American Consequences - July 2017

‘YouWant Winners?’ A Story of Rampant Speculation How to Choose Wine Like a Snob AMERICAN CONSEQUENCES I D E A S T H A T M A T T E R E D I T E D B Y P . J . O ’ R O U R K E Wall Street’s Last Great Party Boy

CRYPTO- PEAK?

From exotic dancers to hedge fund managers, they’re all getting into the same trade

JULY 2 0 1 7

50% OF SILICON VALLEY BILLIONAIRES NOW PREPARING FOR A CRISIS? While middle class Americans are pouring money into the stock market… Some of the richest people in Silicon Valley are doing something that is pretty much the exact opposite.

I’m talking about folks like: Peter Thiel (founder of Paypal) Steve Huffman (founder of Reddit) Mark Zuckerberg (founder of Facebook) Tim Chang (of Mayfield venture capital) Larry Ellison (founder of Oracle) Reid Hoffman (founder of LinkedIn)

If you care about your family… your money… and your future, I strongly encourage you to find out what these folks are doing… And why it might be important for you to do something similar… right away. Everything is explained on my research firm’s website, right here… P.S. Most Americans don’t know there’s one simple and very inexpensive thing you can do to protect yourself. Learn more here…

CONTENTS

JULY 2 0 1 7 : I SSUE 2

LOST? CLICK HERE

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Editor in Chief: P.J. O’Rourke Editorial Director: Carli Flippen Managing Editor: Steven Longenecker Contributing Editors: Bill Bonner, Rory Carroll, Tama Churchouse, Turney Duff, Dr. David Eifrig, Raoul Pal, Todd Prince, Buck Sexton, Teeka Tiwari, Greg Wilson, Gray Zurbruegg Newswire Editors: Scott Garliss, John Gillin, Greg Diamond Creative Director: Erica Wood Cartoon Director: Frank Stansberry Contributing Cartoonists: Clay Bennett, Chip Bok, John Deering, Lee Judge, Bob Thaves Contributing Artist: Bridgette Jester General Manager: Jamison Miller Advertising: Sam DeCroes, Jared Kelly Advertising inquiries: advertising@ americanconsequences.com Editorial feedback: feedback@ americanconsequences.com AMERICAN CONSEQUENCES

06 Letter From the Editor

76 What 'America First' Means BY BILL BONNER

14 Financial Follies

79 Reading & Quoting

16 What Moved the Market

80 The Final Word BY BUCK SEXTON

18 Last Great Party Boy BY TURNEY DUFF

84 Featured Contributors

22 Choose Wine Like a Snob BY DR. DAVID EIFRIG

CRYPTO-PEAK? 32 A Mania Price Explosion BY RAOUL PAL

26 A Conversation With... SARA CARTER

38 'You Want Winners?' BY TAMA CHURCHOUSE

56 Look Inside Real-World Portfolios

62 What's the Connection BY PJ O'ROURKE

44 The New E-mail BY TEEKA TIWARI

66 Republicans Are the New Punk BY RORY CARROLL

50 How to Vanish With $1 Million BY GREGWILSON

70 Accidental Discoveries in the Galapagos BY GRAY ZURBRUEGG

52 The Bare Facts BY TODD PRINCE

American Consequences | 3

INSIDE THIS ISSUE

I n our July issue of American Consequences , we’re tackling bitcoin, blockchain, and cryptocurrencies – with the risks and the opportunity explained in plain language. Editor in chief P.J. O’Rourke leads the way in explaining why he feels guilt about cryptocurrencies instead of the usual fear or greed. Bestselling author Turney Duff shares a wild tale about the dying art of wining and dining on Wall Street. Owner of Eifrig Cellars, Dr. David Eifrig , has one rule to follow when choosing and drinking wine. And we talk with award-winning national security correspondent Sara Carter . Then we’re back on cryptocurrencies – bringing you a balanced perspective... Goldman Sachs alum and Real Vision founder Raoul Pal turns bear, dumping his bitcoin position for 7.5 times his money. He says get out of the bubble now. Hong Kong-based Tama Churchouse predicts the crypto speculation is just getting started. He’s cautiously optimistic on sorting the winners from the losers. Bitcoin has rocketed from a low of 75 cents to more than $3,000 at its height – an astronomical 400,000% gain. Teeka Tiwari

Crypto guru Teeka Tiwari says bitcoin is the new e-mail... and reminds us that bitcoin has been “dead” 129 times before. He sees massive upside, with his recommended positions up thousands of percent. Finally, we’ll close out our bitcoin musing with an exclusive look inside a new Las Vegas crypto strip club from veteran reporter Todd Prince . When exotic dancers get on board, is it a sign of the top? Next, we’ll peek into more than a dozen real- world portfolios – from traders and finance folks to legends like Ronald Reagan’s most- quoted author George Gilder and natural- resource speculator Doug Casey . (If you’ve ever wondered about gold vs. bitcoin vs. the U.S dollar, this one is for you.) Rory Carroll profiles right-wing street artist Sabo (“Republicans are the new punk,” he says), while underground news founder Bill Bonner explores maybe the biggest idea for our magazine... what it means to be an American. And Gray Zurbruegg, president of The Atlas 400, brings us “stay, drink, and try” recommendations from an adventure to the Galapagos Islands. Finally, nationally syndicated talk radio program host Buck Sexton will close us out with a look at a worldwide cyber war... from bitcoin ransoms to mass data breaches... and how you can protect yourself. Enjoy the issue and send your feedback to feedback@americanconsequences.com . - SL

