We’re joined for this 72nd episode of Stansberry Investor Hour by Dr. Steve Sjuggerud and his lead analyst, Brett Eversole.
Fresh from the Stansberry investor summit in Las Vegas last week, they’re here to give us their take on the stock market’s crazy ride this week – as well as some details on Stansberry’s big “Meltinar” Event coming October 24.
In Porter’s own words, “I’ve never seen Steve blow a major market call – wish I could say the same of me!”
So, we think you’ll want to hear Steve’s take on the wild ride in this week’s markets, and what it means for the last stage of the “Melt Up.”
As Steve tells investors this week: “Strap in for the ride. It is a rocky ride higher.”
Editor, True Wealth,True Wealth Systems,True Wealth Opportunities: China,True Wealth Opportunities: Commodities,
Announcer: Broadcasting from Baltimore, Maryland, and New Your City, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
Buck Sexton: Hello everyone. Welcome to another fantastic episode of the Stansberry Investor Hour. I’m nationally syndicated radio host Buck Sexton. Porter is out right now. He is feeling a little under the weather, but we have with us the one and only Doctor Steve Sjuggerud and Brett Eversole. We’re back from Los Vegas from another amazing Sin City conference put on by country club guy, the fantastic country club guy.
Guys, we’ve got a lot to talk about, but before we get to it, just to give folks a sense, we are going to be discussing the Meltinar Event, also what happened with the market this week. Kind of a crazy ride. Talk about Steve’s presentation in Vegas in China investing. But first, Steve, I want to hand it to you. Go for it.
Steve Sjuggerud: Thank you Buck. Yeah, and by the way, great job in Vegas. I thought that was our best Vegas event yet, and I urge listeners to come to our Vegas event, or at least catch the live stream if you possibly can because it’s truly an extraordinary event. It is an event, not just a conference. So yeah, to get into it today, Buck, what I wanted to do was sort of introduce my right hand man Brett Eversole, as you mentioned. Brett has actually been working with me for about nine years, and he does absolutely incredible work.
To give you an idea, everybody at the company says, “Steve, we love working with the Sjuggerud group, and it has nothing to do with you, Steve.” And what they mean by that is Brett is just incredible to work with, and he’s one of the smartest guys in know. So but what I wanted to do is for me, Buck, when I started out investing the real formative years, the first couple years, that’s where I got to know and really learn from these guys like Peter Churchhouse, and Dennis Gartman, and I was just soaking in what these legends were teaching.
Brett started in 2010 as the real estate market started bottoming out. I just wanted to get some of Brett’s insights of what it was like to sit next to me as I’m doing my thing. So, Brett, any thoughts?
Brett Eversole: Well yeah, yeah, Steve. That was a great introduction. Thank you. Yeah, you know, I started in 2010 with you, and I was – we were coming right out of the real estate bust. And honestly, I understood numbers back then, but I didn’t really understand finance, and you gave me a great education doing that. And what was fun about it is that I didn’t have finance background. You could have just said, “Here are $20. Go read these and figure it out.” But instead of doing that you were like, “Let’s go – why don’t you ride shotgun with me. Let’s go do this together.”
So watching you kind of get into some of the real estate deals you did. I remember a story pretty early on you were figuring out how you could buy properties on the courthouse steps, which is something you might read about, but actually doing it is a different thing.
Steve Sjuggerud: It’s funny. In Florida you actually do that, or at least in our county. Like I think a lot of tax sales and these types of things they happen online, but for some reason in our county you actually have to stand and bid on the courthouse steps. And so you could buy properties for pennies on the dollar, and so I was buying – I literally bought a beach condo. I bought – I live on the beach, and I bought a house a block away from me. I mean I just bought some absolutely incredible properties.
Brett Eversole: All on the courthouse steps. And I remember the first one that you had gone and done that was actually going to be a pretty large sale. You had to show up with I think it’s 10 percent of the eventual buy price in cash. So you had gone to the bank and gotten $15 or $20,000 in cash out, and you called the courthouse three, four, five times, “Are you sure it’s going to sell? Are you sure it’s going to sell?” You got sick of calling the courthouse and you called me. You were like, “Brett, can you call the courthouse and check on this number?”
So I called three, or four, or five times. Because they walk out at noon, or what time they do it, and they go through their auction list. And up until that exact moment they can come in, pay off the taxes, take their property back over.
Steve Sjuggerud: Well the funny part is, too, is that what else often occurs right next to the courthouse? The jail, the prison or whatnot. And so here I am, and what else happens in the courthouse? Criminals are sentenced. So I’m walking up with -
Brett Eversole: A big bag full of cash.
Steve Sjuggerud: Yeah. And I’m passing true criminals, or at least accused criminals, right? But yeah, and I think that – let’s see, so but what it was was I was acting on conviction, and I was making this up. I mean I was buying tax certificates for, what, 18 percent interest. I’m buying local bank stocks at $2 a share that eventually went to $20 a share. But -
Brett Eversole: Well, I think what I learned in this process, Steve, is that to do – to find really good investments you’ve got to roll your sleeves up and do it yourself, and I think that’s one of the advantages that you have, and that I have working with you is we’re not based in New York or San Francisco, or a big financial hub. We’re not around Wall Street guys all day. We’re just sitting around coming up with our own ideas, and we don’t get pulled into group think, or what’s the hot ticket item, and it’s a lot easier to be a contrarian and find those really good long term ideas as a result, and that’s one of the most important things that I’ve learned from you is roll up your sleeves, figure out yourself.
Steve Sjuggerud: Yeah, and I think by learning that early I think it gives you a big leg up. Because I think a lot of – and, Buck, I’m not sure how this happens in Washington, but a lot of what happens in finance is guys parroting other ideas that they hear from someone else. And so there are only about 10 original thinkers, and everyone else is just borrowing those ideas and spitting them out somewhere else.
Buck Sexton: In fact, people think that they’re particularly smart if they can just add yet another version of the echo chamber consensus opinion. That’s the way to do it here in DC. So I don’t know how that works in finance, but I can tell you that on political issues you want to find out what the so called smart people say, it all say the same thing, and then someone eventually realizes maybe that’s actually not the smart thing to do.
Steve Sjuggerud: Right, right.
Brett Eversole: Well that’s how you run into like 85 percent of funds underperforming their average because everybody does the safe thing. If everybody else likes this stock, and I like it too and it goes down, at least I’m an idiot but I have company.
