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More Freedom. More Prosperity
Updated: 2 hours 40 min ago

Scathing new report shows just how bankrupt Social Security really is

Wed, 06/29/2016 - 12:19

Last week, a group of analysts published an astonishing report about the future of Social Security in the United States, and their remarks were nothing short of damning.

According to their calculations, for example, these analysts claim that Social Security is already running a huge deficit to the tune of tens of billions of dollars each year.

In fact, this Social Security funding deficit has been taking place for several years now, and it’s actually accelerating. So the problem worsens each year.

According to the analysis, the astounding rise in Social Security recipients vastly outpaces any growth in tax revenue received into the program. And this trend will continue for decades.

The report goes on to describe Social Security’s two main trust funds, OASI (for ‘Old Age Survivors Insurance’) and DI (‘Disability Insurance’).

They tell us that DI actually went bust several months ago.

But rather than attack the root cause of the problem and restructure the program, Congress quietly slapped a band-aid on DI by simply diverting funds from OASI, just enough for DI to limp along for a few more years.

So in other words, they robbed from OASI to pay DI, and keep it afloat through the next presidential election. It’s incredibly short-sighted.

Among the other programs slammed in this report, the Hospital Insurance (HI) fund, one of Medicare’s major trust funds, is of particular concern.

Their brutal analysis shows HI is going to completely run out of money in 2028, just twelve years from now (when President Clinton finishes her third term).

2028 is actually two years earlier than they had originally projected.

And they project the entire Social Security program will be fully depleted six years later in 2034.

Like I said, this report is incredibly damning.

But it raises an important question– just who are these crazy, fringe analysts predicting all of this doom and gloom?

After all, the political establishment has been telling everyone for years that Social Security is going to be just fine. And they seem to have a solid grip on the situation, right?

Well, the report was actually published by the Social Security Administration itself, signed by (among other cabinet officials) the Treasury Secretary of the United States of America.

It’s absolutely incredible. The government is publishing this data in black and white.

They’re telling anyone who’s willing to listen that Social Security has dug itself into an impossible hole.

More importantly, they’re telling us there’s a 0% chance that the government will be able to honor its existing commitments.

They’ll either have to radically raise taxes, or simply reduce (or eliminate) the Social Security benefits that they’ve been promising taxpayers for decades.

The younger you are, the steeper the price you’ll pay.

If you’re in your 60s, for example, you may likely see your benefits cut. If you’re in your 40s or 50s, you can count on it.

And if you’re in your 30s or younger, you can not only forget about Social Security, but you can expect to pay more and more taxes to bail out a program that won’t be there for you when it comes time for you to collect.

This is what happens when nations go bankrupt.

History is full of so many examples of dominant powers who think their wealth will last forever… and so they make far too many promises to far too many people for far too many years.

But eventually the reality of simple arithmetic catches up.

(As we discussed yesterday, arithmetic is slowly dying off in the Land of the Free, so perhaps this explains a thing or two).

We’re seeing this now in the US, and we’ll continue to see this problem worsen in the coming years until it becomes a full-blown emergency and people cry out, “Why didn’t anyone see this coming?!?”

Here’s the good news: you have ample time to prepare, and there are plenty of solutions to fix this.

Don’t get me wrong– I don’t mean “fix Social Security”. Oh no. That program is toast.

I’m talking about fixing this for yourself.

Retirement is one of those life events that is completely predictable. We know it’s going to happen.

And with a little bit of education, planning, discipline, and execution, we can vastly influence the outcome and prevent any major catastrophe from interfering with our goals.

You can dramatically boost your own nest egg, for example, and have much greater say over your retirement assets by setting up a structure like a solo 401(k) or a self-directed IRA.

(When structured properly, you can contribute potentially north of $50,000 per year to your retirement.)

It also makes sense to invest in your financial education; learning more about investing will clearly be beneficial in boosting your returns, and this can have a profound effect over time.

Especially if you’re younger, increasing your average return by just 1% over the course of 20-40 years can add up to hundreds of thousands of dollars in additional retirement savings.

You may also want to consider retiring abroad where you can live the lifestyle you’ve always wanted at a fraction of the price, and substantially stretch the time and value of your retirement savings.

Look, I’m convinced that Social Security will become a national emergency some day. Just remember that since its demise is conspicuously predictable, the impact on your life is completely preventable.

This new breed of celebrities makes China’s rise even more obvious

Tue, 06/28/2016 - 11:29

In the year 605 AD, Emperor Yang of the Sui dynasty in China formally established what became known as the ‘imperial examination.’

This was a standardized test that public officials were required to take, covering everything from arithmetic to writing to military science.

The idea was to ensure that all public servants were educated and qualified.

This concept grew through the centuries, from the Sui to the Tang, Sung, Yuan, Ming, and Qing dynasties, with each successive leader further refining the exam.

It even lasted into China’s early days as a republic at the beginning of the 20th century, and still persists today in Taiwan.

China has had a very long tradition of placing substantial social value on education.

There was a brief interruption in the 20th century during Mao’s Cultural Revolution in which 100,000+ intellectuals were persecuted and shipped off to labor camps.

The economic effects of this decision to kill off intellect were disastrous, and China impoverished itself for decades as a result.

But today education is back at the forefront of Chinese culture, as it was for centuries.

The Chinese obsess over core subjects, particularly the all-important science, technology, engineering, and mathematics (STEM).

The West is lagging here. Even the US Department of Education claims “few American students pursue expertise in STEM fields,” and “we have an inadequate pipeline of teachers skilled in those subjects.”

It’s also a question of values.

Case in point: two weeks ago, state-supported Wayne State University in Michigan decided to drop the mathematics requirement from its general education curriculum.

Instead, the university’s General Education Reform Committee proposed replacing the mathematics requirement with a mandatory course on diversity.

(It’s amazing that young people will actually take on tens of thousands of dollars worth of student debt for this…)

Across the Pacific, however, the Chinese haven’t reached the point yet where their society places much educational value on 18th century gender studies or the history of pop culture.

Instead, China celebrates real intellectual achievement.

Chinese movie stars take to their social media accounts each year during the annual “Gaokao”, or national college entrance exam, to cheer on the students.

The Gaokao is such a big deal in China that it receives substantial national media coverage, and top-scoring students often attract worshipful devotees and achieve minor celebrity status.

The same applies to the online math and science tutors who help students prepare for the Gaokao.

Many tutors attract millions of social media followers and are routinely recognized on the street like any ‘real’ celebrity.

[And in peak season they can make up to hundreds of thousands of dollars per month!]

Here’s an even starker example:

Stephen Hawking gained two million followers within 24 hours of signing up at the microblogging site Weibo, China’s equivalent of Twitter.

Now’s he’s up to 4.2 million, and climbing. That’s in just two months.

By comparison, he has 16,000 followers on Twitter versus Kim Kardashian’s 46+ million.

It’s not that Hawking isn’t famous in the US or Europe– they did, after all, make a movie about his life two years ago (which did slightly worse in the US market than 2014’s Sex Tape…)

It’s that he has a cult-like, almost movie star status in China, where students actually spend time learning about his theories.

To be fair, there’s obviously incalculable intellect in the West. And it’s not like the Chinese are immune to puerile fanaticism for their movie stars.

The key difference in China is that the celebration of intellect and human achievement as a core social value is on par with success and entertainment.

It’s no longer this way in the West. But it used to be.

When Sir Isaac Newton died in 1727, he was buried in England with the honor and prestige of a reigning monarch.

This shocked visiting diplomats from the Ottoman Empire, where intellectuals were treated with suspicion and censorship.

Unsurprisingly the Ottoman Empire was by then rapidly falling into history’s wastebasket of former superpowers, and the West was on the rise.

Decades ago in the US, Albert Einstein and Jonas Salk were huge celebrities.

Charles Lindbergh was once the most famous man in the world.

And children idolized astronauts in the 1960s, whose fame was so vast they were showered with endorsement deals from some of the biggest companies in the world.

Today, children in the West idolize reality TV starlets who are celebrated for having a voluptuous ass.

And in university, ‘checking your privilege’ is becoming more important in the Land of the Free than achieving fluency in the language of the universe– mathematics.

Just like a ballooning national debt, it’s not hard to get a sense of where this trend leads…

Opportunity: the most disastrous event since World War II

Mon, 06/27/2016 - 09:21

[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

So the British people have finally spoken. The Establishment, however, chose not to hear them, turning its perpetual tin ear to criticism from below.

As the flag-bearer for an unaccountable, hypocritical and increasingly bewildered elite, Martin Wolf for the Financial Times showed precisely why Remain lost:

“The fear-mongering and outright lies of Boris Johnson, Michael Gove, Nigel Farage, The Sun and the Daily Mail have won.. This is probably the most disastrous single event in British history since the second world war.”

The London establishment has taken the Brexit news with quiet dignity.

The BBC – like the Financial Times, another media institution that persists despite itself – also struggled to make sense of the UK’s extraordinary decision to enter divorce proceedings with the EU.

Extraordinary not because it was irrational, or xenophobic, or economically illiterate, or sado-masochistic, though that is what the Establishment evidently believed.

