Category: simonblack

[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and manager of the Price Value International.]

After the fall of France in 1940, Great Britain, under Churchill, fought on against the Nazis, virtually alone. Although she would ultimately be joined by the overwhelming military and economic might of the United States, for a period she fought more or less friendless, with her back to the wall. In the process of prosecuting the war, quite apart from the human toll upon her military and citizenry, Great Britain bankrupted herself. Her polity and economy would be irrevocably changed in the pursuit of final victory.

What was her reward? Early attempts at joining the European Economic Community were rebuffed. In November 1962, General de Gaulle hosted the British Prime Minister Harold Macmillan at Rambouillet, south of Paris. The French leader was unyielding, and the French ‘Non’ to British entry to the EEC came as a bitter blow. Andrew Marr in his ‘History of Modern Britain’ writes that

“At one point, Macmillan broke down in tears of frustration at the Frenchman’s intransigence, leading de Gaulle to report cruelly to his cabinet later: ‘This poor man, to whom I had nothing to give, seemed so sad, so beaten that I wanted to put my hand on his shoulder and say to him, as in the Edith Piaf song, “Ne pleurez pas, milord.”

Marr tells another interesting story about the birth of the EU, some seven years before the Rambouillet humiliation. Representatives of ‘the Six’ founding EU nations – France, West Germany, Italy, Luxembourg, Belgium and the Netherlands – met at a small coastal town in Sicily called Messina. Britain declined to send a minister but instead dispatched a middle-ranking civil servant, Russell Bretherton. At the end of the negotiations, so the story goes, Bretherton stood up and told the assembled politicians:

“Gentlemen, you are trying to negotiate something you will never be able to negotiate.But if negotiated, it will not be ratified. And if ratified, it will not work.”

Inaudible though it may be to the tin ear of Remoaners, the EU does not appear to be working today. Its immigration policy is a murderous disgrace; its banking system is teetering on insolvency; its economy is stagnating, with terrible consequences for the young and unemployed at its periphery; full steam ahead, cry its leaders, as impervious
to legitimate criticism as the RMS Titanic was to icebergs.

Now we see the full dynamism of this trading behemoth at work, as the Walloons – an ancient race of space monkeys that featured in several early episodes of ‘Doctor Who’– have done their best to scupper a trade deal between Canada and the 28 separate member states of the European “Union”. If this is an integrated economic bloc, we’d hate to see a dysfunctional bureaucracy of squabbling tiny-minded cretins.

Better off out would seem to be the order of the day. And still EU “leaders” like Donald Tusk nurse fond hopes that Britain might yet reverse its decision to leave, and elect to stay in the burning building instead.

Some hope. Brexit has conclusively delivered a hammer-blow to European competitiveness by facilitating a 16% devaluation of sterling – a currency depreciation that virtually every government on the planet has been trying to pull off but which the European “Union” is structurally incapable of delivering.

One country that has managed to conclude a trade deal with the European “Union” is Vietnam – a country of 94 million people, many of them young, and most well educated.

In a 2012 OECD assessment of maths, reading and science skills among 15 year-olds, Vietnam scored more highly than France, the UK, and the US. Vietnam is rapidly industrialising and becoming the destination for FDI across Asia. It is also highly competitive – its average monthly wages are one third those in China.

Yet its stock market is cheap.

The charts below show the p/e ratios for the stock markets of Vietnam, the United States, the UK and China.

Valuation opportunities: p/e ratio distributions for Vietnam, US, UK and China

Fully half of the Vietnamese stock market trades on a p/e ratio of less than 10.If only there were some way of accessing this value. Happily, there soon will be. SSI Asset Management already manages the Vietnam Value and Income Portfolio, a specialised investment fund that is the single largest holding in our global value fund and that has delivered 33.8% returns in GBP since its inception in December 2015.

SSI will shortly be launching the Vietnam Value Income and Growth Fund in a UCITS format. The anticipated p/e of the fund is 10x, return on equity 20%, and expected dividend yield 5.1%.

Or you could invest in the euro zone: a failing economic and political bloc that is arguably already in a Depression.

Pay money. Take choice.

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I’ll start with an admission that I don’t do vacations very well. Or frequently.

Over the past ten years I’ve probably only taken a week or two off in total.

A big part of that is a deep character flaw of me being a workaholic… but that’s a natural extension of genuinely loving all the exciting business ventures and wonderful people that I’m involved with each day.

I do recognize, however, that taking a break is healthy, and I’m trying to get better at it.

The last few weeks in particular have been a blur.

