Adam Strauss

Got Gold? Got 10% Gold?

June 1, 2018 By Adam Strauss Leave a Comment

I have previously suggested that a 10% gold position makes sense for many investors who want to generate attractive risk-adjusted returns in a diversified investment portfolio.

During my discussion, I spent little time talking about why a 10% position per se makes sense, as opposed to either a 2% position or a 50% position. Instead, my discussion focused on why it makes sense to own a meaningful position in gold.

For some people, a meaningful position is 11% in gold, while for others, it might be 20%. The correct allocation depends on each person’s risk tolerance, return goals, time horizon, and overall financial situation. That’s why my recommendation was “10%+” rather than 10%, or 12%, or 15%; I wanted to give room for the adjustments that must occur due to individual circumstances.

Yesterday, Incrementum published the 2018 version of my favorite annual gold report, “In Gold We Trust,” which I will discuss further in future posts. The extended version of the report is over 200 pages long, and I’m still in the process of slowly reading through the whole thing. Nevertheless, I want to share two tables I found which shed some light on the question of how much gold one should consider owning.

Risk/Reward Implications of a 10% Gold Position

The first interesting table, originally published by Goldman Sachs, analyzes the portfolio impact of adding a 10% gold position to a portfolio of 60% stocks and 40% bonds during the period since 1970. As you can see from the table below, adding a 10% gold position has enhanced returns and reduced downside volatility.

Goldman’s analysis also looks at the impact of adding a 10% position in GSCI (Goldman Sachs Commodity Index), in 30-year U.S. Treasuries, and in cash. Unsurprisingly, U.S. Treasuries and cash reduced risk, which is a good thing, but they also reduced returns. While cash and U.S. Treasuries certainly have a role in a diversified portfolio, these asset classes are not able to boost returns and risk in the same way that gold can.

Obviously, past performance is no indicator of future performance. That said, given how overvalued U.S. stocks are and given how leveraged the financial system is at the present moment, I expect the positive impact (on risk and return) of adding a 10% gold position to a 60/40 investment portfolio to be even more significant over the next ten years than it has been over the past forty years.

What are Central Banks Doing?

I also discovered that the world’s major central banks are on the 10%+ gold plan. To be more precise, central banks own a 13.73% gold position relative to all foreign currency reserves. For central banks, gold serves as a hedge against a decline in the rest of their foreign currency reserves, all of which are fiat currencies and most of which are U.S. Treasuries.

To be fair, the range is enormous, from China at the low end with a 2.25% gold position to Europe at the high end with a 42.64% gold position. While China’s gold position appears low, I suspect that China owns more gold than its official figures suggest due to the enormous volume of gold that has been imported into China over the past five years.

The key takeaway from this second table is that central banks understand the important hedging role that gold can serve in a portfolio of assets, and they have invested their own assets accordingly. Also, they are seeing that the need to hedge is increasing rather than decreasing because their gold positions have been rising year-after-year ever since 2008.

History suggests a 10%+ gold position makes some amount of sense. Central banks are acting accordingly. Furthermore, I expect that President Trump wants to see a weaker dollar, and any kind of a trade war will most likely result in accelerating inflation.

What are you waiting for?

The Upcoming Public Pension Bailout and the Power of Incentives

May 25, 2018 By Adam Strauss Leave a Comment

“I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I gets some surprise that pushes a little further my appreciation of incentive superpower.”

— Charlie Munger

When our son was two years old, like many toddlers, he went through a biting phase. Whenever my wife would carry him, he would bite her. He didn’t bite her in a harmful or malicious way, but it was a bad habit that my wife and I wanted to help him stop.

One of our friends offered us some parental advice about how to keep our son from biting. She said, “tell him if he bites you, you are going to have to put him down.” My wife tried out the advice, telling our toddler son the next day when she went grocery shopping with him, “if you bite me, I am going to stop carrying you and put you down.” As she continued to shop, for a while the advice seemed to be working like a charm.

However, after about ten minutes, he bit her.

Smiling at his shocked mother, our son said, “I’m ready to be put down, now, mommy.”

The Power of Incentives

I share the story to illustrate the power of incentives. Our son bit my wife because he wanted to be put down; he trusted that, if he bit her, he would realize his desired outcome which was to be put down. He knew that if he wanted to be put down, he should bite his mother; the reward system we created provided exactly that incentive.

This is just one among countless examples of the incredible power of incentives.

As an investor, I am always aware that management teams are constantly taking actions to boost their pay, and especially their incentive equity compensation. That’s why buybacks have become a more popular tool than dividends as a method of returning capital to shareholders. Buybacks boost managements’ equity compensation, while dividends do not. Most management plans are flawed in that they incentivize share buybacks, even when it makes no sense to do so.

As wise Ben Franklin said in Poor Richard’s Almanac, “If you would persuade, appeal to interest and not to reason.”

**“If you would persuade, appeal to interest and not to reason.” — Ben Franklin**

Politicians, of course, are not immune from incentives. Far from it. Politicians want to get re-elected, which means that long-term thinking for politicians extends anywhere from three weeks to, at most, two years. There’s no need to ever wonder why a politician voted a particular way; it was to obtain the goodwill of either voters or campaign funders.

The incentive to get re-elected drives all political decision making, and especially when it comes to bailout politics.

For example, in Fall 2008, Congress passed the “Emergency Economic Stabilization Act of 2008,” authorizing $700 billion with no strings attached to bailout Wall Street. What were the incentives here?

First and foremost, Congress was incentivized to save the large Wall Street banks, which had become the biggest campaign funders of both parties.

Second, with an election coming up, members of Congress didn’t want to be blamed for sitting on their hands during a financial crisis.

I remember reading the news at the time, shocked that Congress was about to spend nearly a trillion dollars to bail out Wall Street. However, if I considered the incentives involved, I shouldn’t have been shocked. The reaction of Congress could have been easily predicted years in advance by anyone who understood the power of incentives.

