Category: simonblack

What’s money worth if interest rates are negative?

Interest rates, after all, are the “price” of money.

When we borrow money from a bank and pay interest on the loan, it means that the money we’re borrowing has value. That –capital- has value.

Negative interest rates, on the other hand, suggest that capital is totally worthless.

This isn’t a philosophical exercise. These are the times we’re living in.

Despite a few tiny increases, interest rates worldwide are still near the lowest levels they’ve been in 5,000 years of human history.

Bankrupt governments across Europe who are already in debt up to their eyeballs have issued trillions of euros worth of new debt with negative yields.

And there have even been famous cases (also in Europe) in which bank depositors have had to PAY interest, while borrowers were BEING PAID to take out a mortgage.

Capitalism is defined by capital.

How does capitalism function when the cost of capital goes negative?

How does price discovery take place in a market where people (and governments) are literally being paid to borrow money?

I’m asking these questions because I honestly don’t know the answers.

Something is fundamentally broken in the market today.

Stripping capital of its value causes people to do stupid things.

How else could anyone explain that Argentina, a country in perpetual crisis that has defaulted on its debt eight times in the past century, sold billions of dollars worth of 100-year bonds last month to eager investors?

Or that Netflix, a company which consistently burns through billions of dollars of capital, was able to borrow over $1.5 billion at an interest rate of just 3.625%?

Again, this company lost $1.7 billion last year.

Plus they say they’ll lose another $2.5 billion in 2017, and that they don’t see this situation improving anytime soon.

In fact, Netflix’s most recent quarterly report states very plainly, “we expect to be FCF [free cash flow] negative for many years.”

Tesla, another serial value destroyer, is also tapping the debt markets.

That company is raising $1.5 billion to fund production of its low-priced Model 3.

That will bring the total amount of capital Tesla has raised since 2014 to nearly $8 billion.

Of course, Tesla needs to keep raising money because they burn through it so quickly.

Tesla loses $13,000 on every single car that it makes.

And the company has lost $1.6 billion in the past two quarters alone, not including the absurdly expensive Model 3 launch.

Then there’s Uber, a company ‘worth’ nearly $70 billion (and has raised around $14 billion in cash).

Yet the company loses nearly $3 billion every year.

And let’s not forget the mad dash for Bitcoin, which just hit yet another record high… or the even more high-flying market for ‘Initial Coin Offerings’, or ICOs.

ICOs are so white-hot that, earlier this summer, one company raised $153 million through the Ethereum blockchain in just THREE hours.

And of course there’s Ethereum itself, which is up 2,000% so far this year.

Perhaps most telling is that the domain Ethereum.com is available for sale for TEN MILLION DOLLARS.

Ironically the domain investing.com sold for just $2.45 million a few years ago.

Even Facebook’s fb.com sold for less— $8.5 million.

Now, I’m very much in favor of the crytpofinance movement.

But it’s clear that countless people are throwing money at an asset class that they don’t understand or know anything about.

I wonder how many retail investors who bought Bitcoin at its peak have ever read the original white paper… or have a clue how it works.

Or how many ethereum speculators understand a single line of code from the blockchain’s all-important ‘smart contract’ programming language?

People today are reckless with their money. They’re blindly throwing cash at anything that could produce a return.

This is the type of behavior that takes place when capital loses its value.

History is full of similar examples of capital losing value, including the famous episode of hyperinflation in Weimar Germany.

Hyperinflation hit Germany after the country printed paper money to finance its debt payments after World War I.

The government was printing so much money that they had to commission 130 different printing companies to run around the clock.

In 1914, at the beginning of the Great War, the exchange rate of the German mark to the US dollar was 4.2 to 1.

In 1923, the rate jumped to 4.2 trillion to one. The German mark was essentially worthless.

The currency lost value so rapidly, waiters would have to jump on tables to announce price changes every half hour.

Workers would bring wheelbarrows to work to collect their wages… then immediately leave to spend the money before it lost its value.

The barter system set in, with craftsmen offering their services for food.

Children would make arts and crafts with money, adults would burn the worthless paper to light their stove.

I doubt many people are setting money on fire to heat their homes today.

But they might as well be.

With so many investors throwing their capital into phenomenally pitiful investments that consistently lose money with no end in sight, or bonds which guarantee negative rates of return, the end result is the same–

That money is being set on fire.

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After roughly two months away in Europe and Asia, it’s great to be back here at my favorite place on earth.

I’m not talking about Chile– although I do enjoy the country. I’m talking specifically about this farm. It’s the perfect place for me.

The views are sensational. I’m surrounded by nature. And there’s an imposing backdrop of snow-capped Andean peaks to frame the vista.

And the stars at night are more vibrant than almost anywhere else I’ve been in the world… including the remote savannahs of Africa.

But I’m not here just for the stars or the views…

I’m able to organically produce almost all of the food I eat on the farm.

There’s an exceptional variety of fruit and nut trees, including peaches, plums, nectarines, figs, walnuts, almonds, chestnuts, apples, oranges, tangerines, lemons, cherries, blueberries, strawberries, pears, apricots, loquats, grapes, and quince to name a few…

I can grow pretty much everything save tropical fruits like bananas.

I also produce olives and press my own olive oil. I grow rice and wheat, so I have my own flour.

