Episodes

Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.

Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today, we'll talk with a friend of mine, investor [and] author Vitaliy Katsenelson. I've known this guy for a decade, and he's going to talk about something today that I never ever thought he would do. This week in the mailbag, lots of great stuff. Inflation in taxes Kodak, Tesla, and more. In my opening rant this week, I'll talk about Kodak and Crony capitalism one more time. There's a little bit more to say about this, and I'm going to say it today. That and more right now on the Stansberry Investor Hour.

One more time, guys. Kodak. We've been all over this for the past two weeks, right? I told you they got a $765 million loan to get in the drug business. Kodak, the film camera company getting into the drug business. Turns out in their 131-year history they actually were in the drug business for six years from 1988 to 1994. It was a failure. They got out. And it's notable that they got in in 1988, two years before the recession set in, right? Typical top-of-the-cycle "deworsification" kind of acquisition move for a company that's being managed into the ground.

So fast-forward to the recent episode, again, and we're back in the drug business with the $765 million loan from the government. I thought that was just kind of crazy enough all by itself because it sent the stock soaring from $262 on a Monday to $60 at the peak on a Wednesday. And, you know, the third trading session for the week in that week. Just insane. OK. That was crazy enough, right? Then what did we talk about last week? Well, they granted themselves stock options the day before the [laughs] announcement. Like, that's not fishy. Like that's not a crony capitalist move, you know, to just try to rake some of this money off the top for the management team. OK?

Now, this week there's other stuff going on. So since last we talked, the SEC is investigating this thing. And the loan from the, you know, international – the government agency that's called the DFC – the Development Finance Corporation. The DFC loan is on hold. And the stock, as I speak to you, is below $10 again. And if you look at the stock chart of the last several days, it looks like it was flatlined. You know, like somebody whose heart stopped. And then, wham. They hit it with the paddles, and now it looks like its heart stopped again. It's a ridiculous episode, but I feel like I need to clarify something because of at least one feedback e-mail I got.

In this case, no, it is not OK for these executives to get stock option grants. It's not OK. And it wasn't OK for them to get them – I don't believe – even back in May, right? I put together a timeline. I wrote a whole piece about this for the Stansberry Digest. And I put together a timeline. And my timeline showed that the order – the executive order from President Trump – was May 14. Two days before that, Kodak moved $70 million from a Chinese subsidiary to a U.S. subsidiary, quote, "In anticipation of an intercompany transaction." End quote. I believe starting up a new pharmaceutical subsidiary constitutes an intercompany transaction, right?

So that was actually May 12. May 14, Trump issues the executive order and invokes the defense production Act and says, "Hey. You know, let's lend money to companies so that we can produce drugs domestically. Because too much drug production is overseas and places like China and India." By the way. If you research that, it's not completely true. We'll talk about that maybe another day. Kodak made the director option grants the first time on May 20 – the day of their annual meeting. So eight days before, they're moving money from a Chinese... from a foreign subsidiary to a U.S. subsidiary in anticipation of a major transaction. Then Trump invokes this Defense Production Act, which just appropriates money for national security, right? Two days later.

Then six days later, they grant themselves these options at premium prices. Huh. Then approximately May 28, according to an interview with the CEO, Kodak and this government agency start talking about its new drug business. Hmm. Then on July 27, these idiots grant themselves war options. Then July 28 – and it leaks out. The stock was up 25% that day. The news leaked out. And then July 28, the big announcement, right? $765 million loan to Kodak. The shares were up fourfold that day. July 29, the stock price hits $60 and the volume that day is like 160 times the previous day.

And the previous day was 22 times the day before that. Next day, July 30, a fellow called Mike on Non-GAAP Thoughts – which is a newsletter that he writes on Substack – Non-GAAP Thoughts. He writes this article citing these suspicious option grant dates and strike prices. Next day, July 31, Wall Street Journal publishes an article citing the potential, you know, 90 – they said $95 million windfall for CEO Jim Continenza. You know, and there were others on the management team who received the options too. August 4, Wall Street Journal publishes an article citing a new SEC investigation into the disclosure of the loan and the option grants, right?

Because it looked like the loan – the news of the loan was leaked out on the 27th... I think is really what they were concerned about. But the whole thing stinks. And let me tell you something. What I alluded to earlier when I said, "I need to make something clear about this" – this is not the way capitalism is supposed to work. A corporate management team is supposed to make a lot of money... they're supposed to get $95 million for creating a business that has performed well for a period of time... that has generated, you know – for $95 million bucks, you better be generating, you know, at least $1 billion or more – couple of billion, hopefully – in free cash flow over a period of time consistently, right?

A real, sustainable business for that kind of reward. You don't get paid that kind of money just for getting a loan to be in a business that you were in for six years out of your 131-year history and sucked at. OK? That's not the way this is supposed to work. This is the rankest crony capitalism, the rankest crony capitalism. And crony capitalism is when you get paid for knowing people, right? It starts looking suspicious back in May when they're moving $70 million bucks from China to the U.S. It looks like they already knew they were going to do something. And then, oh, two days later Trump invokes this executive order appropriating these loans for this kind of stuff. Oh.

And then, oh, six days later we start granting ourselves options at prices that suggest we know the stock is going to take off like a rocket ship." Then we do it again on July 27 just to show you how utterly stupid we are. This is not the way it's supposed to work. What they did here was, they just took money from... well, you know, this is government money. So you could say they took taxpayer money, and they said, "Hmm. How can we get way too much of this money in our own pockets? Oh. I know. Let's grant ourselves a bunch of options." OK? You understand now? I don't have a problem with option grants in general. I realize people need to be incentivized. It's just the way things are nowadays, right?

To attract good management, you got to pay them what looks like way too much money a lot of the time. But this is not that. This is a management team taking money from taxpayers – and really, taking it away from shareholders as well. They're giving themselves equity for free that the shareholders have to buy in the market. This isn't the only episode of this you're going to see. There was a smaller episode that I kind of filed this away... I didn't think I was going to mention it. But there was a guy, David T Heinz, in a story in the Washington Post, July 28. I mean, it's all allegation, so I don't know. I'll just say this poor fool apparently borrowed $4 million in this federal PPP – Paycheck Protection Program – it was part of the CARES Act, right? The CARES Act was that $2 trillion coronavirus bill that was signed into law in March.

