December 3, 2013
At this point, you’d pretty much have to be living under a rock to have not heard of Bitcoin.
I actually asked this question (‘have you been living under a rock?) to someone recently who proudly proclaimed that he had never heard of Bitcoin, almost expressing gratification in his ignorance of a game-changing model.
Bitcoin is on fire. Mainstream media coverage is everywhere.
Today, in fact, the Forex Industry Conference kicks off at the W Hotel here in Santiago. And the lunchtime workshop is featuring an hour-long panel on Bitcoin, including the folks behind Coin4ce.com, Chile’s largest Bitcoin trader.
No doubt, digital currency is a growing trend in Latin America… particularly in neighboring Argentina where the government has been nationalizing everything that isn’t nailed down.
The Argentine government has imposed a series of desperate capital controls and price controls, including severe restrictions on purchasing gold and foreign currencies.
Most Argentines have been left to suffer the terrible inflation and erosion of purchasing power that comes with holding a rapidly depreciating paper currency.
But for some Argentines, Bitcoin has been a salvation. And demand for the digital currency has soared in the country as people have realized that Bitcoin cannot be controlled or nationalized by the Argentine government.
As a result, Bitcoins in Argentina frequently trade for more than 30% higher than in neighboring countries… presenting a rather interesting arbitrage opportunity.
With all the mainstream attention, though, Bitcoin has been building its share of detractors. I read an article on Forbes recently entitled something like “Why Bitcoin is doomed to fail”.
Most of these pieces roll out the same tired points– that nobody knows anything about the mysterious programmer who put it together… that it’s too volatile… etc.
True, Bitcoin is incredibly volatile. A lot of this is based solely on momentum and speculation.
Think about it– the premise behind Bitcoin is that it is an alternative to fiat currency. So is gold. Yet while Bitcoin has soared in the last few months by practically an order of magnitude, the nominal gold price has remained flat.
This suggests to me that a lot of the new Bitcoin buyers are speculators– people that are trading paper currency for Bitcoin, hoping to trade their Bitcoins back into even more paper currency at a later date.
This approach defeats the purpose of holding a fiat currency alternative. And it raises a rather interesting problem that is unique to Bitcoin: with such a huge runup in the nominal price of Bitcoin, how is it supposed to be taxed?
The capital gain rules for precious metals are very clear, especially if you’re a US taxpayer. But the IRS has literally issued ZERO guidance on Bitcoin.
If, for example, Bitcoin is considered a ‘currency’ by the IRS, then Bitcoin gains should be taxed as ordinary income according to IRC section 988(a)(1)(A).
But if Bitcoins are considered to be a long-term investment, such as shares of Google that you hold for more than a year, than it should be taxed at lower capital gains rates.
And what about if your Bitcoins are stolen? Are such losses deductible like other investment losses? Or would it be treated like personal property as if your car was stolen?
And what if you’re a US taxpayer holding Bitcoins at an overseas-based brokerage? Would this ‘account’ need to be reported on foreign financial disclosure forms?
Everything is up in the air. And while the IRS has issued fairly clear guidance on precious metals, they haven’t made a peep about Bitcoin… leaving, once again, the onus on the taxpayer to figure everything out.
December 2, 2013
[Editor's Note: Tim Price, Director of Investment at PFP Wealth Management and frequent Sovereign Man contributor is filling in for Simon today.]
In 1983, commodities trader Richard Dennis set out to show that anybody could trade profitably provided they were taught some simple rules.
His partner, William Eckhardt, disagreed… and a wager was born.
(If this sounds familiar, it should be. It forms the basis of the plot to John Landis’ 1983 comedy, ‘Trading Places’.)
Dennis placed classified ads in the financial press soliciting trainee traders– no experience required. Successful applicants were subsequently taught some basic rules about risk management and trend-following.
These aspirant traders were called ‘turtles’ after Dennis’ experience of seeing a Singaporean turtle farm, and his belief that successful traders could be “grown” just like those turtles.
21 men and two women were hired over the next two years in two separate programmes. Long story short, many of ‘the turtles’ went on to become multi- millionaires.
Not only that, but some of ‘the turtles’ went on to join the ranks of the most successful traders in history.
Richard Dennis believed that a successful trading philosophy could be taught to anybody provided they kept to the rules. Dennis himself borrowed $400 from his father and by the early 1980s had amassed a fortune of $200 million.
As his father famously observed, “Let’s just say Richie ran that $400 up pretty good.”
The basic ‘turtle’ rules involved entering trades on the basis of markets breaking out from previously established ranges. If a given futures market traded at a new 20-day high, then it should be bought. If it traded at a new 20-day low, it should be sold. Stop losses were included for hedging downside risk. Risk per transaction was also carefully controlled.
The turtles were allowed to trade a variety of US futures markets, including interest rates, currencies, energies, metals and commodities (hard and soft). Futures markets were favoured due to their depth and liquidity.
Whereas most fund managers try and predict the future, the turtles simply paid attention to the market price. For as long as price trends persisted and they weren’t stopped out, they would add to their positions (subject to obeying the rules about appropriate position sizing).
If the turtles lost money, they would have to reduce their bet size until they’d brought their account back into the black.
There are really only two ways of looking at financial markets. One of them is fundamental: to take into consideration macro-economic themes, the economy, interest rates, inflation. The other method is technical: what are prices doing?
Richard Dennis recognised that price is the only metric really worth trusting– everything else is a matter of opinion. This trading strategy today goes by the name ‘systematic trend-following’.
Unlike many approaches to trading, it requires no special understanding of any given market– just a healthy respect for the price action.
And there are two specific reasons why we look favourably on systematic trend-following funds.
One is that they have a long history of generating attractive returns.
The second is that whatever their future return streams, those returns can be confidently expected to come with roughly zero correlation to the stock market.
This makes them the perfect investment vehicle to sit within a -properly diversified- portfolio alongside the likes of stocks, high quality bonds, and real assets.
The two couldn’t be in a starker contrast—the serenity, peacefulness, and jovial atmosphere of the fourth Thursday of November, and the mayhem, mind-numbness, and scavenging that follows the next day.
How can often the same people that on Thanksgiving are spending time with their families in a holiday spirit, in a blissful and calm environment, just hours later transform into wild creatures that run around like wounded predators desperate to hunt, is a mindful reminder of who exactly you’re dealing with.