Brexit was extraordinary because of the massed domestic and international forces that the British people managed to overcome:

All of the main political parties, the IMF, the OECD, the CBI, the TUC, Goldman Sachs, JP Morgan, Morgan Stanley, most chief executives of FTSE 100 companies, and David Beckham.

So what did 17.4 million British people vote for?

One can only speak for oneself. I voted for economic independence from a failing totalitarian socialist economic bloc.

The EU’s greatest economic monument, the euro, simply isn’t working.

That’s because what may be appropriate today for an economy like Germany’s is unlikely to be appropriate for an economy like Greece.

(Greece, by the way, should never have been allowed to join in the first place – but then institutionalised corruption is another of the euro zone’s fatal flaws.)

Yet the euro force-feeds a one-size-fits-all across the continent, which unsurprisingly is the slowest-growing region in the world.

The euro is emblematic of the EU as a whole– it is too big to function properly, especially when there’s little commonality amongst the EU’s disparate cultures.

Yet whenever skeptics expressed concern at the EU’s direction of travel and its acceleration regardless, it was met with a standard response: the answer is more Europe.

Well, not any more.

The financial markets have also spoken. Or at least yelped.

But a few days’ drama does not make a crisis, and Mr Market has a tendency to become emotional– especially when faced with almost unfathomable complexity and a sudden dramatic change to the status quo.

Whatever else happens, a (temporarily ?) weaker pound will boost prospects for British exporters while Britain gets round to renegotiating old and negotiating new trade deals.

The UK’s credit rating will likely take a knock – but Gilts are already living in fantasyland and have been largely uninvestable for months.

The bigger concerns should surely be for the euro, and for a failed economic and political lunatic asylum that has just seen its first prisoner escape.

Will other inmates decide to make a break for freedom – and sanity ?

We think the EU referendum was ultimately the expression of a choice between big and small government.

Enough British voters seemed to have decided that we can get by with less State rather than more.

And what of all the great ‘risk’ in financial markets that have been discussed round-the-clock by financial news?

Remember that risk is the probability of a permanent loss of capital.

Day-to-day price volatility, on the other hand, is just that – and in financial markets it simply cannot be avoided. It cannot be avoided – but it can be exploited when the market over-reacts. Warren Buffett put it nicely:

“Cash combined with courage to invest in a crisis is priceless.”

This opportunity hardly strikes us as the most disastrous event since World War II. Just make sure to go slowly and be patient. This volatility could persist for quite some time.

Tim Price on the Brexit investment opportunities

Fri, 06/24/2016 - 10:57

I’ve never been so happy to be so wrong.

Britain’s referendum on whether or not to stay part of the European Union was marred by some of the most blatant propaganda we’ve seen in the West in a very, very long time.

But… at the end of the day, the British government at least accurately counted the votes. No shenanigans.

“Leave” prevailed. So the UK will officially be leaving the European Union.

This has led to some unprecedented moves in the financial markets.

The pound is at its cheapest level in decades. High quality British companies are now trading for extraordinary discounts.

Investors are panic-selling because they don’t know what’s going to happen next.

Britain has been part of the EU for four decades, and now that’s coming to an end.

Nothing scares people more than their fear of the unknown.

In fact, for decades, the political, media, and financial establishments have been pushing people along a very clear path that they wanted us to follow.

Elections always represented the illusion of choice between establishment candidates and their establishment policies.

This referendum, just like the surge of candidates like Bernie Sanders and Donald Trump, constitute a major revolt.

Simply put, this wasn’t part of the plan. So the system is in complete panic.

This is a huge opportunity, especially for foreign investors who have an unprecedented chance to pick up high quality British assets on the cheap.

I wanted to dive into this, so I rang up my colleague Tim Price, London-based wealth manager and one of the sharpest investors I know.

Tim and I discuss several options in both stock and the currency markets, and he even highlights what investments to avoid.

You can listen in to our call here.

Note: Tim and I cover the following… and MUCH more:

  • Will the UK experience a major financial recession?
  • The pound has cratered. Is it a buy?
  • Sell this currency instead.
  • Why the polls are always wrong.
  • Will the US dollar remain strong?
  • Avoid this entire industry if you’re buying stocks.
  • What you want to think about buying… and when.

Brexit: I’ve seen more subtle propaganda coming out of North Korea

Thu, 06/23/2016 - 14:03

On November 11, 1947, Winston Churchill, then ex-Prime Minister of the United Kingdom, rose to speak at a debate in the House of Commons:

“Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise.

Indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time;

but there is the broad feeling in our country that the people should rule, continuously rule, and that public opinion, expressed by all constitutional means, should shape, guide, and control the actions of Ministers who are their servants and not their masters.

This may be the perfect summation of what democracy is supposed to be.

And western nations– particularly the US and UK– have been champions of ‘democracy’ around the world (though they typically mean ‘republic’).

Now, today the voters of the United Kingdom go to the polls to decide whether or not their country will remain in the European Union.

This is about as democratic as is gets– direct voting by the people to choose their fate.

Or so they claim.

In reality, each side has had a long, drawn out campaign to influence the outcome.

The ‘leave’ leadership has been scaring voters with horrific stories of evil brown people who will infiltrate the United Kingdom should the country remain in the EU.

I mean, I’ve seen more subtle propaganda coming out of North Korea.

Meanwhile the ‘remain’ side has been threatening eternal economic damnation and financial Armageddon.

Most of the political and media establishment falls in the ‘remain’ camp, so this is where the propaganda becomes painfully obvious.

The IMF, for example, published a report recently suggesting that Britain leaving the EU would permanently lower incomes in the United Kingdom.

Really? Permanently?

So if voters choose to leave the EU, then the UK, which traces its sovereignty back more than 1,000 years and once had an empire so vast they ruled the entire world, will never be able to recover forever and ever until the end of time…?

We’re honestly supposed to believe that a few decades within the European Union has irrevocably thwarted Britain’s 1,000 year history in being able to achieve economic growth independently?

Or that Iceland (not a member of the European Union) can do it, but the UK cannot?

Or that a bunch of IMF bureaucrats can see decades, let alone centuries into the future with 100% certainty?

This is such blatant scaremongering, they’re not even pretending to be professional and unbiased. And this is direct from one of the top financial agencies in the world.

Clearly these people truly love democracy and embrace the idea of voters independently determining their own fate.

The British government (firmly in the ‘remain’ camp) has been using taxpayer funds to support its cause, which is really bizarre when you think about it.

If you’re British, even if you want to vote ‘leave’, the government has been using your money to influence your vote in the other direction.

One of the most absurd scare tactics has been telling people that they’ll lose visa-free travel rights to the European continent if the UK leaves the EU.

This is completely absurd.

Nicaragua has visa-free travel to Europe. Paraguay has visa-free travel to Europe. Are we really supposed to believe that Brits will be shut off from the continent?

They’ve rolled out every possible threat, every human emotion, every celebrity they can find, to influence voters.

In fact, these people love democracy so much they even had Barack Obama fly in to explain to British voters why they should remain in the EU.

(Because, of course, Mr. Obama would willingly hand over US sovereignty to a pan-American political commission based in Mexico City…)

Whichever side wins, it’s clear that no one in power gives a damn what voters want.

Despite having waged wars in foreign lands to ‘make the world safe for democracy’ and despite all the song and bombastic speech about your freedom, they have no respect for your right to self-determination, or even their own electoral system.

All they care about is getting their own way.

And they’re willing to engage in the most vile propaganda and blatant manipulation to do so.

This is a pitiful excuse for the democracy they claim to love so much.

And I’m not sure how long a road it is from here, to how Josef Stalin was quoted in his former secretary’s 1982 memoirs:

“Comrades, you know,” said Stalin, “I think that it’s totally irrelevant who votes, and how they vote. It’s extremely important who counts the votes, and how they’re counted.”

I suppose we’ll find out in a few more hours.

Looking for a second home? Put this country on your radar

Wed, 06/22/2016 - 13:21

Nothing quite shocks the senses like the colors, smells, spices, and prices of Asian street food.

Some of the tastiest (and most bizarre) things I’ve ever had in my life were consumed on the streets of Asia, for a cost of almost nothing.

From China to India, Myanmar to Malaysia, street food is a great metaphor for this entire region: exotic, deceptively flavorful, and incredibly cheap.

Kuala Lumpur is no exception. Sure, the street food is great. But the city itself is surprisingly well developed.

In fact Kuala Lumpur boats some of the most advanced first world infrastructure in the region. Yet it remains an incredibly cost efficient place to live.

For example, the fairly new KLIA express train that transports passengers between the airport and city center in just 30 minutes (the airport is a loooong way from town) is just as good as the airport express in London and Tokyo. Yet it only costs about 12 bucks each way.

The quality of medical care is very high in Malaysia. But it’s so cheap that this country has become a major destination for millions of medical tourists.

You can also obtain incredibly fast Internet, speeds of up to 500 Mbps. Blazing. It’ll set you back about $75/month, but 100Mbps is only $25. That’s a bargain.

