In This Episode

Porter and Buck welcome special guest Erez Kalir, CEO and co-founder of Stansberry Asset Management. Erez gives you three big thematic ideas that he sees playing out in the markets right now…and how to take advantage of them. Porter discusses his “Jubilee” prediction and the possibility of a massive debt restructuring in America. Erez shares the sharpest question a prospective investor has ever asked him during the brutal 2008 downturn, and Porter reveals a “max yield” strategy in the mailbag in response to a listener’s question.


Featured Guests

Erez Kalir
Erez Kalir
Prior to launching SAM, he co-founded and led Sabretooth Capital, an event-driven fund that invested in distressed credit and equities, and managed $1 billion in assets for investors including Julian H. Robertson, the Rockefeller family, and several highly regarded endowments. He also worked at Eton Park Capital Management, a large hedge fund spun out of Goldman Sachs, as the first analyst hired into the Special Situations Group.
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Transcript

Announcer: Broadcasting from Baltimore, Maryland, and New York City, you're listening to Stansberry Investor Hour.

[Music]

Tune in each Thursday on iTunes for the latest episode of Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here at the hosts of your show, Buck Sexton and Porter Stansberry.

Buck Sexton: Welcome, everybody, to Stansberry Investor Hour. I'm Buck Sexton, nationally syndicated radio host and, of course, your founder and fearless leader, Porter Stansberry, is with us.

Porter Stansberry: Buck, it was a great time out in Las Vegas. Glad we left when we did. The shooting started, luckily, the day after we left, which was a terrible tragedy. But I had a great time with you in Vegas. And what a turnout, huh?

Buck Sexton: Yeah, it was amazing. Incredible event. Really compelling speakers. It was great to get a chance to sit down and actually chat with many of them after they made their presentations. We might be presenting that audio as a little extra later on here. But yeah, it was fantastic.

Joining us this week at Stansberry Investor Hour will be CEO and co-founder of Stansberry Asset Management, Erez Kalir. Erez recently appeared at the annual Stansberry conference in Las Vegas where he discussed allocating your portfolio to value in an overpriced market, and why his China Internet play might be even than better than Steve Sjuggerud's. You can sign up and see Erez's entire presentation, and over 30 other timely investment ideas from the Stansberry editorial staff and special guest speakers like Keven O'Leary, by visiting stansberryvegasvideo.com. Again, that is stansberryvegasvideo.com.

And if you haven't already, please subscribe to this podcast on your Apple podcast app, on Google Play, Stitcher, wherever you find podcasts, and leave us that review or comment. It really helps us, and your feedback is essential to growing this show. And we really appreciate it, folks. And remember, you can get transcripts from Stansberry Investor Hour, additional information about our guests, and be notified each Thursday when we publish a new episode by going to investorhour.com and entering your e-mail. That's www.investorhour.com, and enter your e-mail. When you sign up for free today you'll get an account on the Stansberry Research website, so you could access everything you need to get the most from Stansberry Investor Hour.

Porter Stansberry: I have to say, folks, I've been putting on shows for investors for, I don't know… 20 years. I've never seen us produce something that was as slick, as well produced, as well coordinated. It was like a TED talk. It was a really professional show. And I found myself going, "I must be in the wrong place." [Laughs] "This can't possibly be our group. Everything is so slick and high production value." It was really a lot of fun, and the entertainment was amazing. Steve Ford, the son of Gerald Ford, the former president, gave a really wonderful, beautiful, insightful presentation. For me, he was the surprise of the show, because I just thought, "Oh. A guy talking about growing up in the White House, what's that gonna be about?" But it was really eloquent and poignant and left the audience in a great mood. It was really wonderful.

I want to compliment the Country Club Guy, here, for putting on such a great show. He runs our shows. And he did a superb job. It was world class. Congrats, Country Club.

Country Club Guy: Well, I appreciate it. Gone are the days of the alliance meetings where you have eight editors and one speaker who you could care less about. But I'm happy to put it on for you.

Porter Stansberry: It was world class entertainment. And the end of the show, we had a mentalist. Buck, do you know what a mentalist is?

Buck Sexton: There's a show called The Mentalist, but is it somebody who can read your thoughts or something?

Porter Stansberry: I don't know how he does it. He does these incredible … they're like magic tricks, but they're based on his ability to plant suggestions in your mind. So he pulls a guy out of the audience, and he starts questioning him. And he figures out where the guy went on vacation, or something like that. He couldn't have possibly known the answer to that question… You'd have to see it to believe it. But the thing that I loved about this particular mentalist was he had the greatest false close I had ever seen. He had a guest write something down on a piece of paper and put it in his pocket. It was someone's name.

Country Club Guy: A celebrity.

Porter Stansberry: A celebrity. Anyone famous you want to write down. Write the person's name down, put it in your pocket. The he was like, "I'm just gonna ask you a series of questions, and I'll be able to know who's name you wrote down." And so he says, "The trick is, you have to answer, 'no,' no matter what I ask you."

Country Club Guy: Well, the part of that … if I might jump in … is that he said, "Would you like $1100? I'll write the check out to you. You put it in your pocket. If I don't get it, you get to keep the money."

Porter Stansberry: That's right. I'm conflating the story. The person told the celebrity's name to someone else. And he said, "If I don't guess the name of the celebrity, you get $1000." And he wrote a $1000 check and put it in the guest's pocket. So anyways, he couldn't guess the name. The mentalist did a great job of selling it. He acted really disappointed. And that was the end of the show. That was the end of our entire conference. So it was this huge let down. Oh, the trick didn't work. And everyone was starting to file out, and everyone was disappointed. And then the mentalist goes, "Wait one second, though. You know, I didn't sign that check. I made it out to you, but I didn't sign it. I need to sign it, 'cause you won the $1000, and I don't want you to go home and not be able to cash the check. You earned it fair and square. So he runs out into the audience where this guest had sat down again. And the spotlight followed him. He pulls the check out of the guy's pocket. And instead of signing the check he'd written the name of the celebrity on the check. So he had figured out the name of the celebrity even before he'd asked the guy any of the questions. And I cannot figure out how he did it. It was really a fantastic trick. But the fun part was, he had the audience completely believing that it had failed, that it was a collapse.

