Category: simonblack

[Editor’s note: Sovereign Man’s Chief Investment Strategist, Tim Staermose, is filling in for Simon today.]

One of the wealthiest countries in the world– the place where there are more millionaires per capita than anywhere else on the planet– now has a dirt cheap stock market.

It’s Singapore.

And right now, the total market value of all stocks traded in Singapore amounts to about 107% of the country’s GDP.

The historical range for this number over the past few decades has as high as 418% during the bubble years in the 1990s, and as low as 92% at the height of the 2008 financial crisis.

This ‘stock market to GDP’ ratio is a hugely important valuation.

Warren Buffett considers it “probably the best single measure of where valuations stand at any given moment.”

But it’s more than that. Because right now, the Singapore stock market barely trades above book value.

If you’re not familiar with the term, a company’s book value is akin to its ‘net worth’.

In other words, if you added up all of a company’s assets (cash, real estate, business inventory, etc.) and subtract its liabilities (debt, taxes owed, etc.), you end up with its book value.

It’s typical for companies listed on a stock exchange to trade for several times their book value.

Facebook’s stock sells for SEVEN times book value. Boeing’s is at THIRTEEN. McDonald’s is nearly SIXTEEN.

In Singapore, it’s ONE. This makes Singaporean stocks a much greater bargain than those in the West.

As an example, the iShares MSCI Singapore ETF (EWS on the New York Stock Exchange) is an ETF that tracks the Singapore stock market.

It has book value of $10.59 but opened this morning at $10.53; so it’s actually selling for LESS than its book value.

Plus it pays a dividend amounting to 4.4%.

Now, these compelling figures apply to the entire Singapore market. But if you start cherry-picking individual companies, it’s possible to find even better deals.

There are companies in Singapore now selling for well below book value, and paying dividend yields as high as 10%.

And if stocks are too risky for you, bonds issued by the Singapore government (which has ZERO net debt) yield 2.75%.

That’s pretty spectacular compared to bankrupt western governments (especially in Europe and Japan) which have negative rates.

Compared to Western markets, Singapore is a fantastic opportunity right now… especially if you have US dollars to spend. The Singapore dollar is near a multi-year low, so this is an excellent time to get in.

Sure, both the stock market and the currency may stay cheap for a while. They might even get cheaper.

But given these low valuations, you’d be buying with a significant margin of safety and much of the downside risk already covered.

In exchange, you have an opportunity to make significant profits in a highly advanced economy.

If the company share prices increase from these lows, you’ll make money. If the currency appreciates, you’ll make even more money.

And while you wait, you’ll receive a solid dividend yield that puts regular cashflow in your pocket.

This is definitely an opportunity worth considering.

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“Prosperity is like a Jenga tower. Take one piece out and the whole thing can fall.”

That’s a direct quote from John Williams, the President of the San Francisco Federal Reserve Bank in a speech he gave a few weeks ago.

He could have just as easily been talking about propaganda. The Fed, the White House, Wall Street, the media have a vested interest in peddling a certain narrative about the economy.

The narrative goes something like this: “Everything’s awesome. Stop asking questions”.

But if you look at their own data, the numbers tell a different story.

My team and I were recently studying US manufacturing indices, something that has traditionally been a strong indicator of recession.

This is data collected by the Federal Reserve; they survey manufacturing businesses and ask if factory orders are growing, shrinking, or relatively unchanged.

You’d think that based on this “everything is awesome” narrative that all the numbers would be growing.

And yet, much of the data show that manufacturing is shrinking. Or to be even more clear, that the US is in a manufacturing recession.

In Texas, for example, just 4% of businesses report that they are growing. 38% are shrinking.

The Philadelphia Fed’s Manufacturing Index has been in recession since September of last year.

The San Francisco Fed’s Total Factor Productivity is also reporting negative growth.

The New York Fed’s Empire State Manufacturing Index was at minus 16.6 for February. In fact, the last time the index was below -15 was in October 2008, ten months into the Great Recession.

The numbers are all pretty clear: there’s an obvious industrial and manufacturing downturn.

