What you need to know about China's currency...

What you need to know about China's currency... The latest on housing... 'The absolute best way to invest in almost any industry or trend'... A note from resource-investing expert Rick Rule...

Regular Digest readers know our colleague Steve Sjuggerud is bullish on China. As we've discussed several times, his argument boils down to two primary points...

First, he expects $400 billion will inevitably flow into Chinese stocks in the years to come. More important, Steve believes an upcoming decision by the International Monetary Fund ("IMF") will catapult China's economy and markets to even greater global importance.

In short, Steve predicts that China's currency (known alternatively as the "yuan" or "renminbi") will soon be added to the world's list of reserve currencies. This move could potentially send trillions of dollars into China.

But Steve says this decision won't just affect China. It will also have a huge effect on every American... and anyone else who holds U.S. dollars, for that matter.

This week, on the latest episode of his Inside True Wealth podcast, Steve invited EverBank Global Markets Chairman Frank Trotter to discuss the latest on China's currency.

Frank explained that China's currency is already growing in popularity, and that trend is likely only getting started...

Historically, in the world currency deposits, way back even from the mid-1980s, the Australian dollar has always been the most popular currency, you know, over recent years, euros certainly come up, and some of the others have had great days; the Japanese yen and so on...

But right now, China is sitting right behind the Australian dollar as the most popular currency for our clients. And what that tells me is not only is it something that's available that people are interested in, but that China may become a reserve currency sooner than later.

Regardless, flows into the currency – from an investor standpoint, a capital expenditure standpoint, and a first-world investment in China standpoint – are likely to be very high over the next five to 10 years.

If you're anything like the average U.S. investor, you likely have no exposure to China's currency today. Worse, you probably hold close to 100% of your net worth in U.S. dollars and dollar-denominated assets. If so, Frank says you could be missing out on a great way to diversify your investments and profit as the renminbi strengthens...

Currencies have a very low correlation to other assets, whether it's stocks, bonds, mutual funds, real estate, and so on...

The renminbi is likely to rise over the next five to 10 years as China draws all that money in... and it has a low correlation with stocks, even in the local market.

Sometimes I get a commentator that will say, "Well, just get your global diversification by buying a global mutual fund." Well, that's about equities. And if you manage the equities well, perhaps that's a great thing, but the currency risk is a separate asset class.

As Steve explains, most investors in the U.S. never think to diversify their currency exposure and lower their risk to the U.S. dollar. But even those who do are unlikely to consider China. That's why Steve calls right now a "once in a lifetime" opportunity to invest in China... before this idea becomes "mainstream" and other investors rush to do the same.

China isn't the only attractive opportunity Steve sees in the market today. He and Frank also discussed his favorite low-risk, high-return investment in the U.S.: single-family homes. As Steve explained...

Since 2009, except for commodities, all asset classes have soared. Stocks and bonds have soared. What are Mom and Pop supposed to do with their money? They can't put it in the bank because it's earning 0%. They can't put it in bonds because they're getting paid nothing. And stocks have gone up hundreds of percent in the last six years.

What we've seen is the greatest real estate bust and the lowest mortgage rates in generations. Now, Mom and Pop have nothing to do with their money. They are going to try to find income somewhere.

Steve asked Frank, as chairman of EverBank – which does a large amount of home-lending business – to share his "insider" perspective on the housing market today. Frank explained...

Industry-wide, you see a lot of improvement in the housing market. People are selling homes. That means they're probably changing to a new home, perhaps trading up, perhaps moving on because of a new job, and that's a real positive in the market.

For a long time, people have been underwater on a mortgage. And perhaps they finally refinanced, perhaps they've had assistance with one of the government programs, or perhaps they've just accepted that they're going to have to pay off the mortgage when they sell the home. One way or another, they're now willing to make the trade. They have a positive outlook.

Now, is it more difficult to do a mortgage today? Yeah. And I think there are positives and negatives in that. Does that mean more paperwork? Does it take a little bit longer? Do we have to go into more detail? Absolutely. But that's good banking, if you think about it. We all think about it as a little bit of a pain... But at the end of the day, it produces a better loan for the bank and for the individual.

You can listen to Steve's full podcast interview with Frank (or read a transcript) for free right here.

Changing gears a bit, we'd like to highlight the recent performance of one of our favorite investments...

Longtime readers know royalty companies are among our favorite stocks to own. Porter reminded readers why in the June 12 Digest...

There's another kind of business that's almost as capital efficient as insurance... These firms are the absolute best way to invest in almost any industry or trend. I'm talking about royalty companies.

These firms raise capital and then invest in operating businesses. But rather than buying stock or lending on credit, these companies buy a small percentage of the company's future revenue. Royalty rates vary, but they're typically between 5% and 10% of all future revenue. That adds up.

Most folks associate royalty companies with the resource sector. But it's important to understand the power of this business model extends far beyond commodities. In fact, most of the high-quality, "capital efficient" stocks we recommend can be considered "hidden" royalty companies. As Porter said...

Take fast-food giant McDonald's (MCD), for example. Most investors think of McDonald's as a restaurant business and they know that most of the time, investing in a restaurant is a bad idea. But what they don't see is where McDonald's gets most of its revenue. It's not from its restaurants... it's from its franchises. McDonald's earns rich royalties from all of its franchised locations. Meanwhile, it's the storeowners who must put up all of the capital for these restaurants.

