Category: simonblack

The numbers are pretty startling.

Nearly 7 in 10 Americans have less than $1,000 in savings.

1 out of every 3 Americans has nothing set aside for retirement.

And, according to Federal Reserve data, the median working-age couple has saved just $5,000 for retirement.

How is this even possible?

How could it be that the citizens of the wealthiest country to have ever existed in the history of the world barely have any savings?

Simple. The cost of living has skyrocketed over time. It’s become terribly difficult for tens of millions of people to keep up. Just look at the data—

Housing prices, once again, are at all-time highs. And for those who choose to rent instead of buy, rents in many cities have also reached all-time highs.

This is especially difficult for the Millennial generation, which finds itself spending over of 40% of disposable income on housing costs.

If you add in student debt (which continues to plague millennials), that takes even more money out of their pockets each month.

And God help you if you decide to have children, the cost of which is now at a record level.

According to a study published last year by the US Department of Agriculture (not sure why they’re the ones looking into this…), the overall cost of raising a child from birth to age 21 is now a whopping $233,610.

Private studies have pegged that amount even higher, in excess of $300,000.

And, not that there’s any inflation, but childcare costs have risen so rapidly that it has become impossible for many families to keep both spouses in their careers.

Then there’s the costs of insurance and medical care, which continue to soar to record levels.

Healthcare costs in the United States are now at the highest levels EVER.

But even more importantly, the RATE at which costs are rising reached their highest level in 32 years.

It’s no wonder that people aren’t able to put any money away… or that, despite a brief dip after the Great Recession, consumer credit is once again exploding.

Just like their federal government, Americans are once again heavily indebting themselves.

And it’s easy to understand why: they just can’t make ends meet.

The tiny silver lining is that wages have finally started to grow, albeit slightly.

But wage growth has been vastly outpaced by the rising costs of major expenses– like housing, childcare, insurance, and healthcare.

If you find yourself in this situation… struggling without any real sense of security… I’d encourage you to at least consider one out-of-the-box solution:

Think about going overseas.

It’s 2017. Your ability to generate income no longer depends on geography.

I have friends who run a small CPA practice preparing tax forms from their beach home in Bali.

Others who do construction work here in Chile.

Software developers, agriculture consultants, insurance salesmen, paralegals, real estate brokers… they’ve all moved abroad and are thriving.

The biggest thing you’ll notice in terms of your personal finances, though, is that living costs are often remarkably cheaper.

Sure, if you move to Tokyo, Geneva, or Oslo you’re going to be forking over even more money to live.

But the vast majority of the planet is likely MUCH cheaper than where you’re currently living.

I purchased my apartment here in Chile, in one of the nicest neighborhoods in the entire country, for less than what a down payment would be in most metropolitan areas in the US.

And I wouldn’t even regard Chile’s housing market as being particularly cheap compared to other places around the world.

Your medical costs will also drop. Seriously, it’s a joke.

Medical treatment overseas can be incredibly high quality and just a tiny fraction of the cost.

Insurance will cost a tenth of what you’re currently paying, if you decide to have insurance at all.

You might just choose to pay cash whenever you need treatment, and it won’t cost more than a nice lunch.

Childcare? Forget about it. In a lot of places overseas (especially in Latin America or Asia), labor costs are so cheap that you won’t even think about daycare.

Instead, you’ll easily be able to afford your own round-the-clock, live-in help… for far less than what you’re probably currently paying for daycare.

Oh yeah. And your tax bill will likely go to ZERO.

This goes for just about all nationalities, including US citizens.

American expats have some special guidelines that they need to follow, but as long as you have what’s known as “bona fide” residency, i.e. you are really truly living abroad, and not just on paper, you can exclude more than $100,000 each year in “earned” income.

(Note, this does not apply to investment income… but there are ways to eliminate that as well. More on that another time.)

Most households spend tens of thousands of dollars each year on taxes, most of which has gone to fund more wars and more debt.

Just imagine what you could do for your family’s future with all that extra savings.

There are all sorts of other benefits as well.

You may have the opportunity to learn another language, and for your children to learn another language.

You and your family may be able to obtain another citizenship.

You’ll have unique international experience that certainly looks good on a resume and differentiates you from your peers back home.

And you’ll have the chance to develop a deep, close network of friends… fellow expats who share your beliefs and values.

I understand that as human beings, we are naturally afraid of the unknown.

And moving abroad is a big, big unknown.

Our ancestors braved that uncertainty once as well. They too were searching for a better life. It’s in our DNA.

So if you find yourself in a similar situation– barely able to stay afloat financially, and insecure about the future– it may at least be worth considering the possibility.

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Most of the world is in an uproar right now over the travel ban that Donald Trump hastily imposed late last week on citizens of seven predominantly Muslim countries.

But there was another ban that was quietly proposed last week, and this one has far wider implications: a ban on cash.

The European Union’s primary executive authority, known as the European Commission, issued a “Road Map” last week to initiate continent-wide legislation against cash.

There are already a number of anti-cash legislative measures that have been passed in individual European member states.

In France, for example, it’s illegal to make purchases of more than 1,000 euros in cash.

And any cash deposit or withdrawal to/from a French bank account exceeding 10,000 euros within a single month must be reported to the authorities.

Italy banned cash payments above 1,000 euros back in 2011; Spain has banned cash payments in excess of 2,500 euros.