Underfunded Public Pensions – a Systemic, Nationwide Crisis

Let’s now turn to the subject of public pensions, starting with some facts about the current state of public pensions in the United States:*

87% of state and local pensions are defined benefit plans with 29.3 million participants. This means that a meaningful group of voters depend on pensions for their retirement.
Public pension plans use an average expected rate of return of 7% to 7.5%, which seems high to me, given how elevated asset prices are.
Assuming a 7.0% to 7.5% expected rate of return, state and local pensions are just 70% funded currently.
Public pension underfunding levels among municipal pensions are approaching $2.0 trillion in total, but the underfunding level using a more conservative 4% rate of return is closer to $8.0 trillion.
Public pension liabilities are consistently growing faster than assets, which means that the underfunding levels are increasing over time rather than decreasing.

I’ve written previously about the particular situation in Chicago and in Illinois, whose pension plans are already at an extreme level of underfunding. I warned about the potential risk that their underfunded pensions pose to residents, to taxpayers, to pensioners, and to owners of municipal bonds. While each party’s interests are different, all of them are living through a slow-motion train wreck together.

Unfortunately, the pension problems of Chicago and Illinois are mirrored across the United States, which is how the underfunding figure reaches the $2 trillion to $8 trillion range. I expect, due to the power of incentives, the U.S. government will eventually come to the rescue of our underfunded municipal pension plans.

I say this because, like the financial crisis in 2008, the pension crisis is a systemic problem whose reckoning will have nationwide consequences.

The financial crisis was not the result of a localized bubble in housing prices and subprime mortgages; it was the result of a nationwide bubble in housing prices and subprime mortgage credit. Similarly, the pension crisis today is not just a problem in Chicago and in Illinois; it is a nationwide crisis.

The first-order consequences of a pension crisis in Chicago and Illinois are bad enough, but the second-order consequences are nationwide and systemic. If and when financial prices decline and the underfunding levels in pension plans increase further across the country, it will be clear that the pension crisis is a nationwide, systemic problem and that cities and states do not have the capital to fix it.

Once it becomes clear that the pension crisis is a nationwide, systemic crisis, I think we will see a Federal bailout.

Imagining What a Public Pension Bailout Might Look Like

During the next big market downturn, public pension funding levels will inevitably and materially deteriorate. Just as a crisis in mortgage bonds developed after mortgage loan defaults reached a critical threshold, municipal pension plans will eventually surpass their own critical threshold.

With enough public pensions facing an underfunding crisis, municipal bond prices will decline to reflect the additional credit risk represented by state and local governments. This could create panic among municipal investors, pensioners, and municipal employees. It might even result in a municipal bond market freeze, just as the market for subprime mortgages froze during the 2008 financial crisis.

In a panic, the stock market then will sniff out an even larger problem. U.S. economic activity, measured by GDP, depends on the spending of retirees who generate retirement income from pension funds. Without funding from ongoing pension payments, U.S. GDP would decline, creating an economic crisis. Of course, millions of pensioners worried about being cut off from guaranteed retirement benefits would also create a political crisis.

If I were a retired teacher, I would be irate, and rightly so. I imagine I would be so irate that I would call every Congressperson I could, demanding restitution.

Congress would likely respond favorably to the calls it receives from millions of retirees. After all, if Wall Street was deserving of a $700 billion bailout, aren’t our teachers, policemen, and firefighters deserving of a bailout, too? I don’t know whether Wall Street was worth $700 billion (actually, I do know…), but I’m pretty sure our teachers, policemen, and firefighters are worth protecting.

The decision to bail out the municipal pension system will not be based on reason or on the question of what is right and what is wrong. It will not be based on whether Congress is dominated by Republicans or Democrats. And it certainly will not be based on long-term policy considerations.

The bailout decision will be based on incentives.

Congress, who understand perfectly what a strong incentive is when it’s staring them in the face, will respond accordingly. Their incentive will be to get re-elected and to avoid getting kicked out of office by their voters, and a large group of 29 million irate pension participants represents an interest group that will be too large to ignore.

Funding a Public Pension Bailout

The problem is that the cost of a public pension bailout will be $3-$7 trillion by my estimates. That’s a lot more than the $700 billion cost of bailing out Wall Street during the financial crisis.

Not only is $7 trillion ten times the price paid for the $700 billion Wall Street bailout, it’s also a little bit less than half of one year of U.S. GDP. In 2016, U.S. GDP clocked in at $18.6 trillion, so we’re talking about adding as much as 38% to the Federal budget deficit in the year that the “Emergency Economic Stabilization Act of 2019” is passed.

In addition, the balance sheet of the U.S. Treasury is far worse today than it was in 2008. The capacity to take on additional debt is far lower today.

Importantly, during the financial crisis, foreign central banks were buying U.S. dollars hand over fist, making it easier for us to fund a Wall Street bailout. However, this time, I have a difficult time imagining foreign central banks buying U.S. Treasuries in enough size to make it easy for the U.S. to fund a $7 trillion public pension bailout.

If foreign central banks will not be buying U.S. Treasuries to fund the next bailout, who will?

I expect it will be the Federal Reserve that buys Treasuries during the next crisis. I say this because the market will want a higher interest rate to buy U.S. Treasuries under such a circumstance, due to the additional credit risk involved, but a higher interest rate would do even further damage to stock and bond prices, making the public pension underfunding situation even worse.

This scenario is not entirely unimaginable; in fact, Ben Bernanke conceived of this scenario it in his famous helicopter money speech:

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

If the Federal Reserve buys U.S. Treasuries to fund a pension bailout, its purchases will serve to cap interest rates. However, while capping interest rates, the Fed will not be able to also influence the foreign currency market. With interest rates too low to compensate for the credit risk involved in buying U.S. Treasuries, foreign investors will find other places to invest their capital, and that will cause the exchange-traded value of the U.S. dollar to decline.

And that leads me to who will pay for the eventual pension crisis, if and when it happens. The bailout will be funded with the loss of purchasing power by anyone who owns U.S. dollars and U.S. dollar-denominated bonds.

*Source: Grant’s Interest Rate Observer

Chicago Tribune: The Illinois Pension Shortfall is $11,000 per Person and Growing

May 10, 2018 By Adam Strauss Leave a Comment

In the Chicago Tribune today, there’s a story written by Elizabeth Campbell about the Illinois pension situation with the headline “Every person in Illinois owes $11,000 for pensions, with no fix in sight.”

The article touches on many of the important themes I discussed last September in a post about an eventual Chicago or Illinois bankruptcy.