Here's another example. Did you know that soft-drink icon Coca-Cola (KO) doesn't generate most of its revenue from the sale of beverages? Nope, most of its revenue comes from the sale of syrup used by bottlers around the world to make canned or bottled soft drinks.

Coke sells syrup for the same reason that McDonald's sells franchises. It's a way of putting most of the capital costs associated with the business on the back of a local partner. It's the bottlers who have to pay for almost all of Coke's capital costs by building the local bottling plants and supplying all of the trucks needed for distribution.

As Porter explained, the advantage of the royalty business model is incredibly easy to understand...

If you think about this idea for a minute, it's simple to grasp. Take two stocks in the same industry. One has zero capital costs. It's a royalty firm, in one form or another. The other is a typical corporation that continues to reinvest its profits in capital projects. After all, almost all companies require capital to grow.

Over time, which business do you think is most likely to have rewarded its shareholders better? The company that has zero (or nearly zero) capital costs or the company that must reinvest 40% to 60% of its profits back into its business to help generate more growth? The answer, of course, is the company that doesn't have capital costs.

But resource royalty companies are singled out for a reason...

They're arguably the safest and most reliable way to profit from the "boom and bust" commodities sector. (To learn more about the "cyclicality" of the resource markets, check out this free interview in the Stansberry Research Education Center.)

Most commodities are in the midst of a brutal bear market. But high-quality royalty companies have not only survived the downturn... they've thrived. Porter used top gold-royalty company Franco-Nevada as an example...

The most famous (and one of the best) is Franco-Nevada (FNV). Most investors know that owning gold over the last five years hasn't been a great bet. (It's down around 3%.)

But even if you bought gold at just about the worst possible time in the last 20 years, if you bought gold via exposure to Franco-Nevada's royalty streams – its stock – you've done well. You're up nearly 60%...

And when compared with gold-mining stocks, you would have done even better. From today's edition of DailyWealth Market Notes...

Today's chart plots the past two years' performance of two of the world's premier gold-royalty companies, Franco-Nevada (black line) and Royal Gold (gold line)... and the big gold-miners fund GDX (blue line).

As you can see, gold miners are down more than 20% over the past two years... while Franco-Nevada and Royal Gold have risen 45%-plus each. It's a great display of why royalty companies are the safest kind of gold stocks you can own...

A final reminder to end today's Digest...

Regular readers know sentiment toward resources is terrible right now. In fact, just mentioning them here is likely to result in a flood of negative feedback in the mailbag tonight.

But as we often point out, extreme pessimism is often a bullish sign. As we noted in the April 20 Digest...

Buying at the bottom is always easier said than done. Nobody wants to buy an asset when it has been crushed... But the point of maximum pessimism is almost always the best time to buy.

So while you may not love the idea of buying resources today, if you have a long enough time horizon (say, three to five years), we believe carefully selected resource stocks will eventually trade for multiples higher than their current price.

As we've mentioned, we feel so strongly about the opportunity in resources today that we're co-hosting a world-class conference with resource master Rick Rule and our friends at Sprott Resources later this month.

Rick asked us to pass along the following details for interested readers...

It's time to look for opportunities in precious metals. So says resource legend Pierre Lassonde, who made a fortune from founding royalty firm Franco-Nevada (a 100-bagger for early investors).

Lassonde recently told Grant's Interest Rate Observer, "I've never seen gold equities trading at such low valuations in 30 years. Even in the worst of 1980, 1986, 1991 – even 2000, the valuations were better than this."

Right now is the time to be gathering ideas to invest in a massively sold-off sector. You'll find just that at the Sprott-Stansberry Vancouver Natural Resource Symposium, July 28-31.

I have handpicked all the companies and speakers, so that you can bypass the mediocre players in the sector and meet the "best of the best." In fact, Lassonde's right-hand man, Franco-Nevada CEO David Harquail, is delivering a much-anticipated keynote speech.

And my boss (Eric Sprott) is one of the biggest individual investors in gold and silver in the world... And he'll tell you exactly where he sees this market heading. You won't want to miss this...

If you're interested in learning more about this event, it's not too late. Tickets are still available for a special discount until July 10. Click here for all the details, including a full list of speakers and conference schedule.

New 52-week highs (as of 6/30/15): none.

A question about muni bonds finds its way into the mailbag. As always, send your questions to feedback@stansberryresearch.com.

"Regarding your article today on municipal bonds, does it make sense to have municipal bonds or municipal bond funds in a tax-sheltered 401K or IRA (since taxes are not being paid on them anyhow)? When the funds are withdrawn and taxes are due, would that portion of the earnings that are from munis be exempt from taxes? Would the company managing the 401K or IRA keep track of which earnings are tax exempt and which are not?" – Paid-up subscriber R.L.

Brill comment: As always, we can't give individual investing advice. But the short answer is no, it doesn't usually make sense to own municipal bonds or other tax-exempt investments in a tax-deferred account like a traditional 401(k) or IRA. All distributions from these accounts are taxed, regardless of investment type. So you'd generally be losing the tax benefits of owning these bonds in the first place.

Regards,

Justin Brill
Baltimore, Maryland
July 1, 2015