093: The future of crypto in Puerto Rico and avoiding fanaticism

I’m writing from San Juan, Puerto Rico today.

The Sovereign Man team is here to host 150+ Total Access members over the weekend.

And on today’s podcast, we discuss the amazing tax benefits in PR… and why crypto wealth is flocking to the island.

These people think crypto is going to the moon. And by being residents in PR, they’ll pay 0% capital gains tax on any appreciation after they move here.

So I share my thoughts on this, and why they may be in for a tax surprise with their crypto holdings – even with the amazing tax benefits.

Also, following one of the big themes we’ve been covering this year, I discuss fanaticism surrounding crypto (both the bulls and the people calling it a fraud)… and why you should banish fanaticism when making investment decisions.

You can listen in here.

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America’s long-term challenge #2: the looming retirement crisis

Last week, the financial services giant Northwestern Mutual released new data showing that 1 in 3 Americans has less than $5,000 in retirement savings.

It’s an unfortunately familiar story. And Northwestern Mutual’s data is entirely aligned with other research we’ve seen in the past, including our own.

The Federal Reserve’s most recent Survey of Consumer Finances, for example, shows that the median bank balance among US consumers is just $2,900.

And Bank of America’s annual report from last year showed that the average balance per HOUSEHOLD (i.e. -not- per person) was $12,870… which was actually LESS than the average account balance that Bank of America reported in 1997!

On average, the typical US household has less savings today than they did 20 years ago… and almost nothing put away for retirement.

In fact 21% of Americans (based on Northwestern Mutual’s data) have absolutely nothing saved for retirement.

And 33% of Baby Boomers, the generation closest to retirement, have between $0 and $25,000 saved for retirement.

That’s hardly enough savings to last more than a few years… and a major reason why most retirees currently rely on Social Security to meet their monthly living expenses.

According to a Gallup poll from last May, 58% of US retirees said that they rely on Social Security as their major source of income. They simply don’t have enough of their own personal savings stashed away.

But as we’ve discussed many times before, Social Security is rapidly running out of money.

The most recent report from Social Security’s Board of Trustees (which includes the US Secretaries of the Treasury, Labor, and Health & Human Services) tells us that the program’s cost has exceeded its tax revenue since 2010.

Last year this shortfall was $59 billion, 11% worse than in 2016.

And in order to make up the difference and cover this deficit, Social Security has to dip into its trust fund, effectively burning through the program’s savings.

The problem with this approach is that, eventually, these annual deficits will burn through ALL of the program’s savings.

The government knows this; the Board of Trustees even state this in their annual report, projecting that the Social Security trust funds will become fully depleted in 2034.

Sixteen years may seem like a long way off. But we’re talking about retirement here. You’re supposed to think long-term about retirement. And the math simply doesn’t add up.

The Trustee Report states explicitly that, once the trust funds run out of cash, the program will have to, at a minimum, reduce the monthly benefit that’s paid to its recipients.

So if you’re planning on being retired at any point past 2034, the government is LITERALLY TELLING YOU that they won’t be able to pay the retirement benefit that’s been promised to you.

Longer term (pay attention to this if you’re under 40), the numbers get even worse.

The way Social Security works is that retiree benefits are essentially paid for by people who are currently in the work force.

If you have a job, a portion of your paycheck each month goes to Social Security and ends up in the pockets of people who are currently retired.

In order for Social Security to function, there has to be a certain number of workers paying into the program for each retiree.

Social Security tracks this worker-to-retiree ratio VERY closely. The higher the ratio, the better.

In 1995, for example, there were 4.9 workers paying into the program for every retiree receiving benefits.

By 2020, Social Security projects the ratio will be down to 3.7 workers per retiree. And by 2040, just 2.75.

That’s simply not enough workers.

Do the math– at 2.75 workers per retiree, you’d have to pay nearly 40% of your salary just in Social Security tax (i.e. NOT including Medicare, federal, or state income tax) to keep the program running.

It’s also noteworthy that, just this morning, the US government released data showing that the birthrate in the United States is at a 30-year low.

If you project this alarming trend forward by a few decades, you can see how the worker-to-retiree ratio could easily fall below Social Security’s already dismal forecast.

It’s not just Social Security either. State and local pension funds, and even a lot of union and corporate pension funds, are also terminally insolvent.

A report issued a few months ago by the American Legislative Exchange Council estimates that the total amount of unfunded liabilities for state and local government pensions now exceeds $6 TRILLION.

Bottom line, Social Security is broken. State and local pensions are broken. And the federal government is far too broke to be able to bail any of them out.

Even the Social Security trustees admit this– they’re practically giving us a date to circle on our calendars for when the program will run out of money.

Yet a disturbing number of Americans has little to nothing set aside for retirement… and they’re expecting to be able to rely on Social Security.

Something is obviously wrong with this picture, and it would be utterly ludicrous to expect this won’t have a substantial impact.

Either future workers and businesses are going to be hammered with all sorts of new taxes to bail out Social Security–

— or retirees who have no savings and rely exclusively on the program to survive are going to have their benefits drastically slashed.

