In This Episode

Porter tells you about what really happened at General Electric (GE) under the reign of Jack Welch and his successors. It’s the story of an unholy partnership between big government and big media. A tragedy of paper money, financial speculation and excessive greed. Porter explains what GE has been doing since the mid-90s, and it has nothing to do with lightbulbs, locomotives, or power plants. GE has been involved in a gigantic financial gamble for decades…right under the nose of shareholders. The SEC is now investigating the company’s accounting, and Porter explains how GE could easily become the next Enron or Lehman.

Buck and Porter welcome Steve Sjuggerud, editor of True Wealth and Porter’s long-time partner at Stansberry Research. Steve reveals how much longer the stock market Melt Up can continue, which warning sign to look for from the government that has consistently preceded the last three market corrections, and a recommendation for Buck on the easiest way to invest in the China boom.


Featured Guests

Steve Sjuggerud
Steve Sjuggerud
Dr. Steve Sjuggerud is the editor of True Wealth, an investment advisory specializing in safe, alternative investments overlooked by Wall Street. It's based on the simple idea that you don't have to take big risks to make big returns.
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Transcript

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

[Music]

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

Buck Sexton: Hey, everybody. Welcome back to the Stansberry Investor Hour. I'm nationally syndicated radio host Buck Sexton. And with me, as always, our fearless leader, Porter Stansberry. Hey, Porter.

Porter Stansberry: Hi, everybody.

Buck Sexton: Today, we welcome Porter's business partner and lifelong friend, Steve Sjuggerud, to the show. Steve is the lead analyst, editor, and founder of the True Wealth franchise at Stansberry Research. And he is the person most responsible for giving Porter his start in financial publishing. Steve's here today to talk about the latest stages of the epic "Melt Up" we're witnessing in most markets and asset classes around the world. This is a theme that has not only recently caught the attention of financial media, it's something that Steve has been writing about since 2015. Much to the delight and benefit of his True Wealth readers who have seen gains of 66 percent in the technology sector, 109 percent in Tencent and 55 percent in the mobile-payment sector, all within the last 15 months.

You can learn more of Steve's research with True Wealth by going to www.truewealthoffer.com. That's truewealthoffer.com. We want to send our thanks to all the listeners who have been leaving feedback on the Stansberry Investor Hour iTunes and YouTube pages. Search for Stansberry Investor Hour on iTunes or YouTube and you'll find each episode listed along with comments and discussion from listeners just like you. Check it out and plug into the conversation.

You can also join our free weekly e-mail list by just going to investorhour.com. That's investorhour.com and entering your email. When you sign up you'll get access to all the show transcripts, show notes, a notification each week when we publish new content and links for what we talk about on this show.

And with that, let's get this party started. What's up?

Porter Stansberry: Well, Buck, I have to start right here. I was shocked, just completely shocked, as I know most of you have been, to discover that federal government employees sometimes do not act like fair dealers or they sometimes have their own hidden agendas. And they sometimes conspire together to support the politicians who can increase their budgets and salaries and relative power positions in Washington. Can you believe that? That apparently there's a secret society of FBI agents that conspired together to promote the FBI and each other.

Buck Sexton: I saw the story. I'm familiar with it. I'm following it very closely. I don't want us to get too far ahead of this one though just because –

Porter Stansberry: I'm just shocked by that.

Buck Sexton: Well, it's completely believable. That's the problem.

Porter Stansberry: But other people just call that a trade group. You know like there's a financial publisher's roundtable. We don't call it a secret society. And once a year we get together and we discuss what's going on in publishing and what kind of marketing offers are working. And we talk about what the policies should be in our industry, what the rules should be about guarantees and marketing swaps and things like that. And I'm sure the FBI agents do the same thing. They get together and they go, hey, you know what, if we have a liberal president, he's going to increase the budgets more. If we have a conservative president, he might cut back on our funding.

Buck Sexton: There's also ideological alignment that factors into it too. As in they just like a liberal president more. I think it's interesting, Porter, that the Russia collusion narrative for a lot of people is completely believable. That President Trump, who depending on who you ask, has no ability to strategize –

Porter Stansberry: That's insane.

Buck Sexton: - think long term, all this other stuff. All these other criticisms. But he got some special Kremlin conspiracy going. That's believable to them. But that a few FBI agents, as you're pointing out, at the very senior level of FBI and DOJ, didn't like Trump and wanted to throw a wrench into things for him, that's crazy. And I'm like, well, how is one of those crazy but the other one is not?

Porter Stansberry: I have to tell you, this is my favorite political story of all time. It just makes no sense. That a guy like Trump would engage in a conspiracy with the Russians. It makes no sense. He doesn't even have any business interests in Russia. It's all just complete nonsense.

But I got more nonsense for ya. And this is on the financial side. Oh, oh, I don't know, almost 20 years ago now, it occurred to me that General Electric wasn't really an industrial company. It was a giant bank. And I say that because at one point they had 683 billion dollars of assets, but 85 percent of their earnings came from financial investments. And I dug into that. Well, what the heck? I mean that's – Buck, that's a lot of money. GE at one time had more debt than anyone except for the ten largest sovereign borrowers. So if you talk to people who trade government, they considered GE, which at the time was triple A, they considered GE the same as a sovereign country's debt. That's how big it was.

And you're thinking, well, yeah, they make jet engines and locomotives and power plants and lightbulbs. I mean they make lightbulbs. They haven't made lightbulbs in a long time. But let's not let the facts get in the way of a good corporate story.

So what were they doing, Buck? Well, I dug into this in early 2000s. First time I wrote about it publically was 2002, mind you. Two thousand two, Buck. That's a long time ago. And by the way, I'm a Podunk newsletter writer in Baltimore. You're telling me there's nobody in Moran Stanley, JP Morgan, Goldman, any of these hedge funds that can't read the same things that I'm reading and say, hey, there's something wrong here? Or anybody at the SEC or anybody in Washington at all just might want to say, this is probably a bad idea. To have the very largest company in the S&P 500 by market cap running their business as a giant casino. And, Buck, that's no exaggeration. So, what were they doing?

Here's how GE made all of its money from about 1996 to about 2008. Here's what it did. It went into a very short-term lending market. Okay. So for 30, 60, or 90 days it could go into what's called the corporate paper market. And borrow in the very, very short term. So, Buck, if you want to borrow $100,000 for 30 days, the bank's going to say, get the hell out of my office. The bank can't make any money lending you that much money for that little period of time. No way. No one's going to do it. Unless you go down and talk to, you know Eddie on the corner or something.

Buck Sexton: Hey.

Porter Stansberry: Yeah. There's a lot of points there. That's a whole different kind of lending. But because GE is borrowing so much money, it's borrowing hundreds of billions of dollars for 30 days or 60 days or 90 days. And it's never paying it back. It's just rolling it over. Okay. And so banks love that because GE is triple A. It doesn't have to hold any reserves against those loans because it's triple A and it's GE and it's only for 30 days. What could go wrong?

Well, think about it. When you roll over paper again and again and again and again and again and again for more than a decade is it really a 30-day loan? Not really. And by the way, what happens to GE if the bank for any reason goes, you know I'm not so sure about you guys anymore. We're not going to roll those notes over. Well, the whole thing fricking falls apart. And what happens when a 400-billion-dollar hole opens up in the financial system in 30 days? It's the end of the world.

So that's what GE was doing. It was putting a gun to the financial system. And they're saying, dare us to pull it. Meanwhile, what were they doing with all the money they were borrowing? Borrowing huge amounts of money. What were they doing?

They were buying low-quality credit-card receivables from Macy's, JC Penney, people like that. Target. The Target card was backed by GE Capital. So they're borrowing money as a triple A company, but who are they really lending it too? Who's really on the hook for those 30-day loans? The damn tapped out American consumer. The poor-ass mom with three kids shopping at TJ Maxx. That's who's really paying GE's money. And they're charging her 22 percent. How long's that going to last, Buck? How long can that go on? How much debt can you put on the top of that poor old mother?

And that's what was really behind what was going on at GE for a decade or longer. By the way, it's hard to believe this but – so they're lending out to these credit cards which all costs involved, you know they're making like eight percent a year on those loans. And they're paying nothing for the paper. They're paying two percent or three percent for the paper. So they're making that spread. And that's where all their money's coming from. But they've have to borrow so much money to do it. And their other businesses are so lousy that their return on assets are like, you know less than three percent.

