E146: How to Protect Yourself From Financial Crisis Like a Bank

In this episode, we discuss how you can protect yourself from a financial crisis using the strategies that banks use. We’ll also share how you can even use the same tools they do to ensure you can withstand financial distress in times of trouble.

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Topics Discussed:

  • How current economic stressors are impacting the financial system
  • What experts predict for the near future
  • The basics of what it takes to weather a real financial storm
  • How debt, leverage, and liquidity affect your money during crunches
  • How liquid capital protects you during a liquidity crisis
  • Are cash, real estate, crypto, metals, stocks, or bonds safe bets during a recession
  • The investment opportunities that present themselves and how to seize them

Episode Resources:

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Podcast transcript for episode #146: How to Protect Yourself From Financial Crisis Like a Successful Bank

Nate: In this episode, we discuss how you can protect yourself from volatility during financial crises, in the same way that banks do, and even use the same tools that they use to ensure you can withstand financial distress in times of trouble. She’s Holly and she helps people find financial freedom.

Holly: He is Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right. Well, it’s good to be back, Holly. And, this whole year has been a crazy year in the financial marketplace, right? The stock market’s getting just pounded due to inflation and the Ukraine war. Honestly, probably a very large bubble. And you combine all of that with the federal reserve raising interest rates, for the first time in a long time. And suddenly, we’ve got a recipe for disaster for the stocks. We have yet to see it hit every aspect of the economy yet. Holly, but people are on edge. And, that’s really what we wanted to discuss a bit today, was how do the big boys protect themselves? And, I think maybe it’s possibly more obvious than what we often think some of the strategies that are being used to protect yourself in times of volatility.

But, that’s really what we want to talk about today Holly is… I guess we’ll call this the power of capital, if you guys want to use that phrase. The power of capital. And, dive into what we can do to really mimic how banks protect themselves, to make sure that even in times of crisis, they don’t actually lose money, or at least they don’t lose money to the point where they become insolvent, certainly the biggest risk to a bank. So, that’s what we’re going to focus on today. Hope we’ll have fun doing it.

Holly: Yeah. And I think the key here is to understand that what we’re going to share with you is something you can be doing now, and you should be preparing, irregardless of if we go into a downward economy time. I mean, in our world today, it’s pretty turbulent. And whether the market is turbulent or not, you always want to have some protection, irregardless of when that’s going to happen. We know that just with history itself, that the market goes up and down, that our economy goes up and down, but we are seeing an unprecedented time of, “Oh, the interest rates are rising. The market is dropping.” All these things that you didn’t necessarily foresee at the start of this year happening is happening and taking place. So I think, Nate, the biggest question is, what do banks do to protect themselves during a time of crisis?

Nate: The idea for this really stemmed from… I was listening to a podcast and it was a big real estate investor and he was meeting with a guy who’s got a show focused on tax, and wealth advice, and so forth. And so, advanced strategy ideas. Just to paint the picture of the show, they were really talking about the future of the real estate market in this way. Essentially they were saying, with interest rates going up, the mortgage rates, just in January, we’re in the 3% range for a home. And now, you’re looking at 5.5% a lot of the time, just to buy a personal resident. So, it skyrocketed. And so, this is causing a lot of fear to those in the real estate investment world, or, I don’t know if I’d say fear. I think, there’s some level of fear, but it’s certainly a concern that the deals are going to run dry, because the cost of money is going up.

And, is it possible, especially in the commercial real estate investing world, that prices may start going down, because of this increased cost of capital, where maybe, if you just bought some properties, you may not be able to sell them for what you got for them. The question that the individual asked to the real estate investor was, “Well, I mean, how do you protect yourself in times like this? What are you most concerned about?” And he was able to say… The biggest fear when you invest in real estate, especially commercial real estate, and you’re involving a bank loan to help you purchase assets, the biggest fear is having to foreclose on an asset and losing all your money, right? This is the biggest concern that an investor will have going into it.

