Ep 56: Dissecting Social Security & Medicare
One of the most influential legal experts says some government programs AREN'T Ponzi schemes.
Richard Epstein, pioneering Libertarian legal scholar, explains why income inequality is a good characteristic for society.
It’s time for another episode of Stansberry Radio, the show that’s too loud for radio. Here are your hosts, Porter Stansberry and Aaron Brabham.
Aaron Brabham: Welcome to another episode of Stansberry Radio. I’m Aaron Brabham. We have Porter Stansberry back. Porter, how were the holidays, and how was your mini vacation?
Porter Stansberry: The holidays were okay. Everyone in my household got that flu that’s been going around. Yeah, and Aaron –
Aaron Brabham: Yeah, I see that they’re like quarantining – like certain hospitals have like a flu tint that they’re putting up.
Porter Stansberry: Oh, it was pretty bad, and, of course, any time there’s something going around, guess who gets it?
Aaron Brabham: You do.
Porter Stansberry: Me.
Aaron Brabham: Mr. Weak Immune System.
Porter Stansberry: I got two young children and a weak immune system, so I’m like a petri dish for all of the –
Aaron Brabham: That’s not a good combo.
Porter Stansberry: – traveling colds and viruses, so yeah. Actually, we had my whole family down here to Villa Crono in Miami, and pretty much everyone that came to visit us got sick, so we gave everyone the flu.
Aaron Brabham: Well, I think it’s gonna be hard to avoid for me, because it’s going around everywhere. Fortunately, nobody in Delray in the Stansberry offices here has it yet, and I’m gonna, hopefully, keep it that way, or I’m gonna quarantine myself in my own office.
Porter Stansberry: That’s right. But, so, anyway, the other fun thing I’ve done is I set up a radio studio on my boat so I can actually broadcast the show now from my Viking, and that’s where I’m doing the show today. So, I’ve got the beautiful view of E pier at Miami Beach Marina and all the technology necessary to do the show.
Aaron Brabham: Yeah, probably one of the world’s best views, by the way. You’re at the southernmost point of South Beach. It’s about as good as it gets.
Porter Stansberry: It’s pretty nice. It’s pretty nice, and I think you’re gonna come down next week and do the show live with me here probably, right?
Aaron Brabham: I am. I look forward to that. That’s why I’m here in Delray now, so I can only be about 45 minutes away. All right, Porter, today we have Richard Epstein on the show. Richard is one of the most influential legal thinkers of modern times.
He’s a law professor at NYU and a pioneering libertarian legal scholar, so we’ll have him coming up shortly. Porter, you missed out on – we narrowed down our Scumbag Registry. Now, were you copied on all those e-mails? I think you receive all the feedback. You probably received a ton of brackets, didn’t you?
Porter Stansberry: I got a lot of brackets, yeah. So –
Aaron Brabham: Yeah, I was actually impressed with the feedback. It was great.
Porter Stansberry: Well, it’s pretty amazing with – I think we have 79 Arbitron listeners now.
Aaron Brabham: That’s about right.
Porter Stansberry: So, I think every single listener filled out a bracket maybe three or four times, trying –
Aaron Brabham: Which is okay with me.
Porter Stansberry: – trying to stuff the ballot box. So, where are we now on the Scumbag 64?
Aaron Brabham: Actually, we started with 32. We narrowed it down to 32, and then we knocked off half of them, so let me give you an update as to who made it to the – what would it be, the sweet 16? We have Nancy Pelosi, Schumer, Maxine Waters, Eric Holder – man, this guy is getting a lot of votes, run all the way till the end, and deservedly so – Hank Paulson, Blagojevich, Corzine –
Porter Stansberry: Blago – you can’t – Blagojevich was just a – he’s like a comic figure.
Aaron Brabham: Seven.
Porter Stansberry: I know he’s a scumbag, but he’s –
Aaron Brabham: Yeah, yeah, yeah, yeah, yeah. No, I hear you. I know. I know. I remember when I nominated him, you’re like, “Come on, he just was working the system.” I get it, but, hey, the people are sloping, you know.
Porter Stansberry: He’s – you know, I don’t know. I think he’s kind of harmless.
Aaron Brabham: Well, you know he’s not gonna make it to the next round.
Porter Stansberry: He’s not no Eric Holder.
Aaron Brabham: No, he’s no Eric Holder. He’s no Paulson. He’s no Pelosi. He’s none of those people. And then, we had – or Corzine, and, of course, we have Barack Obama. Frank Curzio almost made it out of the first round.
Porter Stansberry: Has he paid you now that you’re living in Florida?
Aaron Brabham: He did. That’s a good question. He did. I got a check mailed to me last week. He had called in. He did the Premium show with us a couple of weeks ago, apologized profusely.
Porter Stansberry: [Laughter] That’s great. That’s funny.
Aaron Brabham: By the way, no interest, little disappointed. No penalty fees, no interest.
Porter Stansberry: Okay, that’s okay.
Aaron Brabham: Yeah, that’s okay.
Porter Stansberry: Can’t sweat the details.
Aaron Brabham: All right, Porter, let’s – we’ve had a lot of listener – go ahead.
Porter Stansberry: Who do you think is gonna win the Scumbag brackets?
Aaron Brabham: Man, I mean, a lot of people have already put in their votes all the way till the end, and I can tell you it’s gonna come down to two people. Who do you think?
Porter Stansberry: Well, I can tell you that my two top would be Pelosi and the New Jersey governor, Corzine.
Aaron Brabham: Yeah, they’re not – they’re definitely not gonna be the top two.
Porter Stansberry: Ooh. Who –
Aaron Brabham: Yeah.
Porter Stansberry: Who’s in the lead?
Aaron Brabham: Well, the rock Barack Obama, not surprisingly, right, and Eric Holder is a very close second. I mean, this guy actually might be able to pull it out.
Porter Stansberry: He’s probably gonna be our next president.
Aaron Brabham: I know. Hey, third term, right?
Porter Stansberry: Term.
Aaron Brabham: By proxy. Well, Porter, we’ve had a lot of people write in. They wanna get your take – you know, before – a week before the holidays, you called the fiscal cliff. You nailed it. You said exactly what was going to happen.
Porter Stansberry: Wait, wait –
Aaron Brabham: Now that it’s –
Porter Stansberry: Hold on. Hold on. And how could you not?
Aaron Brabham: Well, that’s true.
Porter Stansberry: So, let me guess what happened. Hmm, hmm, the tax base was narrowed, and spending was greatly increased.
Aaron Brabham: Yeah, that’s it.
Porter Stansberry: Yeah.
Aaron Brabham: That’s the bottom line.
Porter Stansberry: And something was kicked down – they kicked the can down the street a little ways further, and so there’s gonna be another crisis soon.
Aaron Brabham: That’s right. They’re already on a clock on CNBC for the debt ceiling. We’re only 20 days away from that, apparently, something like that. It’s ridiculous. So –
Porter Stansberry: I can’t _____ what kind of nonsense they come up with. I’m sure you’ve heard about the $1 trillion coin idea.
Aaron Brabham: I have, so that way they can avoid it. They’ll just print up a few of those, and they act like that doesn’t lead to any type of like money problems or inflation. They’ll just print a few and put them in the vault so they can avoid the debt ceiling limit crisis by cashing a couple in. That’s the most absurd thing I’ve ever heard in my life.
Porter Stansberry: I –
Aaron Brabham: It’s like printing your own credit cards for – to run them against your own bank.
Porter Stansberry: Yeah, and anyone who’s seriously proposing this just – you know, I should take them behind the barn and just pull a bullet in their heads. I mean, what a bunch of dumbass, stupid, lame, fucking jackoffs. It just – it boggles my mind that any adult would seriously believe that just because you say a coin is worth $1 trillion that our creditors are likely to accept it as a repayment from a debt.
Aaron Brabham: Yeah, how’d that go for Zimbabwe?
Porter Stansberry: It’s just unbelievable to me that a country that has the strongest military in the history of the world, that has the strongest economy in the history of the world, that has more educated people than anywhere else in the history of the world, we have all these things going for us and yet we seem so determined to grasp defeat from the jaws of victory by pursuing a bunch of economic policies that are the most proven way to destroy your society.
Aaron Brabham: It does seem about as idiotic as it possibly can be and that these scumbags that are running the country that we elect, that are supposed to represent the people, they just represent their own self-interest and themselves at the detriment of everybody else. Nothing’s gonna change. The government’s not gonna take care of you. We talk about it all the time, but yet people always look for them at any sign of anything. It’s just absurd. I don’t know, Porter, did you catch the – did you see our buddy, Alex Jones, was on the Piers Morgan show last night?
Porter Stansberry: Yeah, yeah, yeah. But, hold on, hold on. I’ve got a whole new theory about this, because I’ve been trying to find – I’ve been trying to figure out for years why the people in power would pursue these policies that they know are going to lead to disaster. Believe me, they’re smart enough to know what they’re doing is absolutely crazy. And if you didn’t hear – if you haven’t heard the $1 trillion coin idea, the idea is that there’s some loophole in the law that would allow Geithner to mint a platinum coin, say it was worth $1 trillion, deposit it with the Treasury and then avoid the debt ceiling limit because now the Treasury would have more assets or something so the balance sheet would be improved.
Of course, it’s all nonsense. The coin wouldn’t be worth $1 trillion. It would be worth maybe $5,000.00, and the people who wanna believe in this fiction are – they’re just crazy. So, I’ve been thinking, like why would people believe this kind of stuff, and, of course, they wanna believe it because it furthers their own political power. But, I have a different – I’ve got a different idea now.
I really think that the – that there is a – there’s an answer to why particularly the Democratic Party is pursuing these policies, and the answer is, they want to build an entire society that is dependent upon the political process, because that completely entrenches their power. As long as you have to depend on them to – for your wellbeing, for your retirement, for your healthcare, you can’t ever vote against them.
Aaron Brabham: Yeah, I think that’s the bottom line, but – and you’re right, they are smart enough to know, and that’s the only reasonable explanation you can make.
Porter Stansberry: We really should write a package about this, about the dependent strategy and how effective it has been over the last 40 years, because the amount of people in America who are dependent upon the government has soared. And, therefore, at the same time, so has the Democratic Party’s power. It’s very interesting.
Aaron Brabham: On the hotline, we have Richard Epstein on the show. Richard is one of the most influential legal thinkers of modern times. He is a law professor at NYU and a pioneering libertarian legal scholar. Richard, welcome to Stansberry Radio.
Richard Epstein: It’s very nice to be here.
Porter Stansberry: Richard, thanks for joining us on the show. One of the big topics that we talk about all the time here is the growth of dependency in the United States, and particularly the relationship between government and the welfare state. And I just wondered if you had any opinion about why there has been such a huge increase in dependency in the U.S. from the legal structure standpoint?
Richard Epstein: Well, yeah. I mean, there’s so many different explanations, but the great difficulty here is every moving variable, every moving part is moving in the same direction, which is essentially to increase the total amount the transfer payments that take place in the government. It’s hard to know exactly where to start, but I just did a recent column for the Hoover Defining Ideas show on the history and the fate of the spending clause and the taxing power of the United States. And if you go back to the original design of this Constitution, what you discover is that they were dreadfully afraid of the spending power. They knew that they had to have one in order to make a nation out of the old Articles of Confederation, but they tried to limit it to the creation of what you call public goods, that is, the goods which we should give to one person, you have to give to all.
