June 2, 2015
[Editor’s note: Tim Price, London-based wealth manager and editor of Price Value International, is filling in while Simon travels to Buenos Aires today.]
FIFA headquarters seem more like a nuclear bunker than a swanky executive facility – or perhaps they are both.
They take up 11 acres on the Zürichberg, cost 240 million Swiss francs, and of the building’s eight floors, five of them are underground.
They incorporate a fitness centre, a meditation room and a full size football (soccer) pitch.
Bloomberg Business reports that cell phones are rendered inoperative by the black, Brazilian granite in the bowels of the building, and that executive committee meetings are held on the third subterranean level, in a conference room that has a floor of lapis lazuli.
Buildings make a statement about their owners. FIFA-Hauptquartier seems to be saying: our owners have a boatload of cash.
When the building was inaugurated, high winds and driving rain forced the anticipated flag ceremony indoors.
But that didn’t faze Obergruppenführer Sepp Blatter (for the avoidance of any doubt, we are not suggesting that Sepp Blatter is or has ever been a Nazi paramilitary, although The Guardian has called him “the most successful non-homicidal dictator of the past century”), who opined artfully that
“The sky is touched with tears but we can live with that because football also has to live in all weather conditions and rain is a gift from heaven.”
Grand High Ming Blatter, who has been compared by the president of Dominican Republic soccer, to Jesus Christ, Nelson Mandela and Winston Churchill, also observed of his headquarters’ vast glass frontage that it
“would allow light to shine through the building and create the transparency we all stand for.”
Well, quite. Apart from in those five underground levels where you can’t receive a mobile phone signal, and where FIFA’s legal department requires that visitors sign nondisclosure agreements for routine meetings.
Or even more ‘transparent’, FIFA’s head of finance Markus Kattner told Bloomberg that they wouldn’t disclose how they spent $397 million in personnel expenses, or what Mr. Blatter’s salary is: “We have hidden it so you cannot find it.”
And if FIFA had shareholders, it is likely they would be somewhat less impressed by the gaudy awfulness and conspicuous consumptiveness of it all.
When it comes to the corporate HQ, less can sometimes be more.
When Tom Murphy joined Capital Cities Broadcasting, corporate HQ was a dilapidated former convent. He was asked to project a more professional image for the company.
He responded by painting the two sides of the building facing the road. The other two sides he left untouched. Over a period of nineteen years, he generated a remarkable compound annual return to shareholders of over 22 percent.
Most corporate executives also feel obligated to a) please Wall Street and b) court the media assiduously.
Their time might be better spent on running their businesses in the best interests of their shareholders.
The crowns of our titans of finance have clearly lost some of their sheen over recent years. But the tendency to follow the crowd was well expressed by Citigroup’s Chuck Prince when he infamously told the FT in July 2007 that
“When the music stops… things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Adam Smith in ‘Supermoney’ wrote a passage so wonderful and so relevant to our current situation that we may have become addicted to its re-use:
“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, “What time is it? What time is it?” But none of the clocks have any hands.”
The clocks may not have hands, but the ticking goes on.
Bond markets are living on borrowed time. Bill Gross may have been a few years early, but he was fundamentally right to suggest that they are resting on a bed of nitroglycerine.
The rally in many stock markets is starting to look a little tired, too. Valuations have certainly become stretched. What is the pragmatic solution ? We think it’s to throw in your lot with:
- Successful businesses from all over the world
- With competent and honorable management
- Who don’t squander money on trophy corporate headquarters
- Who think like owners because they are owners
- Who maintain companies that have little or no debt
And, finally and crucially, not consciously to overpay for the shares of those businesses.
In a world where heavily-manipulated stock markets are constantly achieving all-time highs, this is difficult to do. But for a patient, educated investor, there are still options out there.
June 1, 2015
Chances are that you’ve never heard of the International Investment and Trade in Services Survey Act that was originally passed nearly 40 years ago.
And chances are you didn’t catch the November 20, 2014 edition of the ‘Federal Register’, the US government’s daily opus of new rules and regulations that ran 331 pages that day.
So, chances are, you have no idea that the Department of Commerce might just want to throw you in jail right now. I’ll explain.
Back in 1976, Congress decided that they needed more information on US companies’ international trade activities.
So they passed a law requiring the Department of Commerce to survey the biggest businesses in America to find out more about what they were doing abroad.
These days, the survey is conducted every five years. And like most surveys it’s a bunch of useless bureaucratic drivel that only wastes the time of the poor souls who have to fill it out.
Now it’s something that can get you thrown in jail.
Late last year the Commerce Department quietly published a new ‘rule’ in the Federal Register requiring every American with certain investments abroad to fill out their survey, regardless of whether or not they were notified.
In other words, you’re just supposed to know that you have to fill out this form.
And if you don’t, the penalties are severe.
For the first time ever the government is imposing both civil and CRIMINAL penalties for non-compliance.
The fine for not filling out the survey (known as BE-10) ranges from $2,500 all the way to $25,000.
And if they think you intentionally didn’t file, you “may be imprisoned for not more than one year.”
Either way, even if you had no earthly idea and had never heard of this survey, they reserve the right to seek “injunctive relief commanding such person to comply.”
So if you don’t fill out the form, they’ll get a judge to order you to comply.
This really borders on insanity.
The federal government of the United States of America… the Land of the Free… is willing to clog up the court system to either force people to fill out a survey, or to prosecute them for not doing so.
Forget about rapists, murderers, and thieves. The government’s priority is to imprison people who don’t fill out surveys.
What’s really amazing is that your elected representatives in Congress weren’t the ones to enact these absurd criminal penalties.
The Department of Commerce’s Bureau of Economic Analysis (BEA) did this all on its own. They simply created a new ‘rule’, then buried it under hundreds of pages of other regulations.
And even though Congress never even sees them, and no reasonable person has ever heard of them, these rules have the same weight and effect as the law.
So much for representative democracy.
Two important questions come to mind:
1) How many other rules that carry criminal penalties might we be breaking at this very moment without even realizing it?
2) Just who the hell do these people think they are?
Regardless of whether or not the penalties are ever exacted is irrelevant.
It’s disgusting to even be threatened with such atrocity, simply because some bureaucratic functionary needs to justify his/her position.
It’s a clear sign that in today’s system, the government doesn’t exist to serve the people. They think the people exist to support the government.
Abraham Lincoln once told a war-torn nation that a government of the people, by the people, for the people, shall not perish from this earth.
Tragically, Lincoln was totally wrong. Because this is what freedom has become in America.
Have you reached your breaking point yet?
I’ll publish more about form BE-10 soon. The quick and dirty is this: you need to file if you are a US individual or company that owned at least 10% of a foreign business at any time during your 2014 fiscal year (January 1 – December 31 for most folks.)
If you’re an individual, the reporting requirements are very simple– just a few boxes to check. It might take you five minutes… which makes being threatened with criminal penalties even more ridiculous.
The deadline to submit for first-time filers is June 30, 2015, and you can submit via mail, fax, or online. Read more about it here:
Premium members: I’ll have some detailed information for you very soon that will make this incredibly easy. Stay tuned for more.
May 29, 2015
Sovereign Valley Farm, Chile
I came across an interesting story from India recently.
In a landmark animal rights case, the High Court there ruled that birds can no longer be kept in cages.
The judges asserted that birds have a fundamental right to live with dignity and be free.