What he brings up is the idea that liquid safe money is what allows him to serve as a hedge to any risk he’s taking in his real estate portfolio. So in times of volatility, when prices are going haywire, the only real way to protect yourself is to make sure that you have ample reserves in your pocket to weather a storm, because investors will lose the most money in a liquidity crisis. In other words, you lose the most money when you can’t make the payments to a bank on a bank loan. You don’t have the cash to do it. In a liquidity crisis, it’s difficult to offload quickly properties. So, that’s when you start getting foreclosed on and losing all the money. This is what happened in the last financial crisis with the people who lost everything and had to file bankruptcy were the people that were over leveraged, Holly.

It’s not like it’s a bad idea to use loans to make investments, especially in the world of real estate. It’s not a bad thing to incorporate the bank. The problem is, whenever you over-leverage yourself, you’ve essentially taken too much debt on for the amount of capital that you have in liquidity. So, if you take too much debt on, you run a risk that if things don’t work out as well as you had hoped, if things take a downturn, if rents go down, if real estate prices go down, if it becomes a liquidity crisis, that you run this risk of losing everything, because you don’t have liquidity. Something he was focusing on is building up some liquidity right now, so that there’s no real risk to losing these properties, because he’s got enough cash sitting on the sidelines to fund the required maintenance, and mortgage debts, and so forth, that he could stay afloat for quite some time due to his liquidity.

I have struggled trying to put that concept into words, especially when we’re dealing with infinite banking concept. I’ve wanted to express this, it’s hard to do it. I think he did it so eloquently, far better than I did. But, it’s just this idea that your liquid capital serves as a buffer for the risk you may end up taking. So, the fact that I have liquid capital means that in any period of time, I’m never hitting a liquidity crisis. Liquidity crisis are the times whenever you lose the most money. Essentially, I just wanted to set the stage for the show with that discussion that, having capital serves as a hedge to any risk I may end up taking, that I know for a fact, I can survive and weather storms. And it reminded me Holly, of how banks operate, which I think is what you brought up, the big boys.

In other words, a bank also is required by regulation to keep safe capital, it’s called tier one capital. And they’re required to have enough capital on hand as a buffer or as a hedge to absorb any losses that their investments might make. Now, banks investments are mainly in the form of loans. The last financial crisis showed that too many banks had too little capital to absorb losses or remain liquid. Their loans were non-performing. They weren’t getting money back and they did not have enough capital on hand to support the payments to depositors, the payments to run the operation, and so they were starting to go bankrupt. The government has actually stepped in and said, “You need to…” The tier one capital requirements were increased. You need to have more capital sitting in reserves to buffer against the risk of some volatility in the world.

So I guess the message of this show, Holly, is that every investor should be well capitalized. We should think like the banks do, we should have our own tier one capital to support the things that we’re trying to do, whether it’s retirement program money, whether it’s investments in Bitcoin, whether it’s in anything that is not as good as cash, that should be backed up by things that are as good as cash. That’s essentially what we’re trying to say, that there needs to be a ratio and everyone can maybe come up with how comfortable they are, the ratio of how much capital you have should be relative to the amount of risk you’re taking. The more risk you’re taking, the more capital you should have on hand.

Holly: If you’re going to take a huge risk, and say, “I’m going to keep the minimum capital I think I should need.” Should actually be reversed. You need more than you think in capital for the risk you’re taking. So, if you’re a low risk taker, you don’t need as much capital per se. But, there is never a wrong… In my viewpoint, Nate, you can never have too much money, per se in liquidity. So, just be thinking about what that means to you. Wherever you’re investing your money, whether it be real estate, whether it be stocks, whether it be precious metals, crypto, all of those are going to have some volatility. And so, the only way to protect yourself in time of crisis is to have that local capital. And Nate, what’s one of the best places to keep that liquidity?