So, it’s the common defense. It’s paying the public debt and most elusively taking care of the general welfare of the United States. And the theory was that all of these phrases taken together excluded the kinds of transfer payments, which are, in fact, the staple of modern American politics. In starting a new deal, what happened is all of these restrictions became eroded, and the general welfare of the United States was held to be advanced if you take from A and if you give to B, so that what was once a paradigmatic taking now will come to an act of high public virtue. The question is, then, what’s the political extent that these things take place? And it’s really very complicated.
There was, obviously, a lot of transfer payments going on under the Roosevelt Administration back in the 1930s when all this started, but in terms of their actual dollar amount and significance, it was small potatoes to what’s happening since then. But, later on, it turns out that if you give these powers and you have a strong-willed, progressive president, like Mr. Obama is, what will happen is he will appeal to his constituencies or net recipients. They will denounce people like Mr. Romney who say that 47 percent of the United States doesn’t pay taxes. They will think that that’s actually a good thing, not a bad thing, and since they have political majorities, what you’ll see is exactly what Madison feared, in which popular democracies will outvote propertied interest. Now, the question is, is this a good or a bad thing, and the answer is it’s, in general, it’s a bad thing.
Nobody wants people of property to get disproportionate benefits out of a government, but, on the other hand, if you have strong democratic institutions, the only way that they can thrive is if they cannot pick on the wealthiest among themselves in order to talk them into massive amounts of redistribution. Redistribution is not a zero-sum game. It’s not a positive-sum game. It’s a negative-sum game, Porter, and so what happens is, for every dollar that you take from one person, by the time you launder it through administrative expenses and see some of it destroyed through factional uses, and take into account the reductions in productivities that happen when you start using public programs rather than private programs, you’re lucky to get 40 or 50 cents on the other end of this thing. So, it’s massive drain, but it’s a massive drain that provides a local benefit, so these kinds of political constellations, I think, are very powerful.
The second feature, I think, that one has to deal with is, in fact, the kind of social and cultural revolutions that have taken place in the United States. I mean, I’m old enough now to have been raised in the 1950s when I remember such words as “thrift” and “self-reliance” and “self-sufficiency” were very much a part of the common American vocabulary. And I can recall when my parents would speak to me about their grandparents, how they would have been appalled at the thought that anybody would have wanted to provide them with public welfare. This notion of self-sufficiency and self-reliance was absolutely paradigmatic. Well, those moods have certainly changed in the United States today, and you can tell it in a very simple kind of way.
If you go back to the founding of the Department of Health, Education and Welfare, the term was “welfare.” When they took out education, it became Health and Human Services. Well, what’s the difference between welfare and human services? Welfare is not an entitlement. Human services refuses to distinguish between those individuals who receive something because they’ve supplied something and those individuals who receive something because it’s a transfer payment.
And once you don’t make that particular decision, then you say that your paying customers and your non-paying customers sort of have equal dignity in the way in which the receipts start to come to play. And that attitude, I think, has become extremely strong today so that when we start talking about entitlements, we’re doing it in an upside-down way relative to what libertarianism requires. The libertarian set of entitlements is really powerful. It means that people can’t trespass upon your space and upon your person. It means that you can require others to keep their promises to you, as you must keep your promises to them.
And so, these contracting property entitlements essentially allow for productive exchange from which everybody becomes a gainer. The new sense of entitlement is not the protection of contract. Those things are overwritten day by day by the United States Government and the state governments in 1,000 ways. Essentially, the only entitlements that are truly protected now are the transfer payments, because if you try to cut back and to eliminate them through the political system, you will get an absolute barrage of resistance. The Democrats have already announced that essentially Medicare and Medicaid and Social Security are largely off the table, at which point the only thing that’s left on the table is things like defense, which you actually need in the classical, liberal government.
So, you have a political inversion of immense proportion that all those things which were, at one point, not prohibited, but certainly, shall we say, labeling under a presumption of era that is transfer payments now become the preferred currency, and the folks who actually earn a living, they become millionaires and billionaires who are ripping off the system. And the definition of a rip-off today is you have not provided us with the kind of subsidy you want here. Let me, since I’m running on a bit, let me just end this way. Suppose you were to ask the president of the United States what he thought the optimal tax structure was. I mean, it would clearly be progressive, but what is so frightening about the way in which the discourse does – goes is he doesn’t tell us how progressive it should be.
All right, he may not believe that Francois Hollande is correct when he wants to tax Gérard Depardieu, excuse my French, at 75 percent. But, he certainly doesn’t think that 39.6 is the top, and he doesn’t think when you add on the Medicaid expansion of 42 point something or other, that that’s the top. Does he really believe 50 percent federal tax and Social Security taxes, state taxes, other kinds of special excise taxes, the elimination of deductions? Where is it optimal? He doesn’t want to tell you, and that allows him to keep you in a constant state of political disequilibrium.
So, the bottom line about the United States today is you are trying to put an ever-larger transfer society on an ever-smaller productive base, and as the base becomes narrow and the topping becomes larger, thing is likely to fall over, so there’s the short answer.
Porter Stansberry: That was excellent. That was really incredible display of intellectual integrity and fantastic discourse of the law and the trend in the United States. I wish I could have said that myself. I try to say those things, but it doesn’t come out quite so eloquently. Let’s ask about a tougher question for the listeners –
Richard Epstein: All right.
Porter Stansberry: – to deal with. I have a belief that accepting Social Security payments is tantamount to willingly participating in a Ponzi scheme, and knowingly participating in a Ponzi scheme should be considered a crime. Do you think it’s – you think it – although not under a law, I understand, but do you think morally it’s a crime to accept Social Security payments?
Richard Epstein: No. I mean, let’s be careful about this. In fact, the people who are taking Social Security payments today are the ones who have been ripped off in the past. One of the things that’s so striking about Social Security is to ask yourself what the rate of return is on investments in Social Security. I use the word “investment” in quotes because you have no choice about whether or not you make it. If you were the first guy who came into Social Security, and this is a true statement, the guy gets in it about, say, 65.
He probably puts in $14.00, and he gets payments until he dies at age 101, 36 years later. And so, the first generation was getting a several thousand percent return. Second generation, it goes down, third more. Essentially, anybody who’s taking Social Security today, like I am, I must say, what do I think is – I’m basically losing money. Here is the way the crazy system starts to work.
I still work, so I continue to pay into Social Security. I still work, so I continue to pay into Medicare at a much higher rate. If you, in fact, netted out the amount that I put in as against the amount that I take out, essentially I’m still putting more into this retirement system when I’m getting close to age 70 than I’m ever taking out of it, and I have a standing offer to the government, which is I will forego all future benefits from Social Security and Medicare and Medicaid if they’re willing to forego all future taxes with respect to what I’ve had, which means, in effect, that I’m giving them everything I’ve put in up to this particular date. It’s not a Ponzi scheme for the folks who are going in now. The problem is, the people who rip the system off in some sense, not deliberately – they didn’t have any choice about it either – they’re all dead.
Everybody going forward in this case turns out to be a net loser. Now, with Medicare, it’s a very different type of situation, because that program is completely on chain, and essentially the basic calculation that you’d give today is that people go into Medicare will essentially pay for one quarter of their future healthcare out of their premiums. Now, many of them will pay more than that because they have to pay the Medicare taxes that have come from somewhere else.
So, rather than talking in terms of Ponzi schemes, I would just kind of give you a sort of a number. If you go back to 1965 when Bob Dole was still in the Senate, he said, “I’m a man with green eye shape,” and all the rest of this stuff. He actually voted against it, and the basic intuition was that Medicare would come one-half from public contributions and one-half from the actual participants in the program, which sounds like a not-so-unreasonable situation, at a level which was very small. Well, two things happen. One is that the ratio goes from 50-50 to 75-25 on the public side paying the more, and the total amount of expenditures with new entitlements and new program and so forth mushrooms to the point where it’s probably 50 times or close to that amount of what the original expectations were for the program.
And so, what you do is you have this Medicare monster which is out there, and if you look at it, what makes it so difficult, Porter, to understand it is everybody who’s in the system thinks of themselves as simply taking advantage of something which is given to them as right. The program is immensely popular with it. The popular culture tends to ignore the total amount of the transfer payment. The politicians refuse to have any creation, and you get yourself into what you call a kind of a major irreversibility. You take somebody who’s 82 years of age, they’re having faith in these kinds of programs.
They’ve relied on the Medicare, and now you’re gonna tell them, “Oh, you’ve gotta go to the market and price it out.” Well, you can’t do that at this point, so you do – and this was very conscious on the part of people like Robert Ball, who was the original founder of the Social Security system, is you lock it in by creating irreversibilities, by getting people into the system, having them forego private means of protection, and then, once they’re in it, you say to them, “How could you possibly cut this thing back?” And so, then you have to cut back on future recipients, and the answer is the same one that Churchill gave, too little too late. If you start having people taking cutbacks only 10 to 15 years from now, you’ll never get over that hump in the middle, so that is the sorry state of the current affairs. It was a Ponzi scheme, but the guys who played it are beyond, shall we say, recall.
Porter Stansberry: How about do you know – are you familiar how Chile reformed their Social Security system –
Richard Epstein: Yeah.
Porter Stansberry: – before it became insolvent in the early 1980s?
Richard Epstein: Well, I’m not familiar with all the details, but I do know this, that the pattern of influence into Chile came straight from The University of Chicago, where I taught for many years, and still teach as a senior lecturer. And the way in which all of these countries have reformed their pension plans are – Brazil, Chile and so forth – is they basically privatized them, because what happens is when you put large amounts of money into public solution, you know that somebody’s gonna rip off somebody else. But, you don’t who it is who’s gonna rip off whom. It’s extremely difficult to figure those things out, because you don’t know the fine print of the programs, and you don’t know the moral of the characters or the temperament or the ambitions or the interests of the people who are running these programs.
So, I remember when I was in Brazil – this is 20 odd years ago now, 20 years ago now – I spoke to several people, mostly of libertarian persuasion, and they said that everybody regard of their public pension plans is essentially worthless mainly because they would probably be paid out to current recipients. And so, what the company started to do was to put private plans, and remember, that could have been done in the United States. Let me just go back to 1934, 1935, and what you have to remember is in 1930 the average life expectancy of the person in the United States was, say, 61 years of age if they were born in 1930. So, the number of people in the United States who were over 65 was very small, and the idea that there was a period of retirement after 30 or 40 years of productive labor was also a sort of a novel notion.
It was very clear if you looked at the statistics that what was going to happen is that longevity would start to increase, and, indeed, it went up to 65 by 1950, and now it’s in the mid 70s somewhere for men and probably a little bit higher than that, high 70s, low 80s maybe even, with respect to women. And so, you started seeing private companies understand that there would come a point where they’d wanna set this money aside. And so, back in about 1933 or so, Alfred Sloan, who ran General Motors, decided that he was gonna start creating pension plans for workers. Once you get Social Security, it simply takes from most workers all the money that would have been privately saved and puts it into a public solution. Now, one of the things that you should do is look at your Social Security form very closely and ask yourself the following question: how much money do you have in that account?