And the European Central Bank announced last year that it would stop production of 500-euro notes, which will eventually phase them out altogether.

But apparently these disparate rules don’t go far enough.

According to the Commission, the presence of cash controls in some EU countries, coupled with the lack of cash controls in other EU countries, creates loopholes for criminals and terrorists.

So that’s why the European Commission is now working to standardize a ban on cash, or at least implement severe restrictions and reporting, across the entire EU.

The Commission’s roadmap indicates that forthcoming legislation, likely to be enacted next year.

This is happening. And it may serve as the perfect case study for the rest of the world.

A growing bandwagon of academics and policy makers in other countries, including the United States, UK, Australia, etc. has been calling for prohibitions against cash.

It’s always the same song: cash is a tool for criminals and terrorists.

Harvard economist Ken Rogoff is a leading voice in the War on Cash; his new book The Curse of Cash claims that physical currency makes the world less safe.

Rogoff further states “all that cash” is being used for “tax evasion, corruption, terrorism, the drug trade, human trafficking. . .”

Wow. Sounds pretty grim.

Apparently pulling out a $5 bill to tip your valet makes you a member of ISIS now.

Of course, this is total nonsense.

A recent Gallup poll from last year shows that a healthy 24% of Americans still use cash to make all or most of their purchases, compared to the other options like debit cards, credit cards, checks, bank transfers, PayPal, etc.

And the Federal Reserve Bank of San Francisco released a ton of data late last year showing that:

– 52% of grocery purchases, along with personal care products, are made in cash

– 62% of purchases up to $10 are made in cash

– But even at much higher amounts over $100, nearly 1 in 5 purchases are still made using physical cash

This doesn’t sound life nefarious criminal activity to me.

It seems that perfectly normal, law-abiding citizens still use cash on a regular basis.

But that doesn’t seem to matter.

A bunch of university professors who have probably never been within 1,000 miles of ISIS think that a ban on cash would make us all safer from terrorists.

You probably recall the horrible Christmas attack in Berlin last month in which a Tunisian man drove a truck through a crowded pedestrian mall, killing 12 people.

Well, the attacker was found with 1,000 euros in cash.

The logic, therefore, is to ban cash.

I’m sure he was also found wearing pants. Perhaps we should ban those too.

This idea that criminals and terrorists only deal in bricks of cash is a pathetic fantasy regurgitated by the serially uninformed.

I learned this first hand, years ago, when I was an intelligence officer in the Middle East: criminals and terrorists don’t need to rely on cash.

The 9/11 attackers spent months living in the United States, and they routinely used bank accounts, credit cards, and traveler’s checks to finance themselves.

And both criminal organizations and terrorist networks have access to a multitude of funding options from legitimate businesses and charities, along with access to a highly developed internal system of credit.

A cash ban wouldn’t have prevented 9/11, nor would it have prevented the Berlin Christmas attack.

What cash controls do affect, however, are the financial options of law-abiding people.

These policymakers and academics acknowledge that banning cash would reduce consumers’ financial privacy. And that’s true.

But they’re totally missing the point. Cash isn’t about privacy.

It’s one of the only remaining options in a financial system that has gone totally crazy.

Especially in Europe, where interest rates are negative and many banks are on the verge of collapse, cash is a protective shelter in a storm of chaos.

Think about it: every time you make a deposit at your bank, that savings no longer belongs to you. It’s now the bank’s money. It’s their asset, not yours.

You become an unsecured creditor of the bank with nothing more than a claim on their balance sheet, beholden to all the stupidity and shenanigans that they have a history of perpetrating.

Banks never miss an opportunity to prove to the rest of the world that they do not deserve the trust that we place in them.

And for now, anyone who wishes to divorce themselves from these consequences can simply withdraw a portion of their savings and hold cash.

Cash means there is no middleman standing between you and your savings.

Banning it, for any reason, destroys this option and subjects every consumer to the whims of a financial system that is stacked against us.

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On March 30, 1999, the Wall Street Journal’s front page headline blasted the good news across the world:

“Dow Industrials Top 10,000”

The day before, the all-important US stock index, the Dow Jones Industrial Average, closed above 10,000 for the first time in history.

It was a major milestone, and investors cheered.

A few investors, however, were concerned.

They felt that US stocks were too expensive, and the entire market was in a dangerous bubble.

But the Wall Street Journal answered those naysayers, as the headline of the second article on the front page ominously read:

“If this is a bubble, it sure is hard to pop.”

They were right. Sort of. The Dow Jones Industrial Average continued to climb for the next 8 1/2 months.

But on January 14, 2000, it peaked… and then started a horrible 2-year decline that wiped $5 trillion of wealth from investors.

Yesterday the Dow Jones Industrial Average hit another major milestone: 20,000.

You might even have heard the sound of champagne bottles being simultaneously uncorked by jubilant traders at 4pm Eastern Time.

But Dow 20,000 should give any rational individual pause to reflect on the possible consequences.

After all, the single most important characteristic of any investment is the price when you buy it.

It doesn’t matter how spectacular your investment is. If you overpay for it, you have no margin of safety.

And as the market affirmed yesterday, US stock prices can be expressed in a single word: expensive.

It’s not the fact that the Dow hit 20,000 that makes US stocks so expensive. The price of a stock alone doesn’t tell you much.