Incredible. If only we humans had the same fundamental right.
Many of us come from a country that claims to be free.
We grow up singing songs about our freedom, and we are told by our governments that evil men in caves hate us because we are so free.
This is powerful propaganda that starts practically from birth and stays with us for our entire lives.
Even Hollywood does its part with heroic action movies portraying the homeland as strong and free, with evil villains who invariably have foreign accents.
But it’s all a ruse.
Most of us don’t even have the most basic freedom to choose what we can / cannot put in our own bodies, or decide how to educate our children.
The volume of rules, regulations, and laws is so vast now that you can hardly breathe without committing a crime.
And when they’re not busy confiscating private property through ‘civil asset forfeiture’ or shooting defenseless citizens, police now drive around shutting down children’s lemonade stands for failing to have the appropriate permit.
Just this morning the US government’s publication of all the new rules, laws, and regulations totaled 313 pages.
And that’s just for today. Tomorrow there will be more.
Each of these new rules covers the most ridiculous topics– like regulating the way that dishwashers can be sold.
I’m sure we can’t even begin to imagine how horrifying life would be with a rogue dishwasher salesman on the loose.
And many of them come with severe penalties for non-compliance. You can’t even apply for a passport in the Land of the Free anymore without being threatened with fines and imprisonment.
That’s not freedom. Not even close.
Nowhere is this more clear than with the USA PATRIOT Act, the freedom-destroying law from 2001 that authorized all sorts of unconstitutional government powers.
Some of the worst provisions from the USA PATRIOT Act are set to expire this weekend.
But the Obama administration doesn’t want that. And they’ve channeled their inner-Cheney to roll out the same fear-mongering tactics that got this law passed 14 years ago.
Without sweeping powers to spy on Americans, the administration claims that the country would be left utterly defenseless against terrorists.
They have suggested that any dissent to the provisions is “playing national security Russian roulette”, and that the opposition will be blamed *when* there’s another terrorist attack in America.
What’s incredible is how many people believe them… how many people are so afraid of the boogeyman that they support extending the most destructive legislation of their time.
This was a huge litmus test for liberty in America. And I’m dismayed at how little people seem to care about privacy and freedom anymore.
Across the Atlantic, things aren’t looking much better.
In the UK, Prime Minister David Cameron recently stated:
“For too long, we have been a passively tolerant society, saying to our citizens: as long as you obey the law, we will leave you alone.”
Apparently leaving law-abiding citizens alone is being ‘too tolerant’.
Cameron then unveiled a number of new measures to combat “extremism”, including putting people on a government watch list to have their Tweets approved by the police before being posted.
We’re no longer talking about actual terrorist activity, but so-called extremist thought.
It took 31 years, but it appears that the origins of 1984 are finally upon us. It’s happening all across the West at an alarming pace, and people are willing to allow it.
That’s the funny thing about freedom.
True freedom means that you are free to be an idiot. That people are free to make the greatest mistake of all and trade their liberty for security.
And that’s their choice. But they’re not free to trade mine.
What I do with my liberty is my choice. Not anyone else’s. And I have no desire to trade it away for excessive government power masquerading as fake security.
Each of us has that choice.
Unfortunately most people in the West are caged birds. It might be a nice cage with plenty of Starbucks and Bed, Bath, and Beyond megastores.
But it’s a cage… filled with clueless birds chirping away about how free they are.
The truth is that there’s still freedom to be found in the world. No one is going to give it to you. You have to break your own chains, seek it out, and plan for it.
But it’s there. It’s still possible to deliberately live free.
So if you’re one of the few people who still cares about personal liberty and living with dignity, never forget that the cage door is wide open for anyone paying attention.
And that you can fly.
May 27, 2015
It seems strange that a complete accident of birth has such a massive impact on someone’s life.
We don’t get to control where we’re born. It’s a fluke really. Yet as soon as we come into this world a particular nationality is thrust upon us like a birthmark that stays with us for life.
Our nationality dictates so many things throughout our life.
It might mean that we’re required to serve in the military– to go fight and die in some foreign land at the behest of an insensitive, out of touch politician.
It might mean that we’re required to pay an ever increasing portion of our income to finance government largess that we don’t agree with at all.
It can also substantially restrict the places we can go and travel in this world.
That last one is a major issue, because travel is a huge opportunity.
The world is a massive place. It’s gorgeous and there’s so much to explore. Anyone who ever says it’s a small world clearly never spent 26 hours on a plane trying to get to Palau.
There are so many opportunities and so many amazing people to meet that it’s only possible to capture the full human experience through travel.
Yet if you happen to be born on a particular piece of dirt, your travel opportunities are limited.
United States citizens, for example, have a lot of latitude in terms of where they can go. Though there are still a lot of restrictions.
Americans need a visa to go to a number of countries, including Russia, China, and several countries in South America.
If you’re from Ukraine, on the other hand, you can travel to Russia without a visa. However the vast majority of the world is off-limits unless you first jump through a number of administrative hoops.
Representatives from the European Union recently closed out a summit in Riga to decide the future of EU visa policy with respect to Ukraine.
Once again, Ukraine was denied visa-free access to the EU, proving that “European support” for Ukraine against Russia is just hot air and empty promises.
There are, however, 19 other countries, which will be joining the EU visa-free list as of July 1, 2015. They were officially approved late last year and reaffirmed at the summit.
They are: Colombia, Peru, Dominica, St. Lucia, Grenada, St. Vincent & the Grenadines, Trinidad & Tobago, UAE, Marshall Islands, Kiribati, Nauru, Palau, Micronesia, Samoa, Solomon Islands, East Timor, Tonga, Tuvalu, and Vanuatu.
The thing that’s interesting about nationalities is that even though we’re born with one, you don’t have to live your entire life with that single option.
It is possible to obtain citizenship and a passport from another country. This means more options to travel and more options to live and work somewhere else should you want.
Panama is a great example.
There’s still an easy and inexpensive process to obtain residency in Panama, and in 5-years time you’ll be able to apply for naturalization, and then a passport.
Of the 19 countries that join the EU visa-free list this July, both Grenada and Dominica have “economic citizenship” programs where you can make a low six-figure investment in the country in exchange for citizenship.
Colombia and Peru are two places where you can become a legal resident and apply for citizenship in 2-5 years.
This can be very cost-effective, as in Colombia it can cost less than $1,000 to obtain residency, including legal assistance.
Bottom line– there are always options. You don’t have to go your entire life being restricted by something that was an accident of birth.
Having a second passport means having more freedom and more possibilities.
So, finding expedited or cost effective ways to obtaining one is a great tool and insurance policy for anyone to consider.
May 26, 2015
Of all the peculiarities about human nature, one of the most interesting in my opinion is that we’re so resistant to change.
Humans simply don’t deal with it well. We tend to root. We find comfort in familiarity.
And, even when the familiar becomes unpleasant, we still put up with it. We prefer to suffer through something that we know rather than change things and risk the unknown.
This is why people stay in bad relationships. Or why they continue working for bosses they dislike at jobs they despise. It’s the fear of change.
But everyone… absolutely everyone… has a breaking point. It’s a point where the status quo becomes so uncomfortable, so painful, that we snap. And walk away.
It’s the same in finance. People stick with what they know, even if they have to endure a little pain and suffering.
Today’s current banking environment is the perfect example. In the US, interest rates for most bank accounts are so low that they fail to keep up with inflation.
