American Consequences - February 2018

100-Year Opportunity in India

How to Survive Being Feasted to Death

The Biggest Mistake of My Career

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CONTENTS

FEBRUARY 2018 : ISSUE 8

LOST? CLICK HERE

36

20

56

68

52 80

AMERICAN CONSEQUENCES

6 Letter From the Editor BY P.J. O’ROURKE

56 How This ‘Disaster Protection’ Safe Haven Offers Massive Upside BY DR. DAVID EIFRIG 64 100-Year Opportunity in India BY RAHUL SARAOGI 68 One Kim to Rule Them All BY NICHOLAS EBERSTADT

Editor in Chief: P.J. O’Rourke Editorial Director: Carli Flippen Managing Editor: Steven Longenecker Contributing Editors: Peter Churchouse, Turney Duff, Nicholas Eberstadt, Dr. David Eifrig, Kim Iskyan, Victorino Matus, John Podhoretz, Rahul Saraogi Buck Sexton, Steve Sjuggerud Newswire Editors: Scott Garliss, John Gillin, Greg Diamond Assistant Editors: Chris Gaarde, Laura Greaver Creative Director: Erica Wood Cartoon Director: Frank Stansberry Contributing Cartoonists: Hank Blaustein General Manager: Jamison Miller Advertising: Sam DeCroes, Jared Kelly, Jill Peterson Editorial feedback: feedback@ americanconsequences.com

10 Year of the Dog BY P.J. O’ROURKE

12 What Moved the Market

14 What Could Possibly Go Wrong?

16 From Our Inbox

76 Doubts About Asia BY P.J. O’ROURKE

20 Most Hedge Funds Have Missed This Move BY TURNEY DUFF 24 The Biggest Mistake of My Career BY STEVE SJUGGERUD

80 The Not-So-Great Wall BY JOHN PODHORETZ

84 An Interviewwith Chief Risk Officer X BY P.J. O’ROURKE 92 China’s Trillion-Dollar Plan to Take Over the World BY KIM ISKYAN 94  November’s Congressional Elections Loser – Adam Smith BY P.J. O’ROURKE

36 In Asia on the Ground BY P.J. O’ROURKE

42 How to Survive Being Feasted to Death in Asia BY VICTORINO MATUS 46 These Fast-Growing Markets Aren’t on Your Radar BY KIM ISKYAN 52 Singapore’s Property Market BY PETER CHURCHOUSE

98 Read This

100 The Final Word BY BUCK SEXTON

American Consequences 3

INSIDE THIS ISSUE

T his month, we’re focused on Asia. .. It’s a big place currently ignored by most U.S. investors... and it represents a major opportunity. But we cannot consider Asia without considering trade, from free-market idealism to the looming prospect of a trade war. Editor in Chief P.J. O’Rourke gets us started with why trade takes brains and guts. If you understand the (sometimes frivolous!) history of trade, you’re well on your way. Then, we focus on China, the biggest Asian market by far... Bestselling author Turney Duff shows why most hedge funds have missed the huge move in China. Financial analyst Dr. Steve Sjuggerud details the biggest mistake of his career... and why it could lead to the biggest gains of your life. And we’ve partnered with Real Vision – the “Netflix for Investors” – to give you a free insider view of a two-part video series with Steve. Your exclusive access is on page 35. P.J. interviews the toughest guy he knows about his experience doing business “on the ground” in China... from a shared history of Molotov cocktails to a wrench thrown at his head. And Victorino Matus tells how to survive being “feasted to death.” Then we’re moving past China and into the other parts of Asia... •  Kim Iskyan shares three emerging markets that aren’t on your radar...

• Famed real estate investor Peter Churchouse details why the Singapore property market is back... •  Dr. David Eifrig writes why Japan offers disaster protection for your portfolio... • Fund manager Rahul Saraogi tells about a 100-year opportunity in India. • And well-known economist Nicholas Eberstadt shares everything you need to know about the very real North Korean threat.

I said, ‘When you knocked him down the stairs were you wearing an Armani suit like you are now?’ Tom said, ‘Yep.’

P.J. O’Rourke

Plus, don’t miss John Podhoretz ’s take on why China hasn’t taken over pop culture yet (thank goodness). P.J. interviews the chief risk officer at a “darn big and important” global financial institution to weigh the risk of Asia against the risk of the U.S. And Buck Sexton talks about the Olympics in the shadow of a nuclear showdown. Enjoy the issue. And tell us what you think at feedback@americanconsequences.com . Regards, Steven Longenecker Managing Editor, American Consequences

4 February 2018

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THE H

SOME THOUGHTS ON

We cannot consider Asia without considering trade. Our trade with China, for example. Some may view it with alarm...