And it included $349 billion in forgivable loans for small businesses to maintain operating expenses. Mostly payroll, right? That's why it's called Paycheck Protection Program. So you can just pay your employees even though maybe you're running a restaurant and they have to stay home because of the COVID-19, right? So this guy gets almost $4 million from this program, and then a week later people see him riding around Miami beach in a Lamborghini. [Laughs] A brand-new Lamborghini. Lamborghini Huracán EVO, – which I guess that's an electric Lamborghini – costs more than $318,000.

Again. How stupid is this guy? That's like granting yourself the options the day before the loan announcement. You know? And of course, these things are ripe for this kind of abuse. This is what you get when the governments starts like literally throwing money around. All this is done very, very hastily, right? Because we think we have to act. "We have to act now." And so, this is what you wind up with. You wind up with Kodak, and you wind up with this poor sad sack who thought he wasn't going to get caught when he used PPP money to buy a freaking Lamborghini. I mean, it's – you know, somebody's going to include that in some kind of a TV... you know, some kind of fictional TV show. Because it's just too priceless.

So that's where we are. That's where we are in, you know, the state of all things financial in August of 2020. Boy. 2020 is the weirdest freaking year. I mean, things that – I won't even get into some of the things that people I know have been exposed to this year. But it's just so – it's all so utterly weird. When you shut the... who would've thunk – who would've thunk when you shut down the global economy because you're afraid everybody's going to get the flu or whatever that all of this stuff would happen? That you would get people, you know, in Lamborghinis with government money and Kodak management taking money out of taxpayer's pockets. Who would've thunk it? Anybody with a brain is the answer to that one. Anybody with a brain.

And what you do about – what you do about it? Well, look. I told you to avoid Kodak, right? Because people look at that kind of action, and the knee-jerk - the thing that's built into your brain, you know, that's been kind of evolving for hundreds of thousands of years in complete... evolved for hundreds of thousands of years in completely different circumstances that have nothing to do with investing. So immediately, as soon as you see that surge in Kodak, you want to hit the buy button. But I'm telling you it's deadly and wrong every single time. There's a question about Tesla that I'll get to in the mailbag. Same thing. When you see that thing, you know, opening – or actually, it sunk to below $200 a share. Tesla did.

And when you see Tesla, you know, below $200 a share and then – wham – and I think intra-day, it hit something like $1,700 I want to say... and now, it's – I don't know – $1,500, $1,400. Something like that. Almost $1,800 – the 52-week high. So when you see this kind of action, the natural human impulse is to hit the "buy" button. But I'm telling you that is deadly. When you see this kind of action, don't play. Just stay away, keep your money on the sidelines. And in general, this is true of all sort of... in my opinion. I think you'll get a different opinion from other folks at Stansberry.

But in my opinion, this is like extreme, insane Melt Up action. And most of that action, you have to avoid it. There are ways to play the Melt Up, and you can actually make a lot of money if you do it right. Steve Sjuggerud at Stansberry is like the only person... like, if you tried to do this, if you think you're going to make money in the Melt Up, I would say don't do it without him. You know? Don't do it without somebody who knows what they're doing, because you're going to get run over. And experienced readers will tell you, like, around the top – you know, in like 2000, for example, in the peak of the dot com – the action was insane. I covered this in my newsletter Extreme Value a couple of years ago.

And I used the example of Apple. And it was just... you know, it's like up 50%, down 50%. You know? Up 80%, down 30, 40, 50, 80% – like that – before it finally peaks and then falls in the bear market. So when the action gets this crazy, experienced traders are gone. The people who make money trading, they're gone. So, you know, that's really my practical advice based on all this Kodak stuff. Got to give the hat to Mike at Non-GAAP Thoughts, man. He was all over this. He published his article July 30, the day after the stock hit $60 bucks. That was a Thursday.

And the Wall Street Journal published on Friday, and then they published again when the SEC said they were going to investigate like the following, you know, Monday or Wednesday or something. I don't know. But he was on it first, and it was clearly... you know, the spike in volume and all the rest – and the circumstances, a government loan to get into pharmaceuticals for a company that was managed straight into the ground? Come on. This stuff reeks, and you need to avoid it. OK. [Laughs] I've beaten that horse to death. You get the point. Let's move on and talk to Vitaliy Katsenelson. I can't wait for hm to tell you what he did in his portfolio that he's never, ever done that I never thought he would do.

Let's do that right now. We have talked about gold a lot on this podcast. Right now, people are asking, "What are the chances gold could go to $2,500 an ounce?" Well, experts say that it may happen sooner than you think. With rock-bottom interest rates driving the price of gold to all-time highs, our top commodities expert, Bill Shaw, has a new prediction. He says he has found what he calls the single-best gold business on the planet. Bill thinks this stock has the most upside potential of any gold company with an incredibly attractive, ultra-low-risk profile. Check out the video Bill made explaining why he thinks this is the best moment in decades to get into gold. He also shares his No. 1 pick for 2020. You won't want to miss this. Go to www.investorhourgold.com.

Again. That's www.investorhourgold.com. Time once again for our interview. Today's guess is Vitaliy Katsenelson. Vitaliy is chief investment officer at Investment Management Associates in Denver, Colorado. He is the author of Active Value Investing and The Little Book of Sideways Markets. His books were translated into eight languages. Nice. Forbes magazine called him the "new Benjamin Graham." And most importantly of all, he's a personal friend of mine. [Laughs] Vitaliy, welcome back to the program.

Vitaliy Katsenelson: Hey, Dan. It's my pleasure. Thank you.

Dan Ferris: Always a pleasure to talk. It's been a while. Let's just dive right in, because you've done something recently that's a lot different than anything I ever expected you to do. You actually bought gold. I mean, if you're OK with admitting it in public, I guess.

Vitaliy Katsenelson: No. You know, I try not to talk about it in public too much. But sure. Yeah. No. You know, it's kind of interesting. I wrote kind of a five-page letter to clients explaining this decision. And by the way. We're going to publish it, and it's going to be part of the – you know, on the contrarianedge.com. And people want to listen, you know – I am so much smarter on paper than in person. So they can listen to it on investor.fm. But anyway. And I'll tell you this. I usually love writing. Like, I usually get up in the morning, I make a cup of coffee and I listen to classical music, and I write.