**Is the sun setting on the Illinois pension system?**

Those themes include the following:

1. The Illinois pension problem is unimaginably large.

Three years ago Tuesday, the Illinois Supreme Court struck down the state’s attempt to cut its employees’ pension benefits to chip away at a retirement-system debt that’s swelled to almost $11,000 for every man, woman and child.

2. As time goes on, the Illinois pension situation will worsen due to the rules of compound interest.

Illinois failure to address its pension crisis has resulted in further deterioration of the state and cities’ financial condition, exorbitantly high borrowing costs, and an inability to address other critical needs at the state and local level,” said Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finances. “Time is not your friend when your liabilities are compounding and your revenues are not.

3. Illinois politicians are utterly incapable of solving the problem. The best they can hope to do is kick the can down the road and delay the day of ultimate reckoning.

There hasn’t been any progress made,” Dick Ingram, executive director of the Illinois Teachers’ Retirement System, the state’s largest pension. “It’s a case of the numbers have gotten so big that nobody honestly really knows what to do.

4. As the end of the road (bankruptcy) approaches, Illinois residents should expect to see higher taxes and the state should expect to see credit downgrades.

The longer the state doesn’t address the pension crisis, the closer Illinois gets to taxes that are overly burdensome, to credit downgrades, to not paying pensions or even bond defaults, said Richard Ciccarone, president of Merritt Research Services.

Unfortunately, the pension situation in Chicago is no better than the Illinois pension situation. Moreover, other states and municipalities outside of Illinois have similar pension funding problems, although not to the same extent as the underfunding disaster in Illinois and Chicago.

When the next stock market downturn occurs, I expect that we will see a lot more articles like this. The pension situation across the United States is way worse than everybody thinks it is because most pension investment return assumptions remain far too high.

And, eventually, I still expect that will see a Federal bailout. The state of Illinois can’t print money to make its pensions whole, but the U.S. Treasury can and probably will someday.

To Balance U.S. Trade Flows, the Bretton Woods System Must Die

April 24, 2018 By Adam Strauss Leave a Comment

Created in Bretton Woods, New Hampshire, in 1945, the post-war world trading system involved foreign countries holding U.S. dollars as a reserve asset and using U.S. dollars to conduct global trade. With the U.S. dollar as the world’s reserve currency, the United States has provided the world with dollars by running a trade deficit, while the rest of the world has provided the United States with dollar support and cheap financing.

**The current world trading system was created in 1945 at the Mt. Washington Hotel, Bretton Woods, N.H.**

America First versus Bretton Woods

In the context of an increasing risk that the United States instigates a trade war, I would suggest that the United States can choose an America First trade policy with balanced trade and balanced capital flows, or the United States can choose to maintain trade deficits and import capital to fund its national savings deficit. It cannot do both. Mathematically, the United States cannot pursue a balanced trade deficit and also import capital to fund its increasing level of borrowing; after all, the balance of payments must – by definition – balance. Furthermore, if the United States ceases running a trade deficit, it cannot also provide the world with dollars with which to conduct trade.

In order to allow for U.S. exports to balance U.S. imports, everything has to change.

In recent months, U.S. Trade Representative Robert Lighthizer discussed the Trump administration’s willingness, if necessary, to dispose of those institutions that have facilitated global trade since World War II in order to reduce the U.S. trade deficit with China:

The sheer scale of their [China’s] coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented. Unfortunately, the World Trade Organization is not equipped to deal with this problem. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were not designed to successfully manage mercantilism on this scale. We must find other ways to defend our companies, workers, farmers, and indeed our economic system. We must find new ways to ensure that a market based economy prevails.

Demise of the Bretton Woods Trading System?

Paul Krugman raised the problem with balancing trade under the Bretton Woods system in 2013 when he suggested that U.S. protectionist policies, once implemented, would “break up the whole world trading system we’ve spent almost 80 years building.” That world trading system includes those supranational institutions such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO) which were created at Bretton Woods and have supported the growth of global trade and global capital flows since then.

It is difficult to imagine these institutions surviving an era where the United States is no longer willing to work through them to resolve trade disputes. Supporting Lighthizer’s views, in January 2018, U.S. Secretary of Commerce Wilbur Ross participated in a panel at the World Economic Forum in Davos, Switzerland and agreed that it is finally time to break up the world trading system created at Bretton Woods in the aftermath of World War II:

Let me give you my version of post-World War II history… It was deliberate U.S. policy to help Europe and Asia recover from the ravages of the war… It was good policy globally and, at the time, all the way until the 1970s, we had trade surpluses every single year, so it was an affordable policy decision (for the U.S. to reduce trade barriers). I think one of the ways they went wrong was not time limiting it… Concessions that were totally appropriate to Europe or China or Japan in 1945 are singularly inappropriate as we sit here this year (2018)… Now we’re left with the cumulative effect of it, and we are trying to deal with it in a very short time period.

The video can be found below, with Wilbur Ross speaking beginning at 19:00.

With the support of global institutions like the WTO, the largest U.S. export has been U.S. Treasuries for the past several decades, and those U.S. Treasuries have been purchased and held by export-driven economies like China, Japan, and South Korea. In December, 2001, China was finally admitted into the WTO, and the People’s Bank of China went on a dollar buying spree immediately thereafter which continued up until 2013. China’s aggressive investments in U.S. Treasuries at a fixed exchange rate suppressed the exchange traded valued of the Yuan, but it also provided structural support for the dollar and financed U.S. deficits.

Transition Risks

Of course, no trading system lasts forever, and the current trading system certainly has its flaws. However, if the Trump administration follows through on its rhetoric to, in Dr. Krugman’s words, “break up the whole world trading system we’ve spent almost 80 years building,” without working with other countries to gradually transition towards a new system, the economic, geopolitical, and financial risks are significant and of an entirely different character than the risks represented by the 1930 enactment of Smoot-Hawley.

Following the logic of where this might end, I have arrived at an important question.

If the United States manages to successfully eliminate its trade deficit, balance of payments math suggests that net capital inflows into the United States would have to cease. If net capital inflows cease, with a record projected budget deficit (per the CBO), where does U.S. deficit funding come from?

How a Trade War Will Hurt the Economy

April 23, 2018 By Adam Strauss Leave a Comment

Is the United States headed for a trade war? And, if one comes, will a trade war hurt the world economy?

The answer to the first question is I don’t know. The answer to the second question is yes, a trade war will hurt the economy, but the U.S. economy will probably muddle through, albeit with more expensive imported goods and a lower standard of living.