Either way, retirement is a nuclear problem set to explode in the Land of the Free.

One way or another, tens of millions of people are going to have their lives turned upside down.

And it is beyond the powers of the government to do anything to stop it.

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It gets worse: Tesla now has to compete with $50,000 electric BMWs going for $54/month

As if things weren’t bad enough for beleaguered Tesla…

The company lost $1.1 billion in cash in the last quarter, executives are leaving the company in droves, it’s facing production issues with its Model 3 and, as I recently discussed, Elon Musk insulted analysts on the latest earnings call by dismissing their questions – regarding the company’s survival – as “boring” and “boneheaded,” (just after shareholders approved his obscenely large pay package).

Now, in addition to all that, the company has to compete with BMW leasing its $50,000 i3 electric vehicle for only $54 a month. That’s not a typo. Bloomberg recently confirmed you could lease an i3 for less than your monthly cable bill.

Lest you think BMW is making money on that lease, I assure you it’s not. The entire EV sector is losing money.

It’s a race to the bottom… Everyone in the space (including Tesla) is competing against each other, resulting in laughably low monthly leases.

But it’s not just the i3. You can lease a 2018 Honda Clarity for $199 a month. A Chevy volt costs about $100 more each month.

The electric vehicle space is difficult. Vehicle prices are high and there isn’t enough demand for manufacturers to make money (even with generous government subsidies). EV sales made up just 0.6% of total sales last year. And 80% of battery-electric car customers in the US lease instead of buying (not including Tesla, which doesn’t divulge that info)… partly because the resale value is horrid – an i3 is worth only 27% of its original price after three years.

But the old guard auto manufacturers, like GM and BMW, can sell other, profitable vehicles to plug the loss gap.

General Motors loses about $9,000 every time it sells a Chevy Volt (a $36,000 car). Fiat loses an absurd $20,000 on each electric Fiat 500 it sells.

And Tesla, the highest-selling EV company, is the granddaddy loss maker of them all. Which is why the company lost a staggering $2 billion on $8.5 billion in sales last year.

Still, Musk maintains his cult leader status amongst shareholders, who believe he will walk across water and change the world.

But the reality is quite grim…

Tesla had $2.7 billion in cash at the end of the first quarter (down from $3.4 billion at year-end 2017). And the street doesn’t think Tesla has enough cash to last another six months.

In addition to its general, cash-hemorrhaging operations, the company will need to pay down a $230 million convertible bond in November if it stock doesn’t hit a conversion price of $560.64 (meaning the stock would have to nearly double from today’s price) and a $920 million convertible bond next March if the stock doesn’t hit $359.87.

While the company’s recently-falling stock price troubling, the bond market is forecasting real pain for Tesla…

Last August, Tesla issued $1.8 billion of unsecured bonds with a 5.3% coupon due in 2025. Credit rating agency Moody’s downgraded those bonds to B3 (deep junk territory) in March with a negative outlook (they traded at 90 cents then). Today those bonds trade at 88 cents on the dollar for a yield of around 7.5%.

So if Tesla needed to tap the debt markets again today, it would likely be paying around 8% interest on unsecured debt.

And there are likely suckers out there who will make that loan, despite the horrible economics of the EV business…

It doesn’t make sense to have electric vehicles until you have really cheap electricity. If you can get solar down to 1 cent per kilowatt hour, then you have something.

But, for now, you have to charge electric vehicles with energy produced from coal-fired power plants.

I believe Tesla is doing some really cool things. But, under normal economic circumstances, its business simply would not be viable.

The only way this company is able to exist and shower praise and money on an executive that is consistently non-transparent (and is also taking an enormous chunk of the company) is because there is too much cash in the world.

Companies that consistently post losses are able to fool people into loaning them massive quantities of money.

And big investors, like pension funds and mutual funds, are looking for scale. They’ve got trillions of dollars to invest. So, the bigger the investment opportunity, the more attractive it is.

And in a crazy paradox of our time, a company that issues loads of debt is actually a more attractive company than a financially sound one… because these big investors need to put money to work by any means necessary.

Capitalism is upside down today. Central banks have printed money for 10 years.

Now they’re reversing course. And that will have serious consequences.

Companies will get wiped out. It will probably be worse than the “dotcom” bubble. At least with the dotcom bubble, there wasn’t much debt – these companies raised equity.

Today, valuations are higher than the dotcom bubble and there’s loads of debt on top of it.

Warren Buffett famously avoided tech stocks back then. And people said he was stupid as they continued to pump money into a high-flying sector.

It’s the same as today.

People are loaning money to companies that are hemorrhaging cash and facing massive business headwinds.

Tesla is borrowing money and has to compete with BMW that is leasing its cars for $54/month.

As the Federal Reserve, European Central Bank and Bank of Japan all reverse their easy-money policies, they’ll suck liquidity out of the system. That will push interest rates up, which will force people to be more selective with their investments.

And a lot of crappy companies will get wiped out. I’m not just talking about Tesla. Even “blue chips” like GE and other companies that are heavily indebted and aren’t generating solid free cash flow are in trouble.

At a certain point, individuals need to be rational in how they invest their savings.

