July 30, 2015
Usain Bolt has got nothing on Leonidas of Rhodos.
Born nearly 2,000 years ago, Leonidas holds the record as the greatest sprinter of all time, winning more Olympic titles than anyone else in human history.
At four straight Olympic games, Leonidas dominated all three sprinting events– the Stadion (roughly 200 meters), Diaulos (roughly 400 meters), and the bizarre Hoplitodromos– a 400 meter dash carrying 50 pounds of military gear.
Bear in mind that he competed at a time when there was only a prize for first place. Second place was first loser.
(And they didn’t hand out medals to all the kids just for participating.)
As such, Leonidas was a legend in his own time and was decorated accordingly.
Just like today, in fact, many ancient Greek athletes were rewarded by their city-states for an Olympic victory.
In Athens, the government would award prize money that was equivalent to about 500 sheep.
This was a highly coveted back then; livestock was considered a symbol of wealth and power, so a vast flock of sheep in Ancient Greece may have been the Maserati of its day.
I was particularly interested when I read this because I own some sheep in Chile; they cost the equivalent of about fifty to sixty US dollars in the marketplace.
It’s roughly the same price in the United States for young lamb and slaughter ewes (female sheep) based on USDA data.
But what really floored me was when I found out that the United States Olympic Committee hands out $25,000 in prize money to gold medal winners– roughly the amount necessary to buy a flock of 500 sheep today.
So over 2,000 years later, the prize money for champions is more or less the same.
Now, let’s consider which of these two is more valuable: $25,000 worth of sheep, or $25,000 worth of fiat money (paper currency).
Fiat money sits in a bank account earning a yield of 0.5%.
(Or if you’re really unlucky, you might even have the privilege of paying your bank interest like they do here in parts of Europe.)
Sheep, on the other hand, yield… more sheep.
Depending on breed, the typical conception rate for sheep is between 65% to 95%, with a gestation period of about 5 months.
So a herd can expand dramatically in a typical breeding season, producing meat, milk, and wool along the way.
Fiat money produces nothing. At least, not for you.
It remains in the hands of the bank where they make the most bonehead financial decisions with it, parking it whatever risky investment fad gets them the biggest annual bonus.
They’ll further act as unpaid agents of the government, freezing you out of your own savings in a heartbeat.
And if you request to withdraw your own money, they treat you like a criminal terrorist.
Now, I’m not trying to convince you to empty your bank account and go buy a flock of sheep.
The point is that productive assets stand the test of time. Paper currency does not.
Always remember that history is inflationary. And while there may be some aberrant years, holding cash will gradually erode your savings.
It’s imperative to make smart, long-term financial decisions. Seek stores of value that can stand the test of time.
In fairness, that’s easier said than done in an environment where every conventional asset class is in a bubble.
Stocks are at all-time highs. Bonds are at all-time highs (earning negative yields in some cases). Banks are perilously illiquid. Many real estate markets are frothy once again.
So it’s a tall order to find safety and stability– at least, within conventional finance.
Outside the mainstream, though, there are plenty of compelling options.
An heirloom Patek Phillipe wristwatch will likely be a much better store of value to pass on to your grandkids than the usual gift of a US government savings bond.
Productive real estate (including agriculture) can also be a much better alternative than letting money sit in a bank account. It’s like gold, with yield. And the added benefit of providing a place to stay, or even food on the table.
Privately held businesses can also be a great option as they can often be purchased at very low multiples on their earnings, generating instant yields of 40% or more.
And even though most stock are hovering at bubble levels, there are some deep value options available where you can buy shares of a well-managed, profitable business for less than the value of its net assets.
July 29, 2015
Aritzo, Sardinia, Italy
On January 31, 1940, the very first Social Security check ever delivered went to Ms. Ida May Fuller, a former legal secretary who had recently retired.
Ms. Fuller had spent just three years paying into the system, contributing a total of $24.75 to Social Security.
Yet her first check was for nearly that entire amount. Quite a return on investment.
She went on to live past 100, collecting a total of $22,888.92, over 900 times the amount she contributed to the program. Her story is quite the metaphor.
If you’re not familiar, Social Security is comprised of two primary trust funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).
Essentially, all of the taxes paid in to Social Security end up in one of these two trust funds.
The trust funds then ‘manage’ the money to generate a rate of return, and then pay out distributions to program recipients.
Now, the funds are overseen by a Board of Trustees which is obliged to submit an annual report on the fiscal condition of the program. It ain’t pretty.
The Disability Insurance (DI) fund is particularly ugly. In fact, the trustees themselves wrote in the 2015 annual report that
“[T]he DI Trust Fund fails the Trustee’s short-range test of financial adequacy. . .”
“The DI Trust Fund reserves are expected to deplete in the fourth quarter of 2016…”
In other words, one of the two Social Security trust funds is just months away from insolvency.
When people think about Social Security, they think that all the problems are decades away.
Wrong. This is next year.
The other trust fund, OAS, is projected to “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”
Which means that if you’re 47 or younger, you can kiss Social Security goodbye.
Bear in mind, these aren’t my calculations. Nor are they any wild assertions. They’re direct quotes from the trustees themselves.
And, just who are these trustees? The Secretary of the Treasury of the United States of America. The Labor Secretary. The Secretary of Health and Human Services.
Some of the most senior officials in the US government sign their name to an official report stating that these funds are nearly insolvency– one of them even NEXT YEAR.
Not to worry, though. Congress is on the case.
Late last week, several dozen members of Congress introduced the “One Social Security Act”, HR 3150, to solve this problem.
And let me tell you, their solution is bold. Fearless. And brilliant.
HR 3150 attacks the looming insolvency of Disability Insurance by eliminating the fund altogether.
So instead of having two separate funds for two distinct purposes of Social Security, the legislation aims to combine them into one unified fund.
That way, with just one fund, there won’t be any separate reporting about DI’s insolvency.
It’s genius! They make the problem go away by eliminating the requirement to report it.
There’s just one small issue. Legally, they have a word for this. It’s called fraud.
You and I would go to prison if we commingled funds like this. But in the hallowed halls of Congress, this is what passes as a solution.
This is so typical– solving problems by pretending that they don’t exist and destroying any element of transparency and accountability.
This pretty much tells you everything you need to know about government.
Look, it’s a hard reality to swallow. But the government’s own data show that these programs are not going to be there for you.
And the story smacking us in the face right now demonstrates precisely how politicians intend on ‘solving’ the problems.
These people aren’t the solution. They’re the problem.
And don’t think that ‘voting the bums out’ will affect anything. Elections merely change the players, not the game.
The only way forward is to invest in yourself, particularly in your business and financial education. Make plans based on the assumption that Social Security doesn’t exist.
And if, by some miracle, it’s still there by the time you retire, you won’t be worse off for having built a larger nest egg thanks to the financial acumen you developed.
July 28, 2015
Aritzo, Sardinia, Italy
High up in the mountains of central Sardinia, it’s hard to even think about finance.
The weather is perfect. Sunshine abounds. The vistas are absolutely incredible. The food is amazing. This is definitely one of the nicest places I’ve ever been.
And yet it’s almost impossible to ignore the constant gyrations in global finance.