So think about it for a second. Back in the early 2000s, you could buy GE and when you buy those assets you're going to make less than four percent a year on those assets. That's the return on those assets. Or you could just go buy a sovereign bond from the United States government and make the same return.

And so it just didn't make any sense to me why you'd pay a market multiple and why you'd take equity risk on a highly leveraged company and buy a pile of assets that were crap. So I've been writing about GE in a negative way for almost 20 years. I put out big reports in '02 and then again in '09 and then again in 2011. And some things did change over time. Obviously, they got completely blown up in the 2008/2009 financial crisis. In fact, they would have gone out of business. GE would have gone bankrupt except for the federal government guaranteed all of their debts. Not some of their debts. All of their debts. And not for a week or two till they could financing organized. It wasn't like AIG. GE did not get destroyed. GE got 600 billion dollars of loan guarantees for free. The federal government got nothing in return. And in 2012 – that guarantee lasted until 2012. They got three years of complete federal guarantees and paid absolutely nothing for it.

And when the reform came in to make sure that companies couldn't do shit like this anymore, pardon my French, but it really pisses me off. When the reform came in, so, hey, we're not going to do this anymore. Remember the Graham Dodd. Remember the heroes? By the way, the idea that Dodd is anything but a complete cause of this crisis is just ludicrous. So that his name was on the reform bill is one of those things that could only happen in America. It's too rich to be true, but it is.

Anyways, they came out and they said, hmm, we're going to designate which companies can be regulated by the Fed. And then somebody's like, GE still has 83 percent of its earnings coming from finance. And then the government's like, ooh. To be regulated under this agreement we are going to require that 85 percent of your earnings come from finance. Like no matter what happened, GE just continued to skate by and not get caught for anything or have any criticism. It was amazing.

So I kept following the story. I never recommended GE's stock ever. And I kept waiting for the other shoe to drop. And in 2011 what I said was, within five years, it's going to have an enormous write-off. It's going to take a huge loss on all this crap financial stuff that it has bought.

So what they did in '09, they had to get rid of all those financial stuff. So they were selling everything they could sell. They spun off their – they spun off a bunch of stuff. They spun off Genworth. They spun off Signature, which is another finance company. Consumer finance company. They spun off all these financial things so they could get rid of some of these lower performing assets. And then – the Signature I think is the credit-card company I was talking about.

Anyways, but they couldn't sell off all the stuff that was really bad. Because nobody would buy it. So they sold off several hundred billion dollars' worth of financial assets. But they still had several hundred billion dollars of financial assets. And guess why they still have them. Cause they can't sell them.

And so I said in 2011, I said within five years, you're going to see the stock fall by 50 percent and you're going to see GE raise new capital. Have to raise new equity capital because there is no way they can afford the debts they've incurred with the assets they now hold. That was incredibly pressing. It might be the best thing I ever wrote in terms of a prediction. Except for that would have been 2016. And it's now 2018. So I was off by you know 16, 18 months or so.

But what GE just came out and admitted, get this, Buck, this is an amazing fact. Back in 2008 or 2009 when I did my first real vetting of their balance sheet, I found that it had tangible equity of about 40 billion dollars. Which meant at one point it was leveraged 30 to one. Which is as much leverage as broke Leeman and broke Bear. So it had tangible equity of 20 billion dollars. Or sorry, 40 billion dollars. And a week ago the new CEO came out and said, yeah, sorry, we've got a problem with one of our insurance businesses, which is one of the financial asset groups. And apparently, we sold a whole bunch of long-term care to people without realizing how much it would cost to provide. And shockingly some of those people actually got old and filed claims. So, Buck, we need to take a little bit of a charge against our earnings and we're going to have some losses associated with these policies.

Any idea how much money we're talking about, Buck? Any idea? Take a guess. You kinda screw up, maybe you lose 500 million dollars. I mean that's a lot of money to screw up. Now you really screw the pooch, maybe you lose a billion. Okay. I mean a billion dollars is a lot of money.

The first charge was 6 billion dollars. That's not all though. They said, yeah, and also we're also over the next seven years, we're going to have to accumulate 15 billion more in reserves to cover the losses we now expect.

So, Buck, you make a mistake at a company GE's size, maybe it's 100 million dollars. And maybe even an honest mistake, it's a billion. Okay. You come back with a 20 billion-dollar loss, that's somebody lying their asses off. There's no way within a six- or 12-month period, suddenly a whole bunch of people got old. Right? They've known about this problem for years. And they have refused to say a word about it. The same kind of nonsense was going on at GE since 1992 when Jack Welch started playing with all their accounting. Every quarter, they'd make their numbers by one penny, Buck. By one penny. It was something like – something crazy like 74 quarters in a row they beat their earnings forecast by exactly one cent. Back when Jack Welch was doing it, everyone thought it was clever. And after Enron, after AIG, people realize it's a crime.

Well, the consequences to that crime are just now coming out of GE. More than a decade after all this stuff. And I've been writing about it, like I said, since 2002. And guess what? The stock's fallen in half. And guess what else? They have to raise new equity because they cannot afford to pay their debts. They can't afford to pay the interest on their debts cause the quality of their asset base is so lousy. And this was GE, the largest company in America in the year 2000. The bluest of blue chips. A company who other investors consider their bonds like sovereign bonds. This is what happens with total mismanagement, greed, corruption, lying. This is the reality of America's corporate governance and the unholy alliance between big government and big media.

Why do you think nobody ever said anything bad about General Electric before? Well, because it owned NBC. It owned CNBC for years. It doesn't anymore.

Buck Sexton: I was going to say, it is probably the most politically and media connected company that you can think of.

Porter Stansberry: Ever. It was the for-profit wing of the Obama administration, right? Immelt, the CEO, was basically on the president's staff.

Buck Sexton: Buddies.

Porter Stansberry: Yeah. Just utter, utter, utter asinine nonsense. And guess who got banned from CNBC 15 years ago because of the reporting about GE?

Buck Sexton: Good job.

Porter Stansberry: Yours truly. Okay. So on CNBC, your own company was defrauding the hell out of the American public and out of investors to the tune of hundreds of billions of dollars. And yet you get on your TV show every day and you point the finger at so and so and so and so. You know for penny ante fraud compared to the crap you guys were doing. Just absolute pisses me off.

One last little tidbit. Mr. Immelt should go to jail. GE is a highly leveraged financial firm that would have gone out of business except for the taxpayers. And his stock is in the gutter. So what does he do? He starts borrowing money again and paying himself dividends and buying back shares. So GE returned a total of 50 billion dollars in capital to shareholders over the last decade. Did they rebuild their balance sheet? Did they buy better businesses? Did they make money for their shareholders? No. no. No.

What did they do? They bought back stock so that by reducing the number of shares outstanding they could meet their earnings forecast. Not by growing their business. But by manipulating their share count and growing the debt on their balance sheet. Which they can no longer afford.

Here's the best part. So you're Immelt and you realize that's not going very well, but hey, you know what? You're retiring in 2017. How are you going to go out with a bang? Why not return 30 billion dollars to shareholders in one year, 2016. In one year, 30 billion dollars in dividends and buybacks. And whose stock options end up in the money? To the tune of 91 million dollars. That would be Jeffrey Immelt's.

Now the stock has crashed in half, but he's gone and cashed out. He doesn't care. If I was the board of directors of GE, the first thing I would do is file suit against that [Beep]. And if I was a bond holder I'd do the same thing. These people have a fiduciary obligation to put their bond holders and their shareholders first. And they have been grossly negligent. And somebody has got to point the finger at these guys, I guess it's going to be me.

Buck Sexton: They're also the guys who filed a 57,000-page tax return in 2011 and paid zero federal taxes on I think it was 14 billion dollars. Good to have an army of accountants.

Porter Stansberry: Good to have the most powerful media outlet in the country so that no one can criticize you if they want to stay in office.

Buck Sexton: Yeah. It's amazing. Well, people are realizing this now too. The amount of corporate control of different media interests and something that I come up against all the time, it just kinda recedes into the background. But do people really think that, you know Jeff Bezos bought The Washington Post because he cares so much about the future of journalism?

Porter Stansberry: No.

Buck Sexton: I could show you – I'm actually going to be talking about it on radio this week, an editorial from The New York Times in 2000 where they're saying illegal immigration is lawlessness, it hurts the wages of low income workers, it specifically hurts the wages of African Americans. And what changes between 2000 and a few years later when The New York Times is like the biggest open-borders rag in the country? Oh, yeah, that's right. They got a huge injection of cash from Carlos Slim who is very pro illegal immigration, among other things. Bezos owns The Washington Post. All these guys now. They control the media outlets. Facebook. These others that are going to be buying them. So that you can never have the discussion port that you just had about GE if you want to have the platform to make it count. That's the problem.