I even produce my own wine. And I distill organic waste into ethanol to use as a biofuel.

There are free-range chickens that produce organic, all-natural eggs. Pigs and sheep for meat.

Plus the farm has plenty of sources of water and energy. It’s totally self-sufficient… and abundant.

While the total farm size exceeds 1,000 acres, the portion that I farm for personal use is a fraction of that.

But it’s still more than enough to produce FAR more than I can consume. (You’d be surprised how little land it takes to feed a family– even half an acre is sufficient.)

The surplus can be saved, sold, or in certain cases like biofuel, converted into a different product.

It might not be everyone’s cup of tea, but for me this lifestyle is ideal– one that’s based on production and independence.

It’s a powerful feeling to not have to depend on the outside world. And I miss it when I’m away for too long.

I spent years searching for the perfect place to create this lifestyle for myself.

Most of Asia was out of the question since it’s very difficult for foreigners to own property. Europe and North America were cost prohibitive.

That’s how I ended up in Chile.

I’ve traveled to more than 120 countries in my life. I still visit 20-30 countries each year.

And I’m always evaluating business and investment opportunities when I travel… including real estate.

It’s remarkable how expensive property can be in certain countries, like the US. And how cheap it is in others.

I originally chose Chile because, among other things, land prices here are considerably cheaper than in other regions of the world with a comparable climate and soil quality.

The climate and soil is one of the reasons my farm produces such an abundance of variety.

Central Chile is one of the few regions in the world with ideal growing conditions suitable to most plants.

While there are four distinct seasons (this is important in agriculture), it never gets too hot… or too cold.

The only other regions of the world where these conditions exist are California, parts of the Mediterranean, the Western Cape of South Africa, and South Australia.

And by comparison, an acre of highly productive land in Chile, with full water rights, can easily cost 50% to 90% less than what I would pay in the most fertile areas of the US or Europe.

I’ve found this price vs. quality ratio for Chilean land to be unparalleled– especially for farmland and for oceanfront property.

This is why I started a large agriculture business here in 2014. We currently have several thousand acres under management and will become one of the largest producers in the world for our crop in a few years.

There’s no way I could have done this in North America.

In addition to prices in Chile being dramatically lower, the risks are also lower.

Foreigners can own full title to both land and water rights without any restrictions whatsoever.

Developing property doesn’t require years of permitting from 10,000 different government offices.

Our agriculture business deployed more than $50 million to acquire and develop farmland. And the government didn’t hassle us. They were actually, surprisingly supportive.

Labor costs here are also incredibly cheap.

And if you don’t find what you need in the local labor market, you can import foreign labor with minimal red tape. I’ve already brought several workers here from the Philippines.

If it sounds like I’m trying to convince you that Chile is the perfect place, I’m really not.

This country is definitely no Shangri-La. it has plenty of challenges and idiocy.

But my responsibility is to present you with information and global opportunity.

And the fact remains that if you’re looking for compelling investments in raw land, especially agriculture and oceanfront, Chile is still one of the best deals in the world.

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In 353 BC, as violent class warfare broke out across ancient Greece, one wealthy Athenian lamented in his journal,

When I was a boy, wealth was regarded as a thing so…admirable that almost everyone affected to own more property than he actually possessed. Now a man has to be ready to defend himself against being rich as if it were the worst of crimes.

Ancient Greece had become deeply divided at that point.

The opportunities from new ‘technology’ and new trade routes created a lot of wealth for many people. Others were left behind.

Plato called it “the two cities” of Athens — “one the city of the poor, the other of the rich, the one at war with the other.”

Eventually the poorer citizens were able to take over ancient Greece’s prized democracy. And, putting themselves firmly in control of government institutions, the new politicians came up with the most creative ways of raising taxes, seizing property, and redistributing wealth.

They doubled taxes. Import duties and export fees were increased. Real estate transfer taxes soared.

And even though the city-states were in a time of relative peace, the government continued collecting a special ‘war tax’ to fill its coffers.

Naturally they targeted the wealthiest citizens first.

But their methods weren’t working. The poor remained poor.

So the government raised taxes even more and ‘broadened the base’ to also include most of the middle class.

It still didn’t work. They failed to realize that stealing people’s money doesn’t create long-term prosperity.

Meanwhile, commerce and economic growth ground to a halt. Anyone with any wealth, savings, or assets focused almost exclusively on protecting themselves against government confiscation.

In 355 BC the government established a new, special police force to seize assets and imprison well-to-do citizens.

Violent outbreaks became commonplace. Class warfare erupted. In the 4th century BC, the lower classes in Argos and Mytilene banded together and massacred over 1,200 wealthy citizens.

The ancient Greeks were so busy fighting each other over their own money that when Philip II of Macedon (Alexander the Great’s father) invaded Greece, he was practically welcomed as a liberator.

This is one of the themes from ancient history that keeps surfacing again and again: whenever there is a productive class, there are others who aim to steal from them.

We’re still seeing it 2000+ years later.

I was recently speaking to a friend of mine from South Africa who co-founded a successful software company there.

He works his ass off and has done well for himself.

But he explained to me that his profits, in addition to the normal tax rate, are subject to penalties because the company shareholders don’t meet a specific, racial quota.

I find this totally idiotic.

Productive people… whether they start a business, design software, build a house, write a song, or work on an assembly line, create value. They create prosperity.