And if you’re investing in these fantasy, irrational investments, that has consequences.

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Breaking down America’s worst long-term challenges: #1- Debt.

On October 22, 1981, the national debt in the United States crossed the $1 trillion threshold for the first time in history.

It took nearly two centuries to reach that unfortunate milestone.

And over that time the country had been through a revolution, civil war, two world wars, the Great Depression, the nuclear arms race… plus dozens of other wars, financial panics, and economic crises.

Today, the national debt stands at more than $21 trillion– a milestone hit roughly two months ago.

This means that the government added $20 trillion to the national debt in the 37 years between October 22, 1981 and March 15, 2018.

That’s an average of nearly $1.5 BILLION added to the national debt every single day… $62 million per hour… $1 million per minute… and more than $17,000 per SECOND.

But the problem for the US government is that this trend has grown worse over the years.

It took only 214 days for the government to go from $20 trillion in debt to $21 trillion in debt– less than eight months to add a trillion dollars to the national debt.

That’s an average of almost $52,000 per second.

Think about that: on average, the US national debt increases by more in a split second than the typical American worker earns in an entire year.

And there is no end in sight.

At 105% of GDP, America’s national debt is already larger than the size of the entire US economy. (By comparison the national debt was just 31% of GDP in 1981.)

Plus, the government’s own projections show a steep increase to the debt in the coming years and decades.

The Treasury Department has already estimated that it will borrow $1 trillion this fiscal year, $1 trillion next year, and another trillion dollars the year after that.

They’re also forecasting the national debt to exceed $30 trillion by 2025.

To be fair, debt isn’t always bad. In fact, sometimes debt can be useful.

Businesses and individuals use debt all the time to shrewdly finance productive investments.

Real estate investors, for instance, often borrow most of the money they need to purchase a property once they determine that the rental income should more than cover the debt service.

In this way, when applied prudently, debt can actually help build wealth.

And the US federal government did the same thing in its early history.

It was an incredibly astute move on the government’s part, for example, to go into debt to finance the Louisiana Purchase back in the early 1800s, which dramatically expanded the size of the budding nation.

These days, however, the government flushes money down the toilet in the most wasteful ways imaginable, both big and small.

We’ve covered some of the more ridiculous examples in our normal conversations, from that $2 billion Obamacare website to the $856,000 that the National Science Foundation spent teaching mountain lions to run on treadmills.

Even the government’s more legitimate expenses are absolutely colossal now.

Last year the government spent HALF of its budget just to pay for Social Security and Medicare.

The situation is so dire that the government spends more than its entire tax revenue just on these mandatory entitlement programs, plus Defense and interest on the debt.

Even if you could eliminate entire departments of government, they would still be running a budget deficit and going deeper into debt.

The larger the national debt becomes, the more interest the government has to pay each year.

And interest payments increase even more rapidly as rates continue to rise… which is exactly what’s happening now.

A few years ago, the government paid less than 1.5% on its 10-year Treasury note. Today the rate has doubled.

This has a profound impact on Uncle Sam’s cash flow: they have to borrow MORE money just to pay interest on the money they’ve already borrowed… and spend a larger and larger share of the budget on debt service.

It’s a financial death spiral.

Think about it: if the government is having this much trouble making ends meet when they’re paying 2% interest on $21 trillion in debt, what’s going to happen when they’re paying 5% on $30 trillion?

It’s foolish to think that this trend has a consequence-free outcome. No nation in history has ever become prosperous by borrowing record amounts of debt to finance reckless spending.

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One family’s TWO YEAR nightmare of having their child taken by the state

This one is really infuriating.

It started back in 2016… on April 6th to be specific. A Philadelphia-area mother walked into a clinic because her 7-month old baby was being excessively fussy.

The doctor performed a cursory examination, concluded the baby had an ear infection, and prescribed an antibiotic.

Later that day, the mother noticed what seemed like a bone popping in the baby’s side and thought this might be the source of the discomfort.

Concerned, she went right back to the clinic to show the pediatrician.

The doctor claimed that he could not feel any popping and reassured the mother that the baby had an ear infection.

By the next day, the baby was in even worse shape. So the father took her to the hospital and insisted on an X-ray.

The parents’ instinct turned out to be correct– the baby had a mild fracture of her ribs.

Now– this is problem #1 in our story. Certainly the US health care industry is filled some incredibly hard-working and talented professionals.

But the system is designed the churn and burn… to push people through the clinics as quickly as possible.

The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.

This is a major reason why the United States typically ranks so poorly in global health care studies.

According to one study by the Commonwealth Fund and Johns Hopkins School of Public Health, the US ranked dead last among 11 other wealthy countries (UK, New Zealand, Canada, etc.) in terms of quality of care… yet ranked #1 in terms of cost.

Moreover, recent research published by the Mayo Clinic shows that a full 20% of patients in the United States who have a serious medical condition are mis-diagnosed by their physicians.

This is a pretty sad testament to the state of medical care in the Land of the Free.

But this story isn’t about medical care. This is a story about a family being ripped apart by the ‘Justice’ system.