Steve Sjuggerud: Well, one interesting, Buck, is that Brett is really the only guy that’s had the passenger seat when I’ve done these ridiculous things like buy gold at the very bottom. Buy a huge portfolio of tiny gold stocks when it just seems like the worst idea in the world, and I made a few hundred percent on those. But yeah, do you have any other thoughts, or any other ideas about – or even remember that time of buying gold, other things that you’ve seen me do?
Brett Eversole: Yeah, I mean that was a perfect example because I think that was in late 2015, early 2016, and gold had been in a bear market for four or five years at that point. And gold stocks, especially small gold stocks like you were buying were down 80, 90, 95 percent. But, you know, you looked at the landscape and you saw this is about as contrarian a thing you could do right that moment.
And you had the conviction because you’ve been doing it so long and seen these kind of things play out over, and over, and over again that you took advantage of that opportunity. And I think that’s one of the other things I’ve seen you do is that by having experience you’re able to develop that kind of conviction, and when an idea – when an opportunity comes up you jump on it and take advantage of it right then. Because often times you don’t get that – those don’t hang around very long.
Steve Sjuggerud: So yeah, and I think it’s not just not only an investment opportunity, and I hope people can learn from this, how to become a better investor, but I think, Brett, you’ve experienced firsthand the – I do the same thing with people. This week we got – I got an e-mail from a billionaire investor, and it was a very kind e-mail. I think I shared it with you.
Brett Eversole: Yeah, yeah.
Steve Sjuggerud: But I don’t know if you have any examples or things you’ve seen where it’s just doing this with people, building relationships in the same way.
Brett Eversole: Well yeah. You had – we’ve gone to China a few times together, and you’ve gone a few times without me, and the first time we went a few years ago we got the kings tour from the Churchouse’s, Peter and Tom Churchouse, and those are guys who you’d been developing a relationship with Peter for 10 years. And it’s not like you spoke to him very often, but he loves Steve. And you’ve gone out of your way to help him whenever you could. You’ve helped him with their publishing business as time went on. I mean that’s just one example, but I mean they showed us everything and connected us with the right people in Hong Kong and in Shenzhen. We couldn’t have put that trip together ourselves.
Steve Sjuggerud: So yeah, speaking of China, and just getting a little bit off track here, but we did see in our second trip together to China – can you tell me a little about what we saw, and what really affected you?
Brett Eversole: Yeah, that trip was incredible because we went over there with one idea, and came away with a second idea that is probably many times larger. So we went over with this idea of this MSCI inclusion of local Chinese stocks.
Steve Sjuggerud: Yeah, up to a trillion dollars could flow into Chinese stocks. It’s a big idea.
Brett Eversole: It was a big idea, but we literally sat down at the first meeting and we talked to an executive at a finance company, and started picking their brain about this idea of mobile payments in China. We had kind of experienced it in the few days prior where no one was carrying cash, and there were QR codes on every stall, at every store at, every restaurant. And really from that first meeting the entire universe of what we were after in China on that trip completely changed. And when we came back from that trip we launched the China letter around the MSCI idea, but more about this big kind of Chinese tech idea. Those positions have done better than anything else in that portfolio.
Steve Sjuggerud: Yeah, Buck, you know a bit about the ten cent story. I mean we went over there and this woman in this meeting that Brett is talking about, she was indignant about spending cash. She did not want to use cash anywhere, and -
Brett Eversole: I think she had to pay for parking with cash, and she was furious.
Steve Sjuggerud: Yeah, that’s the only thing she paid in physical cash. Really, you’re in China they don’t really want credit cards. Credit cards are – they were a stepping stone to mobile payments, and they kind of skipped over credit cards, and they don’t want cash anymore. It’s all paid on your phone. When I come home and tell people that China is more advanced than things are in the states, whether you’re in the city of Beijing or Shanghai, mobile payments, or just mobile communications, the way people interact with each other.
I’m not saying it’s a better or a worse thing. It’s just it’s more advanced than what we do. So Buck, I know you made a little investment in China didn’t you?
Buck Sexton: I have. I have based on some of your recommend -
Steve Sjuggerud: Did you get it in – did you get it early, or did you get in late? Did you follow my advice to follow your stops, or what’s – do you mind sharing how you did?
Buck Sexton: Sure I will. Sure. I actually can pull it up in front of me right now. I followed the advice late unfortunately, and I am not going with the stop out manure. So basically I’m doing it all wrong so far.
Steve Sjuggerud: You’re doing it all wrong, yes.
Buck Sexton: I’m doing it all wrong, but I own that, and it is – I’m in it to win it long term. But yeah, I own some KraneShares, I own emerging markets, KraneShares, tech index, so that’s KEMQ.
Steve Sjuggerud: Yup, awesome.
Buck Sexton: I own KraneShares, Bosera, a few things.
Steve Sjuggerud: Yeah, great. No, I mean those are the right things to own, and, Buck, you’ve heard me say this in it, but it’s such a strong and such an important thing to me. I strongly believe China has had three separate triple digit moves in about 12 months’ time over the last dozen years or so. Incredible moves in the stock market, and I strongly believe that we are going to have at least one of those moves in the next five years. And I want us to be – I actually expect we’ll see a couple of those. I think it’s going to be one of the greatest, if not the greatest investment opportunity of your lifetime.
The problem is Chinese stocks can truly sore 500 percent in 18 months, and they can also fall 80 percent in less than a year, so the whole idea with the trailing stops and why I encourage it. Buck, I’m not giving you a hard time here, I’m just using the example for our listeners is that -
Buck Sexton: Don’t worry, I haven’t invested enough money that anybody would care, so it’s fine. Go ahead.
Steve Sjuggerud: Yeah, okay, okay, yeah. Is that look, we want to participate in that 500 percent move on the upside, and we don’t want to be caught with our pants down. We don’t want to be obliterated with that 80 percent loss. Because if you have an 80 percent loss then it has to go up 500 percent just to get you back where you started. So I am a huge believer in this China idea.
In fact, Buck, I’ll share something. I haven’t shared this with anyone except the people that attended our Vegas conference. I haven’t shared this with my China subscribers, or my True L subscribers, but I actually recently returned from China, and I took – I had multiple film crews with me. I did a documentary on the opportunity in China, and we interviewed the greatest names in finance. Jim Rogers came over and interviewed. He’s a legendary speculator. We had the largest investment banks in China, and we had some of the head of CNBC chief anchor.
