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Simon Black: Priced To Fantasy

Stock prices today simply aren't justifiable
Tuesday, April 10, 2018, 11:53 AM

Chris and I have been on a ship this week, presenting at The Real Estate Investor Summit At Sea.

We were able to steal away for an hour to sit down with fellow presenter Simon Black (founder of SovereignMan.com) and this excellent discussion ensued. We didn't have any agenda prepared; it's just us three riffing and sharing our thoughts on the most likely implications of the biggest macro risks that have our attention right now.

As Simon summarized:

I spent some time with Chris and Adam last year and they’re really great and smart guys. We’re very aligned philosophically, so I was curious to hear their thoughts on the economy today… and where they see some opportunities.

I enjoyed this conversation more than any other podcast in recent memory.

In our wide-ranging discussion, we covered everything from where we see energy prices going to the geopolitical risks we see today (including the recent tragedy in Syria) to the insane, cash-burning business models of today’s tech darlings.

We all agree the stock market today is “priced to fantasy” and toward the end of our discussion, we shared some specific things you can do, right now, to protect your capital and still prosper while waiting for the inevitable correction.

We talk about gold, raising cash, investing in cash alternatives (including assets that are actually safer and higher-yielding than cash in the bank) and what we’re all personally doing with our own money today.

Simon recently posted this podcast to his audience and we thought you would all enjoy it, too.

Click the play button below to listen to Chris' interview with Simon Black (66m:29s).

Transcript: 

Simon: So, yeah, Simon Black, Chris Martenson, Adam Taggart, Peak Prosperity, Real Estate Guys Cruise. Is that okay?

Chris: Yeah. And we met the first time last year. That was pretty cool.

Simon: Yeah. Yeah, had a blast. Spent a lot of time hanging out with Adam until way early in the morning. And there's just been so much going on in the world. This is a really cool event. I talk to this with my audience, and I know to talk to this with your audience. This is, for me, I don’t speak at events, so this is always a special thing for me. We get tons and tons of invitations ever year. I turn down pretty much every single one of them. I don’t even like to do podcasts, really. I'm so busy doing – I've got so many businesses I'm running, so many things I'm doing, but I always make time for this one just because the quality of the people here, you guys, the Kiyosaki's [PH] etc., and Ross and Robert are just such wonderful guys, gotten to know them so well over the last five years. They gave me a – five years in a row I got a pair of pants with my name on it that I traded with Peter Schiff's wife because she had large and I had medium.

Chris: She's walking around with your name on her ass?

Simon: She's walking around with pants that say Simon, and I came back from dinner – I went to the gym last night with Lauren's Schiff's pants on. So I went down to the gym in the lobby, it says Lauren all over my pants, but hers are like extra-large, so I look like MC Hammer. The crotch is coming down to my knees. And so I looked down – I was like, I look ridiculous – end of Lauren Schiff's pants. So, anyway, and this is like day two, so we've got another week of this.

We're going to – it's cool, I think, doing this on a boat, so we're going to San Juan. We're actually, I think we're getting off on – I have a business – one of my banks is based in Puerto Rico, Peter's bank is based in Puerto Rico. He actually lives there now, and I think I'm getting a bunch of friends of mine who are living in Puerto Rico to come and meet us. They're basically going to crash the party, and maybe one of my attorneys and accountants there is going to come out and talk about what's happening in Puerto Rico and so forth. Kind of interesting thing, you know, obviously, just got wiped out by the hurricane.

Chris: That was awful.

Simon: You'd be surprised. It's still pretty bad, but you'd be surprised. There are parts of San Juan – it's kind of interesting what's happened. Maybe just interesting to get your take on crypto – so many of these guys that have made tons of money in crypto are sort of making Puerto Rico their home now, they're calling in Puertopia, or something like that.

Chris: I've heard about that.

Simon: There's like ten thousand crypto conferences going on there now. And a lot of these guys have actually bid up the prices of real estate. So you'd think that after just horrific hurricane that everything would be dirt cheap and so forth, but it's not.

Chris: That's interesting.

Simon: It's actually not, yeah.

Chris: Just in this one enclave, or…

Simon: So there's a really – one of the nicer parts of San Juan is called Condado, and the prices of real estate in Condado are not cheap at all. In many respects the prices have actually gone up since the hurricane, and so there's a lot of these guys coming down just scooping up all these apartments. You know, we sent a couple of our guys to Puerto Rico recently just to scrounge around and try to find some semblance of great value in the real estate market and couldn't come up with anything.

Chris: Really?

Simon: Oh, yeah. It was pretty surprising. I mean, there's some okay deals here and there, but there really – the think that really surprised me was, by comparison, just other territories right next store, U.S. Virgin Islands and Saint Thomas, I think it was, the real estate is actually so much cheaper in Saint Thomas than it was in San Juan.

Chris: That is really interesting.

Simon: Yeah, I mean, it was kind of wild. So Peter – I've been friends with Peter for years – and he was trying to – he's been trying to convince me for the longest time. He'd say, you got to move to San Juan. I think maybe he's lonely, I don't know. So he was trying to sell me on the idea of buying a condo that's like just underneath his. I'm like, I don’t think I really want to live…

[Laughter]

But so I think then we'll do that, and then we're going to Saint Thomas and then Saint Martin. But we'll get off the boat in Saint Martin. I don’t know if you guys are going the whole way.

Adam: We're going the whole way this year. Last year, we hopped off, I think, at the first place we stopped, at Roatin [PH]. This year we get to do the whole thing.

Simon: So do you live in Maryland still?

Chris: Massachusetts's.

Simon: Massachusetts, right. And where are you, Adam?

Adam: I grew up in Massachusetts, but I'm now out in the People's Republic of California.

Simon: Very nice. The northern republic or the southern republic?

Adam: The northern republic. We're actually up in wine country in Sonoma County.

Simon: So, for my audience, you guys run peakprosperity.com. Really interesting website; we have such a philosophical alignment, obviously. Maybe kind of just a quick sense of the – maybe your views on energy – we talked about that last year, and I unfortunately, missed your remarks this year when I got cornered by either Ross or Robert, I think, during your remarks, but maybe a sense of some of the energy things you talk about with respect to GDP growth and how all that's really changing right now.

Chris: Well, sure. The primary mission of the website is to get people really high-quality information that they're not going to get anywhere else. Kind of, that's the philosophical alignment with this conference and with yourself. There's ways you can look at data and determine for yourself what's going on here. So our view is, you can't look at the economy in isolation anymore – you've got to understand the role of energy in the economy and then, also, ecology or the environment. Look at all three of those and you can get a sense of where we're going.

Not from a futurist, you know, as Yogi Berra said, "Predictions are difficult to make, especially about the future". But trends you can extrapolate. And it almost looks like magic to people who don't know how to do that. But what we're doing is just extrapolating the trends: here's the data, here's where it's going, and our prediction is it's going to keep going that way unless something changes. So with energy, some of the big trends people have to know about is that 2015 saw the worst year of oil discovery since the 1920s, and 2016 was worse than that. and 2017 was worse than that. So oil is farming with a lag time built into it. So if you want to have oil coming out in seven years, you have to have done the exploration and the discoveries seven years ago.

Simon: Right. It's a great analogy. It's saying it's very similar with farming. Where I'm – we started one of the largest blueberry producers in the world. You got to plant those things, and then you wait, and it takes time for them to grow and…

Chris: And you hope supply and demand is in your favor when that happens, when the harvest comes. So what people need to be aware of is that no matter how aggressive we decide to get at throwing the money at the oil supply problem in the future, there's a hole in discoveries which is really dramatic. It's the worse in the series. And is the world using less oil? No. We use about one and a half million more barrels a day every year, year after year, barring a major recession. 2008, 2009, you saw a little down time, but otherwise, it's a long, unbroken series. Right.