And I do this on daily basis. And I hated every minute of writing this letter to clients. And the reason I hated this – a couple reasons. [Laughs] No, really. Just, the reason I hated it's because – first of all – when I was writing this, I felt like I was going to cause a lot of political... into political discussion. Which I really hate doing. I absolutely hate talking politics. And I hoped I didn't when I was done with that. But, like, I was always on the cusp of it, right? And the second thing is, I basically was writing negative things about The Contrarian I absolutely love. OK?

And my, you know... so like you and I talked about a long time ago, I was always kind of on – saying anti-gold is probably overstatement. I was just kind of indifferent to it. Like, I just kind of... you know, I'm indifferent as a – I think as much about gold as I think about as cactuses or sunflowers. You know? That's kind of, gold is in the same category as sunflowers for me. OK? But [laughs] over time, you know, as I observed our behavior I kind of just started to warm up to gold a little bit more and more. At least, I hated the... actually, I became less – hate is kind of the wrong word. But I became less indifferent to that. And actually, even like last October, November, you interviewed me. You and I had a great discussion at the Stansberry Conference in Las Vegas.

And post-conference, I went into these Stansberry people. And I talked about gold, and I said, "You know what? Actually, it's not as crazy anymore just because of what" – you know, like when you start looking at QE it's not as crazy anymore just because we seem like to be wanted to destroy currency as much. Anyway. Fast-forward to today – and this is where it gets interesting. I was thinking about it a month ago. And I realized how arrogant I was. And let me explain what I mean by this. I thought of my thinking in early January – mid-January, mid-to-late January, early February when the virus was raging in China. And I remember catching myself thinking, "Yeah. This thing only happens in China. This is not – this is a China or Asia thing. This is not U.S. thing."

And if you think about it, that's a very arrogant thinking. But the thing is, like, this is – it's very American kind of thinking because we are kind of in the oasis where bad things really don't happen really that often. You know? Bad things usually happen somewhere else. And as I was thinking about this, I realized, "That is kind of arrogant behavior that kind of went to our head as a county." Because think about U.S. dollar for a second, right? It became a reserve currency for a good reason, right? Because we are surrounded by two oceans. In the north, we have a very polite neighbor. In the south, we have a funny neighbor. Fun – well I shouldn't say funny. Fun neighbor. We have the strongest kind of – the most diverse, the strongest, economy in the world.

And we are the largest democracy, at least if you look by the size of population, right? I guess India would be the largest by – I'm sorry. Start over. U.S. would be the largest economy based on their GDP, and India would be largest economy based on population size. So we have all these elements why we are reserve currency, right? And therefore, we were reserve currency. We still are. But I think that, you know, reserve currency is – it's not a God-given right, right? It's something you have to continue to deserve. And we were behaving as if it's a God-given right. And if you look at the GDP – and this is where it gets really interesting.

And 20 years ago, we had $6 trillion of debt, which was about 30% of GDP. In 2019, we had a – our debt to GDP crossed 100%. And, you know, like, we used to look at... and I use it in air quotes, a socialist EU, and said, "You know, we are capitalist, and you are socialist." But you know what? EU's debt to GDP in 2019 was 86%. So we capitalist, social United States now had more debt to GDP than EU did.

Dan Ferris: Right. Who's the socialist now?

Vitaliy Katsenelson: Exactly. And then, you look at us now, and over the last six months we basically spent almost 12% of our GDP or more – probably more than that – on trying to kind of fight the effects of the virus. That is a staggering number, because that number is basically twice as much in terms of percent of GDP to, you know, the rest of the... what the rest of the kind of world did. It's four times as much as Europe and three times as much as Japan. And I think by the end of this year, we're going to be at 130% debt to GDP or somewhere over there. You know? May not be exact number, but that is incredible increase.

And, you know, by the way. In Federal Reserve, I'll read you what went into this. Own $2.5 trillion of our bonds... you know, now they own $3.7. And, by the way, now they also own corporate bonds for ETF's. So, like, when you start seeing this you realize that we are... like, I don't think U.S. dollars can lose the reserve currency status anytime soon. Not because it doesn't deserve to, but just because the alternative – there are no other alternatives, really. But I can only – but I can also see how the U.S. dollar will start and then continue further in decline.

Dan Ferris: Sure. It doesn't have to lose the status – it doesn't have to lose 100% of its... you know, it's like 60% of global reserves. But what if it just goes to 50% or 40%? I mean, that's all that has to happen for things to change a lot, right?

Vitaliy Katsenelson: Yeah. You know, it's kind of interesting. There's an interesting concept I learned in the investing. We usually think in kind of binary terms, right? 0 and 1. But I think we need to think a lot more in nuances. And what you just said is kind of nuance thinking, right? Yes, it's – see, it doesn't have to be 60%. It just has to become 50, right? Which is kind of incremental nuanced change, right? And I think this is exactly what's... you know, I don't know what percentage is going to be. But I know what the direction it's going to go to.

And so, from a portfolio construction, we actually... you put gold, and if you put gold in an interesting way. There's many ways to do this. You know, we could've done it through – rolled to trusts. And I think that's one way of doing it. I did it in the... we bought, in the money, coal options on GLD. And what we did basically, we took a 1% position in the options. But because coal options, you know, have leverage, it's almost like a 4 or 5% position in our portfolio for us.

And the reason I'm going to stress this out... that for me, gold is not the portfolio. It's just a position in the portfolio. Because I don't know what's going to happen next, right? What I just told you is kind of my thesis, and it's, you know – and it may or may not play out. It's not certain. You know, it's very probably, but it's not certain. So that's why, for me, gold is just a position in the portfolio. But one thing we also did – and we've been doing it for a while – we've been buying. A lot more international equities, stock, you know – high-quality companies that are significantly undervalued outside of the United States as well. And so, that's our way to kind of diversify away from the dollar.

Dan Ferris: OK. Let me ask you this. What do you think – I mean, you bought gold or, you know... in a way with options on GLD. What do you think about something like bitcoin? Would you ever – you think you'd ever put that in your portfolio?

