This time is different because there’s free tequila…

We poke a lot of fun at the MANY absurdities we see in this current bubble.

As we’ve discussed countless times over the past few years, there are consequences from the fact that central bankers have conjured trillions of dollars out of thin air and pushed down interest rates to zero.

Stock, bonds and real estate are at or near record highs. Bankrupt countries are issuing trillions of dollars of debt with negative yields (not to mention, serial defaulter Argentina was able to issue 100-year bonds…).

Netflix is one of the most expensive and popular companies in the world even though it burns through billions and billions of dollars with no end in sight.

And, of course there’s Tesla, which we won’t get into here.

But perhaps nothing better captures the absurdity of the times more than WeWork.

I’ve talked a bit about WeWork in Notes, but not nearly as much as some of the other offending companies.

The company is the poster boy for the hot co-working trend. And it’s worth around $40 billion today. Of course, it’s also losing billions of dollars.

Of course, WeWork’s value is far more than any other company of its size because WeWork is a “cool, tech” company. But, at its core, it’s just another real estate play…

WeWork signs long-term leases for office space around the world, then turns around and provides very short-term leases to companies.

The companies pay more for the space, but they have more flexibility because they’re not locked into a traditional, long-term lease.

And this business model exposes WeWork to a HUGE amount of risk.

It’s great for the customers though. WeWork loses tons of money providing this service, which means investors are ultimately footing the bill.

If there’s an economic downturn (and there is a 100% chance of that happening), WeWork is stock with huge obligations and no way to generate revenue on its office space.

When the downturn comes, not only will WeWork’s tenants leave… the company will also be cut off from funding as investors tighten their purse strings.

And to give you an idea of the size of the obligations we’re talking about…

According to the Wall Street Journal, WeWork just surpassed JPMorgan Chase to become the largest leaser of office space in New York City with 5.3 million square feet.

But you don’t have to take my word on how risky this business model is.

The WSJ article also mentions a company called Regus, a European company that did the exact same thing as WeWork during the dot-com boom. It was growing as fast as it could in the late 90s, snatching up office leases all over the place.

And guess what happened…

When the bust hit, occupancy levels plummeted. And the company went bankrupt.

No, Regus wasn’t as cool as WeWork. They didn’t have fair-trade, organic coffee and kombucha on tap. And they didn’t give away free tequila.

But Regus was in the EXACT same business.

And the company still operates today, after it was purchased out of bankruptcy. But it’s been growing at a much slower pace after the lessons it learned in the 2000s.

To give you an idea of the value the market places on conservative growth today…

IWG, Regus’ parent company, manages five-times the square footage of WeWork. But it has about one-eighth the market value.

History has shown this business model is not only excessively risky, but it ultimately failed.

This might be the biggest example of how unbelievably absurd the markets have gotten today.

WeWork is losing money leasing office space and hoping to make it up on volume. Basically, every lease WeWork signs adds more risk and more losses.

It’s the SAME thing that happened to Regus 20 years ago. But people are crazy enough to think this time is different because there’s free tequila…


from Sovereign Man

Netherlands prosecutes its own citizen for calling Turkish dictator a “Goat F*cker”

It was mid-September in 1683, almost 335 years ago to the day. Turkish forces of the Ottoman Empire surrounded Vienna, one of the most strategic cities in Europe at the time.

Controlling Vienna meant controlling the Danube River, which flows from Western Germany to the Black Sea, providing critical access for the Ottomans to invade the rest of Europe.

So if Vienna fell, Europe would soon follow.

The Holy Roman Emperor, Leopold I seemed to abandon Vienna with the bulk of his forces as the Ottoman Turks advanced. He left only a vastly outnumbered garrison to protect the walled city.

The Ottoman’s laid siege to Vienna. Though the inhabitants were hungry and short on supplies, they continued to hold out, repelling every Ottoman assault.

Finally the Ottomans mined under the city walls to place explosives. The outer wall was breached, and all seemed hopeless for Vienna.

But Leopold I had not really abandoned the city. He had been rallying troops in Poland, Germany, and Lithuania, convincing tens of thousands of soldiers to defend the city.

They all understood that it would mean doom for the rest of Europe if the Ottoman Turks took Vienna. It was a war for their very way of life.

The combined European armies arrived just in time, and the decisive battle began at 4am on September 12, 1683.

It lasted the entire day until, just before sundown, Polish King Jan III Sobieski led nearly 20,000 cavalrymen to attack the remaining Ottoman lines in what would become the largest known cavalry charge in human history.

The cavalry charge was successful, and European forces vanquished the Ottoman invaders.

