July 6, 2015
While all eyes were on Greece this weekend, one of the largest banks in Lithuania quietly posted an awkward announcement to its customers.
Interest rates are now negative.
So negative, in fact, that the bank actually has to pay interest to some of its borrowers.
And the bank was totally unprepared for this.
Apparently some meaningful percentage of the bank’s loans are on variable interest.
This means that when prevailing interest rates go up or down, the interest rate on loan goes up or down.
SEB never thought in a million years that interest rates would actually be negative.
So many of the loans don’t actually have any provisions in place which would protect the bank in the event that interest rates turn negative.
As the bank rather delicately explained to its customers, “Negative interest rates are a new and unique situation” that are “raising a number of challenges for financial institutions.”
One of those challenges is that banking systems aren’t designed for negative interest rates.
It’s like the old Y2K bug from 15+ years ago.
The problem was that older computer systems (like my old Commodore 64) only used two digits for the year in the date field. So January 1, 1999 was “01/01/99”.
So on January 1, 2000, many older computers would show the date field as “01/01/00” and think it was January 1, 1900.
That’s sort of the same issue here.
Banks have complicated software to automatically update and calculate how much interest a customer owes based on the loan balance and current interest rate.
But the software designers, especially for older systems, never thought to include anything about negative interest rates.
So now banks have to abandon much of the software and manually recalculate what they owe to their borrowers.
SEB is clearly frustrated.
And while they informed customers that they “will comply with the [loan] conditions” as required by law, they also wanted to be vocal about the fact that they will lose money.
Simply put, whenever banks have to pay their borrowers, you know that your financial system is in extreme crisis.
People can ignore it all they want. Politicians and central bankers can try to deceive everyone and pretend like the system is still strong and robust.
Do you remember how things were in 2007 and 2008 right before the last big financial meltdown?
Any talk about a major crisis was met with derision and ridicule. And yet, when the system collapsed, it all seemed so obvious in retrospect.
Suddenly everyone said, “Duh, of course there were going to be major problems when banks were giving loans to dead people.”
Well, this too is going to seem obvious. And at some point in the future they will say, “Duh, of course there were going to be major problems when banks had to pay interest to their borrowers.”
But before that happens, there’s going to be a major banking crisis (if not several). Make sure your money is nowhere near it.
Specifically, consider placing at least a portion of your wealth in real assets.
And avoid holding the preponderance of your assets anywhere that the government is insolvent.
Parking your wealth in a country that’s bankrupt substantially increases the risk of bail-ins and capital controls (as we saw in Greece, Cyprus, etc.).
Again, it’ll be easy to look back and see how obvious the warning signs were.
Looking forward always takes more courage.
July 2, 2015
When I was a kid, my friends and I used to cruise around on our Huffy bikes for hours at a time.
Often we’d end up on the other side of town in unfamiliar places. No helmets. No knee pads. No reflector vests. No parents.
Had I grown up in today’s nanny state, there’s no doubt I would presently be in foster care or the custody of some government ‘Child Protective Services’ agency, and my parents would be in jail for neglect.
It’s amazing how many rules and laws exist governing what you can and cannot do with children, as if they’re made of glass and need to grow up in a protective bubble.
We’re terrified that something ‘bad’ might happen. That they might fall down and scrape a knee. Sprain a wrist. Or experience pain.
So now there is an entire culture (and extensive legal doctrine) to make sure this doesn’t happen… to overprotect children from anything bad happening. Ever.
Over brunch this morning in Singapore, my colleague Grant Williams pointed out that governments and central banks are doing exactly the same thing with their economies.
They’re so terrified that some factory worker is going to lose his job, or that a pensioner might lose money in the market, that they’ve spent trillions trying to prop up the system.
When did a recession become the worst possible thing in the world? When did a down market or slow growth become some catastrophic emergency?
All of these things are natural parts of the cycle.
When kids do something stupid, they’re supposed to fall down and scrape a knee. The pain teaches them to not be so careless.
And preventing that from happening only reinforces bad behavior.
When businesses and investors do stupid things, there’s supposed to be a recession. There’s supposed to be a market downturn.
These are perfectly natural reinforcement mechanisms to not be so stupid next time.
But we can’t have that. In this nanny state, nature can’t be allowed to take its course.
So instead they treat us all like we’re little children who need to live in a protective bubble.
Well, mission accomplished. We certainly are living in a bubble.
Governments are bankrupt. Their economic figures are so contrived that they count prostitution and narcotics in official GDP figures.
Central banks are insolvent. Entire banking systems are illiquid and poorly capitalized. Capital controls are growing. Pensions are unfunded.
Many benchmark interest rates around the world are actually negative. Bond liquidity is drying up. Central banks are having to directly intervene in the markets.
One of the fastest growing job markets in the Land of the Free now is ‘food service workers’.
Yes, America is creating 60,000 meaningful jobs per month… for waiters and bartenders… at a time when the Labor Force Participation Rate is at a 38-year low.
Most importantly, there are no consequences to stupidity anymore.
Banks can screw up as much as they want, and the government is going to bail them out.
Governments can screw up as much as they want, and the taxpayers will be forced to bail them out.
They met a crisis brought on by too much debt with even more debt. And they refuse to acknowledge the risks.
It’s unbelievable. Yet stocks and bonds are at all time highs, and we’re told that everything in the system is perfectly fine.
This is a bubble, plain and simple. And the longer they try to wrap up the world inside of it, the more destructive its consequences.
July 1, 2015
Yesterday over coffee, a friend of mine leaked the news that JP Morgan’s private banking division here in Singapore is going to start charging negative interest rates.
I almost fell out of my chair.
He’s a successful hedge fund manager and one of their best customers. So when he received the notice, he rang up his private banker and demanded to know why.
Between ridiculously low interest rates (banks are closing loans here for 0.9% or lower) and the increasing costs of compliance, “we can’t make money anymore…” was the response.
It certainly paints a clear picture of how screwed up the entire financial system is.
Compliance is a major component in this. Bankers around the world are buried up to their eyeballs in paperwork and regulations now.
They can’t make a move or approve a single transaction without first doing anti-money laundering, terrorist financing, and tax evasion due diligence.
Imagine it like this: your banker rings you up tomorrow and says,
“The government of China requires us to have all of our depositors fill out this paperwork. So I need you to send this form back to me ASAP…”
You’d probably think it was a joke.
Or at a minimum think, “Wait, what? I’m not Chinese. You’re not a Chinese bank. Who cares about some stupid Chinese regulation?”
And you’d be right.
Except that’s precisely what the United States is doing right now.
All over the world, bankers are contacting their customers and forcing them to fill out paperwork to comply with idiotic US government regulations. Even when there’s no connection to the US.
Here in Singapore, the bankers are completely miserable about it.
They’re so angry for having to call customers and say, “Yes I know you’re in India, and I know we’re in Singapore, and I know you’ve been a customer for 10 years. But you still have to fill out this US government form or else we’ll close your account.”
It’s ridiculous– all of this because the US government is bankrupt.
A few years ago they passed the Foreign Account Tax Compliance Act (FATCA)– a major part of their crusade to stamp out tax evasion and bring in more tax revenue.
FATCA is now in full force. Banks all over the world have been forced to enter into information sharing agreements with the IRS, meaning that they have to report on all of their customers and force them to fill out meaningless forms.
Needless to say, this costs a lot of money.
If you own a business, you can just imagine how frustrating and expensive it would be to have your employees toil away on senseless paperwork instead of… you know, doing real business.
The US government tells us that all of these disclosure programs have brought in about $6.5 billion in tax revenue.
Yet the costs of compliance are estimated to cost at least $8 billion, with some estimates over 10x higher.
Now that’s a neat trick. Uncle Sam gets the money and passes off the costs to everyone else.
And those who don’t comply with America’s rules are destroyed.
The most blatant example of this was last year, when a French bank was fined $9 billion for doing business with countries that Uncle Sam didn’t like.
Bear in mind, this was a French bank, not an American bank.
They violated no French laws. Yet they had to pay the US government $9 billion for doing business with places like Cuba.
(Ironically, Cuba is now BFFs with the United States, but it’s not like the bank is going to get a refund.)
More recently, the US government destroyed an Andorran bank that was accused of weak anti-money laundering controls.
And a few years ago they took down the oldest private bank in Switzerland.
Every bank in the world has seen these incidents, and they’re scared. They could be next.
