Black Lion Capital Management

Junk Deflation Part I

2016-02-01T13:22:00.002-05:00

We met Melvin, a tow truck driver working always working overtime, a few years ago. Years later, Melvin crossed paths with us again. However, this time it was a little different, the setting that is. He was no longer the tow driver, Melvin was in business for himself. It was not the Melvin we met all those years back. He had transformed into a smart and calculated broker between junk car sellers and the scrap yard.

The business plan was simple. It was almost like a movie plot. Bear with us Dear Reader. We will get to the deflation (boring stuff) in just a moment. Recall we said Melvin was just a tow truck driver when we first met him? Well, let us assume he was working for Mr. X. Employer, Mr X, was in the business of junk car removal.During this time, major central banks around the globe were injecting freshly printed money through various forms and different names. Stock market values doubled as a result and so did commodities and metals.Therefore, the news outlets declared victory. We were told the authorities could foresee an economic recovery and that we must not worry.—But back to our story. Melvin was able to acquire the business from his former boss. Apparently, Mr X had lost sight and an account. Due to not meeting the required volume of junk cars scrapped in the yard, Mr. X was forced to stand down from his business.

Prices of metals, such as steel, alloy, palladium, and aluminum had all risen since the 2008 crisis. Supposedly, China was the reason why prices for this resources were appreciating. The Commy state was also growing at double digit rates according to some reports. That meant the demand for metals was dependent on the Chinese economy’s demand for a massive quantity of metals. After working for Mr. X for a few years, Melvin capitalized on the downfall of his former boss. His former boss, as a broker, bought junk cars himself and from individual tow truck drivers. These drivers preferred to receive immediate profit by selling junk cars to Mr. X. You need to imagine Mr. X working seven days and buying a minimum of 20 junk cars a day.

If we may ask you Dear Reader, have you ever seen signs posted on any surface on the side of the street claiming,"We buy junk cars! Pay up to $400?” Well folks, depending on the condition of the junk car; weight, content of metal, individual tow drivers and etc., one could be paid up to $400. The tow drivers who get your junk are forced to make a decision on how to profit off of it. All they need to do is take your junk to Mr. X. Since, Mr. X is a volume seller to the scrap yard, he is happy to pay an extra $150 for each junk car brought to him.

For example, say you bought a junk car from your neighbor (assuming you are intelligent and know the soaring prices for metals). You offer your neighbor $300. Your neighbor is delighted because he has been relieved of his junk and it was removed from cluttering his driveway. Yet, you would just need to contact Mr. X to receive your payment of $450. You congratulate yourself since you just made a profit of $150. Then, you try to convince yourself that if you can buy just ten junk cars, you could easily make $1500 a day.

That was then and this is now. Melvin is the new Mr. X. He has been successfully running the business for a couple of years now. After connecting with him recently, the question “How is business?” was necessary. That simple question led us to further investigate the state of the global economy.

Stay tuned,

Eskinder Haile

Successful Investments Start With These Five Questions...

2015-12-11T11:45:00.003-05:00

Successful Investments Start With These Five Questions...

By Mike Barrett, analyst, Extreme Value

Friday, October 9, 2015

Finding successful investments is hard work.

My colleague Dan Ferris and I routinely evaluate dozens of companies before finding a few that are worthy of additional research. Unfortunately, that means we probably spend more time reading about businesses that we don't recommend than reading about those we do.

Often, our research begins with a company's annual report. To achieve transparency with investors, public companies are required to file these reports with the U.S. Securities and Exchange Commission (SEC), which refers to them as "10-Ks."

Annual reports provide a wealth of valuable data. Better yet, the data are accessible 24/7 on the SEC website.

These reports are often 100-150 pages long and contain a mind-boggling array of numbers. Our challenge is to quickly separate what's important from what's not. Or as Arthur Conan Doyle's famous fictional sleuth Sherlock Holmes says…

It is of the highest importance in the art of detection to be able to recognize, out of a number of facts, which are incidental and which vital.

How do you separate "incidental" from "vital" in a document loaded with thousands of seemingly important facts? You must have a plan.

I have read thousands of annual reports in my investing career. Over time, I've developed a system that helps me quickly assess if a company is worthy of further study.

My system starts with these five questions…

Are there risks related to the company's revenue stream that aren't readily apparent?
Are there other unusual risk factors?
Has the company demonstrated that it can grow revenue and earnings?
Is there evidence of operating leverage?
Is the company generating free cash flow?

Let's look at each individually…
Question No. 1: Are there risks related to the company's revenue stream that aren't readily apparent?

Typically, an overview of the business and how it generates revenue can be found within the first few pages of an annual report. Spend some time there. I specifically look for two risks…

•	Heavy dependence on just one or a few customers.
•	Hidden exposure to commodity prices.

Customer Concentration

Ideally, we're looking for companies that sell to many, many customers. This limits the risk that revenue might suddenly decline from the loss of any one customer. It also limits the leverage any one company can have on the business. Raising prices on a customer that's responsible for 60% of your business will always be a challenge.

Be aware that some industries routinely experience high customer concentration. Food manufacturers like Hain Celestial Group often report Wal-Mart as a major customer (10% or more of sales).

Suppliers of original equipment manufacturer (OEM) auto parts typically have high exposure to one or more of the major car manufacturers. BorgWarner, for instance, reports that 17% of its 2014 sales were made to beleaguered Volkswagen.

Companies in the semiconductor industry also routinely experience high exposure to just a few customers. Cirrus Logic is an extreme example. In 2014, 72% of its sales were made to a single customer, Apple.

Exposure to Commodity Prices

In addition to assessing customer concentration, you also want to determine if there is hidden exposure to cyclical commodities, like oil and gas.

Remember, a company doesn't have to be in the oil and gas business to have significant exposure to its boom and bust cycle. Last November, I addressed this problem in the Stansberry Digest.

Oil prices were starting to fall hard. I warned investors they might be unwittingly exposed if they owned companies that did a significant amount of business with oil and gas producers. Here's what I said at the time…

I've looked closely at hundreds of companies over the past year and I'm continually surprised at the reach of the American oil industry. The manufacturing and global distribution of oil-extraction tools and parts – paired with the transport of crude-oil products – generates billions in revenue for thousands of American companies.

If you own some of these companies (or own mutual funds that hold large positions in them), you're more exposed than you think. If oil continues to fall, your portfolio could take an unexpected hit.

[One] blue-chip stock that lots of individuals and funds hold is Emerson Electric. Emerson is a global industrial powerhouse operating separate divisions in industrial automation, network power, and climate technologies.

Emerson's process management segment has been the primary source of revenue growth over the past few years, thanks to surging demand from oil and gas customers. This division accounts for 35% of Emerson's revenue. A sustained slowdown in domestic oil production (a byproduct of plunging prices) would hurt Emerson's profitability.

After I wrote that, the drop in oil prices did resume. And Emerson's stock price has dropped about 29% since then.

Question No. 2: Are there other unusual risk factors?
Toward the middle of a typical annual report, you'll find the Risk Factors section. Here, a company identifies and lists the primary risks for its business.

Many of these risks are generally the same from company to company. For instance, if a recession appears, sales are likely to decline. If another company is acquired, the integration may underperform the expectations management has set.

What I'm looking for are unique risks. Here's an example from the 2014 10-K of Molina Healthcare, which provides health care plans to more than two million members across the U.S. (emphasis added)…

Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our medical care costs. Historically, our medical care cost ratio, meaning our medical care costs as a percentage of our premium revenue net of premium tax, has fluctuated substantially, and has also varied across our state health plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small changes in our medical care cost ratio can create significant changes in our overall financial results.

For example, if our overall medical care ratio for the year ended December 31, 2014 of 89.5% had been one percentage point higher, or 90.5%, our net income from continuing operations for the year ended December 31, 2014 would have been approximately $0.12 per diluted share rather than our actual income from continuing operations of $1.30 per diluted share, a decrease of approximately 91%.

This is something you don't see every day – a change of one percentage point in expenses potentially reduces income 91%! No matter how attractive Molina might otherwise be, this vital fact about its business model was a deal-breaker for me.

Question No. 3: Has the company demonstrated that it can grow revenue and earnings?
Near the Risk Factors section, you'll usually find a financial review covering the past five years. This lets you quickly see whether the company has been successful at growing sales and profits.

Growth in these two metrics is vital because it typically means the products and services the company sells are enjoying greater demand over time. Companies that get bigger and better are exactly what we're looking for.

Acxiom is an example of a company that has not been growing revenue or earnings. The provider of enterprise software has been around for more than 40 years, but sales the past two years were actually lower than they were five years ago. Earnings also trended down during this period.

By glancing at Acxiom's five-year financial history just a few minutes into my research, I was able to quickly eliminate it from consideration.

Question No. 4: Is there evidence of operating leverage?
Operating leverage is simply the ability to grow profits faster than revenue.

Superior business models often grow profits faster than revenue, so I consider this a vital fact that helps me quickly determine whether a particular company is worth further evaluation.

Fleetmatics provides fleet management software services to 25,000 enterprise customers with large truck fleets. It's a textbook example of operating leverage. Over the past five years, revenue grew about 37% per year on average. Income grew a much faster 85% per year on average.

Adding lots of new fleet customers didn't require the company to build a new plant. It just needed room for a few new employees and their computers. Capital-light businesses such as Fleetmatics routinely demonstrate operating leverage.

Investors love rapidly growing companies that can grow earnings quickly. They regularly pay dear prices to own them. That's why these kinds of companies are rarely found in the Extreme Value model portfolio. Ideally, we look to buy these kinds of businesses during major market downturns when everything goes on sale.

Question No. 5: Is the company generating free cash flow?
The last thing I look for when starting the evaluation of a new company is its ability to generate free cash flow.

This can be easily determined by going to the Statement of Cash Flows, which normally follows the Balance Sheet and Income Statement about two-thirds of the way into a typical annual report.

Free cash flow is not a line item on the cash-flow statement. Instead, it has to be calculated by deducting expenditures for property and equipment (i.e. capital expenditures, or "CapEx") from net cash from operations (or operating cash flow).

As Dan likes to say, free cash flow is what gives equity its value. This is the surplus capital management has at its disposal to grow the business, reduce debt, and give back to shareholders via dividends and share repurchases.

The cash-flow statement in an annual report normally covers the last three years. Ideally, what I'm looking for is growing free-cash-flow generation over that period. If a company was unable to generate even a moderate amount of free cash flow over the last three years, I usually lose interest in it as a potential investment idea.

There are almost 7,000 companies listed on the three major U.S. stock exchanges: NYSE, Nasdaq, and Amex. Finding the handful of businesses that will translate into successful investments is hard work.

Having a plan like the one outlined above helps us eliminate many subpar businesses from consideration quickly… and focuses our attention on those that are worthy of your investment capital.

As you conduct your own research, I highly recommend you follow this guide.

Good investing,
Mike Barrett

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

The Future of the International Monetary System

2015-12-10T15:23:00.001-05:00

The Future of the International Monetary System

By Jim Rickards

Triffin’s dilemma arose from the Bretton Woods system established in 1944. Under that system, the dollar was pegged to gold at $35.00 per ounce. Other major currencies were pegged to the dollar at fixed exchange rates. The architects of the system knew that these other exchange rates might have to be devalued from time to time, mostly because of trade deficits, but the devaluation process was designed to be slow and cumbersome.

A country that wanted to devalue (for example, the U.K. in 1967) first had to consult with the International Monetary Fund, IMF. The IMF would typically recommend structural changes, to fiscal policy, tax policy and other areas designed to cure the trade deficit.

The IMF also stood ready to offer bridge loans of hard currency to help the deficit-hit country withstand temporary stresses while the structural changes were implemented. Only if the structural changes failed and the trade deficits were persistent would the IMF allow devaluation.

That was the process for countries other than the U.S. As far as the U.S. was concerned, the link between gold and the dollar was fixed for all time and could never be changed. The dollar/gold link was the anchor of the entire system.

This fixed link between the dollar and gold made the dollar the most prized reserve currency in the world. That was the hidden agenda of Bretton Woods. With the dollar as the main reserve currency, U.K. pounds sterling, a competing reserve currency, would eventually fall by the wayside.

The U.K. relied on Imperial Preference among its trading partners in the British Commonwealth to gain trade surpluses, and also relied on the willingness of those Commonwealth partners to hold sterling in their reserves. The Bank of England assumed Commonwealth members would not ask to convert the sterling to gold. Imperial Preference came under attack by the General Agreement on Tariffs and Trade, the GATT, which was also part of Bretton Woods. (Today, GATT is known as the World Trade Organization, WTO.)

Bretton Woods was a one-two combination punch designed by the U.S. to destroy the British empire. GATT undermined Imperial Preference. The dollar-gold link undermined sterling. It worked. The U.K.’s trade deficits persisted, and the Commonwealth partners demanded their gold. Eventually, the pound sterling was devalued, and the empire dissolved. It was replaced by a new age of U.S. empire and King Dollar.

There was only one problem, and Robert Triffin pointed this out. If the dollar was the lead reserve currency, then the entire world needed dollars to finance world trade. In order to supply these dollars, the U.S. had to run trade deficits.

The U.S. sold a lot of goods abroad, but Americans quickly developed an appetite for Japanese electronics, German cars, French vacations and other foreign goods and services. Today, China has replaced Japan as the main source of exports to the U.S.; still, Americans have not lost their appetite for imports financed by printing dollars.

So the U.S. ran trade deficits, the world got dollars and global trade flourished. But if you run deficits long enough, you go broke. That was Triffin’s dilemma. Any system based on dollars would eventually cause the dollar to collapse because there would either be too many dollars or not enough gold at fixed prices to keep the game going. This paradox between dollar deficits and dollar confidence was unsustainable.

This system did break down in the 1970s. The solution then was to abolish the dollar-gold peg in 1971, and demonetize gold in 1974. But there was a third leg of the stool invented in 1969 -- the IMF’s Special Drawing Right, SDR.

The SDR was a new kind of world money printed by the IMF. The idea was that it could be used as a reserve currency side by side with the dollar. This meant that if the U.S. cured its trade deficit, and supplied fewer dollars to the world, any shortfall in reserves could be made up by printing SDRs.

In fact, SDRs were printed and handed out repeatedly during the dollar crisis from 1969–1980. But then a new King Dollar age was started by Paul Volcker and Ronald Reagan, with some help from Henry Kissinger, the king of Saudi Arabia and private bankers like my old boss Walter Wriston at Citibank.

Under the new King Dollar system, U.S. interest rates would be high enough to make the dollar an attractive reserve asset even without gold backing. Remember those 20% interest rates of the early 1980s?

Henry Kissinger also persuaded Saudi Arabia to keep pricing oil in dollars. This “petrodollar deal” meant that countries that wanted oil needed dollars to pay for it whether they liked the dollar or not.

The Arabs deposited the dollars they received in Citibank, Chase and the other big banks of the day. The bankers, led by Wriston at Citibank and David Rockefeller at Chase, then loaned the money to Asia, South America and Africa.

From there, the dollars were used to buy U.S. exports like aircraft, heavy equipment and agricultural produce. Suddenly, the game started up again, this time without gold. This new Age of King Dollar lasted from 1980–2010.

Still, it was all based on confidence in the dollar. Triffin’s dilemma never went away; it was just in the background waiting to re-emerge while the world binged on new dollar creation and forgot about gold. The U.S. ran persistent large trade deficits during this entire 30-year period as Triffin predicted. The world gorged on dollar reserves with China leading the way in the 1990s and early 2000s.

The new game ended in 2010 with the start of a currency war in the aftermath of the Panic of 2008. Trading partners are again jockeying for position as they did in the early 1970s. A new systemic collapse is waiting in the wings.

The weak dollar of 2011 was designed to stimulate U.S. growth and keep the world from sinking into a new depression. It worked in the short run, but now the tables are turned. Today, the dollar is strong, and the euro and yen have weakened. This gives Japan and Europe some relief, but it comes at the expense of the U.S., where growth has slowed down again.

The new dollar-yuan peg with China has also contributed to a slowdown in China. There’s just not enough global growth to go around. The major trading and finance powers are cannibalizing each other with weak currencies. Soon the U.S. and China may devalue relative to Europe and Japan, but that just moves the global weakness back to them.

Is there no way to escape the room? Is there no way out of Triffin’s dilemma?

A new gold standard might be one way to solve the problem, but it would require a gold price of $10,000 per ounce in order to be nondeflationary. No central banker in the world wants that, because it limits their ability to print money and be central economic planners.

Is there an alternative to gold? There is one other way out. That’s our old friend, the SDR. The brilliance of the SDR solution is that it solves Triffin’s dilemma.

Recall the paradox is that the reserve currency issuer has to run trade deficits, but if you run deficits long enough, you go broke. But SDRs are issued by the IMF. The IMF is not a country and does not have a trade deficit. In theory, the IMF can print SDRs forever and never go broke. The SDRs just go round and round among the IMF members in a closed circuit.

Individuals won’t have SDRs. Only countries will have them in their reserves. These countries have no desire to break the new SDR system, because they’re all in it together. The U.S. is no longer the boss. Instead, you have the “Five Families” consisting of China, Japan, the U.S., Europe and Russia operating through the IMF.

The only losers are the citizens of the IMF member countries -- people like you and I -- who will suffer local currency inflation. I’m preparing with gold and hard assets, but most people will be caught unaware, like the Greeks who lined up at empty ATMs last month.

This SDR system is so little understood that people won’t know where the inflation is coming from. Elected officials will blame the IMF, but the IMF is unaccountable. That’s the beauty of SDRs -- Triffin’s dilemma is solved, debt problems are inflated away and no one is accountable. That’s the global elite plan in a nutshell.

We never take our eye off the IMF and its plans to expand the use of SDRs. The IMF will include the Chinese yuan in the SDR basket over the next 12 months to make sure the Chinese are “on the bus” when the endgame begins. That’s an important step in the SDR process.

We plan to report on the IMF annual meeting in Lima, Peru, so you have a front-row seat for these developments. This story has longer to run, but the endgame is already in sight. Stay tuned...

Regards,

Jim Rickards

Source: Daily Reckoning

How the Chinese Will Establish a New Financial Order

2015-12-09T13:08:00.000-05:00

How the Chinese Will Establish a New Financial Order

By Porter Stansberry

Friday, September 18, 2015

For many years now, it has been clear that China would soon be pulling the strings in the U.S. financial system.

In July 2015, the American people owed the Chinese government nearly $1.25 trillion.

I know big numbers don't mean much to most people, but keep in mind… this tab is now hundreds of billions of dollars more than what the U.S. government collects in ALL income taxes (both corporate and individual) each year. It's basically a sum we can never, ever hope to repay – at least, not by normal means.

Of course, the Chinese aren't stupid. They realize we are both trapped.
We are stuck with an enormous debt we can never realistically repay… And the Chinese are trapped with an outstanding loan they can neither get rid of nor hope to collect. So the Chinese government is now taking a secret and somewhat radical approach.

China has recently put into place a covert plan to get back as much of its money as possible – by extracting colossal sums from both the United States government and ordinary citizens, like you and me.

The Chinese State Administration of Foreign Exchange (SAFE) is now engaged in a full-fledged currency war with the United States. The ultimate goals – as the Chinese have publicly stated – are to create a new dominant world currency, dislodge the U.S. dollar from its current reserve role, and recover as much of the $1.25 trillion the U.S. government has borrowed as possible.

