Category: simonblack

Bitcoin hit another all-time high today on the back of two, major announcements.

Dedicated Sovereign Man readers know I don’t pay much attention to Bitcoin’s price. Instead, I focus on the market cap and demand fundamentals.

In today’s Podcast, I explain my thoughts on the future demand of Bitcoin and other cryptocurrencies and what these two announcements mean for the sector.

And I share the role of investor psychology in cryptocurrency speculation… And why most people buying crypto today will get crushed – even if Bitcoin hits $1 million a coin.

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500 years ago to the day, on October 31, 1517, a German monk of the Augustinian order named Martin Luther sent a letter to his Archbishop expressing concern about certain practices of Church officials.

In Luther’s era it had become typical for clergymen to sell ‘indulgences’ to anyone who wanted to be pardoned for sins.

Martin Luther felt this practice was a terrible affront to Christian doctrine, so he sent a letter up the chain of command outlining 95 logical points in his argument.

Luther’s letter was hardly a revolutionary work. He was polite. Formal. Almost apologetic.

He actually asks forgiveness of the Archbisop for having “dared to think of a letter to the height of your Sublimity.”

And yet this letter is responsible for kicking off one of the most important social transformations in all of human history, what we now call the Protestant Reformation.

The Reformation was ultimately about rejection of central authority… specifically, the Church.

When the fall of Rome in the 5th century AD left a power vacuum across Western Europe, it was the Catholic Church that stepped in to fill this void.

By the 1500s the Church had firmly cemented its influence over nearly every aspect of life– commerce, politics, economics, family affairs, war, social trends, etc.

At the core of the Church’s power was its theological monopoly.

Remember that the Bible was written in Latin back then… a language that few commoners could speak, let alone read. So Church officials had uncontested control over their flock.

Imagine that benevolent space aliens came to Earth tomorrow morning brandishing a book filled with hidden secrets of the universe.

Sounds exciting. Except that the book is only written in their alien language. So anyone who wanted to understand the secrets would have no choice but to listen to the aliens.

The Church had this same authority 500 years ago… though there was already a growing constituency that had become tired of blind obedience.

Martin Luther became the champion of Catholics who were weary of Church authority.

He was immediately viewed as a threat by the Pope in Rome, and Church officials ordered their top scholars to refute Luther’s arguments.

Luther responded by writing a short, simple explanation of his views in the local German language so that common people could read it and understand it.

It was incredibly popular and widely circulated… which infuriated the Pope even more.

With the Church’s every effort to silence and malign Martin Luther, he responded with more simple, German language essays for the locals.

His popularity grew. Young people flocked to his aid, to the point that they seized and destroyed some of the Church’s anti-Luther propaganda.

By the time the Church excommunicated Martin Luther in 1521, he was already a hero and symbol of the revolution.

The following year, Luther’s German-language translation of the New Testament was published.

It was revolutionary. For the first time in 1,000 years, people had the resources to reject Church authority and explore their own spiritual beliefs.

Suddenly there was no more middle man standing between an individual and his relationship with a higher power– it was the ultimate in decentralization.

Underpinning this entire revolution was relatively new game-changing technology– the movable-type printing press.

The printing press had already been around in Europe for several decades. But it wasn’t until Martin Luther that the invention factored so heavily into social change.

With this powerful technology at their disposal, Luther and his followers were able to rapidly publish their ideas (including the German-language Bible) and spread them across the continent faster than had ever been achieved before.

I thought this was appropriate to bring up today because, on the 500th anniversary of Martin Luther’s 95 Theses, the echoes of history remain with us… and it’s easy to see similar examples of decentralization and rejection of authority underpinned by game-changing technology.

Over the past several years, for example, there have been a number of revolutions (starting with the Arab Spring movement) supported by relatively new technologies like social media and mobile mesh networks.

But perhaps the most prevalent example today is Bitcoin and the blockchain.

Cryptocurrencies represent the antithesis of the traditional monetary system.