My fellow executives at our agriculture business and I have been busy negotiating credit facilities with some of the largest financial institutions in the world, all while the company has been planting hundreds and hundreds of acres at a record pace.

My team at Sovereign Man and I have also just concluded months of discussions about a unique investment and citizenship deal in a foreign country with its prime minister.

And I just received approval for my second banking license after working on this for most of the past year.

So it was definitely time for a break… and for me that means South Africa.

South Africa is a wonderful country to visit, especially out here in the Western Cape.

This may be the only place in the world where in the span of a single afternoon you can see penguins, whales, and great white sharks on the coast, followed by baboons, elephants, lions, and rhinos just an hour inland.

It’s really special.

The weather is also fantastic. Like central Chile, the climate here in Cape Town is classified as “Mediterranean”, which means it never gets too hot or too cold.

The food is great, the people are extremely welcoming. And with the currency (South African Rand, or ZAR) being so cheap, this place is even more spectacular.

I’ve been to South Africa probably a dozen times or more, and I remember coming here years ago when the rand was very strong, around 6 to the dollar.

Back then South Africa was very expensive.

Now it’s the opposite. The US dollar is overvalued, and the rand is extremely cheap.

When I was here last year, I wrote to you when the rand had hit an all-time low against the US dollar, describing just how cheap South Africa had become.

My rental car was just $8 per day. Going out to eat for a multi-course meal at some of the most luxurious restaurants in town, with wine, was barely $15 per person.

In economics there’s a concept called the Law of One Price, which suggests in general that things should more or less cost the same around the world.

The Economist magazine routinely publishes its Big Mac Index, comparing the prices of Big Macs around the world, from London to Tokyo to Sydney, after converting local prices to US dollars.

A Big Mac in South Africa, for example, costs 30 rand, or about $2.14, compared to an average Big Mac price in the US of $5.04.

In theory, the two prices should be more or less the same. Whenever they’re far apart, it suggests that a currency may be undervalued or overvalued.

South Africa’s currency has been massively undervalued. And anytime that happens, there are usually two ways it corrects.

First, an undervalued currency will get stronger.

That’s already happened. Last year when I wrote to you, the rand was at 16 per dollar. Now it’s strengthened to 14.

(Fewer rand per dollar means the rand is getting stronger)

The second thing that happens is that inflation kicks in, and local prices rise.

So instead of a Big Mac costing 30 rand, the price may rise to 40 or 50 rand.

That’s why it makes so much sense to buy inexpensive, high quality assets in an undervalued currency whenever they’re available.

Look at South African stocks as an example.

When I was here last December, the JSE All Shares Index was at roughly 48,000. Today it’s 51,300, an increase of 6.875%.

But given that the rand strengthened from 16 to 14, in US dollar terms the JSE All Shares Index is up 22.1%.

(By comparison, the S&P 500 index in the US is up just 5.9% in the same period.)

This is what happens when undervalued assets and currencies correct.

When the currency gets stronger, you make money. And if there’s local inflation and prices rise, the value of your asset increases… and you make money.

This opportunity doesn’t always exist… but it does for now, at least for US dollar investors.

The US dollar is at a multi-year, multi-decade, and even all-time high against a number of other currencies.

From the UK to Europe to Colombia to here in South Africa, there are places all over the world where the currencies are cheap.

The trick is finding high quality assets in those places which are also relative bargains– inexpensive real estate, undervalued businesses, discounted collectibles, etc.

This takes a little bit of patience and legwork, but the risk-adjusted returns can be phenomenal.

I suppose that’s why I’m combing through real estate listings right now instead of shark diving with my friends… so much for vacation.

(Our Chief Investment Strategist Tim Staermose is a master of this ethos, and his 4th Pillar investment newsletter has scored some big wins recommending deeply undervalued companies in deeply undervalued currencies.)

It’s possible that the US dollar will continue to stay strong for quite some time, so this opportunity isn’t going away tomorrow.

But it definitely makes sense to think globally and look for opportunities to trade an overvalued currency for something that can make you a lot of money– deep-discount, high quality assets denominated in undervalued currencies.

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Below is a short email that my friend Sam posted this morning to his Facebook page about his surprisingly positive experience with the US healthcare system.

I thought it a fantastic read, and I wanted to pass it along to you:

I had to run to the emergency room today for what may be a neurological issue. Dizziness, staggering, loss of balance, that kind of thing.

I’m in San Diego, one of the most expensive cities in the world, and I have no insurance. I figured I was screwed.