Vitaliy Katsenelson: You know, I think – I can almost fast-forward 10 years from now, bitcoin trades at $10 million. And I'm kind of – and I'm saying, "Then let's have a conversation about bitcoin." No. [Laughs] No. Listen. You know, I'm – no. No. No. I'm not there yet. Yeah. You know? I may evolve to it, but right now I can't – yeah. To me, it's still... if it [laughs] – no. The answer is no. Maybe it's digital gold. Who knows? But I'm not there with bitcoin.

Dan Ferris: All right. Well, we'll check back in in a couple years. You know?

Vitaliy Katsenelson: Yeah. No. It's probably going to go up 20 times by then.

Dan Ferris: Yeah. [Laughs]

Vitaliy Katsenelson: Close. But you know what's kind of interesting? Another thing we've been doing is that I've been... I think the world today – and by the way. Just, you almost have to provide context to your listeners. Because I am not a doomsday guy by any stretch of the imagination. And I kind of almost want you to vouch for me.

Dan Ferris: Not at all.

Vitaliy Katsenelson: Not at all.

Dan Ferris: Not even close. Yeah.

Vitaliy Katsenelson: Yeah. Yeah. But I've been buying. A lot more defense companies. You know, like companies that make military equipment. That kind of stuff. And the reason – and for us, it... and we're buying U.S. and European companies in this sector. And for us, that has been a hedge against kind of deglobalization. Or let's call it localization. Because if you think about almost by definition, globalization leads to safer world. You know, kind of a world with fewer wars. Because, you know, through trade you are more interconnected throughout the countries, right?

And if you trade with somebody, you're less likely to have a war with them. What we saw the last – whatever, last four years – is the trend into opposite direction. And I think pandemic actually kind of accelerated the trend. Because you saw this when countries were, like, bickering – bickering is probably the right word – about who gets ventilators, who gets PPE and masks, etc. This kind of stuff... the kind of national, you know, spark. You know, kind of the spark like in March or April. That was national rhetoric has, right? And so, as we localize then I think the world by... you know, if you invert that, the world becoming a little bit less safe every time – you know, the more you do that.

And I think us pulling our – what, 10,000 – troops we had in Germany away from Germany is a wake-up call to Europe that they may need to, you know, kind of spend more money on their defense spending... as much as they don't want to. And kind of if you think of rise of China, all these things lead to kind of less safe world and more likely – which I hope not. This is not wishful thinking. Please don't get me wrong. You know? But more likely that we're going to have some kind of escalations. You know? And then happen in the future.

You know, and the interesting part. If you think about the defense companies in general, usually their business is very, very stable. Usually not impacted by the virus much. They usually have good balance sheets and kind of... not a Google-like return on capital but still it's return on capital. And the lifetimes that pay good dividends. So it's a – we are able to kind of accumulate a good chunk of them, and they can become in a core position in a portfolio, much bigger than gold, by the way, in general. Because I like those business... yeah.

Dan Ferris: OK. Have you heard about this thing called Thucydides Trap?

Vitaliy Katsenelson: No. But you're going to tell me. No. No.

Dan Ferris: Yeah, I'm going to tell you right now. So there's a guy – there's a Harvard professor named Graham Allison, and he wrote a book called, Destined For War, about Thucydides Trap. And Thucydides Trap is where there's a world power and a rising world power. You know, most of the time, they have gone to war with each other. Most of the time throughout history, going all the way back to the time of Thucydides in ancient Greece. When one power's rising and another power is already the world power, they will fight. Now, it's not an absolute – you know, it's not a law of nature. They don't have the fight. China and the U.S. don't have to wind up in a war. But, you know, maybe we wind up in some kind of like a cold war or something or a cyber war or something like that. I mean, we're already kind of there, right? So what you say makes a lot of sense.

Vitaliy Katsenelson: Yeah. Actually, I did actually – now that you mention it. I couldn't remember the name. But I did read about it. Yeah. I think I heard him speak or something or – yeah. So yes, I did. So I guess... yeah. You know, I think the way U.S. – well, I shouldn't say U.S. The way we fight our wars... like, if you think about Cold War, right, Russia in United States never really had a direct confrontation. But we had it through proxies, right? Through other countries, right? And other countries end up being pawns in kind of this – you know, and I think, "who knows what happens in" – you know, I don't know which proxies are going to be, you know, which countries will become proxies for that.

But it just... you know what? You don't even have to have a Cold – you don't even have to have a hard war for the war to happen. And by the way. Just if you think about China, Russia – I mean, China/United States relationship, we are... I don't know. I don't know if you saw what happened yesterday. China put Marco Rubio and six other U.S. citizens on a persona non grata kind of thing. You know? So we are banning Chinese company – you know, like Huawei is – Huawei is... we already have a – we already have a basically technology cold war with China. It's already started. You know?

And so, again. Again. Just, this is so uncharacteristic of me. This is not – this is not typical. I'm usually optimistic, etc. But, you know, I think I'm becoming more realistic now. And I realize I have to be more – I have to be prepared for the future where the world is less safe. And as a money manager and as I'm responsible for my client's money, I need to make the decisions now before they become obvious, I guess. Maybe gold is not necessarily – maybe gold is three months into the obvious category. But I think defense may be, you know... I may be early on that.

Dan Ferris: Yeah. Yeah. but, you know, you want to be early, right? And like you say, they're good businesses with steady revenues and steady earnings. So you're...

Vitaliy Katsenelson: And if you analyze them on their own, I mean – so it has a symmetrical risk-reward. Because like in the... if the world goes back to being safe, you would still make money. And, you know, they're still undervalued on their own. Like, a lot of them trade eight, nine, 10 times earnings. So, you know, you'll still make money if the world stays safe. Which is great. If that happens, I'm very happy about it. And if it's not, then the return – you know, then suddenly they become kind of almost like coal options, and the returns become double, triple very quickly. So again, I really hope it doesn't lead to that. Yeah.

Dan Ferris: You know, I have tried not to talk politics. And specifically, on this podcast. I've tried to avoid the topic of politics because – you know, like you say – we mostly want to talk about investments, stocks, and things. But as I become – I feel the need to become more macro-aware. And as I become more macro-aware, I have to become more fiscal policy-aware and more money policy-aware. And politics just – it just, you know... the political monkeys just smear their feces all over these things. And you can't get away from it. It's just, the stink of it permeates the topic. So it's really impossible to escape it. So you have to try to minimize it. But I totally agree. [Laughs] Those aren't good conversations.