It’s important to look at the price of the stock relative to other important metrics, like cash flow, book value, sales, earnings, etc.

US stocks right now are selling at the HIGHEST price-to-sales ratio in at least 15 years, and far higher than it was before the 2008 crash.

Similarly, the cyclically-adjusted Price/Earnings ratio of the US stock market is now at its highest level since the 2000 crash, and higher than it was before the 2008 crash.

Looking at other metrics like Enterprise Value to EBITDA (a measure of a company’s core business operating cashflow), US stocks are also at their most expensive levels since the 2000 crash.

Certainly, US stocks could continue to become more expensive. Perhaps they go up forever.

Or perhaps an astute investor should start looking for a margin of safety.

Once significant measure of safety is a company’s Price/Book ratio. This is essentially a reflection of how much an investor is paying relative to the value of a company’s “net worth”.

This matters.

In his book What Works on Wall Street, author James O’Shaughnessy conducted an analysis of the investment strategies that were the most (and least) successful in the US stock market for a period of over 50 years.

One of the most successful strategies? Buying companies with LOW Price to Book ratios.

One of the least successful strategies? Buy companies with HIGH Price to Book ratios.

Over the long run, value investing beats just about everything. And these extremely high multiples in the US market clearly do not qualify as good value.

This is not to say that the entire US market is overvalued; there are still pockets of value in North America. But they are becoming much more difficult to find.

Looking abroad, however, there are a number of other markets overseas where valuations are MUCH more attractive.

If North America stands out by way of high valuations, for example, Japan stands out by way of low and attractive ones.

One third of the entire Japanese stock market has a cash flow yield (Enterprise Value / Cash From Operations) of over 15%.

No other developed market comes close to that.

And as analysts from European bank SocGen point out, Japanese companies also have more net cash than listed businesses in any other country:

More importantly, Japanese companies are being actively encouraged to pay higher dividends and buy back their shares.

Whereas the balance sheets of US companies are groaning with years of accumulated debt, Japanese balance sheets are the healthiest in the world, and they are awash with cash to give back to their shareholders.

Japan is very enticing to value investors, and it’s a great example of how looking abroad and expanding your thinking to the entire world can yield very compelling results.

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In September 1986, The Economist weekly newspaper published its first-ever “Big Mac Index”.

It was a light-hearted way for the paper to gauge whether foreign currencies are over- or under-valued by comparing the prices of Big Macs around the world.

In theory, the price of a Big Mac in Rio de Janeiro should be the same as a Big Mac in Cairo or Toronto.

After all, no matter where in the world you buy one, a Big Mac generally consists of the same ingredients– two all beef patties, special sauce, etc.

A Big Mac currently sells for 49 pesos in Mexico, for example; at the current exchange rate, that’s about $2.23 US dollars.

Meanwhile in Switzerland, a Big Mac sells for 6.50 francs, or roughly USD $6.35.

This means that a Big Mac in Switzerland costs 2.8x as much as the exact same burger in Mexico.

Obviously there are a LOT of differences between Switzerland and Mexico that would ordinarily lead to some difference in price.

But 2.8x is clearly excessive, suggesting that the Mexican peso is undervalued relative to the Swiss franc.

The most recent Big Mac Index was just released last week.

It shows that the US dollar is currently OVERVALUED against almost every currency in the world.

Canada. Russia. UK. South Africa. Turkey. Poland. Colombia. Philippines. Euro Area. Australia.

The average price of a Big Mac in each of these countries is dramatically cheaper than in the United States.

The Economist’s data show, for example, that the average Big Mac price in the US is $5.06.

(By the way, that’s 17% higher than the average US price of $4.37 that the newspaper reported in January 2013… not that there’s been any inflation.)

In Canada, however, the paper reports an average price of $6 Canadian dollars, or USD $4.51 at current exchange rates.

This suggests that the Canadian dollar is about 11% undervalued relative to the US dollar.

In the Euro area, the average price of a Big Mac is 3.88 euros, about $4.06 based on current exchange rates.

That implies the euro is 20% undervalued against the US dollar.

In places like Malaysia, South Africa, and Russia, it’s even more extreme, with local currencies 60%+ undervalued against the US dollar.

It’s important to understand what this means.

The fact that the dollar is overvalued isn’t some big prize. It’s not an indication that America is #1, the dollar is King, or that the US economy is strong.

This is a bubble.

Currencies, just like stocks and bonds, are assets traded in global financial markets.

And just like stocks and bonds, currencies can be in a bubble.

You may remember the dot-com bubble of the 1990s, when the stock prices of laughable websites (like Pets.com) soared to unimaginable heights.

As with all bubbles, that one eventually burst, and stock prices crashed.

The US dollar has been in a bubble for more than two years.

Yes, there are clearly a number of fundamental differences between the United States and other countries that would lead to natural exchange rate imbalances.

But again, we’re not talking about the US dollar being overvalued by 5% or 10%. We’re talking about EXTREME differences that are completely irrational.

And it’s not just Big Macs either.

Nearly every shred of objective data suggests that the US dollar is overvalued.

The “US Dollar Index,” for example, which measures the US dollar’s value against an entire group of currencies like the euro, Japanese yen Canadian dollar, etc., is currently at its highest level in 14 years.

