Category: simonblack

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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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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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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[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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[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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Is it Friday again? Must be time for another banking scandal!

Seriously– these banking scandals are happening with such regularity and predictability it would be almost comical. . . were it not for the millions of people who have had their lives turned upside down.

The latest transgression involves, once again, our old friends at Wells Fargo.

Bear in mind that the ink isn’t even dry yet on the $1 billion check that Wells Fargo wrote last week as a penalty to settle its previous scandal, where they defrauded 570,000 clients in a car insurance scam.

By the bank’s own estimates, as many as 20,000 of those clients may have had their vehicles repossessed as a result of their inability to pay for the car insurance that Wells Fargo illegally stuck them with.

And speaking of vehicle repossession, in November of last year Wells Fargo came under fire for illegally repossessing vehicles that were owned by members of the military.

In October, Wells Fargo took heat from federal regulators after it was found that the bank had deliberately recommended investment products that were “highly likely to lose value. . .”

Early that month, the bank admitted that it had ‘erroneously’ charged late fees to more than 100,000 borrowers, even though the delays were the bank’s fault.

In 2016, a number of employees at various Wells Fargo branches in California were found to have sold sensitive customer information, including Social Security Numbers, to a ring of identity thieves.

And of course, in late 2016 and all throughout 2017, Wells Fargo’s notorious ‘fake account’ scandal was found to have affected millions of customers.

There’s a word for all of this: fraud.

And if you or I had committed any of these acts by even the slightest, we’d be wearing DayGlo Orange jumpsuits in a federal penitentiary.

But a grand total of ZERO executives from Wells Fargo have been sent to prison or faced any charges whatsoever.

In fact, the executive who was found to be the most culpable in the fake account scandal scored a whopping $67 million severance package when she left the company in late 2016.

And the new CEO (who took over after the fake account scandal in 2016) has been rewarded with a 35% pay increase even though both the stock price and the bank’s profits have languished.

Scandal #867,241 just hit the news yesterday afternoon: Wells Fargo is now being investigated by the United States Department of Labor.

This time the bank is accused of deliberately pushing customers into more expensive, higher-fee retirement accounts– accounts that are bad for the customers, but more lucrative for the bank.

It just never stops with these people.

And it’s not just Wells Fargo.

Nearly EVERY major bank in the world, from JP Morgan to Barclays, Citigroup, UBS, Bank of America, etc. has been found at some point or another over the last several years of grossly violating the public’s trust.

Yet we consumers still willingly let these criminals hold our money.

Month after month we deposit our paychecks and hold our savings in an institution that rarely misses an opportunity to prove that they cannot be trusted.

They’ve been caught manipulating asset prices, colluding to fix interest rates and exchange rates, and engaging in irresponsible lending practices that put our savings at risk for their sole benefit.

They treat customers with such contempt, scrutinizing even the most innocuous transactions as if WE are the criminals.

And when they screw it all up, gambling away our hard-earned savings on some idiotic investment fad, they go to the taxpayer with hat-in-hand claiming that they’re too important to go out of business… and then shower themselves with record bonuses.

Our reward for putting up with all of this abuse? Well, according to BankRate.com, interest rates at the biggest retail banks (Wells, Bank of America, Chase, etc.) average just 0.01%.

This banking system so pathetic.

Yet we’ve all been institutionalized, practically since birth, to believe that we HAVE to use it… that there’s no alternative.

And that used to be true several decades ago.

But in 2018, there are countless alternatives.

Literally every single function of a bank can be performed better, faster, cheaper OUTSIDE of the banking system.

Rather than holding your savings in a bank, you can literally earn more than 150x as much interest with extremely short-term Treasury Bills. Or if you want, you can even hold physical cash.

For loans, there are dozens of websites where you can crowdfund a home loan or small business loan.

And for retirement accounts– the latest Wells Fargo transgression– you DEFINITELY don’t need a bank.

Retirement accounts are one of the biggest areas where banks and major financial institutions routinely bilk their customers out of useless and unnecessary fees.

Even if they’re not charging you a fee outright, they’re diverting your retirement savings into some fund that they control and taking a percentage or two away from what you should be earning.

And over a period of several decades (we’re talking about retirement after all), a single percent difference in your average investment return because of bank fees can add up to hundreds of thousands of dollars.

So it’s a pretty big deal.

The reality is there are SO many ways to properly structure your retirement in better, more robust, less expensive ways.

For example– if you qualify, a solo 401(k) is an extraordinary retirement structure that’s cheap to administer and incredibly flexible.

With a solo 401(k), you can contribute tens of thousand of dollars each year to your retirement, as well as invest in a variety of assets that are not available to traditional plans (like real estate and private equity).