I mean we just had absolutely the best possible folks, the best possible trip of trying to show the China story both from the investment opportunity, and from the sort of new technology side of things. And hopefully this will be out in about two months. That’s what we’re shooting for. But I’m extremely excited about it. I think that – the thing is, Buck, about China is that I can tell people about it in the states, I can talk about it until I’m blue in the face and no one cares, no one believes me, no one wants to hear it.
But then if I bring people over there, and I truly have brought dozens of people over there. I think this year we had maybe 45 people on our trip. So each year I’ve been bringing people over, and it takes about 30 minutes of being in Shanghai or Beijing before people nod their heads and say, “Yup, I’m onboard 100 percent. You’re right, Steve. I’m sorry I didn’t believe you.”
Brett Eversole: Steve, this kind of goes back to a bigger investment idea that you’ve talked about a lot where you can find something, or there’s a big discrepancy between perception and reality, right?
Steve Sjuggerud: Yup.
Brett Eversole: And that’s really what’s going on in China. I think that’s what you’ve helped to expose more people to in the last few years. But like you say, there’s nothing that beats being on the ground and seeing it yourself.
Steve Sjuggerud: And, Buck, I know that you come at this from a different perspective, and I’d love to hear any insights that you might have on this. Let me tell you where I’m coming from, though, briefly is that what I look for is the one thing. What is the one overwhelming thing? And what I decided in 2009 I said, “You know, the fed is going to cut interest rates lower than you can imagine and keep them there for longer than you can imagine, and that’s going to cause asset prices like stocks and real estate to go higher than you can imagine.”
And that’s the same theme that I stuck with for the last decade, and that was the one important thing, those ultralow interest rates. They overwhelmed any political issues, any economic issues. That zero percent rate was just fuel for asset prices. And so in China, while there will be political and economic issues, and right now we’re experiencing some great ones, these overwhelming flows of funds, in my opinion, will overwhelm the negative political and economic issues.
But I know that from your side of things, not thinking of it from the stock market side, but from the political side, I don’t know if you have anything that you want to throw in the ring of China of things to worry about, or things that you’ve experienced, or things that you’re skeptical of, and maybe we can get you to come on one of our trips and see what you think.
Buck Sexton: Oh, I’d love to come on a trip and just obviously, as somebody was talking to you a few blocks from the White House, the whole issue of tariffs and what a trade war, or whatever people want to call what’s going on right now, will do to the Chinese economy would seem to be. I think if you ask most folks who are paying some attention to what’s going on on this issue they’d say, “Oh gosh, well what about the trade war issue?”
I’m of the mind that you’re going to see China and the US actually get closer on some of these issues. I think they’ll resolve it. I don’t think it’s going to just keep getting worse, and worse, and worse because it doesn’t make sense for either side for that to be the case. Doesn’t mean there won’t be some ugly stuff in the next, let’s say, six months, but I think in the longer term – by Trump’s second – let’s just say his second four year term in office, if that happens, I would assume that a lot of this stuff would be not fixed entirely, but worked out somewhat, and that could mean very good things for us, and for the Chinese. Because ultimately, a lot of their policies are really more about politics than about economics I think.
Steve Sjuggerud: Right, and I mean you bring up a very important point. I mean the trade war is really obliterated Chinese stocks this year, and it’s hurting the US markets right now, too. One of the slides that I showed in my Vegas presentation was the history of trade wars. Nobody wins a trade war. I know Trump says that trade wars are easy to win, but I showed a slide when Smoot Hawley was enacted in 1930, that that was the worst – obviously the depression came, and the worst stock market fall in history came.
The impact of US tariffs was pretty simple. Everyone else retaliated with tariffs and global trade essentially crashed. So it seems – hopefully Trump knows history, and hopefully we’re smarter than this, but there’s a very important point, and I actually played this video at my presentation in Vegas. I just played 90 seconds of it. It was from Jim Rogers, and Jim Rogers, if listeners don’t know, he delivered a 4,200 percent return in the decade of the 1970s to his – to owners of his hedge fund.
So if you’d invested with him I’m sure even Warren Buffet would say, “Yeah, that guy Jim Rogers crushed me.” And then Jim Rogers dropped the mic. In 1980 he just walked away and said, “That’s it. I’m done.” And then he raised his children in China because he saw China as the future, and he wanted them to speak Mandarin.
So he was an ideal guy to interview for our documentary, but he had some scary thoughts speaking of trade wars in the future. He’s long term bullish on China, but what he said, and this is kind of interesting, Buck, and you could actually see this. And you’ve got to realize the guy that could make returns like that, he has to do the probabilities. What are the probabilities of all these outcomes, and what are the investment prospects of those outcomes?
And so what he said is that he believes that Trump will announce that we’ve solved the trade war. He said, “Now whether or not we’ve actually solved the trade war, Trump will come out with a big positive announcement that he did it, and he saved us, and he solved the trade war, whatever that means.” And then the markets could, as Jim Rogers said, the markets then, Steve, will go into your melt up, as you predict, and everybody is happy. But then things will start going south again, and Trump will get angry again, and then he’ll say, “Now we’re going to hit them. Here’s the real trade war,” and that’s Roger’s outlook for what he expects will be the worst bear market of our lifetimes, the worst financial period of our lifetimes.
A pretty scary scenario, but it’s – he’s a smart guy, and knowing Trump’s personality is well, it’s not impossible to see that scenario playing out. I don’t know if you have any thoughts on that, Buck.
Buck Sexton: He’s making some bold predictions.
Steve Sjuggerud: He is, yeah, for sure.
Buck Sexton: I can’t – I’m somebody who always tries to avoid undue speculation in areas beyond their knowledge base. So I would just say he sounds smart, that’s sounds interesting, and let’s see.
Steve Sjuggerud: Yup, yup. Well, I did mention the melt up there, and, you know, Buck, we’ve had a rough couple days in the markets, so we probably ought to talk a bit about that. I got some e-mail from some subscribers saying, “Steve, are you still on your melt up thesis? I mean come on, this has been a ridiculous couple of days.” So just to back up briefly, the melt up thesis is my idea that all great stock bull markets, all great bull markets in any asset class they typically end with an extraordinary period of, to quote Greenspan, irrational exuberance.