Vitaliy Katsenelson: You know, I think we get to invest and – we don't get to choose economy we invest in, right? Just kind of – like, I'm very aware when I write, I always... like, I try not to suggest a policy. I'm just trying to say, "OK. Here's what's happening. Here's how I interpret it, and here's how we adjust for that." Right? Which is not being suggestive, all critical of the policy, whatever. This is just... and guess what? We do have... you know, we are on the way to 130% debt to GDP. I'm not happy about this as American. But that's the reality of that. And by the way. You know what the – you know what the sad part is? If I ran Federal Reserve in March or April 2020, I am not sure if I would not have made the same decisions they did. That is the sad part.

Dan Ferris: That's right. [Laughs] Yeah.

Vitaliy Katsenelson: And that's the sad part. I probably would've made different decisions as a fed chair in – I don't know, somewhere between 2011 through 2019 maybe. But I'm not sure I would not have made the, you know, same decisions as they did in 2020. It's just, you know... again. I'm so glad I don't have their job. Yeah.

Dan Ferris: Right. The pressure alone to act has to be unbelievably overwhelming. If they had not acted, people would be screaming for Jay  Powell to be replaced. And so, yeah. In other words, it's not even that you, Vitaliy, necessarily agree with it. You're just saying – I feel like we're just acknowledging that anyone in that position, it would've been nearly impossible to behave any other way, right? And that's the problem. And institutional finance in general has that aspect to it, doesn't it?

Vitaliy Katsenelson: It does. And I think it's just kind of – you know, I think as I got older I became a little bit more empathetic to others just because it's so easy for me to criticize them, right? But then, if you try - if I place myself... if I ask myself, "If I was in their position, what would I do," I realize, "You know what? Probably not anything much different than what they did." And I think that's the sad reality of the situation we are in.

Dan Ferris: Yeah. Because you and I are human. And put in the same position with the same pressures and the same incentives, how could we realistically expect ourselves to behave any differently? If we ran a big institutional fund, we'd buy the crap out of the FAANG stocks. You know? It's just the way it'd be.

Vitaliy Katsenelson: [Laughs] Yeah. But also, from a political perspective, you start asking yourself, "Well, if they did not do" – so we know the consequences... well, not quite true. As of today, we know the consequences of what they did up to this point. But we don't know the future consequences of what they did, right? But also, what we also don't know – what the consequences would've been if they did nothing. So it's kind of – so you don't know necessarily... we're going to learn the consequences, the moral hazard they created, by doing this.

Because basically, you know, let's be – and this is important from a kind of... not for me to be critical of them. But this is... OK. What they just did basically – if you were a – if you were investor that was looking at risk-reward – right – then you basically have been penalized over the last 10 years. Because every time you did not take risk, you did not make much money. The more risk you took, the more money you made. And that has, in fact – because the Federal Reserve took kind of – especially now – took the risk of like, you know, kind of... they report their market where market stocks only go up, right? [Laughs] Or all assets only go up.

So the moral hazard is created, because now basically what it did... you are incentivized to take more and more risk because there is no price to pay for that. And I think that's, you know – at some point, they'll pay a price for that. You know? And so, that will be the price of – at some point, that leads to more leverage in the system and higher risk-taking. And now combine risk-taking and leverage, and that creates an environment that's very... they're kind of prone to black swans.

Dan Ferris: That's right. They're manufacturing tail risk as we go up and up and up. But let me ask you something. So this prompts me to ask you about your portfolio. Like, you know, we know the kind of stocks that you're buying, and you bought this little position in gold. What about cash? Are you cashed up right now? Do you have a lot of cash right now?

Vitaliy Katsenelson: So it's interesting. We had a huge amount of cash go into the pandemic. Not because, you know – obviously as I told you, I thought that they kind of... the pandemic stuff only happens in China. So no. But we were going – we had a lot of cash because we just could not find enough high-quality companies that were undervalued. And then, when – I remember the day vividly when Italy went on a lockdown, that Monday. Actually, it was Sunday. But the market – we basically also raised... we held stocks that were close to fair value or approaching fair value. We sold them.

So we had plenty of cash going into pandemic, and we basically spent it all over last four or five months. So the interesting part – so existing accounts I have very little cash. However – and this is new counts today – have a lot of cash again. So our new counts are only 50% invested again. So there's a – so in other words, these stocks I was buying, you know, a few months ago – they appreciated already. So the margin of safety is gone. So they're still undervalued. They're just not as... they're less than, you know – less margin of safety. But new accounts today for us are like 50, 55% invested maybe. So you basically close to pandemic levels of... I mean, pre-pandemic levels of cash balances again.

Dan Ferris: How about that? Yeah. it all happened pretty quick, didn't it? You know, the stock market was so high, then wham. And then now, we're back up. I do want to talk briefly about your recent piece on Tesla. I just wanted to touch on that. Because you're written a whole lot of stuff on Tesla. And I think if anybody's interested in Tesla, go to contrarianedge.com. And Vitaliy's got a lot of stuff. But the most recent thing I thought was hilarious. And I quoted it in something I wrote. Because [laughs] you said like, "The price of Tesla discounts a temporal wormhole into the future." And I thought that was kind of a brilliant little observation. Because I like science-fiction books anyway. So what do you mean by that?

Vitaliy Katsenelson: Yeah. Let me just give your listeners some of... I wrote a 37-page analysis on Tesla, which is the longest analysis I've ever done in my life on anything. And by the way. I really encourage you to go to Contrarian Edge. Just sign up, and you'll see there is a Tesla sign-up for that. You'll get it by e-mail. So it's free absolutely. So if you look basically – here's my insight. If you look at market cap of Toyota, a company that makes roughly about eight to 10 million cars a year. OK? Cars a year. It has a $200 billion market cap. Tesla has a market cap of $300 billion.