Lucky for us, we know what's going to happen. And we even have a pretty good idea of how it will all unfold. How do we know so much? Well, this isn't the first time the U.S. has tried to stiff its foreign creditors.

Most Americans probably don't remember this, but our last big currency war took place in the 1960s. Back then, French President Charles de Gaulle denounced the U.S. government's policy of printing overvalued U.S. dollars to pay its trade deficits… which allowed U.S. companies to buy European assets with dollars that were artificially held up in value by a gold peg that was nothing more than an accounting fiction. So de Gaulle took action…

In 1965, he took $150 million of his country's dollar reserves and redeemed the paper currency for U.S. gold from Ft. Knox. De Gaulle even offered to send the French Navy to escort the gold back to France. Today, this gold is worth about $5 billion.

Keep in mind… this occurred during a time when foreign governments could legally redeem their paper dollars for gold, but U.S. citizens could not.

And France was not the only nation to do this… Spain soon redeemed $60 million of U.S. dollar reserves for gold, and many other nations followed suit. By March 1968, gold was flowing out of the United States at an alarming rate.

By 1950, U.S. depositories held more gold than had ever been assembled in one place in world history (roughly 702 million ounces). But to manipulate our currency, the U.S. government was willing to give away more than half of the country's gold.

It's estimated that between the 1950s and early 1970s, we essentially gave away about two-thirds of our nation's gold reserves… around 400 million ounces… all because the U.S. government was trying to defend the U.S. dollar at a fixed rate of $35 per ounce of gold.

In short, we gave away 400 million ounces of gold and got $14 billion in exchange. Today, that same gold would be worth $450 billion… a 3,100% difference.

Incredibly stupid, wouldn't you agree? This blunder cost the U.S. much of its gold hoard.

When the history books are finally written, this chapter will go down as one of our nation's most incompetent political blunders. Of course, as is typical with politicians, they managed to make a bad situation even worse…

The root cause of the weakness in the U.S. dollar was easy to understand. Americans were consuming far more than they were producing. You could see this by looking at our government's annual deficits, which were larger than ever and growing… thanks to the gigantic new welfare programs and the Vietnam "police action." You could also see this by looking at our trade deficit, which continued to get bigger and bigger, forecasting a dramatic drop (eventually) in the value of the U.S. dollar.

Of course, economic realities are never foremost on the minds of politicians – especially not Richard Nixon's. On August 15, 1971, he went on live television before the most popular show in America (Bonanza) and announced a new plan…

The U.S. gold window would close effective immediately – and no nation or individual anywhere in the world would be allowed to exchange U.S. dollars for gold. The president announced a 10% surtax on ALL imports!

Such tariffs never accomplish much in terms of actually altering the balance of trade, as our trading partners simply put matching charges on our exports. So what happens is just less trade overall, which slows the whole global economy, making the impact of inflation worse.

Of course, Nixon pitched these moves as patriotic, saying: "I am determined that the American dollar must never again be a hostage in the hands of international speculators."

The "sheeple" cheered, as they always do whenever something is done to "stop the speculators." But the joke was on them. Within two years, America was in its worst recession since WWII… with an oil crisis, skyrocketing unemployment, a 30% drop in the stock market, and soaring inflation. Instead of becoming richer, millions of Americans got a lot poorer, practically overnight.

And that brings us to today…

Roughly 40 years later, the United States is in the middle of another currency war. But this time, our main adversary is not Europe. It's China. And this time, the situation is far more serious. Our nation and our economy are already in an extremely fragile state. In the 1960s, the American economy was growing rapidly, with decades of expansion still to come. That's not the case today.

This new currency war with China will wreak absolute havoc on the lives of millions of ordinary Americans, much sooner than most people think. It's critical over the next few years for you to understand exactly what the Chinese are doing, why they are doing it, and the near-certain outcome.

Regards,
Porter Stansberry

Source: International Man

Follow us on Twitter: @blacklioncm

Three Steps to Protect Your Portfolio from the Next Bear Market

2015-12-08T16:32:00.000-05:00

Three Steps to Protect Your
Portfolio from the Next Bear Market

ALEXANDER GREEN, CHIEF INVESTMENT STRATEGIST, THE OXFORD CLUB

In one of my recent columns, I noted that investment analysis has gotten far trickier over the last few years.

We have entered a period of “administrative markets,” in which equity returns are affected as much by government policies as they are by economic growth and corporate profits.

In the last few years, we’ve seen large-scale bailouts; trillions in fiscal stimulus; massive quantitative easing; nearly seven years of zero short-term rates; heavy-handed regulation; and sharply higher taxes on income, dividends, and capital gains.

Our corporate tax rate is the highest in the developed world, driving even iconic American companies like Burger King to move their headquarters to Canada.

These policies distort markets... and lately equity investors have been paying the price.

A Shot Across the Bow

The S&P 500 recently plunged more than 10% in four days.

Don’t shrug this off. According to Bianco Research, this has happened only eight other times in the last 80 years.

Yes, the markets took a significant bounce. But I still view this as a shot across the bow, a warning.

Here’s what makes the smart money nervous right now...

In the past, when the economy (and the stock market) went into the tank, the traditional policy response was to stimulate the economy with lower interest rates and deficit spending.

But interest rates are already at zero. And under the Obama administration, the national debt has soared from $7.4 trillion to $18.4 trillion.

What’s next? Are we moving to negative interest rates (like Europe), creating a situation in which you have to pay to leave your money in the bank and even more stupendous deficits? That policy prescription didn’t work well for Greece.

Don’t put me in the gloom-and-doom camp. I’m not a pessimist. But I’m no Pollyanna either.

I consider myself a skeptical realist who looks at both the positives and negatives. Despite the many government policy missteps over the last decade, there are factors to appreciate as well.

For instance, the U.S. economy posted a much bigger rebound in growth during the spring than previously reported… (The Commerce Department adjusted the annual expansion rate in the April-June quarter sharply higher to 3.7%.)

Plunging energy prices are a huge plus for everyone outside the oil and gas industry…

Inflation is negligible…

Housing is roaring back…

Unemployment is falling…

The dollar is strong... And the outlook for corporate profits is improving...

Three Essential Steps

Given the mixed outlook, what should you do with your portfolio now? Start with these three essential steps:

1.		Check your asset allocation. The roaring bull market of the last six and a half years has almost certainly increased – and perhaps more than doubled – your exposure to equities. If it’s now larger than you’re comfortable with, pare back to the point at which you’ll be able to sleep at night. How much in stocks is enough (or too much)? Investment great Benjamin Graham used to say that no one should have more than 80% of their portfolio in stocks – or less than 20%. Look at your age, time horizon, and risk tolerance, and adjust accordingly.
2.		Move those trailing stops. Make sure they are no more than 25% below your holdings’ recent highs. And if you’re using “mental stops” – no actual stop orders entered – be sure to maintain your sell discipline when your stocks trade through your predetermined price.
3.		Adopt a late-stage bull market strategy. That doesn’t mean move to cash. (This bull market could last five more weeks, five more months, or five more years.) History shows that as a bull market ages, the safest and best-performing stocks tend to be recession-resistant, mega-cap value stocks, preferably ones with growing dividends. (Those dividends both support your shares and provide income during the bad times.)

All this government meddling with the market makes this a challenging time for investors. We can only wait and see what policymakers dream up next, whether it’s higher rates or QE4 or something entirely new.

Investment legend John Templeton used to point out that no matter how strange things look, economic and market cycles are all essentially the same.

He famously noted that “this time is different” is the most expensive phrase in the annals of investing. That statement is generally true.

But check your history. When was the last time the national debt was bigger than our GDP and the Fed held rates at zero for nearly seven years?

This time really is different. Govern your portfolio accordingly.

Good investing,

Alex Green
Chief Investment Strategist, The Oxford Club

Source: Bonner and Partners

Four Easy Steps to Banish Fear and Change Your Life, Today

2015-12-07T13:11:00.000-05:00

Four Easy Steps to Banish Fear and Change Your Life, Today

By Mark Ford, founder, The Palm Beach Research Group

Wednesday, September 9, 2015

I used to dread the thought of public speaking. And when I was forced to make a speech, I did a terrible job – which only made me dread the next speech even more. It was a vicious cycle.

When I became the editorial director of a newsletter business in South Florida in 1982, I found myself in an uncomfortable position… I had to conduct meetings and give presentations at industry functions on a fairly regular basis – something I was ill-prepared to do.

So, I decided to enroll in a Dale Carnegie program for public speaking. Somehow, I registered for the wrong course. Instead of focusing on speech-making, it had a broader goal.

And that program changed my life.
It taught me the importance of setting goals and taking action. But it also taught me to be more comfortable as a speaker.

My speech-making skills improved almost accidentally.

Every week, we had to read a chapter of Carnegie's classic book, How to Win Friends and Influence People, and then make a two-minute in-class presentation about how we were going to put the principle of that chapter to work in our lives.

On Thursday evenings after work, I would drive a half-hour to the meeting place.

During that drive, I thought about what I was going to say. It was difficult in the beginning, but it got a little easier each week. By the end of the 14-week course, I was performing at a near-professional level. I had won several awards in competitions and was routinely rated at the top of the class.

The final session was a sort of commencement ceremony. Relatives and friends were allowed to attend, which tripled the size of the audience we had to speak to. I gave the last speech. I was still a little nervous when I got up to the podium, but I'd learned a lot by then.

So, I took a deep breath and did my thing. I got a strong round of applause. Several people I didn't even know came up to congratulate me… and one suggested I should become a comedian.

I wasn't foolish enough to take his advice to heart, but it did make me happy to think I had made so much progress in so little time, starting from practically zero.

How did I conquer my fear of public speaking?

The same way you would conquer the fear of anything else.

Humiliation and Humility

A big part of what we are afraid of is embarrassment – being shamed in front of other people. When embarrassment is extreme, we call it humiliation.

If you pass gas at a fancy dinner party, you feel embarrassed. If your big project at work fails miserably – and you've been bragging it would be a "sure thing" – you feel humiliated.

Humiliation is what happens to embarrassment when it's mixed with pride. The prouder you are, the more failure hurts.

Which brings us to our cure for the fear of failure: humility.

I'm guilty of priding myself. I'm proud of my writing, for example, and the success I've had in business. So, I have to keep reminding myself to be humble about those things.

But I'm not proud of everything I do.

I take no pride in my ability to dance, sing, or speak foreign languages because I do those things so badly. And because my ego isn't involved, I'm not embarrassed to ask stupid questions, to show myself as a beginner, and, ultimately, to fail again and again as I attempt to master those skills.

The truth is, when I started out in business, I wasn't very good at that, either.

Again, that made it possible for me to ask lots of questions, look stupid, and make mistakes… which accelerated my learning curve.

That last observation brings us to an important principle of success. I call it "the secret of accelerated failure." It's a principle I developed in the early 1990s.

The principle of accelerated failure is this: To develop any complex skill, you must be willing to make mistakes and endure failures. The faster you can make those mistakes and suffer those failures, the quicker you will master the skill.

At the Palm Beach Research Group, we teach this secret to our managers.

We encourage them to allow their employees to fail. Not to fail stupidly. Not to make the same mistakes over and over again. But to feel free to fail at something – so long as it was done in the pursuit of knowledge.

If you play golf or practice Brazilian jiu-jitsu, you know this to be true: If you tense up and focus on avoiding mistakes, you will learn very slowly. If you relax, let the mistakes happen, and learn from them, you will advance quickly.

It starts with being humble. Humble enough to accept the fact that when you begin anything new, you're likely to do it poorly.

Humility Is Nature's First Gift

Pride prevents us from admitting we are incompetent. But we're all incompetent when we're learning.

Think of how a baby learns to walk. He begins by crawling, then advances to "forward falling" (as my brother calls it), then to walking like a little drunkard, and then, finally, to walking masterfully.

Babies don't feel shame, because they're not proud.

There's a reason pride doesn't invade the human psyche until 6 or 7 years of age: There's simply too much to learn before then.

If toddlers had pride, it would take them years – or even decades – to walk and talk properly.

Humility is a much-underrated virtue. It provides us with at least three significant advantages:

•	It makes us more endearing. Humble people, especially accomplished individuals who remain humble, are well-liked.

•	It makes it easier to get cooperation. Humble people get more cooperation from others because they don't try to force strong-minded people to accept their ideas.

•	It makes learning easier and faster. Humble people are able to ask questions, make mistakes, and experience failures without embarrassment. This attracts good people to them who want to help. Humble people get the best teachers and get the most from them.

If Humility Is the Solution, How Does a Proud Person Become Humble?

Now we are coming to the most important part of this discussion – a practical plan for defeating the fear of failure.

Here's how you can do it:

1.	Begin by accepting the truth. You're a good person, but that doesn't mean you are naturally good at everything. Look in the mirror and think about the skill you want to accomplish.

	Say out loud, "I accept the fact that right now, I am incompetent at (name the skill)." Repeat this exercise until it doesn't hurt.

2.	Admit your incompetence to an indifferent audience. Once you can say it in front of a mirror, say it in front of a living human being. Begin by admitting your incompetence to someone who doesn't care.

	Admit to your Spanish teacher you are incompetent at public speaking. Admit to your public speaking coach you are incompetent at speaking Spanish. Repeat this exercise until you can do it with grace and good humor.

3.	Next, admit your incompetence to a judgmental audience. Admit you are no good at languages to your Spanish teacher. Admit you have two left feet to your dance instructor. Do this not once, but every time you make a mistake or fail in some way. Do it with grace and good humor. As pop psychologists say, "own" the feeling.

4.	Admit your incompetence to someone who can punish you. This is the ultimate test. The next time you volunteer for a difficult assignment at work, admit to your boss you might fail before you succeed. Do it with grace and good humor, and you will be amazed at the result.

	Your boss won't can you on the spot. (Unless he is reallyincompetent.) Rather, he will admire you for your humility. After all, he knows you are not yet competent. All he wants is your commitment to carry on until you are.

	I've found the most productive and successful executives are very comfortable about saying, "I'm going to try such and such. I'll probably screw it up completely. But if I eventually succeed… just think what good will come of it!"

Defeat your fear of failure by being happy – and even eager – to try and fail until you succeed.

That's how Edison invented the lightbulb. That's how Michael Jordan, a very mediocre basketball player in high school, became the greatest hoops player of all time.

They weren't afraid of failure.

You shouldn't be, either.

Regards,
Mark Ford

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

Don't Let 'The Glidepath Illusion' Ruin Your Retirement

2015-12-04T14:18:00.001-05:00

Don't Let 'The Glidepath Illusion' Ruin Your Retirement

By Dan Ferris, editor, Extreme Value

Friday, August 28, 2015

The traditional notion of retirement says you should take bigger risks in the stock market when you're young.

You have more time to make up for losses than when you're older. As you age, you should take less and less risk, so you won't lose your retirement money.

This strategy is called "Glidepath investing." And it could ruin your retirement.

Let me explain…
The emotional appeal of Glidepath investing is obvious. Young people feel like they're going to live forever, so it feels better to them to take more risks. Buying more risky stocks and fewer safe bonds feels right.

Older people feel they have more to lose and might not be able to support themselves one day, so they tend to be more risk averse. For them, buying fewer stocks and more bonds feels safer.

There's an army of financial planners and other "helpers" out there selling products designed to get you to retirement with a big, safe nest egg, based on this feel-good notion.

However, research suggests that what feels good isn't necessarily what you should do…

Investor and researcher Rob Arnott of Research Affiliates published a report in September 2012 called, "The Glidepath Illusion." Arnott says Glidepath investing will make you less money because it will lead you to put less money in higher-return investments (stocks).

Arnott studied 141 years of stock and bond returns from 1871 to 2011. From these data, he hypothesized a range of possible outcomes. In general, Arnott found evidence that the range of outcomes from doing the opposite of Glidepath investing was superior to the range of Glidepath-based outcomes.

It's well documented that stocks outperform bonds over the long term.Glidepath investors wind up putting a bigger percentage of their assets in stocks when they're younger and have less to invest. They put a higher percentage into bonds when they're older and have more to invest.

That's the basic error. Investors put fewer dollars into higher-return investments, then interrupt the compounding process to put more dollars into lower-return investments. So they make lower returns than if they had done the opposite of Glidepath investing.

Glidepath investing is a good recipe for feeling good, but a poor one for making as much money as possible in stocks and bonds. Arnott's conclusion is worth quoting and keeping close at hand as a reminder…

Investors who are prepared to save aggressively, spend cautiously, and work a few years longer (because we're living longer), will be fine. Those who do not follow this course are likely to suffer grievous disappointment… No strategy can make up for inadequate savings or premature retirement.

Save aggressively. Spend cautiously. Let your investments compound as long as possible before drawing them down. That's sound advice.

Sadly, it makes perfect sense that the financial services industry is once again doing exactly the wrong thing for clients. Don't trust financial planners and brokers. They're commissioned salespeople. They're incentivized to sell investments, NOT to make you money in stocks and bonds.

For as long as my health holds out, I'll stay productive and hopefully get well compensated for my efforts, saving aggressively and spending cautiously. I recommend you do the same.

Good investing,
Dan Ferris

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

The Ultimate Cash-Management Guide

2015-12-03T10:47:00.000-05:00

The Ultimate Cash-Management Guide

By Dr. David Eifrig, editor, Income Intelligence

Thursday, August 27, 2015

No one talks about how to manage your cash.

As regular readers know, we suggest holding cash in an emergency fund and in your portfolio. If you've followed our advice, you likely have tens, and maybe hundreds, of thousands of dollars in cash.

But you need to give some thought to where you put it…
As with every investment, when you look at where you put your cash, you need to balance yield and risk.

Some of these cash accounts I'm going to cover today are 100% risk-free. Others claim to be low-risk, but may have hidden risks that are difficult to understand.

We'll start with the lowest-risk, most "pure" cash accounts… And we'll proceed through investments that could offer a higher yield.
Checking and Savings Accounts
The safest cash accounts are FDIC-insured checking and savings accounts with banks.

FDIC insurance means that even if the bank makes disastrous loans or a bank manager absconds with the money in the vault, the Federal Deposit Insurance Corporation will make depositors whole, up to $250,000.

These accounts are liquid, meaning you can access your cash almost instantly via online banking or at a branch office.

Checking accounts are a good example. You can write checks directly from your account. However, they pay little in interest. I recommend keeping your checking balance just high enough to avoid any overdrafts. Or do what I do and link your checking accounts to your savings account for overdraft protection.

Savings accounts offer better yield, with the same safety.

Were it not for historically low interest rates, this would be a Golden Age for savings accounts. The advent of secure online banking has removed geography from the equation. So smaller banks looking to boost deposits often offer higher rates to anyone.

Big national banks, like Bank of America and Wells Fargo, offer savings accounts that currently yield 0.01% and 0.03%, respectively. You can do much better with a little searching. Websites like Bankrate.com orNerdwallet.com/rates can help you find the best rates.

A word of caution: Always read the fine print to be certain that your account is FDIC-insured. Just because you've walked into an FDIC-insured institution (or visited their website), it doesn't mean every account is insured. These banks offer all kinds of products and many don't fall under the FDIC's watch.
Money Market Accounts
One such FDIC-insured product is a money market account, or MMA.

MMAs, sometimes referred to as money market deposit accounts, will usually have higher minimum deposit requirements than savings accounts, though this can be as low as $500 in some cases.

If you meet those minimums and have your checking accounts covered, MMAs almost always pay a higher rate than savings accounts. So use them when you can.