So every headline anybody's read, like the age of oil is over, it's pure marketing. It's there to deceive or prey on people's hopes. I really hope we get off oil. Well, that's great. But the capitalists in us now well, you've got to find lithium, you’ve got to mine it, you've got hopefully enough cobalt, you got to get your manufacturing supply chains, and then, eventually, you'll have enough cars to sort of dent the oil demand. But we are so far from that moment. So oil is still – it matters. It matters a lot.

So that's our view is that the shale plays are a flash in the pan. You drill them, you get these great flows – not great, maybe four or five hundred barrels a day at that start – that's not bad if you're in the business. But it's eighty-five percent gone. It declines eighty-five percent in that first three years. So as long as you're drilling like madmen, it's great, you can sort of keep it up. But this about a feather that you're blowing in the air. You have to keep that stream of air going, and as soon as you let off of that, whew, this feather comes back to earth quick.

And we already have three major shale basins that are past peak: the Haynesville, the Barnett, and Fayetteville. We started drilling those in 2006-ish, and they peak each in 2016 or 2017, and, whish, straight down. So they're great – I'm not saying don’t go after it – but this idea that the United States is the new Saudi America forever is not the right story. And people that are buying that story could make huge mistakes, right. You know, the sea level strip malls that are like ninety miles from anyplace, the housing suburbs that depend on people commuting by car for really long distances, those are going to be the kind of places for the real estate crowd that are going to get really whacked when, not if, oil goes back to five dollars a gallon and six dollars a gallon.

And this is all barring the most recent John Bolton desire to go attack Iran and the Strait of Hormuz gets into play. Barring no political events, we're just saying the investment hold that we saw was so extraordinary that we know there's a supply hold in the future. It's just farming.

Simon: So we were just talking about it before, I mean, right when we came up here all hell broke loose in this area yet again, so let's talk about that. I mean, it was very interesting just the timing and the sequence of events. There was an event, there was an immediate reaction, there's blame signs and all these things. It seems, you would say, almost obvious, that there's just a very strong desire to take deliberate and significant action, whether that's even potentially military or otherwise. So let's talk about Syria. It'll be probably later today or tomorrow when this goes out, but for people who haven't seen, tell us about what happened in Syria.

Chris: Well, there was just another gas attack, apparently. So all we really have so far are social media tweets and videos that come from the White Helmets. People who aren't familiar with the White Helmet's, they’ve been caught many times staging attacks with crisis actors. They put grey dust on them and film them, and then later they're all like hugging. When you see the before and after photos, you realize this is just made for propaganda, TV production. So this is the group that's putting this out. There ought to be some skepticism around that fact alone.

But again, what we're seeing is the verdict preceding the evidence. So there was a gas attack in an enclave. You know, the rebels are just squeezed down, the Syrian governments got them totally surrounded, last desperate act, and it's in a suburb of Damascus called Duomo. And so this is where it allegedly happened. Again, we would say, who benefits; what's the motive; what possible motive could the Syrian government have for gassing women and children, just a few dozen of them? Has no military advantage, but has an extraordinary possible disadvantage if NATO says, well, that's it, that's our red line. And, of course, Trump tweeted instantly this is horrible, what an animal, big price to pay. So who knows by the time this goes out if another sixty tomahawks have been launched and sent in there.

Preceding this was the Skripal case which was the ex-GRU agent who was – got caught being a double agent and was living for six years in England. And him and his daughter Yulla were poisoned somewhere in Salisbury. We don’t know where. And the interesting thing was the British government had this shifting story about what happened. Oh, they were dosed in the restaurant; we had to decontaminate the whole thing, but if you were there just wash your clothes, you'll be fine. So it's the most powerful nerve agent,

Simon: Yeah, eight times worse than – just throw them in the wash and it'll be all good.

Chris: Yeah, use the extra detergent. And then they said, no, it was in air vents of their car. And then they said, oh, no, it was actually on the door handle. Wait. It might have been in the buckwheat cereal this guy had. So there was this shift – like they didn't know their ass from their elbow in terms of what happened. And if you don’t know how somebody got dosed, it's very difficult to say it was you or it was you. You can't do that. So it's all been shifting. But what didn't matter was that evidence.

So there was this rush to judgement. One hundred and fifty Russian ambassadors were expelled from a variety of countries: sixty from the U.S., twenty-three from the U.K. and so on. And so this lead to – and anybody listening to this, this is the worst relations at any point in my life, and I fifty-five – but this is worse than the cold war by far. And that's the backdrop. And so tensions are really, really high, and then you have this gas attack in Syria.

Simon: With the same time. Just immediate rush to judgement, blame, the tweet storm starts, and then, you know, well see what the next reaction is from there.

Chris: Right. And you have to understand that Russia has been saying for weeks, we suspect that there's going to be a false flag gas attack in Syria. We don’t want anybody to believe it, but if you do that, and then attack us, we're going to fight back. And so that's…

Simon: That's the crucial point. Everybody's got a breaking point, and they sort of in a way have pushed and pushed and pushed and pushed up against the Russians, and now they're saying, hey, if you continue on with this and you actually want to stick your finger in our eye, there's going to be consequences to that. We're going to do it. We're really going to do it. And so it's – unfortunately, we're going to be on the boat, so now I'm going to have to get the internet package in to know what's going on. You know, the ten thousand dollar a day internet package on cruise ships.

I want to go back to energy. One of the things – I mean, clearly, this has significant implications in a number of different things. We've seen volatility in the markets. We've seen – my remarks I talk a lot about interest rates. I know you guys are talking about LIBOR and what's been going on with LIBOR. For me, my story was just looking at U.S. government debt and saying, look, you’ve got – I mean, they auctioned off $300 billion in a single week a couple weeks ago, and that was the entire national debt during the administration of John F. Kennedy. In a week, and in the treasury department's estimates are a trillion dollars this year, a trillion dollars next year, a trillion dollars the year after that, and that doesn't factor in, as we were saying, recession, any kind of crisis – natural disaster even, a war, trade war, shooting, war, anything. And so that has consequences especially when the Federal Reserve and the Chinese. Why would the Chinese be stupid enough to double down and increase their stake on U.S. debt? It doesn't make any sense.

So all the usual suspects that were buying up all this U.S. debt for the longest time are now saying no, we've entered quantitative easing, or we don’t want to support you, say the Chinese or the Japanese who need the money back home for their own economic issues. So you lost 90 percent of your buyers, the people who are buying up 90 percent of your debt over the last ten years, and the only answer is really it has to go out to the market, which is fine. I'm sure it'll be mopped up by the rest of the financial system, but at a much higher cost.

So you’ve got interest rates that are increasing, and as interest rates increase it creates this reflexive, self-perpetuating mechanism where they have to borrow more money to pay interest on the higher rate, which means they go deeper into debt, which means they have to issue more debt, which means interest rates go up, and they issue more debt, and the interest rates go up. And it's this negative feedback loop, this cycle, and we're starting to see the very early signs of that. We're starting to see the very early signs of the effects of the interest rates. Everything kind of calmed down for a couple of days with the trade war in China, and then they said, oh – it's almost like somebody at the White House has a massive, long position on the volatility index. Because as soon as things calm down, somebody calls, yo, Trump, say something crazy. Tweet. Tweet. It's like somebody here is making a ton of money on the volatility in marketplace because as soon as things calm down and they have to do something crazy, and the market starts to flop, and so volatility spikes, and then people are starting to factor in…

The thing that's been interesting to me is its paradigm of hey, it's perfectly fine for companies to not make any money. You’ve got all these companies that have been hemorrhaging cash, negative free cashflow, and all the sudden – you know, Tesla was sort of the canary in the coal mine. So people start saying, you know, not only is the stock price been falling, but the bond price has been falling.