“OMG! The U.S. trade deficit with China is $344 billion!” Others with glee... “Ha-ha-ha! We got China to take $344 billion of our worthless fiat money! Suckers!” But no one regards trade with China as meaningless. Trade is never meaningless. Trade is how – for good or for ill – the modern world was formed. Everyone on Earth is now linked to everyone else. What links us is not society or ideology. And, God knows, it’s not religion. There are only two forces powerful enough to cause 7.6 billion people to hook up with each other. One, of course, is the power of sex. But people have to be in reasonable proximity to each other to have sex (or in the same Internet chat room). The other force is the power of trade. (And that Internet chat room wouldn’t exist without it.)

Trade is different from barter or exchange. Barter and exchange and most other forms of buying and selling can be conducted in familiar settings. Trade takes brains and guts. Chimps in their trees exchange picking nits out of each other’s fur. Trade means taking your goods on the road. The root of “trade” is the Old Saxon word trada meaning “trail.” In order to trade you have to have some idea of why that trail is there and where it leads. Hence trade invents history and geography. You need a notion of what kind of people are at the other end of the trail, what they want to trade for, and what they have to trade with. Hence trade invents sociology and economics. You’ll also require a means of communicating with those people. Hence the study of languages. You’ll want to do careful calculations about what bulk of goods can be carried on the trade route, how the goods and the necessary

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6 February 2018

LETTER FROM THE EDITOR

STORY

OF TRADE

At first, people set out to be those robbers and brigands. They didn’t trade, they just took stuff from other people and killed them all. Then it dawned on the robbers and brigands... “We can’t go back and take more stuff from those other people. We killed them all.”

supplies for the trip will be transported, and the methods by which you can protect your goods and yourself. Hence math, physics, and ROTC. Before you’ve even left on your trading venture, you’ve invented an entire college expedition requires more resources than one man can provide. You’d have to be really rich to accumulate a worthwhile amount of trade goods. You’d have to be really big, strong, and the size of an elephant to carry the goods and your gear. And you’d have to be more skillful than elephants usually are with sword, dagger, spear, and bow for fighting off robbers and brigands. Maybe Conan the Barbarian could do it. But Conan, at least as played by Arnold Schwarzenegger, never struck me as a college man. It’s surprising that anyone ever set out to trade at all. And, at first, they probably didn’t. curriculum and gotten your degree. You’ve also invented business. A trade

“ Trade has the advantage of being repeatable. Alas, as the history of the world proves, war turns out to be repeatable too. But it takes a lot longer to recover from bleeding than it does from banking your profits.

Trade is different from barter or exchange... Trade takes brains and guts.

American Consequences 7

LETTER FROM THE EDITOR

Plus, obsidian is pretty. Flint is not. Obsidian shows evidence of being a frivolous luxury good. Long distance trade was difficult, dangerous, and shallow, superficial, and inane. Another well-documented ancient trade route, with beginnings in the 16th century B.C., was devoted to traffic in amber.

But there’s an aspect to trade that’s even more surprising than its existence... Trade, while never meaningless, is often – even usually – frivolous . The earliest archeological evidence of long distance trade is found in the Middle East and dates back as far as 14000 to 12000 B.C. at the end of the last ice age. The trade involved obsidian, a volcanic glass which is found in what would become modern Turkey and which wound up in Mesopotamia. Obsidian is useful. It can be chipped to form an extremely sharp edge and provided the best cutting tool available until the Bronze Age, circa 3300 B.C. Yet I have my suspicions about how utilitarian this obsidian trade was. Flint, readily available in Mesopotamia, can also be chipped to a sharp edge – sharp enough for practical purposes. But maybe not sharp enough for im practical purposes such as circumcision. The ancient Egyptians are known to have used obsidian knives for this “rite of passage” that boys had to endure when they reached puberty. Rites of passage – however painful – are social luxuries. X-rays of Egyptian mummies indicate that circumcision was common among the upper classes and uncommon among the poor. Obsidian was also made into decorative objects. The poor don’t decorate. Obsidian was polished into mirrors. The poor stared into a puddle when – and if – they wanted to know what they look like.

Long distance trade was difficult, dangerous, and shallow, superficial, and inane.

Precious fossilized tree sap was brought from the Baltic region of Europe to second millennium B.C. Mycenae and to Anatolia, the Levant, the Near East, and beyond. Examples of Baltic amber have been found in Han Dynasty Chinese tombs. Amber is useless . The only practical application for amber is if you want to extract fossil DNA from blood-sucking mosquitoes preserved in the substance in order to clone dinosaurs and get a plot for the movie Jurassic Park . (Spoiler alert: This doesn’t turn out well.) It’s the same with other ancient trade routes. The export of silk to Western civilizations is almost as old as the export of amber eastward. Silk’s value was equal to its weight in gold. Silk was fashion-forward in the Roman Empire and has remained so ever since. You think Hermes neckties are expensive now? They cost $150 and weigh about 3 ounces. They’d set you back $4,000 apiece in Imperial Rome.