That’s because, after the physicians finally saw the baby’s cracked rib, they called in the local Child Protective Services.

A hearing was immediately convened, and the parents couldn’t explain the injury. Their best guess was that their older child may have accidentally injured the baby, but they didn’t know for certain.

And it was based on this uncertainty that BOTH children were taken away.

The older child was placed in the custody of his grandmother, and the baby was shipped off to a foster home.

This is where things become truly bizarre.

The local authorities conducted an investigation and found no “aggravated circumstances”. So the older child was soon returned to the parents.

But the baby remained in a foster home… in the care of complete strangers.

FOUR MONTHS LATER, there was finally an initial court hearing. The judge acknowledged that the older child had already been returned to the parents and was safe in their home.

But she refused to return the baby.

More importantly, the judge mandated that the parents should have SUPERVISED visitation, i.e. they had to go to the foster home to see their own baby under the supervision of a government employee.

Another four months later (now we’re in December 2016), another hearing was held.

Once again, the judge refused to return the baby… and even refused to transfer the baby from the foster home to the custody of the grandmother.

Bear in mind that the older child had already been returned to the parents several months prior.

So if they’d had any evidence that the parents were unfit, you’d think that BOTH of the children would have been in foster care.

But that wasn’t the case at all. That’s because the investigation showed no evidence of wrongdoing. The police weren’t involved. And no charges were being filed.

This was simply a matter of a single judge abusing her authority to separate a family, solely because she wasn’t satisfied that the parents didn’t know how the baby had sustained her injuries.

At that point the family hired a SECOND attorney who appealed the decision.

Another four months went by, and in March 2017, the judge held further hearings on the matter.

At that hearing, the attorney attempted to introduce evidence supporting the family’s claim, as well as testimony from other physicians citing a number of plausible reasons how the baby could have been injured.

But according to court records, the judge “refused to take any testimony in the case” because she thought the new attorney was “disrespectful and a little bit arrogant”.

The judge concluded the hearing by punishing the family even more– she suspended the grandmother’s right to visit the baby, denied the parents request for unsupervised visitation, and authorized the city to start the process to put the baby up for adoption.

More hearings took place over the next several months, until, in October 2017, the judge “involuntarily terminated Parents’ rights.”

In other words, the judge stripped the baby away and shipped her off like cattle to another home. Permanently. The parents were no longer the parents.

Now, it took a looong time. But last week the appeal was finally settled, with a different judge in a higher court.

And the appeals court sided with the parents.

More importantly, the appeals court issued a scathing condemnation of the other judge’s behavior, calling it “abuse of discretion” among other choice phrases.

It took more than TWO YEARS for this family to be reunited… not to mention a ton of money in attorney fees and an incalculable amount of stress.

This is pretty despicable… and worth any rational person questioning how free you really are, when all that’s required for the state to take your children away from you is a judge with an ax to grind.

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Meet America’s next pension casualty: the inventor of chocolate sprinkles

In 1923, a young Jewish immigrant from a small town in modern-day Ukraine founded a candy company in Brooklyn, New York that he called “Just Born”.

His name was Samuel Bernstein. And if you enjoy chocolate sprinkles or the hard, chocolate coating around ice cream bars, you can thank Bernstein– he invented them.

Nearly 100 years later, the company is still a family-owned business, producing some well-known brands like Peeps and Hot Tamales.

But business conditions in the Land of the Free have changed quite dramatically since Samuel Bernstein founded the company in 1923.

The costs to manufacture in the United States are substantial. And business regulations can be outright debilitating.

One of the major challenges facing Just Born these days is its gargantuan, underfunded pension fund.

Like a lot of large businesses, Just Born contributes to a pension fund that pays retirement benefits to its employees.

And in 2015, Just Born’s pension fund was deemed to be in “critical status”, prompting management to negotiate a solution with the employee union.

The union simply demanded that Just Born plug the funding gap, as if the company could merely write a check and make the problem go away.

Management pushed back, explaining that the pension gap could bankrupt the company.

And as an alternative, the company proposed to keep all existing retirees and current employees in the old pension plan, while putting all new employees into a different retirement plan.

It seemed like a reasonable solution that would maintain all the benefits that had been promised to existing employees, while still fixing the company’s long-term financial problem.

But the union refused, and the case went to court.

Two weeks ago the judges ruled… and the union won. Just Born would have no choice but to maintain a pension plan that puts the company at serious risk.

It’s literally textbook insanity. The court (and the union) both want to continue the same pension plan and the same terms… but they expect different results.

It’s as if they think the entire situation will somehow magically fix itself.

Those of us living on Planet Earth can probably figure out what’s coming next.

In a few years the fund will be completely insolvent.

And this company, which employs hundreds upon hundreds of well-paid factory workers in the United States, will probably have to start manufacturing overseas in order to save costs.

Honestly it’s some kind of miracle that Just Born is still producing in the US. The owners could have relocated overseas years ago and pocketed tens of millions of dollars in labor and tax savings.

But they didn’t. You’d think the union would have acknowledged that, and tried to find a way to work WITH the company to benefit everyone in the long-term.

