Category: simonblack

Angelina Umansky, a 39-year-old spa owner from San Francisco, was visiting a friend in Miami two weeks ago when she heard about a new condo development downtown.

Hoping to find a vacation home, but worried that others were interested, too, Ms. Umansky arrived at the sales office at 8 a.m. the day after seeing some model units.

About 50 other buyers were already in line. Two hours later, a sales agent summoned her and said she had four minutes to decide which unit to buy. She acted fast, offering $350,000 for a two-bedroom, two-bathroom unit.

Ms. Umansky thinks she got a bargain; when she called on behalf of a friend less than eight hours later, she was told the asking price on a unit like hers had climbed to $380,000, a nearly 9 percent price increase.”

Above is the opening story from a New York Times article published February 3, 2005, pretty much the very TOP of the biggest real estate bubble in history.

But very few people realized at the time that the market was such a bubble, even though it was exhibiting all the classic signs:

People were literally lining up to buy overpriced assets. Nobody thought you could lose money in real estate back then.

And prices kept rising. Quickly.

A central Florida homebuilder, Transeastern Homes, used to hold sales events at hotels and convention centers.

Prospective customers would spend five minutes looking at a subdivision map before buying. The company would announce price increases – up to 16 a day – over a loudspeaker, putting the crowd into a frenzy.

There are stories of dozens of condo buyers camping overnight in New York City for a chance to buy an incomprehensibly expensive unit.

Fights would break out between agents at showings. Some customers would bribe builders for a chance to buy a unit.

But one of the biggest signs of the top of the real estate market was “investors” flipping pre-construction condos…

Someone would put a hefty down payment on a condo before the building even started construction.

They had no intention of ever living there. They just wanted to flip to another buyer at a higher price, often just a few weeks later, when the building was slightly further along in construction.

According to the Times, a 1,000-unit Miami condo building sold out in 36 hours back in 2004. At least 50% of the buyers were flippers.

This is the type of behavior that happens in a mania– people stop buying assets because of the investment’s strong fundamentals. They have no intention to hold. They just want to flip quickly and make easy money.

The flippers have returned today.

Instead of pre-construction condos, however, today’s flippers are participating in the most frenzied sector in the market: initial coin offerings (ICOs).

If you’re not familiar, an ICO is a way for a business to raise capital from investors.

Unlike traditional ways of raising capital, though, like venture capital funds or angel investors, businesses raise capital through an ICO by selling a digital ‘token’.

These tokens sometimes represent ownership in the business. But more often than not, the tokens confer nothing more than a prepayment for the company’s product or service.

ICOs are sort of like crowdfunding meets cryptofinance.

Imagine that you’re surfing your favorite crowdfunding site and come across a business selling some new Lego toy.

You pay $20 to pre-order the Lego toy, becoming one of the company’s many crowdfunders.

With an ICO, the company would issue you a token, representing that you are entitled to one of its Lego toys at some point in the future, presuming they ever get around to making them.

But here’s where things get strange-

These tokens trade actively in the market; speculators buy and sell these tokens, and prices have been rising at an unimaginable pace.

So it would be like taking your Lego toy token, and then re-selling it at 10x the price you paid only a few days later.

Is the Lego toy really 10x more valuable? Probably not. But this is common among ICOs.

Because of these huge returns, ICOs are attracting more and more speculators looking to make a quick buck.

Most have no idea what they’re buying, or why. They don’t care about the fundamentals of the business. Or the risk. They’re flippers.

Now hedge funds are starting to flip ICOs too.

Consider the recent ICO by messaging app Kik Interactive. The company raised around $100 million from over 10,000 contributors.

A group of early investors – including Blockchain Capital, Pantera Capital and Polychain Capital – invested $50 million in a Kik presale before the ICO.

And they received a 30% discount on the token price.

These early investors can sell 50% of their stake ($25 million) at any time – locking in a more than $10 million profit.

In addition to flipping, ICOs are getting so frothy that even celebrities are starting to endorse them.

Floyd Mayweather (the boxer) posted a photo of himself on a private jet in front of piles of $100 bills saying “I’m gonna make a $hit t$n of money on August 2nd on the Stox.com ICO.”

Paris Hilton told the world she was looking forward to participating in the LydianCoin ICO (whose founder happens to be facing jail time).

These are all signs of an extraordinary, massive bubble.

As with all bubbles, there are certainly some legitimate, well-managed businesses whose tokens might actually be worth something.

But at the same time there’s limitless garbage out there masquerading as investments.

This bubble might persist for years. Or months. Or days. No one knows.

We only know that, at some point or another, bubbles always burst.

Keep that in mind if you find yourself chasing the next hot ICO. Make a calculated decision whether or not it’s worth the risk. And recognize that there’s a decent chance you could lose your entire investment.

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The last several days in Venezuela have been absolutely mind-blowing.

Pretty much all the stories you’ve heard are true– countless people eating out of garbage cans, the appalling shortages of basic staples like food, medicine, and even soap… and the lines.

