listened. That happened in 2021. The news that I found very interesting is Netflix’s Q1 results came out. They had their first decline in subscribers in more than a decade, and Netflix’s stock was destroyed. It lost billions of dollars of value. If you own that stock years ago and you own it now, at least half is gone.
That’s a different position that the company executives are in now. When they were trying to appease, they were still in growth mode, adding employees, and getting as much content as you can. They didn’t want to lose people. Now, they are under a lot of pressure from shareholders of what are you going to do to grow profit and earnings.
They came out. The news comes out that they updated their Netflix culture memo. The Netflix culture memo is a big deal. You’ve seen before their 100-page PowerPoint on what Netflix is and what they expect of employees. We have even talked about it on the show before. It’s an iconic HR guide that’s been looked at 21 million times.
The one night they updated it and there’s a section in it, a new section called Artistic Expression that’s in there. This explains that Netflix is not going to sensor any specific artists or voices even if employees consider the content offensive. It very bluntly states, “As employees, we support the principle that Netflix offers a diversity of stories even if we find some titles counter to our own personal values. Depending on your role, you may need to work on titles you perceive to be harmful.”
This is the statement that’s tough. “If you’d find it hard to support our content breadth, Netflix may not be the best place for you.” In essence, what Netflix is saying is, “We released something incredibly popular, that was number one, by the way, on our streaming service, Dave Chappelle. You didn’t like it. You threw a fit. We listened. In the future, we are not going to listen. We are going to terminate you if you have a problem, if you come out and you protest and do anything.” They are coming out and saying, “We are going to produce content that people like, and we are going to do it within the law. If you can’t get around that, you shouldn’t work here, and we don’t give a shit.”
There’s not a lot to add there. We are a for-profit business and we have shareholders. When you go public and you have shareholders, you are beholden to shareholders. The CEO will lose his job if he does not represent the shareholders in the best possible way. That’s why there’s a board, and that’s why there are people to be elected. These things are real. I pulled up the chart while you were talking to have a couple of contextual things.
The 52-week high, which happened about the same time Dave Chappelle was, a very unpopular way of dominating, was $700 a share. Their 52-week low is $162. It’s a little higher than that now. If you put that in perspective, which is worth doing, the market cap at that point in time was $311billion, and now it’s 1/5 of that. That matters a lot. There are a lot of pissed-off shareholders that are out in the world if that is, in fact, what’s happened at your pricing in that period of time. We want to prioritize the people that work here, but the real master is profits.
You and I both worked for a CEO that on a regular basis reminded us that our priorities as a company, our 1) Shareholders, 2) Customers, 3) Employees. He used to remind us of that all the time. If you start putting employees ahead of shareholders and customers, you won’t have either of the first two. That’s what Netflix is saying right now. “There is no company. We cannot afford to pay any salaries without customers and without shareholders. That’s how we get financed to run a business. We are a business. We are not a charity.”
The CEO goes on to say in this document, “While every title is different, we approach them based on the same set of principles. We support artistic expression of the creators we choose to work with. We program for a diversity of audiences and tastes, and we let viewers decide what’s appropriate for them versus having Netflix sensor-specific artists or voices.” Another thing our CEO or chairman used to say to us all the time in a company Frank and I were in is we don’t make the market. We serve the market.
He used to say that, “We build homes. It doesn’t matter where you like. It doesn’t matter what you think. It matters what people will pay for. That is what we are going to build. That’s the product we are going to make.” What Netflix is saying here is, “We are going to go serve the market. If the market wants content from Dave Chappelle, that may be offensive to some, but it’s profitable, we are going to serve the market and you may not like it, and you should go.” That’s a big change from the way companies were running in an employee market. This is Netflix saying, “We are in a bad place now, and honestly, we are not hiring as many people as we used to. If a few of you leave, it would help our earnings results anyway.”
There are two things that I want to say as we close out this section. This is the definition of free-market capitalism. That’s what it looks like. When you need to kowtow to get people in the door, you do. My guess is unemployment will start to tick up. Good people who work at bad companies will be the first people on the street. The first couple of rounds of layoffs at big companies is pretty easy. We are going to get into some statistics in a minute and some other blue-chippers who have added staggering numbers of employees who will find themselves unemployed at some point in not-too-distant future.
In addition to something, while we are talking about comedy, this is a show that’s supposed to be fun and enjoyable. I will say the following, “George Carlin is one of my all-time favorites, long since dead, but he has a four-hour special on HBO. If you haven’t seen it, you have to. It is awesome.” There’s a comparison between George Carlin and The Beatles. The Beatles came out on The Ed Sullivan Show when they were in ties, they were all dressed up and they became counter-culture.
George Carlin went through the same thing, and he came out about the same time. He’s about the same age as those guys, and it went through the iterations that it takes to be on top with comedy for 5 or 6 decades. My dad loved George Carlin. I loved George Carlin as a kid. It’s awesome. The other thing that’s cool about it was all our favorites like Seinfeld and Chappelle’s in there. Bill Burr is quoted several times. If you like comedy, it’s worth watching.
Another thing that I have been hearing a lot that Frank and I have both thought was a complete bullshit is that COVID changed the way employers and employees work together forever. Remote work was here to stay. Employees were going to have the power. I have never quite believed this. For one, I thought there were a lot of young people that would get tired of that quickly because it’s pretty hard to develop and grow in your career if you are on Zoom calls all the time. That’s how young people learn. It’s by being in offices and observing and being around. I also know that it’s less productive.
Something came out and there’s been a number of these, but I’m going to talk about Apple and Google. Apple came out and said, “We are going to mandate the people come back to work three days a week.” They called it a pilot, but it was a mandate. You are going to come to the office Mondays, Tuesdays and Thursdays. Wednesdays and Fridays are your flex time. You can decide what you want to do. They put it down and Tim Cook, the CEO, sent a memo out saying, “This is the way we are going to do it.”
Apple has a lot of their employees out on the West Coast. They are not as spread out as Amazon or some other big companies. A lot of people are in the same place. It’s more efficient. It’s more effective when people around and working in groups. They came out and did it. A very high-level executive in the company, Ian Goodfellow, is the Director of Machine Learning. When this came out, he threatened to quit. He said, “I’m not with this. It’s not fair. I’m leaving.”
