April 20, 2015
[Editor’s note: This letter was penned by Tim Price, Director of Investment at PFP Wealth Management in the UK and editor of Price Value International.]
In Lewis Carroll’s Through the Looking-Glass, the Queen would sometimes believe as many as six impossible things before breakfast.
She is probably working in the bond markets now.
The average yield on all German government debt is now less than zero, for example. This doesn’t really make any sense, but then not much does any more in the interest rate markets.
We saw last month that the Danish sex therapist (this detail being entirely gratuitous) Eva Christiansen had just been approved for a small business loan at a rate of minus 0.0172%. Ms. Christiansen is herself receiving interest on the loan she’s taken out.
At the same time Danish depositors are paying 0.5% for the ‘privilege’ of keeping their money in the bank.
There was once a time when unprecedented things happened only occasionally. In today’s financial markets, unprecedented things are commonplace.
Jamie Dimon, chairman and CEO of JP Morgan, points out that on October 15, 2014, the yield on US Treasury bonds moved, intra-day, by 40 basis points. How did he describe that move? “Unprecedented.”
But it matters, because Treasury bonds are meant to be the cornerstone of the capital market structure. If Treasury yields move up and down in a single day like a roller coaster, it does not suggest massive confidence in the rest of the financial system.
This pronounced volatility may be a precursor to larger shocks to come.
Even Mr. Dimon himself highlights this concern when he talks about much reduced liquidity in the bond market:
“[T]he total inventory of Treasuries readily available to market-makers today is $1.7 trillion, down from $2.7 trillion at its peak in 2007. Meanwhile, the Treasury market is $12.5 trillion; it was $4.4 trillion in 2007.
“The trend in dealer positions of corporate bonds is similar. Dealer positions in corporate securities are down by about 75% from their 2007 peak, while the amount of corporate bonds outstanding has grown by 50% since then.
This is an incredible reduction in liquidity in what’s supposed to be one of the most liquid markets in the world.
But what does it mean?
For context, it was dodgy corporate credit and mortgage backed securities (bonds) that imploded back in 2008. Suddenly there was no liquidity.
We heard a great line at an investment conference during the dark days of 2008 that summed it up:
“If you’re a distressed seller of an illiquid asset in a market panic, it’s worse than being trapped in a crowded theatre that’s on fire. It’s like being trapped in a crowded theatre that’s on fire, and the only way you can get out is by persuading someone on the outside to swap places with you.”
Given the liquidity dynamics highlighted by Jamie Dimon, all best are off in the bond market. Even the value of US Treasury securities can implode in an instant.
At the recent Grant’s Conference in New York, fund manager Paul Singer identified an even bigger short than the original Big Short (repackaged sub-prime tat). This new, even bigger short?
Long-term claims on paper money. In other words, all bonds.
Is it remotely possible that at some point, perhaps quite soon, the bond market could see yields spike higher, driven by…? As Paul Singer puts it,
“A surge of inflation which far exceeds the strength of the economies is not out of the question and could be catalyzed and accelerated by the oft-stated goal of central bankers to cause more of it.”
The bond market is acting schizophrenically. The cognitive dissonance is deafening.
It has pushed down the yields of bonds on the tacit understanding that central banks (most recently, the European Central Bank) will be buying them by the bucket-load.
But the expressed purpose of so-called Quantitative Easing is to ignite inflation. If you believe that central banks can succeed in creating inflation, then you should be selling bonds, not buying them, especially when they’re yielding less than zero.
We’re not convinced that central bank money creation can easily trigger inflation when the forces of deflation seem to be currently so powerful.
But it matters not. Anybody with half a brain cell will recognize the risk inherent in bond markets today. The relative and absolute attractiveness of undervalued equities, by comparison, is now astonishing.
The only people who should be buying bonds today are altruistic billionaire lunatics with a financial death wish.
April 20, 2015
En route to Mexico
The series was entitled, “The Problem of Alien Immigration into Great Britain, Illustrated by an Examination of Russian and Polish Jewish Children,” and it went on for hundreds of pages over several years.
Pearson’s article focused on “whether the intelligence of the alien Jewish children is closely correlated with their defective physique. . .” and concluded, among many other things, that “Jewish girls have less intelligence than Gentile girls. . .”
Pearson was considered a well-respected scientist. Yet his entire career is full of such work analyzing the various races and making ‘scientific’ claims about their deficiencies to the point that he openly advocated for “war with inferior races.”
He wasn’t alone. Some of the leading scientists in the world from the 18th through the early 20th century dedicated their careers to such nonsense.
Dr. Samuel Morton’s book Crania Americana, for example, is a nearly 500-page phrenology tome which makes all sorts of bizarre assertions of various races based on the measurements of their skulls.
This is what passed as science back then.
And even senior policy makers (including the likes of Winston Churchill) believed in the findings. After all, the ‘scientists’ said it was true, and they had a bunch of fancy equations, data, and mathematical models to back it all up.
Today, it’s revolting to think that anyone could have possibly believed such garbage.
But at some point in the future, people are going to say the same thing about us. Only this time, instead of eugenics and phrenology, our faux pseudo-science is economics.
Case in point—the US Federal Reserve recently published a paper entitled, “When Does a Central Bank’s Balance Sheet Require Fiscal Support?”
Translation: how bad do things have to get at the Fed before they need to be bailed out by the federal government?
Remember that the Federal Reserve is ultimately the issuer of the United States dollar. In fact, you’ll notice when you look at your ‘money’ it says ‘Federal Reserve Note’ on the face.
And over the last several years, the Fed has engaged in the most extraordinary program of expanding its balance sheet.
They’ve essentially conjured new dollars (notes) out of thin air and given them to banks in exchange for all the toxic assets that blew up in 2008, along with trillions of dollars worth of US government debt.
What remains for the fed—the bank’s “net worth”—is razor thin. At this point it’s less than 1.3% of its total assets. This is a laughably tiny margin of safety.
It means that if the value of the trillions of dollars worth of assets that the Fed is holding happens to fall by just 1.3%, then the Fed will be bankrupt.
1.3% is nothing. Most people’s investment portfolios go up and down more than that in a single day.
Jamie Dimon (CEO of JP Morgan) pointed out that Treasury yields moved 40 basis points in a single day last October. So, yes, this absolutely can happen.
But the Fed isn’t worried.
In its latest paper, they say that while it is *possible* that their net worth could become negative, such a phenomenon would be “temporary and would not create serious problems.”
What a convenient assumption.
In other words, the issuing authority of the United States dollar and one of the largest financial institutions in the world thinks it’s no big deal if it goes broke.
How can they possibly justify such madness? Simple. They have pages and pages of complex mathematical models and differential equations to back it up.
Funny thing, Karl Pearson and his colleagues had complex mathematical models too. And influential policymakers believed Pearson’s dubious theories, in many cases actually waging war against ‘inferior races’.
Today’s policymakers believe modern economic pseudoscience as well, and they actually are implementing the ideas… like printing your way to prosperity.
These are the people who have control over your savings. Your investment returns. Your livelihood.
We’re supposed to trust that they’re good guys. That they’re smart, responsible stewards of the financial system.