Oh boy, the lines.

The longest lines I saw, in fact, were not at grocery stores, but at banks.

Hundreds of people were queuing up, many of them to pull money out of their accounts to exchange cash on the black market.

Lines snaked through a bank’s cavernously large lobby, continued outside, wrapped around the entire building, and terminated at some point down the street.

Making a simple withdrawal can be an all-day affair.

Perhaps most surprising was how much Venezuela deteriorated since the last time I came here. And I’m concerned that it will continue to get worse… perhaps even much worse… until it gets better.

As I mentioned last week, long-term this place is a veritable gold mine. The natural resources, cheap hydropower production, port facilities, low-cost workforce, abundant factories, etc.

Venezuela is a manufacturer’s dream.

But none of those opportunities can come to pass until this government collapses and there’s a complete reset.

Undoubtedly the Venezuelan government will eventually run out of money, probably within the next two years. It’s nearly a mathematical certainty.

And when they’ll no longer be able to pay the scumbag police and military who shoot peaceful protesters in the face, it’ll be game over.

But until then they’re doing everything they can to strengthen their grip.

A few months ago the government held a sham election here, where citizens exercised their ‘democratic’ right to choose among a bunch of puppet candidates hand-selected by the government.

You can still see the billboards up across Caracas telling people to go vote between the choices given to them by the government. Freedom!

You’d think that such oppressive tactics to keep a population under control would only exist in brutal dictatorships like Venezuela or North Korea.

But then we witnessed the events in Spain over the weekend where millions of people in the Catalan region went out to vote on independence for their region.

The Spanish government loves democracy so much that they sent tens of thousands of police around the region to confiscate ballots, shut down polling stations, and beat-up peaceful citizens.

This is ‘Nightstick Democracy’ at its finest.

And in a most Orwellian statement, Spanish Prime Minister Mariano Rajoy told reporters later on Sunday that “there was no referendum in Catalonia today. . .”

It was like some Jedi mind trick trying to hide the fact that more than 2 million Catalans voted for independence.

I’m reminded of that old quote, often attributed to Soviet dictator Josef Stalin, that basically says “It’s not the people who vote that counts, it’s the people who count the votes.”

(According to the memoirs of Stalin’s personal secretary, the actual quote was “I consider it completely unimportant who in the party will vote, or how; but what is extraordinarily important is this– who will count the votes, and how.”)

This is pretty pathetic: we are ‘free’, as long as we only vote when they give us permission and choose among the options that they provide us.

A few months ago when writing about Venezuela, I concluded that blockchain technology could fix this.

Think about it– in 2017, it’s pretty ridiculous that people have to go down to a polling station to stuff a paper ballot into a box, all of which will be counted by hand.

Blockchain technology would ensure that everyone registered has exactly one vote, and that every vote is counted once.

No more lost ballots. No more tampering. No more miscounts and recounts. No more voter fraud.

Plus, blockchain voting can be cryptologically hashed to ensure secrecy, as well as provide an easy way for ANY candidate to be nominated.

And compared to the cost of legions of human beings required to supervise and count votes, in addition to the logistical cost of printing and moving all that paper, a Blockchain vote is MUCH cheaper.

A blockchain vote would be a clear, independent, indisputable expression to the world that millions of Venezuelans reject their government… and that millions of Catalans desire independence from Spain.

This isn’t some far-fetched idea. These tools already exist, as do the means to implement them, including identity validation to ensure that every registrant is eligible to vote.

When the game is rigged, there are really only two choices available: stop playing. Or change the game.

And this is absolutely game-changing technology.

Source

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The gunfire on the streets near my hotel started around 9pm last night.

The sound is unmistakable, especially at night on an otherwise quiet city street.

I had recently returned to the hotel after a few evening meetings. And coming back after dark it was as if they had rolled the sidewalks up– restaurants with no patrons, bars and clubs that were totally empty.

There was an incredibly striking woman I remember, standing in front of her restaurant playing hostess to absolutely nobody.

And with few people on the streets, it felt like some sort of zombie apocalypse.

Amazingly enough this country used to be THE wealthiest in the region. And not too long ago.

Throughout the 1950s, 60s, and 70s, Venezuela enjoyed robust growth. Low inflation. Substantial foreign investment. High wages. It was the envy of Latin America.

It was all based on one industry: oil. Venezuela has effectively been a one-trick pony for decades.

And when oil prices were strong, the government was swimming in cash. Even as recently as 2007, the Venezuelan government’s oil revenue was so high that they PAID OFF ALL FOREIGN DEBT.

Think about that: only ten years ago Venezuela had ZERO foreign debt.

But at the same time the government here had a long history of excessive spending. Social programs. Military. Fuel and electricity subsidies. Whatever it took to remain in power.

The government was spent so much money that, even when oil prices exceeded $100 per barrel between 2011 and 2013, they STILL couldn’t break even.

Then oil prices collapsed. By early 2016, a barrel of oil was fetching less than $30.