This is the person who most organizations and most employees think irreplaceable. This is someone who the company can’t stand to lose this person.
Genius level. A very smart guy. Thought to be a very big part of their machine learning group, which is a big part of their future growth in the company. This is not a peon. This is not a low-level manager. This is a guy whose brain is worth a lot of money to Apple. He came out and said this, and I think he thought he was standing up for his team, and Apple said, “Are you going to put that in writing?” They took his resignation and they didn’t hesitate.If you start putting employees ahead of shareholders and customers, you won't have either of the two. Click To Tweet
They reiterated their stance. “This policy might not be for everyone. For those that are not with it, put in your resignation.” The fact that Apple is doing this because the big tech companies were some of the first to come out and say, “We are cool. This was a recruiting thing. You can work from wherever you want and work for us because we are a tech company.”
Apple was one of the ones that said, “You don’t need to come in. We have COVID,” but Apple, the biggest of the big dogs in tech, came out and said, “No, you are coming back.” A lot of the people that work at Apple have said, “This pilot is a precursor, so they are going to say everyone’s got to work five days a week again at Apple.” That’s maybe what even had this Ian Goodfellow is upset, but he’s out of the company. Apple was like, “If it doesn’t work for you, fine. We’ll find someone else to do your job. We are Apple. You are some dude.”
Let’s dive into this first week with Goodfellow and then let’s move into the next one. This is worth talking about. A couple of things. First of all, during the pandemic, like when vaccines were out, you weren’t going to implode by interacting with another human. Goldman Sachs came out and said the following. “If you are under 35 years old and you are not coming to the office every day, you are nuts.” The reason for that is there are smart people who worked at Goldman Sachs who are walking the halls of the office.
There is something to culture and impromptu conversations that happen in an office that is irreplaceable and cannot be replicated in Zoom. Zoom is a wonderful tool, but at the same time, it is not the same. The amount of meetings that I have been in my life that have happened because I bumped into somebody in the hallway or on my way to the bathroom, or I pop into an office, it turns into a 3 or 4-hour session where we whiteboard stuff, that they happen a lot. There’s incredible value thereof being in the office. I want to pivot to a different point after that, but anything to add there or do you agree.
That’s how new managers, every time you move up, you get that Peter principle about to happen. You are always in meetings with guys and gals more senior than you, and you learn by listening and watching the way they make decisions. You don’t get any of that on virtual or on remote. You might get a little better at something individual contributor-wise, but to grow and emulate other people, you have to be around them. You have to see it.
There are a few periods of my life where I don’t like to use the word depressed, but maybe I was depressed or I was not at my peak. Those moments happened to me when I was isolated. When I lived in Charlottesville, I didn’t have a great support system around me. I quit my job. This was starting really low. Even though I had my son and my wife at home during COVID, I couldn’t interact with people. My mood was worse from being away from the office.
How long did Cava companies go virtual?
We were virtual for at least six months before we started getting back together. 3 to 6 months where it was completely virtual, and then we started dabbling a little bit.
You had some people that kept coming in every day.
I did, but those people were pissed that other people were coming in because they didn’t have the office all themselves. It was three months, and then within about 90 days, when you started to get a little bit more data and you realized, “This doesn’t kill healthy people. We knew who was negatively impacted by it. We started to branch into the office.” We did remote work where everybody would work on a rotating schedule. We still do some of that. I have got a 7,500-square-foot office opening and the not-too-distant future. There will be a conversation with our staff. We have a beautiful new office. We expect to see you there because I do agree. There are a very special few people who can work remote and be very productive. Most people are more productive while you are here.
The other side of this Ian Goodfellow, “I quit NVR and I was in my low 30s.” Ian quit in the mid to high-30s. Both of us, when we quit, we are like, “We are pretty high up.” What happened? The company did fine. The stock didn’t come down. Nothing happened. They replaced me when I left with someone who’s still in that job. I don’t think it is as strong as I. Company profits went it dip to smidge on that one division. It doesn’t matter. The company kept going.
One of the things that I have learned is if you have an employee at a small business and you think it is irreplaceable, fire them. They have too much power over you. If you are a business owner and you are beholden to someone, don’t be. What I have seen time and time again is I have been scared about losing people where there are a couple of shitty months that I work harder, work on weekends, work later, and stress out. Yeah.
What happened? I found new people, re-energized different things, and got back into things myself personally. What ended up happening is, in the end, we are stronger because of it. If you feel beholden to somebody and you are not a big business, I encourage you to go the Apple route. “See you later, Ian.” Not Mathews. He is my compadre. Goodfellow.
That is what happened. They have plenty of people behind this person who will step up and want to raise up. As we go into recession, you are going to see that. You don’t pick all the top people in the highest roles. You pick people who have the most upside, who are the most bought in, and who is going to help you survive and do well. That’s the type of market that we are going into.
If you work for a big company and feel like you have some leverage, you don’t. We saw the founder of our company step back from being a CEO and go run the Redskins and goof around. He disappeared from the company. He called himself chairman, but he wouldn’t do anything for ten years. He was gone and the company rolled along. I saw 3 or 4 CFOs. I saw presidents come and go over the biggest operations of the company. Nothing happened. The next guy filled in.
If you ever get a sense of self-importance, there is. I can’t think of anyone in that company that, if they left, I would want to go sell all my stock. It keeps rolling on because it’s a machine. Don’t think that you are so powerful that your company will give a damn if you leave. It won’t. If you are trying to, I’m going to go stick it to my company. You are not. The company doesn’t care. It will only hurt you if you do it for some other reason other than financially. It benefits you. Don’t ever think that it’s worth dying on some hill because the company will be happy for you to die on the hill, and it will move on.
Ian talks big business. I talk smaller. Smaller businesses go through what’s called valleys of death. Valley of Death is 5, 15 or 50 employees. If you have under five employees and you are beholding to somebody, you are pretty much screwed because you don’t have enough people to fill in. You’ll probably lose a segment of the business.
If you get to about fifteen, I would tell you that you have enough people on your staff, or if you have cancer, you are doing more harm to your staff by holding onto that person and letting them go. What you’ll see with fourteen other people is they will rally and they will help you get through it. You get to a point where I’m at with 50. It’s very different because now people will come to you and say, “I would rather this person not be here, and I will do more because it’s not the environment I want to be in.” We covered this from all angles.