Just imagine how different life would be if they hadn’t–

Ottoman rulers had long closed their empire off to intellectual, scientific, and technological advancement. Corruption and ignorance were rampant.

In 1515 Ottoman Sultan Selim I threatened the death penalty to anyone caught using a printing press.

For hundreds of years, in fact, the only western book on science that was allowed into the Ottoman Empire was a medical text on the treatment of syphilis.

If the Ottoman Empire had taken Vienna, it’s hard to imagine that there would have been a Renaissance or Age of Enlightenment. Human civilization could have been set back for centuries.

The differences are as stark as they would likely had been if the Nazis had won World War II.

Fortunately that didn’t happen. Europe won the decisive battle, and reason and prosperity flourished.

Sadly this is no longer the case. Prosperity is in short supply in Europe these days, where countries like Italy and Greece are in a tailspin due to massive government debt (despite some of the highest taxes in the world).

Unemployment rates across much of the continent are appalling. Failing banks need constant bailouts. The disastrously low fertility rate has created a time bomb for most national pension funds.

Reason and common sense are also in short supply.

Case in point: a few weeks ago the government of the Netherlands charged and prosecuted one of its own citizens, a 64-year old Dutchman from the town of Sittard near the German border, for sending angry emails to the President of Turkey.

You read that correctly. The Dutch government prosecuted a Dutch citizen living on Dutch soil because he insulted a foreign government official.

Bear in mind, that foreign government official is Recep Erdogan, who has basically been dictator of Turkey since the early 2000s.

When it comes to ruling with an iron fist, Erdogan makes Vladimir Putin look like a pathetic amateur.

Erdogan has crushed his opposition, imprisoning 160,000 political opponents. He’s tightened controls over the Internet, heavily censored the media, corrupted the judiciary, suspended many individual freedoms, brutally squashed protests, and gradually taken more and more power for himself.

So this Dutchman sent Erdogan several angry emails, comparing him to Hitler and calling him a “goat fucker”.

This isn’t the first time something like this has happened either. Two years ago, a German comedian read an offensive poem on German television about Erdogan, calling the dictator a goat fucker. I’m sensing a theme here. . .

Charges were eventually dropped, but portions of the German poem remain banned.

Now something similar is happening in the Netherlands.

You’d think these governments would be a little bit more preoccupied with the looming social and economic disasters they’re facing.

But no. Europe is so concerned about the delicate sensibilities of Recep Erdogan that they throw away the most basic freedoms of their own citizens.

To appease a dictator, politicians trample freedom of expression… something that is supposed to be the hallmark of Western civilization.

It’s incredible when you compare this to what happened more than three centuries ago when a union of European nations held off the Ottoman Turkish invasion in 1683.

Now European Union nations have laid themselves down at the foot of the Turkish president. And I don’t see the cavalry riding in to save them this time around.


from Sovereign Man

Ten years after the crisis… they’re doing the same thing and expecting different results

“Holy Crap– turn on your TV! This is crazy!”

It was Sunday, September 14, 2008. Exactly 10 years ago to the day.

My friend Jeff called me and told me to turn on the television—where I saw dozens of people on the streets of Manhattan filing out of a skyscraper carrying boxes full of their office junk.

They were all employees of Lehman Brothers, one of the largest investment banks in the world.

Lehman was hours away from filing bankruptcy in what would go down as THE biggest bankruptcy in US history.

The next day the US stock market tanked. And for most of the next several weeks, all global financial markets were a roller coaster of surreal panic and chaos.

I don’t know if you can remember the general mood back then. I can. It was fear.

People were terrified of what was happening in the economy. The real estate market had dried up. The stock market had crashed. Some of the most hallowed financial institutions in the world went bust in the blink of an eye.

It’s now officially been a decade since the collapse.

And the typical sentiment among economists, politicians, and central bankers is that the economy has come roaring back.

There’s certainly a lot of evidence to support this assertion—

Several financial markets around the world have hit all-time highs. Stocks. Real estate. Bonds. They’re all generally selling for record high prices.

Earlier this week the US Census Bureau announced that median household income in the Land of the Free had increased by 1.8% between 2016 and 2017.

(That’s hardly a life-changing pay raise for workers… but it’s better than nothing.)

Governments around the world, from the US to Western Europe, are seeing strong tax revenue.

And the global economy is certainly growing.

In the US, for example, GDP has increased from $14.8 trillion just prior to Lehman’s collapse ten years ago, to $20.4 trillion today, an increase of 38%.

These are all good signs. And if that’s all you look at, it certainly seems like everything’s all good.

But remember that great F. Scott Fitzgerald quote: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.”

So let’s look at the other side of things.

Sure, financial markets have increased. Wages have (barely) increased. Economic output has increased.