And that’s why you can’t get a single financial transaction done anymore without first submitting a mountain of paperwork to prove that you’re not a terrorist. Or financing terrorists. Or laundering money. Or doing business with the Axis of Evil.
Even outside of banking it has become utterly ridiculous.
A friend of mine here runs one of the largest bullion depositories in Singapore; he wanted to buy some raw gold and have it made into bars, so he contacted a refiner.
The refiner said, “Sure no problem. I just need you to send us some compliance documentation before we get started.”
Then he sent a list of no fewer than 22 items that he needed to submit– copies of licenses, passports, certificates, etc.
22 items. Just to have a refiner make some gold bars. Ridiculous.
So obviously they’re not going to waste their time. Which means there’s some business that could have been done, but won’t, simply because of the compliance costs.
The US government has really screwed the world on this. Paperwork is the priority. Not business.
And all because America is bankrupt.
This trip to Singapore has been very eye-opening for me as I’m just now starting to understand how much people within the financial system despise the US government.
They feel like they’re being forced at gunpoint to be volunteer spies and tax collectors, simply because US politicians have been financially irresponsible.
And to me, it’s the biggest sign yet that America’s financial dominance is coming to an end. They’ve essentially engineered it themselves by alienating the whole world.
The transition isn’t going to be smooth. And it won’t happen overnight. But there will come a time, and likely soon, when the United States gets displaced.
And the rest of the world can hardly wait.
June 30, 2015
[Editor’s note: This letter was written by a Greek-American friend of Simon’s who is currently living near Athens.]
Since my arrival into the country late May, the topic of most discussions I overhear everywhere are naturally about the debt negotiations.
I’d call opinions in support or against the Tsipras governments’ activities pretty sharply divided.
Tsipras supporters are generally fed-up with 5yrs of blood-letting “from the Germans”.
Critics, on the other hand, see the euro as some sort of abstract membership in a club that must be retained at all cost.
A minority even criticize Tsipras for—get this—being too soft.
That’s especially true where I’ve been staying here in the port-city of Piraeus, which – being the country’s biggest port, is home to mostly blue collar, working class folks where unions more or less dominate.
To illustrate the political leanings around here, I hazily recall a headline in a newsfeed summing up their worldview quite accurately: “Piraeus – a neighborhood where Syriza is not quite left-wing enough.”
Like most locals, I’ve been steadily hitting the ATM for the past weeks to amass some emergency cash.
I ventured out today for the first time since the capital controls were installed yesterday to have a look around.
In Piraeus, I saw a queue of at least 30 people at a branch of Alpha Bank, and about 10 people at the Bank of Piraeus, where I waited.
The mood among the people waiting was pretty cool, friendly and even throwing a few funny comments around to address the obvious elephant in the room.
Older pensioners who were waiting, being used to getting their money from the window, had dusted off their debit card and received generous help from others on using it.
Experiences were shared on efforts to withdraw cash the previous day, where the published daily withdraw limit of 60 EUR/day for citizens was in effect (and confirmed by to me by the folks on line).
Today however, having presumably exhausted their supply of 20 euro notes, this ATM machine imposed upon users a de-facto daily withdraw limit of 50 Euros – since it was only dispensing 50 Euro notes.
As has also been reported, these capital controls do not apply to foreign bank accounts; and I can confirm to be true as my foreign bank card allowed me to withdraw my self-elected amount (of 300 EUR on this occasion) without issue.
There is certainly an unusual feeling of calm in the air. Car traffic resembles a quieter “Sunday” level than a typical summer weekday going into the high tourist season.
Citizens seem a bit more polite and helpful to one another than before, with no shortage of clever comments to break the tension on everyone’s mind being all in the same boat.
My first thought was to assume a newfound “keep calm and soldier on” state of unity among the populace.
But this is Greece, not Northern Europe. the words “quiet” and “calm” never share a sentence here.
No, this was something different, I believe, more of a “laugh to keep from crying” state of mind.
And being very experienced with Greece and Greek culture for my entire life, this realization was off-putting to say the least.
I’ll forward along any additional observations during my stay and leave you with one final, personal thought.
For all the talk and preaching of the risks one takes by placing all their “flags” into the blind faith and trust of one government in the abstract, it’s nothing like witnessing it firsthand.
Greece, right here – right now, is where that all “gets real.”
But more importantly, all the benefits of a multiple flags approach also “gets real” when you’re the guy who the crisis can’t touch.
I’m able to merely observe and participate without worry, sleeping tight knowing that all that what I’ve worked to achieve in his life is out of the reach of supranational, unelected & unaccountable EU autocrats.
June 29, 2015
It is somewhat amusing that the word ‘crisis’ originates from Ancient Greece.
It’s actually a medical term; Hippocrates wrote extensively about ‘crisis’ being the key turning point in disease progression– the time at which it either overcomes the patient, or it subsides.
And though the word ‘crisis’ is thrown about routinely these days, it’s safe to say that Greece is now truly in crisis in the purest sense of the definition.
Same with the euro, for that matter.
A century from now when future historians write about our time, it’s highly likely they’ll conclude that the euro was the dumbest invention of this age.
And that will really be saying something because the competition is fierce: pet rocks. Acid-washed jeans. FATCA. Google Glass. Fox Business News. Obamacare.
But the euro deserves first prize in the ugly contest.
The idea was to take completely incompatible economies, pretend that they were all Germany, and put them under one monetary roof simply because they were on the same continent.
This is ridiculous, especially today. It’s 2015. Geography is an irrelevant anachronism.
Imagine jamming Argentina, Australia, Angola, and Azerbaijan into a currency union simply because they all start with the letter “A”. It’s just as pointless and arbitrary as geography.
And when one of them starts to collapse (probably Argentina), rather than admit their mistake and dissolve the whole stupid idea, the bureaucrats spend massive amounts of other people’s money fruitlessly trying to hold the project together.
This is what’s happened in Europe.
Every time they wrote a bailout check or extended another loan package to Greece, all the bureaucrats did was INCREASE their risk exposure.
It’s like running back into a burning building– literally the *exact opposite* of what any sensible person would do.
Eurocrats have spent untold billions of other people’s money to save face, just so they wouldn’t have to admit that Project “Make Everyone Germany” has failed.
But what they never acknowledged was that no matter how much they extend and pretend, the disease will always reach its crisis.
And this financial disease is going to slay the patient. History is very clear on this point: debt kills.
Greece long ago reached the point of no return where they were borrowing money just to pay interest. Now it’s time for brutal honesty: game over.
The best example of brutal honesty is across the pond in Puerto Rico– America’s Greece. The governor of Puerto Rico, Alejandro Garcia Padilla, did not mince words when he described the island’s prodigious debt:
“The debt is not payable. There is no other option. I would love to have an easier option. This is not politics, this is math.”
The lesson is pretty clear: a bad system will fail. Especially when that system is built on a mountain of debt and deceit.
It might take years, but it happens. Just look at Greece; it’s taken nearly six years from when it was first identified to reach today’s crisis.
The time in between can either be an opportunity or a curse.
For some, time is an opportunity to take action– to quietly take defensive steps like moving money abroad.
Greeks had the opportunity to do that long ago when the euro was strong and the capital controls didn’t exist.
But for most people, time is a reason to procrastinate. They think that because it didn’t collapse today, tomorrow will be just fine. So they stick their heads in the sand. Or somewhere else.
And now those people are standing in line at ATM machines across Greece with empty garbage bags trying to figure out how to survive against strict capital controls.
June 25, 2015
In late June 1997, eighteen years ago, this part of the world felt pretty normal.
People had jobs. Inflation was fairly low. The economy was growing. Confidence was high. Life was great.
For years, most of the economies across Asia had seen meteoric, credit-fueled growth. Capital was pouring in from all corners of the globe, feeding a construction boom and stock frenzy.
Property prices soared. Stock prices soared. It was a classic bubble.
My friends who have been living in the region for decades tell me stories about how people bought property with the expectation to flip it and make a 50% return in no time.
Or they’d invest in the stock market without the slightest bit of analysis, simply because ‘stocks go up.’
That was the prevailing attitude in Asia back then– this time is different, and the good times will last forever.
But it all unraveled, practically overnight.
Thailand was hit first when a nasty currency swing caused the economy to practically grind to a halt. And the pain quickly spread to the rest of the region.
The local currency here in Indonesia, the rupiah, plunged 83% from its pre-crisis levels.