You are doing very well if you can generate a whopping 0.5% interest. In Canada rates can be a bit higher.
But when you compare these rates to even the official rates of inflation, it’s clear that savers are guaranteed to lose money.
In Europe it’s even worse. Interest rates at many banks are negative… so savers are actually paying the banks.
In theory there’s nothing wrong with paying your banker, presuming that they’re providing a real service.
Traditionally, banks were no different than a secure storage facility: depositors would pay a fee in exchange for the bank safeguarding their savings.
These days a lot of people might pay 50 bucks a month at a U-Store-It place to store $10,000 worth of junk. So why not pay a small fee for a banker to store $10,000 worth of cash?
The reason is that banks don’t operate like a storage facility.
It’s not like the proprietor of the U-Store-It is loaning out your sofa to make a few bucks on the side. If he were, it would be called fraud, and he’d go to jail for it.
Banks, on the other hand, are actually ENCOURAGED to take your hard earned savings and make a few extra bucks on the side.
In fact they have a history of making often absurd loans and wild, overleveraged bets using your money. Not theirs.
So just consider how insulting this is to actually to pay them interest; paying for the privilege of them gambling with your savings. It’s obscene.
But like I said, we all have a breaking point. And there will reach a level where rates get so low (or negative) that no rational person would continue holding money at a bank.
Why bother? You could just withdraw most of your balance, then pay a small fee for a safety deposit box that you stuff full of cash. Cheaper. Easier. Better.
Cash in your hand might pay 0% interest… but at least it doesn’t cost you.
But there’s a huge problem with this approach: there’s very little physical cash in the system.
According to the Federal Reserve, the amount of physical US currency in circulation is about $1.3 trillion. Yet the amount of “M2” money supply is nearly ten times that amount.
So just imagine if even 10% of people hit their breaking points and withdrew their money in cash– there wouldn’t be enough cash in the system to support this demand. And the banks would subsequently collapse.
If governments have proven anything to us over the last seven years, it is that they will do anything to keep the banks from going down.
This is a major reason why they’re trying to get rid of cash, and in some cases even criminalize it under the ridiculous auspices of the war on terror.
In the US, some of the more prevalent names in finance have started calling for an outright ban of cash, including a prominent economist from Citigroup.
(This is a rather convenient position for Citigroup.)
Greece is another great example– they’ve already implemented a tax on cash withdrawals and wire transfers. And further restrictions will inevitably follow.
These measures are all different forms of capital controls, designed to prevent you from taking your money away from such a destructive system.
In fact, I expect the next round of capital controls will be designed to protect the banks… from you.
When a government is bankrupt, the central bank is nearly insolvent, the banking system is illiquid, and an entire population suffers from interest rates that are either negative or below the rate of inflation, capital controls are a foregone conclusion.
They’ll hit just as soon as enough people reach their breaking points… when they say ‘enough is enough’ and they take their money out of the banking system.
Governments have done it before: they’ll declare a ‘bank holiday’ and then impose some sort of freeze on withdrawals. Just like we saw in Cyprus in 2013. Or the US in 1933.
The data and history are very clear on what will likely happen. We just can’t pinpoint the date.
Very few people will guess correctly and withdraw their cash the day before capital controls are imposed.
That’s why it makes sense to take certain steps now.
Consider holding some physical cash, including some healthier currencies like the Swiss franc or Singapore dollar, as well as precious metals.
More importantly, consider moving a portion of your savings to a rainy day fund at a well-capitalized bank overseas in a jurisdiction that isn’t bankrupt.
After all, it’s hard to imagine that you’ll be worse off for having some savings at a strong, healthy bank that actually pays a reasonable rate of return.
May 25, 2015
Historian Will Durant once wrote “in the last 3421 years of recorded history only 268 have seen no war.”
This is astounding. Warfare is constantly with us, often for the most absurd reasons.
These days we’re told that the War on Terror makes us more free.
We’re programed on days like Memorial Day to sing songs about our freedom and to thank the people in uniform for making us more free.
The question I would respectfully submit is, do you feel more free today than you did 5, 10, 20 years ago?
We now live in an era of unprecedented government intrusion.
Senior citizens are thrown in jail for failing to file disclosure forms.
Spy agencies arrogantly engage in illegal surveillance on their own citizens.
And excessive force is so commonplace it barely registers as newsworthy any more.
Curiously a number of polls from 2013 and 2014, including Gallup and the Washington Post, actually show that more people are afraid of the government than of terrorism itself.
This isn’t freedom. And it’s a complete myth that soldiers fight and die in the name of freedom anymore.
Warfare today means that a few people at the top of the military industrial complex, banking, and oil services companies become extremely rich. And everyone else pays the price.
The price for everyday citizens is having less freedom than before.
The price for future generations is inheriting a tremendous war debt.
And the price for soldiers themselves is coming home wounded, limbless, or not at all.
In today’s podcast, I introduce you to Joe, one of those recent veterans who lost his right leg.
I recently met him while in the US, and he has an unbelievable story.
Despite losing a limb in combat, Joe can’t get a new leg because the FDA won’t approve the procedure that he needs.
It’s called osseointegration. And the FDA thinks that it might be too risky for Joe.
Risky. Kind of like being in a combat zone in a country that never should have been invaded to begin with for reasons that were all lies, all to support a war that only makes the country less free.
So since the government doesn’t think that Joe is responsible enough to make his own decisions, he now has to go overseas and pay tens of thousands of dollars out of his own pocket.
Joe doesn’t have the money; so a family member set up a donation page on the Internet trying to get help. (I’m not publishing the link here because I’m going to take care of it myself.)
It’s amazing when you think about it– a combat veteran who lost a leg supposedly fighting for ‘freedom’ can’t have the medical procedure he needs because a destructive government bureaucracy.
That’s what freedom means today in America. And nobody’s fighting for it.
Soldiers are off risking life and limb for oil companies, banks, and defense contractors. And citizens are distracted with bread and circuses.
All the while, government power continues to expand at the expense of the individual.
So today as we’re told to remember the fallen, we might also take a moment to remember the freedom we once had.
You can listen in on today’s Podcast, and learn more about Joe’s unbelievable story, here:
May 21, 2015
Yesterday it was reported that some of the largest banks in the world were slammed with yet another stiff fine by the United States government.
This time it amounted to roughly $5.7 billion, after the likes of JPMorgan, Barclays, Citigroup and RBS admitted to criminal wrongdoing in years of manipulating currency markets.
The word “crime” is derived from the Latin word crimen. In their day, Romans were incredibly creative at dealing with their own criminals: crucifixion, torture, beheadings, were all commonplace. Some people were put into sacks with wild animals and then thrown into the river.
The bankers being charged now had spent years abusing the public trust.
They traded against their own customers for personal gain; they used sensitive information entrusted to them to manipulate markets; and now, all they’re going to get is a fine and a slap on the wrist.
It’s unlikely that anybody is going to go to jail, or that any individual will be held accountable—except for potentially a token scapegoat.
What’s even more interesting is that after defrauding the public for so many years, the fine that they pay goes to the United States government.
How much of that $5.7 billion did you get? Because I didn’t get any, and I’m not going to hold my breath waiting for my share.
It’s so ironic that after years of admitted criminal wrongdoing, the banks stroke a check to the government that will ultimately end up right back in their pockets.