And yet they think it’s perfectly fine if the issuing authority of the United States dollar is bankrupt.
This is total insanity. If you don’t have one already, it’s time to come up with a “financial plan B” that distances your savings and livelihood for such dangerous thinking.
April 17, 2015
Sovereign Valley Farm, Chile
Let’s talk about idiots.
Somewhere out there, some absurdly well-paid banker just placed his investors’ capital in yet another financial instrument which is guaranteed to lose money: Australian government debt.
47 investors participated in the Australian government’s $200 million bond tender; the participants typically bid the amount they’re willing to pay, and the highest bids win the auction.
In this case, and for the first time in Australia, every single one of the 47 bidders offered a price so high that it implies a negative interest rate.
Even the lowest bid in the auction, for example, implied a net loss… or an effective yield of NEGATIVE 0.015%. The highest price implied a yield of negative 0.085%.
What’s really bizarre is that this particular issue was for ‘inflation-linked’ bonds. Which means that if the government’s official monkey math shows that inflation is falling, the yield could actually become even MORE NEGATIVE.
Insane? Of course. But here’s the thing. These bankers aren’t investing their own money.
It’s not like some guy is taking his million dollar bonus and saying, “Hey I think I’ll go buy some government debt that guarantees I’ll lose money.”
No. He buys a Maserati. Then he picks up this garbage debt with his customers’ money.
Not only is this idiotic, it’s borderline criminal. At a minimum it’s seriously unethical.
Banks and other money managers have a solemn obligation… a fiduciary responsibility that comes with the sacred charge of safeguarding other people’s money.
Just like the golden rule, this obligation is very simple: take care for other people’s money even more than you care for their own.
But that went out the window a long time ago.
Back in the 1500s, Renaissance-era merchant bankers risked their own capital alongside their customers, doing meaningful deals that financed exploration and the expansion of world trade.
Now it’s all about commissions, obtuse regulations, and following the latest banking fad.
This is officially now the latest banking fad—buying government bonds at negative yields.
You’ll remember a few years ago when the latest banking fad was handing out no-money-down mortgages to dead people and unemployed bus drivers… or buying “AAA-rated” bonds which pooled these subprime loans together.
That didn’t exactly work out so well. Neither will this.
In fact there are plenty of similarities between today’s negative interest rates and the early 2000s housing bubble.
Back then, banks were essentially paying people to borrow money. They offered the least creditworthy borrowers absurd amounts of money which sometimes even exceeded the purchase price of the home they were buying.
102% loans were not uncommon back then, which financed the entire purchase along with the extra closing costs. We even saw 105% loans which allowed a little bit extra to make home improvements.
It doesn’t take a rocket scientist to figure out that it’s criminally stupid to pay someone to borrow money.
Yet that’s exactly what’s happening now.
Instead of people, though, it’s governments who are effectively being paid to borrow.
We all remember last time how much this impacted the global financial system. Everyone believed that it would all work out OK. Then one day it didn’t. Lehman Brothers went bust, and the entire banking system started to collapse.
There’s very little difference between then and now… and very little reason to expect a different outcome.
Only a fool believes that this time is different.
April 16, 2015
Sovereign Valley Farm, Chile
Walking down the streets of Kalamata, not only had everyone known his name, they’d have offered him a drink and asked about his grandmother’s health.
But in New Jersey where he lived, Hector was a nobody.
Trading in the warm, sunny coast of Greece for bitter winters and relative isolation was unquestionably the hardest thing that Hector and his wife had ever had to do.
They left decades ago because, back then, America was the land of opportunity.
But today, after years of mind-numbing 9 to 5, increasingly painful taxes, and unconscionable fiscal irresponsibility, Hector’s son Nikos is taking the opposite approach and going back to Greece.
It’s 2015. Nikos knows that he doesn’t need to live in the same place as his company or his customers. He knows he can make money from wherever he is on the planet. And he wants to be in a nice, warm, beautiful place.
With Greek ancestry, Nikos has been able to obtain Greek citizenship—not only for himself but for his children too.
This entitles he and his family to live (and work) just about anywhere in Europe, to travel around the world, and even more easily invest as a global citizen.
It also means that no matter what happens in the US, that they have a back up plan.
Making sure to spend no more than 6 months in Greece each year, the family is not subject to Greek taxation.
If you happen to have any Greek in your ancestry I would strongly advise you follow Nikos’ lead and get the papers to prove it.
Some of our SMC members, including Nikos, have gone through the naturalization process without legal assistance (though this does require wading through Greece’s legendary bureaucracy).
To get started, anyone with Greek ancestry will need to compile a significant paper trail from your ancestors to you.
This includes the birth, death, and marriage certificates of your most recent Greek ancestor as well as those of everyone in between.
A helpful hint is that if you have a direct ancestor that is male, start with them first. They are much easier to trace given that all men had to register for the military with the Male Register.
(Note: Greece has had mandatory military conscription since 2009 for all males aged 19 to 45. There are exceptions, but if you just happen to be 46 or older, all the better.)
If you go through the process yourself, you’ll need to contact your home consulate to get started; this is primarily the Greek consulate that has responsibility over the area where you are resident.
For example, if you live in Calgary, you’ll need to contact the Greek consulate in Vancouver which has jurisdiction over Alberta.
Greece has a lot of obvious economic problems right now. And while I would never recommend holding significant financial assets there, a Greek passport can still provide significant benefit.
If you qualify, it’s something I would definitely consider—especially women and men over the age of 45.
April 15, 2015
On August 5, 1861, facing rapidly deteriorating economic conditions and a horrible defeat at Bull Run, President Abraham Lincoln signed the Revenue Act of 1861 into law.
It was the first time in US history that the federal government would charge an income tax on its citizens. But Lincoln felt that it was vital to fund what would become one of the most unconscionably costly conflicts in US history.
The original law in 1861 set a flat tax rate of 3% on incomes above $800.
(Using the gold price as a benchmark, this is equivalent to 42.26 ounces, or roughly $50,500 in today’s dollars. Not that there’s any inflation.)
The income tax was tweaked occasionally throughout the war, and it lasted for a few years afterwards to help fund reconstruction.
But it was ultimately lifted in 1873 during the administration of Ulysses S. Grant. And aside from a single episode in 1894, there would be no income tax in the United States of America for nearly 40 years.
Ironically, during this 40 year period the United States emerged as the largest, most powerful economy in the world.
And they achieved this with no income tax. No inflation. And very little public debt.
Today it’s entirely different. The dollar has lost over 99% of its value. And US debt is more than has ever been accumulated by any other nation in the history of the world.
Entitlement program costs are soaring. The US government’s own figures estimate that the long-term funding gap for Social Security, Medicare, etc. is at $40 trillion. Many private estimates are several times that amount.
This is obviously concerning.
But what’s even more concerning is the complete lack of care and attention this issue receives.
Politicians continue to spend money with a dangerous sense of entitlement.
They believe that since they’re “America” they can do whatever they want without consequence, as if the laws of the financial universe don’t apply.
And their judgement is clearly lacking.
They already borrow money and go deeper into debt just to pay the interest on the debt they already owe.