Porter Stansberry: Mm.

Buck Sexton: Yeah. It's frustrating. Can I tell you a quick secret about GE though?

Porter Stansberry: Yeah. Go ahead.

Buck Sexton: This is embarrassing, but I have a confession for you.

Porter Stansberry: A confession.

Buck Sexton: So I've been, you know deep diving into all things Stansberry Research the last few weeks to set up investments for the year. And I wandered off the, you know wandered off the beaten path. Some equity analysis I found. You know I've got from friends in the business. Somebody was writing something about how GE is so bad and has been so battered that it's actually like a good investment.

Porter Stansberry: Right. It's cheap now.

Buck Sexton: So I put a little bit of money into it. And then in the span of 24 hours, I see – and I know nothing about GE. Like a little bit about the political connection stuff cause that's in my world. And I'm sitting in the chair at Fox Business about to go on TV to talk about what I know. I'm talking about North Korea stuff. And I see this dropping chart of GE and these analysts on TV like, oh, man, GE's getting crushed. I go out there. I ask one of the hosts, what's going on with GE? And she's like, oh, they're totally screwed. They have to do this and that and the other thing. And then I get home and I get your e-mail where you're like, so I've been talking about how terrible GE is for the last 20 years.

Porter Stansberry: Yeah. You're like, oh.

Buck Sexton: Now granted, it wasn't – I didn't lose a lot of money. But it was good. I'm the kid who burned his hand on the stove. It was like a strong buy from a few equity analysts that I read. I'm like, this was a terrible idea, Buck. So I sold out. But yeah, I had managed to invest in GE among the worst weeks in the history of GE to invest in it. But I was only in it for about a few days.

Porter Stansberry: You know, Buck, we have entire model portfolios that we have –

Buck Sexton: I know. I know.

Porter Stansberry: That we've independently researched. And you know Steve Sjuggerud, I want you to understand this. Steve Sjuggerud's capital portfolio was up 26 percent last year. That's the lowest cost of our Portfolio Solutions products. So it's like a 20-stock portfolio. You just buy all 20 stocks. You're done. Up 26 percent last year.

His China portfolio was up I think about 40 percent last year. And his Melt Up portfolio, which has only been operating for maybe six months, is up like 36 percent.

So basically anything you want, you can have from us for free, and I promise you, it's a hell of a lot of more reliable than – by the way, the investment banks who were doing all the lending to GE. Oh, you mean GE is their actual client? Yes. And what am I? You're the sucker.

Buck Sexton: Oh, yeah. No, I told you, this is the first time I wandered off the ranch. And I was like, OK, I'm not doing that again. So anyway. I'm back in the research hub here. And yeah, Sjuggerud, I'm like, hey, Steve, could we do a whole conversation where it's just China investing for novices or idiots? That'll be a separate podcast. But I'm really curious because I want to know.

Porter Stansberry: All right. Well, we're going to bring him in a minute. But before we do that I want to get to one other of my little hobby horses. Buck, you'll never – this is shocking, I know. You'll never believe this, but college students who are paying exorbitant prices for worthless education, don't repay their loans. That's shocking, isn't it? And thanks to Obama, all of the loans essentially, I mean it's over 90 percent of them, are guaranteed by the federal government. So the banks who are making these loans and charging 6% on them, they have no risk. So nobody cares that the Brookings Institution now says that the default rate will be at least 40% by 2024.

Now I've been saying, again, I've been saying this for almost a decade now, that the default rate on student loans will be between 40 and 50%. By the research we've done, over 40% of the outstanding debt is currently not being serviced. That doesn't necessarily mean it's in default yet because there's all kinds of ways you can get into deferment. If you go back to school you can blah, blah, blah. You can work for the government. Whatever.

But the point is, that the taxpayer eventually is going to be on the hook for hundreds and hundreds and hundreds of billions of dollars in losses. Thanks, guys. Appreciate that.

Buck Sexton: I've said this I think to you before here, Porter, on the Investor Hour: When you get all these folks who are mocking the Bernie Sanders voters because the Bernie Sanders voters are saying, oh, you know it should be free and debt should be wiped away, yeah, that's a very irresponsible thing to do with a lot of consequences. But here's the truth. There may actually be the political will for that at some point in the future. I mean you talk about jubilee. The government could, in fact, at some point decide we're going to write off all these debts and essentially socialize the losses.

Porter Stansberry: That's going to happen anyway.

Buck Sexton: That's what Bernie Sanders would do.

Porter Stansberry: It's going to happen anyways. Because there's no way the debts can be repaid and they've already been guaranteed. So if there is a student loan jubilee, it's just a recognition of reality. But guys, think about what that's going to do to money supply, to inflation. And by the way, to the standards that we as a society agreed to live to. If you're going to borrow $100,000 to buy a house, the government expects you to make a down payment and the government expects you to have the wherewithal to pay off that loan. Shouldn't the same thing be true about college loans? Hey, if you want to go to college, that's great. We would love to help you get a head start. You put up half the money. We'll put up half the money. Find. But you have to have a 1,200 on the SAT. Sorry. That's like a threshold. If you don't have a 1,200 on the SAT, don't go to college. It doesn't mean you can't go get vocational training. It doesn't mean you can't have a great career. Electricians make a ton of money. The guys who install HVAC systems make a ton of money. Right. But they didn't spend their weeknights in high school reading Chaucer. They just didn't. And that's OK.

But it makes no sense to lend the guy who couldn't pass freshman English in college, it makes no sense to lend that guy $30,000 to go to college. It doesn't make any sense. And we'd better stop it.

Buck Sexton: Education's become an arms race now. People don't realize it. But when everybody has a bachelor's degree, a bachelor degree becomes what a high school degree was 20 or 30 years ago. Which is more or less where we are now. And by the way, the schools have gotten more and more and more expensive all the time, which is a whole other issue. Schools are outrageously expensive. And my dad tells stories, he was a scholarship student from high school all the way through college and all the way through business school, about saving money for summer jobs and being able to pay off like a semester or two of school. You would have to have a summer job right now as like a professional athlete to pay off the tuitions at these schools.

Porter Stansberry: That's nuts.

Buck Sexton: It's out of control. So –

Porter Stansberry: Yeah. I –

Buck Sexton: - inflation in tuition.

Porter Stansberry: I paid $55 a credit hour as an in-state student at the University of Florida. Was the University of Florida the best college I could have gone to? No. It was the college I could afford. And I worked every weekend at Disney. And I worked during the week at University of Florida. I worked at least 40 hours a week and went to college. No big deal. Still had a lot of fun.

Why would you borrow money to do that? And I learned absolutely nothing. I learned a lot of bad habits. That's what I learned at University of Florida. I learned absolutely nothing.

Buck Sexton: So the story about how I got into media, Porter, the very quick version is supposed to be that like Glenn Beck – whom, you know I do owe a debt of gratitude for bringing me into the business – but that his people found me like a lost puppy in the streets and recognized talent in me. The reality actually is that I had gotten into Columbia Business School and NYU Stern Business School in New York City coming out of the CIA. And was waiting to hear from Wharton Business School. And I had no background in anything business related. And I went to my first of the various meetings where you find out what this actually costs and what your obligations are and what –

Buck Sexton: Ah huh. I had about $2,000 in the bank at the time. And I was like, you know what? I'd like to get paid to do a job. I'm 27, 28 years old. I'd like to get paid. I don't want to do this. I don't want to owe back when you pay it off, close to $250-, $300,000 for this two-year degree that'll get me maybe an entry-level job at like a second-tier finance something somewhere or whatever. Or work as a consultant. I didn't even know what I was going to do. I just figured MBA, you know, means more money. But I looked at it and figured, well, it means more money maybe. But it actually means a lot more debt. So I've faced this one down myself. And I have never doubted that I made the right move. Because I hate debt. I hate it.

Porter Stansberry: You know those schools and those degrees are just basically hoops that allow you to get into very academically challenging positions. Because they signify that you're smart as hell and you can learn. And so if you want –

Buck Sexton: They're credentialing programs. Yeah.

Porter Stansberry: They're credentialing programs. So if you want the opportunity to get a job at a really good hedge fund or a really good financial firm and in a challenging group – because look, it's not hard to get a job as a junior investment banker. You're just going to be working a copy machine all day. That's not really the kind of jobs in finance that you or I would be attracted to.