Dozens of banks went under, credit dried up, and many depositors got wiped out.
Then something interesting happened: the Indonesian economy simultaneously experienced BOTH inflation AND deflation.
On one hand, asset prices collapsed. Stocks dropped like a rock, and people felt much more poor.
But as the currency fell, suddenly imports became MUCH more expensive. So retail prices actually increased as consumers paid more, especially for imported goods.
This is about the worst economic scenario imaginable– asset prices falling with retail prices rising. But it happened.
Three important lessons I’d like to highlight:
1) Perhaps the great financial debate of our time is whether the unprecedented monetary expansion over the last several years will result in inflation OR deflation.
There are many a brilliant mind firmly entrenched in one camp or the other.
And the point is, there could easily be BOTH.
2) No one can predict precisely WHEN a correction will occur. But when the great unraveling does unfold, history shows that it happens very quickly.
3) People allow themselves to believe impossible things.
They’ll believe that asset prices can, will, and SHOULD go up forever.
They’ll believe that conjuring trillions of dollars out of thin air is consequence-free.
But they refuse to believe in the possibility that something will go wrong.
This time is never different.
June 25, 2015
If you’re filling out your FBAR this weekend, here are some things to keep in mind.
The FBAR is a disclosure form, not a tax form. So even though it goes to the treasury department, it’s not like there’s any money owed.
Nonetheless, this is not something to be taken lightly, as the penalty for failing to file can be anywhere from $10,000 to 50% of the amount in each account for each violation. It can even come with jail time.
To help you stay out of the government’s crosshairs, I want to go over the top 5 mistakes people make when it comes to the FBAR. (Note that this is not official tax advice, so please go over all of this with your personal tax accountant.)
1. Misunderstanding the threshold.
I can’t tell you how often we come across people who say think they don’t have to file because they don’t have more than $10,000 in any one bank account.
In fact, the rule pertains to anyone who has had over $10,000 in the last calendar year cumulatively across all foreign financial accounts.
On top of that, it’s not what the account value was at the end of the year, it’s the maximum account value during the year.
So first, go back and convert the amounts in each of your bank accounts to dollars using the IRS’s official exchange rates.
Then add together the values of all your accounts at their highest points in the year.
If the amount you come up with exceeds $10,000 then you have to report ALL of your foreign accounts.
2. Not knowing what to disclose
If you meet the filing requirement, you’re required to report ALL of your foreign financial accounts.
This begs the question, of course: what constitutes a ‘foreign financial account’?
As of now, on top of bank accounts, this also means mutual funds, brokerage accounts, commodities options or future contracts, and insurance policies that have a cash value.
Other stores of wealth such as real estate, coins, jewels, collectibles, and precious metals like gold or silver do not count.
Though keep in mind that gold in a ‘gold account’ does need to be reported, like GoldMoney. But storing coins or bars in a safety deposit box offshore does not.
3. Forgetting your online financial accounts
New innovations in digital finance have complicated this whole matter even further. But it is essential to get this part right, because in many ways it is the easiest area for them to track your activity.
Thus far, Bitcoin is considered by the IRS to be property rather than currency. So it does not count towards the threshold. For now.
You also want to make sure to include other places where you store money online, such as an international Paypal account.
This may go beyond standard financial accounts, as the IRS has even gone after a man for not disclosing amounts he held in online poker accounts.
They claimed that his ability to withdraw money from the accounts made them the equivalent to financial institutions, and the sites were incorporated in foreign countries they were subject to the compliance requirements.
4. Not knowing what counts as foreign
The government definition in this case is the physical location of the account, not the nationality of the institution itself.
For example, opening an account in the Hong Kong branch of Citibank, does count as a foreign account for FBAR purposes; whereas the New York branch of Bank of China does not.
Again, don’t forget to check where the companies of your online financial accounts are based.
5. Forgetting your children
There is no minimum age limit for the FBAR, meaning that even those under the age of 18 are subject to this compliance requirement.
This includes accounts held by a parent on behalf of their children, given that the child is a signatory of the account.
Yes, that’s right, the government even goes after your children.
Just make sure you file
Yes, there are a lot of nuances and fine print with the FBAR. But don’t be discouraged– just remember the most important rule of all: file the form.
Even if it’s less than perfect, even if you don’t fully understand, my personal view is that it’s important to make a good faith effort.
And if you have any doubts, it’s better to err on the side of reporting something rather than not reporting it.
June 24, 2015
[Editor’s note: Podcast link follows at the end of this article.]
I’m not going to make a trite comparison to Nazi Germany.
That seems to be the libertarian thing to do whenever politicians bring up gun control.
Yes, it’s true that throughout history, as long as there has been government, politicians have first sought to disarm their populations before descending into totalitarianism.
But I don’t think that’s what’s happening here.
In the wake of yet another horrible, senseless, shooting, there are once again growing calls to “do something” about all the “gun violence” in America.
This response is pretty natural. It’s cause and effect: when something creates pain, we want to stop the pain.
The logical syllogism is that if criminals are killing people with guns, then ‘we’ need to control guns.
Mr. Obama himself has been thoroughly vocal on the subject, plainly stating that “innocent people were killed in part because someone who wanted to inflict harm had no trouble getting their hands on a gun”.
Now he wants to do something about it.
And to be fair, I really doubt there’s any sinister intent; the President is just doing what he feels is necessary to protect people.
That’s the thing Presidents always say, after all. It’s always some line about how ‘protecting the American people is their #1 responsibility.’
Actually it’s not.
In fact, the word “protect” appears just one time in Article II of the Constitution (the part that deals with the President’s responsibilities).
And it has nothing to do with protecting the American people.
The word is used in reference to the oath of office that every President has taken since George Washington– to preserve, protect, and defend the Constitution of the United States.
Funny thing about the Constitution is that it includes the “right of the people to keep and bear Arms.”
So ultimately the President’s responsibility is to the Constitution, not to succumb to a knee-jerk reaction that doesn’t actually even make sense.
Yes people are angry. And perhaps even scared. But the logic doesn’t add up.
Number one, some people are just crazy. Completely batshit crazy.
This kid who shot up a church because he hated black people was crazy.
And there’s no amount of legislation that’s can protect people from crazy. If someone is really so psycho that they want to inflict harm, they’ll find a way.
I saw the most horrendous video the other day. And I’m sorry I watched it, as it showed a beautiful 17-year-old girl getting stoned to death by hundreds of men in her tribe.
Those guys are crazy. And they murdered this girl. No guns. Just rocks.
So if we’re going to have gun control, we might as well have some stone control to go along with it.
More importantly, whenever politicians talk about gun control, they express the most bizarre logic.
They think guns in the hands of civilians are a danger to society, whereas guns in the hands of the government are protecting society.
And whenever there’s some heinous incident of police brutality, they always tell us that it’s an isolated event that does not reflect on the police community in general.
Then they make the problem worse with massive federal funding that turns police forces into paramilitary organizations, complete with urban assault vehicles.
But the same logic should be applied for the millions of people who responsibly own firearms. One crazed lunatic certainly does not reflect on everyone.
Yet when an incident like this does occur, the government response is to more heavily control public access to firearms.
Look, it’s unfortunate to have to live in a world where there’s crazy people who want to do bad things.
But it would be even more unfortunate to live in a world where we are regulated against being able to defend ourselves against those people… and the institution with the monopoly over ‘protecting’ us has a long-term track record of violence, intimidation, and abuse.
Listen in to hear more on today’s Podcast.
June 23, 2015
If it just so happens that Caitlyn Jenner has an offshore bank account, it would be like lightning striking twice in the same place.
I say this in light of two recent reports that have shown how exceptionally rare these two phenomena are.
Per a recent Economist article I read in-flight, with data from the Williams Institute, it’s estimated that 0.3% of the US population identifies as transgender.
Meanwhile, the IRS has just released data saying that one million people have filed the FBAR; this is the disclosure form that Americans are legally required to file in most cases if they have a foreign bank account.
After stripping out corporate submissions and other duplicates, this works out to be slightly less than 0.3% of the US population.
Apparently it’s about as much of an anomaly for an American to have a foreign bank account as it is for them to question their gender identity.
(I’m not commenting on gender identity issues, just pointing out that it’s uncommon.)
This is a testament to how at-risk Americans are financially.