The answer is you have no idea. And I’m pretty good at finance. I don’t know what in the world I have in this thing, because all they tell you in the program is the amount of the contributions that you made to the program from the time that you started to work. But, you have no idea what the current value is, and then they give you a bunch of options and they don’t tell you what their relative value is one to another, because there’s no actuarial information. If you look at your private plan, all which is vested in usually with Fidelity or Merrill Lynch or whoever it is, you will know to the penny exactly how much money is in that particular program.
And then, what they will do is they will give you a menu, and the menu is essentially like it is in a restaurant. It is something that tells him they are indifferent whether you take A, B, C or D. And so, what you then do is you look at the menu, and you know that you can’t hurt them no matter which one you do, so you take the one that you value the most. And for most people it turns out to be a self and spouse annuity. For some people who are single, it’s a one-person annuity.
If you have a spouse who’s independently wealthy, you may just take it on your own life. And so, that program gets you rational choices. I sit down with friend after friend and they ask me, “Hey, you do this stuff for a living. Can you tell us which of these various options we ought to take?” So, I had some friends in a long discussion as to whether you retire at 62 or 65.
And it’s very hard to figure out. You retire earlier, what happens is you get less money per period, but if you’re ill now, you’re probably better off doing it because you may not live long enough. On the other hand, if you retire later, you get larger sums of money, but there’s now the political list that the taxes on those dollars will become very much higher, so you may not be able to collect them, and you just sit there. And why on earth would anybody want, in the United States, to create a system in which the people who are recipients have no idea of the accumulated amount of wealth that is put to their account? And this means since you don’t know how much you have, if they decide to change the rules, you have no idea of how much you’ve lost.
And this was all designed by Robert Ball. I mean, this is not just an accident. It’s not that it’s a Ponzi scheme. It’s a situation in which all wealth is in politician solution so that the stability of entitlements, which is so much a part of the classical liberal tradition, is essentially thrown by the wayside. It’s a tragic situation as far as I’m concerned, because what happens is, on the receiving end, there is person after person who contributed large sums of money into Social Security, and they do not have the information to make intelligent choices amongst the various options.
Now, let me put it to you this way. Suppose you ran Fidelity and what you did is you took the Social Security form and you gave it out, didn’t tell people how much they had in their account. You only told them when they made contributions, and you gave them a set of options. The Securities and Exchange Commission would be down on their throats _____ for false and misleading information, which indeed it is. It’s the government exemption from the regulations that are imposed upon private firms that induce the kind of irresponsibility they have.
Now, I think our program runs better than it did in Brazil or in Chile, and so, therefore, you do not have quite the same impulse to start first-dollar plans for everybody else. But, it’s a frightening condition in the United States that so many people have only Social Security, maybe a very small amount of private savings or – and equity in their home, and they are subject to a program which has this degree of political stability that is built into it and this degree of uncertainty as to what it is that this stuff is going to be worth. And yet, at the same time, we have this uncertainty in the individual case. We do have the risk of some serious political dislocation. With Social Security, you could probably control it if you gradually, and relatively quickly, raise the entry age to about 67.
Medicare is much more difficult to figure out, because pricing that does not depend upon life expectancy only, although that’s a small part of it. It depends upon the intensity of treatment, and that itself is an absolute opaque crystal ball. You can’t see anything through this thing to be able to make future estimates, and that’s why the program is so bad. And, in fact, Porter, just to mention something to you, this man, the Medicare actuary – I can’t recall his name, Fischer or something like that – what this guy did is every time you put out the official Medicare reports indicating insolvency would be to X, he would say, “In good conscience I can’t do this,” and he would append on his own personal opinion that none of the assumptions that he was told to follow in the report would hold true over time and so that, therefore, the financial situation of Medicare was, in fact, much more dangerous than the report seemed to be.
I mean, and this is the danger of illusory counting, and I could go through instance after instance of government funds which essentially collect money under false pretenses and go, if not insolvent, very close to it precisely because they don’t keep to the accounting rules that are necessary and that are otherwise imposed upon private firms either by contract or, in some cases, by sensible government regulation.
Porter Stansberry: Yeah, the one that jumps out at me is the reserve status at Fannie Mae and Freddie Mac.
Richard Epstein: Oh, I mean, oh, my god. I mean, these characters, what – these mortgages, what – they should carry them at five cents. It’s also, by the way, on the mortgage prices, you remember there was the settlement that was made today, and this shows you how far away we have gone from what is the only sensible way to think about these things. Virtually everybody who got payments under the system, as a Wall Street Journal editorial _____ point out, was, in fact, indisputably in arrears on the payment of their mortgage. But, what happens is we then put on so many formal requirements with respect to foreclosure that the discussion doesn’t go to the question of whether or not the person has or has not paid in.
It goes to the question as to whether the forms that had been sent to him were signed by a human being or by a machine. And so, therefore, you’ve just lost an entire sensibility of what the entitlements are. So, what is the correct mortgage policy on this? I don’t know, I talked about this – I guess I gave a speech at Pepperdine University some – oh, now five years ago, in which I said if you don’t understand the principles of foreclosure that were developed in the English courts of equity in the 14th and 15th centuries, you’ll never be able to figure out how the system is going to work. And the simple proposition is this.
When things are going good and a person has an equity in his home, which means its value is more than the debt, he knows that if he misbehaves, the first person to lose money is himself. And so, what happens is the larger the equity cushion, the more protected the mortgagee turns out to be. But, if it turns out that you now go under water and the value of the property is less than the mortgage that’s on it, now in effect when somebody misbehaves, he gets all the benefit of the misbehavior and the loss goes to the mortgagee, that is, to the bank that lent the money. Well, this is a completely unstable incentive structure. And so, quick foreclosure, strict foreclosures it used to be called, becomes necessary, and you have to get the tenant out – I call them a tenant – actually, the former owner out, because, otherwise, you’ll have wealth dissipation at a stunning rate.
And, therefore, once you do that, you then take the property, you resell it in the market. The bank takes its loss, but at least it’s a clean loss, and the next person who buys it pays for it at its current value, and when he puts a mortgage on it at, say, 80 percent of value, it’s a small mortgage on a lower base. And the property gets into circulation, and the people who were foreclosed, many of whom put very small down payments on, they go back into the rental market until they could a accumulate a down payment and then buy things. If you had done that, this crisis would have been over two years ago, three years ago, because you would have gotten rid of the entire backlog, but when you have a situation in which formality and delay become national policy, when the government insists that you refinance people on the grounds that if you give them a longer period of time to pay the stuff off it will reduce the defaulter rate, and then you have this hand program with about a 95 percent failure rate, what this is is government madness. And so, if we don’t do it through Fannie Mae or Freddie Mac, we then do it through the Federal Housing Authority, and we repeat the exact same mistakes.
And it’s the whole political entitlement culture. I mean, if you go back to your _____ libertarian theory, there is nothing about libertarian theory which says, “Hey, in this particular world we want everybody to be a homeowner and nobody to be a renter.” The theory itself _____ voluntary transactions turn out the mix and it will optimize, and what you should, therefore, do is give no subsidies to people who want to either rent, on the one hand, or to buy, on the other hand. What you do is you let those choices to be made by market and institutions where you’ll get the right mix. And for single-family dwellings, you will typically find that people will buy them.
If it turns out you’re talking about apartment dwellings, oftentimes you will do better off without the tax subsidies from rental arrangements, because a strong landlord is necessary to maintain the public places and to make sure that no tenant-free rides _____ any other kind of tenant, and the world will go into pretty healthy type situations. But, the moment you have these sort of what Robert Nozick called pattern principles, and the Republicans are as hopeless on this as the Democrat, in which we think that the United States needs to have 70 percent of the people living in owner units, you’re gonna always force by subsidy or penalty that kind of distribution and pay the price down the road. So, what has happened in the United States is you got instability in Social Security. You get totally mad housing policies with respect for the way in which you deal to foreclosure, and what you then do you is you pile on top of that major redistribution programs so that, in fact, the way in which you look at the papers today, it’s striking.
The great challenge of America’s future, according to our current pundits, is how we manage our own decline, so that when you think about the Defense Department, the appointment in Chuck Hagel, the argument is this guy is really very good at figuring out how to manage the decline of American influence worldwide. I mean, and if you want to run a defeated nation, you just have to listen to this grand rhetoric, so you have two things going on simultaneously. You have all this endless talk about entitlements, most of which cannot be serviced, and then you have these grand profession that we can’t possibly take our place in the world, and this will come back to bite you. The only way in which you get peace in a world is to have Tax Romana, Tax Americana. If you have a large number of nations of about roughly equal strength with their own separate spheres of influence, that will be an open invitation to instability, and the United States will be impossible to do anything.
They won’t be able to do it with Iran. They won’t be able to do it in the China Sea and the disputes between the Chinese and the Japanese. We won’t be able to reset anything with respect to the Russians who have their own vodka problem and so forth. It’s a very frightening process as to how it is that domestic weakness will lead to international instability. And you can do so much with drones. I’m not trying to _____.
In fact, I tend to defend their use, but it cannot be the case, I believe, that you can maintain world peace if you have the United States pull away from the stage. Let me just mention one little thing. In 1955, when you had the summit, you had the big five, you had China, i.e., Taiwan, didn’t matter. You had England. You had France.
You had Russia and the United States. Well, France and Britain have simply fallen off the map with respect to world power, so it’s the United States and Russia. Russia, of course, is much weaker, which means that the only sort of central power that we had was the United States, and we’re trying to basically mortgage ourselves into second-tier status. The president’s willing to cut the defense budget. Everybody keeps saying the way you balance the budget is to get rid of foreign aid, but we’ve already done that so many times there’s nothing left to get rid of.
What the United States has to face up to is the recognition that in its efforts to run a transfer program, it cannot maintain the traditional functions that government is supposed to serve in terms of maintaining a coherent foreign policy, a coherent military, a coherent public infrastructure and so forth so that, ironically, the things that somebody who believes in Laissez-faire wants to fund infrastructure and so forth is being shortchanged today by these massive policies of redistribution. I mean, it’s a very heavy price to pay. You’ve got a lot of Republican complicity in this thing, but there’s no question which side is the driving force, and that turns out to be the incumbents, and, in fact, Porter, one way to look at this is you will note in modern discourse there is a decline in the use of the term “liberal” by the American left. The new term is “progressive,” and this is a quite conscious term, because what it’s trying to do is to link everything back to the progressive policies of the 1st, 3rd or the 20th century, which then morphed into the new deal when Roosevelt became president.
And it’s to that sensibility that we’re repealing, and that sensibility was a failed tradition in its own times. It created high taxes. It created low productivity. It created massive government cartels. The only thing that they can actually do pretty good was job programs. The CCC really put people to work, and this new round is worse for two reasons.
One is we don’t do it as well, and secondly it’s one thing to take an economy which is in the tank and try to expand government influence from, say, six to nine percent. But, when you’re doing it today and your federal budgets are up to 25 percent of GDP, your state budgets add on to that, regulations add more, it turns out that the diminishing productivity from these additional regulations accelerate and become ever large. And so, unless somebody gets their heads together in Washington, which does not seem likely, we are in for a very long sort of economic winter, and the level of ignorance that I see in public debate at this point is, I think, really a kind of a testament to the failure of the American elites to understand what it is that makes and keeps a nation great. We are coasting on our laurels and the path, unless we change course, and that can only happen with a change in recognition. The path for the future of the United States is down. We will be a declining nation.