Nate: I think the best place to keep liquidity is obviously in dividend paying whole life policy, for so many reasons that if you are new to the show, you definitely want to go back and listen to some episodes where we had more time to cover what exactly we’re doing with these policies. But, I thought I’d bring up a few ideas here. One of them being, it’s very interesting to find out that banks keep a lot of their tier one capital in life insurance policy cash value.

So, I mean, it’s just like you couldn’t make this stuff up. Essentially, what we’re saying to do is, you ought to capitalize your life and your investments in the same way that banks do, offsetting risk that you’re taking in the investment world by making sure you have adequate capital on hand. And you might as well just use the same types of tools that they’re using in the life insurance cash value world, as your buffer to that risk. What we could call a liquidity crisis is anytime you need money and it’s just a crappy time to get rid of the assets you have. That’s essentially what a liquidity crisis is.

So in other words, if you own gold and silver, or even cryptocurrency, and suddenly you need cash to go achieve something in life to go do something, or maybe there is a legitimate crisis and you’re needing money, nobody wants to be put in the position that they have to sell off their assets at a steep loss to pay for things that are needed in their life. I mean, it can be with anything, but in other words, nobody wants to get stuck with their pants down in a liquidity crisis, having to sell at the bottom of the barrel at steep losses, because they didn’t have enough capital on the other side.

So, we want to be able to keep our assets and be in control of when we sell. We certainly don’t want a bank to ever be able to foreclose on us on anything, especially our real estate investments. And we also don’t want to have to sell things to produce income at steep losses. So everyone runs into this if they’ve built up the conventional way… If you’re retiring in a conventional way, then the vast majority of the assets you’ve built up to support your retirement, oftentimes are in mutual funds. Many times a mutual fund has a very heavy weighting towards stocks. And, this is not necessarily a bad thing, this is just a thing, thing, right? Just a thing, we could debate the benefits of that or not. But essentially, what nobody wants to have to do is produce income from that pool of money, mainly invested in volatile assets… Volatile, which just means the value of the assets changes all the time. That’s what volatility means. It’s constantly moving around.

Let me back up one more thing too, that the only way to get real income from those types of assets is to sell them off. Once again, that’s not a bad thing, that’s just a thing, thing. It’s just the way it is. So you have to sell shares of your mutual fund investment to somebody else at whatever price they’re willing to pay for those shares in order to redeem money to then go live. So, everyone in an retirement setting can be used to this. Nobody wants to be forced to sell their shares at steep losses, just because there was a short-term market crash. So, nobody wants to have to sell assets off like that. That’s why it’s so important to have your own tier one capital. You want to have real capital that’s not tied to volatile places that acts as a buffer to ensure that you can withstand financial distress, without becoming insolvent as a person, in the same way that a bank does.

In other words, banks have tier one capital, so that they can withstand financial distress before they become insolvent. The same thing should definitely be the case if you’re in the real estate world, you want to keep liquid capital to make sure you don’t have insolvency. But even if you’re not investing or using any sort of debt to produce what you’re building, you certainly don’t want to be stuck with your pants down, having to sell stuff at steep losses, just to get liquidity. One more thing to note with this too, is that, it’s so fun to be in a liquid place when everyone else is experiencing a liquidity crisis, because when everyone else is experiencing a liquidity crisis, it’s what stirs selloffs, right? And prices plummet in liquidity crises. So, when they need a liquidity, they have to sell at the bottom of the barrel. And so, the price keeps going down and down. The market value keeps going down, because people are trying to offload assets, or they have to offload them to generate liquidity. And so, it makes the toilet bowl spin.

But if you are an individual who is liquid, has sufficient capital, that’s accessible to you, we would call that, just like a bank does, tier one capital, my safe money that supports what I’m doing. If you are in a very liquid position, that means that you can dive in and gobble up assets at really low prices, because everyone else had to sell their assets at these low prices to generate liquidity that they need. We have a lot of big investment, like BlackRock investments and all these big hedge fund style things are gobbling up assets. They’re the ones who especially have to be concerned about liquidity crises, because they’re the ones who often use debt.