But what’s really increased?


Look at the Land of the Free as a classic example: US GDP is up 38% over the past decade. Great.

But over the same period, the US national debt has increased 122%!

In other words, in the last ten years, the US national debt increased by more than $3 for every $1 increase in GDP. It’s brilliant!

And it’s not just Uncle Sam. Overall government debt across the world has TRIPLED since Lehman’s collapse to $63 trillion…

… and that doesn’t count their unfunded liabilities (like pension obligations, or the $40+ trillion that the US government owes its taxpayers for future Social Security benefits).

Individuals are also loaded up with debt. Student debt. Consumer debt. Auto debt. They’re all at record levels. So is corporate debt.

And a lot of that new debt, by the way, is total garbage.

As we’ve discussed before, there are insolvent, money-losing companies that have NO hope of paying back their debts that are able to borrow money at super-low interest rates.

Plus there’s nearly $10 trillion of debt issued by insolvent governments at NEGATIVE rates. It’s absurd.

So what else has increased a LOT in the past 10 years?

Money. Literally, the amount of money in the financial system is near an all-time high.

Following Lehman’s collapse, the Federal Reserve and other central banks around the world created trillions of dollars out of thin air.

And in the process they slashed interest rates to historically low levels.

US interest rates were basically at zero for nearly a decade. In Europe and Japan, rates even turned NEGATIVE.

This is the really interesting part… because… these are precisely the factors that heavily contributed to the Lehman collapse:

In 2000 there was a big recession. The stock market plunged and unemployment jumped. Then 9/11 happened, and the economy sank even more.

So central banks started printing tons of money and slashing interest rates in the early 2000s.

And as a result, housing prices went through the roof. Stock markets soared. Money was cheap and plentiful… so EVERYONE started borrowing.

A mountain of debt soon followed. Mortgage debt. Corporate debt. Credit card debt. They even created new types of debt which quickly became some of the most popular investments among financial institutions (like Lehman Brothers).

And a lot of this debt was total garbage. Worthless.

People with no hope of paying their loans were able to borrow money for nothing.

There’s a famous story of a homeless guy named Johnny Moon who was able to borrow hundreds of thousands of dollars back in the early 2000s to ‘invest in real estate’.

It was totally ridiculous. Yet almost everyone was convinced that the economy was strong and the boom would last.

It didn’t. And ten years ago the collapse took all the ‘experts’ by surprise.

Now, a decade later, the experts once again agree that it’s all rainbows and buttercups.

They believe they fixed a problem caused by too much bad debt by facilitating record levels of even worse debt.

They believe they fixed a problem caused by too much money in the system by injecting trillions of dollars of new money into the system.

They believe they fixed a problem caused by artificially low interest rates by slashing interest rates to the lowest levels we’ve ever seen in all of human history.

They also seem to believe that this time will somehow be different.

Frankly it seems a bit… oh, what’s the word… INSANE… to try the same thing over and over and expect different results.


from Sovereign Man

The Hitler of South Africa is crushing farmland prices… time to buy?

One of our major themes this year has been avoiding big mistakes…

Mostly, we’ve been talking about avoiding assets that are irrationally expensive (like most stocks and real estate today). And we’ve been discussing ways to raise cash and diversify outside of traditional investments to protect your capital.

But now that you have all that cash handy, when do you pull the trigger? When is an asset cheap enough to buy? You can lose just as much money buying too soon as you can buying too late.

If you look around the world today, there are plenty of assets “going on sale.”

Emerging markets have gotten crushed thanks to troubled economies, a soaring dollar (which makes their dollar-denominated debts harder to pay) and trade war fears.

So far this year, the Turkish lira and Argentine peso are down 41% and 50%, respectively – those are HUGE moves for a currency in a short period of time. The Indian rupee, Indonesian rupiah and Russian ruble are also getting pummeled.

EM stocks are down more than 20% this year (they trade around 11 times forward earnings versus 17 for US stocks).

But is buying Argentine bonds (which yield 60% today) or a basket of EM stocks a good deal? (We’ll get to that answer later.)

Here’s another example of an asset that’s getting crushed – South African farmland.

Right now in South Africa, there’s a large movement to confiscate land from white farmers and redistribute it to black people. It’s the hottest topic leading into next year’s elections.

And the fiercest supporter of this movement is a politician named Julius Malema, aka the Hitler of South Africa, who kindly told white people that he wouldn’t kill them… “yet.

So what do you think happens to farmland prices when a crazy, deranged politician is threatening to steal land and kill all the white people?

Well, a hectare of farmland is down about 43% from its April 2016 record. And transaction volume has fallen by more than half.