And just like we saw in Bitcoin at the end of last year, it was irrational exuberance. I mean this was not founded in any value. This was just peer greed at its most core. The same thing happened in the real estate boom in peeking in, what, ’08, ’07. I mean it was crazy. And if you think back it was irrational exuberance. I mean people expected house prices to go up 20 percent a year when the population grows, what, like -
Brett Eversole: Maybe one percent a year.
Steve Sjuggerud: One percent a year, right?
Brett Eversole: Incomes go up two percent a year.
Steve Sjuggerud: Incomes go up two. So yeah, so how could house prices go up 20 percent a year when incomes and population aren’t growing very much at all? So it was just purely greed, purely irrational exuberance, and that’s the way the end of booms end. The NASDAQ boom, the great boom of the 1990s ended this way as we all know with that incredible stock market boom. I think the NASDAQ was up something like 100 percent in its last 12 months, and biotech stocks were up a couple hundred percent in the last few months. It gets crazy.
And so that’s the way these booms end. They end in what I’ve called a melt up. The thing is is that nothing that I’m seeing resembles a melt up in any way. Instead of irrational exuberance, I feel like we’re seeing irrational fear. What we saw – we just saw a small correction really. I know it feels painful, but when you look back at history you look back at that NASDAQ move of 100 percent in the last 12 months and you think, “Wow, that must have been a straight up rocket ride straight north.”
And the reality was, and most people aren’t aware of this, Buck, is that the NASDAQ actually fell by roughly 10 percent or more five separate times in the final 12 months of that great bull market. So man, strap in for the ride. It is a rocky ride higher. This was one move that was not that extraordinary in the grand scheme of things. We’re just gotten used to relatively low volatility, and so I want people to know that we could have more of these. They could be even larger than this one before this melt up really takes off.
But we do not feel – I mean, Buck, when you talk to people do you hear irrational exuberance, or do you feel a feeling of sort of foreboding, like it’s just around the corner?
Buck Sexton: Oh, there’s definitely a dread. I mean everyone that I talk to in the kind of amateur investor space, and I’ve got people that e-mail me and call me all the time as well with their own thoughts on the markets, and they say – I know people quite honestly, Steve, right now who don’t want to invest in anything because their whole position is I want to wait for the bottom to drop out. I want there to be this 20 percent correction. And oh, after that then I want to start picking stocks. And I’ve been hearing that from people for the last six months or so.
Brett Eversole: Man, I feel like I’ve been hearing that since 2013, which it tells – it’s so hard to get the timing on that right, and I think people end up on the sidelines for way too long as a result of it.
Steve Sjuggerud: They’ve been on the sidelines for years. I did a daily wealth I think it was this week, may have been last week, where I talked about, Buck, this is really incredible. I talked about the last great boom in the 1980s and ‘90s, leading up to the 1999, 2000 peak, and what we saw was I think most people wouldn’t have any idea that the stock market went up every single year from 1980 to 1994, except for one year, which was only a three percent loss.
So you had this ultimately 13 year period including ’82 and all the way to ’84, or ’94. You had 13 years where you essentially didn’t lose money, and people thought, “Wow, this has to be approaching the end.” And then ’94 had like – 1994 had like a 20 percent plus return, and now you reach evaluations that had only been seen in the great – like at the peak in 1929, and in the late ‘60s, which also ended very badly.
This was 1994 that we were at these extremes of valuation. And then in 1995 guess what happened? Stocks went up 38 percent. It was outrageous. And, Buck, I lived through this. This was sort of a formative time for me. I started in the early ‘90s, and I thought this is ridiculous. And I was actually like these guys that you’re describing, I was saying, “Well look, any rational person would say that we are now, by 1997, we were clearly off our rocker.” We were clearly beyond 1929, beyond the late ‘60s, beyond any – we were no longer tethered to earth. I mean it was just stratospheric valuations for stocks. That was 1997.
But then 1998 stocks soared again. I think the NASDAQ was up something like 40 percent in 1998, crazy returns, and you have to say at that point, “This is nuts.” Meanwhile, Buck, all of my friends, all these guys I went to college with, they were quitting their real jobs and joining dot coms and getting stock options. And I thought, “Man, I am just the fool sitting here writing about investing, and all these guys, all my buddies are millionaires overnight, and what am I doing here like a bump on a log just writing about these things.” Sort of warning people like, “Gee guys, it’s a little expensive out there.”
Basically I did not want to go through that again. I learned the hard way that valuation, that stock value does not cause. It’s a symptom of a top, but it doesn’t kill the patient. It’s a symptom that the patient isn’t healthy, but it’s not what actually does it in. And what usually does it in, I mean there are a lot of technical factors that I look at, but ultimately at the end of the day it reaches a point it’s the sentiment thing that we’re talking about. It’s that irrational exuberance.
When everyone is talking about it, when everyone is doing it, there’s no one left to buy, and that’s the way it was in real estate in ’08. That’s the way it was in stocks in 1999, 2000, and man, we are not there yet. In fact, we’re in the opposite position. And after this great slide in stock prices, we are now – I found this statistic fascinating and unbelievable. Stocks are now below their average valuation of the last 22 years.
When you look at the price to earnings ratio, which is the primary measure that people look at stocks, when you look at the forward price to earnings ratio, which means when you look at analyst estimates for next year, stocks today are below their average valuation of the last 22 years.
To me this is like how could that be possible. We’ve had, and I know people would be saying this, we’ve had 10 years of nonstop stock movement higher, so how could stocks be lower than their 22 year average in value after a 10 year move higher. And the answer is just this incredible earnings growth. I mean part of it’s pushed – part of it’s predicated on the Trump tax cuts certainly, and but I mean look, low interest rates sure are fuel for higher earnings as well, and it’s just a good economy.
So I am much less concerned than it seems like everyone else is. Valuations are not extreme, investors don’t have the irrational exuberance that you see at stock market peaks, and I think that we will see those coming in the melt up.
Brett Eversole: Now, Steve, I have a question for you because you talk about irrational exuberance. I wasn’t in the investment space in the late ‘90s like that, but I think about Bitcoin in November, December last year, and I remember I threw a birthday party for my wife. Her birthday is in mid-December last year, and I remember the entire party just talking to friends about all these little crappy Altcoins that they were buying, and they thought they were getting paper rich on at the time. And none of it made any sense to me, but you could just – you could cut the irrational exuberance with a knife it was such a fever pitch. It was so ridiculous.
