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Updated: 9 hours 21 min ago

Congress brings Atlas Shrugged to America with this new bill

Fri, 09/19/2014 - 11:13

September 15, 2014
Santiago, Chile

It was known as Directive 10-289, and it was the government’s last-ditch, desperate effort to control the collapsing economy.

The President, along with some of his senior advisors at the Bureau of Economic Planning and National Resources, all widely agreed that the only way out of the crisis was expand government power.

The directive was passed quickly, and among its key provisions:

“Point One. All workers, wage earners and employees of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment. . .”

“Point Two. All industrial, commercial, manufacturing and business establishments of any nature whatsoever shall henceforth remain in operation, and the owners of such establishments shall not quit nor leave nor retire, nor close, sell or transfer their business. . .”

If you’re searching through your favorite news feed right now wondering why you haven’t heard of Directive 10-289, it’s because the law is fictitious. It’s part of the story from Ayn Rand’s Atlas Shrugged.

At that part in the book, the economy was in a full blown crisis.

The government had engineered one emergency after another, and their only idea to ‘fix’ things was to award themsleves even more power and control over the economy… specifically to freeze everything in place.

No one could be fired or quit his/her job. And no business could stop working. It didn’t matter how much money they were losing.

Crazy idea, right? This could never happen in reality… at least not in the West. It sounds like something straight out of the Soviet Union– forcing unprofitable companies to stay in business.

Enter H.R. 5445, the “Postal Jobs Protection Act of 2014″.

I was utterly stunned when I read this. The meat of the bill consists of just 26 words:

“Notwithstanding any other provision of law, no mail processing facility operating as of September 1, 2014, may be closed or consolidated prior to December 31, 2015.”

Let that sink in a minute: they want to pass a law to ensure that NO US postal center can be shut down through the end of next year.

For the sake of context, let’s walk through the numbers.

In its most recent quarter, the US Postal Service lost a massive $1.9 BILLION. That’s far worse than the $699 million loss they rack up over the same quarter last year.

And so far this fiscal year, USPS has lost over $4 billion.

What’s more– the post office has maxed out its $15 billion credit line. They have almost no liquidity left to continue financing operations, they’re not profitable, and they have no capacity left to borrow more money in order to plug the shortfall.

Perhaps most alarming is that, according to the US Postal Service’s own financial statements, its NET worth (i.e. assets minus liabilities) is NEGATIVE $44 billion.

This doesn’t happen by accident. And it’s not the result of some temporary downturn. It takes years… decades of mismanagement and structural issues to reach this point.

Just for kicks, I compared 2-day shipping rates among major carriers in the US for a simple envelope package.

FedEx: $25.12
UPS: $24.16

And the US Postal Service? $5.05 if I order online.

Duh. It doesn’t take a rocket scientist to see the problem here.

Bear in mind that FedEx and UPS are, you know, profitable, earning $3.3 billion and $6.7 billion in pretax income, respectively. (And they each paid an effective tax rate of more than 35%.)

Curiously, when I was in Ethiopia a few weeks ago, there was an article in the local paper there about how profitable the Ethiopian postal service had become.

I mean– postal services around the world have the same problems. A place like Ethiopia has a massive rural population, and it costs a lot to maintain those small offices. Everyone face rising fuel costs and declining volume.

Yet even in Ethiopia they’ve figured it out. They know they can’t continuously run an unprofitable operation, so they reinvent the business model. That’s life.

In fairness, the Postal Service knows what to do. They’re at the end of their rope. And if they’re going to survive, they need to raise revenue and cut costs dramatically.

This includes the uncomfortable prospect of laying off employees and closing down unprofitable processing centers.

But Congress doesn’t want that. And they’re lifting legislation directly from the pages of Atlas Shrugged to ensure the post office keeps operating at a loss.

This is yet another example of incredibly dangerous central planning being planned, proposed, or in progress in the Land of the Free.

Can you see where this trend is going?

True story: You know your country is broke when the cops have to call 911…

Thu, 09/18/2014 - 12:22

September 18, 2014
Santiago, Chile

Imagine coming home from work and finding that a group of men have broken into your house. What do you do?

I have a gratified feeling that for an increasing number of our readers, the answer would be to draw their firearm and defend the home.

But it’s safe to say most folks would… call the police.

This happened in Greece recently, as recounted to me in an email by a colleague who was visiting his family in a rural, seaside town in the country’s southern mainland.

There’s recently been rash of home burglaries in the village– a remarkable turn of events for a place accustomed to leaving windows and doors unlocked.

In one instance, a local resident came home and spied a thief in progress; he immediately called the police to dispatch a unit as quickly as possible. And the police reportedly told the man, “We haven’t enough fuel to come out there right now.”

It shouldn’t come as a surprise to hear that public services are being cut back in Greece given how messed up their economy is.

But protecting citizens against crime is supposedly one of the sacrosanct terms of the social contract.

Citizens around the world have exchanged their freedom for security. It’s a completely absurd trade. . . but nevertheless it’s happened.

And in doing so, governments have essentially monopolized the security business. By and large, police and security are public services provide exclusively by the government.

And supposedly the taxes that we all pay go to fund those services. . . ensuring that someone from the government will come and ‘save’ us when the bad guys approach.

That’s the promise, at least.

But in difficult economic times, bankrupt governments routinely set aside promises they’ve made to taxpayers.

They slash pension (social security) benefits or use funky gorilla math to understate cost of living increases.

They completely violate the sacred vow of maintaining a strong, sound currency.

And they drastically reduce or even eliminate funding for critical services that people have come to depend on.

Of course, this situation isn’t unique to Greece. Every bankrupt nation reaches this point sooner or later.

Recently in [bankrupt] Argentina, a single police officer was left in charge of an entire jail in the Buenos Aires area which was housing several dozen prisoners.

The lone officer, who was clearly in over her head and poorly trained, heard suspicious noises somewhere in the building. So what did she do? She (a police officer) called the police.

Argentine media has published a recording of the officer’s 911 call, where the emergency dispatcher told the officer to get a colleague to ‘try and stop by.’

Oh hey, I hope you’re not too busy issuing parking tickets and providing security for thieving politicians– would you mind making sure we don’t have a prison break on our hands?

But the police officer’s response really reveals just how desperate the situation is, “I have only one vehicle to patrol the whole district.”

Again, these aren’t isolated events. This is a major trend that is due to befall any bankrupt government.

Think about it: are we really so arrogant to believe that a bankrupt government can continue to borrow money forever without consequence?

Bottom line: independence is key. You cannot rely on a bankrupt government to provide the services that they promise.

That goes for anything… from providing basic security to insuring bank deposits to paying out Social Security benefits.

They simply don’t have the financial means to make good on their promises.

And this is a reality that’s important to recognize and prepare for before it’s too late.

One of the most innovative cities in the world [you’ll never guess]

Wed, 09/17/2014 - 11:33

September 17, 2014
Talca, Chile

[Editor’s Note: This is the first in a multi-part series on some of the top Startup ecosystems in the world]

When Chris D. came up with a great idea for his startup he was already thinking outside the box.

But his innovation didn’t stop there. His thought process extended far beyond the business idea into WHERE to best execute his plan.

He was already established in New York. And had he followed the conventional wisdom, that’s where he would have set up shop.