So we are always, I was always attracted to the hard job. Which is, you know, figuring out what the market doesn't know about a small security that can become a large security that can make a lot of money for people. And as a result, you get to make a lot of money. And so those jobs, those analyst jobs at hedge funds and at big wealth management firms are very competitive and it's only super freaking smart people who are getting those jobs and keeping those jobs. Ridiculously smart people.

Well, I wasn't one of them. But I was good friends with someone who was. Steve Sjuggerud. And so I didn't get a job at a bank or a hedge fund. I got a job with Steve. And, you know I'm a slow learner, but 10 years later I knew what I was doing. But most people don't have that kind of mentorship, that kind of internship, that kind of apprenticeship. Most people have to pass the gatekeeper. And the way you pass the gatekeeper is you say, hey, I made a 1,400 on the SAT and as a result I went to Wharton. And, yeah, I can make spreadsheets, you know do the square dance. And that's what they're looking for.

I don't know if you would have been good at that or not. I think you're a very smart guy. But I can't see you slaving away for 12 hours on a spreadsheet. It just doesn't seem like that fits –

Buck Sexton: Nah, it's not my jam.

Porter Stansberry: Yeah. What you like to do with your time. Likewise, I'm surprised you were a sharpshooter for the CIA. It's shocking.

Buck Sexton: Definitely not a sharpshooter. Sharp memo writer. Making those lattes.

[Music]

Porter Stansberry: All right. Well, listen, we are joined now by my very old friend, Steve Sjuggerud. I had the very good fortune to meet Steve Sjuggerud at the beach when I was 12 years old. And I don't know if Steve and I were the only surfers in central Florida who didn't do drugs and generally did pretty well in school and liked our parents, but we were certainly the only ones that we knew. So out in the lineup there was me and Sjugg and 80 other derelicts. And very fortunate to make that relationship with Steve. He helped get me to University of Florida. And then after college got me my first job in financial research. Sjugg, why don't you set the stage for us here? The very early days of our careers in financial research we were – well, I drove down to meet you and you were kind enough to let me sleep on a futon in your apartment for a couple of days. Oh, actually no, for a while there we were sharing a one-room efficiency.

Steve Sjuggerud: That's right. Yes.

Porter Stansberry: With a third roommate.

Steve Sjuggerud: We had a third roommate. A very surprisingly large third roommate. It was actually a rat.

Porter Stansberry: It was a rodent of unusual size.

Steve Sjuggerud: It was a rodent of unusual size. Yes, we did start out in an efficiency living together. And the couches doubled as the beds. I mean it was – this was tiny. And I think a lot of people think, oh, well, Porter Stansberry, the big famous financial guru, but you know we really did start from humble beginnings.

Porter Stansberry: That's right. Well, you know it was a very interesting time. I found, by the way, an article from 1995 about the newsletter industry from the New York Times. I've got to share it with you.

Steve Sjuggerud: OK.

Porter Stansberry: Because it documents all the stuff that you and I try to tell people what's going on at the time. Buck, again, this will shock your sensibilities, but in the early days of the newsletter business most of the newsletter writers were very corrupt. And the only stocks they would recommend were penny stocks that were really crappy, where they got hundreds of thousands of shares or more in exchange for a recommendation. So I put a stock that's trading at a dollar into my newsletter. I show it to 100,000 people. Oh, big surprise, the stock goes to four or five bucks. I claim a great track record success. I just made people 400 percent on their money.

Well, of course, what really happened was I had a bunch of shares. I ran the stock up. I sold all my shares. The stock collapses. The newsletter readers get burnt. I keep a lot of money. And the New York Times documented this in a number of writers who you will recognize.

Steve Sjuggerud: Wow.

Porter Stansberry: And the writers all go, well, that had nothing to do with it. I was just using good judgment. That's a great business. My consulting is different than my newsletter writing, blah, blah, blah, blah, blah.

Steve Sjuggerud: It eventually reached the point where you had to at least say that you were receiving compensation whether you actually said it or not, but at the end of newsletters it would say, I received $50,000 for writing this newsletter about this stock. Plus I received a million shares or whatnot. And people would still buy the stocks.

Porter Stansberry: They would. But that's something different. Those were the paid PR guys. These were just – trust me, you'll recognize the names of these people. They're just straight newsletter guys. And so it took a long time for the industry to get reformed. And I'm proud to tell you that Steve and I, well, really Steve said, man, you know what? If we just – this is a good enough business you don't have to be crooked to be successful. And if you would just take good care of your subscribers, then this could be a great business.

And so instead of cheating, we just always figured our job was to do the hard work that investors should do before they make an investment, Buck, buying GE. You've got to know what you're buying before you do it. And, of course, we've always put our subscribers first, so we've never managed money.

Steve Sjuggerud: We were never beholden to anyone. Right.

Porter Stansberry: Never. We never –

Steve Sjuggerud: Except our subscribers.

Porter Stansberry: Right. We never got paid to recommend anything. We never managed anybody's money. Independent always. But, Steve, one more quick tale if you can before we tell people something that's useful. Will you please, to the best of your ability, tell the fun story of the night that the police thought my car had been stolen.

Steve Sjuggerud: Absolutely. Absolutely. So yeah, it was great. I mean we really did come from humble beginnings in this. And so Porter worked some crazy hours. I used to joke sometimes he would work 9 to 5 where he would come in at 9 one morning and leave at 5 the next day without stopping. Literally working all through the night and through the next day. If we had a big deadline and he wanted to get it right and he was new in the business and he wanted to do great work. And it was admiral and inspiring.

But we lived in Florida. And his car, the air conditioning was broken. Everything was wrong with it. He would leave the windows down in his car. And the car would be in the parking lot. But it's the state of Florida, which every afternoon at some point there's a torrential rain for about 15 minutes. And so Porter's car would – you know you'd hear the crack of thunder and Porter, of course, you know got the lowest on the totem pole at the time, so he didn't have a window or anything his office. You'd hear the crack of thunder. You'd see Porter spring out of his office to go get his car windows rolled up before there was an inch of water in the bottom of the car.

Porter Stansberry: Sometimes I didn't make it.

Steve Sjuggerud: Sometimes he didn't make it.

Porter Stansberry: I didn't know it was raining.

Steve Sjuggerud: So apparently – Porter's dad is awesome. I mean just a really fantastic guy. I mean I thought of him as my second dad. When my parents moved out to Colorado in college, Porter's parents were sort of my surrogate parents in Florida for a time there. So his dad's awesome. But his dad was apparently awakened by the police one night in Orlando. Said, Mr. Stansberry, your car has been stolen and stripped and it's in a parking lot in south Florida. You know it's 2 in the morning, 3 in the morning, and we're sorry to inform you. Porter's dad wakes up, oh, oh, what's going on. Someone stole my car here in Orlando and drove it to south Florida? And then as he came to his senses he realized, wait a minute, Porter's in south Florida.

Porter Stansberry: Yeah, yeah. I'm not driving a 1983 Honda Accord with 315,000 miles on it. And so my dad and I have the same legal name. We're both Frank Stansberry. Buck, my first name is Frank. No one's ever called me that cause it was too confusing in the house cause of my dad. So I was always called Porter, which is my middle name, of course.

And so my dad's like, oh, you don't want to talk to me. You want to talk to Porter. And they're like, ah, ah, ah, you know.

Steve Sjuggerud: Well, this car, by the way, the windows are down. The radio is ripped out of the dashboard.

Porter Stansberry: It wasn't working anymore.

Steve Sjuggerud: I mean –

Porter Stansberry: The funny thing is there was no passenger seat. Because to get the radio out I had to take the passenger seat out to get the amp out of the floorboard. And I never could figure out how to get the passenger seat back in.

Steve Sjuggerud: So, yeah, that's our humble beginnings –

Porter Stansberry: So the police thought my car had been stolen and stripped. And my dad was like, well, where is it? And the police told him. And he goes, well, that's my son's office. And the cops are like, well, it's 3 in the morning. And my dad's like, my son doesn't care. He's at work. Leave him alone.

Steve Sjuggerud: Yeah. So I mean Porter, you know I taught Porter everything I knew, which didn't take so long. He learned so fast and he was off to the races and doing extraordinary things right from the beginning. But it was definitely humble beginnings.