Politicians and policymakers hate this.

They ignore all the benefits of a strong currency, and instead claim that a strong dollar makes US goods and services too expensive for foreigners to buy, which hurts exports.

Donald Trump told the Wall Street Journal last week that the US dollar is “too strong. And it’s killing us.”

On that single statement alone, the dollar index fell 1%.

Fed Chair Janet Yellen has also weighed in on the overvalued US dollar, calling it “a drag on U.S. growth”.

No one has a crystal ball, and it’s impossible to predict precisely WHEN this bubble starts to deflate.

In fact, it’s possible that the dollar becomes even stronger than it is today.

But when the two most powerful policymakers in the country both want the US dollar to get weaker, it’s pretty clear what’s going to happen.

This means that, right now, if you’re holding US dollars, you have an opportunity.

The evidence shows that the dollar is irrationally overvalued, and both the Federal Reserve and the US government want it to be weaker.

The evidence also shows that there are plenty of foreign currencies which are heavily UNDER-valued against the US dollar.

The old saying in investing is “Buy Low, Sell High.”

It also works the other way: “Sell High, Buy Low.”

And that is precisely the opportunity right now: to SELL overvalued US dollars at their 14-year high, and BUY top quality, undervalued foreign assets at their record lows.

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January 20, 2017
Sovereign Valley Farm, Chile

It’s hard to argue with Barack Obama’s jump shot. I can’t imagine Rutherford B. Hayes having that kind of game.

Or his swagger. Comedic timing. Even charisma.

And there have been plenty of times over the last eight years when, in all seriousness, those qualities have truly mattered.

I can’t imagine anyone not getting goose bumps when President Obama sang Amazing Grace during the eulogy of Reverend Clementa Pinckney in 2015 after the horrific church shooting in Charleston.

During his presidency he had thrust upon him the impossible task of consoling an entire nation over and over again. Personality truly mattered.

But tangible, productive results are an entirely different story, and that’s what I want to examine today.

I’ve read a number of articles this week which glowingly praise President Obama’s accomplishments. Others offer scathing critiques.

Most tend to focus on the Affordable Care Act (ACA), i.e. Obamacare, suggesting that reforming healthcare is one of his most important legacies.

Maybe so.

There are undoubtedly millions of people who now have medical insurance that never had insurance before.

And that is certainly a noble accomplishment.

The problem is that focusing on this single metric is a terrible premise.

Millions of people are no longer uninsured. Check. But that’s where their thinking stops.

What’s the overall quality in the system? What’s the cost?

Those metrics are conveniently overlooked.

Not even two months ago, the Obama administration was forced to publicly acknowledge that healthcare premiums will rise by an average of 25% in just a single year under Obamacare.

Plus, many consumers will only have a single option to choose from as a number of major insurance companies scale back insurance policies they offer.

The administration also admitted last year that overall healthcare spending continues to rise, surpassing $10,000 per person for the first time ever.

Then there’s a question of quality and efficiency.

In 2016, a Johns Hopkins study concluded that the number of preventable medical errors has soared in recent years and is now the third leading cause of death in the United States.

Obviously no one can blame Barack Obama for this trend.

But that’s precisely the point: it’s impossible for any program to be successful when the way you define success is so fundamentally flawed.

Obamacare focuses on one thing: coverage. Are more people insured? Yes. And in their mind, that makes it successful.

But anyone who looks at the big picture will reach an entirely different conclusion.

Premiums rose. Overall spending increased. Quality didn’t improve. Americans aren’t getting healthier.

(Not to mention the matter of that $2 billion website…)

However noble the intentions, it’s hard to consider these results a major success worthy of an enduring legacy.

Then there’s the issue of jobs. President Obama has been credited with ‘creating’ more than 11.3 million jobs.

This entire premise, of course, is total nonsense.

It’s not like the President starts businesses and hires people. The only jobs the President creates are in government.

It’s the private sector that create jobs.

And for a guy who once told entrepreneurs, “you didn’t build that,” (referring to their businesses), he sure is quick to take credit for 11.3 million jobs created.

But OK, let’s play along and give him credit: creating 11.3 million jobs is a very noble accomplishment.

Once again, however, this metric for success is flawed.

What’s the quality of those jobs? At what cost?

Total “goods-producing” jobs, i.e. workers who make stuff, actually declined under the Obama presidency.

Manufacturing jobs, construction jobs… even utilities and media jobs… all fell over the last eight years.

Bear in mind that the US was already at the peak of recession when President Obama took office, with unemployment surging.

Yet today, goods-producing jobs are even below those dismal figures from 2009.

So what jobs were created?

A good chunk of them are in healthcare, which sort of highlights the earlier point that Americans aren’t getting healthier since they need even more workers to care for them.

Additionally there were a lot of jobs created in the federal government.

Plus a full 2 million of those new jobs have been waiters and bartenders.

I’m serious.

At the beginning of the Obama presidency in 2009, there were 9.5 million waiters and bartenders in the United States.

Today there’s 11.5 million waiters and bartenders.

So it’s not like all these millions of workers who supposedly owe their jobs to President Obama are out there discovering the cure for cancer.

Then you have to look at cost.

Despite these 11.3 million new jobs, the number of food stamp recipients in the Land of the Free Lunch increased by 13.9 million during the Obama administration.