While our dollars, pounds, pesos, and euros are all highly centralized and under the total authority of unelected central bankers, cryptocurrencies are decentralized.

There is no central authority with Bitcoin. Its value is determined by the market… its community of users, not some bureaucratic committee.

And whenever there is disagreement within the community about a cryptocurrency’s fundamentals or technological limitations, participants have the option to split off on their own.

This is known as a ‘hard fork’. And Bitcoin alone has had a few so far.

Bitcoin forked in July with ‘Bitcoin Cash’ splitting off. And just last week Bitcoin forked again with the creation of ‘Bitcoin Gold’.

Bitcoin Gold and Bitcoin Cash both have technological differences from the original Bitcoin. But the larger point is that the community can choose which one they want to follow.

(I wish traditional currencies could fork; that Greece and Germany are in the same monetary union suggests that the EURO is in DESPERATE need of a hard fork.)

For some reason the media always makes a big deal about these forks, viewing them as a weakness.

They’re wrong. It’s a BIG strength. And it’s quite common in software.

GNU/Linux is an operating system kernel, for example, that has forked countless times since its creation.

Today there’s Redhat Linux, Debian, Ubuntu, Fedora, Kali, CentOS, and dozens of other distributions. Each has its own particular strengths and weaknesses.

But the user is free to choose based on his/her specific needs.

Microsoft Windows, on the other hand, is 100% centralized. The user has no choice.

Forks are crucial for any idea to evolve… which means the concepts behind crypto will only get better.

This is just the beginning. The monetary revolution is absolutely underway. And at a minimum, it’s worth learning about.

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There’s been something happening this month that very few people have noticed.

It’s been lost beneath all the other headline-dominating news, from the Las Vegas shooting to Harvey Weinstein to the Mueller investigation.

But very quietly behind the scenes there’s been an extremely rapid uptick in the US national debt.

In the month of October alone, the US national debt has soared by nearly a quarter of a trillion dollars.

This is pretty astonishing given that October is supposed to be a ‘good’ month for the US Treasury Department; the tax extension deadline means that October is usually quite strong for federal tax receipts.

And it has been– taxpayers have written checks totaling $190 billion to Uncle Sam so far this month.

Yet despite being flush with tax revenue, the US government still managed to pile almost a quarter of a trillion dollars more on top of its already enormous mountain of debt.

It’s always surprising to me how a story this monumental never receives any coverage.

The government of the largest, most important economy in the world is completely, woefully bankrupt. And its rate of decline is accelerating.

You’d think this would be on the front page of every major newspaper in the world.

But it’s not. It’s shrugged off as par for the course, as if accumulating historic levels of debt is somehow consequence-free.

And this complacency is what I find the MOST bizarre.

Consider the following: the US government spends nearly the ENTIRETY of its tax revenue simply on Social Security, Medicare, and Interest on the Debt.

Throw in national defense spending and the budget deficit is already hundreds of billions of dollars.

And that’s before they pay for anything else within the federal government: The Internal Revenue Service. National Parks. Highways. The guys who graze your genitals with the backs of their hands at the airport.

Congress could literally cut almost everything we think of as ‘government’ and they’d still lose hundreds of billions of dollars each year.

Oh, and raising taxes doesn’t solve this problem.

Over the past eight decades since the end of World War II, tax rates in the United States have been all over the board.

The highest marginal tax rate on individual income has been as high as 92% (in 1952-1953) and as low as 28% (1988-1990).

The corporate tax rate has gyrated between 53% and 34%. Capital gains rates have been as high as 35% and as low as 15%.

Yet throughout it all, overall tax revenue as a percentage of GDP has barely budged.

This is how governments measure tax revenue– as a percentage of the overall economy. It’s like measuring how big a slice of the economic pie ends up in the government’s pocket.

And that figure has barely budged for decades.

