Finding the next Sberbank
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful> READ MORE
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful> READ MORE
If you’re looking to invest when the odds are in your favour... where you can make life-changing gains… then look no further than a crisis. When asset prices> READ MORE
As I told you a few days ago, In December 2013, Kazakhstan was ignored by most investors. The country was facing political uncertainty, government corruption and it> READ MORE
Some of the best investments start with disaster… when things are so bad they can’t get any worse. When the situation is so dire, it can only get better. When> READ MORE
Jim Rogers is an investing legend, a world record holder and a best-selling author. He co-founded the legendary Quantum Fund with George Soros, which generated> READ MORE
We never needed the nuclear meltdown survival pack. Thankfully. When my wife and I moved to Armenia a number of years ago, the U.S. government – who had sent my> READ MORE
What if you spent a week in a country… and didn’t end up meeting a single person who is an actual citizen of the country? Hotels, banks, Uber drivers,> READ MORE
Right now, anything Russian is toxic in the investment world. But sometimes the vodka goes down the drain with the mineral water… and I found a stock that I> READ MORE
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful thing, as they say.
Back in the early 2000s, I worked for a Russian bank, as a Russian bank analyst. Shortly before I left the job (and country, and industry) – it takes a special person to be a research analyst for an investment bank for years and years, and I am not that person – Russia was finally emerging from the 1998 financial crisis.
That was the financial crisis (after a while they all tend to blend together) that started in July 1997 in Thailand – and, like a virus, eventually spread to Russia. The currency fell from 6.26 rubles to the dollar to 20.83 rubles to the dollar… the country’s stock market collapsed, falling 93 percent… and the government defaulted on its debt. The banking sector came within a whisper of completely collapsing.
Back then, there was only a handful of Russian bank stocks. The biggest and most important one by far was Sberbank, the country’s state savings bank. A relic of Soviet times – it was used to funnel money from the socialist government to state-owned companies – in 2002 Sberbank accounted for 24 percent of total assets of the country’s banking sector. It had a network of around 25,000 branches, and employed hundreds of thousands of people. After the financial crisis, investors had fled Russian stocks – and, in particular, the banking sector was as interesting to investors as a toxic waste dump.
As my last hurrah as a Russian banking analyst, I took a close look at Sberbank shares. When no one is interested in what you’re doing – again, Russia’s banks had all the appeal of curdled milk – it’s easy to lose sight of the wood for the trees.
And I discovered the below – which is a chart that formed part of the report that I wrote then. It shows that the shares of Sberbank, at a price-to-earnings (P/E) valuation of around 3, were trading at an enormous discount to the banking shares of pretty much every other market.
The story was similar for price/book value (P/B), a valuation measure often used to value banks. Sberbank shares were ridiculously cheap.
Meanwhile, Sberbank was far more profitable than banks almost everywhere else, as the chart below shows. (ROA means return on assets, and ROE refers to return on equity, two important measures of banking profitability.) This was partly because Sberbank was majority controlled by the Russian central bank, and received preferential treatment and had a low cost of funding. But still, it made a lot more money than its competitors.
As I said, Russia, and its banks, were universally ignored by investors. So it wasn’t surprising that Sberbank shares were extremely cheap… and, given its privileged status, it was good at making money. And the entire bank – the largest bank of a country of 145 million – had a market capitalisation of just US$1.6 billion.
That’s not small… it’s tiny. It’s smaller than, say, the current market value of Sally Beauty Holdings, an American beauty salon supply company. Even though Russia, and Sberbank, were still recovering from a brutal financial crisis, neither was going to evaporate or sink into the core of the earth, leaving investors with nothing. Sberbank deserved to be worth a lot more than (say) Sally Beauty Holdings.
So, as a going-away present to my employer, I issued a report with a “buy” recommendation on Sberbank shares. After writing the report, I went on a road show to visit dozens of institutional investors around the world to tell them what I thought. I was greeted with a lot of suspicious muttering and side-eye looks.
But: Their loss. Because over the next ten years, Sberbank was one of the best-performing large stocks in the world… it went up more than 3,700 percent. It helped that Russia’s economy recovered sharply, on the back of the commodities boom. But I had been right: Sberbank shares were absurdly cheap.
Sometimes you have to be lucky to find stocks that are in markets that no one likes… that – if you get a bit of perspective – offer extraordinary value. Other times, they’re right in front of you.
Finding opportunities like this is what my International Capitalist newsletter is all about. We look all over the world for attractive investment opportunities with the potential for big – and even life-changing – profits. You can learn more here.
Editor, International Capitalist
P.S. I spend my time finding the next Sberbank… in Russia, or elsewhere. I look for hated stocks in hated markets – where it’s possible to make astonishing gains like this one. I can tell you more here.
If you’re looking to invest when the odds are in your favour… where you can make life-changing gains… then look no further than a crisis.
When asset prices collapse, it creates life-changing opportunities to buy (the right) assets on the (very) cheap.
But investing in markets or companies in crisis requires leaving what you know… overcoming your “home country bias”… and running towards the fire. (That’s part of what I do in my investment research service… I travel to off-the-radar – and big-upside – destinations around the globe. Find out more here.)
What follows are three of my favourite examples of markets in crisis that were fortune-making for savvy investors. The exciting thing is that the “before” part of each of these situations exists today – in some market or sector or company… it’s just a matter of finding it – before it becomes the “after” of the examples below.
Today, it’s strange to think of Spain as a fascist dictatorship. However, from the 1930s through the 1970s, its markets and economy were largely isolated from the rest of the world. Europe effectively ended at the Pyrenees, the mountain range separating Spain and Portugal from France.
When Spain’s longtime dictator, Francisco Franco, died in November 1975, the country’s future was up in the air. For several years, civil war and chaos looked like a real possibility. (I lived in Spain at the time… and though as a pre-adolescent I didn’t realise it, the country was at a true crossroads.)