So in other words, it's 30% larger than the largest carmaker in the world. However, Tesla is only making roughly 0.5 million cars a year. And it's more or less stock at that number for the last two years – even before pandemic. And by the way. Just to make this point very, very clear, I am neither bull nor bear. So, like, I am not – you know, I'm not a TSLAQ guy either. I try to be as objective as possible. And to make things even more complicated, I own Model 3. And I think this is the best purchase I make on my life. I absolutely love the product. OK? So there is no biases in sense. Like, I'm not... you know, there is zero biases here. But anyway.

So if you look at – so the Tesla has a larger market capitalization than Toyota that makes 20 times more cars than Tesla does. And then, you start thinking about it. "OK." So the market basically assumes that at some point, Tesla will make a lot more cars. But thing is, actually that's not what market assumes. Market assumes that Tesla is already making these cars, right? Because it's, you know, already making these cars today. So No. 1, this is why you have a temporal wormhole. Because basically, it assumes that, "I don't know how much time it takes Tesla to make 10 million cars.

But I know it's going to take years and years. And market assumes it already has happened. But what also market does ignore is that it took Tesla $25 billion of capital investment to make 0.5 million cars. I don't know. Maybe they would become more efficient, etc., at making these cars. But it's still going to take hundreds of billions of dollars of investment to make eight to 10 million, you know, cars. And market is completely ignoring it. So in other words, the capital they're going to have to raise through that or through equity shares. Or basically, they become cash flow positive – really cash flow positive, not from environmental credits – then that money is going to have to be consumed by building all these factories. And the market assumes basically that has already happened. Which is mind-boggling to me.

So in other words, if you and I... in fact, if you look at the Tesla's financials, they're not that much different than they were a year ago. Like, really. The older profitability this quarter came from just selling more credits to Fiat – you know, kind of green credits to Fiat and some other carmakers. But the stock went up – whatever – five or six times. So to me, that's almost a... Tesla kind of highlights what's wrong with this market to some degree. You know? Fundamentals, it's really like Tesla's fundamentals haven't really changed. But the stock just went up six times. And I think the stock went up six times because at first it doubled and then, you know, doubled again.

And I think that – well, it first went up. And it went up more again, and that becomes kind of self-fulfilling kind of reflexivity kind of thing, you know, just high prices encourage high price because that's what usually happens in the speculative market. You know? But yeah. So that's kind of my thesis. And then, you know – and by the way. We have a tiny position in the put options – in Tesla put options that we established maybe a month ago, right about the time I wrote that article... just because it made no sense to me. And, like, those kind of black swan options in a sense that, for us to make any money on them, Tesla stock really has to come back down hard. OK? And so, I'm assuming-

Dan Ferris: Right. So you're way out of the money.

Vitaliy Katsenelson: I'm way out of the money. And it's a tiny, tiny position. You know, but for the... yeah. I just wanted to disclose it, yeah, just to be fair.

Dan Ferris: Sure. Sure. No. Hey. I've discussed Tesla quite a bit on the podcast here. So I wanted to get your views on that.

Vitaliy Katsenelson: But then, I got to tell you this. Model 3. I don't think I will ever, every buy another car that is non-electric. Up to driving electric car, you realize that that is the future. And it's like me trying to explain a rainbow to a blind man kind of thing. It's like, unless you have driven a model of Tesla... and by the way. It has, you know – there are two elements here. There is electric motor element of that – you know, this is common to any electric car, which is just so much better than kind of internal combustion engine... and then, the second element Tesla has done to the car.

Which I think it's phenomenal. You know, there are a lot of futures in that car that are just so much better than any car I ever owned. But my point is this. I don't know if my next car will be Tesla. Probably, you know, 70% chance today it's Tesla. You know, as a car – as other car companies start making their electric cars, I may change my mind. But I know for sure I will never, ever buy ICE car. And the proof of that – I had a minor fender-bender. My fault, etc.

You know, my Tesla was in shop for two weeks. And I had to drive my wife's car, which was my car before Tesla. And I hated those two weeks. Like, I could not bring myself – every time... so that tells you. And again. This is people who are listening to this are going to be thinking about the battery range, all these kinds of – all these things. Read my write-up. And I think in my write-up, I address all those issues. And you realize, actually you should probably give electric car a test-drive. You know? Anyway.

Dan Ferris: So look. We're out of time. But I do want to ask you the same thing I ask all my guests. If you could leave our listeners with just one thought today, what would it be?

Vitaliy Katsenelson: That is such a difficult question.

Dan Ferris: Oh, I know. [Laughs]

Vitaliy Katsenelson: I think you – all the assumptions that we get used to making over last 50 years... and I think this is kind of like me buying gold was that, right? Like going through that – a pandemic is a good reminder of that. We used to assume nothing bad happens in United States. I think we need to re-examine things. And I think I kind of wrote this article, and I really... you know, on a serious note I wrote this article where I talk about Fischer Random Chess.

And this would be in the discussion, so I'm not going to talk about it. But if you read this article that basically describes how I've been rewiring my thinking for today's environment... how I'm, you know – like I'm approaching everything from a first-principle perspective. In other words, if I knew nothing – if I had no historical background – how would I think about the market, about this industry, all these different things? And so, yeah. So this article, can find it on my website contrarianedge.com. But it really goes through this kind of, you know, first-principles analysis. And so, that will be my thought, really.

Dan Ferris: That's excellent. No. I agree. It's a great time to go back to first principles – especially in finance and economics. So that's great. Thank you for that. Look. We're going to be checking back in with you. You're going to be invited back. You know? I look forward to the next time we talk.

Vitaliy Katsenelson: Thank you, Dan. It's my pleasure. Thank you. Bye-bye.

Dan Ferris: All right. Well, I always enjoy talking to my good friend Vitaliy. He does not disappoint. He always sees things that everybody's looking at from a slightly different perspective. And it's, you know... we check in with each other periodically. And, yes, [laughs] you will be hearing from him periodically on this show. I hope you think that's as good of a thing as I do. All right. Let's check out the mailbag. When my friend and colleague Steve Sjuggerud talks, I listen. Steve predicted the rise of gold in 2003, the top of the dot-com bubble in 200, and he even called the bottom of the Great Recession in 2009.

Steve is once again pounding the table on a new prediction. He believes that a mania will hit the U.S. stock market and take most investors by surprise. He said that thousands, if not millions of dollars, will change hands as a result of the anomalies he found in the market. If you want to find out how you can profit from Steve's prediction, he has laid everything out in a video that just went viral. Go to www.investorhourtruewealth.com to watch the video and find out how you can profit in this roller coaster of a market. I watched it, and what Steve found is astonishing.