Remember, when the US government borrows money to indebt future generations, the Federal Reserve then conjures money out of thin air to loan to the banks for free.
The banks then turn around and—through the “primary dealer system”—loan that money to the US government at interest.
The US federal government paid $430 billion just in interest last year on its prodigious debt.
Commercial banks own a huge chunk of that debt, and thus earn a huge chunk of that interest. So rather bizarrely, when the government writes them their interest checks, the bankers will get their entire fine right back.
Or they’ll get it when the taxpayers have to step in and bail them out yet again.
Even if neither of those things happen, Uncle Sam is would still blow this money on more bombs, more drones, and more destructive wars overseas.
How did such abuses of the public become tolerable? I invite you to click below to tune in to today’s podcast, in which I discuss this complex, corrupt, and self-serving system.
May 20, 2015
En route to Denver
While I was in Mexico for our Global Offshore and Investment Summit in Cancun last month, I was approached by Forbes Mexico for an interview on some of the key trends in the global economy as well as internationalization strategies for investors.
You can read the full article here in Spanish, and below I’m reprinting one of the questions on precious metals.
This is understandably a topic that seems to be on many people’s minds these days.
They have seen the writing on the wall—the unsustainability of the current paper money system—but don’t know what will happen next.
Thus, the question of when and how much one should invest in gold and silver is one of the questions I’m asked most frequently.
No one can predict exactly what will rise up after the collapse of the current monetary system, but here is my take on how you can do your best to prepare yourself no matter what happens—
Tell us your thoughts on gold and silver. Is it important for investors to have them in their portfolio? If so, why?
I don’t think that gold is a good fit for a portfolio. When we think about a portfolio, a portfolio is what we hope to achieve an investment return on. But gold is not an investment.
The idea behind gold is that it is a form of savings, albeit a very long-term savings.
It’s a form of savings that can’t be conjured out of thin air by central bankers’ quantitative easing program. Or printed by a government’s printing press.
And it’s consistently shown to maintain its purchasing power over time.
Thus gold is an anti-currency. It’s a kind of asset that you own because you don’t have confidence in the paper currency issued by governments and central bankers.
So with that in mind, the idea of trading in your paper currency for gold, hoping to trade it back for more paper currency at a later date misses the point entirely.
That said—I think that everybody should consider owning precious metals. Again, not as an investment or speculation, but as a form of savings that exists outside of the conventional system.
Sometimes people buy gold and silver and then they fret over the daily fluctuations in the price. They lay awake at night worrying about whether gold is going to go below a thousand dollar or below whatever level.
I think this is a sign that you probably have too much gold. If you’re worried about it, then you’re probably over exposed.
If you have an app on your phone telling you the gold price and you’re constantly looking at it, then that’s your instinct telling you to lighten up.
Rule number one is to be comfortable with your exposure. That means having a gold position that you are comfortable with, that you can lock away and not even think about how the price is moving.
Then you can go on to sleep well, knowing that you have some real savings that can stand the test of time.
May 15, 2015
New York City
Remember all that talk about “taper” last year?
After years of conjuring trillions of dollars out of thin air and rapidly expanding its balance sheet, the Federal Reserve promised to end its unprecedented ‘Quantitative Easing’ (QE) programs.
In total the Fed’s balance sheet exploded from $800 billion to $4.5 trillion between 2008 and 2014. And this wasn’t good news.
A huge balance sheet means that the Fed is overleveraged. It means that they have only a tiny margin of safety in reserve in case there are serious problems in the financial system.
Back in 2008, major banks (like Lehman Brothers, Wachovia, etc.) also had massive balance sheets that were overleveraged, and almost no margin of safety.
When things started to go bad, they all went bust.
So as the Fed spent six years printing money and expanding its balance sheet, they were taking on a substantial amount of risk.
Then in 2014 it supposedly came to an end.
Both Janet Yellen and her predecessor Ben Bernanke promised the world that the Fed would ‘taper’, meaning they would reduce and ultimately eliminate the QE bond-buying programs.
By October, QE officially ended. And the dollar started to strengthen as a result.
But it turns out this was a load of crap.
Every Thursday the Fed publishes its balance sheet for anyone who cares to pay attention, and I track this religiously.
Yesterday’s report showed that last week, the Fed posted a massive increase to its balance sheet– $28.5 billion.
(Most of the increase came from buying mortgage-backed securities– you remember, the ‘toxic’ asset class that blew up in 2008…)
With this huge addition, the Fed’s balance sheet is once again back over $4.5 trillion… within 0.5% of its all-time high.
This is the exact opposite of ‘tapered’. It’s bloated. And dangerous.
The Fed has almost no margin of safety. And if you marked to market the value of the Fed’s assets, they would most likely be insolvent.
Think about the big picture here–
Yesterday I told you how the FDIC, in its own words, doesn’t think they’re prepared for the next financial crisis. And that major US banks often have razor-thin levels of liquidity.
Now we see the Federal Reserve, once again, has no margin of safety and is effectively insolvent.
And all of this is backed up by the US government that, based on its own financial statements, has a negative equity of MINUS $18 trillion.
This is hardly inspiring.
Most people been brought up to believe that banks are safe. The financial system is safe. The US dollar is safe.
But the objective data here is overwhelming: this system is not safe.
Nobody has a crystal ball… least of all me. It’s possible that things could continue like this for years. Or it could all come crashing down tomorrow. No one knows.
But in the face of so much risk, it certainly makes sense to reduce your exposure.
Hold some assets outside of this system. Own some real assets, whether gold held abroad, overseas property, or a productive business.
Consider moving a portion of your savings to a strong bank in a solvent country abroad.
Bottom line: diversify.
Don’t hold all of your eggs in one basket, especially when that basket is a nation with an insolvent government, insolvent central bank, and overleveraged financial system.
May 14, 2015
New York, USA
We have entered a most bizarre and unprecedented age in the financial system where there’s risk in just about everything that we do.
Indiscriminately investing in stocks at their all-time highs carries enormous risk, and financial history is unkind to people who fail to learn that lesson.
To buy bonds, on the other hand, means loaning money to insolvent governments at rates that are either below inflation or even outright negative.
Real estate markets in many parts of the world are right back at the frothy highs they experienced prior to the last financial crisis.
And if Pablo Picasso is any indicator, even an asset class like fine art is booming at all-time highs.
The normal approach in an era of so much financial risk would be to do nothing; gather your capital, sit on the sidelines, and wait for a crash.
Yet now the act of doing nothing and holding your money in a bank also brings an orgy of risk.
Most banks in the West are extremely illiquid, and are in many cases insolvent. But few people ever give thought to the financial condition of their bank.
In the United States, for example, people are indoctrinated almost from birth that banks are safe and somehow infallible.
Banks inter themselves in the most expensive locations with ornate lobbies and cornerstones that proudly inform the world they are backed by the full faith and credit of the United States government.
But that barely counts given that the US government is itself insolvent with a negative equity of minus $17.7 trillion according to their own financial statements.
Then there’s the FDIC, which insures deposits in the US banking system.
In its 2014 annual report the FDIC itself points out that its whole insurance fund constitutes just a fraction of a percent of all deposits in the system, and that its ‘reserve ratio’ is just 1.01%.
With a reserve so low, the FDIC not only lacks any meaningful teeth to insure the system, but it actually fails to meet the minimum level that is required by law.