So, Country Club Guy, a brilliant conference. Buck, so glad you could come out there and meet so many of our subscribers. And if you've never been to a Stansberry investment show before, you gotta come. Next year we'll be at the Bellagio, and we'll give you all the details later about joining us.

But Buck, today we have a great investor joining us. I don't know if you know or not, but my friend, Erez Kalir, runs an investment management firm. And he actually knows a lot about investing. And as that is the point of the show, I think we should get right to it.

[Music]

Buck Sexton: All right, our guest this week on Stansberry Investor Hour is Erez Kalir. Prior to launching SAM, Erez co-founded and led Sabretooth Capital, an invent driven fund that invested in distressed credit and equities, Sabretooth managed one billion in assets for investors, including Julian Robertson, the Rockefeller family, and several highly regarded endowments. Erez also worked in the Special Situations Group at Eaton Park Capital Management, a large hedge fund spun out of Goldman Sachs. He holds a JD from Yale Law School, and has completed advanced studies at Oxford and Stanford. But most importantly, Erez is a longstanding Stansberry Alliance member. Everybody pleas welcome Erez Kalir.

Porter Stansberry: Erez, it's Porter, here. Thanks for being on the show. It's very unusual at Stansberry Investor Hour that we actually have someone who knows what he's talking about when it comes to investment. So thanks for being with us. And I want to lead off with something I think that you'll remember very fondly. Back in 2012 you and I were of a like mind in regards to the oil business. We saw the massive amounts of capital that had been invested into the oil fields for the previous ten years, and we figured that capitalism would probably work, meaning ten times more money is going into finding oil, they're probably going to find ten times more oil than they expect. And I remember, you put together, it must have been 40 or 60 slides, this enormous slide deck that laid out exactly what was going to happen in the equity markets as a result of this huge new investment and new discoveries of oil.

Meanwhile, of course, the peak oil theory was still a popular idea, so there were some investors who believed we were going to run out of oil, in which case, any amount of capital put into the oil fields would prove a good investment and provide an adequate return. And you saw the exact opposite, that the markets were going to function normally, and that there would be an enormous glut of oil, and that investors were making ridiculously poor choices by investing in marginal fields. And the events have played out almost exactly like your slide deck projected. In fact, I still have a copy of that, and I refer to it even today, five years later.

The two questions I have for you is, 1. How do you find those kinds of big, important, big, dramatic three- to seven-year changes in the equity markets? And 2. What do you see that's like that, today?

Erez Kalir: First of all, Porter, thanks so much for having me on the podcast, but don't let me qualify as the rare guest you described who is an expert in anything. I'm no more of an expert than you are. I appreciate the kind word about the oil market, which we both studied in great detail back in 2012 and before then. Honestly, in many respects, I was a follower of some terrific work that Stansberry Research has done about that. The research that Stansberry has produced in energy, in oil in particular, dating back to the very earliest of the shale-oil boom, the shale-gas boom, then the shale-oil boom in the United States has really been outstanding, and has helped the kind of work that I've done a lot.

In answer to your question about how to identify thematic ideas, I don't know that there's any silver bullet. I think that it's very much about being curious, and trying to look at the world with what a Zen Buddhist might call a "beginner's mind," and just ask innocent questions about the world. I keep a running list of ideas like that in a journal. And they're pretty diverse and far flung. I think that it's … like you, I know that you're a voracious reader, and that you don't just read about investing or finance. You're an incredibly broad reader, a kind of Renaissance man. And so I think that reading really broadly outside the field of investing is really useful for that, as well. I've heard both Buffett and Munger describe themselves. I think Munger quoted his grandkids who spent a bunch of time with him, and described him as a book with legs. He's always got a book right in front of his face. He looks like a cartoon figure with a book as his head, and a human body as the part below. And that's a good an explanation as I can come up with for how to try and spot and identify these thematic ideas.

Porter Stansberry: Well, that was killer radio, right there folks. All I'm imagining is Erez, who is a very trim and youthful figure, as a pulp fiction book with legs, whereas yours truly is more like a Britannic encyclopedia with legs. [Laughs] But what's out there today that could qualify as that kind of major, thematic idea? And I want to go back and bring you back to where we were, not intellectually, but emotionally. I was 100% certain that there had been massive malinvestment in the oil fields. I've been following it since 2006. I had unbelievable amounts of evidence. The story had everything. It had gross over-investment. It had a false guru, the King Hubbard guy, the peak oil ideas.

And you had the involvement … which is the key … you had the thundering herd, you had every single individual investor in the world reading about the twilight in the desert … do you remember that, Erez? … how Saudi Arabia was running out of oil. And you had people appearing at investment conference after investment conference pitching these ideas, and the audience lapping it up.

And when you were contrarian to that, when you opposed it as I did, you got shouted down. There was this guy, Chris Martenson, who had an entire publishing company … peakoil.com, by the way, has since changed to peak prosperity. Chris was wrong about us running out of oil, so now he thinks we're gonna run out of everything else, which, of course, is laughable. These neo-Malthusian ideas never go away, they just change the title and republish.

So it was just one of these great themes, because we had so many things in line. We were contrarian. We had the right economics. They had the wrong economics. We had the facts. They had useless theories. They were making … the market was being based on these absurd conjectures. And we knew we were right, which meant we could bet big, because we were certain to be right. The only question was when we would be right.

And I wonder what's out there like that today. And I want to throw out an idea, but I really want … I want you to tell me, what is the big, thematic idea that you are so confident you can bet the ranch? And my thematic idea that I am so confident in that I believe I can bet the ranch for the next five or seven years is the idea of a debt jubilee. And I want to get to that next. But I want to know, what is it right now, with the funds that you manage at your investment firm, SAM, that you feel so confident in that you may not bet the ranch because, of course, you're a diversified, conservative investor. But if I had to tell you, "You gotta put your money in something for five years and you can't ever take it out, and has to be all of your money, what would that be?