Does it make sense to buy South Africa right now? Or even Venezuela, where millions of locals are fleeing to escape starvation and violence? (You can read about a recent trip I took to Venezuela here).

A good general rule of thumb for when an asset is cheap enough… will people literally laugh at you for wanting to buy it?

If you bought stocks in 2008-2009, at the point of maximum pessimism, people thought you were insane.

I remember I was in Punta Del Este then getting my shoes shined. And the guy was complaining about the crisis and telling me I shouldn’t invest in the stock market. It was probably right at the bottom.

It’s the reverse of the famous story about Joe Kennedy, who sold out of stocks in 1929 (before the great crash) because his shoeshine boy started giving him stock tips.

When everybody, including the shoeshine boy, thinks something is the worst possible place to be, then there are no sellers left… and it makes sense to start shopping around. The same goes for the bull case – maximum optimism means no more buyers.

Today, in addition to emerging markets, you could start looking for deals in gold, uranium and Japanese stocks.

But this is an important thing to think about. Because you can’t buy something just because it’s cheap.

After all, when an asset price falls by 99%, that means it’s fallen by 98%. Then it falls in half after that.

The point is, things can always get cheaper. Sometimes they can go to zero, or even negative… when people literally pay you to take an asset off their hands because it’s a liability for them.

When something gets cheap, just like when it gets expensive, you’ve got to avoid emotions. Remain calm and objective.

When an asset falls in half, you need to determine if it can get cheaper, or even stay cheap for a really long time. Ask yourself if there’s a catalyst that could actually bring about growth or price appreciation…

In the depths of the GFC, everyone thought stocks would be in the dumps forever. Nobody was buying. But there was a major catalyst in the form of bank bailouts and the Fed printing trillions of dollars. Stock prices have tripled since then.

Is there a catalyst for South African farmland prices today?

It’s hard to say. But things could definitely get cheaper if the government starts seizing land without compensation.

The idea is to buy an extremely high-quality asset that has the potential for growth.

In South Africa, with land prices down about 50%, if things calm down, you could double your money.

But your downside is also 100%. So you’re flipping a coin… it’s double or nothing.

Probably not the best bet.

But sometimes, a good investment is obvious.

Like when Sovereign Man’s Chief Investment Strategist, Tim Staermose, started researching Hong Kong property stocks in 2015.

He found a company called Nam Tai that had $261 million in CASH, plus a ton of real estate in Asia (conservatively worth $221 million).

But the company’s market value at the time was only $204 million. And it was a solid business.

So you could buy the entire company for $204 million, put that amount right back in your pocket and have another $57 million of cash and $221 million in real estate left over.

His readers made about 130% on that recommendation.

If you look hard enough today, as always, there are good deals to be found.

But it’s important to avoid emotion. Don’t buy just because something is cheap, because it can always get cheaper. Look for an obvious catalyst that can push prices back up.

There aren’t many deals around the world today. But we’ll have an amazing opportunity to put our capital to work soon.


from Sovereign Man

Elon Musk smoking weed has much more dire consequences than you realize

An insane event on March 2, 2017 likely signaled the top of the current market…

On that day, shares of Snap (SNAP), owner of the popular Snapchat app, went public at a valuation of more than $30 billion.

But it wasn’t the sky-high stock price that made this IPO special. Nor was it the fact that the company’s co-founders, 26-year old Evan Spiegel and 28-year old Bobby Murphy, became multi-billionaires overnight.

What made this IPO special was the fact that it was the first time in US market history that a company publicly offered shares with absolutely ZERO voting rights.

Snap clearly highlighted the fact in its pre-IPO documents… “to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange.”

Still, investors piled in, knowing they were buying nonvoting shares… essentially granting totalitarian control of the company to two kids.

Spiegel, the CEO, and Murphy owned nearly 90% of the voting shares. And that gave them COMPLETE control over every major decision the company made, from appointing board members, to a possible sale, to compensation…

Only upon their death would they lose control of Snap (or if they both sell more than 70% of their stock).

If you think about it, there aren’t many people in the world with that kind of power over their constituents.

Kim Jong Un comes to mind… now there’s a guy who can do whatever he wants. But even a general could potentially come and take power from Un.

And then there’s Putin.

At least Putin stands for reelection. Yeah, they may be fixed elections, but at least he pretends.

Then there’s Evan Spiegel. He’s basically at the helm of Snap for as long as he wants. He’s more enshrined than Kim Jong Un.

In my mind, nothing better summarizes the godlike status we mere mortals have placed on Silicon Valley visionaries than the Snap IPO.

Tesla founder Elon Musk is another guy that comes to mind.