Plus, during his 8-years in office, the Obama administration spent a record $28.7 TRILLION and registered a $10 trillion increase in the national debt.

This means that every job President Obama supposedly created cost the American taxpayer $885,000 in debt. Per job.

This is a pretty pitiful return on investment.

And that’s really the bottom line. Debt lasts.

One day his Supreme Court justices will retire. Obamacare may be repealed. History will forget about his charisma and charm.

Edward Snowden may eventually return home. The 500,000+ pages of regulations his administration issued will be replaced.

And even the families of all the innocent victims who were accidentally killed in his drone strikes may move on with their lives.

But the debt will still be there.

Consider this: in the last two weeks alone, the Treasury Department has auctioned off tens of billions of dollars worth of debt in the form of 30-year bonds.

This means that a child who won’t even be born until 2030 will have some high school summer job in late 2046, and an increasing chunk of his income will be taxed to pay off the debt that Treasury Department borrowed a few days ago.

That’s a legacy which outlasts everything else.

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In the mid-1800s at a time when the United Kingdom was still the dominant superpower in the world, an English scientist named Francis Galton wrote a series of papers arguing for the selective breeding of human beings.

Galton’s ideas became known as eugenics.

The concept was that genius and talent were hereditary traits passed from generation to generation, and that, to ensure the growth of our species, the best and brightest should be bred like cattle.

Scientists soon began taking measurements of nose angles and forehead slopes in order to establish a correlation between a physical features and talent.

The scientific community concluded that a person with certain physical features was predisposed for great success and achievement.

But it worked both ways.

If your forehead was too wide, or your nose to jaw ratio too slight, you were viewed as morally and intellectually inferior.

Given that many races share similar physical features, this phony science became the moral justification for segregation, slavery, and even genocide.

Today our species is clearly more enlightened, and we can stand amazed that such ridiculous ideas used to be taken seriously.

There will come a time, however, when our descendents say the same thing about us.

Case in point: half a world away at the World Economic Forum in Davos, Switzerland, Nobel Laureate economist Joseph Stiglitz made remarks earlier this week that the US should “get rid of currency.”

He means paper currency, as in the US should not only get rid of $100 bills… but ALL paper currency– 50s, 20s, 10s, 5s, and even 1s.

You guessed it. Stiglitz suggests that regular people don’t need paper money, and that it’s only useful for drug dealers, terrorists, tax evaders, and money launders.

This thinking is so 20th century, and it’s simply wrong.

ISIS is a great example.

The US military has literally blown up more than a billion dollars worth of ISIS’s stockpiles of physical cash during airstrikes.

But this hasn’t affected their terrorist activities one bit.

That’s because the most notorious terrorist group on the planet famously uses both the world’s oldest currency (gold) and the world’s newest currency (Bitcoin).

Professor Stiglitz has likely never been anywhere near a terrorist, so he likely doesn’t have a clue how they conduct financial transactions.

Stiglitz also relies on the old claim that cash facilitates illicit activity.

Again, this thinking only highlights a Dark Ages mentality.

In the today’s world, drug dealers and prostitutes accept credit cards.

No matter what you’re selling on a street corner, whether it’s hot dogs or marijuana, there are plenty of solutions (like Stripe, Square, or PayPal) to easily allow anyone to accept credit card payments.

But these intellectuals seem stuck in a Pablo Escobar fantasy that drug dealers have entire rooms filled with cash.

What Stiglitz, and perhaps many law enforcement agencies, fail to realize is that one of the biggest tools in masking illegal activity is actually Amazon.com.

Specifically, Amazon gift cards.

If you’re looking to quietly and easily pay large sums of money, even tens of thousands of dollars, you can do so with Amazon gift cards.

Amazon gift cards are essentially a “cash equivalent”.

Amazon sells just about everything on the planet, so its gift cards can either be spent or quickly resold for cash.

(You can obscure a financial transaction even more by using an Amazon gift card to buy another gift card…)

Curiously there are no loud, universal calls to ban Amazon gift cards. That’s because these policymakers and academics are stuck in the 1980s.

Instead, they’ve nearly all jumped on board the “cash ban” bandwagon.

These guys just don’t get it.

Cash isn’t about tax evasion or illegal activity.

It’s about having a choice.

Any rational person who actually looks at the numbers in the banking system has to be concerned.

In many parts of the world, banks are pitifully capitalized and EXTREMELY illiquid.

This is especially the case in Europe right now where entire nations’ banking systems are teetering on insolvency.

In the United States, liquidity is also quite low, and banks play all sorts of accounting games to hide their true financial condition.

Plus, never forget that the moment you deposit funds at a bank, it’s no longer YOUR money. It’s the bank’s money.

As a depositor, you’re nothing more than an unsecured creditor of the bank, and they have the power to freeze you out of your life’s savings without even giving you a courtesy call.

Physical cash provides consumers another option.

If you don’t want to keep 100% of your savings tied up in a system that’s rigged against you and has a long history of screwing its customers, you can instead choose to hold physical cash.

There’s very little downside in doing this, especially since most people are barely making any interest in their checking accounts anyhow.

Physical cash means there is no one else standing between you and your savings.

But Professor Stiglitz and his colleagues don’t want that.

They want a massive, centralized bureaucracy to have control over your savings.

