Category: simonblack

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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For about two weeks each year this little-known corner of Italy becomes one of the most interesting places in the world.

Dozens of productive people from across the planet and all walks of life gather at this estate every summer to break bread, build relationships, and exchange ideas. (check out the photo)

Over the years we’ve had scientists, politicians, vagabonds, artists, and musicians, as well as enormously successful investors and entrepreneurs in attendance.

As you can imagine, the conversations are fascinating.

The other night, in fact, late into the evening over the local Montefalco wine, we devised a subversive, early-stage plan to rid Venezuela of its destructive, totalitarian government. More on that in a minute.

One of the most interesting characters that shows up each year is my friend Zac– an Australian inventor with fiery red hair whose creative intellect is surpassed only by his irreverent candor.

Imagine the late, great comedian George Carlin having a love child with Doc Brown from the Back to the Future, and you can start to grasp Zac’s personality.

He’s great. And something of a mad scientist.

To give you an idea of his business pursuits… he was recently working on a revolutionary new sexual lubricant made from DMT, a powerful psychedelic drug found in Ayahuasca. He’s calling it “Stone and Bone.”

A few days ago Zac asked to borrow my car for quick trip up to Bologna, about 3 hours away.

Apparently, he’d struck a deal with a gentleman there to purchase a new type of 3D printer.

(As soon as he left I found out that Zac isn’t a particularly experienced driver; miraculously the car is still in one piece, though I suspect he may have 3D-printed a new bumper.)

If you’ve never seen a 3D printer in action, the technology is revolutionary.

And by ‘technology’, I mean it in the purest sense of the word: “the application of scientific advancement for practical purposes.”

If I could rely on the hideous nomenclature from Generation Snowflake, our modern concept of ‘technology’ has been culturally appropriated.

Technology used to be the stuff of scientists and inventors. Alan Turing. Robert Noyce. Steve Wozniak. Benjamin Franklin. People whose creations helped push society forward.

Today, ‘tech’ is applied so loosely that even an app like Instagram (whose sole purpose seemingly is for sharing butt-selfies) is considered technology.

Netflix is a ‘tech’ company because its proprietary algorithm tells you what movies you might like to watch next.

Netflix’s movie algorithm is no more ‘technology’ than the guy working at the Apple store is a ‘genius’.

I’ve long written about a concept I call the ‘Universal Law of Prosperity’.

Unlike most laws, this one’s pretty simple: if you want to be prosperous, you have to produce more than you consume.

It applies to governments, big companies, individuals… and even entire civilizations.

Our civilization has a great many modern conveniences.

We can control our air conditioners with our iPhones. We can instantly stream the latest version of Despacito. We can ask Siri when the next showing of Wonderwoman will be.

And pretty soon we’ll have driverless cars which will allow people to spend their morning commutes surfing Facebook and Instagram instead of staring at the road.

These are all nice things to have. But it’s all a form of consumption.

This trend towards consumption is everywhere you look– many of the greatest scientific minds in the world are in Silicon Valley right now figuring out how to induce people to waste even MORE time on Facebook, click on more ads, and upload more selfies.

As a civilization, we are trending towards more and more consumption. And that path has consequences.

That’s what I like about 3D printing: it’s real, productive technology.

And it’s game-changing. The technology is reaching the point where it’s possible to 3D print just about anything.

Production is almost always empowering. With the ability to produce comes the ability to prosper and become more free.

Here’s an easy example: longtime readers know that I founded a large agriculture business in Chile back in 2014.

We own and operate about 5,000 acres of farmland; and last year, the executive team came up with a much more efficient way to irrigate and plant blueberry seedlings.

We needed to retrofit our tractors with some custom parts, but manufacturing them would have cost a fortune. Moldings and castings can be incredibly expensive.

Our workers welded together a temporary hack that was marginally effective. But now we can 3D print exactly what we need at minimal cost.

Not only does this constitute huge savings and more optimal efficiency, but it also gives us the power to be more self-reliant.

If we’re no longer beholden to the limited options that John Deere has available. If we come up with a better idea, we can immediately execute.

As a more extreme example, if the government ever tries to ban something like firearms, you’d be able to 3D print one from home.

It’s the same thing with cryptofinance; if the government ever imposes capital controls or shutters bank accounts (like what happened in Cyprus in 2013), people would still be able to access their funds and engage in transactions through the Blockchain.

This is the sort of technology that pushes civilization to a higher level– not selfie-poles and streaming movies.

It’s also the sort of technology that can help solve some of the biggest challenges of our time.

I’m completely serious when I say that the Blockchain may be one of the key ingredients in freeing Venezuela of its totalitarian government.

I need a few weeks to test this hypothesis. But I hope to have more to tell you soon about this idea.