When you talked about in ’94 people were still skeptical, but the market went up. I mean were people skeptical through ’94 or ’95, ’96? Like what do you think happened to make that switch, or to just switch one day?
Steve Sjuggerud: Well, usually there is – so it’s a great question, Brett, and the short answer is yes, you are correct. ’94, ’95, ’96, ’97 people were skeptical. I mean that was the rational part of things. The market had been in a bull market since the early ‘80s. This was one of the longest bull markets ever. There was a bit of a recession in around 1990, but for the most part stocks had gone up for 15 years.
Brett Eversole: The economy had been great for a decade plus, too.
Steve Sjuggerud: So typically what you see is something has to – there has to be a switch, as you said. There has to be a catalyst, but you never know if that catalyst is actually going to be the thing that tips it over into the irrational exuberance. But really the promise of the internet truly was the catalyst for that. And I know that seems obvious in hindsight, but I mean everyone was excited about the promise of it. And the reality was different than the promise because people were paying outrageous prices for the companies that would lead the way and the technology, and many of those companies either went away, or it took them many years to actually grow into the promise that they were offering.
So today, we do have a bit of a different world, and I think that it will be on this same type of thing. Almost always the greatest booms happen in technology, in biotech type things. That’s just where the innovation is happening. And I think this time around, and I really think that our visit to China and seeing Tencents really opened out eyes to it, is I think this time around it will be the social media stuff, the ecosystem type businesses. Because when you see what Tencent really does, it’s far beyond what a Facebook could ever do.
We kind of saw the future, and I think that this global ecosystem, we call it social media here in the states, but it’s really much more than that. I think when investors start to realize what’s possible there, I think that those are going to be the tech businesses, and biotech as well will be sort of leading the way in this boom, but I don’t feel that at all yet. I mean we talk about the Fang stocks, we talk about these big tech names, but they’re not at crazy values.
Brett Eversole: It seems like a niche of the overall market. It doesn’t seem like the overall market feels like a – it’s just a little piece here, a little piece there, but not everybody.
Steve Sjuggerud: And that’s the way it goes, though. And that’s another good point is as you reach the pinnacle of these peaks, the leadership, the number of stocks leading the way continues to narrow and narrow, so it’s not the overall market. In fact, Warren Buffet’s portfolio, I think Warren Buffet was essentially flat during the last 12 months of the previous melt up. So the greatest investor of all time delivered a zero percent return while the NASDAQ went up 100 percent.
So you can’t just buy the whole market and expect it to do the best. You want to focus on the, to me, these social media companies, and you realize just how powerful Google is in your lives. I think that – to give you an idea, we’re looking at a company and how powerful these top names are. For example, one popular thing that Tencent does is Tencent most people don’t realize – so Tencent is China’s most important company, and I believe it’ll be the world’s biggest company someday.
And China owns WeChat, which is sort of the Facebook of China, but it’s also the world’s largest gaming company. Bigger than sort of your Microsoft X-Box, and bigger than any of the gaming companies you can imagine. But what’s interesting is that, and I’m finding this, I don’t know if you guys find this, I’m shocked that even my wife is a mobile gamer. Now I’m not talking that she plays Call of Duty or something, but like on her cellphone when she burns time, she’s playing some kind of balls game, or something, I don’t know. Buck, do you, or Brett, you experience this at all?
Brett Eversole: Yeah, my wife plays some game whenever we’re on planes. I don’t know, it involves moving little circles and things around to – yeah, yeah, she’s hooked on it whenever she’s got nothing to occupy her for more than 10 minutes at a time.
Steve Sjuggerud: And so shockingly to me, the way you get these games, of course, is on the Apple, the App Store, or on Android’s Google Play Store. And every one of these games Apple and Google take 30 percent of the price. Any money spent they take 30 percent off the top. And when you go to China and you see the absolute proliferation of mobile gaming, it’s insane. These major players are taking incredible amounts off the top. No one is really thinking about how we’re going to live in the – my son, I have a teenage son, and I think as much as a sports fan as he is, I think that he would rather watch a guy play – what’s the big title from Tencent?
Brett Eversole: Fort Night.
Steve Sjuggerud: Fort Night. I think my son would actually rather watch excellent Fort Night players. He would pay more to watch that than to go to like a Florida Gators football game or something. I mean it’s just a different generation, and I think we’re going to see an entirely different universe very soon.
Brett Eversole: Yeah, that’s always kind of been your pitch on Tencent is that they control screen time in China better than any company in the world. And they’re not going to be unseated in that regard, and they’re kind of still figuring out how to turn that into dollars. But you look at what Facebook has done over the last – I mean really since they went public in 2012. People weren’t really sure how they were going to turn all those eyeballs, and all of that into dollars, and they’ve done a really good job of it, and now they’re one of the most valuable companies in the world.
Steve Sjuggerud: Yeah, so in speaking of this, actually we just kind of stumbled into this direction, but we do have our big event coming very soon, October 24th. It is the Meltinar event, and we will be talking about these companies and how to take best advantage of this. Without a doubt we are talking about businesses like Tencent. People have no idea how many different businesses that Tencent actually owns a percentage of, and is involved in. We have found an incredible business that will take exact advantage of this theme that we’re talking about, and we’re actually going to share – I mean this stock is – it’s an incredible story.
The upside is just extraordinary. It takes all of these boxes and we will reveal this stock for free at our Meltinar event on October 24th. But I mean it’s the exact way. It takes advantage of everything that we’re talking about, the Tencents, the mobile gaming, the social media. It’s just a sort of a perfect -
Brett Eversole: Yeah, companies actually partnered with Tencent. They’re an investor, which is always great to see.
Steve Sjuggerud: Yup, yeah. But I mean Tencent is involved in an – you would be stunned at how many businesses Tencent has a stake in, and it’s pretty brilliant. You know, Buck, I’m sure you know Uber. Everyone knows Uber the ridesharing service. And Uber tried to go into China and they tried to spend tens of billions of dollars doing all of the correct things with the government, hiring local drivers, hiring – schmoozing and doing all of the right things, but the one thing that they didn’t have was that Tencent – I think Tencent owns less than 10 percent of Didi, which is sort of China’s Uber.