But that shouldn’t matter because Fox News, CNN, CNBC, and the White House tell us that consumer spending drives the US economy; industrial production is irrelevant.

They run headlines like “RETAIL SALES RISE MORE THAN EXPECTED” as part of the good news narrative.

This sounds mysteriously like “FEWER PEOPLE KILLED BY POLICE THAN EXPECTED” or “FEWER AIRLINES DECLARE BANKRUPTCY THAN EXPECTED”.

But the reality is that prosperity isn’t a Jenga puzzle. It’s quite simple. You have to produce more than you consume.

Strangely, though, the financial establishment cheers when consumption is up. And they totally ignore the data when production is down.

This is the exact opposite of prosperity.

And no surprise, if you look at the long-term data you’ll see that a manufacturing downturn (i.e. less production) almost invariably precedes a recession.

There were large downturns in manufacturing and industrial production in 2008, 2001, 1990, 1980-81, 1974, 1970… and every other recession since the Great Depression.

More importantly, out of the 17 recessions over the last century, the longest period between them was about 10 years.

The average time between recessions at just about 68 months.

Bottom line– the economy is due for a recession. And the indicators suggest that one may already be in the works.

The bigger challenge is that both the Federal Reserve and the Federal Government are out of ammo.

The US government spent trillions fighting the last recession back in 2008.

But back then the US government debt level was “only” $9.5 trillion, so they could theoretically afford the bailouts.

Today government debt exceeds $19 trillion, well in excess of 100% of GDP. They don’t have the ability to bail anyone out, including themselves.

The Fed doesn’t have any room either. On average, the Fed cuts interest rates by 3.5% in a recession. And the smallest interest rate cut in any recession during the last 60 years was 2%.

Today, interest rates are at 0.25%… next to nothing. They’ve been at near-zero levels since the last recession.

That means that even if the next (i.e. current) recession is extremely mild and the Fed cuts by only 2%, interest rates are practically guaranteed to go below zero.

And from there, it’s a very short road to capital controls.

Capital controls are a policy tool used by desperate governments to keep money trapped in a failing financial system.

Think about it—when rates turn negative, who in his/her right mind would keep money in a savings account that’s going to charge YOU interest for the privilege of letting a banker gamble your funds away on the latest investment fad?

A rational person would close his/her account. Or at least maintain a minimal balance and hold cash.

But if too many people take their money out of the banks, then the entire system collapses.

And governments have shown they will do whatever it takes to prevent this from happening… even if it means restricting what you can/cannot do with your own savings.

We’re already seeing bank withdrawal restrictions in Europe, as well as loud calls to ban cash on both sides of the Atlantic.

These things are happening. And with the recession data in particular, we’re not talking about “what if”. We’re talking about “what is”.

Even if all the data is wrong and there’s never another recession again until the end of time, you won’t be worse off for having a Plan B that protects your family, your savings, and your livelihood from such obvious risks.

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Maybe it’s greed. Or fear. Or blatant irrationality. But there’s something inside human nature that makes us think unsustainable situations can last forever.

One of those has been the meteoric rise of the US dollar, particularly over the last year. The dollar became king once again in 2015, towering over oil prices, gold prices, and just about every other currency on the planet.

The South African rand, the Colombian peso, the Canadian dollar, the Australian dollar, the Singapore dollar, the euro, the pound. Each of these has reached a multi-year, multi-decade, or even all-time low against the US dollar within the last several months.

This, clearly, is not sustainable.

As I’ve written several times in this letter, the dollar has become the most overvalued currency in the world.

I gave an example last summer of a round-the-world airline ticket, which when priced in US dollars cost about $14,164.60.

The exact same ticket, when priced in South African rand was 81,395 rand, which back then was just barely over $6,000.

It’s such an amazing difference—the exact same ticket costs over twice as much when priced in US dollars… an obvious sign that the dollar is overvalued.

I also noticed this as I traveled where countries like Australia, Canada, Singapore, and the UK were suddenly “cheap”.

None of this made any sense.

It’s completely absurd that the currency issued by the greatest debtor to have ever existed in the history of the world would enjoy such unsustainably false strength.

For anyone with a global view, however, this has been an amazing opportunity to buy high quality foreign assets at a steep discount.