Porter Stansberry: Wow. Again, what great stuff. We’re running out of time, but you made a point at the end there about the level of economic sophistication and understanding of our political leaders, and I just wanted to see if you had any opinion about the $1 trillion coin solution?
Richard Epstein: The $1 trillion coin solution, I don’t even know what that is. But, you tell me and I’ll have an opinion.
Porter Stansberry: Oh, some of the New York elites – who’s the liberal columnist for The New York Times, the economist guy, Krugman.
Richard Epstein: Paul Krugman, God bless us.
Porter Stansberry: God bless us. So, Krugman has put forth this idea that’s been much ballyhooed in D.C. that we could solve the debt ceiling problem by having the – Geithner authorize the U.S. Mint to produce a $1 trillion platinum coin. Now, of course, the – it would only be $1 trillion face value. The intrinsic value of that coin would only be, you know, $3,000.00 or $4,000.00, but then he could deposit that coin into the Treasury and then – and solve the balance sheet problem and, therefore, eliminate the debt ceiling and that –
Richard Epstein: Well, I mean –
Porter Stansberry: – we could just keep producing these coins as often as we needed them.
Richard Epstein: Well, I mean, this is just a simple evasion to try to get rid of the congressional authorization of the debt, which seems to be part of the standard practice in the United States. I mean, it is essentially yet another illustration of how it is instead of making concrete achievements through productivity gains we’re gonna try to run the United States through smoke and mirrors, because, I mean, why stop at $1 trillion coin? Why not make it a $10 trillion coin? If this thing becomes real currency, what will happen is, of course, it will lead to the inflation, which a man like Krugman says will never happen. I mean, the fellow has – I mean, I don’t know what he’s on, but his basic – interest rates are low today even though we’re spending in deficits, so they’ll be low tomorrow as well.
He’s gonna be right for a very long period of time because of the level of inactivity we have reduces the circulation of money, but once this thing flips over to the other side, there will be no way that we could reverse course, so one of two things will happen. Either we’ll never get to the full employment state that we had, at which point he would then say let’s withdraw it, or when you get to that thing, there will be a level of inflation which will be extremely difficult to do. Another way of putting what he says in very traditional terms is if you’re a nation in debt, the way in which you avoid your obligations is to cheapen your currency, and that seems to be what it is that he seems to be proposing. And I think the man has lost his mind in some sort of serious sense. I mean, this was a very eminent trade economist, and even today when he starts talking about mid-level issues, there’s actually signs of lucidity.
But, ever since he’s become a public _____ of one form or another, it’s just watching – I don’t even know how to begin to describe it – a series of abusive pronouncements, all of which are wrong, I mean, just to give but one illustration. There is no entitlement reform in the current package that just came through Congress, and you read the Krugman columns and he keeps on talking about the generous concessions that the president has made on these issues. They aren’t concessions that were made. They’re promises of talking points to be made some point in the future, and the truth about the matter is, if he’s gotten what he wants, he will give no more on this front than he has to in order to secure Republican compliance through the House of Representatives. The last time, I mean, Boehner, whom I think has got the most thankless job in Washington, understood that if he tried to block any reform, he would pay a huge political price because of the automatic nature of the new entitlements.
But, the next set of tax increases doesn’t happen by default, and at that particular point, the bargaining power starts to shift in his direction. I think the president is oblivious to the danger of what he does, and I think it’s kind of a tragic situation that people like Paul Krugman has such enormous influence on the body politic when, in fact, you talk to people like Allan Meltzer who were around you at the Hoover Institution, that John Kale, that both of my colleagues out here, these guys actually really know some stuff about what’s going on, and they simply are not heard in high government circles. It’s a frightening situation that how bad intellectual advice can translate into bad public policy.
Porter Stansberry: Again, it was great having you. I can’t think of any guest we’ve ever had who I thought was smarter or more well spoken, and I didn’t even have any disagreements to raise issues with at all. I think you’re right on the money in every way. So, thanks very much for your time.
Richard Epstein: Oh, well, thank you.
Porter Stansberry: And I hope that as this begins to unravel you’ll come back and tell us the details of why it’s all happening.
Richard Epstein: We can arrange that, and you remember to send me the link, okay?
Porter Stansberry: Very good.
Aaron Brabham: Absolutely, we will send you that link. Thank you so much for your time.
Richard Epstein: Okay, take care, guys. Bye-bye.
Aaron Brabham: Porter, that guy, he knows his stuff.
Porter Stansberry: Very smart guy, and, like I said, I really wish that I could be as concise as he is. I know there are a lot of listeners who probably thought he went on and on and on, but he didn’t say the same things twice. He just explained very fully how our entire country has become a giant game of redistribution and political patronage, and he did it in a very sophisticated way. I was very impressed, I really was, with him – very impressive.
Aaron Brabham: That’s one of the few interviews I will actually download the transcripts from and go through it word by word, because that was a lot to digest and – but, what he did have to say was – it was huge on every level. It was fantastic synopsis and a breakdown. That was great, because I think you do a great job breaking down complex things. This guy really, really brought the heat.
Porter Stansberry: It was impressive, and I have to really think about his Social Security arguments, because he didn’t agree with me with the whole Ponzi scheme concept because he says the real perpetrators are already dead.
Aaron Brabham: They’re already dead, right. They already collected. They already used their Ponzi. That’s something to think about.
Porter Stansberry: Very good, too, because I also realized that I’m lumping the two things together, Social Security and Medicare. I’m lumping them –
Aaron Brabham: Mm-hmm.
Porter Stansberry: And when you look at them together, there’s still a very lucrative transfer taking place where current recipients are still getting between 300 percent and 500 percent on their contributions, but it’s – the benefit is mostly – truly is mostly in Medicare. So, maybe I should really be railing on the people who use Medicare.
Aaron Brabham: Thought provoking. I like it. See, listeners out there, Porter does change his mind when great arguments are put forward, so we’ll see. Think about it. See what you think. All right, Porter, we got some “you just can’t make this stuff up” segments.
A lot of it’s kind of the standard you’ll groan and you’ll be like, “Oh, just stop it,” but this is what I like to do. I like to get you a little riled up every now and then. Not a shocker, welfare recipients took out cash – we’ve talked about this – took out cash at bars, liquor stores and X-rated video shops, hookah parlors and even strip clubs, where they presumably spent their taxpayer money on lap dances rather than diapers. So, there’s a database of 200 million EBT records from January 2011 to 2012, and they were obtained by the poster of freedom of information request. And guess what?
Yeah, people max out their money, because they have ATM machines that dispense cash to people. I don’t know why they have a cash assistance program. That seems like the most ridiculous thing that you could do, but guess what? They go out and spend their money on strippers and liquor and X-rated shops, and, for some reason, this is a shock to politicians.
Porter Stansberry: So, let me get this straight, people who can’t take care of themselves because they’re undisciplined and lazy, if you give them money, they’ll spend that money on drugs, booze and whores?
Aaron Brabham: Yeah. Yeah, is that shocking to you or what?
Porter Stansberry: I am – Aaron, I tell you what, it’s a whole new day. It’s just like the sun just came up and everything changed.
Aaron Brabham: Oh, man, it’s a – yeah, it’s insane. So, a family of four –
Porter Stansberry: This is – this goes right to my whole dependency theory. I mean, the only –
Aaron Brabham: Absolutely.
Porter Stansberry: – reason that you would do this is if you wanted to buy votes and you wanted to keep people sort of enslaved to the political process. And guess who makes a bunch of money on the EBT program? You’ll never guess.
Aaron Brabham: J.P. Morgan Chase.
Porter Stansberry: There you go, about $100 million a year on issuing EBT cards.
Aaron Brabham: That’s absolutely insane. And then, there was another story to go along with this in Massachusetts where they essentially had to send out kind of notices to welfare recipients, and 19,000 notices came back because they couldn’t find the right address, right. Like the people just don’t – they don’t exist anymore according to the records of mailing. However, don’t worry about that, because they still send all their money electronically, so people still spend all the welfare money, and they’re still doing everything they want to do, but the government kind of lost 19,000 of them. And the governor said, quote, “But, it’s only four percent. It’s not a big deal.”
Porter Stansberry: [Laughter] Just imagine if we ran our company that way. Hey, you know, we didn’t mail a lot of the newsletters that you paid for, but it was only four percent. Give us a break.
Aaron Brabham: Yeah. Yeah, we were 96 percent accurate. I mean, we try to reach you, but sorry, I don’t know, we got your money. Who cares? That’s the attitude that they have.
Porter Stansberry: It’s awful.
Aaron Brabham: Porter, how is your weight loss going? Let’s get a little update there.
Porter Stansberry: Ooh, update.
Aaron Brabham: It ties into my next story.
Porter Stansberry: Update, I’m at 250, Aaron.
Aaron Brabham: Two fifty is – you’ve reached 250 a lot faster than you thought, I believe.
Porter Stansberry: I started at the very beginning of December, and my program is no bread, no booze, no cheese, so I’m just trying to moderate portion size. I haven’t gone crazy. There’s no counting calories. I’m not eating food out of a box. I’m just trying to moderate my behavior, and definitely because my back is healed up, I started an exercise program. And I dropped 15 pounds in about 6 weeks.
Aaron Brabham: That’s outstanding, and did you see I forwarded you the Sjuggerud – he’s also on a weight loss mission right now. He wrote it up in DailyWealth Premium, I believe, and he’s down like 20 pounds or something, man. He’s pretty pumped.
Porter Stansberry: Yeah. It’s pretty impressive when you really start watching your diet how quickly you can lose weight if you’re disciplined about it. Now, there has been one small setback, which is I was hosting a bunch of people in Miami for the big football game last night, the _____.
Aaron Brabham: Sure.
Porter Stansberry: So, I did slip out of my no booze for the last I’m gonna say three days, and it’s pretty incredible. Just cutting out booze for a month, my tolerance to alcohol disappeared.
Aaron Brabham: That’s amazing.
Porter Stansberry: Oh, I’m telling you, it was – I had a horrendous hangover, and I only had like four or five drinks, so anyway, small setback. I probably put on two or three pounds over the last three days, but I’m sure by the end of the week that’ll be right back off.
Aaron Brabham: So, I found a good – a very good franchise – I believe it’s gonna be huge – in Dallas. They started one called Downsize Fitness, and it only allows members to join if they are minimum of 50 pounds overweight, and it’s for both men and women. So, you remember they had the Curves franchises, and I think they still do, that was gearing towards women that were overweight.
Porter Stansberry: For the plus-sizes ladies.
Aaron Brabham: For the plus-size ladies, because it is a reality. Like I joined LA Fitness up here, and it is a reality that I go into LA Fitness and it’s – whenever I look around and I see like really obese people working out, it’s startling for me because I’m used to looking at a bunch of really, really fit people. I think this gym is going to boom. They have like extra size equipment, oversize equipment for these people. But, my question is, when they lose 50 pounds, do they automatically get kicked out?
Porter Stansberry: No, they can’t, because the whole way that the gym business works, they get you on the auto-pay, and then you just never stop paying even after long – after you’ve stopped going to the gym. But, listeners, I wanna give Aaron Brabham some props. This guy is in unbelievable shape. There are not many guys in their [coughs] mid 30s [coughs] –
Aaron Brabham: Yeah, I like that.
Porter Stansberry: – _____ in their mid 30s who are in better shape than they were at their prime in high school or college, and Aaron is. He’s in fantastic shape.