Yet thanks to their idiotic union, these workers are stuck with an insolvent pension fund and zero job security.

Now, here’s the really bizarre part: Just Born contributes to something called a “Multi-Employer Pension Fund”.

In other words, it’s not Just Born’s pension fund. They don’t own it. They don’t manage it. And they’re just one of the several large companies (typically within the candy industry) who contribute to it.

So this raises an important question: WHO manages the pension fund?

Why… the UNION, of course.

The multi-employer pension fund that Just Born contributes to is called the Bakery and Confectionery Union and Industry International Pension Fund.

This is a UNION pension fund. It was founded by the Union. And the President of the Union even serves as chairman of the fund.

This is truly incredible.

So basically the union mismanaged its own pension fund, and then legally forced the company into an unsustainable financial position that could cost all the employees their jobs. It’s genius!

Just Born, of course, is just one of countless other businesses that faces a looming pension shortfall.

General Electric has a pension fund that’s underfunded by a whopping $31 billion.

Bloomberg reported last summer that the biggest corporations in the United States collectively have a $382 billion pension shortfall.

Not to worry, though. The federal government long ago set up an agency called the Pension Benefit Guarantee Corporation to bail out insolvent pension funds.

(It’s sort of like an FDIC for pension funds.)

Problem is– the Pension Benefit Guarantee Corporation is itself insolvent and in need of a bailout.

According to the PBGC’s own financial statements, they have a “net financial position” of MINUS $75 billion, and they lost $1.3 billion last year alone.

The federal government isn’t really in a position to help; according to the Treasury Department’s financial statements, Social Security and Medicare have a combined shortfall exceeding $40 TRILLION.

And public pension funds across the 50 states have an estimated combined shortfall of $1.4 TRILLION, according to a 2016 report by the Pew Charitable Trusts.

It doesn’t take a rocket scientist to see what’s coming.

Solvent, well-funded pensions and state/national retirement programs are as rare as mythical unicorns.

Nearly all of them have terminal problems and will likely become insolvent (if they’re not already).

The unions are driving their own pensions into the ground; and the government has ZERO bandwidth to bail anyone out, least of all itself.

So if you’re still more than two decades out from retirement, you can forget about any of these programs being there for you as advertised.

But there is a silver lining here:

The government can’t fix this. The union can’t fix this. But YOU can.

YOU have the ability to take matters into your own hands and establish a robust, well-funded, tax-advantaged retirement plan.

One example is a “solo 401(k)”, an extremely cost-effective and flexible plan that allows you to squirrel away tens of thousands of dollars each year and invest in a wide range of potentially more lucrative asset classes, from private equity to cryptocurrency.

There’s a multitude of other options out there.

Fixing this problem merely requires a little bit of education, and the will to take action.

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“Bitcoin will go to $40,000 this year. . .”

Every year around this time I attend a small, private event to break bread with some of the most invigorating people I know.

There’s only about 100 people in the room– but they’re all at the top of their game… business and intellectual leaders from a variety of industries.

And we gather each year to build relationships with one another and hear about some cutting edge ideas that are usually 2-3 years from hitting the mainstream.

This past weekend’s event, for example, showcased some revolutionary medical advances, including an approach that targets specific proteins to treat afflictions that are caused by, or exacerbated by inflammation– including cancer, arthritis, etc.

It’s really exciting to see what’s on the near horizon with medical technology.

Among other speakers was also a prominent crypto evangelist who spoke about what the future of cryptocurrency will look like in the coming years.

No major surprises– he told the audience that crypto is still in its infancy and has an incredibly bright future.

I agree. And his analogy to illustrate this point was looking at the growth of the tech sector from the early 1980s through today.

Back in late 1970s before personal computers became ubiquitous, there was serious doubt (even within the industry) that consumers would ever adopt the technology.

Ken Olsen, founder of Digital Equipment Corporation, famously stated in 1977 that “there is no reason anyone would want a computer in their home.”

That very year saw the introduction of the Apple II, Commodore PET, and Tandy TRS-80 personal computers, all of which proved extremely popular with consumers.

By 1982 the computer replaced “Man of the Year” by Time Magazine, and several dozen companies had jumped into the industry designing hardware and peripherals.

Technology stocks began to rise, and shares of companies like IBM and Hewlett-Packard quickly doubled in the early 80s.

But at that point a bunch of investors and market analysts began musing that the technology trend had reached its peak.

They had no idea what miraculous advances were still to come, and instead viewed the entire sector as an expensive fad.

Share prices languished for several years– IBM stock went nowhere from 1983 until 1986.

But then Microsoft went public in March of 1986. And suddenly the market realized there was a whole new component to technology: software.

Microsoft’s stock price exploded, doubling in its first twelve months, and increasing 10x in four years.

But by the early 1990s the tech boom had once again run out of steam. Investors thought that the big software trend was totally overdone and that there really wasn’t much room for the tech sector to keep growing.

Share prices languished again, as the market had no idea what was coming next.

Then, in the mid 1990s, people caught wind of this thing called the “Internet”, which back then they referred to as the “Information Superhighway”.