4 | July 2017

Big news… Porter Stansberry is back on the air hosting Stansberry Investor Hour , with brilliant co-host: Buck Sexton . Buck is a former intelligence officer for the CIA, and worked for the Intelligence Department of the NYPD. Together, Porter and Buck are interviewing some of the most influential (and sometimes controversial) figures in the world. From Julian Assange, the besieged founder of WikiLeaks, to Cactus Schroeder, a Texan oil man known for inking multi-billion dollar deals, our guest list is never short on notoriety. Every Thursday , the Stansberry Investor Hour podcast will upload to iTunes, keeping investors (like you) in touch with what’s happening in the markets and critical world events.

To ensure you never miss an episode of Stansberry Investor Hour… Step 1: Simply visit the iTunes store by clicking here Step 2: Click “Subscribe”

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IT’S ALL TOTALLY FREE OF CHARGE. We simply want you and every Stansberry Research subscriber to have convenient, unconditional access. So be sure not to miss out. Subscribe to Stansberry Research Hour – and even check out Porter’s past interviews – by accessing our iTunes podcast archive.

From Editor in Chief P.J. O’Rourke

LETTER FROM THE EDITOR

A Blockhead Confronts the Blockchain

THE HISTORY OF MONEY IS INCREASING CONFUSION... BITCOIN IS NO EXCEPTION

P eople have all sorts of feelings about All I feel is ignorance and guilt... First, let me explain the guilt. I’m a libertarian, and I want a medium of exchange – a kind of money – that adheres to libertarian principles. Money that adheres to just one libertarian principle will suffice. This is the privacy principle: “ What I do that doesn’t physically harm you is none of your damn business. ” Business is conducted with money. Cryptocurrency would seem to be the private kind of money libertarians want. It’s private in the two most important senses of privacy. cryptocurrency – wild enthusiasm, cool skepticism, greedy desire, utopian hope...

First, cryptocurrency isn’t subject to government public policy. Government public policy, of course, is to issue as much money as it feels like issuing. Government treats money like a stalker treats posting things on your Facebook page. A couple of clicks of a Federal Reserve keyboard, and there’s another creepy rant. The original rant didn’t have much value, and subsequent rantings are increasingly worthless and worrying. But “unfriending” the government is hard. Second, cryptocurrency encrypts transactions. What you’re buying or selling isn’t revealed to a nosy snoop. That nosy snoop being, once again, government. I’m a law-abiding guy. I’ll wait for the “walk”

6 | July 2017

in body armor rappelling from helicopters into my backyard target range demanding an explanation for my blowing holes in 1,000 empty beer cans. And they’d probably be accompanied by a Department of Health and Human Services counselor insisting I go into a treatment program for drinking 1,000 cans of beer. That’s the case in favor of cryptocurrency. But I feel guilty (or feel like I should feel guilty) because I don’t support or advocate cryptocurrency. I don’t even find the idea of cryptocurrency very interesting. In fact, I have no use for the stuff. As of this writing, the market value of one bitcoin is about $2,500. But if you wanted to buy the banged-up Volvo station wagon that I got for my teenage kids to bang up some more and you offered me six bitcoins for it, I’d tell you to bite me. This is because I feel ignorant. I am confused by the mathematical intricacies used to form the computer-programmed blockchains that underlie cryptocurrencies. Of course, I’m confused by lots of things. I’m confused by women, which didn’t stop me from marrying a delightful one. I fly on airplanes all the time while having no idea why they take off or how they land. But I am particularly sensitive to confusions

light when I’m on an empty street corner in the middle of the night. I don’t even cheat on my taxes – any more than federally mandated tax loopholes force me to. I wouldn’t use cryptocurrency for any criminal scheme. (Well, except maybe getting some Cuban cigars.) But no matter how legal the purchases I make are, I don’t like those private purchases being on the public record in sales receipts and credit-card records available to who-knows-which nosy snoop government agency. And I don’t like other people’s purchases being on the public record either. If somebody buys an inflatable, anatomically correct Minnie Mouse doll for intimate relations in the privacy of his home, I sure don’t want to know about it. I don’t want government to know about it either, for fear the Environmental Protection Agency (EPA) may impose endangered plastic rodent regulations on us all. Or maybe some high-minded EPA functionary will leak the information to animal-rights group PETA, causing the inflatable mouse doll store to be vandalized when my car is parked nearby within paint-tossing range. I’m more worried about government abusing its police powers than I am about individuals abusing their purchasing powers. My taking delivery on 1,000 rounds of 9mm ammunition is information the government does not need to have. No thank you to Homeland Security agents

One small step for man, one giant leap for accountants!