Just as Smoot-Hawley was a predictable political response to the decline in worldwide aggregate demand which began in 1929, the 2016 election of a protectionist as President of the United States was, in retrospect, a political response to the loss of the U.S. industrial manufacturing jobs over the past twenty years.

**The U.S. output gap has been persistent since the Global Financial Crisis.**

The chart above shows that the recovery of GDP since the Financial Crisis and the continuing output gap has been consistently disappointing. The large and persistent output gap, representing the difference between actual GDP and the Congressional Budget Office’s (CBO) estimate of the maximum sustainable output of the economy, suggests that something permanent has impaired the U.S. economy. The continued disappointment in GDP growth, combined with a persistent trade deficit and increasing economic inequality, represent structural economic and social problems with no easy solution in sight.

In 1930, in a response to a sharp downturn in economic activity that began with the 1929 stock market crash, Congress passed the Smoot-Hawley Tariff Act. In 2016, in response to a persistent output gap, the United States elected Donald Trump as President, promising stronger trade tariffs and a weaker dollar to protect domestic jobs.

Four Key Differences between 1929 and 2018

While Smoot-Hawley didn’t cause the Depression, it also didn’t help. To be sure, a trade war will not help the global economy today if it happens. Having said that, global trade has evolved since the Great Depression and is very different today, for several reasons. Below are four key differences:

1.In 1929, the United States had a trade surplus, with net exports of goods and services exceeding net imports, whereas today the United States runs a large trade deficit. In 1929, the United States was the producer to the world, much like China is today.

World trade was largely balanced in 1929 with the U.S. trade surplus representing less than 1% of GDP, whereas in 2016 the U.S. merchandise trade deficit represented 4% of GDP (see chart below). The United States trade deficit is far from balanced. Likewise, the trade surpluses of countries like China, Taiwan, South Korea, and Germany are far from being balanced.

**The U.S. trade deficit is large and not improving.**

Trade is far more important today to the global economy, so the stakes are higher for all parties involved in global trade, including but not limited to the United States and China. Mathematically, this means that the value of exports and imports relative to world GDP is at a much higher level today than it was in 1929.
In 1929, tariff rates were already high, with an average import duty of 13.5% in 1929, and the increase after Smoot-Hawley was not significant. By 1931, the average tariff rate in the United States had only increased to 17.8%. Today, the average U.S. import duty is just 1.5%.

These differences suggest that the potential impact of greatly increased tariff rates is likely to be greater today than the increased tariffs implemented in 1930 under Smoot-Hawley. Trade wars are always a drag on the economy, but the more dependent the world economy is on trade, as it is today, the bigger the adjustment for the global economy once a trade war begins.

Everyone will be hurt in a Trade War, but the United States will be hurt less

Trade barriers make imports more expensive for consumers, thus creating inflation and suppressing aggregate demand. Because of its effect on demand, protectionism has a negative impact on economic activity for all parties involved. That said, in a trade war, trade surplus countries such as China are generally hurt more than trade deficit countries. The GDP level of a surplus trade country like China is enhanced by its net exports to other countries. Similarly, trade deficit countries, such as the United States, suffer relatively less in a trade war because their net imports detract from GDP.

Given this dynamic, in retrospect, it seems odd that the United States passed Smoot-Hawley at all in 1930. As a trade surplus country at the time, the United States clearly stood to lose more than it had to gain from lower levels of world trade because, in 1929, the United States exported more goods and services than it imported. Indeed, when global demand declined as a result of the 1929 crash and subsequent banking crisis, every country suffered, but, as the world’s leading exporter, the United States economy suffered more.

Today, in contrast, the United States is in a different situation. Because of China’s large trade surplus, China’s GDP growth would suffer more than the U.S. GDP growth in a trade war. Two Australian economists, Warwick McKibbin and Andy Stoeckel, modeled the impact of a 10% global tariff on GDP for each country, and they came to the conclusion that U.S. GDP would decline by an estimated 1.3%, while China’s GDP would decline by an estimated 4.3%, or more than triple the U.S. decline.

**The GDP impact of a trade war is worse for China’s GDP than for U.S. GDP.**

In other words, there are no winners in trade wars, but some countries lose more than others. The United States, with its large and highly diverse economy, should muddle through a global trade war comparatively better than export-driven economies such as China, Taiwan, Japan, South Korea, and Germany, in my view. These surplus countries simply do not have the domestic demand to replace the export-related demand coming from the United States.

How the United States Will Suffer in a Trade War

U.S. GDP will hold up better than the GDP of surplus countries in a trade war. Wages will rise, and domestic producers should enjoy increases in sales and profits due to lower levels of foreign competition. However, the United States will experience plenty of problems and adjustments of its own if a trade war happens.

Below is a short but important list of economic adjustments that the United States will have to make if a trade war happens:

Higher priced imports will create inflation and reduce U.S. living standards.
With higher inflation, interest rates could rise further, making it difficult for investors to generate an attractive return on domestic stock and bond investments.
The United States will enjoy less global influence. Other countries work closely with the United States due in part to the size and openness of its markets.
Foreign central banks will be reluctant to purchase U.S. Treasuries, making it more expensive for the United States to finance its debts.

These adjustments would be difficult under almost any circumstances. It has been several generations since the United States experienced high and accelerating inflation. The last time it happened, in the 1970s, the level of financial leverage across the U.S. economy was much lower than it is today. As inflation and interest rates increased, the economy was able to adjust. With much greater financial leverage today, however, the economic adjustments are likely to be more painful this time.

Did Smoot-Hawley Cause the Great Depression?

April 20, 2018 By Adam Strauss Leave a Comment

In light of President Trump’s recent trade tariff threats, financial news articles are citing the Smoot-Hawley Tariff Act of 1930 with increasing frequency. While U.S. industrial workers cheer on new tariff proposals, free traders sternly warn that Trump is on the verge of starting a global trade war that could throw the world into a global depression, just like Smoot-Hawley caused the global depression.Are these worries well-founded? Is Ferris’s teacher correct? Should you be selling your stocks to avoid a repeat of the 90% stock market downturn which occurred between 1929 and 1933? Or are fears about repeating the mistake of Smoot-Hawley just a tempest in a teapot?