His shareholders and bazillions of Twitter followers truly believe this guy is the second coming.

And a big driving force behind tech stocks during this bull market has been the adherence to this cult-like following… a blind faith and belief that the visionary behind a company is going to change the world.

But I believe we’re starting to see that faith is being tested.

Musk has made headlines a lot recently for his erratic behavior… like calling someone a pedophile, making fun of analysts on earnings calls and saying that he’s taking Tesla private when in reality, he’s not.

And that’s in addition to the founder continually overpromising and underdelivering, in particular when it comes to hitting manufacturing deadlines.

Still, his followers marched on, unwavering in their faith.

But the latest snafu seems to have shaken them…

Last week, Musk made headlines for smoking pot on a live broadcast with Joe Rogan.

Tesla stock fell over 6% on the news (which also included the company’s accounting chief stepping down after one month on the job).

I want to be clear. This isn’t about whether or not Elon puffed weed. Honestly, who cares. It’s just a plant.

What’s important is that this is more demonstrably erratic and manic behavior from the visionary founder. He’s just showing A LOT of inconsistencies.

And in addition to Tesla, the government is gunning for Zuckerberg and Facebook. Snapchat is proving to be a disastrous investment (down nearly 65% from its IPO). WeWork bonds just got downgraded to junk…

We’re starting to see major cracks in tech investors’ faith.

This is a MAJOR turn that’s taken place over the last couple of months. And if tech stocks go down, the market is going with it.

Tech stocks, in particular “FAANG” stocks – Facebook, Amazon, Apple, Netflix, Google – have been holding this market up for a long time.

Tech stocks have been responsible for around 95% of stock market gains this year.

Amazon alone was responsible for more than one-third of the S&P 500’s gains.

In addition to investor’s losing faith, the government is also breathing down the necks of these tech giants…

Senator Bernie Sanders introduced the cutely named Stop Bad Employers by Zeroing Out Subsidies Act (aka Stop BEZOS Act) that aims to tax companies for low-wage employees receiving government assistance.

Senator Orrin Hatch wants to reopen the Federal Trade Commission’s antitrust case against Google.

Of course, Facebook is in the doghouse for privacy breaches.

And now companies are viewing their visionary founders as liabilities… Apparently investors and boards have woken up to the fact that these guys are fallible (and mortal), so there’s more talk of key man risk insurance should anything happen to them.

It’s been nothing but buttercups and unicorns for tech stocks these past few years. And these recent developments go to show you, everything moves in cycles. And we may be entering a downcycle in tech.

This is a significant development you should be paying attention to.

In a market that’s been bid sky high based on faith and not fundamentals… a loss of faith can be catastrophic.


from Sovereign Man

The pension crisis is bigger than the world’s 20 largest economies

If your retirement plans consist entirely of that pension you’ve been promised, it’s time to start looking elsewhere.

It seems like every week we have some new pension catastrophe to report. Seems like there’s a trend, no?

As you probably know, pensions are giant pools of capital responsible for paying out retirement benefits to workers.

And right now many pension funds around the world simply don’t have enough assets to cover the retirement obligations they owe to millions of workers.

In the US alone, federal, state, and local governments, pensions are about $7 TRILLION short of the funding they need to pay out all the benefits they’ve promised.

(** And that doesn’t include another $49 trillion in unfunded Social Security obligations…)

America’s private pensions are in bad shape too — a total of around 1400 corporate pensions are a combined $553 billion in the hole. Plus, 25% of those funds are expected to go broke in the next decade. But the pension problem is much bigger than just what’s happening (though the US problems are SEVERE).

In 2015, the total worldwide gap in pension funding was $70 TRILLION according to the World Economic Forum. That is larger than the twenty largest economies in the world combined.

And it’s only gotten worse since then…

The WEC said that the worldwide pension shortfall is on track to reach $400 trillion by 2050.

And what solutions did they suggest?

“Provide a ‘safety net’ pension for all.” You know, sort of like Social Security… which as we mentioned is $49 trillion in the hole. Not exactly a sound solution.

Another solution the WEC offered was to increase contribution rates– in other words, forcing current workers pay more to support retired workers.

Only one problem with that… global demographics are awful. There just aren’t enough young people being born to pay out benefits for retirees.

And that problem is coming to a head in South Korea, where about 13% of the population is currently of retirement age: 65 or older.

By 2060, 40% of the population will be over 65.

And, you guessed it, there aren’t close to enough people being born to burden that load.

This is a nightmare scenario for pensions (in addition to fact that low interest rates have made the returns pensions need to break even basically unachievable).

But worry not, South Korea has an answer for the problem…

The government spent $113 billion over the past 12 years trying to get people to have more kids (I’m curious what this money was spent on… removing condom dispensers from bathrooms?).