Real estate in Malaysia has also long been one of the best deals in Asia; it’s far cheaper to buy in Malaysia than in Singapore or Hong Kong.

And in many respects it’s cheaper to buy property here than even in Thailand, even though Malaysia is more developed.

What’s more, it’s also possible for foreigners to actually purchase real estate and own title to the property in Malaysia, which is highly uncommon across Asia.

Starting around 18 months ago, the local currency (the ringgit) plunged 33% against other major currencies like the US dollar, NZ dollar, and Swiss franc. So for many foreigners, Malaysia has become even cheaper.

That’s why it may be a good idea to keep this place on your radar– it’s an excellent balance of quality versus price.

Plus the country is diverse enough to provide a range of options; in fact, just outside this sleek, modern capital city, you’ll find gorgeous beaches, imposing mountains, and just about every landscape to suit your desires.

It’s also helpful that the government welcomes foreigners.

Through the Malaysia My Second Home program, for example, people over the age of 50 can receive a 10-year visa by demonstrating basic financial solvency.

This includes liquid assets of RM 350,000 ($87,500) and income of RM 10,000 ($2,500) per month. Plus you may have to deposit RM 150,000 ($37,500) in an interest-bearing local bank account.

The nice thing about this is that your foreign income is not taxable in Malaysia, so it can be quite a tax efficient choice of residency.

Note: the program is also available for those under the age of 50, though the eligibility qualifications for younger people require financial assets of RM 500,000 ($125,000) and a local bank deposit of RM 300,000 ($75,000).

That said– Malaysia is far from perfect and it’s important to understand the drawbacks.

First off, this place is legendary for its corruption, and it starts at the top.

The current Prime Minister Najib Razak was found by an investigative team at the Wall Street Journal to have funneled $700 million from a state-owned investment firm into his personal bank account, or bank accounts of close relatives.

The government also has a history of targeting political opposition groups and expanding its police and spying powers through special ‘national security’ laws.

(Gee, where have we seen that before…?)

So it’s not all cookies and candy over here. This place definitely has challenges, and I wouldn’t commit any serious investment capital here.

But it’s fair to say that foreign residents largely insulated from most of Malaysia’s domestic issues, so as a place to spend time, the cost vs. quality metric still warrants this place being on your radar.

Reflecting on the past seven years of Sovereign Man

Tue, 06/21/2016 - 12:18

I’ve always been pretty bad with birthday and anniversaries. Even my own.

So I didn’t even realize until this morning that Sovereign Man actually turned seven years old over the weekend.

Seven years. I can hardly believe it. But it seems even more incredulous to think about how much has happened over the last seven years.

When I sent out the very first Notes from the Field email in June 2009, the world was at the height of the biggest financial crisis since the Great Depression.

Since then, we’ve seen the US government’s debt soar by 70%, and the Federal Reserve’s balance sheet more than double.

We’ve seen the US government caught red-handed spying on EVERYONE, from citizens inside the United States to even their own allies.

We’ve seen an appalling rise in police violence and Civil Asset Forfeiture to the point that the US government now steals more than every thief in America combined.

We’ve seen over half a million pages of new bills, rules, and regulations introduced in the Land of the Free, including some of the dumbest laws of all time like FATCA.

We’ve seen interest rates held down to near-zero in the US, and even slashed to negative territory in Europe, Japan, and many other countries around the world.

We’ve seen entire banking systems go bust, like in Cyprus back in 2013, when the national government FROZE everyone’s savings and implemented severe capital controls to “bail in” the system.

We’ve seen a meteoric rise in the worldwide use of the Chinese renminbi, as well as major, direct assaults against the US dollar’s global dominance.

We’ve even seen America’s own allies openly question why the dollar is still the primary reserve currency in the world.

History tells us that wealth and power routinely shift. That major superpowers can and do go bankrupt. That dominant financial systems and reserve currencies can be displaced.

And that whenever any of this happens, there are consequences.

Our species has been dealing with these same trends for thousands of years. This time is not different.

History also teaches that for people who ignore reality and pretend that nothing is happening, the impact can be severe.

But for those who recognize obvious trends and take simple, rational steps to reduce the consequences, the opportunities are enormous.

If your country is broke, don’t hold everything that you’ve ever worked for or hope to achieve within easy reach of your bankrupt government.

If your financial system is underpinned by highly illiquid banks and an insolvent central bank, don’t keep all of your savings there.

If you are living in the most frivolously litigious society to ever exist in human history, don’t keep 100% of your assets there.


That’s fundamentally why we started this site seven years ago.

No one can claim to predict the future with any certainty, but it’s easy to see the direction that these big picture trends are unfolding.

My objective was to present publicly available data to show that, yes, your country and financial system are bankrupt… plus simple, rational solutions to distance yourself from the consequences.

So much has happened since 2009 to validate that premise, and these trends are only picking up steam.

Back when we started, it was just me and my partner Matt. We were two guys trying to make an impact for an audience of practically zero.

After seven years, hundreds of thousands of people have signed up for this letter.

And today Sovereign Man has more than two dozen employees (mostly out of our offices in Chile) dedicated to helping people become more prosperous and more free.

I’ve had the extreme privilege of building wonderful relationships with giants I’ve greatly admired, like Ron Paul, Robert Kiyosaki, Jim Rogers, Marc Faber, and others.

But more than that, it’s been amazing to have spent time with so many of our readers.

I’ve met thousands of Sovereign Man subscribers over the years at our conferences and events, and I’ve have routinely come away inspired at how many incredible, switched-on people read this letter.

So most of all I just want to say thank you for allowing me to be part of your life.

We certainly live in interesting times. And I look forward to being with you in the coming years as these historic trends continue to unfold.

Free at last?

Mon, 06/20/2016 - 10:51

[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

“How foul this referendum is. The most depressing, divisive, duplicitous political event of my lifetime. May there never be another” – Tweet from the novelist Robert Harris.

“Free at last, Free at last, Thank God almighty we are free at last.” – Martin Luther King, Jr.

…Free of further campaigning, for the time being, if nothing else. By the end of this week, the entire British nation will enjoy a collective sigh of relief. If there is any natural justice, the EU referendum will have swung in favour of sovereignty and against totalitarianism but, whatever the outcome, at least the campaigning, from both sides, will be over. For politicians, economists, political hucksters and the various news media, this was not their finest hour.

The European Union has become a slow motion collision between magical thinking and wishful thinking. The project is a mirror favouring selective vision, in which observers of whatever background or political stripe see deeply what they want to see but are blind to the project’s more obvious failings. Pacifists see a social construct that has kept peace between Europe’s various warring factions – notably France and Germany – for over half a century, but fail to notice, or for that matter much care about, the youth unemployment rates in the periphery of the euro zone. Advocates of free movement praise Schengen and turn a blind eye to the bodies of immigrants washing onto the shores of Greece and Italy. Supporters of Big Government see a political union that is already huge and continuing to expand, and pay scant heed to the rising cost of regulation that others must bear. Fans of bureaucracy – typically quasi-monopolistic big businesses and the ever-popular banks – see an integrationist scheme that raises the barriers to entry against smaller competitors and engulfs them in red tape, but they ignore the decline in relative economic power, whereby the EU of 1980 accounted for 30 percent of the world economy, while a much larger EU (by population) accounts for just 17 percent of world trade today. For those at the top of the pile who suckle off the teat of the State or the multinational, life is good. There are apparently 10,000 functionaries in the EC earning more than the British Prime Minister. For those obliged to fund this parasitical class, be they taxpayers, small businesspeople or entrepreneurs, or all three, the commercial ‘success’ of the euro zone looks a good deal more questionable. But in the end, whatever the posturing, it really came down to a simple decision on the part of the electorate: should the ideal State be larger, or smaller ? ‘Leavers’ may have seemed either reckless or romantic, but ‘Remaniacs’ have displayed a chronic lack of self-belief.

And the tone of the debate, of course, has been horribly off-key, and it worsened even before the terrible murder of MP Jo Cox. There has been a constant tide of fatuous self- serving pronouncements from both sides, but if ‘Remain’ do win, it will not be because they staked out the high moral ground. They undermined it. As Bloomberg’s Mark Gilbert points out, the campaign to keep Britain in the EU has continually favoured intimidation over persuasion. Where misinformation has not done the job, mud-slinging has taken over.

Suppose that the Leave campaign, which one might call Project Lie, wins the referendum next week.

wrote Martin Wolf for the Financial Times,

How bad might the economic consequences over the next few years be ? Alas, they might be very bad indeed.

The very same Martin Wolf was the author of ‘The Resistible Appeal of Fortress Europe’ (The Centre for Policy Studies / The American Enterprise Institute, 1994), in the foreword to which the late Keith Joseph wrote,

In this erudite essay, Martin Wolf explores the techniques the European Commission and its subordinate bodies use to inhibit and distort the free movement of goods and services. It is a paradox that an entity conceived in The Treaty of Rome as a liberal force has evolved into being a protectionist one. Supra-national protectionism is not new to the theatre of politics. Imperial Preference was the same illusion based on a different geography.