But then again, doing things differently and better than others is the hallmark of a great entrepreneur.

Comparing costs, lifestyle, and entrepreneurial environments, he found that by leaving the country he could have stronger opportunities and a better work environment for half the cost.

And it was anything but a sacrifice.

Trading in a tiny flat in Manhattan, he and his co-founder were able to rent a 6-bedroom penthouse apartment, complete with a pool, gorgeous views, and a maid.

Yes you read that right, a maid.

Honestly, what could be better for focusing on your big idea than not having to think about cooking and cleaning?

Bootstrapping your startup is definitely a lot of work, but that doesn’t mean it can’t be fun while you do it.

And it’s not just about your lifestyle, but the business environment as well.

The goal isn’t of course to find just the cheapest place in the world to live. You also want to find a place where you can start a business quickly and easily, and where there is low taxation and availability of the talent you need.

It’s great that a number of cities around the world are hotly competing to become the next Silicon Valley.

In the process, they are creating excellent and exceptionally welcoming environments for new businesses.

They want you to start your business there, so they are going out of their way to entice entrepreneurs with better working spaces and greater access to mentorship and capital.

This is exactly what’s happening in Medellín, Colombia, which is where Chris chose to launch his startup. (Surprise!)

Named by the Wall Street Journal as the most innovative city in the world in 2012, Medellín has so much to offer budding entrepreneurs.

People are coming from around the world to be a part of Medellin’s environment of openness and opportunity, enhancing these aspects even further.

And the Colombian government is actively making it easier foreigners to live and work in the city, and to encourage business and entrepreneurship as well.

Medellin’s startup ecosystem now consists of numerous incubators, co-working spaces, and networking events.

And supplementing the vibrant nightlife and social scene of Medellín, you can keep busy with regular events specifically designed for entrepreneurs, hosted weekly by groups like CoffeeGrid and the Medellin Entrepreneurship Society.

Both domestic and international ventures that come to the city can dive in to this strong network of entrepreneurs.

And if accepted to an incubation program, foreigners can benefit even further from the available mentors and facilitated access to VC funding.

Why spend your time fighting upstream, struggling to cover expenses and to get noticed in a far more saturated arena?

There are better, more innovative ways to make it happen.  After all, that’s what startups are all about.

Scottish independence: they love democracy so much they’re trying to subvert it

Tue, 09/16/2014 - 15:43

September 16, 2014
Santiago, Chile

The polls in Scotland will close this week on one of the more important elections in recent history… perhaps one of the only elections that actually matters.

Rather than a typical vote to see who the captain of the Titanic will be, Scots are deciding whether they want to be free and independent from the UK.

Every eligible voter has a say, and a simple majority decides the outcome for everyone else.

By definition, this is the PUREST possible form of the democratic process.

What’s ironic here is that ‘democracy’ is typically held up as the hallmark of free society.

Western nations have spent years (and trillion of dollars) force-feeding representative ‘democracy’ down the throats of developing countries at gunpoint.

Opening his second Presidential term in 2005, George W. Bush famously told the world that “it is the policy of the United States to seek and support the growth of democratic movements and institutions in every nation and culture. . .”

Given the west’s big love for democracy, you’d think this instance in Scotland– the most fundamental example of the democratic process– would be able to take place free, unfettered, and uninfluenced by government.

Government, in fact, is supposed to be the responsible steward to protect and champion democratic rights. At least, that’s the BS they’re constantly selling us.

But that’s not what’s happening.

British politicians are scared to death that Scotland will file for divorce. So they’re doing everything they can to influence the outcome of this supposedly impartial democratic process.

They’ve spent an incalculable amount of money trying to influence the outcome, effectively subverting a democratic election.

Their claim is that the government knows better than you do. They say they’re doing this for your own good. If Scotland breaks away, your children and grandchildren will suffer immeasurably as a result.

In other words, you NEED US TO TAKE CARE OF YOU. You cannot function without us being in charge of you.

The British government is spreading untold fear, paranoia, and propaganda to drive this point home, all in an effort to influence the outcome of a supposedly free and fair election.

It’s incredibly hypocritical. And the government’s desperation drives home how fragile this system really is.

They know how much weaker and impotent they’ll be if Scotland becomes independent. And they’re terrified of it.

But here’s the thing– this isn’t even the real story. The outcome of the election is irrelevant.

The real issue here is that this election is even happening at all.

Bear in mind that human nature is highly resistant to change. This is the way of the universe.

Sir Isaac Newton told us that an object at rest tends to stay at rest unless acted upon by an external force of sufficient enough to overcome the object’s inertia.

In chemistry, activation energy is defined as the minimum energy needed to be input in order to produce a chemical reaction.

A wooden log in a fireplace doesn’t spontaneously combust. You must first add sufficient energy (heat) to the system before the wood will burn.

Until that activation energy is reached, no reaction will occur.

Humans are the same. Our natural state is to remain at rest. Overcoming our inertia is incredibly difficult. Doing so requires tremendous energy. And motivation.

The fact that millions of people in Scotland are even considering rocking the boat and radically change is very telling.

It shows there is a deep, deep dissatisfaction with the status quo. People are sick and tired of the way things are. The system has completely failed them. And they want change.

This is huge. And it’s a sign of things to come.

The dissatisfaction is growing worldwide. As I reported yesterday, the latest Gallup numbers show that only 23% of Americans are satisfied with the direction of the country.

Change is coming. And not just any change. Deep, radical change– a fundamental reset in the way we do business, the way we organize ourselves as societies, and the way we view money.

There’s tremendous opportunity for people who understand this trend and stay in front of it. And frankly I think this makes it a very exciting time to be alive.

I invite you to spend some time with me this afternoon exploring this incredibly important issue in our latest Podcast episode.

Click here to listen to more of this

019: Scottish independence: they love democracy so much they’re trying to subvert it

Tue, 09/16/2014 - 15:33

The polls in Scotland will close this week on one of the more important elections in recent history… perhaps one of the only elections that actually matters.

Rather than a typical vote to see who the captain of the Titanic will be, Scots are deciding whether they want to be free and independent from the UK.

I invite you to spend some time with me this afternoon exploring this incredibly important issue in our latest Podcast episode.

This seems to be going well (chart)

Mon, 09/15/2014 - 15:35

September 15, 2014
Santiago, Chile

Gallup released a new poll late last week showing how many (or few, as it were) Americans are ‘satisfied’ with the direction of the country. 23%. That’s it. 76% are NOT satisfied. Only 1% aren’t sure.

The chart below shows the astounding, long-term decline since 2000.

Note, this is a trend that has outlasted three Presidents and six Congresses. It’s not about a single politician, or even ALL the politicians. It’s about the system itself.

Bottom line, people are fed up. The system has failed. And people are starting to realize it. Where do you think this goes?

A most bizarre holiday today… it’s really a sign of the times

Mon, 09/15/2014 - 14:19

September 15, 2014
Santiago, Chile

Today is a rather peculiar public holiday in Japan: “Respect Old People Day”.

And judging by the official demographics, an increasing proportion of the population should be revered today.

One in eight Japanese is aged 75 or older. People over 65 will reach 33 million, the largest ever, roughly 25.9% of the population.