What’s happening in China is nothing short of astounding, seeing the depths to which a desperate government is willing to go to bail out a broken system and maintain the status quo.
You have to hand it to the Chinese– they clearly don’t give a damn about subtlety.
In the US, market manipulation has taken on a much more sophisticated approach.
It caught my attention last week that the Federal Reserve’s balance sheet is still within 0.3% of its all-time high.
All the fanfare about Quantitative Easing coming to an end, and the Fed cleaning up its balance sheet, turned out to be a load of bull.
When the Fed entered the financial crisis in 2008, its balance sheet was roughly $900 billion.
At its peak, its balance sheet totaled $4.5 trillion. Today, it’s still at $4.5 trillion.
So much for a new era of responsibility.
But to give you a sense of how closely tied the Federal Reserve is to financial markets in the US, this morning I pulled the data and plotted the two together.
This chart shows the relationship between the size of the Federal Reserve’s balance sheet and the Dow Jones Industrial Average since the start of the crisis in late 2008:
You can see that the market stays within a tight range, and as Quantitative Easing played out over the years, that range became even tighter.
Even now that Quantitative Easing has supposedly ended, the ratio between the Fed’s balance sheet and the Dow Jones Industrial Average remains nearly constant at 253x, with a standard deviation of just 1.5%.
That’s a fancy way of saying that, whether intentional or not, the Fed is completely dominating the US stock market.
It’s the same story with mortgages. Treasury bonds. And just about every other major asset class in the US.
Which means that any shrinkage of the Fed’s balance sheet will drag down markets with it.
The Fed may not be as brash as China, but their unsustainable support for financial markets is just as precarious.
This is a time for extreme caution; there’s simply been too much pressure built up in the system, and there’s no way of knowing when or where it’s going to be released.
Over a century ago in the early 1900s, the world was in an equally dire predicament.
Germany was the brand new kid on the block (having been officially formed in 1871), but was already among the greatest powers in Europe.
Russia, France, and Britain were all still dominant powers. Austria-Hungary and the Ottoman Empire were in serious decline, but were still forces to be reckoned with.
History tells us that any time there’s a clear shift between major powers, tension and conflict arise. And 100 years ago was no different.
By 1914 everyone in Europe was preparing for war. But nobody knew exactly what the cause would be.
Out of all possible scenarios that came across military planners’ desks, it ended up being a 19-year old Serbian named Gavrilo Princep who kicked the whole thing off.
He was just a kid—an obscure, unknown kid—who pulled the trigger that killed the Archduke, lighting the match that blew up the powder keg.
People certainly sensed that war was in the air. But no one would have ever predicted that it would start with Gavrilo Princep.
Similarly, we can look around the world and feel like crisis is in the air. But will it come from China? Greece? Puerto Rico?
Likely none of the above.
Any match that lights the system ablaze will probably come from some obscure corner of the Matrix, at a time and place that no one can possibly divine.
July 24, 2015
I’m sitting here on a park bench with my friend and colleague Johann Gevers overlooking an absolutely serene lake in Zug, Switzerland.
With the elegant and imposing mountains behind, it’s as quintessentially Swiss as you can get.
Johann is the founder of Monetas, an advanced digital transaction platform that could dramatically change the way people do business around the world
Monetas is a ‘cryptofinance’ company– part of the new generation of technology firms that has set its sights on revolutionizing finance.
This goes way beyond Bitcoin.
The world of finance as we know it is highly centralized. Anytime you buy a Starbucks coffee or pay your electric bill, the funds pass through a heavily congested financial highway that is exclusively controlled by the banks.
All the money is funneled through their system. It’s expensive. Inefficient. And incredibly outdated.
Think about an international wire transfer—the funds flow from one bank, to a larger bank, to an even larger bank (typically in New York), and back down to smaller banks on the receiving end.
And everyone takes a fee along the way.
This is ridiculous in 2015. The technology already exists to eliminate all of the middle men and allow transactions to pass directly between a buyer and seller.
These companies are game changers. And in Johann’s case, he deliberately selected this picturesque valley in Switzerland as the place to base his company.
In Johann’s assessment, Switzerland still presents the most stable, credible, freest place in the world to run a business, especially something that could really disrupt finance.
And he’s working hard to bring even more cryptofinance companies here to Zug—a vision he calls “Crypto Valley”.
If you listen to his story, it really makes sense. Economic freedom. Low taxes. Friendly, cooperative government.
I invite you to join Johann and I today as we discuss some of the unique and inviting features of Switzerland… and the future of finance.
July 23, 2015
I’ll admit that I lucked out.
Nearly 15 years ago, I discovered that I was entitled to a European citizenship because of my Italian ancestry.
Back then I hadn’t yet realized all the power and benefit of having a second passport. But it sure seemed like a good idea.
The way I figured, another passport just meant having more options. I knew enough to understand that, with an Italian passport, I could live and work anywhere in the European Union. And that struck me as a major benefit.
It took a long time– probably an entire year just to assemble the paperwork. It was a nice project, actually, because it gave me a great reason to spend time with my mother chasing around documents together.
Then there were the multiple appearances at the consulate. The Byzantine bureaucratic hurdles.
I remember at one point I paid them a small fee- it was probably just fifty euros or so. I had paid them the equivalent in dollars.
But the process took so long that the dollar lost value against the euro, so months later they sent me a letter asking me to send more money!
I’ll never forget the day, though, when the Fedex envelope finally arrived.
Inside was my very first second passport. It was incredible. And one of the things that got me started on this journey.
Suddenly I realized that I was no longer beholden to one nation. That no single government had exclusive authority over me. I had more options. I had more freedom.
It was a feeling I’d never had before. It was like I had been missing something for my whole life, but never even knew it until that exact moment. Then I wondered how I had ever gotten along before without a second passport.
I cannot overstate the benefits of this. Having a second passport is something I call the ultimate insurance policy.
It ensures that, no matter what, you always have a place to go. To live. To work. To do business. To retire. And in some cases, even seek refuge.
Now, obtaining a second passport often takes time to establish, sometimes years. So it’s advisable to start thinking about your options now.
Right here in Europe, there are a number of possibilities for obtaining second citizenship, for which there are three basic approaches.
The first is for those that happen to be a part of the lucky bloodline club. If you are able to demonstrate sufficient ancestral links to a country, in many cases you can be entitled to their citizenship.
Ireland and Poland, for example, will grant citizenship if you can prove that you have a parent or grandparent from there.
Hungary will go even further back if you can prove ancestry way back from the Austro-Hungarian empire.
This type of citizenship known as jus sanguinis is commonplace across most of Europe. So with the right ancestry and documentation, you could be on your way to a second passport in a matter of months.
If ancestry is not an option, another option is to buy citizenship.
In scrambling for money, many governments are turning to selling citizenship to well-heeled foreign investors.
In some cases, like Spain and Portugal, the government trade legal residency in exchange for a significant property investment.
In Malta and Cyprus, the governments have taken to naturalizing foreigners who make a very large economic investment and meet other qualifications.
I expect more such opportunities to begin springing up as European nations get nearer to bankruptcy.
Thirdly, lacking the right ancestry or a pile of cash, there is also the option to trade some of your time.
After a fixed number of years of continuous residency, in many countries you can be eligible to apply for naturalization.