Erez Kalir: Let me give you three ideas. I'll give you two on the long side, and one on the short side. The first long idea is one that you're gonna be intimately familiar with, Porter, because your childhood friend and business partner, Steve Sjuggerud, has written about it as eloquently, and as intelligently as anyone. I think that, for a five to seven year time frame, there is an incredible opportunity in China, and principally in the domain of the Chinese Internet and e-commerce. And I'm not only talking about the big Chinese Internet stocks that a lot of people are familiar with, things like Ali Baba, or Tencent, or Baidu, or JD.com., which I'm guessing a lot of your readers, in part thanks to Steve's terrific work, are already familiar with.

I'm also talking, to borrow an expression from the Oil Patch … I'm also taking about much lesser known picks and shovels companies, except they're not picks and shovels companies in the oil domain, they're picks and shovels companies in the technology domain, that I'm pretty sure are gonna be 5 to 10 to 20 daggers over the next decade in China. So, I'll give you just a couple of examples.

In the same way that we had, in the United Stated, companies like Digital Realty Trust, and Acquinex, which were ten daggers over the past decade doing nothing more sophisticated than building outsourced server farms where IT companies could, in effect, par for build computer server capacity. That market is basically just at its very beginning, and in its nascency in China. There's a small Chinese company with a U.S.-listed ADR called GES Holdings, which trades under the ticker GDS. It's got about $1 billion in market cap, which is an early leader in that space. I think that company is a good bet to increase its market cap by five to ten times over the coming decade, principally on the back of the growth in cloud computing capacity in China.

There's another company in this theme called ZTO Express, which really just specializes in package delivery and logistics. It has replicated the part of Amazon's value chain that has the expertise in package delivery and logistics that Amazon has developed globally in the United States. And ZTO offers that on an outsourced basis to a number of the leading e-commerce providers in China.

So, I guess the first idea that I would nominate would be China. The second idea on the long side, which I think is a big, juicy, thematic idea is also one that I think Stansberry Research has written very eloquently about. I don't know that there's anyone who writes about it actually more eloquently than Dave Lashmet, and that is, I really think that we're at a turning point in biotechnology, in many different kind of branches of biotechnology. I actually studied … I was pre-med undergrad at Stanford. I thought I was gonna go to medical school. I was a biology major. I have a biochemistry degree from Oxford, so I'm not like a total … I wouldn't describe myself as an expert, but I can find my way around a scientific publication without being totally blind to it. And it feels to me that we're at a place today in the kind of pace and significance of medical discovery that is evocative to me of where we were with PCs in the early 1980s.

Porter Stansberry: Erez, you know I went to University of Florida. So, you know what I know about biology? How to get girls pregnant.

Erez Kalir: [Laughs] Cool. Well, it's good stuff, Porter. I know that that's totally self-deprecating, too, 'cause I've heard you talk to Lashmet. You can probably speak more intelligently about the discoveries going on today in cancer biology than pretty much anyone.

Porter Stansberry: Well, I'm married, now, so I had to learn some other facts. But, sorry. I just had to interject there. I'm just very impressed with your knowledge about all that stuff, and I thought I'd make a little joke.

Erez Kalir: Cool. Well, I don't mean to blah, blah too much. But actually, the stuff that's being done now, you've got a sweet spot of companies in the space between $100 million and $1 billion in market cap. We're not talking about the Pfizers or the Bristol-Myers of the world. We're talking about smaller companies that are really at the leading edge of discovery. And the kind of stuff that is going down in that space today is so, so, so cool. I think that your children and my children … I know our kids are about the same age … are probably gonna grow up by the time that they're our age, they're gonna look back at the way a number of these diseases are being treated today, and it's just gonna seem like a totally different era compared to what's available to them, which I think is both incredibly cool, and for investors to find the right … either can do the work themselves, or can find the right tour guides, like a Dave Lashmet, to help them identify those ideas. I think that that's a really kind of killer theme.

Porter Stansberry: Yeah. I'm really excited about this new age of genetic engineering. The very first gene therapy drug received FDA approval 90 days ago. And there's this CRISPR technology that allows genetic editing. This stuff is medicine at a whole different level that I don't think people really have any appreciation for how important this is, and what will be done with this over the next decade. There's definitely a lot of money to be made in the biotech space. And what's interesting, Erez, is like you said, for most investors, this sector, almost like insurance, is just a realm beyond. They don't have the knowledge to understand the … to find the needle in the haystack, or to understand the wheat from the chaff … we can use any kind of metaphor you want.

Most people, like you said, they cannot find their way around a scientific journal. And I was making a joke about it, but that's exactly why I hired David Lashmet 15 years ago, or jeez, 18 years ago. So, he's done a great job for our subscribers over the years, and I think you're right about that.

So, we've got China, we've got biotech. You said there was three trends that you could invest heavily in for the next five to seven years. What's the third?

Erez Kalir: The third one, I think probably actually naturally intersects with the one that you alluded to or dropped at the top of the conversation. The third one is a short idea, or a short theme order, to be long volatility, and in particular to be long volatility in the domain of credit, which is really just a way of saying … you and I have discussed this a bunch of times before. We're at the intersection, today, of two long and big trends. One is a debt super cycle, where more and more and more debt has been piled on and into both the U.S. economy and the global economy. I think people tend to think that we "solved" that problem, or at least cleaned it out post the 2008 financial crisis, which is just factually wrong. And the other thing that has come hand in hand with that, that debt super cycle is probably about 35 years in the making, if not longer.