But Spain slowly evolved into a democracy. It adopted a new constitution in 1978, and the government put down a coup attempt in 1981.
The 1982 elections solidified Spain’s transition to democracy and its eventual position in the western military alliance, NATO.
In 1986, Spain joined the European Economic Community – now the European Union. (People rang in the new year, marking the official entry into the EEC, with the cry, “We’re Europeans!” I was living there then… and it made a big impression on me.) At the time, new EEC members received massive infrastructure investments in order to help lift their standard of living to be on par with the rest of the union. These funds fuelled a two-decade economic boom in Spain that only ended with the 2008-2009 global economic crisis.
Investors who saw the opportunity for enormous positive change in Spain in the 1970s could have made returns of 4,300 percent in subsequent years.
In 1983, Sri Lanka, a small island nation south of India, entered a prolonged civil war. The conflict between the Sinhalese ethnic majority and the Tamil ethnic minority lasted 26 years. (It was one of history’s more brutal conflicts… the Tamil Tigers reportedly invented the suicide vest – and pioneered suicide bombing as a war tactic.)
The long war stunted the country’s economic growth and created political uncertainty. Suicide bombings and other terror tactics by the Tamils posed an ongoing threat to the rest of the island. This fueled a steady migration out of Sri Lanka and strongly deterred foreign investment.
Meanwhile, excessive government spending fostered high inflation and constant budget deficits (when governments spend more money than they take in). As a result, Sri Lanka’s stock market suffered low turnover and minimal foreign interest. Sentiment toward the country was overwhelmingly negative.
(In fact, to much of the rest of the world, Sri Lanka’s civil war is what they know of the country… I’ve often been asked, “Oh, are they still at war?” after I mention that I lived there for a few years.)
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In 2002, Sri Lanka’s economy began to slowly improve, and the country made some progress toward political harmony. The turnaround was strong enough to trigger a sharp rally in the Sri Lankan market. In November 2005, the election of President Mahinda Rajapaksa, coupled with a strong public mandate to end the civil war, further fueled the rally.
Then the global economic crisis hit, along with the final and most ferocious chapter in Sri Lanka’s civil war, and in early 2009 the country’s stock market fell sharply.
The Sri Lankan stock market didn’t re-rate until the Tamils were definitively defeated in May 2009. The northern and eastern regions of the country – previously off-limits to investment and economic development because of the war – were gradually re-integrated into the economy, bolstering growth.
Investors who bought Sri Lankan stocks amidst negative sentiment could have made gains of 2,000 percent – though with plenty of volatility along the way.
The sugar industry experienced multiple price shocks throughout the 20th century. That’s not unusual for commodities, which tend to go through cyclical “boom and bust” periods.
Sugar boomed from 1962 to 1964, after the U.S. suspended imports of sugar from the Caribbean island of Cuba. (Socialist Fidel Castro led the Cuban Revolution that ousted President Fulgencio Batista in 1959, and the U.S. imposed a multi-decade economic blockade on the country, as part of its failed effort to undercut Castro.)
In 1964, the price of sugar started to fall. By 1966, the price had collapsed to close to a penny per pound. Finally, sugar was so cheap that demand started to rise. Then, in 1969, the U.S Food and Drug Administration banned cyclamate, a common sugar substitute, after researchers discovered it was carcinogenic. This pushed demand for sugar even higher.
Over the next four years, consumption outpaced supply, and inventories dwindled. This triggered a dramatic increase in sugar prices. Sugar hit a high of $0.64 per pound in October 1974.
Investors who got in at the 1966 low could have made just upwards of 5,000 percent through late 1974.
Today, many markets are close to all-time highs. But there are plenty of assets that are in crisis… or – maybe even worse – are unloved and ignored, and as a result are trading at crisis-like levels.
Finding high-upside opportunities like these are the reason I launched International Capitalist. I look all over the world for attractive investment opportunities with the potential for big – and even life-changing – profits. And for a limited time, we’ve opened International Capitalist to new subscribers… you can learn more about it here.
Publisher, Stansberry Churchouse Research
As I told you a few days ago, In December 2013, Kazakhstan was ignored by most investors. The country was facing political uncertainty, government corruption and it was a world leader in banking sector non-performing loans.
On the surface, this sounds terrible. But this type of setup is – potentially – a contrarian investor’s dream. That’s why I found it interesting.
The fact that there was such widespread concern about the future of Kazakhstan meant that in late 2013, it was all “priced into the market.” In other words, investors were already assuming the worst. So anything but the worst would be good for Kazakhstan.
It seemed to me that Kazakhstan, and its banking sector, was a great setup for an out-of-favour investment… (in case you missed it, I explained the setup here).
In 2013, Kazakhstan had the highest level of non-performing loans (NPLs) of any banking sector in the world.
Investors use NPL levels like doctors use blood pressure readings… it’s a key barometer of the overall health of the banking system and, by extension, the economy. Kazakhstan’s NPL levels suggested the country’s banking sector and economy should have been on life support – if not six feet under.
The country’s largest bank (based on assets), Kazkommertsbank, had nearly one-third of its loans overdue.
KKB serves retail and corporate customers across Kazakhstan and the region. In 2013, about half of its US$19 billion loan book was extended to the real estate and construction industries (and just 14 percent to individuals).
The post-global financial crisis devastation of the Kazakh real estate sector helped explain why so many of its loans were overdue. While Kazakhstan wasn’t alone in having a damaged and bloodied banking sector, its NPL levels were absurdly high compared with banks in pretty much any other part of the world.
So you can understand why investors didn’t want anything to do with the bank. But in 2013, KKB was taking all the right steps to improve its business and bottom line.