US banks, according to their own financial statements, are extremely illiquid, keeping only a nominal percentage of your deposit on hand as cash or cash equivalents.
The rest of your money, upwards of 97% in most cases, is placed in the latest investment fad, whether it’s loaning money to dead people, or buying risky mortgage pools.
Banking, sadly, is a herd mentality. Bankers will do what every other banker is doing regardless of the risks.
And since so many US banks are comfortable with liquidity rates approaching zero, every other bank is fine with this as well.
The implications of this are profound; the slightest bit of strain on their operations means that there won’t be any cash for you to withdraw.
In the best case scenario they’ll make you wait a few days to access your account, while they call back loans and other investments to try to scrounge up the money.
In the worst case scenario, if the banks are not only illiquid, but insolvent, you’ll never see your money again. This is increasingly likely.
Again, their own numbers show that top US banks are not well-capitalized and have been using clever accounting tricks to hide major losses for years. (I’ll record a whole podcast soon to walk you through this scam.)
Regulators know this and are starting to hold unscheduled, closed-door meetings with the banks to figure out how bad the damage is.
The Federal Deposit Insurance Corporation (FDIC) theoretically insures you against a major collapse, but even they report that they are not prepared to handle a financial crisis.
This then leaves the fate of the US banking system in the hands of a government that is insolvent to the tune of $18 trillion, and supported by a central bank who’s nearly insolvent as well.
This is hardly a stable system. And insiders know it– the US government has already baked in rules forcing individual depositors to “bail-in” the banks if the system fails.
The point here is that there are numerous risks in keeping all of your eggs in one basket. Especially when that basket is visibly rotting through the base.
Sadly, most Americans either are ignoring the obvious danger in the system or are simply not taking action. Either way, 99.7% of the population is completely unprepared for what’s to come.
There may be many more who are simply not filing, or who don’t meet the threshold. But even if the real number is 10x the IRS estimate, that’s still 97% of the population without a clue.
Hopefully you’re not in that group.
If you take a peek outside of the United States you’ll see that there are places of refuge out there.
Several banks abroad that make loans responsibly and maintain healthy reserves in case of potential shocks.
They are located in stable jurisdictions with well-capitalized central banks and solvent governments that can genuinely fulfill their promises of support.
Taking at least a portion of your savings and putting it into a more secure bank abroad is a sharp financial decision.
And it is also a completely legal one—as long as you make sure to meet the IRS’s compliance requirements.
This includes filing your FBAR by the June 30th deadline, just one week from today.
June 22, 2015
In May 1940, a visibly concerned Winston Churchill traveled to Paris to survey the city’s defenses.
Nazi forces had already blasted past French units and were rolling easily through the Somme Valley towards Paris.
There wasn’t much time. And Churchill bluntly asked the commanders in his notoriously pitiful French, “Où est la masse de manoeuvre?”
“Where are your reserve forces?”
He later wrote in his memoirs that their response was one of the most shocking moments of his life. “Aucune,” replied the commander. “We have none.”
Hitler took Paris within a few weeks.
And on June 22, 1940, seventy-five years ago to the day, French diplomats signed a peace treaty making France a vassal state of Nazi Germany.
Maxime Weygand, France’s most esteemed general, remarked of the occasion, “What we are paying for is twenty years of blunder and neglect.”
Given the extraordinary risks in the system right now, these words may soon come to haunt us as well.
Seven years ago a global financial crisis was spawned from too much debt, artificially low interest rates, and a complete misperception of obvious risks (like loaning money to dead people…)
They ‘solved’ that problem with even more debt, lowering interest rates below zero, and continuing to ignore obvious risks (like buying stocks at all-time highs).
You don’t have to be a financial genius to see the absurdity in this logic.
Based on their own financial statements, most Western governments are completely insolvent, and most major central banks are close to insolvency.
They’ve already ratcheted interest rates down to zero (or below) and have racked up a mountain of debt.
There are effectively no tools left for governments and central banks to deal with another major crisis.
Like Paris in 1940, they have no Plan B. They’re completely defenseless to support the financial system or the currency in the event of a major shock.
We should all take a moment to appreciate this level of incompetence. This doesn’t happen overnight.
It takes decades of “blunder and neglect” to engineer financial vulnerability on this scale. But they’ve somehow managed to pull it off.
The only question is– how long until the next financial shock? Because it’s not a question of ‘if’, but ‘when’.
Note- this is not some sensationalist, fear-mongering assertion. Quite the opposite. I’m incredibly optimistic about the future (more on that in a moment). But calling a spade a spade is merely a statement of fact.
Bear in mind that financial crises, depressions, and recessions are all ‘normal’ parts of the business cycle… even when there’s not this level of risk in the system.
In the United States, in fact, the government calculates an average of 57 months between the end of one recession and the beginning of the next one.
So just looking at the government’s own historical averages, at a minimum, a recession is long overdue.
Given all the other major risks around the world (a Greek default, bond illiquidity, the Chinese stock market, etc.), something much more severe may be in store.
Today, an independent, freedom-minded person knows they can’t rely on the government to reduce the risks they face in the world.
Luckily, you don’t have to. Your government might not have a Plan B. But all the tools are out there to take care of yourself and your family.
Consider this: most of the Western financial system is extraordinarily overleveraged right now.
Banks are highly illiquid. Governments are insolvent. Debt has exploded. And yet bond liquidity is drying up at an astonishing rate.
If you are 100% invested in this system, your money is exposed to significant risk.
Greece, Iceland, Cyprus, etc. are modern testaments to how easily governments impose capital controls when the metaphor hits the fan.
Why leave yourself so vulnerable, when instead you can easily shift some of your savings to a stronger, healthier banking jurisdiction abroad?
Or you could jump ship on the corrupt paper financial system entirely by owning real assets held abroad (or digitally)– precious metals, private businesses, real estate, and even cryptocurrency.
Another smart option is to establish a second residency abroad.
This gives you the legal right to reside elsewhere, ensuring that you always have a place to go in case you ever decide leave in hurry.
With the Nazis at the gate in 1940, I imagine a lot of people in Paris probably wished they had planned better.
And in general, a major crisis can turn people’s lives upside down if they’re unprepared.
But I’m optimistic.
We’re in the beginning of a major system reset thanks to a massive technological revolution.
Just as the Agricultural Revolution and the Industrial Revolution fundamentally changed human civilization forever, so will the Digital Revolution.
It will change everything– from the financial system to the power of government to the way that societies are organized.
And this is seriously exciting. There will likely be a number of upcoming crises as the old system fades away and a new system takes its place.
But for those who are prepared and in a position of strength with a solid Plan B, this is truly a time of tremendous opportunity.
June 22, 2015
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
The great biologist E.O. Wilson once observed:
“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
In few arenas are our mental shortcomings thrown into more stark relief than in the investment markets. Our brains evolved ‘fight or flight’ mechanisms to enable us to recognise potential predators in the wild. However, they have not yet had the evolutionary time to help us respond to threats – real or perceived – in the economy, bond or stock markets.
In recent weeks we’ve highlighted the aberrant price and yield volatility of longer dated German government bonds.
Since these instruments represent something close to the ‘risk-free’ rate for the euro zone, the fact that their prices are convulsing like someone in an electric chair hardly bodes well for future price stability across other capital markets.
It’s not fair just to blame Greece – how about the central banks that drove interest rates down to zero, effectively forcing investors into higher risk markets?
The markets cocktail of 2015 is a strong one, and whatever decision you ultimately make involves having to take a sip or two.
Bond prices are high (but we think unlikely to go meaningfully higher – there’s certainly insufficient value there for us).
Most stock market levels are high (but may easily go higher). Currency volatility is high. Commodity price volatility is high.
Even deciding to hoard cash is a decision to embrace an unusual level of risk these days – as Greece may confirm in due course.
For us, the sensible response is two-fold.
One: diversify across asset classes to an unusual extent as preparation for whatever future shocks may come.
Two: avoid the credit markets wherever possible, and favour instead high quality equity – or equity managers – offering the closest thing to a genuine margin of safety. To our way of thinking, nothing else makes any sense.
Tim Price is a principal at London-based Price Value Partners, a new global value equity fund, which invests precisely on the basis that Tim describes above. He is also the editor of Price Value International.
June 19, 2015
I’ve never been a big fan of celebrating my birthday.
I just don’t see the point of commemorating the day I popped out of the birth canal.
To give credit where credit is due, mothers do all the heavy lifting, and they’re the ones who should be celebrated.