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What I’m about to tell you is a bit scary. But as you’ll see, it could easily happen to anyone. So please read this in full… and then go change your passwords.

We have a friend whose email was hacked some time ago. It happened because, as many people tend to do, she used a very simple password for her email and logged in over an unsecure network, allowing hackers to easily grab it.

What’s more, she used the SAME password for multiple other online accounts. So when the hackers obtained her email password, they could also access her bank account.

After obtaining access to her email account, the hackers combed through years and years of old files and emails until they found a document with her signature on it, along with other key personal information.

From there, they created a phony contract that made it appear she was buying a property for $500,000, and then they Photoshopped her signature at the bottom of it.

The contract looked completely legitimate. So when they faxed it over to the bank, along with wire instructions to please transfer $500,000 out of her bank account, the bank believed the scam.

The hackers were also able to log in to her bank account and send internal messages to the bank, ‘confirming’ the wire transfer.

On the bank’s end, everything appeared to be in order. So they transferred the money.

Poof. $500,000 was stolen.

Now, clearly the bank had some pretty weak internal controls in place. I’m astounded that a bank in 2017 would transfer half a million bucks to the other side of the planet based on a faxed signature that’s so easily reproduced by any teenager with Photoshop skills.

And more than likely the bank is going to have to pony up some cash.

But still… no sense in taking the risk.

I thought her story highlighted an interesting point with respect to Cryptocurrency.

One of the big reasons that more people DON’T own cryptocurrencies like Bitcoin or Ether is because of the cybersecurity risk.

There are plenty of Boogeyman stories floating around about major Bitcoin exchanges getting hacked.

Or perhaps my favorite instance of this was when Bloomberg’s Matt Miller inadvertently had his Bitcoin hacked on LIVE television back in 2013 because they gave the viewers a 10-second closeup of the private key.

It was basically the equivalent of flashing your bank password on live TV.

These fears about cryptocurrency security are not unfounded; there are a number of ways to be hacked.

But as this story shows, the same risks exist in conventional banking. There’s no shortage of scams– fraud, identity theft, etc. are all pervasive.

And if you’re not paying attention and/or aren’t properly educated, you can easily get robbed.

Cryptocurrency is the same. It’s not scary. It’s just different.

And frankly if you learn the tools and implement the right cryptocurrency security [like proper cold storage], Bitcoin is nearly impossible to steal and MUCH more secure than conventional banking.

It really is just a question of education.

Now, let’s briefly go back to good password security. Remember the golden rules of passwords:

1. Have a unique password for every website or account.

More bluntly, DO NOT USE THE SAME PASSWORD FOR MULTIPLE ACCOUNTS. As this story shows, if hackers obtain that single password, they’ll be able to access your entire life.

2. Use a long password, at least 14 characters with a random combination of letters, numbers, and special characters.

Avoid “dictionary words”, or anything that looks like a dictionary word. For example, “simon” is a terrible password. And “s!mon” isn’t much better.

Also avoid anything familiar. Your kid’s name. Your dog’s name. Your favorite movie. Your phone number.

Good passwords are things like:

5rlIrw1t$,bhg7I3y!

It would take centuries for a supercomputer to crack that one.

Now, obviously we can’t possibly remember dozens of cryptic passwords.

That’s the biggest reason why people so frequently reuse the same password over and over again across multiple websites, or even their home’s Wifi router.

Fortunately there are several “password managers” that exist, like 1Password, which allow you to maintain an easy, secure, encrypted database of your passwords on your own computer.

The idea is that you only have to remember a single master password which allows you to decrypt the database and access the rest of your passwords.

[By the way, 1Password recently started offering a monthly subscription service to store your passwords on their servers. We definitely recommend NOT doing this. It’s much more secure to buy the software and maintain the database yourself.]

Password managers make password security much easier as long as your master password is highly secure.

One tool to create and remember a secure password is to think of a sentence or phrase that you can more easily remember.

For example, “Simon really loves Italian red wine in the summertime, because he goes to Italy every year!”

Then you could use that sentence as a code by inserting the first letter in each word as the password:

SrlIrwits,bhgtIey!

and then make it more secure by adding/substituting numbers and special characters for the letters.

5rlIrw1t$,bhg7I3y!

That’s a very secure password, AND it’s a LOT easier to remember.

You can apply this same technique, by the way, when you set up a password-protected secret key for your cryptocurrency wallet.

As a final note, be VERY cautious with unsecure, public WiFi.

Surfing the Internet in those cases is like shouting your passwords across a crowded room. It makes it very easy for hackers to steal from you.

If you can’t avoid unsecure networks, then at least make sure you use a VPN (Virtual Private Network) to first establish a secure connection.

This is very difficult to hack and one of the best ways to ensure your data won’t be stolen over an unsecure network.