I don’t think Smoot-Hawley caused the Great Depression, for several reasons.

chicago soup kitchen during the great depression — **Soup Kitchen Line in Chicago during the Great Depression**

The Tariff Rate Was High Before Smoot-Hawley

Signed into law by President Hoover, Smoot-Hawley raised tariffs on 890 products, increasing the average industrial tariff from 37% to 48% in the United States.

Since the industrial revolution began, the world has experienced great periods of prosperity even in the midst of significant trade barriers. As demonstrated in the chart below, the U.S. tariff rate averaged 10%+ between the 1830s and the 1940s, a period in which the United States grew enormously, even as it evolved from an agrarian country into the world’s industrial powerhouse.

As you can see in the chart below, the average import duty, already high in 1929, did not increase by very much after Smoot-Hawley was passed. Moreover, previous increases in the average import duty during the course of the 19th and early 20th centuries did not cause a Great Depression.

**Smoot-Hawley did not result in a remarkable increase in the average import duty.**

Companies Involved in Global Trade Didn’t Cause the 1929 Stock Market Crash

A year before Smoot-Hawley was signed into law, the stock market crashed on September 4th, 1929, with the worst performing sector being utility companies. Utility companies were heavily indebted, but their revenues and profits were largely unaffected by global trade. In other words, the possibility of a future trade war did not cause the stock market crash.

Prior to the 1929 crash, the Federal Reserve had tightened the availability of credit in order to temper the strong stock market, and monetary policy remained restrictive even after the crash. Post-crash, central banks were unwilling or unable to pursue countercyclical lending to stimulate demand. Subsequently, during the early 1930s, a series of banking crises took place in the United States and across Europe which likely turned what should have been a garden-variety recession into the Great Depression.

World Trade Declined Due to Inadequate Global Demand, not Trade Tariffs

As the Depression progressed, world trade suffered due to inadequate global demand, but a reduced level of trade was most likely the result rather than the cause of that inadequate demand. While the Smoot-Hawley Act most worsened an already-bad situation, circumstances suggest that its economic impact was somewhat muted.

Prior to the passage of Smoot-Hawley, European countries were already erecting trade barriers in response to their weakened economies. Importantly, Smoot-Hawley applied tariffs to roughly one-third of U.S. imports, representing just 1.3% of U.S. GDP. Furthermore, the tariff rate was already quite high prior to the Smoot-Hawley Act, with Smoot-Hawley increasing the average duty from 13.48% in 1929 to 17.75% by 1931.

Perhaps more importantly, exports plus imports represented less than 10% of U.S. GDP in 1929; international trade was simply not as prevalent then as it is in the present era. As such, the $470mm decline in net exports which occurred between 1929 and 1931 represented only 0.5% of U.S. GDP in 1929. Relative to the stunning 26.6% decline in U.S. GDP that occurred between 1929 and 1931, a 0.5% GDP detraction from net exports seems relatively minor when taken into context.

**A decline in net exports did not drag down U.S. GDP by very much.**

Investment Implications

Based on the economic evidence, I would agree that the passage of Smoot-Hawley was not an incrementally positive development for the ailing U.S. economy in 1930, but it was certainly not the primary cause of the Great Depression either. In this view, I concur with economist and New York Times columnist Paul Krugman, who said in 2010, “I don’t think the Smoot-Hawley tariff was a good thing…but did Smoot-Hawley and other trade restrictions cause the Depression? No.”

To be sure, there are plenty of reasons to worry about the U.S. stock market and the global economy, having nothing to do with trade:

The U.S. stock market has been on a nine-year tear, which is a relatively long bull market.
The overall valuation of U.S. stocks is high.
The Federal Reserve is hiking interest rates, slowing down the economy and creating financial stress for highly indebted corporate and household borrowers.
According to the Congressional Budget Office, the U.S. fiscal situation, already poor and deteriorating, is poised to worsen considerably as a result of the Trump tax reforms.
Geopolitical risks remain at elevated levels.

Overall, I think the consequences of a trade war today would be quite different than what happened during the Great Depression. Back then, a contraction in trade occurred coincident with deflation, monetary policy that was too tight, and a banking crisis.

While this is a subject for another post, the facts suggest that trade tariffs will be inflationary rather than deflationary. The prices of most U.S. stocks and bonds currently do not discount for this risk.

Four Reasons Why Donald Trump Wants a Weak Dollar

September 11, 2017 By Adam Strauss Leave a Comment

I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting—that will hurt ultimately. Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good. It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.

– Donald Trump, speaking to the Wall Street Journal on April 12, 2017

I’m the king of debt. I’m great with debt. Nobody knows debt better than me.

-Donald Trump, in an interview with CBS News on June 22, 2016

If the dollar strengthens significantly, it will have a significant impact on your investment portfolio. Similarly, if the dollar weakens, it will also have an impact on your investment portfolio.

If you are an investor, or, for that matter, if your earnings are denominated in dollars, it’s worth paying attention to what Donald Trump says about the dollar.

I say this because President Trump has enormous influence over what happens to the purchasing power of the dollar. As President, he appoints the Secretary of Treasury and the members of the Board of Governors of the Federal Reserve. Trump signs legislation that will affect fiscal spending. He is in charge of the country’s foreign policy.

For years, Donald Trump has consistently communicated that he wants a weaker dollar. You might be wondering, is this just rhetoric, or does he plan to make appointments and pursue fiscal policies and foreign policies that will actually weaken the dollar? Put more simply, does Trump mean what he says about wanting a weaker dollar?

In my view, it’s more than just rhetoric. Donald Trump is highly motivated to keep interest rates low and devalue the dollar. I say this because of where his own political and business interests lie.* I believe it’s possible to examine Donald Trump’s interests and determine whether Trump is more likely to be a weak-dollar President or a strong-dollar President. So far, I have found four reasons that support my view that he will be a weak-dollar President.

Reason #1: Almost 90% of Donald Trump’s $3.5 billion in estimated net worth is tied to real estate.

Donald Trump is a billionaire, but more importantly, he is a real estate billionaire.

Real estate is an asset class that is highly sensitive to interest rates. When interest rates go up, real estate values decline, and vice versa (all things being equal). Real estate investments are valued according to the present value of their future cash flows. Low-interest rates increase the present value of those future cash flows.

That might be why Donald Trump recently said, “I do like a low-interest-rate policy, I must be honest with you,” in April 2017.

