The worst deal anyone ever made…

It’s considered the worst merger in history.

Back in January 2000, AOL bought Time Warner for $162 billion, which was considered an astonishing amount of money back then.

Their goal was to create a tech/media giant. And they failed miserably.

Time Warner was having a difficult time establishing an online presence, so they thought they would benefit from AOL’s 26 million dial-up subscribers.

And AOL, the leader in “online” at the time, was supposed to benefit from Time Warner’s cable network and content.

At the time – peak dotcom madness – tech firms could do no wrong, and investors praised the ambitious merger.

But January 2000 was literally THE top of the market. The dot-com bubble burst almost immediatley afterwards. Recession followed.

In addition, AOL was bleeding subscribers as cheaper and faster broadband Internet providers stole market share.

By 2002, the merged companies were performing so poorly that they had to take a $99 billion write-off– the largest in corporate history– to account for the deterioration of AOL’s business.

They say history doesn’t repeat, but it often rhymes. And today the tech world and media world are once again in a frenzy to merge.

Earlier this month, telecom giant AT&T completed its acquisition of media titan Time Warner following a 2-year ordeal to obtain government approval.

Now, the fact that these two private companies had to fight in court against the government simply to be able to merge is pretty ridiculous.

But this letter isn’t about the heavy hand of government.

It’s about debt.

Because, including the whopping amount of debt that AT&T inherited, the deal between the two companies was valued at $108 billion.

$108 billion. That’s an awful lot of money that AT&T paid for Time Warner.

Yet in exchange for such a princely sum, Time Warner will only contribute around $1 billion in annual Free Cash Flow to AT&T.

This is crucial to understand.

Remember that, in simple terms, Free Cash Flow represents the final profit available to shareholders after all capital investments, taxes, and other expenses have been deducted.

Plus, because Free Cash Flow filters out most accounting gimmicks, it’s one of the better representations of a company’s true profitability.

So that means AT&T bought Time Warner for about 100x Free Cash Flow, equivalent to a yield of just 1%.

AT&T believes, however, that certain ‘synergies’ exist between the two companies, which could increase that Free Cash Flow level to $3 – $3.5 billion.

Yet even if they’re successful in achieving that target, AT&T’s effective return will only rise to 3%.

That’s the best case scenario… which is hardly worth writing home about.

I mean, seriously, you could do better than that buying government bonds. Why take on so much risk for such a trivial return?

But in order to achieve this 3% target return, AT&T had to (a) dilute its existing shareholders, and (b) take on tens of billions of dollars in debt.

According to AT&T’s own press release, the company now has $180.4 billion of net debt.

And we needn’t go back too far in the past to highlight how ridiculous this is.

In 2010, AT&T generated $15.4 billion in Free Cash Flow. And at the time it had $57.5 billion in net debt.

By the end of 2017, the company’s free cash flow had increased 20% to $18.5 billion.

Yet its debt more than DOUBLED to $125 billion.

Think about that– a 20% increase in Free Cash Flow, yet a 100% increase in debt.

And now, post-merger, the company is increasing debt another 44% to $180 billion, while Free Cash Flow is increasing about 5%.

This is a massive imbalance. The role of any company’s management is to allocate resources in a way that safely maximizes returns for shareholders.

Yet AT&T seems to be doing the opposite– taking on riskier levels of debt to generate diminishing returns.

They’re not alone.

Already, global corporate debt excluding financial institutions stands at a record $11 trillion. And just like AT&T, debt has grown much faster than Free Cash Flow.

There’s also currently a bidding war between Disney and Comcast for just a portion of 21st Century Fox’s assets.

The bid is now $71.3 billion, though it’s possible the final amount could be MUCH higher… and another ridiculous multiple of Fox’s Free Cash Flow.

According to the Wall Street Journal, the combined AT&T/Time Warner and Comcast/Fox entities would carry a combined $350+ billion of debt.

That’s larger than the size of the Colombian economy.

It’s pretty remarkable to even be able to borrow that amount of money, let alone for assets which produce relatively small returns.

This is one of the telltale signs of being near the top of a bubble– when companies throw caution to the wind and take on substantial risk for minimal benefit.

It’s worth thinking back to the housing crisis and financial meltdown a decade ago.

Prior to the collapse, banks spent years loaning money at practically 0% to borrowers with bad credit.

And more than that, these risky borrowers didn’t even have to put down any money. Banks commonly loaned up to 105% of a property’s purchase price… and used their depositors’ savings to do it.

Bear in mind, banks often made less than 1% on these mortages.

So just like the AT&T example today, banks from a decade ago took on huge levels of risk in exchange for miniscule returns…

… until eventually the entire system blew up.

That’s not to say there’s some imminent financial catastrophe looming.

But it would be silly to ignore the impact of adding hundreds of billions of dollars worth of debt to acquire assets which contribute comparatively tiny returns.

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The latest casualty in the global pension catastrophe is…

In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires.

Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury.

So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere.

Augustus wanted to end this practice by setting up a special fund specifically for military pensions.

And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations.

Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare.

He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money.

But as you can probably already guess, the money didn’t last.

Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes.

Within a few centuries, the fund was gone.

This is a common theme throughout history… and still today: pension funds are almost invariably mismanaged to the point of catastrophe.

We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time.

Congress has even formed a committee that’s preparing for massive pension failures.

And here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund.

According to the Pennsylvania state auditor, the pension was 65.7% funded in 2011, i.e. the fund had enough assets to pay about two-thirds of its long-term obligations.

Now, that alone should have been enough to sound the alarm bells.

But by 2013, two years later, the fund’s solvency rate had dropped to 49.7%. And by 2015, it was just 38.5%.

Incredible. 38.5%. At that level, there’s simply no chance the city will ever be able to meet its obligations to retired police officers.

A few years ago, city politicians took notice of this enormous funding gap and tried to take some small steps to patch it up.

Specifically, the city proposed excluding an officer’s overtime in the calculation of his/her pension benefit.

It was a small change and certainly wouldn’t solve the bigger problem. But it would at least buy the fund a few more years of solvency.

So naturally the union sued.

And earlier this month a Pennsylvania court ruled against the city, i.e. Wilkes-Barre must continue calculating pension benefits the old way.

This helps no one; it only accelerates the demise of an already insolvent pension.

Oh, and it’s not just their police pension either. Wilkes-Barre’s pension for firefighters is hardly better off, just 46.1% funded.

Unfortunately, these pension problems aren’t unique to Wilkes-Barre. City and state pension funds across the country… and the world… are in similar, dire straits.

The city of San Diego has a $6.25 billion shortfall on obligations promised to current and retired employees.

The State of New Jersey has $90 billion in unfunded pension liabilities.

And of course, Social Security has unfunded liabilities totaling tens of trillions of dollars.

The situation isn’t any different in Europe.

Spain’s Social Security Reserve Fund has been heavily invested in Spanish government bonds for several years– bonds that had an average yield of NEGATIVE 0.19%.

You read that correctly.

Unsurprisingly, Spain’s pension fund is almost fully depleted.

The United Kingdom has trillions of pounds worth of unfunded public pensions.

Even conservative Switzerland has a public pension that’s only 69% funded – a seemingly fantastic number by today’s dismal standards.

Last year, the Swiss government proposed a plan to save its pensions, asking to increase the retirement age for women by one year (from 64 to 65, the same as men), and increase VAT by 0.3%.

But the plan was rejected by Swiss voters in a national referendum– the third time in 20 years that pension reform failed to pass.

And that’s really the key issue here: pension plans are almost universally toast.

Most of the time, politicians just ignore the problem and try to kick the can down the road to the next administration.

But occasionally they try to do something to help.

Yet whenever they do… voters reject the plan. Or the union sues. Or something else happens that prevents much-needed reforms from passing.

This merely accelerates the inevitable: these pensions are going bust.

I’m not trying to be sensational– these are mathematical realities echoed by the officials who oversee these funds.

For Wilkes-Barre’s police pension, it’s the Pennsylvania State Auditor who says the program is only 38.5% funded.

With Social Security, it’s the United States Secretary of the Treasury who says the program’s trust funds will soon be depleted.

Social Security even provides a date, like the expiration on a carton of milk, after which Social Security will go bad.

These warnings are all publicly available information, not some wild conspiracy theory. And that’s really what they are: warnings.

At this point, continuing to believe that these pensions will be solvent forever is completely ludicrous.

The only rational option is to take matters into your own hands. For example:

– Start saving more. You’d be shocked at what an enormous difference it can make to save an extra $1,000 per year when compounded over several decades.

– Learn to be a better investor. Averaging an additional 1% annual return for your retirement savings can add up to hundreds of thousands of dollars over the course of 20-30 years.

Consider a more robust retirement structure like a Solo 401(k) or self-directed SEP IRA that allows you a greater breadth of investment options– everything from real estate to crypto to private equity.

– And it may even be possible to stash $50,000+ per year in self-employment “side” income, (selling products on Amazon, driving for Uber, etc.) into that retirement account.

The signs are clear… anyone depending on social security or a pension for their retirement is in trouble. It’s time to take this issue into your own hands.

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Do you have a cryptocurrency addiction? This British hospital has a treatment for you

By the time Louis XIV passed away in 1715, seven decades of his absurd extravagance had nearly bankrupted France.

His reign was marked by constant warfare and the most excessive spending imaginable, from opulent palaces (including Versailles) to a costly welfare state– public hospitals, parks, monuments, museums.

Louis XIV had turned France into the world’s leading power. But it came at a heavy cost.

The national debt was nearly as large as the entire French economy itself, and the government’s annual budget deficit was appalling.

France was bleeding cash. And so in 1719, the government tried a new idea to shore up its finances.

First, they issued a formal decree granting a full monopoly over nearly all of France’s international commerce and trade to a company called Compagnie du Mississippi, i.e. the Mississippi Company.

The government gave full control of the deal to a Scottish banker named John Law; Law was to sell shares of the Mississippi company to the public, and funnel the proceeds to the government.