What should be the start of a reflective holiday period instead turns into chaos on Black Friday when promotional sales of the holiday shopping season kick-off.
This time people were fighting at Wal-Marts over $1 DVDs when the sale started. A fight broke out over a toaster that was $2 off. Grown women were fighting over a sweater. An air mattress. Six grown-up guys started a fistfight over an Xbox 360. People are fighting over bathmats, towels…
These are the clearest arguments of how hollow Ben Bernanke’s remarks were during the dinner I attended recently in Washington D.C., when he said that the Fed doesn’t have much influence on the growing wealth gap in the country.
In reality, however, keeping interest rates at zero and printing billions of dollars a month couldn’t have a bigger impact—those with an established capital, the bankers, the ultra-wealthy, are seeing their portfolios rise to record levels while the middle class is getting hosed with rising costs of everything, from food to medical care, fuel, and education.
No wonder people are scavenging around and fighting over a toaster that’s $2 off.
Now imagine what happens if things get much worse. Right now everything seems normal. Sure, life is getting harder for ordinary folks, but everything still functions like usual.
What happens when a major event causes the inevitable day of reckoning and the US dollar falls off the edge of a cliff where it’s tethering right now?
What will you do? How will you react? Where will you go?
Exactly 12 years ago Argentina was tethering on such a brink. At the end of November everything seemed normal. The economy was in a bad shape but life muddled through.
In a matter of days at the beginning of December, however, bank withdrawals were limited, people’s accounts were frozen, angry mobs took over factories, closed roads and bridges, forced the President to flee in a helicopter, and caused dozens of deaths amid violent riots.
The currency was toast and the Argentines had to resort to barter.
Having objective foresight and taking steps to prepare and protect yourself is crucial. And the best part is—it makes sense no matter what. You’re not worse off by putting some of your savings in a safer bank overseas, or acquiring residency in a thriving economy.
That’s why I urge you to pay attention to tomorrow’s unique offer we’re opening up. It’s something we’ve never done before and is quite easily the most straightforward, no-brainer opportunity you’ll ever have to protect yourself from people fighting over appliances and stampeding each other.
November 27, 2013
Sovereign Valley Farm, Chile
Do you remember the days when travel used to be glamorous and sexy? The mere prospect of getting on an airplane was tremendously exciting. Friends and family would come with you to the gate to see you off and pick you up.
Today, millions of passengers in the Land of the Free will take off their shoes and assume the “I surrender” pose inside a radiation machine that provides negligible benefit and maximal cost to taxpayers.
Our modern security theater is a stark contrast to the past. But there’s been something else happening over the last several decades that is even more insidious… and far less obvious.
In 1979, Texas International Airlines (the precursor to Continental) introduced the first modern frequent flier program. American Airlines soon followed, launching their AAdvantage frequent flier program in 1981.
When the program launched, you could upgrade to a first class seat on the Concorde for 20,000 miles (something that you couldn’t even do today). Today, an upgrade to first class between the US and Europe would set you back 50,000 miles, plus $900 in fees.
In fact, just about every mileage award category has been getting more ‘expensive’, particularly among the major US carriers. The majority of the increases have taken place in the last several years.
United Airlines, for example, is raising the number of miles required for most of its awards starting February 1st. The steepest is an 87% increase for first class award seats on United’s partner airlines flights to the Middle East.
A United economy class ticket to Hawaii will increase by ‘only’ 12%. And business class to Europe and Japan will increase 20%.
Just like central bankers with paper currencies, airlines are devaluing their miles.
They have created trillions of miles in the system, many of these through special gimmick promotional giveaways. We’ve probably all seen the ‘sign up for the new credit card and receive 25,000 bonus miles’.
But just like the real economy, rapidly increasing the money supply (airline miles) devalues the currency and creates inflation.
That’s exactly what’s happening here. Airline miles are worth less and less.
Moreover, the airlines have begun to restrict award seat capacity. If you have ever tried to actually USE your miles, you’ve probably become very frustrated. Sometimes you have to book those flights a year in advance just to get one crummy seat.
They’ve also begun increasing fees on top of the mileage awards– so now if you want to use miles to upgrade, you have to pay a steep fee on top of the miles.
Airline miles are a great analogy of how inflation works in the real economy. It’s clear that the supply of miles is increasing rapidly. But the effects go unnoticed for a long time.
Then suddenly, one day, prices go up dramatically (as in the case of United).
And most people who have been responsibly saving for a rainy day (or that dream trip to Paris) suddenly find that years of their savings are worth less.
Airline miles are the most rapidly depreciating currency in the world. And they’re an interesting sign of things to come with fiat currencies.
November 26, 2013
On the flight down to Chile the other day from the US, I opened up a local Texas newspaper to an article entitled something like: “Getting the most out of your savings account”.
The reporter went on to list all the banks in the area where you could lock your money up in a 1-year Certificate of Deposit, and ranked them by who was paying the highest interest rate.
This will come as no surprise to you, but 0.9% was soundly in the top 10 for a 1-year CD… and 0.4% was in the top 10 for a 6-month CD.
“Pathetic” is probably the word that I would use to describe this. Perhaps even criminal.
We all know that the rate of inflation is substantially higher than what the government’s official reports say. But even if you use the government’s own numbers, “core CPI” is now 1.7%.
This means, quite simply, that if you hold cash in a bank account in the Land of the Free, YOU WILL LOSE MONEY. Period.
Think about it– if you’re only receiving 0.9% on your money, but prices rise by 1.7%, then next year your purchasing power of your savings will have declined by 0.8%. The ‘value’ of your bank account may be marginally higher, but in inflation-adjusted terms, your savings will buy less.
If you factor in the real rate of inflation (not the phony government gorilla math), you’re losing even more.
This constitutes theft, plain and simple. It is a most destructive means of stealing savings from the middle class over the long-term. And few people realize it’s happening.
And it’s not just banks in United States; the situation is similar in Canada and Western Europe.
Not to mention, the yields on these governments’ bonds hold the same pattern. If you buy a 2-year US government Treasury note today and hold it to maturity, you’ll receive a whopping 0.29% rate of return.
This from a government that has accumulated more debt than any other nation in the history of the world.