Again, you can use the tools at the websites we've mentioned to find the highest rates on MMAs.

For both savings accounts and MMAs, regulations state that you can't have more than six transfers per month into or out of the accounts. So it takes a little planning to make sure that your checking balances can handle whatever you need.
Certificates of Deposit
Certificates of Deposit, or CDs, have many of the benefits of savings and money market accounts… For example, they're FDIC-insured, with no risk of loss unless our entire government collapses… with just one drawback.

However, that drawback comes with a higher yield, and it just may be the perfect place to place your cash depending on your needs.

The risk they do carry is liquidity risk. When you put your cash in a CD, you agree to leave it there for a particular amount of time, between three months to five years.

If you want to get it back before then, you need to pay a penalty.

Since the money is locked up, the bank will give you a higher interest rate. You can collect about 1%, or even 1.15%, on a one-year CD from some of the more competitive banks… with higher yields for longer time periods. Check the websites we've recommended to find the best rates.

Given that your money is locked up, CDs work better for the cash allocation of your portfolio as you approach retirement, not your emergency fund.
Money Market Mutual Funds
All the prior cash accounts have a major advantage: They are FDIC-insured. The peace of mind that should give you can't be overstated.

When you branch out into money market mutual funds (or MMMFs), you do not have an FDIC guarantee. You now face the risk of loss. You have become an investor, and not a saver.

That's not how MMMFs are sold, though. They are sold as ultra-safe places to hold your cash savings. You'll see language from fund companies like, "[the fund] seeks to provide current income and preserve shareholders' principal investment by maintaining a share price of $1."

This $1 share price is the central focus of MMMFs. You buy shares for $1 and the fund invests that cash in short-term securities. By law, the investments must expire within 90 days.

When the fund makes money, its share price doesn't rise. Instead, it creates more $1 shares and adds them to your account. If you check your balance, it doesn't look like you're an investor. It looks like your dollars are growing.

Here's the trick with MMMFs…

They are exceptionally safe… until they aren't.

MMMFs use a wide range of securities to generate their returns. There is a massive market of short-term securities that you've likely never explored.

They use securities like short-term Treasury bonds and T-bills, but they also use things like overnight repurchase agreements, or repos. This is a complex system whereby a bank will borrow $99.99 overnight and pay back $100 the next day. Of course, this is happening on the scale of trillions of dollars.

This system is called the "shadow banking" system. It works flawlessly almost all the time. But when things go wrong, there's trouble.

This is what happened in the financial crisis. In 2008, the short-term paper markets froze up. People were too scared to lend to one another, even overnight loans to the biggest banks. The market was in a panic.

A few funds got themselves into trouble. The Reserve Primary Fund was one of the largest and most respected funds, with $68 billion in assets. In particular, it had a big pile of securities issued by Lehman Brothers. Since everyone was in a panic, the fund couldn't figure out what these loans were worth.

The fund was unable to maintain its $1-per-share value. This is known as "breaking the buck."

Investors in the Reserve Primary Fund had their cash frozen while the fund sorted things out. It was more than a year before a court ordered the fund to pay out whatever funds it did have to shareholders.

Some people had hundreds of thousands of dollars in "cash"… but they couldn't access a penny.

Now, trouble like this doesn't happen often. Prior to 2008, not a single fund broke the buck in the 37-year history of MMMFs.

So you shouldn't fear MMMFs… but you do need to understand what's happening with your cash when it no longer has FDIC insurance.

There are also some tricks you can use to ensure you get the best MMMFs.

The shadow banking system is a highly efficient market. That means if a fund has a higher yield than its competitors, it's taking on more risk.

You should also back out the fees. For instance, take two funds that each yield 1% after fees. You would think that they have the same risk. However, one might charge a 0.5% management fee and the other might charge 0.25%.

That means the fund with the higher fees has to use riskier investments to get the same yield. In this case, the low-fee fund is unequivocally better than the high-fee fund.

And diversification will benefit you here as well. If you have a substantial amount of cash and you don't want it frozen during a crisis, spread it around a few different MMMFs managed by different investment companies. Three different funds should be enough.

MMMFs do have some remote risk, and right now their yields are not high enough to justify taking those risks relative to FDIC-insured accounts.

MMMFs, on average, yield only about 0.01% today. When you look up funds, you'll see it quoted as the seven-day yield. This uses the fund performance from the last seven days to determine its annual yield.

Considering you can earn much better than that in an FDIC-insured savings account, we consider MMMFs mostly off the table until interest rates rise.

MMMFs might not be such a great investment then, either. The U.S. Securities and Exchange Commission has drawn up a new set of rules for MMMFs to make them safer. The trouble with MMMFs comes partly when everyone tries to withdraw their funds at the same time.

So, effective October 2016, MMMFs used by individual investors can deny you access to your money for up to 10 days, or they can charge a redemption fee of 2%.

To make that worth it, MMMFs are going to have to yield a heck of a lot more than they do today.
To sum up:

Most people don't spend too much time thinking about their cash.

But sitting down and taking a rational look at your cash needs can provide for emergencies and immediate needs without sacrificing long-term returns.

And making sure you hold your cash in the right place can help you sleep well at night while keeping inflation off your back.

Here's the good thing about getting your cash investments in order: Once you do, it takes little time to keep things in order.

If you're an income investor, you should be successfully generating cash month after month and quarter after quarter. This essay should help you know what to do with it.

Here's to our health, wealth, and a great retirement,
Dr. David Eifrig

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

How to Get One of the Highest, Safest Yields in Today's Market

2015-12-02T11:38:00.001-05:00

How to Get One of the Highest, Safest Yields in Today's Market

By Dr. David Eifrig, editor, Income Intelligence

Friday, August 21, 2015

Before we get started, I must admit… It's one of the most boring sectors of the market…

You probably won't be bragging about it at the summer barbecue or your company's water cooler…

If everyone purchased this type of investment, the financial news channels would die. Headlines would get a bit less shrill. And people would mostly ignore CNBC's latest "hot take" on the market…

But most people would also enjoy better returns and have greater diversification. Rather than selling at bottoms and buying at peaks, investors would ride the inevitable waves and earn a fat return over the years.

You see, the advantage to investing in this sector isn't just that it's safe… or nearly unknown outside of a group of select Wall Street "insiders"… It also returns a higher yield than nearly any other safe investment you could make today.

In other words, this investment is a powerful tool for income investors that's right at the intersection of yield and safety.

Today, I'm detailing the opportunity in what's known as preferred shares (or "preferreds")… the hybrid blend between bonds and stocks.
Based on the benchmark S&P U.S. Preferred Stock Index, preferreds offer an average yield of 6.24%. That's a huge payout in today's low-rate world. That yield is also safer than traditional dividends.

Preferreds are able to do this because they are fundamentally different than other securities… Here's how a preferred share works…

If a company needs to raise $100 million in capital it could do this several ways:

•	It could sell shares of common stock. That would dilute each shareholder's ownership, but the company wouldn't have to make regular payments, unless it chose to pay dividends.

•	It could borrow the money by issuing bonds. It would have to pay interest along the way, and pay back the bonds at maturity.

•	Or, it could issue preferred shares. Unlike a common stock dividend, the dividend rate on preferreds is specified in the contract.

The company could sell four million preferred shares at $25 each, collect $100 million, and agree to pay a dividend rate of, say 5%, in quarterly installments.

Now, the preferred dividend isn't guaranteed (and neither are common stock dividends). If the company runs into financial trouble, it canchoose to suspend its preferred dividends. However, it can't pay a single penny in dividends on its regular common stock unless it keeps paying dividends on its preferred shares. Many preferred shares are also "cumulative," meaning that if the dividend is suspended for a few quarters, that tally keeps adding up and it must all be paid back when the company starts paying a dividend again.

Preferred shares are typically issued as "perpetual" preferreds, meaning that they will go on paying that dividend rate indefinitely. Though like a bond, if the market price of a preferred share is higher than its issue price, a new buyer would earn a lower yield than the original rate. Other preferred shares are "callable," meaning the company can buy them back at a set price after a specific date in the future.

So as a practical matter, preferred shares' dividends are much safer than regular dividends. And there are some additional benefits to preferreds…

The way to build a safer and more profitable portfolio is by combining uncorrelated assets. For example, stocks and bonds don't move perfectly together. When you combine them, you can earn a better return relative to your risk.

When investments move perfectly together, they have a correlation of 1.0; and if they bear no relation to each other, they have a correlation of 0. As you add more uncorrelated assets, you make a portfolio stronger and stronger.

Preferreds, in particular, are in a class of their own. Preferreds have only a 50% correlation with stocks and are even less correlated with the bond market.

The closest correlation with preferreds are investment-grade corporate bonds. That makes sense. Preferred shares are high-quality, safe investments that pay regular income flows, just like good bonds.

By adding preferreds to your portfolio, you've utilized an entire new asset class, making your portfolio more resilient to volatility.

On top of that, the dividends paid by preferred shares are often considered "qualified dividend income." This means that they are taxed at the lower capital-gains rate, rather than as income. It depends on your income level, but if you're in the 25% tax bracket, you'll pay 25% on interest income from bonds, but only 15% on qualified dividends from preferreds. That means collecting $1 from a preferred is the equivalent of collecting $1.13 from a bond.

Preferreds have improving financials, rising stock prices, and more potential upside than bonds if a company does well.

At the same time, the income stream of preferreds is more dependable and fixed, like bonds. It also has a better claim on assets in the rare case of bankruptcy. If a company goes bankrupt, bondholders get to take what they are owed from the assets. After that, preferred shareholders take what they are owed.

Investing in individual preferred shares is relatively simple – most preferreds trade over the major exchanges and are easily accessible through your broker.

For investors looking for short-term capital gains, preferred shares don't make for the best investment. But the opportunity for an income investor should be clear. High yields paired with safety are exactly what I look for in Income Intelligence.

Here's to our health, wealth, and a great retirement,
Dr. David Eifrig

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

The Fed Is Bluffing... Interest Rates Won't Rise in 2015

2015-12-01T13:13:00.000-05:00

The Fed Is Bluffing... Interest Rates Won't Rise in 2015

BY BILL BONNER
POSTED
AUGUST 20, 2015

BALTIMORE, Maryland – What did we tell you…

The Janet Yellen Fed will not raise interest rates in any meaningful way anytime soon. Instead, she will announce new QE programs.

Yesterday, red was showing up just about everywhere – U.S. stocks, European stocks, Asian stocks, emerging markets stocks, crude oil…

But it could have been worse…

U.S. stocks recovered some of their losses for the day, after the minutes of the most recent Fed meeting showed Yellen and team still won’t pull the trigger on a rate hike until certain unspecified conditions are met.

According to the Fed, the conditions for a rate increase are “approaching” but haven’t been met yet.

Well, guess what… Conditions will never be met.

It doesn’t work that way. This economy will never recover – not as long as it is under the current Keynesian management. It is like a patient attended by quack doctors – doomed to get sicker from their quack “cures.”

Market Morphine

Today’s economy depends on large doses of cheap credit…

And like morphine, you have to up the dosage just to stay in the same place. Take away the drugs, and the pain rises.

The pain caused by falling stock prices, for example.

Take away the cheap credit… and the buybacks on Wall Street dry up. That means earnings per share – the ultimate driver of stock prices – fall, too.

With falling corporate earnings and stagnant household incomes, the inevitable direction for stock prices is also down.

As we discussed in last Friday’s Diary, we’ve already seen that today’s stock prices are not the result of sober reflection on the part of investors.

They do not sit down with a yellow pad and a No. 2 pencil and calculate streams of income over the next 10 years. Instead, they count on the cronies to rig the market for their benefit.

As regular readers know, corporate execs have been borrowing at ultra-low rates and using the money to buy and cancel shares in their own companies. This clever piece of financial engineering reduces the count of outstanding shares and pushes up their value.

The insiders get bonuses… by looting the company’s capital and replacing it with debt. And shareholders get a nice bump in their portfolios.

Since 2009, the market cap of the S&P 500 has risen by almost $11.7 trillion.

And according to a new report from Aranca Investment Research, S&P 500 companies have spent almost $2.3 trillion on buybacks over the same period.

So about one-fifth of the increase in market cap is due to buybacks.

Cheap credit is essential to the looting process. Take it away and the flimflam falls apart. So do stock prices.

The “Recovery” Illusion

But the Fed can’t allow a real crash in the stock market. The “recovery” illusion is based on rising prices for equities.

Supposedly, this leads to a “wealth effect.” According to Fed doctrine, as investors see the values of their investment portfolios rise, they start to spend like drunken capitalists.

The economy is then supposed to explode with growth as “animal spirits” return to shoppers… leaving shiny coins all over the street for the poor to pick up.

Of course, it doesn’t happen…

Instead, the real spoils of cheap credit go to the C-suite cronies, who manipulate the stock market by pumping borrowed funds into buybacks. Stocks go up. But the real economy goes nowhere.

At the Sprott-Stansberry Natural Resource Symposium in Vancouver last month, our friend and Stansberry Research analyst Dr. Steve Sjuggerud debunked the idea that a rising interest rate cycle always coincides with falling stock prices. He pointed out that stocks have tended to rise in value during periods of rising rates.

Don’t worry about the Fed tightening, he told the audience. It doesn’t have to mean lower stock prices.

We don’t doubt that Steve is right. Typically, when the economy heats up due to organic growth, interest rates rise… and so do stocks.

But this is no typical bull market… and no typical economy.

The stock market is being driven higher by ultra-low rates, QE, and clever financial engineering. And the economy is not in the kind of healthy expansion mode that pushes up stock prices and interest rates at the same time.

Instead, much of today’s economy is as cold and lifeless as a corpse.

Commodities are plumbing record lows – most notably oil and “Dr. Copper,” widely seen to signal a deteriorating economy worldwide.

Shipping and freight prices reveal a slowdown in trade. (See today’s Market Insight below for more on that…)

A strong dollar, slowing exports, and falling commodities prices are hammering many of the emerging markets.

And China is struggling to avoid its own Great Depression.

That’s why Ms. Yellen is reluctant to raise rates. She knows it will be painful when she does.

Instead, she’ll administer another dose of morphine…

Bill Bonner

Source: Daily Reckoning

Starting Today, November 30, $1 Trillion Starts Moving to China

2015-11-30T11:40:00.001-05:00

Starting Today, November 30, $1 Trillion Starts Moving to China

By Dr. Steve Sjuggerud

Monday, November 30, 2015

Nobody is talking about it… but two incredibly important things are happening TODAY that have to do with China's financial markets…

These two things are just the beginning…

The two things happening today represent the beginning of up to $1 trillion moving into Chinese financial assets. (That $1 trillion is not my number. It is from two giants of finance – Standard Chartered and AXA Insurance.)

I'll share both of these big changes with you today and tomorrow.

First, let's look at what's happening in China's currency…
China will finally join the global superpower club.

Today, China's currency, the yuan, will likely be allowed to join the big four currencies – the U.S. dollar, the euro, the Japanese yen, and the British pound – as the fifth member of the International Monetary Fund's currency (the Special Drawing Rights, or "SDR").

Specifically, earlier this month, the head of the International Monetary Fund ("IMF"), Christine Lagarde, said:

"The IMF staff assesses that [China's currency] meets the requirements to be… [included] in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar."

Here's the timeline for all of this…

The IMF will OFFICIALLY announce if the yuan gets to join its SDR reverse currency basket today. If the yuan gets approved, China will "join the club" on October 1, 2016.

The thing is, it's already a foregone conclusion…

There's no need to wait to hear the answer. You see, any country protesting the inclusion of the yuan would look like an idiot at this point.

So what does this mean? In short, it's a vote of confidence in China's drastic reforms by the world's major powers.

This move is largely symbolic (as none of us actually use the IMF's currency). What it means is far more important in the long run… It means that China's currency "passes the test." China's currency is finally considered to be as legit as the other four, in the eyes of the world's superpowers.

Most folks are blowing off the significance of this. I think that's a mistake…

After today, hundreds of billions of dollars will likely flow into China's currency in the coming years, and from a variety of sources… As a reserve currency for central banks… as a way for investors to diversify outside of the U.S. dollar… as a speculation… as a medium of exchange in global trade… etc., etc.

The era of China's yuan as a legitimate currency starts today. (You can check www.IMF.org to be sure it happened.)

My humble suggestion is, get your money there first…

Tomorrow, I'll show you what's going on in China's stock market… And why it gives us an incredible investment opportunity right now.

Good investing,

Steve

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

Caution! Corporate Cronies At Work...

2015-11-25T15:06:00.000-05:00

Caution! Corporate Cronies At Work...

TIVOLI, New York – U.S. stocks flat. A bump in Tokyo. A bump up in Shanghai. Gold registered a $7 loss in New York trading.

Noise, in other words. Nothing to worry about. So let us remind readers, and ourselves, of what is really going on.

This is a Great Zombie War. The fight is between zombies and their crony allies and the rest of the world.

That is the real struggle in Greece, for example.

The insiders – taking advantage of the Greek government’s ability to borrow at low interest rates – enjoy benefits that would otherwise be unavailable.

Now, Athens is deeply in debt… and the insiders are desperate to keep the credit flowing (to them!).

Jackass Codes

You’ll recall that zombies are people who live at others’ expense. They are not bad people, but the system either allows them… or condemns them… to take advantage of others.

Some of the ways the zombies do this are obvious. They get subsidies, guarantees, and direct payments from the feds (who claim to be providing an essential service).

Other ways are less visible. Extensive regulations, for example, keep out competitors, raise profit margins, and provide zombie jobs for inspectors, regulators, and assorted hacks.

Charles Hugh Smith, the chief writer at the Of Two Minds blog, gives a good illustration, relaying the experience of one of his correspondents:

For many years, many of my friends and family who have come to my home and experienced my cooking, have told me that I should ‘open a restaurant’…

About five years ago, there was a restaurant for sale, not too far from my home and business. I thought about buying the restaurant, but at that time, the economy was not doing well, and I wanted to take a wait-and-see attitude before I committed to anything.

Eventually, the restaurant closed down and a different type of business opened up in the space that had been a restaurant. That business went under in the middle of 2014, and I decided it might be time to open a retail food establishment in the space that used to be a restaurant. How hard could it be?

How hard?

Too hard…

The story is too long for us to repeat here. One permit led to the need for another. Then he needed an inspection. The inspection led to further requirements – enlarge this, replace that, put in this system, take out that… one after another… month after month… paper after paper.

Pettifogging standards… jackass codes… pointless rules… every one of them expensive and time-consuming. Finally, even a seasoned entrepreneur was forced to give up:

Essentially, I spent seven months trying to not only figure out what I needed to do, while I was paying rent and utilities, but I also spent many hours trying to figure out the complexities of what the state required.

The law in Nevada is called the Nevada Revised Statutes, or NRS. The statutes for retail food are about 500 pages thick. That’s just the codes that cover food. This does not cover the building, electrical, plumbing, and service codes (such as ADA compliance, handicap parking, etc.).

So, I quit. They beat me.

It always amazes me when politicians use the sound bite of how they will ‘create jobs.’ Well, I am an entrepreneur and have created thousands of jobs over the past 25 years…

But here are at least six jobs that I won’t be creating.

Profits Without Prosperity

Meanwhile, the Harvard Business Review reports a shocking figure: Between 2003 and 2012, companies listed on the S&P 500 spent 54% of their profits buying back their shares (reducing the number – and raising the price – of outstanding shares).

