GUALFIN, ARGENTINA – We’re taking the doctor’s orders; 9,000 feet above sea level just doesn’t seem to work for us.
So we moved down to the tiny casita we built near the vineyard, 1,000 feet lower.
We spend the night there and commute back to the main house in the morning.
The casita is an adventure in itself.
It was meant to test the limits of minimalism in domestic architecture. Handmade with local materials by your editor and two sons, there is no wood used except in doors and windows.
Bill’s casita near the vineyard
And the only power comes from a car battery. It powers two lights… and pumps water up to a reservoir. From there, the water flows into a small, black tank, the simplest water heater ever built.
We have cold water in the morning and warm water in the evening. We cook over an open fire.
It’s a delightful little holiday… in its own quirky way.
But work goes on! Our job is to keep an eye on the world of money and try to make sense of it.
Two big stories dominated the financial news yesterday – both meaningless.
First, the S&P 500 hit an all-time high… after the Fed made its usual muffled noises about reducing its balance sheet (unwinding quantitative easing [QE]).
It will “soon be appropriate” to tighten up a bit, said the Fed.
Or maybe not. GDP growth fell in the first quarter. And inflation fell last month, suggesting that it may not be appropriate after all.
Second, President Trump’s budget proposal got some attention.
“Dead before arrival,” says our friend David Stockman, who served as President Reagan’s budget chief. David:
There’s no way Trump will be able to ram any meaningful cuts through the congressional meat grinder, no matter how fiscally sound. The Dems and their media accomplices are already denouncing the Trump budget for shredding the safety net and attacking the poor.
Congress, including most Republicans, will not go along with cuts in Social Security disability or over $600 billion in Medicaid cuts over the next 10 years, just to name some of the proposed reductions.
But what did you expect?
The Donald’s budget has some good ideas… some bad ideas… and some ideas that make you wonder. But it doesn’t matter. The Deep State, not the White House, controls the budget process.
Since the election of George W. Bush, insiders make sure that all major constituents of the Imperial Establishment get their money.
No crony left behind!
So let’s move on…
Yesterday, we looked at how expensive mutual fund management fees can be.
Two percent doesn’t seem like much. But if you’re making only 4% a year, you’re giving up half your gains to the manager.
Hedge funds – which are free to use various strategies such as betting stocks will fall – are even worse. They charge 2% on the principle plus 20% of the profits.
Imagine you begin with $100,000 and the fund loses 50% one year and makes 50% the next. You’re even, right?
The manager took $2,000 for his fee. Plus, you lost $50,000. So you end the first year with $48,000.
The following year, you see a gain of $24,000. But you give 20% of that to the manager… plus the 2% management fee.
You end up down more than $40,000… after paying nearly $8,000 to the manager.
Stick with that deal long enough and the manager will have 100% of your money.
Superinvestor Warren Buffett says most people would be better off avoiding these costs… and the risk that the fund manager is a dud… by buying a low-cost ETF that tracks the performance of the S&P 500.
You could also avoid the management fees by simply buying shares in Buffett’s investment firm, Berkshire Hathaway. You get to invest alongside the world’s greatest investor… at zero cost.
But that doesn’t mean you’ll make money with Buffett. Over the past 20 years, Berkshire Hathaway failed to beat the return from 30-year U.S. Treasurys.
What? How could that be?
Following the 2008 crisis, the Fed bought long-term Treasurys as part of its QE program, driving up prices. Even Buffett couldn’t keep up.
But wait, there’s more.
Guess what beat BOTH long-term Treasurys and Buffett… with zero management fees… and near-zero risk.
And before we open the envelope, consider that this was a period in which every major central bank was pushing up bond prices directly with $12 trillion in newly created money.
…a period in which the Dow tripled…
What beat stocks and bonds? Can you guess?
Gold, with an annual return of 7.6%. Go figure.
Our guess is that however well stocks have done in the last 20 years, they won’t do anywhere near as well in the next 20 years.
ETFs account for about $2.15 trillion worth of U.S. stocks. And 27% of stock market trades are now done by “quant” hedge funds – that is, funds run by computer algorithms.
Both are more or less on “autopilot”… and both are subject to violent downdrafts. In other words, neither of these are patient, long-term, value-oriented investors.
ETF buyers are gambling on “the stock market,” not investing in the businesses that happen to be traded in a market.
Similarly, quant funds are indifferent to the underlying companies and the values they represent. And typically, they work on formulae that call for rapid sales when stock prices fall below certain thresholds.
Rapid selling could be a problem, too, for index-tracking ETFs. Because everyone is investing in the same index funds at the same time.