So several years ago I started a tradition. Each year on my birthday I reach out and say thanks to people who’ve had a positive impact on my life (including my mother).
Now, today isn’t my birthday. But it is Sovereign Man’s.
Six years ago, June 19, 2009, my co-founder Matt Smith and I sent out the very first edition of Notes from the Field to an audience of practically zero.
Since then hundreds of thousands of unique, bright, freedom-minded people have joined our ranks. And I’d like to continue the tradition of expressing my gratitude.
But first if you’ll indulge me for a moment, I’d like to tell you about my amazing experiences in Nepal.
For the last few days, I’ve had the privilege of helping displaced Nepalis whose isolated mountain villages were wiped out from the recent earthquake.
Many of them ended up in Kathmandu with nowhere to go.
So several weeks ago a local woman I befriended established a special camp to provide food and housing for hundreds of victims.
This morning I rented a helicopter for her, and we went high up into the Himalayas right next to the Tibetan border to drop off supplies for the people still there, and to bring back the sick and elderly to the camp.
Spending time with them has been amazing.
Nearly all of the displaced villagers at the camp are farmers. And as they have nothing to farm right now, they’re using this free time to learn how to read, write, and speak English.
Everyone is so gracious and appreciative, even to be living in a loud, crowded tent city next to the airport.
For anyone who comes from a developed nation, it’s hard to not feel thankful.
I’m damn lucky to have been born in the United States in the late 1970s. I had loving parents. Electricity. Three meals a day.
And for that I am truly grateful.
But there is a huge difference between gratitude and complacency.
Nearly the entirety of Western civilization is in decline. Central bankers have put everyone’s livelihoods at risk by playing dice with the financial system.
And bankrupt governments are wiping out freedom as quickly as they can.
Yes, we can feel lucky that it’s not us squatting over a bucket in a refugee camp.
But that doesn’t mean we should be complacent and let our freedom slip away, simply out of guilt that our standard of living is higher than a refugee’s.
Human civilization has been pushed forward for thousands of years by people who said, “We can do better. We can achieve more. We can have more.”
It’s called progress. And it is ruined by complacency.
It’s normal to want to be free.
It’s normal to want to achieve more so that your children can have a better life.
It’s normal to want to prevent a destructive bureaucracy from destroying everything you’ve worked to build.
Gratitude and ambition are not sworn enemies; they can exist in harmony.
You can be grateful for your standard of living while simultaneously having the ambition to grow and protect it.
And you can be grateful for where you came from while still protecting your livelihood from your government’s incompetence.
In fact, I would argue that only those who are grateful for the freedom they used to have would care enough to preserve it.
From the very first email we ever sent six years ago, my goal has been to help provide the tools and education for our readers to do this: become more prosperous and more free from a system that has failed.
And there are major benefits to doing this that go far beyond ourselves.
One thing that I didn’t mention is that my friend’s efforts in Nepal have all been financed privately.
She’s received zero help from any government, nor are there any NGOs running the facility.
It’s a pretty clear lesson; for anyone who cares about helping the less fortunate, one of the most powerful ways to do so is to make sure you remain one of the fortunate.
And you can’t do that if everything you’ve worked to achieve gets wiped out by capital controls. Or inflation. Or excessive taxation that goes to finance destructive wars.
Taking rational, legal steps to increase your freedom means that YOU are in control of your life and choices– in this case, to choose to help people, instead of helping your government drop bombs on them.
This is what it means to be a Sovereign Man. It’s the freedom to choose.
I’m grateful to have had this experience here, and to have had six amazing years of daily conversations with you. I look forward to many more together.
June 18, 2015
I’ll never forget the Oath of Office I took when I was commissioned as an Army Intelligence Officer all those years ago.
The most important part is where you swear to “support and defend the Constitution of the United States against ALL enemies, foreign and domestic.”
That was the part that kept ringing in my head as George W. Bush went on TV in the run-up to the Iraq war talking about weapons of mass destruction.
We had been on the ground in Kuwait since late 2002, months before the invasion of Iraq kicked off. And every time Bush told that lie, I thought about my oath.
I’m disappointed to admit that, back then, I didn’t have the courage to go up against the big Army machine… to march into my Battalion Commander’s office and say, “Sir, we must defend the Constitution against the President of the United States.”
I knew I would get crushed.
When I left the military, I started noticing all the other ways in which the government turned the Constitution into a punchline. And that practice has only accelerated.
I came up with a different solution. Instead of fighting some faceless machine, I voted with my feet and left the country.
That, coupled with my drastically reduced tax bill thanks to being an overseas expat, has prompted a lot of use of the word ‘unpatriotic’ since I started writing this letter six years ago.
I find this appallingly ignorant.
The American Revolution itself was predicated on the inequity of taxation without representation.
Are your interests represented when they buy bombs and body scanners? Mine certainly aren’t.
Yet people who define patriotism by the frequency and rapidity of their flag-waving think that we all have some collective duty to ignorantly believe whatever we’re told by the government.
I disagree. So does the New Oxford American Dictionary, which defines ‘patriot’ as
“a person who vigorously supports their country and is prepared to defend it against enemies or detractors.”
There’s that phrase again– ‘defending against enemies.’
Who exactly are these ‘enemies’, by the way? Are they men in caves who hate us for our freedom? Arab teenagers with intense sexual angst and a collection of firearms?
No. The real enemies are not foreign… but domestic. It is the apparatus of government itself that has collapsed upon the founding document of the nation.
It’s not unpatriotic to lament how far a government’s practices have diverged from its Constitution.
It’s not unpatriotic to want to be free.
And it’s not unpatriotic to take steps to make that happen.
In fact, people who think it’s everyone’s patriotic duty to pay taxes are only feeding the beast that makes them less free.
And it’s entirely delusional to think that all of this can change by going to a voting booth.
There’s no politician that’s going to change this.
Nobody is going to stand on stage and say, “My plan is to eliminate entire departments of government, fire half of all government workers, terminate social security, and default on the debt.”
Elections are pointless charades. But rather than vote for new people, we can simply vote to restrict the resources they have available.
Yes, there are legal obligations to pay tax. And everyone should abide those obligations or risk pointless imprisonment.
But with proper planning, tax obligations can be minimized.
In my case, I left the country.
This provides up to $100,800 in tax-free income based on the Foreign Earned Income Exclusion, and that’s before taking into account additional deductions, allowances, and exclusions.
Recently I used my tax savings to finance a new prosthetic leg for an amputee war veteran that had been abandoned by the US government, and to buy food for earthquake victims here in Nepal.
Had I not taken steps to reduce my tax bill, a big chunk of my income would have paid for more soldiers to get their legs blown off, and more bombs to be dropped by remote control on brown people.
Instead, now I get to decide how my income and savings can best have an impact on the interests that I believe in.
Let’s call it “representation without taxation”. And it’s completely legal as long as you follow the rules.
Sure, not everyone has the ability to leave the country. But there are options to fit any lifestyle and circumstance.
In addition to taxes, for example, it’s important to consider moving a portion of your savings abroad where it can’t be confiscated or frozen by capital controls.
Safeguarding your wealth is a huge part of this strategy, in fact.
The larger point is that taking steps to preserve your wealth and freedom is not unpatriotic.
And for anyone who truly cares to defend your country from its domestic enemies, starving the beast is one of the most powerful tools you have available.
June 17, 2015
Before leaving the house early one morning in 63 BC, an anxious Julius Caesar told his mother, “Today thou shalt see thy son either pontifex maximus… or an exile.”
Caesar was running for his first BIG elected office- pontifex maximus, the high priest of Rome. And he was a young upstart at the time.
His opponents were all older, more reputable men. And his chances were low.
But Caesar had an ace up his toga. Since he couldn’t win on merit, he planned to buy the election, blowing ridiculous sums of money to butter up the voters.
He spent lavishly on games, gifts, and feasts. And he borrowed nearly all of the funds to do it.
This was an enormous risk for him; if Caesar lost the election, he wouldn’t have been able to repay his financiers, and likely would have fled the city.
Caesar had borrowed so much money, in fact, that he single-handedly depleted cash reserves among Rome’s major lenders, causing a significant bump in interest rates.
Cicero remarks on this in a letter to a friend, writing: “Bribery’s thriving… the interest rate has doubled.”
Of course, it wasn’t technically ‘bribery’.