These companies devoted another 37% of their earnings to dividends. That means 91% of profits of America’s top corporations went to shareholders. Just 9% went into capital investment, research and development, expansions, and wage increases.

When we first saw that number we thought it must be a mistake. In our business, we have reinvested about 90% of our profits over the past 20 years – the opposite of the 449 S&P 500 companies in question.

What kind of business would be so shortsighted as to give up so much of its capital?

What kind of corporation would spend so little on R&D… business development… and capital investment?

Ah… then we realized: It’s the cronies at work!

Cronies in the C-Suite

First, as to why a company would do such a foolish thing, the Harvard Business Review gives us the answer:

In 2012, the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards.

By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings-per-share targets.

The cronies are paid to do it.

You’re probably wondering how this fits into the Great Zombie War. Isn’t this just capitalism at work? Isn’t this their own money… and they can do with it what they choose?

We answer these questions with questions of our own: How is it possible for them to do this? In the normal course of business you’d think they would need to hold on to more of their money. They are capitalists, aren’t they? They must need capital, don’t they?

Well, you are underestimating the subtlety of the zombies’ war plan.

It is fueled almost entirely with credit… provided at ultra-low cost by their cronies at the Fed. The cheap credit permits corporate America to borrow heavily at little cost and distribute this cash to shareholders… and, more importantly, to corporate insiders.

C-suite cronies are looting America’s top corporations of their capital and replacing it with debt. The public will shoulder the cost of so much cheap credit in the form of future inflation. Meantime, corporate insiders enjoy the spoils in the form of blowout bonuses.

That is why the zombies are fighting so hard to keep the credit bubble inflated – not, as commonly advertised, because it stimulates a recovery.

Cheap credit gives them a way to take what isn’t theirs.

And the war goes on…

Regards,

Bill Bonner

Source: Daily Reckoning

The Most Important Lesson When Buying Stocks

2015-11-24T12:02:00.003-05:00

One of the Most Important Lessons When Buying Stocks

By Mike Barrett, analyst, Extreme Value

Friday, July 10, 2015

You're not going to succeed in the stock market by just buying the world's best businesses…

For the past several years, my colleague Dan Ferris and I have urged Extreme Value readers to buy great businesses… Businesses that gush free cash flow, reward shareholders, have great balance sheets, earn consistent profit margins, and have high returns on equity.

But if you pay too much, even a fantastic company can turn into a mediocre and possibly terrible investment…

That's why we also tell readers to never buy a great business until it's trading at a cheap price. This is a discipline I impose upon myself and encourage you to embrace.

To see just how a great business can turn into a mediocre – and even terrible – investment if you pay too much, let's look at American candy icon Tootsie Roll Industries (TR)…We've never recommended Tootsie Roll, but Dan and I have followed the high-quality business for years. Tootsie Roll's results don't change much from year to year or decade to decade. Since 2005, revenue and free cash flow (FCF) have compounded at low levels of about 1.5% per year. Since revenue doesn't change much year-to-year, neither do dividends or shareholder equity.

Return on equity, or "ROE" (using free cash flow instead of the usual net income because the business is capital-intensive), is routinely a strong 15%-20%. Occasionally, when manufacturing equipment is updated and capital expenditures exceed 2% of revenue, the ROE drops to 5%-10%.

Since things don't change much operationally, it's crucial you buy shares at a cheap price. Otherwise, you lock yourself in for years of meager returns, despite the regular cash and stock dividends.

Let me illustrate…

Right now, shares trade around 24.5 times trailing 12-month free cash flow. That's expensive for outside passive minority investors like us.

If you'd bought Tootsie Roll in 2005, you'd have paid a similarly expensive multiple. Shares ended that year at $28.93, valued near 23 times FCF.

Since then, approximately $10 in cash dividends and stock splits would have reduced your cost basis from $28.93 to $18.66. (Capital returned to you lowers your cost basis dollar for dollar.)

At the end of 2014, shares closed at $30.65. That produced a compound return of just 6% per year over the full nine-year holding period. At Extreme Value, we want our investment capital to earn double-digit compound returns of 10% or better.

It was the same story if you bought in 2010. Shares were trading near $29 and at an expensive 23 times 12-month FCF. By the end of 2014, your cost basis would have been reduced to $24 by cash dividends and stock splits. Again, that's a compound return of only around 6% per year over the four-year holding period.

If you had bought when shares were cheap, though, it would have been a different story entirely…

Shares temporarily dropped to $20 in 2009 and the valuation multiple was a much-lower 15 times FCF. Since then, cash dividends and stock splits would have reduced the cost basis to about $13.68… and the compounded return on investment would've been closer to 18%, not 6%, per year.

This is one of most important lessons I can teach you about buying stocks: A great business is a great long-term investment only if you buy it when it's unusually cheap. Pay too much and you're doomed to underperform, or possibly even lose money.

This is why you should be choosy about making new trades. Stock prices have soared the past six years so most individual stocks are still too expensive to buy today.

In short, if a great business you want to buy is expensive right now, be patient. Prices tend to fluctuate. Eventually, you'll get a chance to buy it at a price that will also make it a great investment.

Good investing, Mike Barrett

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

Four Steps for Finding Great Investments

2015-11-23T12:41:00.000-05:00

Four Steps for Finding Great Investments

By Porter Stansberry

Wednesday, June 24, 2015

We're going to do something that's hard for most people in today's essay...

It involves some math. It involves thinking hard about rather abstract ideas. For most of you, it will involve learning new jargon, which is probably the hardest part. No, it's not as hard as walking across a giant desert for 40 days. But it's something most people will go to great lengths to avoid. So let me tell you why you should first calculate these four things every time you buy another stock.

What you'll find below is a nearly foolproof way to evaluate the quality and the value of any business. This four-part test will allow you to quantify, with surprising precision, exactly what makes a given business great, average, or poor. This knowledge will allow you to make vastly better and more-informed decisions about what any business is worth and what you should be willing to pay for it on a per-share basis. But that's not the best reason to learn this four-part test...

The real secret is, once you develop the discipline to always do this work before you buy any stock, you'll never make a quick decision to buy a stock ever again. Once you add something that's hard to do, that requires a little bit of time, a little rigor, and a little discipline to your investment process, you're going to greatly reduce the number of stocks you buy.

You're also going to radically improve the quality of the stocks you're willing to invest in because you'll have the skills to do so. And that will eliminate more than 90% of your investment mistakes. Remember... you don't need to find a great investment every month, or even every year. You just need to find them every now and then... and have capital ready to put to work.

As I explained yesterday, I believe the No. 1 thing you need to know to be successful as an investor in common stocks is what type of business makes for a great investment.

Investment legend Warren Buffett says the same thing. He puts it this way...

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.

So... what makes a great business? How can you be certain its earnings will materially grow over reasonable periods of time? To figure it out, let's take one of Buffett's most famous investments – Coca-Cola (KO).

Coke sells addictive (caffeine-laced) sugar water for more than the price of gasoline all around the world. It has integrated its brand into people's lives through decades of advertising spending – an investment that has paid off tremendously. Coke has one of the world's most universally recognized and admired brands.

But how do these advantages translate into hard numbers? The most obvious characteristic of a great business is high profit margins. High profit margins are proof of a great brand, a superior product, or some form of regulatory capture that permits greater-than-normal profitability. On every dollar of revenue last year, Coke earned nearly $0.25 in cash. And it brought in $46 billion in revenue.

To figure out exactly how much money Coke earns in cash, we simply look at the company's cash flow statement, under the line: "total cash flow from operating activities." We see that in 2014, this was $10.6 billion. (You can get this by looking at the company's annual report, Yahoo Finance, or any number of other online databases, like Bloomberg. Here's a link to Coke's cash flow statement on Yahoo Finance.)

Next, we divide those cash profits by the company's total revenue ($45.9 billion), which you can find on the income statement. Doing the math gives you a fraction that is commonly expressed in percentage form: 23%. Coke's cash operating profit margin is 23%. It's earning $0.23 in profit on every dollar it generates in sales. In our experience, businesses with cash operating profit margins in excess of 20% are world-class. If you were putting together a checklist, you could start there. A great business must have cash operating profit margins greater than 20%.

The next "mile marker" you're looking for is something we call capital efficiency. This is another concept that, like profitability, is easy for most people to grasp. All you're trying to understand with this test is how much capital the company requires to maintain its facilities and grow its revenues. For example, oil and gas companies are notorious for spending every penny they make on drilling more holes and building more facilities. Their capital-spending programs leave little of their profits to be distributed to shareholders (often less than zero).

We've developed a sophisticated way to measure, in precise terms, the capital efficiency of any business using several factors in our monthly Capital Efficiency Monitor – a part of our supplemental Stansberry Data service.

But you can use a much simpler equation as part of our four-part test of a great business. All you need to do is figure out whether the company in question distributes more capital back to shareholders... or spends more money "on itself" via capital-spending programs.

A great business is able to distribute more profits to its shareholders than it consumes via capital investments. Coke, for example, spent $2.4 billion on capital investments in its own business in 2014. It spent $5.35 billion on dividends and $2.63 billion on share buybacks in the same period. You can see that Coke is spending far more on its shareholders than it spends on itself. (By the way, all of these numbers are labeled clearly on the cash flow statement I linked to earlier.)

What's powerful for investors about businesses like these is that you don't have to depend on a "greater fool" to come along and pay you more money for your shares than they're really worth. You don't need lower interest rates or a raging bull market to be successful. As these businesses grow, they're going to increase their payout amounts, year after year. It's the compounding effect of this growth that will make you wealthy – not the misguided actions of foolish investors. That's why Buffett says you should never buy a stock you wouldn't be happy to hold for a decade, even if the stock market was closed.

The third part of our four-part litmus test for great businesses is return on invested capital. (Here comes the jargon.) Yes, it's a mouthful. But I promise, with just a little practice, you'll be able to easily calculate this figure in your head. We use this metric because there's no purer way of determining the value and the power of a company's "moat" – the degree to which the company is sheltered from profit-eliminating competition.

The business school formula for determining the precise amount of invested capital is complex and requires several different numbers (and judgments about each of them). It's a pain. And there's a much easier way to get a ballpark figure – just add the total amount of a company's long-term debt and the total value of the company's equity capital. You'll find both numbers as simple line items on the balance sheet.

Coke has $30 billion worth of equity capital and $42 billion worth of debt (adding the current position of long-term debt to long-term debt). So in our book, the company has invested capital of $72 billion. On this capital last year, the company reported $7 billion worth of net income, or "earnings." You'll find Coke's net income on the key statistics page, or you can look at the income statement directly. Once you have the numbers, you just do the basic math (seven divided by 72) to derive another percentage: 10%. As you'll see, this is where Coke falls a bit flat. The beverage market is ultra-competitive and Coke's brand only provides a small measure of protection against competitive pricing.

The last part of our great business test is also a bit "wonky" and will make you sound like a finance geek. It's called return on net tangible assets. This number gives you the best overall measure of the quality of any business. It's similar to the more commonly used return on equity (ROE) with two important differences.

First, measuring returns against net tangible assets takes goodwill out of the calculation. So companies with large amounts of goodwill (like companies with great brands) will typically show a much higher return. Second, this measure of quality rewards companies that can borrow most of the capital they need because their results aren't cyclical.

Calculating this number is also really easy. Yahoo Finance lists “net tangible assets” among its balance sheet statistics. All you have to do is compare this number with the company's net income for the last year. In Coke's case, net tangible assets total only $3.9 billion. Coke earned a profit equal to 179% of its net tangible assets – a truly outstanding figure.

(Note: In some cases, a company will actually have more liabilities than it has tangible assets. In those cases, the math you see above no longer works because you can’t divide using a negative net tangible assets figure. When that happens, we’ll subtract out only the long-term portion of total liabilities. This provides a more meaningful number, while still measuring the company's ability to safely replace equity with debt in its capital structure.)

Putting all of these factors together, our test of business greatness starts with profits. How much money, in cash, does a business earn from its operations, expressed as a percentage of its sales? The higher the margins, the better. This tells us that the company owns high-quality brands and products, and market position. We expect great businesses to produce cash operating margins of at least 20%.

Our second test is capital efficiency. Does the business produce substantial amounts of excess capital, and does management treat shareholders well? We test this by seeing whether shareholders receive at least as much capital each year as the business reinvests in itself.

The third test is return on invested capital, which is the best measure of a company's moat. Here again, we would expect to see returns on invested capital of at least 20% to qualify as a great business.

Finally, our last measure of great companies – return on net tangible assets – is the single best overall measure of the quality of a business. It combines brand value, capital efficiency, the quality of earnings, etc. No surprise, we expect returns on net tangible assets in excess of 20% annually.

Business quality is extremely important, but the stock price is equally important for investment outcomes. Our best advice is to value high-quality businesses by the amount of cash they earn before interest, taxes, depreciation, and amortization. In finance jargon, this measure of profits is called "EBITDA." You can't use this measure with lower-quality businesses, but it works well for high-quality businesses because it allows you to quickly judge companies in different industries against each other.

Now, let me show you a trick that will show you when to buy a high-quality company. We try to avoid paying more than 10 years' worth of EBITDA per share when we buy a business. We measure the cash earnings against the enterprise value of the business (the value of all of the shares and all of the debt, minus the cash in the business). But you don't need to do all of this work yourself. You can find this multiple on Yahoo Finance on the key statistics page for any given stock. Valuing businesses is a lot more difficult than evaluating their performance. You should be willing to pay more for a high-quality business that's growing.

Below, you'll find nearly 40 different companies we consider great businesses, according to their results over the last three years. Roughly half of these companies are trading at or close to reasonable prices. Not including the valuation figure (No. 5), the numbers below were compiled using the last three years of operating metrics, so these numbers may look a little different than the ones you calculate at home, if you're only using current figures.

Company	Symbol	Share Price	No. 1: Profits	No. 2: Efficiency	No. 3: Moat	No. 4: Quality	No. 5: Price
InterDigital	IDCC	$57.80	45%	29.3	21%	48%	6.2
Shanda	GAME	$6.95	39%	15.0	30%	99%	7.5
Apple *	AAPL	$128.60	32%	3.4	29%	35%	8.1
Gilead	GILD	$114.18	42%	4.0	29%	485%	8.9
TiVo	TIVO	$10.57	49%	21.2	16%	30%	8.9
Microsoft *	MSFT	$46.26	39%	3.0	22%	35%	9.4
Scripps	SNI	$67.80	30%	14.0	20%	413%	9.7
Edwards	EW	$131.77	30%	2.3	24%	38%	9.8
Coach *	COH	$35.88	25%	3.4	45%	50%	10.1
Oracle	ORCL	$43.78	38%	14.1	18%	606%	10.2
VeriSign	VRSN	$62.75	60%	13.5	46%	39%	11.6
Myriad	MYGN	$33.37	27%	10.3	21%	28%	12.2
Ubiquiti	UBNT	$31.29	27%	9.4	59%	59%	12.2
Lorillard **	LO	$71.22	25%	23.5	98%	35%	12.3
3M	MMM	$157.08	19%	3.2	21%	27%	12.3
Philip Morris **	PM	$80.04	30%	9.8	40%	34%	12.4
j2 Global	JCOM	$66.47	36%	4.9	15%	64%	13.0
AVG	AVG	$25.38	33%	0.3	162%	63%	13.0
F5 Networks	FFIV	$124.14	34%	11.6	21%	33%	13.2
CBOE	CBOE	$57.45	40%	4.5	69%	68%	13.6
Linear	LLTC	$46.67	44%	7.4	28%	42%	13.7
Check Point	CHKP	$83.87	58%	49.6	18%	23%	14.2
Moody's	MCO	$107.15	31%	15.0	41%	79%	14.3
MasterCard	MA	$92.36	42%	19.4	43%	62%	16.1
Verisk **	VRSK	$73.88	31%	2.3	22%	51%	16.2
QIWI	QIWI	$28.29	37%	5.7	57%	161%	16.2
Core Labs	CLB	$120.51	27%	8.3	56%	127%	16.6
Choice Hotels **	CHH	$56.36	22%	11.5	45%	26%	17.2
Biogen	BIIB	$387.78	32%	2.4	23%	51%	17.4
Sirius XM	SIRI	$3.90	28%	11.3	47%	71%	18.0
NetEase	NTES	$144.99	53%	3.1	20%	22%	18.6
Visa	V	$68.42	44%	8.6	13%	100%	18.7
Priceline	PCLN	$1,180.86	34%	6.4	28%	56%	18.7
FactSet	FDS	$164.58	30%	11.5	38%	85%	19.5
Celgene	CELG	$110.46	36%	12.6	17%	321%	25.7
TripAdvisor	TRIP	$75.41	33%	(0.9)	19%	89%	25.8
AbbVie	ABBV	$67.53	28%	5.9	24%	94%	27.9
Baidu	BIDU	$206.99	42%	(0.4)	22%	49%	28.6
Intuit	INTU	$105.59	33%	5.5	23%	55%	32.7
WisdomTree	WETF	$21.78	39%	0.8	45%	36%	35.9
* In the Stansberry's Investment Advisory model portfolio
** For Quality, using return on tangible assets because intangible assets minus long-term debt is negative
We believe the best overall measure of the overall quality of a business is return on net tangible assets. We derive this figure by dividing annual profits (net income) by the company's tangible assets minus total liabilities. Companies that can produce large profits on their asset base may sometimes have more debt on their balance sheets than equity, in effect replacing equity capital with long-term debt. While investors normally should seek to avoid highly indebted firms, companies like these that can produce high and consistent returns can safely use credit as a replacement for equity in their capital structure. This produces large returns on equity, making these businesses extremely attractive to outside passive investors. Please note: In certain examples, extreme amounts of negative equity made our calculations meaningless – you can't divide with a negative number. In those situations, we isolate long-term debt (as opposed total liabilities) to derive net tangible assets. If that still yields a negative number, we simply use returns on tangible assets as a substitute.

The Four-Step Test of Greatness:

	No. 1. Cash operating profit margin: cash from operations / revenue (should be greater than 20%).

	No. 2. Shareholder payout ratio: capital returned to shareholders / capital expenditures (should be greater than 1).

	No. 3. Return on invested capital: net income / long-term debt + shareholder equity (should be greater than 20%).

	No. 4. Returns on net tangible assets: net income / net tangible assets (should be greater than 20%).

Bonus Step:

No. 5. Share price multiple: enterprise value / EBITDA (ideally less than 10).

Regards,

Porter Stansberry

How Successful People Use Their Spare Time

2015-11-20T23:59:00.004-05:00

How Successful People Use Their Spare Time

By Mark Ford, founder, The Palm Beach Research Group

Wednesday, July 22, 2015

Jack and Jill live in the same apartment building and work in the same office. They both wake up at 7 a.m., shower, have breakfast, and get to work by 8 a.m. It is at this point that their habits diverge.

From 8 a.m. until 9 a.m. (when the rest of the workers come into the office), Jill plans her day and gets to work on a job that is important to her long-term goals.

Jack likes to get into work an hour earlier, too, but he prefers to spend the time "relaxing into his day" with a cup of coffee and the morning newspaper. Jack sees Jill working away and feels sorry for her.

"We both get credit for getting into work early," he thinks, "but she has exchanged happiness for money."

In his opinion, that makes Jill greedy, foolish, and, ultimately, self-centered…

David Niven, a college professor and author of the book, the 100 Simple Secrets of Successful People, would half-agree.