And you can even borrow money directly from your retirement plan under certain circumstances.

Self-directed IRAs are also great structures with similar benefits, though they have slightly higher costs and less flexibility.

Bottom line, there are plenty of options on the table to distance yourself from this abuse.

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In June 1884, a local farmer named Jan Gerritt Bantjes discovered gold on his property in a quiet corner of the South African Republic.

Though no one had any idea at the time, Bantjes’ farm was located on a vast geological formation known as the Witwatersrand Basin… which just happens to contain the world’s largest known gold reserves.

Within a few months, other local farmers started discovering gold… kicking off a full-fledged gold rush.

Just over a decade later, South Africa became the largest gold producer in the world… and the city of Johannesburg grew from absolutely nothing to a thriving boomtown.

This area is singlehandedly responsible for 40% of all the gold discovered in human history – some 2 billion ounces (or $2.6 trillion of wealth at today’s gold price).

And while the Witwatersrand Basin is still being mined to this day, it’s not as active as it used to be.

Gold production in Witwatersrand peaked in 1970, when miners pulled a whopping 1,000 metric tons of gold out of the ground.

A few decades later in 2016, the same area produced just 166 tonnes– a decline of 83%.

That’s not unusual in the natural resource business.

Whereas it takes nature hundreds of millions of years to deposit minerals deep in the earth’s crust, human beings only require a few decades to pull most of it out.

This creates the constant need for mining companies to explore for more and more major discoveries.

Problem is– that’s not happening. Mining companies aren’t finding anymore vast deposits.

According to Pierre Lassonde, founder of the gold royalty giant Franco-Nevada and former head of Newmont Mining–

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million-ounce gold deposit, at least ten 30+ million ounce deposits, and countless 5 to 10 million ounce deposits.

But if you look at the last 15 years, we found no 50-million-ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits.

So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know.

Bottom line: gold discoveries are dwindling.

Part of the reason for this is that mining companies aren’t investing as much money in exploration.

According to S&P Global Market Intelligence, major mining companies (excluding those in the iron ore business) have been cutting their exploration budgets for years.

By the end of 2016, exploration budgets hit an 11-year low.

And this has clearly had an effect on new discoveries.

This is all because the gold price has been relatively flat for the past several years.

Investors have lost interest. And the mining companies, eager to cut costs, have pared back their exploration budgets as a result.

But this is where it gets interesting: natural resources are cyclical. They go through extreme periods of BOOM and BUST.

When gold prices are high, major mining companies scramble for new discoveries.

Eventually when they start mining those deposits, though, the supply of gold increases, pushing prices down.

As the price falls, the miners’ profit margins fall, which causes investors to lose interest and the miners to reduce production.

This causes supply to fall, prices to increase, and the cycle starts all over again.

In a way it’s almost comical. And that brings us to today. Well, technically yesterday.

We’ve been seeing for more than a year that interest rates have been rising.

Yesterday afternoon the yield on the 10-year US Treasury note surpassed 3% for the first time since 2014.

And oil prices have been rising steadily as well

Financial markets don’t like this combination– it means that inflation is coming. Big time. And stocks plummeted worldwide as a result.

Now, that immediate reaction was probably a bit too panicky.

But the deep concern that inflation is coming (or has already arrived) is completely valid.

Inflation is a HUGE problem. And the traditional hedge in times of inflation is GOLD.

But remember– new gold discoveries have collapsed in the past 15 years.

And, as Lassonde said above, there are few discoveries on the horizon to make up the difference.

These companies can’t just go out and start a new mine, either. Even if they found a promising deposit, with all of the bureaucratic red tape, it would take seven to nine years to start producing gold.

So when demand for gold really starts to heat up, the supply won’t be there.

And this could really cause the gold price to soar. (Silver could rise even more… but we’ll save that for another time.)

Now, there are plenty of small, highly speculative companies, known as ‘junior miners’ who specialize in exploring for new deposits.

And when the gold market is in a frenzy, juniors with great deposits tend to be acquired at ridiculous prices by the major miners.

Now, I’m not suggesting you load up on junior miners– you can make a lot of money if you know what you’re doing, and LOSE a lot of money if you don’t know what you’re doing.

These are tiny, extremely high-risk companies often run by sharks and con-men.

As Doug Casey writes in his novel Speculator, they’re great and taking YOUR money and THEIR dream, and turning it into THEIR money and YOUR dream.

Fortunately there are safer ways to take advantage of this looming imbalance between supply and demand in the gold market.

Physical coins are an easy option.

Gold coins typically sell at a price that’s higher than the market price of gold– to account for the work involve in minting the coin.

This price difference is known as the ‘premium’.

