Hoeing the Rough Row with Porter Stansberry
Source: Karen Roche of
The Energy Report
Three decades' worth of no-holds-barred credit led to
oppressive debt for Americans and America. It left us a financial
wreck; with our currency collapsing and efforts to spend our way
back to prosperity stumbling at every turn. For more about
Stansberry & Associates Investment Research Founder Porter
Stansberry's take on the perilous predicament-and his coping
strategies-read this exclusive
The Energy Report:
The National Bureau of Economic Research announced last week not
only that we are out of the recession but that in fact, it ended in
June 2009. They did note that it was the longest recession since
the Great Depression. Did this announcement surprise you?
On one hand, I expected the authorities to come out and say
everything is getting better at some point, and I also expected
that pumping enough money into the economy could stimulate some
economic activity. So, I guess in that way, I was expecting it.
Then, in a deeper, more intrinsic way I wasn't expecting any
significant improvement to the economy whatsoever. I would argue
about the meaning of this conclusion, too, and point to
measurements of our national net worth as being the appropriate
gauge to measure whether we're experiencing any genuine economic
growth. America's net worth continues to fall in terms of the
average household net worth, and also, of course, our government's
net worth is growing in the red dramatically every quarter.
So while I'm pleased that there is more economic activity, I
wish there was more employment, and that we were heading in the
right direction in terms of growth of median incomes and net worth.
But I'm unfortunately very pessimistic that any real increase to
net worth, either measured by the government or by individual
households, can be achieved when the government continues to paper
over our problems with more credit and more money instead of making
our economy more competitive on a global basis.
But measuring net worth as the true driver, hasn't individual net
worth really been decreasing over the last decade? Wasn't the
perceived net worth really based on debt?
The average household income has really stagnated since 1971. For a
while, it continued to increase in terms of statistics, because
more and more families had two wage earners. During the '70s,
household income looked as if it was still increasing but factoring
in the additional wage earner, it didn't change at all. And then it
began to decline in the late '90s, and has continued down for the
last 10-12 years.
So in terms of household incomes, we've definitely gotten much
poorer over the last 30 years, and that's just a measure of income.
In terms of net worth, meaning all of our balance sheets-our assets
minus our liabilities-America was richest on paper in the spring of
2007 before the start of the mortgage crisis and the real estate
You're talking about individual net worth, not corporate net
Exactly, talking about median household net worth, median household
income. So, individual incomes have been stagnant and/or declining
for more than 30 years, and individual net worth has fallen
precipitously since 2007 and continues to do so.
You can survive your income falling if it's not dramatic. Your
income can decrease for a long time before you start living beyond
your means. I think what's happened to America, in a cultural
sense, is we stopped getting richer as a country in the early
1970s, but we haven't adjusted our consumption patterns in any way,
shape or form to meet the realities of the new lower income. As a
result, debt has piled up over the last 35 years. And of course as
you add debt without increasing income, you're reducing your net
And look at the size of the U.S. federal government debt
outstanding today-not the unfunded obligations; just the bonds that
are outstanding-and you look at the federal government's annual
revenue, the debt is now 356% of the revenue. If the federal
government didn't own the world's reserve currency, you can imagine
that it would be impossible for that government to get credit
anywhere. No one would lend to an entity that's so far in debt as
the government already is. And yet it's the government that
continues to provide additional stimulus to the economy by adding
to its already swollen obligations.
So the government continues to pump money into the economy via
expansion of credit and/or straight out printing money (via
quantitative easing). That has a diminishing-returns effect, so
people would argue now that "cash for clunkers" and TARP, etc.,
didn't do anything.
In the middle of this train wreck, our currency is gradually
being debased and efforts to restart the economy with additional
spending aren't working. They probably can't work. How long does
this continue? How much debt gets racked up before real, true panic
sets in and people simply start to flee the currency at all
How long? How much?
I don't know the answers. But I don't believe the current strategy
is feasible. I think the only thing that really can be done-it
would be painful, but less painful than the calamity we're heading
toward-is to demand that people be responsible for their private
obligations. No more bailouts, no more stimulus, no cash for
clunkers. You, the American people, have to live within your means
starting on this date.