The other thing that's gone hand in hand with that is, since the financial crisis, because of this intervention of global central banks, we've also entered this era of … this Truman Show era of artificially suppressed and low volatility, which is what you get when the central banks put their big thumbs on the scale, and inject as much liquidity as they have into financial markets. And being short volatility, in other words, selling volatility, as been a killer trade since the financial crisis. Everyone who's done that has, at least to date, profited in doing it. To me, you know that there's a bell ringing when people are actually manufacturing or inventing ETF that allow you to be short volatility through an ETF product. But eventually … and I think these things will go hand in hand … that debt bubble will unwind. And I think that when that debt bubble unwinds, it will also be a massive unwind in the short volatility bubble.

This is basically just a circuitous way of saying, "I want to be long credit volatility."

Porter Stansberry: Here's an interesting fact for you. These are round numbers, but you know how I feel about round numbers. If you get too specific you're probably fooling yourself, 'cause they're always changing. But there's about one and a half trillion dollars worth of student loan debt outstanding today, Erez. And here's a fun fact about that. That was as much money as the entire federal government owed in 1985.

Erez Kalir: Wow.

Porter Stansberry: Here's another fun fact for you. One US corporation … one … AT&T is now carrying more debt that the entire Republic of Ireland. And also, I could name another 50 countries for you. AT&T is now one of the largest sovereign borrowers, except one little detail, it's not a sovereign country. [Laughter] But AT&T can't actually tax people and force them to pay back those debts. The last time I saw a company that was one of the ten leading sovereign borrowers, it was General Motors in 2005. And you know what happened next.

My guess is that AT&T ends up being about as qualified as General Motors was to pay back those loans. My bet is that the amount of credit that has been stuffed into wireless networks makes it impossible for any of those companies to maintain market share or profits. My bet is that Sprint goes out of business within … goes bankrupt. I don't know if it'll be liquidated … goes bankrupt within the next three years and defaults on over $30 billion in debt, making it one of the top ten bankruptcies of all time. AT&T will not be far behind.

And what will the federal government do? Bail to the cell phone companies? Are we going to pay… Are we gonna write checks for everyone's cell phone bill? I know there's an Obamaphone. Maybe there will be an Obama telephone network here shortly, ladies and gentlemen.

And the other thing that I want to point out is, that students, 18 to 24 year olds now owe as much money as the federal government did in the mid 1980s, which is not that long ago. And here's a very simple wager for you. Currently more than 40% of those obligations are not being serviced. That does not mean that they're currently in default, because there's all kinds of ways students can avoid paying back their loans. Federal government's much like an over indulgent millennial parent, in that regard.

But very simple bet for you, Erez. Virtually none of those debts will ever be paid. And within this debt cycle, that will be the crisis that leads to what I predict will be the jubilee. There will be some kind of national individual debt restructuring where people, largely because they're old enough to vote, will be allowed to not pay their debts. The question is whether that will be a deflationary … cause a deflationary spiral, or will that cause an enormous inflationary spiral? We don't know. It depends on whether or not the debts are simply written off, or whether there's money that prints them over. And, of course, we can't predict the future, but we can bet that with average student debt now at $37,000, that those loans will not be serviced, and they will not be paid. And we will look back on the last decade and wonder how much of the prosperity we believe is real is really nothing more that the student bubble?

Sorry. My phone went off. It's my wife's birthday, and I'm planning a surprise. Don't tell her.

Anyway, that's my debt rant. I know we were supposed to be listening to Erez in this segment, but I feel very strongly that anyone who looks at the facts of the current debt cycle, it's just completely mind boggling. Erez, I know you and I have talked about this for years. But it's just crazy. And here's another fun thing. American consumer debt is now large than it was before the '08 crisis. So consumer debt includes mortgages, cars, student loans, credit cards, all that stuff. There's more than $1 trillion in credit-card debt. There's more that $1 trillion in credit-card debt.

And here's another interesting fact. The amount of debt, as a percentage of income in the United States, has changed a lot in the 20 years for certain people. So if you break down the American public into deciles, based on income, there's the top decile, the top 10%. They make a lot of money. Those are people like Buck, Erez, Porter, Country Club Guy. They do very well. Then there's the next decile …

Buck Sexton: Buck doesn't belong in that decile.

Porter Stansberry: Oh, please. Oh, please. Then there's the next decile. They do very well, too. That's like the guys in the control room. You never hear their names. We won't let them out. We keep them in a cave. And you go so far down the line. Then there's, of course, the bottom two deciles. These are the people that we see living in Baltimore. They don't have homes that you would consider to be safe. They generally don't take care of their children. They've never had a bank account. They may have substance abuse problems. They're the kind of people when you see walking down the street, you avoid. You cross the street to be away from these folks. They're poor because of their choices, by the way. I'm firm about that. If they made better choices they wouldn't be poor for long. But, of course, that makes me a bad person, and we can't talk about that.

Sorry, Erez. I know I'm dragging this out.

But the point I want to bring up about this debt cycle is, over the last 20 years, we've all added a lot more debt. But in terms of income ratios, the top decile hasn't changed. In other words, rich people haven't borrowed any more money than they used to. As you go down the deciles, though, Erez, what would you expect happens?

Erez Kalir: I would guess that the debt ratios have become a lot higher. And then people lower down in the income ladder have just gotten a lot more leverage.

Porter Stansberry: The people at the bottom two deciles have gone from having same kind of debt ratios as wealthy people, to having debt ratios that are absurd. Over 250% of income. It's payday loans. It's subprime autos. It's subprime mortgages. It's subprime credit cards. This … The thing that most defines this credit cycle, Erez, is the extreme, the extreme low quality of the borrowing. It makes the debt more expensive for the economy to carry, and I've never seen anything like it in history. We have truly lived in an age where the rich have piled onto the poor. And they have done so, not by exploiting their wages, but by exploiting their propensity to borrow. It is extraordinary.

Erez Kalir: Yeah. Disheartening. And both economically messy and politically messy.