Porter Stansberry: So, Steve, we brought you in here not to talk about our funny mid-'90s days, but to talk about the incredible run you have at the beginning of this bull market. And I want to set the stage for Buck. Steve, as you know, you know him personally, he's a very conservative guy. He's a straight shooter. Very modest. Self-deprecating. And he doesn't take risks either publicly or privately. So he marries his college sweetheart. He's got two great kids. There's a white picket fence, I'm sure. You know. Like he's the guy you wish you could have as your neighbor.

In 2009, stocks got so cheap and sentiment was so negative, which for a contrarian is a very attractive time to buy stocks, Steve, you went out and got a second mortgage on your house or a mortgage on your house –

Steve Sjuggerud: I did. Yeah, second mortgage. Yeah.

Porter Stansberry: I mean who does that – and bought stocks with it.

Steve Sjuggerud: Yep, that's correct.

Porter Stansberry: So that's the ultimate pounding on the table this is the right time to buy stocks. And I admit, I did much the same thing.

Steve Sjuggerud: Well, either the world was about to end, you know with Lehman, or it was the best buying opportunity of our lifetime.

Porter Stansberry: Of our lifetimes. Yeah. And I admit, I didn't take on debt but I did put all of my liquid assets into stocks, which I had never done before. And so –

Steve Sjuggerud: That's the only time I've ever done that. Taken money against my house for an investment like that. So.

Porter Stansberry: Yeah. By the way, we did it independently. And I'm like, Steve, I don't know if I should tell you this cause you're probably going to tell me I'm crazy and I know we don't behave this way, but I just put all my money into stocks. And Steve's like, well, Porter, you won't believe this, but I just borrowed money and put it all into stocks. And I'm like, oh, my god, we're both complete maniacs and we're normally the diversify, have some cash, be cautious –

Steve Sjuggerud: - I've been doing this since the early '90s and I'd seen so many crises come and go. I mean especially since I specialized in international stocks. So I'd seen it over and over again in Asia and over and over again in Argentina. And just, you know it was picture perfect.

Porter Stansberry: It was. It was picture perfect. And we were buying stuff that was just – it was silly. I remember looking at Starbucks and eBay and all these companies under 15 bucks. Tiffany. McDonald's. I mean it was just – you could buy the best franchises in the world for peanuts.

Steve Sjuggerud: One of the things I did was I bought an India small-cap hedge fund where they owned more value in stocks in a company than the market cap of the company. And even including that it was still at like four times earnings. You know there was – it was the cheapest I'd ever seen anything on the planet.

Porter Stansberry: It was a great time to be an investor and it was easy. Forget about shooting fish in the barrel. The whole market was in the barrel. I mean everything was cheap and attractive and –

Steve Sjuggerud: But investors were deathly scared.

Porter Stansberry: And we couldn't, of course, convince anyone to buy stocks. Now fast forward to 2015. I started getting very worried about the credit cycle. Stocks seemed very, very expensive. And I'm like, hey, Sjugg, it's probably time for us to start moving to the sidelines. I mean let's not get greedy. We've had –

Steve Sjuggerud: Six years.

Porter Stansberry: We've had a great bull run. And I was full bullish from '09 to 2015. I took a little bit off in 2011 cause I was worried about Europe. But I got full bullish again for 2012. We had a lot of great big homerun stocks. Big. But 2015 comes around and I'm like, hmm, you know this bull market's getting long in the tooth. Interest rates for some corporations went up to about 10%. There's a little bit of a bear market there in the credit markets. I thought that was going to roll over into equity. And we did have a like almost a correction in January 2016. I think the market was down like 9.9 percent from top to bottom. But it didn't correct. There wasn't a bear market. And the bull kept going. And that's where the stories really diverge, Buck. I have been too cautious ever since then. And Sjugg has been unbelievable, unassailably consistently bullish. To the point where in the last year, I just mention, all three of the portfolios you're involved in have dramatically outperformed in the market. And the market's up 20%. So your capital portfolio is like at 26%. Something like that.

Steve Sjuggerud: Yeah, last year.

Porter Stansberry: Your China portfolio's at –

Steve Sjuggerud: Fifty-five-ish.

Porter Stansberry: Fifty-five for the year. I thought –

Steve Sjuggerud: That's the average return on the current – I mean on all –

Porter Stansberry: But for the year it's probably up 30% something.

Steve Sjuggerud: Yeah. Easy.

Porter Stansberry: And your Melt Up is around the same.

Steve Sjuggerud: Yeah. Thirty-five-ish or something. Yeah. And that's only a few months into its life.

Porter Stansberry: Homerun, homerun, homerun, homerun. And the lesson, and I wanted Steve to just to talk about this for a bit, is it's a very important lesson. And that is that there are very, very few and certain times in a bull market cycle where even the investor enthusiasm and bullishness doesn't lead to a correction. Most of the time when people get this enthusiastic about stocks it means there's going to be a correction because everyone who's bought, they've already bought and you just have to pull back.

But when investor sentiment reaches euphoria at the end of a bull market you get this thing which is the Melt Up, they call it, or the blow off top. And if you're in the market that can be – you can make a decade worth of gains over the last four or five months of the run.

Steve Sjuggerud: The biggest gains can often happen then. Like we saw it in the real estate market. You know when everybody's getting in and everyone's levering up. And you and I experienced it in the U.S. with the Nasdaq boom. And yeah –

Porter Stansberry: Eighty-five percent the last year.

Steve Sjuggerud: And I think that's part of what drove me to – so and actually in 2015 at our Alliance meeting for our lifetime subscribers, my speech was called "Welcome to the Melt Up." And I've started hammering the possibility of this Melt Up theme back in 2015. And I feel like just in the last month or so now everyone is –

Porter Stansberry: Using that word. Yeah.

Steve Sjuggerud: They're using the word. You know there's no trademark on the word or anything. But I feel like I was – I've been strongly using it for a long time with a lot of our subscribers. And you are right, one thing that I want to talk about though as well that I don't want us to ignore is where to from here. What happens two years down the road, five years down the road, seven, 10 years down the road.

So let me just give the overview that I do believe that there is still more upside potential in the stock market. And the significant reason is it's not 1999 yet. As we joked, your mom has not called you and said, Porter, should I buy some AOL? You know as she did I think it was January 2000 or Christmas vacation 2000. And it's not the real estate peak. We don't have that feeling of that type of euphoria yet.

We are certainly getting much closer just in the last month or two.

Porter Stansberry: Yeah, we haven't yet had exotic dancers emailing us for investment advice.

Steve Sjuggerud: That's right. Yeah.

Porter Stansberry: Which is one of the usual signs we do eventually receive.

Steve Sjuggerud: So I think that my Melt Up thesis, so it was originally built on the idea, you know I first call it the Bernanke asset bubble. But it just kept running. The very basic principal was that interest rates would stay –

Porter Stansberry: Yeah, we're now on the third central banker of your bubble.

Steve Sjuggerud: Yes.

Porter Stansberry: The Bernanke, Yellen, and what's the new guy's name?

Steve Sjuggerud: Yeah, yeah, so now we're changing it to the Melt Up where it can encompass everyone. Yeah.

Porter Stansberry: This is a bubble that's so big it has hyphenated.

Steve Sjuggerud: Yeah, that's right. That's right. Yep. So the basic concept was that interest rates would stay lower than people could imagine for longer than they could imagine. And therefore, asset prices like stocks and real estate would go higher than you can imagine. And all of these things have been true this entire period of time. Now we're starting to see interest rates come higher. So the Bernanke asset bubble, the Melt Up, the things that drove it are starting to go away. But that doesn't mean it can't continue to run away from us.

Porter Stansberry: That's right. And just to protect my own reputation I would like to point out that I didn't just start shorting the market in 2015. I just added more cash and added more hedges to my portfolio. The Total Portfolio that I managed for us. And we did fine. We were –

Steve Sjuggerud: Fantastically. Yeah. Over 20%. I mean, yeah.

Porter Stansberry: Yeah. We had a great year. And we were protected in case something had gone wrong. But it didn't. This was the lowest volatility I've ever seen. This is one of the biggest gains I've ever seen in the market. And this is definitely the most euphoria I have seen since 1999. But I agree with you, I don't see yet the signs of the end. But I do see how it will end. And I know that you agree with me about this.

Steve Sjuggerud: Yeah. I do agree. And it's interesting that, you know Porter and I do our work separately from each other. We do our homework differently. But we often – I wouldn't say we often even come to the same conclusions, but in this particular case –

Porter Stansberry: We do sometimes though. And it's always like, oh, I got this great idea. Oh, I do too. I mean this is a really good one. Yeah, well, let me tell mine first. No, let me show you this. Oh, it's the same thing.