If we then defaulted on the U.S. government bonds, we'd tell our
creditors, "We're going to give you a certain percentage of our tax
receipts, but we have to renegotiate our debt because we can't pay
it back." It would be really bad for six or nine months, but then I
think things would be great because you would have washed out all
the excesses, people could get back to work and the dollar would
fall to a value that would make our economy very competitive on a
Demanding people live up to their private obligations on a par with
the defaulting on U.S. government bonds strikes me as curious. On
one side, I see individuals who have benefited least from any
stimulus-in fact, many of them are unemployed, losing their homes
and going into bankruptcy. The banks are the ones getting bailed
When I say that people have to be responsible for their private
obligations, I'm talking about the big banks, right? If a bank
actually had to be accountable to its depositors, there's probably
not a major bank in the United States that would be open tomorrow.
I mean we're all comfortable with the banks because we know that
the printing press stands behind them. But that's no way to run an
economy. For the economy to work, there has to be winners and
losers and people have to be responsible for their obligations.
We're living in a socialist dream right now, and it's going to end
up becoming a socialist nightmare. These dreams always do.
Creditors of people cannot continue to expect the government to
guarantee every obligation. It simply isn't feasible. It can't be
done. You can't guarantee every mortgage in the United States. You
can't do it. Likewise, the U.S. government's creditors have to
understand that there is such a thing as government default on
debt. It happens all the time. If you make a loan to a government
that is in as far over its head as our government, you're making a
In terms of stagnant individual income, enormous obligations and
declining net worth, is what you've described unique to the U.S. or
would you also put other leading countries in that same bucket?
In scale, I'd say it's unique to America. The scope that we have
continued to consume above our level of income is oppressive, and
it was enabled by the fact that our paper currency is the world's
standard. So we had no barriers to credit, which meant that we
could borrow a heck of a lot more than anybody else and end up with
a lot more debt than anybody else.
The macroeconomic problem of stagnant-to-falling median
household income is common throughout the developed world. That has
only one cause, which is poor competitiveness. We don't work as
hard as our Asian competitors, to put it in plain terms. But in
America, unlimited access to credit exacerbated the problem.
To what extent has government debt increased to cover the increased
credit provided to individuals?
Over the last three years, what's happened is a huge transfer of
obligations from private balance sheets to public balance sheets,
right? The biggest and most important example-which isn't even
discussed in Congress or in Washington as being a problem, which is
truly amazing-was shifting $10 trillion of obligations owed by two
private corporations, Fannie Mae and Freddie Mac. We shifted
responsibility for all those credits onto the U.S. Treasury. That
had the impact at the time of doubling-doubling!-our entire
national debt in one swipe of the pen. That's just an incredible
transformation that took place when the government decided to
guarantee all of Fannie's and Freddie's creditors, when you know
what Fannie and Freddie really own with all that money they
borrowed is pretty much every mortgage in the United States.
You can see that we as a nation have decided that the government
ought to be responsible for our mortgages. In a way, that's us
saying we believe the government ought to be responsible for all of
our private debts.
And where does that lead?
It's interesting isn't it? That was the goal of every socialist
regime in history, right? And yet, here we are in America living in
the new socialist utopia where no private citizen is really
responsible for their private debts. It all becomes a matter of
You know, I don't think it's any real great surprise to any
thinking person when I say I doubt this experiment has a happy
ending. I don't think you can socialize everyone's private
obligations and end up with a good economic result.
Is the only outcome some big train wreck?
I'd argue that we're in the midst of the train wreck. We're going
to see a continual increase in sovereign debt around the world,
even though, according to any standard model of repayment all the
leading sovereign debtors are already bankrupt.
I got a report in my inbox last week from Morgan Stanley (
) in London, basically going over all the different sovereign debt
problems. It's really amazing because this is sort of a mainstream
investment bank, and they had reached all the conclusions I had
reached independently, which is that all these Western countries
are completely upside down. Their economies aren't growing, their
populations are aging and there's no way that they can generate
enough revenue to begin to repay their debts, which continue to
grow every year. And all the evidence out there says that risks of
a major, major financial catastrophe in the Western economies
continue to grow.
Won't all the equity markets crash in that kind of catastrophe?
No, not necessarily. As I mentioned, I'm not particularly bullish,
but in some situations equities offer better value than bonds, and
in some situations stocks will do well, at least in the short term,
because of exposure to Asia.