Porter Stansberry: The real problem with those bottom deciles is, not only do they make poor choices for their health, and for their wealth, and in terms of making violent decisions, they also make very, very poor decisions at the polls. The tend to vote for people like the crack-addicted former mayor of Washington, D.C., among others. And they get the leaders that they deserve. And unfortunately, that rubs off on the rest of us when it comes to the presidential choices that they make. So, I think it's gonna be a fascinating election in 2020, when you have the rich white guy, aka Trump, vs. whatever the radical progressives can find. And imagine how that … Buck, you should jump in here, of course … imagine how that presidential primary will go. Imagine the Democratic primary. It's gonna be a question of who can promise the most absurd thing. Not only free college, let's just go ahead and pay back all your student loans. And then there's Mark Zuckerberg-er who's gonna give everybody a standard income. So who do you want to vote for, Buck and Erez? Are you gonna vote for the guy who promises to give you $20 grand a year, or the guy who promises to give you $40 grand a year, and wipe out all your debts? What's your vote, Erez? How are you gonna go down on that?

Erez Kalir: [Laughs] I'm gonna write in someone on the ballot.

Porter Stansberry: [Laughs] Well listen, we should probably get back to something that revolves around useful information. I know you've been on the phone with us already for 30 minutes. So I'm just gonna hold you to one more question. And the question I have for you … Folks might not know this, but you run an investment firm that does something that's a little unusual. You have what's called "managed accounts." So instead of running one fund that everyone piles into, you create custom accounts, or semi-custom accounts for every client. The nice thing about that is it allows you to start people out in the right stocks, instead of just in the stocks that you have, some of which will inevitably be overpriced in a mutual fund when you buy it.

The question I've got for you, though, is what makes for a good client of an investment firm? Because I can tell you this, it doesn't matter how good the manager is, if the client is driven by emotions, or allows fear or greed to get the best of him, you will not be able to deliver good results. The client who sends you all of his money at the top of the market is not gonna do well. Likewise, the client that calls you in a panic at the bottom of the market and demands all their money back is not gonna do well. So, what kind of client gets the best results from a money manager like yourself?

Erez Kalir: Wow, what a great question. No one has ever asked that question. So, maybe I can answer that question by sharing an anecdote. We're really fortunate and at SAM to have a client roster that includes some really incredible people, people who are in many important ways, much more accomplished than I am, in terms of what they've managed to build as entrepreneurs in business. And I would put you in that category, Porter. But there's a gentleman, who I won't name, who is almost certainly a billionaire. He had an incredibly successful investment banking career in the first half of his career on Wall Street. And then decided, in some way, that investment banking was too … there was too much financial engineering, and not enough proverbial dirt underneath his fingernails.

So, he walked away from his leadership position at one of the top investment banks on Wall Street when he was in his early 40s. And he went off, went back to Texas, which is where he was from, and proceeded over the next coming decades to become an oil wildcatter, and to build and sell three successive extraordinary successful oil companies, the last of which he sold to EOG for about $1 billion. So, this gentleman has really seen and done it all. He's seen and done it all on Wall Street, and he's seen and done it all as a successful serial entrepreneur in one of the hardest areas in which to be successful as a serial entrepreneur.

And he came to New York about nine months ago, and asked to meet me for breakfast to talk about investing some money with us. And he's a kind of gruff guy, so I met him over breakfast. And one of his first questions was, "Erez, I understand that we're in bull market, stocks moving up. If you were in my position, what do you think would be a prudent rate of return for me to ask you for, if I were to invest capital with you?" And I swallowed hard, 'cause I didn't know whether the answer that I was about to give him was gonna go down well. I expected him to laugh in my face, or basically maybe even to make fun of me. And the answer that I gave him was, "Look. In a market like this, if I were investing this kind of capital, I'm not really sure that I would look for much more than 5, 10% after fees."

And again, I was expecting him to throw up on that, because, as we all know, stocks, since the 2008 financial crisis, have been … the S&P 500 has been advancing at a rate of about 15% per year. But this gentleman looked at me, and he smiled. And he said, "That's exactly what I was hoping you would say. If you'd given me a number that were higher than that, I would be quite concerned that you would either just be chasing the market, or taking on imprudent risk. And if you think that you can invest my capital in the market in ways that are not just market chasing, where you're running a synthetic S&P fund and you can earn me that return safely in a way that doesn't put my capital at a risk of undue impairment, you're gonna end up managing a lot of my money." Suffice it to say that this gentleman ended up investing an amount north of $20 million with us.

But in any event, that's a long-winded answer to your question, Porter, but I … let me boil it down. I think that good clients these days probably have three essential qualities. The first is, they have realistic expectations about what they're looking for. They're mindful of the Warren Buffett saying: "To be greedy when others are fearful, but fearful when others are greedy." So that's number one. Number two, they're long-term minded. And number three, at least in so far as SAM is concerned … and I know I, or at least I think I speak for you as well, 'cause I know how you positioned your total portfolio for Stansberry Portfolio Solutions. Like Warren Buffett, and like many of the world's leading investors today, at least in this market environment are clients who are not afraid of holding at least a little bit of cash on the sidelines. So that's my long-winded answer to your question.

Porter Stansberry: Very good. I hope I end up being a very logical and reasonable client. You guys… Listeners out there should know that a 100% of my equity investments and my children's equity investments are with Erez at SAM. And there is no stronger, finer endorsement that I could possibly make. If you have more than a half million dollars in investable assets, and you want the services of a money manager, you will not find anybody better than Erez. Trust me. I have met them all.

Erez, thank you very much for joining us. If people are interested in a meeting with you, do they need to come to New York and sit down with you in person? Or is there a number they can call?

Erez Kalir: Not at all. They're absolutely welcome to come to New York and meet me in person. Delighted to take that meeting. We also have a small office in the San Francisco Bay Area where the president of our firm, Molly Lienesch, is based. But, for those of you who don't pass through either San Francisco or New York, our number is 415-849-9480. Again, 415-849-9480, or if email is easier it's just [email protected]. The "AM" stands for "asset management." So Porter, thank you so, so much for the chance to chat with you here. It's always a blast, and I always learn something.