Steve Sjuggerud: It's the same idea. Yeah. And so, Buck, over history an interesting thing happens. And I think you might get a kick out of this because it is government-driven. Essentially the main cause of recessions and ultimately stock market collapses is a government. And the reason I say this is you have these government actors essentially, the Federal Reserve, they are pushing around short-term interest rates. And they're trying to do this in a benevolent way. Trying to help the economy and trying to prevent these very things that they end up creating. But long-term interest rates are essentially set by market forces. The 10-year Treasury bond is set by, you know the free market essentially. And short-term interest rates, very short-term interest rates, they're set by the Fed. The Federal Reserve.

There's sort of a natural structure where if I'm going to lend you money, Buck, for a long period of time, I'm going to demand a higher interest rate than if I was going to lend you money that you were going to pay me back tomorrow. So there's a natural structure where short-term interest rates are typically lower than long-term interest rates. I hope that makes sense. There's more risk if someone's going to lend for the long run. Who knows where you're going to be in five, 10 years and are you going to pay off that loan?

So a unique thing happens though. On occasion, the Federal Reserve trying to slow down a runaway economy or trying to slow down when the unemployment rate gets too low or when inflation gets too high, the Federal Reserve will raise interest rates in the short run higher than long-term interest rates. So you know this upsets the market, the natural market, the natural order of things. And I would say that the last three market peaks, the last three recessions were all preceded by the Federal Reserve raising short-term rates higher than long-term interest rates. And it's a very simple idea. Does it make sense?

So what we're seeing is now the Fed is all of a sudden off pushing up short term interest rates –

Porter Stansberry: Sjugg, let me explain it this way.

Steve Sjuggerud: Hopefully I didn't make it too complicated there.

Porter Stansberry: Well, there's a lot of detail there. I like a simple metaphor for folks who don't spend their lives studying interest rate curves.

Steve Sjuggerud: Yep.

Porter Stansberry: So, the simple metaphor is normally the financial system acts like gasoline on the economy's engine. And you can think of the Fed pressing down the gas pedal giving the economy more fuel. Just as a metaphor. When interest rates are attractive for financial firms. When financial firms have to pay a little bit of money, a little bit for the money and can lend it out at a high price, so when short-term rates are below two percent and long-term rates are above four percent, there's a lot of gas coming into the economy cause the Fed is pushing it and it's profitable to do the lending. So it all happens.

Now when the economy starts to overheat and inflation gets to be a problem or the Fed thinks it will, they have to take that gas pedal off. And the way they do that is they make it unprofitable to lend. So they make the costs on the banks go up and the short-term rates go up. And that, as a result, reduces the lending, reduces the capital flowing in the economy, reduces the liquidity and has the opposite impact on prices.

And what we're seeing is that the Fed is coming back on that pedal. The gas is coming off the economy. So even though stocks are going crazy and bitcoin's going crazy, sort of the underlying dynamic is a cooling process right now.

Steve Sjuggerud: Yeah, absolutely. And so Porter and I have both said that we expect the short-term rates will rise above long-term rates in the near future. And when you look back over history, the last three times – basically every time over the last 40 years, but the last three times in particular which are all in our memories, you had about an 18-month window from when the Fed raised short term rates above long term rates to when the recession and the stock market collapse actually came. And so it's amazing the success of this simple indicator, but the logic is there too.

So I believe that we could have an additional 18 months to 24 months of upside in this stock market. That we haven't reached that peak of euphoria. This is me. This is not Stansberry Research as a unified anything. This is just me talking. But a lot of people have heard this from me. And something that I've just started writing about in the last week or two is, OK, so Steve, you've predicted this bubble. This Melt Up. You've talked about it for years. But I really want to look ahead. Where do we go after this? What happens next? And there have been a couple papers that came out recently. One from Jeremy Grantham and one from Rob Arnott of Research Affiliates. These are basically esteemed value investors.

Jeremy Grantham says that the return that you can expect on stocks over the next seven years is -4.6% a year for the next seven years. That's his prediction. Based on his homework. And I can tell you briefly what that is. And Rob Arnott did his own version of value-based homework and he said that the return that you can expect over the next 10 years as a total return of zero. Zero percent.

So these are big numbers. These are real numbers. And essentially what they are getting at is they are just simply talking that the market will return to a mean over time. Reversion to a mean. And to me, a lot of people see, oh, well, Steve likes to follow the trend. You know Steve waits for the uptrend before he buys something.

What I believe is that in the short run the trend matters. But in the long run, value matters. And reversion to the mean does matter. And we are starting from a point today that is as expensive as any time in history. So I recognize that the long run picture when you consider reversion to the mean is pretty darn scary. And I still believe in the short run that there's still plenty of room on the upside before that revision to the mean is going to kick in.

Porter Stansberry: Got it. And I think that's great advice. And obviously I've been preparing for that downside as well. And I know that at the research group we're going to do fine. In fact, on a comparative basis we do a lot better in flat to down markets because that's where our research really pays off. In a bull market, everything goes up.

Steve Sjuggerud: Well, also, just one final point on that is to me this is a moment to make money while the sun's shining. And then play great defense for the following essentially eight years. People don't realize how long bull markets can run on and how long bad times can run on in the markets.

Porter Stansberry: Yep. It can be another –

Steve Sjuggerud: And they do confuse a good economy with a good stock market. That's another – anyway.

Porter Stansberry: Well, listen, I want to get to the – I appreciate all that. And I think that's helpful for people. But I want to get to one more thing about you that I think is inspiring and interesting for folks. And, you know we don't have much time. I want to wrap it up in about five minutes because we've been on for almost an hour now. But what I – one of the things I wanted to tell people about Steve is, Steve has been the smartest person I've known my whole life and he's incredibly talented. Buck, what you don't know about Steve is he's a world-class guitar player. He actually invented a new kind of guitar. I don't know. I can't explain it.

Steve Sjuggerud: I'm deep in the weeds in the guitar stuff.

Porter Stansberry: And he's also one of the world's great watermen. So he was a great surfer. He was a great kite surfer, a great wind surfer, and now he's one of the best stand up paddle guys in the world. He's been all around the world surfing. You know all over the Pacific Ocean. Hawaii, Central America, everywhere surfing. And he's –

Steve Sjuggerud: Porter's giving me a lot of credit here I think, but I appreciate it.

[Cross Talk]

I appreciate it. Keep raining it on. Thanks, Porter.

Porter Stansberry: And, you know he's been a great family man, you know. I think people underrate how big of a deal it is to have a great marriage and to be a good family man. So I think a lot of people think Steve's a successful guy cause he writes one of the biggest financial newsletters in the world. He has for 20 years. Obviously, we've done well in this business together. But it hasn't really changed anything about Steve. And every time I've tried to get Steve a promotion or to get him into position where he would actually make more money because he'd have more responsibility for our company, he always politely turns me down. And says, no, you know I'm not doing this per se for the money.

And so I just wanted to ask you a question, Steve. You're approaching 50 years old. You're not there, but you're approaching 50 years old. You and I have both –

Buck Sexton: Doesn't look a day over 40, by the way.

Porter Stansberry: Well, that happens when you spend a lot of time surfing. It's good for you. You and I both have made more money than we realistically need. I mean there's different – I spend a lot more than you do. There's different degrees of that. But we've certainly made enough money if we wanted to retire we could easily. We're still working very hard. And I just kind of – I wanted to ask, you've always lived life on your terms. Steve was accepted to Princeton. He didn't go there. He went to University of Florida. "Porter, it's cheaper and you know there's nowhere to surf at Princeton." So he's always done things his way and always had his own roadmap for life. Steve had opportunities to be a hedge fund manager at big, big shops. He always turned that stuff down. And stuck with a simple life that he enjoyed. And I wonder, Steve, what's next for you now? You know. How do you take the foundation that you've built in your life and what's stage two look like to you?

Steve Sjuggerud: That's a great question, Porter. It's a challenging one. And I've watched our mentor, Bill Bonner, continued to work extremely hard. But to him I think it's not work. I mean, he can't not figure out what's going on in the world and share that with people. And that's – you know we'll go to dinner parties or something and you know I mean I love our family friends and such. But I mean, at times I'd rather be working than doing what other people think is fun. You know to me it's really fun to chase down an idea, dig into it and roll up your sleeves. You realize that you don't know an idea until you write about it. Because you realize what you don't know.