8 February 2018

The Silk Road wasn’t called the “Burlap Bag Byway.” And the spice trade wasn’t initiated because the peasants of 3000 B.C. needed pepper in their gruel... When Columbus bumped into the New World while trying to shortcut the spice trade, the resulting commerce was in gold, silver, and tobacco. None of which form portions of a healthy diet. The truly needed and necessary products of the Americas – potatoes, corn, beans, and squash – were, at best, ballast. The origin of trade is silly. Jonathan Swift pointed this out in 1726 in Gulliver’s Travels . Gulliver voyages to a country where the horses – the “Houyhnhnms” – are civilized, highly intelligent, philosophical, and wise, while the people – the “Yahoos” – are bestial, naked, semi-tamed beasts of burden. (Off-topic aside: It is a sure sign of Silicon Valley’s cultural illiteracy that a personal web site provider would name itself “Yahoo!”) The Yahoos behave like typical international trade customers. Swift writes: “... in some fields of [this] country there are certain shining stones of several colors, whereof the Yahoos are violently fond... they will dig for whole days to get them out, then carry them away, and hide them by heaps in their kennels... [My Houyhnhnm host] said he could never discover the reason for this unnatural appetite, or see how these stones could be of any use to a Yahoo... He assured

me, which I also observed myself, that in the fields where these shining stones abound, the fiercest and most frequent battles [among Yahoos] are fought, occasioned by perpetual inroads of the neighboring Yahoos.” Trade war! But we owe the entire modern world full of all its connections, comforts, and opportunities to “certain shining stones [and fabrics, and ornaments, and gewgaws] of several colors, whereof the Yahoos are violently fond.” Trade starts out silly, but then gets down to serious business. Or reasonably serious... I say as I stare into the shining screen of several colors on my Apple iPhone X, made in China.

Hank Blaustein | © 2013 Grant’s Interest Rate Observer. Used by permission. www.GrantsPub.com

American Consequences 9

YEAR OF THE DOG Doing Business in Asia? Better Check Your Chinese Horoscope.

The Year of the Dog began on February 16... The Lunar New Year – rather than the Deceased-Dick-Clark New Year – is celebrated across Asia. The Chinese Zodiac and local variations of it are used to designate the lunar year in China, Japan, Korea, Mongolia, Vietnam, Laos, Cambodia, Thailand, Burma, Sri Lanka, Nepal, and elsewhere on the continent. According to the Chinese Zodiac, there is a 12-year cycle in which each year takes the name and the characteristics of an animal – Rat, Ox, Tiger, Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, and Pig. (Except for the dragon, it sounds like a low- budget municipal zoo.) What can we expect from the Year of the Dog? I consulted China Travel Guide, the largest online China travel agency, which, besides making bookings, gives pointers and explanations about Chinese culture: Dog is man’s good friend who can understand the human’s spirit and obey its master, whether he is wealthy or not. The Chinese regard it as an auspicious animal. If a dog happens to come to a house, it symbolizes the coming of fortune [and a mess on the rug]. The invincible God Erlang in Chinese legend used a loyal wolfhound to help him capture

monsters. [I use a loyal Labrador retriever to help me capture dead ducks.] Then I randomly – fortune cookie style – chose a website on the subject. It’s called “Your Chinese Astrology.” It says: People born in the Year of the Dog possess the best traits of human nature. They are honest, friendly, faithful, loyal, smart, straightforward, venerable and have a strong sense of responsibility. On the negative side, they are likely to be self-righteous, cold, terribly stubborn, slippery, critical of others, and not good at social activities. Donald Trump was born in the Year of the Dog. You be the judge of the Chinese Zodiac’s accuracy. Of course, 2018 is also called “2018” by the Chinese. The dog is an auspicious animal and both 8 and 18 are auspicious numbers. I’m too Irish to make fun of Chinese superstitions. If you grew up with as many Irish great-aunts as I did (six of them), you know that a lone crow, shoes on the table, a hat on a bed, a red-headed woman aboard a ship, and a chair falling over when someone stands up are all terrible omens. At least the Chinese have good omens. The only Irish good omen I can think of is that it’s lucky to be pooped on by a bird.

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10 February 2018

This is the Story of Your Enslavement… You have nothing saved. You owe on your house, car, and credit card. But this was no accident. 40,000 people per day are now learning about the biggest scam EVER perpetrated against the American people – and what you can do about it. Click here for details. THE REAL REASON WHY THE DOW IS HEADED TO 50,000 Markets have gone mad – hitting new highs every month. How much longer could it last? Steve Sjuggerud says, “Hold on to your hat – a lot longer than you think.” To watch his updated presentation on the Melt Up, click here . >>

According to a recent story in the Wall Street Journal , some real estate brokers who serve Chinese clients are expecting a banner year, because...

The number eight when spoken in Cantonese, sounds like the word for “prosperity.”

And... The number 18, when spoken out loud in Cantonese, sounds like the phrase “I want to be very wealthy.” One real estate broker interviewed by the Journal said...

You will likely see buyers and agents scheduling viewings and closings for the eighth day of the eighth month of 2018.