For a few years after the global economic crisis, KKB largely stopped lending money so it could focus on getting as much value out of its overdue loans as possible. It started taking stakes in projects with long overdue loans, and making additional loans to see projects to the end… where it could finally realise some value.
These sorts of recoveries take time – and finding a buyer for a completed project can take even longer. The process was slowed even further by the corruption, inefficiency and immaturity of the Kazakh legal system, which was still learning how to deal with the intricacies of asset foreclosure.
Results were slow… but steady.
This made the stock absurdly cheap in December 2013, trading at a forward price-to-book (P/B) ratio of 0.3… compared with the average P/B level of around 1 for most banks. This means that you were paying 30 cents for every US$1 of capital on KKB’s balance sheet.
That price reflected investor expectations that a whole lot was still going to go wrong for KKB… or rather, that KKB was completely off the radar. Investors didn’t want to touch a toxic Kazakh bank.
But how bad could it really be? I believed that the shares wouldn’t be this cheap forever… thanks to a number of powerful and underappreciated catalysts.
First, NPLs were at the top of the central bank’s agenda. They wanted to make it easier for banks to clean up their balance sheets.
Second, KKB was doing the right thing by working to maximise value from its overdue loans. The CEO of a competitor, who, if anything, would prefer to see KKB fail, told me (during a chat in his office when I was in town) that he was very impressed with the approach of KKB management.
There was a cushion, too… KKB had US$1.5 billion in cash on its balance sheet. And it had a solid capital adequacy ratio (a way to measure the balance between a bank’s capital, and the amount of risk it takes on).
Finally, there was already a success story in the Kazakh banking sector… which suggested that investors may begin to notice KKB soon. Investors had been focused on Halyk Bank, the other big publicly traded Kazakh bank. Halyk had announced strong quarterly results and promising underlying growth. And its shares had been rising steadily for months – outperforming shares of KKB. This was a good sign that investors would be willing to invest in KKB as its outlook improved.
The company faced a lot of challenges, though.
First, the government held a 21 percent stake in KKB, which was scheduled to go up for sale in 2014 – and no one knew who might buy it. That meant there was a risk of someone buying who didn’t have small shareholders’ best interests in mind.
However, I thought that this risk was limited. The European Bank for Reconstruction and Development (EBRD), a developmental lender throughout Eastern Europe and Central Asia, held a 10 percent stake in KKB. The EBRD had a lot of pull with Kazakhstan’s government, and one of its main focuses was on protecting the rights of small shareholders. So I thought the risk to small shareholders was overstated.
Second, I knew KKB’s loans portfolio and earnings wouldn’t start growing significantly until it resolved its NPL problem. And any weakness in the Kazakh real estate market could also hinder KKB’s efforts to restructure its loans. But my analysis suggested that KKB shares were so dirt cheap that all of this was already reflected in the share price… and then some.
So, I recommended KKB shares to the subscribers of an investment service I was writing at the time.
A few months after my recommendation, the Kazakh banking sector began to stabilise. New legislation called on banks to bring down their NPLs to 15 percent by the end of 2014 and 10 percent by the end of 2015. To help banks achieve these results, the government amended the tax code to make it easier for banks to write off loans. Stabilising prices in the real estate market also meant that banks could move bad loans off their books.
And KKB ended up buying rival BTA Bank. Investors saw this as positive news… it made the combined entity the largest banking group in Kazakhstan, which the government couldn’t afford to let fail.
Within a year of my recommendation, other investors started to see the potential in KKB… and we ended up locking in a 137 percent return in just seven months.
These are the types of gains that are possible when you look far and wide for investment opportunities. And great opportunities appear in all sorts of circumstances, markets and environments.
These opportunities are around us all the time. Maybe it’s an economic crisis, or financial mismanagement or political problems. A country’s currency might be under fire… the market might be facing an economic slowdown… investors might be fleeing because of a massive corruption scandal… a country’s economy that is dependent on commodities might be hurting when commodity prices take a dive… or perhaps the world’s central banks are reducing the growth of money in the entire global market environment, hurting investor sentiment far and wide. There are lots of reasons that a particular sector, market or stock might have fallen out of favour.
Remember, markets (and investors) don’t always behave rationally… and that’s where the real opportunities are.
Editor, International Capitalist
P.S. It’s to find high-upside opportunities like KKB that I launched International Capitalist. I look all over the world for attractive investment opportunities like Kazakhstan in 2013… with the potential for big – and even life-changing – profits. For a limited time, we’ve opened International Capitalist to new subscribers… you can learn more about it here.
Some of the best investments start with disaster… when things are so bad they can’t get any worse. When the situation is so dire, it can only get better.
When investors have given up, prices fall. And at that point, it’s sometimes possible to find incredibly cheap assets.
But not always. Other times, a market is out of favour, and stays that way, for a reason. The general consensus is right… and contrarians get their fingers burned. Or, worse, they go up in flames altogether.
Below I’m going to tell you about what was one of the world’s most hated markets – which also held the possibility of an exciting investment opportunity. Or was it a contrarian graveyard?
Read on… and in a few days I’ll tell you how it turned out.
In December 2013, I visited the central Asian country of Kazakhstan, in search of high-return investment ideas. Kazakhstan is bigger than all of Western Europe, but few people can find it on a map. It’s situated in a geographic blind spot south of Russia, and west of China. And with a small population for its size – all that space for around the same number of people who live in the Indian city of Mumbai – Kazakhstan wouldn’t cross the radar of most investors.
But Kazakhstan carries considerable heft in some ways. It’s the world’s largest producer of uranium… it has the 12th-largest oil reserves in the world… and it controls vast quantities of chromium, lead, zinc, copper, iron and gold.
And in 2013, there was one other thing Kazakhstan was a world champion in… something that you don’t want to be the “best” in.