In some cases, they even create jobs.

This is exactly the sort of behavior that should be encouraged, not penalized.

Yet this trend persists all over the world, as it has for thousands of years.

Fortunately, there’s a multitude of options to do something about it– to take completely legal steps that dramatically and legitimately reduce the amount that you owe.

In my friend’s case, we talked through ways to use Double Tax Treaties (DTAs) to his advantage.

A DTA is an international agreement in which two countries agree on reduced levels of taxation in the event that their jurisdiction overlaps.

As an example, South Africa has a DTA signed with Hong Kong.

The agreement states that a Hong Kong company which generates certain types of income in South Africa will be subject to dramatically reduced rates than the normal South African tax.

So in theory my friend could move his software company to Hong Kong and collect royalties from South Africa at a tax rate of just 5% (which is stated in the treaty), instead of the 40%+ that he’s paying now.

Obviously there’s a lot of ‘i-dotting and t-crossing’ to make this happen. And this letter clearly isn’t intended to be tax advice.

It merely serves as an example that there are ALWAYS completely legal ways to reduce what you owe.

DTAs, by the way, aren’t some ‘loophole’. This is both national AND international law.

Here’s another easy example– estate tax, also known as inheritance tax, or ‘death tax’

This is a tax that many governments collect on your assets when you die. It’s offensive… proving that the state views us as nothing more than dairy cows to be milked, even when we’re no longer alive.

Countries all over the world charge estate tax. The US exemption levels are currently quite high. But many states also charge estate tax at rates which can wipe out your heirs.

But the estate tax is one of the easiest taxes to avoid — you can form a domestic trust, maximize gift tax allowances, redomicile to another state, etc.

The estate tax is so easy to avoid that many accountants call it the ‘stupid tax.’

And not doing something about it means that you’re literally giving away your money to the government.

That’s precisely the point: taxation is based on the principle that a group of out-of-touch politicians knows how to spend your money better than you do…

… and that they have some divine power to maximize social benefit with public funds.

This is obviously not the case. Most governments have a track record of serial failure when it comes to spending other people’s money: war, waste… and that $2 BILLION website for Obamacare.

We can all can come up with far more productive uses for our hard-earned savings than any government representative.

And given the innumerable ways to legally reduce what we owe, we have the power to do so.

If you haven’t taken these steps already, why not?

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Yesterday a good friend of mine came over for lunch to talk about his new business.

He has a very simple and compelling concept that easily helps restaurants make more money and creates a win/win for everyone– restaurant owners, diners, and the business itself.

This is exactly the type of model that I like to invest in.

Best of all, though, the business he’s creating isn’t new. There’s a company based in Asia which started a few years ago that is doing something similar.

This Asian company is flourishing. And since they’ve been in business for a while, they’ve already built the software, tested the market, and worked out the kinks in the process.

All my friend really has to do is mirror what they’re doing over here in Latin America.

This is, by far, one of the easiest ways to start a successful business: import a business model that’s already working into a rapidly developing country.

Make no mistake, starting a business is always challenging. And there’s always some level of risk.

Customers might hate your product. You might not be able to raise the investment capital you need. You might not be able to hire the talent that your business requires.

But when you’re essentially mirroring another business model that’s already been proven to be successful somewhere else, a LOT of that risk disappears.

I’ve seen this done so many times before.

One of the most successful entrepreneurs here in Chile used to live in Silicon Valley several years ago.

Back then there were a number of Peer-to-Peer lending sites being launched in the US, and he immediately realized that he could bring this idea back to Chile where the concept of Peer-to-Peer lending didn’t exist yet.

Today his company has become incredibly successful and has helped dislocate the local banking monopoly.

Clearly there has been a lot of hard work in growing that business.

But he didn’t have to start from scratch– he was able to build his company from the foundation of a business model that was already working well in North America and Europe.

This is one of the many great things about living overseas, especially in countries that are still developing.

You’ll find that there are ALWAYS products and services that are ubiquitous back home which don’t even exist yet overseas.

And savvy entrepreneurs can jump start their businesses by importing a proven model or idea that’s already working.

So if you’re an aspiring business owner trying to figure out your next move, start by looking around at what’s already working… then find a foreign country where that business model doesn’t exist yet.

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Today is one of those days when I feel blessed to have such wonderful and interesting people in my life.

A few months ago I introduced you to Ben Yu, a Silicon Valley-based entrepreneur who’s easily one of the most unique people I know.

I first met Ben when he came to our summer entrepreneurship camp a few years ago.

I knew instantly that he was bright… and different.

He had already won the prestigious Peter Thiel fellowship, dropped out of Harvard, and started a successful company (in which I invested, alongside many of our Total Access members).

Among his many talents and interests, Ben is heavy into cryptocurrency.

And a few days ago as he was reading the latest Howard Marks investment memo, something caught his eye.

Howard Marks, of course, is the billionaire founder of Oaktree Capital.

His regular investment memos are highly insightful, and on Monday we told you about the latest commentary in which Marks cast a stark warning to investors.

Marks plainly states in his latest commentary that market valuations are at their highest levels in history…

… that complacency is at record levels, i.e. investors seem to think that the good times will last forever…

… that risk levels are quite high, while returns are incredibly low…

… and that investors are engaging in some damn foolish behavior.