But the truth of the matter is that equity offers you a hedge
against inflation as well because the company's earnings and the
company's assets will continue to grow in price along with
inflation. In theory, dividends also should increase to match
inflation. The case study here is the share price of The Hershey
). I have studied the price of chocolate and Hershey's bars over
the last 70-80 years. Hershey went public in 1926; so, it offers a
really nice template to see how changing rates of inflation and
even periods of financial catastrophe such as The Great Depression
affect a blue chip stock. The answer was really fun; it turns out
that chocolate is a slightly better hedge against inflation than
even gold. So, the world's leading branded maker of chocolate did
quite well, thank you, and there are plenty of other examples from
businesses of all stripes. Companies that have a good competitive
position can typically raise prices as much as inflation, or
Equities should do well even in hyperinflation. The downside is
that during periods of hyperinflation, the earnings multiples on
equities disappears. So, even really good companies like Hershey
and Wal-Mart and Johnson & Johnson will be trading at four,
five or six times earnings, maybe even less. And that's really
tough for investors if you happen to buy the stock at 12 times
earnings or-heaven forbid!-at 18 times earnings. That reduction in
the earnings multiple can wipe you out.
So that's why I've been telling my readers to be extremely,
extremely, extremely conservative. Buy the very best companies only
when they're trading at absurdly cheap prices and offering you a
nice yield to protect you. And if you're not willing to short
stocks as well, don't buy stocks at all; stay in cash and gold. If
you had been in cash and gold this year, you would have been just
fine. If you had been following my portfolio, you would have done
very well, too, not because we did great with the stocks we bought,
although they did okay, but we did great with the stocks we
So, looking through to the end of 2010, will you maintain an
aggressive shorting strategy?
I have pulled back the reins on new shorts; I haven't added to my
short position in the last two months due to the return of
quantitative easing. I expect we'll probably end up covering most
of our short book before the end of the year. After that, it
depends on whether we find good opportunities to short on an
individual company basis, and it depends on how the markets and the
asset prices react to the quantitative easing. I can't make any
prediction about what exactly our strategy will be in 2011 because
we're not there yet. I'm still trying to survive 2010.
The default discussion has been going on for quite a while, and
with elections coming up, it seems that we can expect either
additional stimulus or quantitative easing. What's the straw that
finally breaks the camel's back?
I can only tell you that no one really cares about a creditor's
debt load up until the moment that everyone cares. The Greek bond
yields didn't move at all until the market went into a panic six
months ago over them, and yet the creditors all had the data on the
way the Greek economy was working for years. I vividly remember
reading commentary in the late 1990s of well-known economists
saying there's no way Greece should ever be part of the EU because
they have a kleptocracy, basically a government of thieves. But
they still were able to borrow money on ridiculous terms up until
the moment people decided not to lend them anymore.
Well, they're actually still lending them money.
Yes, but only with that $185 billion bailout fund standing behind
the Greek credit. Otherwise, no one would have lent them any more
money. Greek bonds that are denominated in euros are not going to
default. Rightly or wrongly, creditors believe that they can get an
extra 200 basis points at yield by buying Greek debt instead of
German bunds, because to the creditor it's the same thing. Now that
the Germans have not allowed the Greeks to default, in reality the
credit risk of the Greek bond is no more or less than the German
bund. So you're giving speculators all the basis point difference
for free. That's the way they see it.
Even more interesting than the fact the Greeks were bailed out,
the stock market has picked up noticeably in the last several
weeks, which coincides exactly with the beginning of the latest
European quantitative easing. The same thing happened in the spring
of 2009 in the U.S.-asset markets and asset prices of all types
start going higher every time there's more quantitative easing.
It's not because those assets are becoming more valuable, but
because people are fleeing the currency every time the printing
presses come on.
And how likely is more quantitative easing in the cards in the
The answer is absolutely, 100%, for sure, yes, there will be. And I
think it will cause asset prices to rise. I don't think it will
cause our economy to have any real benefit.
Of course, it's not just the federal government that's in big
trouble. If there were a real rating agency, California's rating
would be lower than Greece's. I read somewhere that something like
300 separate agencies have the power to issue bonds under State
credit in California. And there are going to be bankrupt
municipalities all over the United States; Harrisburg, the capital
of Pennsylvania, declared bankruptcy this month.