In 2013, Kazakhstan had the highest level of non-performing loans (NPLs) of any banking sector in the world, as you can see in the graph below.
Investors use NPL levels like doctors use blood pressure readings… it’s a key barometer of the overall health of the banking system and, by extension, the economy. Kazakhstan’s NPL levels suggested the country’s banking sector and economy should have been dead.
Before the 2008-2009 global economic crisis, Kazakhstan’s banking sector was widely viewed as one of the best-regulated and strongest in all of Eastern Europe and Central Asia. It boasted of strong growth, effective regulation and stability. International fixed income investors happily lent money to Kazakh banks, which in turn lent bales of cash to construction companies and real estate developers… some of whom held stakes in the lending banks.
Kazakh banking stocks went through the roof. International banks lined up to buy Kazakh banks at valuations that made sense only if Kazakhstan was going to start making diamonds out of ice.
Then came the 2008-2009 global economic crisis. If the crisis knocked the global economy out cold, the Kazakh banking sector was knocked down, run over, stomped on and left for dead.
Kazakh banks that had lent to real estate developers – after a 400 percent run-up in real estate prices during the previous three years – found their collateral almost worthless when real estate prices fell 30 to 50 percent. And repaying foreign currency debt obligations suddenly became a lot more difficult, when the Kazakh currency, the tenge, depreciated 25 percent, reducing its buying power relative to foreign currencies. That meant that companies earning tenge had to earn a lot more (in the teeth of a crisis) to make their debt payments.
The country’s banking sector crashed hard. Levels of NPLs exploded. The entire banking system was paralysed.
Most investors saw that Kazakhstan had the highest level of NPLs in the world, and avoided the country’s banking sector like it was on fire. And that’s where the potential opportunity raised its head.
Markets that are widely disliked can generate huge returns. When pretty much everyone who wanted to sell, has sold, it doesn’t take much improvement in how investors view a market to lift prices sharply.
But there’s one thing worse than being hated: Being ignored.
And as I said earlier, Kazakhstan barely registered on the radars of even the most intrepid investors.
Of course, there were some good reasons that Kazakhstan was ignored.
For starters, Nursultan Nazarbayev had been the country’s president since 1990. He had never received less than 90 percent of the vote in any election – which was more a reflection of how Kazakh elections functioned, than his popularity.
The country’s TV stations and newspapers said what he wanted them to say. In the rare event that anyone dared to speak up, they felt the sharp end of a steel boot.
But even Nazarbayev couldn’t overturn the laws of nature… At the time, he was 73, where the life expectancy of the average man is 64. So many assumed he was living on borrowed time. (It’s something he’s good at… Nazarbayev is still Kazakhstan’s president today.)
Kazakhstan isn’t like other countries, where the vice president, or the head of parliament, would step in were the president to die, via a carefully crafted constitution. And Nazarbayev has been able to stay in power so long in part because he hasn’t let anyone position himself as a successor.
No one really knows if a succession plan exists. So in 2013 – and still today – a lot of people are worried about what will happen when he dies. Many investors have decided that the political uncertainty isn’t worth the risk.
And with a strongman president like Nazarbayev, it should come as no surprise that corruption was also a problem in Kazakhstan… even more so than most other emerging markets. In 2013, the country was ranked 140 (out of 177 countries surveyed) in the Transparency International Corruption Perceptions Index… well below the likes of India (94) and in the same ballpark as Nigeria (144).
With rampant corruption, political uncertainty, and holding the title of worst NPLs, you can understand why investors weren’t interested in Kazakhstan, or its banking sector.
But this type of setup is a contrarian investor’s dream. That’s why I found it interesting.
Several years ago I worked for a global political risk-consulting firm, where I advised some of the world’s largest portfolio investors, and Fortune 100 companies, on different dimensions of political risk. One thing I learned was that when everyone – investors, diplomats, businesspeople and, yes, political risk analysts – is absolutely sure that a country is going to experience a cataclysmic political meltdown… it doesn’t happen. The reality winds up being something far less interesting. (It’s the political events that no one sees coming that really stir things up.)
The fact that there was such widespread concern meant that in late 2013, when I was kicking the tires in Kazakhstan, it was all “priced into the market.” In other words, investors were already assuming the worst. So anything but the worst would be good for assets in Kazakhstan.
At the time, after visiting the country and speaking with a lot of people, I felt that there was more of a succession plan in place in Kazakhstan than most people thought. Nazarbayev had carefully planned every step of his political life. He built an entire city – a grandiose monstrosity, or a work of architectural genius, depending on who you talk to, called Astana – as a memorial to himself. A guy like that will make sure his legacy of stability and prosperity won’t be erased the minute he passes away.
And the banking sector was a mess… but banking sector messes can’t last forever. And Kazakhstan seemed to have mapped a way out.
At this point, Kazakhstan’s economy was growing fast. As I mentioned, the country is a massive minerals producer, sitting on the doorstep of China – one of the world’s most voracious minerals consumers. It was my sense that it was only a matter of time until Kazakhstan’s market bounced back.
In short, it seemed to me that Kazakhstan, and its banking sector, was a great setup for an out-of-favour investment.
In a few days, I’ll tell you about the investment opportunity I found in Kazakhstan… and whether it was a triple-digit winner… or a terrible mistake.
Editor, International Capitalist
Jim Rogers is an investing legend, a world record holder and a best-selling author. He co-founded the legendary Quantum Fund with George Soros, which generated returns of more than 4,200 percent over ten years. Jim retired at 37, and later drove around the world… twice.
He’s one of the founding fathers of the boots-on-the-ground approach to investing in emerging and frontier markets around the world.
I recently sat down with Jim – a fellow resident of Singapore – to talk about markets. Below is an extract of that conversation, about biggest threats investors should be worried about today… and how they should protect themselves.
Kim: Jim, what do you view as the biggest threats to markets?