"Yes, Jill is acting out of self-interest," he'd say, "but so is Jack"…
Both of them choose to do what they do with their spare time because they believe they benefit from it. Jack doesn't like work. Thus, he doesn't want to work more than he has to.

But since he has to work from 9 a.m. to 5 p.m., he figures he might as well do a good job during that time. And he does.

Jill does like to work. And although she doesn't enjoy every single aspect of it, she especially enjoys the hour between 8 a.m. and 9 a.m. That's when she plans her day, figures out what she can accomplish, and gets some work done on a project that she knows will change her life for the better.

By 9 o'clock, Jack feels relaxed, but just a little bit sad. In a few minutes, the office will be teeming with activity, his inbox will be overflowing with work, and the phone will be ringing off its stand.

Jill actually feels better than she did at 8 o'clock.

In their use of spare time, Jill is an investor, while Jack is a spender.

As an investor, Jill works from 8 a.m. to 9 a.m. because it gives her dividends. On a short-term basis, she is rewarded by knowing that her day is set, her inbox is organized, and she has already done something she cares about.

On a medium-term basis, she benefits by enjoying a more orderly day. And on a long-term basis, the work she puts in now will provide her with all sorts of rewards in the future – higher pay, better work, more responsibility, etc.

As a spender, Jack is not willing to work that extra hour every morning. He would rather use it to "buy" some time that will give him instant gratification. Generally speaking, value compounds over time. This is true of money, knowledge, and work.

Invest $1,000 in the stock market today, and you can be pretty sure it will be worth about $2,000 in about eight years (assuming the stock market grows at its historic 9% rate). The same principle holds true with work.

Every hour that you put in today will be worth many times that amount later on. The rewards can be extraordinary if you think of them in terms of money.

Let's say Jack and Jill are both earning $20,000 per year right now. By putting in an extra hour per day for a full year, Jill can expect to get salary increases that are, perhaps, 20% higher than Jack's. If that's the case, when he gets a $1,000 raise, hers would be $1,200.

That may not seem like much during the first year, but by the third year, Jill will have jumped up to a new level – a management position with a salary of $40,000.

If she continues to put in that extra hour per day, she will eventually be running the business, pulling down $175,000 per year. Meanwhile, though Jack has been enjoying his early morning hours, he will have had a very slow career arc. With any luck, he'll be earning about $55,000 per year as a junior manager.

During the 20 years of their respective careers, Jill will have earned a lot more money and lived much better in terms of material goods. But Jack does not regret his choice.

After all, he figures that he has enjoyed an hour per day of pleasure – five hours per week, 260 hours per year, for 20 years – that Jill gave up. That's 5,000 hours of "fun" that Jill didn't have.

But now, Jack and Jill are 48, and Jill doesn't have to work anymore. She was able to retire with $4 million in the bank. But Jack is forced to continue working.

With two kids in college, a mortgage, and so on, he couldn't retire even if he wanted to. Every 40-hour week that Jack now works is 40 hours that Jill can spend enjoying herself.

It will take Jill just 120 weeks, less than two and a half years, to catch up with Jack in terms of the amount of time he spent on personal pleasure all those years between the hours of 8 and 9 in the morning.

And Jill will not only be much richer and freer than Jack, she'll also be able to continue enjoying herself… an extra 2,000 hours per year. That is how successful people use their spare time.

Regards,
Mark Ford
Source: Daily Wealth

Follow us on Twitter: @blacklioncm

The Three Most Important Concepts in Investing

2015-11-19T10:24:00.000-05:00

The Three Most Important Concepts in Investing

By Porter Stansberry

Tuesday, June 23, 2015

Let's start in the desert…

Imagine you had to walk across the Rub' al Khali – "the Empty Quarter" – of the Arabian Peninsula. This 250,000-square-mile desert is the largest sand desert in the world. Sand dunes there reach as high as 800 feet. It rains less than two inches a year. The surface temperatures reach 125 degrees.

This isn't hypothetical. Three guys decided to try and walk across this desert completely unassisted. In 2013, South Africans Dave Joyce, Marco Broccardo, and Alex Harris became the first humans to walk completely unassisted through the Empty Quarter. They plotted a 1,000-kilometer course from Salalah, Oman to Dubai. You can listen to them talk about their adventure here. Their story is completely nuts… but fascinating.

So what the heck do three crazy South Africans hiking across a giant desert have to do with investing? It's obvious (to me). For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub' al Khali on foot. You have few landmarks to guide your way. And there are lots of ways to die. Most people don't make it…
Think about the three most important pieces of equipment you'd need to walk across the Rub' al Khali, beyond the most basic stuff like shoes, clothes, food, water, etc.

The most obvious piece of advanced equipment you'd need? A GPS, right? Nope. What Joyce, Broccardo, and Harris needed most wasn't a GPS… or even a map. What they had to have to make it across 1,000 kilometers of desert in 40 days (after which they would have quickly starved to death) was Google Earth. They needed to know their precise position in the desert relative to the giant sand dunes, which you can only see using Google Earth's satellite photos. Before the advent of publicly available satellite photos, walking across this desert would have been impossible. GPS alone wouldn't have been enough.

They also needed a strong, lightweight, easy-to-pull cart, so they could carry enough water for the journey. Obviously, they needed food, too. But the water was far more critical and heavy to carry. They spent about three years testing various designs for carrying enough water. The key to success was using mountain bike tires on their cart, rather than wide full tires, which were too difficult to pull through the sand.

And finally… to make sure they had continuous access to Google Earth, they needed to use a solar-based charger to power up a satellite phone. They lost the charger on the 10th day of the trip. So one of them had to turn around and follow their tracks for 25 kilometers to find the charger before it got dark. Without it, they probably would have died. Imagine trying to find that charger… before dark… in the desert… by yourself… knowing that if you couldn't find it, you and your friends would probably die.

Learning the story about the guys crossing the desert, I started thinking about the three most important things most investors need to understand if they're going to be successful in the stock market. Not the obvious stuff… like the way dividends compound returns or the time-value-money formula (which explains that your returns will be driven by how much time your investments are allowed to compound and how much money you save). Nor am I talking about the more advanced, but still simple concepts, like position sizing, trailing stop losses , andavoiding taxes (where possible).

It's not that these things are unnecessary. They're critical. But they're like shoes, hats, and sunglasses when you're crossing a desert. Nobody would go without them, and they really don't require much foresight or wisdom. Instead, I wanted to answer a pair of more difficult questions. Brian Hunt, our Editor in Chief, put it best…

Porter, what are the three things you believe every investor in common stocks must know to succeed, but that you believe most people don't know how to do? Where is the greatest gap between the value of knowledge and the inexperience of most individual investors?

I thought about this set of questions for a long time. Here's my list…

No. 1: The most important thing for investors to understand about investing in stocks is simply what kind of businesses make for great investments and how to properly value these kinds of businesses.

You can think of this knowledge as your personal Google Earth for crossing "the desert" of investing. Knowing how to recognize great businesses and knowing what they're worth is like knowing where the sand dunes are and how to get past them.

Here's an example of what I mean: Do you think Markel (MKL) – trading around $770 a share – is an expensive stock? Why or why not?

If you can answer this question within 30 seconds by looking at a few key statistics, then you're ready to cross the desert. If you can't… you're just not ready. You have to power up your satellite phone and spend more time studying your maps.

If you have no idea whether Markel is expensive or cheap, don't worry. You're not alone. Judging by my experiences with wealthy and business-savvy subscribers, I would estimate less than 10% of our subscribers really understand these concepts. Without this knowledge, I'm nearly certain you can't be successful as an investor. Not for long, at least.

No. 2: The second thing I know you must have to "cross the desert" successfully is a strategy that will continue to make you money even when you're wrong about the big picture.

I've been expecting a serious crash in stocks since 2013. So in myInvestment Advisory, we trimmed our long positions by selling some stocks. And we hedged our exposure to the market by selling short some stocks.

But we didn't sell everything. And we didn't move to a 100% short portfolio. We've done great with our investments since 2013, even though my market outlook has been 100% dead wrong (so far).

The idea that you don't ever want to bet the farm on any particular outlook (or any particular investment recommendation) is hard for most investors to understand and implement. When events in the world spook most individual investors, they simply pull out of stocks completely. They generally do so at the worst possible time. You have to learn how to make money even when you're wrong about the market as a whole. And you have to follow your strategy… even when it's scary.

No. 3: The last thing I think most individual investors either never learn or only learn the hard way after several big beatings is to never, ever chase what's "hot."

These investment "mirages" will cost you almost every time. It takes a lot of discipline to stick with great businesses that you can personally understand. It takes discipline to buy them when you can get them at a reasonable price. It takes discipline to follow your position-size limits.

When a great new business comes along – like online auctioneer eBay (EBAY) in the early 2000s – learn to be patient. Follow it for years, and buy it when it comes into your range.

If you had bought eBay back in 2004, you'd be up a little more than $3 per share today (from $58 to $61) more than a decade later. Sure, eBay was and is a great business with a huge "moat." Nevertheless, investors who chased after it while it was "hot" saw their investments decline almost 90%. It was far better to have bought it for less than $15 a share back when it was trading for a reasonable price.

Over the next three days, I'll be going over these three concepts in detail. I hope you'll take the time to read these essays and think about them. (Remember, there's no such thing as teaching, only learning.) Knowing these ideas is the best advantage I can give you as an investor. You don't have to be a genius to be a great investor. But you need the proper map. And you need the discipline to follow it.

Regards,
Porter Stansberry

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

Financial Innovation vs. Technological Innovation

2015-11-18T11:40:00.000-05:00

Financial Innovation vs. Technological Innovation
A Conversation Between Charles Hugh Smith and Peter Coyne

Peter Coyne: Charles, welcome to The Daily Reckoning. I’m a fan of your work and try to read everything you publish on your blog,www.oftwominds.com. I encourage all of our readers to visit your site and do the same.

I consider you a very deep thinker. I'm always scratching my chin and thinking harder than I have for most of the day after reading your work.

Charles Hugh Smith: That’s a very big compliment. I’ve been a Daily Reckoning reader for at least a decade now.

Peter Coyne: Great. I’d like to discuss two types of innovation with you today. One’s productive and the other is unproductive. The unproductive kind I’m talking about has been going on for decades in the financial services sector. It’s called “financialization.”

Can you describe what financialization is?

Charles Hugh Smith: Sure. Financialization is a phrase we use to describe two aspects of our economy. One is the securitization of assets that were once stable and decentralized. This would include home mortgages, for example.

Home mortgages used to be quite a stable asset class. They were very boring... they paid interest… and banks would hold them for years or even decades. The forces of financialization, however, took this stable asset and securitized it.

In other words, it was turned it into a financial security that could be sliced and diced into tranches, sold globally and then leveraged with derivatives. You can think of the whole thing as an inverted pyramid of financial assets that were all resting on a relatively small base of an actual mortgage.

The second aspect of financialization generates profits without generating more productivity or goods sort of services. In other words, it’s detached from the real economy.

The real economy is totally based on increasing productivity, which is the only force that raises all boats, if you will, in an economy.

Financialization doesn’t generate any new goods and services.

The home mortgage debacle that brought down the economy in 2008 was a classic example in which no new goods and services were created by securitizing, tranching or generating a lot of financial profit for those doing the financialization. It didn't really boost the productivity of the economy or generate any more goods and services.

Peter Coyne: So -- and correct me if I'm wrong on the stats, here -- I think it was something like since the late ’70s, the financial services industry has doubled as its share of GDP. Likewise the number of workers employed by the financial services industry has also grown by a similar amount.

What’s been the missed opportunity the financialization that’s been going on since at least the 1980s -- in terms of lost growth, productivity and standard of living?

Charles Hugh Smith: Well, that is an excellent question, Peter, because very few analysts ever look at the opportunity costs. Opportunity cost, by the way, is a phrase we use to describe what else we didn’t invest in, because we invested in financialization.

And when I say investment, I’m not just talking just about money and financial assets. I’m talking about human capital and social capital. For example, what are we devoting all of our best minds to pursuing?

And so obviously, when you have a financial sector that’s paying a third of a million dollars, half a million, up to even one million dollars per person, you're creating a huge incentive structure to suck in the most ambitious minds.

That means, instead of creating innovation in goods and services, they're creating so-called financial innovations, which don’t really aid the productivity of the whole economy. So, there is a gigantic opportunity cost to creating huge incentives for the financial sector.

Why is the financial sector able to suck off so many talented people and keep growing? As you pointed out, it’s immensely profitable. I believe the statistics are that financial sector used to generate about 10% of the S&P 500’s total corporate profits, and now it’s on the order of 30%.

Peter Coyne: How has that affected the relationship between regulators and government and the financial sector?

Charles Hugh Smith: Well, that profitability has enabled the financial sector to buy a lot of political influence. This is something that readers of The Daily Reckoning are well aware of, but the average American may not realize that it’s not just profit that flows into the hands of a few, it’s profit that enables the purchase of political influence on a vast scale, too.

Peter Coyne: Once the process of financialization starts, it seems to take on a life of its own. But in the interest of fully understanding what’s going on, what was the root cause of financialization in the U.S. -- across the globe, even?

Charles Hugh Smith: I think that we really can’t understand our economy and this slow movement from producing goods and services to financialization without understanding how we create and issue money.

Again, this is a topic that’s well known to longtime readers of The Daily Reckoning, but the average American might not understand it. Money is created and distributed into the hands of the few.

It’s not like everybody gets a check for $1,000 every time the Federal Reserve creates money. It flows into the hands of the few who then lend it to the rest of us at interest. This dynamic of creating a lot of debt and leverage with debt instruments, erodes the underlying economy, because people are spending more and more of their income on paying interest and servicing debt. That means there’s less money left over to invest in productive assets.

I think one other point we have to stress here is that, when financialization is so immensely more profitable than producing goods and services -- due to tax law and the structure of our economy and political system -- then corporations are almost duty bound to pursue financialization techniques to boost their profits. Otherwise, they won’t be as profitable as their competitors and the people running the corporations will be fired.

That is a hidden dynamic that we see in stock buybacks, for instance. We know that trillions of dollars have been borrowed and then used to buy back the shares of existing companies. This is another classic example of financialization generating immense wealth for the owners of those shares that have been boosted.

But it didn't really impact productivity or create any new goods and services; it just enriched a few at the top who own most of the shares.

Peter Coyne: Right. There’s a great chart I like to publish that illustrates this trend we’re discussing. It shows income gains between World War II and 1971. And before we went on a paper dollar standard, the bottom 90% of income earners, not the top 1%, made big income gains.

Post 1971, the top 1% was making all of the gains. Again, I think that illustrates when the U.S. economy switch from investing resources from innovation in producing material things, to financial innovation.

But this is pretty abstract stuff to the individual investor. For example, if I read an article that claims, “The income gap widened in the U.S. by 1% in 2014,” it would make for a good political debate, but it’s an abstraction that has little direct impact on my wealth.

Why is this topic important for the everyday investor to understand?

Charles Hugh Smith: That’s an excellent question that I don't think very many people ask. It allows us to tie in global trends to our decisions as individual investors.

Let’s talk briefly about these really large, really long-term trends that have helped fuel this income disparity. That includes globalization, and we have to recall that, after World War II ended in 1945, the U.S. was basically supreme in the world in terms of having its factories intact and its financial system intact, and an educated workforce.

We sort of had the whole global economy in our hands for probably about 15 years. And then, as Germany, Japan, and other countries rebuilt and became highly competitive and their currencies were extremely weak compared to the dollar, then we lost a lot of advantages that we had held for almost two decades.

Even if we had strict trade laws and a lot of other things that people have often promoted as saving us from globalization, just the fact that the rest of the world became much more competitive with us was something we can never escape. It was just the reality of it.

And so, globalization is one driver. Now, every American worker is, to some degree, competing with other people around the world because many of the tasks, products and services can be done anywhere on Earth.

To say that we can keep wages rising at the bottom when there’s a lot cheaper labor sources elsewhere is just not realistic for the enterprise that has to constantly look at costs and profitability. Those trends are something we have to be aware of.

But how does that relate to being an individual investor, as you asked?

Well, obviously, investors want to look at diversifying their portfolios and keeping a sharp eye on currencies. I've been a dollar bull for many years. That’s one of the things that I think any investor has to keep in mind. Trade and profitability are intimately bound up with the value of the currency that the profit is being generated in.

For example, if a country’s currency is declining in value compared to the dollar, then the profitability of any company you own is going to be declining as well. The reverse is true, too. If you're earning a profit in dollars, and the dollar is rising in its purchasing power, then you're making a lot more money than what it would appear just as a profit margin.

Peter Coyne: That’s a good reason, you’re right. It’s something Jim Rickards, our resident currency war expert, talks about often, too.

If it’s ok, I’d like to move onto another question I have for you. In the past, we’ve written about innovation cycles in the DR, specifically, technological innovation cycles.

But I wonder if there are also cycles of financialization? And if so, where are we in the cycle and how does it end?

Charles Hugh Smith: That’s another great question, Peter.[Laughter] I really enjoy getting to answer questions that are outside the mainstream and very insightful, because any answer is going to shed some light on the core issues, here.

We can refer first back to the business cycle. That term “business cycle” is bandied about often. What it really means is the expansion and contraction of credit. When people are able to borrow more money for whatever reason -- their income can have risen so they can afford to service more debt, interest rates might have declined, the economy might be expanding -- they can use that to invest and buy more goods and services That then puts the economy in expansion mode.

Then, after people have over borrowed, and banks have lent too much money to marginal borrowers and companies have invested in marginal investments, which are not paying off, then a lot of credit has to be wiped out.

In other words, there’s a credit contraction. That’s basically an analogy for recession. In other words, people cut back because they can’t borrow any more. Bad investments are written off and bad debt is written down.

That’s a key part of financialization. You see, the vested interests in financialization would suffer tremendous losses if bad debt was written down. So, financialization is basically the process by which we never allow any credit contraction.

That’s because, if credit contracts, then these highly leveraged corporations and banks, which are using financialization to make immense profits, go bust. This is why the 2008-2009 financial meltdown was so dangerous to the too big to fail banks. They were so highly leveraged that the loss of 1% of their capital would basically render them insolvent.

This is part of why financialization is so corrupting, if you will. It never allows a normal business cycle to play out. And so what we're now seeing is, financialization is getting to the point of diminishing returns.

The Federal Reserve keeps adding liquidity and credit to the economy, but they can’t create more qualified buyers or good, solid investments. They can’t just create them out of thin air like the create credit. That’s why we're seeing less and less positive results from the expansion of credit.

Peter Coyne: You mentioned why the vested interests in financialization won’t let the credit expansion end. But you also mentioned diminishing returns to credit creation.

That means though big banks and the Fed don’t want the financialization cycle to end… and they’ll do everything the can to keep it going… that it might end anyway.

In your opinion does that spell a massive deflation or inflation, ahead?

Charles Hugh Smith: That is the trillion-dollar question. [Laughter]Clearly, for deep, long cycle reasons, deflation still has more to room play out. By long cycle trends, I'm referring first to demographics, in that, as the population ages, people spend less money, they have less need to buy things, and their earning power goes down. Then they're starting to sell assets to pay for their health care and they're selling their large homes to downsize.

All of the economic impacts of an aging population are deflationary. Then we also have technology, which is also deflationary in terms of producing goods and services faster, better, cheaper.

Peter Coyne: Globalization, like you mentioned, too. That’s deflationary.