In Japan, where they spend over 50% of its tax revenue just to pay interest on the debt, loaning money to the government for TEN YEARS will only get you a 0.6% annual return.
Meanwhile, Japan’s Prime Minister is very publicly doing everything he can to stoke inflation to 2%. This means you will be guaranteed to LOSE 1.4% per year. It’s unreal.
Fortunately there are a few ‘safer’ havens.
Norway has the world’s safest banking system, and the world’s strongest currency (if you analyze the central bank’s fundamentals). But bank interest rates in that country can be as high as 3% or more. It’s nothing to write home about, but certainly better than a guaranteed loss.
Here in Chile, banks have a unique type of savings account whereby they will pay a low fixed percentage above and beyond the rate of inflation.
And the nice thing is that, in most cases, the ENTIRE value of your bank deposit is backed by a government that is awash with cash and has zero net debt.
It’s the same story with bond yields; while the 2-year Treasury in the US is paying 0.29%, the 2-year bond yield in Chile is 4.55%.
Again, Chile has ZERO net debt. The US government is the largest debtor in the history of the world. Yet Chilean bonds pay more than 15-times the US government rate.
How does this possibly make any sense?
It doesn’t. But while the vast majority of the investing crowd is overpowered by a ridiculous herd mentality, the rest of us can break free of this and take advantage of the world of opportunity out there where no one else is looking.
November 25, 2013
[Editor's Note: Tim Price, Director of Investment at PFP Wealth Management and frequent Sovereign Man contributor is filling in for Simon today.]
“In investing, what is comfortable is rarely profitable.” — Robert Arnott
Valuations still matter.
Assuming that one is -investing- as opposed to -speculating-, initial valuation (i.e. the price you pay for the investment) remains the single most important characteristic of whatever one elects to buy.
And at the risk of sounding like a broken record, “initial valuation” in the US stock market is at a level consistent with very disappointing subsequent returns, if the history of the last 130 years is any guide.
Without fail, every time the US market has traded on a cyclically-adjusted P/E (CAPE) ratio of 24 or higher over the past 130 years, it has been followed by a roughly 20 year bear market.
The evidence for the prosecution is clear, especially for the peak years 1901, 1929, 1966 and 2000. And 2013? The CAPE ratio is more than 25 today.
But there is the stock market, and then there are individual stocks. We have no interest in the former, but plenty of interest in the opportunity set of the latter.
We’re just not that interested in the US market, given general valuation concerns, and the malign role of Fed policy in distorting the prices of everything. As purists and unashamed value investors, we have plenty of other fish to fry.
Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades.
The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years’ time.
The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms.
Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. The stand-out area is obvious: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people.
In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that.
But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it.
Asian personal consumption between 2007 and 2012 – while the West was suffering from a little localised financial crisis – grew by 5% to 10% per annum. Industries likely to benefit from sustained growth in domestic consumption include food and beverages, clothes, cars, and insurance.
But the index composition of Asian equity index benchmarks leaves much to be desired.
Of the 10 largest companies in the MSCI Asia ex-Japan index, three are low margin exporters in Korea and Taiwan, one is a low margin Chinese telecoms business, three are state-run Chinese banks, one is an inefficient Chinese oil and gas producer, and one is an expensive Chinese internet business.
That doesn’t leave much for value investors to go on.
Asian equity funds more generally, tending to be index-trackers, are heavy in Chinese stocks of indeterminate value and clunky ‘old Asia’ exporters with far too much research coverage.
Or one can ignore index composition (‘yesterday’s winners’) entirely and focus instead on ‘best in breed’ businesses throughout the region on an unconstrained basis– especially those with favorable returns on equity, strong balance sheets, and low valuations.
As Greg Fisher of Adepa Asset Management wrote, amid a world of worries, “keeping the discipline of holding lowly valued, under-owned and unleveraged companies is likely to continue to protect our capital and earn us both income and capital appreciation over the longer term.”
Or to put it more plainly, and in the words of Warren Buffett, “price is what you pay; value is what you get.”
US stocks may be expensive, but you can get better economic fundamentals and cheaper valuations selectively throughout Asia.
And as insurance against the sort of disorderly currency moves that seem to be almost inevitable courtesy of so many central banks behaving badly, we still maintain you can’t do better over the medium term than gold.
November 22, 2013
In George Orwell’s seminal work 1984, there’s a really great scene early in the book between Winston (the main character) and Syme, a low-level functionary at the Ministry of Truth.
Syme is working on the 11th Edition of the Newspeak Dictionary, and he explains to Winston how the Ministry of Truth is actually removing words from the English vocabulary.
In Newspeak, words like -freedom- have been struck from the dictionary altogether, to the point that the mere concept of liberty would be incommunicable in the future.
I thought about this scene recently as I was testing out Google’s new Ngram Viewer tool.
If you haven’t seen it yet, Google has digitized over a million books that were printed as far back as 1500, and they’ve made the contents searchable within their own database.
The Ngram Viewer allows you to search for particular keywords. And you can see over time how prevalent the search terms were for particular years.
Out of curiosity, I searched for the term “gold” in English language books starting in 1776.
As one would expect back in the 18th and 19th centuries when gold was actually considered money, the instances of the word ‘gold’ favored prevalently in English language books at the time.
The trend continued into the early part of the 20th century.
But then something interesting happened in the mid-1930s. The use of the word ‘gold’ in English language books reached its peak… and began a steep, multi-decade decline.
Further investigation shows that the peak actually occurred in 1933. And as any student of gold in modern history knows, 1933 was the same year that the President of the United States (FDR) criminalized the private ownership of gold.
It remained this way for four decades. And by the time Gerald Ford repealed the prohibition on gold ownership, the concept of gold being money had been permanently struck from the American psyche, just as the Orwellian Newspeak dictionary had done.
By the mid-1970s (and through today), people have become readily accepting of the idea that money was nothing more than pieces of paper conjured at will by central bankers.
The good news is that, according to Google’s data, there seems to be slight uptick in the number of instances of the word ‘gold’ in English language books over the last 10-years or so.
No doubt, this probably has a lot to do with gold’s seemingly interminable rise relative to paper currency.
One can hope that the trend will hold… that more people will wake up to the reality that the central-bank controlled fiat currency system is a total fraud.