So I don't see myself not doing what I'm doing because I just – it's fun. It's one of the most fun things. It just so happens that it works out well for our subscribers. You know, Porter, you were talking about offering potential different positions where I could be sort of a boss in our type of industry or a more powerful thing. But it was kind of like taking the shoe cobbler and making him the manager of the shoe store. I would rather be making shoes than managing the store. And I want to continue to be making the shoes.

Porter Stansberry: I think what Steve's saying is that a lot of people work really hard so they can retire to a place like Amelia Island, Florida, and play golf and relax and do something that they want in their spare time. And what Steve did was he retired to Amelia Island when he was about 35. And he's been doing what he wanted to do with his life the whole time anyway. So maybe there isn't a change in my life or yours. Because I can't imagine not doing what we do. Like Bill and like you, I love so much following the drama and the story. And I love the discoveries. And I love knowing stuff that the mainstream media won't print.

Steve Sjuggerud: You know there's a really cool validation that I get out of what we do too. For example, this week I'm or in the next couple months I have a few properties closing that I bought in 2009 and 2011. And each of those are all closing at about three times what I paid for them in cash. You know not leveraged. And you know there's just a validation of coming up with an idea that no one has thought of and sharing it with your –

Porter Stansberry: One of those closings wouldn't be the property, would it?

Steve Sjuggerud: One of them is ours. Yes.

[Cross Talk]

So yeah. So I think we made about three times our money on that.

Porter Stansberry: Whoo. That's awesome. Congrats.

Steve Sjuggerud: So ah, anyway. So the validation – it's just so much fun to go to China. When I was, for example, you know one of my recent ideas is China. And I went over there. And, Porter, we're sitting down with the heads of research for the very top brokerage firms in China. And this is two summers ago. And I am telling them the China story. Like, no, listen, this is a great story. And they're kind of shuffling like well, you know we just came out of a correction. I mean, you know I hear ya. I mean, it's supposed to be their job to pitch to me the great China story –

Porter Stansberry: Well, I saw you do it at the Long Beach coin show in 2004.

Steve Sjuggerud: Yeah.

Porter Stansberry: You're like, man, coins are going to be a great investment. And then everyone freaked out, don't say investment.

Steve Sjuggerud: Yeah, that's right. That's right. Yeah. You can't –

Porter Stansberry: You can't say that word here. We're just hobbyists.

Steve Sjuggerud: That's right.

Porter Stansberry: Yeah. You could buy – back then you could buy 100-year-old gold coin for $400.00. Same coin today is $1,800.

Steve Sjuggerud: That's right.

Porter Stansberry: That was a great investment.

Steve Sjuggerud: And, you know just entering a world that no one believes in and –

Porter Stansberry: By the way that Long Beach coin show in 2004 was just one of the most shocking times. We were so clearly contrarian. And, Buck, you know contrarian means that you believe the opposite of what everyone else believes. The gold market – the gold coin market – had been dead since the late 1980s. Had been dead.

Steve Sjuggerud: Dead.

Porter Stansberry: And these guys were so deflated.

Steve Sjuggerud: I was the youngest guy there by about 20 years.

Porter Stansberry: Right. I mean it had been 15 years since anyone under the age of 50 had walked into that show.

Steve Sjuggerud: Yep. And the next year I put on a conference there and I brought Seabridge Gold, which no one had heard of, and then brought – said we've got to get into gold. And Seabridge ended up going up 995% on that recommendation.

Porter Stansberry: The other fun thing about that is we just get to discover. We get to make these discoveries. And one last part of that gold thing was we actually flew to Zurich with someone who will not be named. Very, very wealthy guy who was taken with Steve's idea. And his point was, let's go see how many of these coins are really out there. And –

Steve Sjuggerud: The belief in the market was that all of the U.S. gold coins had shifted over to Switzerland to get out of the – to prevent from being melted. Yeah.

Porter Stansberry: They supposedly had been moved in the '30s and '40s out into Switzerland. And so we went to actually look in the vaults, Buck, in Switzerland at some very, very big famous Swiss banks. Guess what? Coins weren't there.

Steve Sjuggerud: That's right. Yeah. This guy had flown over to buy all of their inventory. Whatever they had. And they weren't there.

Porter Stansberry: They're out. They had melted a whole bunch of them. Other places had bought them. The Chinese had bought them. It was just a really fascinating story of trying to figure out where all that gold was. And once we realized there was no inventory, we knew the price was going to go crazy, which, you know which it did.

Anyway, Steve, it was great pleasure having you on the phone. Buck, we have time we'll get to the mailbag real quickly.

Steve Sjuggerud: Thank you guys.

Buck Sexton: Yeah, sure. Let's get through it. And by the way, Steve, that was awesome, man. Thank you.

Steve Sjuggerud: Oh, thank you. Thank you so much.

[Music]

Buck Sexton: All right. First up in the mailbag this week. We actually have a question that includes Steve. So, Steve, you can't go anywhere: Buck, Porter, Steve, I'm a Stansberry Alliance member and a longtime listener back to the biblical days of the old Stansberry radio program known as BB for "before Buck." And now AB for "after Buck." I like this guy. I have to say, Stansberry Investor Hour is much better having a professional cohost with a viewpoint. Not only has Porter converted me to a subscriber, but Porter's worldview and paying more in taxes has converted me from a Democrat to a libertarian. Man, this is awesome. You've interviewed many Stansberry writers, but you missed the biggest interview, Steve Sjuggerud.

Porter Stansberry: No, we didn't. We just did it.

Buck Sexton: He is one of the main reasons why I first subscribed to your research. It would be great to hear Steve and your opinion on the following. First up, Steve, do you think ETFs are in a bubble? And then the second one, how do you determine trailing stops for ETFs and leverage ETFs? There's been so much discussion regarding trailing stops for individual stocks, but how does this change when investing in ETFs? Specifically, I am interested in hearing your thoughts on setting percentage trailing stops based on volatility and risk/reward ratios. There we go, Steve.

Steve Sjuggerud: Yeah. That's a lot of things in there in that question. So yeah, so ETFs in a bubble, I mean me, I'm actually a big fan of ETFs. It's a way for individual investors to spread their risk at a low cost. So I wouldn't consider them ever really in a bubble. It's just a way to get a large basket of securities in a sector that you like or a country that you like, like China. I'm not worried about ETFs. For the most part.

So the second question about trailing stops, to me this is the most important thing that people can possibly do with their money in the Melt Up. And a great example is Porter and I – I shouldn't give myself credit here. Porter recommended a stock called JDS Uniphase in the last Melt Up in 1998 did you, or '99?

Porter Stansberry: January '99.

Steve Sjuggerud: So January '99. And the stock went up 1,600%. And we used a 25% trailing stop on this stock. So the stock went up 1,600%. And then the stock fell by 25% and we hit our trailing stop on the stock. And so we told investors to sell. I don't know if it was probably March 2000, something like that. And investors pocketed a 1,200% gain on the stock in say 15 months. Not a bad trade. But I'm almost certain that most of the subscribers not only didn't get in on Porter's initial recommendation, but they bought later and later in the recommendation and they added more and more as it went up. And then the real killer is as it's turned down, instead of them following our advice to take your 1,200% profit off the table, they instead bought more on the way – it treated me so well on the way up and now I can buy it at a bargain. And the stock actual ended lower than Porter initially recommended it.

So I am certain that most of the subscribers instead of making a 1,200% return following our recommendation and using a trailing stop instead ended up losing money on the stock.

So I want our subscribers to participate on the upside and get the JDS Uniphase type, you know recommendations on the way up here I the melt up. But they must follow our trailing stop recommendations.

Porter Stansberry: The people who are new to Stansberry Research won't. And there's nothing that you can do about that unfortunately. These are one of the – this is one of these things you have to learn the hard way.

Steve Sjuggerud: Yep. Pay your tuition.

Porter Stansberry: But we've been coaching this to investors since 1996. And so there are now dozens of years' worth of experienced people who have been following us. And they are all on board. And I would also point you to use our partner at TradeStops. Tradestops.com. Their software makes all the stuff just completely simple. Sends you an email any time you hit a trialing stop. Then you just sell. You're done.