But here’s the thing, people don’t like to leave their WeChat app in China. It seems ridiculous. They don’t want to swipe out of it and go to Uber’s app. Within WeChat you have a button for Didi where you can hail a taxi without leaving your usual ecosystem. It would be like Facebook having a ridesharing or something, and people simply don’t want to leave it. And so no matter what Uber did in China, spending tens of billions of dollars, schmoozing all the right people, making it attractive to customers, the fact that it was already – Didi was already within Tencent’s ecosystem, Uber failed essentially in China. There is no Uber in China.
Brett Eversole: It was dead on arrival because it didn’t have that.
Steve Sjuggerud: And so Tencent owns a lot of different pieces. There’s also when you go around Beijing, I mean it’s the historic joke about China of all the bikes downtown Beijing. Now it’s all fancy cars, Audis and – Audis, and BMWs, and Teslas have replace the bicycles, but there’s still plenty of bikes. The bike sharing is pretty unique. You just hop on a bike wherever it is, and if it’s a yellow or an orange one it’s a Tencent owned bike business. Tencent owns say 10 percent of it. You hop on, you swipe your QR code, you ride it to wherever you need, you get off and you paid for that bike, but people want to use their Tencent bikes. They want to use the WeChat bike. It’s just – it is truly incredible.
So one thing, we had Naspers speak. Naspers owns a third of Tencent. We had Nasper speak at our Vegas conference, and one of their slides was incredible. They said that in China – this is a stunning figure, in China I think it was 56 percent of people’s online time was on Tencent properties.
So I think for comparison in the US, the largest that someone sits online, the average American sits on Facebook somewhere in the teens, and that means some people spend 50 percent of their day, and some people spend none of their online time on Facebook. But in China it’s over 50 percent. I think it was 56 percent of screen time in China is on a Tencent property. That’s whether they’re playing a mobile game, they’re chatting on WeChat, they’re buying something on a store, they’re watching the NBA, all of these things are controlled by Tencent.
Brett Eversole: It’s a brilliant model Tencent put together. Because you talk about Didi, the ridesharing, or the bikes, or anything like that, so they’ll find a company that kind of has that infrastructure. They’ll invest in them, and then they’ll put them on their platform. So they almost guarantee that Didi was going to be the successor, but they already bought part of the company beforehand. So they had the ability to invest in these good companies, and then almost guarantee that they’re successful at putting them on their platform because no one else can compete.
Because like you said, if 56 percent of your time is in WeChat, I mean it’s just it’s incredible.
Steve Sjuggerud: Yeah, but I know the goal wasn’t necessarily to spend all this time on telling the wonders of Tencent, which we’re big fans of, but we just got out of our Los Vegas conference and we really haven’t kind of done a rundown of that. So I didn’t get to see a ton of the presenters, but I did want to talk about some of my favorite ideas that I did see.
I know one of that I thought was really neat, and, Brett, you mentioned this one too, was from Wes Gray. Do you want to talk about this idea?
Brett Eversole: Yeah, so Wes Gray, I think he’s the founder of a company called Alpha Architect, but he’s got a doctorate. He got his doctorate under Eugene Fama of Chicago School of Business, right?
Steve Sjuggerud: It was crazy. He actually said that he went – he said he got out of the military, and he went to the University of Chicago. Eugene Fama truly won the Nobel Prize for -
Brett Eversole: A future market hypothesis.
Steve Sjuggerud: Yeah, and -
Brett Eversole: Yeah, so when Wes Gray was a student under him going to get his doctorate, he decided he was going to pick a dissertation to prove Eugene Fama wrong.
Steve Sjuggerud: So the guy who won the Nobel Prize.
Brett Eversole: Yeah, and his goal was to just be a jerk and try to prove the guy wrong.
Steve Sjuggerud: Yup. And so yeah, you want to tell a little bit about -
Brett Eversole: Yeah, so the idea he talked about at the conference is what he called the God Portfolio. His point is that investing is really hard, and sticking with a plan is really hard. So what he did was he took the top 10 percent of stocks over the next five years. He assumed that you knew the future. If you were God you could know the future. And so in year one you would buy the best, what you know to be the 10 percent best performers in the market over the next five years. And then you hold them for five years, and then you do it again.
Steve Sjuggerud: So you have perfect foresight. You know the best -
Brett Eversole: Exactly, and what he found is this portfolio still had drawdowns of 40, 50, 60, 70, I think as much as 80 percent. Drawdowns as much as 80 percent. So his point was even if you could hire God as a portfolio manager, you’d probably fire him too.
Steve Sjuggerud: Yeah, you’re supposed to be God man. What are you doing?
Brett Eversole: Yeah, we’re down 40 percent, God. Like I know you’ve got it going on, but this isn’t really working for me.
Steve Sjuggerud: I know you’re supposed to see the future and all, but you’re fired. I can’t live down 40, 50, 60, 70 percent. And yeah, so I mean risk is a part of the markets, and we experience that in the last week here with the incredible downside that we saw. So that Wes Gray’s idea, this God portfolio, that there’s nothing you can do. I mean you’ve got to just don’t invest if you’re not willing to understand that there’s downside risk.
Brett Eversole: Absolutely.
Steve Sjuggerud: And we try to mitigate that. One of the questions I get a lot is how do we know when the melt up is over. I’m not God. I mean I don’t have the perfect foresight. I can’t tell you, but what I can do is let my winners run, and then cut my losers. So my plan is I want to capitalize on all of the upside. I want to participate all the way up, and then we will use a trailing stop to get us out on the way down.
The principle here, the simple idea is that you want to have your downside risk be a smaller number than your upside potential. That’s it. If you can invest that way it’s very simple math. It’s very simpler sort of gambling strategy of you have less risk than you have upside. That’s it.
Brett Eversole: Well, all you can really do is put yourself in the position to get the analysis and hopefully get things right, but you’ve got to protect yourself because you can’t bat a 1,000. Nobody bats a 1,000. And a lot of the best investors they bat below 50 percent, but they manage their risk very, very well.
Steve Sjuggerud: Yeah, and to give you a little more specific on this, this is real simple stuff. Let’s say that you say, “I want to have –“ if you think this investment of yours is going to have 30 percent upside potential, and what you want to do is you want to have – ideally you want to have three times the upside potential as your downside risk. So if you think you’re upside potential is 30 percent, and you set a 10 percent stop, then now you’re in a great position. You’re a three times the upside potential as your downside risk.