The US government’s tax revenue as a percentage of GDP is almost invariably around 17%, i.e. roughly 17% of all US economic value is paid to the federal government as tax revenue.

It doesn’t matter how high (or low) tax rates are set. Tax REVENUE stays the same.

So even if they jack up tax rates back to 90%, IT STILL DOESN’T SOLVE THE PROBLEM.

This is a cost problem; the government simply spends too much money on programs it cannot afford.

The only realistic way out is for the US government to eventually capitulate… and default.

This could mean selectively defaulting on holders of US debt (for example– the Chinese, Japanese, Federal Reserve, Social Security Trust Funds, etc.); one day Uncle Sam simply stops paying.

Or it could mean defaulting on promises made to citizens, like providing a strong national defense, maintaining a stable currency, or paying out Social Security benefits as advertised.

Each of these scenarios has its own particular consequences, ranging from steep inflation to a full-blown global financial crisis.

Bottom line, there is no rosy scenario here.

That’s not to say that any of this is going to happen tomorrow. Far from it. These consequences are years in the making.

But it’s imperative to start doing something about it now.

Social Security is a great example.

As we’ve discussed before, the program is already running out of money.

The Social Security Board of Trustees (which includes the US Treasury Secretary), estimates that its key trust funds will be depleted in 2034, at which point the program will be fully dependent on government tax revenue to pay monthly benefits.

Now, 2034 isn’t exactly around the corner.

But if this debt trajectory continues on its current path, by 2034 the US government will have to spend the bulk of its tax revenue paying interest.

With the Social Security Trust Fund depleted and government tax revenue consumed by interest payments, it’s hard to imagine anyone receiving their full benefits.

This isn’t a problem you want to wait 17 years to acknowledge.

If Social Security ever does dry up, you won’t be able to conjure a monthly pension out of thin air.

That’s why the time to start creating your Plan B is now: it takes time to build up retirement savings.

And even if some miracle were to occur– the national debt declines, Social Security is recapitalized, etc.– you won’t be worse off having an independent source of wealth that doesn’t depend on the government.

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Last year, I attended the Benjamin Graham Conference in New York City – this annual event brings together the best value investors in the world.

A speech by billionaire hedge fund manager Leon Cooperman stood out to me. He discussed why the hedge fund 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… But they still charge a hefty 2% of assets under management and 20% of gains (sometimes more) for their lackluster performance.

Part of the reason is people are waking up to the fact that most hedge funds aren’t worth those high fees… as the saying goes, hedge funds are more of a compensation scheme than an asset class.

Also, running a hedge fund is harder now than it’s been in decades… We’re experiencing record low volatility (if every asset is going up in lockstep everyday, it’s hard for a hedge fund to add much alpha). And we’re coming to the end of 40 years of declining yields… Many popular hedge fund strategies are hard when yield spreads are compressing (and even harder when rates start ticking up).

In short, 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. Unlike the high-frequency traders, who are trading assets at lightning speed, trying to arbitrage out a fraction of a cent, value investors understand they’re buying part ownership in a business. And they want to buy high-quality businesses with top-notch management at good prices.

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 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 frank, you don’t stand a chance in that world.

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.

And, as an individual investor, you can find small, out-of-favor companies that larger investors wouldn’t tough… they need to move huge amounts of money around, so the assets they can buy are limited.

So, you can still find huge inefficiencies in certain parts of the market the big boys ignore.

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 4^th 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.

The company had two old factories in the Shenzhen, China that it had owned since the early 1980’s. The area used to be an industrial wasteland.

But, as China grew, the real estate was now on the edge of the city. And Nam Tai planned to redevelop the old factories into a high-end residential and commercial development.

Tim saw it with his own eyes… And he knew there was tremendous growth potential (in addition to the value by buying shares below their net cash).

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

4^th Pillar readers are now up nearly 175% on Nam Tai properties… And they achieved those gains buying an incredibly safe and cheap stock.