But more importantly, this should give you a hint of how the government views you… Much like a dairy cow. Not enough milk? Breed more cows!)

But for all the money and effort, South Koreans are actually having FEWER babies– a decline of 1.12 babies per woman in 2006, to just 0.96 this year.

So when you look a few decades out, South Korea clearly isn’t going to have enough workers paying into the pension system to support all the retired beneficiaries.

Even the government acknowledges this. And they’ve already started managing expectations…

One of the government’s proposals is to slash retirement payments by 10%.

At the same time, the government wants to increase current contributions (i.e. payroll TAX) by almost 50%.

These people have been planning their futures based on promises the government has been making for decades. Unfortunately, those promises have no basis in reality.

And if you think higher pension contributions and lower payouts are contained to South Korea, you’re nuts.

Earlier this year, the US Office of Personnel Management proposed $143.5 billion worth of pension cuts for current AND already retired federal workers.

Remember, US government pensions are $7 TRILLION in the hole. And the demographics are just as bad (the US currently has the lowest fertility rate on record).

Look, I’m not trying to be alarmist. These are just the cold hard facts that everyone needs to understand.

We’re talking about long-term challenges to retirement. But it’s retirement… ergo we’re SUPPOSED to think long-term about retirement: years, decades out. Retirement requires having a plan.

Or, in this case, a Plan B… as anyone depending on a pension or social security for retirement is out of luck.

Governments have lulled hundred of millions of people into a false sense of security based on financial promises they are not going to be able to keep.

It’s not a political problem. It’s an arithmetic problem. And one they’re unable to solve.

But you can.

While you might not be able to fix the pension gap in your home country, you can definitely secure your own retirement.

There’s no need to rely on empty promises and broken pension funds. With some basic planning, education, and a bit of early action, you can safely sidestep the consequences of this looming financial crisis that is larger than the world’s 20 largest economies combined.

Here’s a great, free resource to get you started.


from Sovereign Man

Jim Grant’s 10 most important lessons in finance – Part 2

[Editor’s note: Yesterday we published the first installment of a special essay from Jim Grant on the 10 most important lessons learned in his 35 years in finance.]

Today, we continue with the final lessons…

6. Markets are not perfectly efficient. Because the people who operate them aren’t perfectly reasonable. The debate over efficient markets has raged since the birth of public markets. Grant’s comes down on the side of inefficiencies—of lucrative inefficiencies.

 There will always be value in active management. It keeps the market honest. Active managers bid for companies that have been punished unjustifiably… And they apply selling pressure on egregiously overvalued, fraudulent and dying companies. It’s these inefficiencies – and Grant’s longtime, historical understanding of them – that gives our readers special perspective.

If markets were so all-fired efficient, why did the Nasdaq reach the sky in 2000? Or banks and junk bonds the depths in 2009?

 7. Patience is the highest yielding asset. Charlie Munger, Warren Buffett’s longtime partner in Berkshire Hathaway, explained the importance of patience this way:

 How did Berkshire’s track record happen? If you were an observer, you’d see that Warren [Buffett] did most of it sitting on his ass and reading. If you want to be an outlier in achievement, just sit on your ass and read most of your life.

 Let us only say that the point survives the exaggeration.

 8. Never stand in line to buy anything. Here I have a confession to make. In January 1980, at the peak of the Great Inflation of the Jimmy Carter era, a line snaked out of the doors of a lower Manhattan coin dealer. The people in that queue were waiting to buy gold at what proved to be a generational high, $850 an ounce. I was in that queue. I’ve made plenty of mistakes since then. But that particular mistake I’ve subsequently avoided. Believe me, once was enough. 

9. Leverage is like chocolate cake. Just a little bit, please.  Markets will always correct. They corrected after the Dutch tulip mania in 1630s. And they corrected after the subprime mortgage debacle in 2007. What do corrections correct? They correct the errors of a boom.

And when markets correct, they cause the most amount of financial pain to the greatest possible number of people.

 You’ll never know exactly when these corrections are coming. But if the creditors aren’t calling your assets on the way down, you will live to fight another day. And if you happen to have cash on hand, you can make the greatest profits of your investing career.

10. “Don’t overestimate the courage you will have if things go against you.”

 “Consider all the facts – meditate on them. Don’t let what you want to happen influence your judgement.”

 “Do your own thinking. Don’t let your emotions enter into it. Keep out of any environment that may affect your acting on your own reason.”

These final three items, which I’ve included as a single lesson, are in quotation marks because I borrowed them from the late Bernard M. Baruch – one of the greatest investors who ever lived.