Charles Hugh Smith: Yes, so, those are long-term, multi-decade trends that are not going to be stymied or overwritten easily. The caveat to that, of course, is that a central government and a central bank can destroy their currency. Once the currency’s been destroyed and its credibility has been lost then you can get hyperinflation because people are desperate to turn that money into something that will hold its value longer than a few hours or days.

So, there are two competing forces and I, myself, don’t feel that there’s any clarity on which one’s going to win in the long term. But in the short term, there are huge deflationary forces are that will be very hard to overcome.

Peter Coyne: Do you think that because the world financial system is more connected than ever and because central banks are all printing in concert that the credit expansion could go on for much longer than anyone expects because the risks are spread across the globe?

Charles Hugh Smith: You know, Peter, that’s an excellent observation that the scale has a lot to do with the end result. It works both ways, I think.

As you say, the fact that there are now multiple large central banks that are capable of issuing enough new currency to reflate an asset bubble on their own certainly distributes the risk, if you will, to a number of central banks.

In other words, if there is a global recession, any one central bank has the power to generate enough new money and credit that it can soften that global recession.

But, on the other side, what we see is a very high correlation of policies. Since Keynesianism, which is the philosophy of running huge government deficits on a permanent basis to boost demand and money with, by lowering interest rates and liquidity issuance, that you're going to solve all economic and financial problems.

Keynesianism is the dominant ideology of all central banks. They're all pursuing the same policy. In that regard, we actually are seeing a heightening of risk because everyone’s doing the exact same thing to keep financialization going. That actually increases the risk.

Peter Coyne: Right. That’s something Jim Rickards has seared into my mind -- that the risk in the financial system grows exponentially as the scale of the system increases.

Meanwhile, what do you think the knock-off effects on society are? Do you think financialization makes people shortsighted and tempted to be unethical?

Charles Hugh Smith: That’s an excellent topic, which, again, is underrepresented, in our financial media and our mainstream media.

As you suggest, a focus on short term profits as the only metric that matters pushes people to ignore the longer-term consequences of their actions and choices. It more or less forces them to engage in whatever it takes to reap the profit that will keep them their job.

These kind of incentive structures that we've created as defaults lead to exploitation of anything that’s ethically ambiguous. By that I mean, if there’s some loophole that can be exploited then there’s a desperate drive to find and exploit it while retaining a veil of legality.

I don’t want to take an overly political example, but I think the Clinton Foundation is offering us many, many examples of exactly this kind of behavior. The sort of letter of the law has been followed, but it’s been distorted and exploited for the personal gain of a handful of people.

I think that describes a lot of the actions of the too big to fail banks and/or people within those banks, too.

Peter Coyne: That’s a good point. I wonder if, on the flip side of this financialization discussion, you think that productive innovation offers a way out of this situation.

Do you believe that there’s an innovation cycle counterbalancing the financialization cycle?

Charles Hugh Smith: I am absolutely positive about innovation as a way out of the financialization trap. As you say, I think it could create a sustainable, fairer economy once financialization either implodes or is eroded by more positive trends.

I believe there are several kinds of innovation. We're very familiar with technological innovation -- smartphones, apps and so on. But there’s also social innovation, and that’s a slower process. Social innovation requires changing people’s value systems and how they perceive problems.

I see a great opportunity to use technology to implement broad social innovations. The primary example is peer-to-peer businesses like Airbnb and Uber. These businesses are changing the way we do things not just technologically, but the way we organize our cities, organize our lives, organize our work.

These are really broad based changes, and I think it’s all for the better. But the other side of technology is that there’s always going to be an industry that has vested interests. This can include the government sector, not just the private sector. Public unions are a good example of a vested interest that will fight tooth and nail to resist any technology that disrupts their slice of the pie.

What’s interesting about that is, economies that are mostly controlled by vested interests -- like third world kleptocracies or former colonies that are ruled by a very small elite -- do very poorly. That’s because those vested interests are so powerful and wealthy that they can stymie or co-opt or get control of any technology that could disrupt them. But those economies are also stagnant. The only thing that’s widely distributed in those economies is poverty.

Peter Coyne: How do we avoid that extreme?

Charles Hugh Smith: As consumers, investors, and citizens, we have to insist that vested interests are stripped of the power to stop technology from disrupting their piece of the pie.

When I look at, say, the U.S. economy from a 30,000-foot view, I see some very, very large industries, which are always private sector government cartels, if you will. They're always industries that are controlled by a few government agencies and a few really large corporate players.

I'm thinking of healthcare and national defense, specifically. Each of those is about $700-800 billion in terms of the federal budget. They are overwhelmingly the largest part of the government’s expenditures, and they're also extremely large in terms of the overall economy. Health care is roughly 18% of the whole gross domestic product.

These are industries, which are completely ripe for disruption, but it’s very difficult to get innovation into these sectors. That’s because the vested interests have so much political power.

I see that as something that we have to chip away at.

Innovation is allowed to blossom in our economy when there are no existing vested interests and nobody to fight it. The personal computer was the ideal example of that. There wasn’t really an industry that profited from no one getting his or her hands on a personal computer. And so, the personal computer was allowed to expand into this new territory.

Innovation is really our only hope to boost productivity, which is the only tide that can raise all ships. But vested interests are going to fight tooth and nail to suppress it or marginalize it. And I think the healthcare sector is an excellent example of that dynamic.

Peter Coyne: That’s interesting. I think we’ve bit off enough to think about for one reckoning. I’d like to have you back to continue you this conversation, though.

Charles Hugh Smith: That would be great. I appreciate you asking such terrific questions. These are large, complex topics.

Peter Coyne: Yes, and I want to thank you for your time, Charles, I appreciate it. It’s been thought provoking. We’ll talk with you soon.

Regards,

Peter Coyne
The Daily Reckoning

Source: Daily Reckoning

Are You Ready for the Coming Debt Revolution?

2015-11-17T11:11:00.000-05:00

Are You Ready for the Coming Debt Revolution?

Bill BonnerMay 15, 2015

There is a spectre haunting America…and all the developed nations of the world.

It is the spectre of a debt revolution.

We left off yesterday talking about how the economy of the last 30 years — and especially that of the last six years — has favoured the old over the young.

‘Rise up, ye young’uns,’ we as much as said, ‘you have nothing to lose but your parents’ debts.’

We showed how the value of US corporate equity, mainly held by older people, had multiplied by 28 times since 1981.

That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.

But what did it do for young people whose only assets are their time and their youthful energy?

Alas, the real economy has increased by only five times over the same period.

A grim and menacing spectre

And when you look more closely at work and wages, the spectre grows grimmer and more menacing.

Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen — from $57,000 to $52,000 — in the 21st century.

But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why?

Was this huge shift — of trillions of dollars of wealth from young working people to old asset holders — an accident?

Was it just the maturing of a market economy in the electronic age?

Was it because China took the capitalist road in 1979?

Or because robots were competing with young people for jobs?

Nope…on all three counts.

First, old people, not young people, control government.

Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap.

Old companies fund most Washington lobbyists, too.

And old people decide elections: There are a lot of them…and they vote. They know where the money is.

Second, the government — doing the bidding of old people — restricts competition, subsidises well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the greybeards.

Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending. This rewards the current generation while pushing the costs into the future.

Grandparents prey on grandchildren

None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.

This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have.

We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971.

It was behind the eight ball, fearing foreign governments would call away America’s gold.

Few in the White House realised they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren…for the next 44 years.

And it’s still not over.

The new credit money — which could be borrowed into existence with no need for any savings or gold backing — was just what old people needed.

We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.

That spending lifted the value of the geezers’ assets and increased their living standards.

Meanwhile, the average 25-year-old reporting for work in 2015 can’t expect a single dollar more in real hourly wages than his father did in 1980.

The total value of outstanding US corporate bonds was 17% of GDP in 1981. Now, it’s $11.6 trillion — or 65% of GDP.

What did corporations use that money for?

Some of it went into capital investment that made companies more productive and more profitable. But much of it went where you would expect it to go: to buy back shares…to acquire other companies at inflated prices…and to pay off executives as the value of their share options went up!

Who did this benefit?

Mostly people over 50.

Government debt is even worse. Unlike most personal debt, it doesn’t go to the grave with the person who borrowed it. It sticks around to burden the next generation — who got nothing from it.

Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs — few of which provided any benefit to young people.

An accident? A mistake?

Partly. But old people must have known what they were doing.

Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they pocketed much of the money.

When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when their credit balloon popped in 2008, they whined to the feds to protect their ill-gotten gains.

Honest capitalism? Not if they could prevent it.

Creative destruction? Not on their watch.

Pay for what you get? Not if they could put the bills on the next generation.

Young people of the world, unite!

Regards,

Bill Bonner

Source: Daily Reckoning

The Ultimate Way to Invest "Outside the Stock Market"

2015-11-16T11:46:00.000-05:00

The Ultimate Way to Invest "Outside the Stock Market"

By Brian Hunt, Editor in Chief, Stansberry Research

Friday, May 8, 2015

"Investing outside the stock market."

Since the 2008 stock market crash, this has become one of the hottest topics in the financial industry. Investors have gone wild for investing "outside the stock market."

Instead of stocks, the regular Joe is far more interested in Silicon Valley venture capital, gold IRAs, real estate, and websites that allow him to loan money to small businesses. After getting burned badly in the crash, the average investor is interested in just about anything but the stock market.

If you're one of these people, please print this essay and read it several times.

In it, I'm going to reveal an important secret about investing "outside the stock market." You won't hear it from the people touting this idea.

Learning this secret could transform the way you invest. It could mean the difference between making millions of dollars with your investments… or struggling to ever register a positive return. It could instantly make you a much, much better investor.

As I'll show you, you can get rich investing outside the stock market… but not in the way you might think.
Before we cover this secret, I'm going to "pull back the curtain" on our business… and tell you something fascinating about the past six years at Stansberry Research.

In early 2009, True Wealth editor Steve Sjuggerud became extremelybullish on stocks. Remember, at this time, people were terrified we were about to enter another Great Depression. The banking system was on the verge of failure. Unemployment was soaring. Investors had suffered through the worst stock market drop in more than 70 years… and they were panicking.

Steve believed the Federal Reserve would respond to the panic with extraordinary fiscal stimulus… which would cause stocks to soar in value.

Since that bold call, the market has rallied for six years. During this whole time, Steve has stayed bullish. While many investors were worried about another market crash, Steve has stayed unrelentingly bullish… and unrelentingly right. The stock market has more than tripled in value. The people who listened to Steve have made a fortune.

Unfortunately, not many people listened to Steve.

Although Steve has been phenomenally successful with his calls, we've been phenomenally unsuccessful selling Steve's True Wealth service with bullish sales messages. People simply don't want to hear them. They either don't want to invest at all or they want to invest in anythingbut the stock market.

It's understandable. For many folks, the financial losses were so large – and the memories are so painful – that they never want to hear about stocks again.

Despite the stock market soaring in value since 2009, less than half of American families say they own stocks.

This disinterest in stocks has helped fuel the rise of "crowdfunding" websites that allow people to invest in startup companies.

It has fueled the rise of lending websites, like Lending Club. These websites allow individual investors to loan money directly to small businesses. In less than 10 years, Lending Club has gone from a tiny firm to a $6 billion business.

I'm sure some of these "outside the stock market" investments make sense.

But there's a much more powerful idea to keep in mind here…

There's a valuable piece of investment wisdom that says, "It's not a stock market, it's a market of stocks."

There is power in this old quote. It makes the crucial point that when you buy a stock, you are not "buying the market." You are not buying a lottery ticket or a hot potato to pass back and forth to other investors.

When you buy a stock, you buy a business.

When you buy a stock, you become an owner of its real estate… its equipment… its brand… its patents… and its intellectual property. As a stock owner, you are entitled to a share of the business' cash flows and dividends. The portion of your wealth in that stock rises and falls with the success of the underlying business.

That's why the sophisticated investor doesn't see his stock holdings as investing "in the stock market."

He sees his stock holdings as ownership stakes in real businesses.

Sure, shares of his ownership stake trade on the market, but that's irrelevant to him. What's relevant is the condition of the business… just as if it was a private business investment.

For example, let's say you own a share of your town's most popular restaurant.

It's in a great location. Everyone in town knows it's the place to go for a business dinner or an anniversary celebration. It's co-owned and managed by an honest, hard-working family.

Six years ago, your ownership stake in the restaurant put $30,000 cash in your pocket. That amount has grown each year since then.

As an owner of this business, would you care if the Nasdaq rises 3% next Tuesday? Would you care if the Dow dropped 15% next year? No way. You would only care that the business is still pleasing customers and producing cash flow. The level of the Dow Jones Industrials would have no effect on the value you, your partners, or a potential buyer would place on your business. Zip. Zero.

This is how sophisticated investors view their investments in public stocks.

The sophisticated long-term stock investor doesn't see himself as "playing the market." The world's greatest investor, Warren Buffett, has famously said they could close the stock market for five years and he wouldn't care. Buffett built his fortune by being an owner of high-quality businesses that generate cash… not by investing "in the stock market."

Adopting Buffett's approach to stocks is a huge step forward for individual investors. Buffett approaches his stock purchases as ownership stakes in businesses. He doesn't "buy the market." He buys high-quality businesses with great brand names and big competitive advantages.

This is the real secret of investing "outside the stock market."

This approach can radically improve your investment results. It can also radically reduce your stress levels.

To show you how it works, consider someone who bought an ownership stake in Johnson & Johnson (JNJ) in 1990. At the time, J&J was an established blue-chip leader in consumer products and pharmaceuticals. It was one of the elite businesses in America.

In April 1990, someone who bought an ownership stake in J&J began earning the company's $0.15-per-share annual dividend payment. This translated into a 2% yield on his capital.

Over the next 25 years, J&J's focus on strong brand-name products helped it grow from $11 billion in sales to $74 billion in sales. It also increased its dividend payment every single year. This dividend has increased through bear markets, recessions, terrorist attacks, and stock market crashes.

As I write in 2015, the person who bought an ownership stake in J&J in 1990 has seen the value of his stake grow 1,321%… He is now earning a 42% annual yield on his original investment. And he's earning it by owning one of the world's best businesses.

Stock market declines don't concern this business owner. Why care about a 10% decline in the Dow when you're earning 42% in dividends from one of the world's best businesses?

And recessions? He has seen them before and survived them. He knows that during a recession, people will still buy cough drops, cold medicine, Band-Aids, mouthwash, and prescription drugs from his business.

These situations are common when you buy high-quality businesses like J&J, Apple, Hershey, McDonald's, Starbucks, Wal-Mart, Disney, and Budweiser… and hold them for the long term.

Our publishing company is so committed to helping investors identify high-quality businesses that we've devoted an entire section of our flagship Stansberry's Investment Advisory to it. We screen and research the world's best businesses. We detail them for readers. When one gets cheap enough to buy, we recommend buying as much as you can afford. Many sophisticated investors consider this research a "cheat sheet" for buying the world's best businesses. It's one of the most important services we'll ever publish.

You might have noticed that I didn't use the words "buy stock" during this example. I used words like "owner" and "business."

That's because seeing yourself as an owner of a business is so critical to this mindset… the mindset of an elite investor.

If you're willing to put in a little time… if you're willing to learn what makes a great business… and if you're patient enough to only buy when great values are present, you can build incredible wealth with "outside the stock market" investments. You can build incredible wealth as an owner of high-quality businesses.

Consider beverage giant Coca-Cola (KO)… It sells more than 3,500 different products in more than 200 countries. It has 20 brands that each generate more than $1 billion in annual sales. And it earns thick, 20% profit margins.

Do you think people will still be drinking soda, water, and juice 25 years from now? So do I… And Coke will be selling them. According to Forbes, Coca-Cola is the fourth most valuable brand in the world.

Over the last 25 years, Coke has increased sales from $10 billion to $46 billion. It has increased its annual dividend payout in each of the last 50 years. If you had bought a stake in Coke's business 25 years ago, you would have paid $4.70 a share and started earning its $0.10 annual dividend. That's a 2.1% yield.

Today, your share of the business would be worth more than eight times what you originally paid… a 770% increase. And you would be earning a 28% annual yield on your investment. Meanwhile, the broad market has returned 520% during that time.

Or… consider fast-food icon McDonald's (MCD). It has more than 35,000 restaurants in more than 100 countries… And it serves 70 million customers a day. It earns large, 17% profit margins.

Do you think people will still want fast food at low prices 25 years from now? So do I… And they'll get it at McDonald's. According to Forbes, McDonald's is the sixth most valuable brand in the world.

Over the last 25 years, McDonald's has increased its revenues from $7 billion to $27 billion. It has increased its annual dividend payout in each of the last 38 years. If you had bought a stake in McDonald's business 25 years ago, you would have paid $7.60 a share and started earning its $0.08 annual dividend. That's a 1% yield.

Today, your share of the business would be worth more than 12 times what you originally paid… a 1,178% gain. And you would be earning a 45% annual yield on your investment.

These incredible results don't even take into account the amazing power of reinvesting your dividends. This is the practice of taking the money you earn in dividends and using it to buy more shares.

If you bought a stake in J&J 25 years ago and reinvested your dividends, the value of your piece of the business would have grown 2,361% instead of "just" 1,321%. The value of your Coca-Cola stake would have grown 1,313% instead of 770%. Your stake in McDonald's would have grown 1,891% instead of 1,178%.

With this in mind, I encourage you to build a "shopping list" of high-quality businesses… and look to buy them when they go on sale.

These sales are often caused by serious-but-solvable business problems that produce share-price declines. Sales can also come in the form of stock market crashes. These occur every 10 or 15 years. They give you spectacular times to buy high-quality businesses.

For example, during the 2008-2009 credit crisis, the value of ownership stakes in entertainment blue chip Disney dropped more than 50%. In early 2009, you could have bought a stake in the company for $20 per share. Six years later, the economy had improved… people spent more money on entertainment… and the value of Disney's ownership stakesclimbed 400% to $100 per share.

As I mentioned, you can get rich investing outside the stock market.

There you have it… an enlightened way to view an idea many Americans are concerned about… but have totally wrong.

Don't want to invest "in the stock market" by owning the Dow? Great. Invest outside the stock market. Buy a world-class business like McDonald's the next time it's selling for the bargain price of 10 times cash flow. Become a shareholder in one of the world's greatest businesses.

Don't want to invest "in the stock market" by owning mutual fund shares? Great. Invest outside the stock market. Buy an elite business like Starbucks or Hershey or Disney after the next market crash leaves them selling for bargain prices.

If you're interested in making great investments outside the stock market, then don't "buy the market"… and don't view stocks as hot potatoes to buy and sell every week.

Take a radically different approach than amateur investors…

Do what sophisticated investors do… Buy businesses.

Regards,
Brian Hunt

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

How to Read an Extra 52 Helpful Books This Year

2015-11-13T12:11:00.000-05:00

How to Read an Extra 52 Helpful Books This Year

By Mark Ford, wealth coach, The Palm Beach Letter

Wednesday, April 15, 2015

You can give yourself a competitive edge – one that could pay you big dividends one day – by doing a little carefully calculated extra reading this year.

I know you are busy already, but what I'm about to suggest won't take too much time – and the benefits you'll get from it will be wonderful. I'm going to show you how to read an extra 52 books this year and every year thereafter…
Every day, new nonfiction books are published on every possible topic. Some of these contain information and advice that will help you achieve your goals. The trick is to locate the good ones and read them quickly, efficiently, and strategically.