The other big company that came out and they did this a little bit differently. Google, they are requiring that people come back to work in certain areas, but they are offering some full-time remote work positions. Everyone is like, “Look at Google,” when they are talking about Apple. Here’s the big caveat. Google also rolled out internally a new internal calculator that drops your pay if you are going to go work remotely somewhere that’s not in San Francisco, New York or some of their big, expensive offices. For example, if you want to move from San Francisco to Lake Tahoe and take a fully remote position, they are going to ask you to take a 25% pay cut. You are some low-level engineer at Google making $150,000, which is a low-level engineer. It’s like an entry-level position there.
You are making $150.000. You got to drop to $112,000 if you want to go take a remote position. They are saying, “Some of you can work remote, but that’s also that is Google putting a tangible dollar amount on what they think happens for your productivity. They are saying, “We think you are that much less valuable when you are remote than if you are in the mother hub with the team working folly, even though it doesn’t cost us any more to work remotely in different places. We are going to make it painful enough because we know the value of you being in the office.”
That is a precursor for Google to do what Apple is doing, which is saying, “We don’t have that position anymore fully remote. Get your ass to the office if you want to work here.” To me, those are both good examples of the market turning where big companies are saying you don’t like it. “Go work somewhere else. We are not dying for people anymore. We are overstaffed because the Recession has already started.”
What I will add to that is exactly this. Employers, even small ones like me, know that people aren’t as productive when they are not in the office. They needed a good excuse to put their backbone up and say, “We are not going to stand for that anymore, and this is that time.” You are picking the people who are going to be on your life raft by saying, “The qualifications of being here or you must come in every day.” People will start to look at that because the market’s going to soften and that’s going to be something that’s pretty big.
I’m going to go one step farther here. Frank’s business. A lot of his employees, you can do it remotely. There’s software. There are ways to interact. He’s much more productive with them in the office, but they survived. I’m wearing my Keep shirt. When COVID happened, you said the valleys of death. We may be had five engineers outside of David at the time. It was a small team when it happened. We took no weeks off. Everyone kept coming to the office. The reason is we were inventing a mechanical product. You had to test it. Guys had to work, interact together, get things done. We could not have done it remotely.
It was either go out of business, burn all of the investors’ cash that they raised and try to wait this thing out or try to invent a product. The first wasn’t an option. People who were masked came to work. It’s Atlanta. Thankfully it’s the South. I don’t think we’d have been able to do it if we had an office in New York, Chicago, or San Francisco, because, politically, there was a divide. I liked what you said about small companies. We were a small company. There wouldn’t have been something for you to do at home so much. You could do some remote work, but we needed to be there with our hands on the product, and it was a matter of life or death for us to keep coming in.
I’m going to take this in a slightly different direction. This is it. I used the moniker saying several times during COVID. There were a lot of bad companies with good people. What happens with a company is it needed strong leadership and strong leadership was we got to come to the office. You are going to understand pretty quickly I can or I cannot work here when you are going to deal with that.
You’d rather have a slightly smaller team of people all together in the best element for them, and you adjust to that. That’s what he did. What we did in our business was we made sure people were comfortable. There was a period when everybody was in masks. There were all kinds of things, but as the market continued to change and iterate, and we were in a place where construction workers were essential. You had to be very mindful of what was happening and you had to adjust to what’s happening now. It’s not masked. It’s the economy. Janet Yellen came out and said, “The inflation isn’t transitory.” We know.You don't make the market, you serve the market. Click To Tweet
Someone literally siphoned gas from my wife’s minivan while she was at the pediatrician. I told this to one of my friends and he goes, “Tony, the neighborhood where you are going.” It’s happening around us, and the pressures are starting. The businesses start to feel them. With good leadership, what you realize is we have to make a decision for the business to survive and thrive, and what you realize is sometimes people come with you and sometimes people don’t.
The betterment of the company in the case of Netflix, Google, and in the case of a small company like Keeper Mind, what you have to decide is we need to survive, and we have to make good choices. What I think what happens is that’s what leadership is and that’s where you are going to ultimately survive and thrive, and if you don’t make these choices, if you cower away from them, if you don’t commit, you’ll become a victim of it instead of someone who’s leading it.
Tony neighborhoods in Richmond are the safe neighborhoods in Detroit. I always like to say that to Frank. Another story around another giant and the reason we were talking about Giants is because, make no mistake, they are the kingpins of the economy. What the big guys are doing, everyone follows.
The big guys are big for a reason. They are good or have an incredible product or service, and they are also smarter. I don’t remember the number. We look at it. Amazon has 275,000 employees or something like that. It’s a big number.
1.62 million employees.
They are at 1.62 million. What that leads me to believe is having enough money to hire smart people who say, “Go be smart.” I have 40-something. They are smarter than us. They see things faster. They analyze it faster. They are able to process it faster.
They are two steps ahead of a small guy. You have more data points, more employees and their hands are involved in so many different markets. They see trends way before guys like you and I would. They are always two steps ahead of you. It’s always instructive to pay attention to what they are doing and what their CEOs are saying.
Amazon came out and missed earnings in 2 of the past 3 quarterly reports, and in the last one, they missed big and didn’t warn the streets. Their stock got crushed. If you want to talk stock prices, they hit a high of around $3,700, and they got down to as low as $2,000. For that company, it was the largest company on the planet, but that’s close to $1 trillion off of a market cap.
That’s a pretty crazy number, but leading up to all that. Amazon had doubled the size of its logistics capacity in a two-year period. Amazon is already the largest logistics company ever created, and then they doubled in two years, which is, for me, that’s nuts. They did it all starting in the COVID timeframe. They got to a place where they were opening a new warehouse. Amazon warehouses are massive. They are not small warehouses.
They were opening a new warehouse in the United States roughly every 24 hours. Every 24 hours, a whole warehouse would open from Amazon. They’d come out and they say, “Here we are missing another earnings report.” The quote from their CEO was, “Our teams right now are squarely focused on improving productivity and cost efficiencies throughout our entire fulfillment network.” That is CEO speak of, “We are about to start laying off some people and cutting a bunch of real estate out of our business.”