Earlier this year you advised your readers to not be upset to be
sitting in cash and be really careful about the markets because
there's tremendous volatility. For those who didn't want to truly
hedge themselves in equities, you recommended short-term Treasuries
and gold. If asset classes are going to increase in value in every
quantitative easing, why wouldn't you recommend equities?
When the quantitative easing started in March of 2009, I was wildly
bullish, the most bullish I've probably been in my entire career. I
told people straight out that equities are much cheaper than
precious metals; they're cheaper than bonds. I did put my readers
into a lot of stocks in 2009, and we made a lot of money.
This year, the Fed had promised to stop its quantitative easing,
which made me very cautious because I believe as soon as the
quantitative easing stopped, asset prices would fall again. And so
I've recommended more individual short positions this year than I
ever recommended before.
How's that working for you?
I think I recommended at least eight new short positions, and so
far, not surprisingly, all of them have been profitable, some
wildly so. Now that the quantitative easing is beginning again with
the Europeans, I think that will be seconded at some point by the
U.S. and, therefore, I think it is time to consider buying stocks
again. But I'm simply not as wildly bullish as I was before because
on an overall basis, stocks in general aren't as cheap as they were
in March of 2009.
Having said that, I think there are some uniquely good values
out there-most notably global blue chip companies that are exposed
to growth in Asia. You don't have to be a stock analyst to know
these companies because you're familiar with their brands-Johnson
& Johnson (
) and Wal-Mart Stores Inc. (
), Intel Corporation (
) and Microsoft Corporation (
). You'll find a lot of situations where you can buy global blue
chip businesses that have big exposure to Asian growth where your
dividends in the stock are going to pay you more money than buying
the bonds! That's an incredible anomaly.
Do bonds currently represent more risk or is this purely a yield
I don't want to scare people out of high-quality bonds. I am not
expecting any sort of corporate bond market catastrophe in the near
term, and as long as you're dealing with relatively short duration
stuff you will be fine. If you're buying a bond that matures in
five years, you're taking some inflation risk, but not really all
that much. But still. . .why would you take any inflation risk in a
bond when you can buy stock in the same entity that is yielding
more? You wouldn't. And yet, some people are doing exactly that. .
Point taken. Are you shorting U.S. Treasuries?
Not any more. I got out of that trade a couple of months ago
because it started to go against me, and I didn't want to have a
loss, but I think you're completely out of your mind if you buy
U.S. Treasuries that are yielding-what are they yielding now?-less
than 3%? It's mind-boggling; I can't begin to understand it. I
really can't. People holding long-term-i.e., 20-year-U.S. paper are
sitting on a ticking time bomb. The losses in this asset class will
be epic, of historic proportions.
In our last conversation, you predicted something that was
extremely contrarian at the time, when you said that the total
environmental impact from the Gulf spill would not be as draconian
as was being published. You also suggested at that time to buy
BP Plc (NYSE:BP; LSE:BP)
Anadarko Petroleum Corp. (
because they were undervalued, and indeed, both BP and Anadarko
have had some pretty nice increases since July. Is there any
continuing upside on these types of oil stocks or will an overhang
of negativity restrict these stocks from reaching their former
Well, full disclosure, I ended up buying both equities this summer.
That I own them both personally should tell you a little bit about
what I expect. Obviously, I must believe there's more upside to
each stock or I wouldn't own them. But we have a policy as
newsletter publishers; I don't write about any position that I am
in and I don't buy the stocks that I cover in my newsletter. I
understand the argument about having skin in the game, but as an
independent publisher, it's very important to analyze each
situation and each company completely objectively without giving
any thought to whether I am in the stock personally.
When we had that conversation, the issue of increasing regulations
on offshore oil drilling was constantly in the news. It isn't
getting much attention now, but do you feel there will be any
significant regulatory changes as a result of the spill?
No. Any regulatory effort will be captured by the industry and
would be used to protect the incumbents against new competitors,
and I am sure that will happen. As a nation, we need onshore and
national oil and gas production, and I am sure we're going to
continue to have lots of it. So I am not at all concerned about the
regulatory burden for any of the oil companies in the country.