The thing about demographic trends is that they’re like a huge oil tanker—once they’re on their course it’s very hard to steer them around in another direction.

These are monumental, generational changes that are very hard and slow to reverse.

By today’s trend, Japan’s population will dwindle from 127 million today to around 100 million by 2050. It’s the worst possible demographic nightmare.

People stopped having as many babies decades ago. It was too damned expensive.

Then the big collapse came in the late 80s, and the economy has been dragging it heels ever since.

When prosperity is low, people consequently delay having children. They have fewer children. Or they don’t have them at all.

This has enormous long-term implications for the country and its fundamentals. Fewer people of working age means fewer jobs, less productivity, less consumption and less government tax revenue.

On the other hand, a bulging group of older people means more spending for medical care and pensions.

In the recently proposed budget for fiscal year 2015, the Japanese government earmarked 31.7 trillion yen for social security, welfare and health spending.

This is the largest item in the budget, consuming 31.2% of all planned government spending.

And it’s only getting larger.

It doesn’t help that Japan is essentially already bankrupt.

The second largest item in Japanese government’s budget is interest.

While social security, welfare and health spending has increased by 3% from the current budget, debt servicing is up by 11% and now amounts to 25.8 trillion yen, or an incredible 25% of Japan’s budget.

So just between pensions and interest, they’re spending 57.5 trillion yen. Last year they only collected 50 trillion in tax revenue.

So before they spend a single yen on anything else in government… anything at all… they’re already 7 trillion yen (about $70 billion) in the hole. They have to borrow the rest.

Bear in mind, this is coming at a time when interest rates for 10-year Japanese bonds are 0.5%, and even closer to zero on shorter notes.

If interest rates rise to just 1%, which is historically still very low, Japan will spend almost all of its tax revenue just to service the debt!

You can’t make this stuff up. It’s a screaming indicator that this system can’t possibly last.

Europe, the US and Japan, three of the biggest economies in the world, are all on a similar inevitable trend—they’re in debt up to their eyeballs, with absolutely no arithmetic possibility of ever getting out of the hole unscathed.

Japan is just worst of them all.

And history is so full of examples of what governments do when countries get into this position: as reality beckons, they become even more careless and destructive.

The question of when will it happen is irrelevant. What difference does it make if Japan collapses tomorrow or two years from now?

This is not a credible and sustainable system that is worth tying up all your livelihood and life savings with.

Nobody is going to send you an advanced notice that the banks will remain closed tomorrow and all deposits will be frozen.

That’s why we always say to buckle up and put your seatbelt on ahead of time.

Just like William Shakespeare said in The Merry Wives of Windsor: “Better three hours too soon, than a minute too late.”

3 of my favorite low-tax places to retire

Fri, 09/12/2014 - 14:32

September 12, 2014
Sovereign Valley Farm, Chile

If you’re thinking about retiring to Florida for the warm weather, lack of state income tax, and plentiful medical care facilities, you might want to reconsider.

A 68-year old Florida retiree recently filed a lawsuit against Orlando-based Florida Hospital after doctors there allegedly mixed up her lab results and told her she had terminal cancer.

The woman suffered in agony for months believing that she was going to die; then the hospital decided to treat her by removing part of her rectum.

It turned out she was perfectly healthy.

Now, accidents can happen anywhere. It’s an unfortunate part of the medical industry.

But the reality is that Florida has its obvious flaws. And it is by no means the only place in the world that has a claim to all the features of a top retirement destination.

The world is truly a big place, and there are a lot of options out there.

When you retire overseas your money can often go further, so a pension that might have you eating baked beans out of a tin can in the United States can buy you a gourmet dinner elsewhere.

You’ll enjoy a better quality of life in a country where medical costs aren’t at the outrageous levels that they are in the US.

With all that money you save you’ll be able to catch up on new experiences that you missed out on while you were working to support your family.

Here are three options across three continents that each offer their own benefits, but have at least one prominent feature in common—a favorable tax regime so that you get to keep more of what you receive in your golden years.


The Philippines is one of the easiest places in the world to retire to.

Residency is incredibly easy to attain for retirees. If you’re over 35, a refundable bank deposit of just $20,000 – or in some cases even less – qualifies you residency in the Philippines.

If you’re over 50 and have a pension income of at least $800 a month, a bank deposit of as little as $10,000 will suffice.

Income you have remitted to the country from overseas, such as any pension income you may have, is free from tax.

English is widely spoken and almost universally understood, so you won’t have to struggle with a new language.

It doesn’t hurt that the Philippines is an incredibly beautiful place with a low cost of living that allows you to stretch your pension longer there and truly have an enjoyable time


If you were hoping to spend your golden years reading the classics while sipping espresso in a Parisian café, Andorra may be your back door solution.

Andorra is not part of the EU, and officially not part of the borderless Schengen area, but having residency there gives you a low-tax backdoor option to having a de facto Europe-wide residency.

While there’s no official retirement residency program, you can become a “passive resident” of Andorra just as long as you’re not earning a living within Andorra.

Qualifying for Andorran residency comes with a steeper price tag; one option requires an investment of 400,000 euros in the country (about USD $520,000).

This amount can be applied towards the purchase of a home, however, and housing in Andorra is quite reasonably priced.

Andorra is one of my favorite destinations in Europe: clean, safe, and efficient. The food is high quality, the air is pristine, and if you love the outdoors, it’s a tough place to beat… especially if you live to ski.


Panama is increasingly becoming a place to be for retirees due to its yearlong sunny weather, affordable cost of living, inexpensive (yet high quality) medical care, and close proximity to north America.

It’s incredibly easy to gain residency in Panama, and you can technically “retire” on a pensionado visa at age 18.

Panama is also one of a handful of places where US retirees can have their social security funds directly deposited.

If you retire to Panama, you can actually have your monthly stipend sent directly to a local Panamanian bank account. And there’s absolutely no local tax levied on it whatsoever.

Don’t spend your retirement worrying about how you’re going to pay your bills, or making decisions about whether to buy food or medicine.

Consider taking advantage of lifestyle arbitrage opportunities that exist overseas and enjoy a better and more exciting retirement abroad.

TRUTH: You’re more likely to be shot by a police officer than a terrorist

Thu, 09/11/2014 - 15:47

September 11, 2014
Santiago, Chile

Governments and mainstream media outlets have a great way of presenting sensational threats and evil villains.

They want us to be terrified of men in caves, roving bands of barbarians, and deadly viruses that turn our insides out.

Last night, for example, President Obama told the world that ISIL poses the most significant threat to global security.

(Ironically al-Qaida no longer seems to be a threat, and ISIL, which no one had heard of until a few months ago, is now public enemy #1. It just goes to show how shallow and reactionary the security theater is…)

But here’s the truth:

If you live in the Land of the Free, you’re far more likely to get ‘accidentally’ shot by a police officer than blown up by a terrorist.

You’re also far more likely to lose the preponderance of your life’s savings due to a currency crisis than you are to be infected with the Ebola virus.

Words are hollow. Look at reality.

Mr. Obama said last night that America stands for Freedom. Justice. Dignity.

It sounds great. But this comes from a President that has presided over illegal spying of American citizens, allies, and even sitting politicians in Congress.