Belgium is a very attractive options for this. There, you need just five years of residency before you can be eligible to apply for naturalization.
And you don’t even need to spend the preponderance of that time in the country.
This is not intended to be an exhaustive list. There are plenty of other options out there, but for now I just wanted to give you an idea of what’s out there.
Keep in mind that while some of the paths to obtaining second citizenship are much quicker than others, none of them are instantaneous.
So it pays off to get started in the process sooner rather than later.
After all, it’s hard to imagine that you’d be worse off—especially if you’re a member of the lucky bloodline club—for taking advantage of this.
More options mean more freedom, and that’s always a good thing.
July 22, 2015
By plane, Asia and Europe are 12 hours apart. But on the ground the gap feels like decades.
It’s always a shock to leave a place like Vietnam (where I was last week) and fly to Europe.
Vietnam is one of the fastest growing countries in the fastest growing region of the world. It’s exciting.
Whereas here in Europe, sometimes it feels as if nothing’s changed in the last five centuries.
It’s a night and day difference.
All eyes may be on Greece right now, but in reality, the economic malaise is widespread across the continent.
Italy is gasping to exit from its longest recession in history, while unemployment figures across Southern Europe remain at appalling levels.
In France, the unemployment rate is near record highs.
Finland, once a darling of the Eurozone, is posting its worst unemployment figures in 13-years.
Even in Austria growth is flat and sluggish.
It’s clear that Greece is not the problem. It’s a symptom of the problem.
The real problem is that every one of these nations has violated the universal law of prosperity: produce more than you consume.
This is the way it works in nature, and for individuals.
If you spend your entire life going in to debt, making idiotic financial decisions, and rarely holding down a stable job, you’re not going to prosper.
Yet governments feel entitled to continuously run huge deficits, rack up historic debts, and make absurd promises that they cannot possibly keep.
This is a complete and total violation of the universal law of prosperity. And as their financial reckoning days approach, history shows there are generally two options.
The first outcome is that a country is forced to become more competitive– to rapidly change course and start producing more than it consumes.
It’s like a bankrupt company bringing in a turnaround expert: Apple summoning Steve Jobs in its darkest hour.
But here’s the thing: if a nation wants to produce, it needs producers. That means talented employees, professionals, investors, and entrepreneurs.
So any bankrupt nation that wants to survive is going to have to roll out bold incentive programs to attract talented people, growing businesses, and capital.
This includes cutting taxes, reducing red tape, establishing easy residency programs for talented foreigners, etc.
And it’s already happening.
Even the UK has been working to slash its corporate tax burden and attract more multinationals to its shores.
Portugal has been offering residency in exchange for real estate investment, which has helped stabilize its troubled property market.
Malta offers economic citizenship, providing public finances with vital capital.
And I expect Greece to launch similar programs; we might even see the Greek government selling off passports bundled together with an island. No joke.
They’d be well advised to do so; because the second option for bankrupt nations is to slide deeper into chaos.
Rather than changing their course and trying to produce more than they consume, struggling governments instead often choose to seize and confiscate everything they possibly can.
They impose capital controls, confiscatory tax rates, and inflation– further destroying productivity and wiping out people’s savings.
This only makes them decline faster, dragging down anyone whose assets are within the government’s reach.
This is why it makes so much sense to have a Plan B.
If your home country fails to produce more than it consumes, it’s not safe to hold 100% of your assets there.
This is really a very simple concept: don’t keep everything you’ve worked to build for your entire life in a bankrupt country.
It’s hard to imagine you’ll be worse off for doing something so sensible.
Even if everything seems fine at the moment… even if it feels like your government has the situation under control… it still makes sense to develop a Plan B.
In fact, now is the best time to do so– when it’s calm.
After all, the absolute worst time to start thinking about where to move your assets is after the metaphor hits the fan.
Any sense of tranquility in the markets, or strength in your currency, is NOT a reason to be complacent. It’s an opportunity to make sensible decisions to diversify, including steps like:
– Moving some emergency savings abroad to a well-capitalized bank outside of your home government’s control.
– Take a hard look at your investments and consider reducing your exposure to any absurdly overpriced paper asset bubble. Strive to purchase high quality assets on the cheap.
– Own something real as a hedge against the system– precious metals, cash-producing (and food-producing) farmland, etc., all ideally held outside of your home country.
– Reduce debt and invest in your family’s financial education.
– Consider a second passport (it’s the ultimate insurance policy) or at least a second residency abroad to ensure that, no matter what happens in the world, you and your family will always have a place to go.
Take advantage of the time you have now to take simple, common-sense steps and ensure that everything you’ve worked to achieve won’t vanish in an instant.
July 22, 2015
[Editor’s note: This letter was written by Sovereign Man’s Chief Investment Strategist Tim Staermose.]
The selling in gold (and silver) stocks has been nothing short of brutal in the past several sessions, save for a modest bounce Tuesday.
The Philadelphia Gold & Silver Index of precious metals mining companies is now back to levels last seen in 2002. Gold then was less than 1/3rd the price it is now.
Admittedly, the cost of mining gold is up significantly since then, so many large gold companies are struggling to make money now, even with gold around $1,100 an ounce.
Many also carry a lot of debt. Barrick Gold (ABX), for example, has a particularly bad balance sheet, and the stock has now been sold down to levels not seen since 1991!
To me, the selling is starting to look like some sort of capitulation.
The higher quality stocks in the sector, whose business models are not burdened by high mining costs, nor large debt balances — for example, the royalty companies, such as Royal Gold (RGLD) and Franco Nevada (FNV)— also saw double-digit losses in a single trading session on Monday.
So, it looks to me like the baby is being thrown out with the bath water.
We cannot know for sure where the bottom is, or hope to time it exactly. But, I suspect it is close.
The trigger for the sell-off seems to have been a mini ‘flash crash’ in the price of spot gold during the most thinly traded part of the week, early Monday morning in Asian trade.
Some 5 tons of bullion were sold on the Shanghai stock exchange within minutes, and the price of gold briefly plunged by $44 to $1,080 an ounce.
It has since recovered much of that initial loss, but all sorts of theories have been doing the rounds about the reason for the fall, and many traders and investors are very jittery.
One school of thought says that China has not been accumulating nearly as much gold as everyone thought and therefore maybe won’t underpin stronger demand going forward either.
Whatever the case, I sense an opportunity.
Personally, I am looking at using the volatility in gold and gold stocks to construct an options trade that will benefit from a rebound in well-selected mining companies in Australia.
Selling an ‘out of the money’ put spread when volatility is high is a good way of bringing money into your account that will stay there, in the event the underlying stock doesn’t keep tanking, and the options expire worthless.
But simple trades such as going long the gold stock miners ETF, GDX, or even buying longer-term positions in the quality mining companies might also be warranted at this time.
I can’t guarantee there isn’t going to be another leg down. But, gold and silver stocks sure are cheap and hated right now. And for those with contrarian instincts, that makes them worth a close look.
July 21, 2015
Prague, Czech Republic
I’m at a complete loss for words.
I keep waiting for the deep baritone of that guy who voices all the action movie trailers to chime in. But it doesn’t come. Because this all real.