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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It’s one of the best sectors in the world for explosive gains…

Deeply cyclical industries such as shipping, oil & gas, mining, and the service industries that supply them are one of the few areas of the market where you can actually make 5 to 10 times your money… and you can make those kinds of returns on large, well-known companies.

Anyone who tells you those types of gains are only achievable by taking wild speculations (bitcoin comes to mind today) is wrong.

Cyclical stocks can fall 80 or 90% during a downturn. But when the market turns, these beaten-down stocks are coiled springs.

And here’s the best part…

Because you’re buying solid companies at rock-bottom prices, you’re able to achieve these enormous returns without huge amounts of risk.

Take shipping company Frontline (FRO) for example. It’s the largest oil tanker company in the world. Frontline owns a fleet of 59 tankers that it uses to move oil and oil products from where they are produced around the world to where they are consumed.

It’s a simple business. But it’s one of the most cyclical in existence.

When oil prices soar, demand for tankers is extremely high and shipping companies such as Frontline charge very high “day rates” to rent their vessels.

As day rates increase, companies redeploy any idle ships to capture those profits. And they order new ships (which can cost around $100 million and take years to build).

At the same time, the underlying oil market is seeing similar activity…

As oil prices increase, producers rush to bring more oil online. We see an oil glut and price crash.

Drillers idle their rigs. Shipping companies are stuck with extra capacity.

Day rates for shipping plummet. And highly indebted shipping companies struggle to even service their debt (and hold on to their ships).

Lots of shipping companies go out of business in the downturn, which reduces the tanker supply.  The companies that survive are forced to idle their excess ships.

Soon after, there’s a shortage of tanker capacity. And day rates start creeping back up.

The companies that survived the cyclical downturn are in prime position to make windfall profits as the next bull market gets under way.

Back to Frontline…

The stock hit a low of $19.95 on September 1, 2001. But shares soared to over $300 by November 2004. That’s a 1,400% gain – enough to turn every $10,000 invested into $150,000 in just three years.

But shares fell back down to $164 by January 2007. Then another bull market sent them soaring to new highs of $348 by June 2008.

You get the idea. Cyclical companies like Frontline are volatile.

If you bought at the bottom of the cycle in 2001 and held until the June 2008 peak, you made a life-changing 1,644% gain.

At Frontline’s 2008 peak, crude oil was over $140 a barrel. Today, it’s trading for less than $52.

And shares of Frontline have fallen 98% to just over $6 a share.

But Frontline is still one of the largest tanker companies in the world with a $1 billion market cap. It’s survived previous downturns. And I’d bet it will survive this one, too.

So anyone buying shares of Frontline today could potentially make hundreds, even thousands of percent profits.

It sounds easy enough.

Wait for cyclical stocks to fall 90%, buy at the depths of the market, then wait for the cycle to turn around.

But two things typically conspire against investors achieving success in deep cyclical stocks:

1. Human nature. Most people can’t act against the crowd and buy when assets are hated and prices are depressed. It’s scary to do. And it’s easy to fall into the trap of believing “this time it’s different,” and that the gloom and despair are going to last forever. But it never does.
2. Debt. Whether the cyclical company in question has too much debt to survive the deepest down-turn is always a key consideration. And it pays to err on the side of caution. Hence, I am only interested in largely debt-free cyclical businesses. And there are not a lot of them.

Here’s a 70-year chart of crude oil prices that shows you just how big the swings can be. Be honest with yourself… Could you withstand these wild price swings?

I’m currently recommending a cyclical oil exploration company in The 4^th Pillar… And it fits perfectly into my strategy of buying high-quality companies at less than their net cash.

At the top of the last oil boom, the company’s shares were north of A$12. They’d run up from the initial listing price of 20c. In other words, $10,000 invested at the IPO would have grown to $600,000 at the top of the boom — a gain of over 5,900%.

Right now the company has a market value of under A$300 million. But it’s got around A$400 million in cash and no debt.