You don’t get to be the CEO of Amazon. These are like 2 of the first 3 quarters with Jeff Bezos not at the helm. Here’s the new CEO. Jeff Bezos had this amazing run and he’s a smart dude. He clearly went to the chairman when he knew they were going to have some shitty quarters coming up. That’s what our chairman did. He got out right before he knew the ship was going to hit the fan. The new guy’s got to come to get on these calls and say, “We were missing earnings when my predecessor went twenty years without missing earnings reports and here I am missing them.”
That guy has got an ego. He’s not going to come in there and screw up on the cost. He can’t control, to an extent, the top line. You can’t control revenue. If demand drops for Amazon products and services, you can’t control that. What the CEO is not going to do, is keep missing on the bottom line. He is not going to come in there and keep saying, “They came out and said we are overstaffed.”
They went out. They raised wages. They paid big bonuses for new hires. They were willing to send out a half-empty van to make sure customers got their packages on time. They were inefficient because everything was about growth and sales. Everything was about taking market share from FedEx and UPS, but now that they are getting crushed in those areas. Mark, my words, they are going to reduce headcount by a lot, and they are going to reign in all of their op expenses. That’s going to happen.
When you’re Amazon and they hired roughly 800,000 people over the past few years alone, 1.62 million workforces. They have a lot of expenses they can take out like that. We talk about this all the time. When you get to be that big and you hire that many people, even if you are a great interviewer, hiring is 50/50. How many people did Amazon hire out of that 800,000? If they went in objectively looked at it, they are only keeping them on board because they are desperately needed people to grow at that pace.
Their first round of layoffs might be 200,000 to 300,000 is going to be easy. They are going to go through and be like, “Tell me all the morons you wish you could have hired when we were too busy. Give me all the names. Let’s get rid of them.” They are not going to miss on the bottom line. They are going to sweep through and clean house.
Amazon clearly runs a more complicated business than either me by a factor of, I’m not sure, but it’s certainly more than one. A few things that you look at, what are you spending on marketing and advertising? What’s your payroll? What’s your nonessential spend? What’s R&D? When there’s a recession, you look at R&D like Research and Development. What are the things that we want to do that we don’t necessarily have to do?
Those are usually three pretty big items on anybody’s P&L. First one is always spending money on our advertising, and if that’s the case, can we cut it? Payroll in my business is higher than my marketing spend, and that’s one of the places you go to first to look. It’s like, “How do we get tighter here?” You’ve heard of terms like reductions in force.
All of the major corporations follow these things because it’s not terribly complicated. There are only so many things you need to do. We are putting this out as a warning right now. If you said, “Why are you guys talking about this right this minute?” If you are on the fringe of being kept at a business, now’s the time to work hard, to dive in, to commit to getting better. The company needs you
Get on board with companies trying to do the initiatives. Now is not the time to start pouting because some have moved your cheese, and it’s not the same way this company has changed. It’s changed. It’s going to change even more. There’s going to be belt-tightening and policies you don’t like. They are going to get focused on expenses.
Whereas maybe in the past, they would have ignored it because everyone was growing. It’s time to get on board if you want to keep your job. If you don’t want to keep your job, don’t listen to any of this, but you better get on board because that’s the first people I got rid of as people I had to sell all the time on why they needed to change.
The other thing is, if you are great and you are at the wrong company, quit now. Most companies are still looking. There is another article up right now about how unemployment is growing, but they are still not enough workers. Now’s a good time to reset if you are great, but when you get to where you are going, dive in with both feet. Don’t give anybody any thoughts or excuses. Show your value very quickly, because if you do that like you’ll be looked at as an essential person. Now’s one of those moments where it’s like make sure you are on the right boat, and if you are on the right boat, show your value because these are those moments.
I can talk about this when we were at NVR. We had different experiences. Ian and I were in different departments, but here’s what happened. The company has been going through some changes. You are a manager. If you are in the room, it means you are not getting fired, but if you look around, you didn’t see somebody. You are like, “They were firing him in three days.” That’s real.
What you do is you do what’s called forced ranking and you go through every single employee and every single position, and you rate people from the beginning, from top to bottom. You know who are the people that we need to have if we need to run at 50%, 60%, or 70% where we eliminating. That’s the process, and it’s the process everywhere. Ian talked about it about who don’t you like? This is the process. It’s up to you if you work someplace to continue to show value and to add to making the company become indispensable. If you are indispensable going to one of these, what tends to happen is an insane reward on the other side of it.
We can end on the Amazon thing after this, but the reason why Amazon, these comments and earnings reports are so important, and I love something you said when you talked about R&D. R&D is wishful thinking for companies that are growing, but when you are as big as Amazon, you have a CapEx budget. It’s Capital Expenditures investments you are making.
When you are growing crazy, you might have a big CapEx line item which is we are going to upgrade our software and distribution systems. We are going to put robots in some of our warehouses that with barcode scanners. We are going to hire autonomous driving forklifts that don’t even need employees on them that move around.
I’m going to give you something even better. It’s more relatable to everybody else. In the last recession, gas prices were insanely high. People were like, “I’m going to go buy a Prius.” I’m like, “Get an oil change, change the tires, and ride that van into the ground.” The amount that you are going to spend saving gas by buying a brand-new Prius is not even close to what you are going to save. You take that old van and run into the ground.If you work for a big company and feel like you have some kind of leverage, you don't. Click To Tweet
CFOs on a CapEx project. A CFO is typically looking at 12 to 18-month payback. If I go spend $1 million on a new crane system, am I going to get my million dollars back in some return? How are you going to calculate that within twelve months? All those CapEx projects are now going to go to you better show a return of 3, 6, or 9 months. If you are not hitting those hurdles, what’s going to happen is they won’t spend the money.
What the pin action of that is the guy who sells the crane. He didn’t sell a crane this year, and then the crane company went and had to lay people off because they didn’t have enough revenue. It reverberates through the entire economy because big companies like Amazon quit spending at the rate they were before. They don’t buy that software package. They don’t buy that crane. They don’t buy those new forklifts that need to be upgraded because you’re doing exactly what Frank is saying.