So you could actually be wrong twice, you could be wrong two thirds of the time and still make money. And that’s the simple idea of this sort of gambling strategy. I hate to call it gambling because meaning that like the successful gambler strategy where you’re downside is less than your upside.
You know, another speech that I enjoyed was our friend David Tice, and I think most people don’t know David Tice, but this guy. I mean he owned a short fund, meaning that he was betting against the markets during the whole boom. He had something called the prudent bear fund. He was doing – he was truly a short seller into the worst bull market of all time.
Brett Eversole: This is in the ‘90s, correct?
Steve Sjuggerud: Yeah, and he stayed in business, which is a credit to him, right? I mean he’s swimming upstream for years, and he still managed to find a way to at least not move backwards in that. And so he shared a typical short seller idea, a very interesting idea. Basically he says Australian real estate never had the big correction, and now we’ve reached that point of irrational exuberance in Australia where everybody thinks that home prices can just keep going higher.
But meanwhile, they’re starting to be some cracks, and the banks – everybody bought these houses on interest only mortgages and they can’t afford their mortgages anymore. Meanwhile, it’s a double whammy, the banks are going back to these home buyers and they’re cancelling their interest only mortgages, and forcing them to have the traditional principle and interest mortgage where the payment is much higher, so the people are going to be defaulting on their mortgages. It’s going to cause a downward spiral, and the guys left holding the bag are going to be the Australian banks.
And David Tice said his favorite idea, simplest way to play this is there actually is an ETF of Australian banks that trades in the US. I think it’s from the Market Vectors Group. I don’t remember the symbol offhand, but David said it’s very easy to buy put options on the ETF that trades in the US of Australian banks. And man, his presentation was compelling.
Now before I get ahead of myself, David’s presentations are always compelling, but sometimes he’s early. Sometimes he’s way early, so before you go out and start buying up these put options on these Aussi banks based on this little conversation, I would strongly recommend that you make sure there is a downtrend starting in place. Because if David is right, this thing could go down a long way. But David can swim up – as you learn how booms, whether it’s a Bitcoin boom, or a housing boom, they can go much higher than you could imagine, so you don’t want to bet against it. You want to wait for the true turn before you would start following David’s advice. So I thought that was a good presentation as well.
And another one I just caught portions of, but I’m just – I just really love this guy. And, Buck, I don’t know if you have any thoughts on this, or, Brett, you had any thoughts on this, but I thought Dennis Gartman, he’s always compelling. That’s it. That’s it. We talked earlier that only – there are only a few guys out there with original thoughts. And _____ Dennis Gartman, this guy gets up at 1:00 in the morning every single day. He’s never missed a day. He missed one day he said. I think, what, kidney stones was it?
Brett Eversole: Yeah, kidney stones. He recommended not having kidney stones.
Steve Sjuggerud: Yeah, and he publishes on July 4th, he just publishes. So he gets up at 1:00 in the morning, and he gets out his eight page Gartman letter every day by 5:00 AM. It’s the first thing on trader’s desks. So he doesn’t have the luxury of reading everyone else’s insights to figure, and then copying them. He has to be the original thinker first thing in the morning getting it on people’s desks at 5:00 AM.
So did either of you guys hear something in Gartman, or do you agree about Gartman being a unique thinker?
Buck Sexton: I couldn’t tell how much he was just being kind of funny versus how much he really believed. You could simplify the whole issue of trade imbalance to they give us stuff, and we give them paper.
Brett Eversole: Right, yeah. That was exactly what I was exactly what I was thinking, Buck, as well. That one was _____.
Buck Sexton: I don’t think it’s quite as that.
Steve Sjuggerud: Yeah. Yeah, I remember that, yup.
Buck Sexton: There’s a lot that goes into that paper. So look, it was a funny line, but I just – the way he said it I couldn’t tell – I mean, Steve, how did you – do you remember that line? I mean, how did you take that?
Steve Sjuggerud: Yeah, I remember that line.
Buck Sexton: He thinks that trade – I mean that tariffs are essentially for idiots. I mean I think it’s interesting for one, that the US government actually funded itself via tariffs for the first – oh, well, long period. I don’t want to give you the wrong day, but early on that was actually how the government funded itself. But if tariffs are so stupid and so self-defeating in all cases, why do so many countries including the EU and Canada have tariffs in place?
Steve Sjuggerud: Yeah. No, I think that Gartman was oversimplifying, but I do want to bring up a point. I don’t know the feeling in the beltway on this, but look, the US has run a trade deficit for consistently for an extremely long time, and we have gotten wealthier consistently for an extremely long time. These Asian countries have, some of them have – many countries have not made advances, and have run trade surpluses for a very long time. So the notion that a trade deficit is bad, and that the other guy is stealing from us, I think that’s oversimplifying it from the White House.
And to be honest, when I saw, and I don’t know how you feel about this, Buck, but when I’ve heard Peter Navarro speak, to be honest I just wonder how he got these degrees, and how he got where he is, and I’m honestly thankful that Larry Cudlow is around to help bring some rational thinking there. I don’t know if you have any opinions or thoughts on that you want to share on that.
Buck Sexton: Well, I just would wonder why if this is also – I mean I can only approach the respective of somebody who’s just looking at it and trying to take a rational sense of what’s going on. If it’s so self-defeating what Trump has done, are we really to believe then that the economy is as strong in this country as it is despite that, or maybe are people overstating the downside of doing this?
And also, I think the Canadian example is really interesting. People were saying, “Oh my gosh, why would Trump ever do something so terrible to Canada as put in place any kind of punitive tariffs?” Well, it’s in response to punitive tariffs from the Canadian government against our products. If it’s so obviously stupid and there’s no upside, why do so many other people do it? And I feel like the free trade people, there’s this chorus of free trade is the best, and I understand why.
This is what all the smart set says, but I never really get a good answer as to why do so many countries, including very advanced countries including the EU which has a large overall economy altogether than we do, why do they have so many tariffs in place? Is it really just for domestic political reasons, I mean domestic political consumption? We need to prop up the dairy farmers because the dairy farmers vote democrat, or vote socialist, or whatever?
Steve Sjuggerud: You know, so there’s a couple questions in there, and the first one is I think that the success of – I think there have been a lot of things right that the left does not want to acknowledge. I mean, look, we have had a lot of economic success, and these tax cut – there have been a lot of extremely good things that have definitely juiced the economy, the tax cuts being one of them. And the incredible fall in the – the incredible change in the regulatory environment basically having so many fewer regulations in the way of people and business succeeding. This is great. This is great for the economy.