We’ve talked about places like Colombia for years, where beautiful properties can be picked up for far less than the cost of construction.

With the US dollar’s dramatic overvaluation against the Colombian peso, these properties are even cheaper.

We’re seeing similar phenomenon all over the world in stocks, property, and private businesses.

But looking at the data, it appears that this dollar bubble may have started to burst, or at least peaked, in January. I’ve noticed four clear signs that indicate this.

Over the last 60 days, most currencies around the world, from the Chilean peso to the Singapore dollar, to the Australian dollar have surged against the US dollar.

Oil prices are up, and gold is having its best year since 1980.

Emerging markets, which have been in the dumps for more than a year, have roared back; the MSCI Emerging Market Index is up roughly 15% since January.

No one has a crystal ball, and it’s certainly possible that there will be another surge back in to the US dollar for a short time.

But this recent dollar weakness is a clear reminder that what goes up must come down.

Don’t be too concerned if you missed the top. There’s still an incredible amount of opportunity out there to buy cheap, high quality foreign assets.

I just acquired a business in Australia in a deal that took way too long to complete; over the last few months the Australian dollar climbed from 70 cents to 75 cents.

This cost me an extra $300,000.

But even at 75 cents, the business was still a huge bargain in US dollar terms; plus it’s still well-below the long-term average for the Australian dollar.

(I’m still quite optimistic about other opportunities in Australia.)

It’s the same all over the world; currencies everywhere are starting to appreciate, particularly in rapidly developing countries.

Don’t miss it this time. There’s still a tremendous opportunity to make money.

Even with a smaller amount of savings, you can use this dollar bubble to your advantage by investing in corners of the world where there’s pockets of extraordinary value.

More to follow.

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[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

“Simple but not easy”
– The title of Richard Oldfield’s book about value investing.

It has a young, highly educated population. 60% of its people are under the age of 35. It has a literacy rate of over 85%. Almost a quarter of a million new engineers graduate from its universities every year. And its stock market trades on a price/earnings multiple of just 5.5 times, with a dividend yield of 13%. Welcome to Iran.

Is this one of the investment world’s big opportunities, asks Merryn Somerset-Webb in her FT column this weekend? It very well might be. The question for foreign investors is whether those attractive valuations offer sufficient compensation for the clear geo-political and resource-related risks that come with investing today in the Middle East. Nobody knows the answer to that question. But purely from a valuation perspective, Iran certainly looks interesting, albeit with the inevitable caveats that come with frontier market investing.

And not just frontier investing. It is a characteristic of true value investing that any manager genuinely practising it encounters scepticism or outright hostility on the basis of what often appears to be either a contrarian streak or outright madness. Although there is a growing body of statistical evidence that value investing is one of the most successful long term investment strategies (last week we cited James O’Shaughnessy’s 52 year study from the US stock market, which saw a $10,000 portfolio of 50 stocks with the lowest price/book ratios, for example, compound to over $22 million), it remains on the fringes of acceptable investment practice, because it’s emotionally difficult to pursue – both for investment manager and investing client.

Richard Oldfield, presenting at the Ben Graham Centre for Value Investing at the Ivey Business School in January, mentions three attributes often associated with value as an investment strategy: patience; a tolerance for pain; and a margin of safety. Any value investor who remembers the first dotcom boom will relate to the first and second attributes. Any value investor who held the course into 2000 and subsequent years will appreciate the third. True value investing ensures that you never consciously overpay for high quality assets – but you may need to wait for the market to wake up to the inherent value you’ve found.

There’s certainly no need to rush into bonds. The rolling black comedy that is the bond market lurches ever further into the mire of absurdity. Italy, for example, has the second highest public debt burden in Europe after Greece, and yet last week its three year bonds joined those of other countries trading at a negative yield. Investors are paying to own debt issued by an insolvent government. In what universe does that even make sense? $5.5 trillion of debt now offers the prospect of a guaranteed loss to those “investors” electing to hold it to maturity. Last week Mario Draghi took the ECB and euro zone interest rates even further into the Twilight Zone. Will negative interest rates improve prospects for the banking sector or trigger economic growth? We think the answer is definitively No. But they do reinforce the case for bonds now being an uninvestible asset class.