But instead, the experience was unreal.

I got seen immediately. I didn’t even have time to sit down, they just whisked me into an examination room.

The doctor and nurse were ON IT, and they took their time with the exam and consultation.

The visit ultimately involved staying the whole day for observation, all kinds of tests, sedation and reversal, blood pressure check, a full blood panel work up (results tomorrow, yes TOMORROW keep your fingers crossed) and having both ears cleaned and flushed.

The bill was a mere $374.63.

Do I have some insane insurance plan? Nope.

Am I being super-subsidized by the rest of America? Nope.

Am I a privileged politician with a special “bosses only” healthcare plan? Don’t make me laugh.

It turns out that the care was for my dog, not for me. And we didn’t go to a ‘people’ hospital– I obviously took my dog to an animal hospital.

She and I are both biological machines, mammals made mostly of water (though she sheds more than I do).

The only other real difference is that the government is regulating the hell out of healthcare for people, while (relatively speaking), leaving healthcare for animals alone.

And that, my friends, is the reason Obamacare has flopped, and why your healthcare costs will keep going up.

It’s not greed. It’s not the drug companies. It’s not anything other than the application of government intervention in what should be a free market.

Simon again.

It’s not exactly controversial these days to suggest that the US healthcare system is in bad shape.

According to data collected by numerous independent agencies like the Institute of Medicine, Commonwealth Fund, and Kaiser Family Foundation, the US still ranks dead last among advanced economies in overall quality of its healthcare system.

In fact, the US healthcare system has the worst record in the number of deaths caused by mistakes or inefficient care.

And wait times in the US for urgent care and primary care visits rank lower than every other developed nation.

Americans pay at least 50% more for healthcare in terms of annual spending than people in other advanced nations, yet they receive less care as measured by the number of doctor visits.

Sure, it’s great that there are fewer uninsured people than ever before in the US, but this is a measure of QUANTITY, not a measure of QUALITY.

Undoubtedly the US is home to some of the finest medical professionals in the world.

But they’ve been buried under an expensive, over-regulated bureaucracy that continues to erode overall quality in the system.

A 2015 report from the National Academy of Sciences summed it up by stating, “For Americans, health care costs and expenditures are the highest in the world, yet health outcomes and care quality are below average by many measures.”

But instead of trying to understand WHY the system is so slow, bureaucratic, and expensive to begin with, politicians try to ‘fix’ it by creating more regulations.

It’s as if they believe they can legislate their way to a quality, efficient medical care system, just as they believe they can legislate their way to a better education system or economic prosperity.

This almost never works.

After all, the people who come up with these rules are notoriously unqualified and have rarely ever held a job outside of their giant government bureaucracy.

So despite what may be some very good intentions to fix the system, they invariably make things worse.

The end result is that your pet probably has access to more efficient healthcare than you do.

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On Friday afternoon, New York state Governor Andrew Cuomo signed a bill making it illegal to -advertise- your home for short-term rent on websites like Airbnb.

The law specifically targets New York City homeowners in apartment buildings who advertise their properties, or even just a spare room in their homes, to rent for less than 30 days at a time.

It’s important to note that New York already passed a law a few years ago making it illegal to rent your home out to short-term tenants.

This new law makes it illegal to ADVERTISE… which is basically pre-crime.

Now you don’t even need to commit the egregiously criminal act of renting out your home to a nightly traveler.

Simply informing the public that you’re thinking about it is enough to get slammed with a major fine.

Violations carry a penalty of up to $7,500, dramatically higher than New York’s penalty for reckless driving (up to $300) and even higher than the fine for driving while intoxicated (between $500 and $5,000).

I’m sure we can all sleep more soundly tonight knowing that the courageous politicians of New York are keeping the streets safe from nefarious criminal terrorists trying to earn a few extra bucks from their own private properties.

It’s ironic that New York City already has one of the highest hotel occupancy rates in the world, in excess of 90% in some parts of the city like Times Square.

(Which makes New York one of the only places in the world where a 2-star fleabag like the Comfort Inn can command rates between $249 and $429/night.)

So websites like Airbnb fill an obvious market need.

Last year alone, Airbnb generated $451 million for New York City property owners who rented their apartments or spare rooms to short-term travelers.

That’s 451 million reasons to continue allowing Airbnb to operate in the city.

Everyone wins. Hotels still have high occupancy. Property owners generate supplementary income. Travelers have a better experience in the city. And politicians get their tax slice of $451 million.

But now they’ve screwed up a perfectly good thing that was creating plenty of benefit.