American Consequences | 7

LETTER FROM THE EDITOR

No intrinsic value is involved in fiat money, just a pronouncement of Existentialism from central banks. Trillions and trillions of dollars, euros, pounds, and renminbi are singing, “We’re Here Because We’re Here Because We’re Here Because We’re Here.” (A popular tune in the trenches during World War I – appropriately enough, since WWI was when fiat money came into global use.) By now, anybody who isn’t confused by currency is simply insane. And the extra confusions of cryptocurrency aren’t the anti- unwelcome mysticism to the already baffling material and philosophical aspects of money. Some regard the blockchain with almost religious awe, as if it were the work of mythical “Geek Gods” high upon Mount Laptopus. An article by Marco Iansiti and Karim R. Lakhani in the January issue of the Harvard Business Review claimed that blockchain technology “has the potential to create new foundations for our economic and social systems.” No, it doesn’t. I give you this from Wikipedia, where information was drawn from more extensive 2015 and 2016 articles in The Economist , Fortune , and Wired : “A blockchain is a decentralized and distributed digital ledger... authenticated by mass collaboration powered by collective self-interests... This allows the psychotic medication that’s needed. Cryptocurrency even adds a kind of

concerning money. The history of money is a history of increasing confusion – much of it deliberate. When the medium of exchange was barter, we were doing things like trading goats for pigs. Unless we were so stupid that we fell for the old “pig in a poke” trick, what we saw was what we got. The move to “commodity money,” with prices set in coins made of something valuable – gold, silver, copper – complicated trade. Yes, making change was easier. (No more having to pay for a goat by fishing a ham and three pork chops out of our pockets.) But it raised new questions. How to assay the metal content in coins? Who to trust to mint them? The advent of “fiduciary money” – pieces of paper redeemable in coins – meant further confusions. Who really had those (possibly dodgy) coins? Where did they keep them all? Did they have enough? And then came “fiat money.” This, as I mentioned, is what the government prints when it feels like it. Most of the money in the world today is fiat money. We’ve got it because the government says we’ve got to. Anybody who isn’t confused by currency is simply insane. And the extra confusions of cryptocurrency aren’t the anti- psychotic medication that’s needed.

8 | July 2017

participants to verify and audit transactions inexpensively.” One small step for man, one giant leap for accountants! The blockchain is a tremendous, life-changing innovation – if you’re a CPA. Throw those green eyeshades in the air! Dance around your spreadsheets with wild abandon! Yes, the blockchain is confusing, but what it is, even more so, is boring. However, it’s also supposed to be secret and secure. I don’t think so. There is the cryptocurrency “blooper reel” to be considered: In 2013, the Chinese bitcoin trading platform GBL suddenly shut down – a $5 million “bitcon.” In 2014, the Mt. Gox bitcoin exchange declared bankruptcy after “losing” $473 million worth of customers’ bitcoins. ( Did Gox look under the couch cushions ?) In 2015, a cryptocurrency called Paycoin was offered through something called “ZenPortal.” In a Zen-like experience, 10,000 clients were left to meditate on being freed from the worldly burden of having $19 million. In 2016, the founder of the Florida cryptocurrency market Cryptsy was accused of misappropriating millions of dollars and then fleeing to China, perhaps to go to work for GBL. And then, $53 million in Ethereum

I’m more worried about government abusing its police powers than I am about individuals abusing their purchasing powers.

cryptocurrency disappeared from Ethereum’s “Decentralized Autonomous Organization,” which turned out to be a little too decentralized and autonomous to qualify as being organized. But let’s chalk that up to experience. What’s half a billion dollars among virtual friends? Every new technological development has its missteps. Such as the time inventor Thomas Edison electrocuted Topsy the elephant to prove that alternating current is more dangerous than direct current. (Edison’s actual involvement in frying Topsy may be, like the security of your cryptocurrency account, dubious. But it’s one of those stories – such as Cryptocurrency Is the Money of the Future – that we journalists call “too good to check.”) Cryptocurrency on the World Wide Web does not create monetary security or secrecy. Money has always involved insecurities and secrets. Banditry, after all, was invented long before cash was. When we were trading goats for pigs, it was hard to hide them under a mattress. They squeal and bleat. Bandits would steal the pork roast and the Libyan hamburger.