I know he won’t mind (after a brilliant career in Wall Street and Washington, Mr. Baruch died in 1965, at the ripe old age of 94).

I came to know the great investor in the course of writing his biography. If you read enough, you, too, can assemble a circle of friends from the past as well as  the present.


from Sovereign Man

The 10 most important lessons in finance from a legend in the field

[Editor’s note: Yesterday, we published a podcast we recorded with the legendary financial commentator, Jim Grant.

Jim is the editor of Grant’s Interest Rate Observer – one of the most-respected and followed financial publications in the world. In his 35 years writing Grant’s, Jim has seen a financial cycle or two.

And he’s amassed a network of many of the most important people on Wall Street (who often share their insights in his publication).

We’re excited to share a special piece from Jim in Notes today about the 10 most important lessons he’s learned in his 35 years in financial markets.

It’s a bit long, so we’ll publish the first half today and the rest tomorrow.

We’ve also arranged a special deal with Jim for Sovereign Man readers, which you’ll see below.]

From Jim Grant:

I’ve published over 800 issues of Grant’s Interest Rate Observer to date… That’s more than    four million words of market analysis.

I’ve made some good calls in that time (and, yes, some bad ones).  I’ve even gained some fame – at least in certain circles – for my more accurate predictions.

But, more importantly, I like to think that I’ve become a knowledgeable student of Mr. Market. I’ve lived through and analyzed manias and crashes.  I’ve seen interest rates fall from 20% to zero – and below… I’ve seen the stock market sawed in half and I’ve seen stocks rise far above any sane measure of valuation.

And through it all, every two weeks, I’ve shared my thoughts with a select group of readers.  Many of them have been with Grant’s since day one.

With that in mind, here are the 10 most important lessons I’ve learned in finance…

1. The key to successful investing is having everyone agree with you — LATER. The most popular investment of the day is rarely the best investment. If you want to know what’s popular, look no further than the front page of your favored business journal… Or just tune in at your next cocktail party.

At Grant’s, we seek profits where no one else is looking. We’re happy to wait for the consensus to come to us.

We’ve been contrarian since day one. In our minds, there’s no better lens through which to view the market.

2. You aren’t good with money. Because humans aren’t good with money. We buy high and sell low because it’s what comes naturally. It’s difficult to control emotions. It’s more difficult when money is involved.

But with detailed security analysis and an expert understanding of market cycles, you can minimize emotions when it comes to your portfolio.

 3. Everything about investing is cyclical… prices, valuations, enthusiasms. And this will never The greatest investors develop a sense of when markets have reached euphoric levels. And of when fear is crippling reason.

 Where do you think we stand on that scale today?

4. You can’t predict the future. Nor can the guy who claims he can.

You can, however, see how the crowd is handicapping the future. Observing the odds, you can make better choices.

You can recognize the rhythms of market cycles (see lesson 3). And with enough practice, you can profit from those cycles – or at least avoid disaster. As when we warned Grant’s readers in our September 8, 2006 issue about a bubble in subprime mortgage debt – 11 months before the crisis began. And three years later, when we advised going long bank stocks before they rallied 250%.

5. Every good idea gets driven into the ground like a tomato stake. Exchange Traded Funds (ETFs) were a great idea. They allowed investors diversified exposure to a number of markets for minimal fees.

 Today, ETFs account for more than 23% of all U.S. trading volume with a total market value over $3 trillion. And the ETF market is forecasted to hit $25 trillion globally by 2025.

Yes, ETFs allow investors to diversify into lots of markets for a little bit of money. But ETFs allocate money without consideration of value.

And what happens when everyone rushes for the exits?


from Sovereign Man

098: Sovereign Man’s podcast with financial legend Jim Grant

Last week I recorded the most memorable podcast I’ve hosted in some time.

Jim Grant, editor of the famed Grant’s Interest Rate Observer, joined us for a discussion. Grant’s, in my opinion, is one of the finest financial publications out there.

And it’s a treat to have a guy like Jim on the podcast.

He’s written Grant’s for 35 years. And in that time, he’s made some incredible calls (including first writing about the excesses in housing in 2001) and some not so incredible ones… But, most importantly, he’s amassed a cult following of the best and brightest in business and finance.

Central bankers, Wall Street CEOs, hedge fund billionaires… they all read Jim.

In other words, his opinions count. So I hope you’ll tune in to hear what he has to say…

In our discussion, Jim and I talk about the current state of the economy, the latest Fed announcement and some of the insane excesses in the market today.

And Jim sums of the absurdity of today’s market in one, important paradox.

Finally, we share a few ideas on how to protect yourself and maybe even profit from these excesses.