Mr Wolf is Chief Economics Leader Writer for the Financial Times so we are grateful to him from diverting from his daily demands to take time to explain the manner in which the European Union is wandering far from the ideals of liberal open markets.

Mr. Wolf is entitled to change his mind. As both journalist and ‘economist’ he hardly has a choice but to, on an ongoing basis. Ralph Waldo Emerson advises us that a foolish consistency is the hobgoblin of little minds. Mr. Wolf seemingly prefers the philosophical flexibility of his muse, Keynes, which allows his attitude towards the bigger issues to swing in the wind like a Marxist weathervane.

The Referendum campaigns have stirred up muddy waters that, with hindsight, might have been better left untouched. They have done grave damage to political relations across party lines – and may have scuppered the political futures of numerous members of the Cabinet. With any luck they have also sounded the death-knell for economic forecasting, which after months of ridiculous claim and counter-claim, opinion loudly obliterating fact, now has all the style and credibility of a banshee on crack.

And there are still four days left for those undecided to make up their mind. We recommend two books for those searching for considered answers rather than shrill assertions: Daniel Hannan’s ‘Why vote Leave’ and Roger Bootle’s ‘The Trouble With Europe’. For those in search of hard facts and reasoned arguments as opposed to economic fictions, these two works do not disappoint. The following quotation is taken from the former.

The euro must be maintained, regardless of the cost in higher unemployment and lost growth. Schengen, too, must be upheld, regardless of the impact on security or, come to that, refugee welfare. Whatever the question, the answer is always ‘more Europe’.

Does that have to be the answer for Britain, too ? Having tried and failed to convince our friends to go in a different direction, must we submit ourselves to their project ?

Surely we can do better.. If we cannot lead by persuasion, let us lead by example.

Now is the time to be looking at the world’s ‘forgotten’ precious metal

Fri, 06/17/2016 - 14:03

In our daily conversations, we regularly discuss how important it is to own real assets– especially precious metals.

There’s so much risk in the financial system right now. Just consider your own bank account, for example.

If you’re in the West, more than likely your bank is -extremely- illiquid, meaning that they only keep a small portion of your funds in reserve.

The rest of your money is gambled away in the latest investment fad; and as we’ve reported recently, banks are once again making low-money down home loans to subprime borrowers with YOUR money.

This is the same playbook that nearly causes the entire financial system to collapse back in 2008.

Now, here’s the thing—and a lot of people don’t realize this: the money in your bank account isn’t really YOURS.

Sure, your name is on the bank account. But as soon as you make a deposit, that money belongs to the bank. And you become one of their many, many unsecured creditors.

It hardly seems worth the risk, especially given the paltry 0.1% interest they’re paying you.

We’ve talked a lot about different solutions, like holding physical cash, as well as precious metals.

But when we use the term ‘precious metals,’ most people immediately think of gold.

That makes sense, of course. Gold is the most famous and most widely held precious metal.

But there are three others, namely palladium, platinum, and silver.

Silver in particular may be worth a closer look; we wrote to you several months ago that silver was very cheap on a relative basis, especially compared to gold.

And so far this year silver has been a top-performing commodity.

So today I thought it appropriate to take some time and specifically explore silver.

I sat down this afternoon with the founder and CEO of one of the fastest growing storage and precious metals trading firms in the world, based here in Singapore, and I think you’ll learn a lot from his insights into what he considers the ‘forgotten’ precious metal.

You can listen in here.

The Federal Reserve has brought back “taxation without representation”

Thu, 06/16/2016 - 11:06

In February 1768, a revolutionary article entitled “No taxation without representation” was published London Magazine.

The article was a re-print of an impassioned speech made by Lord Camden arguing in parliament against Britain’s oppressive tax policies in the American colonies.

Britain had been milking the colonists like medieval serfs. And the idea of ‘no taxation without representation’ was revolutionary, of course, because it became a rallying cry for the American Revolution.

The idea was simple: colonists had no elected officials representing their interests in the British government, therefore they were being taxed without their consent.

To the colonists, this was tantamount to robbery.

Thomas Jefferson even included “imposing taxes without our consent” on the long list of grievances claimed against Great Britain in the Declaration of Independence.

It was enough of a reason to go to war.

These days we’re taught in our government-controlled schools that taxation without representation is a thing of the past, because, of course, we can vote for (or against) the politicians who create tax policy.

But this is a complete charade. Here’s an example:

Just yesterday, the Federal Reserve announced that it would keep interest rates at 0.25%.

Now, this is all part of a ridiculous monetary system in which unelected Fed officials raise and lower rates to induce people to adjust their spending habits.

If they want us little people to spend more money, they cut rates. If they want us to spend less, they raise rates.

It’s incredibly offensive when you think about it– the entire financial system is underpinned by a belief that a committee of bureaucrats knows better than us about what we should be doing with our own money.

So this time around the grand committee decided to keep interest rates steady at 0.25%.

Depending on where you sit, this has tremendous implications.

If you’re in debt up to your eyeballs (like the US government), low interest rates are great.

It means the government can continue to borrow even more money and go even deeper into debt.

Low interest rates are also good for banks, because they can borrow for nothing from the Fed, then earn a handsome profit on that free money.

But if you’re a responsible saver, low interest rates are debilitating.

Banks only pay their depositors about 0.1% interest. Yet according to the US Labor Department, inflation is at least 1.1%, and has averaged 2.23% since 2000.

This means that when adjusted for inflation, anyone who bothers saving money is losing at least 1% every single year.

That might not sound like much. But compounded over a longer period, it can lead to a substantial difference in your standard of living.

Maybe that’s why the government’s own numbers show that wages, when adjusted for inflation, are far lower than they were even 15 years ago.

Or why wealth inequality is now at a level not seen since the Great Depression.

Or why alarming data from Pew Research last year show that the middle class is now no longer the dominant socioeconomic stratum in the United States.

Back during his days as a presidential candidate, Ron Paul used to frequently remark that inflation is an invisible tax on the middle class.

And he’s right.

The combination of inflation and low interest rates benefits certain people, while it causes middle class people’s savings to lose purchasing power.

This constitutes a transfer of wealth from savers to debtors.

In other words, it’s a tax.

Yet unlike a normal tax which is passed by Congress, this inflation/interest rate tax is created by the central bank.

You and I don’t get to vote for the twelve members of the Federal Reserve Open Market Committee (FOMC) who dictate interest policy.

In fact, based on the way the Federal Reserve works, the majority of the committee members are actually appointed by commercial banks.

Here’s the quick version: there are twelve Federal Reserve banks in the US banking system.

They’re located in major cities like New York, San Francisco, St. Louis, Dallas, etc. And each Federal Reserve bank has its own separate Board of Directors.

Yet two-thirds of the board members for each Federal Reserve bank are appointed by big Wall Street banks like JP Morgan and Goldman Sachs.

And oh, hey, what a surprise, the last three major appointments to the Federal Reserve were all former high-level Goldman Sachs employees.

These guys aren’t even trying to hide the fact that Wall Street banks control the Fed.

So, Wall Street banks control the boards of directors at the Fed banks. The Fed bank boards of directors appoint the committee members who set monetary policy.

And the monetary policy they set ends up being a gigantic tax… a transfer of wealth from the middle class to a tiny group of beneficiaries, including the US government and the banks themselves.

This is an unbelievable scam… and it truly is taxation without representation.

Unelected bureaucrats impose their will over the entire financial system in a way that benefits a handful of people at the expense of everyone else.

And we have absolutely no say in the matter.

Well, actually we do.

Even though we can’t vote for the boards of directors at the various Federal Reserve banks like Citigroup and Goldman Sachs can do, we are able to vote with our dollars.

Think about it: every single dollar that you keep in this poor excuse for a financial system is a tacit vote in favor of the corruption.

Every dollar you take out of the system is a vote against it.

And as we’ve explored before, there are substantial options for your savings– precious metals, cryptocurrencies, productive real estate, safe P2P arrangements with strong yields, and well-capitalized banks abroad that actually pay sufficient interest to keep up with inflation.

The subprime mortgage is back: it’s 2008 all over again

Tue, 06/14/2016 - 10:41

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

Capitalism always wins

Mon, 06/13/2016 - 12:25

As you can imagine, here in Vietnam they call it the “American War”. Or sometimes the “Resistance War Against America.”

Most of us call it the Vietnam War. It left millions dead, and millions more wounded over a nearly two decades long conflict.

It caused catastrophic medical and environmental damage from over 75 million liters of the cancer-causing Agent Orange courtesy of the Monsanto Corporation.

And of course there’s all the unexploded ordinance that still exists across the countryside here which continues to maim and kill civilians year after year.

Financially, when adjusted to 2016 dollars, the war in Vietnam cost American taxpayers over $1 TRILLION in direct military costs alone.

So what exactly did Uncle Sam get for this exceptional investment?

Nothing. Certainly nothing positive.

Saigon fell on April 30, 1975, and the north and south were merged to form the Socialist Republic of Vietnam.

So the US government’s containment agenda to prevent the spread of communism was a total failure.

But then something completely EXPECTED happened: Vietnam went broke.

Under communist rule, Vietnam suffered some of the worst economic conditions imaginable: soaring debt, inflation, corruption, unemployment, rampant poverty, and even famine.