Naturally, they’re citing ‘public safety’ as their primary justification. They can get away with anything if has to do with safety and security.

The text of the legislation states that they must “ensure that all buildings comply with fire, building and other safety codes relative to their class.”

Right. Because renting your apartment to a retired couple who flew into town to see Hamilton means that the entire building will burn down to the ground?

This is really some next level logic.

Driving home the political delusion, State Senator Liz Krueger released a statement in favor of the law, calling it

“a huge victory for regular New Yorkers over the interests of a thirty-billion dollar corporation.”

(Big Sister Krueger also encourages New Yorkers to rat each other out to the authorities should they find one of their neighbors violating the law.)

If this person actually had a clue about anything, she’d realize that Airbnb has NEVER generated a profit and has lost billions of dollars since it was founded.

So this ‘victory’ is against the regular New Yorkers she claims to protect– ordinary people who use the site to generate extra income and help make ends meet in one of the most expensive cities in the world.

Now those people will lose their extra income, and the government will lose the tax revenue it would have generated.

With the stroke of a pen, New York has gone from a win/win scenario to a lose/lose scenario. It’s genius!

More importantly, these politicians are proving to the world, and to the next generation of entrepreneurs, that when you try to do something useful and innovative, you will be penalized.

With stupidity like this so pervasive in government, it’s no wonder why the productive and entrepreneurial spirit is being crushed in the Land of the Free.

Research from the US Department of Commerce shows that the startups in the United States, as a percentage of the total number of businesses in the economy, are at the lowest level since the 1970s.

And this figure has been in terminal decline for decades.

The same Commerce Department data show that fewer jobs are being created by startups than ever before.

Unsurprisingly, GDP growth in the United States has also stalled.

And productivity has actually been declining for the past three quarters.

These are all related stories: when a broken system and out-of-touch political class make it more difficult for people to produce, prosperity suffers.

And it doesn’t take a rocket scientist to see where this trend is going.

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I just had a great lunch with a couple of entrepreneurs that our Sovereign Man: Private Investor group funded a few months ago with a $1.5 million investment.

These guys are incredibly bright entrepreneurs, and they co-founded a wonderful business.

Essentially they’re becoming an Alibaba or Amazon.com, supplying business product needs from office furniture to welding equipment to printer cartridges to local Brazilian companies.

The business has been growing rapidly even though Brazil has been suffering its worst recession since the Great Depression.

Buying into great businesses is ALWAYS my preferred investment. In fact, I think that a great business is the best asset anyone can own.

In good times, a great business makes a LOT of money. In times of inflation, a great business holds its value and acts as a hedge against rising prices.

In times of deflation, a great business produces valuable cash profits.

And even in times of recession when poorly managed companies shrink and shutter, great businesses grow their market share and emerge from recession stronger than ever.

People often fret over finding the right investment manager or financial advisor to generate sufficient investment returns for their savings.

But in reality, no one is capable of growing your investment capital more than honorable, talented, energetic entrepreneurs and managers who run great businesses.

I also prefer to invest in private businesses (as opposed to large companies listed on major stock exchanges) because it puts me so much closer to the action.

Apple may be a wonderful company, but CEO Tim Cook is never going to take my phone call, let alone spend three hours at lunch discussing the company’s strategy.

Last, I prefer to invest in companies that are exporting proven business models overseas– and that’s exactly what these guys are doing.

No one is reinventing the wheel here; there are already dozens of other companies in places like the US, Europe, and China that have built successful business-to-business (B2B) e-commerce platforms.

So launching a business like this in a more developed market like the US would mean they’d have to compete with extremely large companies who’ve had a 10+ year head start.

But in Brazil, no one else is really doing this.

For a multi-trillion dollar economy with more than 30 million active businesses, Brazil is practically virgin territory in the B2B e-commerce space.

That spells opportunity.

And instead of starting from scratch, these entrepreneurs (both of whom are foreign– from Germany and the US) copied a proven business model that is already working in more competitive markets back home.

This is a great way to become very successful overseas.

Most big companies are fighting over profits in very large, highly competitive markets like North America and Europe.

But the rest of the world is often ignored.

So with a little bit of hustle and ingenuity, foreign entrepreneurs can export proven, successful business models from their home countries into lucrative foreign markets where there is practically zero competition.

This dramatically increases the chances of success.

Even starting a simple franchise can be a great example.

In large, developed markets, popular franchises are ubiquitous and have a lot of other businesses and franchises to compete against.