Aaron Brabham: I’m kinda taking my life seriously these days in the form of I’m enjoying it so much that I really want to maximize the way I sleep, the way I feel during the day. I’m looking forward to living versus just dying by eating a bunch of white foods and being a fat slobbo, so thank you, Porter. I appreciate that. I do work hard for it.
Porter Stansberry: It’s very impressive. It’s rubbing off on me.
Aaron Brabham: Oh, well, that’s important. All right, Porter, so another “you just can’t make this stuff up,” and this is something that you’ve written about extensively. Last year you were real bullish on the banks and for all the right reasons that you –
Porter Stansberry: Yeah, that –
Aaron Brabham: You call it a timing problem.
Porter Stansberry: Oh, god, that’s like the – that’s one of those bad beats that is – that – probably one of the top three bad beats of my entire career. I nailed the entire reason why the bank stocks were gonna soar, and Bank of America was one of the best performing stocks in the S&P last year, and I nailed it. I understood exactly why real estate prices are gonna come back up, and the banks are very leveraged to real estate and all those losses they took would come back off the books and their book values would double or triple and the stock prices would go up as well. And I got it all right, and I still ended up losing money on the trades. Just it’s unbelievable that I owned those stocks during the only 90-day period last year where they went down and we got stopped out.
Aaron Brabham: Yeah, and I have a feeling they’re gonna be on a bit of a run here, because the ten major banks and mortgage companies agreed to pay $8.5 billion to settle compliance that they wrongfully foreclosed on homeowners who should have been able to stay in their homes because they had the big like robo-signing and all that scandal type of stuff. So, as these things clear up, obviously, it makes the balance sheets a lot better. It makes the companies a lot stronger. Man, you had it nailed. You just missed it on timing, and that 25 percent caught on the bottom.
Porter Stansberry: Yeah, and that’s one of the things that happens to investors. You have to make up your mind that in order to avoid a catastrophic loss, sometimes you have to take an unfortunate loss. But, you can survive a small, unfortunate loss, and you cannot survive a catastrophic loss, and so that’s the price you pay to be a disciplined investor. And that’s the only way that I’m comfortable doing it, so it’s the way I recommend other people do it as well.
Aaron Brabham: All right, we got a little nanny state segment. The FBI recently said that more people are killed with hammers and clubs each year than with rifles. By the way, I would much rather die of a rifle wound than a hammer or a club to the head, I believe.
Porter Stansberry: I don’t know. I think the worst way for me to imagine dying would be drowning.
Aaron Brabham: Well, that’s kind of a reality in my life all the time as poor a swimmer as I am, and I agree with you, it’s very fearful.
Porter Stansberry: Aaron is the only guy I know that literally can’t swim. It’s hysterical. I –
Aaron Brabham: I can get by. I can get by kind of.
Porter Stansberry: I had to save his life twice in the ocean. [Laughter]
Aaron Brabham: So, while you’re laughing on the sideline and you – yeah, while you’re laughing with a beer in your hand on the deck while I’m struggling in the water, and you just said to me that you fear drowning. How about a little sympathy in 2013, my friend? Jeez.
Porter Stansberry: How sad for you that you can’t swim. Don’t –
Aaron Brabham: That’s a good _____.
Porter Stansberry: Hey, listen, seriously, though, I don’t believe that I will drown. I played water polo in high school, and I was a big wave surfer most of my life. I’ve been under water for a long time. I just think it would be the worst way to die, because you lose control of yourself underwater and you begin to breathe in water. You can’t help it, and that is just – losing control of yourself in that way, I think, would be the worst part of dying.
So, if you got shot by a rifle, it would hurt, and you’d bleed out, or your head would get knocked off. You wouldn’t even know anything. Or getting hit in the head with a hammer or a club, you – it doesn’t involve that loss of control that drowning inevitably would.
Aaron Brabham: My biggest fear, and I’ve talked to a lot of friends – I don’t know why. I guess I have a morbid side or something, but my biggest fear is like I’m stuck in the woods and I’m running from a big, giant bear, and instead of going left, I go right and that turns out to be the wrong path. And as I’m getting mauled, I think to myself, “All you had to do was just go the other direction.” I just don’t want one of those.
Porter Stansberry: [Laughter] That sounds like some kind of a bad dream.
Aaron Brabham: It kind of is, because for me, the death is the decision-making part that you chose the wrong path, and as you’re dying and you know it, all you can think about is, “Damn, I should have gone the other way, man. That was stupid. I should have done the other thing.”
Porter Stansberry: You’ve been up to TVL, the lodge I have in the mountains in Pennsylvania –
Aaron Brabham: Oh, yeah.
Porter Stansberry: – Twin Valley Lodge. And guess what I always take when I go in the woods in TVL always?
Aaron Brabham: I would take that .357.
Porter Stansberry: I take the .45.
Aaron Brabham: Oh, .45 would be even better.
Porter Stansberry: Or the .357, but I don’t go in the woods without a gigantic hand cannon.
Aaron Brabham: No, that’s actually very smart, because bears climb trees. They run fast, and they’ll maul you instantly.
Porter Stansberry: _____ a bear, I’m blowing its head off.
Aaron Brabham: Yeah, no mercy. No waiting to see what happens next.
Porter Stansberry: Yeah. I see a bear, I’ve got a pistol, dead bear.
Aaron Brabham: Yeah, dead bear. That’s that.
Porter Stansberry: And tree huggers, don’t bother writing me.
Aaron Brabham: All right, Porter, so for –
Porter Stansberry: _____ bears, especially when they kill my dogs and threaten my life.
Aaron Brabham: I’m with you. So, before we get into the listener feedback, you are up on deck today for the Premium show. Are you prepared to deliver what you believe is your best idea?
Porter Stansberry: Absolutely.
Aaron Brabham: Okay. So, for our listeners that aren’t already Premium subscribers, the first thing you can do is just go add your e-mail to our list by going to stansberryradio.com. We also have little subscriber ports everywhere that you can click on and become a member. It’s only ten bucks a month. What we do for ten bucks is we give you our best ideas, each week one big idea that you can have for an actual investment idea from our – all of our analysts. Today we have Porter up. Porter, any kind of teaser you can give without giving it away today?
Porter Stansberry: Well, it’s like I always tell people, if you wanna which – the best newsletters – which of Stansberry’s letters are the best, you just – you need to read mine.
Aaron Brabham: I can’t really say no, because I work on your team, so what am I supposed to do, go against it? I agree. Those are the best newsletters.
Porter Stansberry: I’m actually just teasing.
Aaron Brabham: I know.
Porter Stansberry: Most of the people I’ve hired are far smarter than me, and they do a great job, and the report card is coming out for newsletter subscribers on Friday, so you’ll get to see what all the results were, and unlike pretty much everybody else in the whole industry, we do our grades on the basis of risk weighting. So, if you just picked a bunch of risky stocks and got lucky and they happened to go up last year, you don’t necessarily get a good grade. What we’re really looking for is consistency. We want analysts who can find a high percentage of winning picks, and we want great returns that are very low risk. And so, we evaluate our analysts on their consistency and on their performance on a risk-adjusted basis, which is – there’s no one else in the whole newsletter industry that does that.
In fact, I don’t know any other publisher that does any kind of annual review of their analysts at all, so you wanna know who the best is at Stansberry, just look for the report card coming out on Friday. And for the Premium show today, I’m gonna tell you guys about a discovery that our analysts made that is right in the middle of the biggest, most important trend in the world’s economy, which is, believe it or not, the discovery of huge, new supplies of oil in the United States. And we have an excellent way to invest in that trend that’s very, very safe and that I think will at least double your money in 2013. So, if you wanna know more about it, then stick around for the Premium segment, and if you can’t afford $10.00 a month, then that’s okay, because you probably don’t have any money to invest.
Aaron Brabham: Yeah, that’s right. That’s pretty much the bottom line there. Now, Porter, last week in your Friday Digest I enjoyed your Friday Digest; I always do. You just, for the record, for everybody, you still believe the end of America is coming, and by that I mean the – some type of currency collapse, correct?
Porter Stansberry: I do. I think that any time you have serious economic and political leaders who are talking about manufacturing $1 trillion platinum coin and depositing it in the Treasury that you’re going to have a huge monetary crisis, and if you can’t see that and you think that’s just me trying to scare people into buying newsletters, you’re out of your mind. And if you watched what happened with the fiscal cliff stuff, all that happens in our political system is politicians either narrow the tax base or don’t do anything to raise revenue, or both, and spend more and more and more, so every year the deficits keep getting bigger and bigger and bigger. And it’s only a matter of time until some of our creditors finally say, “No, I’m not gonna lend you guys any more money.” And that will increase the amount of quantitative easing the Fed has to do.
They’re already doing $45 billion a month, which is – $45 billion a month, that’s – that comes to about $600 billion a year, which is roughly half of our annual deficit. So, we’re already printing half of the money that we need, and we’re gonna be printing more and more and more of it. And for folks who think that’ll never cause inflation, they’re just insane. It will take a long time, let’s say another three to five years at most. It’ll take a long time for that monetary base to expand into the real economy, to leak into the real economy, but it absolutely will.
And you will see prices skyrocket for anything that can’t be printed, and we’ve gone through this so many times, I’m not gonna bother to go over it today, but, yeah, that is still gonna happen. What has changed in my outlook since when I first started writing about these problems in 2006, 2007, what’s changed is that the timeline is getting pushed out because we’re gonna have a big decrease into our imports, because we’re gonna be producing a lot of our own petroleum products. And we’re gonna be exporting a lot of petroleum. In fact, we’re already a net exporter, so that’s gonna really improve our balance of trade, which will weaken the inflationary pressures on the dollar and give us more time. The problem is, instead of using this enormous bounty to fix our balance sheet, all it’s gonna do is encourage the politicians to spend more.
So, the problem will actually end up getting bigger because of the wealth we’ve discovered in Texas and North Dakota and other places. And the good news is is that this gives you more time to prepare, but the bad news is that the problem is gonna get even worse, because the debts are gonna get even bigger. The dependency is gonna get even bigger, and the imbalances are gonna get even bigger around the world, so I’m really – I’m very seriously warning you that you need to have some hard asset savings. That means things like productive real estate, like farms or timber, and that means hard assets like gold and silver. And I know I’ve been saying this for a while, but, hey, look what the price of silver has done since I began telling people to buy it.
It’s gone from 14 to 50, and now it’s at 30. I still think it’s a good buy. I feel the same way about gold. I feel the same way about productive real estate, so – I mean, I think since I started talking about buying farms in 2008, 2009, the price of farmland in Iowa has more than doubled. So, a lot of people are critical of me and say, “Hey, you said the end of America was gonna come. It seems like it’s still here.”
Well, yeah, of course, but look what’s happened to the monetary system we have, and look what’s going on in terms of the real inflation, and I think it’s fair to say I’m exactly right. But, I think it’s gonna get a lot worse.
Aaron Brabham: Yeah, and I’m sure you saw the Fed minutes last week that they reviewed, and the Fed, you know, they had a lot of regional presidents, whatever, concerned about the printing efforts. But, don’t worry, they’re gonna reevaluate that at the end of the year after they purchase $45 billion a month, like you said, add another $600 billion to the balance sheet. They’re not gonna change anything. They’re gonna keep printing. It doesn’t matter what they say.