Plus, the company owns 100% of an oilfield I think can throw of US$409 million a year in revenue (remember, the entire company is under A$300 million today) … And oil majors Chevron and Statoil are exploring near its other major asset. If either of these companies has success, this small company will soar in value.

4^th Pillar subscribers can access this recommendation in my September issue.

For everyone else, if you’d like to learn more about The 4^th Pillar and immediately access this recommendation, click here…

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US stock markets hit another all-time high on Friday.

The S&P 500 is nearing 2,600 and the Dow is over 23,300.

In fact, US stocks have only been more expensive two times since 1881.

According to Yale economist Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio – which is the market price divided by ten years’ average earnings – the S&P 500 is above 31. The last two times the market reached such a high valuation were just before the Great Depression in 1929 and the tech bubble in 1999-2000.

Some of the blame for high valuation goes to the so-called “FANG” stocks (Facebook, Amazon, Netflix and Google), whose average P/E is now around 130.

But there’s something different about today’s bull market…

Simply put, everything is going up at once.

Leading up to the tech bubble bursting, investors would dump defensive stocks (thereby pushing down their valuations) to buy high-flying tech stocks like Intel and Cisco – the result was a valuation dispersion.

The S&P cap-weighted index (which was influenced by the high valuations of the S&P’s most expensive tech stocks) traded at 30.6 times earnings. The equal-weighted S&P index (which, as the name implies, weights each constituent stock equally, regardless of size) traded at 20.7 times.

Today, despite sky-high FANG valuations, the S&P market-cap weighted and equal-weighted indexes both trade at around 22 times earnings.

Thanks to the trillions of dollars printed by the Federal Reserve (and the popularity of passive investing, which we’ll discuss in a moment), investors are buying everything.

In a recent report, investment bank Morgan Stanley wrote:

We say this not as hyperbole, but based on a quantitative perspective… Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001.

So, ask yourself… With stocks trading at some of the highest levels in history, is now the time to be adding more equity risk?

Or, as billionaire hedge fund manager Seth Klarman notes… “When securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”

Volatility – as measured by the Volatility Index (VIX) – remains below 10 (close to its lowest levels in history). For comparison, the VIX hit 89.53 in October 2008, as the market plunged.

We haven’t seen a 3% down day since the election. And if that holds through the end of the year, it will be the longest streak in history.

And this false sense of security comes just as the main driver of this bull market – the trillions of dollars global central banks printed after the GFC – is coming to an end.

Markets saw around $500 billion of accommodation in 2016. And “quantitative tightening” should suck about $1 trillion out of the markets in 2018… That’s a $1.5 trillion swing in two years. And it’s a major headwind for today’s already overvalued markets.

But that’s just one issue. Remember, we also have…

Slowing global growth, record-high debt, potential nuclear war with North Korea, a rising world power in China, and cyber terrorism (just to name a few of the potential pitfalls) …

Still, investors continue to put money to work without a care in the world.

And more and more of that money is being invested with ZERO consideration of market valuation – thanks to the rise of passive investing.

Through July 2017, exchange-traded funds (ETFs) took in a record $391 billion – surpassing 2016’s record inflow of $390 billion.

According to Bank of America, 37% of the S&P 500 stocks are now managed passively.

Investors in these passive index funds and ETFs pay super-low fees in return for an automated investment process. For example, any money invested in a passively-managed S&P 500 ETF is equally distributed (based on market cap weighting) across the 500 S&P companies… So, companies like Apple, Google, Facebook and Amazon get the biggest share of that money.

The result… as this dumb money rushes in, the biggest stocks get even bigger – despite their already ludicrous valuations.

And the biggest players in this field are amassing a tremendous amount of power.

Vanguard, which introduced the world’s first passive index fund for individuals in 1976, has $4.7 trillion in assets (around $3 trillion of that is passive).

BlackRock, the world’s largest asset manager and owner of the iShares ETF franchise, is approaching $6 trillion in assets. And only 28% of BlackRock’s assets are actively managed.