Jim: Washington, D.C. is the major threat to all of us because they want to do things like [start a] trade war. And they want to get in a war with somebody, whether it’s Iran, North Korea, whoever. But North Korea’s calmed down. Mr. Moon in South Korea has done a very good job. There’re lots of people that are bashing Russia. I have no idea why they’re bashing Russia. …
And the central bank in America, they’ve brought up gigantic debts on their balance sheet, they’ve push interest rates to the lowest in recorded history. Interest rates have never been this low anywhere in the world. With the result that debt has skyrocketed everywhere in the world. Interest rates are going to go higher again, they’ve already started.
So what I’m afraid is going to happen is as interest rates rise, you’re going to see problems in the markets. Everybody’s going to call the central bank and say, “Oh, you must rescue us.”
Now, the central bank is made of bureaucrats and academics, they don’t know what they’re doing. They will panic, they will try to rescue us. I don’t know what they’ll do, print more money, buy assets, whatever they’re going to do is not going to be the right thing. And so we’re going to have worse problems.
I hope I can survive the next bear market because it’s going to be horrendous and it’s going to be a big mess. It’s going to be the worst in my lifetime.
When I say that, some people say, “Well, you’re gloom and doom.” No, we’ve always had bear markets since the beginning of time. Janet Yellen, who was the head of the central bank in America until recently, said, “No, we’re not going to have bear markets ever again. We solved the problem.”
She said we’re not going to have bear market. I know we are. 2008 we had a bear market, it was horrible because of too much debt.
Well, Kim, debt all over the world is much, much, much higher now. People have talked about austerity, nobody’s practicing austerity. It’s going to be a horrible nightmare. And I hope I survive it, I hope we all survive. But I know just having read enough history that a lot of people are not going to survive it.
Kim: You’ve often talked about the explosion of debt in markets. Can you tell me some more of your thoughts on that?
Jim: Well, Kim, as you know, debt worldwide has boomed in the past 30 years, but especially in the past 10 years. In 2008, the world had a big problem because of too much debt. Since 2008, the debt has skyrocketed everywhere. And so the next time we have a problem, it’s going to be a doozy. I mean, the Federal Reserve alone in Washington, its balance sheet is up by 500 percent in 10 years. It’s staggering what’s been going on in the world. No matter where you look.
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In 2008, China had a lot of money stored for a rainy day. It started raining, China started spending the money and helped rescue the world. But even China has a lot of debt now. You’re going to see bankruptcies in China the next time the world comes to an end. And that’s going to surprise a lot of people… it’s going to surprise me, and I know it’s coming. I’m telling you, it’s coming. But it’s going to surprise a lot of us, and that’s just going to make the bear market even worse.
Kim: What are your thoughts about the U.S.-China trade war?
Jim: Mr. Trump for many years has been keen on trade wars, so it seems to be in his soul, in his psyche. He said that trade wars are easy and are good. That’s totally inaccurate. But it doesn’t matter, he’s the president and even if he has wrong information, which most politicians do, he will do what he can get away with. And so he wants trade wars, the people around him that he keeps bringing in, they’re all keen on trade wars. Nobody has ever won a trade war, but they don’t know that. And if they know that, Mr. Trump thinks he’s smarter than history, he can control history. I don’t think he is, but we’ll find out.
If it happens, then when the problems start coming, it’s going to be worse than any of us can imagine. It’s not going to be good.
You’ve seen previous trade wars, nobody has ever won. They’ve never helped anybody. Maybe some in the short term. But even when trade wars help some people, they hurt other people even in the same country. So they may happen. If they happen, you’re going to have a lot of readers because everybody’s got to know what to do. You have job security because somebody has to report it and somebody has to tell us what to do.
Kim: In anticipation of all of this eventually happening, what does the cautious investor do today to protect or insulate himself?
Jim: Well, they should read your newsletter. Everything I know I learn from you guys, for goodness’ sakes.
Also… agriculture is probably going to do well, even if the world comes to an end, because agriculture has already been going down the tubes for 35 years now. Agriculture has been terrible. I would suspect that’s a place to rescue yourself.
Probably the best thing to do is to become a farmer. I’m not going to become a farmer. But if people want a new life outdoors, especially in China, the Beijing government is doing everything it can to help farmers and to help the countryside. So agriculture especially China, is a good place to be.
I own U.S. dollars. I own a lot of U.S. dollars, not because I have any confidence or faith in the U.S. dollar. America’s the largest debtor nation in the history of the world, and the debt’s going higher and higher.
But when there’s turmoil, people look for a safe haven.
People think the U.S. dollar is a safe haven, and it is less bad. At least, people think it’s less bad than things like the euro, the Swiss franc, the British pound. So where else are they going to go?
What will happen is U.S. dollar will get overpriced, maybe turn into a bubble, depending on how bad the turmoil is. And I hope at that point I’m smart enough to sell.
Probably what will happen is as the dollar goes higher, gold will go down, all currencies will go down, including gold. Gold usually goes down when the dollar goes higher.
So the dollar will get overpriced, turn into a bubble. We’ll sell at the top. Gold will be down, we’ll buy gold. [Jim has told me in the past he also recommends owning gold and silver.]
Maybe the Chinese renminbi will be convertible by then. Who knows? Those are some of the things that often happen when the dollar goes higher and there’s crisis.
Publisher, Stansberry Churchouse Research
We never needed the nuclear meltdown survival pack. Thankfully.
When my wife and I moved to Armenia a number of years ago, the U.S. government – who had sent my diplomat wife there – issued new arrivals and their family members an unusual welcome package: A cellophane bag containing a roll of duct tape, a few surgical masks and a small bottle of iodine pills.