Let’s let our Amazon vans run a little longer. Let’s not buy new vans, but then here’s where it starts to hit the real estate market. They don’t have demand. They are not out looking for a new warehouse every day. That demand was pushing prices up in the market and it was getting everyone else chasing. Now they are going to go beat up all those landlords and negotiate the rates down, or they are going to threaten to leave, to get out. They are going to sublet to other people.
All of that stuff hasn’t even started working its way to the economy. Amazon came out and said, “We are surprised by how badly we did, but we’ll be better. We are going to reduce our expenses.” We haven’t even started to see Amazon’s problems. Reverberate. When you are a multi-trillion-dollar business that is in a panic mode about reducing expenses, those bowling pins are going to be flying around for the next twelve months, which tells me we are at the start of a recession. All of these big companies are going to be cutting CapEx, R&D and employees cutting their thirst for real estate, and that is going to reverberate all through the economy.
I’m going to end this segment on this one. If you go back and look during the last recession, there was a book and ultimately a movie that came out and was called Too Big to Fail. If you’ve ever seen the movie, it’s pretty awesome because the guy who played Danny Noonan in Caddyshack, his name is Michael O’Keefe is in a meeting, and he does this. He gives a wave. He waves at somebody they are talking about all the banking problems and all the bank problems, Wells Fargo, Bank of America, City, everybody, all these problems.
There’s a company who sponsors the most popular soccer team in the world and I’d never heard of them, and they are called AIG. What happened eventually is AIG came out and it’s this big mess that nobody saw coming of a trillion-dollar mess, and it happened because other dominoes fell. When Ian and I are talking about is get your house in order. It’s early.
I was talking about this earlier. I was talking to somebody about the banking fall last time and the housing. You had three years between when the Lehman brothers fell, and there were signs like, “Now’s the time to be incredibly proactive. Be ahead of it. It’s coming.” It could change, and if it does pivot again. What it’s looking like is we are trending in that direction and big things or big shoes are going to fall.
It’s easy to hear. I was talking about, “What Amazon was doing doesn’t affect me.” My point here is if Amazon were to try to go reduce its expenses by 20%, it would affect every American in some way, no matter what industry you are in. It affects the hotel, transportation, and real estate industries. Frank and I own properties across the street from a big Amazon warehouse that was added in the past couple of years. It impacts everything. If they are now saying they are having problems and they are going to cut expenses, or at the beginning of a buckle in and figure this out over the next 12 to 18 months, it could be a tough economy.
Make the mistake. All the companies we talked about, maybe Netflix sign, but Amazon, Google, and Apple have got their hand on the whip. They have got their hand on the whip. When Netflix starts moving, someone’s going to get hit with the back end of it. The business end of it is the loose end, not the one with the handle. They are controlling it and there’s going to be reverberations.
Alastair talked about that when he came on the show about the whip handle. It happens. We took our first Joe Rogan break, just without the weed. If you ever listen to the Joe Rogan Podcast, he takes pregnant pauses. It’s been a day for those of you that are loyal watchers, if not listeners. Ian and I are back and better than ever.
With a wardrobe change. I feel like Diana Ross. I changed wardrobes. I kept the same hat on, but I had a different Nike shirt on and I put on glasses. If you are watching this on YouTube, you are like, “This guy changed wardrobes mid-show.”
It’s like that time you came down to my house for Thanksgiving and I had three different outfits on you kept calling me Diana Ross.
Speaking of Joe Rogan, why don’t we do weed breaks? Can we start doing weed breaks?
I have got an artist doing a new rendering on one of my walls. He was sitting there rolling a joint in front of my three-year-old. I’m like, “Time to go home.”
What’s that smell? He’s an artist. That’s what they are into. Another data point, out of all of these big companies, Walmart, Target and Costco, all got crushed because their quarterly earnings came out and they were lousy the same. Walmart was a big one because Walmart is known as a very disciplined company that gets ahead of things. Walmart is Walmart because they have some of the lowest costs on the planet for any retailer, but they had big earnings miss and their CEO said, “We had unexpected bottom-line results, and we think this is an unusual environment.” Meaning this economy is worse than we thought it was, and our input costs are incredibly high.
The CEO also came out for Walmart and this one’s a little weird, and I don’t know if these folks were on leave, but he said that they had more employees return from COVID leave quicker than expected and it caused the company to become overstaffed during a big part of the quarter. I found that was interesting that you could get surprised by that. I would have thought they were managing the schedule of which that happens.
You pay less for people that there’s probably a period of leave they could be on, and then the rest is a personal leave. That’s how it’s always was for big companies. When I worked there, you had a paid leave, and then if you got past a certain point, then it was personal leave where the company only paid for a small chunk. That was the company had to approve it. Maybe they had approved longer leaves, but he said that those scheduling challenges they think have been resolved.
When they are talking about when a company as big as Walmart with million-plus employees, thousands of locations are involved in every community around the country. When they come out and say they have unexpected bottom-line results and unusual input costs, what that means is immediately after reporting that awkward and uncomfortable earnings report, the CEO has to do a conference call with analysts then, asking them lots of questions about why didn’t you see this coming. They are having a meeting with the top executives of the company.
They have probably already had multiple, but there has one and he’s saying, “Get your shit together. Go get your costs lower, get on your suppliers, and if you can’t get your costs lower, take people out.” They are not going to get on a second call and say, “We were overstaffed for a large part of the quarter.” Is there any chance that happens two quarters in a row? There’s zero chance. A good CEO of Walmart is not going to say that it’ll happen once, it won’t happen twice. That happened the last quarter.
What’s happening right now is they are laying people off. They are slowing the pace of hiring. People that are asking for raises are not getting it. They are doing everything within their control to lower their costs, which impacts Americans. They impact the average people, and then those folks are feeling stressed now, and they are going to spend less.
Walmart workers are also American consumers. They spend less. Their supply chain is getting beat up. When the supply chain gets beat up that they get a lower cost, they are forced to eat some of their higher input costs. They laid people off. There’s this pin action, this chain of events that ravages through the economy that is starting. That’s the point we are both trying to make here. These are recent earnings reports, and it’s starting that it’s starting to seep through the rest of the economy and it will be for the next 3, 6 or 9 months.