Passive funds owned by these two firms are taking in $3.5 billion a day.

Bank of America estimates Vanguard owns 6.8% of the S&P 500 (and stakes of more than 10% in over 80 S&P 500 stocks).

And as long as the money keeps flowing into passive funds, the bubble keeps expanding.

At a time of exceptional market risk, more and more money is being managed without any notion of risk.

But what happens when these uninformed and value-agnostic investors have to sell?

Humans are emotional creatures. And when we do finally see that 3% (or even larger) down day, investors will rush for the exits.

And the computers will pile on the selling (every model based on historically low volatility will completely break when volatility spikes).

But when the wave of selling comes, who will be there to buy?

As these passive funds dump the largest stocks in the world, we’ll see an air pocket… nobody will be there to hit the bid.

And when the drop comes, it will come faster than anyone expects.

So, while most investors are ignoring risk, I’d advise you to use this record-high stock market to your advantage…

Sell some expensive stocks to raise cash. Own some gold. And allocate capital to sectors of the market that haven’t been blown out of proportion thanks to the popularity of passive investing. That means looking at smaller stocks and stocks outside the US.

Even if stocks go up for another year, which they may, it’s simply not worth the risk to chase them higher… Because the downturn will be devastating.

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In today’s podcast, Sovereign Man’s Chief Investment Strategist Tim Staermose joins me to talk about the risks in today’s market…

We cover the rise of passive investing, and why we think it could cause chaos when the market turns – with some of the biggest and most popular stocks (like Apple and Amazon) falling 10% or 20% in a day.

We also discuss the massive amount of debt in the system today and how capitalism has turned upside down.

Tim also explains his value-investing strategy that has led to a 97% success rate in his advisory service, The 4th Pillar… And he shares a couple of his favorite opportunities today.

You can listen to the full discussion here.

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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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With the nearly daily moves to record highs among the hundreds of cryptocurrencies that currently exist, talking about ‘regular’ currencies seems about as out-of-fashion as that hideous shoulder pad trend from the 1980s.

[Millennial readers: see here if you’re confused.]

But there are actually a few currencies out there worth talking about right now.

And top among them, especially for anyone holding US dollars, is the Hong Kong dollar.

The Hong Kong dollar is different because it is ‘pegged’ to the US dollar at a pre-determined rate.

Unlike the euro, pound, yen, etc. whose exchange rates fluctuate on a daily basis (and occasionally have major, violent price swings) the Hong Kong dollar is set at 7.80 HKD per US dollar, plus or minus a very narrow band.

The Hong Kong dollar has effectively traded between 7.75 and 7.85 for the past three decades– a variation of about 0.64%. This barely registers as a rounding error.

Now, there are a handful of other currencies which are also pegged to the US dollar.

Venezuela’s government fixes its bolivar currency to the US dollar at an official rate of roughly 10:1. (Though when I was in the country a few weeks ago the Black Market rate was 30,000:1.)

In Africa, the government of Eritrea pegs its currency (the Nakfa) to the US dollar at a rate of 13.5:1.

Even Cuba’s government pegs its “convertible peso” to the US dollar at 1:1 (less some absurd exchange fee).

But none of these currencies is a viable alternative to the US dollar. The US government’s finances may be in shambles, but Eritrea’s, Cuba’s, and Venezuela’s are in much worse condition.

Hong Kong is a rare exception in the world.

The Hong Kong Monetary Authority, the country’s central bank, is among the best capitalized on the planet.

Plus the government is awash with cash and routinely runs substantial budget surpluses.

Hong Kong has virtually zero debt, and nearly $1 trillion Hong Kong dollars ($126 billion) in net foreign reserves.

That’s a public savings account worth roughly 40% of the country’s GDP.

Hong Kong’s Net International Investment Position, which is essentially a reflection of the government’s ‘net worth’ is about $1.25 TRILLION, or 380% of GDP.