I’m talking about the trailer George Clooney has just released to promote his new non-profit, entitled THE SENTRY.
(Yes, they use all-caps. It sounds like a great name for the next Marvel superhero movie.)
THE SENTRY is an initiative that “seeks to disrupt and ultimately dismantle the networks of perpetrators, facilitators, and enablers who fund and profit from America’s deadliest conflicts.”
Wow, eliminating genocide sounds like an incredibly noble cause. Of course, in order to do so, Mr. Clooney’s aim is break down financial privacy.
There’s been a long-standing war against financial privacy for years.
As western governments have slid further into bankruptcy, they’ve made coordinated efforts to interdict privacy across the world through tax information exchange agreements, black lists, and turning bankers into unpaid spies.
Plus they’ve been extremely clever in their marketing campaign, working tirelessly to associate financial privacy with some of the worst elements of society.
At first, their propaganda suggested that only people interested in financial privacy were guilty of tax evasion. Then organized crime. Then terrorist financing.
Now it’s genocide.
This is really insane. Privacy is completely natural and part of our most basic social edicts.
Privacy is why it’s taboo to discuss how much money you make. It’s why we thrive on keeping secrets and knowing other people’s secrets.
Privacy is normal. And for years it was something that used to be the rule, not the exception. Especially in regards to finance.
That was the origin of the term “private banking”. It wasn’t about money laundering. It was about being a grown adult and keeping your business to yourself.
Now they’ve destroyed the concept to the point that anyone who seeks out financial privacy is suspect of tax evasion. Or organized crime. Or terror financing. Or now genocide.
And it’s not just finance; it’s privacy in all things.
Here in Europe the British Prime Minister wants to outlaw encryption technology… because apparently only terrorist criminals and ISIS members use secure email.
What’s even more bizarre is how a guy like George Clooney even has a say in the global financial regulations.
Yes, Ocean’s Eleven was very entertaining.
But I’m completely baffled at how George Clooney has any influence over my financial privacy. Or anybody else’s except for his own.
Ominously, THE SENTRY has been among the first that I’ve seen which specifically mentions gold as a means of illicit finance.
And governments have already taken dramatic steps to criminalize the holding of physical cash.
Apparently they want to ensure that your only financial option is to deposit your money with a shaky bank in a bankrupt country earning a rate of interest that fails to keep up with inflation.
Now, I think we can all agree that dictators are bad people (as are rapists, murderers, pedophiles, fraudsters, and corrupt politicians). And stopping them is a nice idea.
But the road to tyranny is always paved with the stones of good intentions.
Because no matter how many financial regulations get passed, and no matter how far the dictators are chased by Mr. Clooney on his white horse, the fact remains that bad people will always find the resources to do bad things.
And in the meantime, the crusade to save the world only serves to make everyone else less free.
This war on privacy is a war on freedom. And it’s getting totally out of control.
July 20, 2015
[Editor’s note: Tim Price, London-based wealth manager and editor of Price Value International, is filling in while Simon travels to Europe.]
History and convention tell us that bonds are the ‘safest’ investments in the world.
Yet it is the crowning irony of the current financial situation that policy makers have made these traditionally safe assets the most unsafe investments in the world.
Western government bonds no longer offer any attraction, either in terms of income or capital preservation.
They are simply instruments of confiscation. They just haven’t yet been fully recognized as such.
That clearly leaves stocks as the preferred risk asset, by default (a relevant pun). But what sort of stocks?
History offers some useful clues.
James O’Shaughnessy in his book ‘What works on Wall Street’ conducted extensive research on common stocks in the US market.
And the most compelling strategy for delivering attractive long term returns came from value investing.
O’Shaughnessy analyzed a 3,000 stock universe over a period of 52 years.
For each year he identified the 50 most expensive and least expensive stocks by a variety of metrics. He then rebalanced that 50 stock portfolio each year, ensuring that only the most and least expensive stocks were retained.
If you had bought the 50 ‘growth’ stocks with the highest price / earnings ratio, for example, after 52 years, a portfolio with an initial value of $10,000 would have grown to $793,558.
That sounds like a decent return. Until you compare it with a portfolio comprising the 50 stocks with the lowest price / earnings ratio.
This ‘value’ portfolio, with an initial value of $10,000, would have grown to $8,189,182, over 10x as high.
If you had bought the 50 ‘growth’ stocks with the highest price / book ratio, the results were even more extraordinary. Your initial $10,000 would have compounded, over time, to $267,147.
But if you had bought instead the 50 ‘value’ stocks with the lowest price / book ratio, a portfolio with a starting value of $10,000 would have grown to be worth $22,004,691– over 80x as high.
A period of 52 years is a statistically meaningful period of time. The O’Shaughnessy study strongly suggests that over time, ‘value’ completely trumps growth.
A bias to ‘value’ may not work every year, but it’s unlikely that any strategy will work without fail year after year. There will always be good years and bad years.
‘Value’ investing requires patience, an attribute that many investors frankly lack.
The larger problem today is that many traditional markets are expensive.
Robert Shiller’s cyclically adjusted price / earnings (CAPE) ratio for the S&P 500 index, for example, currently stands at 27.3. Its long run average is 16.6.
On a CAPE basis, the US stock market realistically has only been more expensive twice in history– once in 1929, and once in early 2000, both years of spectacular busts.
Aldous Huxley once wrote, “That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
The history is very clear about the benefits of investing in the waters of deep value. And it is similarly clear about the dangerous of buying into overpriced markets.
One can only hope that Mr. Huxley was wrong.
July 17, 2015
As Europe burns, Puerto Rico sinks, and China violently gyrates, it’s nice to know there are still some exciting bright spots of growth in the world.
Vietnam is certainly one of them.
The first thing you should know about Vietnam is that it’s a really wonderful place to spend time.
I’ve always loved it here. The food is one of the best parts, heavily influenced by the French occupation of Indochina. It’s incredible.
Hanoi is one of the most picturesque capitals in Asia, with gorgeous French colonial architecture and a plethora of manicured lakes throughout the city.
And the nearby coastline is also one of the most breathtaking in the world; it looks like something out of Avatar.
But what’s really interesting about Vietnam is the growth potential here.
As China transitions into being a more developed economy, they’re no longer able to be the world’s cheapest manufacturers of lower-end products anymore.
Many of the cheaper goods that China used to produce like clothing are now being manufactured here (or in Cambodia).
And that’s the reason I’m here; we’re in talks to acquire an Australian-based business, and I am considering Vietnam as a potential location for the CEO to move the manufacturing operations.
Manufacturing is cheap here due to the low costs and plentiful workforce; there are over 90 million people in Vietnam, and the population is one of the youngest in Asia.
That’s pretty significant given that the life-expectancy here is higher than any developing nation on the continent.
This is a strong sign of future economic growth. Because as young populations age, their disposable income tends to rise. That boosts living standards dramatically.
You can see that already happening here; Vietnam is in what I call its ‘motorbike phase.’ I’ll explain–
If you visit incredibly poor countries across Africa, for example, you’ll see most people walking to get from point A to point B. Or if they’re really lucky, they have access to a bicycle.
But as an economy progresses and grows wealthier, transportation is one of the first things people upgrade.
So then comes the motorbike phase.