And yet they continue to spend, often on the most destructive things like bombs, drones, and war.
They throw money at failed programs. They hire armies of bureaucrats who make life more difficult for productive citizens. And they equip legions of police and armed enforcers to intimidate the population into submission.
All of this is ultimately supported by taxes. Your taxes.
You see, the creditworthiness of any nation is underpinned by its ability to raise and collect taxes.
If investors feel like a government has an intimidating-enough system of taxation that can bully citizens into compliance, they feel comfortable loaning a government money.
It’s a very simple calculus: when the US government goes into debt, YOU are the collateral.
Whether you realize it or not, whether you signed up for this obligation or not, you’re on the hook. You’re the guarantor.
It’s obscene when you think about it; these people have carte blanche to ruin the country, and then they stick you with the bill.
Remember this as you’re standing in line at the post office to send off that 1040.
Continuing to pay taxes into this system only encourages them.
Yeah sure there’s an election coming up in the Land of the Free. It’s looking to be another wide open field among a bunch of insiders who are responsible for causing all the problems.
This vote (as we’ll discuss down the road) is completely meaningless.
What is tremendously impactful, however, is how you ‘vote’ with your dollars.
Every day you are making an election. By choosing one brand over another in the supermarket, or by buying an iPhone versus an Android, you are essentially voting for the better candidate.
Over time, the good candidates who have a history of providing quality products and services rise to the top. And the bad candidates are starved of the resources they need to go on.
It’s time to starve these people of the resources they need. Continuing to pay them every year only encourages them. It sends a signal that we support their decisions.
Cutting off their resources is a far more effective strategy than checking a box in a voting booth.
No, I’m not suggesting that anyone commit tax evasion or stop filing a tax return. This is a one-way ticket to the jailhouse.
But I personally feel a moral obligation to arrange my affairs in a way which maximizes every deduction possible and to pay the absolute minimum that is required by law.
There are countless options… from using tax-deferred options like IRAs or foreign corporations, to even moving abroad.
US tax code, for example, provides a clear path for Americans to move overseas and pay no tax on the first $100,800 in foreign earned income.
Or you can move to Puerto Rico and pay absolutely nothing on investment income or corporate dividends.
Most people don’t realize how many options they have at their disposal to cut what they owe.
And in my mind, it not only makes obvious financial sense, but it’s one of the best weapons anyone has to fight back.
April 14, 2015
70 years ago, the United States of America had just emerged from World War II as the most dominant superpower in the world.
At that point America’s economy was the only one left standing.
And the US government had essentially dictated terms in establishing a new global financial system (known as the Bretton Woods agreement).
Doing so thrust the dollar at the center of world trade and banking.
Suddenly every government, central bank, and major corporation needed to hold and transact in US dollars… and to establish a banking relationship in the United States.
This gave the United States a tremendous amount of power—power they respected and never abused.
At the same same time, high ranking members of the Nazi party had fled to the four corners of the world, often with a vast treasure trove stashed away at Swiss banks.
Most of this wealth was acquired through mass genocide. And yet Switzerland’s secrecy laws protected Nazi clients from having their information turned over to authorities.
No one pressed the issue further.
Think about it—the US government could have done something.
They had the power back then. They could have punished Switzerland with all sorts of banking and financial penalties. They could have threatened to kick them out of the financial system.
But they didn’t.
Instead, in 1945, the US government gave the Nazis a pass.
This is extraordinary when you think about it. Because if you fast forward several decades, we see now that the US government is chasing people to the ends of the earth.
Even more, they’ve brought the full extent of their financial resources to bear against entire banking systems (including Switzerland’s).
They’ve successfully shuttered some of the oldest banks in the world, imprisoned foreign bank executives, and even gotten foreign governments to change their laws.
So who exactly are the nefarious criminal terrorists that Uncle Sam is spending so much effort to chase down?
Americans. Specifically, Americans who have failed to file administrative paperwork with the IRS to declare overseas financial accounts.
There are countless stories out there of people having their life savings confiscated by the government because they didn’t file a disclosure form (even if there are no back taxes due).
Certainly there is some meaningful percentage of these people who have been hiding undeclared income overseas hoping to never pay tax on it. And it’s important to acknowledge that.
But while this sort of behavior had been going on for decades, it took until 2010 for the US government to pass the Foreign Account Tax Compliance Act (FATCA), establishing the power to bully global financial institutions into compliance.
The reason is obvious: the United States government is broke.
Decades ago the future was bright. And they could afford to give the Nazis a pass. They didn’t really need the money, and it wasn’t worth abusing the tremendous financial power that they had been entrusted with.
But today, every penny matters.
The US government is in a position where they have to borrow money just to pay interest on the money they’ve already borrowed.
Their own internal numbers estimate their ‘net worth’ at MINUS $60 trillion, which includes their own estimates of long-term social security liabilities.
So they have no qualms about abusing the trust that the rest of the world has given them… or even creating new powers out of thin air through the most destructive legislation imaginable.
It’s often said that there are only a few times in a person’s life when you can really see what someone’s character is made of—typically times of extreme adversity such as being near death or flat broke.
That’s where the US government is right now. Enabling us to now see its true character.
This is not a government of the people, for the people, by the people. It is a government that takes from the people. By any means necessary. And they grow bolder with each passing day.
April 13, 2015
On March 16, 1936, the government of the United States published the very first edition of the Federal Register.
President Roosevelt had been taking a lot of heat over the previous year; under his New Deal program, dozens of government agencies were passing new rules, regulations, and codes at an absolutely feverish pace.
It became impossible for anyone to keep track of them—even the other agencies within the government.
So in the summer of 1935 they created a new law requiring every executive agency to publish a daily, official record of their activities.
This official record was called the Federal Register. And it would contain a complete set of every rule, regulation, code, and proposal issued by each of the executive agencies.
The first edition was published on March 16, 1936. It was sixteen pages.
Every single work day since then, without fail, the government has published the Federal Register.
Its first full year (1937) contained a total of 3,450 pages. By 1942, the Federal Register had grown to over 10,000 pages.
It passed 20,000 for the first time in 1967. More than 30,000 in 1973. And more than 40,000 the following year in 1974.
The Federal Register exploded during the 1970s, in fact, touching nearly 90,000 pages by the end of the Carter administration.
During Reagan’s time, the publication shrank to under 50,000, only to rise again under subsequent presidents.
The longest edition ever published was logged at 6,653 pages in a single day, during the administration of Bush II.
President Obama has averaged nearly 80,000 pages per year, far and away the highest of any President in US history.
This morning’s edition, in fact, is a whopping 358 pages full of new rules, regulations, and proposals.
Did you read it? Neither did I. But as the old saying goes, ignorance of the law is not an excuse.
This is absurd. Every single one of those regulations makes people less free.
They criminalize the most innocent behavior and make it impossible for the average person to know what’s legal and what’s not as if we all have some some civic duty to read and memorize 80,000 pages per year of government regulation.
4,500 criminal statutes now exist under US Code. That’s 1,500 times more than the three crimes outlined in the Constitution– piracy, treason, and counterfeiting.
(Ironically, the Federal Reserve and commercial banks commit the latter on a daily basis…)
We’ve seen this theme countless times throughout history.