Ancient Rome had a very fine line between bribing voters (known as ‘ambitus’), and simply being a generous guy (‘benignitas’). Caesar insisted he was the latter.
When the votes were finally counted (or not counted), Caesar was declared the winner, thus continuing the long-standing tradition of buying your way into office and rewarding your benefactors with political favor.
He wasn’t the first to do this. And he certainly wouldn’t be the last.
In the Land of the Free today, the modern scion of the Republic, very little has changed from Ancient Rome.
One primary difference is that rather than spending campaign money on gifts and games to entertain voters, the election itself has become the entertainment.
Presidential races today are nothing more than a two-year, multi-billion dollar circus performance.
Mainstream election coverage already ranks among the most banal reality television, focusing on scandal, conflict, one-liner zingers, and hairstyle choices.
And now that Donald Trump has entered the race, the 2016 Presidential election will assuredly become the Greatest Show on Earth.
I can just imagine the media eating up his witty use of the phrase “You’re Fired” in campaign speeches that refer to his opponents.
But perhaps it’s America that’s fired.
Sure, you get to engage in the most demeaning exercise of casting a ballot so that one of these people can steal half of your money and use it to make you less free.
They call that ‘voting,’ and we’re told it’s our civic duty. But it’s just an illusion.
Just like in Caesar’s time, the election will go to the people who spend the most money.
But I’m not talking about the candidates. They’re just puppets. Entertainers.
I’m talking about the people who bankroll them.
These financiers have learned some valuable lessons since 63 BC: you never back just one horse.
Instead, they hedge their bets by heavily funding multiple candidates and buying influence over all of them.
One only need look at Hillary Clinton’s top donors to get a sense of who they are: Citigroup, Goldman Sachs, JP Morgan, etc.
Anyone who strays from their interests has his/her funding cut and is pronounced ‘unelectable’ and ‘unpresidential’ early in the circus by the media ringmasters.
This makes voting nothing more than a pointless, demeaning illusion of choice between candidates who have already been preselected by their financial backers.
It reminds me of what it used to be like wandering down the grocery store’s cereal aisle when I was a kid.
Sure it seemed like there were a ton of options.
But when you really looked closely, you could see that all the products were all packed full of the same unhealthy chemical ingredients and GMO grains.
And only about three companies produced all of them– Kellogg’s, Post, and General Mills. Not much of a choice after all.
Yet people fall for this scam every single election cycle. They think that their vote matters, and then they go to the polls and ‘choose’ whoever has the best jump shot, or whoever promises them the most free stuff.
(Remember, it’s not bribery if a candidate is just being generous!)
Curiously the country always ends up worse than before– less free, and more broke.
If you really want to vote in a way that counts, you have two far more powerful ballots you can cast.
They’re called your feet.
June 15, 2015
In the history of post-Norman monarchs in the UK there have been nine Henrys. Eight Edwards. Four Williams. Four Georges. And three Richards.
Yet there was only one John.
In fact, in nearly 1,000 years since William the Conqueror took England in 1066, John was the only King to never have his name repeated.
And with reason. He wasn’t exactly a popular guy, widely despised by his people and nobles alike.
John constantly taxed and plundered his subjects to finance pointless wars abroad. He extorted them with ever-increasing fines and imprisoned people for absurd, victimless crimes.
He used his local police (sheriffs) to confiscate private property under threat of violence, building them into the most feared and powerful force in the kingdom.
According to Harry Buffardi’s book “The History of the Office of the Sheriff”, King John deliberately selected “men of harsh demeanor for the post”.
(Does any of this sound familiar?)
The historical evidence suggests that John was so hated that he was assassinated by poison; Shakespeare dramatizes this episode in his little known play King John, which contains the most wonderful death line “[N]ow my soul hath elbow-room. . .”
Before he departed this earth, however, King John was forced to make certain concessions to the nobles who had waged all-out rebellion against him.
After taking London, the rebel barons met John to formalize these concessions at a picturesque riverside meadow called Runnymede, not far from Heathrow airport.
The contract they hammered out on June 15, 1215 (which is actually June 22nd in our modern calendar) contained a list of rights and privileges that eventually became known as Magna Carta.
And to this day it continues to be held up as some sort of holy document that spawned everything from the English Bill of Rights to the United States Constitution.
Over the weekend I went to a special Magna Carta exhibit at the British Library in London, which praised the document for building the foundation of personal liberty (ironically while all of us were under CCTV surveillance).
That’s certainly the official story.
The National Archives in the US calls Magna Carta “one of the most important legal documents in the history of democracy,” and that “during the American Revolution, Magna Carta served to inspire and justify action in liberty’s defense.”
Yet this is a total myth, as much as “Columbus discovered America.”
The truth is that Magna Carta was a document for the nobles, by the nobles. No one gave a damn about the common people.
The document outlined numerous privileges and protections for nobles, including lower taxes, freedom from wanton imprisonment, and due process.
(Curiously Magna Carta also mandated widespread deforestation across England.)
Yet virtually all of these wonderful rights specifically excluded the serfs. Magna Carta only entitled the Nobles to freedom.
Very little has changed.
Eight centuries later, we still have nobles who come from political-banking dynasties… House Clinton, House Bush, House Goldman… all living above the commoners.
Meanwhile governments and police are still extorting people, confiscating their property through civil asset forfeiture, imprisoning them for victimless crimes, and waging pointless wars abroad.
Sure we can sing songs about our freedom. But that doesn’t make it true.
Neither does writing down freedoms on a piece of paper.
Governments’ behavior shows that they couldn’t possibly care less about any rights that were written down in some centuries-old charter.
Just because it’s in a document doesn’t mean they’ll adhere to it.
And that was perhaps the most humorous irony at the exhibit. At the very end they had an original Magna Carta from 800 years ago. But it’s been so worn away with time that it was completely illegible.
I chuckled and thought to myself, “That’s about right.”
But here’s the thing: we don’t need a piece of paper to tell us that we’re free.
Human beings are born free. Freedom isn’t handed to us by kings or politicians. It’s not awarded by contract.
Freedom is natural. And we don’t have to wait around for House Clinton or King Barry First of His Name to grant it to us.
It’s fine to write it down. But if people don’t truly care about being free, the document will amount to nothing but an illegible artifact at a museum exhibit.
Each of us has the ability to do something to take back our freedom. All the tools and resources already exist.
It’s the Digital Age. We’re no longer bound by geography. Banks. Governments. Even borders themselves. They’re all becoming increasingly irrelevant.
This is powerful stuff, and critically important to take advantage of while things are still ‘normal’.
Right now it’s pretty clear that the temperature is rising. People are starting to wake up to the fact that, when it really counts, they’re no more free than a medieval serf.
They pay taxes at gunpoint. They have no access to real justice.
And many of the most important aspects of their lives, from the value of their savings to their medical care to the way they’re allowed to educate their own children, are tightly controlled.
If the surge in riots and anti-government violence is any indicator, it looks like history may be repeating itself. And we may soon be reaching our own Runnymede moment.
June 15, 2015
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
Today marks the end of the most notorious example of fiscal insanity in modern times.
The Reserve Bank of Zimbabwe today begins a process to “demonetise” its now irrelevant currency, the Zimbabwe dollar.
Between now and September 30, Zim dollars can be exchanged for the US variety.
Holders of Zim dollars should not get too excited. As the FT reports, accounts “with balances of zero to Z$175 quadrillion will be paid a flat US$5”.
As the proud owner of a Z$100 trillion note, I may not take up this generous offer. A Z$100 trillion note has far more comic potential even than a US$5 replacement.
The Central Statistics Office of Zimbabwe stopped publishing estimates of price rises in 2008, when inflation was rising at an annual 231 million percent.
But it couldn’t happen here. Martin Wolf of the FT has said so, so it must be true.
And yet the suspicion lingers. What happens when trillions of dollars, pounds, euros and yen get printed out of thin air? How can money printing be the answer? If it were, Zimbabwe would be the richest country on earth.
So here we stand, seven years into the post-Lehman financial era, and base rates still squat at around zero. Government debt loads are even more creakingly immense.
Much of the banking system, especially in Europe, remains unreconstructed.
Emergency central bank support for the financial sector has bought us seven years. It doesn’t seem to have bought us much else.
And Greece remains a thorn in the side of the euro zone grand project.
More ominously, there are signs of fault lines emerging in the bond markets of the euro zone.