So, we can stick it to them, even though we’re the little guy, if we’re well capitalized, then we can buy their assets that they’ve lost money on and we can make money. This is the power of capital. And, I know maybe this is a long show talking about this one little thing, but I’ve had a hard time putting words into what having capital really does and how it really impacts an investors success possibilities. Beside that, there’s so many investors out there who are just having capital sitting in banks like idiots, right? If only they knew what we knew, Holly. If only they knew about the infinite banking concept, they could have the same liquidity, the same structure, but be making a whole lot more money by simply changing where they’re capitalizing and just take a hint from the banks who are already doing exactly this, buying whole life insurance policies, stuffing them with as much cash as possible, and using those as their capital buffer. That’s exactly I think what we ought to be doing as well.

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Holly: You as the little guy, don’t have to reinvent the wheel. We’re not having you do anything that banks aren’t already doing. So, if banks are putting their money into life insurance, as the safe place to store that capital, then all you should be doing is mimicking what they’re doing. And if the banks are doing it, then they know this has been tried and tested, and that they’ve always come up out for the most part on top with their safe capital. And they haven’t had to go under, to where you and I, if we just put our money in the bank, Nate, it does nothing for us but give the leverage and power to the bank. And then, the bank still has all the control. And you’re still the little guy having to go to the bank to use your own money.

And so, you guys have to start thinking of other ways, which, the only way I know of, in my viewpoint, or the best way, is putting it into that dividend paying whole life insurance, where you are an owner, where you can borrow that money and it’s still compounding uninterrupted. And, there aren’t terms and conditions for you to borrow this money. I mean, I think that’s-

Announcer: Can’t be denied. Yeah.

Holly: … You can’t be denied your loan. You can’t be denied. They don’t ask for a payment plan of how you’re going to pay it back. Yes, you should be paying it back, but you had a bad couple months, could you stop making a repayment? You absolutely could, because you’re the bank. You can’t ever tell the bank, “Hey, I’m not going to pay on my note for six months. I’m not going to pay on my note for this.” They’re going to foreclose and take whatever asset it is you used as a collateral for that. And so, I think this is one of the safest ways for you to be able to protect your assets, instead of having to sell them and lose them at a really steep.

Nate: Yeah. I mean, I really don’t know of too many assets that actually thrive during liquidity crises. You know what I mean? There’s very few. The things that thrive in liquidity crises typically are going to be the things like a bank account and dividend paying whole life insurance policies. And the only one that actually profits you and me at a sustainable level, that’s actually significant in any way is dividend paying whole life policies issued by mutual companies. It’s the rock bed of America practically, with some of these giant behemoth companies. So, I also find it interesting that banks use this. If banks thought putting money in banks was the best, why would they ever put a whole bunch of their tier one capital in life insurance policy cash value. They must be thinking about it differently than the average consumer is thinking about it.

As we’ve said before, Bank of America, Wells Fargo, they each have over 20 billion of their tier one capital in life insurance cash values. They have more money invested in their policy cash values than they do in their equipment and real estate, all of the hard assets that they own, they’ve got more money in life insurance cash values. So, they have a ton sitting here and all we’re saying is, “Hey, you can actually do essentially the same thing. You can build up your capital in a very similar place, with the same type of tool, and achieve the same type of result as a bank does in your own life and be responsible the same way that they are.”

As I’ve already brought up, it really doesn’t matter in a liquidity crisis, whether or not you are invested in stock market, or assets, or real estate assets, or cryptocurrency, or gold and silver, everybody needs liquidity to survive. Nobody wants to have to be forced to get liquidity by selling their stuff at much less than they bought it for. And so, the way to do that is to make sure that you have a buffer against that in a place that cannot move around.