The initial share sale was a phenomenal success. Law promised investors that the Mississippi Company would pay an annual dividend equivalent to about 120% of the share price.

It was an extraordinary prospective return. And investors literally lined up outside of Law’s house to apply for shares.

Almost immediately a bustling secondary market for the shares emerged, and countless people of every age, gender, and social status spent their days buying and selling stock in the Mississippi Company.

The investor hysteria was so extreme that the share price of the Mississippi Company would sometimes rise 20% in the course of a few hours.

A quaint plaza near John Law’s home became the unofficial stock exchange for Mississippi Company shares, and there are legendary stories of the investor frenzy there.

In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote about a local cobbler who was able to rent out his stall in the plaza for an extraordinary sum of money, and about a hunchback who earned a great living charging speculators to use his hump as a writing surface to sign contracts.

EVERYONE was making money. It was commonplace that illiterate farm laborers would turn their meager savings in substantial fortunes, practically overnight.

Of course, hardly anyone knew what they were buying– whether there was an actual business plan, whether management was competent, or whether the deal could generate any profit.

Those seemed to be irrelevant details. The only two things that mattered were the fact that the share price was going up, and that the New World had enormous potential.

So the speculation persisted.

At the end of 1720, the bubble finally burst, not even two years from the time that it started.

A few people made money– those who got in early and weren’t stupidly greedy. But most people lost everything. And John Law fled to Belgium.

Now, it’s difficult to read about the Mississippi Company Bubble and not think about the modern roller coaster ride of cryptocurrency.

Please don’t misunderstand– I’m not anti-crypto.

I was an early adopter of Bitcoin and have made a number of investments in promising crypto startups.

But even the most die-hard crypto fanatic should acknowledge the irrational frenzy in late 2017 that saw cryptocurrency prices soar to new heights on an almost daily basis.

And just like the Mississippi Bubble, it was fed by countless speculators feverishly throwing their money at an asset based on the facts that crypto has enormous potential, and it was going up in price.

Apparently, crypto fever got so bad that a hospital in the UK set up a program for Cryptocurrency Addicts.

The Castle Craig Hospital website has a self-assessment tool with a number of questions, for example–

  • Am I spending large amounts on cryptocurrency?
  • Do I spend a lot of time thinking about different types of cryptocurrency?
  • Have I ever fibbed to other people about how much time or money I spend trading in cryptocurrency?
  • Do I become restless or irritable if I try to cut down my screen time related to cryptocurrency?
  • Do I carry on trading in cryptocurrency after losing money – to try to gain it back?

And more.

The fact that this treatment program even exists is a testament to the sheer volume of fanatics who are consumed with the prospect of getting rich quick on the next cryptoflavor du jour.

When there’s that many people who believe they can become extraordinarily wealthy in a short amount of time by merely acquiring an asset that’s a tiny representation of a future trend, you can rest assured that most of the easy money has already been made.

And that’s really the point: we’re no longer in the earliest, most nascent stages of the crypto game.

You hear about Bitcoin now on the nightly news. It’s mainstream.

So the idea that there’s still a high likelihood of making a 10,000x return on some random coin or token at this stage in the game is just plain naive, especially when the investment thesis is simply “crypto is the future.”

Yes, the broader concepts of crypto and distributed ledger technology are the future, just as the New World represented tremendous opportunity back in 18th century France.

But just like the Mississippi Bubble, that larger trend doesn’t automatically mean that F*ckToken and T!tCoin are worthwhile investments.

Now, I’m not saying that you can’t make money in crypto anymore. Far from it.

As we talked about last week, there are still unimaginable fortunes to be made from this trend.

But at this point, those new fortunes are awaiting investors and entrepreneurs who are at the forefront of developing the technology and applying it to the countless, game-changing possibilities in public and private industry.

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This former trillionaire is flat broke

It’s hard to imagine, but today is actually Sovereign Man’s 9th birthday.

Nine years ago, on June 19, 2009, I sent out the first ever Notes from the Field email.

To commemorate the occasion, I thought I’d republish that first article… because I think it still captures the challenges we face, as well as the boundless solutions ahead of us.

I hope you enjoy.

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William “Bud” Post is flat broke.

He has dealt with lawsuits, jail time, bankruptcy, and now lives on food stamps.

It seems strange to think that he used to be a multi-millionaire… but it’s true. In 1988 he won $16.2 million from the Pennsylvania lottery (valued at $30 million in today’s increasingly worthless money), and Bud became drunk on his own wealth.

You’ve probably heard similar stories—the struggling, working class lottery hopeful hits it big in the Powerball only to return to the trailer park, broke, within a few years.

In irresponsible hands, wealth can evaporate faster than Nancy Pelosi’s approval ratings… and the lottery winners like Bud generally make bad decisions.

They become careless and foolish with their wealth, spending enormous sums of money on opulent consumer goods, gambling trips, and nights in the champagne room.

Banks line up to provide them with generous lines of credit that they blow on useless toys or handouts to a fawning entourage.

At the height of this bubble, someone like Bud has fame, wealth, power, friends, women, houses, yachts… but no foundation for the future.