So it’s going to be a good year... at least for selling Apartment 18 at 888 Park Avenue or for going out and buying 18 dogs in August. One final thought on the Year of the Dog... In the 1730s, poet Alexander Pope’s treasured Great Dane, Bounce, had a litter of puppies. Pope gave one to his patron Frederick, Prince of Wales, who was living at Kew Palace. Pope wrote a couplet engraved on the pup’s collar. We might want to keep it in mind concerning U.S./China trade relations. I am his Highness’s dog at Kew; Pray tell me, Sir, whose dog are you?

>>

American Consequences 11

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

Since the beginning of the year, strategists and fund managers have said their largest concern was inflation. The markets have enjoyed this incredible 10-year run due to low growth and low interest rates. Today, central banks are feeling the need to retool their armories ahead of the next crisis. The Federal Reserve is raising interest rates and letting debt mature without rolling the money back into the market. In other words, it’s pulling back on stimulus. European Central Bank policymakers have said they are open to adjusting guidance to align more with a strengthening economy. The People’s Bank of China has discussed cooling domestic lending to control its debt. Bank of Japan board members are questioning continued stimulus in their country. These moves are signals of the potential end of easy-money policies. Now enter the hedge-fund masters – Ken Griffin of Citadel, Paul Tudor Jones of Tudor Investments, and Ray Dalio of Bridgewater. TheseWall Street heavyweights are always looking to craft a story around the path of least resistance and then sell it to the public once they’ve established a position. They found exactly what they’re looking for in inflation. They realized the markets had become so complacent that taking the opposite bet was a quick way to profit. They saw the year- end euphoria and received confirmation last month when equity investment inflows jumped a record $25.7 billion in one week.

VOLATILITY HAS COME BACKWITH A VENGEANCE. The Volatility Index (VIX) has rallied 97.13% since the beginning of the year. Fears of rising inflation reversed sentiment among overly complacent investors. Equity markets peaked in late January thanks to strength in emerging markets and healthy earnings from U.S. corporations. Bond prices dropped as confidence grew among central banks that the global recovery would bring inflation back to the 2% target. The dollar also declined as economies outside the U.S. grew and recent federal tax cuts increased deficit projects. The S&P 500 Index was up 5.56% for the month, before sliding into correction territory (a downward move of 10% or more) in early February. The slide began with the February 2 labor report. The U.S. Department of Labor reported job and wage growth was strong, but productivity lagged. Concerns focused on the possibility of higher prices without an uptick in gross domestic product (GDP). Inflation scores roiled the equity market as the VIX spiked 125% and the 10-year Treasury yield rose to four-year highs. From the intraday high on January 26 to the intraday low of February 9, the S&P 500 dropped 11.84%. On a closing basis, from the high on January 26 to the low of February 8, the S&P 500 lost 10.16%. In that same time frame, the Dow Jones Industrial Average, Nasdaq, and Russell 2000 lost 10.35%, 9.71%, and 8.97%, respectively.

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John Gillin Greg Diamond

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In summary...

Since that time, they’ve been outspoken on

12 February 2018

First, worst-case expectations were priced in – a classic example of “sell the rumor, buy the news.” Second, investors realized that economic growth is on the rise. Third, earnings and outlooks continued to be positive. Fourth, the Fed cares more about Personal Consumption Expenditures (PCE) than it does about CPI in terms of inflation. PCE data at the end of January stood at 1.5%, well below the Fed’s 2% target. Meanwhile, recent commentary from the Fed has expressed its lack of concern regarding inflation. Consequently, Dalio, Griffin, and Jones are experiencing their own “pain trade” – as their short positions need to be repurchased. term barometer of economic activity. The data is based on the responses of 300 purchase and supply-chain executives across the country. March 8 European Central Bank policy announcement. The market will be paying close attention to commentary on stimulus withdraw and the path of rate hikes. Recent speculation has centered on the central bank changing to a tightening path (raising rates) going forward. March 9 U.S. releases payroll data. This is an important gauge for growth and inflation.

their inflation concerns. Considering they have roughly $185 billion in assets under management between them, it’s easy to understand their market influence. When taking leverage into consideration (many large funds can carry 2x to 3x leverage), they could be commanding nearly $600 billion... and the case becomes more obvious. That was until the release of Consumer Price Index (CPI) data this week... key data the market counts on to confirm the case for shorting. CPI measures a basket of consumer goods and services to gauge the cost of living for individuals. Despite higher-than-expected inflation numbers, markets rallied. February 21 Markit releases preliminary manufacturing, services, and composite Purchasing Managers Index (PMI) data in the U.S. and the Eurozone. This is a key gauge for judging the state of global growth. The release of the Fed’s Federal Open Market Committee meeting minutes. Investors will sift through this data for clues on domestic growth and policy outlook. February 28 – March 3 Caixin releases preliminary manufacturing, services, and composite Purchasing Managers Index (PMI) data in China – another key gauge of global growth. March 1 The Institute for Supply Management releases its Manufacturing, New Orders, Prices Paid, and Employment data. This data is widely followed and an important near-

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American Consequences 13

WHAT COULD POSSIBLY GO WRONG?