Which leaves equities as the logical ‘default’ option for investors looking for either income or growth. But the problem of valuation then arises. Which equities offer the likelihood of meaningful capital growth without their valuations having already been dangerously distorted by over-generous monetary stimulus?

Stock markets generally seem to have recovered their poise. Strategist Jonathan Allum of SMBC Nikko writes,

“I have no desire to tempt fate but it does seem increasingly clear to me that in the first six weeks of the year, global financial markets lost their collective marbles, jumping nervously at shadows that were largely of their own creation. Since the middle of February (the MSCI Global Index bottomed on the 11th February), the markets have, a little shamefacedly, been pulling themselves together and both equities and commodities have rallied rather impressively.”

That applies, perhaps even more strongly, to emerging markets too. MoneyWeek points out that both pricing in, and sentiment towards, emerging markets may also have turned. They cite Robert Arnott and Christopher Brightman of Research Affiliates who suggest that emerging markets “appear to have bottomed”. The MSCI Emerging Market index has risen by roughly 15% from its post-crisis low in January.

Here’s a developing market we think is more equal than most. It has a population of 94 million, 50% of whom are under the age of 30. It enjoys a 93% literacy rate. It has average wage costs less than a half those of China, and as a result is the most popular destination for foreign direct investment in Asia. It will benefit from the implementation of a free trade agreement with the EU this year. A Trans-Pacific trade partnership was signed in October 2015, which gives this country preferential access to the US and Japan. These markets already account for 29% of this country’s exports and it already runs trade surpluses with both of them. Foreign ownership limits were lifted in this stock market in June 2015. This is currently a ‘frontier’ market but MSCI is widely expected to redesignate it an ‘emerging’ market within the next 12 to 18 months. That redesignation, as and when it comes, will open the floodgates to billions in foreign investment capital.

And it’s an inexpensive market. Over 50% of the market trades on a price/earnings ratio of less than 10 times. Over 50% of this market trades on a price/book ratio of less than 1. Welcome to Vietnam.

You can perhaps see why our global value fund has a 15% exposure to this market. But it’s not on an indexed basis. Much of it is with a manager whose existing value fund has delivered returns of 297% over 4 years while the index has returned 16% over the same period. (The balance is with a top-performing pan-Asian value fund which is now closed to new investors.)

All of which suggests, to us, that there is genuine value out there, but much of it is concentrated in pots of gold hidden along “the road less travelled”. As Warren Buffett said, it is difficult to buy what is popular and do well. As the ad says: Think Different.

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I’m looking for motivated, ambitious, talented people who know deep down that they can do amazing things in this world if they have the right mentorship.

If that sounds like you, you need to know about our annual Liberty and Entrepreneurship camps.

Each summer we gather top business and financial mentors, along with a hand-picked group of talented individuals who aspire to change the world, for five life-changing days at a lovely lakeside resort in Europe.

Our instructors are like-minded, seasoned entrepreneurs who share the most valuable lessons they’ve learned in becoming truly free, and successful.

This isn’t business school theory, or financial lessons that only work inside a textbook. We talk about how it really works in life, and in business.

Many of our students have gone on to start successful businesses based on the inspiration, actionable lessons, and practical advice they took away from the camp.

But it’s not just about business. We’ve had artists and activists. Investors and engineers. Doctors. Dentists. Attorneys. Teachers. And unemployed dreamers.

It’s a hell of a group.

In fact, in addition to the incredible mentors, each summer we have students representing dozens of countries– places like Mongolia, Zimbabwe, Bulgaria, Argentina, Australia, Bangladesh, and Japan.

It’s a chance to build an incredible network with like-minded people from all over the world. Many of our alumni have even gone on to become business partners.

Our Liberty and Entrepreneurship is a non-profit program. I sponsor the entire event through our foundation, Sovereign Academy.

We cover all the costs for our students while they at the camp, including food, accommodation (it’s a wonderful resort), and transport around Lithuania.

The only financial cost to the students is their flights to/from Lithuania.