Chris: You mean, they have to make money.

Simon: What a shocker. People actually – what a wake-up call. And now, on top of all this we've got the Russia situation. Where do you think this impacts oil?

Adam: Oh, gosh, I mean, if we get into any sort of kinetic confrontation with Russia, I think the price of oil is going bananas.

Simon: Do you think that affects natural gas as well? I mean, natural gas is sort of a fragmented marketplace where we see…

Chris: It doesn't shift well.

Simon: Right. Exactly. It's still very early stage of that. But oil, on the other hand, is very much global, unlike natural gas. Where do you see all of this affecting markets?

Chris: Well, you had a really important data series, and I just want to add one more to that which is that the commercial grade corporate market is also trading at the highest yield in years. And so if you're looking at the corporate buybacks, that buoying affect, there's been a number of key players that have really buying the heck out of the equity markets, and stocks are what people mostly focus on. But bonds is where the action is going to get ugly when it really goes ugly, right. But let's just look at equities for a minute because that's where people get their headlines, and a lot of people have their money there. Corporate buybacks were really one of the largest drivers of the recent rise in equities. I mean, it was very big. I put fifty percent explanatory factor on that alone.

Simon: Oh, easily. And then, well, if you consider, as well, the lift in earnings per share as a result of corporate buybacks, not just stock price, but when people say oh, earnings per share. Well, there's a reason why earnings per share have gone higher because they took so many shares out of circulation. Just look at revenue. The revenue growth has basically been nothing if you look at earnings per share. Earnings per share has increased, but it's like, well, what's going on here? Well, clearly, they're just taking their shareholders capital and they're buying back all these shares, taking shares out of circulation, and you decrease the denominator, and the overall number goes up.

Chris: Right. So listen, I'm not going to fault the CFO of some company that says look, I can borrow at two percent and I can yield – I can retire stock that's yielding three percent on a dividend basis. They do that. They do that all day long. But they were going into the debt markets and just borrowing like crazy. When does that gravy train stop? Well, it stops when those numbers no longer make sense. If I have to borrow at three to retire at three, now you have to – that's hard. But if you have to borrow and three and a half to retire at three, now you're going to get fired, and you should.

Simon: Well, I will fault the CFO for that. The CFO's and CEOs and Chairman's of the Boards for that. So I'm the chairman of a publicly traded company that's listed on the Australian Securities Exchange, and we invest in U.S. real estate actually. And so one of the things that's – if my company – if we looked at this and said, okay, our book value, our net asset value and so forth is at – I'll just make up number and say $10, but our stock price is at $20, so our market value is so much higher than realistically the intrinsic value of the company. And then I took the shareholders money or even went into debt to buy back shares at a dramatically higher price than what stuff was actually worth, I should be fired. I should be fired for that.

My responsibility, and I think any executive's responsibility, is to make sound investments. And what we should be doing is buying things that are accretive to shareholder value and not destructive. And I think that the entire idea is that we should be out and taking capital and buying undervalue assets, not our own shares which are being overvalued by the market. If the share of my book value was $10 a share, and my share price is $5 a share, that would be brilliant. That would be brilliant. Of course, I should take shareholder capital and buy back all these shares because that's actually a great deal for all of the rest of the shareholders that are hanging on. And shareholders that want to exit at a 50 percent discount to book value, if they're dumb enough to actually sell their shares at that level, hey, great, we'll go ahead and buy them, and that's great for all the other shareholders.

And, to me, the fact that all these executives have spent the last several years going into debt to buy back shares at all time highs at levels that have only been seen – valuation have only been seen before prior to the Great Depression. I look at that and say, that is reason enough to sell everything. To me, all those guys should be fired.

Chris: And it will all turn out to be absolutely stupid when they have to reverse that process and issue equity to retire the debt. Because that's the other side of this story, right, at some point.

Simon: Exactly. Exactly. You know, whenever you get into a situation where debt is too high – one of the things that I was talking about in my remarks is that there have been a couple of agencies that have gone through some analysis, gone through and looked at companies in the S&P 1,500, which a lot people don’t know there is and S&P 1,500. There is an S&P 1,500 which is obviously even more encompassing than the S&P 500. They looked, and they had to filter out some companies that didn't have enough of a track record. They looked at the last three years, and they came up with about 1,100 companies that had three years' worth of track records. and found that 14 percent of those companies had EBIDA that was less than their interest expense.

So it's not even – you're not even talking about [Cross talking] 14 percent of the 1,100 companies had interest expense that was greater than their ability to pay interest. So essentially, they're the federal government. They have to borrow money just to pay interest on the money they’ve already borrowed. The markets been very accommodating of that because they – people invest in story's, and they said, oh, well, this is going to have some huge market share at some point down the road, they're going to make all this money, and so we're just going to keep hemorrhaging losses and keep going deeper and deeper and deeper in debt.

And certainly, there's some business models that do require, the first several years – oil exploration or whatever else – that do require hey, we're going to lose money for the first several years, and then hopefully, we're going to make lots of money after that. But in this particular case it's like the entire business model is almost – we're never going to make money. As I was talking about in my remarks, you know, wework and all these guys, it's like they just don’t care. They take their shareholders capital and they buy…

Chris: Do you know what the CEO of Netflix said?

Adam: Go ahead. I was thinking exactly. That's…

Chris: I don’t remember the exact quote, but it was – he basically said, in a shareholder meeting and investors conference call, he said, look, the more we burn cash, the better things are, because what we're doing is, we're spending that money building this intellectual property assets, and the more of those we have the more we're worth. So he basically said, trust us, we're going to do these really special programs, you know, we're going to produce more Breaking Bad's and all this, and that's going to, of course, be positive for us. But it hasn't worked for them in any single year of operation yet.

Simon: Of course. Yeah. And then the thing is, we track this a lot. It's like where everything is priced, it's priced for perfection. In theory, if everything that Netflix could do would go according to plan, if everything was just perfect forever and ever, and there were no risks, no consequences, nothing bad ever happened then maybe, just maybe, they might be able to pull it off. If they just threw enough money at it at some point, off in the distant future, the unicorns would come out, and the rainbows would shine, and it would all be fine. Netflix would make money. But it's priced for perfection.

It's like what you're saying with the treasury budget, you know, even all that trillion and a trillion and another trillion, and none of that factors in anything potentially bad that might happen. Of course, you look at Netflix, and it's like they’ve got a deal with – I mean, they're competing with Disney; they're competing with Apple, and they're competing with all the traditional guys. They're competing with Amazon, and those guys go through cash like its nothing. I mean, they deal with companies that have way more – I mean, Apple has more cash than Netflix has market capital. And you're competing against those guys. They could literally burn more than your entire market cap and still have money left over. So who's going to produce more Breaking Bad's and all that.

Adam: And just take one of those, right, Disney, which has basically announced that its going to pull its catalogue from Netflix in the next year or two, right. I don’t remember exactly which year, but I can imagine the Disney movies and well as the Marvel movies are pretty substantial percentage of the content that's consumed on Netflix. But since that announcement, I think Netflix is up like 40 percent.