Porter Stansberry: Erez, you're very welcome. And for the listeners out there, I want to make just one point very clear. Stansberry Asset Management is a separate business entity, completely different board of directors, a different ownership group than my publishing company, which is Stansberry Research, of course, as you know. And the two don't mix. Erez manages Stansberry Asset Management in New York. And I, of course, am involved in the management of Stansberry Research in Baltimore, Maryland. It's important for me, just to make sure everyone understands, Erez does not have any kind of early access to our newsletters. He is a subscriber, just like everybody else. And his management choices, his investment choices, are going to be different for each individual client. So it's not as though you get to invest in my newsletters if you put your money with Erez. He's a money manager who relies on our research, but there's not … it's not as though you're gonna have Steve Sjuggerud or Porter Stansberry managing your money, because we don't do that. We just do research.

Erez, anything else you want to add to that disclaimer?

Erez Kalir: No, I think that covers it, Porter.

Porter Stansberry: Okay. We'll visit again. Thanks for joining us. And listeners out there, I want to, again, just remind you, Erez is a great asset manager. If you're interested in that kind of service, you should definitely consider him. And the other thing I wanted to tell you is, whether you have an asset manager or whether you manage your assets yourself, your most important choices actually are not which stocks you by … and most people believe that's what it comes down to. It's not. It's which asset classes you choose to invest in, how much you invest, and the timing of those investments. If you want to be successful, either by using an asset manager or, of course, doing it on your own, it's very, very important that you understand that factor.

So, any asset manager is gonna give you a return that's correlated to the stock market, if you're investing in stocks, or to the bond market if you're investing in bonds. So those choices, how much you put in stocks, how much you put in bonds, and how much you put in cash are the ultimate variables that matter. And I just want to make sure everybody understands that 'cause we talk a lot about individual stocks on the show. But really, your long-term returns are gonna be dictated way more by your asset class choices than by your individual stocks.

Erez, thanks for joining us, and look forward to speaking to you soon on other matters.

Erez Kalir: Thank you so much, Porter. Cheers.

[Music]

Buck Sexton: He's a very affable and well-intentioned fellow.

Porter Stansberry: He's brilliant. It's … Most people just don't understand this about Erez. He was managing $1 billion for Tiger Management for Julian, who is, as you probably know, a legend in the investment world, and one of the most successful hedge fund managers of all time. In the same league as George Soros, and Warren Buffett. And Julian Robertson was the largest seed investor in Erez's fund, which is an extraordinary testament to Erez's talent. And you just, generally speaking, you're not going to find a guy like that managing money for you if you open an account at Edward Jones or something. Nothing wrong with any other broker in the whole world, but you're not gonna get Erez's incredible brain and his enormous network. You're not gonna get those advantages unless you're with Stansberry Asset Management.

Plus, basically you get a hedge fund, but you're only paying less than 2% a year. It's a bargain, and it's where the whole industry is going into those kinds of fee structures. So, call him if you're interested. And otherwise, let's get to the mailbag.

Buck Sexton: All right. Let's get into it. First up in mailbag this week on the Stansberry Investor Hour, we've got number one. "Porter, In the last couple of episodes it's been mentioned that it would be wise to diversify wealth outside of the United States stock market and banks. I'm fairly new to the investment game, as a millennial," oh, a millennial, "and I have a modest portfolio." Me too, buddy. "So I can't go out and buy gold coins and bullion, let alone a random storage unit in which to store it. Being young, I do have a higher risk tolerance, so I've been looking at the Mexican bank rate. I believe U.S. corporate tax reform, possible changes in NAFTA, and maybe even the knee-jerk reaction that could come from talk of building Trump's wall will spike the exchange rate. Assuming these events play out, what are your thoughts on taking advantage and parking U.S. dollars in a high-rate Mexican fixed-interest vehicle? The current bank rate in Mexico is around 7%. A big Stansberry fan, subscriber, and novice investor, Mike."

Porter Stansberry: Well Mike, my first answer is you should just send that money to me, because I won't pay you anything on it, but I'll at least send it back to you in ten years, and you'll have it, which is better than you're going to get if you put it in the Mexican peso. But, a more sincere answer, I have not studied the currency of Mexico in some time, because the historic track record of the peso is not so brilliant. It's probably not a place I would consider investable in terms of currency. Now, having said all that, let me also posit another answer, with a little even more sincerity and significance. There is a fantastic investment strategy that's called "Max Yield." And it was invented by a guy who used to be a very close friend of mine, Chris Weber. Unfortunately we had a terrible falling out in business and, as a result, we're no longer friends. But Chris is a brilliant investor. And he created this idea called Max Yield. So I want to give him credit for it.

And the idea is you look around the world at the 20 largest OECD countries. I believe Mexico is one of them, although I can't swear to it. It's been a long time since I studied the IMF tables. But basically you define that as your investable universe. And you look for the country that has the very highest bank rate at the start of every year. So on January 1, Max puts all of his cash, all of his banking money, the 10 or 20% of your portfolio you keep in cash, into the highest yielding currency in the OECD, regardless of any other factor. So you're not looking at their trade deficit. You're not looking at their current account. You're not looking at the risk of default in terms of a massive devaluation. You're just looking at the yield.

So, I know, for many years, Turkey is the Max Yield country, because of the … it's a fringe European economy, and they have a weak currency, and they have lots of potential unrest. There was an attempted coup there just recently. Buck would know way more about that then I do. But the point is you just go for yield. And you make a bet that most of the time, nine times out of ten, the yield is going to be more than the inflation will cost you. And so, most of the time your wealth is gonna compound at a nice rate. And I haven't seen … I have not seen an updated Max Yield study for some time, but I do know, long term studies of this strategy are ridiculously successful. So you're looking at compound and annualized returns doing the strategy historically of between 10 and 12% in cash.

So, the idea you have is actually a lot more sound than my initial flippant answer. But I just don't know enough about the Mexican currency today to know if that's a good bet or not. It sounds reasonable to me. But you gotta be careful. This is not a long-term strategy. You change the currency you do this in every year. Because eventually, these places always devalue. It's just the timing of it that's variable.