And when gold becomes popular, the premiums often increase too.

This means you can make money both from the rise in gold prices, as well as the increased premiums.

Avoid anything obscure– stick to the most popular gold coins like Canadian Maple Leafs.

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On June 6, 1991, Richard Overton finally hit his breaking point.

Apparently Mr. Overton had been spending quite a lot of time in front of his television, watching a flurry of beer commercials featuring scantily clad women falling all over themselves for average looking men.

Overton realized immediately that drinking Anheuser-Busch’s magical products would be the solution to all of his problems.

So hurtled to his nearest liquor store for a case of beer.

Except… nothing happened. No tropical islands. No Clydesdale horses. No Swedish bikini team.

Moreover, Overton found out that alcohol can actually have negative effects on the mind and body.

Overton was shocked and dismayed. He felt that, by buying and drinking beer, he was entitled to the fantasy lifestyle in the commercials… without any of the downsides.

Anheuser-Busch had betrayed him. And he wasn’t going to take it lying down.

So, in the name of beer drinkers everywhere, Overton sued on grounds of false advertising, claiming that Anheuser-Busch’s TV commercials “involving tropical settings, and beautiful women. . . had caused him physical and mental injury, emotional distress, and financial loss.”

Sadly this is a true story– just one example of the countless absurd, frivolous lawsuits that get filed in the Sue-nited States of America every year.

Here’s a more recent one:

Late last week, the Democratic National Committee (the headquarters for one of the two major political parties in the Land of the Free) launched a suit against everyone they could think of.

The DNC believes a carefully coordinated conspiracy between Russia and the Presidential campaign of Donald Trump hijacked the 2016 US Presidential Election.

So they filed a federal lawsuit in Southern District of New York (Manhattan) against more than two dozen defendants, including:

– Russia
– Wikileaks
– The Trump Campaign
– The GRU (the successor to the KGB)
– Ten unknown, unnamed individuals, cited in the lawsuit as John Doe #1 through #10.

The DNC alleges in the complaint that these defendants violated a multitude of laws, from the Digital Millennium Copyright Act to the State of Virginia’s common law prohibiting ‘Conspiracy to Commit Trespass to Chattels’.

Now, I won’t bother to comment on the grounds of the lawsuit. That’s not relevant here.

However you feel about this Trump/Russia issue, it’s important to step back for a moment and take note of the absurdity of this lawsuit.

How in the world is it even possible to sue “Russia”?

“Russia” is not even a legal entity. It’s just the name given to a giant piece of land on a map.

In theory you could sue the Russian president. Or even the Russian government.

But suing “Russia” is about as ridiculous as suing “Rap Music”. Yet in the Sue-nited States, you’re free to sue anyone or anything.

Perhaps more importantly, the DNC is suing ten different “John Doe’s” i.e. people who are entirely unknown.

But again, in the Sue-nited States, you’re even free to sue people who might not exist.

One of the truly bizarre things I find about this lawsuit is that the defendants are alleged to have violated an obscure Virginia state law… even though the lawsuit was filed in New York City.

But in the Sue-nited States, you’re free to sue for any reason whatsoever.

This is an incredibly important reminder. Whether you’re living in the US, or you just do business or invest in the US– this is the most litigious country that’s ever existed in the history of the world.

And you can either hope that it never happens to you… or you can do something to prevent it.

Frivolous litigators are trolls that are always scavenging for easy targets– businesses or people with wealth that’s completely exposed.

Cash in your bank account. A profitable, healthy business. A home where the primary mortgage balance has been paid down. Even cryptocurrency.

If you ever get sued, you’ll quickly end up going through a ‘discovery’ process, whereby the opposing legal counsel will obtain access to EVERYTHING in your entire life– financial records, bank statements, phone records, Facebook messages, and emails.

Their job isn’t to prove that you actually wronged their client.

All they need to do is demonstrate to the jury that you’re a bad person.

And, chances are, there’s probably something in the last 20 years of your email records– a crass joke, a naughty email that you forwarded, etc. that present you in an unfavorable light.

In a lawsuit, all of your assets are on the table. The judge has the power to freeze your bank account, put a lien on your home, liquidate your business, whatever he/she wants.

And of course, even if you win, you lose. The mere pain of having to go through a lawsuit can be incredibly expensive and emotionally draining.

Litigators are betting on this… that you don’t have the financial resources or emotional wherewithal to go to court. So they’ll push you into a costly out-of-court settlement.

The central idea behind asset protection is to make yourself a less attractive target.

First and foremost, that means not flaunting your wealth. The more people who know about your finances, the higher the chances are that someone will want to sue you.

Second, don’t keep all of your eggs in one basket. If you own your home, your business, your bank account, investments, etc. all in the same place, you’re really taking on a lot of risk.