Simon: Well, then, of course, you got the Time Warner, AT&T merger. If that goes through and those guys will have their own over the top service. And everybody's trying to do their own over the top service. Like everybody is just getting all of their ducks in a row so that they can – I mean, what was it? CBS that started their launching the new Star Trek series on All Access which has apparently been fairly successful for them.

Netflix has got to compete with everybody so the stock, and like most of these in the market, are priced for perfection as if they're going to achieve their outcome without an obstacles or consequences. And I think it's the same think if you step back and look at the big picture in debt markets. We look at how government debt is prices, not only in the United States, but in Europe where you still have $10 trillion in debt with negative yields.

Chris: The European junk bond index is trading with a yield, traded below 2 percent at one point. It's closing in a 3 now. So it's trading with a yield that was 50 basis points less than the ten-year treasury, right. Junk debt. [Cross talking]

Simon: [Cross talking] that nobody expects to be in business in a couple of years, and you're getting two percent on your money. It's pure madness. And so all of that, if you think, okay, nothing bad is ever going to happen forever, then maybe there will never be any inflation, there will never be any potential consequence, no bumps in the road. No wars, no trade wars, no debt crisis, none of these things. Then maybe, just maybe, it might turn out okay and two percent won't be all that bad. But everything is essentially priced as if nothing bad will ever happen ever again.

You said it right, exactly, and if you sit back and look at the big picture you go, oh, well, you know, there's this and there's this and there's this and there's this. And now just, again, you know, twenty minutes ago they're saying, oh, Russia is behind this gas attack that may or may not have happened. And you know, there will be consequences. Tweet. You know, and so god, I mean, the market was just down 500 points or something like that.

Chris: It's so egregious to me, it's offensive. Argentina hundred-year bond sale was an offensive moment in financial history for me.

Simon: For me, the Belgian hundred-year bond sale, which happened, what, a year and a year and half before the Argentine. I mean, a hundred-year bond sale for any country, any country, it's like who thinks they can predict a hundred years in the future. This is insane for a country like Belgium that hadn't even had a government for a couple of years – it has a caretaker government – you know, and have their own woefully, pitiful finances, and then people kind of looked around and said, okay, yeah, we're able to place that, that sounds good. And they did it in Argentina. You know, which is a country that has defaulted, what, four or five times in the last hundred years. Then they say, oh, we'll go ahead and od that. Are they priced at like seven percent or something like that?

Chris: Three times over subscribe, so I think they ticked it down a tiny bit.

Simon: It's pure madness. Again, it's so – although we sometimes get around our offices we'll kick around ideas of what's the next sort of absurd thing that's going to happen in finance. It's like how low will the Japanese government go with – or it's like, you know, we always use Japan as an example because to me I always tell people, I said, if you could only go to one other country in your life, go to Japan because it literally isn't – it's another planet. There's sort of the rest of the world, even like exotic places, you know, South Korea and China and all these places in the Pacific where they still have cannibalistic tribes and stuff like that, and then there's Japan. And Japan's weirder than all of those other places put together. And it's like they could really get away with anything in Japan where they just – it's like the government say, well, you have to send us your first born and pay forty percent negative interest rates in your local bank account. And people are going to go, okay. Just the absurdity.

I remember watching this – Kyle Bass one time saying that they actually had it in the Japanese version of the Ministry of Finance in Japan something on the website, on the debt section, where it was saying, yes, our debt level is very high, please don't worry. That's just how they dealt with it in Japan. Please don’t worry.

Chris: I've never been able to understand why it is that the Japanese yen is consider, basically, a safe haven currency because, to me, that's the number one major currency most likely to die first for obvious reasons.

Simon: I've said the same thing. I think the order is sort of Japan and then maybe the euro, and then…

Chris: Cracks up.

Simon: Yeah, it starts to crack up a little bit. I mean, the euro makes me scratch my head too because it's like you have this continent that has – basically has been at war with itself for 2,000 years. They’ve had about two decades where they’ve learned to play nice with one another, and we're all going to ride off into the sunset under this euro umbrella where it's like this known fact that all these countries that got under the euro – they just lied about it. The Greek's lied about it; the Portuguese lied about; the French lied about it.

Everybody just manipulated their market economic statistics, and so nobody really holds up to what it's supposed to be. You’ve got the German's and the Austrian's and so forth. They kind of do their end of it. But everybody else, it's a farce. It's like how does it even work, you know? I was kind of racking my brain thinking what happens with the euro? Do the weak countries break away or do the strong countries break off on their own and sort of leave Greece behind?

Adam: That's what they were thinking about in 2008 right after that, that you might actually get kind of a northern euro and a southern euro.

Simon: Which would potentially be a halfway sound currency if you actually get the guys that are fiscally responsible and not necessarily going deeply into debt.

Chris: And then there are these sociological trends that are pressing the weight that I think is going to shatter Europe at some point. So first you just have the egregious insult of having your Central Bank print money which takes from everybody else and hands it to a very select crew. So you have this massive wealth gap, you know, which the Bank of England just came out and wrote a big position piece in an article and said, we don’t think Central Bank policy had anything to do with the wealth gap. But they presented it seriously.

Simon: Was that in The Onion?

Chris: It was right on their website. It was a fantastic moment in Central Banking policy making and explanatory stuff. And then, you got Brussel's saying, oh, by the way, let's just take all these refugees, right, and we're just going to insert them into your culture, and you have to take them. And talking with people – I was talking with a woman who was a newscaster, a very attractive lady, and her husband was next in line of a U.N. position, and she comes from Belgrade. And when I asked her at this dinner, I said, can I ask you about the refugee crisis thing and she said – turned immediately, where it's off chit chat – she said yes. So I asked here, you know, what's going on? Within a minute she was crying because her beautiful city of 300,000 she wasn't safe in anymore. She can't go back.

Simon: Where is she from?

Chris: Belgrade. Every street corner had a group of six to eight men there who were just not speaking the language and had nothing better to do and had very different cultural views of women. So her beautiful city had been taken away, and she was furious at Brussel's because basically Brussel's said, you got to take them, and no, we're not going to give you any money, and if you don't take them we're going to pull some funding from you.

Simon: I mean, it's such a mafia the way the EU works. It's no wonder why you see the rise of all these sort of ultra-nationalist's parties and more radical candidates and so forth. And it's like, duh, what do these people expect?

Chris: Well, that brings us to the Italian election. This huge Euro-skeptic movement and far right, including ultra-nationals come out. So all these things are just pressures on the European experiment.

Simon: I want to shift gears. So one of the cool guys that comes here – he's been here two years in a row – he's a chief economist at Fannie Mae – you guys sat down with him for a while yesterday. I don't know where the hell I was. I must have been – I was running errands down in town. I had to go to Brickell yesterday, and there's this musical festival here, the Tortuga Music Festival right next to our hotel. Apparently Snoop Dog was around and Keto [PH], and the traffic was like Tortuga paces. I mean, it took 45 minutes just to get to the other side of the bridge over here. All day I was sitting in traffic, and I had to go down to Brickell for some business which ordinarily it's like 45 minutes, but I mean, it was just like hours and hours coming and going. And so I missed Doug's remarks, and I haven't even really seen him.