Under Diocletian’s reign, the Roman Empire’s body of laws and regulations multiplied like rabbits.
He centralized all aspects of the economy, controlling wages, prices, commerce, and agricultural activity. Violations in many cases were subject to the death penalty.
And when people complained, he told them that the barbarians were at the gate, and that individual liberty needed to be sacrificed for the greater good of security.
By Diocletian’s time, Rome was already bankrupt. His regulations pushed the Empire over the edge.
It’s not much different today. Each and every one of these obscure regulations COSTS MONEY.
So it’s not surprising that as the number of pages in the Federal Register has increased, so has the US federal debt.
In order to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.
The US government is targeting its own citizens now more than they went after the Nazis. This is a 100% true statement, which I will explain tomorrow.
More to follow.
April 10, 2015
Panama City, Panama
After an incredibly pleasant week in Medellin, I departed this morning for Panama where the capital city’s already notoriously painful traffic has become a parking lot in the wake of the Summit of the Americas.
Leaders from most of the Western Hemisphere are here for the summit, including one Barack Hussein Obama.
So you can just imagine the security nightmare. Everything in the city has ground to a halt.
Yet despite all the fanfare for the big bosses who are in attendance, so far it’s been Mark Zuckerberg who has stolen the show.
Yesterday the Facebook co-founder announced that, through his Internet.org foundation, he would provide free Internet access across Panama.
He’s already been doing it successfully in Colombia and several African nations.
It’s a sign of the times that a room full of politicians can’t even begin to accomplish a tiny fraction of what a single individual in the private sector can do.
What’s more, Zuckerberg’s pledge really shows how much the world is changing.
The politicians in attendance here are stuck in the old system that is defined irrelevant lines on a map.
But this system is rapidly changing, and it’s precisely because of technology.
12,000 years ago the Agricultural Revolution completely changed the way that human beings organized themselves.
Paleolithic hunters and gatherers who had spent countless generations roaming the earth in constant search of new sources of food were suddenly able to put down roots.
They discovered that by putting seeds in the ground and nurturing the soil, they could coax life-giving sustenance directly from the earth itself (including the dreaded gluten!)
Because of agriculture they didn’t need to roam any longer. They could stay in one place, and on a single plot of land feed an entire tribe.
For the first time ever, human beings could divide labor, allowing certain individuals to specialize in food production, while others took on other vocations in science, engineering, and medicine.
And even more importantly, they could consistently produce more than they consumed, building up a pool of savings to stash away for a bad harvest year, or to exchange with nearby tribes.
This changed everything about human civilization, including the way that societies were organized and the way they engaged in commerce. The Industrial Revolution is another great example.
For several decades, the world saw an unprecedented economic expansion based on rapid technological advances that made manufacturing and commerce dramatically more efficient.
People’s standards of living rose substantially. Feudalism was effectively destroyed. A real middle class rapidly emerged. And a brand new class of entrepreneurs rose through the ranks to become the new wealthy class.
Like the Agricultural Revolution, this changed everything, from the way that societies were organized to the way they engaged in commerce. Today it’s the Digital Revolution. And it’s changing everything.
People meet in chat rooms, fall in love online, and break up by changing their Facebook status. We have co-workers, bosses, and employees on the other side of the planet.
We have greater and greater control over the information we consume and the way we educate ourselves.
And the more this technology progresses, the less power that bankrupt, destructive governments have over us.
If they decide to ban firearms, we can start 3D printing them. If they impose capital controls, we can move our assets to de-centralized digital currency.
And if they continue to restrict even the most basic freedoms like what we can/cannot put in our own bodies, we can choose to move somewhere else where we can be more free (with the added benefit of paying less tax).
Digital technology and modern transport allow us to live wherever we want, earn money worldwide, and maintain relationships with loved ones across the globe.
It’s 2015. We no longer need to be confined by something as anachronistic as geography… or by the increasingly irrelevant governments that control it.
April 9, 2015
The world has truly gone mad.
We’ve become accustomed somewhat in the last several years to historical anomalies such as zero percent interest rates, Quantitative Easing, competitive currency devaluation, etc. by governments and central banks the world over.
It’s almost become the new norm.
But then there’s always something that happens that shocks us all over again.
And just like with any other addiction, the infusion of ridiculous and unsustainable policies has to be that much more potent to have any effect.
Two such developments have just taken place in the financial world.
First, Switzerland became the first to issue 10-year government bonds with a negative yield.
Let that sink in for a moment.
Especially in the last year we’ve seen governments issue short-term debt with negative interest rates. But now the Swiss government is the first that will actually profit from its long-term 10-year debt.
Just like in a bad infomercial—“But wait, there’s more!”
The government of Mexico just sold 100-year bonds denominated in EUROS. Also the first ever of its kind.
A few years ago, Mexico sold its first 100-year bond—that one was denominated in US dollars. Later, they sold another century-bond in British pounds.
You can just imagine the figures at the Mexican central bank’s meeting going: “Well, that went great. I wouldn’t have believed we could ever get away with that… Hey, what if we tried to do it in euros next time, haha?”
So they did. They took advantage of the European Central Bank’s unprecedented stimulus and issued a 100-year bond in a currency that most likely won’t even be around in the next decade.
Who’s dumb enough to buy this stuff—10-year debt at negative yields and 100-year debt in a doomed currency?
Institutional investors, of course—large pension funds and the like. You might look at news like that and think, well, that’s crazy, I’d never do that. But the fact is, it’s being done with YOUR MONEY.
Just like Winston Churchill commented that it’s false to characterize the fighting at places like the Somme, Verdun etc. in WWI as battles, when they were actually more like prolonged sieges, what’s happening in the financial world today is similar.
Currency wars is a term that’s been used frequently in recent years to describe what the world’s central banks and governments are doing.
In fact, this isn’t a currency war at all—it’s much more like a currency siege.
And when you think it can’t get any worse, it does.
Just like in WWI when nobody expected the amount of destruction and misery that happened. Heavy artillery barrages. U-boats. Tanks. Poison gas… It just kept getting worse and worse.
The financial world today is the same. Billion dollar stimulus packages. Quantitative Easing 1, 2, 3… Negative interest rates. Negative long-term debt yields. Cash withdrawal and transaction controls. Higher taxes. Capital controls…
It doesn’t stop. And it’s even getting worse.
Who are the losers now? Just like in WWI, they’re the guys in the trenches. They’re not the politicians making these decisions—the losers are the rest of us.
This isn’t a siege of one nation against the other. The siege is against us.
But what if we refuse to fight?
In WWI, if you got out of that trench, you had an officer with a pistol threatening to shoot you on the spot.
Capital controls are the equivalent of the officer with a pistol keeping us in the trenches today.
But luckily there are still plenty of ways to escape. They can’t make us suffer in the trenches.
April 8, 2015
About a week ago after having one of those days, I felt like unwinding by turning off the world and tuning in to some mindless action flick.
Netflix heeded the call and immediately served up 1994’s Clear and Present Danger starring a slightly younger Harrison Ford as CIA executive Jack Ryan.
It’s a decent film if you’ve never seen it… and, without giving away too much, a big part of the plot takes place in Colombia.