This, coming from a man wrote in his 2012 book The Price of Inequality,

“[T]he success of [Apple and Google], and indeed the viability of our entire economy, depends heavily on a well-performing public sector. There are creative entrepreneurs all over the world. What makes a difference. . . is the government.”

Sam Walton, Richard Branson, Steve Jobs, and millions of other entrepreneurs are apparently worthless. To paraphrase Barack Obama, “They didn’t build that.”

All that matters is the government.

Just like his call to eliminate cash, Stiglitz’s entire book is an impassioned argument for MORE centralization and government control.

150 years ago, Francis Galton’s appalling ideas were considered science.

Stiglitz’s ideas are what pass as science today.

They’re equally ludicrous.

And one day our future descendants will look back on our own time and wonder how so many people could have allowed themselves to be fooled.

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[Editor’s note: Tim Price, London-based wealth manager and co-manager of the VT Price Value Portfolio, is filling in for Simon today.]

Here’s some food for thought.

There’s been so much discussion over the past few years, and 2016 in particular, about the roaring US economy and stellar performance of US companies.

As an example, we are constantly told about the cash piles that US companies have hoarded around the world.

This is meant as an indicator that US companies are accumulating huge profits.

It turns out this is not entirely true.

As Andrew Lapthorne of Societe Generale pointed out at his bank’s investment conference last week, that giant pile of cash is concentrated in the hands of a few companies.

While the largest 25 US companies are rolling in cash, the remaining 99% of corporate North America barely has any.

Specifically, the 25 largest companies in the US have an average cash balance of over 150% of their average debt levels.

But the cash average for every other company averages about 16%, a nearly 10x difference.

It’s a similar story of concentration when it comes to corporate profitability.

The biggest US companies remain very profitable, with an average return on equity that has been very stable at around 16% since the early 1990s.

But the trend of profitability for the remaining 2500 US stocks has been deteriorating for the past two decades, with an average return on equity falling to just 6%.

In other words, all the supposed success of US companies is extremely concentrated, and the health of the overall US market has been obscured by the performance of a handful of mega-cap companies that are selling at record levels.

As value investors, this gives us reason to stay away.

Value investors are bargain shoppers; we’re on the lookout for high quality assets, especially profitable, growing businesses, whose shares are selling at an obvious discount.

As Warren Buffett has pointed out countless times, most people by nature are bargain shoppers.

Everyone wants a great deal, whether it’s on a new car, family vacation, or online purchase.

For some reason, though, that psychology doesn’t apply to investment decisions.

It’s as if people feel more comfortable buying shares of a company that’s popular, expensive, and overvalued.

In the long run, value investing is what matters.

Stock prices fluctuate wildly from day to day, and even year to year.

But a value investing strategy dramatically outperforms in the long run.

As the following chart shows, $10,000 invested in the broader US stock market in 1986 would be worth $291,334.08 today.

That’s a fantastic return on investment.

But had you invested in value stocks, that same $10,000 would be worth $449,358.86 today, over 50% more.

Value stocks beat other asset classes as well—bonds, international stocks, precious metals, real estate, etc.

The approach works.

The difficult part, of course, is finding that bargain discount business, particularly in a sea of overvalued share prices.

But this is when an astute investor starts looking abroad. There are always pockets of value somewhere in the world.

Japan remains a great example today.

Having endured a more than two-decade deflationary recession, Japanese corporate balance sheets are now among the strongest in the world.

Yet given the still inexpensive share prices, Japanese stocks offer something comparatively rare in modern investment markets: a genuine margin of safety.

One intriguing indicator of the Japanese stock market is its low “dividend payout ratio” compared to other countries around the world.

A company’s dividend payout ratio represents the portion of its profits that it pays to its shareholders each year.

Some companies pay a higher portion of their profits to shareholders, while others retain their profits to reinvest back in the business.

Japanese companies, on average, have THE lowest dividend payout ratios in the world, at less than 40%.

By contrast, British companies’ dividend payout ratios exceed 100%. This is hardly sustainable.

As an example, British company GlaxoSmithKline, popular among large equity income funds, made £1.9 billion in 2015… but paid out £3.8 billion in dividends that same year.

No company can indefinitely continue to pay its shareholders more than it makes in profit.

The Japanese stock market is at the other extreme.

Flush with cash, Japanese companies are now able to return capital to shareholders, either through dividends, or through share buybacks.

(When a company uses its cash pile to buy its own stock, the share price tends to rise, which benefits shareholders.)

Stock buybacks in Japan are now accelerating.

Yet unlike in the US and UK where companies go into debt to fund their dividends and share buybacks, Japanese companies can buy back their shares and pay dividends out of cash and profits.

(It may not be too much of a surprise to learn that Japan represents the single largest country exposure in our value fund.)

I’m not trying to encourage you to rush out right now and buy Japanese stocks.

The larger point is that successful investors do not constrain themselves by something as antiquated as geography.

There’s always a great deal to be had somewhere in the world.

And putting in a little bit of effort and education to find it can make an enormous difference in your portfolio.

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I’ve got auditors sitting in my office here in Santiago right now.

No, not those auditors. Not the kind from the IRS that strike fear in the hearts of taxpayers.

The auditors in our office are from one of the big international accounting firms, and we invited them to review our agriculture company’s 2016 financials.

This is something that nearly all large, responsible businesses do in order to provide their shareholders with a comprehensive annual report.