So you guys sat down with him. Essentially, Fannie Mae obviously is the government sponsored agency, government sponsored enterprise, that is basically there. To me this is like, what a scam, nobody realizes how this works. You got banks that go out and make mortgages, and then they turn around and they flip that to basically the federal government. So they get all their money back, and they make a little profit on it. Obviously, they're not going to float these loans unless they're making a profit. I'm saying they make a profit. They charge fees over here, they make a profit over here. And looking at this whole taxpayer sponsored agency that's been set up that just basically puts money in the pockets of the banks. I don’t get that deal. You guys don’t get that deal. We don’t get to just sell shit to the government for a guaranteed profit with no risk whatsoever on our part. You just get money for free, and then the taxpayers end up paying for it. How is this even possible?

But if you really look deeper into banking, that's how it works. They get these zero percent loans from the federal reserve, and the entire loan, and loan it essentially to the taxpayers of the United States at interest. And so you get unlimited amounts of borrowing capacity from the fed, and then you just turn around. It's just the easiest zero risk carry trade in the world. Borrow at zero, park it somewhere else at three, four percent, and do that literally trillions of dollars at a time, and it's just a gift. Flip these loans that you don’t have to actually take any risk on. It feels like Communism. It's like you're basically doing something – I mean, you might as well have guys digging ditches with spoons if the whole idea is just to make sort of work projects for people. I don’t understand the point of all this.

Chris: If we wanted to be honest about it, the Federal Reserve would just wire money directly into the banks.

Simon: Right. Just skip all that stuff. I mean, it's be a little bit more efficient that way. So Fannie Mae is, I mean, they're a massive player in the U.S. housing market, particularly single-family homes and all these other. But I mean, in the multifamily market we do, for the company which I'm chairman, we do multifamily, we've dealt with – there are different government agencies for that, and to see this stuff, it's all so appalling. You come in, the government guarantees loans and all these sorts of things. For me, you know, I have certain things that I have to do. I have a fiduciary responsibility to get the best deal possible for my shareholders, but on a personal level, I'm like, what in the world is the government doing getting involved in this apartment complex? What are you doing?

And so for the last couple of years, anyway, the guy who's the chief economist of Fannie Mae, who's the agency who's the biggest of these, who's going out and gobbling up all these loans and putting money in the pockets of the banks, basically, so he comes here and talks about the housing market. And we had some great conversations last year, and I actually interviewed him, I think, last year, but the audio was so bad because I used my mobile phone. You guys actually have whiz-bang high-tech equipment. And he's not the guy that you think. When we were sitting there actually at lunch – I had lunch with – it was me and Peter Schiff and Doug – and we're just sort of grilling this guy the whole time about what about this, what about that? And he's actually quite philosophically aligned, and very candid and transparent.

He was telling us, he said, the only reason I took the job – and I said, I'll take the job on the caveat that I get to say whatever I want. And I said, okay. So he says whatever he wants. And, you know, he's maybe fairly bearish on U.S. housing?

Adam: In the long term, yeah.

Simon: Yeah, he was last year. Last year I said, what's your take on U.S. housing? He said, it's overpriced. In a word, it's overpriced.

Adam: Very true. I was trying to suss out absolutes from him thinking he needs to be a little bit cautious about what he says publicly, but I think that's the gist of it. I think what he said is, but there's still an undersupply of housing in the U.S., and until some of these more macro-fundamental issues that we've been talking about really express themselves, we can kind of expect it to probably limp along for maybe like another year. But he said, look, you know, nobody knows how long expansions last, but certainly this one has lasted longer than most and it's going to come to an end at some point. You then get him talking about the risks, and after you finish the conversation you realize what he's saying is sort of economics speak because we're actually in a lot of trouble. He's just not willing to put it that straight forwardly on record.

Chris: He relayed one anecdote from the conference. He said the young woman comes up and says – who's in housing – and said, wait a minute, who's going to fix this? How does this get fixed? And he just said, honey, there isn't any fix. You just get too far over the tips of your skis you're tumbling.

Simon: And that's what corrections are for. That's why they call them corrections. They're supposed to wipe away all those silly accesses, all the things that shouldn't exist, but they do exist because it's been too much excess in the system for too many years which is why – so it's funny – it's always unpopular when I talk about Tesla. There's always people that come and say, no, Tesla's changed the world and whatever. It's like because it's a cult. It's the cult of Elon Musk that has convinced people that's okay to lose enormous quantities of money with no end in sight.

But in a normal market where capital actually has value and is respected by the market, by entrepreneurs and so forth – not to say that Tesla would exist – but that business model of just hemorrhaging cash, that wouldn't exist. The business model of Netflix hemorrhaging cash wouldn't exist. All of these business models, you know, the weworks of the world and so forth, like none of that stuff exits. The business model of Uber, which is essentially just a transfer of wealth from shareholders to passengers…

Adam: It's a massive consumer subsidy.

Simon: Right. Exactly.

Chris: I take advantage of it every time I can. I love the free rides.

Simon: Right. Totally. I was telling some of our – I think I did it on the podcast the other day we're talking about Drop Box. You know, they charge $100 bucks for however many zillions of gigabytes of storage. And we run from our bank, we run our own secure servers and our file synching and so forth. You cannot do that for $100 a year. I don’t care how much scale you have, you can't do it for $100 a year. And, of course, the proof is in the pudding because Drop Box is losing money, and the financials that we see, the little snapshots, show that they're hemorrhaging cash, and that's just the model.

All of these models are basically just transfers of wealth from shareholders, most of the time, to consumer. Occasionally the employees in the case of Snap Chat, for example, where they just shower their employees with stock options and so forth. But most of the times it's torrential wealth from shareholders to consumers because there's no respect. Capital has no dignity. Nobody cares. It's just this thing to just burn and big deal, and let's go see what happens. And those are all the excesses that have to be washed away when there's a correction. Hence, the name correction.

It's kind of interesting to see – I think that's been a general theme. You guys have talked about it; I talk about it; Doug talked about it; Peter always talks about it; Rob Kiyosiki talked about here just at this event that clearly there's been an economic expansion since the end of the recession. It's been going on ten years of sort of constant economic expansion that's been one of the longest, depending on how you measure it, one of the longest, if not the longest expansion certainly is U.S. economic history. It's certainly also the weakest.

And it's one of those things that, as sure as night follows day, there are these things move in cycles, there are expansions, there are peaks and troughs and we've all been kind of talking about this idea of a correction at some point. There's decline. What do you guys do – what do you sort of tell your audience? How you do get prepared for that?

Chris: I think there's a strain that we've sort of been dancing around here. A lot of what I do when I come to a conference like this is try and talk people out of their stock portfolios. I want people not to be holding Tesla because I'm pretty convinced that that's just going to be proven to be a bad idea. Because that's where people have their investment and all this and that. And what we're trying to do is expand, first, this idea that wealth is not money. Money is just a medium of exchange. And so if you really want to be wealthy you need to build up all different kinds of capital.

Financial capital is one of eight forms. We want people to be safe with it. If you're going to have money in the markets, make sure it's managed well, that people understand what the true risks are. There's now counterparty risks that didn't exist ten years ago. I understand your bank may fail, your brokerage, we don’t know. Maybe JP Morgan goes down. We don’t know because nobody can decipher what' going to happen in the rip-roaring correction to that quadrillions of derivatives that are parked out there – whatever the number is. So a lot of what we're doing is giving people the message that if you read the tea leaves that says there's probably a little bit less time in this story…

Simon: When you’ve already got ten years of up behind you, it's like, how much more is there in the gas tank?