Each trip to the ATM is a missed opportunity to make a smart decisions… but Bud never cared. He thought the money would last forever. He thought the banks would always give him a loan. He thought his friends would never leave him.

Then one day Bud went to the ATM and found that his balance was ZERO. He went to the bank for a loan and was declined. The money was gone. His friends had disappeared.

The lawsuits started rolling in. Suddenly poor Bud found himself with absolutely nothing but distant memories of drunken consumption.

Sound familiar? It should. Bud is the United States of America.

America hit the lottery after World War II. We had defeated the Germans, nuked the Japanese, and remained the only developed country in the world that had not been devastated by the war. The US instantly became the richest kid on the block, and like Bud, spent the next several years in an alternate universe devoid of rational thinking.

Decades of poor financial decisions were made based on the idea that the money would never run out.

LBJ fought a costly war in Vietnam while building the Great Society.

George W. Bush fought two wars and told America to go shopping.

Barrack Obama thinks he can provide universal healthcare while bailing out every malignant company in America.

The common theme here is the avoidance of difficult choices. When Bud went to buy a new car and saw five that caught his eye, he bought all of them and built a bigger garage.

America’s politicians have made a similar series of irrational choices for decades, and now the money is gone… all that remains is America’s winner syndrome.

We’ve been winners for so long we don’t know any other reality. We live in a bubble world where the United States is the biggest, richest, smartest, most powerful country on earth, even though mounting evidence suggests otherwise.

We continue to spend like Bud as if we are wealthy lottery winners, still assuming our God-given right to avoid tough decisions.

Individually, such delusional behavior and separation from reality are symptoms of a severe mental illness.

If the collective body of America’s politicians were a psychological patient, he would be locked up as a danger to himself and society.

We call this affliction winner’s syndrome, and it continues to plague the decision making process in the halls of Congress. The only antidote is a healthy dose of reality and rationality.

At any point, Bud could have pulled himself out of his downward spiral with a little clear thinking, a little less ‘yes we can,’ and a little more ‘maybe we can’t…’

Clear thinking could still save America. If we take it on the economic chin, allow our businesses to fail, and restructure the economy, the United States will come out of this slump stronger than before.

Unfortunately, there are no near-term indications of rationality in Washington… though while the country may be on a slide, clear thinking could still save you– and that’s where we come in.

Clear, rational thinking in today’s world means considering the full range of global opportunities to invest, protect yourself and safeguard your assets.

We specialize in these opportunities; we travel the world in search of the best lifestyle choices, financial deals, privacy options, and asset protection strategies, some of which we’ll share with you in this daily letter.

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Whether this is your first day, or you’ve been with us since the beginning, thanks from the bottom of my heart for being part of this thriving community.

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Surprise! Taxpayers have been footing the bill for sexual misconduct in Congress

On January 23, 1995, President Bill Clinton signed into law a piece of legislation that had been almost unanimously approved by both the United States Senate and the House of Representatives.

It was called the Congressional Accountability Act of 1995– CAA.

The idea behind the CAA was to force Congress to abide by the same rules of workplace health and safety that private companies have to follow.

And one notable example was sexual harrassment; until the CAA was passed, sexual harrassment rules didn’t really apply to Congress.

Here’s where it gets crazy, though: the CAA established an agency called the Office of Compliance to adjudicate various workplace complaints.

And the law further directed the Treasury Department to allocate taxpayer funds to pay claims and damages resulting from such workplace complaints.

In other words, for nearly a quarter of a century, taxpayers have been footing the bill to settle monetary damages every time a member of Congress was caught groping an intern.

What’s more, section 416 of the CAA requires that all mediation, hearings, and deliberation in sexual harrassment claims (or any other workplace complaint) be kept strictly confidential, i.e. NOT disclosed to the public.

Plus a lot of the settlements come with strings attached. In one case of sexual harrassment against former Congressman John Conyers, the legal settlement required the complainant sign an agreement with strict non-disparagement clauses:

“Complainant agrees that she will not disseminate or publish, or cause anyone else to disseminate or publish, in any manner, disparaging or defamatory remarks or comments adverse to the interests of Representative John Conyers . . .”

They’re finally in the midst of passing a law to change this.

There’s a new bill that was recently introduced in the Senate called the CAA Reform Act which aims to heavily revise the originaly 1995 bill.

Among other provisions, section 111 of the CAA Reform Act will require members of Congress to pay their own damn legal settlements… so they’ll no longer be able to grope interns on the taxpayer’s dime.

It’s amazing that this was actually the law of the land for more than two decades.

The United States fancies itself as having the most advanced republican democracy in the world. But this is banana republic stuff, plain and simple.

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The Hitler of South Africa tells white people he won’t kill them. . . yet

Earlier this week while most of the world was transfixed on the World Cup, the Trump/Kim handshake, or a multitude of other sundry events, Julius Malema, aka the Hitler of South Africa, was busy telling white people in his country that he’s not going wage genocide against them. Yet.

In an interview with TRT World News published this week, Malema said, “We have not called for the killing of white people. At least for now. I can’t guarantee the future.”