I say ‘financial cost’ because the greater cost I expect from students is their commitment to follow through.

Make no mistake, this is an investment. I do this to invest in people. And I choose carefully because I don’t want to waste that investment on someone that isn’t going to build on what they learn.

Application Process

Here’s the bottom line: we can only accept 50 people. And each year we receive so many applications that our Liberty & Entrepreneurship Camp is starting to rival Harvard in its acceptance rate.

We require each applicant to submit a video. Just like life and business, there are no instructions.

All I can tell you is that I watch every application video personally. It’s one of the most important things I do each year.

You can read more about the camp and application process by clicking here.

Don’t delay. The application deadline is March 31st.

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The 12.5 hours spent crossing the Pacific on Qantas flight 27 feels like going through a wormhole.

The flight departs Sydney, Australia at 12:50pm and arrives to Santiago, Chile the same day at 11:20am. In other words, the plane lands 90 minutes before it departs.

When I landed yesterday, the captain came on the P.A. and said, “Ladies and Gentlemen, I have good news; if you enjoyed Wednesday March 9th, it’s still Wednesday March 9th!”

It really does feel like going back in time.

This feeling was only reinforced when I whipped out my phone and saw that German bank Berlin Hyp had just issued 500 million euros worth of debt… at negative interest.

I wondered if I really did go through a time warp, because this is exactly the same madness we saw ten years ago during the housing bubble and the subsequent financial crisis.

To explain the deal, Berlin Hyp issued bonds that yield negative 0.162% and pay no coupon.

This means that if you buy €1,000 worth of bonds, you will receive €998.38 when they mature in three years.

Granted this is a fairly small loss, but it is still a loss. And a guaranteed one.

This is supposed to be an investment… an investment, by-the-way, with a bank that almost went under in the last financial crisis.

It took a €500 billion bail-out by the German government to save its banking system.

Eight years later, people are buying this “investment” that guarantees that they will lose money.

The bank is now effectively being paid to borrow money.

We saw the consequences of this back in 2008.

During the housing bubble, banking lending standards got completely out of control to the point that they were paying people to borrow money.

At the height of the housing bubble, you could not only get a no-money down loan, but many banks would actually finance 105% of the home’s purchase price.

They were effectively making sure that not only did you not have to invest a penny of your own money, but that you had a little bit of extra cash in your pocket after you bought the house.

Paying people to borrow money is just crazy, whether it’s homebuyers, bankrupt governments, or banks.

Global insurance giant Swiss Re calculated that roughly 20% of all government bonds worldwide now have negative yields. And over 35% of Eurozone government bonds have negative yields.

(They would know—along with pension funds and banks, insurance companies are some of the largest buyers of bonds.)

With this deal, Berlin Hyp becomes the first non-state owned company to issue euro-denominated debt at a negative yield.

They won’t be the last.

We’re repeating the same crazy thing that nearly brought down the system back in 2008—paying people to borrow money.

The primary difference is that, this time around, the bubble is much bigger.

Back then, the subprime bubble was “only” $1.3 trillion.

Today, conservative estimates show that there’s over $7 trillion in negative rate bonds.

What could possibly go wrong?

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Human beings have come up with some crazy ideas for money and finance over the years.

Conch shells. Beads. Animal skins. Salt. Rice. All of these were used as a form of money at one time or another.

But the strangest by far has got to be the Rai Stones of Yap Island.

Yap is a tiny speck in the western Pacific, a few hours by plane from the Philippines and Guam.

Long ago, islanders began using gigantic limestone discs called Rai Stones as a form of money

Rai Stones were large– the size of a mid-sized car– so they were seldom moved.

And they could be anywhere… at the bottom of the ocean, in the middle of the jungle.

So rather than roll your Rai Stones down to a local bank, or pile them up in the back yard, everyone on the island just sort of knew who owned which Rai Stones.

And whenever there was a transaction, word got around that ownership of a particular Rai Stone had changed hands.

It was crude, but it worked.

This is the hallmark of any well-functioning financial system: the ability to properly account for private property ownership.

Think about it– when you buy a house, there’s a deed that’s recorded in the local clerk’s office. When you buy a car, a certificate of title is issued.