Venezuela’s public finances were in shambles… so the government resorted to the same old tactics that nearly every bankrupt government has relied on throughout history.

For one, they started spending their foreign reserves– essentially burning through the public savings account.

Today Venezuela has its lowest level of foreign reserves in decades, less than $10 billion, compared to $42 billion in December 2008.

They’ve also sold off a huge portion of their gold reserves.

In late 2015 Venezuela held 373 metric tons of gold. Today that’s down to 188 metric tons, a nearly 50% drop in less than two years.

More importantly, though, the government has resorted to printing incomprehensible quantities of paper currency and vastly expanding the central bank balance sheet.

The chart is really amazing to see– the Venezuelan central bank’s balance sheet literally TRIPLED in a SINGLE MONTH between April and May of this year.

They keep printing more and more money, to the point that the currency has become totally worthless.

I remember coming here a few years ago when the black market rate was around 8 bolivars per US dollar.

On my next trip it took 100 bolivars to buy a dollar in the black market. And the rate kept dropping with each trip.

This time I exchanged dollars at around 27,000 per US dollar. Meanwhile the ‘official’ rate is a laughable 10:1. It’s a nearly 3000x difference.

So, depending on which exchange rate you use, Venezuela is either absurdly expensive or absurdly cheap.

A ride from the airport was about 80,000 bolivars. At official rates that’s EIGHT THOUSAND DOLLARS. For a taxi ride.

But at black market rates it’s less than three bucks. Quite a difference.

Last night I exchanged $100 and received this brick of cash in exchange.

Needless to say this monetary insanity makes life extremely difficult.

Anything imported is prohibitively expensive. And with the economy collapsing, domestic production is also grinding to a halt.

There’s very little economic activity. People are sitting in their homes trying to survive. Medicine is scarce. And even staples like food are running out… which is totally nuts.

Venezuela is a vast country with rich, fertile soil and abundant sources of water. There is absolutely no reason why there should be food shortages here.

Chalk up another victory for socialism and central planning.

In their desperation, people are turning to crime, prostitution… anything they have to do to make ends meet. I routinely see people picking through garbage cans eating scraps, anything they can find.

Incredibly there is still a hint of normalcy in the city, at least during the daytime.

People are out on the streets going about their lives… heading to work, taking their kids to school, playing sports, chatting with their friends.

I find it remarkable how well this place has held itself together. Venezuelans constantly display ingenuity and resilience in their ability to deal with such an epic crisis.

And the good news is that this will one day get better.

The government has nearly run out of money and is dangerously close to defaulting on its debts. At some point they’ll no longer be able to pay the armed thugs who keep the population in line.

It’s inevitable. Totalitarian governments almost invariably fall when they run out of resources to sustain themselves.

It may get worse before it gets better. But eventually this madness and oppression WILL come to an end, whether through war, revolution, peaceful means.

What I find so strange is how little optimism there is for Venezuela.

By comparison, investors are perennially excited about Cuba. People have been saying for decades that Cuba will be an investment paradise once the authoritarian regime comes to an end.

Sure, great. I’ve been to Cuba. I like it. And there will certainly be great opportunities there.

But few people apply this same logic to Venezuela. And I find that strange.

This place is huge. There is SO MUCH opportunity here. 30+ million people. Enormous reserves of natural resources. Plenty of coastline. Ports. Infrastructure. Manufacturing capacity. Strategic geography. Renewable energy.

Whether it’s next year or ten years from now, this country has the potential to some day become one of the most exciting places in the world.

Source

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The first thing to understand about Venezuela today is that it’s becoming exceedingly difficult to even get here.

Or get out.

Nearly every major regional and international carrier has discontinued service to/from Caracas.

Due to safety concerns amid all the chaos and violence here, Lan Airlines in Chile (now merged with TAM in Brazil as Latin America’s biggest airline) no longer serves Venezuela.

Aerolinias Argentinas, based in Buenos Aires, stopped flying to Caracas last month.

Delta Airlines. United. Air Canada. British Airways. Alitalia. Aeromexico. All of these airlines have no longer fly here.

Even Avianca, the national carrier of Colombia (right next door) terminated its daily flight between Bogota and Caracas back in July.

There are only a few routes remaining– I flew from Panama on Copa Airlines. And it was ridiculously expensive (more on that below).

Overall, Venezuela is being systematically cut off from the rest of the world.

But it gets worse.

Foreign governments are starting to put up barriers to prevent Venezuelans from coming to their countries.

For example, the Panamanian government decreed a few weeks ago that Venezuelan citizens will require visas in order to visit Panama, effective October 1st.

And there will likely be more of these visa requirements as the situation here in Venezuela deteriorates.

Moreover, the visas are becoming harder to acquire.

I keep hearing stories here from people who have been rejected for travel visas to other countries, mostly because the foreign consulates believe [perhaps accurately] that a Venezuelan tourist will attempt to stay illegally in their country.
There’s a story, for instance, about a Venezuelan family who applied for a visa to Australia to visit family there.