As you can just imagine, the Colombia portrayed in a 90s Hollywood movie is a disaster zone full of drug lords, rebels, and narcoterrorists. (Yet curiously all these Colombian criminals speak English to each other…)
This is exactly what most North Americans still think of when they hear ‘Colombia': Danger. Chaos. Kidnapping. Murder.
Nothing could be further from the truth. Colombia is a paradise.
So much so, in fact, that I’m inclined to send my friends in Hollywood a Thank-You letter in gratitude for scaring everyone away. Because without the steady, negative media, this country would be teeming with expats living the good life.
As it stands there is just a small (though rapidly growing) expat crowd here. And as a result, prices are still incredibly cheap.
Medellín is probably the starkest example. This place was ground zero during the drug-infused days of Pablo Escobar, so the stigma still lingers like a bad burrito.
Real estate, for instance, is absurdly cheap. Investors not only get the ‘Colombia stigma’ discount, but also the ‘Medellín discount’.
To give you an idea, a nice 2 bedroom apartment in the fanciest district in the city can cost around $100,000.
If you’re a big spender, you can get something that’s very high quality and palatial (again, in the best part of town) for about $250,000 to $300,000.
As for rentals, a budget of between $2,000 and $3,000 can fetch you the sort of apartment that most people only dream about: boss-style penthouse living complete with a terrace jacuzzi overlooking the city.
And if you are a US dollar investor, the Colombian peso is weak right now, so Medellín is definitely worthy of your attention. Your savings can really go a long way.
In a nutshell, this city is close to perfect.
The weather is eternally spring-like. It’s quickly becoming a major center of young entrepreneurial innovation. In fact, if you’re looking for a great Startup vibe, Medellín should be on your short list.
It also doesn’t hurt that seemingly every woman in this city looks like Penelope Cruz. (And yes, a lot of expats do come here looking for love. Colombia does not disappoint.)
As an expat destination, this place is what Panama was like 10+ years ago back when prices were incredibly cheap.
I remember signing property deals in Panama back in 2004 for less than $1,000 per square meter (stupidly cheap) for some of the best properties in the city.
That’s where Medellín is today. It’s an unbelievable steal. And there’s not a doubt in my mind that some day this will be one of the world’s most popular expat destinations.
Get in while you can. Whether you’re a property investor or just looking for a place to spend a few months, this city definitely needs to be on your radar.
April 7, 2015
En Route to Colombia
Despite being an otherwise staid, traditional news service, the professional banking division of the Financial Times recently released an utterly scathing assessment of the British economy.
It was entitled, “The UK economy is a ticking time bomb,” and the editor didn’t pull any punches in completely shattering the conventional fantasy that ‘all is well’, and that advanced economies can simply print and indebt their way to prosperity.
I’ll quote below, emphasis mine:
“What is the problem? Quite simply, the key numbers are terrible. According to the OECD, after five years of ‘austerity’ the UK’s budget deficit is 5.3%, down from 11.2% in 2009.
“In other words, it has gone from being close to meltdown to a situation that is merely dreadful.
“Since the government is spending more than it earns, it is hardly surprising that it is borrowing more, and that the debt-to-GDP has risen from 68.95% in 2009 to 93.30% in 2013, again according to OECD figures.
“As the UK is currently growing it should really be running a budget surplus, providing it with the means to run deficit financing during the next downturn.
“This is one of the tenets of the Keynesian philosophy that underpins a lot of left-of-centre economic thinking.
“Unfortunately Europe’s political parties of all persuasions have bastardised Keynes’ ideas – running deficits in both good and bad times – so as to render them almost meaningless.
“To make matters worse the UK, again similar to most advanced economies, is an ageing society with pension, welfare and healthcare systems that are wrongly structured and financially unsustainable.”
“We can blame the politicians for failing to be honest with the electorate about the challenges ahead.
“Or we could blame the voters who punish at the ballot box any party that tells them anything other than good news and wants to hear that taxes can be cut, spending raised and the budget balanced all at the same time.”
April 6, 2015
Last week, the government of China closed the enrollment window to join its new Asian Infrastructure Investment Bank (AIIB) as a ‘founding member’.
The AIIB, if you haven’t heard of this yet, is designed to essentially displace the Western-controlled IMF and World Bank.
And prior to last Tuesday’s deadline, dozens of nations around the world from New Zealand to Denmark signed up to join.
This is a huge coup for China, and probably the most obvious sign yet that the global financial system is in for a giant reset.
Under the weight of nearly incalculable debt and liabilities, the United States is in terminal decline as the dominant superpower.
From Ancient Rome to the British Empire, this has happened many other times in history.
This time is not different. And everyone else in the world seems to get it. . . except for the US government.
They act as if the financial universe will revolve around America forever—that they can print money, indebt future generations, and wage war as much as they want without consequence.
But they’re completely blind.
Practically the entire world is lining up against them to form a brand new financial system that is no longer controlled by the US government.
In an editorial published in the Financial Times, former US Treasury Secretary Larry Summers summed it up plainly saying that this “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
The consequences of this shift away from a US-controlled financial system cannot be understated.
No more endless spending. No more solving problems with more debt and more money printing.
Suddenly it will be time for painful decisions in the US—like slashing Social Security benefits, drastically scaling back the military, and selectively defaulting on the debt.
Make no mistake, this transition is going to be bumpy.
China may already be the largest economy in the world by many measurements. But the Chinese economy is in for some serious strain over the coming months and years as its massive credit bubble bursts.
So in addition to America’s fiscal and monetary challenges, the world is going to have to suffer through a potential Chinese crisis as well.
But this does not affect the long-term story. Remember, nothing goes up or down in a straight line.
On its road to becoming the global superpower in the 20th century, the United States suffered its own series of deep economic setbacks—from the Panic of 1907 to the Great Depression, and several recessions in between.
China’s path will likely be similar.
This is one of the most important trends of our time. And it’s happening right in front of our eyes.
The world is rapidly throwing off US financial domination. The global financial system is starting to reset. Global financial and political dominance is shifting.
As with any great change, there are going to be people who get completely wiped out—primarily, people who didn’t see the change coming or chose to ignore the trend.
The flip side of this is that, for anyone with the intellectual courage and independence of mind to be paying attention, this is a time of extraordinary opportunity.
Some of the wealthiest people in Europe were minted in just a few years during the Weimar hyperinflation of the 1920s.
And some of the greatest fortunes in the world (some of which still exist today) were made in the early days of the United States as the country rose to dominance.
That’s ultimately the opportunity we have today. We can’t do anything about the trend. It’s happening.
What we can control is how we react to it: ignore it at our own peril, or seize the opportunities that come from it.
April 2, 2015
Sovereign Valley Farm, Chile
Every few centuries or so, an amazing new technology comes along that fundamentally changes human civilization.
There are so many other examples throughout history. The Agricultural Revolution. The Industrial Revolution. The invention of the printing press.
The printing press was a particularly interesting parallel for what’s happening today.
Before the printing press, people were living in the dark. Their information was heavily controlled, and they were forced to rely on the ‘authorities’ for personal, financial, educational, and spiritual guidance.