People realized there was yet another component to the tech boom. And so the investment bonanza continued.

This cycle has repeated itself again and again… with mobile, social media, e-commerce, etc.

All along the way, investors occasionally went through periods believing that technology had nowhere else to grow… or that it was all just a fad. They never had a clue what was coming next.

This is a pretty reasonable comparison to cryptocurrency.

It’s similar to the early 1980s when people thought that these technologies were just silly fads… or that the tech stocks were already expensive and they had missed the opportunity to invest.

A lot of folks probably felt that way about Microsoft stock in 1990, after it had increased 10x from its IPO price four years earlier: “I missed it, the opportunity is gone.”

Microsoft’s share price, of course, would grow by another 10x before the end of the decade. And it’s up 100x through today.

People are saying the same thing about crypto. It’s either too expensive to buy (“I missed it”), or it’s some sort of passing fad that will eventually go away.

Most likely neither one of those is true.

Now, here’s where I started to strongly disagree with this past weekend’s speaker.

At the end of his remarks, he told the audience unequivocally that “Bitcoin will go to $40,000 this year.” (And some attendees in the room actually bought Bitcoin based solely on this statement…)

Certainly there’s some data to support the assertion. Various cryptofinance companies are working on ways to open up more investment in the sector to large banks and institutions.

Right now, crypto is dominated by small investors. If you want to by $1,000, or even $1 million, worth of crypto, you can.

But if you’re a large fund with $50 billion under management, and you want to buy hundreds of millions of dollars worth of cryptocurrency, it’s REALLY difficult.

The infrastructure doesn’t exist. Not yet. But they’re working on it.

The banks and funds themselves are designing their own platforms to trade crypto, and even NASDAQ is getting in on the game.

Once they succeed, there could be a flood of institutional capital into cryptocurrency. Bitcoin could certainly benefit. Or perhaps it won’t.

Remember the old quote from F. Scott Fitzgerald: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”

Bottom line– you have to be able to understand both sides. There are ALWAYS risks.

Specific to Bitcoin, for example, a truly honest assessment of the core software may lead to the conclusion that it’s technologically inferior to newer tokens and coins.

It’s also possible that large investors may bypass Bitcoin altogether and buy newer generation tokens.

No one has a crystal ball, especially in crypto. And it’s inappropriate to make blanket assertions that the price will reach X by date Y.

Understand the obvious big picture trend. But also understand the risks. Then, based on the balance of the two, and a long-term view, make a RATIONAL decision to invest.

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Capitalism has new rules. And they’re seriously messed up.

It was just a month and a half ago that Tesla approved an eye-popping long-term pay package, worth as much as $50 BILLION to founder and CEO Elon Musk.

And on Wednesday afternoon, Tesla held its first corporate earnings call since then.

You’d think that Elon would have been gracious and professional, anxious to demonstrate that the shareholders’ trust in him has been well-placed.

Instead the call was filled with contempt and disrespect, with Elon outright refusing to answer questions that he deemed ‘boring’.

Bear in mind, Tesla’s financial results were gruesome; the company burned through yet another $1.1 billion in cash last quarter. That’s 70% worse than in the same period last year.

Even more problematic, Tesla is losing money at such an unexpectedly fast rate that they’ll likely run out within the next several months.

According to the Wall Street Journal’s analysis, Tesla doesn’t have enough cash to cover its basic debt payments and capital leases due within the next six months.

Needless to say, investors are worried.

The shareholders and analysts on the call kept pressing Elon to explain how the company was going to survive, and how he would turn around Tesla’s notorious production challenges.

But Elon completely dismissed any such questions as “boring”, “bonehead”, and “not cool”.

Pretty amazing.

I mean, this guy was given a potentially $50 billion compensation package just six weeks ago.

So the LEAST he could do was answer his investors’ completely reasonable questions.

But he didn’t. It’s almost as if he deliberately wanted to show as much disrespect as possible to the trust and confidence that shareholders have placed in him.

This is a pretty despicable attitude for any executive to have.

Yet this whole situation is emblematic of what I call ‘the new rules of capitalism.’

And New Rule #1 is: Businesses no longer need to make money.

Tesla is just one of a multitude of high-flying, hot-shot companies whose entire business models are based on burning through cash, managed by executives who don’t care.

WeWork, as we’ve often discussed, is an even more absurd example.

WeWork provides short-term office space to companies around the world, with a whole bunch of interesting perks (including free tequila).

For customers, it’s great. But WeWork loses tons of money providing all those great perks to its customers… which means that investors are ultimately footing the bill.

In other words, the suckers who invested in WeWork are essentially buying tequila shots for the office tenants.

Similarly, Uber continues to lose money; according to the company’s leaked financial statements, Uber lost a whopping $4.5 billion in 2017.

To put it another way, every time you take an Uber somewhere, the company is losing money… which means that the suckers who invested in Uber are subsidizing your ride.

Netflix is another perennial loser, having burned through more than $2 billion of its shareholders’ money last year in order to produce original content.

Remember that the next time you binge watch Stranger Things— Netflix investors are heavily subsidizing your evening’s entertainment.