The consular official denied their visa, stating, “I cannot be satisfied that you genuinely intend a temporary stay in Australia.”

But even if someone here in Venezuela is lucky enough to be able to obtain a visa and find a flight, the cost of travel is now prohibitive.

My roundtrip ticket between Panama and Caracas cost over $2,000. It’s only about a two hour flight.

(Granted, I flew in business class, but even the economy ticket was nearly $1,500. Crazy.)

This a simple supply/demand issue. There are hardly any airlines flying out of Venezuela, and a whole ton of people who want to get out. So the price goes through the roof.

Bear in mind that due to the nasty hyperinflation that Venezuelans have suffered, the minimum wage here works out to be about $32/month.

So it would literally require a minimum-wage earner more than four years of saving 100% of his/her paycheck just to afford a ticket out of this place.

This means there are millions… and millions… of people trapped here. And they’re suffering immeasurably.

For a place that used to be one of the wealthiest countries in the region, Venezuela is now completely destitute. People are running out of food. Medicine. Even toilet paper (yes, the stories are true).

The reversal of fortunes is remarkable. And the lessons are abundant.

First and foremost, Venezuela is an obvious example that rational, thinking people should have a Plan B.

No matter how peachy and wonderful things may seem, it makes sense to have a backup plan… especially if your government happens to be running woefully unsustainable finances as Venezuela’s government has done for years.

At a minimum, that backup plan ought to include some savings, ideally denominated in a stronger currency or an asset like gold that has a 5,000+ year history of holding its value, and held overseas in a stable country out of harm’s way.

Additionally, consider obtaining a second residency in a foreign country that you and your family enjoy.

Legal residency in a foreign country provides a LOT of advantages.

It means that you’ll always have a place where you and your family are welcome to go… and in many cases to work, invest, and do business.

Many foreign residency programs also make you eligible to apply for citizenship and a second passport after a few years have passed… which provides even MORE benefits that could be passed down to your children, grandchildren, and future generations.

In many countries, legal residency can be incredibly straightforward to obtain. We’ve written a lot about residency in places like Panama, Chile, Andorra, Philippines, Belgium, etc.

But nearly every country on the planet has standard procedures to obtain residency. So there really is a world of options out there.

Venezuela shows that when crisis hits, it’s too late. The options dry up.

So, again, a rational person develops a Plan B… now. When everything is just fine.

Think about it like insurance; you don’t wait until the house is engulfed in flames to buy a fire insurance policy. You buy the policy when everything is still fine.

And the great thing about a strong, robust Plan B is that even if nothing bad ever happens, you won’t be worse off.

There’s no downside to having the legal right to live, work, invest, etc. in a foreign country that you and your family really enjoy… where one day you can obtain a second passport.

There’s no downside in having some precious metals or emergency savings held at a conservative bank in a stable jurisdiction.

But if something ever does happen, you and your family will be covered.

Source

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My friend Adam (not his real name) lives in Puerto Rico and sent me a startling update…

Adam and his family evacuated the island for the hurricane, but he’s been in close contact with his friends who stayed on the ground.

And the situation is bad.

According to his contacts on the ground, people in Puerto Rico are running out of cash. And ATMs aren’t working.

That’s how it happens during a crisis – food, gas, cash (all the things you need most) disappear first.

This is exactly why you keep several months’ worth of expenses in cash in a safe (a little gold helps, too). It’s a simple step you can immediately take to help keep you and your family safe during a crisis… And the tragedy in Puerto Rico shows you that crises do happen.

Adam also told me a mutual friend is pleading with him to call his government contacts and ask for guns. He wants them to fend off looters who are allegedly banding together into large groups and imitating police officers.

Puerto Rico is struggling right now. And it’s going to be painful as the territory rebuilds after Hurricanes Irma and Maria.

But Adam is going back after the storm. And I’m still hosting my Total Access members there in November.

The island is still there. Act 20 and Act 22 still exist. And there’s still tons of long-term potential in Puerto Rico. We’re doing our part to bring economic activity to the island and start the rebuilding process right away.

Changing gears, let me tell you about Adam and why he decided to move to Puerto Rico…

He built one of the most successful educational software companies in the world (you’d know the name if I told you).

But Adam and his equally hardworking wife, Hope, lived in Los Angeles for most of that time.

Every year, they’d make progress. And then every year, they’d get the bill: The federal government demanded more than a third of their hard-won success. The state government wanted an additional 9%, plus a franchise tax that increased according to gross income. Local taxes added up as well.

Adam and Hope were drowning in taxes.

Before we discuss how they solved their problem, let’s look at what they were dealing with:

California is one of the most punishing states in the country when it comes to taxes. The state is infected with parasitic idea that businesses owe the state a disproportionate amount for any success they experience.

In fact, an Op-Ed in the LA Times, published a week before Tax Day 2017, blazed the following headline across its pages: Instead of taxes, make corporations give the government stock.

MAKE corporations GIVE the government stock?