This makes the chain of ownership very clear and unmistakable. You know with 100% certainty that whatever you buy is exclusively yours.

But strangely enough, this isn’t the way it works when you buy stocks in the Land of the Free.

There’s a concept in the US financial system called “Street Name Registration”.

This means that when you open a brokerage account and buy shares of Apple, your broker registers those shares in THEIR name, not yours.

In other words, your broker officially owns the shares.

On their internal books, the broker maintains a liability that they owe you the shares. But the Apple stock isn’t your asset. It’s the broker’s.

The reason they do this is convenience. It’s easier for them to buy and sell stock on your behalf if the shares are held in their name.

This strikes me as totally ludicrous.

Imagine if when you buy a new car the dealer registered the title in HIS name instead of yours; or if your home was held in the name of your real estate broker.

This makes no sense. Financial securities should work like any other asset: when you buy it, it’s yours. Simple.

That’s how it works here in Australia, where they have a system of direct ownership; it’s called the Clearing House Electronic Sub-register System, or CHESS.

That’s a fancy way of saying that, in Australia, when you buy or sell stocks, ownership of the shares passes to you directly.

The database is maintained electronically, and brokers have no control over these records.

This ensures there is no feckless intermediary standing between you and your assets.

It’s such an easy concept– to actually own the stocks that you buy. But that’s not the way the financial system is set up in the US.

The even bigger issue is that Street Name Registration in the US leads to serious problems whenever there’s financial turmoil.

Banks and brokers have a bad habit of ‘borrowing’ from their customers. They call it ‘hypothecation’ and ‘re-hypothecation’.

Essentially, brokers routinely take the shares that they’ve purchased on your behalf (and registered in their own name) and pledge them as collateral in other deals over and over again to boost their profits.

Assuming everything else goes OK, problems seldom arise.

But as soon as the financial system hits a speed bump (like it did in 2008), it can get very bloody for the original investor who put up the money.

Bottom line, you might not own what you think you own.

And given all the serious challenges facing the financial system, it makes sense to pay attention to how your investments are registered.

It may be worth checking with your broker to see if you can do ‘direct name registration’, whereby they re-title the investments in your own name.

This would help ensure that if your broker ever ran into trouble down the road, you would still have control of your assets.

You might also want to consider investing in better jurisdictions like Australia where you can have a lot more certainty over the assets that you own.

Besides, there are plenty of great investment opportunities down here.

The Australian dollar is at a multi-year low against the absurdly overvalued US dollar. So assets are already quite cheap.

Besides, the commodity recession has pushed valuations so low that many Australian companies are trading for less than the amount of cash they have in the bank.

This has been a winning investment strategy for us (and premium members), with returns in excess of 30%. More on this another time.

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[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

In his book What works on Wall Street, James O’Shaughnessy analysed a variety of strategies that delivered market-beating returns in the US stock market.

Value investing proved to be one of the most outstanding.

O’Shaughnessy took a variety of metrics – the price/sales ratio (PSR), price/cashflow, price/book and price/earnings – and then collated the 50 stocks from the broad US market which displayed the highest, and lowest, for each metric. He then annually reweighted his two lists, and ran this portfolio of ‘growth’ and ‘value’ over a period of 52 years, ending in December 2003 (shortly before the third edition of his book was published in 2005).

The results of O’Shaughnessy’s experiment are shown below.

(Source: ‘What works on Wall Street’ by James O’Shaughnessy)

Your hypothetical $10,000, starting 52 years ago, invested in the 50 stocks with the highest price/sales ratio (PSR) compounded up to $19,118. That may seem like a pretty good return, until you see what you could have won, by owning the 50 stocks with the lowest price/sales ratio from the same market. Your hypothetical $10,000 ended up with a terminal value of $22,012,919. Did someone say ‘value beats growth over the longer term’? Similar outperformance comes whether you’re assessing stocks by price/cashflow, price/book, or price/earnings. In each case, over the longer term, ‘value’ doesn’t just beat ‘growth’. It wipes the floor with it.