Again. That's www.investorhourtruewealth.com. In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments and politely worded criticisms to [email protected]. I read every word of every e-mail you Send me, and I respond to as many as possible. I'm starting to not be able to read the ones that are too long. Try to keep them short. And I'm also just not even – I'll never address anything that is from outer space, just too crazy. Just obviously stupid and wrong and crazy. All right. We got lots of stuff today. I'm excited about the mailbag.

First up is Chris J. Chris J. says, "Longtime listener, first-time e-mailer. I'll make it short." Thank you, Chris J. He continues. "I feel like expanding the balance sheet through money creation is going to be the new form of taxation. Both have the effect of reducing citizen spending power." That is taxation and money-creation, "Both have the effect of creating money for the government to spend. Creating money is essentially a flat tax affecting all citizens and non-citizens alike. Creating money has apparently far less political impact than levying taxes. I don't think most citizens really understand the impact of or the immediate pain of expanding the balance sheet like they do of taxation. It seems far less politically damaging as well. What am I missing? Best, Chris J."

I don't think you're missing much here, Chris. The only thing I would quibble with a little bit is when you say that essentially a flat tax affecting all citizens and non-citizens alike. I think that when you create money and pump new liquidity into the system, the people who get it first benefit the most. So if the Federal Reserve is printing money to buy securities, well, they're buying them from the big dealers. So Goldman Sachs gets the money first. You see? So, you know, that one quibble. Also, in this environment it seems that pushing interest rates way, way down and therefore levitating asset prices... it benefits asset holders, right? And that's not everybody.

So it actually – far from affecting all citizens alike, it really just exacerbates and exaggerates that huge difference between wealthy asset-holders and everybody else. Otherwise, yeah. I'm with you. Edward B. writes in and says, "Porter. The article regarding Kodak and unpalatable, political cronyism was straight to the point. Now, how about a second one on political cronyism in Emergent BioSolutions and how unprepared we in the U.S. were for a pandemic? An example of another company rising like a phoenix from political gifts from The Forgotten Man." Edward B. So maybe I will look into Emergent BioSolutions. Edward B."

But, Edward, Porter did not write that article that you refer to in the Stansberry Digest. I did. That was from me. And thank you. So yeah. Maybe we'll look into Emergent, and we'll have another Kodak-like story to tell. [Laughs] Good question and thank you for the tip on Emergent. So a regular correspondent, Lodavik H., writes in again this week. And he says, "Let me ask you an easy question about that Kodak thing. Why is Kodak getting money fighting COVID? What are they doing that makes this workable in a common-sense deal? I don't know. They are in the picture business. I hope Kodak will survive. I hate it when things go wrong. I just don't wish it to the people."

Maybe he means like the employees and shareholders. "But it is part of life." And then, he says, "I have a question for you. Why is it legal for the members of Senate and Congress to trade with insider knowledge? Just make trading" – I assume you mean insider training – "illegal." OK. And then, at the end – can't read your whole thing, Lodavik, there's just not time. "Finally, I have a question for you regarding biotech firm Galapagos. They have over $5 billion in the bank, no clue what to do with it? What is your idea about it? Keep doing the great work. Best regards, Lodavik H."

Thank you, Lodavik, once again. I'll look into Galapagos. Don't know anything about it. And I mention it, maybe somebody listening to us knows something about it and maybe will report on it. But look. Senate and Congress can't use their knowledge to do insider trading anymore. They used to be able to do that, but they did finally put the kibosh on it. So yeah. I agree. Why was it ever allowed in the first place? Next comes Ron K. Ron has a really good question here. He says, "Dan, I'm interested in your thoughts of the benefits of trailing stops for long-term investing in ETF's. If buying an ETF that tracks a major U.S. index" – like SPY or QQQ – "with the indices historically always correcting themselves in time, what benefit does using a trailing stop have? Thanks, Ron K."

Ron, that's not a bad point, right? If you want to hold one of these indexes for 30 years because you know the compounding over that kind of time frame is probably going to be pretty good, selling ever just makes no sense. You know, until you get close to that 30-year mark. I mean, if you get a bear market at the 25-year mark, it can be a problem, and maybe a trailing stop could help at that time. But until you're sort of done, you know, getting toward the end of your investing career, a trailing stop doesn't make sense. Does it? Doesn't seem to.

Now, I'm glad you asked this question because I'm going to add a wrinkle to this, which is that these essentially passive vehicles – they're not really passive. That's the first myth about so-called passive investing. These vehicles are price-insensitive buyers to the tune of trillions of dollars in a year. Or maybe $1 trillion or so per year. Something like that. At least hundreds of billions. I know Vanguard took in $400 billion last year. And that's, you know, more than $1 billion a day with, you know – what is it, 252 trading days? So I think there's a huge amount of money pouring into people whose only algorithm is: receive a dollar of capital, buy a dollar of equity.

What if it reverses? "Oh. You need a dollar of cash? I have to sell a dollar of equity." It could get really ugly. At this point, there is enough money in levered strategies – and we covered this before. With interest rates going down, the leverage goes up. Because interest rates going down means bond prices go up. And those bonds are used as collateral for levered strategies, and they just tend to mindlessly follow the algorithm. "Oh, more valuable collateral? Borrow more, buy more." And then, you get to a point where it reverses because the collateral starts yielding – if it starts yielding negative and you know that you're not... you don't want to hold something that's costing you to hold it. So maybe that reverses those strategies and starts a cascading effect. We'll see. We'll see how this all plays out.

But I'm not... I used to be OK with indexing and think, "Yeah. You know, folks won't get hurt over the long-term." But I think we have the potential for – I don't know – maybe sort of a Japan-like outcome where things crash and kind of go sideways for way too long. OK. Dominic F. is next. I love this, Dominic. [Laughs] He says, "I love your show. Keep up the good work. I'm a value investor and proud dad of two wonderful daughters – six and nine years. In Episode 165, you talk with Amity Shlaes about the school systems – in 200 years the system has not changed. How do you teach your children financial intelligence? It's not taught in school at all. Any tips? I try to implement the financial education in daily routines and hoping that they are not fed-up. Best regards from Berlin, Germany, Dominic F."