That’s where Vietnam is now. Tens of millions of people have swapped their bicycles for motorbikes. And you can see it everywhere.
It’s also at this point that people start buying other middle-class luxuries– small air-conditioners, laptops, etc.
The next stage in development is the small car phase; this is what we’re seeing in China, which has now become world’s #1 automobile market.
Then you have the big SUV and sports car phase, as we see in developed nations like the United States.
Finally, it all comes full circle in the end, with developed countries like Denmark and the Netherlands going back to walking and bicycles. Though this time it’s by choice, not out of poverty.
Vietnam is eager to keep moving up. And the government recently passed some incredibly favorable laws to provide incentives for foreign investors to come here.
Foreigners, for example, can now own and control Vietnamese companies. This is a huge benefit which promises to be a major economic boon in coming years.
Yet despite all of this potential, the Vietnamese stock market is quite cheap.
Some of the largest companies in Vietnam trade at single-digit P/E ratios, and far less than their book value. Yet they’re profitable and often pay dividends in the 4% to 6% range.
I highly doubt that’s going to last. But for now Vietnam is an overlooked oasis, just like Colombia and some of our other favorites.
I think the growth trajectory here will be very much like China’s has been over the last decades. In fact, I think Vietnam is very much like China was 15-20 years ago.
So if you missed the China boom, don’t let Vietnam pass you by. It’s a place that should definitely be on your radar.
July 16, 2015
“The first form of culture,” wrote historian Will Durant, “is agriculture.”
And he was right. When human beings discovered 10,000 years ago that the soil would provide more food than they could possibly eat, this changed everything.
For the first time ever, early humans could actually work WITH nature and reliably control their food production.
They were no longer dependent on unpredictable wildlife or the dangers of the hunt.
Nor were they resigned to devouring an entire beast in one sitting, only to end up right back where they started– in search of their next meal.
Agriculture gave them the opportunity to produce far more than they could consume. And to easily save the surplus for a later time.
To save like this is completely natural. And by that I mean saving is part of nature.
Dogs bury their bones. Squirrels hoard nuts. Even plants set aside some excess solar energy for a rainy day by producing and storing sugar.
For us humans, agriculture was our earliest form of savings. And it was the key ingredient to civilization.
With a vast pool of food savings at his disposal, early man could put down roots and build societies without having to worry about where the next meal would come from.
It was this sense of savings that formed the dividing line between primitive man and civilized man.
This reminds me of that old criticism about gold being a “barbarous relic”.
John Maynard Keynes first coined the term when he denounced the gold standard, and Paul Krugman has echoed this sentiment in our own time.
Both men are champions of government spending and the inexhaustible creation of paper money.
It’s a curious statement, though, given that gold is an acknowledged form of savings.
Even governments and central banks around the world continue to hold gold as part of their official reserves.
Owning gold is saving, which by definition is civilized, i.e. NOT barbarous.
Debt, on the other hand, is the exact opposite. It is a lack of savings that shows a complete disregard for the future.
It is the modern equivalent of gorging on some wild beast with no thought to tomorrow’s meal… or in this case, no thought of tomorrow’s generation.
Debt is the barbarous relic. Not gold.
And governments are up to their eyeballs in it, continuing to engage in this primitive, uncivilized behavior with wanton abandon.
Don’t expect them to change their ways.
Our society awards our most respected prizes for intellectual achievement to faux-scientists who encourage these barbarous acts.
They create complex mathematical models, ‘proving’ why our Neanderthal governments should print more money, borrow more debt, and stage fake alien invasions to boost the economy.
No doubt future anthropologists will find this to be a curious and savage system.
July 15, 2015
Kunming, Yunnan province, China
It’s here in southwestern China’s postcard-perfect Yunnan province that the mighty Mekong River rises.
From its source in a nearby mountain range, the river proceeds south, cutting its way across Southeast Asia’s fertile lands through Burma, Laos, Thailand, Vietnam, and Cambodia.
The Mekong is hugely important; its waters irrigate million of acres of land and provide untold quantities of fish, both of which support tens of millions of people in the region.
So it’s a major concern that China appears to be unilaterally diverting the Mekong to support its own needs.
We’ve discussed China’s worrisome drought several times in the past.
It would not be the slightest overstatement to say that China’s water situation is rapidly approaching crisis levels.
Even China’s Agriculture Ministry is sounding the alarm bells.
The numbers they’re reporting show that China already has to import more water than the United States imports oil.
And this is creating major problems for their food security– for without staggering food imports, China cannot feed itself.
If you add up all the acres of farmland that it takes to grow the amount of food China must now import each year, the total area is larger than the entire state of California.
And this problem is only getting bigger.
Here in Yunnan, the scenic countryside stretches to the horizon with beautiful farms and vast walnut groves, benefiting from the province’s gentle climate.
Yunnan is actually one of the biggest walnut producing regions in China, which itself is the largest walnut producer in the world.
But this won’t last. It can’t. They simply don’t have enough water.
That’s actually the reason I’m here– walnuts.
One of the two major focuses of our Chilean agriculture business is walnuts– something we chose precisely because of the long-term water crisis in China (not to mention the water crisis in California, another major walnut producer).
As Chinese production declines, the resulting shortage should boost prices and substantially benefit our firm.
For now, China’s government is doing everything they can to stem their food security and water crises from getting worse. And that includes commandeering the Mekong.
Over the last few years, the Chinese government has built several massive dams along the Mekong River in Yunnan province.
The Nuozhadu and Xiaowan dams are so large, in fact, that their combined reservoirs have enough capacity to cover the entire state of Maryland in five feet of water.
In addition to providing bountiful hydroelectricity for Chinese industry, these dams are also being used to hoard water.
China has a long history of trying to tame rivers.
It goes back to the days of Mao when legions of engineers did everything they could to alter and divert natural rivers for the betterment of farmers.
(Even China’s former President Hu Jintao started off as an engineer for SinoHydro…)
It didn’t work. And combined with the rest of Mao’s absurd central planning, millions of people starved to death.
Trying to fight nature always ends badly. But governments never learn.
This is exactly what the Chinese government is trying to do right now with its bubbly stock markets.
Like their water crisis, this is a force of nature. When a market bubble gets too inflated, its natural course is to pop.
No amount of clever engineering can prevent this. Delay, perhaps. But never prevent.
China’s response to their financial emergency has been the same as their water emergency: deceit and desperation.
They suspended trading, encouraged small investors to mortgage themselves to the hilt, pushed bank balance sheets onto even shakier ground, and published the most insane propaganda worthy of the Pulitzer Prize for fiction.
They even took a suggestion from Shakespeare’s Henry VI: “The first thing we do, let’s [imprison] all the lawyers.” And yes, they actually did throw a bunch of lawyers in jail for ‘encouraging dissent.’
But like their water crisis, this isn’t something they can out-engineer.
It would be like expecting a bunch of bureaucrats to centrally plan their way out of a black hole.
It’s just not going to happen– nature is too powerful a force, like an unstoppable train.
And fundamentally in this world, there are two kinds of people: those who see it coming, and those who don’t.
For those who see it coming, you have options. You have freedom.
You can choose, at a minimum, to simply get out of the way, and ensure that the train doesn’t hit you or your family.