November 21, 2013
Today I’m in Miami at a conference on Global Residency and Citizenship where I’m slated to speak this afternoon as part of a panel.
So far it’s been really interesting; there are several Presidents, Prime Ministers, Finance Ministers, Ambassadors, etc. from a number of countries– Malta, Cyprus, St. Kitts, Antigua, etc.
Each of them is here for the same reason; they’re trying to convince a room full of investors and attorneys to invest in their country.
Bear in mind, most of these countries are near fiscal straits. St. Kitts & Nevis, for example, has one of the highest debt levels in the western hemisphere as a percentage of GDP.
And you probably recall what happened in Cyprus– the government and banking system were in such bad shape that they had to ‘bail in’ the banks by stealing customer deposits.
They’re desperate to raise cash. And they’ve had to resort to innovative methods.
Many of them are now ‘selling’ residency. For example, Hungary has a program where you can invest in government bonds. And in exchange, you can become a resident.
Portugal has a similar program called the Golden Residency program, whereby you can simply purchase a property or some other such investment in exchange for a very tax efficient class of residency. After six years, you can even apply to become a naturalized Portuguese citizen.
Then there are other countries that are selling citizenship. Malta has a program whereby you can invest 650,000 euros (about $875,000) in exchange for citizenship. Cyprus and Antigua also both have similar programs, though at different price points.
These programs are undoubtedly controversial. Political opposition groups are hammering home fears about how criminal terrorist masterminds will be able to acquire Maltese citizenship and use it for nefarious purposes.
You’d think they’d be happy that some foreigner is willing to pay almost a million dollars for a travel document… money that the government desperately needs to pay down its sizeable debt burden. But I suspect the fearmongering will quiet down once the money starts rolling in.
This is the future. Rather than treat people like dairy cows and work horses, governments are going to have to position themselves to attract talented, productive residents and citizens.
As The Economist wrote in October last year: “The world’s most valuable resource is talent. no country grows enough of it. Some, however, enjoy the colossal advantage of being able to import it.
Fortunately, this is already happening.
Panama has a very popular program to attract retirees to move to the country; it’s been so successful for them that the program has been copied throughout the region.
Many European nations, from Spain to Ireland, are now providing residency to any foreigner willing to bring capital into the country and help them mop up all their excess housing inventory.
Places like Singapore and Chile have been rolling out the red carpet for entrepreneurs and businesses, providing all sorts of subsidies and tax incentives.
This is a good thing. When governments compete, people win. And those who refuse to compete will eventually run out of dairy cows…
In our modern times, we can be mobile. We’re not chained to the land as if we’re living in the feudal system. There’s nothing stopping a family from uprooting and heading overseas if the lifestyle, business opportunities, and tax environment would provide a better quality of life.
And I’m pleased to tell you that, even though there are a lot of serious economic storm clouds on the horizon, there are more and more governments starting to realize that they have to become competitive.
I’m following this trend closely and will have more to report as the opportunities unfold.
November 19, 2013
En route from Hong Kong to the United States
Senator Tom Carper (Delaware) is confused about Bitcoin.
As Chairman of the Senate Committee on Homeland Security and Governmental Affairs, this is how Carper framed his opening remarks yesterday at a hearing about digital currencies– with complete, incoherent confusion.
Carper’s hearing went on for several hours as one witness after another testified about the potential evils of digital currencies. They hailed from agencies and organizations like:
- The Homeland Security committee
- Criminal Division of the US Attorney General’s Office
- US Secret Service Criminal Investigative Division
- The Financial Crimes Enforcement Network
- The International Centre for Missing & Exploited Children
Based on the way they stacked the witness list, the message they’re sending is clear: digital currencies like Bitoin equate to crime, terrorism, and child exploitation.
But the height of absurdity in yesterday’s hearing probably came during the testimony from the Financial Crimes Enforcement Network (FinCEN), in which the agency’s chief cited the BENEFITS of digital currencies, including:
- simple, easy to navigate
- lower fees than the conventional financial system
- globally accessible
- can be used as both a store of value and medium of exchange
Yet in listing all of these benefits, FinCEN’s chief was actually trying to make a case AGAINST Bitcoin! In her mind, only criminal terrorists want low-fee, secure, globally accessible money.
All of these politicians and bureaucrats can’t wait to get their arms around digital currency to regulate the hell out of it. They don’t understand it… therefore they think it’s dangerous.
Even the World Bank president (a US government-appointed stooge) weighed in on digital currencies. It’s obvious they’re all afraid.
And their entire argument begins with the deeply flawed premise that financial privacy is somehow wrong, immoral, and nefarious.
There’s no sense trying to convince them otherwise. Government’s mission is to obstruct… particularly a government in decline.
So we can expect more hearings, more regulation, more disclosures. At least, in the Land of the Free.
Over here on the other side of the world, though, they’re not afraid of Bitcoin.
Places like Hong Kong and Singapore understand that they have a role to play as preeminent international financial centers in becoming financial hubs for digital currencies.
If the US wants to shoot itself in the foot (again) and shut itself out of the market, so be it. But Asia is embracing its potential role in the marketplace, complete with all the risks and rewards.
It wasn’t but a few weeks ago that a Hong Kong-based bitcoin exchange ran off with a few million dollars of customer money. But that hasn’t cooled demand in the region… nor has it sparked a wave of debilitating regulations to clamp down on digital currencies.
What this ultimately means is that all the new businesses and intellectual capital associated with digital currencies will flock to Asia… just in the same way that all the cutting edge precious metals firms are now basing themselves in Singapore.
The US government is sharpening its steak knives in anticipation of a great digital currency roast. But they’ll find out very soon that Bitcoin has left the building… and moved on to greener, safer pastures in Asia.
This is good news, especially for second generation digital currencies and related firms like litecoin, ripple, and ven.
November 18, 2013
You’ve probably heard by now that there’s a politician in Russia trying to ban the dollar, calling it a Ponzi scheme.
20 years ago this would have been considered blasphemous. 10 years ago it would have been laughed at. Today, it’s taken seriously. And with good reason.
If you dive deep into the Federal Reserve’s balance sheets, you can see for yourself.