Another Op-Ed published in the same paper, three days before tax time, stated the following: America is a country where someone like Trump can become a billionaire. We need to change that.

Whatever your feelings about the president, this is absurd.

The tenor of such pieces states a clear message: Success is quickly becoming anathema in the US. We need to make it harder to come by. And the government is “owed” more and more for it.

At the moment, the United States’ corporate tax rates remain at 38.9%… one of the highest rates in the world.

And remember that in the US, corporate taxes are levied at the federal, state, and often local levels as well.

Being strangled by taxes, especially when you are just starting out and don’t have a lot of extra cash flow to invest back into your business, squelches growth. It often prevents entrepreneurs from expanding their product lines or market scope. It delays or thwarts the ability to hire other people… it hinders the ability to provide jobs to other taxpayers.

Adam and Hope finally had enough.

Now, they live in Puerto Rico… and they pay 4% in taxes. Period.

And, yes, they finally feel free.

Adam and Hope say they are happier now, with a richer and more satisfying social life, than they ever were in Los Angeles.

They were familiar with Puerto Rico before they moved. But only after hearing about Puerto Rico’s tax incentives, did they consider relocating…

Act 20, as it’s known, grants a 4% tax rate to businesses. Act 22 is tailored to investors and other individuals and allows for zero taxes on capital gains, dividends and interest earnings. In a nutshell, under Act 20, business owners who move to the island can slash taxes down to 4%.

The taxes looked attractive to Adam and Hope. But Puerto Rico looked like a war zone in the press. So they didn’t consider moving there.

Then they saw a video from Sovereign Man’s 2015 Cancun event, where I discussed the incentives with local experts.

They flew to San Juan a week later. And, no surprise, the media was wrong…

Puerto Rico was far from a war zone.

Adam and Hope calculated how much money they would save by moving to Puerto Rico, made one more trip to find a place to live… and then, on December 30, 2015, they started their new life in San Juan.

What they found, in addition to immense tax savings, was a community with a shared ethos. People who move to Puerto Rico for these incentives programs tend to be entrepreneurs with similar mindsets and drive.

And even though Puerto Rico is in a time of crisis… All of these opportunities still exist.

If you take the long view today, you can still save a fortune in taxes and live a high-quality life in Puerto Rico.

I’ll let Adam have the last word: “You don’t even think about the stress of dealing with tax details anymore,” he says. “You can just run your business and live your life. There’s tremendous freedom in that.”

Source

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Earlier today in Sri Lanka’s Colombo International Airport, a passenger was arrested by local authorities and found to have stuffed nearly $30,000 worth of gold into his rectum.

That’s nearly 1 kilogram of gold. In his ass.

The gold had been carefully wrapped in plastic and included four small bars and multiple chains of jewelry.

Airport police were tipped off when they noticed the 45-year old man “walking suspiciously.” No sh*t, Sherlock.

And curiously this was not even close to the first incident of rectal gold smuggling in Sri Lanka. Just last week another passenger was found with 314.5 grams of gold stuff inside her rectum. Amateur.

Gold, of course, has a long history of value and marketability, going back to ancient civilizations that have been extinct for thousands of years.

Archaeologists have unearthed dozens of graves, some of which date back more than 6,000 years, containing gold artifacts.

It is, by far, the oldest form of money that is still in existence today.

And it is a form of money. Despite you and I not being able to pay for a Starbucks coffee with gold, governments and central banks continue to hold the metal as part of their official international reserves.

Gold has also long been considered a traditional ‘safe haven’ asset. When the world goes crazy, the gold price spikes.

In the days after the 9/11 attacks 16 years ago, for example, the gold price shot up 33%. In the first few days of the Global Financial Crisis in September 2008, the gold price rose more than 20%.

And, until recently, every hint of a North Korean missile test sent the gold price higher.

In May 2013, for example, the North Korean missile test sent gold rising $54. Even earlier this year, North Korea’s missile test in April sent the gold price rising nearly $40.

Yet now, despite the prospects of war on the Korean peninsula being at the highest levels in decades, the gold price is actually falling.

This is totally backwards.

It’s not just the gold price, either. Physical demand for precious metals has also been lower in 2017, given the US mint’s dramatic 67% decline in sales earlier this year.

And the World Gold Council has also reported steep declines in gold demand so far in 2017– 18% in Q1 and 10% in Q2, most notably due to reduced demand from gold ETFs.

This trend makes sense given what we see in the news… or rather, don’t see in the news– have you noticed that no one really talks about gold anymore?

Gold commentary used to be a staple in financial media. Now the winds seem to have shifted– it’s all about cryptocurrency.

Cryptocurrency is definitely exciting. And with such absurd gains, it’s no wonder that crypto has been dominating headlines.

Crypto also represents the future.

Just today I received a payment to the bank account of our agriculture company here in Chile; the wire transfer originated in the United States, yet took three days to arrive.

Along the way, the banks took around $500 in fees. Around $150 of that was the wire transfer fees charged by the sending bank, receiving bank, and correspondent bank, plus another $40 in fees charged by SWIFT, the international payment messaging service.