I wear multiple hats; as an entrepreneur who has started a few large companies, I have shareholders that I need to keep updated.

But as an investor, I’m a shareholder in a multitude of businesses, and I need to be updated about how those investments are performing.

So this is an especially busy time of year… writing and reviewing multiple reports and business plans.

If that sounds boring, I assure you it’s not. There are few things more interesting to me than creating something valuable and tangible out of nothing.

And that’s ultimately what business is: value creation.

Great entrepreneurs come up with big ideas to solve problems for their customers.

And through sheer willpower, talent, and persistence, they birth their ideas into existence. If enough value is created, the rewards can be incredible.

The same goes for investors.

If a company performs well, the shareholders who invested in it can realize phenomenal returns.

The other day I was on the phone with a few CEOs of some of the companies we’ve invested in, listening to them discuss their progress.

One is a Colorado-based financial technology company, and the other is a Colombia-based medical cannabis producer.

Both businesses are doing exceptionally well and run by extremely talented people that I trust.

As an investor, I couldn’t ask for a better deal. All I had to do was write a check.

In exchange, I’ve got these two guys… some of the most successful and highly skilled entrepreneurs I know, busting their butts every day to add two zeros to the amount of money that I invested.

Obviously there’s risk in any investment… even if you buy government bonds or a bank certificate of deposit.

But an astute investor will reduce this risk by assembling a diversified portfolio of great businesses.

That way, if something goes wrong with a business, the rest of the portfolio will make up for it.

I’ve long argued that a great business is one of the best “real” assets to own.

It can provide so much benefit– cashflow, tax deductions, estate planning vehicle, asset protection, etc.

Plus, in times of inflation, a great business increases in value, so it’s a fantastic hedge.

In times of deflation, a great business generates highly valuable cashflow.

In good times, a great business expands and makes big profits.

In bad times, a great business weathers the storm and increases its market share as its phony copycat competitors get flushed away.

There aren’t a whole lot of asset classes that provide such diversity of benefits.

Now, there are ultimately three ways to own an asset like this.

First, you can start a business yourself. This isn’t as scary as it seems.

Like learning Chinese or public speaking, starting a business is a skill… and one that can be acquired with time, education, and experience.

(We hold an annual entrepreneurship camp every summer designed precisely to help people build those skills.)

Second, you can buy someone else’s business.

It may surprise you, but businesses are bought and sold every day, just like real estate or antique cars.

In 2015, for example, our holding company purchased a retail apparel business in Australia that has been in existence for about 20 years.

It’s a well-established brand, and the business is highly profitable.

Now we’ve hired new management and made several changes to increase those profits even more.

There are ‘business brokers’ around the world who specialize in finding buyers and sellers of private businesses, just like real estate agents match buyers and sellers of property.

But for people who don’t want to buy an entire company, the last option, of course, is to buy -shares- in a business.

When it comes to buying shares, most people naturally tend to think about the stock market.

The shares of large companies traded on major stock exchanges are extremely liquid; it only takes seconds to buy or sell shares of Apple.

Conversely, if you own 5% of a local sandwich shop, those shares are harder to liquidate.

The benefit is that shares in private companies tend to be MUCH cheaper.

As an example, I wrote a check for $1.5 million to purchase the Australian company I mentioned.

It makes that much in a year.

So the effective price was basically 1x annual profit (or a “P/E ratio” of 1), meaning my money is recouped in a year.

Large companies traded on major stock exchanges tend to have irrational valuations.

Consider Netflix, whose stock price is valued at 360 times its yearly profit.

So Netflix investors theoretically have to wait three centuries to recoup their investment.

This difference is phenomenal… and that’s why I generally tend to stick to private companies: you can get much more VALUE for your money.

There are exceptions, of course.

Just like a public company’s stock can sell for an absurdly high price, it’s also possible to sell for a ridiculously low valuation.

My analysts are always looking for profitable, well-managed companies in hidden corners of the market where the shares are so cheap they’re selling for less than the amount of money the company has in the bank.

It’s very hard to lose money when you’re able to buy $1 for 75 cents.

The great thing about these types of investments– cheap, undervalued shares traded on public exchanges, is that they’re available to ANYONE.

You just have to be willing to do the work to find them.

Later this week I’ll show you how my team spots these investments.

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Not too long ago my step-dad had to spend a few days in intensive care. Pretty scary stuff.

He had just about every nasty symptom imaginable, from constant vomiting to dizziness to ultra-high fever, but the doctors couldn’t figure out why.

Fortunately his condition improved enough that he was released from the hospital, and now he’s on the mend.

Now, my step-dad is a Medicare patient. But he just found out that he’s been unceremoniously dropped by his Primary Care doctor.

Apparently his physician dropped all of her Medicare patients in one giant culling.

It turns out that physicians across the country have been firing Medicare patients; and according to a late 2015 study from the Kaiser Family Foundation, 21% of physicians are not taking new Medicare patients.

Much of this trend is based on stiff penalties and financial disincentives from the Affordable Care Act (Obamacare), and 2015’s Medicare Access and CHIP Reauthorization (MACRA) Act.

MACRA in particular is completely mystifying.

The law created a whopping 2,400 pages of regulations that Medicare physicians are expected to know and follow.

Many of the rules are debilitating.