Buck Sexton: All right. Up next on the mailbag for this week's Stansberry Investor Hour we have D.S. writing in to say, "I'm a former long armer and current Alliance member. Buck, long time listener to you and Glen." Thank you, D.S. "Loving the new show, you two, Porter and Buck have put together. My question is about China's plan to buy oil with yuan," am I messing that up?

Porter Stansberry: No. That's the yuan. It's sometimes called the renminbi.

Buck Sexton: Yuan, okay. Making sure. I studied Arabic for awhile.

Porter Stansberry: Dollar, buck, cash. There's lots of names for U.S. currency, too. The yuan.

Buck Sexton: Yeah. I think the renminbi I prefer because that one you can't mess up, right?

Porter Stansberry: Well, it has a little more pizazz. Oh, renminbi.

Buck Sexton: Is it gernica or guernica? People get very …

Porter Stansberry: Gwangzi? Do you have an gwangzi? Can I get some fresh gwangzi please?

Buck Sexton: I might even go with the Spanish, never mind the Chinese. So, I'm working on it. But the yuan, I got it right. I'm happy about that. "My question is about China's plan to buy oil with yuan convertible to gold. Looking at the world's supply of oil, a lot, versus the supply of gold, limited, do you see this putting upward pricing pressure on gold? Also, Porter's absolutely right about North Korea. It is horrible beyond words the number of people who would suffer and die in the conflict. If it comes down to a fight, though, North Korea should cease to exist. This would likely save more lives in the long run, just as dropping the bombs on Japan did over a full-scale ground invasion. Thanks again, guys."

Porter, you want to do the gold part first? Then you can talk about domination of a conflict with North Korea.

Porter Stansberry: Yeah. We can get into North Korea quick. The gold thing is, the answer to that is absolutely. I also think all of the virtual currencies are bullish for gold, because inevitably, there are going to be problems as that market matures. There just will be. And when people want to get out of their virtual currencies, either for the short term or forever, if they have a bad experience, they're not gonna want to go back to the paper money. They want to go back to something that's anonymous. And gold, of course, is. Let's not dwell on that. I think that's an obvious answer.

The North Korea thing I want to touch on again because I just got finished watching the amazing PBS series on Vietnam. There's a new Ken Burns film. And it's ten episodes long. Each episode, I believe, is two hours. And the footage and the story telling and the analysis of what happened is truly breathtaking. And it's really cool to watch the guys who made those terrible decisions discuss it, explain how they got us into that mess. And it was so revealing. When the truth was being told about our South Vietnamese partners, our allies, how corrupt that regime was. And a lot of these very senior soldiers … in fact, the guy who ran the Air Force in the First Gulf War said point blank, "We were on the wrong side." That was just chilling.

Anyway, the point I want to make about all that is there was something like 3 million civilians in Vietnam killed in that war, which went on from 1945 until 1975. And Buck, you'd know better than me, but my bet is that if we had just told the Vietnamese in 1965, "You're going to respect this border, you're going to respect the DMZ, and we're going to have an election. And if you win the election, fine. Then Vietnam will be reunited under the communists." They would have said, "Great." But you know what happened, of course. We would never … we would never agree to the election, which was where the whole war came from. But never mind the facts. Let's just pretend that we wanted to end that conflict with the bomb. My point is only that if we had just dropped a bomb on Hanoi at the start, that a whole lot less people would have been killed.

And that's my point about war. There is nothing civilized about war. War, itself, is a crime. And there are crimes throughout war on both sides. There's no such thing as civilized war. And so I think that's more clear to society when the starkness of an atomic bomb is used. And I think that atomic bomb, that terrible reality, instant reality is the only thing that will drive people to a political solution. And that's why I think we should tell the North Koreans, "Knock the crap out. Stop lobbing bombs over Japan, or else." And I think if we behave that way, if we said those things and did that, I think the world would be safer. And I actually think there'd be a lot less violence.

Buck Sexton: There's also the Tacitus approach. Roman historian. The "create a wasteland and call it peace." So, you could always go all in on whatever your problem is and solve it if you have the upper hand with force. It's a question of are you willing to make that moral calculation? I wonder, though, if we have … Let's … We have one more here that I wanted to get to on the … 'cause you would …

Porter Stansberry: I want to ask you a question about that morality. Is there anything more moral about murdering lots of innocent people slowly, as opposed to quickly? I know people get upset about Hiroshima and Nagasaki, and I understand exactly why. But the reality is, in war, lots of innocent people are going die, and/or starve, and/or be killed by disease. It's going to happen. So the only way, if you really take a moral view is, "Well, we can't have war." Well, okay, great. But we didn't start a lot of these wars, although we did our fair share. My …

Buck Sexton: Well the overall cost …

Porter Stansberry: So, what's the difference? What happened in Iraq? How many innocent civilians have been killed in Iraq over the last 20 years of our involvement there?

Buck Sexton: Yeah. But you have to work in the unknowable. And people still criticize Rumsfeld for his know unknowns, versus unknown unknowns. It's actually a good way to think about a lot of national security problems. No one will know what the full scope of casualties will be. And we talk about Iraq, that's one example I'm very familiar with. And …

Porter Stansberry: But what do you think it is? Look. We engendered a civil war. We've bombed the country from the stone age to the stone age. How many people? How many lives have we destroyed by our involvement in Iraq?

Buck Sexton: By Mideast standards, Iraq was actually a pretty urbanized country. Afghanistan is pretty stone age. But Iraq actually was pretty developed in a number of areas, or at least comparatively to the neighborhood. I would say that, if you could make the calculation of what the overall casualties were and know it, then maybe dropping a bomb in the beginning to stop it would be something you'd be willing to do. But Porter, people don't know. And so to say we'd drop a bomb on Hanoi to end the conflict with Vietnam, or to prevent the conflict with Vietnam, well, no one ever thought that we were gonna lose 50,000 U.S. soldiers, or we were gonna have 50,000 casualties in Vietnam, right? That was never the …

Porter Stansberry: Right. So my math on that, I'd go back to … you mentioned Tacitus … I'd go back to Aesop. "A bird in the hand is worth two in the bush." So I can know, roughly, the casualties of dropping a bomb. And I can't know what the casualties of a long, unlimited war would be. So if I think it's roughly … I think the bomb is not … is half as much as a long war, I'm probably making a good bet.