American Consequences | 9

LETTER FROM THE EDITOR

But you can shoot a bandit. You can shoot a computer too, for all the good it will do in getting your goat back, which is why I stick to beer cans. The Internet is an enormous hacking industry serviced by a small global interconnected computer network. These hackers can hack anything . According to major news outlets, Russian hackers hacked into the American electoral system, right down to the level of presidential primary ballots. I’ve been covering American elections since 1972, and I am absolutely clueless about what goes on with presidential primary ballots (and so are all the political reporters I know). Talk about encryption – local politicians have primary voting shenanigans sealed in a crypt. And yet here were the Russian hackers in Yoknapatawpha County, Mississippi – probably unable to understand a word of English as it is spoken by Mississippians – figuring out which yokel supporting Hillary would beat which hayseed supporting Bernie to become a Mississippi delegate to the Democratic National Convention. And right now, some dateless, pear-shaped 16-year-old wearing emoji pajamas is in his bedroom, with the floor covered in empty Snickers wrappers, logging on to make himself a Darknet billionaire. I hope Walgreens accepts cryptocurrency in payment for acne cream. I have an old friend, Michael Farr, president of Farr, Miller & Washington investment

consultants, who tells a story he calls, “How Ignorance Saved Me a Fortune.” At the end of 2000, Enron was rated “most innovative large company in America” by Fortune magazine’s Most Admired Companies Survey. Michael thought it might be a good buy. He asked his top team of analysts to look at Enron. A week went by and Michael heard nothing from his analysts. He talked to them and they said, “We’re still working on it.” Another week went by. Nothing. “We’re still working on it.” Two more weeks went by and Michael called his analysts on the carpet. He said, “A month ago, I asked you to look at Enron. And I haven’t heard a damn thing.” Michael’s analysts said, “Do you remember what you told us when you hired us?” Michael said, “Um... no.” “You told us,” the analysts said, “the first thing to do is figure out how a company makes money.” “And?...” said Michael. “We’ve been doing nothing but look at this company for the past four weeks, and we can’t figure out how Enron makes money.” Enron’s 2001 bankruptcy cost investors more than $68 billion. Michael hadn’t invested. He says, “If I hadn’t been feeling ignorant, I’d be broke.”

10 | July 2017

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FROM OUR INBOX

future. Therefore, I thought of Hillary as the “conservative” choice. Now I’m worried that Trump may be re-invigorating the Left. You’re right, Len, although I do make fun of both sides, I’m not neutral. I’m a firm libertarian/conservative who believes in the Constitution and wants a minimal government that keeps its nose out of our personal lives. But I am neutral when it comes to people. Liberals can be some of the nicest folks on earth. And conservatives can be bullies and jerks. I want to thank you for being a voice of reason in a mad world. There is nothing like humor to reveal the naked truth. I’m reminded of Will Rogers. – JimWoods P.J. O’Rourke comment: There’s no one I’d rather be compared to than Will Rogers, who, among a million other quips, said, “I don’t belong to an organized political party – I’m a Democrat.” I wonder how many people remember Rogers today? Which reminds me of all the other old-time humorists who no longer have the reputation that they should... A great one that I recommend to you is Kin Hubbard (1868-1930), cartoonist at the Indianapolis Star. He created a character, “Abe Martin of Brown County” – a wise old backwoods Hoosier. Abe would have a new saying every day. My favorite: “Every now and then an innocent man is sent to the

Re: Welcome to American Consequences You are the smartest sumbitch I’ve ever read, not just because you express my thoughts so well, but because I’ve read a number of great writers, none of whom made me laugh. – Mike Boland P.J. O’Rourke comment: Flattery will get you everywhere! But note that in your much appreciated compliment you say “because you express my thoughts so well.” I may be the smartest sumbitch you’ve ever read, but it sounds to me like the smartest sumbitch you’ve ever listened to is you. Keep up the good thinking! You claim to be neutral, making fun of both the left and right. But let me ask you one question. Who did you vote for in the last election? Or given the outcome and what has happened since, who should you have voted for? – Len Richan P.J. O’Rourke comment: Actually, I voted for Hillary. I figured her for a one-term president. I thought that after eight years of lousy Obama policies, we’d be getting more of the same, and at least we’d know what we were getting and how to survive it. Then, after four years of miserable Hillary failure, sensible libertarian/conservatives would return and run the country for the foreseeable

12 | July 2017

Send us a message, question, or criticism at feedback@americanconsequences.com

legislature.” Will Rogers himself called Kin Hubbard “America’s greatest humorist.”

to do. Why would you think the Dems wouldn’t do the same? Politics in 21st century America! – Tony V Buck Sexton comment: Thank you for your spirited email Tony. Unfortunately, your facts are in error... Scooter Libby was never charged with leaking anything, he was charged with lying under oath and obstruction of justice. You note Bill Clinton and say nothing was ever found on him. But in fact he lied under oath, which is perjury – exactly what got Libby into trouble. Clinton should have been prosecuted, but was only disbarred and impeached instead.

Re: The Fed Don’t Mean a Thing The Fed does not set the Federal Funds Rate either. The Federal Funds Rate is an average of the rates negotiated by private banks for the overnight lending and borrowing of “excess” reserves. The only rate the Fed can set is the discount rate that the Fed charges on reserves it lends to private banks. – Ken Miller Dr. David Eifrig comment: Correct. The full name is the Federal Funds Target Rate. The Federal Reserve changes the discount rate with the goal of hitting that “target.” It usually works fairly well, but the Fed doesn’t even have complete control over the rate that bears its name! Re: Trump Must Beat the Siege Funny how you cherry pick your situations... Scooter Libby (probably Cheney) committed a crime revealing a CIA undercover agent. But you failed to mention the ongoing witch hunt that followed Clinton through his tenure with nothing ever found. (Lying about having sex!) The GOP also attacked and blocked everything that Obama tried

Chip Bok Editorial Cartoon used with the permission of Chip Bok and Creators Syndicate. All rights reserved.