It’s what they do, and until they do something different, you’ve gotta believe that this end of America is gonna play out. I’ve been doing a lot of research on how many people actually own physical gold that are Americans, and it’s somewhere estimated between only one and four percent. So, the day that we do – the dollar does lose its – even if it was ten percent value, the gold’s already gone. You’re gonna see it exponentially go up, in my opinion, and it’s gonna be way too late.
If you think it’s – the prices are high now, get ready. By the way, Porter, I made a call to Van Simmons last week, and I talked to him for a good 15 minutes. I’m putting my game plan together right now. I’m getting into the hard metals game.
Porter Stansberry: Well, the other thing to think about, and with this problem, this is the real big problem, is how many Americans – we should get online and get this number. Nuresh, you can – I’m sure you can Wikipedia this. How many Americans have a net worth of over $10,000.00, okay, and, and, and have liquid savings of at least $10,000.00? In other words, if you’ve got $10,000.00 in the bank, that’s good, but it doesn’t matter if you’ve got a mortgage that’s $100,000.00 or whatever, you see what I’m saying? How many people actually have a positive net worth and have at least $10,000.00 in liquid savings, meaning stocks, bonds, cash, gold?
I guarantee you the number of people that have a positive net worth and have at least $10,000.00 in liquid savings, these are the people who can survive a monetary crisis. These people who have some ability to pay their bills and to function if the banks close down or the credit cards stop working or whatever might happen. So, I bet you it’s – I bet it’s far less than ten percent of the people in this country, and when you stop for a minute and think about that, how the richest country with the largest economy in the world, how we could end up with a population that is literally bankrupt. If you don’t have a positive net worth and at least $10,000.00 in liquid savings, you’re broke. Stop pretending otherwise. The thing that I’m afraid of is what’s gonna happen to those people, the people that don’t have a positive net worth, that don’t have any kind of liquid savings.
If there is a monetary crisis, the value of their wages will disappear. I mean, it will disappear. The value of their wages will decline by 75 percent or more, and believe me, I have – I was in Argentina in ’02 and ’03. I saw this happen to people who believed that they were wealthy and middle class, and their standard of living went from six-figure standard of living to less than $10,000.00 a year standard of living, because everything that they thought they could count on is now worthless. Their pension was worthless.
Their non-hard asset savings were worthless. In fact, in Argentina, they did a rule that said if you had cash in the bank, if you had U.S. dollars in the bank, it was now pesified, meaning the regular Argentinian peso, which was devalued by 75 percent, but meanwhile, if you had debts, your debts were not pesified. So, if you had a mortgage, your mortgage was converted into U.S. dollars while your savings was converted into pesos. That’s what happened in Argentina, and people think, “Oh, that could never happen here.” Bull [word beeped out].
That could absolutely happen here, and you can’t believe how desperate the banks and the politicians will get when the money system that they have created falls apart, and it will absolutely fall apart. And anyone who doesn’t know that is fooling themselves, so that’s my message to you. You can’t fool around with this stuff. It’s absolutely happening as we speak, and if you’re – if you’ve just become immune to it, you’re – man, you’re really taking a huge risk. So, yeah, those things are all very big concerns for me, and I think that you can manage those risks very easily just by doing something sensible like saving some money now and putting it into gold and silver or buying some kind of productive real estate, or even just buying a good equity investment, you know, like a good company like a McDonald’s or – who was the other cheap, really high quality stock I saw?
Oh, maybe like even, believe it or not, Bank of America. So, you can do something to protect yourself, but not if you’re blind to what’s happening, and the biggest risk, the people who are most at risk are the people who are retired and who are depending upon the government to live up to its promises. You can be sure that that won’t happen.
Aaron Brabham: Yeah, Porter, so I did a little quick Google search here, and – now, this doesn’t take into account also your 10,000, but also 10,000 liquid, but it says – this was done in August of last year – “A new study finds that Americans die with virtually no financial assets.” For more than 46 percent of the U.S., that translates into less than $10,000.00, so basically half, half the country, less than $10,000.00.
Porter Stansberry: This is when they die, and when they die they’ve been getting big Social Security – not big to most people, but they got – they’ve been getting Social Security checks, and they have their mortgages paid off, hopefully, you know. So, their net worth – your net worth probably begins to grow after you’re age 55 or so. You’d expect it to, but I guarantee you, it’s less than ten percent of the people in the country who are working age that have a positive net worth and at least $10,000.00 in savings. It’s unbelievable, but it’s true. And just by the way, Aaron, think about the people you know socially. Think about all of the friends that you have that are between 25 and 35 years old. How many of them have a positive net worth?
Aaron Brabham: Ah, man, I would say maybe, maybe, maybe three or four percent, maybe.
Porter Stansberry: And those people don’t have any savings.
Aaron Brabham: No, no, these – just about every one of my friends has some level of credit card debt. Yeah, they probably have like a 401(k) or something like that, but you can’t really touch that, because your penalties and your taxes would be outrageous. Plus, you can’t buy any precious metals in 401(k). You can in IRAs, but, yeah, you’re really limited, but all these people I know, they have some form of, whether it’s a car payment or credit card debt or huge mortgages, they’re all negative, for sure. They’re all negative.
Porter Stansberry: It’s not just that. It’s that they don’t even own anything anymore, right? They’re home is more –
Aaron Brabham: That’s true.
Porter Stansberry: They lease their cars, right. I mean, it just boggles my mind. I just don’t understand it. Hey, you know how many cars I’ve ever bought that I made payments on, Aaron?
Aaron Brabham: Zero.
Porter Stansberry: Zero. Are you kidding me? A car is an asset that declines in value. You can’t have a debt on it. You’re never gonna get to even. It’s just insane the fiscal insanity of everyone in this country. That’s the surest way I know we’re heading for a crisis, because there aren’t – I mean, people out there, they don’t even have the foggiest idea why they wouldn’t wanna be in debt.
Aaron Brabham: Now, this kinda goes back to what you were talking about earlier, and to me, everything is learned – well, it should be learned from your parents, but we know that doesn’t usually happen. I had some bad teachers in my life for finance, but everything is learned for – these people from the government, and when you look at the government every day of lying and cheating and stealing and losing money and misappropriating and using all these controls or whatever and you see that it’s okay for them to increase the debt limit, it’s okay for them to almost go off the fiscal cliff, why isn’t it okay for you to do that? People have given over their accountability to the government. The government has them exactly where they want them.
Porter Stansberry: Well, this goes back to that whole idea. This is the second part of the whole dependency thing, so if you’re not poor and ignorant and the government can’t just get you trapped into the EBT program or whatever, then they get you to borrow $50,000.00 to go to college, and now they’ve got you, because you’ll be in debt until you’re 50 paying for college.
Aaron Brabham: Yeah, that’s insane. That’s insane, for, most likely, a degree that it didn’t matter at all. You shouldn’t have even gone and gotten it.
Porter Stansberry: The only part of private finance that has been growing in terms of the – so, like mortgage debt has been decreasing, consumer debt has been decreasing, automobile debt has been decreasing since 2008, since the crisis. Guess which is the only kind of consumer debt that has been increasing since then? Student loans.
Aaron Brabham: Student loans, for sure.
Porter Stansberry: And student loans have been growing fast. It’s gone from, I think, around $600 billion to over $1 trillion now since 2008. It’s just crazy. We’re in the middle of this gigantic university bubble, and if you go around the university towns – like I spent a lot of time in State College – the amount of buildings they have built in the last ten years is insane. Or you look at John Hopkins in Baltimore, I mean, the size of that campus has probably doubled.
That whole huge medical facility they’ve built over in the ghetto in Baltimore, I mean, where is all this money coming from? Well, it’s coming from the – it’s coming from federal-backed loan programs. Well, guess what happens when those loans don’t get repaid? The federal government writes them all off. You got the government backing loans to college students that can never pay them back, and you got the government backing loans through the FHA and homeowners who have no chance of paying it back.
And you still have that stuff going on five years after a financial crisis that almost destroyed the U.S. dollar, and it’s like we’ve learned nothing from it, so we’re still pushing loans to people who can’t possibly pay them back. And, of course, now it’s even worse because we’ve got – backing this whole system now, we’ve just got a printing press, and people look at me and think I’m a fear monger. You know, it’s like I’m not even telling you half as bad as it could be, so we’ll see what happens, but I wouldn’t bet against me.
Aaron Brabham: No, but you know what? Maybe we should tell people half as bad as it’s going to be, because maybe that’ll be the wakeup call. Maybe I’m working on something like that. We’ll see what happens. All right, Porter, we’re gonna go to the voicemails. All right, fire it up.
Voicemail: Porter Stansberry has a way that I could let him handle my finances. I’m up in New Jersey, and I wanted to know if there was any investors he knows about up here, or I’d even be willing to let him take a look at my finances, little as they are, because I want them to grow.
Aaron Brabham: Sure, Porter, send them to the e-mail. Porter will look at them right now.
Porter Stansberry: No, no, no, no.
Aaron Brabham: No, no, no, don’t do that.
Porter Stansberry: I don’t manage anybody’s money. It’s not what I do, but I would – there are a couple of folks I would recommend that you talk to. I don’t know, obviously, anything about your financial situation, and I don’t give any personal financial advice, because that’s – another thing that the government has totally sown up, they don’t want anyone to have actual financial education. They want you to be stuck in the dark and to have to go to a broker, who, nine times out of ten, is just gonna screw you over, and Aaron can vouch for that. But, there is a good broker I trust.
He’s at a company in Winter Park, Florida, called International Assets. His name is Jeff Winn, W-I-N-N, and he’s done a great job for a lot of friends and family members over the years, and he definitely is not like your typical broker. He’s more like a financial planner, but he’s, obviously, a pretty successful guy, and he’s only looking for clients that have substantial assets. If you’re a small-time guy, it’s very good to get – it’s very hard to get good help, because you just can’t afford it, so you have to learn on your own, and you have to just do some smart things. And I don’t think it’s all that hard.
You’ve gotta make more than you spend, or spend less than you make, however you wanna look at it; that’s step one. And I tell people this all the time. They look at me like I’m crazy, but my whole life I saved half of my after-tax income. That was my whole strategy, ‘cause I really wanted to be rich, so I saved half my income, and people think, “There’s no way I can do that,” but the truth is, there’s – it’s easy. If you simply make that your top priority, it can be done. The second thing that you have to do, if you wanna be wealthy, is you have to establish a second – a stream of income that you own and control, so you need your own small business.
It can be anything that you want that you’re good at. You can advertise on the Internet. You can learn a little bit of marketing. You can have your own stream of income. Now, there are some – there’s – you don’t have to have – you don’t have necessarily to have your own business.
There are a lot of entrepreneurs, for example, myself and Aaron Brabham. Aaron runs his own little business inside my company, and his income is not limited. It’s only limited to his efforts and his success, so he wants to make more money. He can do a better job as a copywriter for us and he can have a bigger income. The point is, you’ve gotta grow your income, and you can’t depend upon getting a raise, so you’ve gotta take matters into your own hands, which might mean getting a sales job, or it might mean building a side business.
It just depends on what your strengths are and what you wanna do with your life, but if you can grow your income and you save half of it and then all you gotta do is just make some okay investments. You don’t need to get rich as an investor. You just need to do okay, and to do okay you should aim to make between 8 and 12 percent a year. I know it doesn’t sound exciting, but it’ll add up, and you can do that really easily just by having a relatively diversified portfolio. You buy a handful of world-dominating, dividend-growing stocks, like McDonald’s we’ve talked about, Hershey’s we’ve talked about.