That Burger King down the street has to compete against McDonald’s, Wendy’s, and a dozen other franchise burger joints.

But in smaller markets abroad, top franchise brands are still unique.

(They just opened a PF Chang’s restaurant in my neighborhood in Chile; it’s almost comical how popular it has become, and the owners are minting profits.)

In many respects we’ve done the same thing with our agriculture business in Chile, importing a proven business model and international best practices into a country that doesn’t generally adhere to the highest standards.

This has quickly propelled us to become one of the top companies in our sector, and we’re growing rapidly.

There are countless other examples of people following this approach overseas, and becoming very successful doing so.

I’ve long been a big proponent of living abroad; the tax and lifestyle advantages can be unparalleled, as are the opportunities for your kids’ education and development.

Worst case, it’s an easy excuse to learn a foreign language, and having overseas experience is a great differentiator on a professional resume.

(Not to mention, if you spend time living overseas you could also end up with a second passport– a tremendously valuable insurance policy that your family can enjoy for generations.)

Most importantly, though, the economic opportunities are profound.

There are entire industries that are wide open, just waiting for smart, talented people to import proven business models from their home countries.

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The series of debates in the contest to see who will become Captain of the Titanic is finally over.

And as the smoke clears from the evening’s entertainment, the main headlines are focusing on just one thing: Donald Trump’s pledged refusal to say he will accept the election results.

The media is spinning itself into an absolute frenzy over this, perhaps even worse than the Pussygate tape.

It started even before the debate, with yesterday’s headline in the Washington Post read, “Trump’s election-rigging allegations are affecting people’s faith in democracy”

The media is all collectively vomiting in disgust: how dare anyone question the sanctity and purity of American democracy?

I find this to be such a farce. The election itself is a complete farce.

Citizens aren’t even voting for President. The United States is still tethered to the corpse of an electoral college system that has its roots in the late 1700s, before the Constitution was even ratified.

The reality is that the President is chosen by 538 “electors,” who, in most cases, are not even legally bound to vote for the candidate to which he or she has pledged.

More than half of the states in the US have no laws to punish “faithless electors” who either abstain or vote for a different candidate, and most states have no procedure to void a faithless elector’s vote.

Admittedly, this electoral college system probably made sense… in 1789.

Back then it was too difficult and logistically challenging to have a nationwide election since transportation was so slow and dangerous.

So I can understand why the Founding Fathers established this system in the early days of the nation.

But the fact that this system is still used in 2016 is a complete joke.

They pretend that America’s representative democracy is the most advanced and pristine in the world, and yet it’s still based on a system in which the people aren’t even voting for President.

By definition this is NOT representative democracy.

As for the allegations of rigging, this is one of the things that drives me crazy about the election.

I’m not “for” any candidate. But I’m completely revolted at the blatant anti-Trump media bias.

The Huffington Post, for example, cannot even mention Donald Trump without adding an editor’s note at the end of the article saying

“Donald Trump regularly incites political violence and is a serial liar, rampant xenophobe, racist, misogynist and birther who has repeatedly pledged to ban all Muslims — 1.6 billion members of an entire religion — from entering the U.S.”

Great. We all understand that you think he’s a bad guy.

But what’s sorely lacking is the anti-Hillary editor’s note, something that would read:

“Hillary Clinton is a pathological liar and sociopath who has spent decades engaging in criminal misconduct and abusing her power to enrich herself and her supporters.”

Of course, you’ll never see that. The media still get starry-eyed whenever candidate Clinton walks into the room. It’s revolting.

The one that I find most disturbing is the story that Hillary made up about landing in Bosnia in March 1996.

She claimed that she landed “under sniper fire,” and that they all “just ran with our heads down to get into the vehicles to get to our base.”

Then a video surfaced showing what really happened when she and her daughter landed in Bosnia– it was all hugs and kisses and photo ops. No sniper fire. No running to the vehicles.

Hillary claims to have “mis-remembered”.

Funny thing, when former NBC News anchor Brian Williams “misremembered” being in danger during a ride in a marine helicopter, the guy was crucified and lost his job.

In fact, the people who had the biggest conniption fit over Williams’ misremembering was the media itself. His colleagues turned on him in a nanosecond.

Yet when Hillary misremembers the media gives her a pass.

My dictionary describes the word “RIGGED” as when there’s deliberate activity to produce a result that is advantageous to a certain person.

Well, when the media bias is so brazen, overwhelming and one-sided… RIGGED is absolutely an appropriate word to use.

It’s not sad or disgusting that Trump is questioning the purity of the process or alleging that the election is rigged against him.