The beauty of taking a break overnight is this. Elon Musk gives the gift that keeps on giving. There was an awesome quote that Ian and I were going back and forth on that. I’m going to read to you now. Elon Musk tells Tesla employees to return to the office. Inside of the article, here’s our favorite line. “These people should pretend to work somewhere else.”
What if you have a bunch of people says that they are going to quit because you made them come back to the factory. I love this. Frank said this to me. We were going back and forth. We were giggling. We are both big Elon Musk fanboys. Everything about him is amazing. If I was the richest man on the planet, I only hope I would stay as raw and cool as that guy. He never went corporate.
He only talks about now being the day when he sleeps on the floor. He’s like, “You need to have face-to-face action with your people. They need to know you are working. Years ago, I guess he probably had fifteen houses and said he was sleeping on the floor in a factory.
He’s frustrated because Tesla can’t ship the product. People are on waiting lists that are going back 2, 3, or 4 years. David O’Keefe, he’s got one of the founder’s edition Tesla he’s waiting on. He’s been waiting for two and a half years and has no line of sight to it. Elon is getting frustrated that their delays are a lot of man-made. He’s saying, “This is bullshit. This whole myth that people can be as productive at home. That’s not true. We see a huge productivity bump when people come back to the office.” Someone asked him on a podcast, “Aren’t you afraid that a lot of Tesla employees are going to quit?”
He’s saying, “Not just Google said, ‘You are going to take less money if you work remote.’ Apple is saying, ‘We are running a pilot three days in the office.’” Elon is like 40 hours a week in the production facility, in the office, and when he was asked, “What if they leave?” He said, “They can go pretend to work somewhere else.”If you're great and you're at the wrong company, quit now. Now's a good time to reset if you're great. Click To Tweet
He’s all been saying, “People that are remote are pretending to work. They are not accomplishing shit.” I agree with him. In a company like his where you manufacture things and invent things, you can’t do that remotely. You and I can run a show remote, but no one would accuse you and I working or producing anything. We are on here talking. We are not building anything. You can’t do what Tesla’s doing in an economy. That’s one more bullet point that people thinking they are in control and the employee-employer relationship, that’s changing very fast.
To become a CEO of a major company, you’ve got to be good. Now some of this is going to be through stocks and selling some of your stocks, but the tenth highest paid CEO was $240 million. The highest-paid was Elon Musk at $24 billion, but a lot of it was stock options. The point is, that’s generational money. If you are going to be there long enough to get that paycheck, you have to have shareholder value.
We talked about this. It would come down to shareholder value is earnings. It’s all driven by earnings, and then ultimately, it goes to stock price. Stock price becomes options and options become cut. In order to get there, these people are competitive smart people whose wives want beachfront houses in Palm Beach. The way for them to get them if they need to stay. In order for them to stay, they have to preserve profit and they need to do all of those things first.
Another thing that was posted is Microsoft’s lower fourth-quarter guidance, citing unfavorable foreign exchange rates. The signs are everywhere. When you talk to intelligent people are all saying, “It’s coming.” My point of this and we talked with this all the time. It’s coming. If your financial house is not in order, do it. You probably have another six months to be aggressive and get an order. To be honest. The best thing you can possibly do is be in order.
Personally, when the water comes in, where do you want to hit? Do you want to not touch your feet? Do you want to hit your ankles? Do you want to hit your knees? Do you need a snorkel? I don’t want to have a snorkel and I don’t want to let get my chest. I don’t want to feel it or I want to be able to capitalize.
I left a meeting that I’m coming back from with a private lender in Richmond. He emailed me a few and said, “I’m foreclosing on this.” The meeting I had is, “If you foreclose on more, this is what we do.” I was a couple of minutes late because I drove them and showed them some of the stuff on Westwood. I showed it to him because I wanted him to know that, “We are capable of bigger scope projects. We can do apartments. We can do singles and all kinds of stuff. If you find yourself in a situation where you’d have to foreclose on something, we can help you add value and bring it to market.” Why? It’s because he’s going to have to foreclose. It’s already starting.
In a recession, I want things with no risk. If he’s the bank and he’s carrying the asset, I don’t have to buy it. There’s no risk. We are already starting to see these things and get ahead of it. I’m not as smart as any of the people on this list that are making this much money because I’m not. What I’m telling you is these people are thinking at this level. It filed into evidence under example, triple to of it’s coming.
The last point that I wanted to bring up in this episode has glaring signs that we are seeing that rough times are ahead. I’m right now in the market for venture capital funds. It’s a step beyond angel investing. Angel investing is you are helping someone out who’s a small business on their first round.
Venture capital is normally in the millions of dollars for businesses that are valued at $5 million to $30 million. Normally, you are pre-revenue for venture capital. Private equity, revenue, capital, and business are involved. Venture capital is normally taking a risk on an idea and a founder before they have started earning any revenue or profits.
We are there with our car alarm company with Keep, and I have been studying a lot of the market because we are going to have to go out and talk to them soon enough. There is a lot of interesting stuff going on in venture capital. In the last years, there’s been more than $330 billion poured into US-based startups, and that amount is double what was a record amount in 2020. Venture funds poured $330 billion in, which was double the record of 2020.
For clarity, that’s an annual number, $330 billion in 2021.
A record doubled on top of a record, and that was during a time when everyone is now admitting the valuations were stupid. If you think tech stocks were overpriced and they all got crushed, those are publicly traded companies with real revenue. Startups were overpriced even more because they didn’t have any revenue. They were ideas.
One of the largest and fastest-growing venture capital firms is a firm called Tiger Global. This will interest you. Tiger Global made their name and growing. They made their name by revolutionizing the way venture capital is done. You are going to laugh. Stop me if you’ve heard this before in mortgage lending.
They have an incredible app. It’s going to revolutionize the business. We are not a home builder. It’s our platform.
We are not a venture capital firm. We are a technology firm that does venture capital. You’ve heard that before. We are not a real estate firm. We are a tech firm that does real estate. Tiger Global, whose claim to fame was, they can underwrite a deal faster than anyone else, and with less of the hassles with less of the expenses, we’ll make a decision much faster.
It sounded like countrywide mortgage to you several years ago, fast and easy loans. We don’t underwrite stated states. They were doing all kinds of deals, and I have been listening to Venture Capital Podcast for the last year and a half of people are lamenting how’s Tiger Global doing these deals. They are doing deals in a week on a handshake, and how are they doing any due diligence? Do you remember what I told you when I lost my first commercial deal in some New York REIT? Did it without any diligence.