American Consequences | 13

WHAT COULD POSSIBLY GO WRONG?

Financial follies and disaster in the making

Argentina just sold a 100-year bond issue... three years after its latest default... and despite defaulting on its sovereign debt six times in the last century. That’s an average default of once every 17 years. The debt is yielding roughly 8%, so investors should receive their money back within 12 years... so long as nothing goes wrong. The cryptocurrency Ethereum briefly “flash crashed” more than 99% on the GDAX exchange... dropping from $319 to pennies within seconds... The drop was blamed on a $30 million “sell order” that triggered stop-loss orders. And the Ethereum price recovered quickly. But in the meantime, crypto investors lost millions... another reason not to enter your stop-loss orders into the market – whether the stock market or the crypto market.

Brazilian leveraged-buyout firm (and frequent Warren Buffett deal partner) 3G purchased Popeye’s Louisiana Kitchen three months ago... for almost $2 billion... The acquisition price was a 20% premium to the share price... and is equal to 21 times the annual earnings of the business before taxes, interest expense, or depreciation. That’s an all-time record price for any restaurant acquisition in history over $100 million, according to Jim Grant of Grant’s Interest Rate Observer. Popeye’s has 1,600 locations in the United States and another 400 around the world... Thus, 3G paid about $1 million per location. Is there a difference between borrowing a bunch of money to make mortgages in America’s worst neighborhoods... and borrowing a bunch of money to sell chicken? Stay tuned.

14 | July 2017

Investment bank Merrill Lynch announced it sees a “swift and material” decline in U.S. auto sales developing this year... It expects new-car sales falling to 13 million, down 25% from the peak of around 17.5 million in 2016. Among the many problems the sector faces is a “tsunami” of off-lease inventory, which will drive down used-car prices. Merrill’s comments are important because Merrill is the “thundering herd.” By the time Merrill has figured out a trend, you can be sure it’s well in motion... Speaking of, “Big Three” U.S. automaker General Motors (GM) is finally admitting the obvious: The boom in auto sales is peaking. But while the company admits that sales are slowing, its outlook remains relatively rosy. GM believes this “moderate downturn” will cause prices to plummet to levels not seen since... 2015, when new- vehicle sales totaled a little more than 17 million. Why? Because the company is “disciplined.” We doubt it... During the last big downturn, sales peaked near 17 million in 2005... and ultimately plunged to just 10 million by 2009. Given the size of the recent boom, we wouldn’t be surprised to see sales fall to less than 10 million this time around. GM has a different definition of “disciplined” than we do.

Home sales in Canada fell the most in five years last month... but prices kept climbing. Vancouver has long been one of the most expensive cities in the world. Now Toronto’s joining it. Speculation has taken over much like it did during the U.S. housing boom. If you want to see how this story ends, watch the Oscar-winning film Big Short. The Japanese central bank now owns more than 40% of the entire Japanese government-bond market. It’s also the third-largest holder of Japanese equities. The Bank of Japan is now a top 10 shareholder in one-fifth of Japan’s 3,750 publicly traded companies. What happens when a central bank has cornered the market? Right now, Japan’s government-bond market is no longer functioning properly. It has ground to a halt... Of course, that doesn’t mean a crisis is imminent. But it does suggest the next crisis will be far more severe than it otherwise would be... And millions of investors are likely to be blindsided when it finally begins.

American Consequences | 15

WHAT MOVED THE MARKET THE BIGGEST STORIES THAT MATTERED FOR THE MARKET LAST MONTH...

late this year or early next year, that’s two out of three – and they are agenda items likely to get the business dollars flowing. However, 2018 kicks us back into an election year and opposition to everything and anything on either side of the aisle goes way up. So if they can’t get this done by early next year, the Republican growth agenda could become a 2019 event. June 27 & 28 Central bank rhetoric takes a hawkish turn European Central Bank (ECB) President Mario Draghi implied there is potential for the ECB to begin a stimulus withdrawal later this year... Throughout the first half of this year, Mr. Draghi had resisted calls by government leaders and other ECB governors – Germany, notably – to recognize Eurozone growth and act accordingly via stimulus withdrawal and/or rate hikes. Now a different picture is being painted. Bank of England Governor Mark Carney also caught the markets by surprise by saying that rates in the U.K. could soon be headed higher. Bank of Canada Governor Stephen Poloz echoed similar sentiment, reiterating that the bank may be considering higher interest rates.