Your entire life and livelihood can be frozen with the stroke of a judge’s pen. And it’s just never worth taking that kind of chance.

One option is to consider moving certain assets abroad, to a jurisdiction that’s not under the control of your home country’s government, particularly a place with strong asset protection laws. (Nevis is a good example.)

When structured properly, this approach makes it difficult for litigators to attack your assets, which is a huge disincentive for anyone to file suit against you.

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[Introduction from Simon:

While I’m down in southern Chile today inspecting the farming operations of our thriving agriculture business, I thought I’d send you an excerpt from Tim Staermose’s quarterly update to his investors.

You probably recognize Tim’s name; he’s Sovereign Man’s Chief Investment Strategist and editor of our popular 4th Pillar Investment Alert Service.

He also runs a small fund. And, over the weekend, he sent a note to his investors.

I thought it contained some really valuable insights, particularly about the risks of “index investing.”

Passive investing is one of the most popular strategies in the world today– don’t think about anything, don’t do any research, simply ‘buy the index’.

Tim’s comments below show that this can be a much more dangerous (and silly) investment strategy than most people realize.]

============

Let’s take a moment and look at the Russell 2000 in the United States.

If you’re not familiar with it, the Russell 2000 is an index consisting of smaller companies whose shares trade on various stock exchanges in the United States.

According to stock market data firm, Bianco Research in Chicago, 33% of the companies in the Russell 2000 lost money in 2017.

That’s pretty astounding. 2017 was an “everything is awesome” year in the United States. The economy was supposedly strong. Unemployment was low. Consumer spending was strong.

And yet, even despite these strong economic fundamentals, a third of these companies lost money.

More importantly, 404 companies within the Russell 2000– more than 20%– did not even generate enough revenue to pay interest on their debts.

Even within the S&P 500 Index (which consists of much larger, more ‘stable’ businesses), a full 8.3% of the companies within the index failed to generate enough revenue to pay interest on their debts.

That’s downright scary.

All else equal, that means unless they can continue to issue more debt, a meaningful percentage of companies on one of the world’s broadest market indexes will most likely go bankrupt.

Would you really want to own such businesses?

I certainly don’t. And that’s why buying “the index” is anathema to me.

If you buy a Russell 2000 ETF, or the popular SPY ETF that tracks the S&P 500, you are essentially investing part of your portfolio in ALL these money-losing businesses.

Ironically, some of the most popular stocks right now– like Tesla– are in this category: they don’t generate enough revenue to pay interest on their soaring debts.

Shareholders in these firms are essentially betting that management will be able to continue borrowing until, hopefully at some point in the future, the businesses might eventually be able to cover their interest payments.

To me, buying stocks like this is not sensible investing. It’s a form of gambling.

In the LONG RUN, prudent, rational investing always triumphs over gambling.

Consider this the next time you think about buying into an Index Fund or ETF: do you really know the fundamentals of EVERY SINGLE COMPANY in the index?

If the answer is NO (which it probably is), then recognize that you are deliberately investing your hard-earned savings in an asset that’s selling near its all-time high without fully knowing what you’re really buying.

That strikes me as an incredibly difficult way to make money. . .

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Wells Fargo stole the headlines yet again today for defrauding its clients.

The bank was fined $1 billion today for selling over 500,000 clients auto insurance they didn’t need (which in some cases caused the owners to default on their car loans and get their cars repossessed) and for charging erroneous fees to mortgage borrowers.

If you still bank with Wells Fargo, maybe this will finally serve as a wakeup call to take your money elsewhere.

But this is just the latest in a long string of fraudulent bank behavior…

Wells Fargo also opened millions of fraudulent accounts for their customers without their permission – in some cases moving money from existing accounts (without the customers’ knowledge) to fund the new accounts.

And of course there was the entire mortgage fiasco, where banks would recklessly lend depositor funds to unemployed people to buy homes they couldn’t afford… which ultimately led to the collapse of the financial system (which was then bailed out by taxpayers).

And there’s interest-rate fixing scandals, rogue traders losing billions of dollars, commodity price manipulation, forex fraud… the list goes on and on.

These banks willfully and repeatedly abuse the trust placed with them by the public. Yet people continue to allow this to happen… all while making .05% interest!

In today’s podcast, I explain a few steps you can take to get your money out of the banking system and achieve much higher yields – with less risk than keeping your money with a bank.

Sovereign Man readers know I get fired about with these banking abuses. That’s one of the reasons I started my own bank.

And I’ve got a few choice rants in today’s podcast.

Again, you no longer have to participate in this system. There are plenty of alternatives today.

Tune in to today’s podcast here.

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