Holly: I don’t worry about my cash value going up or down. I don’t worry about that in my policy. I know it’s going to happen over time and what has happened in the past. But even if I have my money in a savings account in the bank, I never know what that interest rate is going to be. Am I going to get anything or am I not? Or-

Nate: There is no such thing as a guarantee industry, you’re right.

Holly: … The only way to get anything is to keep it in there. If I take it out, I lose the interest on that money I took out. And so, I think, that’s the key is you’re not losing the interest necessarily on the money that you’re borrowing out of your policy. And that’s not an interrupted compounding. That’s what is part of the key to this that you guys have to understand is, it’s your money that you get to use today and pay back in the future, but you are now the bank. So, we should be mimicking exactly what the banks are doing. They have over $20 billion in cash value, they obviously know something you and I don’t know, or they’re just stupid. And I don’t think banks are stupid.

Nate: Yeah, they got it. And, honestly, that $20 billion number, that’s five years old. I mean, I’ve been saying that for five years. I’m assuming it’s significantly higher than that now. So, somebody could look that up too. But that was 2016 or 2017, the last time I looked into how much bully these banks currently have. We’re now in 2022. I’m only guessing it’s gotten significantly higher. But I guess, as we’re going to wrap up, investors lose the most money in liquidity crises. We all need to have some capital buffer to avoid getting stuck with our pants down, whether it’s selling at a loss, or whether it’s actually getting foreclosed on, which is what we saw during the last real financial crisis.

I don’t know where this one’s going to go. I mean, we’re steering towards a recession. The stock market is going haywire. Every single time, without fail by the way, so this is not one of those thing, things, this isn’t made up by Nate, every single time the federal reserve starts to increase interest rates it automatically produces a recession. That’s just been the case. If we’re going to have a recession, that means that there are going to be people stuck with their pants down in liquidity crises, which means that those of us who are liquid are going to be in great shape.

You always want to build your financial life in a way that can withstand any pressure. You want to be able to withstand every pressure. So, that’s why you should be well capitalized. And there really is no better place for the average person in America to build up a tier one capital support of their investment portfolios, other than dividend paying whole life. And if you know what that is, I’m being serious. Please tell me what it is. I’d love to investigate. But right now, I can’t really think of anything. There’s something special about it. And it’s our mission to try to get that out there to have people understand, “This is why banks use it. This is why you should use it too.” Anything else Holly, on your end?

Holly: I just really hope you guys understand the desire is, to put you guys in control and to make you aware of what’s going on and taking place. So, exactly like Nate said, you’re not caught late to the party, or with your pants down, and you have no liquid asset. And the only thing you can rely on is the banks, because the banks would love for you to rely on them, because they’re just going to take your assets. And, they’re just going to keep growing bigger and have more money to use while the little people are left holding the bag with nothing to show for all the hard work that you guys have done. You work hard every single day and you should be putting that money in a place where you have liquidity, and where you have a security for what’s going to happen in the future. Because we can’t predict the future, but based on the past, we know where we’re headed, is all I’m going to say.

Nate: I know we need to stop. We need to wrap it up. I mean, there’s just so many things that cause liquidity crisis in people, especially investors. Whether it’s big tax bills, where we need to start selling off assets to pay for taxes. Especially, for traders and different things, if you’ve been moving some money around. I mean, there’s just so many things that hit you out of left field when you’re not prepared for them, you need money to do that and you don’t want to be stuck having to sell off assets at losses, which happens to people. It’s the trifecta, the great dilemma. So, with that, I think, we can help you with that. I hope this was helpful to you as just as far as an idea is concerned. This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e146.

Announcer: Listeners, one last thing before you go, start your journey towards financial security and wealth today, visit livingwealth.com/beatinflation. You’ll gain instant free access to the beginner’s course that Ray, Nate, and Holly made just for you. Again, that’s livingwealth.com/beatinflation.