Among them, Mark cites multiple examples of how investors are lining up to buy bonds issued by bankrupt governments.

In June, for instance, Argentina issued billions of dollars worth of bonds with a 100-year maturity.

Bear in mind that Argentina defaulted at least five times on its debt in the previous 100 years.

So it seems likely that the miniscule return investors will receive completely fails to compensate them for the risks they are taking.

Marks also wrote about cryptocurrency as an example of foolish behavior.

On the topic of Bitcoin, ether, etc., Marks states simply, “They’re not real!” and “nothing but an unfounded fad.”

And so… my friend Ben Yu took the liberty of emailing Howard Marks to engage him on the topic if cryptocurrency.

Ben was polite, but incisive as always, saying that Bitcoin is “no more or less real than any shared concept of money. . .”

His point is that the dollar isn’t “real” either. It’s merely a concept that people believe in.

Plus, over 90% of all US dollars in circulation, in fact, are already in digital form.

When you log in to your bank account and see a number printed on a screen, that account balance exists almost exclusively in bank databases. There’s very little “real” paper currency that exists.

So in this respect the dollar is also predominantly a digital currency.

The primary structural difference between the dollar and Bitcoin is that the dollar is completely centralized.

It’s controlled by an unelected committee of central bankers who wield dictatorial authority over its quality and supply.

Bitcoin, on the other hand, is DECENTRALIZED, i.e. controlled by its community of users.

Currencies have existed in various forms since nearly the dawn of civilization, and our ancestors used everything imaginable as a medium of exchange.

Salt. Rice. Giant, immovable stones. Gold.

In the early days of the United States back in the late 1700s, people even commonly used whiskey as a medium of exchange. Worst case you could always drink it.

Each of those currencies worked because people had confidence in them.

In Medieval Japan people knew that if they received rice as a payment, that same rice would be accepted as payment for goods or services somewhere else.

For people who truly understand cryptocurrency, Bitcoin has inspired similar confidence for its users.

And with good reason. The technical design of Bitcoin solves a number of major problems that plague conventional banking and monetary systems.

But if you don’t understand something, it’s hard to trust it. It’s hard to have confidence in it.

Howard Marks admits he is in that camp. And he actually responded to Ben. Personally.

I thought that was pretty cool. And he was quite gracious.

In his reply, he agreed with the value premise of cryptocurrency, saying “The dollar has value because people accord value to it. Bitcoin may be no different.”

But he went on to conclude that

My issue is that (as I understand it), people can create their own bitcoin, whereas they can’t create their own dollars. . . To me, the idea that people can create currency and have it accepted as legal tender makes no sense. But maybe I just don’t understand.

It was an honest, thoughtful response. And one that Ben has probably heard a number of times before. I certainly have.

Marks is a highly accomplished, sophisticated investor. And he admits he doesn’t understand Bitcoin.

I know a number of other accomplished, sophisticated investors, many of whom are household names. They don’t understand it either.

It’s common in human nature to fear, or at least be suspicious, of what we don’t understand.

And that’s the typical refrain I hear from very sharp financial minds, “I don’t understand Bitcoin, I think it’s a scam.”

Ignorance doesn’t make something a scam.

And given how big the cryptocurrency opportunity is, it’s certainly worth learning about before passing judgment.

Cryptocurrency is the future. Governments, major banks, tax authorities, stock exchanges, and even central banks are moving towards crypto.

It’s worth understanding.

But frankly it works both ways: while it’s foolish to disregard something out of ignorance, it may be even more foolish to buy something that you don’t understand.

Countless people are buying Bitcoin right now with zero understanding of its structure, challenges, or opportunities.

They’ve never heard of hash functions or SegWit. They’re just gambling that the price is going higher.

This is crazy.

There is absolutely no substitute for learning.

And if you’re looking for an easy place to get started, Ben also took the liberty of writing an easy-to-understand article: Cryptocurrency 101.

You can read it here.

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If you invested $1 in this stock back in 1968 it would be worth around $7,000 today – returning over 20% a year for nearly 50 years.

No, this isn’t another story about buying Warren Buffett’s holding company, Berkshire Hathaway, back in the day and getting rich.

This is about buying cigarettes… In particular, cigarette giant Altria (MO).

The tobacco industry has long been one of the steadiest and most profitable in history.

In 2015, investment bank Credit Suisse published a report showing the performance of every major American industry from 1900 to 2010 – over 100 years of data.

If you invested $1 in the average American industry back in 1900, you would have had $38,255 by 2010. That’s a return of about 10% a year.

You would have done even better if you invested in food companies – turning $1 into $700,000 by 2010.

But tobacco stocks far outperformed every other industry.

One dollar invested in tobacco stocks in 1900 was worth $6.3 million by 2010 – a result 165 times better than the average American industry.

Even during the great financial crisis, people smoked more.

In 2008, Philip Morris International – the international tobacco arm that separated from Altria Group in March 2008 – sold 869.7 billion cigarettes and generated $63.64 billion in revenue (increasing 2.5% and 15.2%, respectively, from the previous year).

Cigarettes are so steady that sales even increased by 6.3% in the first quarter of 2009 during the peak of the financial crisis.

It turns out that selling addictive products is a great business.

Altria is a cash machine, and the company’s ‘free cash flow’ allows it to pay out generous dividends to its shareholders.