When those indexes fall hard enough, everyone is going to be panicking at the same time. This will increase selling pressure… and cause even steeper declines.
So the difference between an ETF and a hedge fund may only be time. With the latter, you lose money little by little; with the former, you could lose it all at once.
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
Bitcoin is on fire…
After shooting up 402% over the last 12 months, the world’s most popular “cryptocurrency” is now worth $2,740.
At today’s gold price of $1,255, it now takes more than 2 ounces of gold to buy a single bitcoin – worth less than 10 cents as recently as 2009.
According to the original white paper by the pseudonymous creator of bitcoin, Satoshi Nakamoto, bitcoin is a version of “electronic cash” that “allows online payments to be sent directly from one party to another without going through a financial institution.”
The comparison with gold is apt.
Nakamoto based his electronic cash on the gold-standard money system.
Like gold, the supply of bitcoin is finite. And the steady addition of new coins into the bitcoin supply by way of energy-intensive computing processing power is comparable to gold miners expending resources to add gold to circulation.
— Chris Lowe
P.S. My colleague Teeka Tiwari first recommended bitcoin when it was selling for just $428. But he’s even more excited about other little-known crypto plays you have probably never heard of. Plays that are up 398%… 1,542%… even 5,640% over the last 12 months. And according to Teeka, these gains are only getting started. To find out Teeka’s list of the most explosive crypto plays for 2017, read on here.
Toronto Homeowners Suddenly Want to Sell
Canadian real estate has been on a tear. But after government intervention and the near-collapse of a Canadian mortgage company, Toronto homeowners are starting to get nervous.
The World Is Running Out of Sand
You may not know it, but sand is an essential ingredient in many products. Window panes, wine glasses, and cell phone screens are all made with sand. And there are dangerous implications for a world without sand…
The Investing Mistake You’re Making Every Day
One of Bill’s top analysts, Chris Mayer, has had decades to study the markets and investors. And in his experience, there is one risky investing mistake that almost everybody makes without realizing it…
In today’s mailbag, well wishes and even some wellness advice in response to Bill’s recent hospital visit…
I’m sorry to hear about your illness. The stress from battling these swamp critters is most likely the reason. I would suggest you go back to Maryland as soon as possible and have the doctors at Johns Hopkins thoroughly examine you, just to be safe.
But be sure to ask the renowned physicians at Johns Hopkins to keep an open mind and think outside the box if they aren’t sure about your condition. Maybe it’s something from the food, the water, the animals, etc. at the ranch? Perhaps your cowboy boots are too tight!
– Frank W.
You think you can kick the bucket? The sheer effrontery is astonishing! So let me tell you something – if you dare keel over, one of us is coming over to the other side to drag you back.
– Anthony O.
First the Doom Index then a heart attack scare. Very ominous. It is also enlightening to inject some humor into such situations. I for one appreciated your perspective. I also like the cattle prod idea. Where can I get one in California?
– Jim S.
The U.S. Embassy in Peru advises visitors to go to the market and buy coca leaves and chew them for altitude sickness. Yes, these are the leaves cocaine is made from, but they are used throughout the Andes for altitude sickness.
– Michael M.
On the matter of the cattle prod… Do you mean to use it on the originarios when they come to take your ranch or as a homemade defibrillator? In either case just take care.
– Don N.
Glad you’re ok, Bill. I would probably have a heart attack if you stopped writing those wonderful, daily missives.
– Joseph R.
You don’t live at 9,000 feet altitude, you live at 9,000 ft. elevation, not unless you’re already an angel. Look up the meaning of both words. I can hardly believe I’m teaching the guru. Lol.
– P. W.
My wife had trouble with oxygen absorption. We live in Georgia, so it wasn’t an altitude issue. Rather it was health related (Diabetes issues). Her Cardiologist prescribed Sildenafil (Viagra) which opens up the blood vessels to provide more Oxygen. Ask your doctor. It might help. Keeping a small Oxygen supply wouldn’t hurt either. Good Luck, because we (your loyal readers) are not ready for the black crepe or dirges just yet…
– David N.
Tonight at 8 p.m. ET, Chris Mayer is hosting a free investing webinar.
You may know Chris as one of Bill’s top analysts. He is also the man whose recommendations Bill is following with $5 million from his family trust. And remember, an independent audit revealed that Chris’ recommendations beat the market 3-to-1 from 2004 to 2014.
If you decide to attend this free event, Chris will show you his method for picking the best-performing stocks of tomorrow before they take off. Reserve your spot right here.