When the reporter mentioned that some people might view these remarks as a call to genocide, Malema responded, “Crybabies. Crybabies,” but later warned white South Africans that “the masses are on board” for “an un-led revolution and anarchy”.

Malema is a prominent politician in South Africa and at the forefront of his country’s movement to confiscate land from white property owners and redistribute it to the country’s black population.

No actual specifics about the plan have been revealed, of course.

So even if someone thinks this land grab is social justice, it’s at least reasonable to acknowledge the massive corruption that plagues South Africa’s government.

And presuming that a multi-billion dollar expropriation wouldn’t be fraught with graft is just plain naive.

There has also been zero acknowledgement that forced exprorpriation of private property would cause a wave of defaults on real estate mortgages, triggering a massive banking crisis and unforgiving recession.

South Africa already a prime example about the economic consequences: Zimbabwe’s own land expropriation plunged that country into an economic cataclysm spanning two decades.

Yet these all seem to be irrelevant details.

Malema even went so far as to downplay Zimbabwe’s economic catastrophe, saying “You cannot [measure] the Zimbawean revolution based on the capitalist definition.”

I’m not sure what Marxist definition he’s using to measure success.

But we do know that two decades after land redistribution in Zimbabwe (which used to be considered the breadbasket of southern Africa), more than a quarter of the population is in danger of starving to death.

So even by the most basic metrics, Zimbabwe’s policies have been a total failure. Copying them is tantamount to suicide.

It’s truly astonishing that someone so dangerous and out of touch has been able to rise to power. And even more astonishing how quickly it’s happened.

A decade ago few people had heard of Malema. Now he commands millions and grows more powerful each day.

Swift, radical changes like this are common around the world, and throughout history.

In 1913, just a few years before the Russian Revolution, the Bolsheviks were a tiny group of radicals. Four years later they had taken over the entire country.

In 1928, the Nazi party was an obscure joke, winning a mere 2.6% of the votes in the national election that year.

Not even five years later, Adolf Hitler was German chancellor and had been awarded supreme power by the Enabling Act of 1933.

Point is, the world can change very quickly.

That’s why I’ve long been a strong advocate for having a Plan B.

It’s great to maintain a positive outlook and remain hopeful for the future. I certainly do. But sometimes circumstances don’t turn out like we hope.

Sometimes a tyrant rises to power. Sometimes financial markets crash overnight. Sometimes the most unexpected outcomes become reality.

Acknowledging these possibilities doesn’t make you a pessimist or an alarmist.

Rather, it’s rational and prudent to take basic, sensible steps to protect what you care about most, and what you’ve worked so hard to achieve.

For example, if you keep 100% of your wealth and investments domiciled in the same country where you live, you’re taking on unnecessary risk… especially if your home country is heavily indebted and legendary for civil asset forfeiture and frivolous lawsuits.

One sensible tactic would be to consider moving at least a small portion of your wealth to a different jurisdiction known for strong asset protection laws.

Another idea– some people may be surprised to discover that they’re eligible for citizenship in another country due to some long-lost ancestor.

Ireland, Poland, Italy, Spain, and a number of other countries all have laws making it possible for descendents of their nationals to become citizens.

And a second passport is a great asset . It ensures that, no matter what happens, you’ll always have another option… to travel, live, work, invest, do business, and bring your family.

That’s the whole point of a Plan B. You might not ever need it. But if you can prudently reduce your risk at minimal cost, there’s absolutely no downwide in having one. It just makes sense.

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On the verge of a major turning point

This morning I had the pleasure of being buried in a mountain of paperwork– the penalty for trying to do basically anything in the financial system these days.

It seems that everything, from sending a wire transfer to establishing a new account, comes with endless bureaucratic hoops to jump through as you’re forced to convince these people that you’re not a criminal money laundering terrorist.

In my case I was opening a new brokerage account. And as I went through the process, the questionnaire asked me about my risk tolerance.

Was I seeking low risk and low returns? Or high risk and high returns?

This is one of the oldest fallacies in investing– the idea that risk and return go hand in hand.

I remember taking a personal finance class more than 20 years ago and seeing a neat little graph in the textbook showing a straight line at a perfect 45 degree angle: the higher the risk, the higher the reward.

Sadly there was no option for “None of the above.” Because in truth I prefer strong returns with minimal risk.

And for anyone willing to put in the hard work, there are options to achieve this outcome.

We’ve been discussing this concept a lot lately because I think we’re on the verge of a major turning point.

Just consider what’s happened in the last two weeks alone:

Yesterday, the Federal Reserve raised interest rates, as expected.

But the Fed also signaled continued rate increases based on concerns about inflation and an overheated economy.

Two days earlier, the Department of Labor published data showing that inflation in the US reached a 6-year high.

And earlier this month the Labor Department reported the lowest unemployment rate in decades.

(The unemployment rate is a deeply flawed metric. But regardless, the central bank typically raises interest rates when it gets too low.)

This is all happening at a time when the federal government has racked up a record amount of debt that is only going higher.

The Treasury Department’s own estimates are that it will borrow trillions of dollars more over the next few years.