Tracking down good books is easy and fun. Make it a habit to browse bookstores, especially in airports and train stations (where business and self-help titles are abundant). Pick up any title that interests you. Scan the table of contents. If it seems promising, read the first page. If you find the book interesting and easy to read, hold on to it. Keep going until you have twice as many books as you can read, and then keep the ones you are most excited by.

If you follow these simple steps, you'll be eager to get home and start reading. Eagerness alone won't get you through an extra book a week, no matter how interesting and well-written it is.

To keep up with a weekly schedule, you have to find a way to cut your reading time by less than half. If you approach nonfiction books tactically, they don't take very long to "read."

The first and most important thing is to realize that books like these are raw material for your imagination, not finished artwork. So you should go through them as you might go through a big pile of kindling, looking for a few straight, dry pieces. Don't waste your time fooling around with what's not important. And don't feel compelled to read every word.

I like to think that every good book has one big secret to convey and several smaller ones. Your job is to find out – as quickly as you can – what they are. There are many ways to speed-read, several of which I've tried over the years.

The system I use now allows me to get through most business books in two to four hours.

Here's how I do it (and I'm a painfully slow reader):

1.	Read the table of contents. It should give you a quick idea about the range and depth of the subject matter. Figure out what you want from the book: what it can teach you.
	By doing this beforehand, you can dramatically shorten the amount of time you need to spend with the text itself. Your subsequent reading will be targeted and efficient, because your subconscious mind has already begun to think along the right lines and your interest has been primed.

2.	Read the introduction and/or first chapter. One of them usually serves as a sort of executive summary of the entire book. Here is where you can pick up the author's main argument and discover – if the book is well-written – his big idea.
	(In my experience, most good nonfiction books have, at base, one Big Insight or Secret. If you miss that, you miss the book.)

3.	Read the first paragraph of each successive chapter and the first sentence of each successive paragraph. You will be amazed at how much information you can pick up that way.

	In terms of actual reading, you are covering only 20-30% of the text, but in terms of content, you are getting 80-90%.

	To get the most from this process, I usually assume that each chapter has one useful thing to teach me – and that's what I look for.

4.	Finally, read the entire last chapter and/or epilogue. Like the introduction/first chapter, at least one of these will often serve as a summary. Reading them gives you a chance to internalize what you've already discovered and to make notes if you haven't already.

	I recommend keeping some sort of reading journal in which you record the title, author, Big Idea, and smaller ideas of each book. If you make your entry just after you've finished a book, it shouldn't take more than five or 10 minutes.

	Review what you've written once within 24 hours and then again sometime the following week. You'll be amazed at how much you'll remember about the book.

Once you get used to this way of reading, you'll find it addictive. You'll have a constant stream of new ideas coming to you that will help you in every important area of your life.

You'll get smarter and better with each passing week – and that will make you feel better and more confident. Your friends and colleagues will notice the difference. And sooner or later, one of the ideas you pick up will be the big one that takes you to the next level.

Start today by going to the bookstore after work and picking up your first title. Feel free to mark it up with a pen or highlighter, but remember that you are not looking to study it in detail but to select from it a few very helpful secrets.

Use the scanning method I recommended if it helps, but make sure you get through this book within the next seven days.

The most important thing to remember is not to try to learn too much. One big idea and a half-dozen little ones are plenty. Get them down and move on.

Regards, Mark Ford

Source: Daily Wealth

Follow us on Twitter: @blacklioncm

6 Major Flaws in the Fed’s Models

2015-11-12T08:52:00.000-05:00

6 Major Flaws in the Fed’s Models
by James Rickards

For now, the U.S. dollar is the dominant global reserve currency. All markets, including stocks; bonds, commodities, and foreign exchange are affected by the value of the dollar. The value of the dollar, in effect, its “price”, is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in the world.

The Fed may have some legitimate role as an emergency lender of last resort and as a force to use liquidity to maintain price stability. But, the lender of last resort function has morphed into an all-purpose bailout facility, and the liquidity function has morphed into massive manipulation of interest rates.

The original sin with regard to Fed powers was the Humphrey-Hawkins Full Employment Act of 1978 signed by President Carter. This created the “dual mandate” which allowed the Fed to consider employment as well as price stability in setting policy.

The dual mandate allows the Fed to manage the U.S. jobs market and, by extension, the economy as a whole, instead of confining itself to straightforward liquidity operations. Janet Yellen, the Fed chairwoman, is a strong advocate of the dual mandate and has emphasized employment targets in the setting of Fed policy. Through the dual mandate and her embrace of it, and using the dollar’s unique role as leverage, she is a de facto central planner for the world.

Like all central planners, she will fail. Yellen’s greatest deficiency is that she does not use practical rules. Instead she uses esoteric economic models that do not correspond to reality. This approach is highlighted in two Yellen speeches. In June 2012 she described her “optimal control” model and in April 2013 she described her model of “communications policy.” The theory of optimal control says that conventional monetary rules, such as the Taylor Rule or a commodity price standard, should be abandoned in current conditions in favor of a policy that will keep rates lower, longer than otherwise.

Yellen favors use of communications policy to let individuals and markets know the Fed’s intentions under optimal control. The idea is that over time, individuals will “get the message” and begin to make borrowing, investment and spending decisions based on the promise of lower rates.

This will then lead to increased aggregate demand, higher employment and stronger economic growth. At that point, the Fed can begin to withdraw policy support in order to prevent an outbreak of inflation. The flaws in Yellen’s models are numerous. Here are a few:

Under Yellen’s own model, saying she will keep rates “lower, longer” is designed to improve the economy sooner than alternative policies.

But if the economy improves sooner under her policy, she will raise rates sooner. So, the entire approach is a lie. Somehow people are supposed to play along with Yellen’s low rate promise even though they intuitively understand that if things get better the promise will be rescinded. This produces confusion.

People are not automatons who mindlessly do what Yellen wants. In the face of the embedded contradictions of Yellen’s model, people prefer to hoard cash, stay on the sidelines and not get suckered by the bait-and-switch promise of optimal control theory. The resulting lack of investment and consumption is what is really hurting the economy. Economists call this “regime uncertainty” and it was a leading cause of the length, if not the origin, of the Great Depression of 1929–1941.

In order to make money under the Fed’s zero interest rate policy, banks are engaging in hidden off-balance sheet transactions, including asset swaps, which substantially increase systemic risk. In an asset swap, a bank with weak collateral will “swap” that for good collateral with an institutional investor in a transaction that will be reversed at some point. The bank then takes the good collateral and uses it for margin in another swap with another bank. In effect, a two party deal has been turned into a three-party deal with greater risk and credit exposure all around.

Yellen’s zero interest rate policy constitutes massive theft from savers. Applying a normalized interest rate of about 2% to the entire savings pool in the U.S. banking system compared to the actual rate of zero, reveals a $400 billion per year wealth transfer from savers to the banks from the zero rates. This has continued for six years, so the cumulative subsidy to the banking system at the expense of everyday Americans is now over $2 trillion. This hurts investment, penalizes savers and forces retirees into inappropriate risk investments such as the stock market. Yellen supports this bank subsidy and theft from savers.

The Fed is now insolvent. By buying highly volatile long-term Treasury notes instead of safe short-term treasury bills, the Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries these notes on its balance sheet “at cost” and does not mark to market, but if they did they would be broke. This fact will be more difficult to hide as interest rates are allowed to rise. The insolvency of the Fed will become a major political issue in the years ahead and may necessitate a financial bailout of the Fed by taxpayers. Yellen is a leading advocate of the policies that have resulted in the Fed’s insolvency.

Market participants and policymakers rely on market prices to make decisions about economic policy. What happens when the price signals upon which policymakers rely are themselves distorted by prior policy manipulation? First you distort the price signal by market manipulation and then you rely on the “price” to guide your policy going forward. This is the blind leading the blind. The Fed is trying to tip the psychology of the consumer toward spending through its communication policy and low rates. This is extremely difficult to do in the short run.

But once you change the psychology, it is extremely difficult to change it back again. If the Fed succeeds in raising inflationary expectations, those expectations may quickly get out of control as they did in the 1970’s. This means that instead of inflation leveling off at 3%, inflation may quickly jump to 7% or higher.

The Fed believes they can dial-down the thermostat if this happens, but they will discover that the psychology is not easy to reverse and inflation will run out of control. The solution is for Congress to repeal the dual mandate and return the Fed to its original purpose as lender of last resort and short-term liquidity provider. Central planning failed for Stalin and Mao Zedong and it will fail for Janet Yellen too.

Regards,
James Rickards

Source: Daily Reckoning

The Ultimate Cheat Sheet to Investing Part II

2015-11-11T13:19:00.000-05:00

The Ultimate Cheat Sheet to Investing Part II

By James Altucher

H) My Friend Has a Business Idea. Should I Invest in It?

Probably not. But if you want a checklist, make sure these four boxes can be checked:

The CEO has started and sold a business before.

The business is in a sector with a strong demographic headwind behind it. (Or is that a tailwind?)

The company has revenues and/or profits.

You are getting a really good deal. (This is subjective, but you can look at similar companies and what they were valued at.)

I can say this: every time I have invested with this approach, it has worked miracles. And every time I have not invested in this approach it’s been a DISASTER. Like, a CLUSTERF*(*K.

Claudia, my wife, doesn’t let me invest in a private company unless all four items on my checklist apply. It’s good to be able to say, “I love your idea, but my wife won’t let me invest.”

After that, they usually say something like (you can imagine…), but I don’t care. I get to keep the money in my wallet and not give it to them.

Which is important, because I tend to believe in everything people tell me.

I) What Do You Think of Bitcoin?

I think Bitcoin has about a 1 in 1,000 chance of being a survivor. So I have 0.1% of my portfolio in Bitcoin. I can write a lot more on Bitcoin. I soldChoose Yourself in bitcoins before the book was officially released. Bitcoin went up 500% after that.

I can explain everything about Bitcoin, but I can’t explain the future. So we’ll see.

J) What About Metals as a Hedge Against Inflation?

Gold may or may not be a good investment. We’ve all basically agreed that gold, as a story, has some value, so we make it go up and down and up and down.

In the 1500s, the Aztecs used gold to make jewelry. They had a lot of gold lying around.

They didn’t understand why the Spaniards kept talking about gold. They asked Cortez. Cortez said, “We can’t think of anything BUT gold.” And then Cortez killed them all and took the gold.

In Spain, gold meant a lot. In the Aztec empire, it was a toy.

Statistically, it’s not really a hedge against inflation. Money, gold, inflation… they are all examples of stories. They go up or down depending on how many people like that particular story that year.

K) What About Metals Like Gold? Don’t They Have Intrinsic Value?

The only currency in the history of mankind that had actual intrinsic value was when people traded barley in the markets of the ancient city of Ur. Since then, we’ve developed currencies that depended on our faith in their value.

Every currency has faith and hope backing it. When people began to lose faith in US currency (in the Civil War), the words “In God We Trust” were put on the dollar bill to trick people into having faith in it.

But if you’re going to pick a metal, wait until the gold/silver ratio gets higher than its historical average and buy silver.

How come? Because silver is both a precious metal (like gold) and an industrial metal (also like gold, but much, much cheaper). So there actually is some intrinsic value in silver.

I bought some silver bars back in 2005. But then I lost them when I moved. That’s why nobody should listen to me about investing.

L) What About Mutual Funds?

No. Mutual funds and the bank representatives who push them consistently lie about the fees they are charging. I know this from experience.

One time I accompanied a friend of mine who had made some money (she was a model and had a good run for a while) and was looking to invest it. She asked me to go with her to see her bank representative who had some “ideas.” Because she was beautiful, I went with her to the bank.

I didn’t talk at all during the meeting but jotted down every time the bank guy lied. He lied five times.

Afterward I explained each of the lies to her.

What happened? She put all her money with the guy. “He’s practically family.” I can’t argue with a good salesman.

But he lied about the mutual funds’ performance that he was pitching, the fees they were charging, the commissions he was charging, and a few more I can’t remember now. I wrote an article about it in the Financial Times back then.

Fact: Mutual funds don’t outperform the general market, so better to invest in the general market without paying the extra layer of fees.

Use the criteria I describe above, pick 20 companies and invest.

M) What Are Some Good Demographic Trends?

The Internet. Yes, it’s still growing.

Baby boomers retiring. They need special facilities to live in. They need better cancer diagnostics and treatments.

Energy. The more people we have, the more energy we will consume. Go for energy sources that are profitable and don’t need government subsidies. Whenever you depend on the government, you could get in trouble.

Temp staffing. Every company is firing people and replacing them with temp staffers.

Batteries. If you can figure out how to invest in lithium, then go for it.

Chemistry. For 3,000 years we solved all of our problems with chemistry. For the past 50 years we solved our problems with computers. But chemistry will solve the next 3,000 years of problems.

N) Is a House a Good Investment?

Everyone will disagree with me on this, but the answer is an emphatic “NO!”

It has all the qualities of a horrible investment:

Constant extra layers of fees and taxes that never go away (maintenance, property taxes, etc. that all rise with inflation).

Usually housing is too large a percentage of someone’s portfolio. Even just the down payment ends up being the largest expense of someone’s life.

Usually massive debt is involved.

If you can avoid, 1, 2, and 3 and don’t mind the opportunity cost in the time required to maintain your house, then go for it. Else rent and use the money you saved for other investments that will be less stressful and pay off more.

Fact: Housing has returned 0.2% per year in the past 100 years.

O) If No Housing and Only 30% of My Portfolio in Stocks, Then What Should I Do with the Rest of My Money?

Why are you in such a rush to put all of your money to work? Relax! Don’t do it!

The saying “cash is king” exists for a reason. I will even say “cash is queen,” because on the chessboard the king is just a figurehead, and the queen is the most valuable piece.

Cash is a beautiful thing to have. You can pay for all of your basic needs with it.

You can sleep at night knowing there is cash in the bank.

I love a stress-free life. When I look back at the past 15 years, the times when I’ve been most stressed is when I’ve been heavily invested, and the times when I’ve been least stressed is when I had cash in the bank.

With cash in the bank, you can also invest in yourself.

P) What Does That Mean, “Invest in Myself?”

It costs almost nothing to start a business. Find something people want and start posting information about it on a blog and then upsell your services on the blog. Or write 1,000 small books about different topics and publish them on Amazon. You can do this on the side while you learn and have a full-time job and then when you are ready, you can jump to your other passive streams of income. I have a podcast coming up soon with a guy who makes $25,000 a month doing this. Note: It takes a lot of work to find “passive” income, but when it happens, it’s worth it.â€¨These are some ideas. There are many others.

Invest in experiences rather than possessions. Figure out interesting and unique experiences you can have or places you can go to (but they don’t always have to be places). Experiences pay much higher dividends than an extra TV or a nicer car.

Books. Reading is the best return on investment. You have to live your entire life in order to know one life. But with reading, you can know thousands of people’s lives for almost no cost. What a great return!

Q) Should I Save Money with Each Paycheck?

No. Just try to make more money. That is easier than saving money. I find that whenever I try to save money, I end up spending more. I don’t know why that is. I’m a horrible spender, which is probably why I’ve gone broke so many times.

Better to just make more with many streams of income so you don’t have to worry about going broke. And then saving will come naturally as you make more money.

Don’t forget that a salary will never make you money. After taxes and the daily grind and your exhaustion and the feelings of “I hate my job,” and then inflation and then new expenses (kids), you will never be able to save. Avoiding Starbucks every day won’t make you a millionaire, that’s a fact.

I say it glibly, “try to make more money.” I know it’s not that easy. But in the long run, if you have a constant focus on alternative ways to make more money, then you will.

R) What Else Should I Do with My Money?

Forget about it.

Money is just a side effect of health.

I talk a lot about the daily practice I started doing when I was at my lowest point.

I know now after years of doing it that it has worked. I’ve done very well with it, and I started doing it when I was dead broke, lonely, angry, depressed, and suicidal.

I didn’t start it from a position of privilege.

And you don’t have to buy my book. I’m not selling anything.

Here’s the whole thing: stay physically healthy in whatever way you know how (sleep well, eat well, exercise). Be around good people who love you and respect you and whom you love and respect, and be grateful every day.

Think of new things each day (or all day) to be grateful for. “Gratitude” is another word for “abundance,” because the things you are most grateful for become abundant in your life.

And finally, write down 10-20 bad ideas a day. Or good ideas. It doesn’t matter. After exercising my idea muscle for six months, I felt like an idea machine. It was like a superpower that just wouldn’t stop. More on this in another post.

Money and abundance in your life is a natural side effect of the above. I know this for myself, but now since writing about it for almost four years, I can tell you from the letters I get that it works for others.

S) What’s in It for You?

I don’t know. I used to write about money stuff because I wanted investors, or I wanted to sell books or to get speaking engagements. Now I want none of that.

But I get worried that in a world of increasing economic uncertainty, more and more people are getting “stuck” and getting lied to and are scared about what is happening.

Most people will think I am giving bad advice. That’s fine. I probably am. I am just trying to avoid the BS, and I hope you do also.

Too many people I know are nervous and depressed.

There’s nothing else to know about investing your money. If your bank tries to give you any advice, just say, “Thanks, but I’m okay.”

If they want you to put your money in a savings account, even “so you can get the interest” I would politely decline. There’s a reason they are asking you to do this, and I have no idea what it is, but it’s not good for you.

You won’t get rich investing your money, but you can do very well. And if you combine that with investing in yourself, you will get wealthy.

But only if you remember that financial wealth is a side effect of real inner wealth.

This is the most powerful investment you can make with your time and your life.

You can always make money back when you’ve lost it.

But one single split moment of stress and anxiety you will NEVER make back again.

Investing in the future will never bring back the past.

To be able to sit and not have a million stressful thoughts racing through your head. To be able to appreciate everything around you for the abundance that it is.

But the world is constantly saying “thank you” to you for being alive, for creating new things, new energies, new experiences.

Every day, give the world at least one more reason to whisper “thank you” to you.

That’s the best investment.

Source: James Altucher

The Ultimate Cheat Sheet to Investing Part I

2015-11-10T13:43:00.000-05:00

The Ultimate Cheat Sheet to Investing Part I

By James Altucher

In the history of capitalism, this is the hardest time ever to invest. People are going broke, losing their jobs, interest rates are zero, deflation AND inflation are both rampant, and fear more than greed rules the junk news.

Everyone pretends to be informed by reading about the latest crisis in Ukraine. Meanwhile, education costs in the US have risen faster than inflation or income for 40 years in a row. Incomes have been flat to down for 40 years in a row. Retirees have no interest income to depend on. And a handful of stocks are at all-time highs, hiding the fact that the market has largely crashed over the past three years.

In short: people are scared. And I do think the uncertainty is going to rise quickly, so I wanted to put this note together.

In 2001 and 2002, I lost all my money through bad investing. Sometimes I made it all back. Sometimes I didn’t.

So why should anyone listen to me about investing? You shouldn’t. You shouldn’t listen to anyone at all about investing. This is your hard-earned money.

The three most important words in investing are: “I don’t know.” If someone doesn’t say that to you, then they are lying.

I was preparing for my podcast conversation with Stephen Dubner, coauthor of Freakonomics. One of the statistics he points out is that CXO Advisory Group polled the predictions of 500 investment strategists and pundits. The “experts” had a 47% success rate. Good luck if you listen to any of them.

Here’s my experience.

I’ve run a hedge fund that was successful. I ran a fund of hedge funds, which means I’ve probably analyzed the track records and strategies of about 1,000 different hedge funds.