Steve Sjuggerud: Yep. I mean Dr. Richard Smith literally is a PhD in uncertainty. He's devised these systems to give you the optimal trailing stop. And this listener, he asks, what percentage trailing stop should I use for each of these positions? I would urge you to use TradeStops. Richard has done all of the math, all of the historic math to show the optimal exit. And of course, if you have a less volatile stock you'll have a tighter trailing stop. And if you have a more volatile stock you'll have a wider one. And there are all kinds of technical answers. But instead of having a technical answer with TradeStops, Tradestops.com, you just type in your stock symbol and it tells you what the trailing stop should be. The optimal one based on history for that stock. And the more volatile the stock is, the wider the trailing stop it would have. Buck, this might not be your area of expertise, so you know – what am I missing in my answer that you would like to hear?

Buck Sexton: No, it's definitely not my area of expertise. But it's awesome for me to be learning all this stuff. So if somebody wanted to put in TradeStops to their portfolio, they'd literally go to Tradestops.com for example and they can find out what a reasonable good level would be for that?

Steve Sjuggerud: That's right. Yep. It tells you – and so –

Porter Stansberry: Not just a reasonable. They –

Steve Sjuggerud: Specific.

Porter Stansberry: Yeah. Various stocks have different harmonic ranges, if you will. So there's sort of a normal steady state trend that they're in and when they break out of that trend that's when you want to sell. But that spread, you know is going to be different for every single stock. And Tradestops.com does all the math for you. Richard Smith designed all the programming. And so it makes it very easy. And the biggest thing is you can actually just input – with a couple clicks, I mean less than five minutes for sure. Probably less than a minute, you just enter your brokerage log in and it is able to read – it can't do any trading for you, but it can read what's on your brokerage account, populate the trade stop software, and tell you immediately what your position size should be, what your trailing stop should be and how much risk you're taking in your portfolio. All of which is information you really can't get any other way.

Steve Sjuggerud: And so if you believe me that, you know we're in a Melt Up and that there's still significant potential upside, but you also believe me that in the long run the story is much scarier, what are you going to do to make hay while the sun shines but still get out in time? I don't have a better answer for you than using Tradestops.com to help you get out and to capitalize on those trade like a JDS Uniphase like Porter's recommendation from 1999. Where if you followed our advice you would have made 1,200%, but I bet the likely outcome was more than half the people actually lost money on that. Just because they didn't want to follow – yeah.

Buck Sexton: As a quick follow up, on ETFs you mentioned China specifically. Are there a couple of China ETFs that you are really strong on for this year? I mean if somebody were –

Steve Sjuggerud: Absolutely.

Buck Sexton: – theoretically, let's say, to get into this now, which Chinese ETF would you say is the way to go?

Steve Sjuggerud: Yeah. The short answer is the KraneShares China A ETF. The symbol is KBA, the KraneShares Bosera MSCI China A ETF. Symbol KBA. And a lot of our China recommendations have gone up an incredible amount, but the China A shares have actually not soared that much. These are the ones that trade locally in China. Buck, it's a longer story for you, but in short, hundreds of billions of dollars are going to flow into China A shares in the next few years as China opens up its markets and international investors are forced to allocate to China. And that money is going to flow into the stocks in that fund. So even better, when the U.S. sneezes the rest of the world stock markets usually catch a cold. But China is just so far – China A shares are essentially much less correlated to global stocks than any other major market. So even if the U.S. starts to go down, Chinese A shares can still do very well. So KBA would be my favorite recommendation for that. Hypothetically if – theoretically if someone was interested in buying, right?

Buck Sexton: Right. Yeah.

[Cross Talk]

Porter Stansberry: And by the way, freeloaders, go buy Steve's newsletter. It's all of $100. I mean the caliber of advice that you can get from us for peanuts is just shocking that still people, you know – well, give me something for free. Have a little something for free. We used to call those guys on the old show, we used to call them T-rexers, cause their arms are too short to reach their wallets. They want everything for free.

Steve Sjuggerud: Speaking of T-rexers and speaking of great metaphors, I've been meaning to ask you, Porter, I want to know if this was yours or if you borrowed it from somewhere else. You have such a vast inventory in your head. But you said like squirrels watching a bank robbery. Now where did you get that one from? That's too good.

Porter Stansberry: Like squirrels watching a bank robbery.

Steve Sjuggerud: Was that from here? Was that – where is that from?

Porter Stansberry: No, I've got to give credit. That's a Bonner-ism.

Steve Sjuggerud: It's a Bonner-ism.

Porter Stansberry: Yeah.

Steve Sjuggerud: That's great. Yeah. See that's our mentor anyway. Yeah. We –

Porter Stansberry: I've stolen a lot of my best stuff from him.

Steve Sjuggerud: Yeah. That was good.

Porter Stansberry: Yeah. That's one of my favorites. I mean it's just so perfect. My favorite squirrel watching a bank robber moment was the U.S. government's geologic survey. The USGA or whatever it's called. I forget all the details. There's so many government agencies.

Steve Sjuggerud: [Inaudible]

Porter Stansberry: The USGS or whatever it is. The people who are supposed to be able to figure out how much hydrocarbons are left in the country and they're supposed to be managing our country's resources, right? Well, these guys put out a paper in 2006 that explained that the U.S. was dangerously consuming its reservoirs of natural gas. Their offices, for the people that wrote this paper, were in Dallas, Texas. So just north of Dallas, Texas, like five miles there is this thing called the Barnett shale. These companies started doing this hydraulic fracking and horizontal drilling combining those technologies. And they turned the Barnett shale into the biggest gas fields in the world. Between 2001 and 2008. And the guys in the office in Dallas –

Steve Sjuggerud: Didn't know it. Yeah.

Porter Stansberry: Had no idea it had happened. Like squirrels watching a bank robbery.

Steve Sjuggerud: That's good.

Porter Stansberry: Anyways. I just, yeah, that's just what's so fun about our job. And the thing that always cracks me up is we're just two dumb surfers. You know you're in Amelia Island, I'm in Baltimore, it's not like we – we have built up a good network over time, but we just learned this stuff because we actually care enough to dig into the facts and to call people who know. What the heck are these other guys doing?

Steve Sjuggerud: It seems like the biggest gains come when the least people believe you when you bring up the idea.

Porter Stansberry: Oh, that's the best. Yeah. That's the best.

Steve Sjuggerud: I think Fannie and Freddie was a great one.

Porter Stansberry: Yeah. Fannie and Freddie are going to go broke. No way, it's impossible. Well, yeah, they are. GE is a big problem. You're going to see. Oh, no, no, no. How about when you told your dad he should buy gold coins he says, no, I can't. I'm still holding on –

Steve Sjuggerud: Son, I love you, I'd do anything for you. I've bought everything you've ever recommended. I'm not buying gold coins. That's when I knew gold – and sure enough, they went up hundreds of percent.

Porter Stansberry: Time to double down. All right, Buck, one more mailbag question then we have to go.

Buck Sexton: Number two. In the mailbag. This is – oh, by the way, that last email was from Wayne. This email, and thank you, Wayne. This email is from Brandon, an Alliance member. "Ariana, thank you for caring so much about Porter's diet. All the best." So there we have it.

Porter Stansberry: That's a brief one. We have a question anywhere? And by the way, we do appreciate Ariana's special concerns. I think it's probably best that Steve's married, cause I think Ariana would be a big fan, Steve.

Steve Sjuggerud: Oh, yeah? What does that mean?

Male: You mention Tyrannosaurus before Porter eats more red meat than Tyrannosaurus. It's going to get stuck in his heart. It's terrible.

Steve Sjuggerud: I'm glad she cares so much.

Porter Stansberry: Yeah. All right.

Buck Sexton: Yeah. She tells him to stretch too, by the way. Very important to stretch.

Porter Stansberry: Yeah, stretching. Everyone's a snowflake. All right.

Buck Sexton: So that's it for this week, man.

Porter Stansberry: Yeah. That's a wrap. That was a good show. Steve, you definitely improved the quality of our content. Thanks very much.

Buck Sexton: Thank you, Steve. That was really cool.

Porter Stansberry: All right, everybody.

Buck Sexton: Have a question for us? Maybe a guest suggestion or topic you'd like to hear us discuss, write to [email protected] 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 remember, if you want to receive the Stansberry Investor Hour weekly update each Thursday and get access to transcripts from the show, all the show notes with time stamps, highlight links and a reminder when we publish new content, just go to investorhour.com. That's investorhour.com and enter your email. Thanks again for listening everybody. Porter and Mr. Sjuggerud. Thank you, gentlemen.

Porter Stansberry: Thanks, Buck. We'll see you next week.

[Music]

Male: 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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