Financial follies and disaster in the making

ending months-long negotiations and increasing current spending caps by about $300 billion... a number that Reuters reports, “would not be offset by any spending cuts or new tax revenue, meaning an increase in the federal deficit.” With a current federal deficit estimated at around $700 billion, what could possibly go wrong ? Well, after passing both an unfunded tax-cut bill and last week’s spending bill, the expected federal deficit has reached $1.5 trillion... nearly as high as the deficit incurred under President Barack Obama to fight the financial crisis and recession. And assuming these tax cuts and spending increases are extended, we could see an annual deficit of as much as $2.1 trillion by 2027.

Investors downright love U.S. stocks today... Early this month, the Conference Board business-research group released its latest monthly survey. Most folks pay attention to its “consumer confidence” index, on how consumers feel... and what they might spend. But the survey also asks participants if they expect stock prices to increase, decrease, or remain about the same over the next 12 months. The latest results are incredible... And they’re getting almost no attention in the mainstream news. More Americans now expect stocks to rise this year than any other time since the last “Melt Up” in 1999... And amid this newfound confidence, “mom and pop” are rushing back into stocks for the first time in years. Just in time for the biggest correction in years to come a few days later .

A $94 billion boost to the military...

A $1.5 trillion deficit becomes law...

One of the biggest winners in the spending bill? The Department of Defense. With a 2019 defense budget of around $716 billion,

On February 8, President Donald Trump signed a massive spending bill into law,

14 February 2018

the Pentagon is seeing its largest annual budget increase since 2002. And defense spending is essentially guaranteed to continue to increase if the U.S. intends to maintain its status as a world superpower. Especially considering the very real (and expensive) possibility of future conflict with North Korea. We don’t advocate for war. But we do see one coming... As we go to press the mainstream media is mulling over recently released Consumer Price Index (CPI) data... specifically the largest month-over-month increase in the cost of consumer goods since 2005. Inflation can be a sign of a strengthening economy... but this increase – combined with a weak dollar, decreased retail spending, and rising interest rates – could lead to continued market volatility and corrections. Less consumer spending on more expensive goods means companies make less money. (And a weak dollar means these goods could potentially cost even more.) Combine those decreased earnings with increased borrowing costs (i.e. rising interest rates) and it’s not long before investors start selling “underperforming” companies. We’re not calling for an end to the current bull market... that’s a call no one can accurately predict. And it seems clear that we’re still in a bull-market Melt Up. But the “Melt Down” will come eventually... and we hope you’re ready for it. Inflation is up... time to worry?

If you lost sleep in the recent correction... Your portfolio is likely NOT prepared to weather a real correction . You might be overcommitted to stocks in general... You might have too much exposure to certain sectors of the market... Or you might have too much of your money in several individual stocks. If you’re like many investors, it’s probably all three. If that’s the case, we urge you to take some time tonight to re-evaluate your asset allocation and position-sizing strategies. And be sure to have a trailing-stop loss – or another well-defined exit strategy – in place for every position you own. has been warning readers about the exploding national debt for a while now... and he’s just finished what could become the most important book in America over the next few years. The American Jubilee explains much more about America’s biggest problem today... and what you MUST do to survive and prosper in the years to come. Read The American Jubilee . It will be the best $19 you ever spent. You can get your copy here. Something to read... American Consequences contributor Porter Stansberry

American Consequences 15

FROM OUR INBOX

Re: Our Newest Readers Weigh In I feel I’ve learned a lot from reading your information. Pay no mind to the naysayers – we’ve become a land of lotus-eaters, who when distracted from our mindless munching, turn against those urging us to pick up the oars and return to the sea. – Scott Corrales P.J. O’Rourke comment: Anchors aweigh, Scott! And take a look at Tennyson’s poem “Ulysses” where the Greek hero, now in old age, urges his elderly mariners to go on one last adventure: We are not now that strength which in old days Moved earth and heaven, that which we are, we are; One equal temper of heroic hearts, Made weak by time and fate, but strong in will To strive, to seek, to find, and not to yield. The first rules we learned in my class on “How do we knowwhat we know?” called epistemology, were the fallacies of logic and the rules of bias. The reason we listen to people who disagree with us is that we might be missing something critical in data or perspective. It just astounds me that most American media do not check their bias or their information. Keep up the good work! – Grant Peever

P.J. O’Rourke comment: And keep up the good thinking, Grant. My favorite logical fallacy that Big Media uses is the “question-begging epithet.” This is where what is to be proved by an argument is assumed in the statement of the argument. For example, a headline like “Unequal Tax Cuts Favor Rich.” We all know that anything “unequal” is just awful, don’t we? Your choices of articles for the most part are timely, on topic and interesting. On the rare occasion I find you “getting too out there” I just skip on to the next topic because I understand you can’t please everyone all of the time. – Sharon Mazurek P.J. O’Rourke comment: I sure can’t, Sharon! I know this because I have three adolescent children. Please tell them that, when Dad gets on his rant about “What’s the Matter With Kids These Days,” they should “just skip on to the next topic.” You knowwhat they say, you can lead a horse to water but you can’t make him drink! That pretty much sums up what a lot of folks are doing today, they do not want to hear/ know the truth because REALITY is simply too scary. – Louise Long P.J. O’Rourke Comment: Or too HARD, Louise. I’m reminded of the Dorothy Parker quip about horticulture, “You can lead a whore to culture, but you can’t make her think.”