This is going to be incredibly difficult given that Uncle Sam’s most reliable lenders over the past decade (China, Japan, and the Federal Reserve) are no longer buying US debt.

And because there are fewer buyers for US government bonds, the interest rates on those new bonds will be higher. It’s basic supply and demand.

Bottom line, all of these trends lead to higher interest rates.

And for an economy that has been addicted to 0% interest rates for more than a decade, this will likely have serious consequences.

One obvious consequence is that higher interest rates tend to put pressure on asset prices.

Think about real estate as an example: most people borrow money to buy property.

If a buyer makes enough money to be able to afford a mortgage payment of $3,000 per month, that’s enough to buy a $827,000 house (assuming a 20% down payment) if interest rates are 3.5%.

But if rates rise to 5.5%, that same $3,000 per month only buys a $654,000 house.

Higher rates mean buyers can’t pay as much, so real estate prices fall across the board.

It’s similar with stocks.

For the past several years, companies have borrowed enormous quantities of money and used a lot of it to buy back their own shares.

Stock prices surged as a result of this artificial demand.

Rising interest rates should significantly diminish these debt-fueled buybacks, meaning that one of the biggest contributing factors to rising stock prices over the past few years is going away.

So no matter whether you’re buying a house or investing your retirement savings, we’re reaching a turning point where there’s a lot of risk looming over important financial decisions.

And that takes me back to risk vs. reward.

Bottom line, you don’t have to take a lot of risk to achieve higher returns.

Here’s an easy example: right now the biggest banks in the US pay almost nothing to their depositors.

Bank of America’s interest checking account pays just 0.01%. JP Morgan Chase pays a whopping 0.02% on a 1-month Certificate of Deposit.

The government of the United States, on the other hand, is currently paying almost 2% on a similar product, the 28-day T-Bill.

There’s virtually no difference in risk: loaning money to your bank, versus loaning money to the government.

To be clear, neither is risk-free. Not by a long shot. But I’m illustrating that the risk differential between the two options is essentially zero.

Yet the reward with T-Bills is 100x as great. So you’re taking similar risk but achieving a MUCH higher reward.

It seems obvious. But most people don’t think about this.

We’ve been trained to believe that our savings belongs in a bank, that our investment capital belongs in the stock market, and that higher returns require higher risk.

But there’s an entire universe of options that defies these conventions.

We talked about a few of these yesterday— including T-Bills, asset-backed Peer-to-Peer loans, and deep value investments.

Deep value is essentially buying $1 for 50 cents.

This is our Chief Investment Strategist’s primary area of expertise– he routinely finds absurdly undervalued businesses that are selling for a fraction of their liquidation value.

Think about it: if you only pay 50 cents for an asset that’s legitimately worth $1, you stand to double your money.

Yet most of the risk has already been taken off the table. So there’s not much downside remaining.

Low risk. Strong return.

Whatever you choose to do, it’s important to start paying close attention to what’s happening.

The people who drive these policy decisions are being EXTREMELY vocal.

The Federal Reserve. The Treasury Department. They’re telling us what’s coming next. Ignore them at your own peril.

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Three sensible places to keep your money amid so much insanity

One of my many business activities is being the Chairman of the Board of a company that’s traded on a major stock exchange.

The company is in the real estate business; we own a number of residential properties.

And at the annual shareholder meeting a few weeks ago, one of the obvious topics that came up was the fact that real estate prices are near their all-time highs in many places around the world.

In the UK, Canada, Australia, New Zealand, for example, property prices are near record highs.

It’s the same in the US, where the median home sold for a record high price at the end of 2017.

In fact US home prices are rising at twice the rate of inflation, according to Bloomberg.

But it’s not just real estate prices that have gone through the roof.

Bond markets are also near all-time highs, and there’s still trillions of dollars worth of bonds out there with negative yields.

Stock markets around the world are also near all-time highs, or at least multi-decade highs– including the United States, Germany, UK, Japan, etc.

And there’s no shortage of companies, including some very prominent brand names, that perennially lose money, go deeper into debt, and fail to generate enough revenue to even be able to afford their interest payments.

Yet even those stock prices are near record highs.

There’s so much that defies basic common sense.

Just yesterday, we discussed that Warren Buffett, the most successful investor in modern history, is NOT buying in this market.

In fact, he’s selling… and stockpiling a mountain of cash that he’ll deploy when markets turn the other direction.

Buffett knows that markets always move up and down in cycles.

‘Up cycles’ are precisely the time to sell– when everything is irrationally expensive.

And ‘down cycles’ are the time to buy– after a major crash or correction.

This strategy is simple and effective: buy cheap. Sell expensive.

No up cycle lasts forever. In fact, they usually only last a few years.

This current one has lasted almost ten years. And with all of these record high asset prices, we’re overdue for a major correction.

As Buffett wrote in his most recent annual report, “history is on our side. . .”

Once markets finally do correct, there will be some incredibly high quality, trophy assets available to purchase for bargain prices… the sort of legendary investments that can create lasting, lifelong wealth.

And you can wait patiently by parking your cash in a handful of safe assets, preserving your wealth and even generating a solid return while you wait for the monster opportunities that are coming.