The central planners created extraordinary mismatches in supply and demand and production inefficiencies.

It was just like those old stories from the Soviet Union– too many factories making left boots without any factories making right boots.

This lunacy lasted for years, resulting in mass migration and a full-on refugee crisis.

Things finally started to change after the Soviet Union collapsed– a giant warning sign that socialism and central planning simply don’t work.

By the late 1980s, China, Vietnam, and other Asian socialist states were among the most impoverished countries in the world.

Yet market-oriented Hong Kong and Singapore were right next door… and thriving.

Eventually they saw the light, and nearly all of these socialist countries started a long, slow conversion to embrace capitalism.

It really started in earnest about 15 years ago after Vietnam signed a trade deal with the United States.

And since then the changes have been extraordinary.

Vietnam is now consistently one of the fastest growing economies in the world.

Here in Ho Chi Minh City (Saigon), the skyline constantly has new additions with office towers and condo buildings.

The dramatic increase in standard of living here has been astonishing.

All you have to do is walk down any one of the city’s streets and see locals driving their new motorbikes, pulling up to a trendy air-conditioned café for a cup of coffee and high speed Internet on their smart phone.

Last night I walked by the dilapidated headquarters of the local chapter of the Communist Youth Organization.

Next door is the Young Businesspeople Association. Across the street is a luxurious new shopping mall. And a block away you’ll find McDonalds and Dunkin’ Donuts.

That pretty much sums it up: Capitalism ALWAYS wins.

Rather than fight the war, the US government would have been a lot better off saying, “Oh you want to be Communist? Wonderful! You go ahead an enjoy that, and give us a call in 20 years once you’re totally impoverished…”

It would have saved a hell of a lot of time, money, and lives.

Capitalism always wins because people want the comfort and lifestyle that become possible when talented people have the incentive to work hard and innovate.

It doesn’t even really require too much to create these incentives. The recipe is simple: property rights, financial reward, and limited bureaucracy.

Just bear in mind that all three are critical.

If it takes 4 years and 600 permits to start a business, for example, it won’t matter if tax rates are low and property rights are sacred; there will still be too many disincentives to produce.

So when governments start redistributing wealth and property and creating mountains of regulations to ‘protect’ the people, they degrade all three factors.

Remember the Universal Law of Prosperity: You have to produce more than you consume.

So when there are disincentives that destroy production, prosperity suffers and everyone is worse off. It’s so simple.

Amazingly enough, though, so much of the West seems to be sprinting in the direction of central planning.

The amount of regulations created every single day by the US government is just shocking– TODAY alone another 507 pages of rules and notices were published.

It’s also astounding to see how prominent socialism is becoming in the Land of the Free.

There’s this pervasive fantasy that people can get a bunch of free stuff and we all end up like Norway.

The reality, of course, is ending up like Venezuela with shortages of toilet paper and a currency in hyperinflation.

What I find so striking, however, is that while the West seems to be moving faster and faster towards this fantasy of socialism and central planning, out here in Asia they’re going in the opposite direction.

Vietnam has already had its horrible socialist experiment. They learned their lesson.

And though Vietnam is starting from a much lower base, and they have a LONG way to go, they’re pushing to become more market oriented, and hence, much more prosperous.

It’s really not rocket science. Where you have freedom, you have prosperity. Where you don’t, you have Venezuela.

Safety in (the right) numbers

Mon, 06/13/2016 - 11:27

[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

“Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day.” – Tweet from Janus Capital.

Bill Gross’ warning is, of course, tautological. A supernova is an exploding star. What he probably meant to say is that the bond market is a star that will turn into a supernova one day. But then so what? At some point our own sun will die and the planet Earth will likely be engulfed by it as it explodes. Since that’s not likely to happen for roughly 5 billion years, we can probably renew our monthly travel cards with a sense of equanimity.

But then Bill Gross has form here. It was Bill Gross, modeller of sunglasses and billionaire bond investor, who suggested back in January 2010 that the UK Gilt market was “a must to avoid” and that UK Gilts were “resting on a bed of nitroglycerine.”

In January 2010, 10 year Gilts yielded 4%. They now yield roughly 1.25%. In 2010, the UK national debt was just under £1 trillion. It now stands at over £1.6 trillion. If Gilts were resting on a bed of nitroglycerine six years ago, they are now bouncing up and down, in spiked running shoes, on a bed of picric acid and octanitrocubane whilst firing flaming napalm arrows at a dartboard made of pure antimatter.

The pitiful yields available from the likes of UK Gilts and US Treasuries are bad enough. But if there’s money figuratively burning a hole in your pocket, may we suggest the iShares Swiss Domestic Government Bond 1-3 year exchange traded fund, instead. This little peach of a product owns just two bonds. 53% of the fund is invested in the Swiss 3% bond maturing 8 January 2018. This bond yields minus 1.06 percent. The remaining 47% of the fund is invested in the Swiss 3% bond maturing 12th May 2019. This bond yields minus 1.04 percent. How many did you want again?

As George Cooper of Equitile tweeted some months ago,

The combination of indexing, ratings agencies and syndication means that collectively the investment industry does not provide effective discipline to borrowers.

George is being polite. Not only does the investment industry not provide effective discipline to borrowers, it allows something to happen that should be beyond the scope of rational investment markets. It actively supports negative interest rates rather than abhorring them. Allocating the blame is only part of the issue. Who, after all, is really at fault – the investors in iShares’ Swiss government bond fund, for buying an investment product of questionable utility, or iShares, for constructing it in the first place? The answer, of course: Mario Draghi. And Janet Yellen. And Mark Carney., (George Cooper is interviewed on Bloomberg for his thoughts on the wisdom of central bankers here.)

So we might collectively come to the conclusion that while the bond markets have become essentially uninvestible, the duration for this environment of uninvestibility might prove to be longer lasting than anyone, including Bill Gross, ever anticipated. The pragmatic solution is surely to seek out real assets that should hold up tolerably well in deflation but which offer the potential for participating in any ultimate reflation – rather than being destroyed by it. As we view the world, the assets that would seem to fit the bill are not bonds but equities. And rather than blithely tracking the indices with all the risk that that entails, we prefer to go the extra mile and insist on owning stocks that offer a ‘margin of safety’ by dint of trading at especially attractive valuation discounts versus the rest of the market.

The good news: such value stocks exist, albeit not necessarily in those markets that are most obviously appealing to index trackers. (The US, for example, accounts for roughly 60% of the MSCI World Equity Index, but is a) not cheap, and simultaneously b) extremely well covered by the analyst community.)

Even better news: the valuation discount to growth has rarely been bigger. We highlighted the following chart at the end of May.

Source: Bloomberg LLP

The chart shows the performance of value stocks versus growth stocks – as defined by MSCI – since 1975. When the red line is rising, value stocks are outperforming. When the red line is falling, value stocks are underperforming. And as Rob Arnott of Research Affiliates points out in his April research note ‘Echoes of 1999’, for the three year period ending in March this year, value has endured its worst performance relative to growth for forty years:

Historical experience shows that starting valuations similar to those we see today in value stocks have led to their prolonged, massive outperformance, making a strong argument for rebalancing into a deeper value tilt and avoiding the popular, bull-market growth stocks.

It’s hardly rocket surgery. If bonds are outrageously expensive, which they are, buy stocks instead. And if growth stocks are expensive, which by and large they are, buy value stocks instead.

Human nature doesn’t change, which causes markets to oscillate between cycles of greed and fear. Though they may not seem like it, especially at their extremes, or when they’ve persisted for some time, those cycles represent opportunity. In his first edition of ‘Security Analysis’, Benjamin Graham quoted Horace:

Many shall be restored that now are fallen, and many shall fall that are now in honour.

Four alternatives to holding your savings in a bank

Fri, 06/10/2016 - 11:59

“Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day.”

Those were the words of famed bond fund manager Bill Gross.

(Gross was actually the first portfolio manager inducted into the Fixed Income Analyst Society’s “Hall of Fame”. And yes, there really is a hall of fame for that.)

Gross wrote that more than $10 trillion in government bonds actually have NEGATIVE yields, and that interest rates are at the lowest levels in financial history.

For example, the British government just issued its lowest-yielding bonds since 1694.

This has very dangerous implications.

Goldman Sachs recently calculated that a mere 1% rise in US Treasury yields would trigger over $1 trillion in losses, exceeding all the losses from the last crisis.

(Bear in mind that interest rates need to rise by at least 3x that amount just to reach their historic averages… so this is entirely plausible.)

Most of those losses would be suffered by Western banks, the majority of which have insufficient capital to withstand such a major hit.

Gross describes this potential risk as a ‘supernova’.

Now, he may have used that word because it’s a really cool-sounding superlative to describe the impact of this risk.

But coincidentally, ‘supernova’ is the perfect analogy for our financial system.

Remember that a supernova is an ultra-bright flash of light that results when a star explodes at the end of its life.

The explosions are so powerful that astronomers can see these incredible stellar events even from distant galaxies.

In 2015 the brightest supernova ever recorded was found in a galaxy some 3.8 billion light years from earth.