It’s sad that it’s actually happening… and that the establishment which is actually doing the rigging refuses to even entertain the possibility that it’s true.

This is banana republic stuff, plain and simple.

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Here’s a great example of how, no matter what’s happening in the world, there’s always an abundance of compelling, lucrative opportunities.

Lately the British pound has plunged to historic lows.

The pound recently touched a 31-year low against the US dollar, and an all-time low against the euro.

And earlier this month the pound shed nearly 3% of its value in the course of a single day.

That’s simply not supposed to happen to a major currency.

A move of just 1% for a major currency is considered shocking. Currencies are supposed to be stable, not ultra-volatile like a penny stock.

Yet these sharp swings keep happening to the pound, mostly out of Brexit fears.

Emotion has taken over. There’s no rational basis for the pound being this cheap—merely panicked selling on the assumption that everyone else is going to be selling.

This is a broken market. And I imagine it must be nerve-wracking to be living in the UK and watching your currency knocked around like some third-world peso.

Yet anytime markets break down like this and emotions take over, great opportunities almost invariably emerge.

We’ve discussed our deep value investment strategy before; financial markets in some parts of the world are so fractured that it’s possible to buy shares of a profitable business for less than the amount of cash it has in its bank account.

That qualifies as a no-brainer– an extremely LOW risk way to generate a built-in profit.

Some colleagues and I are taking this a step further, in fact, and working on a deal to purchase a controlling stake in a listed company that is selling for a fraction of the value of its assets.

(SMPI and Total Access members– watch out for more information on this one.)

These types of opportunities exist almost everywhere that markets have broken down, and the UK is no exception.

I’ll highlight a few simple examples that don’t involve investing tens of millions of dollars.

One asset class that makes sense to consider is collectibles, things like rare coins or wine.

Like gold and silver bullion, collectibles are real assets. And scarce. They’re not making any more 1982 Chateau Petrus.

With collectibles, I prefer to stick to assets with a wide base (i.e. nothing too niche) that are fairly easy to buy and sell.

Art and antiques, for example, can be difficult to value and sell without going to an appraiser and broker.

But certain luxury watch brands, on the other hand, can be sold in minutes, especially the historic high-end Swiss manufactures like Patek Philippe, Rolex, Jaeger-LeCoultre, IWC Schauffhausen, and Vacheron Constantin.

Many of these watches are hand-made and they are NOT mass-produced, so they’re scarce and extremely popular.

Right with the British pound at around $1.22, luxury watches being sold in London and priced in pounds can be had at a steep discount to their US dollar prices across the ocean.

A recent year Patek Phillippe Calatrava model (5119G) is selling for about GBP 12,300 in the UK right now, or right around $15,000.

(And that doesn’t include the benefit of receiving a VAT refund.)

This same watch can easily sell for more than $20,000 in the US.

You could even sell it yourself on Amazon or eBay at a steep discount to that price and still make a very healthy profit.

Technically it should even be possible to sell the watch first in US dollars, and then purchase it in pounds from a UK vendor once you collect the money from your buyer.

That way you can generate a solid profit without actually using any of your own money.

It’s easy to be fearful when markets break down, when terrifying political candidates emerge, and when it seems like World War III is breaking out.

But as a result of all that fear, there are countless opportunities like this to generate low risk, built-in profits.

And thanks to our modern technology, these opportunities are available to anyone in the world who has access to the Internet… and a little bit of hustle.

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[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and manager of the Price Value International.]

The consumption of financial media can be dangerous. Mixed with overpriced global brands, it can be deadly. In August 2000, Fortune Magazine published an article entitled ‘Ten stocks to last the decade’. As befits something written during the latter stages of the TMT boom, Fortune’s recommendations concentrated on Technology, Media and Telecoms stocks. Their ‘Ten stocks to last the decade’, and their stock prices at the time of original publication, were:

Stock	Price
Nokia	$41.06
Nortel Networks	$79.25
Enron	$83.75
Oracle	$82.375
Broadcom	$240.75
Viacom	$69.00
Univision	$48.00
Charles Schwab	$40.00
Morgan Stanley	$104.06
Genentech	$167.06

How did these ‘Ten stocks to last the decade’ fare? The following table shows their stock prices on 19 December 2012.