16 February 2018

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

Re: Hawaii Missile Scare One of the worst things that happened in Hawaii was Target store [in Kahului, Maui] making everyone leave the store when the missile alert went out... There are very few “safe” places in Hawaii. People were shopping with their kids in a place that was safer than homes and told to get out causing pandemonium and fear as to where people would go nowwith minutes before a missile hit. – Rebecca G. Steven Longenecker comment: This is shocking, Rebecca. Though we can’t solely pick on Target here... Other major stores evacuated customers, too, despite the “SEEK IMMEDIATE SHELTER” directive in the emergency message. We found reports that Wal-Mart, U-Haul, and other stores used a similar “evacuate and lock out” response.” But we did want to get an answer for you. So we reached out to Target. Here’s the company’s statement... At Target, we’re focused on creating a safe and secure shopping environment for our guests. When the false missile alert was issued the other weekend, our store leaders worked quickly to take care of our team members and guests in the midst of an unprecedented situation.

We apologize for any confusion that may have been created. Like many retailers, we’re evaluating our safety procedures and have been in contact with emergency management teams to understand what happened and learn from the situation. There’s no real satisfactory response here. But it is fair that inbound missiles aren’t “business as usual.” And while we hope that Target has a more consistent plan the next time this happens, we really hope that “next time” doesn’t happen. Re: Social Security as an Entitlement I’ve been paying in to SSI all my life it is owed to me, and is in no way an entitlement. Welfare is an entitlement. SSI is MY MONEY! – “Iron Man” You do a disservice to your readers when you describe Social Security as an entitlement. It is not. I paid into the Social Security system for 44 years and most of that time, our elected officials were ‘borrowing’ from the trust to pay for pet projects. I am sure you have noticed that power corrupts, and absolute power corrupts absolutely; there are no poor dictators on earth today. But nothing tempts a person like the ability to ‘legally’ spend another person’s money. – Hugh Howard

American Consequences 17

FROM OUR INBOX

Re: One-Time ‘Cash Event’

You may want to rethink [using the word “entitlement”], because it implies that it is something that you haven’t earned. Maybe some people haven’t, but I have paid into Social Security and Medicare with every single paycheck I have ever received... I agree that there needs to be reform. A large part of the problemwas that there was a surplus to start with and our fearless leaders spent that money on all kinds of goodies. They got used to it. Now, there isn’t a surplus and they are hand wringing and yammering about ‘entitlements’, trying to rebrand it as an unearned luxury. – Pam Roberts Anyone calling SS an entitlement isn’t a true economist... I’ve been paying into SS since I was 14. I expect a return on my investment. Clearly you’re living in an imaginary world if you label SS as an “entitlement”. – Thomas Lynch P.J. O’Rourke comment: OK, OK, all of you are right! The problem is that we’re right, too. Social Security shouldn’t be considered an “entitlement.” And it was deliberately set up as an “insurance program” so that it wouldn’t appear to be an entitlement. But that insurance program was a Ponzi scheme, which left Social Security, in fact, unfunded. All that we Social Security recipients are left with is a government promise that we’ll get what we’re entitled to. Consult Native Americans for a further discussion on government promises.

American Daily Consequences has the following quote from Doc Eifrig regarding Trump’s tax plan and the repatriation of funds held abroad by U.S. companies: This happened before. In 2004, the U.S. held a smaller repatriation holiday. Studies of the results show that 90% of the repatriated profits went to buybacks, dividends, and executive compensation. Clearly, none of you recognized the heavy irony in that statement. Trump and the Republicans have claimed a different intent this time loudly and continually (well, in public), as reported in the media: “President Trump and congressional Republicans argue that it’s important to get companies to bring the money home because it would be used to create jobs.” As usual, they’re lying. – James Briggs Steven Longenecker comment: We’re focused on the facts, James, not claims of good intentions. Do you usually expect the government to tell you the full story? Why did you expect this time to be different? If you are an investor, the repatriation is likely to benefit you. (And if you’d like to learn how to gain instant access to Doc’s 10 favorite repatriation opportunities, you can read more here .) But if you’re relying on the government to “create” a job for you... Well, I have some bad news. (Please read P.J.’s earlier comment again about government promises.)

18 February 2018

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American Consequences 19

MOST HEDGE FUNDS HAVE MISSED THIS MOVE

‘A PIG ON LSD’ OR A MAJOR OPPORTUNITY?

20 February 2018

CLICK HERE TO READ THEWEB VERSION

The late ’90s and early 2000s were a golden age for Wall Street... Almost anyone with a decent track record could slap a logo onto letterhead, raise hundreds of millions of dollars, and charge a 2% fee for assets under management while taking 20% of the profits.