The printing press changed everything. It was an extraordinarily powerful social technology that spawned entire political revolutions and the rapid advance of human education.
In Europe, the number of printed books went from millions to literally billions.
Suddenly information became extremely difficult for governments to control. Ideas became unconstrained. Antiquated political regimes were brought down. And intellectual achievement flourished.
We are now in the early stages of a brand new transformation brought about by yet another technological advancement—the Digital Revolution.
And it’s changing everything, from how we do business to how we meet and engage with one another.
Most importantly, the Digital Revolution has created the ability to bring together literally millions of people and spread ideas quickly and efficiently. Information cannot be controlled.
This has the power to make entire industries obsolete. And banking is one shining example.
‘Modern’ banking is still based on the same system that has been in existence for at least a century.
Yeah, sure, they all have websites now. But this doesn’t make them high-tech.
At their cores, banks are still 19th-century fractional reserve institutions that take in money from depositors, make irresponsible loans and investments, keep razor thin margins of safety, and beg for bailouts when the system breaks down.
And along the way they find every opportunity to screw consumers.
Moreover, commercial banks have de facto control over entire economies.
They nominate representatives to serve on the boards of central banks, who in turn establish interest rate policies and give free loans right back to the commercial banks with money that they’ve conjured out of thin air.
The system is incestuous and obscene. But now things have changed.
Today, every possible function of a bank, from savings to loans to money transfers, can now be done faster, cheaper, and more efficiently by new technology, courtesy of the Digital Revolution.
Websites like Transferwise or Azimo make it possible to send money across the world at negligible cost.
Social media sites provide the opportunity for people to exchange currency with one another without the need of an absurdly-priced money broker.
You can also obtain a loan or investment capital online from crowdfunding sites now, whether its for your startup company or mortgage for your home.
And you can even move your savings out of the banking system altogether—whether to new digital currency platforms, or something ancient and traditional like precious metals.
All of this technology already exists—it’s just a question of how quickly it will be adopted.
Unsurprisingly, millennials are leading the charge.
According to a report by (ironically) Goldman Sachs, 33% of millennials surveyed said they don’t expect to need a bank in five years, and 50% are counting on tech startups to entirely overhaul banks.
And I expect that in 10 years’ time, the technology and adoption will have progressed to the point that today’s banks will be entirely obsolete.
Thomas Jefferson once wrote that “. . . power should be taken from the banks and restored to the people, to whom it properly belongs.”
It took two centuries. But now it’s actually starting to happen.
April 1, 2015
Several months ago, the government of Australia proposed to tax bank deposits up to $250,000 at a rate of 0.05% (5 basis points).
Their idea was for the money to be invested in a rainy day Financial Stabilization Fund to insure against in the unlikely event of a banking crisis… or all-out collapse.
And as of this morning, it looks like the levy might just pass and become law in Australia. All parties support the idea. Which means that Australia might just have a tax on bank deposits starting January 1, 2016.
To be clear, the proposal seems to plan on taxing the banks based on the amount of deposits they’re holding—but it’s pretty obvious this will be passed on to consumers in the form of lower interest rates.
Let’s look at what this means:
1. Taxes on bank deposits are generally the same as negative interest rates. Australia is a rare exception.
Interest rates on bank deposits in most developed nations are practically zero… if not already negative.
So charging a tax above and beyond this would clearly push rates (further) into negative territory.
I have, for example, a small bank account in the United States that pays me about .03% interest (three basis points). If the government imposes a tax of 5bp on interest of 3bp, I’m left with negative interest.
Australia (along with New Zealand) is a rare exception since interest rates are actually positive. You can get 2-3% on a savings account. So a 5bp tax still results in positive interest.
2. Taxes always start small… then increase over time.
Of course, the proposal on the table right now is a 5bp tax. There’s nothing that says this can’t increase to 50bp over time.
When the United States government first imposed the modern federal income tax a century ago, the top tax rate was just 7%. These days that would qualify the US as a tax haven.
Over time, tax rates rose to as high as 92%. Tax rates can (and do) rise. And once they’re passed, they’re almost never abolished.
3. Taxes are rarely used for their stated purpose
Politicians create and raise taxes all the time for special purposes. And again, over time, they are often diverted away from those purposes.
In 1936 after a devastating flood in Johnstown, Pennsylvania, the state government passed a ‘temporary’ 10% tax on all alcohol sold in the state in order to help pay for disaster relief.
Six years later the work was complete. But the tax is still on the books (now at 18%), with all the revenue going to whatever the state lawmakers want to blow it on.
FICA is another great example. Though payroll taxes in the US were initially established to fund Social Security and Medicare, the federal government steals this revenue every year to haplessly try and plug budget deficits.
So a tax to build a financial stabilization fund might sound comforting in theory… but will all the revenue actually be allocated for that purpose? Doubtful.
4. If this can happen in Australia, is anyone foolish enough to think it can’t happen in the US or Europe?
Australia has a sound and sturdy banking system.
Banks in Australia are actually, you know, solvent. Capital ratios and liquidity rates are solid. Australia’s is a well-capitalized banking system—far more than in the US and Europe.
The numbers tell a very clear story. Banking systems across Europe in particular have had to be routinely bailed out over the past few years—Slovenia, Spain, Greece, Cyprus, etc.
In the United States it is perhaps even more absurd. Based on their own numbers, US banks are highly illiquid, still gambling away customer funds in trendy investment fads that will likely suffer an epic meltdown.
Backing up this little scam is the FDIC, which itself is pitifully undercapitalized to support any significant problem in the banking system.
Backing up the FDIC is the US federal government, which is already drowning in more than $60 trillion in liabilities (based on the most recent GAO report).
And supplying crack to the crack head is the US Federal Reserve, America’s central bank.
With net capital just 1.26% of total assets, the Fed is so pitifully capitalized they make Lehman Brothers look like Berkshire Hathaway.
So if the government of Australia is concerned that their well-capitalized banking system needs a safety net and wants to tax deposits for such purpose, how in the world can we possibly expect the US and Europe, with all of their banking system risk, won’t do the same?
March 31, 2015
Sovereign Valley Farm, Chile
Yesterday we discussed the utter insanity of the debt-based education system—the trillion+ dollar explosion of student loans out there that may very well be the next bubble to burst.
It’s a completely ridiculous system which saddles 22-year olds with tens of thousands of dollars of debt before they even have a chance to start life.
But this has become the norm. DEBT has become the norm. Like everything else in our financial system, debt dominates.
Government finance. Consumer spending. Pension programs. Higher education.
All of these systems are based on debt.
And anyone who wants to break free from this needs to seek unconventional alternatives.
So if you’re a young person looking for other options other than debt-based university, consider the following:
1) Attend a foreign university. If you absolutely MUST attend university at such a young age, consider top quality universities abroad.
Most importantly, you’ll have the unforgettable experience of living abroad… something that can not only be life-changing, but also set you apart from your peers.
It’s also a great way to learn a foreign language (even though the courses at many foreign universities may still be taught in English).
Plus, studying abroad can be a LOT cheaper.