They are like, “We’ll waive due diligence. We’ll wire the money and do it.” I was like, “I told you,” and you are like, “You lost. You’re out.” That’ll bankrupt you if there’s something wrong or hairy. It’s the same thing. Tiger Global shook up the industry by not paying attention, and they had all these junior-level people out looking for deals that had never been through a recession.
Here’s the interesting thing. Tiger Global came out and said they took a $17 billion loss in their hedge fund, and they have raised two of their biggest rounds ever. Their biggest round was $6.7 billion in venture capital. Then they went out six months later and doubled that. They did $12.7 billion. Here’s the wild thing. They have already committed. All of those raises threw it out there to all these people, and now they are taking all these huge losses.
Right at a time, Andreessen Horowitz is one of the biggest venture capital firms. Marc Andreessen, by the way, started Netscape, one of the original web servers. They came out. They did a poll of all of the startups that they have invested in. More than half of all Andreessen startups are laying people off. I’m sharing some of this because Frank went to a real estate conference where every A-hole got up and said, “Soft landing coming. Everything’s cool. No recession. Things are fine.” Real estate is on the very ass-end of the economy. It’s not liquid. It’s slow. It takes debt.
People don’t sell houses when things go bad. It’s normally the last shoe to drop. I’m seeing this because I’m on the front end with a startup that I have invested in, and I’m responsible for raising more money. I’m seeing venture capital drying up on the very front end. This is the nose of the dogs sniffing around is startups and venture capital, and it is getting obliterated.
It is an absolute scorched earth. VC firms are panicking that they are going to lose money. They are retrenching. They are not raising any more money. They are showing losses to their investors. I’m seeing that on the front end. When startups are going through all of that means, there’s going to be a massive redeployment of human capital.
If all of those businesses weren’t great ideas, that means that there’s an inefficient use of human capital. If you take a smart engineer and he’s working on a dumb idea, that’s a poor use of capital for the American economy. There’s a whole change that’s going to have to take place with a lot of those people getting displaced, where are they going to land? Where are they going to go? There’ll be new winners emerging, but there’s going to be a twelve-month ugly period we go through where a lot of people aren’t working.
It’s like getting sixteen base runners and all this 0.3 runs. It’s very hard to fathom.
As you are having this conversation, I’m once again looking at CNBC because it’s relevant.
You are doing some amazing half-assed research on the fly.People that are remote are just pretending to work. They're not actually accomplishing anything. Click To Tweet
In real-time. The good news is when it has to do with CNBC in, breaking news is looked at as research, not be fucking off. Tiger Global drops 14% in during the tech sell-off pushing heads funds 2022 losses over 50%. We have got some sweet real estate to invest in here in Richmond, Virginia. Strong returns.
Have you ever talked to an edge fund sales guy?
I’m doing it right now.
They are hilarious. They talked to you about different things. They want your assets. For me, they want me to move my money from something to give it to them. They have this spiel that they tell you a hedge fund. “We hedge bets. We can make you money in an upmarket and a down market.”
There’s always a bull market. It’s our job to find it.
It’s such bullshit. They tell you that in any market, we can make money. We are perfectly hedged so that you will always make money. Until there’s a bad economy, and then they always lose their ass like everyone else. They normally lose 2 and 3 times as much as if you put it in the S&P 500. It’s such a bullshit line.
There are two things there that are fascinating. The first one is this, that person who told you they are incredibly well-hedged gets fired. You call them and their fucking phone doesn’t answer, that number’s been disconnected. That’s one. Two, this is why Warren Buffett says, “Don’t give your money to a hedge fund. Buy it and ETF tied to the SMB, and you’ll outperform.” It’s because it’s a bunch of crap.
It all comes down to hubris and ego. If you said, “Wrap up this episode from me,” the market is giving us signals and signs. One of my favorite books we talked about here a bunch is This Time Is Different. It isn’t different. It’s the same stuff. We have seen it for eight centuries. If you track it, Ray Dalio came out and said the same thing, “There are signs. Things are happening.” If you have hubris and you have the ability to act and preserve capital, now’s the time to do it. We might be early. We might be completely wrong, but if we are not, now’s a great time to have it.
I will tell you a few things I’m doing right now because I believe this is the beginning of the long recession. Maybe not a long recession, but we are starting something that will be an ugly period of the economy, and it will be a recession. I am taking every single consulting opportunity I can right now, and I’m pushing for more. I’m selling my ass off right now to lock-up this one.
Which is a shift and you were saying no.
I was saying no because I was like, “Our all-star tournament is coming up and I got a lot of stuff going on. We’ll keep it.” Now, I’m like, “I’m pushing right now for a six-figure training package with a whole bunch of managers, which can be time-consuming for me. I’m going to take that money and put it in the bank and I’m not going to put it in stocks. I can put it in real estate. I’m going to load it up on cash.”
It’s like if my asset values are all going to come down, the one thing I can control is I can go earn more. I’m going to go try to get as much earnings as I can. I’m going to get it. I’m also leaning a lot closer to if I get another stupid offer on one of my collision centers, on my commercial properties, I’m going to take it. I’m going to let that money sit in cash.
Pay the taxes, whatever. I’m not going to do a 1031. If I get another one, I got an email from some guy out in Texas who has a buyer that wants to buy Gerber Collisions and they want to make an LOI to me. I’m going to look at it hard. If it’s a fat deal, I’m going to quit being a pig and say, “Go ahead and give it to me,” and I’m going to let that money sit in cash.
I want to say something really quick. Ballpark it. If you sold the thing, ballpark it. What are you going to make?
Let’s take the Gerber one. I paid $3 million for that. I could get an offer for $4.2 million.
Stop there. You are going to make roughly $1 million. When we were kids, that was hitting the fucking lottery. $1 million was a lottery ticket. It was like, “I got a lottery ticket.” You bought it smart, but you’ve owned it for how many years?
Four years. The other cool thing about that is I have made close to a quarter-million a year on that property and rent without any expenses. I have already made $1 million on it, and I can make another million and I can take all that money and put it in cash. I’m not doing it because I like making $250,000 a year on it. I got some debt on it, so that money pays the debt down. The interest, I got write-offs on it.