Investment Conclusion: We can expect Donald Trump to appoint members to the Board of Governors of Federal Reserve who are supportive of low-interest rates because low-interest rates will support the value of his real estate holdings.

Real estate also tends to hold its value in an inflationary environment. When the cost of the materials used in constructing a building increase, the replacement costs of existing real estate properties increase commensurately. As a result, property values tend to increase in an inflationary environment.

A decline in the value of the dollar would likely lead to increased rents and increased replacement costs for Trump’s various real estate properties. Conversely, an increase in the value of the dollar would likely result in a decline in property prices. Weak-dollar policies will serve Donald Trump’s investment interests better.

Investment Conclusion: We can expect Donald Trump to make appointments and pursue policies that result in a weaker dollar because a weaker dollar should increase the value of his real estate holdings.

Reason #2: The majority (~52%) of Donald Trump’s estimated net worth is tied to New York City real estate.

trump tower NYC real estate — **Trump Tower is just one NYC trophy property among many that Donald Trump owns.**

New York City real estate is dependent on the health of the local NYC economy, which is, in turn, dependent on the health of the financial markets. When financial markets boom, so too do New York City and New York City real estate. When financial markets bust, so too does New York City and its real estate.

During the financial crisis, Trump’s estimated net worth declined by almost 50%, from $3.0 billion to $1.6 billion, and at least one of his properties filed for bankruptcy. That’s what will probably happen again during the next financial crisis.

Since the financial crisis, as markets have rallied, Trump’s net worth has increased almost three-fold, from $1.6 billion to $3.5 billion, driven by increased profits for banks, hedge funds, and wealthy investors located in New York City.

Investment Conclusion: Donald Trump will pull out all the stops to prevent financial markets from declining. Trump will pursue low-interest rate and weak dollar policies to support the health of the financial markets, which will also support his New York City real estate empire.

Reason #3: Trump’s various real estate holdings are encumbered with approximately $1.1 billion of debt.

In one important respect, Donald Trump’s financial interests are aligned well with that of the United States. Both Trump and the United States have a lot of loans to pay to creditors.

By depreciating the dollar, President Trump, in effect, reduces his own indebtedness. If the dollar declines in value, Trump would still have $1.1 billion in loans outstanding, but the real (inflation-adjusted) value of those loans would be lower. Also, the real (inflation-adjusted) value of his net worth would increase substantially.

Let’s use some simple math example to illustrate this concept.

Forbes estimates that Donald Trump owns $4.2 billion in real estate which is encumbered with $1.1 billion of mortgage-related loans. Thus, Donald Trump’s real estate net worth is approximately $3.1 billion ($4.2 billion of real estate assets minus $1.1 billion of debt).

Let’s now assume that Donald Trump manages to devalue the dollar by 50% and that, as a result of a devalued dollar, all real assets double in price. His real estate would then be worth $8.4 billion, but his debts would remain at $1.1 billion. Donald Trump’s real estate net worth would increase from $3.1 billion to $7.3 billion. Because of the debt leverage that Trump is employing, his real estate net worth increases by 135%.

Investment Conclusion: Donald Trump’s weak dollar policies will likely be helpful for real estate investors who have a manageable level of debt leverage.

Reason #4: Donald Trump wants to bring jobs back to the industrial manufacturing states of Michigan, Ohio, Pennsylvania, and Wisconsin.

Without winning these Midwest manufacturing states during the 2016 election, Donald Trump would not be President of the United States today. He won these states by promising to bring jobs back to the United States. Without delivering on his promise, Trump will likely not win these same states again when he runs for re-election in 2020.

2016 electoral college map — **Wisconsin, Michigan, Pennsylvania, and Ohio provided Trump with 64 electoral votes in the 2016 election.**

If the dollar increases in value, the competitiveness of U.S. manufacturers will decline relative to foreign producers. If the dollar declines in value, the relative competitiveness of U.S. manufacturers will increase. I see no way for Trump to deliver on his promise to the industrial manufacturing states without figuring out a way to reduce the value of the dollar.

Investment Conclusion: Donald Trump will make appointments and pursue policies that result in a weaker dollar in an attempt to bring jobs back to the United States and secure his re-election. The companies that will likely benefit from the most from a weaker dollar are U.S. exporters.

Investment Implications of a Weak Dollar

Donald Trump’s commercial and political interests suggest that the President is highly motivated to depreciate the dollar. Doing so will contribute to the real value of his net worth and help his chances of being re-elected. If I’m right, some of the investment implications include the following:

Real assets: Real assets should maintain their inflation-adjusted values. Owning gold, real estate, and other tangible assets should protect the purchasing power of your investment portfolio as the dollar declines in value. I would expect real estate assets to outperform financial assets (see what happened in the 1970s below).

U.S. stocks: Although I have said multiple times that the inflation-adjusted return from owning U.S. stocks during the next ten years may be poor due to high valuation ratios, the U.S. stock market may rise in nominal terms as the dollar declines in value. U.S. corporations that rely on exports should perform better than U.S. companies that rely on imports.
Foreign stocks: Foreign stocks in countries where valuation ratios are reasonable should outperform U.S. stocks, and a weak dollar will be a tailwind for overseas stocks. A few weeks ago, I discussed some of the reasons why South Korea stocks are attractive right now.
U.S. bonds: If you a lot of exposure to U.S. bonds, you should consider the potential decline in the purchasing power of your investment portfolio. Even if the nominal price of your bonds remains the same during the Trump administration, your bond portfolio might buy less over time as the dollar depreciates.

What investments are you making which should perform well as the dollar continues to decline in value?

*Source: In my analysis, I am relying on Forbes for estimates related to Donald Trump’s assets and liabilities.

My Barron’s Interview on South Korea Stocks

September 1, 2017 By Adam Strauss Leave a Comment

Barron’s interviewed me to discuss my thoughts on South Korea in a piece they called “Sabre-Rattling Creates Discounts in Korea.”

I’m not sure I love the headline, as my view is closer to “Discounts Have Existed in Korea for Years. Ignore the Sabre-Rattling and Buy.” If you don’t have a Barron’s subscription, you can read about my South Korea stock market view here.