(I’m currently using a service called VyprVPN, but there are countless others available.)

Now– please go change your passwords 😉

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Every summer around this time I rent a palatial wine and olive estate here in central Italy for a few weeks of relaxation with friends, business colleagues, and Sovereign Man: Total Access members.

We’ve been coming to the same place for six years in a row, and it’s gorgeous.

At the center of the estate is an 18-bedroom mansion that has been in the same family since it was built four centuries ago.

Back then, Italy was still a major center of wealth and power. London was still a developing backwater and New York didn’t even exist yet.

But cities like Florence and Bologna were among the most prominent and prosperous in the world.

This magnificent estate was originally built as a wedding present by one of the region’s leading families. It even has its own chapel on the grounds where the ceremony was performed.

While the estate has miraculously remained in the same family over the centuries, Italy’s wealth and status in the world has diminished.

Today, this country is sadly in dire straits.

Italy has one of the worst public debt burdens in the world, exceeding 130% of GDP.

The banking system here is crumbling, and many of Italy’s leading banks — like Unicredit and Monte dei Paschi — are in desperate need of a bailout.

Unemployment persists around 12%. Youth unemployment exceeds 37%.

Economic growth has flatlined… Italy barely registers 1% annual GDP growth.

Adjusted for population growth, the country has basically been in recession for years.

The signs are obvious. Italians feel the economic pain. It eats into their standard of living.

Naturally the government is a total disaster– corrupt, incompetent bureaucrats whose attempts to ‘fix’ everything have only made the situation worse.

Over the last ten years, in fact, the Italian government has engineered widespread poverty across the country, with the number of people living below the poverty line almost tripling since 2006.

We’ve become close with the current owner of the estate. She’s the great-great-etc. granddaughter of the original nobleman who built this place.

And each year we have what I call the ‘annual airing of the grievances.’

Basically she talks in that highly animated way that only Italians are capable of doing, venting and griping about all the ways the Italian government has been screwing her.

Every year it’s more of the same. Capital controls. Wage and price controls. Debilitating regulations.

A few years ago in an effort to ‘protect’ workers, they imposed a minimum wage so steep that she could no longer afford to harvest her olives.

She had workers who were perfectly willing to accept the normal, lower wage. But the government wouldn’t allow it.

Paying the higher wage, though, meant that she was 100% guaranteed to lose money.

End result? There was no harvest… so nobody made any money.

Genius.

Now they’ve invented all sorts of new taxes and jacked up existing rates to astronomical levels, in addition to burying her in paperwork.

Year after year I hear these stories, and year after year the situation becomes worse.

But the worst part in my mind is that she isn’t doing anything about it.

I’ve tried to explain to her how many solutions exist. There are ALWAYS completely legitimate ways to solve these problems.

For example, she could set up an overseas booking agency in a tax-favorable jurisdiction like Singapore, UAE, or Hong Kong (which all just happen to have comprehensive tax treaties with Italy).

Let’s say she chooses Hong Kong.

Similar to Booking.com or Hotels.com, her Hong Kong booking agency would market the property to prospective customers, book the reservation, collect all the money up front, and charge a 25% commission for this service.

A 25% commission is pretty standard for in the industry. That’s what she’d pay if she booked reservations through Hotels.com.

So if a customer pays 40,000 euros for the week, the Hong Kong-based booking agency would take a 10,000 euro commission. Then it would pay the remaining 30,000 euros to the villa’s account in Italy.

That 30,000 euros would be just enough to pay the villa’s expenses. So the Italian operation would barely break even (and hence pay very little tax in Italy).

But the booking agency’s 10,000 euro fee is nearly pure profit.

And since that company is based in Hong Kong, it is not subject to Italian taxation.

Depending on how the booking agency is structured, it’s even possible the profits could be tax-free under Hong Kong’s generous territorial tax system.

The idea is that instead of drowning in paperwork, steep taxes, and insolvent banks, she can legally set aside profits that will remain in a stable, low-tax jurisdiction with a well-capitalized banking system.

This is just a quick, back-of-the-envelope example.

There would be a number of intricacies and professional advice involved in establishing a final structure, so please don’t take this as a ‘how-to’ guide. It’s not.

The point I’m trying to make is that there are always solutions.

It really breaks my heart, though, because she never implements them. It’s always the same reaction– “Yes, I really need to do that.”

But it never happens. And each year her inaction costs her more money, more stress, more dignity.

Nothing beats action. The greatest plan in the world is worthless without the will to act.

And that starts with cultivating the right action-based mindset: No politician is going to ride in on a white horse to engineer prosperity for all.

WE are responsible for solving our own problems and improving our own lives.

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Last night Netflix executives announced that a record 104 million people worldwide now subscribe to its service.