They assassinate people by remote control drones. They aggressively pursue whistleblowers who shine a spotlight on their activities. And they set aside international law to invade any country of their choosing in their sole discretion.

They’re also actively encouraging the collapse of the dollar-denominated financial system.

Right now, the preponderance of world trade is transacted and settled in US dollars.

This has created tremendous demand from literally billions of people, companies, banks, and governments around the world to hold dollars and use the US banking system.

As a result, the US effectively gets to trade money they have conjured out of thin air for goods and services that foreigners have had to work hard to produce.

This is an unbelievable privilege for the US, and one that they have been abusing for years.

They have chased entire nations out of the financial system. They’ve blasted foreign banks with debilitating penalties for doing business with countries the US doesn’t like.

They’ve arrogantly commanded foreign banks to comply with absurd, costly regulations.

And they’ve practically forced the Chinese and Russians into bed with one another.

Mr. Obama can trumpet American exceptionalism all he wants. He can brag about how ONLY America can lead the world. But the Chinese are laughing all the way to the bank.

Fact is, China, Russia, and others are already taking steps to circumvent the US dollar and the US financial system.

The world is desperate for an alternative to the dollar And China is about to give one to them.

This isn’t any cloak and dagger stuff. It’s happening in broad daylight for everyone to see like a slow-moving train wreck.

The government is turning your country into a police state, and they’re destroying the value of your currency.

These are the real threats to your life and livelihood. Not ISIL. Not al-Qaida. Not Ebola. Ignore the propaganda and see for yourself.

20% of this entire industry just lost their jobs. Time to buy?

Wed, 09/10/2014 - 13:17

September 10, 2014
Santiago, Chile

Jim Rogers is easily one of the smartest and most successful investors I know.

And one of his seemingly endless pearls of wisdom about investing is that sometimes the best thing to do is absolutely nothing.

Sit on the sidelines, and wait until the opportunity is so obvious the money is just lying there in the corner waiting to be picked up.

You don’t become really successful (in investing or otherwise in life) by doing what everyone else is doing. Following the herd is a sure-fire way to mediocrity.

It’s important to keep this in mind as the stock markets keep on hitting new all-time highs almost on cue, week in, week out.

It’s perverse what investing in public markets has largely become—gambling whether stock prices will go up or down based on what a cabal of unelected central bankers is going to do, say, or merely whisper.

That’s why fundamentals don’t seem to matter anymore when it comes to stock prices.

If GDP growth slows down (or even collapses), the stock market goes up because investors are predicting lower interest rates.

Yet if GDP goes up, investors will hail “The Economy is Coming Back!” and send stocks even higher.

The euphoria is so painfully obvious.

Even the Bank of International Settlements – that little known “central bank of central bankers” – warned that the world economy as vulnerable now to a major crisis as it was in 2007, with the added danger that debt is even higher.

As perhaps the biggest proof of how irrationally broken public markets are, European stocks have risen 15% in the last year, despite growth being zero and expected earnings declining by 3%.

That’s why I largely avoid putting my money in the stock market. I prefer investments where I have much greater control on the outcome—private businesses, real estate etc.

That said, sometimes great opportunities do present themselves in public markets as well.

Thanks in large part to China’s slowdown, junior mining / exploration companies are one of the most degraded asset classes in the market right now.

Case in point: exploration spending in Australia has declined by 40% in Q1 2014 compared to just a year earlier.

And as many as 20% of geologists in Australia have lost their jobs in the last few months. Companies are trimming down their exploration activities and focusing on extracting value out of their existing mines.

Even some of the major mining companies are starting to search for profits elsewhere; Rio Tinto is one of many large firms turning to agriculture, specifically selling cattle to the Chinese.

The whole industry has been hit to the point where some companies are being valued at less than the cash they have in the bank.

In other words, the market is valuing their assets – management expertise, land leases, exploration licenses, equipment etc. – at zero, while also giving a discount to their cash bank balance.

This means investors can buy a dollar’s worth of assets for just pennies.

And it’s entirely possible that one day, perhaps even very soon, the market will wake up and value these assets more favorably.

Our Chief Investment Strategist recently made some recommendations to our premium members for a small portfolio of junior miners trading for less than cash.

Australia’s KGL resources shot up by 66.7% in about six weeks. Another, Paringa Resources, rose by 400% in a few months’ time.

Bear in mind, though, even when you buy a company for less than the cash it has in the bank, it’s still possible to lose money. It’s very hard… but possible.

There’s no such thing as risk-free, no such thing as ‘free profit’. An investor always has to take risks.

That said, chasing new all-time highs is not the way to make money.

Look for assets and industries that everyone hates, that people think you’re crazy for even considering investing in, and find value in those.

Read this and find out if you’ll be eligible for Scottish passport in 10 days

Tue, 09/09/2014 - 13:40

September 9, 2014
Santiago, Chile

Anyone who’s ever seen the movie Braveheart has heard of William Wallace, one of the original heroes of Scottish independence.

Though Mel Gibson’s highly fictionalized account was one of the most historically inaccurate movies in modern cinema, Wallace did, in fact, lead Scottish rebels against English invaders. And he died for his cause.

Wallace was severely tortured after being convicted of high treason against King Edward I; he was dragged by horses, hung nearly to the point of death, revived, relieved of his manhood, ritualistically disemboweled, made to watch his entrails set ablaze… then finally beheaded.

Not the way you want to go.

That said, the movement for Scottish independence lived on, and England folded in 1357, ending a 60-year war between the two nations.

For the next 350 years Scotland remained an independent state until… go figure… a financial crisis.

In a desperate attempt to become (almost overnight) a major world trading power in the 17th century, the government of Scotland backed a comically ill-fated attempt to colonize Panama.

It failed miserably. Yet the investment in the Darien Scheme (as it was known) amounted to up to half of Scotland’s total money supply.

When it went bust, Scotland was nearly broke.

There had already been a push to reunify with England for some time. And with the country’s economy in shambles, unification seemed like a good move.

Today Scotland again finds itself debating the question of its independence, fueled once more by economics.

It’s easy to point to a number of different causes of rebellion, revolution, and dissent. But ultimately it’s economics that matter more than anything else.

When times are good and everyone is prosperous, few people want to rock the boat. No one has an incentive to change the system when it’s working so well.

Only when the prosperity begins to collapse do people have a strong motivation to change the status quo.

Suddenly the jobs are less plentiful, the taxes are higher, the standard of living is lower, and the costs are greater. And people demand change.

The greater the pain, the greater the desire to shake things up. And it’s happening across the world.

In Europe, separatist and extreme parties are gaining ground on the heels of an economic depression that has besieged the continent for several years now.

In France, Spain, Italy, Greece, etc., people are fed up with the current state of affairs, and they are agitating to split off from their current political leadership.

Likewise, Scottish voters are going to the polls in just over a week to decide if they should break away from the UK.

And from the looks of things, the independence movement has a very strong chance of winning.

Whenever major changes happen, this brings opportunities as well.

For example, a newly independent Scotland would create its own tax and corporate laws, potentially providing a number of major incentives to attract foreign talent and productive companies.

A Scottish passport would also be attainable for many people. Some basic guidance has already been issued:

British citizens living in Scotland on day one of independence, plus Scottish-born British citizens living outside Scotland, would be automatically considered Scottish citizens.