Sharp sell-offs over recent weeks have led many to ask whether a 40-year bull run in interest rates may finally be on the turn.
Bond market volatility has been exacerbated by regulator-imposed curbs on bank inventory.
Like the other major central banks, the US Federal Reserve, through the aggressiveness of its own stimulus and price distortion, has painted itself into an uncomfortable corner.
Art Cashin, UBS’ director of floor operations, told CNBC: “While the Fed is talking about being measured and data dependent, they’re potentially playing with fire here because they could start spontaneous combustion that they can’t control.”
Bonds remain outrageously overvalued, in most cases, despite the recent sell-off, which could be a precursor of more dramatic moves to come. But a number of major stock markets are hardly cheap.
Robert Shiller’s cyclically adjusted p/e ratio for the S&P 500 index stands at 27 times. Its long run average is 16.6.
The US broad market has only been more expensive than today twice in history – in 1929, and in 2000. Neither was an auspicious time to be buying US stocks.
So what is the rational investor to do?
The current titanic struggle between deflation (the markets) and inflation (central banks) has been well described as a tug-of-war.
On some days, deflation appears to have the upper hand.
On others, inflation seems to be in the ascendant.
At other times, both forces appear to be in an uneasy state of near stability.
We think the ultimate outcome is more likely to be inflationary, since inflation answers the debt problem in the most politically feasible way.
Either way, the outlook for most bond markets seems poor to us, given that supposed safe havens in the debt world actually have lousy creditworthiness.
And the very substance of credit derives from the concepts of belief and trust. Once confidence in the system cracks, it is unlikely to return in a hurry.
What is the pragmatic solution ?
Given the outlook for both bond and stock markets, we wrote a few weeks ago that we believed it was to own:
- Shares in successful businesses from all over the world, on an index-unconstrained basis
- With competent and honourable management
- Who think like owners because they are owners
- With companies that have little or no debt
- And crucially, not to overpay for shares in such businesses, but to maintain the ‘margin of safety’ that comes from buying them at hugely attractive multiples.
Interest rates haven’t been this low for 5,000 years. Bonds as an asset class are now compromised and no longer offer risk-free returns.
Equities seem to be the more attractive asset class but it makes sense to be highly selective, and to avoid the more egregiously overvalued, instead favouring lower risk, higher quality, truly defensive stocks.
We are clearly inhabiting a strange and unprecedented financial environment. There has been much malinvestment, and in our view far too much ill-conceived and certainly untested monetary stimulus.
As Robert Louis Stevenson once observed, “Sooner or later everyone sits down to a banquet of consequences.”
Tim Price is a principal at London-based Price Value Partners, a new global value equity fund, which invests precisely on the basis that Tim describes above. He is also the editor of Price Value International.
June 11, 2015
OK this is really getting ridiculous.
Despite being the sacred keepers of the Catholic faith and trustees of the meek, the Holy See has just inked a deal with the US government putting the Pope in bed with the Internal Revenue Service.
It’s so bizarre you couldn’t possibly make this stuff up anymore.
The Vatican City has been forced into sharing information with the US.
So now, like a good little doggy, they’re obliged to cough up financial records on anyone they’ve ever had dealings with whenever Mr. Obama snaps his fingers.
I’m not sure this is what Pope Francis had in mind when he called for an end of “the cult of money and the dictatorship of an economy”.
Ironically, the oft-quoted Book of Proverbs says that “[T]he borrower becomes the lender’s slave.”
And this is true in almost all cases. Except, apparently, when it pertains to the US government.
Despite having borrowed more money than any nation in the history of the world, the US government still acts like everyone’s master, including dictating the most ridiculous terms on financial agreements like this.
It’s all part of FATCA– the 2010 legislative joke formally known as the Foreign Account Tax Compliance Act.
We’ve talked about this before– FATCA may prove to be the greatest disaster in US history. And there’s one simple reason why.
Ever since the end of World War II, the US banking system has formed the backbone of global banking and finance.
Right now, if a South African refiner buys oil from a Brazilian producer, that transaction will likely be settled in US dollars and clear through the US banking system.
In other words, the money will flow from South Africa to New York, and from New York to Brazil.
It’s like this with most international trade transactions, particularly commodities contracts like coffee, oil, and metals.
For over 70 years now, the rest of the world has trusted that the US government would continue to allow free and unfettered access to a sound, safe, stable banking system.
And… one would think that the US government would respect this tremendous responsibility of overseeing the world’s core banking system. Yes. One would think.
But that hasn’t happened at all.
In 2008 after Lehman Brothers failed, suddenly the world got a dose of reality.
After an epic financial disaster which brought down some of the largest banks in the United States, suddenly the world realized that the US banking system wasn’t so safe after all.
One bank after another failed. Several had to be nationalized. Nearly all of them had to be bailed out.
Fool me once, shame on you.
Then in 2010, the US government passed FATCA… which mandated that every bank on the planet jump into bed with the IRS.
They further threatened that any bank which did not comply would be kicked out of the US banking system… essentially choking off a foreign banks’ ability to conduct international business.
Fool me twice, shame on me.
Then last year the US government went after French bank BNP Paribas, fining them a whopping $9 BILLION for doing business with countries like Iran and Cuba (though the latter is now curiously America’s BFF.)
And naturally, if BNP didn’t pay up, the US government threatened to kick them out of the US banking system. Notice a pattern?
Fool me thrice. OK how many f**king times does the world need to be fooled before they do something about it?
Too many times, apparently. But it’s finally starting to change.
The world has realized that the US government has a track record of reckless irresponsibility.
They’ve proven to the world that they’re willing to take the sacred international banking obligation that they’ve been entrusted with and turn it into a weapon of intimidation.
This is unbelievably stupid.
The US government is taking a giant, steaming dump on its last remaining competitive advantage.
Having control over the global financial system is for all intents and purposes a license to print money.
It meant that the US could create as much money as it wanted, indebt itself as much as it wanted, because there would always be strong foreign demand for dollars.
But you can only bully the rest of the world so many times before foreigners start looking for alternatives.
And that is happening.
The new China International Payment System (CIPS) will be the first credible option in conventional banking to circumvent the US. And it’s coming online later this year.
Not only is CIPS not dependent on the US dollar or the US banking system, but it also fixes a number of technological inefficiencies with the current system.
Over the long-term, the end result will be fewer banks using the US system, resulting in a substantial decline in their use of US dollars and their ownership of US government debt.
Think about it like this– foreigners currently own a third of US government debt.
If they no longer have as strong an incentive to own US dollars and start reducing their load, who’s going to pick up the slack?
Who will the US government turn to when they need to borrow money?
Whether you want to or not, the US government will find the most creative ways possible to ensure that you invest your money in the ‘safety and security’ of government bonds.
Welcome to the coming capital controls.
June 10, 2015
If you’ve been a reader of Notes from the Field for any time, you’ve probably realized that history is a major passion of mine that routinely finds its way into this missive.
19th century English politician John Dalberg-Acton, who famously remarked “power corrupts, and absolutely power corrupts absolutely,” also wrote once that History is not a burden on the memory but an illumination of the soul.”
It’s not about dates and places and battles… but stories.
History is far better than a soap opera or romance novel. It’s the ultimate reality TV show, following people around their lives and getting an up close view of their conflicts and bad decisions.
We have a lot to learn from these stories. They may not repeat verbatim. But their stories certainly reflect into our own time.
They teach us that ‘this time’ is never different.
Today we’re merely a slightly more evolved version of the roughly 100 billion people who came before us. And we’re susceptible to the same mistakes they made.
Over the past 15 years I’ve taken history a step further into my own personal life and have spent a lot of time tracking down my family history.
My paternal line is originally Norman, the medieval barbarian tribe from northern France.
They came here to Oxford County in southern England at least eight centuries ago, and the first evidence of them in public records dates back to 1250.
I’ve even found old court cases dating back to 1302 in which an ancestor of mine was sued by Italian merchants for the sum of 10 pounds (a huge sum back then).
It’s amazing to think about. In the 14th century, Italy was the dominant superpower in Europe, and England was just a petty kingdom.
Marco Polo was traveling the orient at the time, and the gold florin of Florence was the primary international reserve currency.
Then things changed. Italy declined and Spain rose to prominence. Then France. Then England. Then America.
I’ve traced my family’s history through all of this, through the rise and fall of nations, and to the colonies across the Atlantic in the early 1600s.