The U.S. government handed out these “nuclear meltdown packs” because it was concerned about potential problems at Metsamor, Armenia’s nuclear power plant. With typical Soviet attention to detail, the plant was built on an earthquake fault. So the U.S. government figured it would soothe the nerves of its employees with this baggie of anti-nuclear goodies.
At the time, Armenia was ripping a page out of Ukraine’s post-Chernobyl handbook, by demanding that the European governments that wanted to close the plant pay around US$1 billion to provide for alternate sources of energy. Though an economic minnow with fewer than 3 million people, Armenia’s dodgy nuclear power plant was at the intersection of Europe, Asia and the Middle East. And it understood first-world pressure points: The threat of a nuclear cloud drifting towards western Europe was an exceptionally effective leverage.
Armenia’s approach more or less worked. Russia wound up helping Armenia (for a price, of course), and other countries also pitched in to head off a nuclear meltdown at Metsamor (so far, at least). So we didn’t need to use our nuclear meltdown kit.
That’s a nuclear meltdown kit. What about the financial equivalent… that is, are you ready for the financial equivalent of a nuclear meltdown?
What if you lose your job… have a major expense that wipes out your savings… or the bank where you hold your money goes bust? Or there’s a more systemic meltdown like a global economic crisis… a currency crash… or a banking sector meltdown?
Just think back to the last big downturn, the global economic crisis a decade ago. Were you prepared back then?
The idea behind diversification is simple. It means putting your eggs in different baskets. That is, spreading your risk across different types of assets, so that a decline in value in any one holding isn’t so bad – because there will likely be other holdings that rise to help balance out the losses.
But diversification goes beyond just holding a number of different assets… what if you have your eggs in different baskets, but the truck that’s carrying your baskets (that is, the entire financial system) wipes out? You need to make sure that your eggs are in different trucks. This involves spreading your wealth across different markets and economies and asset classes.
Think of it this way… investing an entire portfolio in your home market (even if it’s spread across stocks, bonds, gold and cash, for example) is like having eggs in lots of different baskets… but all on the same truck. If the truck crashes, you’re in trouble. Because all of these assets are in the same country, they’re correlated.
Correlation is the relationship between two or more assets. It measures what happens to the price of one asset when the price of a different asset changes. When they are negatively correlated, their prices move in opposite directions. This evens out your overall performance when things get bumpy. But when they’re positively correlated, it can spell disaster for your portfolio.
That’s why you need to own stocks and bonds in a variety of markets. You should also spread your savings around in bank accounts in different countries. And if you don’t already own precious metals like gold, now is the time. Gold is one of the most effective hedges against market downturns because its price is negatively correlated to stock markets. That is, when markets go down, gold usually goes up.
Having a rainy-day fund can help you survive any meltdown that comes your way.
Most Chinese citizens are well-prepared for a meltdown in this regard. The average savings rate in China is over 30 percent. That means a third of total disposable household income is put into savings. And the country as a whole recovers around 45 percent of its GDP.
Singaporeans also recover a large chunk. The country as a whole recovers around 44 percent of its GDP. And Hong Kong recovers around 25 percent of its GDP.
Meanwhile, the U.S. is lagging. The U.S. recovers less than 20 percent of its GDP. And according to a 2016 survey, 69 percent of Americans have less than US$1,000 in their savings accounts. And 34 percent have no savings at all.
If any of these Americans are hit with a financial meltdown, they’re at risk of very soon not having enough cash to meet basic expenses.
When I say “personal equity”, I’m not referring to how much you own of a company, which is the usual meaning of this term. I’m talking about a much more broad definition of your assets – financial and personal and professional experience and prospects and earnings power.
Equity is what’s left after you add up the value of everything you own, like stocks and stamp collections and your flat. Then you subtract what you owe (on your mortgage or to the taxman or your ex-spouse, for example). What’s left is your net worth, or your equity.
But personal equity is about more than what you own now – it’s about how you’re going to build your equity in the future.
I’m talking about where you’ll be earning your living – adding to your savings – in coming years. Where is your paycheck coming from? What other sources of income do you have? Where is your professional network – and how strong is it? How transferable are your skills? How many languages do you speak – and how easily could you work in a different country?
Asking these sorts of questions will help you understand how diversified you really are.
Most people work in the same country where they have almost all of their assets. And even if you do hold some foreign shares or own real estate in another country… when you factor in where and how you’ll be earning money in the future, you’re probably a lot less diversified than you think.
If you’re going to be living in the same place for a long time, maybe forever, it probably makes sense to have a lot of your personal equity in that country. But what if the banking sector goes bust… your home currency massively devalues… the real estate market crashes… or the government starts searching for ways to plug a massive budget deficit, and your assets are all in that country? They’re just cherries for the picking.
What does this mean for you? Think of diversification in a way that encompasses other countries and currencies… and skills and geographies and your backround. If your strategy towards investment – in financial assets as well as your personal equity – is completely diversified, you’ll be a lot better off in the long run.
Editor, International Capitalist
P.S. Over the past 25 years, I’ve lived and travelled all over the world in search of investment opportunities… the type of opportunities that could lead to big – even life-changing – gains. And in my International Capitalist newsletter I’ve shared several big opportunities in markets and easy-to-buy stocks that probably aren’t on your radar. It’s not open to new subscribers… but I’m looking to make it available in coming days. Stay tuned here.
What if you spent a week in a country… and didn’t end up meeting a single person who is an actual citizen of the country?
Hotels, banks, Uber drivers, waiters… everyone you came into contact with – they were all from somewhere else.
The Middle Eastern nation of Qatar is the world’s richest country. It’s as big as the U.S. state of Connecticut (or around four times the size of Hong Kong) and has as many people as the U.S. state of Oklahoma… or about less than half the population of Singapore. And – at least as far as I know – during the entire time I was there I didn’t meet a single bona fide, passport-holding Qatari. (And yes, I tried – hard.)