It’s a good conversation to have with yourself over. What would I rather be? Would I rather be liquid? You don’t have a real job. You do this with me. It doesn’t pay. Do you have to look at these types of things like what would I rather have? Would I rather have an annuity where they might come back and try and renegotiate your rent like you did during Coronavirus? Would you rather have the cash? You need to have these decisions with yourself like Ian and I are having them because this is not our first rodeo.
We are not unlike Walmart and Amazon. Frankie and I are doing a real estate deal. For one of the properties that are in the real estate deal, we raised $4.5 million for it, and we took out some debt. From our proforma to what it would cost now, it’s almost double. Those expenses are real.
That cost the capital. I performed at one point higher than I had placed. One of the other parts of the deal is 100 basis points, which is a lot and I’m under market by 250 basis points. What that means in English is it’s not going to cashflow the same. A conversation I had with Ian is, “I haven’t come to this decision yet, but I’m thinking about it.”
When we did the deal, we thought about, “We might hold it for ten years. If this happens in the market, we’ll cashflow. It’ll be great. We’ll have this many tenants. We could sell a few other units.” One of the options was Frank had thought through this. If the economy goes to shit and all of my expenses go up and this thing doesn’t work, I can sell this. I can go do the project. It’s still a lot better than what we paid for because it’s an old building and I will quick flip it, and that’s something I will do. The situation we are going through, we thought about it. We thought about all the negative things that could possibly happen.
However, unrealistic it felt at the time that 2022 would be this. We still thought about it, and we said, “What happens if that happens?” The answer was, “We’ll sell it way faster.” Frank and I are looking at right now of if we could get that done and get an offer and still make some money on that and take that piece of the real estate off of our books, would we do it?
We both said, “We do that. We’d go look for another deal at realities nowadays. That would proforma based on the more negative environment we are in.” For us knowing this is probably a longer recession and not a soft landing like everyone’s saying, we might be a little more prone to say, “Let’s get that risk asset off our books. Let’s get it off our books and take what the market gives us.”
There was a guy that Ian and I both worked with. I won’t mention him, but Ian and I both thought he was a tremendous dildo.
That doesn’t narrow it down. We thought that way about a lot of people we have worked with.
It’s the truth, but that’s why I said it that way. Any of our loyal readers know this first.The market is giving us signals and signs. If you have hubris and the ability to act and preserve capital, now's the time to do it. Click To Tweet
They could narrow it down, like, “Ian and Frank thought most people they worked with were tremendous dildo.”
We think each other is a dildo.
It’s true, including me. I felt this way on me.
In 2005 or 20065, this dildo went to a meeting and the meeting was with our CEO who Ian talked about who became the chairman, but he was still the CEO at the time. The CEO used the term soft landing. He counted it. In an hour and a half meeting, he’s at almost 70 times. I still remember this. 2008 to 2012 was not a soft landing. That was a fucking plane crash.
Into the side of a mountain plane crash. There was no landing in the ocean.
Whatever it was, an abrupt end to that flight, it happened. He used the term soft landing more than 60 times in an hour of meeting. When I went to this real estate conference, everyone talked about a soft landing and all I could think about was it wasn’t soft. The thing that talks about is this meeting happened in 2005 or 2006. The market told you in 2008 through 2012, it was super bumpy. There were warning signs.
I might be wrong. We might not go into recession. It might be perfect, but I’d rather be super secure and not lose to have more on the table at risk. Ian and I are talking about that the CEOs of these big companies can’t be at risk because they will lose their jobs. You’ve got to be very mindful of where you are going. Depending on where you are in your career, where you work and what your situation is, you need to be good. You can be liquid. You’d be with great company. You should look at and think about these things, which was the whole point of why we discussed this during this episode.
It’s important, especially with your money, career, and what you plan to do with your time over the next five years. It’s important to pay attention to what these big companies are going through and what they say they will do. To have the awareness to think about what are the ramifications of these big companies having to make tough decisions. How does it bang its way all the way down to our level and the things that we are doing because it will? It will impact. There is no soft landing.
When these big titans of industry are struggling and their stocks are down 50%, they are going to make some tough decisions that impact thousands of companies and millions of people, and it will reverberate all around the economy. You have to pay attention to it and you have to think, how long is it going to take for that to work its way into the things I’m invested in and into my job.
We are going to be in a period where it is more of an employer’s market than an employee’s market over the next couple of years. We are going to be in a period where it’s going to be choppy on all investments, and you’ve got to be smart about keeping enough capital and cash available and work your ass off and save money. This is not the time to be spending on a bunch of stupid stuff. Save money and put money away. You are to wish you had more cash.
Ian and I are of the age where these movies matter to us. What happens? Right now, there are early warning signs. Ian and I are talking about the last downturn. I’m going to go back to the late-‘70s, early-‘80s. If you go back and watch the movie Back to School or The Breakfast Club. Pick another. Pretty in Pink, Sweet 16. There are a bunch of those. Those romcoms.
Weird Science doesn’t talk about this, but all of those other ones do. They all mentioned the economy in the movie. Why? It’s because it has been a shitty economy for 4 or 5 years. When they wrote those scripts, that was what was happening. It manifests in things. It happens in the movie. All of it, but in these movies, it becomes part of the script because it’s happening around you.
Right now, it’s early. It’s not being talked about in movies, but if you go back to the last recession and look at company men, some of these things where people lost tons and tons of jobs or margin call. It happens and it makes its way, but it doesn’t start with the movies. It gets to the movies. This is the early part of the scene. This is what dictates what we’ll be watching on television and in movie theaters going forward, but it’s starting to happen now, but that’s the process. It starts in the news, big CEO who are smarter than us that have more data telling us these things, and it makes its way all the way to the day you eat milk duds and popcorn and watch it.
That’s a great way to finish. Anytime we can finish with ‘80s movies, that’s a pretty fantastic ending.
Talk to them Africans.
You son of a bitch. Don’t do that. Are you going to go smoke some weed now? Now that this is over, are you going to go eat some gummies?
That’s for you.
I don’t have employees to face the rest of the day.
Great episode. Protect yourself. Be safe out there.