On top of that, the sending bank charged a fat fee to convert the funds from dollars to pesos even though we explicitly instructed them to NOT convert.

Then the receiving bank charged another fat fee to fix the mistake and convert the funds back from pesos to dollars.

Unbelievable.

A cryptocurrency payment over the blockchain, on the other hand, would have taken minutes… maybe an hour or two at most. And cost less than $1.

As I’ve ranted about in the past, the crypto market is full of bubblicious irrationality at the moment. But the underlying technology is still revolutionary and highly disruptive.

(Not to mention our friends in Sri Lanka don’t have to cram any bitcoins into their rectums…)

But crypto’s power and potential is not in conflict with gold. Both represent a decentralized form of money. Both represent an alternative to the banking and monetary system.

It’s not a competition between gold and Bitcoin.

As a colleague of mine once said, I own gold for all the “I don’t knows.”

Will the US and North Korea go to war? I don’t know.

Will the US default on its enormous (and growing) $20+ trillion debt? I don’t know.

Will the central bank be able to expertly engineer the unwinding of its $4.5 trillion balance sheet and raise rates from historic lows without triggering any consequences whatsoever in financial markets? I don’t know.

By being 100% in dollars (or euros, pounds, renminbi, etc.), you are effectively saying, “Yes, I do. I know exactly what’s going to happen in the future. Everything is going to be fine forever, so I don’t need to hedge myself even one bit.”

That’s a pretty lofty bet.

Gold and crypto are both cut from the same cloth… and one trait they have in common is that they’re both for the “I don’t knows”.

This is not a question of either/or. The answer is both.

Source

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First it was Pets.com, and all the unbelievably stupid Internet businesses in the 1990s.

Investors were so eager to buy dot-com stocks, all you had to do was put an “e” in front of your business or product and you’d immediately be worth millions.

It didn’t matter that most of these companies didn’t make any money. Investors kept buying.

Later on after the dot-com bubble burst, another big craze developed in junior mining stocks– shares of small exploration companies looking for big mineral deposits.

The epicenter of the junior mining industry is in Vancouver, Canada, and the stock exchange there (TSX-V) throttled to record highs.

Shares of companies with literally no profits, no revenue, and no assets were worth tens of millions of dollars.

Then that bubble burst.

A few years later, a new hot craze developed– in cannabis companies.

The market has been flooded with companies (many of them curiously based in Canada’s poor climate and high cost structure) with plans to grow medicinal marijuana.

Their stock prices have soared, with valuations in some cases exceeding $1 billion.

Every time the bubble bursts with these big trends, most of the companies get wiped out.

Only a handful survive– primarily the ones who focused on building long-term, sustainable businesses instead of chasing a quick buck.

From the ashes of the dot-com bubble, companies like Amazon, Godaddy, eBay, etc. emerged in-tact and are still successful today.

Similarly, while many junior mining companies went completely bust, a handful are still operating and quite profitable.

And there will be a few extremely successful cannabis companies over the next several years who step over the remains of their innumerable, defunct competitors.

Clearly today’s big craze is crypto and blockchain.

Like the dot-com bubble in the 90s, you could add the concept of blockchain to just about anything and have a ‘business’ worth millions, no matter how idiotic the original idea.

(Someone will soon pitch me an idea for an app to publish grocery lists into the blockchain. It’s absurd.)

And like all the other big investment fads in the past, most of the companies in this space won’t exist a few years from now.

There are lot of reasons for that, starting with the fact that building a business is hard.

I’ve done it successfully a few times. And unsuccessfully more times that I care to remember: it’s incredibly difficult, so the odds are against most of these companies anyhow.

But more importantly, these big investment fads always attract people looking to make a quick buck. And that doesn’t work in the long-run.

Case in point: earlier this week a company called HIVE Blockchain Technologies went public.

It’s stock price is already up over 3x… since MONDAY, from an opening of 62 cents to $1.89.

Just prior to that, the company closed a private placement at 30 cents… and a few months ago the company was selling shares between 1 and 3 cents.

In other words, a handful of speculators made more than 600x their money in just a few months with a company that has ZERO revenue, simply because ‘Blockchain’ is so popular right now.

This has become the norm in the world of crypto and blockchain.

ICOs, another hot crypto fad, have been racking up huge returns of their own.

‘Tokens’ issued by crypto startups that have no profit or revenue are seeing similar gains of 2x to 10x or more in a very short period of time.

In the case of HIVE, the company is in the business of mining cryptocurrency.

And based on its current stock price, HIVE is worth close to $400 million.

Yet its own financial statements report that they have not generated a penny in revenue.

What’s more, the company’s “illustrative results” show that they -could- make around $7 million per year.

So investors are already paying 57x that amount before the company even gets started.

Even more curious, HIVE’s only real asset is its client relationship with a company called Genesis, one of the largest crypto mining companies in the world (and also a major shareholder in HIVE).