Or you might even choose to find a way to profit from it, just as we are doing with China’s water crisis.
Undoubtedly, whenever a nation as large and populous as China’s experiences such severe financial gyrations, there’s money to be made; if nothing else, potentially some great bargains for patient investors.
The other type of person is the one who doesn’t see it coming and must suffer the consequences of ignorance and inaction.
Being one or the other isn’t random. It’s a choice– a decision to be ignorant. Or a decision to be educated and prepared.
Which one will you decide?
July 14, 2015
When I first came to Burma (Myanmar) several years ago, there was scarcely an ATM to be found anywhere.
It was primitive. And frustrating.
After all, most people coming from the West tend to think their banking system is robust and highly advanced.
And that’s true to a degree. Internet banking and ATMs are certainly nice modern conveniences.
But if we go back in time and look at traditional banking as far back as the Middle Ages, there’s actually very little about the industry that has changed.
It’s all still quite primitive.
Centuries ago, banks would receive deposits from their customers. And in exchange, they would issue a receipt, or ‘bank note’. Pretty simple.
Whoever had possession of the bank note was entitled to withdraw that money from the bank. So naturally those notes eventually became a form of currency.
If you owed a debt to someone, and presuming s/he had confidence in the bank, you could settle your debt with the bank note instead of actual money.
Banks did the same thing with one another, using a series of notes and credit letters to trade, transact, and settle debts with one another.
And out of this system grew a vast, complex network of interbank credit.
In a typical deal between two banks, for example, there would often be no actual money changing hands.
Instead, they would merely make an entry in their books indicating that one bank owed money to the other.
So instead of passing around cash or gold, banks would settle deals with accounting entries and promises to pay.
Today the practice is almost identical, it just happens electronically instead of on paper.
Central bank balances are credited in favor of one bank or another, but there’s still no money that changes hands.
Again, ATMs and Internet Banking are modern conveniences. But they have done nothing to truly disrupt the centuries-old banking model.
That is now changing. Quickly.
Tech companies are starting to figure out how to make every traditional banking function faster, cheaper, and better, all while eliminating the middle man.
Companies like Revolut, Transferwise, and Dwolla, for example, are online money transfer services that can send funds cheaper and faster than banks.
KlickEx is a currency service that provides a peer-to-peer market for foreign exchange, eliminating the need to use a bank.
Countless crowdfunding platforms exist to obtain startup capital for a new businesses. So no one needs to go to the bank with hat in hand anymore.
And there’s a multitude of peer-to-peer lending platforms where you can borrow money for just about anything– from a home mortgage to a new car, all without a bank.
Companies like Square and Stripe are rapidly taking over credit card processing, yet another industry that used to be dominated by banks.
And even the most basic practice of taking deposits is now on tech companies’ radars.
Google revamped ‘Wallet’ service, for example, allows consumers to effectively park their savings with Google instead of a bank.
So rather than holding your cash at some illiquid, poorly capitalized bank, consumers can choose one of the most profitable companies in the history of the world to be their direct financial counterparty.
Now, I’m not suggesting you rush out and do this; I’m merely pointing out that this is a rather large nail in the coffin of the financial industry.
Deposits. Lending. Funds transfers. Credit Card Processing. Foreign Exchange… can all be done now better, faster, and cheaper outside of the banking system.
This isn’t some wild conspiracy theory. This is a fact; all of these tools ALREADY exist. It’s just a question of how quickly they’ll be adopted.
And if you look at the last great trends in consumer technology (the Internet, smart phones, etc.) the time frame was ten years or less to achieve global scale.
Banks’ days are numbered. And in a decade’s time, we won’t even recognize the financial system.
We’ll be doing everything online, global, and without the constant nuisance and central control of governments and banks.
Click below to listen in:
July 13, 2015
Have you ever walked into a restaurant and seen a table full of people staring at their phones instead of talking to the real live human beings across from them?
That used to never happen in Yangon… simply because no one had mobile phones.
It was actually pretty nice being able to talk to people without being interrupted by some infernal device.
But now the Burmese are catching up with the rest of the world.
Mobile infrastructure is still comparatively underdeveloped here. But the city has gone from basically zero coverage to ubiquitous 3G in about 18 months.
After opening up to the world in 2013, the ‘kindler, gentler’ national government awarded licenses to two foreign companies to build and operate a mobile network.
Even just 2-3 years ago a SIM chip cost thousands of dollars. Now you can buy one for a few bucks.
And with a flood of cheap smart phones from China, mobile is becoming a must-have.
Millions of people are now on mobile, many of whom are accessing the Internet for the first time ever. And it’s really changing things.
I’ve been amazed at how different this place has become just since my last visit a year ago; hardly anyone is without a mobile device.
But it’s more than that. There are more businesses. More vehicles. More trade. More production. And more prosperity.
Their new ability to communicate, access information, and do business is having a profound effect on the economy, and it’s really exciting to see.
Decades ago Burma was the richest country in Southeast Asia.
In fact, in the early 1900s, Yangon (known as Rangoon back then) was more cosmopolitan and developed than most of the United States.
It boasted wide, clean boulevards, beautiful homes, top hospitals, and an excellent quality of life.
Then the military government took over and ruined everything. By the 1970s, Burma had become the poorest country in the region.
This highlights a very clear lesson from history: where there is freedom, there is prosperity. Where there is tyranny and corruption, there is hardship.
It’s not a complicated formula. If people have peace and freedom, they will thrive.
Sprinkle in a dash of technological advancement and an economy will grow like the magic beanstalk.
Burma is starting to get all three of these factors.
The massive impact of technology being imported into the country cannot be understated; it’s as if the rest of the world just handed a cigarette lighter to a cave man.
Additionally, though this is still a tightly controlled society, Burma is starting to get its first taste of economic freedom.
Businesses are now able to export to global markets that they’ve never had access to before. Jobs are becoming more plentiful. Domestic consumption is growing.
And after years of isolation, consumers are getting their first taste of imported products.
Their taste is insatiable; it’s as if decades of pent-up demand is exploding in a gigantic supernova of consumption.
Most people had never even tried Coca Cola before 2013; now thirsty consumers are gobbling it up like crazy.
This is going to be a major driver of economic growth for several decades.
Samsung, Huawei, and LG are already raking it in. But for small investors and entrepreneurs trying to figure out how to invest in Burma (Myanmar), there are three primary ways to capitalize on this rapidly growing market:
1) Servicing local expats
This is an old staple; anytime a country emerges from isolation, war, or has a resource boom, you can expect a flood of expats to come rushing into the country.
This has happened time and time again in places like Iraq, Libya, Angola, etc.
Often the expats are from NGOs and big oil companies, and they are typically accustomed to a standard of living that doesn’t currently exist in the country.
Real estate is a simple example (though there are many others).
Most of the apartments available in Yangon are in poor condition, far below the international quality that expats demand.
So it’s possible to build a very lucrative business from customizing and improving apartments to international standards.
2) Selling local products to the world at international prices
Burma has some obvious cost advantages. Salaries here are rising, but they’re still incredibly low, even when compared across the region.
Ironically this place is crawling with Chinese entrepreneurs looking to set up factories; Burmese manufacturing costs are far lower than in China.