The supernova was over 500 BILLION times brighter than our sun. Incredible.

But given the star’s extraordinary distance from our planet, the explosion actually occurred 3.8 billion years ago… a long time ago in a galaxy far, far away.

It took all that time for the light from that supernova to reach us.

That’s what’s happening now in our financial system.

The financial supernova happened years ago. But the light… and the consequences… are finally starting to reach us.

Given these risks, let’s discuss some rational alternatives to the banking system:

1) Physical cash

This is an easy option for just about anyone. Holding cash completely eliminates the risk of keeping your savings in a shaky bank.

You can secure your cash by storing it in a safe at your home, or at a non-bank private vault facility.

It means your savings won’t be gambled away by your banker on the latest investment fad.

You can’t have your account frozen by any one of dozens of government agencies.

And if something goes wrong with the banking system, your savings will survive untouched.

But cash is no panacea. While it dramatically reduces the risk to your savings posed by potential challenges in the banking system, you may also want to consider…

2) Precious metals

While cash is a great hedge against problems in the banking system, precious metals are a fantastic hedge against problems in the broader monetary system.

If the market ever wises up and realizes that all these pieces of paper passed off as money are simply worthless claims on bankrupt governments, OR there comes a day when central banks print the straw that breaks the camel’s back, you’ll want to make sure you own gold and silver.

Gold is a real asset with a 5,000 year history of value and marketability, three times as old as the oldest paper currency still in use (the British pound).

Now, like any form of savings, gold by itself doesn’t produce a rate of return.

Cash in a bank account earns about 0%. Cash in a safety deposit box earns 0%. Gold in a safety deposit box earns 0%.

So in order to earn some return on your savings, it’s necessary to consider owning…

3) Safe, cash-producing assets

For large investors like Bill Gross who have billions of dollars to manage, finding safe returns is next to impossible.

But for smaller investors like you and I who have thousands or even millions to invest, there are countless options.

For example, we’ve introduced our premium subscribers to an opportunity where they can generate up to 6% on Peer-to-Peer loans that are fully secured at a 2:1 margin by real assets like gold and silver.

This is a fantastic, low-risk way to generate a reasonable rate of return on your savings.

Of course, if you have a longer-term view, you can do even better if you consider owning…

4) Deep-value investments

Yesterday we discussed this simple idea with a powerful track record:

Own profitable businesses managed by talented people of integrity, and buy them when the share price is below the company’s intrinsic value.

Share prices go up and down day to day. But over the course of several years, wonderful, well-managed businesses perform extremely well in any environment.

In the event of inflation, they go up in value. In deflation, they produce valuable cash flow. Even in a crisis, they’re the first to recover.

Great businesses often pay steady dividends as well, so you can expect to earn healthy cash flow while honest, talented executives look after your savings.

6 rules I follow when making any investment

Thu, 06/09/2016 - 11:01

This morning as I glanced at the headlines, I had to sit back and wonder– when did the world get so crazy?

Interest rates across the West are at zero or negative.

Bankrupt governments are selling 100-year bonds with tiny interest rates, while others have convinced investors to pay for the privilege of loaning them money.

What really gets me is that people aren’t laughing. Serious investors are buying up the $10+ trillion worth of negative-yielding debt issued by bankrupt governments as fast as they can.

After all, everyone else is doing it.

Yesterday I told you how, at age 20, I borrowed a bunch of money and did what everyone else was doing at the time– buying Internet stocks at the height of the dot-com bubble in 1999.

I lost everything within a year.

And ever since I left the military more than a decade ago, I’ve dedicated a huge portion of my time, money, and effort toward learning from the sharpest people I could find.

I traveled to nearly 120 countries to build relationships with brilliant mentors in order to learn what I never could in school.

For example, I never went to business school.

But based on what I learned from my business mentors, I’ve been able to build five successful companies that now employ over 125 people on four continents.

From my investment mentors, I learned how to not be such an idiot… how to ignore the crowd and focus on the core fundamentals of a business.

One of my value investing mentors explained to me, for instance, that if you’re going to invest in the stock market, you should buy a single share as if you’re buying the entire business.

And he laid out six rules to follow when making any investment:

1. Always consider the risks before even thinking about how much you can make

Sometimes it’s worth taking huge risks where there’s a good chance you’ll lose everything.

Startups are a great example; there was a 95% chance that Google was going to fail when it first launched. But the return has been more than 100,000x the initial investment.

Clearly that kind of return is worth the risk.

Conversely, if you buy and hold 5-year Japanese government bonds right now, you’re counting on the second most bankrupt government on the planet to pay you back.

Bear in mind that Japan’s government is so broke they spend 40% of tax revenue just to service the debt.

And in exchange for taking on such substantial risk for five years, your reward is a whopping NEGATIVE 0.25% per year.

In comparison, it hardly seems worth it. Know the risk, and make sure the reward is worth it.

2. Don’t invest unless you know WHY

Before making any investment, have an objective. After all, there are a lot of different reasons to invest.

Sometimes you might be seeking income, i.e. buying rental real estate for the cash flow.

Capital appreciation is another common goal; people are typically looking to turn a $100,000 investment portfolio into $500,000.

But there are other reasons as well: Asset protection. Hedging against financial/systemic risks. Reducing taxes. Estate planning. You can even invest to gain citizenship.

To accomplish any goal requires careful planning and disciplined execution, whether you’re trying to lose weight or save for retirement.

But you can’t ever create a plan unless you start with a clear objective.

3. Invest in people of integrity who have a track record of success.

Most investments are ‘managed’. Apple is managed by CEO Tim Cook and the Board of Directors.

Investments in government bonds are essentially ‘managed’ by the Treasury Department and all the politicians and bureaucrats.

Any investment with dishonest or incompetent management will ultimately become worthless. It’s simply a question of time.

A great asset managed by competent people of integrity will be a winner.

4. Buy assets that generate vast amounts of cash flow.

No exceptions. A profitable business (or any asset that produces safe, strong cash flow) makes sense in any environment: inflation, deflation, stagnation, etc.

5. Avoid excessive debt.

Borrowing can be a good thing, especially when interest rates are low like they are today.

But too much debt leaves a company (or government) vulnerable and unable to pay its stakeholders.

6. Know the value of what you’re buying, and never overpay for it.

The bonds of bankrupt governments are selling at record levels right now. Tech companies like Uber that lose hundreds of millions of dollars have valuations in excess of $60 billion.

None of this makes any sense.

There’s something to be said for investing in growth, especially when you can get in at a very early stage (like being an early investor in Google).

But paying out the nose to buy losing companies or bankrupt government bonds makes no sense.

Know exactly what a company is worth. With stocks, for example, you can look at a company’s “net tangible assets” — all of its physical, disposable assets minus its liabilities.

For example, if a company has $1 million in cash, $1 million in inventory, and $500k in debt, then its net tangible assets equal $1.5 million.

Buying well-managed, profitable companies that sell near (or even below) the values of their net tangible assets provides a substantial margin of safety.

This is a core principle of value investing. The whole concept is to essentially buy a dollar for 80 cents.

If you’re just getting started and you don’t yet understand a lot about finance, definitely learn about value investing.

The idea is incredibly simple, and its proven long-term track record outperforms all the other popular hotshot strategies.

Learning about value investing means learning about the inner workings of business, money, and cash flow.

It’s a fantastic foundation to your financial education, which is truly one of the best investments you can make.

Freedom and financial independence start with just one thing

Wed, 06/08/2016 - 14:18

The year was 1999. I was 20 years old. And like most 20 year olds, I knew EVERYTHING.

Or at least I thought I did.

I was a young West Point cadet at the time, and I’d just received a bank loan of more than $22,000.

This is something that every cadet in his/her junior year is able to do; banks line up to give us lump sum loans secured by our future earnings as Army officers.

I had grown up in a lower middle class household, so when a bank offered me $22,000, I jumped. It was more money than I had ever seen in my life.

I didn’t have a plan about what I would do with the money, other than some fantasy of turning it into millions of dollars.

Nor did I have any real investment education or experience.

But hey, I knew everything. So I took the money and went into debt.

That turned out to be a HUGE mistake.

Rather than take time to invest in my own education and learn from the most successful investors I could find, I assumed that I knew everything and proceeded to dump the entire loan amount in the stock market.

I so desperately wanted to be rich, and I tried everything, including buying all the hotshot Internet stocks that were going to the moon.

At first the portfolio did well, and it only encouraged my arrogance. Every dollar I made reinforced the absurd self-belief that I was a masterful investor and knew what I was doing.

Now, go back and read the first line of the article: “the year was 1999.” The dot-com bubble was at its peak.

Warren Buffett had famously warned investors that the market was in a massive bubble. And I remember thinking, “Who is that stupid old man, and what the hell is a bubble?”

But again, I knew everything.

Then the bubble burst. And not only did my profits evaporate, but even the principal amount started to shrink.

Desperate to recoup my investment losses, I started making even dumber decisions, like buying collapsing dot-com stocks on margin.

In other words, I borrowed even more money and combined it with the money I had already borrowed to buy the shares of terrible companies with no assets. Genius.