Genesis has more than a million customers who pay an up-front, flat-fee to have the company mine cryptocurrency on their behalf.

HIVE is now essentially a customer of Genesis.

So investors are essentially buying shares of HIVE at a price that’s 57x what the company says it -could- be making (but isn’t) by having Genesis mine cryptocurrency for them.

Seems like investors could save themselves the trouble (and forgo the 57x share price markup) by simply becoming direct customers of Genesis themselves.

Who knows… maybe HIVE is the real deal. Maybe it’s the rare eBay or Amazon that emerges from the bubble in-tact and successful.

But this is a pretty clear example of the irrationality that ensues every single time there’s some white-hot investment fad.

After a hiatus of many, many, many moons, I blew the dust off my microphone and recorded a new podcast about this topic.

It wasn’t so much a podcast as a heated rant against this ridiculous bubble… and a clear explanation of precisely WHY so many crypto assets are generating unbelievable returns.

You can download it here.

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Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money than has ever been in the financial system than ever before.

Economists measure money supply, something they call “M2”. And M2 is at record high levels– nearly $9 trillion higher then at the start of the crisis in 2008.

Now, one might expect that, over time, as the population grows and as the economy grows, the amount of money in the system would increase.

But even on a per-capita bases, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

Again, that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity or artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in a business. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil as a great example.

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported profit (net income) of nearly $40 billion, with Free Cash Flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

And at the time, Exxon’s debt was $6.6 billion.

Ten years later, Exxon’s annual report for the full year of 2016 showed revenue of $226 billion, net income of $7.8 billion, free cash flow of $5.9 billion, and an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon in 2016 g 40% less revenue [due to the decline in oil prices].

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’s profits, and those profits are 80% less, then the share of the business should also decline.

Except– that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has fallen dramatically as well.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

With company after company we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying way more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed created over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries”, i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And amazingly enough they’re exciting about it.

This doesn’t makes sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed formally announces that, after nearly a decade, they’re going to start vacuuming up a lot of that money they printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

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[Editor’s note: This letter was co-written with Tim Price, co-founder of the VT Price Value portfolio and editor of Price Value International.]

In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.

Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.

The investment had already made Newton a lot of money, he was up more than 100% in a very short time.

In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.

Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.

There was only one problem: the share price of the South Sea Company kept climbing.

All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.

The market then collapsed, and he lost virtually all his life savings.

The experience is said to have given rise to his bemused response:

“I can calculate the movement of stars, but not the madness of men.”

It’s now been roughly ten years since the Global Financial Crisis began.

In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.

The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.

Stocks are at all-time highs. Bonds ar at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.

Yet asset prices keep climbing.

Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently announced that he is closing his hedge fund.

Hendry is a famous critic of this monetary absurdity and consequent asset bubble.

“It wasn’t supposed to be like this.. markets are wrong,” Hendry told investors.

Of course, the market is under no obligation to be right. Ever.

Hendry’s view is accurate– nearly every objective metric shows that the market is incredibly overpriced.

Clint Eastwood’s infamous character Dirty Harry once remarked that a man needs to know his limitations. We think we know at least some of ours: we can’t time markets.

And the only thing we know with any certainty, as sure as night follows day, is that there are always corrections– both booms AND busts.

A decade’s worth of QE and ZIRP has fuelled a runaway train, and at some point there will be a correction.

Does it make sense to stand in front of the train? Or is it better to, as Isaac Newton did, leap aboard for some final thrills?

We prefer neither.

Instead we’re diversifying as pragmatically as we can, working diligently to find undervalued companies run by honest, talented managers.

It requires more hard work and patience than buying some overpriced index fund or whatever the popular investment du jour happens to be.

But nobody ever said this investing business was supposed to be easy.

Earlier this year my publishers invited me to write the foreword to their definitive edition of Reminiscences of a Stock Operator, a thinly disguised biography of the legendary trader Jesse Livermore.

Livermore was extraordinary. Born in 1877, Livermore ran away from home as a child and soon began trading stocks.

By the time he was 20, he had already amassed a fortune of $3 million, more than $75 million in today’s money.

Livermore sold short, i.e. bet that stock prices would fall, just prior to the 1907 crash, as well as the 1929 crash.

His bets were so lucrative that, going into the Great Depression, Livermore had a fortune of more than $100 million, or about $1.4 billion today.

But Livermore wasn’t just great at making money from overheated markets. He was also a master of losing money.

This book is widely and rightly regarded as an investment classic. It is also crammed with valuable observations about the practice of speculation and successful trading.

Among them, the importance of being patient and disciplined:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.”

Sitting. As in, doing nothing. As in… neither standing in front of the train, nor jumping on board.

Hedge fund managers like Hugh Hendry don’t have this option. They have to be invested. They have to report to their investors every quarter… and if they’re not making money, investors bail.

But as an individual, you are not accountable to anyone but yourself.

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity.

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On Tuesday afternoon, Jamie Dimon, the CEO of banking giant JP Morgan, let loose on Bitcoin.