For example, I’ve written extensively about holding cash in very short-term Treasury Bills. That’s what I’m personally doing.

While a bank pays 0.02% interest, T-bills pay nearly 2%, 100x as much.

Buffett has parked over $100 billion in short-term T-bills.

That money isn’t tied up in stocks. So if the market has a sudden, major correction… or even a crash, Buffett is going to have $100 billion to deploy, scooping up all sorts of trophy assets on the cheap.

We’ve also talked about certain peer-to-peer loans, which can be short-term investments paying between 6 – 12%.

We’ve shared a few options with our premium readers that are incredibly safe and heavily collateralized by hard assets, including gold and silver.

These can be great, safe, short-term assets to hold, so you can take a lot of risk off the table, yet still earn a solid rate of return while you wait for better investment opportunities to come along.

Another option to consider is deep value stocks– high quality businesses whose shares are trading at a steep discount to the company’s intrinsic value.

Here’s a great example: our Chief Investment Strategist, Tim Staermose, recommended a stock some time ago called Nam Tai Properties.

The Hong Kong-based company owned a bunch of real estate in Asia, conservatively worth about $221 million.

Plus the company had $261 million in cash with virtually no debt.

So that was nearly $500 million in net assets. But the company’s market valuation was a mere $204 million.

Tim did the hard work to find the company and recognized the opportunity: when a company is trading at that steep of a discount to even the value of its cash balance, it’s hard to get hurt, i.e. very difficult for the stock to go even lower.

But there’s obvious, upside potential built in.

And that’s what happened. Some time after Tim’s recommendation, Nam Tai jumped more than 100%, and we all made a tidy profit.

But while we waited for that to happen, the stock was very stable, i.e. it didn’t move down.

In this respect, we viewed this as a sort of piggy bank– a place to stash a bit of capital with minimum downside… but LOTS of upside. Low risk, strong return.

We think all three of these options are sensible alternatives to consider: safe, places to park your capital where you can still generate lucrative investment returns while waiting for an inevitable market correction.

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The most successful investor in modern history is selling… here’s what it means for you

It’s typically pretty hard to find anything exciting to say about drywall.

Yes, drywall… as in, the building material that’s used for interior construction.

Drywall, also known as wallboard, is manufactured from rehydrated gypsum to produce a calcium sulfate plaster, that’s later mixed with mildew-resistant foaming agent. . . hello? Are you still there?

Seriously, though, in this particular case, drywall is a big deal.

I’ll explain.

The largest distributor of wallboard in the United States is a company called USG.

USG is quite large– the company has been around for more than a century and generates billions of dollars in revenue.

(Its shares trade on the New York Stock Exchange under the ticker symbol USG.)

And it just so happens that none other than Warren Buffett’s Berkshire Hathaway is the largest shareholder in USG.

Buffett scooped up a 31% stake in the company during the financial crisis 10 years ago in a sweetheart deal that valued USG at less than $1 billion.

Yesterday, USG agreed to a $7 billion takeover bid from another drywall manufacturer, Germany-based Knauf.

Presuming the deal closes, Buffett’s investment in USG will net around $2 billion, nearly 7x his original investment ten years ago. Not a bad return.

But here’s the interesting thing.

Warren Buffett is notorious for almost NEVER selling. His famous quip, “Our favorite holding period is forever,” means that he likes to find wonderful businesses that are selling at a discount, buy as much of them as possible, and enjoy the returns of that investment indefinitely.

In other words, if you’ve acquired a fantastic, well-performing asset at a cheap price, why sell?

And he practices what he preaches. Buffett rarely sells anything.

It was a big deal, for example, when he announced earlier this year that he had sold off all of his IBM shares. It was a very rare move for Buffett.

But with USG, Buffett was happy to sell; Knauf’s bid was a whopping 31% higher than where USG’s stock was trading prior to the announcement.

That’s a pretty insane price… so insane, in fact, that the man who typically holds his investments forever– is happy to sell.

It’s even more peculiar given how well USG has been performing.

Revenue and operating cash flow have been growing steadily. And the US housing market (which drives USG’s fortunes) has also been strong.

Maybe Buffett just didn’t like the company, or management. Who knows. And by itself, the USG sale might not be a big deal.

But let’s go back to what we discussed a few months ago.

As I wrote in February, Buffett’s company reported a record cash balance in its annual report– a massive stockpile of $116 BILLION in cash at the end of 2017… most of it in short-term Treasury Bills.

Moreover, Buffett reported that he hardly bought anything in 2017 either:

“In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.”

Buffett’s $116 billion mountain of cash was enough to literally buy any of the 450 largest companies in the United States.

But he didn’t buy a single one. Why? Because they’re all too expensive. Asset prices are far too high.

So… here is the most successful investor in modern history who:

1) Didn’t buy anything in 2017;

2) Is stockpiling a mountain of cash;
3) Is now selling an asset that he would typically hold forever because another company made an absurdly high offer for the business

It’s true that no one rings a bell at the top (or bottom) of any market.