Perhaps the 52-year period in question was a statistical anomaly. But we doubt it. More likely, the statistical aberration is the recent outperformance of bonds versus stocks, during an environment in which the supply of bonds has never been higher in recorded human history.

The perversity of the O’Shaughnessy study is that it flies in the face of the idea that markets are rational or efficient. Logically, by taking more risk – in paying up to own ‘growth’ stocks at higher multiples than the market average – one should expect to achieve higher returns. But O’Shaughnessy shows that this didn’t happen.

Which highlights the attractiveness of ‘value’ as an investment strategy at a time when many equity markets have become, in our view, unsustainably expensive as a result of monetary stimulus and the success – so far – of ‘Smart Beta’ and ‘growth’ strategies. ‘Value’ investing typically offers investors what Benjamin Graham called a “margin of safety”, on the basis that high quality companies are being bought at a discount to their inherent value. ‘Growth’ stocks, on the other hand, are clearly being bought at a premium.

The renowned ‘value’ investor Seth Klarman once said,

“The hard part is discipline, patience and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.”

With bonds now being essentially an uninvestable asset class, now is the time to swing. But only for the right kind of stocks.

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Over 4,000 years ago during Sargon the Great’s reign of the Akkadian Empire, it took 8 units of silver to buy one unit of gold.

This was a time long before coins. It would be thousands of years before the Lydians in modern day Turkey would invent gold coins as a form of money.

Back in the Akkadian Empire, gold and silver were still used as a medium of exchange.

But the prices of goods and services were based on the weight of metal, and typically denominated in a unit called a ‘shekel’, about 8.33 grams.

For example, you could have bought 100 quarts of grain in ancient Mesopotamia for about 2 shekels of silver, a weight close to half an ounce in our modern units.

Both gold and silver were used in trade. And at the time the ‘exchange rate’ between the two metals was fixed at 8:1.

Throughout ancient times, the gold/silver ratio kept pretty close to that figure.

During the time of Hamurabbi in ancient Babylon, the ratio was roughly 6:1.

In ancient Egypt, it varied wildly, from 13:1 all the way to 2:1.

In Rome, around 12:1 (though Roman emperors routinely manipulated the ratio to suit their needs).

In the United States, the ratio between silver and gold was fixed at 15:1 in 1792. And throughout the 20th century it averaged about 50:1.

But given that gold is still traditionally seen as a safe haven, the ratio tends to rise dramatically in times of crisis, panic, and economic slowdown.

Just prior to World War II as Hitler rolled into Poland, the gold/silver ratio hit 98:1.

In January 1991 as the first Gulf War kicked off, the ratio once again reached 100:1, twice its normal level.

In nearly every single major recession and panic of the last century, there was a sharp rise in the gold/silver ratio.

The crash of 1987. The Dot-Com bust in the late 1990s. The 2008 financial crisis.

These panics invariably led to a gold/silver ratio in the 70s or higher.

In 2008, in fact, the gold/silver ratio surged from below 50 to a high of roughly 84 in just two months.

We’re seeing another major increase once again. Right now as I write this, the gold/silver ratio is 81.7, nearly as high as the peak of the 2008 financial crisis.

This isn’t normal.

In modern history, the gold/silver ratio has only been this high three other times, all periods of extreme turmoil—the 2008 crisis, Gulf War, and World War II.

This suggests that something is seriously wrong. Or at least that people perceive something is seriously wrong.

There are so many macroeconomic and financial indicators suggesting that a recession is looming, if not an all-out crisis.

In the US, manufacturing data show that the country is already in recession (more on this soon).

Default rates are rising; corporate defaults in the US are actually higher now than when Lehman Brothers went bankrupt back in 2008.

These defaults have put a ton of pressure on banks, whose stock prices are tanking worldwide as they scramble to reinforce their balance sheets against losses.

I just had a meeting with a commercial banker here in Sydney who told me that Australian regulators are forcing the bank to increase its already plentiful capital reserves by over 40% within the next several months.

This is an astonishing (and almost impossible) order.

The regulators wouldn’t be doing that if they weren’t getting ready for a major storm. So even the financial establishment is planning for the worst.

Good times never last forever, especially with governments and central banks engineering artificial prosperity by going into debt and printing money.