This quasi-government regulatory agency fails to meet the government regulatory requirement and is in worse shape than the banks that it’s supposed to insure.
Perhaps even more important, the FDIC doesn’t expect to meet this statutory minimum until at least 2020.
To me this begs an obvious question. Do we really have another 5+ years before there’s another major crisis in the US banking system?
Most US banks today are just as illiquid as they were before the crisis, holding just a tiny portion of deposits in reserve and gambling away the rest.
And the most popular place that they invest their customers’ deposits today is exactly the same as in 2008: mortgage-backed securities.
Curiously, the FDIC’s reserves today are actually far lower than they were prior to the crisis.
On top of that, back then the FDIC only insured $100,000 worth of your deposits per financial institution. Now it’s $250,000.
So essentially the FDIC is on the hook to pay more than twice as much money to depositors. Yet it has a lower reserve to support an even larger system that is up to the same precarious practices as before.
This doesn’t exactly inspire confidence.
But don’t take my word for it.
In a recent announcement, the FDIC tells us how banks have grown far larger and even more complex since 2008, and that “[s]uch trends have not only continued, they accelerated as a result of the crisis.”
The FDIC goes on to suggest that its current tools and business model are “not sufficient to mitigate the complexities of large institution failures.”
But even though they’re not equipped to handle it, they’re not entirely sure what to do.
That’s why the FDIC is “seeking comment on what additional regulatory action should be taken. . .”
In other words, they’re asking the public for suggestions about how to handle a major US bank failure. Hardly encouraging.
Bottom line– your bank is potentially in the same boat it was in 2008. The FDIC is worse off. And the federal government is totally insolvent.
These are not risks you should assume away. Give great care to the decision of where you hold your savings.
And definitely look abroad.
There’s an entire laundry list of offshore banks that are in great financial condition and located in strong, stable foreign countries.
It’s hard to imagine that you’ll be worse off for holding a portion of your savings in a country with no debt at a healthy bank that’s 5x more capitalized and 10x more liquid than where you currently bank.
May 13, 2015
En route to New York
One of the many experiences uniquely endured by Americans is having to confess your sins once a year to the federal government.
Specifically, Uncle Sam requires most individuals with foreign bank and financial accounts to fess up and disclose on an annual basis.
In fact, these offshore account disclosures must be submitted not once, not twice, but three times, and sent to two different departments.
This is classic government thinking.
For anyone with a foreign financial account, the first form you need to know about is Schedule B of your IRS form 1040.
In fairness, this one’s pretty easy. You check the appropriate boxes in part III of the form and list the foreign countries where you hold financial accounts.
The second is the relatively new IRS form 8938, which came out of the 2010 FATCA legislation (often misspelled as FACTA).
This one is more comprehensive; you’ll need to provide more details on a wider variety of foreign financial assets in addition to bank and brokerage accounts.
For example, shares of private foreign companies, foreign partnership interests, and foreign hedge funds must be reported on form 8938.
Both of these two forms are filed with your taxes to the IRS each year, typically by April 15th.
The last one is FinCEN 114– the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR. This must be filed by June 30th each year.
The FBAR is required by any US person or domestic entity if the total value of their foreign financial accounts exceeded $10,000 at any time during the previous calendar year.
Example: Let’s say last year you had a bank account in Hong Kong whose maximum value during the year peaked at $15,000.
Last year you also had a Canadian brokerage account whose maximum value was $7,500, and some precious metals at GoldMoney which maxed out at $9,000.
ALL of the accounts would need to be reported on the FBAR by June 30, 2015.
(Note- if any of your accounts were denominated in a foreign currency, the government provides an official FBAR exchange rate to convert to US dollars.)
The FBAR is submitted electronically, and you now have two options to file.
The first option is to register at a government website and fill out the form online.
The second way is even easier– it’s a brand new option they just released a few days ago.
Now you can simply download this form, fill it out at your leisure, and upload it whenever you’re ready.
Remember, though, the FBAR is not submitted to the IRS.
Even though the information is similar to the other forms, the FBAR goes to an entirely different department– the Financial Crimes Enforcement Network.
This has always struck me as bizarre– even though it’s perfectly legal to hold money abroad, it must be reported to an agency that specializes in financial crimes.
It really gives you a sense of how the US government views people who don’t have confidence in their failed system.
Naturally, they do treat it as a crime if you don’t file the form.
The severity of the penalties is absurd. They’ve thrown senior citizens in jail and levied enormous fines, simply for failing to file.
And it gets worse every year. This is one of the greatest indicators of how bankrupt and desperate the US government is becoming.
You don’t see wealthy nations doing this sort of thing. Hong Kong doesn’t incarcerate its residents for some innocuous financial oversight.
Only broke countries have the need to threaten people with imprisonment and force them to disclose the precise whereabouts of their savings.
Yet despite the reporting inconvenience, moving at least a portion of your funds offshore is one of the best financial insurance policies there is, particularly when there’s so much risk in the system.
Tomorrow I’ll share some official data to explain why.
May 12, 2015
A few days ago I was having lunch with some executives who run one of the largest fruit companies in the world.
The company is Chilean, and as the guys are all local, they were curious about my take on Chile as a foreigner.
I told them that Chile is far from perfect. But there’s one very special reason why I spend so much time here.
It’s not some cliché that Chile is the most beautiful place in the world.
If there’s one thing that I’ve learned in traveling to 116 countries across all 7 continents, it’s that there are countless beautiful places in the world.
Chile is certainly one of them.
In the north of Chile lies the driest desert in the world with its absolutely majestic night skies.
I’ve been to some of the darkest jungles in the middle of nowhere in Africa, where the stars pale in comparison to northern Chile.
Moving further south, Chile very quickly turns into the Tuscan countryside. Followed by the Swiss/Austrian countryside. Followed by the surreal vistas of Patagonia. And then finally Antarctica.
All of this is part of the same country.
What makes Chile so special is not its exceptional climate either.
The Koppen Climate Classification for Central Chile is less formally known as the “Mediterranean climate”, which means four beautiful, mild seasons.
This is climate classification is exceedingly rare and only exists in a handful of countries in the world.
Nor is the best thing about Chile the favorable lifestyle and abundant opportunities here.
The cost of living is reasonable, and Santiago in particular is quite safe, modern, and advanced.
From my flat in Santiago, it’s roughly an hour’s drive to both the ski slopes and the Pacific Ocean.
Economically, there’s tremendous business, investment, and even employment opportunity here.
Chile is rapidly becoming a high-income nation; there’s a robust and growing middle-class with lots of disposable income. Yet at the same time there’s a noticeable shortage of many high quality products and services.
You’d be amazed that even something as simple as a high-quality restaurant could be pretty innovative down here.
But while all of those aspects of Chile are really nice, there’s one more thing that makes this place really special:
This is the easiest place on the planet to obtain residency for any nationality. And as an entrepreneur, this is an unparalleled benefit.
You can form a local business here in a day. And with your new company, the first 25 employees can all be foreigners.
If you want to open an Indian restaurant for example, you could easily bring five or six chefs directly from India.
If you want top-quality Spanish-speaking servers, you can bring another group from Cancún or Nicaragua.
Or say you’re running an IT business and want to bring a team of programmers from Russia– you can do that too.
And the process of obtaining legal residency for them is incredibly simple and cost effective.
I’ve done it myself– we have people here from all over the world working at our various businesses.