I’m just talking purely from sort of the economic, sort of the academic perspective. These are the things that help grow an economy, and letting people spend their own money, letting people be more free of regulatory burdens, these are good things, so I don’t want to paint all of it with a bad brush at all. And then on your – on the trade question, in short yes. These are countries protecting themselves. That’s what the voters want. I want you to protect my trees, my dairy farmers, my loggers, my local industries.
So I think that I know it sounds like a simplified answer, but I think that’s ultimately it. The very shortest answer is that free trade I do believe is the way, and that all of these individual countries have come up with their own industries that they want to protect, and that Trump is going in and trying to say, “Hey wait a minute, that’s not fair.” And I hope he is successful – I hope he is more successful than potentially pushing it too far, and grandstanding a little bit too much, and grinding us to a place that we don’t want to be.
I hope that wasn’t sort of too nuanced an answer of breaking this down, but certainly very good things have happened. I think you’re actually right that the simplified answer about protection is where we are. I think that Trump is trying to bust some of that, and hopefully the result is good and not bad.
Brett Eversole: Well, Buck, you’re a better political thinker than am, but wouldn’t you also see kind of Trump going through this as a fulfilling a campaign promise? Because he really went and won the election through the middle of the country, which is where all of the trade imbalances have hurt America. So I mean would you see it as fulfilling that campaign promise, and then almost like as a way of campaigning for the upcoming election?
Buck Sexton: It is fulfilling a campaign promise, but Trump has been, I think, rightly – it’s been pointed out, people have criticized him for shifting on a whole lot of positions over the course of his public life. He hasn’t been a politician for very long even though he’s the president. But the one issue he’s been consistent on for decades is this trade issue, which is interesting. This is one place where if you go way back, Trump has always thought that trade deficits were a way that we were losing overall productivity and wealth. Probably when it gets to a certain level, right?
I don’t think anybody has any expectation that there’s going to be perfect trade equilibrium. I don’t think it’s supposed to be a dollar in and dollar out. That’s completely unrealistic, but what is the trade deficit right now with China? It’s pretty big, and it has been for a long time, as Steve pointed out, so he’s been consistent on that. I think he’s a true believer in this theory. I don’t think this is just something that he said in the campaign trail that he’s now going to follow through on because he feels an obligation to his voters. He really thinks that China is ripping us off.
And to be fair, there’s no question that China is ripping us off. It just may not necessarily be through tariffs. I mean I’ve been for a while, and this now draws more on a background in intelligence than in obviously politics, or me being a novice to economics and trying to learn about investing. The theft of intellectual technology, of intellectual property rather, and technology, and everything, military secrets that China has engaged in for the last 20 or 30 years is breathtaking in scope, and probably civilization changing over the long run.
And we didn’t really know how much the Soviets stole from us until we got access to their archives after the fall of the wall. I think if people knew what China was actually taking from the US through mostly cyber espionage, they would be shocked and pretty frightened actually.
Steve Sjuggerud: Yeah, I think that’s – my hope is that essentially the trade grandstanding ultimately leads us to some sort of solutions on the intellectual property theft. I mean that is – to me that’s – we shouldn’t care so much about the price of cheap tee shirts, or manufacturing. It’s the intellectual property that is the big thing.
By the way, I know we’re running up against the end of our time here, but, Buck, did you see that Bloomberg story about the little chips? If you didn’t we don’t need to talk about it, but man, it is an unbelievable story. But there was very little confirmation of the existence of this little chip that was supposedly planted by China, and is on these servers that Apple and everyone is using. Did you see that Bloomberg story?
Buck Sexton: I actually haven’t seen that one, but I know that there are serious restrictions on what kind of technology we’ll import from China, and what we want in terms of even at the supply chain level. Because the sophistication of what they can do for surveillance, and really creating backdoor purposes so they can get access into things that we think are secure, that’s a huge concern. So I’m assuming this falls under that umbrella of -
Steve Sjuggerud: Exactly.
Buck Sexton: Yeah, that’s real.
Steve Sjuggerud: It’s an incredible story, and it seems so brazen, and it seems like you would certainly get caught. And Bloomberg did a pretty incredible story on it, but there wasn’t a whole lot of sort of proof, or confirmation of its existence. And then everyone then came out and said, “No, no. It didn’t happen to us. It didn’t happen to us,” but now there’s more evidence that it exists. But anyway, something to look into.
So look, I know we only have a couple of minutes left, but I do want to urge folks to come onboard for the Meltinar on October 24th. This is truly going to be incredible, and incredible event. We have some of the biggest names in finance that are going to be onboard for it. The skepticism that I’ve seen over the potential for this leaves me to believe that the upside potential here is absolutely incredible.
We don’t see a great 10 year boom like this end with a whimper. It ends with a bang. And we’re going to go through exactly how, exactly why, how long it should last, how high it could go, how we expect the end to happen, and what you should buy. We will share, as I said, that’s one specific name that is perfectly poised to take advantage of this. I mean this is the biggest event that I have done at Stansberry in my career, so I really want to urge our listeners to join us on October 24th for that Meltinar.
Buck Sexton: And do we have the right URL? It would be the meltupevent.com. I know they can go there, right? The meltupevent.com?
Steve Sjuggerud: You know, Buck, I don’t have it in front of me if it’s the meltupevent. I should know that, but I’m concentrating on the quality of the information.
Buck Sexton: Yup, well I’ve got you. Or people can go to buckevent.com, too. That’s another way to get to the same place with just the Melt Up events, so there you go.
Steve Sjuggerud: Yeah, well thank you. And anything else you’d like to ask, or like to cover, Buck? I didn’t mean to short things too much there, but I know we’re getting out -
Buck Sexton: No. Gentlemen, it was great having you on here. I’m excited to hang out with you next week for the Melt Up event. That’s going to be really interesting and a lot of fun. So I’ll be with you in Baltimore at Stansberry HQ. And as for say to Brett and Steve, thank you so much. It’s been illuminating, and to everyone listening, love or hate us just don’t ignore us. Send us e-mails, tell us what you think, investorhour.com. We’ll see you all next week.
Steve Sjuggerud: Thank you guys. Thank you, Buck.
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