The Whole World Is Watching This Carnival Game
The whole world is watching this carnival game... Chatting with a retired military cryptologist... Why he's worried about China... One thing I can't quite figure out when it comes to China... A 2,500% return on a golden hippo-shaped bathtub... Answering common questions about cryptos...
Carnival games are all the same...
The poor guy trying to win a stuffed animal for his girlfriend starts out totally confident he can do the simple task required.
If he's lucky, he only loses $5 or $10 before he figures out it's just not going to happen.
That's the China trade talks in a nutshell – so far. And I (Dan Ferris) have a feeling the guy in this carnival game – President Donald Trump – is in for the long haul... and will lose more than just a little walking-around money.
Trump seems totally unaware that he's the guy trying to win a stuffed animal...
He's so proud and confident. He wants to impress us all so he can court us through to the presidential election a year from now. He believes deeply in his ability to negotiate (or do anything else).
Due in part to Trump's endless self-promotion via Twitter, the trade talks with China so far look – to the stock market, at least – less like a steady string of disappointments and more like a ride on a merry-go-round... round and round we go, up and down on a fake horse, happy organ music filling our ears.
Only the squeamish want to get off the ride. Most of us are handling the dips just fine. And as long as the market keeps making new highs, who cares anyway?
In this week's episode of the Stansberry Investor Hour podcast, I discuss why you need to figure out which stories and narratives in financial markets are important and which are meaningless noise. To wit, my take on one of the most important details in the U.S.-China trade war story remains unchanged...
Who should you bet on?
Trump, who needs to get re-elected next year and needs trade negotiations to go well enough to make that happen? Or Chinese President Xi Jinping, who made himself president for life and would be happy to string the U.S. along for decades?
This will probably get me surveilled (if I'm not already), but I'd have to bet on Xi.
Last week, I told you I took a red-eye flight to be with my folks during my mom's recent health scare...
My siblings took over, so I flew back home Saturday. On the flight, I happened to sit beside a retired military cryptologist. He was gregarious and described an interesting career. I asked if China worried him. He said absolutely...
China has always viewed the entire South China Sea as its own, he said. Its ambitions are known to be even larger. He lamented that, through patents (which are public information), we've given a fair amount of technology away to China, which steals intellectual property without a thought – including various important weapons-related developments.
I asked if he had ever heard of "Thucydides's Trap." I was a little surprised that he hadn't.
Harvard history professor Graham Allison wrote a book about it called Destined for War: Can America and China Escape Thucydides's Trap? Allison also wrote an article about it in the magazine Foreign Affairs.
Thucydides was an ancient Greek historian. In his classic work, History of the Peloponnesian War, Thucydides mentions in passing what he believed to be the true underlying cause of the conflict...
The real cause I consider to be the one which was formally most kept out of sight. The growth of the power of Athens, and the alarm which this inspired in [Sparta], made war inevitable.
It's not hard to reimagine that second sentence: "The growth of the power of China, and the alarm which this inspired in the U.S., made war inevitable."
Straight-up predictions aren't really my thing, so I'm not predicting a war. But I do like to identify sources of risk and opportunity...
If I'm right about China having a leg up on the U.S. in trade negotiations, conventional warfare based on trade issues seems unnecessary.
Would it surprise anybody but Trump if Xi strung him along for the next year – or five, depending on the outcome of the next election? Then I'd bet the next U.S. president would work to restore the status quo, ending the trade war by simply getting off China's back.
It's hard for me to see conventional warfare with China as a real potential source of risk for investors. But war can catch you by surprise and take many forms. In this case, the surprise is that – between trade talks and all the cyberattacks that originate in China – you could argue...
The war has already begun...
In the ancient Chinese classic, The Art of War, Sun Tzu says, "Those who render others' armies helpless without fighting are the best of all." The commentary on Sun Tzu's text says, a few lines later, "A skillful martialist ruins plans, spoils relations, cuts off supplies, or blocks the way, and hence can overcome people without fighting."
China has been winning without fighting for years now. A 2017 article at The Conversation website argues China has likely stolen more government and trade secrets than any other country.
Maybe that's the way of war in the 21st century. War will be more about who can steal more by computer hacking, not who can bomb whom back to the Stone Age.