July 10 Senate health care reform opposition swells to 14 With Democrats opposed to the Senate’s version of the Affordable Care Act reform bill, the GOP could only afford to lose two votes out of 52 members in the Senate and still pass it via the reconciliation process. From the outset, however, the bill had five Republican Senators opposed. Despite multiple attempts by Senate Majority Leader Mitch McConnell to try and rally the troops to support the legislation, they went into the July recess without passage. This is one of the big three catalysts (the other two being tax reform and infrastructure spending) for the administration’s growth agenda. July 9 Tax reform keeps getting pushed out Treasury Secretary Steven Mnuchin originally predicted a tax reform bill by early August. That turned to late August. Then August turned into September. Now, the party line is by year end. The deadline keeps extending... and the growth agenda is taking longer than expected. If the GOP can get tax reform and infrastructure spending implemented Upon returning, the number of Senators in opposition to the bill swelled to 14.

EDITORS

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16 | July 2017

July 26 Federal Reserve next interest-rate decision. Rate hike not happening, but shot for start of balance-sheet unwind. September more likely. July 28 U.S. GDP reported. We’d put money around 2.3%-2.8%. Tone out of Fed is back to 2% growth this year. July 31 Congress deadline ahead of summer recess. Incentive for GOP senators on healthcare reformwent up after McConnell threatens to cancel the first two weeks of August recess. August 1 Fed’s main inflation gauge (PCE) released. Oil prices will hold it back, slight uptick at best. August 11 Second major inflation gauge (CPI) released. Again, oil prices will weigh... best-case scenario is slight improvement.

WATCH THESE DATES

And while Federal Reserve Chair Janet Yellen sounded more dovish than she had in the recent past regarding inflation, she still said the Fed was maintaining its course for four more rate hikes by the end of 2018, and would soon commence winding down the balance sheet. This rhetoric was meant to send a signal to borrowers that the period of low rates and easy money may soon be coming to an end... June 28 Fed’s stress test passes banks with flying colors Thirty-three of 34 banks tested passed with flying colors. (The exception was Capital One.) Consequently, buybacks and dividends were raised across the board. Investors have been flocking to the space ever since. Bloomberg estimates the capital return amount by the banks being tested to be around $120 billion. To boot, the expected rise in yields around global central bank commentary is viewed positively for the space as it should boost net interest margins. June 21 MSCI approves China addition Global index provider MSCI will add mainland Chinese stocks to one of its key benchmarks and could pull more than $400 billion of funds from asset managers, pension funds, and insurers into mainland China’s equity markets over the next decade.

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American Consequences | 17

WALL STREET’S LAST GREAT PARTY BOY THE DYING ART OF WINING AND DINING ON WALL STREET

It’s Friday evening and one of the last great partiers on Wall Street has plans to stay in. The 47-year-old sales trader sits on a black Fendi Casa sofa while playing Grand Theft Auto on his Xbox. He’s waiting for the Chinese food delivery guy in his 2,500-square-foot apartment he bought nearly a decade ago. After dinner, he plans to smoke weed, watch something on Netflix, and be in bed by midnight. For Brad (not his real name), staying in on the weekends is part of his business strategy. He says it’s to recharge – to unwind, if you will. During the week, he’s out on the town entertaining clients. This week, he was out on four of five weeknights. He said that two of the nights were tame by Wall Street folklore standards – he was home by 1 a.m. They were the typical hug-and-tug business dinners followed by some minor-league gallivanting. By his estimation, each night resulted in 100,000 shares of business at $0.02 each – a $2,000 commission. Not bad for a night’s work. The other two evenings he ended up “playing through”... which means he never went to sleep before going straight to work. The first of the two nights, he ended up at a roving strip club with two hedge fund traders and a pocket full of blow. Brad had received a text message in advance with the address of the secret location of the

By Turney Duff

18 | July 2017

club. They were set up with a table in the back and got dances from what he calls “civilians.” The establishment prides itself on not hiring professional strippers... It finds what they call “normal girls” – women with other professions who dance for extra cash. Brad’s night, fueled with vodka and cocaine, produced almost 300,000 shares of business the next trading day. On the other night, “it got a little ugly,” as Brad says. He means it in the best way possible. About once a month he attends an underground party in the basement of a steakhouse with 10-15 guys. It’s an ultra- exclusive invite. The evening’s festivities cost Brad $10,000 for him and a customer. This kind of entertaining is reserved for only his best client... a client who accounts for 25% of his annual commission totals. They trade together almost every day and Brad brings home around $200,000 a year by keeping him happy. Their night started off at the restaurant bar with the other regular Wall Street riffraff. They sipped scotch and waited. Then one by one, they were escorted to the basement. The business was taking precautions to not draw attention to a herd of guys going somewhere. Eventually everyone was seated at the table where they feasted on an epic steak dinner, a full bar, craps table, DJ, and an assortment of drugs. The party had started. Then the escorts walked in – two girls to every guy. The clothes came off immediately.