I relish the freedom to hire the best people in the world as opposed to having to hire people that some government regulation force me to choose from.
Being completely unconstrained by the local labor market means that I’m not being held back by talent.
Whether you’re an entrepreneur and investor, or a foreigner looking for a nice, safe place to live, this is a huge benefit.
And here in Chile is the only place in the world where it’s so incredibly simple.
May 11, 2015
Under the republic of Ancient Rome, to be a citizen was an unparalleled status that people throughout the entire known world aspired to achieve.
Roman citizens were granted very special privileges and benefits. The right to vote. The right to stand for election. The right to engage in commerce.
They had the right to settle disputes in an impartial court.
Roman citizens were even exempt from the death penalty, except in cases of treason, where they were still afforded a fair trial.
But citizenship is ultimately a contract. And like all contracts, citizenship has both costs and benefits.
It also changes over time as the stronger party sets aside or ‘reinterprets’ parts of the contract.
As the Roman republic descended into imperial chaos, the costs of citizenship began to outweigh the benefits… many of which disappeared altogether.
Elections became obviously rigged, and bribery was rampant. So the right to vote wasn’t exactly much of a benefit.
Cicero tells us in 54 BC that so much money had been borrowed to rig Roman elections that interest rates had temporarily doubled.
By the 4th century, Romans were being executed simply for violating Emperor Diocletian’s infamous wage and price controls.
And in addition to the rapidly deteriorating benefits, the cost of Roman citizenship was constantly increasing through higher taxes and a devalued currency.
We find the same trend unfolding today in the Land of the Free.
US citizenship obviously still carries significant benefit. But for many people the costs are already far too high… and the benefits are disappearing quickly.
Elections have become entertaining formalities where the highest offices are passed around among political dynasties.
The right to engage in commerce has been smothered by an army of bureaucrats and regulators.
US citizens are being body scanned, spied upon, and in extreme cases, even assassinated by drone strike.
And their once-prized civil liberties have become a punch line of the police state.
This is tough to stomach.
Sure, the US is still a nice place to be. It’s generally clean, safe, and well-developed.
But it’s often more gut-wrenching to live in once-great nation in terminal decline than it is to deal with the inconveniences of a less-developed country on the rise.
Panama is a great example. It’s a middle-income country full of great opportunity and growth. It’s clearly a nation on the rise. And a very nice place to be.
Greece might technically have a higher GDP per capita and more developed infrastructure. But the trend between each of these two places is pretty obvious.
In Panama there are still a lot of growing pains like any developing country.
But there’s an overwhelming sense of optimism. Panamanians know where they’re going: Forward. Higher. Better.
Conversely, it’s viscerally painful to feel trapped in a former paradise stricken with terminal corruption and bankruptcy. And to feel like there’s nothing you can do about it.
And you’re right. There’s nothing you can do about your government.
You can’t bail out the US government. Or the Japanese government. Or the French government. Or anyone else.
These trends are unfolding. It’s happening. Free countries are becoming less free. And rich countries are going broke.
But what you can control is what happens to you.
We all have a breaking point where the costs of citizenship outweigh the benefits.
And when people reach their breaking points, they deal with it in different ways.
Some express their frustration through violence as we’ve seen recently in Baltimore– a classic case of cost exceeding benefit.
Others take the ultimate step of divorcing themselves from their governments.
Last quarter, in fact, 1,335 people in the Land of the Free renounced their US citizenship. This was a record number. Again.
But these aren’t the only options. Violence and renunciation may seem extreme. But they are not exclusive.
Today, all the tools and resources exist to take back your freedom, reduce the costs, and reclaim the benefits, without having to resort to extremes.
I’ll talk about some of these options in the coming days.
May 7, 2015
I generally try to record a podcast each week, but I fell off the wagon recently because of the big event we just hosted in Cancun.
I thought there would be no better way to get back on track than to ask famed investor Dr. Marc Faber to join me for today’s episode.
If you haven’t heard of Marc Faber, he’s a professional investor who runs the site GloomBoomDoom.com, and was probably most aptly described by the Sunday Times as “a blunt-spoken Swiss who says the things nobody wants to hear…”
(to which I would add, “and happen to be entirely true.”)
Marc was kind enough to fly halfway across the planet to come to our Global Offshore and Investment Summit two weeks ago.
And now that we’re both back in our respective corners of the world, I called him up for a quick interview.
As usual, his insights were spot-on.
We talked about the distinct possibility of wealth taxes and capital controls, which in many respect are already with us.
The ongoing and dangerously escalating war on cash is nothing more than a form of capital controls– a despicable tactic to trap people’s savings in an failing system.
That’s one of the biggest reasons why Marc is an advocate for owning precious metals and diversifying internationally.
This is a centuries-old tactic. The idea of keeping a portion of your assets abroad is nearly as old as the concept of government itself.
And it used to be something only available to the mega-rich.
But in this day and age the tactics are open to everyone.
We can now move money abroad with the click of a mouse.
We can establish foreign accounts without leaving town… and store precious metals overseas while sitting at home in our underwear.
And these steps are important. When you consider all the different risks out there, it’s incredibly foolish to keep everything you’ve worked for, and everything you’ll achieve in the future, in the hands of a desperate, bankrupt government.
Take a listen here:
May 7, 2015
Boris and Svetlana were simple farmers back in the old Soviet era.
They grew grapes on Russia’s bountiful Caspian coast, dried them in the sun, and sold raisins according to the quotas set by the committee.
Every year the Soviet Union’s Raisin Administrative Committee (RAC) would regulate production, often ordering farmers to destroy upwards of 40% of their crop in order to achieve some sort of bizarre, contrived equilibrium.
This adherence to the religion of central planning in the Soviet Union was so severe that even after the wall fell they couldn’t quite manage to divorce themselves from it.
In his book ‘The Company of Strangers,’ British economist Paul Seabright recounts a hilarious conversation he had just a few weeks after the breakup of the Soviet Union.
Seabright was speaking to the former director of bread production in St. Petersburg, who said:
“Please understand that we are keen to move towards a market system. But we need to understand the fundamental details of how such a system works. Tell me, for example: who is in charge of the supply of bread to the population of London?”
Seabright explained, of course, that no one is in charge of such things.
In the West we don’t have centrally planned committees to regulate the supply of bread, raisin, milk, etc.
One would think.
But guess again, comrades.
Because Boris and Svetlana are actually Marvin and Laura Horne of Kerman, California.
And yes, the Raisin Administrative Committee really, truly does exist in the Land of the Free. I am not making this up.
This happens year after year: RAC bureaucrats centrally plan precisely how many raisins will be sold in the market.
All raisins exceeding that quota are confiscated and stockpiled by RAC, which in some years has amounted to as much as 47% of US raisin production.
Aside from the unconscionable conclusion that this constitutes outright theft, it also means that American consumers are paying more for groceries than they should be.
Naturally, raisins aren’t the only crops targeted by bureaucrats.
There’s the Potato Administrative Committee, Citrus Administrative Committee, and oodles of other New Deal-era committees to set food production quotas.
Marvin and Laura Horne really did take a stand.
About a decade ago they bucked the quota and took the bold step of selling all the raisins that they had grown.
And they really have been punished severely for it. The US Department of Agriculture assessed a $695,226.92 fine against the Hornes, not counting penalties, interest, and legal fees.