I read an article in the Wall Street Journal last weekend about young people in San Francisco who receive oodles of free goodies from VC-funded startups.

One guy was able to buy a small car because a car-sharing startup offered him thousands of dollars in CASH just to sign up and use the service.

Others talked about eating dozens of gourmet meals for free, courtesy of the various meal delivery startups in San Francisco who offer free meals to new customers.

Ultimately this means that the suckers who invested in those startups are buying meals, clothes, cars, and just about everything else, for freeloading consumers.

There are so many more examples– Dropbox, Snapchat, etc.– of companies whose sucker investors are footing the bill for consumers.

Each of these companies loses money. And it’s becoming an epidemic.

In fact, more than 20% of the companies which comprise the Russell 2000 index, and nearly 10% of companies in the S&P 500 index, burn through so much cash that they have to BORROW money just to pay INTEREST on their debts.

But under the new rules of capitalism, these losses don’t matter… because there are countless investors, funds, and bankers delighted to have the opportunity to put more capital into the business.

This isn’t normal– it goes against the most basic laws of finance: businesses are supposed to make money for their investors, not the other way around.

Yet investors keep throwing capital into these bottomless pits… while (and this is REALLY bizarre) simultaneously showering the founders with blind admiration.

It’s incredible how much praise and esteem is hurled upon company founders who burn through their investors’ capital like a deranged financial sociopath.

Instead of being fired for incompetence, however, they’re hailed as ‘visionaries’.

These people are completely out of touch– both the founders who treat their shareholders with such contempt, as well as the sucker investors who continue enabling this abuse.

You don’t have to be Nostradamus to recognize that some day this stupidity will end suddenly and painfully.

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My partner found $57 million in a random corner of Asia

[Introduction from Simon: We’ve got one more investing Notes today.

This essay, originally published in August of 2016, I think best exemplifies the strategy Sovereign Man’s Chief Investment Strategist, Tim Staermose, uses in his 4th Pillar investment service.

It shows you the huge potential in buying quality assets for less than their net cash backing. It’s hard to wrong when buying the right companies for so low a price.

And despite today’s richly valued markets, Tim has still found three companies currently trading for less than their net cash and cash equivalents.

Read on to learn more about the 4th Pillar strategy…]

Two months ago at the annual Benjamin Graham Conference in New York City, billionaire hedge fund manager Leon Cooperman told the audience that their industry was on the ropes.

“[O]ur industry is in turmoil. It’s very ironic because you’ve got Clinton and Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn. . .”

He’s right. Investors are bailing on hedge funds in record numbers because these hot shot investment managers aren’t able to generate meaningful investment returns.

All the tricks that used to work for them in the past are now falling flat.

And as Cooperman explained, there’s a giant consolidation right now where only two types of people will be able to make money in financial markets.

The first is traders… specifically high frequency traders (HFT).

These are the gigantic financial institutions and billionaire math geniuses who build sophisticated algorithms that buy and sell stocks at blinding speed, sometimes entering and exiting positions in just a fraction of a second.

High-frequency traders rarely (if ever) hold positions overnight, let alone for months and years.

They’re not interested in the fundamentals of a business, merely the volume and momentum of the stock.

The second group is long-term value investors– people that are trying to buy a dollar for 50 cents.

Value investors care very deeply about what they’re buying; in fact, they don’t buy stocks, but rather shares of high quality businesses with talented, honest, energetic managers.

These two methods– trading vs. value investing– are remarkably different.

To be a trader today means competing against titans like Goldman Sachs, with their legions of PhD quantitative analysts, plus some of the most advanced networks and intellectual property in the world.

Or even worse, competing against high-frequency traders who have paid bribed the exchanges so that their own servers can be co-located in the same building as the exchanges’ servers.

This enables the traders to receive information from, say, the New York Stock Exchange, a fraction of a millisecond before anyone else.

But in that fraction of a millisecond, the HFT firm’s algorithms can process the information and place trades ahead of the crowd.

That’s the environment that traders are competing in.

And to be successful in this environment, you need an edge. You win by being smarter, accessing information faster, or developing superior technology.

Value investing is entirely different.

Value investing is about patience, common sense, and good old fashioned hard work.

Here’s a great example– Tim Staermose, our Chief Investment Strategist at Sovereign Man, recommended a business called Nam Tai Property to subscribers of his premium investment newsletter, the 4th Pillar.

Around New Year’s 2015, Nam Tai had $261 million in CASH, plus a ton of real estate in Asia conservatively worth $221 million, even at recession prices.

Yet the company’s market value at the time was $204 million.

So in theory you could buy the entire company for $204 million, put that entire amount right back in your pocket, and still have $57 million in free money left over, PLUS $221 million in real estate.

It was an unbelievable deal.

But Tim was skeptical (as usual), so he hopped on a plane and spent a LOT of time on the ground investigating the company’s assets first hand to determine for himself that it was real.

It was absolutely real. (We’ll discuss later this week why the market sometimes presents these crazy opportunities…)

So with some common sense to recognize a great opportunity ($57 million in free money… duh.)