After independence, children born in Scotland, and children born outside Scotland to at least one Scottish parent, will be automatically considered to be Scottish citizens.

A person who has a parent or grandparent eligible for Scottish citizenship, will be able to register as a Scottish citizen by descent.

Scotland will also allow dual citizenship, so no one would have to renounce his/her existing citizenship.

Presuming the independence movement wins, Scottish citizens will be able to apply for a Scottish passport from day one of independence.

People will be able to continue using their existing UK passport until it expires. They can then choose to get a Scottish passport when their existing passport is due for renewal.

Scotland’s Future sets out that Scotland will remain part of the Common Travel Area between the nations of the British Isles, which means that the Scots won’t need a passport to travel to the rest of the UK or Ireland.

These are exciting times and this once again illustrates that there are opportunities hidden within every crisis.

We’ll be carefully following the results of this event and will have more details for our premium members as things unfold.

Lifestyle arbitrage: Meet the 600 single Brazilian women trapped in a small town with no men

Mon, 09/08/2014 - 15:07

September 8, 2014
Sovereign Valley Farm, Chile

When Ferdinand Magellan and his men arrived in the harbor of Rio de Janeiro in 1519, throngs of naked native women swam out into the surf to greet them.

Having spent the previous months battling through the brutal waters of the Atlantic, this was certainly a welcome sight.

In those days, getting on a ship to sail across the world was akin to playing Russian Roulette. A lot of folks just didn’t make it.

Fortunately the last five hundred years has been rather generous to human kind.

Our technology has virtually eliminated the risk of traveling across the globe, slashing the time, and minimizing the cost.

(Yes, with all the gazillions of point programs and ‘hack’ methods out there, international travel can be done easily on a shoestring.)

This means that in less than 24 hours, you could be on the other side of the planet… experiencing for yourself the tremendous opportunities that the world has to offer.

Case in point: the town of Noiva de Cordeiro in Brazil is home to more than 600 women and only a handful of men.

Unhappy with the idea of their lonely future, they recently put out a very public call for potential male suitors to move to their town.

As we talked about before, marrying a Brazilian is one of the fastest ways to obtain Brazilian citizenship and an excellent Brazilian passport, but that’s not what I want to talk about today.

When we discuss overseas opportunities, it’s not just business and investment opportunities we should look at. The world can be your playground to explore and experiment with different lifestyles.

Activities that are illegal in one jurisdiction are considered normal in another.

Tired of the police state ruining your nights out? In Brazil you can party down the street with the locals until sunrise.

Want to leisurely converse about the state of the world while sipping coffee and watching a Mediterranean sunset? Try Greece, Croatia or Spain.

Feel like your hometown is just too stale and boring? Try Colombia, where you’ll find a vibrant culture and adventure waiting for you at every corner.

Are you addicted to skiing? Try Andorra (or even right here in Chile).

Looking for someone to talk to about your online business? Stumble into any café in Chiang Mai, Thailand and you’ll find a plethora of budding entrepreneurs.

Every country has something different to offer, and there’s a city and a country to fit every personality type.

As a tourist you generally get treated better in these places than actual citizens.

Perpetual travelers can enjoy the best of what a country has to offer without being weighted down with excessive bureaucracy and taxes.

Modern travel and communications have made and are making the world an ever-smaller place. You don’t have to be physically present somewhere in order to make money.

If you’re willing to make the leap abroad, a whole new world of opportunities awaits you.

Sure, often those opportunities relate to business and investing.

In the West, for example, most nations are debilitated by excessive debt and tax burdens, cajoled along by central bankers who have completely distorted the marketplace.

Yet there are a number of exciting markets in the world underpinned by strong demographic fundamentals and the emergence of a new middle class.

This is real growth. It’s not just some central banker printing money.

It’s really invigorating to see on the ground first hand. But to be fair, life isn’t all about money, wealth, and business.

This is, after all, why so many people head overseas for vacation. They unplug from the rat race for a few weeks each year and go to a beautiful place surrounded by friendly people where they can live the good life for a short time.

And the entire world is full of other opportunities as well…

The last time this happened, the US went to war to ‘defend’ its interests.

Sat, 09/06/2014 - 16:30

September 6, 2014
Santiago, Chile

In 1974 Richard Nixon struck a deal with Saudi Arabia that might go down as the biggest scam in US history.

In exchange for weapons and protection, the Saudis would sell their oil for US dollars, then reinvest those dollars back in the United States.

This was a matter of life or death for the dollar at the time; Nixon had closed the gold window three years before, and a massive devaluation of the dollar ensued.

Ensuring that the world’s most traded commodity would only be priced and settled in US dollars was absolutely critical in propping up the currency.

Looking back, it was a brilliant strategic move. The rest of OPEC followed, and this sealed the deal for US financial, political and military supremacy for decades.

The petrodollar was born.

Today, oil remains the most widely traded commodity in the world. And since EVERY nation either buys or sells oil, it means that every nation holds US dollars.

Rather than just sitting on a pile of paper currency, though, foreign banks, governments, and central banks tend to hold US Treasuries, i.e. US debt.

This means that the US government has a nearly unlimited supply of foreigners to pawn off its dollars, debts, and deficits onto.

The rest of the world toils away to produce things. They work in the fields, manufacture products in factories, pull oil and gas out of the ground.

The US, on the other hand, prints dollars… and then trades this paper to foreigners for the stuff they’ve actually worked to produce.

It’s an unbelievable scam.

You’d think the US government would be gratefully sending fruit baskets to every foreign country in the world, treating everyone like a welcome friend.

But that’s not what they do.

The US government arrogantly commands every bank in the world to report to the IRS. They drop bombs, send in drones, and invade foreign nations.

They spy on their allies and enemies alike. They freeze foreigners out of the US banking system and fine foreign banks for doing business with countries they don’t like.

It’s unbelievably stupid. Their behavior practically begs foreigners to abandon the dollar, and the US.

And it’s starting to happen, right in front of our very eyes.

The US has shown that it’s willing to go to war to support this petrodollar system.

(Saddam Hussein won support from the UN in the early 2000s to sell oil for euros. Shortly after, he was gone.)

So the fact that it’s starting to unwind right now is very concerning, especially given the existing battlefield in Ukraine.

Join me in today’s podcast episode as we explore how the petrodollar is the US’ biggest Achilles’ heel and how it’s clearly in the early days of its demise.

New bill: Congress engineering yet another financial crisis

Fri, 09/05/2014 - 19:00

September 5, 2014
Santiago, Chile

Say hello to the next financial crisis, brought to you courtesy of the dumbest new bill of the week: H.R. 5148: Access to Affordable Mortgages Act.

Ordinarily whenever an individual wants to borrow money for a mortgage, the bank conducts due diligence… both on the borrower as well as the property.

It’s in the banks’ interest (as well as the banks’ depositors) to ensure that the property is at least worth as much as the amount being borrowed. Duh.

Congress doesn’t agree. Apparently when banks conduct property appraisals, that seems to unfairly discriminate against some segment of the population trying to buy crap properties.

And we certainly can’t have that going on in the Land of the Free.

So with HR 5148, Congress aims to exempt certain ‘higher-risk mortgages’ from property appraisal requirements.