Maybe you take a couple of slightly more risky investments in the oil and gas sector that we’ve been talking about right now. But, anyways, the point is, you don’t try to trade your way to wealth. You just invest sensibly, and to do that you have to learn a little bit about finance and a little bit about business, but you can do that reading newsletters, and my newsletter is, I think, $100.00 a year, depends on the offer. But, you don’t spend a lot of money on it, and you definitely don’t need to spend a lot of money on brokers or hedge fund managers or anything like that. You can do it yourself.
You really can, and you can do it for very, very cheap, and the thing that I will tell you that you don’t know yet, but you will learn, is that the number one key to success for you financially is simply discipline. It’s saving money and it’s being disciplined with your investments. That’s it, and there is no broker in the world that can do that for you, so the most important variable is already inside yourself. Decide you wanna be wealthy. Take logical steps to achieve it and be disciplined.
That’s all you really have to do. And then, of course, you have to have a little bit of knowledge, and it’s not hard to obtain. You can get it from us, or you can get it from other providers, and then just make sensible investments and stick with it. You’re not gonna be rich in six months. You’re not gonna be rich in 18 months.
You’re not gonna be rich in 5 years, but in 10 years, in 12 years, in 15 years you can be, and I know because I’ve done it, and I know because a lot of my friends have done it. It’s not that hard, and paying a bunch of money to a broker or hedge fund manager is not gonna make it any easier. It’s gonna make it harder because you’re gonna have more expenses. So, I don’t think you need a money manager. I think you just have to be reasonably intelligent, but, most importantly, very disciplined.
You have to wait for the opportunities to come to make the right investments, and you have to be willing to save your income.
Aaron Brabham: Yeah, and I’ll tell you from a person that has gone up and down with my cycles of money and retirement, the number one thing that I’m focused on right now, and you’ve really done a good job of mentoring me on this, is, first and foremost, because it’s – once you make that decision to start saving, capital preservation, I mean, that’s first and foremost. So, don’t listen to your neighbors talk about this homerun or some risky stock or be fooled by something you receive in the mail that’s for a pump and dump, for a penny stock or anything like that. Capital preservation where it’s at. That’s why Dan Ferris, every time he’s on as my cohost or even as a Premium segment, I really can’t emphasize enough that the world-dominating dividend growers or with a compounding of interest and in your dividends and things like that, man, they really add up a lot, and plus, I like to sleep well at night. I don’t like to be concerned anymore when stocks go down 40 percent because I didn’t set a trailing stop.
Porter Stansberry: Yeah, I love it. This is unbelievable, but true. I was doing some research last month on Coke and McDonald’s and Hershey, and there was one other one I wrote about. Or maybe there’s only three. But, anyways, McDonald’s, Coke and Hershey, and I was working with my analyst, one of my assistants, Bryan Beach.
And I said to him, I said, “Go get a 30-year chart of those stocks.” I said, “I bet you they’ve all gone up – they all go up about 15 percent annualized, 15 percent annualized.” And I pulled that number right out of the air. I had no idea.
I wasn’t looking at the charts. I wasn’t looking at the stocks. I just know that that’s the long-term performance of a very capital-efficient company, and sure enough, that was exactly right. I was exactly right on the number. It was 15 percent annualized, so – but, here’s the thing, to do that, you have to be disciplined enough to reinvest your dividends.
And I ask those people all the time to go to a conference or something, and I say, “Hey, how many people here own very capital-efficient companies like Coke and McDonald’s and Hershey, et cetera?” These are branded consumer staple businesses, simple, slow-growth businesses that are like battleships. They will always be around. And a lot of people raised their hands, and then I said, “Okay, how many people automatically invested dividends, you set that up with your broker to automatically invest the dividends?” Almost none.
So, if you’re not automatically reinvesting the dividends, you’re going to lose about half of the long-term performance, so instead of making 15 percent a year, you’re gonna end up making 7 or 8. Makes an enormous difference in your financial future, and it doesn’t require anything beyond common sense. It’s just common sense, and yet very few people are disciplined enough to do it, and so that’s the thing that I would tell anyone who comes to me is, “Look, learn how to save money, and learn how to own a very – a well-managed, capital-efficient business, and don’t spend the dividend, and don’t sell the stock,” because what’ll happen is you’ll have a crisis in your life in six months and you’ll decide that you need that money right now. And so, you’ll go sell the stock, or you’ll spend the dividend, and you’re just completely defeating yourself. And so, it really – it doesn’t – you don’t have to be a rocket scientist, but you have to be disciplined, and most people never, ever will be disciplined enough.
Aaron Brabham: And literally it’s a checkbox on the brokerage form. It’s checking that you want your dividends reinvested. It is that simple. Just do that and just let it go. Just don’t even worry about it. It’s not a complicated thing, that people act like it’s so difficult to do. Just let it go.
Porter Stansberry: And Aaron, you were a broker. How many times did you have a client who actually did the right thing, bought a stock at a good price, and then, you know, so it went up 60 or 70 percent, right, and then what _____ –
Aaron Brabham: Mm-hmm.
Porter Stansberry: – immediately?
Aaron Brabham: Oh, they’re done. They’re cashed out. That’s it. They got a winner, because they needed – cashed that winner in because they have nine other losers in their junior mining sector or whatever that they thought was gonna make them an overnight millionaire, so they sell the worst assets, much like a mutual fund would do.
Porter Stansberry: Anyway, that – we could talk about this all day long, but if you think that you need a broker, I will tell you that unless you have $5 million, you don’t need a broker. You really don’t. You can easily do it yourself. You could use E*TRADE or Ameritrade or whatever. It’s all very simple, and what you really need is discipline. You don’t need expertise. You just need discipline. That’s all.
Aaron Brabham: Yeah, by the way, when you have a broker, 99 percent of the times when they call you it’s because they need a little commission. They’re trying to – probably towards the end of the month. They gotta make their bills. Oh, yeah, that’s probably not the best idea when you have somebody else recommending you things just because they need to make a little bit of money. Not a good idea.
Porter Stansberry: If you have $5 million or more, I think a broker can actually be very affordable and can be very useful, because if you have that kind of money, you can do more things in terms of positive carry. You can. You can do it smartly. You can get very low-cost loans, and you can invest in something like an Annaly that’s gonna pay you a very high yield. Now, I’m not saying you do this with all $5 million, but you can do it with – you can use leverage in a smart way, and, of course, most people use leverage in exactly the worst way.
What I’m suggesting is that if you have a large amount of capital, there are more sophisticated things that you could do if you have a broker to help manage it and set it up for you, and in that case he can pay for himself. But, otherwise, I really don’t think you need it, and by the way, you don’t have to do anything sophisticated to become wealthy. I’m just saying if you have a lot of money and you need somebody to help you put it to work, then a broker could make sense. And also, a financial expert can help you with things like financial planning and with insurance, and you definitely need to work with someone individually for that stuff, because there are all kinds of wrinkles, and, unfortunately, they all revolve around – they’re all about limiting taxes. I mean, that’s the – I mean, when I meet with financial experts, they’re all promising me that there’s ways to avoid estate taxes when I die, and I just turned 40.
I’m not counting on dying for a while, but isn’t that crazy that you have to spend half your life working to avoid a tax on assets you’ve already paid income taxes to acquire. It’s just madness.
Aaron Brabham: Complete madness. All right, we got a couple of e-mails. Then, we’re gonna get out of here and go to the Premium show. Justin asked, “Can you recommend some reading I could do to learn how to invest? I would really like to learn how to read company reports so I can be an informed investor in the future.” Do you have a good balance sheet type of book, Porter?
Porter Stansberry: The Wall Street Journal or Barron’s, I can’t remember which masthead it’s under, but they have a really good book for investors called How to Invest, and it’s either Barron’s or The Wall Street Journal. I’d recommend that you start there, but you know what I think is even easier than that, Aaron, and, you know, people are not gonna believe this, but it’s true. You can – the easiest thing to do is to pick a company that you know pretty well because you’re a customer – hang on a second. Hang on a second. My mate is cleaning my window.
So, unfortunately, I’ve got a great mate, Sam. He keeps the boat sparkling clean, but he’s hosing the window right next to my microphone, so… So, okay, so where were we, _____?
Aaron Brabham: Talking about picking your favorite company to do your analysis on to train yourself.
Porter Stansberry: Literally, this is how I did it. I mean, I studied economics in college. Of course, they didn’t teach me anything useful, so I had to teach myself finance, and I had a Ph.D. helping me, Steve Sjuggerud, which was – that was handy. But, the – really the way I did it was I started reading the 10-Ks, which are available for free from any company website or from the SEC website. You get the annual report, which is, for some reason, known as a 10-K, and you read the annual report of a business that you know well, and read it straight through, and if you come across a word you don’t know, look it up on Wikipedia or look it up in the dictionary.
And just figure out how the business works, and then once you know how the business works and if you know the company well enough, I mean, for example, something simple. Find something that’s a smaller company that you know well, like, throw out a name, like Chipotle, right. You know what Chipotle does. They own restaurants, and they make burritos, so just read all about their business, and then when you look at the numbers and the income statement and the cash flow statement and the balance sheet, then the numbers should all make sense to you because you understand all the parts and pieces anyways, so the numbers are just the details of it. And then, here’s the best part.
You can actually do this. You can call the company’s IR department and you can spend all day long on the phone with them, asking them questions, and they will answer your questions all day long for free, because that’s what they get paid to do. They’re trying to help investors understand their company. So, what I would tell you is – you can read a book about it if you want, but the best way to learn it is just by doing it. Just sit down with a company that you already kinda know, read the annual report, and then look at the financial statements, and when you see a number that you don’t know what it means, call the company and ask them.
And I promise you that’ll – I mean, you will get 90 percent of it just doing that. The only two things that I think are really tricky that you’d have a hard time figuring out if you didn’t know a little bit of accounting is the whole way the depreciation works. It’s hard to understand why you see so much money getting added back on the cash flow statement. And that money being added back is the depreciation, so companies charge themselves depreciation because their assets are growing older, and they depreciate, and that’s a non-cash charge. So, the biggest difference between the income statement, which is the dollars coming in, the dollars going out, and the cash flow statement, which just shows you how much actual cash is moving, is depreciation.
The difference is that the depreciation gets added back in the cash flow statement, and once you kinda – that’s really hard to figure out if you don’t understand the depreciation accounting, if you don’t understand the concept. But, once you know that, it gets really easy to look at pretty much any company and kinda figure out what’s going on. Now, there are certainly companies that are much harder to figure that out for, like insurance companies and banks. They’re very difficult because the accounting is arcane, so accounting was really developed for manufacturing companies, and they’ve applied those same rules to financial companies, like insurance companies and banks. And the rules really don’t make much sense, so you have to kinda really be an expert, and you gotta read all the notes, and you gotta – it’s a total, gigantic pain.
So, I wouldn’t start with a bank or an insurance company. I would start with a simple operating business that you understand, a company whose products and services you like, and then once you get to know that, then you can apply what you’ve learned to almost any other business.