Plus a LOT of hard work for Tim and his team to make sure that it was legitimate and real.

Plus a little bit of patience (it took about 18 months for the stock to surge), Tim’s 4th Pillar subscribers are up 108% on Nam Tai Property.

That’s the great thing about value investing: it’s not rocket science.

Yes, investigating a company’s assets and analyzing its balance sheet is a skill, and one that can be learned. Great value investors like Tim have become masters of it.

But it’s not about being smarter or better or more advanced than everyone else. It really is about patience, common sense, and hard work.

Between the two, it’s clear to me that DEEP value investing is the superior approach.

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This billionaire’s “$5 million test” will make you a way better investor

[Introduction from Simon: Notes readers know I’m nervous about the market today.

Prices for stocks, bonds and real estate are near all-time highs. Meanwhile, government, corporate and consumer debt are also at all-time highs.

And in the face of record valuations and record debt, we’re seeing rising interest rates (the yield on the 10-year Treasury hit 3% last week for the first time since 2014) and other signs of inflation like rising oil and copper prices.

Who knows how much longer this bull market, fueled by $4 trillion from the Fed and low interest rates, can continue.

That’s why I’ve been advising you to raise some cash. But, even in today’s market, you can find value if you know where to look.

And Sovereign Man’s Chief Investment Strategist, Tim Staermose, recently found one of the most exciting opportunities I’ve seen in awhile.

Since we’ve been talking so much about finance and economics so much in Notes recently, I wanted to share a great piece on value investing we originally ran last year.

You’ll find it below…]

In 1982, a man named Jim Tisch bought seven supertankers for $42 million. He found them by cold calling companies he found in the Yellow Pages.

Yes, $42 million is a lot of money… but these tankers were each four football fields long. That’s a lot of steel. And they could carry between 2-3 million barrels of oil.

And these ships were built just eight years earlier at a cost of $50 million apiece.

Jim Tisch is the son of the legendary Laurence “Larry” Tisch, the late billionaire founder of Loews. Corp – a conglomerate that has owned hotels, movie theaters, insurance, cigarettes, oil and watches over the years.

And like his Dad, Jim had a nose for value…

Low oil prices in the early 1970’s (around $3 a barrel) caused demand to soar. To keep up with the growing demand, everyone rushed to build supertankers (which can take years to complete).

Then the Arab oil embargo in 1973 sent oil prices soaring to $12 a barrel by 1975.

The Iranian Revolution (and ousting of the Shah) followed in 1979… And Iran drastically slashed its output. Oil jumped to over $37 a barrel.

Now there was much less oil coming out of Iran (and a year later, Iraq), but the tankers were still floating in the water.

Tisch started sniffing around for tankers in the early 80s, when, according to Tisch, only 30% of the global fleet was necessary to meet demand.

That’s why he was able to buy at an almost 90% discount. As he said at a 2006 speech at Columbia University:

[S]hips were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap.

By 1990, the market for tankers was turning around… too many ships were scrapped and the volume of oil coming from the Persian Gulf was increasing.

Noting the strength, Tisch sold a 50% interest in his ships for 10 times his initial investment.

He still maintained half ownership… and collected enormous cashflows from operating those ships.

When he first stepped foot on a supertanker, Tisch said he formulated the “Jim Tisch $5 million test.” From the same speech at Columbia:

And what is the Jim Tisch $5 Million Test, you may ask? While on the ship you look to the front and then you look to the rear – then take a look to the right and then to the left –then you scratch your head and say to yourself – “Gee! You mean you get all this for $5 million?!”

In other words, sometimes a good investment is obvious…

But where do you find obvious value today?

The US stock market is at all-time highs… And companies like Netflix (that lose billions each quarter) march higher and higher.

Bond yields are still scraping the bottom…

And cryptocurrencies have soared so high many are calling it a speculative bubble. Even if you’re a believer in crypto, it’s still not prudent to allocate a large portion of your wealth to the sector at this point.

Likewise, you can’t put everything you have into cash or gold.

But if you do the work, you can find certain securities that are just as safe as cash…

That’s the entire premise behind The 4th Pillar – the value-investing service written by our Chief Investment Strategist, Tim Staermose.

Tim screens thousands of stocks across every global market to find something that – according to efficient-market theorists – shouldn’t exist… “a free lunch.”

What if I offered to sell you a $100 bill for $60… would you take that deal?

Of course you would. It’s literally free money.

But that same opportunity exists in the market today. You just have to know where to look.

That’s why Tim spends all day screening literally ever global stock market until he finds what he’s looking for…excellent companies trading for less than the net cash on the books.

Some of these companies are trading so cheaply because of a short-term problem. Others are just ignored or misunderstood by the market.

But when you’re able to buy an entire operating company for less than the amount of cash it has in the bank… Well, let’s just say that passes Jim’s $5 million test.

After all… How much risk is there if you could take a company private for way less than the amount of cash it has in the bank, cease operations and pay out the cash as a dividend?

Not much…

Remember, there’s still value in the market today… it’s just getting harder and harder to find.

You can start by screening global stock markets for companies trading for less than their net cash… Or you can see how Tim does it.

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