According to local demographic data, around 88 percent of the 2.7 million residents of Qatar are foreign born (people I spoke with at Qatar put the percentage of foreigners closer to 95 percent). There are hundreds of thousands of citizens of Nepal, most of whom are there to work on the construction of stadium and railways for the 2022 FIFA World Cup that’s being held in Qatar. And there are also lots of people from India and Bangladesh… and people from everywhere else, occupying a vast range of construction to white-collar jobs.
But Qatar isn’t alone for its citizens being vastly outnumbered by foreign residents. It’s joined by the United Arab Emirates – a fellow rich Middle Eastern commodities state – as being run by foreigners. There are also a lot of foreigners in Hong Kong and Singapore, according to the United Nations – but nothing like Qatar. By comparison, just 14 percent of residents of the U.S. are foreign-born. And only 1 percent (and that might be rounding up) of people in China come from somewhere else.
Foreign-born Population as Percentage of Total Population
Source: United Nations, Priya Dsouza Communications
Qatar can get other people to do its work – build roads and stadiums (for the 2020 World Cup), run banks, manage hotels, wait tables, manage dairies – because it’s so wealthy. The country’s GDP per capita of US$125,000 is more than double that of the U.S. It’s 42 percent higher than Singapore. If I had a dollar for every time that a taxi driver in Doha, the country’s capital, pointed to a gaudy structure behind a big white wall and told me it was a residence of a member of the royal family (there are lots and lots of them), my stay in Qatar would have been complimentary.
Does it matter that Qataris are so far outnumbered? Qatar wouldn’t get anything done if not for the foreigners working there. Nothing would happen. (A great illustration of this phenomenon is a 2004 movie called A Day Without a Mexican… it takes place in California and shows a satirical look at what would happen if all the Mexicans disappeared from California.)
(I visited Qatar as part of my research for a recent issue of International Capitalist, a research advisory where I visit off-the-radar places and tell you about global investment opportunities with enormous potential upside… it’s not currently open to new subscribers, but by signing up here for Kim’s Global Insider, a special complimentary every-so-often e-letter I write, you can be at the front of the line to learn when it is.)
Since almost everyone in Qatar is from somewhere else, there’s no sense of “real” in Qatar… at least as far as I could tell during the week I was there. (Often you can learn at least something about what a place is really all about in a pretty short period of time. Or… you can miss a whole lot. Tell me how wrong I am here.)
For example, downtown city markets – whether it’s gold or fruit or spices or … in Osh or Bangkok or Tehran or Mexico City or anywhere in between – are usually disorganised, messy affairs… featuring rabbit warren streets and haggling stall hawkers and tourist junk and undiscovered treasures.
That’s not the case with the souq (market quarter) in Doha, which reminded me of a Tintin-meets-Disney market. It’s clean, neat, quiet and devoid of character. It makes a Lower East Side sidewalk jewelry market where artsy millennials sell US$150 pendants to sandals-clad West Villagers feel crazy and chaotic by comparison.
That’s not to say that Doha’s souq isn’t fun. The evening buzz – lots of people milling about and eating Iraqi food at tables on the sidewalk – is pleasant (if beer-free). The weather in February is nice. I bought my son a cool World Cup 2022 scarf. But if you’re looking for authenticity, look elsewhere.
When Tamim bin Hamad al-Thani, the current leader of Qatar, was a teenager, his parents had tennis legend Boris Becker brought over to give him tennis lessons.
Wander around Doha, and you’ll see breathtaking, bleeding-edge architecture by the world’s most renowned architects. The many malls that dot suburban Qatar make Dubai’s extravagant cathedrals to excessive consumerism seem like sidewalk chapels by comparison. And one auto dealer has so many extra Rolls Royces in stock that it stores the overflow in a nearby parking garage. Extravagance has a middle name, and it starts with a “Q”.
Qatar is smack in the middle of a rough neighbourhood. And since June 2017, it’s been under a blockade. You see, in June, Qatar’s neighbours – Saudi Arabia, Bahrain, Egypt and the United Arab Emirates – closed their borders with Qatar. That means there’s no flow of goods, people or capital between these countries and Qatar. No imports or exports… no tourism or flights or cars… no visiting businesspeople… from its most important economic and political counterparts.
That was thanks in part to U.S. President Donald Trump.
Qatar has long been a friend of the U.S. A military base in Qatar has been home to U.S. forces since 2001. The 10,000 troops here have been an important base for U.S. operations against ISIS.
But despite that, in May 2017, Trump used his first trip to the Middle East to call for more support in the war against terror. This helped lead to Saudi Arabia, the UAE. and Bahrain cutting diplomatic ties and blockading Qatar in an attempt to get it to crack down on its alleged connections with terrorism and distance itself from Iran. Trump supported the blockade.
Still, all things being considered, Qatar has managed to weather the blockade better than a lot of people thought. And the country’s economy is still forecast to grow by nearly 2.6 percent this year.
Publisher, Stansberry Churchouse Research
P.S. Over the past 25 years, I’ve lived and travelled all over the world in search of investment opportunities… the type of opportunities that could lead to big – even life-changing – gains. And right now, although many stock indices are at all-time highs, I’m seeing big opportunities in markets and easy-to-buy stocks that probably aren’t on your radar.
I write about investing around the globe in a new supplemental e-letter, Kim’s Global Insider. I talk a lot more about global investment themes… markets around the world… where, and how, to invest internationally… what I see in Asia from Singapore (where I live)… and my boots-on-the-ground travels.
I invite you to join me on my profit-making journey around the world.
Please go here (just one click and you’re done) to automatically receive the complimentary Kim’s Global Insider. And you’ll also be at the front of the queue when we open International Capitalist to new subscribers.
Right now, anything Russian is toxic in the investment world.