This is nearly unparalleled. By comparison, the US government’s net worth is NEGATIVE $65 trillion– roughly NEGATIVE 350% of GDP, versus Hong Kong’s POSITIVE 380% of GDP.

One country is broke. The other is a financial fortress.

And while the US government’s liabilities keep mounting, Hong Kong’s foreign reserves keep increasing.

Between the two, it’s pretty obvious that Hong Kong is in vastly superior financial condition. And that’s what makes the Hong Kong dollar so compelling.

By holding Hong Kong dollars, you essentially get all the US dollar benefit without having to take the US dollar risk.

If the US dollar remains strong, the Hong Kong dollar remains strong. The two are virtually interchangeable.

But unlike holding US dollars (where your savings is linked to a bankrupt country), Hong Kong dollars are backed by one of the most solvent, fiscally responsible governments in the world.

So if there were ever a US-dollar crisis, Hong Kong could simply de-peg its currency… meaning anyone holding Hong Kong dollars would be insulated from the consequences of the US government’s pitiful finances.

It’s like having a free insurance policy… which is what an effective Plan B is all about.

Right now is a good time to think about moving some savings into Hong Kong dollars.

The Hong Kong dollar spent the last several years at the extreme ‘strong’ end of its trading range (7.75 HKD per US dollar).

It’s now back to 7.80, right in the middle of normal trading range, so it’s a slightly better entry point.

If you find that the Hong Kong dollar is not for you, in general it still makes sense to diversify at least a portion of your assets away from your home country’s currency…

… especially if your currency happens to be overvalued.

The US dollar has been artificially strong over the past few years. IT began a multi-year surge back in 2014 for no apparent reason.

GDP growth was tame, US debt kept piling… there was no fundamental, logical reason for the US dollar’s sudden strength.

I took advantage of this anomaly by trading overvalued US dollars for high quality assets (businesses, shares, real estate) in countries with undervalued currencies– like Australia, Chile, Colombia, Georgia, UK, Russia, Canada, etc.

This strategy decreased my risk and increased the odds that the investments will perform well.

As an example, I bought some assets denominated in British pounds (GBP) immediately after the Brexit vote when the pound sank below $1.20. The pound is now around $1.32, about 10% higher.

So even without factoring in the share price appreciation or dividends, those GBP investments have already made 10% in US dollar terms.

In Australia, I acquired a private business at a time when the Australian dollar was at a multi-year low. Similarly, the Aussie dollar is up 10% since then, so there’s already a built-in gain.

The US dollar has definitely lost some ground this year and isn’t as strong as it was in 2015 and 2016.

But the US dollar index is still at a higher level than its long-term, trade-weighted average, so there’s more room for the dollar to weaken.

This means it’s still a good idea for US dollar holders to consider some high quality foreign assets… and at a minimum, think about that free Hong Kong dollar ‘insurance policy’.

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In 1906, American entrepreneur William T. Grant opened his very first “W.T. Grant Co 25 cent store” in a small town outside of Boston.

The store became popular and fairly profitable. So Grant opened another. And another.

Three decades later, Grant’s retail empire was generating $100 million in sales (an enormous sum back then). And by the time of Grant’s death in 1972, there were over 1,000 stores bearing his name.

Investors loved W.T. Grant Company stock for its reliable profits and high dividends.

Many of our subscribers may remember W.T. Grant. The chain was among the largest in the US at its peak.

And then something completely unexpected happened…

In 1976, W.T. Grant Company declared bankruptcy.

At the time, it was the second biggest bankruptcy in US history. And, like the downfall of Lehman Brothers and other big Wall Street institutions at the onset of the 2008 financial crisis, it was a shock to the world.

How could a company as big and profitable as W.T. Grant Co. go bust?

In the autopsy that followed the bankruptcy, accountants found that while the company was generating substantial PROFIT, it was not generating any CASH FLOW.