Just like any other bank, the Federal Reserve has assets and liabilities. The difference between the two of these is the bank’s capital. And in general, the higher the capital, the stronger the bank.
One way to measure a bank’s capital is as a percentage of its assets– higher is always better.
You may recall, for example, that when Lehman Brothers went bankrupt in 2008, the firm’s capital (or equity) was about 3% of its total assets.
A year ago, the Fed was at 1.93%. By August of this year, its capital had fallen to 1.53%. Today it stands at just 1.42%. So the Fed’s balance sheet is clearly deteriorating quite rapidly.
This is critical to understand… because the dollar is ultimately the Fed’s currency. The Fed has monopolistic control over the US money supply. So as the Fed deteriorates, so does the dollar.
Take a look at that dollar in your pocket. It says ‘Federal Reserve Note’. ‘Note’ is just an accounting term for a liability. So by printing money, the Fed is really just creating more liabilities and eroding its balance sheet.
As they do this, the Fed’s capital shrinks. This puts the Fed… and the dollar… in precarious financial condition.
Now, when the dollar reaches its intrinsic value in British Thermal Units is anyone’s guess. Maybe it happens tomorrow. Or in the next decade. No one knows… And that’s why it’s important to find a solution that is suitable in either scenario.
Here’s one option to consider: own the Hong Kong dollar.
Fundamentally, the Hong Kong dollar is MUCH stronger than the US dollar. Hong Kong’s central bank is nearly 20-TIMES more capitalized than the Federal Reserve, and the Hong Kong government has a minimal debt level.
But more importantly, the Hong Kong dollar is pegged (for now) to the US dollar. It trades at 7.80 Hong Kong dollars per US dollar, a very narrow band.
This essentially eliminates currency risk. You can freely convert between Hong Kong and US dollars without taking a bath.
And if the US dollar surges temporarily with respect to other currencies, the Hong Kong dollar will also do well.
But should the US dollar collapse, then the Hong Kong Monetary Authority would simply de-peg from the US dollar… or at least revalue it.
In other words, by holding Hong Kong dollars, you can capture the benefits of US dollar exposure while protecting against downside risks.
There may be options at your local bank for holding Hong Kong dollars. But the best option is to go straight to the source– open a bank account in Asia, preferably Hong Kong or Singapore where you can own Hong Kong dollars directly.
The banks are much better capitalized in this part of the world, and you would substantially reduce your counterparty risk by holding the funds directly.
(Sovereign Man Confidential members: please refer to recent premium content for information about how to do this…)
November 16, 2013
Thailand is known for a lot of things– quintessential white sandy beaches, hard partying nightlife, quiet Buddhist reverence…
But what a lot of people don’t realize is that Bangkok is probably one of the most important cities in the world when it comes to illegal trafficking.
Human trafficking. Narcotrafficking. Money laundering. Weapons. Forged documents. Etc.
Bangkok is just as vital to these industries as New York or London to the global financial sector.
And now, thanks to India’s sagging economy, they can add one more to this list: gold smuggling.
Recently, India has been in a state of economic turmoil. Beset on all sides by spiraling inflation, economic stagnation, and a rapidly depreciating currency.
In response the Indian government imposed capital controls in a feeble attempt to curb gold imports and reduce its widening current account deficit.
This constitutes theft, plain and simple. By eliminating options to hold anything other than rapidly depreciating paper, Indian politicians essentially stole the purchasing power of people’s savings
India’s government banned gold coin imports outright. And tight restrictions were placed on the importation of other bullion products, replete with excessive taxation and duties to pay.
The private sector hasn’t exactly taken this lying down. History shows that whenever governments create prohibitions, smugglers and bootleggers will always step in to fill the void.
And because of its traditional gold ties, regional commerce, and generous transportation options, Thailand has now become a major transit point for international gold smuggling destined for India.
The World Gold Council recently released its quarterly data on global gold trends, and the numbers are very clear: India’s gold demand cratered, dropping 32% because of the restrictions.
In Thailand, however, gold demand is up 125% from the 3rd quarter of 2012.
I’ve noticed this on the ground; there’s been a surge of gold shops and new inventory in the marketplace, particularly the small ‘biscuit’ bars that are easier to smuggle.
Much of this is bound for India.
Indian customs officials say that the amount of gold seized has soared over 300% this year.
They claim to have found people hiding gold just about everywhere you could imagine– from airplane lavatories to betwixt their butt cheeks. Not exactly the smartest way to smuggle gold… Just imagine being the buyer of those bars!
Of course, most of the gold is making its way into the country. The borders are too porous and there’s just too many people going through.
Based on the markup that gold sells for in India and the cheap cost of air travel in this part of the world, a smuggler can net nearly $10,000 on a single trip bringing 5kg of gold into India.
That’s a fairly solid payoff for a day’s work, though there are obviously risks involved.
But as much as I admire the swashbuckling, unbridled capitalist spirit of these smugglers sticking it to politicians, there is definitely an easier way.
This whole episode really underscores the importance of having at least a portion of your gold (and paper savings) safely held overseas where your home government can’t control it.
If you have gold overseas and some funds in a foreign bank account, then your savings will be protected from the disastrous consequences of capital controls.
Digital currencies like Bitcoin may also be an alternative to paper money; they’re growing in popularity in places like Argentina where people continue to be beaten down by extractive government policies and capital controls.
More on that in a future letter.
November 15, 2013
One of the biggest lies in finance is this perpetual deception that inflation is good.
Ben Bernanke, the current high priest of US monetary policy, recently remarked that it’s “important to prevent US inflation from falling too low.”
Well of course, we wouldn’t want that, would we? Just imagine the chaos and devastation that would ensue if the cost of living actually remained… you know… the same.
One shudders at the mere thought of price stability.
Of course I jest. Fact is, inflation benefits those who are in debt up to their eyeballs at the expense of people who have been financially responsible.
Yet economists have somehow managed to convince people that inflation is just and necessary. We all know inflation exists. But we’ve been programmed to shrug it off as if it’s a natural part of the system.
The even greater deceit is how they report the figures.
Governments all over the world lie about inflation; they do this because inflation has such a huge impact in monetary policy.
The playbook they all use is very simple– as long as inflation is ‘low’, then central bankers can print money. So they have a big incentive to underreport it.