For instance, MACRA changed how physicians can be reimbursed for their Medicare patients by establishing a bizarre set of standards to determine if a physician is providing “value”.

As an example, if a patient ends up in the emergency room, his or her physician can incur a steep penalty.

This explains why my step-dad was dropped by his doctor.

The healthcare system has been broken to the point that physicians now have a greater incentive to fire their Medicare patients than to treat them.

One Florida-based physician summed up the situation like this:

“I have decided to opt-out of Medicare, acknowledging that I can no longer play a game that is rigged against me; one that I can never win because of constantly changing rules, and one where the stakes include fines and even potential jail time.”

The irony is that all these new laws and regulations were designed to “save” Medicare.

As we’ve discussed many times before, both Medicare and Social Security are dramatically underfunded and rapidly running out of cash.

Medicare is the worst off between the two; MACRA and Obamacare were supposed to create hundreds of billions of dollars in cost savings.

It’s clear now that this cost savings comes at the expense of physicians… and the result is a rising trend in Medicare patients being dropped.

But even with the cost savings, the Congressional Budget Office projects that Medicare will become completely INSOLVENT by 2026.

As I write this letter, Congress is already taking steps to repeal the Affordable Care Act.

If they finish the job, all the supposed cost savings will be eliminated, and Medicare’s projected insolvency date will be accelerated to 2021.

So the government must either keep legislation that isn’t working and have Medicare run out of money in 2026… or repeal the legislation and have Medicare run out of money in 2021.

Either way, Medicare is toast.

Oh, and bailing out Medicare isn’t an option either.

They would need TRILLIONS of dollars to fully fund Medicare, which is just about impossible for a government that loses hundreds of billions each year and already has a $20 trillion debt.

I’m not suggesting they’ll let Medicare go bust.

More than likely they’ll just come up with some band-aid fix that has terrible consequences.

For example, they could bail out Medicare by stealing from Social Security.

Bear in mind that Social Security is a total mess.

Back in the 1960s there were nearly 6.5 active workers paying into the system for every Social Security recipient.

Today that worker-to-beneficiary ratio has fallen by nearly half.

There simply aren’t enough workers paying into the system to support the swelling number of retirees.

That’s why Social Security is terminally underfunded.

And stealing from its trust funds to support Medicare would merely accelerate the demise of Social Security.

Again, there are no good options to save these programs.

But you can easily take charge of your own health and retirement, and there are plenty of solutions available.

Sure, if Social Security and Medicare are still around when it comes time for you to collect, great.

But you’ll be a LOT more secure, for example, if you set up a robust, flexible retirement structure like a solo 401(k) or self-directed IRA.

These allow you to contribute MUCH more money to your retirement, cut costs, and invest in a variety of asset classes that could produce superior returns.

Even just a 1% improvement in your net returns could boost your retirement savings by hundreds of thousands of dollars when compounded over 20-40 years.

A well-structured retirement plan could even own something like an e-commerce business, where not only the profits, but even the investment returns on those profits, would accumulate tax-free towards your retirement.

There are better options in healthcare as well.

Clearly no insurance plan can substitute for healthy food, good choices, and plenty of exercise.

But it’s amazing how much cheaper high quality care and medication can be if you expand your thinking overseas.

Countries like Canada, Mexico, Thailand, India, etc. are renowned for medical tourism.

Whatever treatment you require, from cancer to fertility, top-tier facilities are available abroad at a fraction of the price, and you can actually be treated like a respected human being.

And the cost savings in treatment is often vastly higher than any travel costs in getting there.

(You’d think Medicare would encourage going abroad for treatment…)

Social Security and Medicare are both finished. The numbers don’t lie, and even the annual trustee reports tell us that they’re pitifully underfunded.

But the good news is you don’t need the government to retire and be healthy.

There are plenty of solutions available to take back control for yourself. It just requires a little bit of education and the will to act.

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One of my interesting friends is in town visiting Chile for a few days.

His name is Gianni– he’s originally from Croatia but lives in Vancouver, and has spent most of his career in the mining business.

Gianni is especially bullish on copper… primarily because he thinks the Age of Big Oil is coming to a rapid close.

He believes that conventional gasoline vehicles will be increasingly replaced with electric cars, which simultaneously reduces demand for oil AND increases demand for copper.

For investors, this presents an interesting opportunity.

Oil and copper prices have been strongly correlated for decades; in other words, as oil prices went up, copper prices went up.

This made sense in the past since both commodities were affected by the same macroeconomic forces.

Fast growing economies tend to consume a lot of copper and oil, pushing up prices.

But now Gianni thinks it’s time for those prices to de-couple.

You may recall that German carmaker Volkswagen is in hot water after being caught falsifying its emissions data. The press is calling it “dieselgate.”

Volkswagen has already been fined $15 billion by the US Justice Department, and roughly $2 billion of that is supposed to be earmarked to build electric vehicle charging stations across America.

This increase in EV charging infrastructure may very well create additional demand for electric vehicles… meaning that oil is going to start losing a LOT of customers, while electricity is going to gain.

Copper remains one of the most important commodities in electrical infrastructure, so prices may very well rise much higher in the future as a result of what’s starting to happen now.

Take a listen to today’s podcast, in which Gianni and I discuss the future of energy, as well as ways to profit from this long-term global trend.

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