L’Ecole Polytechnique in France, for example, is consistently ranked as one of the top universities in the world. Yet first year tuition is less than $4,500, and they have a special program that’s 100% English, including even the admissions process.
Even for advanced education, the English-language Masters programs at top-ranked EPFL in Switzerland can run as little as $1,350 each year, literally 95% less than in the US.
If you are American, this is a no-brainer while the dollar is strong. You can save tens of thousands of dollars on the cost of your education while still attending a tier-1 school.
2) Travel. Get out and see the world. A budget as low as $5,000 can get you a round-the-world ticket and finance your living expenses for several months as you immerse yourself in rapidly growing economies.
(Note: travel ‘hacks’ such as maximizing the use of free airline bonus miles are very useful in keeping to budget…)
You’ll learn more about how the world works in four months on the road than in four years of university.
More importantly, you’ll meet people and be exposed to countless opportunities that will prove invaluable when you’re trying to decide what direction to take your life.
3) Join a startup
While traditional university education is a great way for young people to heavily indebt themselves before they even get started in life, joining a startup is the exact opposite—a potentially game-changing way for young people to build wealth.
Aside from the tremendous business experience and the life lessons in creating something from scratch, this route has the added benefit that eschewing college for a startup is socially palatable.
Naturally you’ll need to go to a startup hive—places like San Francisco, Austin, Berlin, Bangkok, Santiago, etc.
While anyone can realistically do this, joining a startup is a great option for young people precisely because you’re young.
You have no attachments. No family to support. No mortgage. Nothing to tie you down. And very little to lose.
4) Find a mentor. This used to be the way people learned their craft—by studying under someone who was doing it.
Seek out someone you admire who has all the success traits that you desire and make yourself indispensible to that person.
Offer to be an unpaid intern—use a small fraction of what you would have paid for a university education to finance your living costs. Then learn as many valuable skills as you can directly from someone who has mastered them.
5) Above all else, learn. Even if you can’t go abroad, or you don’t have enough scratch saved up for any of the above options, spend at least an hour a day improving your financial education, learning a language, or developing other marketable skills.
6) And yes, apply for our summer entrepreneurship camp.
Every summer I bring in some of the most successful entrepreneurs I know to teach young people exactly how to build a business and create value in the world.
But probably the biggest benefit is the alumni network that the students join—young, like-minded movers and shakers from around the world.
Our entrepreneurship camp is free—I finance it myself. And our goal for the past six years has been to essentially combine each of the options I outlined above. Education. Travel. Entrepreneurship. Mentorship. Etc.
Attending our camp is highly competitive. We receive applications from all over (this year we already have applications from places like Burkina Faso, Philippines, Moldova, Algeria, Kazakhstan, China, etc.), and we have limited space available.
But if you’re interested in what could potentially be a life-changing experience, take a look at our website: www.sovereignacademy.org.
The application deadline is TONIGHT at midnight.
March 30, 2015
Sovereign Valley Farm, Chile
What I’m about to tell you is not my own opinion or even analysis. It’s original data that comes from the United States Federal Reserve and national credit bureaus.
- 40 million Americans are now in debt because of their university education, and on average borrowers have four loans with a total balance of $29,000.
- According to the Fed, “Student loans have the highest delinquency rate of any form of household credit, having surpassed credit cards in 2012.”
- Since 2010, student debt has been the second largest category of personal debt, just after a home mortgage.
- The delinquency rate for student loans is now hovering near an all-time high since they started collecting data 12 years ago.
- Only 37% of total students loan balances are currently in repayment and not delinquent.
The rest—nearly 2 out of 3—are either behind on payments, in all-out default, or have entered some sort of deferral program to delay making payments, with a small percentage still in school.
It’s pretty obvious that this is a giant, unsustainable bubble (more on this below). But even more important are the personal implications.
University graduates now matriculate with tens of thousands of dollars worth of debt.
Debt is another form of servitude. Like medieval serfs, debt keeps people tied to jobs they dislike in places they don’t want to be working for bosses they hate doing things that make them feel unfulfilled.
Debt makes it very difficult to walk away and start fresh.
In fact, ‘starting fresh’ is almost legally impossible when it comes to student debt. Even in US bankruptcy court, student debt cannot be discharged in almost all cases.
It is an albatross that hangs over you for a decade or more if you do make the payments, and it follows you around for the rest of your life if you do not.
(I’m not suggesting anyone default on what they owed—simply pointing out that nearly every other form of debt can be discharged EXCEPT for student debt.)
This kind of debt has a huge impact on people’s lives.
Again, according to the Federal Reserve, “[G]rowing student debt has contributed to the recent decline in the homeownership rate and to the sharp increase in parental co-residence among millennials.”
So the Fed’s own analysis shows that student debt is a cause for people in their 20s and 30s to live at home with their parents. Amazing.
This certainly hollows out the argument that a university degree is a one-way ticket to a higher salary, brighter future, and better standard of living.
Look, I’m not going to try to tell you that a university education is worthless or a cruel joke.
There are clearly both tangible and intangible benefits to completing a four-year degree, especially for vocations in science, medicine, etc.
But let’s be honest—many kids end up at university by default. They don’t know what they want to study. They don’t know ‘what they want to do’.
They’re just sort of expected to enroll, attend, major in something, and graduate.
Much of this is done merely to please other people or satisfy a social expectation without any real sense of whether the path they’ve chosen at that time is the right one.
Modern university education, in fact, is based on the premise that an 18-year old kid can make up his/her mind about what s/he wants to do in life.
But how can they really know what they want to do in life without first having some exposure to life itself? How can anyone know?
Most students grow up living at home with their parents. They graduate from high school. And they go off to college pressed to make some grand life decision without ever having dipped a toe in the world to get a sense of the infinite options.
From this perspective, spending four to five years discussing theory at such a formative age can be terribly counterproductive.
Subsequently graduating with an enslaving level of student debt can make the experience borderline destructive.
Again, it’s not to say that university has no benefit.
The question is whether it’s worth the cost at that particular time, i.e. whether entire generations should be forced into a cookie-cutter path where everyone spends ages 18-22 in university, graduates with a boatload of debt, starts a career in whichever industry is willing to hire them, and ultimately begins paying taxes.
This route takes away all the choice… the ability to live life deliberately.
It’s how people ‘end up’ doing what they do by default, instead of finding their professional passion and life’s calling.
Most people give up the choice. And it all starts with debt.
It didn’t used to be this way.
Long ago, people actually went to university to learn. That was the goal.
Today we’re told that it’s a necessary stepping stone for social and financial success.
Curious how the data demonstrates the exact opposite.
Like many of our prevailing social constructs, this education system is on the way out.
Just like our unsustainable monetary system in which we award totalitarian control of our money supply to unelected bureaucrats who conjure trillions out of thin air in their sole discretion…
… just like our unsustainable banking system in which commercial banks hold just a tiny fraction of their customer deposits and then gamble away the rest of it…
… and just like our political system in which a government that’s $60 trillion in debt continues to waste money with wanton abandon…
… this education system is unsustainable.
It’s just as unsustainable to expect a 22-year old to enter the world with uncertain prospects and tens of thousand of dollars of debt.
And, like our monetary, banking and political systems, it’s time for a reset. More on this tomorrow.