Cleaning Up Wall Street There are many reasons why this party is so secret. The biggest is that for decades now, Wall Street has been trying to “clean up” the reputation of the industry. Brad admits that the wining-and-dining business model is becoming harder and harder to sustain in today’s environment. The game has changed, he says – it’s not like it used to be. Today, a large portion of the hedge funds on the Street can’t trade with Brad even if they wanted to. Many customers on the buy side have a commission formula already in place – who and how much gets paid are predetermined. So a night out on the town won’t move the needle for those customers.

American Consequences | 19

WALL STREET’S LAST GREAT PARTY BOY

like characters, unprecedented greed, and an attitude of impunity. Big commission dollars brought big expense accounts and there was no limit to the way brokers treated hedge fund traders. The entertainment was only limited to the imagination. And it was all paid for by commission dollars. With $50 million in commissions to give out over the year, I was very popular. And I had plenty of new best friends. That is, that’s how it used to be. From Blow to Bagels In hindsight, one seminal event shifted the landscape of wining and dining forever... It was a 2003 outsized bachelor party that owns a permanent place in Wall Street lore. It was rumored to have dwarf tossing and cost $160,000, which was allegedly paid for by sell-side firms courting a Fidelity trader. And it was partly the reason Fidelity was fined $8 million dollars by the U.S. Securities and Exchange Commission. And although the change wasn’t instantaneous, the bad press marked the transformation of gift-giving rules on Wall Street. From that moment forward larger and more conservative institutions started putting rules and limits in place on how a client could be entertained. Before the bachelor party, many sell-side managers were fully complicit. And in some cases, sales traders were incentivized or even required to do as much entertaining as they could. But after the bachelor party, the corporate card-carrying game took a left

The first five years of Brad’s career, he worked at a bulge bracket firm. He was armed with some of the best research, banking, and capital on the Street. He also had a generous corporate card that was rarely scrutinized. It was easy to do business. Then in the late 90s, he traded all of that in to work at a direct payout shop... a brokerage firm that pays sales traders an exact percentage of their commissions. At the time, small sell- side shops would pay someone 40%-50% for every dollar they brought in. Brad’s timing was sublime. It coincided with both the technology boom and the emergence of hedge funds. It was an era where hedge funds would quickly rise to a $2 trillion dollar plus industry, the remuneration for hedge fund managers soared into the billions, and sales traders saw their own wealth grow beyond imagination. Personally, I was on the other side of some of Brad’s early trades. I had millions and millions of unsupervised commission dollars to hand out. I flew over traffic jams in private helicopters to the Hamptons and Atlantic City. I sat in 50-yard-line seats at the Super Bowl and right behind the dugout at Yankee playoff games. A broker and I once went to a World Series game with eight tickets in our pockets. We used the six extra ones to go outside to smoke because of the stadium’s “no reentry” policy. Each cigarette cost us $2,000. The nights were filled with secretive, Gatsby-

20 | July 2017

turn. And a lot of the hardcore entertainment practices had to be taken off the books. From 2004 to 2008, the number of guys who could extravagantly entertain clients nearly shrunk in half. The sales traders at bigger banks were on a much shorter leash, but men and woman at lower-tier firms and direct payout shops like Brad still had carte blanche. And there were plenty of buy-side traders willing to partake in some of the good old- fashioned wining and dining. The nights were filled with secretive, Gatsby-like characters, unprecedented greed, and an attitude of impunity. It wasn’t until the financial collapse in 2008 that most hedge funds and mutual funds started to catch up to and monitor this type of activity. The buy side moved their compliance officers from a desk right next to the back office all the way to a corner office next to the founding partner. Who and how much brokers got paid became a major focus. I recently spoke with the head of a trading desk for a multibillion-dollar asset management firm that’s highly respected on the Street. And he too reiterated the same changes in the wining and dining of today. He said he pays for himself every time he goes out with a broker. I tried to give him a metaphorical nudge to the gut suggesting – come on, you can get away with some things... But he responded: "

Not worth it . Today someone on the buy side who partakes in excessive entertainment could be risking their job. In 2017, a lot of the face-to-face meetings between brokers and clients are on a much different level. It’s considered to be somewhat of a plum to be offered a couple of bikes at SoulCycle or a spot in a CrossFit workout class. And even more common is a breakfast meeting in the office. I guess you have to bond over bagels these days. It’s a tougher gig. I followed up with Brad a few days later. He told me he ended up watching a few episodes of Stranger Things on Friday night. The rest of his week looked more interesting... plans to wine and dine at Japanese hot spot Zuma on Tuesday... Drinks at the luxury Mark Hotel on Wednesday... And Thursday, he’ll swing by Beauty and Essex – a speakeasy style lounge hidden behind a pawn shop. Brad says he knows he’s on the endangered species list. But he doesn’t care: “ I don’t have any other skill. I’ll just keep entertaining clients until I can’t do it anymore .”

Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where their founder and several Galleon employees were found guilty of

insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side; AWall Street Trader’s Tale of Spectacular Excess.

American Consequences | 21

Drink This

CHOOSE WINE LIKE A SNOB

Decades ago in college, I started conducting wine tastings.