Curiously, this legislation reverses several provisions in the 1968 ‘Truth in Lending Act’.

It’s as if Congress is now anti- Truth in Lending and pro- whatever the hell gets the money on the street.

And of course, all of this comes at a time when mortgage rates are still near their all-time lows.

You can borrow money to buy a home today at just 4%. That’s less than half the long-term average of 8.5%, and a fraction of the 16%+ people were stuck paying 30 years ago.

Isn’t paying 4% affordable enough? Nope. Not according to Congress.

So now they’re trying to engineer yet another financial crisis by encouraging banks and other lenders to exercise minimal due diligence on their mortgage portfolio.

This comes at a pivotal time. US banks are only now just barely starting to recapitalize after the early days of the financial crisis.

They’ve unloaded their toxic assets to the US government and Federal Reserve.

They’ve borrowed money at essentially 0% from the Fed and loaned it to the Treasury Department at interest (the mother of all scams).

After six years of these freebies and taxpayer-funded bailouts, bank balance sheets are only now starting to clear up.

So what does Congress do? They propose a new law to screw up bank balance sheets all over again.

It’s idiocy on an epic scale… and it makes one wonder what team of monkeys is coming up with these ideas.

Everything that’s wrong with banking summed up in one bonehead advertisement

Thu, 09/04/2014 - 17:58

September 4, 2014
Santiago, Chile

If you’re looking around right now for a new bank account that pays a reasonable rate of return, ANZ bank has a hell of a deal for you: 0%!

That’s right. ANZ is offering its depositors absolutely zero interest.

Now, a bank paying 0% isn’t exactly abnormal in today’s banking environment. But what’s really strange is that ANZ actually took out an ad in an Australian newspaper to advertise this.

Yesterday’s page 10 of the Australian Financial Review (AFR) had a quarter-page ad from ANZ boasting about 0% interest rates for accounts denominated in number of foreign currencies, including Hong Kong dollars, Japanese yen, British pounds, and more.

Curiously, in order to qualify for this bargain 0% rate, you have to meet a rather significant deposit minimum.

For the 0% Japanese yen account, for example, you have to deposit 23.5 million yen (currently about $223,000 US dollars).

So basically some manager at ANZ actually thought that paying 0% interest on substantial account minimums would be an attractive offer… so attractive, in fact, that they should brag about it in the newspaper.

This is so completely ridiculous. But it really crystalizes what’s wrong with the entire financial system.

We’re told to keep our money in banks… that banks are safe. But the objective data tells a completely different story.

Holding money in most banks guarantees that you will lose money.

Adjusting for taxes and inflation, you’re losing at least 2% per year, even if you believe the governments’ notoriously understated official inflation statistics.

This level of absurdity pushes people into riskier and riskier assets, simply in an effort to avoid LOSING money.

Case in point– the government of Spain recently issued 1 BILLION euros worth of bonds that yield a paltry 4%. And they’re due in 2064.

Bear in mind, Spain is completely broke. And just two years ago the government had to pay 7.5% on ten year notes.

Now people are lending money to the Spanish government for 50 freaking years at just 4%.

This is insane.

But couldn’t this insanity last forever? Couldn’t the grand wizards of the financial system continue to engineer one deranged bailout after another for decades to come?

Possibly. But unlikely.

Right now the US dollar is the world’s dominant reserve currency. This gives the United States nearly total control of the global financial system.

In order to clear cross-border trade transactions, foreign banks HAVE to use the US banking system (which is controlled by the US government).

Further, rest of the world must essentially mirror US Federal Reserve policy.

But this power… and insanity… only lasts as long as the US dollar is the dominant reserve currency. And this is starting to change rapidly.

China’s renminbi is becoming much more widely accepted around the world for trade settlement; a number of foreign governments are now holding renminbi reserves and doing deals to promote trade in renminbi.

Even in the United States, renminbi payment business increased 327% last year, and the US is now the fifth largest offshore renminbi settlement center.

It’s no secret here, this is happening right under our noses. The financial system IS changing.

People who ignore this trend do so at their own financial peril.

Yet those who understand what’s happening and align themselves accordingly stand to make fortunes.

The Weimar Republic’s episode with hyperinflation in the 1920s is a great example.

Despite all the warning signs, most people did nothing… and they got wiped out.

A handful of people, though, saw the writing on the wall. They took steps to safeguard what they had. And they allocated their investment capital to bet that the currency would collapse.

They were right. And vast fortunes were created in a matter of months.

Throughout history there’s always a handful of people ahead of the trend. And they’re rewarded for their foresight.

Right now we’re in the very early stages of a similar transition– arguably one of the most important economic transformations since the Industrial Revolution.

Because of this, opportunities already abound if you know where to look. It’s an incredibly exciting time to be alive.

It’s official: Public opinion of Congress sinks below that of used car salesmen

Wed, 09/03/2014 - 13:00

September 3, 2014
Santiago, Chile

Poll after poll confirms what I’m sure you’ve already been feeling.

People are disenchanted with the existing system. They don’t trust the government, they don’t trust the banks, and they don’t trust the media.

You can hear the rumblings of grumblings, and it’s only growing louder and louder.

Lost confidence in government

If you were to ask 10 Americans if they have confidence in Congress, less than one would now say yes.

And it’s not just disgust with the legislature. It’s all of government. Confidence in President Obama is at its lowest level ever.

Supposedly those in political office are there to act on behalf of the people. That’s what a republic is all about, right?

However, after one conspicuous bailout of a big business after the next, it’s become clear who’s really manning their puppet strings.

What little respect there was for politicians is disappearing fast.

According to Gallup, public opinion of the integrity of members of Congress has recently sunk to its lowest levels as well, even below that of used car salesmen. And that’s not even a joke.

Lost confidence in banks

We’re told for our entire lives to put our money into banks rather than hiding it away under their mattresses or some such nonsense.

Only in banks will it be safe and earn interest.

What a joke that has become. Today if you hold money in a bank, you are guaranteed to lose money.

Citibank, for example, is offering an ‘interest-bearing’ savings account that pays 0.01%. That’s one hundredth of one percent… or $1 per year in interest on every $10,000.

What’s even more hilarious is that you have to pay TAX on that amount. Presuming a 20% tax rate, you’re left with an after-tax yield of 0.008%.

Now… even if you believe the government’s numbers, they claim the rate of inflation is 2.1% based on the June 2014 CPI numbers published by the Department of Labor.

So on a tax-adjusted, inflation-adjusted basis, you’re LOSING 2.092% each year that you hold money in a bank account.

Meanwhile, banks are recording record profits and enjoy the full backing and support of the Federal government.

It’s a disgusting system. And it’s no wonder why (again, according to Gallup), confidence in banks is hovering near its record low, and less than half the level it was at ten years ago.

Lost confidence in media

Then there’s traditional media in the US, which is nothing more than destructive entertainment masquerading as news.

Gallup polls show a long-term, growing distrust in major news outlets, including newspapers, TV news channels, and major news websites.

Distrust for mass media hit an all-time high in September 2012 and has remained near that level ever since.

Meanwhile, the Land of the Free with its Constitutionally-enshrined freedom of the press plunged to number 46 in the most recent World Press Freedom Index.