Also, at the end of our discussion, Jim shares a very special offer for Sovereign Man readers.

To learn more about the exclusive deal we’ve arranged, just click here…

And, you can listen to the podcast here.


from Sovereign Man

Forget who takes the mid-terms: Here’s how to personally repeal Obamacare

If the US government doesn’t act quickly, Americans may be stuck with years more of deteriorating healthcare and skyrocketing medical bills.

Back in 2010, Congress and President Obama completely overhauled the US healthcare system with the “Affordable” Care Act (aka Obamacare). Their intention was to provide all US citizens with access to healthcare.

But, the result of government interference in markets was – surprise – rising costs and lower quality service.

Over the past several years, politicians have paid lip service to abolishing Obamacare. Even with a Republican-controlled House and Senate in 2017 and 2018, Congress couldn’t issue a repeal.

And now, US midterms elections are looming.

Obamacare stands no chance of repeal by a potentially divided Congress starting in 2019.

Fortunately for you, when it comes to healthcare policies, it doesn’t matter who takes control of Congress…

Because you can still find fantastic and affordable healthcare, even without a corporate-sponsored insurance plan. You just have to look outside the US.

As countries like the US, Canada and the UK suffer under bloated healthcare bureaucracies, more of their citizens are venturing beyond their countries’ borders for medical treatment at a fraction of the costs – so-called medical tourism.

Still, patients receive safe and first-class care from English-speaking doctors, many trained at top medical schools around the world.

For example, heart bypass surgery in the US costs well over $100,000. If you have great insurance, you’ll be fine to remain in the US. (The US healthcare system is great for wealthy patients with low deductible, comprehensive health insurance plans.)

But if you’re self-employed and without access to a large employer’s group plan, your out-of-pocket costs for this surgery may be unaffordable.

Or, you can travel to Thailand, save a fortune and recuperate in a first-class facility.

Bumrungrad International Hospital in Bangkok was the first Asian hospital to receive Joint Commission International (JCI) accreditation. JCI is the gold standard to certify hospitals and clinics worldwide.

At Bumrungrad, they offer a package deal for heart bypass surgery. The package includes the surgeon and anesthesiologist’s fees, operating room charges, routine lab tests, X-rays (if required), medications, medical supplies, pacemaker (if required) and seven nights’ accommodation, including two in the post-surgical Coronary Care Unit.

And your grand total? 690,000 baht (about $21,000 USD).

Medical tourism is not just for major surgeries.

You can also benefit from venturing abroad for preventative health or routine procedures like executive health screenings – a comprehensive physical exam with labs, electrocardiogram, stress tests, consultations with multiple specialists, etc.

Places like the Cleveland or Mayo Clinics will administer an executive exam… but, depending on your insurance, it may not cover these types of physicals.

So, you may pay $5,000 or more out-of-pocket, plus food, lodging and airfare. And you may wait in line for months, as more US patients want this service.

But, back in Thailand there’s no months-long wait and no multi-thousand-dollar price tag for an executive exam.

A screening for a 30 to 40-year-old man or woman includes: Renal function, three liver function tests, a urine test, lung and heart X-rays, an ultrasound of abdominal organs, an electrocardiogram and a few other services. Doctors, nurses and technicians will spend 3-4 hours with you.

And for this thorough exam, you’ll pay… 9,500 Thai baht or about $292 at the current exchange rate.

Even their highest-priced executive exam for women over 50 is 25,600 baht, which is $786. And this package includes all the labs and screenings as above, plus an ophthalmology exam, hearing screening, brain blood vessel check and checks for colon, liver and cervical cancers. Patients spend 5-6 hours with the medical staff.

In the US, you’re lucky to spend 15 minutes with a doctor. And as healthcare deteriorates, US wait times may rival Canada’s and the UK’s – where thousands of patients wait for months to see a specialist.

Then there’s the regulatory hurdle, which prompts individuals to seek care elsewhere. The Food and Drug Administration (FDA) erect barriers that prevent experimental (and often effective) procedures and medicines.

So, medical tourism offers you the chance to skip long medical lines, receive top care that may be unavailable in your home country and potentially save thousands of dollars.

I view medical tourism as another international arbitrage opportunity. Arbitrage is when you take advantage of a price difference between two markets.

For medical tourism, your arbitrage opportunity takes advantage of more than just a price difference. Often, it’s a quality of care difference, too.

If you’re from a nation suffering under a healthcare system that doesn’t meet your needs and expectations, why wouldn’t you explore other options around the world?

You don’t have to wait for Congress to repeal Obamacare.

With a little planning and action, you can take charge of your health, venture abroad and issue your own repeal.


from Sovereign Man