Stock	Price as at 14.8.2000	Price as at 19.12.2012
Nokia	$41.06	$4.21
Nortel Networks	$79.25	$0.00
Enron	$83.75	$0.00
Oracle	$82.375	$34.09
Broadcom	$240.75	$33.16
Viacom	$69.00	$54.00
Univision	$48.00	$0.00
Charles Schwab	$40.00	$14.47
Morgan Stanley	$104.06	$19.09
Genentech	$167.06	$95 (Taken Over)

Clearly, Fortune Magazine is unlikely to be winning any investment awards any time soon. Unless it buys them.

All in all, the Fortune portfolio lost 65% of its value over the subsequent decade. Three of its favoured companies went bankrupt, and one was bailed out.

In the words of the legendary value investor Benjamin Graham,

“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons [by Wall Street]. And sometimes–in fact very frequently—they make mistakes by buying good stocks in the upper reaches of bull markets.”

(Emphasis ours.)

Is there a chance that investors today run the risk of making the same mistake–of overpaying for good stocks during a period when the stock market is, perhaps, somewhat artificially high, courtesy of seven years of egregious and otherwise ineffectual monetary stimulus?

Example. Unilever is a good, if boring, company. It sells soap, shampoo and a variety of foodstuffs. It is also extremely popular with equity fund managers who regard the shares as bond proxies–safe, dependable, low volatility earners. The problem with this groupthink is that–as Benjamin Graham warned–
once the crowd bids up shares beyond a certain point, they no longer offer any “margin of safety”.

Unilever shares have now, arguably, reached that point. They trade on a p/e ratio of 23 times and a price to book ratio of 8. They are not cheap in any Benjamin Graham sense of the word.

And in its well—publicised spat with Tesco last week, the company now seems to be behaving like a cynical, opportunistic, price-gouging profiteer.

(Marmite, for example, is manufactured in Burton-upon-Trent in Staffordshire. As far as we are aware, Burton-upon-Trent does not have its own currency which has suddenly depreciated against sterling which might justify a 10% price hike.)

Unilever is, of course, free to charge whatever it likes for its products. By the same token, consumers are perfectly free to boycott Unilever products and buy something cheaper, and perhaps more appealing. That goes for the shares, too.

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On May 12, 1780, John Adams wrote to his wife Abigail,

“I must study politics and war that my sons have the liberty to study mathematics and philosophy. . . in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain.”

(… to which I would add, “so that their children can hide from the world in their safe spaces.”)

There may be no other quote that so succinctly surmises the rise and fall of empire.

In the early days, people have no illusions about the hard work and dedication required to create a civilization out of nothing.

Yet as a country approaches the zenith of its wealth, the mentality begins to shift.

People become less focused on production and more on consumption… enjoying the benefits of all that hard work.

Towards the end, there’s hardly anyone left alive who can even remember the days that the nation had to work hard and produce.

All anyone has ever known now is consumption… being the ‘richest country in the world’, and enjoying all the benefits that come along with that title.

This is why there’s so much debt.

Wealthy nations have become so accustomed to their lifestyles that, rather than buckle down, work hard, and produce more to keep the good times going, they’d rather simply borrow from future prosperity to pay for consumption today.

In fact, in its semi-annual Global Financial Stability Report released just a few days ago, the International Monetary Fund tells us that overall global debt is at an all-time high, now at over 225% of total world GDP.

Rich countries are leading the way with average debt at an even higher 277% of GDP, a level that makes it “difficult to grow out of the problem.”

Famous economists in rich western countries have come up with all sorts of catchy reasons why no one should worry about the debt–

Reasons like, “because we owe it to ourselves,” or “because we can print our own money…” abound.

People have been spouting this illogic for years to the point that it has become dangerously axiomatic through sheer volume of repetition.

If you say something enough, it eventually becomes true… no matter how wrong it happens to be.

The reality is that debt is incredibly dangerous. Even the ancients understood this.

Much of early theology and human civilization, from the Hebrews to the Romans, focuses on debt repayment and jubilee.

Even the concept of karma in Buddhism and Hinduism is about maintaining a positive moral balance sheet.

Debt is a killer. And the reason why is precisely because one person’s debt is simultaneously someone else’s asset.

Right now if you have, say, a $100,000 bank deposit, you have an asset. But the bank has a debt– they owe you $100,000! It’s your asset, but the bank’s liability.

Similarly, if you have a $1 million mortgage, you have a $1 million debt.

To the mortgage company that receives the interest payment each month, however, that $1 million loan is their asset.

So in fairness, a record amount of debt in the world also means that there’s a record amount of assets.

Here’s the problem: The laws of the financial universe can be bent… but they cannot be broken.

So whenever debt levels grow too large, especially when debt is being squandered on consumption and growing at a far faster rate than the economy itself, then there must be a default.