This is sandwiched between Romania and Haiti, and trailing countries such as Papua New Guinea.

Distrust of government. Distrust of banks. Distrust of news sources. So much for hope and change.

All of this data is clearly indicative of something that I suspect tens of millions of people feel viscerally in the gut: this is not the country I grew up in. Things have changed. And not for the better.

The sad part is that most people feel trapped… powerless to stop the obvious trend that’s encroaching on their way of life. So they ignore it and hope that it goes away.

This trend isn’t going anywhere.

And the people in power are only making things worse. Every law, every regulation, every policy, no matter how well-intended, only marches closer towards the inevitable.

It doesn’t have to be this way.

While governments and institutions can only make things worse, individuals have an entire universe of solutions at their fingertips.

If you mistrust the banking system (and all the evidence suggests this is a valid conclusion), WHY hold your money there?

It’s 2014. Money doesn’t get moved around by stagecoach anymore. You are under no obligation to hold the preponderance of your life’s savings in a system you don’t trust.

There are a multitude of options around the world to hold your savings in and actually generate a solid rate of return.

Further, if you mistrust your government, WHY have, literally, 100% of your life and livelihood tied up there?

There are hundreds of options and solutions to ensure your government has as little influence and control over you as possible.

It doesn’t have to be gloom and despair. No one has to be a lamb waiting around for the slaughter.

There are ways to fix this… for yourself, your family, and your loved ones.

This isn’t anything radical. It’s common sense.

Presenting the most pitifully capitalized central bank in the West [Hint: It’s NOT the Fed]

Tue, 09/02/2014 - 16:12

September 2, 2014
En route to South America

As the world’s top central bankers gathered at their annual jamboree recently, the governor of Bank of Canada, Stephen Poloz, undoubtedly received envious comments from his fellow money magicians for Canada’s perceived status as a global financial safe haven.

This newly found perception was perhaps best exemplified during a Bloomberg interview, when the CEO of RBC Wealth Management – the biggest financial institution in Canada said that “Canada is what Switzerland was 20 years ago, and the banks in Canada are what Swiss banks were 20 years ago.”

This is the new flavor of Kool-Aid. Canada is seen as the new banking safe haven and an “island of safety and stability” because of its perceived sound fiscal position, commodity wealth and solid economic performance.

Now, anytime I see central bankers slapping each other on the back, I’m going to be skeptical. But here at Sovereign Man, our conclusions are all data driven… so we dove into the numbers.

First, the Big Daddy himself—Canada’s central bank.

Any strong, healthy banking system requires a central bank with a pristine balance sheet… specifically, substantial net equity as a percentage of assets.

So how strong is the balance sheet for Banque du Canada? Not very.

As it turns out, Banque du Canada is actually the most pitifully capitalized central bank in the western world. They’re in such bad shape they actually make the Fed look healthy.

Hong Kong’s Monetary Authority Exchange Fund is a good example of a strong balance sheet; their latest figures as of 30 June show a whopping capital reserve equal to nearly 22% of total assets.

This is a massive margin of safety for the central bank.

The US Federal Reserve, on the other hand, shows a capital reserve of just 1.27%. And Canada? A tiny 0.47%… as in less than one half of one percent.

This isn’t safety and stability. It’s a rounding error.

Moreover, Canada also has ZERO reserve requirements for its banks; this means that Canadian banks are not obliged to hold any of their customers’ deposits.

So yes, it’s legally permissible for a Canadian bank to loan out 100% of its customers’ funds.

Not to worry, though. The Canadian Deposit Insurance Corporation (CDIC) is standing by to insure bank deposits up to $100,000.

But when you look at it closely, there isn’t much there for depositors at all. There’s roughly $646 billion of eligible deposits in the Canadian banking system. Yet the CDIC only has $2.8 billion in cash available to insure it all… a ratio of just 0.43%.

Even more troubling is that Canada has legislated an actual Cyprus-style confiscation of deposits in the event that Canadian banks deplete their capital.

Buried deep into the government’s Economic Action Plan 2013 is a provision that would implement a “bail-in” regime for “systemically important banks”.

This would legally allow the banks to tap into customer deposits if the banks get into trouble… something I don’t find particularly safe.

Last, the Canada myth really starts to become apparent when you look at the country’s gold reserves.

At the beginning of this century Canada held 46.19 tonnes of gold. Now they hold only 2.99 tonnes. That’s a whopping 93.5% decline in gold reserves in just over a decade!

In other words, Canada’s monetary leadership has made a conscious decision to reject real assets in favor of paper assets that can be conjured out of thin air.

They’ve managed to run their central bank into borderline insolvency.

It’s important to look at facts and not rely on sentiment.

To anyone who rationally looks at the data, the obvious conclusion is that Canada is certainly NOT the safe-haven it’s been built up to be.

Back to the future

Mon, 09/01/2014 - 19:02

September 1, 2014
London, England

[Editor’s note: This missive was penned by Tim Price of PFP Wealth Management in the UK, a frequent contributor to Sovereign Man]

“Sir, Arnaud Montebourg, the former French economy minister and the sourest note in the Hollande repertoire, dares to complain of “absurd” austerity policies ? (“Hollande purges cabinet following leftwing revolt”, August 26.) If those policies are absurd, it is because they were not accompanied by the structural reforms so badly needed to make the French economy healthy. I am speaking of long outdated redundancy and seniority labour laws, oppressive regulations for the business sector and the unbearable bureaucratic roadblocks that stand in the way of start-ups.

“To these, one can also add the traditional Gallic mindset of envy, if not outright hostility, towards those French citizens and other Europeans who are willing to work longer, harder and smarter and want to make good money; a mindset that Mr Montebourg never hesitated to parade before the world. Now that he and his cohorts on the left of the Socialist party have departed the government, perhaps François Hollande can move forward and leapfrog France from the 19th to the 21st century.”
- Letter to the FT from Stan Trybulski, Branford, Connecticut, 28th August 2014.

“There’s a great deal of ruin in a nation.”
- Adam Smith.

“You will never understand bureaucracies until you understand that for bureaucrats, procedure is everything and outcomes are nothing.”
- Thomas Sowell.

Much of what we think we know isn’t necessarily so. The invention of the printing press with movable type? Traditionally credited to fifteenth-century Germany and Johannes Gutenberg, it was actually invented in eleventh-century China. Paper also originated in China long before it was used in the West. As did paper money and toilet paper (albeit today, these are pretty much interchangeable). English agriculturalist Jethro Tull is widely credited with the discovery of the seed drill in 1701. It was in fact invented by the Chinese 2,000 years beforehand. The first blast furnace for iron smelting is associated with Coalbrookdale – tragically close to schools in the West Midlands. It was actually introduced by the Chinese before 200 BC. The Chinese were also first to use the fishing reel, matches, the magnetic compass, playing cards, the toothbrush and the wheelbarrow. Perhaps even golf. So how did a society apparently so dynamic and innovative by comparison with the West then enter a centuries’ long decline?