Aaron Brabham: And another little caveat to that or twist to that is you can become an expert by reading all kinds of books and everything, and Porter, you talk about this all the time, but until you actually do it, you actually don’t learn it the right way. So, for example, people are really – they just hate the idea of options, even though selling puts is probably the best strategy out there, naming your own price, getting paid to wait to see if you hit it on a stock that you really wanna own at a lower price. But, until you do it, it’s a complicated mess, but if you do it one time, everything instantly – it makes you feel good. Your fear goes away, and now you have a new investing strategy. Just try it.
And like you always says, Porter, try one contract, try one bond. Try it. Just do something different, but you gotta try it.
Porter Stansberry: People are afraid of short stocks, so I tell them, “Short one share.”
Aaron Brabham: Yeah, just try it. It’s gonna cost you seven bucks in commission, or whatever, but try it.
Porter Stansberry: You’re putting yourself at risk for a $30.00 stock, you know. Give yourself a trailing stop at $40.00. Short it at $30.00. You can afford to lose $10.00 to learn how to short a stock, and once you’ve tried it a couple times and you’re like, “Oh, it’s not scary, and I can do it, and it’s no big deal.” But, I say exactly the same thing about learning to be – learning how to value businesses.
Read an annual report. Look at the income statement and the balance sheet, the cash flow statement, figure out what all the numbers mean, and you do it a couple times and then it’s not scary anymore. And one of the things that I still do all the time is I have my analysts put together the numbers for me without telling me anything about the business. I don’t know the name of the company. I don’t even know what industry it’s in.
Just show me the numbers, and I love looking at it over ten – I’ll get a printout from Bloomberg, ten years of numbers on a business, and I can tell – I’ve been doing it for so long now, I can almost always tell you what industry it’s in and usually what company it is just by looking at the numbers. And I can definitely tell you what you should pay for it, and then it’s so much – it’s so fun. Now, obviously, if it’s – if the numbers are all – they could – anytime they want they can fool me, but it’s a really fun game to play, which is to put the numbers in front of a guy who’s good at accounting and say, “What’s this business worth?” And then, you find out, let’s say the business is worth $100 million or something like that. And then, you go and you find out that in the stock market it’s trading for like $10 billion or something, and you’re like, “That just makes no sense.”
And so, that’s one of the things that we do internally a lot is we look hard at the numbers of each business we’re contemplating investing in to make sure that we’re not paying too much. And I think that’s the most important skill that you could add to become a better investor is becoming very good at valuation and becoming very good at understanding what the numbers mean. And the only way to get there is just to spend time doing it.
Aaron Brabham: All right. Porter, we also received a ton of feedback about the Scumbag Registry, so we have our final eight announced. We’ll be sending out the brackets or the elite eight. We’ll be sending out the brackets for that, so watch your e-mails. You can also go to stansberryradioscumbag.com and you can see the brackets there as well.
Feel free to write in, e-mail us who you think should make the final four. We are gonna come up with a great trophy with some Latin scribe on there. We’re going to somehow send it and present it. I’m almost hoping that Obama doesn’t win so we can have somebody else that receives it that might actually look at it, because if it goes to Obama, it’s just gonna be trashed.
Porter Stansberry: Don’t vote for Obama. Don’t vote for him for anything, not even the Scumbag Registry.
Aaron Brabham: I’m with you, man. I’m with you. So, we wanna thank Richard Epstein for joining us today on the show. Visit us at stansberryradio.com. Tweet at us @StansberryRadio.
Like us on Facebook, and please call us, 855-SARadio, 855-727-2346. We haven’t had a lot of hateful comments lately, so we’re – maybe we’re just getting soft because we’re getting older, I’m not sure, but I think we’re gonna kick it up for 2013. We’re gonna be recording a black label show next week, I believe, Porter. We’re gonna try to. Plus, we’re gonna be releasing our Van Simmons interview that we recorded last – a couple weeks ago, and that’s our Premium education feature podcast for Premium subscribers.
Man, Van is an expert at silver and gold coins and pretty much any type of unique art. It was a great interview. I think our listeners are gonna get a ton out of it.
Porter Stansberry: I have one thing to add. I want to lobby for Corzine.
Aaron Brabham: Okay, all right, go for it.
Porter Stansberry: Take the sweet 16.
Aaron Brabham: Yeah, he’s part of the running right now. He’s in the final eight right now.
Porter Stansberry: Vote for Jon Corzine, and here’s why. Politicians we already know they’re all scumbags, okay, so we have a higher – to be a real champion scumbag as a politician, you’ve gotta be really scummy, you know, like really pure evil. But, Corzine, okay, he is a private guy. I mean, yes, he ran for governor, but that was just kind of a lark because of his ego. He ran Goldman.
He should know right from wrong, and he was leading a private company, MF Global, and what he did was he took all of his customers’ money. This isn’t money that people invested with him. This was money that his company was supposed to be holding for them in order so that they could have the backing to trade in the markets. This is deposits. This is depositors’ money not to be touched, and he broke the cardinal rule in our industry, which was that he messed with these segregated accounts, and what he did with the money was he gambled on European debt.
So, he took other people’s money without their permission and gambled on buying sovereign bonds in Europe, which was one of the stupidest things you could possibly do with money, and he lost it all, and he’s still not in jail. This is unbelievable. Jon Corzine all the way to the top.
Aaron Brabham: Ah, man, I gotta agree with you, because – and for any of you out there, look, I had a Series 7, Series 63 and all that type of stuff. The number one thing – Porter, I can’t stress this enough, and you just tried to, but the number one cardinal sin – and you’re right, this guy ran Goldman Sachs. He ran for governor. I mean, this guy knows better. The number one thing – you can just Google Series 7 and then type in the word “comingle.”
That will probably come up 1,000 times in a Series 7 prep book. It is the one thing that you cannot do. You cannot take other people’s money and invest them in things that you wanna do without their permission. You can’t comingle. I’m with you, actually, straight to the top.
Porter Stansberry: All right, listen, Aaron, it was a great show, and I just got a good funny from somebody I wanna share before we sign off for the day. Think about this –
Aaron Brabham: Let’s hear it.
Porter Stansberry: – Aaron. You know how in the Notre Dame locker room there’s a famous picture as you go down the steps, there’s a sign that says “Play like a champion today.”
Aaron Brabham: And everybody hits it on the way down.
Porter Stansberry: Sign, and every time I send my sons off to school in the morning, I say, “Play like a champion today,” and I give them a high five or whatever. Well, somebody took the shot of Notre Dame’s locker room where that sign is up and they Photoshopped it to say “Play like Alabama today.”
Aaron Brabham: Oh, wow, that’s brutal. That’s awesome, though.
Porter Stansberry: Oh, that game was brutal.
Aaron Brabham: Man, the SEC is – they’re legit, and don’t – I don’t want anybody from a different conference saying anything until they can win six out of seven like the SEC does.
Porter Stansberry: Seven in a row, Aaron.
Aaron Brabham: Oh, was it seven in a row? I thought it was six – yeah, seven in a row is – it’s completely unheard of, and this year, of course, everybody was like, “Oh, but look at all the SEC teams that lost in the bowls.” The worst bowl matchups I’ve ever seen in my life this year, in my opinion, and the SEC had already beat themselves up trying to get into the national championship game. You can’t look at what they do during the bowl games, because it’s all about number one, who finishes on top and who takes home that national trophy. Congrats, Alabama.
Porter Stansberry: Yeah, congrats, Alabama, and I can also tell you that I watched the Florida bowl game, and they weren’t even trying. I mean, these guys are just lollygagging.
Aaron Brabham: No. That’s what I mean. I mean, for them, for the SEC, the top contenders, the national championship is the focus, not getting into some shlump bowl game. You’re not gonna see the SEC’s best in some bowl game where they’re battling somebody that’s not even an SEC opponent. I don’t care what anyone says, the SEC trumps everything, and it will continue to do that. They get the best recruiting classes, and they beat each other up, and competition makes you stronger.
Porter Stansberry: I can tell you this, if Louisville fans think that they can beat Florida, then they should come down to Gainesville and play us during the regular season. They would be destroyed.
Aaron Brabham: Oh, I would enjoy that. All right, Porter, well, [music playing] great show today, and stay on or click over to the Premium segment. We’re gonna knock that out right now.
Stansberry Radio is a purely public broadcast and is not intended to be personalized financial advice for any individual specific situation. Each individual’s financial situation is unique, and Stansberry Radio should not be relied upon and/or considered as personalized advice. Stansberry Radio is not licensed to render personalized advice and should be considered simply the public opinions of Stansberry Radio and its guests. Recommendations on specific financial securities are not intended to address any listener’s particular financial situation.
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This Episode's Guest
Richard A. Epstein is the James Parker Hall Distinguished Service Professor Emeritus of Law and Senior Lecturer at the University of Chicago Law School. Epstein started his legal career at the University of Southern California, where he taught from 1968 to 1972. He served as Interim Dean OF THE LAW SCHOOL from February to June, 2001. He is also the Laurence A. Tisch Professor of Law at New York University, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
He received an LLD, hc, from the University of Ghent, 2003. He has been a member of the American Academy of Arts and Sciences since 1985 and a Senior Fellow of the Center for Clinical Medical Ethics at the University of Chicago Medical School, also since 1983. He served as editor of the Journal of Legal Studies from 1981 to 1991, and of the Journal of Law and Economics from 1991 to 2001.
His books include Cases and Materials on Torts (Aspen Law & Business; 10TH ed. 2012)(WITH CATHERINE M. SHARKEY); D ESIGN FOR LIBERTY: PRIVATE PROPERTY, PUBLIC ADMINISTRATION AND THE RULE OF LAW (HARVARD 2011)The Case Against the Employee Free Choice Act (Hoover 2009);Supreme Neglect (Oxford 2008); Antitrust Decrees in Theory and Practice: Why Less Is More (AEI 2007); Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation (Yale University Press 2006); How Progressives Rewrote the Constitution (Cato 2006). Cases and Materials on Torts (Aspen Law & Business; 10TH ed. 2012); Skepticism and Freedom: A Modern Case for Classical Liberalism(University of Chicago 2003): Cases and Materials on Torts (Aspen Law & Business; 8th ed. 2004); Torts (Aspen Law & Business 1999); Principles for a Free Society: Reconciling Individual Liberty with the Common Good (Perseus Books 1998): Mortal Peril: Our Inalienable Rights to Health Care (Addison-Wesley 1997); Simple Rules for a Complex World (Harvard 1995); Bargaining with the State (Princeton 1993); Forbidden Grounds: The Case against Employment Discrimination Laws (Harvard 1992); Takings: Private Property and the Power of Eminent Domain (Harvard 1985); and Modern Products Liability Law (Greenwood Press 1980). He has written numerous articles on a wide range of legal and interdisciplinary subjects.
He has taught courses in ADMINISTRATIVE LAW, ANTITRUST LAW, civil procedure, communications, constitutional law, contracts, corporations, criminal law, EMPLOYMENT DISCRIMINATION LAW; ENVIRONMENTAL LAW, health law and policy, legal history, labor law, property, real estate development and finance, jurisprudence, labor law; land use planning, patents, individual, estate and corporate taxation, Roman Law; torts, and workers' compensation.
- with Rick Rule
- with John Doody
- with Porter Stansberry
- with Porter Stansberry
- with Doug Casey
- with Rick Rule
- with Alex Jones
- with James Altucher
- with Richard Epstein
- with Porter Stansberry