Quoting a report from the US Department of Labor, for example, a recent headline from Reuters stated “U.S. consumer prices rise, but underlying inflation benign”.
I’m not entirely sure how inflation can be ‘benign’ while consumer prices are simultaneously rising.
Yet this is the modern day doublethink coming from the Ministry of Truth that we are all expected to unquestioningly believe.
Inflation does exist. I’ve seen it all over the world as I travel. In India right now, the reported inflation figure just hit 10% at a time when the economy is sagging.
In Bangladesh, workers are now rioting over rising cost of living, which far exceeds the proposed wage hikes that are on the table.
In the Land of the Free, the average price of a movie ticket is $8.38 earlier this year, another record high. Walnut farmers in California are now reaping record high prices on their crop.
And of course, McDonald’s is now killing their once popular dollar menu as they can no longer afford to sell anything at that price.
There are examples everywhere. And this also goes for asset price inflation.
We can see many stock and bond markets near their all-time highs. But then there are other asset classes… like farmland in Illinois, which is now selling for $13,600 per acre.
With an average yield of 160 bushels per acre, the net financial return after paying variable costs is less than 2%. It just doesn’t make any sense.
And in the art world, a Francis Bacon triptych just sold for a record $142 million at Christie’s in New York.
Everywhere you look, there’s overwhelming evidence of bubbles and price hikes. It’s simple. There’s too much money in the system.
Not only is this destructive, it’s the height of deceit to tell people that there’s no inflation.
November 14, 2013
“It’s a big club…. and you ain’t in it.”
– George Carlin
Irony: The woman who is set to become one of the most powerful people in the world begins her confirmation hearing today. And few people have ever even heard of her.
It must be a byproduct of the government-controlled education system; people still think they live in a free country with a representative democracy. It’s anything but.
Voting, elections, etc. are all just illusions to make people think that they have some influence in society.
A tiny elite orchestrates the whole system. And one of the most influential conductors is the Chairman of the Federal Reserve, a post about to be taken over by Janet Yellen.
Since most people have no idea how central banking really works, her confirmation hearing today is just a footnote.
Even people who are otherwise financially sophisticated simply trust that the men behind the curtain know what they’re doing.
This is quite strange when you consider that central bankers have nearly total control over the economy.
In their sole discretion, they are able to set interest rates, conjure money out of thin air, finance trillion-dollar government deficits, bail out commercial banks, etc.
And through these tools, they have the power to manipulate the prices of just about anything, from the Google stock to real estate in Thailand to turnips in Sri Lanka.
For the last several years, the US central bank has set the example for the rest of the world in aggressively using their policy tools.
Most significantly, they have unabashedly printed money in unprecedented quantities. And this has not been without consequence.
For some, the effects have been beneficial.
Rapid expansion of the money supply has pushed asset prices up all over the world. Stocks. Bonds. Many commodities. US Farmland. Artwork. Fine wines. Just about every asset class imaginable is near its all-time high.
People who are already wealthy have the available funds to invest in these markets. So their wealth has grown even more– exponentially.
The middle class, on the other hand, is experiencing an entirely different effect of money printing– retail price inflation.
And anyone who has been to a gas station, airport, university, doctor’s office, grocery store, etc. over the last few years understands this phenomenon very well.
A typical middle class family has little excess cash to invest after paying for rapidly increasing living expenses. Food. Fuel. Mortgage. Insurance. Etc.
And whatever wages or savings they have are being eaten away by inflation. So while the wealthy are getting wealthier exponentially, the middle class is actually getting poorer.
This explains why the wealth gap in the Land of the Free is the largest since 1929 at the start of the Great Depression.
Central bankers are responsible for much of this. In conjuring money out of thin air, they are benefitting one segment of society at the expense of another.
And with Janet Yellen at the head of the Fed, you can be sure that nothing is going to change.
Yellen has made it clear that she will continue to print unlimited quantities of money despite overwhelming data that such actions are ineffective and destructive for the the majority of the population.
Kyle Reese from the first Terminator movie sums this up rather succinctly here:
November 13, 2013
By the early 4th century AD, the Roman Empire was suffering tremendous turmoil, including plague, barbarian invasions, deep recession, civil wars, coups, etc.
Much of this had been brought on by Rome’s utterly dismal economic condition.
The government simply did not have enough money to sustain its operations, let alone pay for all the generous welfare programs needed to placate the population.
So as you could imagine, they decided to make up the difference by debasing the currency.
Roman coins were being debased so rapidly that they eventually lost credibility as a medium of exchange among the merchant class. As a result, the empire’s once vast trade network practically collapsed.
With such an abrupt decline in commerce, the government’s tax revenue also declined. In 301 AD, things got so desperate that Diocletian stepped in with a ‘solution’.
First, he blamed evil speculators for all the inflation, imposing the death penalty on some of them.
Then he issued what is arguably the dumbest law in the history of the world– his now infamous Edict on Maximum Prices, which imposed price controls for a thousand goods and services from wine to clothing to wages.
Of course, any high school economics student can tell you that price controls don’t work. And they didn’t work for Diocletian either.
The long-term effect of the law was devastating. Inflation and shortages soon prevailed. And there was a mass exodus of rich and poor alike who fled the empire seeking a better life elsewhere.
One could argue that this was the straw that broke the camel’s back for Rome.
Ironically, Diocletian was actually attempting to ‘reform’ the system, not to send Rome over the cliff. Yet this is one of countless historical examples of how the road to ruin is almost always paved with good intentions.
Just like Diocletian, our modern politicians continually make attempts to ‘fix’ things. Yet their attempts fail miserably, typically making the situation worse.
Two of the most destructive laws recently passed by the US government, for example, are the (1) the Dodd-Frank Wall Street Reform and Consumer Protection Act and (2) the Foreign Account Tax Compliance Act (FATCA).
Like Diocletian’s Edict, these laws are attempts to reform the system. Yet the results have been disastrous. In particular, they’ve destroyed one of the last competitive advantages that the United States has today: the dominance of its banking system.
The US banking system is really the foundation of the global banking system; an international wire transfer from, say, Thailand to Colombia will pass through one or two of the big Wall Street banks before reaching its final destination.
Nearly every bank in the world relies on the US banking system. It’s critical.