Allison's book backs up this idea...
In four of 16 historical occurrences of Thucydides's Trap – three in the 20th century – war was averted through "imaginative statecraft," according to the Thucydides's Trap project at Harvard.
It seems like that could add a little oomph to my colleague Steve Sjuggerud's table-pounding "buy China" recommendation. Steve knows institutional index investors are about to pour money into Chinese equities... He's getting subscribers in before they start buying.
Between Steve, the Xi versus Trump staredown, and The Art of War... long-term bullish on China feels right.
But there's one thing I can't quite figure out...
Financial markets don't seem to care much about the violent protests in Hong Kong, even though they're getting worse and augur poorly for the survival of Hong Kong under the one country, two systems regime that has been in place since the territory reverted to Chinese control in 1997.
Anti-government protestors have barricaded themselves at university campuses across the region. They're stockpiling makeshift weapons and food, and they're sleeping in shifts to keep watch for police.
On Wednesday night, in the city's central business district, police rammed a barricade with an armored car and sprayed protestors with so-called "less than lethal" bullets from a nearby rooftop. Police say violence has reached "very dangerous and even deadly" levels.
In the South China Morning Post, Beijing's melodramatic liaison to Hong Kong warned that "if these terrorist atrocities were allowed to spread, Hong Kong would slide into a bottomless abyss."
If Hong Kong were still a separate country, its gross domestic product would rank 34th, according to 2018 World Bank figures. That would put it somewhere in the company of Denmark, Malaysia, and Singapore. Not a world power... but not chopped liver, either.
Given that it's still a major Asian financial center, it's hard to believe global financial markets aren't a little more jittery about what's happening in Hong Kong.
Of course, the one financial market that has reacted is Hong Kong's stock market...
By the middle of August, Hong Kong's Hang Seng Index was down about 14% from its highs around when the protests started in late March. Since then, it has recovered about 5%.
Here's what ultimately troubles me, though not enough to be bearish on China...
I like China about as much as your average Athenian liked Sparta back in the fifth century B.C. Whatever "market reforms" the country has put in place... I don't look at it as a capitalist miracle. It's still an authoritarian state with a centrally controlled economy.
I wouldn't trust the Chinese government as far as I could throw it.
But I do think the folks in Beijing want their country to be the No. 1 world power. And they know it takes big bucks to make that happen. So they tolerate enough of what you might mislabel as "capitalism" to get the job done.
Perhaps I'm just guilty of typical Western paranoia. I'd love to be wrong... If you live in China, please write in and show me the fatal flaw in Chinese strategy to dominate the world's economy.
Either way, the ride up is sure to be a lot of fun for investors who follow Steve's advice, perhaps for years to come. But I worry about what follows that move higher... about Thucydides's Trap... and what will happen once China gets a lot bigger.
And while we expect good returns on Chinese equities, we simply must discuss...
The returns on golden hippo-shaped bathtubs!
On Tuesday in New York (where else?), auction house Christie's sold a gold bathtub shaped like a hippopotamus – for $4.3 million. The seller bought it at a Sotheby's auction in 2006 for $168,000. That's a 13-year return of roughly 2,500%. (Note to self: Send Porter an e-mail about a new product that recommends investments in animal sculptures.)
The tub isn't even real gold. The artist François-Xavier Lalanne, of the late husband and wife art duo, Les Lalanne, made it in 1969 out of welded brass and copper. It's a life-size representation of a hippo. Its body is the tub, and a sink and vanity fold out of its jaw.
Occasionally, in the evenings, as I sip wine in the family room with my wife, I fantasize about making weird art that I can sell for ridiculous amounts of money.
It was certainly a good business for the Les Lalanne estate...
Their personal collection sold for $101.5 million last month at a Sotheby's auction in Paris, more than four times the high end of the estimated range of $17 million to $25 million. Collectors from 43 countries bought every piece in the collection in a two-day event.
Last month's auction featured a life-size rhinoceros desk, called Unique Rhinocrétaire. A 2010 Les Lalanne exhibit featured an 11-foot bronze rabbit with hooves and a bird's tail.
François-Xavier died in 2008, and Claude passed in April of this year. It'd be nice if I could make my weird art pay off while I'm still alive. That gives me an idea...