The Hornes took the matter to court. And believe it or not, this case has actually reached the Supreme Court.
But even there at the Pantheon of American Justice, the issue is still hotly contested.
It’s incredible that even the nation’s most enlightened legal scholars can’t unanimously see the absurdity (and unconstitutionality) of this system.
But it only serves as further proof of how far things have fallen in the Land of the Free.
Congress is there to create the most absurd, destructive, and invasive laws imaginable.
Executive agencies are standing by to cram them down your throat at gunpoint.
And the courts can’t even recognize when theft is theft.
Under such a heavy yoke, I would respectfully submit to the Hornes that there are a lot of places in the world to grow raisins.
Or run a business. Raise your children in the way that you want. Choose what you can/cannot put in your own body.
Or just about anything else.
And do so with much more freedom and comfort, never again having to worry about Big Brother, the national debt, or the next destructive regulation to come your way.
May 5, 2015
Sovereign Valley Farm, Chile
Well, it was bound to happen sooner or later.
Our beloved amigos at the US Financial Crimes Enforcement Network (FinCEN), have just issued the first-ever ‘civil enforcement action’ against a virtual currency.
The offending criminal mastermind in this case? Ripple Labs.
If you’re not familiar, Ripple is a virtual currency platform that was once the darling of Silicon Valley, attracting top VC firms like Google Ventures and Andreessen Horowitz.
Ripple’s technology allows users to conduct financial transactions with one another — sending and receiving payments in cryptocurrencies like Bitcoin, as well as fiat currency.
Imagine Bitcoin meets Paypal… and you have the basic idea.
As part of its technology, the parent company Ripple Labs also created a native virtual currency called ‘XRP’, which is the second largest in the world after Bitcoin when measured by market capitalization.
Because of all of these features, Ripple Labs qualifies as a ‘money service business (MSB)’ according to FinCEN… which makes them subject to all sorts of regulations.
At the top of the list is the Bank Secrecy Act (BSA), which, contrary to its name, requires banks and MSBs to betray their customers’ financial secrets to the US government.
Specifically, the BSA mandates that all banks and MSBs file ‘suspicious activity reports’ if they “know, suspect, or have reason to suspect” that a transaction of $2,000 or more is ‘suspicious’.
And in the age of the USA PATRIOT Act, suspicious transactions are BIG BUSINESS for Uncle Sam.
Last year a record 2.4 MILLION suspicious activity reports were filed. That’s a 40% increase from 2013’s record year of 1.7 million.
As you can imagine, Ripple Labs failed to register with FinCEN as an MSB, nor did it submit suspicious activity reports.
In its complaint, FinCEN describes several of the oooooh-so-nefarious violations.
According to FinCEN, “In January 2014, a Malaysian-based customer sought to purchase XRP from [Ripple Labs], indicating that he wanted to use a personal bank account for a business purpose.”
HOLY JIHAD BATMAN!!!! Someone wanted to use a personal bank account for business purposes?!?! NUKE THE SON OF A BITCH!
I mean, seriously. This is the complete nonsense that keeps financial bureaucrats up at night: some guy in Malaysia wants to buy digital currency with his personal funds.
But what’s really wild is that Ripple actually DENIED the transaction. They just didn’t file the SAR.
So… even though Ripple didn’t actually ENGAGE in said ‘suspicious activity’, failing to file the SAR (with the appropriate TPS report cover sheet) was enough to land them in hot water.
End result — Ripple was dinged with a $700,000 fine.
Now, $700k is a pittance compared to the $9 BILLION that BNP Paribas was slammed with last year for doing business with countries that were former enemies-turned-BFFs of the US government — namely Cuba and Iran.
But it’s still a ridiculous penalty for having done nothing wrong.
Of course, it’s never about right or wrong. It’s about sending a message. And that’s exactly what FinCEN is doing.
By going after Ripple (a major player in the industry), FinCEN is trying to scare all the smaller players into ratting out their customers.
This, after all, is what desperate, bankrupt governments have done for millennia —
Step 1: Track down where everyone’s money is.
Step 2: Take it.
You don’t see rich, stable countries doing this sort of thing. In fact, the exact opposite.
An official from Hong Kong’s Treasury recently stated that: “the Government does not consider it necessary to introduce at the moment new legislation to regulate trading in such virtual commodities or prohibit people from participating in such activities.”
Night and day difference.
We’ll continue to see these steps in the US and in Europe. Tracking down virtual currency transactions. Banning cash. Anything they can do to keep your money trapped in the system where they can keep their eyes on it.
It’s all the more reason to move a portion of your savings out of that system and into somewhere safe.
May 5, 2015
[Editor’s note: This letter was written by Tim Price, editor of Price Value International and Director of Investment at PFP Wealth Management in the UK.]
There is one thing riskier than investing in a free market: investing in a rigged market when you think the central bank has your back.
At some point, the free market returns with a vengeance, like a coiled spring made out of pure risk. That time may be coming soon.
Last week, German government 10-year bond yields suddenly spiked from just 8 basis points to 37 basis points.
Now, a 29 basis point (0.29%) jump may not seem like much, but with yields so slender, a move of that magnitude is easily enough to put a few leveraged funds out of business.
Bonds have never been more expensive in human history, and yet their supply has never been higher.
10-year US Treasuries yield just 2.1%. 10-year UK Gilts yield 1.84%. 10-year German government bonds now yield 0.37%. And that bug-in-search-of-a-windshield 10-year Japanese bonds yield 0.32%.
Bloomberg’s William Pesek highlights the tortured logic plaguing Bank of Japan Governor Haruhiko Kuroda as he attempts to escape from the corner of the bond market he has painted himself into:
“[Japan] defies the basic tenets of economics for the nation with the largest total debt, largest ratio of geriatrics and low rates of immigration to have lower bond yields than countries like Singapore, Sweden or Switzerland.”
When one of the world’s government bond markets finally blows up (Japan still looks like the primary candidate, but stranger things have happened), economists will scratch their heads and wonder where it all went wrong.
Wiser souls will wonder how economists could ever have thought that money printing was the answer to anything.
In the introduction Schuettinger and Butler’s outstanding book Forty Centuries of Wage and Price Controls,” David Meiselman writes:
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
Quantitative easing is a squalid little lie. It appeals to economists with no grasp of history. It pretends that too much debt can be simply resolved through futile attempts at price controls and money printing.
The practical outcome of QE is that it turns the bond market into a no-go area for any rational investor.
We are now in the terminal stages of QE, during which the practical limitations of this fatuous and discredited policy are being revealed.
When you devalue money and distort the supposed risk-free rate, you devalue every aspect of the capital structure, and of society itself.
May 4, 2015
Sovereign Valley Farm, Chile
It was another time. Another era. Another superpower.
Great Britain’s was the largest economy in the world in 1873. And it showed.
The British pound dominated world trade and was the most widely used reserve currency on the planet.
And London was the undisputed epicenter of global finance.
There was more money in London, in fact, than in just about every other major financial center in the world combined.
Britain was clearly at the top of the world.
But in 1873, a financial reporter named Walter Bagehot published a book that shined a huge spotlight on some of this phony prosperity.
Bagehot was Editor-in-Chief of The Economist at the time. He was a brilliant finanical thinker, and the book, Lombard Street: A Description of the Money Market, was his masterpiece.
For example, the book describes how, even though the British banking system was the most widely used and powerful in the world, it was dangerously overleveraged:
“There was never so much borrowed money collected in the world as is now collected in London,” writes Bagehot.