Niall Ferguson, in his excellent book ‘Civilization’ (Penguin, 2012) puts forward six “identifiably novel complexes of institutions and associated ideas and behaviours” that account for the cultural and economic outperformance of the West between, say, the 16th and 20th centuries:

  • Competition
  • Science
  • Property rights
  • Medicine
  • The consumer society
  • The work ethic

He defines these trends as follows:

  1. Competition: “a decentralization of both political and economic life, which created the launch-pad for both nation-states and capitalism”.
  2. Science: “a way of studying, understanding and ultimately changing the natural world, which gave the West (among other things) a major military advantage over the Rest”.
  3. Property rights: “the rule of law as a means of protecting private owners and peacefully resolving disputes between them, which formed the basis for the most stable form of representative government”.
  4. Medicine: “a branch of science that allowed a major improvement in health and life expectancy, beginning in Western societies, but also in their colonies”.
  5. The consumer society: “a mode of material living in which the production and purchase of clothing and other consumer goods play a central economic role, and without which the Industrial Revolution would have been unsustainable”.
  6. The work ethic: “a moral framework and mode of activity derivable from (among other sources) Protestant Christianity, which provides the glue for the dynamic and potentially unstable society created by “killer apps” 1 to 5”.

For our purposes we are most interested in Ferguson’s first “killer app”, Competition. But we will also refer to it in a slightly different context – “the lack of bureaucracy”. As the chart below shows, from 1000 AD to its high water mark in the 1960s, UK GDP relative to China’s was a one-way bet. Since then, however, the trend has gone into reverse.

Source: Niall Ferguson / Penguin Books

What can account for this dramatic reversal of economic fortunes? Economic reforms in China, led by Deng Xiaoping in the late 1970s, are likely to be responsible for at least part of the turnaround. But the relentless and sclerotic expansion of the State in Britain has also played a role.

UK general government expenditure (green) and private expenditure (black) as a proportion of GDP

Source: David B. Smith / Steve Baker MP

As the chart above shows, at the turn of the last century, UK state spending accounted for roughly 10% of the economy and the private sector accounted for the rest. But as the welfare state has swelled, government spending has mushroomed to account, now, for something like half or more of the entire economy. And state spending, by and large, is inefficient spending – at least by comparison with the inevitably more disciplined for-profit sector. In other words, our relative economic prospects have declined in inverse proportion to the expansion (metastasis) of the State. In turn, bureaucratic parasitism likely accounts for productivity differentials in the eurozone; the German State accounts for roughly 45% of its economy, the French State 56%.

Politicians have been able to swell the State thus far only with assistance by two groups: with the involuntary support of taxpayers, and with the connivance of central bankers. Popular resentment of what is laughably termed ‘austerity’ threatens the ongoing indulgence of the first group; the almost terminal straining of market forces by the latter runs the risk of a disorderly collapse of confidence in bond markets, after which continued Western deficit spending would be virtually impossible.

We seem to be close to the endgame. Even as perversely, record-low bond yields (indiscriminately – across markets as diverse as Austria, Belgium, Germany, Holland, Finland, Ireland, Italy and Spain) have sent desperate investors scurrying into stocks instead, those same investors are, with extra perversity, displaying a similar lack of discrimination and not even attempting to locate relative value within markets. Extraordinarily, the Wall Street Journal points out that

“Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren’t run by stock pickers or star managers. The inflow has pushed the mutual-fund giant to almost $3 trillion in assets under management for the first time. The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners… Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds… Through July, passively managed stock funds have seen a net $128.4 billion in investor in flows, compared with $18 billion for traditional stock funds…”

Nor is this lack of judicious investment a product of bullish US market sentiment. The same arbitrary index-following – at all-time highs – is being pursued in the UK. Trade magazine FTAdviser reports that

“Retail investors put more money into tracker funds in July than in any other month since records began, according to the latest IMA data.”

Index-tracking may have merit at the bottom of the market, but at the top?

Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place.

The morning after: What happens when a government destroys its currency

Mon, 09/01/2014 - 15:06

September 1, 2014
Dallas, Texas

Imagine this scene:

“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight.”

“The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before…”

This is how an American business executive described living through Mexico’s devaluation of the peso exactly 38 years ago on September 1, 1976.

Looking back, it was so obvious.

Mexico had a mounting debt, destructive policies, and a woefully unsustainable fixed exchange rate with the US dollar. All the writing was on the wall.

But most people ignored the warning signs and kept their money in pesos.

Mexican President Luis Echevarria even went out on the radio to reassure people that the currency was safe.

Finally, under intense fiscal pressure, the government reached its breaking point. And on August 31, 1976, they made the decision to devalue the peso.

People woke up the next morning on September 1st to a 50%+ decline.

Coincidentally today is also the 75th anniversary of the Nazi invasion of Poland, the event that ultimately dragged the world into war.

Germany had already invaded Austria and Czechoslovakia in the months before.

By May 1939 Hitler had stated very plainly, “the decision remains to attack Poland at the first opportunity.”

Even a week before the invasion, Hitler told his military commanders, “I have prepared . . . my ‘Death’s Head’ formations with orders to kill without pity or mercy all men, women, and children of Polish descent or language.”

Germany had 60 divisions massed on the Polish border ready to invade.

Yet people in Poland were told to keep calm, remain in place, and have confidence in their leaders.

Finally, on August 30, the Polish government ordered a partial mobilization to meet the German threat.

Needless to say, it was too little, too late. Germany invaded only hours later.

This is a familiar story that repeats across history. Despite obvious warning signs, people almost universally allow themselves to ignore reality.

It’s human nature to want to believe that everything is going to be OK. And when our political leaders whisper soothing words of hope and optimism, we take the bait.

Looking back, it was plain as day that Mexico was going to devalue the peso. Everything about the economy and currency was totally unsustainable. Deep down people knew it.

Similarly, it was plain as day that Hitler was going to decimate Poland. And people knew it.

Yet millions allowed their confidence to be misplaced in leaders who assured them that everything was OK.

Are we so different today?

The raw numbers tell us that most banks in Europe are insolvent. Bank in the US are dangerously illiquid.

Most western governments are bankrupt. Pension and social security funds are insolvent.

Financial markets are at precarious valuations. And the dollar is beginning to unravel as the dominant reserve currency.

These are data-driven assertions. And my guess is, deep down, your instincts are also telling you that something is seriously wrong with the system.

Yet we’re all told to keep calm by our leaders. There’s nothing to see here, nothing to worry about.

Looking back, it’s all going to seem so obvious. If a major, global currency crisis hits within the next 12-months, people will think, “duh, how did I not see that coming?”

Unfortunately by then it will be too late.

It takes only a little foresight and planning to insulate yourself from an event that can have disastrous consequences.

If you knew the Mexican peso was at an unsustainable level, why would anyone continue to hold pesos?

Similarly, if all the objective data suggests that the dollar is in store for an epic decline… and that the entire world is on a path to shift away from the dollar, why in the world would any rational person base his entire life savings in dollars?

It takes little effort to actually do something about it. Hold stronger currencies overseas. Own real assets. Move your retirement account abroad where your bankrupt government can’t steal it.

These are common sense steps, just like putting on a seatbelt when you get into a car.

The time to act is now. Why play Russian roulette when the odds are clearly in favor of the house?

Don’t try to time it. Nobody has a crystal ball. It’s irrelevant whether the trend unfolds over weeks, months, or years. It’s pretty clear where this is all headed.


Disclaimer: You, and only you, are responsible for your actions.

Do your research well.


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