The resource sector is another prominent example; mining gold here means you can sell at the global market rate, but pay much lower Burmese extraction costs.
It’s the same thing with agriculture as well– paying lower local costs but exporting at global market prices. (This is similar to what we’re doing in Chile.)
3) Selling global products to a growing local market
Last but not least are businesses that sell foreign products to the rapidly growing market of local consumers.
This is what Samsung, LG, etc. are doing. But mobile phones just scratch the surface.
Think about the intrepid foreigners who brought American blue jeans to Russia after the fall of Communism. They sold like hotcakes.
There’s hardly anything available for sale here (McDonalds doesn’t even have a presence in the country).
This makes it a great opportunity to acquire master distribution rights, i.e. become the exclusive distributor of certain foreign products in Burma.
I once did business with a Russian oligarch, for example, who obtained the master distribution rights for high-end European chocolates.
This gave him the exclusive right to sell an incredibly popular product to a rapidly growing consumer market.
He was broke when he negotiated the deal, but made a vast fortune off of it.
There’s the same potential here.
There are no shortcuts; you’ve got to be here, or at least spend some serious time on the ground.
(After all, if it were easy to invest in Myanmar, there wouldn’t be any fortunes to be made!)
But for those who do, this is one of the most exciting markets in the world.
July 13, 2015
[Editor’s note: This letter comes from Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
“Nobody knows anything.”
That was famed Hollywood producer William Goldman’s sardonic assessment of the movie business in his classic memoir ‘Adventures in the screen trade’.
In finance, things are subtly different. “Nobody learns anything,” appears to be the mantra.
If one generation happens to stumble upon knowledge – probably involuntarily, and learnt at great cost – then the next generation (or nation) scampers blithely away from it and on towards some fresh disaster.
Mario Draghi at the ECB gave us the phrase “whatever it takes”. Now the policy chiefs of China are running with it.
Government buying stock to support the market? Check.
Government halting trading in half the stocks on the market? Check.
Government banning large shareholders from selling for six months? Check.
Government suspending any further IPOs? Check.
Government slashing interest rates? Check.
Government ordering companies to buy their own shares? Check.
This makes for the most absurd global financial situation we can remember.
There may have been wilder outbreaks of mass fatuous behaviour – as Adam Smith could easily have said, there’s a great deal of absurdity in a market.
But we have long held that if you don’t understand the rules of the game, it’s best not to play the game.
Doing anything in credit markets today involves making a macro market call that is fundamentally impossible.
All debt markets have become speculative arenas courtesy of central bank activity.
Participating in stock markets today absolutely requires a margin of safety (and a strong stomach).
But value, we believe, does exist out there – provided you have a manager with the geographical flexibility and mandate to look for it.
If your fund manager simply tells you that stock markets are too expensive, he’s looking in the wrong places; time to find a new manager.
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.
July 10, 2015
What do these have in common? Their likelihood is next to impossible. So why worry?
This is how people tend to think about the financial system.
Mentioning even the possibility, for example, that the US could default on its debt is met with so much scorn and contempt it would be safer to stand on the street corner warning about an alien invasion.
The same goes for the imposition of capital controls. Or a collapse in the banking system. Or a currency crisis.
No one, from the average guy on the street to a Nobel Prize-winning economist, wants to acknowledge that these possibilities exist.
And yet the most casual glance at the headlines proves that these events not only can happen, they do happen.
The Greek government is broke. This didn’t happen overnight. It’s not like Greece has always been a picture of financial health and just recently fell on tough times.
Greece has been broke for ages. As has the Greek banking system– overstuffed with government IOUs and bad loans that have no hope of being repaid.
And that’s why we’re seeing everything unfold in the headlines. Bank runs. Capital controls. Default.
It all starts with debt. Whenever a country gets too deep into debt, it’s going to get into trouble. History is very clear on this point.
Debt almost always leads to negative consequences, most notably default.
They’ll either default on their private creditors, i.e. the poor souls who loaned them money to begin with.
Or they’ll default on foreign governments, creating destructive trade wars and currency crises.
Mostly, though, they’ll default on their obligations to their citizens– suspending pension payments, imposing capital controls, raising taxes, destroying the value of the currency, and bailing in the banks with customer deposits.
Debt kills. And sooner or later, if history is any guide, nearly every heavily indebted nation will resort to this very limited playbook.
Just look at Greece: the government has established tight restrictions over bank withdrawals and is even preventing people from accessing safety deposit boxes.
This highlights yet again that banks are merely an extension of their governments– stooges that will turn against you in a heartbeat and comply with every order their bankrupt master gives them.
It’s foolish to hold one’s life savings within the banking system of a heavily-indebted nation.
And doing something about it need not be complicated.
It’s 2015. You can move savings to an offshore bank account (i.e. a stable foreign bank with very strong fundamentals) without having to leave town.
Or in some cases, without leaving your living room.
It’s also easy to hold real assets like gold and silver in a fully insured, non-bank safety deposit box overseas.
This is sound advice for anyone living in a heavily-indebted nation.
It’s not some wild assertion or conspiracy theory to acknowledge that there’s risk in the system. The publicly-available data is very clear: almost every western nation is insolvent and far past the point of no return.
These are real risks not to be assumed away. They’re uncomfortable and unpopular to think about. But they are not negligible.
And in the face of such clear data, rational, thinking people ought to have a Plan B.
July 9, 2015
It’s eerily befitting that at this very second, all of South China is frantically anticipating a major storm bearing down on the region.
In this part of the world they call them typhoons, which comes from the Chinese ‘tai fung’, meaning ‘strong wind’.
And strong they are. Here on the 33rd floor of my hotel in Kowloon right now, I can hear the wind whipping ominously as if it’s about to blow right through the windowpane.
Just across the border in Shenzhen, there’s an even stronger wind, blowing trillions of dollars of wealth right out of the system.
And more than that, it’s blowing away confidence.
Financial systems are based on confidence. Think about it– these governments and central banks have absolutely nothing tangible to offer.
They print up countless pieces of colored paper backed by nothing of value and pass it all off as ‘money’.
They rack up trillions worth of debt and act like it’s inconsequential.
Banks operate by keeping only a tiny fraction of their customers’ funds on reserve, loaning out the rest for wars, ghost cities, and bridges to nowhere.
These shaky nodes make up a perilously fragile financial system that is just barely held together by a very thin veneer of confidence.
In order for it to continue functioning, every participant in the financial system must have confidence. Or at least have confidence that everyone else has confidence.
Without confidence, the system collapses very quickly.
Think about what happened in 2008: suddenly the market lost confidence in the solvency of some of the biggest banks on Wall Street, and overnight the entire financial system was in crisis.
Confidence is everything. And China just lost it.
For years the Chinese government has been trying to build a reputation as a credible financial leader in order to compete with the West.
The West dominates global banking transactions with the SWIFT system; but China is now launching the CIPS system to compete.
The West dominates supranational finance with the IMF and World Bank; but China has launched the Asia Infrastructure Investment Bank to compete.
The US dollar and euro dominate global reserves and international trade; but China has quickly loosened controls, established renminbi financial centers around the world, and entered into numerous swap agreements to compete.
It’s working. Or at least it was. Confidence in China has been building, most clearly evidenced by the meteoric rise of renminbi activity.