And I'll go a little bit further. There's been a lot of talk
about the risks of fracking and these gas reservoirs. Someone made
a movie suggesting that an oil company in the area was responsible
for people having natural gas in their water wells. While I'm
certainly not denying that oil and gas reservoirs sometimes leak
into water reservoirs, it goes on all the time as a consequence of
natural geography much more so than drilling pipes, which are
usually less than four feet across. It's much ado about nothing,
and the oil industry has always had its critics, going back to
Rockefeller and Ida Tarbell. People making claims against oil and
gas companies are as old as the oil and gas business.
As you've noted before, the world will continue to rely on oil
because it's such an efficient form of energy, relatively easy to
find and extract, dense and portable. Considering the growth in
Asia you alluded to earlier, do you buy into the peak oil
No, peak oil is one of the greatest promotional ideas ever created
to the benefit of oil and gas speculators and investment bankers.
To me it represents such bad thinking and it's so intellectually
bankrupt that I get frustrated just commenting on it. It just
doesn't make any sense because if peak oil were a real phenomena,
if it were truly possible to exhaust the world's reservoirs of
hydrocarbons in the earth's crust, how come every single prediction
of when hydrocarbon production will cease has been wrong, every
single time in every single region?
One of the graphs that the peak oil guys would pull out in early
2000 showed onshore natural gas production has been declining since
1974, and that chart was accurate up until 2001, when we discovered
a new way of extracting natural gas. Ever since then, natural gas
production has gone up, and is now approaching a new all-time
The point is that our ability to produce hydrocarbon energy-oil
and natural gas-is not limited by the supply of hydrocarbon energy,
it's limited by our knowledge and technology for extracting it.
Human beings are remarkably adaptable and resourceful and creative,
and we will continue to discover new and more efficient ways of
creating, extracting and using hydrocarbons. The idea that we will
run out of hydrocarbons is mostly used to scare people who probably
shouldn't be investing their own money.
Given that and what a barrel of oil trades for, is oil a good
investment at this point or will it really just be going
Is oil a good investment? Oil is really a good investment over the
long term because it is remarkably useful to such a degree that the
lower the price goes, the more people will use it, which tends to
put a floor under its price. If you study the history of oil, you
know it certainly goes down a lot sometimes when people start using
less of it because of economic declines. But it doesn't stay down
very long, and it always comes back and goes higher.
So oil is a great investment, but that said, I am very
conservative about buying oil today due to the economic problems I
expect in a lot in the major developed countries. With those
problems, I don't think global demand for oil is going to go
anywhere for a while, and I know the supply is increasing
dramatically because of new technologies and new discoveries.
So I am not particularly bullish on oil right now, and I don't
expect to become bullish on oil for a long time. But that doesn't
mean that oil is a bad investment, and it doesn't mean that you
can't do very well buying lots of different aspects of the oil
Are you still bullish on nuclear energy? Do you still see
undervalued companies in the sector?
Yes, I'm still relatively bullish on nuclear energy on a global
basis, but when we talked last I was particularly bullish on both
Exelon Corp. (
Duke Energy Corp. (
because they were really, really cheap. They were trading for four
or five times cash flow, and yielding more than 5%, which seems
like a fantastic opportunity in an era of less than 1% government
bond yields and all the other uncertainties.
Both of these companies remain undervalued. They're both well
run, regulated utilities. I would favor Exelon a little bit over
Duke just because they have more of a nuclear plant, and I am still
very wary of cap and trade. I don't know if cap and trade will pass
this year as I once anticipated, but unfortunately the global
warming madness is not going away. Efforts to retard the
consumption of coal here will be continual. If you want cheap,
reliable electricity in the United States, you're not going to do
it with paddle fans and mirrors on top of buildings. If you want to
get off of hydrocarbons, the only option that's even reasonably
affordable is nuclear energy.
You've been really savvy at picking out opportunistic investments
themes. You've shared some today with the global blue chips. Are
you looking at any new investment opportunities that you can share
Just to reiterate, I really think that the highest quality blue
chip companies in America that have good global businesses are
really cheap. Most people don't realize that Wal-Mart does more
than $100 billion-$100 billion, with a B-a year in sales in
emerging markets. They're just now really getting going in China,
and just opened their first couple of stores in India. So I think
Wal-Mart has an enormous amount of growth ahead in those
I would also point to Intel, which is also in my newsletter as a
recommended buy for the same reasons-super cheap, great global
business, the absolute leader in its field-as with Wal-Mart, as
with Johnson & Johnson, as with Microsoft. I like all those
kinds of blue chip stories, and I really think it's an exceptional
opportunity when you can get these stocks that have a great global
business and are paying you more in dividends than you'd get from
coupons on their bonds.