Hedge funds started popping up faster than Starbucks locations in Manhattan.

By 2005, hedge funds looked beyond the crowded American markets and into money- making opportunities outside of the U.S. China fit the bill. There was tons of potential... especially with the Hong Kong Stock Exchange. It operated very similarly to London or New York. Everything seemed legit, transparent, and precise. It felt safe. You could fairly evaluate a company and feel comfortable with your investment. Of course, there was currency risk, but nobody cared about that – there was money to be made. By 2005, hedge funds looked beyond the crowded American markets and into money- making opportunities outside of the U.S.

The selling point was that hedge funds provided more flexibility, had superior information, could move in and out of trades faster, and ultimately could manage risk better. Investors threw money at young up- and-coming money managers with the hopes of high returns without any market correlation. And it worked... Information flowed, markets were friendly, the IPO calendar was blistering hot, and performance was significantly higher than parking your money in a mutual fund. But as the success continued, more hedge funds jumped into the game. And it became increasingly difficult to make money. Traders and portfolio managers were chasing the same stocks and the same ideas. It got crowded... “Crowded” is a term that means too many investors are making the same play for the same reason. The usual result is no one really profits.

By Turney Duff

American Consequences 21

There were two other markets in mainland China: the Shanghai and Shenzhen Stock Exchanges. Those exchanges were opened by the Chinese government in the early ’90s as a way of modernizing China’s economy. And they were harder to get into than the most exclusive nightclubs in Manhattan. It felt like you needed to know someone and have a secret password just to get past the bouncer. It was nearly impossible for U.S. investors to participate. But in November 2014, the government created the Shanghai-Hong Kong Stock Connect program which allowed foreign investors to buy shares of Chinese companies. A similar program connecting Shenzhen with Hong Kong followed two years later. Prior to these programs, only Chinese citizens and a few foreign fund managers could trade mainland China stocks. And with the new opportunity came suspicion and skepticism. Many investors avoided these markets entirely. There was a mystery surrounding any investments made into these markets. Rumors started to swirl about fake and manipulated economic numbers from the Chinese government. There was also much debate about the effect of China’s ghost cities – vast planned urban real estate projects that are built from nothing. They have everything – everything except people. Skeptics pointed at ghost cities as evidence of local officials trying to make a quick buck because land sales created a lot of revenue for China’s

government. It created cheap funding for business...and local business was not on the up-and-up. For many, it was an extremely difficult market to analyze. Few were sure what to believe. Some alleged that the Chinese government was acting as a “man behind the curtain” of the market. In 2015, Jim Chanos, founder of investment management firm Kynikos (Greek for “cynic”) said the Chinese markets were: “ Like a pig on LSD. You don’t know which way it’s going to run. ” Chanos had earlier correctly predicted the downfall of Enron, so he made waves with this comment... He was talking about an individual investor’s defenselessness to huge intraday swings depending on the temper of the People’s Bank of China so-called “plunge protection team,” the theory that the Chinese government would step in if the market was down too much. Some investors believe that Chinese companies don’t properly measure risk... and that private company winners and losers aren’t

The Chinese markets were: “LIKE A PIG ON LSD. YOU DON’T KNOW WHICH WAY IT’S GOING TO RUN.”

22 February 2018

So the debate of if, or how much, the Chinese markets are rigged continues today with U.S. investors... The spectrum runs from money managers who believe their fiduciary responsibility is to totally avoid China due to being unable to properly evaluate risk... and goes all the way to money managers who are comfortable and entirely focused on those markets because they don’t want to miss an outperforming market. Of course, if you think something is rigged – rigged to not go down – doesn’t that make it an easier investment? That is... until the gig is up. Then you’re considered a fool for holding the bag.

If you think something is rigged – rigged to not go down – doesn’t that make it an easier investment?

always decided based on a “fair” playing field, but instead based on decisions from China’s ruling Communist Party. Local debt markets are even more difficult to unravel because the government controls the interest rates. Investing in China can mean extreme moves... and it makes individual companies almost impossible to analyze. Most of the hedge fund guys and girls I spoke with told me they haven’t been overly exposed in the Chinese markets. And they’ve missed the most recent run up. They cited the possibility of a U.S.-China trade war, slowing economy, and growing debt. But many of them also mentioned not being entirely comfortable investing in these markets. Instead, U.S. hedge funds have been allocating more money to Japan and India. And yet, given that China’s stock market is No. 2 in the world, with a market cap of almost $10 trillion, this is a major thing to “leave out” of a global strategy. So some investors, when they do invest, choose to play it safe and stick to the better-known technology/Internet companies like Alibaba (BABA), Tencent (TCEHY), Baidu (BIDU), and NetEase (NTES).

Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where its 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 23

The Biggest Mistake of My Career COULD LEAD TO THE BIGGEST GAINS OF YOUR LIFE

24 February 2018

NOW

Honestly, I was nervous... I was asked to speak at the New York Stock Exchange last month... on a panel discussion full of PhD experts... about China’s new multitrillion-dollar infrastructure plan. The PhDs had flown in from Beijing and London, among other places. Hundreds of Wall Street bigwigs were in attendance – all waiting to hear what we had to say. But what was I going to say? “What do you want me to talk about?” I asked Brendan Ahern, the Chief Investment Officer of KraneShares. It was his show – the China “One Belt One Road” Summit – held to commemorate KraneShares’ newest China fund. “Will you tell that story about the biggest mistake of your investing career?” he asked. “Really? You want me to tell the story of my biggest investing failure... to a room full of investors in a private meeting at the New York Stock Exchange?” “If you don’t mind,” Brendan said. So I did. Here’s the story I told them: The worst mistake of my investing career...

By Dr. Steve Sjuggerud

CLICK HERE TO READ THEWEB VERSION

American Consequences 25

I n 1996, I visited China to check out the investment prospects. During my most important meeting, I couldn’t help but snicker to myself. “There is no way any of this will ever be accomplished,” I thought. I was standing on “The Bund” in Shanghai – looking across the Huangpu River at mostly undeveloped land. “What you see across the river,” the executive said as he beamed with pride, “will be greater in all ways than Manhattan.” I squinted my eyes and peered into the distance... looking for signs of, well, anything. But I couldn’t picture it. And I’ve spent a quarter-century spotting investment ideas before anyone else could see them. There was a start... a big building or two, most notably the Pearl Tower. But you needed an unreasonable amount of hope to see a futuristic Manhattan across the way. The “THEN” photo on the previous page was essentially the view back then...

We walked the few steps back on The Bund to his office, which was essentially a double-wide trailer. There were more executives inside, all wearing semi-white short-sleeve dress shirts and smoking cigarettes. It wasn’t a high-end look. This office was the home of Shanghai Lujiazui Finance and Trade Zone Development Company. That probably means nothing to you now... But back then, Lujiazui (as it was known) was the biggest stock on the Shanghai “B-share” market. It was the biggest blue-chip stock that foreigners were allowed to buy. I was really hoping to be impressed. But I wasn’t. The executives took me over to a massive boardroom table. They had put hundreds – possibly thousands – of skyscraper models on it. It looked something like this...

I was certain there was no way China could come close to completing such a massive buildout. NOWAY!

And then, it did...

26 February 2018

In 1996, when you looked across the river from The Bund, all you saw was the Pearl Tower (the “Space Needle”-type building circled on the left) and a couple others, as I showed you in the first picture. Looking at that scale model, I was certain there was no way China could come close to completing such a massive buildout. NO WAY! And then, it did ... Today, this area is a glitzy financial district with futuristic-looking skyscrapers, luxury dining and nightlife options, and panoramic views. (You can watch a brief YouTube video about the area here. ) If I was a Hollywood producer and wanted to set a movie 20 years in the future, I would go here. I’m not kidding. Yes, it’s the future. And yes, it’s China.

You get my point... In less than two decades, China turned acres of dirt into a city that is more futuristic than Manhattan. It is the single greatest infrastructure achievement I have seen in my lifetime. It is one of the greatest transformations in the history of man. I didn’t believe for a second that it could be done. And I have never been more wrong in my investing career. Fast forward to last summer. I was in Beijing, eating dinner with a friend who has lived in China for decades. “You don’t understand, Steve...” he said. “Every major city in China looks like this.” All the Americans at the table went quiet.

The Biggest Mistake of My Career

American Consequences

27

This massive difference between reality and perception creates a massive investing opportunity for us in China today.

We were sitting at Din Tai Fung restaurant. According to the New York Times , it’s one of the top 10 gourmet restaurants in the world (not just Beijing). Anthony Bourdain said he’d “travel half way ‘round the world to eat dumplings at Din Tai Fung.” We’d walked 200 yards from our hotel to the restaurant – past Tesla car-charging stations, ultra-modern high-rises, and perfectly manicured streets. Honestly, it felt like we’d stepped into the future. This is Communist China? We had already decided that Beijing today is the most modern city any of us had experienced... Where else other than Beijing can you buy a bottle of wine out of a vending machine... with just your mobile phone? (Pictured below.)

Payment via your phone’s WeChat app is all this vending machine accepts. Cash and credit cards are no good. We talked about WeChat in last month’s issue of American Consequences . It’s owned by Tencent (OTC: TCEHY) , which I predict will become the world’s largest company someday. Again, we had just spent a couple of days in and around Beijing. This is the reality in Beijing. Life here is as futuristic as it gets. Can all the major cities in China be even close to this? Our dinner host – an American-born Chinese executive who has lived in China for decades – said yes. And I can personally confirm it based on the Chinese cities I’ve visited. The thing is, the American perception about China is different from this reality... This massive difference between reality and perception creates a massive investing opportunity for us in China today. Once-in- a-lifetime profits are possible. When the massive difference between reality and perception goes away, the potential for these gains will disappear too. Let’s take a quick look at some current misperceptions. And then we’ll move to the reality... and the incredible opportunity...

28 February 2018

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