But it seems pretty clear from Buffett’s actions that it might be a good time to take some money off the table and wait patiently for the compelling opportunities yet to come.

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The real opportunities in cryptocurrency… aren’t cryptocurrencies

Hallelujah.

After almost a decade since Bitcoin was created, the SEC announced last week the creation of a new, senior position to coordinate the agency’s cryptocurrency and ICO efforts.

As usual, the government showed up late to the party. But at least they showed up.

The good news is that the person chosen by the SEC to fill that position is quite sharp.

She has an engineering background, obtained her law degree from Georgetown, and, most importantly, she understands crypto.

The bad news… or at least the expectation that a lot of die-hard crypto fanatics have… is that increased government oversight will be negative for crypto prices.

Over the weekend, for instance, almost every major cryptocurrency fell, in part because the government launched an investigation into cryptocurrency price manipulation.

But in all likellihood, reports of cryptocurrencies’ death have been greatly exaggerated.

Governments almost always regulate technology– automobiles, radio, television, the Internet.

And while regulations often create unnecessary costs and inconveniences, they haven’t stopped the overall rise of these important technologies.

Crypto will likely be the same. It’s too mainstream to kill off, and the SEC needs to show the world that they embrace innovation.

Plus, there are too many mega-corporations that have been investing heavily in their own blockchains and distributed ledger technology (DLT), and those companies have far too much political clout to be shut down by the SEC.

(DLT is the umbrella term to describe all the various technologies which distribute transaction information and records to various participants. Blockchain is one type of DLT.)

If anything, that’s the real threat to most of the tokens and cryptocurrencies that exist today– the rapid advancement of the technology itself.

Consider Bitcoin, which is still by far the most popular cryptocurrency.

Bitcoin was originally launched back in 2009 as an electronic form of cash to make secure payments across the Internet without having to go through a bank or financial institution.

Yet Bitcoin’s own software limits its throughput to just a handful of transactions per second.

By comparison, Visa and Mastercard can handle tens of thousands of transactions per second, and there are already emerging technologies in the sector to compete at that level.

From a technological perspective, Bitcoin is in the Digital Dark Ages. And it’s hard to imagine that the least efficient technology in the sector will forever continue to be the most valuable.

This is almost always the case with technology. Back in the early 1990s when the consumer Internet was in its infancy, the “World Wide Web” didn’t really exist.

We used to use something called ‘gopher’, a text and menu-based version of the web.

Then a bunch of engineers perfected hypertext transfer protocol, ‘http’, and the World Wide Web as we know it today was born.

Given how much better the user experience was with http, it didn’t take long for gopher to almost completely disappear.

The same thing could happen in crypto.

And this is important, because as these new Distributed Ledger Technologies continue to develop, it’s possible that almost ALL of today’s tokens and cryptocurrencies could disappear.

Some of the newest Distributed Ledger Technologies don’t even have tokens.

Hyperledger, for instance, is a project run by the Linux Foundation in partnership with dozens of major companies like IBM, Accenture, Cisco, Deutsche Bank, Intel, and American Express.

They’ve already released a number of working DLTs. And not a single Hyperledger DLT comes with a native coin or token.

In other words, it’s like a really advanced Blockchain without the Bitcoin.

The use cases for hyperledger are far-reaching- document storage, financial transactions, property records, even voting.

In fact there’s a candidate for US Congress in the state of California who claims that he’ll use the technology to allow his constituents to vote directly on federal legislation.

Then there are the banks– many of whom are developing their own DLTs.

JP Morgan already launched one called Quorum, an open-source distributed ledger and smart contract platform that rapidly processes financial transactions among a closed network of participants.

They’ve essentially created a blockchain to modernize global banking infrastructure.

Outdated crypto technology doesn’t stand much of a chance when some of the largest firms in the world are putting a ton of resources into making it better.

And this brings me to where the real opportunity is.

Most of the talk about cryptocurrency these days seems focused on what’s going to be the next Bitcoin or Ether. People are trying to figure out what’s the next currency or heavily promoted ICO that can turn $1,000 into $1 million.

That’s probably not the right way to look at this sector anymore.

Certainly there are a handful of specific tokens or coins that have real utility (like some of the privacy coins).

But again, aside from those select few, it’s possible that today’s most popular cryptocurrencies and tokens might follow in the footsteps of gopher.

It’s not going to happen tomorrow. But over the next 5-10 years, inferior, pointless coins and tokens could easily be replaced by superior technology.

So rather than trying to speculate on the next hot ICO, or divining whether going YOLO in Shitcoin, TrumpCoin, or Fuzzballs will make you a crypto millionaire, the real fortunes to be made are in the application of these technologies

Manufacturing. Real estate. Insurance. Global shipping. Retail. Healthcare.

There are litereally thousands upon thousands of compelling, lucrative ways to apply these Distributed Ledger Technologies across various industries around the world.

This is what happened with the Internet. Once the technology was developed, the real money wasn’t made by the people who developed TCP/IP and HTTP.

It was made by the entrepreneurs who applied the technology in ways that fundamentally changed how we do business… and by the investors who backed them.

Right now those opportunities with DLT are wide open.

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