He further shines a huge spotlight on the risks of illiquidity, describing how Britain’s largest banks only held a very small percentage of their customer’s funds in cash:
“[T]here is no country at present, and there never was any country before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in England.”
“[T]he amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it.”
In Bagehot’s day, banks invested or loaned out the vast majority their customers’ savings, only holding around 10% to 15% of deposits in reserve. Bagehot found this abysmally low.
Yet today some of the largest banks in the world hold as little as 3%. And debt levels have hit records never before seen in the history of the world.
Our system is even more leveraged and more indebted.
But the similarities don’t stop there.
Bagehot reminds readers of the spectacular collapse of banking house Overend, Gurney, and Co… sort of the Lehman Brothers of its day.
Overend had engaged in pitifully stupid behavior, run itself into insolvency, and was not bailed out by the government.
Overend failed in 1866, and it nearly dragged down the entire financial system with it.
It had been only seven years since that crisis when he wrote Lombard Street. But the major banks were right back to their same old reckless, irresponsible behavior. He writes:
“Even the great collapse of Overends, though it caused a panic, is beginning to be forgotten.”
Bagehot also blasts the central banking system (dominated by the Bank of England) which had effective control over the economy:
“All banks depend on the Bank of England, and all merchants depend on some bank.”
Of course, no one truly understood how that system worked. Everyone just had confidence that the central bankers were smart guys and absolutely would not fail:
“[F]ortunately or unfortunately, no one has any fear about the Bank of England. The English world at least believes that it will not, almost that it cannot, fail.”
“[N]o one in London ever dreams of questioning the credit of the Bank, and the Bank never dreams that its own credit is in danger.”
But as Bagehot points out, the data showed otherwise:
“Three times since 1844 [the Bank of England] has received assistance, and would have failed without it. In 1825, the entire concern almost suspended payment; in 1797, it actually did so.”
Clearly these central bankers weren’t particularly good at their jobs. Bagehot sums it up like this:
“[W]e have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty—who might be called ‘amateurs’. . .”
“But still there is a faith in the Bank, contrary to experience, and despising evidence.”
This is miraculously dim-witted– to assume the men behind the curtain are going to get it right, and to willfully ignore the objective evidence which shows:
- there is an unsustainble amount of debt in the system
- the banking system is dangerously illiquid and overleveraged
- banks are still engaged in the same risky behavior, 7 years after a major crisis
- the central bank has far too much control over the economy
- yet is run by amateurs
- and is itself is at risk of failing
Of course, it wasn’t too long after this that Britain was overtaken as the world’s #1 economy, military power, and reserve currency.
Whew. Sounds crazy. Good thing we learned those important lessons, and that our modern system is so much better.
April 30, 2015
En route from Mexico City, Mexico
I’m certainly a proponent of taking advantage of everything the world has to offer.
This includes looking for nice places all over the world. I love spending time in Thailand, Italy, Chile, Croatia, Brazil… But sometimes we forget what’s in our own backyard.
It’s been a couple of years since I’d traveled to Mexico, and I’m embarrassed to say that I’d forgotten how much I like it here.
The food is great, the weather is warm, people are friendly, the culture is vibrant, and it’s in many cases shockingly cheap.
More importantly it’s a place where you can exist without mother government trying to regulate every last aspect of your life—from what you put in your body to how you raise your children.
Of course Mexico today has a dark stigma of drug-related violence and police corruption hovering over it like a dark cloud.
In a way it’s like Colombia, another place I’ve visited recently.
Both countries are pictured as incredibly dangerous places that sensible people should avoid.
But that’s simply not the reality. And just like a good investment, Mexico and Colombia represent undervalued opportunities.
The stigma about violence and chaos sets prices low, so there are very solid opportunities to buy right now. Especially given how cheap both of their currencies are right now.
What’s great about Mexico is that it’s such a big country, so there are a lot of choices.
From Mérida to Monterrey, Guadalajara to Puerto Vallarta, Colima to San Miguel, there are dozens of great cities to choose from with inexpensive lifestyles and vibrant expat communities.
Mexico is an easy transition to living abroad, for both North Americans and Europeans.
There’s a lot of obvious influence that comes from the north, while at the same time from centuries of colonial European flavor. So it feels very familiar, while at the same time you can feel much more free.
In terms of investment opportunities; as an agriculture investor, I’m keenly observing the country as it positions itself to be a major exporter of high value crops.
Bottom line—whether you’re looking for a nice, warm, inexpensive place to relax or retire, thriving entrepreneurial hotspots, or attractive business and investment opportunities, Mexico is certainly a place to consider.
April 29, 2015
Mexico City, Mexico
Kim Dotcom is a giant in many senses of the word.
As the founder of file sharing website Mega Upload, he brazenly thumbed his nose at every international copyright law in existence.
He spent his fortune lavishly on the quintessential playboy lifestyle that most people only dream of, replete with Asian beauty queens and yacht parties.
But a few years ago the US federal government tried to put an end to it all, orchestrating a coalition of the willing to send paramilitary forces in an air assault invasion of Dotcom’s estate in New Zealand.
In the time since, he’s launched an even more secure version of a file-sharing site (Mega.co.nz), in which he and his staff have no knowledge of any files stored on their servers.
He’s also been locked in a multi-year court battle trying to get his assets back.
He just lost that battle, costing him a whopping $67 million.
This brings up a major point that few people ever think about until it’s too late—asset protection.
Most people don’t realize that there are dozens upon dozens of government agencies that can deprive you of your assets and freeze you out of your livelihood with just a single phone call.
No trial. No due process. Straight to execution.
Dotcom himself said the system “has allowed the US government to legally steal all of my assets without any trial, without any due process, without any test of the merits.”
Rather than crossing my fingers and hoping that rule of law will be upheld, personally I’d prefer to just take my assets out of their reach.
In order to do so there are various levels of asset protection that one can pursue, each providing varying degrees of security.
At the most basic level, you can establish a domestic limited liability company.
This is often enough to shield at least a portion of your assets from creditors if you are personally sued as the most they will receive in many cases is a ‘charging order’, or a claim on the profits of the LLC.
In practical terms this isn’t much of a victory at all.
Having said that, aggressive creditors and government agencies won’t be stopped by a domestic LLC.
So the next step up is changing jurisdictions to a foreign LLC, particularly in a place like Nevis or the Cook Islands.
A foreign LLC generally makes it extremely costly for creditors to come after you. And depending on the jurisdiction, they’ll still likely be left with very little.
Still, though, while a foreign LLC may be sufficient to defend against most private creditors, it’s still not enough to deter government agencies.
This is what makes a properly structured foreign trust the Rolls Royce of asset protection.
Properly structured trusts in jurisdictions like the Cook Islands have successfully fended off attacks from even the US government in the past.
Look, there is a stigma associated with asset protection. It’s as if only people who are guilty of some crime or fraud would seek to protect what they’ve earned.
This is total nonsense.
The state of the “justice” system today is pretty clear. You are not innocent until proven guilty.
Instead, they will confiscate all of your assets and any means you would have had to defend yourself, leaving you with nothing to prove your innocence.
Of course no one ever expects to be sued or to end up on the wrong side of some government agency’s list.
But if it ever does happen, your life will change overnight. So it might make sense to consider some options while they’re still available.