I’ve learned one major thing, which I will repeat below: ALL OF WALL STREET IS A SCAM. There are zero exceptions. I’m afraid this is true, even though I often denied it.

I’ve been a venture capitalist and a successful angel investor (I was ahorrible venture capitalist though—but I put that under the category of “does not work well with others”).

So I’m not in that business anymore. It’s too much work to run a fund anyway.

Over the past 15 years, I’ve tried every investing strategy out there. I honestly can’t think of a strategy I haven’t experimented with.

I’ve also written software to trade the markets automatically, and I did very well with that, but that industry is now dominated by the high-frequency guys.

And I’ve written several books on my investing experiences, from automatic investing to Warren Buffett, to hedge funds, to long-term investing (my worst-selling book, The Forever Portfolio, has sold 399 copies since it came out in December 2008, including one copy for the entire last quarter).

Incidentally, why publish a book called The Forever Portfolio during the worst financial crisis in history? I begged my publisher (Penguin) to postpone, but it couldn’t. “It’s in the schedule” was the magic incantation. Publishers largely suck. The good news is the company will never make back the advance.

That said, I am proud to have made the first crossword puzzle to ever appear in a book on investing.

So, okay! Let’s get started. Don’t follow any of my advice. This is what I do, and it works for me.

A) Should I Day Trade?

Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake, and then eat all of the cupcakes.

Then you will get sick and eat all of your money, but it will taste thrilling along the way. That’s what day trading is.

B) I Don’t Believe You. Many People Day Trade for a Living.

No. I personally know of two. Maybe three. And they work 24 hours a day at it and have been doing it for a decade or more. So unless you want to put in that amount of time and be willing to lose a lot first, then you shouldn’t do it.

One more thing: when you day trade and lose money, it’s not like a job.

When you go into a job, you NEVER lose money. If you don’t show up for two weeks, you get paid. Even if you have been warned repeatedly about sexual harassment, you still get paid. You might get fired, but they won’t take your money.

The stock market TAKES your money on bad days.

Sometimes it takes a lot of your money. We’re not used to the brutality of that, and it can destroy a person psychologically, which makes one (me) trade even worse.

C) Well Then, Who Does Makes Money in the Market?

Three types of people:

People who hold stocks forever. Think: Warren Buffett (he has never sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells shares but for 20 years basically held on to his MSFT stock).

People who hold stocks for a millionth of a second (see Michael Lewis’ book Flash Boys, which I highly recommend). This is borderline illegal, and I don’t recommend it.

People who cheat.

I’ve seen it for 20 years. I’ve seen every scam. I can write a history of scams in the past 20 years.

Without describing them, here’s the history: Reg. S, calendar trading, mutual fund timing, death spirals, front running, pump and dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist. Those are scams from just the past 15 years. If I went back 50 years, the list would be 50 times as long.

One time I wanted to raise money for one of my funds. I went to visit my neighbor’s boss. The boss had been returning a solid 12% per year for 20 years.

Everyone wanted to know how he did it. “Get some info while you are there,” a friend of mine in the business said when he heard I was visiting my neighbor’s boss.

The boss said to me, “I’m sorry, James. We like you and if you want to work here, then that would be great. But we have no idea what you would be doing with the money. And here at Bernard Madoff Securities, reputation is everything.”

So I didn’t raise money from Bernie Madoff, although he wanted me to work there. Seemed like a very nice guy.

I was depressed when I left his offices in the so-called “lipstick building” in Manhattan. “Why will I never be good enough?” I thought.

Later, the same friend who wanted me to get “info” and “figure out how he does it” said to me: “We knew all along he was a crook.”

Which is another thing common on Wall Street. Everybody knows everything in retrospect, and nobody ever admits they were wrong.

Show me a Wall Street pundit who says “I was wrong” and I’ll show you… I don’t know… something graphic and horrible and impossible [fill in blank].

Remember the magic words:

I. Don’t. Know.

D) So How Can One Make Money in the Market?

I told you about: #1. Pick some stocks and hold them forever. Since “I don’t know” applies, it’s very hard to pick the right ones. Here’s what I do:

E) What Stocks Should I Hold?

Warren Buffett has some advice on this (and I know because I wrote thebook about him. A friend of mine who knows him told me my book was the only book that Buffett thought was accurate about him).

So since I don’t know anything, I will let Warren Buffett take over here.

He says, “If you think a company will be around 20 years from now then it is probably a good buy right now.”

I would add to that based on what Warren does. It seems to me he has five criteria:

A company will be around 20 years from now.

At some point, company’s management has demonstrated in some way that they are honest, good people. If you can get to know management, even better.

The company’s stock has crashed for some reason (think American Express in early ‘60s, which he loaded up on. Or Washington Post in the early ‘70s. Or Coca-Cola in the early ‘80s).

The company’s name is a strong brand: American Express, Coke, Disney, etc.

Demographics play a strong role.

With Coke, Buffett knew that everyone in the world would be drinking sugared water before long. Who can resist? He also started buying furniture companies right before the housing boom. He knew that as the population in the US grows, people will need chairs to sit on.

Note that Buffett is not what some people call a “value investor.” He buys based on demographics. A lot of people argue about that.

F) What Else?

One time I accidentally got an email that was intended for a famous investor. It was from his broker and contained his portfolio. I can’t say how this accident happened, but it did.

Of course, I opened the email.

This is a man who writes about lots of stocks.

His entire portfolio was in municipal bonds.

I don’t know whether or not municipal bonds are good investments. But I would look into stocks that are called “closed-end funds” that invest only in municipal bonds.

They usually pay good dividends, usually trade for less than their cash or assets in the bank, and are fairly stable (it’s very hard for a municipality to not pay back its debts for various reasons, some of them constitutional).

But do a lot of research into the towns.

I’ll tell you one story. I had an idea for a fund in 2008 when oil was crashing at the end of the year.

Stocks/funds that invested in municipal bonds in Texas were getting destroyed. Somehow, because oil was going down, everyone naturally assumed that Texas was going to simply disappear. I assumed that most people were wrong about Texas.

I researched every municipal bond out there and found a good set of Texan cities that were being sold off with the others else even though they had nothing to do with oil.

I pitched it to a huge investor who had told me he wanted to back me on any idea I could come up with.

He loved the idea. He loved it so much he didn’t invest with me, and a few weeks later he told me, “We now have about $500 million in this strategy and we bought the very stocks you were recommending.”

I don’t know what to think about this. That’s Wall Street.

They went up over 100% in the next six months while the world was still in financial collapse. So he made a lot of money.

As for me, I didn’t put a dime into my own strategy and made nothing.

But that’s my fault.

In investing, you never have anyone to blame but yourself. Blaming is draining.

G, PART 1) Should I Put All of My Money in Stocks?

No, because you’ll never know anything about a company, and you won’t get the kind of deals that Warren Buffett gets.

So use this guideline:

No more than 3% of your portfolio in any one stock. But if the stock grows past 3%, you can keep it. To quote Warren Buffett again: “If you have Lebron James on your team, you don’t trade him away.”

No more than 30% of your portfolio in stocks (unless some of the stocks grow, in which case you just keep letting them grow).

G, PART 2) What if We Are in a Bubble?

Some hedge fund manager (David Einhorn) just said we might be in a tech bubble. Back to rule #1: He doesn’t know. It’s just a headline. He’s also the same investor who loaded up on housing REITS in 2007 because he had analyzed statistically “it always paid off.”

(I don’t know).

Bubbles don’t mean anything. We had an Internet bubble in the ‘90s. Then a housing bubble. Bubbles, bubbles, bubbles. And if you just held through all of that, your stock portfolio right now would be about a percent from all-time highs.

So ignore cycles and bubbles and ups and downs.

AND NEVER EVER read the news. The news has no idea about the financial world and what makes it tick. Any investing off the news is like taking out your eyes because you trust a blind person to drive you to work.

I worked at different points for the Financial Times, the Wall Street Journal, and other news outlets. Here’s what the top editor says to his staff every morning: “Tell me something scary that happened last night.”

Part II Tomorrow...

Source: James Altucher

The One Thing I’m Going to Teach My Kids About Investing

2015-11-09T09:06:00.000-05:00

The One Thing I’m Going to Teach My Kids About Investing
By Porter Stansberry, Editor, Stansberry Alpha

Over the years, I've explained a lot of Wall Street's "secrets"...

I've explained how discounted bonds are sometimes vastly better investments than stocks. I've covered how selling naked puts is almost always safer and more profitable than buying stocks outright.

These concepts (and others) are critical to active investors. They all play a role in giving you the tools you need to increase your returns. You ought to know all about them and be able to use them tactically to take advantage of opportunities in the market.

I've written about these concepts many times over the years. And I've said they're the "most important" thing I could teach you from time to time. I wasn't lying. All of these strategies have their "time in the sun."

Believe me... having this tool bag and knowing when to use these strategies will make you a much better investor. It will allow you to profit from opportunities the market always creates.

But... how can you learn to be patient enough to wait for these opportunities? That's what I'd like to show you with today's essay. I hope you'll print this one out... mark it up... and keep it near your desk.

The Real Secret…
The real secret is in this one...

So what's the most important idea I've discovered in finance? What's the one thing I'm going to teach my kids beyond the obvious stuff about saving, compounding and risk management? What do I believe is the real secret to investment success?

And... the biggest question of all... How do I invest my own money in securities?

Over the long sweep of your investing lifetime, strategies that only work extremely well in certain market situations are unlikely to play a dominant role. The big secret, therefore, is something you can use all the time, for your entire life, as an investor. And here it is: Some companies are much better than others at compounding capital. Much better.

If your goal as an investor is to compound your savings over time, wouldn't it be easier to simply figure out which companies will compound your capital at an acceptable rate, buy those firms (and only those firms) at reasonable prices and then do something else with the rest of your time?

Here's a simple but powerful example...

Well-run insurance companies can produce what's called an "underwriting profit." They are literally paid money in advance to manage your capital. And they get to keep not only the investment profits, but profits from the premiums, too.

That's like paying the bank to keep and use your money. No other business can compound capital so consistently.

Insurance companies have other fantastic advantages, too. They're able to legally defer most of their taxes. They're nearly immune to economic factors. They're scalable. I could go on...

They're a focus for us because well-run insurance companies are legendary compounders of capital. Buy them at reasonable prices, and it's impossible not to do well.

Natural Wealth Compounders
In the March 2012 issue of my Stansberry Investment Advisory, we explained that insurance stocks had rarely been cheaper. We recommended several through the year. Since then, stocks of all stripes have exploded higher... but they haven't outpaced insurance companies.

Insurance stocks as a whole – as measured by the SPDR S&P Insurance Fund (KIE) – have far outpaced the S&P 500.

It's not an accident that the greatest investor in history, Warren Buffett, has long focused on insurance stocks and other companies that are highly capital efficient. That is, companies that are natural wealth-compounders.

Starting with his 1972 investment in See's Candies, Buffett gradually over the years shifted the bulk of his wealth into a simple, long-term compounding strategy...

While Buffett didn't abandon all other forms of investing, his largest allocations since 1972 have all used this compounding strategy. That famously includes his 1988 purchase of Coca-Cola... when Buffett put roughly 25% of Berkshire's capital into a single stock!

And it wasn't a cheap stock, either. At the time, Coke was trading for 16 times its annual earnings. Buffett had figured out the one real secret of finance... the one secret to "rule them all."

Three Important Questions
To use a long-term compounding strategy effectively, you really only have to answer three questions:

•		First, is the company in question able to produce very high returns on its assets? In other words, is it a great business?
•		Second, are these unusually high returns very likely to continue for decades, without requiring large and ongoing capital investments?
•		Third, can the management of the company be trusted? Will bankruptcy never be even a remote possibility?

If the answer to these questions is "yes," then all you have to do is simply not pay too much when you buy the stock. Most of the companies that fit these criteria are branded consumer-products companies – stocks like McDonald's, Coke, Heinz and Hershey.

Long-Term Earnings Power
Buffett explained in his 1983 shareholder letter how he thinks about these companies. The secret to their long-term earnings power is very simple: It's their brand and the relatively unchanging nature of their products.

These companies' products are so well known (and adored) by customers that these firms can constantly raise prices to keep pace with inflation.

Meanwhile, the brands – while requiring some advertising – aren't like factories, gold mines or drugs...

They don't require massive investments of new capital. There's no new gold mine to find and build. There's no patent that's going to expire. And there's not even any new product that must be created: Coke's fans went crazy with anger when the company tried to change its product in a small way back in 1985.

All these firms have to do is continue to deliver the same thing, year after year. And that means they can afford to return huge amounts of capital to shareholders.

Merely buying and holding any of the stocks I mentioned above would have made you 15% a year if you'd just reinvested the dividends for the last 30 years.

Even if all you did was invest $10,000 and then nothing else – not a penny more – you'd still end up with $575,000 at the end of 30 years. If you invested $10,000 annually, you'd end up with $4.3 million.

And the best part? This approach can be used by anyone.

Simple Math
The math is simple. And is it really that hard to realize that Heinz is the best sauce company... that Coke is the leading soft-drink business... or that McDonald's makes the best hamburgers for kids?

The No. 1 objection I get from readers when I talk about this strategy is: "That's great, Porter. Wish I'd known about that when I was 25. But it's too late for me now. I don't have 30 years."

That's nonsense. Think about it this way... Buffett was born in 1930. He didn't buy Coke until 1987. He was 57 years old. It has been one of the greatest investments of his life – bar none.

If that doesn't convince you, just think about it this way. How often do you make more than 15% on your portfolio in a year? Whether you've got three decades to invest or only one, you should aim to produce the highest possible annual return without putting your capital at undue risk.

There's no safer investment approach than this one, as your returns are being manufactured by great businesses. You don't need a "greater fool" to pay too much for your shares to make a profit. In fact... the biggest risk you face is selling at all because that will trigger taxes (in most accounts).

It's this seemingly invisible power that allows these companies to return massive amounts of capital to shareholders – a factor that sets them apart and greatly reduces investor reliance on capital gains. This is incredibly important over the long term.

Source: Bonner and Partners

Follow us on Twitter: @blacklioncm

The Swiss’ Pearl Harbor Sneak Attack

2015-11-06T09:30:00.000-05:00

The Swiss’ Pearl Harbor Sneak Attack
by James Rickards

The most dramatic battle yet in the currency wars took place last Thursday. It was the financial equivalent of a Pearl Harbor sneak attack…

“I find it a bit surprising that he did not contact me,” IMF Director Christine Lagarde told CNBC’s Steve Liesman that day, “but, you know, we’ll check on that.”

You can almost imagine the conversation afterwards between Mario Draghi of the European Central Bank (ECB) and Swiss National Bank (SNB) President Thomas Jordan…

Mario Draghi:“Did you tell Christine?”

Thomas Jordan:“I thought you were going to tell her…”

Mario Draghi: “Wait, I thought you were!”

Switzerland had just abandoned its peg of the Swiss Franc to the Euro. The result was mayhem with an immediate 30% drop in the value of the Euro against the Franc, and billions of dollars of trading losses by banks and investors around the world.

Several foreign exchange brokers went bankrupt because their customers could not settle their losing trades. The Swiss operated in total secrecy.

Currency wars resemble real wars in the sense that they do not involve continuous fighting all the time. At certain times, there are intense battles, followed by lulls, followed by more intense battles.

But there is nothing new about the Swiss National Bank’s move. It’s the latest salvo in the currency war that President Obama started in 2010 and it won’t be the last. It was in 2010 that the president announced his National Export Initiative designed to double U.S. exports in five years.

The most dramatic battle yet in the currency wars took place last Thursday.

The only way to do that was with a cheaper dollar, so the president’s policy amounted to a declaration to the world that the U.S. wanted other countries to let their currencies go up so the dollar could go down. Ten months later, the Brazilian Finance Minister, Guido Mantega, shocked global financial elites by publicly proclaiming what everyone knew, but no one would say — that the world was in a new currency war.

The problem with currency wars is they last a long time; sometimes even fifteen or twenty years. The reason is they have no logical conclusion, just back-and-forth devaluations and revaluations as countries retaliate against each other.

We have seen this seesaw pattern re-emerge. The weak dollar of 2011 has turned into the strong dollar of 2015. Countries that complained the weak dollar was hurting their exports in 2011 now complain that the strong dollar is hurting their capital markets in 2015.

That’s the other problem with currency wars — no one wins and everyone loses. Currency wars don’t create growth; they just steal; growth temporarily from trading partners until the trading partners steal it back with their own devaluations.

The surprise revaluation of the Swiss Franc on Jan. 15 will not be the last such surprise. There are many important pegs left in the international monetary system they are vulnerable to being broken. Right now the Hong Kong dollar and the major Arab currencies are all tightly pegged to the U.S. dollar.

The Chinese Yuan is loosely pegged to the U.S. dollar, too. If the U.S. raises interest rates this year as the Fed has warned, the stronger dollar may force those countries to break the peg because their own currencies become too strong and hurt their exports.

If the Fed does not raise interest rates, the result could be a violent reversal of current trends and a weaker dollar as the “risk on” mantra causes capital to flow out of the U.S. and back to the emerging markets. Either way, volatility is the one certainty.

The other problem with the currency wars is what the IMF calls “spillover” effects, also known as financial contagion. Many mortgages in Poland, Hungary, and other parts of Central and Eastern Europe are made not in local currency but in Swiss Francs. The stronger Swiss Franc means those borrowers need more local currency to pay off their mortgages.

This could lead to a wave of mortgage defaults and a mortgage market meltdown similar to what the U.S. experienced in 2007. This shows how a decision made in Zurich can wipe out a homeowner in Budapest. Financial contagion works just like Ebola. Once an outbreak begins, it can be difficult to contain. It may not be long before the Swiss Franc sneak attack infects investor portfolios in the U.S.

We’ll be monitoring the danger on your behalf. Financial contagion can also be a two-way street. It not only creates dangers, it creates opportunities for investors who can connect the dots in the currency wars. The easiest conclusion you can draw and act on is this simple truth: Do not believe government and central bank lies.

This maxim is not without historical precedent. You’ve probably heard about Franklin Roosevelt’s own sneak currency attack. In 1933, President Roosevelt devised a plan to increase the price of gold in dollars, effectively a dollar devaluation. But he had a problem. If he increased the price of gold while Americans owned it, the profit would go to the citizens, not the U.S. Treasury. He knew that he had to lie to the American people about his intentions in order to pull off the theft of the century.

So Roosevelt issued an emergency executive order confiscating the gold at about $20.00 per ounce, and then revalued it to $35.00 per ounce, with the Treasury getting the profits.

On Thursday, the Swiss National Bank pulled a similar stunt. Last November, the Swiss citizens voted on a referendum to require an informal link of the Swiss Franc to gold. The Swiss National Bank argued against the referendum on the ground that it would cause them to break the peg of the Swiss Franc to the Euro.

The people believed them and voted “no” on the referendum. But now the Swiss National Bank has broken the peg anyway. The price of gold is spiking as a result, but the Swiss citizens have lost the benefit of that because the referendum is now a dead letter. The Swiss National Bank lied to the Swiss people about their intentions with regard to the peg.

The lesson of history is that citizens should own some gold, store it safely, and don’t believe government and central bank lies. In fact, we could see more investors fleeing to the safety of gold in the coming months as trust in central bankers wanes.

Regards,

Jim Rickards

Source: Daily Reckoning