Chris: So are you picking up nickels in front of steamrollers kind of a moment. So there's just a ton. So the advice is look, cash is a legitimate position. You want to be in cash in a time like this. You want to know what your buy lists are. Maybe there comes a moment where it makes sense to buy into some of these different equities and things, maybe even the one we've talked about. But at a lower price, under different circumstances.

Simon: Where there's real value.

Chris: All of that. And, of course, gold. And real assets. Real assets. Properties.

Adam: I think one of the core topics we've been talking around here too, and we talked a lot about this with Doug Duncan, is there's lots of blame in this story, but I think you can place most of it at the feet of the Central Banks. I mean, since 2008, basically, we've been on the largest ever money printing orgy in the history of the world.

Simon: Orgy of money printing.

[Cross talking]

Adam: But I appreciate that Doug put this chart up to share this, but we've been tracking this for a while, but most people think in their mind like, all right, I kind of remember how scary things were during the latter stage of 2008, early 2009. I kind of get that the government had to step in to keep the financial system from basically just complete seizing. I remember TARP, I remember TALF, okay. And most people think that there was a whole bunch of rescue efforts that were done in the first year of the financial crises, and then things kind of tapered off as this recovery came on.

But if actually look at the liquidity flows, they've grown in magnitude pretty much year after year after year. Year end 2017 was the largest year of liquidity injection in the market by the Central Banks. So even though we've been in "recovery" for the past half-decade or so, the emergency measures have actually gotten greater and greater every year. And, of course, all that money has to go somewhere, and sloshes around the world. And sloshes into – you hear a lot of people calling this market now the everything bubble. It really explains really why capital has no value right now because it's so easy to get and it's so cheap.

So it can flow into idiotic business models like you're talking about. And so I would say that things aren't priced to perfection, I'd say they're priced to fantasy. And they're priced to fantasy because we're living in this make-believe period right now where people have kind of gotten used to the fact that we can just keep printing more and more money month after month after month and it doesn't have any implications. So that's where we're headed.

And so I think all of us have been warning our listeners for years that things have gotten dangerously overvalued and that it's prudent to position defensively and, of course, year after year we've been wrong, again I'm using air quotes. I don’t think we will be wrong in the long run, it's just taken longer than we thought because we didn't think the excesses could grow this big or be sustained this long. And so my big fear, and I think most of us share this is – Chris uses the analogy of a ladder. In 2008 we fell from a certain rung on that ladder and it was quite painful. Now, I think we're maybe like maybe twice that level of rungs up the ladder. So the higher the excesses go, the more painful the correction is.

And so, we've been advocating defensive – basically been advocating don't play they game if you can. Try to get out of the stock market. As Chris said, we're big fans of actually getting out of paper assets and tangible assets, and we can talk more about that in a moment. But even a lot of tangible assets right now are overpriced. Real estate is very overpriced. So a lot of smart people, and I know you and I have talked about this, Simon, is of a lot of smart people that we follow have pretty much found themselves boxed into, I'm holding cash which I really don’t have confidence in the long run, and I'm holding precious metals which I do, and I'm kind of just sort of waiting for this big correction.

Deploy the cash when we can at better valuations but get ready because I think what we're going to see – highly likely given human nature and how the games been run so far – is the market probably will get away from the Fed and the central players in general, I should say. We're going to have a painful, and maybe even more painful than 2008 style, correction. And then I think the response you're going to see from the central players are going to make what we've seen so far over the past ten years in terms of liquidity look like child's play. I think that's when you're going to see the bonfire of the world's fiat currency.

Chris: But the day I get that check from the Federal Reserve for a hundred grand that goes to every household, you got to get there before the next guy, and buy whatever it is that's not nailed down, or maybe is.

Adam: And, really, we're talking about what is there it's real tangible things that hold their value or at least nominal increases as inflation or hyperinflation does its damage.

Simon: To me, I think we've been saying a lot of the same things. I mean, this is always a dangerous time when the fear of missing out is far greater than the fear of loss. And it's basic human psychology, and that's how you know, really, that you're in a bubble. It's like people go, yeah, it's definitely excesses, and it definitely feels a little pricy, but it seems like it could go up another fifteen, twenty percent. And it's like, as the say, nobody rings a bell at the top, and you don’t really ever know.

For us, yeah, I kind of tell people, I say, look, okay, yeah, your bank is paying two basis points, and so it's sitting on a bunch of cash in a bank actually. Certainly, that's a shitty thing to do, but if all you're earning on cash is two basis points, you're really not trying hard enough. There are other options, and we put a lot of our listeners into different things where we do, for example, these short term, secured loans, where you’ve got real assets, gold and silver, for example, that two to one margins, fifty percent, forty percent loan to value ratios, even less than that, thirty percent loan to value ratios, making five, six percent on something like that even just over a six month period.

You and I were talking, we're sitting on a shitload of twenty-eight-day T-bills. Because however you feel about Donald Trump, he's probably not going to default on me in the next twenty-eight days.

Adam: And I write about this for our audience, and you can set up a treasury direct account in five minutes, and literally go from getting those two basis points to getting a percent this quarter.

Simon: The last one that I closed was just whatever, a couple of days ago, was 1.8 percent, I think. So you're talking about getting 1.8 percent without the same counter party risk because you don’t have to accept your bank's balance sheet risk anymore, not to mention they treat you like a criminal terrorist every time you want to withdraw your own money or do something just totally innocuous. I mean, they treat customers like they're criminals. But you can go from making 0.02 percent at your bank to making 1.8 percent just sitting in twenty-eight-day T-bills. And then mix that with some other options that, some things that we're doing where you can make four, five, sic percent, even twelve, thirteen on real asset backed, very conservative loan to value short term stuff that is really stuff that favors – to me, it's better than being a small investor if you’ve got tens of thousands, hundreds of thousands, millions, especially even low eight figures, you can do things that are not available to Goldman Saks.

If you're the guys that have $500 billion, trillion dollar, two trillion-dollar balance sheets, you don’t have a lot of options. You really don’t have options. You're pretty much – I mean, if you're a European pension fund sitting on $400 billion euros, you don’t really have a lot of options other than buying negative yielding hundred-year paper and these sorts of things.

Chris: Junk debt for two percent.

Simon: Right. Junk debt for two percent because that's the only option because it's an asset closet so enormous. But if you're a small investor, even if you have ten, fifteen, twenty million dollars, certainly, if you have two hundred thousand, five hundred thousand, a million, twenty-five thousand, there are a lot of other options that are available to you that were on a blended rate. Sure, you make four, five, six percent without taking anywhere near – there's risk in anything that you do. There's always risk. There's risk in doing nothing. There's risk in holding cash under your mattress. There's risk in anything. So there's no such thing as risk free.

But you can really look at different options that are on the table that are really only available in niches that are small, that are only available to small investors. You know, blend these things together and have a very, very, very low marginal rate of risk, and still make six percent on your money. And sure, maybe you're not making whatever, ten percent, twelve percent on the stock market, but I'd rather make mid, single digit returns and very, very low risk than make whatever, twelve, thirteen, fourteen percent and have all of my hopes and dreams pinned on the bubble continuing for another year.

So, to me, and one of the things that we talk about a lot is all about risk adjusted return. How much risk are you taking relative to every dollar that you're expecting or hoping for in returns. And if you're betting everything in financial instruments that are priced – and I like your word better – priced to fantasy, fantasy pricing – you're really taking on extraordinary amounts of risk. And there are better ways, I think, to do that where you can still generate a perfectly reasonable rate of return while you sit patiently and wait.