Stock Market Math: Why Long-Term Returns will be Sub-Par

August 31, 2017 By Adam Strauss Leave a Comment

In the short-term, stock market returns are nearly impossible to forecast reliably; I have yet to come across anyone who can do this well on a consistent basis. Traders and speculators try to make short-term predictions; sometimes their calls are right, and sometimes their calls are wrong. In the long-term, however, which I define as a ten year period, it is possible to make a pretty good forecast. It requires applying stock market math concepts to determine probabilistically which markets are attractive and unattractive based on valuation and to even construct a crude forecast of average annual investment returns.

I have been making the case that U.S. stocks are a currently a high risk, low reward proposition for long-term investors, due largely to the fact that U.S. stocks are overvalued. While U.S. stocks are generally expensive, I am also coming across increasing evidence that U.S. small cap stocks, as measured by the Russell 2000 Index, are particularly expensive.

However, before I write any further about small-cap stocks, I want to discuss a question that a client asked me which got me thinking about stock market math.

Why I Love Talking to Clients

In our recent quarterly letter, we explained why U.S. stocks are overvalued and, as a result, likely to be a high-risk, low-return proposition for investors with a ten-year investment horizon.

After studiously reading the letter, one of my clients sent me an unsolicited email commenting on the letter. He said, “The two charts comparing value and 10-year forward annual return correlate beautifully. As you caution, they suggest sub-par returns in the future.”

I copied and pasted the two charts to which he was referring just below. They do indeed correlate beautifully.

While I agreed with his assessment, his comment suggested that the relationship between valuation and stock market returns might be a spurious one. As I considered how I might respond, it became apparent that we did a poor job of explaining why high stock market valuation levels lead to anemic 10-year equity returns going forward.

To put it simply, it’s all about the math.

Stock Market Math 101

I would suggest that your long-term investment returns from owning stocks will be approximately equal to the sum of the following three sources of investment return:

Dividend yield, plus
Revenue growth, plus
Increase (decrease) in the cyclically adjusted Price/Earnings (CAPE) ratio

Each of these factors contributes to stock market returns, sometimes to a greater extent and sometimes to a lesser extent, depending on the period in question. While dividends and revenue growth are almost always positive contributors to stock market returns, with the CAPE ratio, valuation can become a positive or a negative contributor to investment returns. If you start out the year with the S&P 500 Index at a 20x CAPE ratio, and then you end the year with the S&P 500 Index at a 10x CAPE ratio, you just experienced a 50% stock market crash (without considering the impact of dividends or revenue growth).

From the long-term chart of the CAPE ratio below, you will see that an expansion of the CAPE ratio was a major contributor of the S&P 500 Index since the financial crisis in 2008. The strong U.S. stock market has not been a function of strong revenue growth or a high dividend yield — it is simply a function of an expanded valuation as expressed through the CAPE ratio.

Likewise, you can see that a compression of the CAPE ratio was a significant driver of negative stock market returns between 2000 and 2009. If you get anything else from this chart, it should be that changes in valuation are an important driver of overall stock market returns.

Applying Stock Market Math to 1982

To better understand how stock market math works, let’s apply these three investment return drivers retroactively to the S&P 500 Index in July 1982, which was right at the end of a sixteen-year bear market.

(As an aside, yes, it is indeed possible to generate a negative return from owning stocks for sixteen years.)

Dividend Yield: In 1982, the dividend yield was 6.2%. In other words, even if stocks stayed flat, as long as companies continued to pay out the same level of dividends, you were going to generate a 6.2% return owning the S&P 500 Index. Today, a 6.2% return from owning U.S. stocks would be lovely.
Revenue Growth: Between 1982 and 1992, the U.S. economy expanded at a nominal rate of almost 5% per year. Between the dividend yield and revenue growth, thus far we are already at a double digit return from owning the S&P 500 Index, but we are just getting started.
CAPE ratio: The cyclically adjusted P/E ratio was at a generational low in 1982. During the subsequent decade, the CAPE ratio expanded from 6.6x in July 1982 to over 20x in July 1992, which means that the stock market tripled from CAPE multiple expansion alone.

Between July 1982 and July 1992, an investment in the S&P 500 Index generated an annualized return of approximately 18% between 1982 and 1992. It was a great decade to own U.S. stocks.

As I said, this stock market math model is a bit crude, but it is simple and useful in illustrating why valuation matters to long-term stock market returns.

Applying Stock Market Math to 2017

Today, the economy and the stock market are in a different position. In 1982, investors were worried about inflation, whereas today investors are worried about deflation. Interest rates were near a generational high, whereas today interest rates are near a generational low. Importantly, in 1982, U.S. stocks were inexpensive, whereas today U.S. stocks are incredibly expensive.

Let’s break down the math for the 2017 stock market:

Dividend Yield: The dividend yield of the S&P 500 Index is currently 1.9%. If stocks stay flat, as long as companies continued to pay out the same level of dividends, you are going to generate a 1.9% return. This is about 25% of the dividend yield that U.S. stocks were generating for investors in 1982.
Revenue Growth: During the past five years, real growth has been 2.2% and nominal growth has been about 3.7%, but that was before productivity started to decline at the end of 2016. That said, inflation could accelerate. Let’s assume revenues grow at a nominal rate of 4% per annum during the next ten years.
CAPE ratio: The cyclically adjusted P/E ratio is at a multi-year high of 30.5x, which is 50% more expensive than the 20x CAPE ratio of 1992 and 460% more expensive than the 6.6x CAPE ratio of 1982. Let’s assume that the CAPE ratio declines over the next ten years to the 1992 CAPE ratio of 20x. Such a contraction of the CAPE ratio would generate an annualized negative return of -4.1%.

Putting it all together, albeit, with several simplifying assumptions, an investment in the S&P 500 Index is set to generate an annualized return of 1.8% between 2017 and 2027. That 1.8% figure is equal to a 1.9% of dividend yield, plus 4% from revenue growth, minus 4.1% from CAPE ratio contraction.

Your approximate return from owning the S&P 500 Index, under my assumptions, would be positive, but not by all that much. And if the CAPE ratio contracts to 15x, your return would be negative.

For a 1.8% return, plus or minus, my question is, why take the risk?

You have much better options to consider which reduce your risk, enhance your likely return, or both. For example, you could buy a ten-year Treasury note and earn 2.1% per annum over the next decade. Owning U.S. Treasuries, you would generate a commensurate retrun while taking less risk. Alternatively, you could invest in other countries like South Korea where there is certainly risk, but where the valuation is far more reasonable and your likely return will be more attractive. Finally, you could selectively pick individual securities where the stock market math looks more appealing.