First, to pay for my weekend wine. Then because I found that I loved teaching. I’ve shared my love of wine with hundreds, even thousands, of people. Most of my tastings are informal (though my best blind tasting, for the senior partners of Goldman Sachs and Morgan Stanley, is a story for another day).

By Dr. David Eifrig, owner Eifrig Cellars

But I’m no ordinary wine snob...

Folks get too easily intimidated by wine and wine shopping, worried that they’ll buy the wrong wine for the food. So every single time I conduct a tasting, I start with this simple thought... my opening line, which is also on the back of my Eifrig Cabernet label: “This wine tastes like you imagine it tastes.”

If you follow this one rule, you’ll take most of the worry out of picking a wine. That’s because all you need to do is “own” your taste buds. Commit to picking a wine, try it with a food, and be honest. Does it satisfy, is it heavenly, or is it just so-so? When you blindfold them, most people have

22 | July 2017

only a 50-50 chance of telling the difference between a room-temperature white and a red. So stop worrying. Once you recognize it’s your taste buds that matter, focusing on trying to please ‘em won’t take that long and you’ll learn how to choose the perfect wine. Now I know what you’re thinking... It can’t really be that simple. But for the most part, it is. Basic rules for wine pairing 1  Focus on your taste and what you imagine it tastes like. 2  Make a guess as to howmuch tannins are in the wine. 3 Pair sweet with spicy. Red and white wines do come from different grapes. Red wines tend to be made from darker grapes. But the real difference is how they’re pressed... Wine makers press white wine grapes and the fermentation commonly excludes the skins. On the other hand, red wines include skins with both the pressing and fermentation. (By the way, most red wine grape juice starts clear, just like white grapes.) Start With Color and Pairing

But even within the red and white families, there are many types of wine. They vary based on things known as tannins and acidity. Tannins are molecules found in grape skins, seeds, and even the barrels used to age and store wine. Tannins are also oral astringents. Astringents mean they are dry and help clean the palate. It’s the same reason you enjoy astringent foods like pickles with meat-heavy sandwiches. The way astringents work is they break down some of the lubricating proteins in our saliva (which is why they taste “dry”). But they also break down fats, which helps release some of the flavor. In turn, the fat helps soften some of the dryness of the wine and helps the fruit flavors come out.

Then Guess the Tannins

Common food and wine pairings

The second rule is uncovering the tannins in a wine so you can pair it with food. Knowing a bit about these will help you pick the perfect bottle... Whites typically don’t contain much tannins. However, some whites that age in barrels instead of stainless steel tanks pick up low levels of tannins from the wood. That’s why oaked chardonnays typically have a fuller mouthfeel and are a bit more acidic than unoaked.

Fish: White Pork: Rosé or white Chicken: White or light red Pasta:

Light red Beef: Red

American Consequences | 23

Drink This CHOOSE WINE

And if you pair white wine with fish, a touch of acid (even if it’s from the wood tannins) makes the fish taste less “fishy.” That’s because the acids cause a chemical reaction with molecules in the fish called amines. The amines are what make fish smell fishy. Acids from white wines bring out the other flavors of the fish as well. And lemon acid does the same thing... It complements the fish.w Harvey Steiman, editor at large of Wine Spectator , recently wrote that a good approach is to match the acidity of the wine with the acidity of the dish. That’s because you don’t want the acidity of the food to overpower the wine. Acidic wines feel crisp, fresh, and tart. Remember, white wines can be acidic as well. Some foods, like chicken and pork, can go with either white or red depending on how they’re prepared. Generally, I suggest a white wine for either, and maybe a rosé or light red, depending on the overall flavor. As for red wines, the skins and seeds included in the pressing and fermentation release even more tannins into the wines – creating the color. Remember that with red wines, the lighter the wine color, the lower the tannins. That’s why there’s quite a

and merlots. Meanwhile, light to moderate fatty foods like salmon or pork can pair well with a light red like a pinot or Chianti. Finally, there’s one more rule for simple pairing... Pair spice with sweet. Sweeter wines, especially whites like riesling, tend to pair better with spicier foods. That’s because sweeter wines help coat your tongue, which is likely burning from the spice. Keep in mind, lower alcohol wines, like riesling and moscato, are also gentler on your palate as you enjoy spicy foods. Keep in mind, these are general rules based on chemistry. You may find varieties of wines that go better with your meal but break these rules. Recently an old classmate of mine from the Kellogg School of Management wrote to tell me he’d just had my Eifrig Cabernet with grilled swordfish on the beach. What? Fish with red wine? But it was a perfect match... why? The oil and richness of the fish was complemented by the perfectly balanced acids and heavy tannins of the cab. Remember... The best part of learning about wine is the trying and discovering what you like! The most important thing is that the value of wine tasting lies with you, the individual taster. Spending hundreds of dollars on a “good” bottle of wine doesn’t mean you’ll enjoy it (unless it’s mine of course).

LIKE A SNOB

The best part of learning about

wine is the trying and discovering what you like!

spectrum. Fatty foods like steak require heavy tannin reds like cabernets

24 | July 2017

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