But let me be perfectly clear about this: I am not expecting any
home runs, you know? If you can make 10% to 15% a year in these
stocks over the next 10 years, count yourself lucky.
At the beginning of our conversation, you were talking about how
household net worth has been deteriorating. How does one build
wealth at that rate?
Those are actually very, very good returns-exceptional returns.
Assuming inflation doesn't take it away.
Right, assuming that. But of more than 21,000 mutual funds in the
U.S., do you know how many did better than 10% a year for the last
10 years? Not even 250 of them. And you know what else? All of
those funds that did better than 10% a year specialized in either
precious metals or emerging markets-all of them. You're not going
to get rich just by buying domestic U.S. stocks. I just don't think
it's going to happen. If you want to do well in this period of
global turmoil, in this period of very, very poor competitiveness
in the U.S. and in the developed economies compared to the emerging
economies, you have to really pick your spots like I did when I
bought BP and Anadarko. You can make money on a crisis like that,
or you need some real specialty in finding the right kind of
resource situations. That entails taking on enormous risk, which
isn't appropriate for most retirees.
But a typical individual investor, someone over the age of 50
with net worth of less than $1 million, really the only thing you
can expect to do for the next 10 years is just survive. The best
way to do that is to buy these really good global blue chip
companies when they're paying reasonable dividends. If you're
making 5% a year on the dividend on something like an Exelon, the
stock doesn't have to go up all that much for you to get to that
It is. If you're getting a double-digit return on U.S. stocks,
you're doing a great job.
Very good. Would you expect better than double-digits in U.S.
stocks that focus exclusively on emerging markets?
I would, but I also would caution anybody against getting involved
as a direct resource play investor or a direct emerging markets
investor if they don't have a lot of financial experience and
expertise. Those markets are very difficult. This is what I do full
time and it's not easy for me, so I just don't think that's
appropriate for most people. That's why I've told my readers if
they're not willing to short stocks, go to cash and gold and just
sit on it, because it isn't going to be a great year in stocks.
It's not going to be worth the risk.
So far, fortunately, that's been the right advice.
You have to realize the enormity of the problems our governments
have gotten us into and you can't forget about them. There was a
$185 billion bailout in Europe? Well, Europe's governments are $3
trillion in debt. That little bailout that kept Greece will not
solve their problem. Likewise, $1.7 trillion of quantitative easing
in the U.S. is tiny in contrast to $15 trillion in debt. In other
words, we're at the very beginning of these problems. They haven't
If you try to get really aggressive under these circumstances,
if you try to go after growth stocks or start buying whatever the
latest commodity is, you'll end up taking a beating. In this
environment, it's going to pay to be cautious.
Very good perspective. Thank you, Porter.
After serving a stint as the first American editor of the
Fleet Street Letter,
the oldest English-language financial newsletter, Porter
Stansberry put out his shingle at Stansberry & Associates
Investment Research, a private publishing company. Celebrating its
10th anniversary last year, S&A has subscribers in more than
130 countries and employs some 60 research analysts, investment
experts and assistants at its headquarters in Baltimore, Maryland,
as well as satellite offices in Florida, Oregon and California.
They've come to S&A from positions as stockbrokers,
professional traders, mutual fund executives, hedge fund managers
and equity analysts at some of the most influential
money-management and financial firms in the world. Porter and his
team do exhaustive amounts of real world, independent research and
cover the gamut from value investing to insider trading to short
selling. Porter's monthly newsletter,
Porter Stansberry's Investment Advisory
, deals with safe value investments poised to give subscribers
years of exceptional returns, while his weekly trading service,
Porter Stansberry's Put Strategy Report
, shows readers the smartest way to book big gains during the
ongoing financial crisis.
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1) Karen Roche of
The Energy Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Energy Report:
3) Porter Stansberry: I personally and/or my family own shares of
the following companies mentioned in this interview: BP and
Anadarko. I personally and/or my family am paid by the following
companies mentioned in this interview: None.
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