And just like people and families which rise and fall, nations, too, have a life cycle.
They’re born. They grow. They peak. They decline. And often they’re born again.
This life cycle is greatly accelerated when governments manipulate the one universal ingredient of prosperity: freedom.
It might sound hokey and cliche, but there is nothing more important in a strong economy than freedom.
How much more wealth would there be if 30% of your income could be reinvested back into the economy instead of squandered on destructive wars and wasteful domestic programs?
How many more jobs would there be if starting a new business wasn’t so fraught with taxes and stupid regulations?
How much greater would the savings rate be if interest rates weren’t constantly being manipulated down to zero?
But the trend in the world, and especially in the developed West, is less freedom. Not more.
And no big surprise, prosperity has declined right along with it.
In the US, average wages are lower than they were even 15 years ago. This is hardly progress.
Meanwhile debt levels have exploded higher around the world as governments sacrifice future growth to finance wasteful consumption today.
It’s a vicious cycle, because as prosperity declines and governments become more bankrupt, they curtail freedom even more.
This causes an even greater decline in prosperity and even more government bankruptcy, which causes them to curtail freedom even more.
The solution is you. The individual. And in today’s podcast I’d like to explore some of the options that are available to you.
June 9, 2015
In the 5th century BC during the Golden Age of Athens, culture and intellect flourished in Ancient Greece more than at any other time or place in history up to that point.
It was an amazing period of discovery.
Philosophers Socrates and Plato, writers Sophocles and Euripides, historians Herodotus and Thucydides, all lived during this period and completely revolutionized their fields.
One of their contemporaries was the physician Hippocrates, who did more to advance medical science than any other human being until Louis Pasteur.
In his book “On Sacred Disease,” Hippocrates became one of the first to propose that illness wasn’t a curse from the gods, but rather the result of some natural cause.
In his book “On Ancient Medicine”, he wrote extensively about how good food and regular physical activity were the best ways to ward off disease and stay healthy.
But most famously, his book “The Oath” describes his solemn vow to practice medicine exclusively for the benefit of the patient, which is often colloquially summarized as ‘do no harm.’
To this day physicians still recite some version of the Hippocratic Oath, swearing to uphold standards of integrity and professionalism for the benefit of the patient.
Over drinks last night in London, my colleague Tim Price wondered aloud why there is no Hippocratic Oath in finance.
It’s incredible when you think about it– finance is one of the most heavily regulated industries on the planet.
And yet with legions of bureaucrats regulating their every move, and compliance officers looming over banking like Dark Lords of the Sith, there’s still an incredible amount of impropriety going on.
Brokers and exchanges happily sell away our investment data to give an edge to High Frequency Trading firms.
Just a few weeks ago some of the largest banks in the world pled guilty to CRIMINAL charges of rigging foreign currency rates.
In fact, they’ve fixed just about every market they’ve ever gotten their hands on, from silver to LIBOR to just about everything else in between.
Banks gamble away their depositors’ savings on risky investment fads, and money managers stuff their clients’ retirement accounts full of overpriced stocks and ho-hum mutual funds.
Where is the oath for bankers and money managers to stand up and say “I promise to do my best for the sole benefit of the client”..?
It doesn’t exist. Even more importantly, every incentive in the industry is to do the exact opposite.
Chuck Prince, who once presided over banking giant Citigroup famously said once that “as long as the music is playing, you’ve got to get up and dance.”
Prince ultimately resigned from Citi after the bank suffered massive losses in the credit crisis. Apparently his dancing skills weren’t up to snuff.
But consider the magnitude of that statement if you’re a young banker.
The guy who dominates your industry is basically telling you that you’ve got to get out there and keep dancing, even when all the indicators suggest that the market is about to collapse.
This pretty much sums up the financial industry today.
It’s not that these guys are stupid. It’s not that they can’t see the writing on the wall. It’s not that they’re blind to the tremendous amount of risk in the system.
The issue is that their jobs are on the line.
Finance doesn’t take kindly to mavericks. Despite all multi-million dollar bonuses and huge salaries, people have absolutely every incentive to follow the herd and continue putting their clients’ savings in risky investments.
Anyone who doesn’t tow the line is quickly fired.
This is nowhere close to ‘do no harm.’ It’s much closer to ‘screw anyone you have to screw to keep your job.’
Sound, safe, objective financial advice is a rare thing. And that’s why your ultimate financial decisions, like your health decisions, should never be outsourced.
If you don’t understand investing and personal finance, that’s not a reason to outsource everything to a money manager.
Rather, it’s a reason to educate yourself about investing and personal finance.
But like Hippocrates told us about health, it doesn’t need to be complicated.
Just like a brisk walk and a quality meal go a long way in promoting good, long-term health, sometimes good, long-term investing can be as simple as buying quality companies run by honest, talented managers.
June 8, 2015
I’ll be up front with you and say that this video is disturbing.
It’s like a bucket of ice-cold water thrown in the face of the dream world that most people are walking through.
Watching riots on TV in places like Baltimore and Ferguson, it’s easy to think, “That couldn’t happen here. All that police violence only happens in poor communities.”
This weekend it was the safe, quiet suburb of McKinney, Texas, about 30 minutes outside of Dallas.
McKinney is no gang-infested slum; it’s an affluent bedroom community with an average household income over $96,000 according to Colliers International.
(Having grown up just a few miles away, I would add that it’s pretty sterile too, full of big-box retailers, megaplex cinemas, and chain restaurants.)
Over the weekend some local kids were having a summer pool party to celebrate a friend’s birthday.
With that many adolescents crammed together in one place, there was undoubtedly some silly teenage drama going on. And police were called to the scene.
One of them starts off almost immediately screaming profanity-laden tirades at the kids, many as young as 14.
This courageous officer’s advice to young people included such gems as “Sit your asses down,” and “Don’t make me fuckin’ run around with 30 pounds of goddamn gear on. . .”
At one point throws a girl to the ground who had apparently failed to ‘get her ass out of here’ with appropriate alacrity.
You can see him grab her neck and attempt to shove her face into the pavement.
The kids all start screaming. Two of them rush over to try and help their classmate, at which point Captain America pulls his gun out and advances menacingly towards them.
They bolt. So he turns his attention back to the girl, grabs her head once again, and screams “ON YOUR FACE!!!” as he pins her down on the ground and puts her in handcuffs.
It’s really disturbing to watch.
Had it been a parent trying to grind his kid’s face into the pavement, Child Protective Services would have immediately removed the girl from the home and the father would be rotting in jail this very moment.
But when a police officer does it, he goes on ‘leave’. And only when he’s unlucky enough to be caught on camera.
If some random stranger grabbed your child and started attacking her, you’d instantly turn into Bruce Lee and put the guy in a Kung-Fu death grip.
But when a police officer attacks your child, the government expects you to just stand around and watch.
That’s one of the most disturbing things from the video.
You’ll see there are a bunch of adults in the video milling around with their hands in their pockets while the kids get abused.
I appreciate they’re doing whatever they feel like they can do to make the best of a bad situation.
But they’ve been indoctrinated for so long that their reaction is to be obedient and submissive. They don’t interfere with ‘the law’. They know their place and they act like it.
The kids, on the other hand, are all still young enough that they haven’t totally subordinated themselves to the state. There’s still a part of them that’s free.
So when the cops get totally out of control, their instinct is to fight back.
That is, after all, our natural instinct– to be free.
We have to -learn- to be intimidated and subservient to the state. We have to learn to stand around with our hands in our pockets while our children are abused. And that learning takes place in none other than the public school system.
I checked the McKinney Independent School District’s website and found that these kids all recite the Pledge of Allegiance in the morning, including that part about “liberty and justice for all.”
They sing songs gushing about freedom in America. But they just got a taste of how free they really are.
Hopefully that lesson stays with them. It’s certainly more powerful that an entire semester of the mandatory civics class they have to take.
After watching the video I actually downloaded a copy of the staple civics textbook Magruder’s American Government, and found a rather prescient passage in the first chapter:
“This nation was founded by those who loved liberty and prized it above all earthly possessions.”
True statement. But that instinctive flame to be free has gone out for so many people, not only in America but across the world.
And no nation can rise again until that flame is rekindled.
The textbook continues:
“To preserve and protect [their rights and liberty], each generation must learn and understand them anew, and be willing to stand up for them when necessary.”
Perhaps that time is finally coming.