In fact Altria has increased its dividend for 47 years in a row.

Yet despite being one of the steadies industries in the world, tobacco stocks got crushed last Friday…

The Food and Drug Administration (FDA) announced it wants to reduce the nicotine in cigarettes to make them less addictive.

The news cratered shares of Altria, which fell nearly 20% intraday.

Yes, the FDA is trying to regulate the tobacco industry. But this isn’t the first time that’s happened.

The government already banned most forms of cigarette advertising. And it’s levied enormous taxes on the product. But the tobacco industry still prevailed.

And it will take years for the FDA to push this through, if it happens at all… Big Tobacco will fight like hell in Washington.

The larger point is that when a company as big and stable as Altria crashes 20% in a day, it’s time to pay attention.

How did this happen?

Simple: Passive Investment Funds.

Consulting firm Macro Risk Advisors estimates passive index funds (including ETFs and mutual funds from behemoths like Vanguard and BlackRock) own 85% of Altria’s shares.

And that’s part of the reason Altria sold off so hard. Before I explain, let’s talk about passive investing…

Passive investors buy stock regardless of valuation (as opposed to “active” managers who try to pick stocks that will outperform).

And they charge rock-bottom fees because no one is making complicated investment decisions.

When you put money into an S&P 500 index fund, your money is spread across those 500 stocks based on their size, i.e. the largest company gets the biggest portion of your money.

And passive funds are growing – with over $5 trillion in assets.

According to a Wall Street Journal analysis, U.S. mutual funds and ETFs that track indexes owned 4.6% of the S&P 500 in 2006.

Today, passive managers own 37% of the S&P 500 (and ETFs account for around a quarter of the daily volume across U.S. exchanges according to Bank of America Merrill Lynch).

Vanguard, which created the first passive mutual fund in 1976, is now receiving $2 billion a day from investors who want to own index funds.

And that $2 billion is immediately invested into the market, irrespective of the quality or value of the stock market.

Vanguard now owns 6.8% of the S&P 500 and is the #1 shareholder of many of the largest companies in the world.

Now, remember that index funds don’t trade stocks. They buy and hold.

Even if the FDA makes a big announcement that could affect the industry, index funds hold their positions.

But since passive funds are the majority owners of many large companies (like Altria), there’s only a small number of shares remaining that can change hands during a normal trading day.

This is why we can see such crazy volatility.

On a day where there’s bad news (like a negative FDA announcement), the passive funds which own 85% of Altria do nothing.

But many of the active investors who owned the other 15% started selling their shares.

When only 15% of the shares of a company ever trade, then the share price can collapse within minutes if even only a handful of the active investors decide to sell.

This is one of the consequences of the passive investing trend.

Small, individual investors are piling in to index funds. And this creates conditions where stocks can easily suffer WILD and violent swings.

More importantly, what happens when small investors decide they want to get out of index funds?

This means the funds will have to sell.

So just imagine what will happen if passive funds, which own 37% of the S&P 500 today, suddenly have to sell…

Altria’s 20% drop is a pretty big warning sign, yet another indication of a broken market.

We could soon see even more major dislocations, with some of the most popular stocks in the world gapping down 10+% in a single day.

As I’ve written before, this is a very good time to consider taking some money off the table.

When the cycle turns south and asset prices start to fall, it’s investors who set aside some capital for a rainy day who will call the shots and enjoy the most lucrative opportunities.

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One of the greatest investors in the world is getting worried…

Howard Marks is the billionaire founder of Oaktree Capital, one of the largest and most successful investment firms in the world.

A few times each year Marks write up his thoughts about financial markets– he calls them ‘investment memos’.

And he just released his latest one with a very clear message: it’s time to be cautious.

From Marks’ memo…

I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses.

Marks admits this bull market could continue. But he’s happy taking chips off the table in today’s particularly dangerous market.

Asset prices are high across the board – the S&P 500 is trading at 25 times trailing 12-month earnings compared to a long-term median of 15 – and prospective returns are low.

Meanwhile, we’re also seeing record-low complacency amongst investors.

Just this morning the Wall Street Journal published data from Yardeni Research showing that percentage of ‘bearish’ investors who believe that the market will fall is near its lowest level since 1987.

The Volatility Index (VIX), a statistic which measures ‘fear’ in the market place, is at its ALL-TIME lowest point in its entire 27-year existence – hitting 8.84 last week, compared to above 80 in 2008.

The VIX hit 8.89 on December 27, 1993. From Marks:

The index was last this low when Bill Clinton took office in 1993, at a time when there was peace in the world, faster economic growth and a much smaller deficit. Should people really be as complacent now as they were then?

Compare that today, where market pitfalls abound…

– North Korea is threatening to nuke the US
– Donald Trump is firing his entire cabinet
– The Federal Reserve has dropped interest rates to record lows and drowned the world in trillions of dollars of cash
– Debt levels are at record highs
– Entire banking systems, especially in Europe, are in need of massive bailouts
– The US government will run out of money in less than 90-days and hit the debt ceiling once again

Marks points out an important thing to remember about the VIX… It doesn’t say what volatility will be, only what investors think volatility will be. And the crowd is almost always wrong.

We’re eight years into the current bull market. Stocks have been rising for eight straight years– the second-longest winning streak in history behind the S&P 500’s 417% gain between December 1990 and March 2000.