Yet each of these laws creates debilitating, onerous regulations that foreign banks are required to follow.
It’s the height of arrogance that the US government expects to be able to regulate and control foreign banks.
But the only thing the laws are really doing is accelerating the creation of a new standard for international banking– one that minimizes US influence.
As I’ve been on the ground here in Singapore for the last several days meeting with a number of bankers, this is becoming very clear.
Many senior bank executives have explained to me that they are rapidly expanding their regional ‘corresponding bank’ relationships. They’ve also told me how non-US dollar cross border trade is really taking off.
In other words, Asia is beginning to declare its financial independence by establishing its own system to avoid the US banks. Places like Singapore and Hong Kong are becoming the primary settlement and correspondence centers, rather than the US.
All of this substantially reduces US power and influence. So like Diocletian’s Edict, these ‘reform’ laws have had the exact opposite effect as the US government intended.
Foreign banks are complying for now. But quite soon, the United States will end up losing one of the few remaining jewels of its global financial dominance.
November 11, 2013
I’m here today with about 100 special guests who have flown in to Singapore from all corners of the world for an intensive 2-day offshore tactics workshop.
Singapore is a great place to hold such an event as it’s easily one of the most financially stable jurisdictions on the planet.
Think about it– the government here has ZERO net debt. They run generous budget surpluses each year. In fact, they’re awash with so much money that they have to find creative ways to give it back to taxpayers.
And speaking of taxes, Singapore has one of the lowest tax regimes of any developed country at just 14%. (By way of comparison, it’s roughly twice that figure in the US, and over thrice that figure in Western Europe…)
They’ve created conditions to attract foreigners, foreign business, and foreign capital from all over the world. And at the same time, they’ve created an environment where residents get to keep the vast majority of what they earn.
The banking system here is also a major plus; Singaporean banks are incredibly liquid, maintaining plentiful cash reserves as a percentage of customer deposits.
If you look objectively at the numbers, it makes all the sense in the world to move a portion of your savings to a place like this. Zero net debt. Minimal tax burden. Strong, liquid, well-capitalized banks.
By comparison, most western developed countries are drowning in debt, and their banks are thinly capitalized.
There are consequences to keeping your money in a banking system with such dismal fundamentals. Just ask anyone in Cyprus who had their bank accounts confiscated earlier this year…
Yet for many people, the idea of moving some funds overseas to a safe, stable place is ‘unpatriotic’. This is patently ludicrous.
Do we really owe it to our fellow citizens to keep our savings chained to a dangerously undercapitalized banking system? Or captivate our funds in a rapidly devaluing currency?
Any such sentiment is sadly misguided. Our first priorities are to our families… not some loudmouth politician who thinks he should be able to tell you what you can/cannot do with your own money.
The woes of most western developed nations have far passed the point of no return. They’re so deep in debt, they’re practically all borrowing money just to pay interest on the money they’ve already borrowed.
And nearly every day, they make the problem worse with even more destructive, debilitating regulations.
As I reported recently, the IMF is now openly encouraging the idea of a 10% “one off” wealth tax… suggesting that governments ought to just levy a portion of people’s bank accounts.
Some people may think it’s our patriotic duty to lay down in traffic for these criminally incompetent politicians. Never mind that they have an unblemished track record of war, deceit, and wasting other people’s money.
Yet many still believe that if we all ‘share’ in the sacrifice, then everything will improve.
Quite the opposite. The more they do, the more laws they pass, the more initiatives they launch, the worse it gets.
Placing any trust and confidence in these people to fix things is seriously dangerous… and hazardous to your family’s financial health.
The only solutions are the ones where you can rely on yourself. It’s up to each of us to take care of ourselves, and the people within our own circles.
Moving a portion of your savings overseas may be a step in this process.
If nothing ‘bad’ happens, you won’t be worse off for having some funds in a strong, stable bank overseas. But if these bankrupt governments decide to follow the IMF’s advice and start grabbing people’s accounts, you’ll be seriously glad you had the foresight to move some money abroad.
Obamacare aside, rest assured there will be more broken promises and lies from Barack Obama as well as future Presidents, so act accordingly. Because next time it might not be your health care plan but instead your life savings that are affected. For now though, watch this video to see the true character of politics:
Share this if you’re sick of politics
November 7, 2013
Check out this chart below. It’s a graph of total US tax revenue as a percentage of the money supply, since 1900.
For example, in 1928, at the peak of the Roaring 20s, US money supply (M2) was $46.4 billion. That same year, the US government took in $3.9 billion in tax revenue.
So in 1928, tax revenue was 8.4% of the money supply.
In contrast, at the height of World War II in 1944, US tax revenue had increased to $42.4 billion. But money supply had also grown substantially, to $106.8 billion.
So in 1944, tax revenue was 39.74% of money supply.
You can see from this chart that over the last 113 years, tax revenue as a percentage of the nation’s money supply has swung wildly, from as little as 3.65% to over 40%.
But something interesting happened in the 1970s.
1971 was a bifurcation point, and this model went from chaotic to stable. Since 1971, in fact, US tax revenue as a percentage of money supply has been almost a constant, steady 20%.
You can see this graphically below as we zoom in on the period from 1971 through 2013– the trend line is very flat.
What does this mean? Remember– 1971 was the year that Richard Nixon severed the dollar’s convertibility to gold once and for all.
And in doing so, he handed unchecked, unrestrained, total control of the money supply to the Federal Reserve.
That’s what makes this data so interesting.
Prior to 1971, there was ZERO correlation between US tax revenue and money supply. Yet almost immediately after they handed the last bit of monetary control to the Federal Reserve, suddenly a very tight correlation emerged.
Furthermore, since 1971, marginal tax rates and tax brackets have been all over the board.
In the 70s, for example, the highest marginal tax was a whopping 70%. In the 80s it dropped to 28%.
And yet, the entire time, total US tax revenue has remained very tightly correlated to the money supply.
The conclusion is simple: People think they’re living in some kind of democratic republic. But the politicians they elect have zero control.
It doesn’t matter who you elect, what the politicians do, or how high/low they set tax rates. They could tax the rich. They could destroy the middle class. It doesn’t matter.
The fiscal revenues in the Land of the Free rest exclusively in the hands of a tiny banking elite. Everything else is just an illusion to conceal the truth… and make people think that they’re in control.