Considering how an artist's death tends to make his works more valuable, maybe faking my death could be sold as a type of performance art.
Now, I'm not certain I could pull it off. But is there any doubt that some rich art nut somewhere would pay me a ton of money if I did it right?
I'll keep you posted (or maybe you'll just read about it one day).
Finally, thank you...
I was deeply touched by the outpouring of sympathetic and encouraging reader feedback from my Digest last Friday. Stansberry Research subscribers are an exceptional group of folks. I'm grateful to everyone who wrote in... and those who didn't but felt the same.
What You Want to Know About Cryptos...
But Are Too Embarrassed to Ask
Over the past couple of years, you've probably heard a lot about cryptocurrencies.
Bitcoin – the original and oldest cryptocurrency – went on a tremendous run in 2017, soaring roughly 2,000% in less than a year... peaking at nearly $20,000 that December. But then, just as quickly, bitcoin's value plunged more than 80% throughout 2018.
It's a hot-button topic in financial circles...
However, many individual investors simply don't know how cryptos work – or what they're good for. And as regular readers know, we strive to give you what we'd want if our roles were reversed. So over the next few days, Crypto Capital editor Eric Wade and analyst Fred Marion will answer several common questions to help you better understand this space...
And then, next Wednesday night, November 20, at 8 p.m. Eastern time, we're hosting a FREE online event about cryptos. Eric will be joined by Dr. Ron Paul, the 12-term U.S. congressman who just bought his first bitcoin last month. During this event, Eric will explain why 2020 could see a bigger crypto boom than we've ever seen before. Learn more here.
We'll start with the first two questions today...
- What is a cryptocurrency?
It's a long-running joke in the industry that the hardest thing about cryptocurrencies is explaining them without taking an hour to do it. It's a complex topic...
But here's our one-sentence definition: A cryptocurrency is a computer program that makes digital coins and tokens that anyone can use over an extremely secure network.
At their heart, they're computer programs – or teams of computer programs that all work together.
Bitcoin – which you'll often see written as "BTC" – is the best-known crypto and the easiest to understand... Physical "bitcoins" don't exist. You can't hold them. Bitcoin is simply digital money that isn't controlled by a government, group of people, or corporations.
One part of the bitcoin computer program allows the safe transfers from one bitcoin investor to another. That should make sense... If you're going to use bitcoin as a currency, you need a way to send and receive them.
Another part of the program watches every transaction, making sure no fake or fraudulent transactions take place before they're verified. Since we're talking about hundreds of millions and sometimes billions of dollars in bitcoin exchanging hands every day, preventing fraud is important...
It's like credit-card company Visa (V) suddenly announcing that anyone in the world can download its software and start verifying its transactions in exchange for a cut of the fees. That's how the bitcoin computer program works... Anyone can run the program and even verify transactions for a cut of the transaction fees.
Yet another part of the bitcoin computer program works like a ledger, keeping a permanent record of all the transactions. The ledger is like bitcoin's accounting books... It's a public list of all the bitcoin transactions that have ever happened.
For example, if Alice pays Bob for a service with a bitcoin, it's recorded in the ledger for both people. But not only that... It's also recorded in the ledger by Carl, Debra, and anyone else who runs the bitcoin program.
(Of course, that's a simple explanation because on the bitcoin network, people's names aren't used. Instead, the ledger uses unique bitcoin addresses... They're like super-long phone numbers.)
You'll commonly hear this ledger called a "blockchain."
The blockchain was one of bitcoin's biggest innovations. Since every transaction is public, it can be verified by anyone else within minutes, in most cases. While every bank in the world shuts down and reconciles its database with other banks every night, bitcoin runs 24 hours a day.
The word "crypto" comes from bitcoin's super-strong cryptographic code... In other words, it's the same type of secret code used to protect highly classified government information.
The code makes sure the bitcoin network and the ledger stay secure... Alice doesn't want Bob to be able to steal from her – or to even guess her password. And no one else wants the database to be manipulated... So they're all protected with the secret code.
With cryptocurrencies, all these pieces of the puzzle work together to make it possible for us to buy, sell, and transfer them safely... even though no one is in charge.