Unsurprisingly, within about a year of taking the original loan, I had lost it all. Every single penny.

Back then I considered $22k an unbelievable amount of money, and I thought I’d never recover.

In fact I spent the next several years of my life paying the loan back– precisely $404.33 per month.

Each month was a painful, humbling reminder of my arrogance and stupidity, and it motivated me to go out and properly educate myself.

But I learned that real education wasn’t taught in a traditional school system.

Sure, I could calculate the area of an isosceles triangle and recite the photosynthesis equation.

But none of my schooling had taught me the first thing about money, banking, business, or investment.

So I started finding mentors.

In 2001 I read Robert Kiyosaki’s seminal work Rich Dad, Poor Dad and was inspired to start investing in real estate.

After reading a half dozen other books on the topic to become knowledgeable, I looked in the county database to find the top 20 property owners in my area.

I contacted each of them and offered to buy them lunch. Most didn’t respond. A few declined. One guy accepted. Just one.

But I learned more in a few hours with him than I would have in years of school.

And the relationship that we kept up afterwards proved invaluable. It was like having a seasoned coach to help guide my decisions and keep me from making huge mistakes.

This was a big Eureka! moment for me– I realized how important and valuable it was to learn from experienced, successful people.

Think about it: with such a globalized world and our modern technology, there are countless opportunities to build a business and generate additional income.

These days it’s completely realistic to create $5,000 to $10,000 per month or more with a part-time side business… as long as you have the proper business education.

It’s the same with investing.

Did you know, for example, that generating just 1% more per year can turn into literally hundreds of thousands of dollars in additional gains for your retirement savings over a few decades?

With proper investment education, it’s completely realistic to not only avoid stupid losses, but to generate MUCH higher long-term returns… as well as create steady sources of passive income.

In our daily conversations we often discuss the concerning trends that freedom-minded people face.

Dozens of governments are totally bankrupt.

Most western economies are built on pitiful foundations of debt and consumption, rather than savings and production.

There’s been a sustained, long-term decline in freedom, and an alarming erosion of the middle class.

Central bankers have made interest rates negative, and there’s now over $10 trillion worth of bonds issued by bankrupt governments with negative yields.

It’s total madness and gets crazier by the day.

But with proper education, it’s possible to understand both the risks AND the solutions, like holdings some physical cash and precious metals to make sure you don’t become a refugee of our bankrupt financial system.

This is a major part of becoming a Sovereign Man: realizing that YOU have the power to create your own freedom and financial independence, no matter how crazy the world gets.

And it all starts with proper education. After all, the best investment you can make is the one you make in yourself.

Why portfolio theory is wrong

Mon, 06/06/2016 - 13:58

[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

“Suffice it to say that volatility and risk are not the same thing, but that for reasons which remain obscure most of the investment world chooses to treat them as if they are. The only one that makes any sense at all is that the mathematicians who came to dominate the financial world from the 1950s onwards were desperate for something they could calculate, and the variance of past periodic returns seemed like the best candidate.”
– Guy Fraser-Sampson, ‘Intelligent Investing’

Some people in finance have a sniffy attitude towards academics, writes Buttonwood in the latest Economist magazine. For good reasons, we might add. (Why are academics so bitchy ? Because the stakes are so low. And as Jerry Pournelle observed, you won’t learn much about capitalism at university, and you shouldn’t expect to. Capitalism is a matter of risks and rewards, and a tenured professor doesn’t have much to do with either.) So far, academia’s biggest contributions to finance have been Modern Portfolio Theory, the Capital Asset Pricing Model (CAPM) and the Efficient Market Hypothesis. With contributions like that, who needs asinine overly simplified wrong models ?

From the get-go, Buttonwood’s piece (‘Risk and the stock market’) launches from a dubious platform:

“Risk is linked to reward; it is virtually the first lesson one learns about finance. Safe assets pay low returns; if you want higher returns, you have to risk your capital.”

But QE has subverted the relationships between supposed safety, returns and risks. As Jeremy Siegel points out,

“You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So which is the riskier asset?”

Today, for example, all German government bonds out as far as 9 years to maturity carry a negative yield. Anybody buying them and holding them until redemption is guaranteed to lose money, even before inflation. Safe? Or extremely hazardous?

And as Berkshire Hathaway’s Charlie Munger points out, using volatility as a measure of risk is madness. Risk, for Berkshire and for ourselves, is either the risk of permanent loss of capital or the risk of inadequate return.

So it is hardly surprising that two papers in the Journal of Portfolio Management find fault with financial theory. The first, ‘Risk Neglect in Equity Markets’, by Malcolm Baker of the Harvard Business School, found that – as conventionally defined – more risk led to lower returns, not higher ones. Baker took two portfolios from 1967. One consisted of the 30% of US stocks with the lowest beta (volatility relative to the market as a whole), the other of the 30% of US stocks with the highest beta.

By the end of the study, $1 invested in the high beta portfolio had grown to $18. But $1 invested in the (less risky) low beta portfolio had grown to $190. You could drive a truck through the difference in compound returns, which equates to some 5.5% a year. Not only is the low beta portfolio the stand-out performer in returns, it also displays lower volatility and its maximum drawdown (peak to trough loss) is 35% versus 75% for the high beta portfolio.

Baker’s study is not alone. In ‘What Works on Wall Street’, James O’Shaughnessy selected the 50 most expensive stocks in the US stock market on the basis of a variety of metrics (price / sales; price / cashflow; price / book, and price / earnings), together with the 50 cheapest stocks using the same metrics. Each portfolio of 50 stocks was rebalanced annually to ensure that the focus on outright expensiveness and cheapness remained consistent over time. The results are shown below.

Value of $10,000 invested in various value strategies, over 52 years

Source: ‘What Works on Wall Street’ by James P. O’Shaughnessy

Financial theory would have suggested that the ‘expensive’ portfolio enjoyed higher returns. O’Shaughnessy’s study, like Baker’s, showed exactly the opposite.

Take price / book. The ‘growth’ portfolio, which had a starting value of $10,000, ended up after 52 years being worth $267,147. But the demonstrably cheaper ‘value’ portfolio, with the same starting value, ended up being worth over $22 million.

Perhaps value trumps growth. (We clearly believe so, which is why we established a global fund of unconstrained value managers.) Perhaps financial theory is wrong.

The second paper cited by Buttonwood examined the role of tracker funds – cheap, passive market-tracking vehicles. The index-tracker owes its existence to the validity of the Efficient Market Hypothesis – the theory that active managers cannot beat the market over time. One problem with trackers is that they are dumb. They “dilute the purpose of the stock market, which is to allocate capital to the most attractive companies”. Another problem with trackers is that they are dangerous. Firstly, they cause herding, as trackers collectively buy or sell the market’s respective winners and losers. Secondly, they offer no escape route for the investor in the event of a market sell-off. The market-tracking investor is destined to go down exactly in line with the market. This is a particular problem if stock markets are currently priced above their fair value, which certainly appears to be the case for the S&P 500, which stands roughly 60% above its long term fair value, according to Robert Shiller’s cylically adjusted p/e ratio, or CAPE.

The third problem with trackers is that the Efficient Market Hypothesis is wrong. Warren Buffett made the same observation when he wrote about the Superinvestors of Graham and Doddsville in his appendix to Ben Graham’s reissued ‘The Intelligent Investor’ in 1984. There is a class of managers that has meaningfully outperformed the market over many years, whilst simultaneously taking on less risk, because everything they buy offers a ‘margin of safety’ by comparison to more expensive (and therefore riskier) stocks. They are called value investors and we are extremely happy to be invested right alongside them.

Introducing Europe’s Frightening New Tax Directive

Mon, 06/06/2016 - 11:31

In a bizarre story disclosed over the weekend, we learned that Belgium’s Princess Astrid was robbed by two assailants on a motorbike.

The thieves apparently approached her while she was sitting in traffic, smashed in her window, snatched the Royal Handbag, and sped off with over 2,000 euros in cash.

I have no doubt that was a harrowing experience for the princess, as it would be for anyone.

But as I researched a bit more, I learned that Belgium’s royal family is lavishly paid, particularly for a small country of just 11 million people.

King Philippe of Belgium receives more than 10 million euros per year. His father, the ‘retired’ king receives a pension of nearly 1 million euros annually.

Princess Astrid, the King’s sister, receives about 300,000 euros per year, in addition to usage rights of the royal properties.

In order to pay for this largesse, Belgium suffers some of the highest tax rates in the world, as high as 50% if you earn even a modest income.

In addition there’s 13% employee contributions to Social Security (plus employer contributions of 35%), and a Value-Added Tax of 21%.

Businesses in Belgium are subject to a 30% corporate tax rate, a 3% ‘crisis surcharge’, and my personal favorite, a 5% ‘fairness tax’.

In total the Belgian government’s tax revenue eats up about 45% of GDP, which means that the government takes almost half of all economic output.

This is an astounding figure… though it’s less than other governments in Europe like France or Denmark.

Now, with due sympathy to the princess, I wonder if having 2,000 euros stolen by motorbike bandits is philosophically much different than having 50%+ of your income stolen by the government.