He was speaking at the Barclays Financial Services conference, and when asked whether his bank employs any Bitcoin traders, he responded-

“If we had a trader who traded Bitcoin, I’d fire them in a second,” calling any trader who deals in the cryptocurrency “stupid”.

He went on to say that Bitcoin is a “fraud” and “won’t end well”.

Now, Dimon is a brilliant executive and banker. He knows his stuff. But… fraud? Really?

My dictionary defines fraud as “wrongful or criminal deception intended to result in financial or personal gain.”

That term seems to more aptly describe the banking industry that Dimon represents.

From Wells Fargo’s illegal opening of fake customer accounts to the constant manipulation of interest rates, exchange rates, and asset prices, outright FRAUD is standard practice among big banks.

Dimon also stated that Bitcoin is primarily appealing for criminals– “if you were a drug dealer, a murderer, stuff like that. . .”

Again, this is a totally baseless and confounding statement. 10+ million Bitcoin users are drawn to the cryptocurrency for a multitude of reasons.

For some, the fact that it is decentralized is a major factor. For others, it’s the low transaction cost.

Sending an international wire transfer through the banking system, for example, can take three days and cost $100. With Bitcoin it takes an hour and costs less than a dollar.

Sure, criminals might use Bitcoin. They also use Amazon.com gift cards and government bonds.

Ironically for Jamie Dimon, criminals even use JP Morgan bank accounts to launder their money, considering that the bank has paid BILLIONS in fines over the last few years for failing to detect their customers’ illegal activities.

To be fair, Dimon does raise a valid point about Bitcoin’s (and most major cryptocurrencies’) unbelievable price runups.

Bitcoin is up nearly 4x since the beginning of this year, and nearly 30x over the past four years.

That’s not supposed to happen. And it’s always precarious to buy or speculate in anything that’s at its all-time high.

Speculation is, after all, what’s driving most of this boom.

The original Bitcoin ‘White Paper’ from 2008 described the concept as a “peer-to-peer version of electronic cash” to “allow online payments to be sent directly from one party to another without going through a financial institution.”

In other words, Bitcoin was intended to be a medium of exchange for the digital world. Send money. Receive money. Buy things online. E-commerce.

That was a hell of an idea that makes a lot of sense.

But that’s not what Bitcoin is primarily being used for today.

Instead, Bitcoin is a source of speculation– people are buying something they don’t understand based purely on an expectation that the price will increase, at a time when the price is already near a record high.

Clearly such irrational behavior will create wild, violent, emotional price swings.

And that’s exactly what’s been going on over the last year. In fact Bitcoin’s price has fallen more than $1,000 (nearly 25%) just in the last few days.

Again, that’s not supposed to happen… not in an orderly market.

But this is not an orderly market.

There are too many mad speculators who think they’re geniuses for owning Bitcoin despite not knowing a hash from a block… yet they hold a extremists’ fanaticism that their prized asset will go up forever.

That’s ludicrous. Nothing goes up (or down) in a straight line. There will always be booms and busts. And the bigger the boom, the bigger the bust.

The key problem with the Bitcoin price is that it’s so difficult to determine what’s fair value.

Most other assets– stocks, bonds, real estate, etc. can be valued by some objective means.

If I want to buy a 5,000 square foot property that cost $650,000 to build, I at least have some basis of comparison to determine how much I’d be willing to pay.

Similarly, whenever I buy a private company, my analysts and I pour over the financial statements to determine its net asset value and see how much free cashflow the business generates.

Based on this analysis, we can come up with a bid.

Even currencies have certain indicators to determine whether they’re undervalued or overvalued.

The Economist, for example, routinely publishes its Big Mac Index to compare the price of a McDonald’s Big Mac around the world, and hence provide an objective valuation for currencies.

This is just one trivial example; the point is that there are countless ways to analyze various assets.

Bitcoin lacks most of those fundamentals. There’s no Big Mac Index for Bitcoin, no balance sheet or free cash flow.

One fundamental that stands out is “market cap,” i.e. the value of all Bitcoin currently in circulation.

Right now it’s about $60 billion, with a user base of more than 10 million [though a ton of those people are speculators and not real ‘users’]

By comparison the Danish krone currently has a market cap (i.e. M2 money supply) of $205 billion, yet a population of only 6 million people.

Gold has a market cap of roughly $7 trillion, over 100x the size of Bitcoin. And while gold also has no balance sheet or cash flow, it is owned by governments and central banks all over the world.

Whether Dimon likes it or not, Bitcoin is the future.

Our modern monetary system is based on an anachronistic 19th century idea of awarding unelected central bankers totalitarian authority over the money supply.

And our ‘modern’ banking system is a 13th century idea backed by mid-20th century technology.

It’s pretty pathetic, really.

Bitcoin, despite its flaws and mob of speculators, represents the first true advance in financial technology for the Digital Age.

This technology has endless possibilities to disrupt entrenched industries that have been screwing their customers for decades.

That fact alone makes it worth learning about.

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