That's right... No central party – like a bank or government – is in charge of bitcoin. It's why you'll often hear cryptos like bitcoin referred to as "decentralized."
The blockchain has spurred radical innovation in non-financial industries, too...
For example, some cryptos can be used to transfer virtual items in video games. Others track pharmaceutical drugs from their raw ingredients all the way to a hospital bed... help build artificial intelligence networks or insurance marketplaces... and countless other uses.
In short, cryptos are already touching almost every industry on the planet.
- OK, so I know bitcoin is a crypto. But what other cryptos exist?
Yes, bitcoin is a crypto. And – at least for now – it's the biggest and the most popular.
But after bitcoin launched, all sorts of entrepreneurs dreamed up ways to make their own cryptos with different features than bitcoin...
For example, Ethereum (ETH) supports "smart contracts," which enable automatic financial transactions. And Binance Coin (BNB) can get you discounts and other benefits on the world's busiest crypto exchange, Binance.com (and its American counterpart, Binance.us).
Bitcoin is extremely strong – some experts say it can't be hacked – but it's also pretty slow when it comes to verifying transactions. Imagine if you're buying groceries... Instead of swiping your card and being approved in seconds, it can take minutes – or hours, in rare cases – for bitcoin to verify a transaction. So faster cryptocurrencies were developed.
Also, in recent years, other cryptos came along that can better protect your privacy by hiding information about your transactions. And others added specific features like a built-in programming language or "programmable money." That unlocks the potential for automated financial transactions...
Imagine, for example, if you only had to pay for insurance when you were physically driving your car. Thanks to smart contracts – financial transactions that don't require human intervention – that day will come. Smart contracts are impacting everything from the lending industry to prediction markets to robotics and more.
Other cryptos target specific-use cases. Called "utility tokens," they grant the holder certain privileges... for instance, voting rights or access to a specific service.
We're also seeing more "security tokens" emerge... They're similar to stocks and can do things like pay dividends, include embedded financial reports, and more. Altogether, more than 6,000 cryptos exist today that have at least a small amount of trading volume.
But even though investors now have so many cryptos to choose from, bitcoin has remained popular because it aims to be a very "hard" form of money. Eventually, bitcoin will have zero inflation, which appeals to a lot of investors. You see, bitcoin's supply is finite...
Eventually, we'll have 21 million bitcoin in the world and no more. That's how bitcoin's founder programmed the network... And it means that's all that can be created. That makes it very scarce. And the cryptographic code we talked about earlier ensures bitcoin buyers that no one will ever water it down in the future.
OK, that's enough for today... We'll answer more questions over the next few days in the Digest. But again, we hope you'll join Eric and Dr. Ron Paul next Wednesday night, November 20, at 8 p.m. Eastern time for our free online event about cryptos.
During the event, Eric will discuss a radical new crypto that some experts have called "the next bitcoin"... Right now, you can buy this crypto for less than a penny. But Eric believes it could soon shatter expectations by fulfilling one of bitcoin's original functions, with 10-bagger potential or higher. We hope you'll join us... Reserve your spot right here.
New 52-week highs (as of 11/13/19): Bausch Health (BHC), Celgene (CELG), Disney (DIS), Huntington Ingalls (HII), Nuveen Preferred Securities Income Fund (JPS), Masco (MAS), Microsoft (MSFT), Invesco S&P 500 BuyWrite Fund (PBP), Rockwell Automation (ROK), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), Silvercorp Metals (SVM), and Vanguard S&P 500 Fund (VOO).
In today's mailbag: Another Stansberry Alliance member responds about my mother's health. As always, you can send your comments and questions to feedback@stansberryresearch.com. We can't provide individual investment advice, but we read every note we receive.
"Hey Dan, loved your last article regarding your parents. Lost my mom almost 7 years ago and I still expect to see her in the orchards when I'm walking my dogs! How lucky you are to have your parents for so long, I miss my elders every day and miss our conversations, I am sure I'm not near as interesting to my kids as my parents and grandparents were to me! Sticking to my circle of competence, thanks to you!!" – Paid-up Stansberry Alliance member Dan G.
Good investing,
Dan Ferris
Vancouver, Washington
November 14, 2019