And investors seem to see nothing but clear skies ahead.

And their false sense of security is pushing them to take on greater amounts of risk.

For example, junk bonds today yield just 6%.

In other words, pitiful, low quality companies that few analysts expect them to even remain in business are able to borrow money at just 6%.

That’s insane.

We recently wrote about Netflix losing $2 billion over the past 12 months. Yet the company’s stock price continues soaring to all-time highs.

In May, Netflix issued more than a billion dollars in debt at a rate of just 3.625%.

Would you loan money to a company that loses $2 billion a year in return for 3.625% ?

The answer is probably no. Marks shares his thoughts on Netflix’s debt:

Is it prudent to lend money to a company that goes through it at such a prodigious rate? Will Amazon or Google be able to loosen Netflix’s hold on its customers? Is it wise to buy bonds based on a technology position that could be overtaken? Positive investor sentiment has taken the company’s equity value to $70 billion; what would happen to the bond price if worries about rising competition took a bite out of that one day? Should you take these risks to make less than 4% per year? In Oaktree’s view, this isn’t a solid debt investment; it’s an equity-linked digital content investment totally lacking in upside potential, and it’s not for us. The fact that deals like this can get done easily should tell you something about today’s market climate.

In addition to appetite for their bonds, the “FAANG” stocks – Facebook, Amazon, Apple, Netflix and Google – are priced for perfection.

Netflix trades for nearly 240 times earnings. Amazon’s price-to-earnings ratio is over 190.

The market believes these stocks have cemented their leadership positions and cannot be unseated. But the future is always uncertain.

And throughout history, plenty of “can’t lose” companies – like Kodak, Xerox, Yahoo, etc. have fallen from grace.

I’d encourage you to read Marks’ full memo here. It’s one of the longest he’s ever written.

And remember to be prudent today…

There’s a global glut of liquidity. Asset prices are sky high across the board.

Investors are happily taking large risks for low returns. And they’re as complacent as they’ve ever been.

This is the type of behavior that takes place closer to a market top than a market bottom.

So it’s OK to take some money off the table today. Yes, you may miss out on future returns.

But you can also be 100% certain that money will be safe when the markets turn… And you’ll have more cash to take advantage of any bargains.

To repeat Marks’ initial warning… It’s better to turn cautious too early than too late.

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I’ve probably consumed more airline food than anyone I’ve ever met.

It’s not great for my health. But it comes with the territory.

Over the past decade, I’ve hit nearly every country on the planet, sometimes traveling 250+ days per year.

I travel for business: Sovereign Man’s entire premise, when I started it a decade ago, was to offer you boots-on-the-ground insights into global businesses, world economies, and international opportunities.

I travel for investments: No way am I going to sink a huge amount of money (or even a small amount) into a business without meeting the CEO in person, asking questions about the operations and the books, and gaining a personal glimpse into how things are run.

I travel for relationships: I live in Chile part of the year. My parents are in the US. Good friends of mine live all over the world, on every continent but Antarctica.

Personal, face-to-face interactions are hugely important to me, whether I’m assessing a business, gaining insight into a country’s economic woes, or just keeping up with an old friend from high school.

I started traveling abroad as a kid, originally to see family in Europe. Later, the Army took me to Saudi Arabia, Iraq, and other parts of the Middle East. As a civilian, reading books such as Jim Rogers’ Investment Biker inspired me to travel to learn more about the world — especially about the business and investment opportunities out there.

And those opportunities proved staggering — both in number and scope.

Travel truly is the best teacher, and remains the best way to find great investments that no one is talking or writing about.

Over the years, I’ve learned a lot about how to travel well… without breaking the bank. I don’t do hostels. I don’t usually travel in coach, which I recognize is a huge luxury. But I still spend a fraction of what most high-end travelers squander on getting around the world.

And here are three of my best tips for saving tons of money on travel…

Avoid the major hubs…

My colleague, Tim, often travels from Asia to New York or Europe. He lives in Bali much of the year, so if he’s flying from Hong Kong to NYC on, say, July 31, he’ll compare biz class seats on routes such as:

• HK-NYC (about $7,500 one way)
• Taipei-HK-NYC ($3,000)
• Manila-HK-NYC ($2,400)

If you’re in the US and are trying to get to Europe, you can deploy this strategy as well.

Say you live in Oklahoma City and want to go to London, round-trip, in economy class. We recently looked at flights leaving July 31 and returning August 14. Here are the results:

If you fly from OKC and stop in Dallas on the way to London, the fare might be $1700. If you drive to Dallas and fly from DFW to London, you might pay $1500… plus dole out cash for gas and parking for two weeks.

But if you fly from Denver to London, you’ll only pay $1200. You can find a $70 Southwest Airlines flight to Denver International and still save $400+ on the overall journey. That savings will buy you a hotel night, a few meals, or a side jaunt once you’re in England.

Book on Tuesday afternoon and fly midweek

The powers-that-be come in on Monday and see how seats sold over the weekend. Then, they eye competitors’ fares and go to war. By Tuesday afternoon, the prices have settled.

Fares go back up on Friday, after the government-required, three-day sale period. So, if you want the best available seats at the best available price, start scanning the Internet around 3PM Eastern on Tuesday.