Good question. And I want this to be as simple as possible. But I do have a tip that I think is very useful. Elsewhere in your e-mail, you mentioned understanding shares – meaning, you know, equity buying and selling and money and money policy and debt and compounding. Start simple. Don't worry about all of that. The foundational skill, the thing that makes the difference, is going to be the skill and habit of saving. And just ingrain that into your girls. Ingrain that into your two wonderful daughters, six and nine years.

And I would say this to any parent. If you want your children to be financially well-off and financially comfortable in their lives, do one thing: save, save, save. Encourage them to save. Because that habit established early in life and set in stone – it actually strengthens your character, I believe. And it is absolutely the foundational skill for a whole... to carry you through a whole successful investment career throughout your life. I firmly believe that with every fiber of my being. Save, save, save, Dominic. That's the thing you need to get them to do. All the rest will follow. Great question. Thank you for that.

Cindy K. says, "Hello. I love your show. My question is this. Just like with the possibility of government intervention in bitcoin, why won't the government say once again that they are confiscating gold and make it illegal to hold it or buy it? Sincerely, Cindy K." Well, they did this in 1933. FDR did it. I mean, I probably shouldn't say this out loud [laughs] on a podcast. But I'm not giving them mine. That's all I'm going to tell you, Cindy. They can't have mine ever. And if my neighbor says, "Hey. I'll give you, you know – I'll give you a 1 ounce Krugerrand for your guitar collection or" – I don't know, whatever it turns out to be, he and I may have business to transact.

And if somebody says, "Hey. I'll give you 10 bitcoin for your car," or whatever... you know, whatever it is, we may have business to transact. And the government won't have nothing to do with it. That's my answer, Cindy. You do what you think is best. Edward E says, "Hi, Dan. Enjoy the program. Always thoughtful. Your interviews are interesting and informative. I've heard you comment several times on the returns of Sysco Systems and wondered if you'd taken into full account the multiple stock splits by the company. Share prices would be lower, but it would also double positions." I'm not sure what that means. But he says, "Thanks and keep up the good work, Edward E."

Yeah. Edward, I've looked at this chart like 100 times. Split-adjusted, it peaked at $80 in March of 2000, bottomed in October of 2002 at around $8 bucks. I think it was $8.60, actually. And it hasn't been higher than $58 or $59 since. So it has not recovered to its dot-com peak. And the point of this is, investors lacked the imagination. They couldn't imagine that Sysco wasn't the no-brainer stock. It was in 10 of the top-10 top mutual funds of the time. Everybody said it was the no-brainer. "No matter what happens, they're selling the plumbing of the Internet, and the thing will grow and grow and grow and grow for 30 years, and the stock is going to be hundreds of dollars a share," blah-blah-blah-blah-blah.

Didn't come true. Didn't come true because the investors lack imagination at these moments. And I believe we're at another one. No one can imagine that Amazon isn't the greatest thing in the world. No one can imagine that Facebook and Google and Apple, you know, in the 400's – at $2 trillion market cap. People simply can't imagine that these aren't the greatest businesses now and forever. I promise you they will be disappointed. When? Well, you know, I'm not in that – I'm not in the wind [laughs] business exactly. But that's a great question. Thank you for giving me an opportunity to rant about that.

One more to go. Shannon F. is the last one this week. And she says, "Hi, Dan. Can you please attempt to explain the 5-for-1 stock split of Tesla? How is this even possible given that it is not even profitable without creative accounting gyrations? Shannon F." I don't completely understand the question. The 5-for-1 stock split is just, you know... it's bookkeeping. It doesn't affect the value of the company. It's not based on the fundamentals. It has nothing to do with the profitability.

Now, if you're kind of implying a question – if you're saying, "How did this thing get to peak at almost $1,800, and it's $1,500 to the point they feel like they want to split the stock," or whatever – "You know, how did it get this far? How did it get to a market cap in excess of $300 billion at one point" – that's just the function of the craziness of markets. It happens. It happened in 1929, it happened in, you know... with the go-go '60s... the late '60s, early '60s. It happened in the '90s... it happened, you know, right before the financial crisis – it's happening now. It's just something that people do every now and then. They go crazy for companies that aren't making any money because they love the story. Boom. Done. That's it.

But yeah. So they'll split the stock 5-for-1. And I remember when I first I got into this business there was a fellow – whose name I will keep to myself... who's actually a good guy. I got nothing against him. But at the time, I was saying... you know, it was like 1999, early 2000. I was like, "Man. I want to short the daylights out of some of this stuff. I want to short Yahoo." I thought it was ridiculous. And I remember his objection to this idea. He says, "You're crazy. This thing's going straight up every day."

And he kept saying, "They're going to split the stock. They're going to split the stock." Because the average no-nothing idiot trading stocks at home in his pajamas thinks that when you split the stock, "Well, hey. If they split – if they split Tesla from $1,500 to $300 – last time I bought it at $300 I made a bunch of money. So I'm going to buy it at $300 again. I'm going to make a bunch of money." Meanwhile, you know, you're requiring the market to value the thing even higher, right? The market cap doesn't change when you do a stock split. That's the point. It's just the amount of outstanding shares goes up by five times, and the share price adjusts down to one-fifth.

And, you know, I don't know. People think they do this to make the stock more liquid or to make it more attractive to smaller shareholders or something. I don't know. I don't know what they think. But they're wrong. It's stupid. And they just reminded me of that episode because I know there are people out there who are going to say, "Oh, yeah. I can't wait to get my hands on some juicy Tesla shares after the split." Idiots. Craziness. All right, Shannon. Thank you very much. That's the mailbag this week, and that's another episode of the Stansberry Investor Hour.

I'm having way too much fun with this. I hope you're enjoying this as much as I am. Do me a favor. Subscribe to the show in iTunes, Google Play or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can also Follow us on Facebook and Instagram. Our handle is @investorhour. Our handle on Twitter is @investor_hour. You have a guest you want me to interview? Drop me a note at [email protected]. Till next week. I'm Dan Ferris. Thanks for listening.

Announcer: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail, [email protected]. This broadcast is 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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