These two terms sound the same, but they’re dramatically different.

Profit, or more specifically net income, includes all sorts of bizarre accounting rules that don’t actually make sense in the real world.

Due to these rules, companies are often required to adjust revenue and expenses for things like “depreciation”, or “foreign exchange gains and losses”.

These are all merely accounting terms that don’t directly and immediately affect cash balances. But they can dramatically impact “profitability.”

Here’s one example from my own experience: a few years ago, the large agriculture company that I founded here in Chile purchased a farm.

We bought it for far below the property’s market value.

It was a great deal for the business. BUT… accounting rules required that our company record a PROFIT based on the difference between what we paid for the property and what it was worth.

This idiotic rule made it seem like we achieved a profit simply for buying a property.

This makes no sense. In the real world, we would only earn a profit by SELLING the property for a higher amount than we paid. You can’t profit before you sell something.

It’s rules like this that make profit an unreliable metric.

CASH FLOW is much more accurate.

Specifically, OPERATING CASH FLOW tells us how much money a company makes from its business.

It strips out all the silly rules and focuses purely on how much cash a business generates from its operations.

Then there’s FREE CASH FLOW, which is the amount of money left over for investors AFTER a company makes all of the necessary investments it requires for future growth.

Cash flow is what counts. If a company has negative cash flow, it will eventually go under.

Profit can be misleading. And that’s what happened to W.T Grant Co. It was profitable but had negative cash flow.

Today there’s another famous business in similar circumstances– our old friend Netflix.

Quarter after quarter, Netflix reports a profit. Just yesterday afternoon the company had its quarterly earnings call, posting a profit of $553 million. Not bad.

Yet when anyone dives just a little bit deeper into the numbers, Netflix’s cashflow is absolutely gruesome.

The company’s Operating cashflow is negative. In other words, after stripping out all the unrealistic accounting nonsense, Netflix’s core business LOSES MONEY.

In fact Netflix’s operating cash flow has been negative FOR YEARS. And the amount of money they’re losing is increasing.

Netflix’s business has lost $1.3 billion so far through the first nine months of 2017. That’s 52% worse than the $916 million operating cashflow deficit they suffered in the first nine months of 2016, and nearly three times worse than the $504 million operating cashflow deficit during the first nine months of 2015.

Throughout this period, the number of Netflix subscribers has steadily grown, now well in excess of 100 million.

And every time Netflix reports a big surge in subscribers, the stock price soars.

This is truly bizarre. Just look at the cash flow numbers: as the number of Netflix subscribers has grown over the years, the company losses have grown even more.

It reminds me of that old saying from the 1990s dot-com bubble– “We lose money on every sale, but make up for it in volume.”

But it gets worse.

The company’s negative Operating Cash Flow doesn’t include the billions of dollars that it spends on content.

And on its quarterly earnings call yesterday, executives announced they will spend a whopping $8 billion on original content next year.

That’s $8 billion that they don’t have. And don’t forget the $1.4 billion operating cash flow deficit.

Where are they possibly going to find this money? Simple. Debt. Netflix will pile on more and more debt despite racking up enormous cashflow deficits.

Now, to be fair, it’s not unusual for a business to lose money for a period of time as part of a longer-term plan to generate strong cashflow.

But just look at this industry: it seems like EVERYONE is diving in to this original content game.

Apple. Facebook. Amazon. CBS. Disney. Google. Sony. Time Warner. Hulu. Each of these organizations has developed a streaming service with original content.

And some of them (especially Google and Facebook) have an endless war chest thanks to their cash-gushing core businesses.

Google’s parent company (Alphabet) reported free cash flow of $11.6 billion in the second quarter alone. So they could easily outspend Netflix and still have billions of dollars left over.

All of this competition is going to be great for consumers; these companies are collectively spending tens of billions of dollars to entertain us. And they’re going to lose money doing it.

But for investors this is sheer madness. Don’t be the sucker paying for other people’s entertainment.

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