As for the flights themselves, the cheapest fares tend to happen on Tuesdays, Wednesdays, and, if you’re flying internationally, Thursdays. Airlines know that vacationers tend to start flying on Friday night or Saturday morning, so those fares tend to be higher.

Ditto for peak-season. If you’re going to Italy and want to save on airline prices, plan to visit in April or November, not in July or August. (That won’t just save you money on airfare; it’ll save you money on your entire expense list.)

FareCompare.com, by the way, does a decent job of what a given flight generally costs.

The exact time to book your flight

The algorithm gods have made it clear: to get the best fare, you want to book a domestic flight about two months in advance. Fifty-seven days is generally perfect.

According to priceoftravel.com (and we’ve tested this), if you’re going from North America to Europe, 7 to 16 weeks out tends to be the best window. From North America to the Caribbean, you want to book about 2-3 weeks out, to South America, 5-16 weeks, and to Asia, 8-20 weeks out.

Going somewhere for Christmas? Buy your ticket in mid-August.

By the way, the old song about buying a last-minute ticket to save on fares? No longer true. Airlines know that business travelers often need to suddenly pick up and leave… and that they’ll expense their ticket price. The airlines are happy to pad the expense report and jack up the price a day or two before the flight.

These are only three of the many money-saving travel tips we shared with our Sovereign Man: Confidential readers. If you travel regularly, or even if you’re just planning one international trip this summer, this single issue could easily pay for an entire year’s subscription.

If you’re not already a subscriber, you can learn more about Sovereign Man: Confidential here.

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Eighteen centuries ago in the year 212 AD, the Roman Empire was in dire financial straits.

Emperor Caracalla had nearly bankrupted the treasury spending lavishly on his personal proclivities, waging pointless wars, and executing some of Rome’s most productive citizens.

We’re talking about a guy who murdered his brother (Geta) in order to become Emperor, and then had Geta’s name stricken from every official record.

Caracalla made it a capital crime for anyone to even mention his brother’s name.

Then he killed Geta’s friends and business partners. He killed Geta’s advisors and generals. He even killed Geta’s concubines.

He also killed anyone he suspected of being disloyal.

As Edward Gibbon describes in his seminal work, Decline and Fall of the Roman Empire:

“[Under Caracalla,] it was a sufficient crime. . . to be descended from a family in which the love of liberty seemed a hereditary quality.”

The only people who prospered under Caracalla were soldiers.

The emperor paid them extremely well to buy their loyalty, and he happily looked the other way as the army pillaged and plundered everywhere they pleased.

This drained Rome’s finances.

Ancient Roman historian Lucius Cassius Dio recounts a famous conversation between Caracalla and his mother Julia, in which Julia says…

“There is no longer any source of revenue, either just or unjust, left to us.”

The emperor responded, “Be of good cheer, mother. For as long as we have this [pointing to his sword], we shall not run short of money.”

Caracalla doubled Rome’s already debilitating taxes. He debased the currency, slashing the silver content of the Roman denarius coin.

He even introduced a new coin called the antoninianus, which was legally worth two denarius coins despite containing only 50% more silver.

Yet despite trying nearly every dirty trick in the book to restore the treasury, Caracalla was still driving Rome to bankruptcy.

So in 212 AD the Emperor issued an edict called the Consitutio Antoninana, effectively granting universal citizenship to all free men living within the Roman Empire.

This was a big deal– Roman citizenship had once been a highly coveted prize that was rarely granted.

For Caracalla, citizenship was merely another tool to enlarge his tax base.

This was one of the first instances in history of a desperate, bankrupt government using residency or citizenship to boost the economy and tax revenue.

We see many more examples of this today.

Here in Europe, both Malta and Cyprus now have ‘citizenship by investment’ programs, whereby a foreigner (quite often wealthy Chinese) can invest a sum of money in exchange for citizenship.

In Malta the required investment is 650,000 euros, plus fees. In Cyprus it’s 2 million euros, plus fees.

Cyprus and Malta really need the money.

Cyprus is so broke that its entire banking system went bust in 2013, and the government had to resort to freezing EVERYONE’S bank account.

And Malta has racked up severe, unsustainable budget deficits for 19 out of the last 20 years.

In fact, last year was the FIRST year in two decades that Malta’s government ran a budget surplus, totaling 101 million euros.

Given that the Maltese government approved 214 citizenship-by-investment applications last year at 650,000 euros each, they collected at least 139 million euros from the program.

In other words, Malta’s citizenship-by-investment program is the ONLY reason its government ran a budget surplus last year.

A number of other bankrupt European countries have “Golden Residency” programs, whereby foreign investors receive residency in exchange for purchasing real estate.

Spain and Portugal are two of the more popular golden residency destinations, and those programs have both been very successful in attracting affluent foreigners.

[Sovereign Man: Confidential members: see our Black Paper from earlier this month on Golden Residency programs.]

And a few months ago here in Italy, the government created a “non-domicile” tax regime to attract wealthy foreigners.

Under these new rules, foreigners can earn unlimited income worldwide (subject to a few conditions), yet pay a flat tax to the Italian government of just 100,000 euros.

100,000 euros might sound like a lot of tax to pay.

But if you’re earning, say, 1 million per year, this amounts to an effective tax rate just 10%… as opposed to the 50% tax rate that someone might be paying in Germany or California.