These tactics destroy a financial system. And the cracks are visibly expanding.

So while the gold/silver ratio isn’t any kind of smoking gun, it is an obvious symptom alongside many, many others.

Now, the ratio may certainly go even higher in the event of a major banking or financial crisis. We may see it touch 100 again.

But it is reasonable to expect that someday the gold/silver ratio will eventually fall to more ‘normal’ levels.

In other words, today you can trade 1 ounce of gold for 80 ounces of silver.

But perhaps, say, over the next two years the gold/silver ratio returns to a more historic norm of 55. (Remember, it was as low as 30 in 2011)

This means that in the future you’ll be able to trade the 80 ounces of silver you acquired today for 1.45 ounces of gold.

The final result is that, in gold terms, you earn a 45% “profit”. Essentially you end up with 45% more gold than you started with today.

So bottom line, if you’re a speculator in precious metals, now may be a good time to consider trading in some gold for silver.

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Every time I come to Viet Nam, I’m always astounded at the incredible growth and opportunity here.

This time around I’m reviewing a number of suppliers to buy raw materials from for a new business we’re acquiring in Australia.

Just a few years ago those supply contracts would have easily been awarded to companies in mainland China.

But today Viet Nam is beating the pants off the Chinese.

In large part due to China’s long-term growth over the past 10+ years, wages and input costs in mainland China have increased dramatically.

China might still represent the best value for the money when manufacturing high-end electronics like iPhones.

But due to the rise in input costs, China can’t compete when making socks or producing fabric. They’re no longer cost competitive.

That business is going to Viet Nam, one of the cheapest places in Asia to produce.

In many respects Viet Nam is the ‘new’ China, or at least where China was a few decades ago.

There are 90 million people in this country. Most of them are very young– Viet Nam boasts one of the youngest demographics in the region.

(Conversely, China’s demographics are precariously upside down thanks to decades of its absurd One Chile Policy. This is going to be a HUGE problem down the road.)

Wages are much lower in Viet Nam, and there’s an enormous amount of manufacturing capacity.

As a result the country’s exports have grown dramatically, by as much as 3,000% in the last two decades; much of that growth is from the last few years.

This economic growth is having a visible impact on the country.

Every time I come here it’s noticeably better– more advanced, more developed, more modern, and more free.

And for expats in particular, the country is amazing.

Rent costs nothing. Food costs nothing. Domestic help costs nothing. Mobile and broadband costs nothing.

The lifestyle you can achieve here on a very modest budget is incredible.

And it’s a lot of fun here. Ho Chi Minh and Hanoi are both wonderful, thriving cities, along with Nha Trang, Hoi An, and Da Nang.

Plus Viet Nam’s coastline is one of the most exquisite on Earth. Definitely put it on your bucket list.

Viet Nam may become one of the top expat destinations in the world as more people are drawn to the high quality, inexpensive lifestyle in a country with substantial opportunity.

Last year Viet Nam’s government continued its trend of loosening a number of restrictions.

And in addition to making it easier for locals to work hard, produce, and thrive, they even made it much easier for foreigners to visit, stay, invest, acquire shares and property, etc.

(Incidentally, property rental yields in Viet Nam tend to be high, and companies listed on the stock exchange sell for big discounts to their net tangible assets.)

It’s incredible that those opportunities exist today.

It wasn’t that long ago when Viet Nam was one of the most closed, despotic, impoverished countries in the world.

Things finally started to change in the late 1980s when the Communist government opened up and encouraged private business ownership and free market incentives.

There’s still a long way to go.

Blatant corruption in government is rampant, almost comical. It’s still very much a jungle, both literally and figuratively.

But the trend is obvious.

Viet Nam has gone from being ‘the Cuba of Southeast Asia’ to a country with more opportunity, fewer restrictions, and one of the fastest growing middle classes in the world.

It just goes to show how powerful freedom can be: prosperity rises when a nation progresses from ‘unfree’ to more free.

(Sadly the opposite trend in freedom and prosperity is playing out in the West.)

Keep Vietnam on your radar, it’s definitely a trend you want to know about.

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