Why the South Korean Stock Market Appears Attractive, Despite North Korea

August 18, 2017 By Adam Strauss Leave a Comment

The South Korean stock market is a great place to find value, and particularly right now when the U.S. stock market is so overvalued. In my view, the investment returns over the next 7-10 years are probably going to be more attractive in South Korea than the United States.

The Korean Stock Market (KOSPI) – A Top-Down Valuation Approach

If you look at the Korean stock market, also known as the KOSPI, the Price/Book ratio is barely above book value, and the P/E ratio is less than 10x. Furthermore, the Korean market is even cheaper than these surface-level valuation measures suggest because many Korean businesses own the shares of other Korean companies which have real value but are not captured by the traditional valuation metrics that are picked up on a Bloomberg screen.

StarCapital provides a free tool to help you understand which countries are cheap and which countries are expensive. Across several valuation measures, including Price/Book, Price/Sales, Price/Earnings, and the Shiller P/E ratio, South Korea comes up as the #1 cheapest country in the world. The table below shows the ranking of the most undervalued 12 countries:

South Korean stock market attractive — **The South Korean Stock Market (KOSPI) – an Attractive Value**

As an aside, you might be wondering what the most expensive country in the world is. If you have already read my posts about overpayment risk and the rise of price-insensitive investors, you would probably guess that it’s the United States.

And, if you did guess the United States, you’d be correct (see table below).

U.S. stock market overvalued — **The U.S. Stock Market (S&P 500 Index) – an Unattractive Value**

It’s important to remember that valuation measures are only useful for making long-term investment decisions. The more undervalued a particular stock market is, the more likely you will be in generating more attractive returns over a seven to ten-year period by investing in that market. Valuation measures are usually not helpful in predicting near-term stock market returns. In 1998, U.S. tech stocks, already grossly overvalued, continued to rally for two years before finally correcting severely. If you are a long-term investor, you are better off paying attention to valuation and trying not to worry about short-term price fluctuations, in my view.

Why is the Korean Stock Market Cheap?

It’s a difficult question to answer definitively. To be honest, I’m not exactly sure why Korean stocks are cheap. I’m also not sure that it matters.

However, I can confidently say that Korean stocks are not cheap because of current headlines related to a potential armed conflict between the United States and North Korea. I say this because South Korean stocks have been cheap for years, and Korean stocks have rallied in 2017. That rally has occurred despite the fact that the risk of armed conflict with North Korea has increased substantially. Go figure.

My speculation is that Korean stocks are cheap for two reasons.

First, it’s difficult to invest in individual Korean stocks as a U.S. investor. There are few ADRs that you can buy in the United States (although I will discuss one ADR below), and you can’t directly own individual Korean stocks without opening up a brokerage account in South Korea.

Second, South Korean companies do not typically return cash to shareholders as aggressively as U.S. companies do. That’s a knock against South Korea and a lot of other countries. On the other hand, Korean companies also don’t abuse stock options and other forms of equity-linked compensation as aggressively as U.S. companies do.

These are certainly drawbacks, but, in my view, Korean stocks pay you well for living with these drawbacks.

What Happens if There’s a War between North Korea and the United States?

I believe a war is highly unlikely. Such a war would involve at least two countries with nuclear weapons. Including Russia and China, four countries with nuclear weapons could become involved. All four countries understand the game theory behind mutually assured destruction (MAD). For that reason, I expect all parties involved to pursue their national interests through diplomacy.

While I believe this is the most likely outcome, I could be wrong in my optimistic assessment.

If I am wrong, that means a major war that will break out in Asia, potentially involving nukes. Along with North Korea, South Korea will be hardest hit. The South Korean stock market will go down in value. To put it incredibly mildly, that wouldn’t be a good development at all.

However, South Korean semiconductors power the world, from computers to smart phones to cars to data centers. A war would disrupt the global semiconductor supply chain. Such a disruption will affect world markets, not just the South Korean stock market. The risk to financial markets is not at all limited to South Korea.

In summary, if a war happens, it will likely be world markets that go down in value, not just South Korea. If a war doesn’t happen, South Korea has more long-term upside than a lot of other countries, in my view. The risk-reward profile looks attractive, despite the threat of an outbreak of war between the United States and North Korea.

Finally, if you are worried about market risk, you should have a diversified investment portfolio with a meaningful allocation to cash and gold. If war breaks out, these investments should perform well, even if world stocks do not perform well.

South Korea Stock Picks

The three Korean stocks that I particularly like are Samsung (005930-Korea), SK Telecom (SKM), and Hyundai Home Shopping (057050-Korea). Full disclosure, I am an investor in all three of these companies as I write this post; I also might choose to buy more, trim, or sell my positions in these companies at some point in the future.

Samsung currently represents about 25% of the KOSPI index, so Samsung’s undervaluation drives the undervaluation of the larger South Korean stock market. Samsung has been an excellent investment over the past year or two, but its shares are still inexpensive, in my view, and especially so compared to the U.S. tech companies that trade on the Nasdaq. The company is trading at 10x next year’s earnings and with a 2017 EV/EBITDA multiple of 3.8x. Its current free cash flow yield is 9%, despite the fact that cash and investments represent about 15% of Samsung’s market cap.

SK Hynix represents another 10% of the Korean stock index, where SK Telecom is a major holder. SK Telecom is like the Verizon of South Korea. The company is trading at P/E 2018E of 9x, a current free cash-flow yield of 12%, and an EV/EBITDA multiple of just 2.3x after adjusting for the company’s investment in SK Hynix. Importantly, SK Telecom offers an ADR with the ticker SKM, so it’s an easier stock to buy if you are a U.S. investor.

Hyundai Home Shopping runs a home shopping network in South Korea, similar to QVC in the United States. For whatever reasons, home shopping is more popular in South Korea than the United States. The company is profitable, growing, and generating healthy levels of free cash flow. Adjusted for the company’s cash and investments, Hyundai Home Shopping is trading at an adjusted EV/EBITDA of just 2.0x. The valuation of Hyundai Home Shopping is remarkable, in my opinion.

What are your favorite South Korean investments?