Buck Sexton: Yeah, but then again, if Vladimir Putin may decide, "You know what? If I just take out Kiev, the rest of Ukraine will be quiet. So, if America can do that, so can I." You set a precedent, as well. We're not the only people with big weapons that make big booms.

Porter Stansberry: Of course. But that would obviously be a war of aggression. And I think you'd have a different outcome. It'd certainly be seen as …

The other thing that I wonder about is, how the hell can we keep asking the poorest members of our society, for no wages, to go put their lives at risk, when we have a tool back here that makes it all unnecessary? People say they lost a lot of people. The soldiers talk a lot about the waste of how many people were killed, soldiers were killed, in Vietnam, for what? Nothing. We lost the war. The North Vietnamese won. We pulled out. We quit. They took over. There was a 25-year economic catastrophe there as a result. Why were all those lives spent? Well, even if we'd won the war, I'd still … if I was a soldier, I'd still be like, "Why the hell did 50,000 of my friends have to die when you wouldn't even use the one thing that could have ended the war in a week?" Wouldn't those lives be just as wasted?

Buck Sexton: Oh, the calculation about the U.S. bombs in Hiroshima and Nagasaki, to this day, most historians, I think, come down on the side of it being less … the human cost being less than it would have been if we had had an invasion of the Japanese mainland, based on the islands that had gone before. By the way, as an aside here, I saw Hacksaw Ridge on the way back from the Stansberry Conference on the plane. If you have not seen it, excellent movie. And I hate most movies these days. This is a really good movie, and it's about fighting on … I'm actually blanking on …

Porter Stansberry: Palau or one of those numerous islands.

Buck Sexton: No. It was …

Porter Stansberry: Okinawa.

Buck Sexton: Yes. I think it was.

Porter Stansberry: Guam.

Buck Sexton: I think it was … No, it wasn't Guam. I think it was Okinawa. Now I'm telling you I liked the movie, and I'm forgetting where the island was where they were fighting. Do you want to …

Porter Stansberry: Yeah, let's go on. We've got one more piece of mail, and we have definitely over stayed our welcome in terms of our blood thirstiness for using the nuclear weapons.

Buck Sexton: Yes. It was Okinawa, by the way. So I was right. I just … I thought I got confused, 'cause I also really like the Clint Eastwood movie that takes place on … in WWII … Okay. I'll move on.

So, Porter …

Porter Stansberry: What … a book recommendation in the same area. It's something … I think the book's called Flood Tide. And it's about the battles for those final islands, Saipan and Okinawa. It's a fantastic book. I just read it about three months ago.

Buck Sexton: All right. Let's get into number three here in the mailbag. "Porter. You were wrong. Hillary is not stupid. She and Bill, together, are the best politicians of our time. I say that pejoratively, of course. Every politician has skeletons in their closet. And she has a big walk-in closet, full of skeletons right next to her broom. She's a good politician. The problem with Hillary is that the paradigm changed, and she didn't see it. She isn't stupid. She just sucks. If you want a good Porter horse laugh, I highly suggest you read the feedback section on Amazon for Hillary's new book. It's priceless. And these are the comments that Amazon didn't remove. I agree on the time allotted to guests, time is preferable. "

Porter Stansberry: That's probably pretty funny.

Buck Sexton: "Love your work. Keep it up." This one's from Kirk. Yeah. I've actually … I'm in the middle, right now, of the What Happened? book by Hillary Clinton. It's nothing new, but it's amazing to see that she is able to find blame for everyone else but herself, really. She says that she takes responsibility, but then she pushes it on everybody else.

Porter Stansberry: Let's talk about anything but that.

Buck Sexton: [With Bill Clinton accent] "Bill Clinton comes from the same school of biology that Porter does."

Porter Stansberry: That's right.

Buck Sexton: [Clinton accent] He's got the same expertise.

Porter Stansberry: He was the … the listener said that Hillary sucks. And I was thinking that Bill probably would argue. [Laughter]

Buck Sexton: Now I'm gonna get in trouble.

Porter Stansberry: Oh, boy.

Buck Sexton: Some of my radio listeners are gonna be like, "Good heavens. What is this man saying to you?"

Porter Stansberry: I'm driving Buck down into the weeds.

Well listen, folks, thanks very much for your letters and your views. We … love us or hate us … just don't ignore us. It's very important that we hear from you. You may not know this, but the podcast is not the most lucrative thing we do here at Stansberry Research. But we love interfacing with you guys. So, send us the feedback, especially if there's arguments that you want to make that are counter to what you have heard. We like the criticism even more than the praise.

Buck Sexton: [email protected] is a great way to let us know what you think. If we use your question on the show, we'll send some Stansberry Research swag. Love us or hate us, just don't ignore us. And next week it's gonna be an American consequences takeover with P. J. O'Rourke. We'll get into the upcoming issue of American Consequences, P. J.'s latest discussion with President Thomas Jefferson in Las Vegas, and maybe a surprise guest.

Thanks again, everybody, for listening this week. Please do subscribe to the podcast, and share it with a friend. Tell some folks about it. It was great to get a chance to speak to so many Stansberry subscribers and supporters in Vegas, and hear that they like the podcast. So please spread it around. Have a great rest of your week. We'll see you again this time next week on the Stansberry Investor Hour.

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Announcer: Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your email. Have a question for Porter and Buck? Send them an email at [email protected]. If we use your question on air, we'll send you one of our studio mugs.
This broadcast is provided for entertainment purposes only, and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research, and is copyrighted by the Stansberry Radio Network.

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