This number handily beat what analysts were expecting, and the stock SURGED nearly 9% to an all-time high. Netflix is now trading at more than 200 times earnings.

Look, I like Netflix. House of Cards is entertaining.

But you shouldn’t invest in a business based on its number of customers and quality of content alone.

And if you dive into the company’s numbers, you’ll see immediately that Netflix is hemorrhaging cash.

To be fair, Netflix earned a profit last quarter. But as we’ve discussed before, ‘profit’ (or ‘net income’) is extremely misleading.

Accountants use all sorts phony accounting tricks to manipulate a company’s net income. So, if you really want a good understanding of a company’s performance, take a look at its Cashflow Statement.

The Cashflow Statement strips out all the accounting nonsense and simply shows whether or not a business made money.

So, while Netflix has a record number of viewers, the operating cashflow of the business was actually NEGATIVE $1.9 billion over the last twelve months.

And things get worse…

If you include the additional capital investments the company has to make in order to stay in business and remain competitive (like acquiring new content), the total “Free Cash Flow” is NEGATIVE $2.2 billion.

And the business doesn’t expect this to change anytime soon.

On its Investor Relations website, Netflix clearly states that its aggressive investments will “continue to weigh on [Free Cash Flow], even after we achieve material global profitability.”

Translation: Even if Netflix is successful, it still plans on burning through cash.

In the meantime, the company has to make ends meet by taking on increasing amounts of debt. In fact Netflix’s total debt level soared 45% just in the last three months to over $4.8 billion.

So, yes, Netflix is great for consumers.

But as an investment the business continues to lose billions of dollars and pile up debt. It also has to compete with Amazon, Google, Facebook and every other media company in the world.

Still, investors have pushed Netflix’s stock price to an all-time high, valuing the company at nearly $80 billion.

Remember, when you buy shares of a company, you become an owner of that business. And you want to make sure the business is financially sound.

If the owner of the local car repair shop was losing money every year and piling on debt, would you want to buy that business? You’d probably tell them to take a hike.

Or, if you wanted to risk it, you wouldn’t pay an obscene valuation for it.

But that’s exactly what’s happening here. Because Netflix and other tech companies like Tesla are “in the spotlight,” investors are buying regardless of valuation.

Look, I get it. Scoreboard. Buying expensive, popular stocks has been profitable for investors…

And it could be a winning formula for the foreseeable future.

But we know there will be a top. There always is.

Ask yourself… With companies like Netflix and Tesla losing billions of dollars, racking up debt and trading at obscene valuations – do you think we’re closer to a market top, or a bottom?

Nothing goes up (or down) in a straight line forever. Markets always have been, and always will be, cyclical.

And today, by nearly every conventional metric, the biggest companies in the market are incredibly overpriced.

Price/Earnings. Price/Book. Cyclically-adjusted P/E. Market Capitalization to GDP. Enterprise value to EBITDA.

Each of these shows that the market has rarely been more expensive, and if so, only prior to a major crash (i.e. 1929, 2000, 2008, etc.)

Meanwhile, the Volatility Index (VIX), the market’s “fear index,” is trading near record lows. So while stocks reach more and more absurd valuations, investors have never been more complacent.

But everything is not that rosy.

GDP growth in the US came in last quarter at a pitiful 1.4%. That barely keeps pace with population growth.

Productivity is declining. Wages are stagnant.

And the government racked up so much new debt last month alone that they’re on pace for another $1+ TRILLION to be added to the national debt this year.

No one has a crystal ball. But, again, the data suggests we’re getting closer to the top of the cycle.

We won’t know for certain until it’s long past.

Even the ‘experts’ will still be telling everyone to “BUY BUY BUY” literally days before the actual top. That’s how investor psychology works…

Fortune Magazine famously recommended “Ten Stocks to Last the Decade” on August 14, 2000, within a few months of the stock market peaking.

A decade later, several of those companies (including Nortel and Enron) had gone bust. And overall, the portfolio had lost two-thirds of its value.

It’s hard to sit on the sidelines while all your friends are making money in an irrational market. The ‘fear of missing out’ is an incredibly powerful human emotion.

And bull markets, by design, draw the maximum number of investors in before the big crash.

So if you’re not invested in stocks like Netflix today, you may think you’re missing out. And, honestly, these stocks could go even higher from here.

As I wrote to you last week, markets are under no obligation to make sense.

Don’t be drawn in by the siren song.

If you sit this market out, you could miss another 20% rise.

But you’ll also miss a devastating collapse.

If you want to own Netflix, be patient. It will go on sale eventually.

And you’ll be able to buy the same company for 50%, 60%, maybe even 80% lower than today’s prices.

But you have to have cash available when that moment occurs.

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