But sometimes the vodka goes down the drain with the mineral water… and I found a stock that I think fits the bill.
The ugly truth about the crypto market is that most people will not get rich — for a very simple reason.
Russian shares have for years traded at a much lower valuation than other emerging markets. I started working in the Russian stock market in the mid 1990s – I lived in Russia for nine years in part as a stock market analyst for a handful of investment banks – and for most of that time, Russian assets have been cheap.
The graph below shows the cyclically adjusted price-to-earnings ratio (CAPE) for a range of markets. The CAPE uses the average for ten years of earnings, and adjusts them for inflation. This smoothens the cyclicality of a single year P/E. It’s more difficult to calculate, but it’s a more complete valuation measure than the normal P/E ratio. According to the CAPE, Russia is the world’s cheapest stock market by far, with a CAPE of just 6.5, compared, for example, to Hong Kong’s 18.1 or Japan’s 27.7.
For starters, emerging market stocks are generally considered more risky… so they often trade at a valuation discount to developed markets.
Russia is even a lot cheaper than other emerging markets, though, in part because of the perception (and reality) that political risk in Russia is higher than in many other emerging markets. The country has a reputation for instability.
I was managing a hedge fund in Moscow during the summer of 2008 when Russia invaded neighbour, and fellow former Soviet republic, Georgia. The Russian stock market crashed. But that was soon overshadowed by the full force of the global economic crisis, during which the Russian economy contracted by more than any other big global economy… and its stock market similarly underperformed nearly every other country.
More recently, Russia’s invasion and annexation of Crimea, a Ukrainian territory, in 2014, started a conflict that is still going on today. Russian president Vladimir Putin has an image as a power-hungry dictator who will do anything to stay in power. And last month’s so-called presidential elections, which saw the re-election of Putin to a fourth term, will do nothing to reduce the perception of political risk in Russia.
Overall… it’s enough to make you think that the country’s market is a value trap.
And in early April, we were given another reason for Russian assets to remain cheap.
On April 6, the U.S. Treasury Department announced new sanctions targeting seven Russian oligarchs, a dozen of the companies they own or control, 17 senior Russian government officials and a state-owned weapons trading company and its banking subsidiary.
Senior U.S. administration officials said the sanctions are a broader measure aimed at the “totality of the Russian government’s ongoing and increasingly malign activities in the world.”
The short-term impetus for that measure was the spy universe… last month, a former Russian spy and his daughter were poisoned on British soil. UK Prime Minister Theresa May, and many others, think that the Russian state was culpable. So in response, the UK announced the expulsion of 23 Russian diplomats identified as “undeclared intelligence officers”, the suspension of all planned high-level bilateral contacts between the UK and Russia, and plans to consider new laws to increase defenses against “hostile state activity”, and a number of other measures.
In response to the sanctions, Russian stocks crashed last week, by 8.4 percent. Sanctioned aluminum producer Rusal, which is controlled by billionaire Oleg Deripaska, plunged more than 50 percent. The ruble also fell to its lowest level against the dollar since 2016.
What happened was that investors indiscriminately sold anything related to Russia. No one wanted to be left holding the next Russian company whose CEO the U.S. government decides is close to Putin. So it’s easier to sell first.
Another one of the stocks that was hit hard is Russia’s answer to Google. It’s a US$11 billion market cap company called Yandex (Nasdaq; ticker: YNDX). It is the world’s fourth-largest Internet search provider. And it has around a 55 percent market share of the Russian internet search market (in part because the Russian government has made it very difficult for Google to operate in Russia). For comparison, Google has a 42 percent market share in Russia.
Yandex doesn’t just operate in the search engine space. The company has an email service and a cloud storage product. It has also launched a voice-enabled digital assistant called Alice. Yandex also has a ride-hailing and food delivery business. And in March, it formed a joint venture with Uber (valued at more than US$3.8 billion) to combine their ride-hailing and food delivery businesses in Russia.
Yandex has also developed a self-driving car (which it’s already testing in Russia). It also recently signed a deal with Russian state-run bank Sberbank to create a joint e-commerce venture. And it has introduced a new feature for online shopping in around 76,000 global stores and services that give customers the option of paying for purchases in installments.
So Yandex is a rapidly growing company that’s expanding far beyond search. Revenues were up 24 percent in 2017, and adjusted net income grew 9 percent.
However, the stock’s performance leaves a lot to be desired. The shares are up 150 percent since early 2016. But the stock is at about the same price level today as it was for its IPO in 2011 (although revenues are up 160 percent in U.S. dollar terms since then). And after the recent selloff, the shares are down 25 percent over the past month. On April 9, in response to U.S. sanctions, it fell 12 percent.
But here’s the thing. Yandex, or its CEO, Arkady Volozh, is highly unlikely to be targeted by the U.S. government, or anyone else. He’s not really on the radar. He’s not a chum of Putin’s, and (unlike the heads of businesses that may be included on a second wave of U.S. sanctions) he didn’t make his money by knowing the right people at the right time in the Russian government.
Yandex has to colour between the lines set by the Kremlin – as does any business in Russia, China and other economies where the government plays a big role in the economy. But he’s the opposite of a Russian oligarch who’s going to fall under U.S. sanctions.
At least as importantly, American problems with Russia haven’t usually touched on technology. Russia is a commodities-driven economy (despite years of rhetoric about diversifying its economy)… and its search engine isn’t really a concern to the U.S.
I’ve followed and liked Yandex for a long time (I recommended it to the subscribers of a premium investment service I wrote several years ago). If relations with the west further sour, or if hot words turn to hot war in Syria, Yandex shares are going to suffer along with other Russian shares. But if not, Yandex is a great example of a stock that’s being unfairly tarred with the rest of a difficult market… and likely to recover sooner rather than later.
Publisher, Stansberry Churchouse Research
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