Buffet is sitting on twenty-eight-day T-bills. Twenty-eight-day T-bills. Buffet's got $114 billion in T-bills. He's not – Buffet's not buying even five-year notes or two-year notes, or even six-month T-bills. He's buying twenty-eight T-bills and has got $100 billion worth of that stuff. So the best that he can hope for is one or two percent. He can't buy any of these other things because the most successful investor of our time knows that there's a correction coming, and he wants to have all the ammunition there to buy up all that stuff.

And if you look at it in the long run, and again, for small investors, sure, we can average out to different instruments to make four, five, six, seven percent on these things without taking the risk and still having a lot of dry powder there. And if you look at it in the long run of what's your – you serve IRR of buying something at the top and then trying to smooth that out over the next cycle versus just patiently waiting, making smaller returns but still decent smaller returns, and then being able to just really come in heavy when there's a big correction. And you can buy the very high-quality assets on the cheap. It really ends up being a much better return for you over the long term.

We did a bunch of studies where we looked at investment returns for guys that bought, not even at the top, but within even two or three years of the top. If you bought in '98, you know, or you bought in 2005, and if that's when you bought to see what your return, adjusted for inflation, adjusted for tax – not even adjusted for risk – just tax adjusted, inflation adjusted returns. If you buy at the top, and it's like two percent or less, it's like was it really worth the roller coaster ride to make two percent? There's easier or better ways to do that without having to take on that kind of risk and volatility.

Adam: Interesting. Dave Fairtex is one of the analysts that writes a lot on our site, has done some backend analysis like the sort you're talking about. Not necessarily what I recommend, but I really like the spirit of it where he's realized kind of to your point where nobody can really effectively climb the market with consistency. But it's much easier to identify when you are in the territory of a cycle high or a cycle low. And he's done the numbers and basically said, if you can be patient, there is an investing strategy where you basically get out when the markets are approaching all these overvalued metrics, and there are times when you can buy in when the undervalued metrics are relatively clear, certainly, relative to what they were when you were at a high. And you may only need to make your trades like once every seven years.

Simon: And then, just don’t check your account. It's like what Talib says. What does he say? Your satisfaction with your brokerage account is inversely proportional to the number of times that you log in and check it.

Adam: Which I think is the real truth. And, of course, humans being humans, our human nature works against us in so many areas, and that's one of them. But we can just literally get comfortable with that. I think most people would probably do a lot better in the long run.

Chris: I'm on year sixteen now, one of my trades, which is gold, which I bought at $300 principally. Got in.

Simon: Work out well for you?

Chris: Well, so far. But it's been very frustrating these past few years watching it just sort of get hornswoggled and constrained and languished quite a bit. Particularly with the macro trends around it, like looking for the flow of gold from West to East, right. Our vaults are just emptying. One of the more telling this was talking with a gentleman last year who runs a refinery saying – in Switzerland – saying, we're getting bars now. They check the numbers, right, and you can track back a serial number on the bars, and we're getting bars that were poured in the '50s and 60s now. Somebody's hitting the bottom of vault, you know.

And they also have one other thing which is an award. If any of the staff see a bar come in for remanufacturing that has a Chinese stamp on it that they'll win something, because nothing leaves Chinese. They mine 400 tons a year, it gets minted, stamped, and it doesn't leave the country. So it's been interesting watching those giant flows.

Adam: And just to talk about gold and silver for a minute, I think we're all fans of precious metals probably for a lot of the same reasons. But if there was – Simon, if we could have talked in 2008 and I'd have said, okay, look, the Central Banks collectively, including China, are going to print up whatever it's been, what, $15 trillion or so in the next eight years, and you can only pick one asset class to own, what would it be? And I'm going to imagine that commodities or at least precious metals might have been on your short list there, right. And if you look at performance of those guys over at least the past six years or so, it's been really disappointing. We could talk about why, but certainly in terms of value right now, particularly against the type of risk that we're seeing, precious metals still offer a really good value at this point in time.

Simon: It's amazing one of the only asset classes that hasn't peaked and reached some record high. It's been…

Chris: Historically, it's been…

Simon: …everything else has just gone to the moon except for gold and silver. It's been a one-way street – means that it provides not only some kind of relative value there. Obviously, the reasons why you want to be in gold and silver to begin with, but just as a speculation – for us, we always say – to me, like I don’t view gold and silver really as a speculation. My goal in buying gold isn't to trade paper currency for gold, hoping to trade it back for more paper currency later. To me, it's just, in a way, it's a different form of money. I actually had this discussion with – I had a discussion with Jim Rogers once, and he said, well, you think gold is money? And I said, clearly, it's not legal tender. We were having dinner in Singapore on night, and I said, at the same time neither is my – I've got a titanium credit card – it's like, this isn't really legal tender either. I can't trade my credit card for something, but I can sure as hell use it for something. A share of Apple stock isn't legal tender, but you can believe that if I had a share of Apple stock I could get rid of it pretty much twenty-four hours a day anywhere in the world for something else that happens to be the local medium of exchange wherever I can be in the world. And so all these things, essentially, are different forms of money, including gold and silver. And so to me it's just sort of almost an emergency from of savings, you know, that just sort of makes a lot of sense to hold.

I got a friend, he says, the reason he holds gold and silver is for the I don’t know's. Will there be a war between the U.S. and Russia? I don't know. Will there be a war between the U.S. and China? I don't know. Will there be a massive correction? I don't know. And that's why I own gold. Because I don't know. And it's a great insurance policy for a lot of those things. You know, he says, I hope one day my grandkids discover all these gold coins that I have and wonder, Grandpa, why did you ever buy those things, you know? Just sort of these cute little trinkets that the grandkids stumble across and have no idea why. He says, you know, I hope…

Adam: Kinda the hope the world hasn’t gone to hell.

Simon: Exactly. Because that means that everything sort of turned out okay which is why – I think to me it's like any type of insurance, you know, you never have a hundred – you never have an insurance policy that's like a 100 percent of your portfolio. It doesn't really make sense to be 100 percent in anything I don’t think. If you have 100 percent in anything that's no longer an investment, that's a fanaticism into something. To think that's there's a hundred percent certainty in any one thing is crazy. You think about an insurance policy of any kind, a fire policy on your house cost like one or two percent of your home's value. For collision insurance on your vehicle might be four or five percent or something like that. So certainly, to try and insure 100 percent of your wealth with 100 percent gold position seems like that's quite excessive, but I think certainly having some ownership in gold and silver makes a ton of sense.

Chris: And those are two words for me – gold and silver. A lot of work we do at Peak Prosperity is around looking at resources and the depletion aspect. So when I go to a mining conference, one of my favorite questions to ask is, what are your ore rates? And they're all just plummeting. In my lifetime, ore rates have come down by about 75 to 80 percent in my lifetime.

Simon: It's so funny because at those conferences its always the same guys telling the same story about pounds in the ground. I love talking to the IR guys in the mining business because they all try and say the same things. Oh, we got 800 thousand pounds of whatever – we just got to get it out of the soil. I go, oh, that's all you got to do, just scoop it up. Where do I sign? Tell me where to send the money, because they all have the exact same story. But I agree, like if you…

Chris: It's depleting. Silver is depleting. So if you believe that the future is going to involve some sort of industry, silver is going to be part of that. It's the most reflective, most conductive, most amazing element for all sorts of new uses, all that stuff. So I consider my silver holdings are going to be my family legacy in the sense that those trinkets you talked about, my great grandkids, as yet unconceived or born grandkids unconceived or born, someday, they're going to come across this big old stash of bars and coins and either I'm that crazy great grandfather, besides my legacy as a ensured, or I'm the genius who set the family up for the next three generations, and they can figure out a way and figure out a way how to be more productive. But one way or the other this stuff is just needed. And it's going away.