Yet a default itself is not necessarily a bad thing.

In a default, there’s supposed to be an orderly liquidation process in which a delinquent borrower’s assets are sold off and redistributed to the lenders.

So wealth isn’t necessarily lost, merely transferred from borrower to lender.

But that doesn’t always happen.

When lenders are smart, they make loans backed by high quality collateral.

Think about what a typical home loan is supposed to be: the borrower puts down 20% of the purchase price as a down payment, and the bank loans the remaining 80%.

This means that the bank’s investment is backed by a house (collateral) which is worth 25% more than the initial principal balance of the loan.

This way the bank has an ample margin of safety to recoup its investment in the event that the borrower defaults.

But what happens when the collateral is worthless? Or when there’s no collateral at all other than some delusion about how great the borrower is?

That’s when the entire system runs into major problems.

Think back to the financial crisis: banks weren’t making conservative loans.

They were offering borrowers 105% financing, more money than the homes were worth.

By 2008 bank balance sheets were stuffed full of non-performing loans where the buyers had stopped paying… yet the collateral was worth far LESS than the loan balances.

Poof. Nearly everyone took a bath, and trillions of dollars of wealth was lost in the crisis.

So the real danger isn’t the amount of debt itself, but whether or not there’s any collateral or high-quality assets backing the debt.

Looking at the record $152 trillion in global debt, it’s clear that much of this is backed by nothing but the false promises of once-wealthy nations.

Western governments have spent years increasing their debts, but instead of wisely investing the proceeds in assets for the future, they’ve squandered most of it on war, waste, and consumption.

So when the inevitable occurs and there’s a default, bondholders have almost no collateral to recoup their losses. Trillions of dollars of wealth will be lost.

It’s often considered crazy and treasonous to even imagine a default.

Yet to deny the possibility requires a belief that wealthy nations can continue increasing their debts until the end of time without consequence.

And that may be the craziest idea of all.

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The King of Thailand died yesterday, and the military junta running the country has declared an entire year of mourning.

I saw a quick headline from The Economist which screamed, “The death of the Thai king throws the country into turmoil.”

Really?

This must be a different country from the one I know.

I’ve been traveling to Thailand 3-4 times per year over the past decade, and we have staff who have been living there for at least that long.

It’s perfectly clear to us what impact a new king is going to have on Thailand: there will be a new face on the currency.

And that’s about it.

It’s true that the late King was widely revered, elevated to god-like status by his people.

But in Thailand, as in most places, “he who has the guns makes the rules.” And that has long been the military.

Over the past 15 years, the powerful elite in both the military and wealthy families who actually control the country have engineered several coups to put their own people in power and ensure their interests wouldn’t be interrupted upon the King’s death.

And given that the Crown Prince and heir apparent has spent most of his life outside of Thailand, it’s unlikely there will be any meaningful change to the status quo.

Lately he has been living in Germany with, at least until last year, his pet poodle FuFu who was promoted to the rank of Air Chief Marshall in the Royal Thai Air Force.

Air Chief Marshall FuFu died last year and was cremated after four days of Buddhist funeral rites.

So something tells me the Thai political system isn’t going to be receiving a much-need enema anytime soon.

The military and powerful elite have spent the past several years preparing for this moment to ensure that everything will be, as Thai people like to say, “same same, but different.”

In other words, nothing more than a different face on the currency.

There has been worry and concern for years that Thailand would plunge into chaos upon the king’s death… or that Thai assets and financial markets would collapse.

Stocks had in fact been sliding for days after the rumors began circulating that the king was gravely ill.

Then, as soon as he passed away, stocks actually started to climb, with the MSCI Thailand Capped ETF surging since the King’s death.

Shares of Thai Airways, for instance, are up 15% this morning.

So it appears that predictions of Thailand’s demise have been somewhat exaggerated.

There always seem to be these experts who predict dire chaos and consequences immediately following some event—just like Brexit, just like Colombians’ rejection of the FARC peace treaty.

It almost never happens that way.

The most severe consequences are seldom triggered by a single event, but rather years… decades of bad decisions and negative trends that build into a giant tidal wave of inevitability.

The same principle applies to the US presidential election next month.

No matter who wins, the world isn’t going to explode.

Nor is it going to be all sunshine and buttercups.

Regardless of which candidate the Electoral College chooses to become the next President of the United States, there is no stopping the inevitability of US default, its $20 trillion debt, or the insolvency of Social Security and Medicare.

Same same, but different.

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