Even five years ago, the renminbi didn’t even register in international data tracking.
Yet its usage now has exploded, to the point that the renminbi is now the 5th most widely used currency in global payments, ahead of the Canadian dollar and Swiss franc.
But now they’ve gone and screwed it all up.
The absurd bubbles in China’s stock markets have burst. But rather than let the market take its natural course, the Chinese government has stepped in to ‘manage’ the crisis with the most mystifying, baffling steps imaginable.
Their early anti-crisis actions included slashing interest rates and reserve ratios to ‘encourage’ banks to keep lending.
Then they actively prompted small investors to dive headfirst into the marketplace, even suggesting that people offer up their homes as collateral to buy stocks on margin.
Now they’ve resorted to halting trades– half of Chinese stocks are now suspended. You can’t buy them. Or sell.
In fact they’re banning large buyers from selling. And they’re even threatening to jail short-selling investors who profit from stocks declining.
These measures won’t work. Every bubble eventually bursts, and there’s nothing they can do to prevent it.
More importantly, though, China has singlehandedly destroyed much of the credibility they spent years building.
Just when people were starting to get over the credibility hump, the Chinese government went and did all these ridiculous things. Now everyone’s back to thinking, “Same old China…”
The trust is gone.
We can absolutely expect a lot of the wind to be taken out of the renminbi sails, slowing its rise to challenge the dollar as the dominant reserve currency.
Undoubtedly China’s long-term future is very bright. But this is a major setback. It’s not that the market is crashing– it’s how the government is responding.
Later this year the IMF is supposed to decide whether or not to include the renminbi in their ‘SDR’ pseudo-currency basket.
This is something that would be a major step in re-aligning global finance. And it’s a big deal because the vote only comes once every five years.
Until now, the IMF was practically backed into a corner. They had no choice but to let China into the club.
But now they have all the ammunition they need to deny China, yet again, for another five years.
They can point to this incident and say, “Due to the unstable nature of China’s capital markets and regulatory environment, we will not include the renminbi at this time.”
And that, ladies and gentlemen, keeps the US dollar in the driver’s seat for the next five years.
Let’s put it another way: the currency issued by one of the most pitifully capitalized central banks in the world, backed by the greatest debtor that has ever existed in human history, will dominate the world for another five years.
This practically gives Uncle Sam carte blanche to spend the next five years completely unchecked by competition, going even deeper into debt and making their problems even worse.
The bubble in China may be bursting. But the bubble in America is about to get even bigger.
July 9, 2015
Standing before the European Parliament yesterday, it took Nigel Farage just four minutes to completely destroy every argument supporting the Eurozone.
A few years back when he spoke at one of our Sovereign Man events in Santiago, he anticipated everything that we’re seeing right now.
Today it’s not nearly as controversial to say that the Eurozone experiment has failed. Anyone aware of what’s happening in Greece should say the same. But very few people really understand why.
As Nigel explains in the video below, right from the start, the system was never intended to help the Greek people.
Greece entering the euro was great for Goldman Sachs. But terrible for Greeks. It chained the country to a system in which it didn’t belong.
And what about all the bailout money that’s been thrown at Greece in the time since?
None of it actually went to the Greek people. It went to bail out the French, German, and Italian banks who own Greek debt.
Sure, social welfare drags an economy underwater. But corporate welfare is what really drowns it.
Since the crisis, the country’s debt to GDP has gone from 100% to 180%. Tensions have skyrocketed, and the Greek people are suffering.
(Last night Zerohedge published footage of Greek people on the island of Lesvos raiding a food truck. Shocking.)
They are the ones that now have to bear the burden of a stagnant economy, capital controls, and inflation.
July 8, 2015
Thousands of years ago in Ancient Greece, it was a commonly held belief that the gods walked the earth among us humans.
And that perhaps even Zeus himself might show up at your doorstep disguised as a vagabond.
From this sprang the legendary sense of Greek hospitality, known as ‘xenia’.
It meant that a complete stranger could walk into your home unannounced, and you had an obligation as the host to take care of him.
To feed him. To house him. To bathe him. To let him freeload for as long as he needed.
And since no Greek was willing to risk the wrath of the gods by being a bad host, xenia was one of their most important customs.
Homer tells us of one famous instance of xenia in his epic poem The Odyssey.
You’ll probably remember it from high school– the never-ending saga of Odysseus, King of Ithaca, as he makes his way home from the Trojan War.
The war lasted ten years. Then Odysseus’ journey home lasted another ten years.
And I think it’s the perfect analogy to the situation Greece finds itself in now.
After the war, Odysseus’ fleet is blown off course by a massive storm during the voyage home, resulting in one misadventure after another.
They’re captured by a savage Cyclops from whom they narrowly escape after blinding him with a wooden stake to the eye.
His men become enchanted by magic fruit, causing them to completely lose their senses.
Later they encounter cannibals who destroy nearly the entire fleet.
Then the witch-goddess Circe turns half of his men into swine, and reverses her spell only when Odysseus agrees to be her sex slave.
They pass by dangerous sirens, narrowly avoiding disaster by strapping their captain to the mast and stuffing their ears with beeswax.
They barely fend off the six-headed monster Scylla, and then nearly all die at the whirlpool Charybdis, after which Odysseus is taken prisoner once again.
He ultimately escapes, then almost dies (again) in a terrible storm (again) and gets shipwrecked (again), this time on the island of Scherie.
It’s always something with this guy.
I mean… seriously. Odysseus goes from one disaster to the next. Just like Greece today.
Greece is in a never-ending crisis, going one misadventure to another.
And right before they collapse, someone always comes to the rescue. The IMF writes a temporary bailout check, and Greece just barely escapes disaster… only to fall into another disaster.
It happens over and over like a never-ending odyssey. Except that eventually it does end. And rather poorly.
When Odysseus finally makes it back home to Ithaca after two decades away, he finds that he’s completely broke because 108 Greek men had been staying at his house and mooching off the estate.
And as was Greek custom at the time, his wife Penelope had an obligation to take care of these men, all of whom abused the xenia tradition for their personal benefit.
Modern Greece is legendary for its absurd public benefits.
Hairdressers get to retire with full benefits on a taxpayer-funded public pension at age 50; dead people receive welfare benefits.
This modern-day version of ‘xenia’ is an insane, easily abused system that’s brought Greece to bankruptcy.
Odysseus responded by killing every one of 108 men who milked the system.
The Greek government is certainly set on doing the same. But since they can’t identify any single perpetrator, they’re going after the entire nation.
The capital controls the Greek government has implemented are punitive to nearly every man, woman, and child in the country. People can’t even access bank safety deposit boxes.
And there’s clearly more punishment to come.
This theme is not new. For thousands of years, nations have gone bankrupt from their own stupidity.
And on the way down, they impose an escalating series of controls designed to keep the party going for just a little bit longer.
Wage controls. Price controls. Capital controls. People controls.
Greece is once again in this position, along with nearly every government in the West.
Even the US has been narrowly escaping collapse for years. Government shutdowns are narrowly averted by some last-minute magic trick. Temporary emergency measures bail out the banking system. Etc.
It’s an odyssey. But it too shall come to an end… rather poorly for those involved.