Plus you get to live la dolce vita on Lake Como.

(Italy also created easy paths to residency for startup entrepreneurs, investors, etc.)

US citizens have an even better option: Puerto Rico.

You’ve probably heard that Puerto Rico is miserably, hopelessly broke.

And a few years ago amid rapidly deteriorating economic conditions, Puerto Rico’s government passed some exciting tax incentive laws to attract affluent foreigners (primarily from the US mainland).

The two most famous incentive laws are Act 20 and Act 22.

Act 20 allows certain businesses to pay just 4% corporate tax, while Act 22 gives investors 100% tax relief on investment income (like dividends, interest, and capital gains) subject to a few conditions.

These tax incentives are incredible deals, especially for US citizens, due to the way that the IRS exempts certain Americans from paying US tax.

In other words you can legally escape the IRS by becoming a Puerto Rican tax resident. And under current rules you don’t even have to live on the island full time.

What’s really interesting is that, even though Puerto Rico has now effectively declared bankruptcy, the government is doubling down on these incentive programs.

They know the only way out is to attract talented, productive people.

This is the bright side of record debt and government insolvency.

Eventually, a desperate, bankrupt government has no choice but to roll out the red carpet for energetic value creators.

Plenty of great options already exist. And we’ll probably see more to follow.

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I could get used to this.

As I told you yesterday, I spend part of the summer each year at a centuries-old villa in a storied pocket of Italy. And I invite some of the most brilliant and productive people on the planet, most of whom I’ve met traveling the world over the last decade.

Italy has a way of making people expansive – past the handmade pasta we eat every night. Looking over the rolling Umbrian hills, we chat over Chianina beef, local wine, and fresh fruit each night — exchanging ideas and inspiring new ones.

So we were happy when our friend Ryan joined us on Monday.

Ryan is another brilliant and creative redhead, like the Zac the Mad Scientist I told you about yesterday. Ryan is a digital marketing guru, serving clients all over the world.

He’s less manic than Zac… so far, no psychedelic sexual lubricants in his product arsenal… but every bit as shrewd.

Ryan, like most successful people I know, is a master at creating opportunities for himself.

Champions don’t wait around for things to be handed to them.

They take action…

They use their brains to figure out what’s right in front of them, turn it into an asset or opportunity, and move forward.

And that’s exactly how Ryan, at a young age, grabbed some low-hanging fruit and turned it into permanent foreign residency.

He’s not even 40, and he’s working toward a full, foreign citizenship.

Why is this important? Because permanent residency somewhere abroad – wherein you can come and go as you please in another nation, no questions asked – and/or second citizenship elsewhere – where you can take full advantage of the rights offered to every other citizen in that country, as can your kids – are essential components of a robust Plan B.

A Plan B, as longtime readers know, is the ultimate insurance policy.

No matter what happens in your home government, instead of being “triggered” and cowering hysterically in a corner, you can simply get on a plane – or, in Ryan’s case, a car – and go.

If you sense that your home government is about to enact capital controls, guess what?

As a permanent resident or citizen of another country, you can likely open a foreign bank account and move your savings abroad. (You can do this as a foreigner, too, but in most countries, residents and citizens find it easier to open bank accounts.)

If some socialist mandate of a tax code – I’m looking at you, California – is crippling your small business, guess what?

You can move your business somewhere that doesn’t cannibalize its most productive citizens.

Or, if you just want a place to go that’s cheap, safe, and offers a great lifestyle…

You can do that, too.

That’s exactly what Ryan did. Now, instead of paying 5 bucks for a tiny taco in San Diego, he can grab an even fresher, more delicious one for 75 cents in the state of Baja California Sur. And then hike to a waterfall.

Ryan is a permanent resident of Mexico. And by permanent, I mean permanent. He never has to renew it. And it even entitles him to apply for citizenship.

“It’s a great comfort because I know that no matter what’s going on in the world or in the economy, I can skip the tourist lines and walk straight back into a completely functional life in Mexico, to a home, to a work setup… no questions asked” says Ryan.

We wrote to Sovereign Man: Confidential subscribers about Ryan this week, telling them exactly how he gained permanent residency abroad.

I can’t give you all the details here, but the recipe was simple and straightforward:

1 part hustle + 4 parts time.

Ryan moved to Baja, worked from there, ate some of those amazingly fresh Pacific fish tacos, and walked away a few years later with full-blown residency.

Why Mexico? Family. He had family there, which made the transition easier.

The point is, there’s low-hanging fruit all around us.

If you have a parent or grandparent from a country that honors citizenship by bloodlines, then go get your passport.

If you’ve got some money to invest, look into countries that offer what are called Golden Visas – residency in exchange for an investment in, say, local real estate. A guy I know bought a condo in Portugal through its program. He rents it out to offset the investment and has residency… and thus access to the rest of the European Union.

Another solution: I’m close to a US citizen who had her baby in Chile, which grants citizenship to those born on its soil. Boom. The kid had two passports at three weeks old. The parents are permanent residents.

In short, there are dozens of ways to gain foreign residency or citizenship. (And we, in turn, have dozens of step-by-step, how-to articles in our member library.)

And once you have it – especially citizenship – you have it, and can generally pass it onto your kids.

So, what’s your low-hanging fruit?

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