November 6, 2013
Last week, the US Treasury Department released a statement amid great fanfare and triumph, that the federal budget deficit for fiscal year 2013 was ‘only’ $680 billion.
Yes, the sad state of affairs today is that a deficit of ‘only’ $680 billion is actually considered good news.
Now, I’ve spent a lot of time over the last week diving into the numbers to figure out the real story. And frankly I’m amazed that what I found hasn’t made front page news.
For starters, the big reason for this supposed drop in the deficit had nothing to do with fiscal restraint.
In fact, government spending barely budged. And if it weren’t for months of ‘sequestration’, government spending would have soared as usual to yet another record high.
The real story here is government tax revenue, which grew about 13%. This is a pretty solid jump, and it’s what all the major news outlets have focused on.
But this figure is actually quite misleading.
As an example, revenue for excise tax (which is a decent measure of the economy’s core production) grew by a much smaller figure– only 6%.
The biggest percentage jump in tax revenue came from something that the government isn’t even supposed to count: payroll tax.
Technically considered “off-budget employment and general retirement receipts”, this is the tax that is supposed to go directly to the Social Security Trust Fund.
You have a job. You pay into the Social Security system. That money remains in the Trust Fund, managed by conservative financial stewards. And in the future, your contributions are going to be there for you in the form of monthly benefits.
At least, that’s how it’s supposed to work.
But what really happens is the government just steals this money and uses it for whatever purpose they want.
In Fiscal Year 2013 that just ended on September 30th, the federal government stole a record $673 billion. This is nearly 20% higher than what they stole last year, which was itself one of the biggest amounts they had ever stolen in history.
This kind of fraudulent accounting is worse than Bernie Madoff or Ken Lay. You and I would go to jail for this. The President gets to take a victory lap.
Now, if you don’t count this ‘off balance sheet’ tax revenue, the situation changes dramatically. ‘On-budget’ tax revenue for 2013 is just $2.1 trillion.
With this calculation in hand, I then examined government spending.
Remember, the US government categorizes its spending into ‘mandatory’ and ‘discretionary’.
Mandatory spending includes all the things they are required by LAW to spend. It goes out the door automatically without Congress ever having to write a check, just like your mortgage:
Social Security: $870 billion
Medicare / Medicaid: $856 billion
Gross interest on the national debt: $415 billion
Food stamps (SNAP): $101 billion
Mandatory tax credits: $79 billion
Veteran benefit programs: $78 billion
Federal employee retirement: $77 billion
Unemployment insurance: $72 billion
This list is incomplete… there are literally dozens of other mandatory spending programs. But so far the total is $2.54 TRILLION.
So once again, if you don’t include the record theft of your Social Security contributions, the government was in the hole $448 BILLION.
This was before they were able to spend a penny on anything that we think of as government… including the military, Homeland Security, or the gas bill for Air Force One.
This is not a political problem. It’s an arithmetic problem. And it should be as plain as day that the party is over. The music is going to stop and millions of people are going to be left without a chair. Are you going to be one of them?
November 5, 2013
[Editor's Note: What follows was originally published in Notes from the Field exactly one year ago.]
Just over 400-years ago today, a group of 13 conspirators were caught trying to assassinate King James I of England and blow up the House of Lords in what became known as the Gunpowder Treason.
If you’ve ever seen the movie V for Vendetta, you know the story. Guy Fawkes was found underneath the House of Lords with three dozen barrels of gunpowder… and to this day, his effigy is still burned annually in commemoration of the event.
Fundamentally, the Gunpowder Treason was about freedom. The English monarchy at the time was controlling nearly every aspect of the economy and their subjects’ lives– from what they could wear to how they could worship.
“Sumptuary laws” which regulated private behavior were commonplace. Elizabeth I, for example, re-introduced a beard tax on all facial hair grown in excess of two weeks.
She also published long lists, categorized by social class, dictating precisely what color and type of garment her subjects were required to wear.
It turns out these sumptuary laws were just an early form of state-sponsored corporate welfare; the English textile industry had paid Elizabeth huge sums of money in exchange for royal decrees about knitted caps and woolen socks.
As a consequence, a great deal of English labor and disposable income was misallocated towards silly garments instead of being put to more productive uses… and the country was in an almost perpetual state of stagnation.
Not to mention, English finances deteriorated under Elizabeth. By 1600, state expenditures were 23% greater than tax revenue, which would be the equivalent of a $550 billion budget deficit in the US today. Not exactly a trivial figure.
James I, Elizabeth’s successor, continued to spend extravagantly and indebt the English economy, often showering taxpayer funds on a handful of favored nobles.
By the time James’s successor Charles I came to power, the monarchy’s credit was running so thin that Charles had to force people to loan him money; those who refused were imprisoned and had their property confiscated.
Unsurprisingly, civil war broke out in 1642. Charles I was executed in 1649, and the genocidal dictatorship of Oliver Cromwell dominated England for the next decade.
When you think about it, this collapse was inevitable.
For decades prior, the entire English economy was under the control of a single individual who massively indebted the state, impeded growth, and reduced people’s individual freedoms. Not exactly a recipe for long-term success.
The Gunpowder Treason of November 5, 1605 may have been a failure for the conspirators, but given enough time, a system so screwed up, so unsustainable, was destined to collapse on itself.
We’re not so different in the west today.
We have our own sumptuary laws, regulating everything from tobacco consumption to what foods we can/cannot eat. We have our own state-sponsored corporate welfare. We’re comically indebted.
And just like the English monarchs, we have a tiny elite that controls absolutely everything about our economy– taxation, regulation, and the supply of money.
Needless to say, this is also unsustainable. And history shows that these types of unsustainable systems will always collapse under their own weight.
Is it wise to think that this time is any different?
As a follow up to our Facebook post earlier today (http://drones.pitchinteractive.com/), we want to share a video with you on Obama’s Drone War in Pakistan and Yemen. Having denied the existence of its drone program for years, the United States government finally acknowledges it exists, but maintains that these weapons are extremely precise. According to the current administration, drone strikes did not result in a single civilian casualty in 2012; this video shows that this is a brazen lie. This is yet another example of governments lying to “their” people without conscience or scruple.
Look at the crimes being committed in your name…