Simon: You make a very good case on the industrial side of things for sure. Especially that relates much more so to silver. And I think you're right that you're saying it doesn't really even require a big position to have that very – if the thesis plays out…

Adam: It's a very cheap call option.

Simon: Exactly. It's a very cheap call option. It's a very cheap call option on the future, and if it doesn't pan out, oh well. This is an asset – these are two assets that have had value and marketability for the entire 5,000 years of human…

Chris: I just came back from the British museum, took my eighteen-year-old daughter there – that's where she wanted to go. And we were – of course, we gravitated to the hordes. All these people had found hordes in England with their metal detectors. So you'd see these extraordinary displays off all these arm bracelets and neck torques in bits and pieces. And so we're looking at one of the larger hordes. It was forty-four kilograms, and my daughter's like, oh my god, can you imagine finding this? I'm like, forty-four kilos of silver, it's not that hard to come by. So all the sudden she was like, her eyes wide, and she's like, holy shit, our family horde is way bigger. I was like, yes, it is.

Simon: Right on. Fellows, I think we probably got to cut it off. I haven't even packed yet. Final thoughts, Adam.

Adam: Well, you know, I'd love to have another conversation at another point in time because you're such a great thinker, Simon, and just a good guy to hang with.

Simon: We have a lot of fun.

Adam: Clearly, I'm looking forward to having more fun together with you. But we haven't really gotten to the thing that I think makes what Chris and I do at Peak Prosperity more differentiated than the other economic speakers here at the conference, because really what we like to do is talk to people about the resilient living side of the equation because we think that's to your point. There's no guarantees. Nobody should have all their eggs in one single basket, and that includes not money alone. And there's a lot of other aspects of life that we don’t know. We don’t know what's going to happen, but there's a lot of things that you can be doing in all the other elements of your life that will give you protection and maybe give you even some upside should some of these nastier things that we were sort of speculating about might happen.

And the best part about them is, even if they don’t, all the steps are life enhancing. And I think you're somebody who embodies that in your own lifestyle and what you’ve done down in Chile. So I'd love to dig into that more deeply with you, really and get to learn more of your story at some point too.

Simon: Definitely. We say the same thing all the time at our events. It's like you're not going to be worse off for doing X, Y, and Z. We take quite a little more international vent. We talk about things like there are, for many people, very simple ways to obtain something like a second house. Some people are in line for it just because they have a grandfather who's Irish or Polish or something like that. To say, there's literally no downside than having to having this document that says that you're welcome to go and live and stay and work and invest and bring your family and so forth, something the entire future generations of you family that won't be born for decades will be able to enjoy because you spent a little teensy bit of time and effort and research of something today. There's no down side to that whatsoever.

In my case, I spend a lot of my time on an organic farm in Central Chile growing basically, pretty much 100 percent of everything that I eat is just grown right out of my own soil, organically, not a lot of downside there. I'm eating healthy, and if the entire world goes to shit, I'm not really going to notice with respect to my own personal livelihood and so forth. But I mean, look, even if everything's great and the unicorns and the rainbows do come out and it's all gravy, I'm not worse off eating organic healthy food seven days a week, three meals a day.

Adam: Right. And employ people in your community and give people work and eat there. To your point, there's no downside to it.

Simon: Chris, final thoughts?

Chris: Well, it's obviously a conversation that just got started.

Simon: We didn't even talk about crypto.

[Cross talking]

Chris: …a few insights from Doug Duncan, the Fannie Mae economist, that we didn’t get to. So lot's more to talk about, obviously. So I'm really looking forward to this next few days together.

Simon: Definitely. We can sit down and do this on the boat while we're at sea or just kind of cruising.

Chris: Absolutely. Absolutely. So with that, this has just been fantastic, good conversation, and thanks for arranging it.

Simon: Good stuff, guys. Okay. Time to pack. Thanks, everybody, for listening.

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6 Comments

Snydeman's picture
Snydeman
Status: Platinum Member (Offline)
Joined: Feb 6 2013
Posts: 507
May I?

May I be the first to say that the lead picture for this podcast is easily one of the best I've ever seen on any website ever. ;)

Snydeman's picture
Snydeman
Status: Platinum Member (Offline)
Joined: Feb 6 2013
Posts: 507
Great podcast

Which starts with a picture of a cat holding a magnum riding a fire-breathing unicorn. How can you go wrong?

 

In all seriousness, I loved the back and forth of the podcast. It's nice to hear the banter and humor, and it felt like I was right there in the room with you three. There weren't many "new" insights, but I loved when Simon asked Chris and Adam to summarize PeakProsperity's mission, etc. It was nice to hear a reiteration of what the site's philosophy is, even if I already knew it. I really liked hearing three perspectives in one podcast!

 

If I could pick nits, there were a few sound issues where voices would drop off, but I attribute that to the set-up required to pull this off in the first place, so all things considered it was good. Last, there were a few times when Adam would say something, but then got talked over. Minor points, both, but I figured I'd give feedback.  

 

-S

 

 

MKI's picture
MKI
Status: Bronze Member (Offline)
Joined: Jan 12 2009
Posts: 77
Japan, etc.

Chris: I've never been able to understand why it is that the Japanese yen is consider, basically, a safe haven currency because, to me, that's the number one major currency most likely to die first for obvious reasons.

Simon: I've said the same thing. I think the order is sort of Japan and then maybe the euro, and then…

 

An engineer would say: whenever the data doesn't make sense, it usually means that one's understanding of the system is incorrect. This is the most logical hypothesis.

An alternative view? Japan produces real wealth due to having a high-IQ, unified population. So their currency can do whatever it wants. The forgotten variable is human capital.

Chris: Belgrade. Every street corner had a group of six to eight men there who were just not speaking the language and had nothing better to do and had very different cultural views of women. So her beautiful city had been taken away,

The above quote is a solid example of what happens when a culture denies the reality of human capital. People and culture are not interchangeable. Some people and cultures are productive and generate wealth, others don't. And IMO most of the economic fantasies these days result from ignoring the simple reality of human and cultural capital and instead focusing on tangibles: resources, land, property, oil, etc. The latter is fungible. The former is everything. Japan is a great example. And it all makes sense through this proper lens.

LesPhelps's picture
LesPhelps
Status: Platinum Member (Offline)
Joined: Apr 30 2009
Posts: 797
Priced to Fantasy

We could have a word contest here.

I vote for Priced to absurdity.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5752
Meeting Simon was great
Snydeman wrote:

If I could pick nits, there were a few sound issues where voices would drop off, but I attribute that to the set-up required to pull this off in the first place, so all things considered it was good. Last, there were a few times when Adam would say something, but then got talked over. Minor points, both, but I figured I'd give feedback.  

Simon is a really great person and an extraordinary businessman.  The insights he delivered to a young investors meeting, and then later at an agricultural investing session, were crisp and useful, each in their own way (no repetition).

The sound issue was three guys, one microphone, on a boat, with varying degrees of awareness of how important it is to keep a measured distance between oneself and a live mic.

:)

 

Geedard's picture
Geedard
Status: Bronze Member (Offline)
Joined: Oct 13 2014
Posts: 79
Agree completely

Agree completely - this was a great podcast - entertaining, informative (like Simon’s style and description) and a nice insight into, what felt like, a behind the scenes discussion. Thanks for sharing. 

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