Both of these events can occur at gunpoint. Both carry severe penalties if you resist.

At least with the bandits it only happens once, or rarely, in a lifetime. With the government it happens every single day.

Every time you spend money. Every time you earn. Every time you invest. The government’s there taking its share.

US Supreme Court Justice Oliver Wendell Holmes Jr. once wrote that “Taxes are what we pay for civilized society.”

Of course, Holmes wrote that statement at a time when tax rates were about 3.5% (not a typo), so it’s completely taken out of context.

But the quote still serves as a rallying cry for Social Justice Warriors who want to take more of your paycheck.

The entire premise of income tax is that ‘your’ money isn’t really yours after all. It’s theirs.

They have first right to take as much as they like from your earnings, leaving you with whatever leftovers they choose.

Income tax is like a financial Primae Noctis. And yet governments always seem to want more.

I don’t get it. There are so many examples of low-tax countries that are thriving.

Even in Europe, for example, Estonia has a profits tax as little as 0%. And yet they consistently run a budget surplus.

Ireland has had a low-tax regime of just 12.5% on corporate profits for years, and they recently announced a new tax regime for certain companies as low as 6.25%.

Go figure, these low tax rates have attracted substantial investment (and jobs) from huge multinational companies, all of which has boosted the Irish economy.

So the Irish government essentially takes a small slice of a rapidly expanding corporate pie, as opposed to Belgium and France’s huge slice of a shrinking pie.

It’s not rocket science. If you create reasonable incentives, businesses will invest, the economy grows, and everyone wins.

But despite these obvious examples, bankrupt nations don’t want to do that. Instead they do the exact opposite, driving productive citizens and businesses away.

A few days ago, for instance, the European Commission released details of a tax directive that will create a pan-European tax system, complete with a brand new Tax ID number for all the good citizens of Europe.

The proposal also aims to increase taxes across the board if they feel that a member state (like Ireland) doesn’t charge enough tax.

According to the proposal, other European countries like Ireland and Estonia “distort competition by granting favourable tax arrangements.”

Apparently it’s not ‘fair’ that high-tax France and Belgium have to compete with low-tax Ireland and Estonia.

So rather than the bankrupt countries getting their act together to attract business, the solution is to penalize everyone and make the entire continent less attractive.

It’s genius!

The directive goes on to demand more onerous reporting, attack anyone who takes legal steps to reduce what they owe, and even threaten businesses with exit taxes if they try to leave Europe.

This really is like a return to the feudal system.

This financial bubble is 8 times bigger than the 2008 subprime crisis

Fri, 06/03/2016 - 12:19

On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that,

“We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve.

Of course, we now know that he was dead wrong.

The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences.

One of the chief culprits of this debacle was the collapse of the sub-prime bubble.

Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan.

When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers.

The deals got even sweeter, with banks making 102% and even 105% loans.

In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket.

So basically these subprime home buyers were getting paid to borrow money.

Of course, we know how that all turned out. By 2008 the entire system crashed, and the post-game analysis had some pretty obvious conclusions:

Bad things tend to happen when you pay people to borrow money, especially when they’re not particularly creditworthy.

Thank goodness no one in finance engages in such risky behavior anymore!

Or do they?

Today, subprime is back.

There’s been a lot of talk lately about a growing bubble in the subprime auto loan market, and even student loans.

But the biggest subprime bubble of all is the negative interest loans being made to sovereign governments.

All over the world now there are governments that are issuing sovereign bonds with negative yields… and many of these governments are totally bankrupt.

Japan, with its debt level at more than 220% of GDP, is the latest entrant into the world of negative interest bonds.

Japan’s debt is so high, in fact, that it takes 41% of government tax revenue to service.

Even in Italy, one of Europe’s most notoriously and hopelessly bankrupt countries, the government bonds have negative yields.

‘Negative yield’ means that an investor who loans money to government will get back less money than s/he invested once the bond matures.

In other words, the government is getting paid to borrow money.

So it’s not much different than when banks paid subprime homeowners to borrow money ten years ago based on a misguided premise that home prices always go up.

Now they’re just paying subprime governments to borrow based on a misguided premise that governments will ALWAYS pay. (Just like Greece!)

The key difference is size. At the peak of the housing bubble ten years ago, there was about $1.3 trillion worth of subprime mortgages in the financial system.

That $1.3 trillion bubble was enough to bring down several major banks and cause cascading damage across the global financial system.

Today’s bubble is EIGHT TIMES the size of the last one, with more than $10.4 trillion worth of government bonds that yield negative interest.

And what’s even more concerning is how quickly it’s growing.

In January 2016, the total amount of government bonds in the world with negative interest totaled $5.5 trillion.

One month later in February the total had grown to $7 trillion. By May it was $9.9 trillion. And today it’s $10.4 trillion.

So this gigantic sovereign bond bubble where governments are being paid to borrow money has practically doubled just in the last several months.

This isn’t a cause for panic or to assume that the financial system is going to crash tomorrow.

But it’s clearly a disturbing trend… the proverbial powder keg in search of a match.

And when future pundits write the history of the financial crisis to come, whether it happens today, tomorrow, or years from now, you can bet they’ll wonder how the entire system failed once again to see something so dangerous… and so obvious.

Why an offshore bank may be safer

Thu, 06/02/2016 - 12:56

“Offshore”. It’s practically a dirty word now. The O-word.

The mere concept of “offshore” is automatically associated with criminal activity, tax evasion, and terror financing.

Consider the notion of offshore banking.

The immediate image that comes to mind is some moustache-twirling billionaire tax cheat hiding his ill-gotten gains in a nefarious island bank.

The media crusade over the Panama Papers only reinforces this absurd stereotype.

But the reality is far different than the fiction that’s being peddled.

In the US, the epicenter of the movement against financial privacy and freedom, the banking system has become a pitiful shell of the sturdy pillar it’s supposed to be.

Just think back to 2008.

After years of raking in huge profits as they loaned their depositors’ savings out in the most reckless and irresponsible sub-prime home loans, the banks crashed.

Then they went to the government with hat in hand, telling us the world would come to an end if they didn’t receive a massive rescue package.

Despite nearly $1 trillion in a taxpayer-funded bailout, the biggest bailout of all came from the Federal Reserve.

The Fed spent years conjuring trillions of dollars out of thin air and ‘loaning’ it to commercial banks at 0% interest to help them recapitalize.

But in bailing out the banks, the Fed had to expand its own balance sheet so rapidly that they rendered themselves nearly insolvent.

In the meantime the Fed has also had to continue funding the US government’s addiction to debt, which has doubled since the financial crisis and now exceeds 100% of GDP.

The US financial system, therefore, is comprised of an insolvent government, a borderline insolvent central bank, and commercial banks that have a history of making reckless decisions with their depositors’ funds.

Meanwhile, over in Europe, many of the commercial banks themselves are outright insolvent and have had to resort to cash and withdrawal controls to trap their depositors’ funds in a failing system underpinned by negative interest rates.

It’s insane. The world’s most developed banking systems are dominated by debt, insolvency, negative interest, and reckless abandon.

What could possibly go wrong?

Given this ridiculous financial reality, it should be clear that banking overseas has nothing to do with tax evasion.

Tax evasion is pointless and stupid anyhow. If your goal is to reduce what you owe, there are countless ways to legally do so.

For example, instead of committing tax evasion, a US investor who wants to reduce his/her taxes could move to Puerto Rico instead.

Becoming a legal resident of Puerto Rico can eliminate US federal income tax obligations.

Meanwhile, the island has an incentive law reducing the rate of tax on certain investment income to 0%. And you don’t even have to live there year round.

So, Option A is risking jail time by committing tax evasion. Option B is moving to a beachfront paradise for part of the year and legally paying zero tax. Duh.

That’s ultimately the point of going offshore: it gives you more power, more freedom, more control, and more safety.

Banking overseas, for instance, can be MUCH safer.

There are many jurisdictions abroad, like here in Hong Kong for example, where the banks are highly capitalized and maintain strong, conservative cash reserves.

Hong Kong banks are also backed by a deposit insurance program that’s actually well-funded, which itself is backed by a government that has zero net debt and is swimming in cash, plus one of the best-capitalized central banks on the planet.

What a night and day difference.

In the Digital Age, geography is an irrelevant anachronism. It shouldn’t matter if your bank is across the street or across the world.

The most important characteristic of a great bank is its financial stability.

Is it liquid? Is it solvent? Are its lending and investment practices conservative? Is the country’s banking system robust and sustainable?

Most of the West gets fairly poor marks in these key questions.

But if you expand your thinking to the entire world, you’ll find there are much better, safer options abroad.

Don’t buy the popular myth. Having a foreign bank account isn’t about being a tax cheat.

It’s completely and totally legal as long as you follow your country’s disclosure rules.

(US taxpayers—this could include FinCEN Form 114, IRS Form 8938, and/or 1040 Schedule B.)

This is ultimately about keeping your capital safe by holding your savings with a strong, conservative bank in a sustainable, debt-free financial system.

It just makes sense.


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