On the topic of real education, the application window for our free summer entrepreneurship camp closes tomorrow night at midnight. Find out more here: www.sovereignacademy.org
March 27, 2015
Yesterday morning, CNBC Asia’s anchorman Martin Soong cradled a young, hairy-nosed wombat named Billi on live television.
He then transitioned to interview an entrepreneur who is raising money to colonize Mars.
Now, as much as I’m sure we’re all fans of wombats… and as much as it might be a great idea to colonize Mars, it’s time to be soberingly honest: these are classic indicators that we’ve reached the top of the market.
Money is no longer serious business. It’s all fun and games chasing the latest investment fad with no regard whatsoever to the risks involved.
In fact, the very idea of ‘risk vs. reward’ is completely broken. Now it’s all risk, very little reward.
As my partner in Asia Tim Staermose told me yesterday, “Sensibly investing long-term savings and pension money for acceptable risk-adjusted returns could not be further from everybody’s minds.”
Of course, this is what happens when interest rates are effectively zero… or even negative as they are in certain cases in Europe.
We’ve talked about this before— Europe has such dangerous financial incentives now that in certain cases there are SAVERS who are paying the bank to deposit their money, and BORROWERS who are being paid by the bank to go into debt.
It’s completely upside down.
But to say this is unprecedented is actually incorrect.
In fact, it was only a few years ago that borrowers in the United States had HUGE incentives to go into debt.
After 9/11, the US Federal Reserve pushed interest rates down to nearly zero. Mortgage rates dropped, and suddenly it became incredibly cheap to buy a home.
Demand picked up… gradually, then suddenly.
Demand for housing (and hence mortgages) became so great, in fact, that banks began to doggedly compete with one another.
The conservative practices of the past were abandoned. Instead of demanding a 20% down payment from the borrower and financing 80% of the purchase price, some banks started offering 90% loans. Then 95%. Then 100%.
At the height of the bubble, we were seeing people with no job, no income, and no assets to post as collateral receiving 103% loans. In other words, people were essentially being paid to borrow money.
Markets tend to have very short memories. But I think we can all recall that this experiment in no-money-down, teaser-rate lending did not end well at all.
Curiously, what we’re seeing now is even worse.
Now interest rates literally are negative. Most notably, you have to pay money for the privilege of loaning your savings to bankrupt governments.
It’s easy to look back on the housing crisis with 20/20 hindsight and say, “That was dumb…”
Yeah. It was. But this is even dumber… and very few people in finance seem to care.
The most dangerous words in finance are, “This time is different.” That seems to be what people honestly believe… that THIS time paying people to borrow money in an even more destructive way will have zero consequences.
I invite you to explore this topic with me further in today’s podcast— you can listen in here:
March 26, 2015
If there’s one lesson we can learn from the 20th century it’s that we should be suspicious of a government that actively tries to disarm its population.
When the Khmer Rouge came to power in Cambodia one of the first things they did was set out to disarm the population.
There were already a series of strict gun control laws in place, left over from the time of French colonialism, but the Khmer wanted to take no chances.
They went door to door asking people if they had guns, telling them “no one has a need for a gun anymore,” because, “we’re here to protect you.”
After 10 days of going door to door they cut the friendly act and told everyone to leave their villages and go for a long walk. While they were gone they thoroughly searched houses for leftover guns and foreign currencies.
Now that they were certain that the populace was unarmed, the Khmer Rouge were free to go on a murderous rampage that left somewhere between 2 and 3 million people dead over their 4 year reign of terror.
Similar stories played out in Nazi Germany, the Soviet Union, Uganda, Armenia, Guatemala, China etc. resulting in more than a hundred million deaths.
I’m not suggesting that calls for greater gun controls are a pretext to mass genocide, but it’s still worth bearing in mind the dangers of living in a country that has strict gun control laws.
Maybe you’ve thought about moving abroad, but are uncomfortable with the thought of leaving your guns behind.
The good news is that the US isn’t the only country where people can bear arms. Here are four other countries where you can own guns:
Switzerland is famous for having one of the most well-armed populaces on the planet. Not only are the Swiss allowed to have guns, many citizens were traditionally required to own one and go through training on how to use it.
Switzerland’s laws require having a permit in order to be able to buy certain firearms, but these are attainable with minimal and straightforward bureaucracy.
Czech Republic is another place in Europe where you can enjoy the benefits of gun ownership without having to deal with much government paperwork.
You’ll need to get a permit in order to legally own firearms, but these are relatively easily available—also for most foreigners who live there.
There’s no limit to how many firearms you can own and you can carry a concealed firearm.
Private possession of a large variety of guns is allowed for Estonian residents under a license. These can be obtained for any number of reasons, including self-defense.
The government maintains a record of individual civilians licensed to possess firearms and ammunition, but private sale and transfer is allowed, as is concealed carry.
Most types of firearms can be legally purchased in Paraguay, but a license is required and a central registry of gun ownership is maintained.
The plus side is that even as a tourist you can legally buy weapons in Paraguay.
March 25, 2015
Now it’s Austria, Switzerland, and Australia that have joined dozens of other countries around the world in the anti-dollar alliance.
These nations, which also include most US ‘allies’ in Western Europe like Germany, France and the UK, have all signed on to be founding members of China’s new Asia Infrastructure Investment Bank (AIIB).
The AIIB is the biggest disruption to the global monetary system since the end of World War II.
For decades, global finance has been completely dominated by the United States… and the US dollar.
This is the reason why a transaction for oil between Bangladesh and Brazil will close and settle in US dollars.
It’s why a French aircraft manufacturer will sell its jets to European airlines… not in euros, but in US dollars.
It’s why a contract for aluminium traded in London will clear in US dollars.
Nearly every major financial or commodity contract in the world is priced in US dollars.
And this requires that the entire world not only holds US dollars in order to engage in trade, but to also use the US banking system.
This has put the United States in a position of unparalleled privilege.
Think about it—the rest of the world placed its trust and confidence in the US banking system, the US government, and the US dollar.
And in return, this privilege has afforded the United States the opportunity to indebt itself more than any other nation in the history of the world, quintuple its money supply, and wage endless wars overseas… all with relatively minor consequences.
But here’s the thing: the US has been conspicuously abusing this privilege for years. They’ve taken things too far.
Debt levels are so obscene it’s now almost mathematically impossible for the US to ever pay it off.
The US banking system led the world into the greatest financial crisis it had seen since the Great Depression.
The US government now even brazenly spies on its own allies.
This isn’t how you maintain the trust and confidence of the rest of the world.
Nearly every other nation out there has had enough. And they’re locking arms with China’s new AIIB in a clear sign of alignment against the US government and the US dollar.
What’s really incredible is how China was able to convince European nations to join AIIB.
Unlike, say, the World Bank, which is totally dominated by the United States, China freely gave up veto power in AIIB… showing willingness to SHARE POWER with other nations.
This is something that the United States government has never been willing to do.
Of course, the Obama administration has vigorously protested this move by its allies and has gone on the offensive to discredit the AIIB.
As US Treasury Secretary Jacob Lew told Congress last week, “Our concern has always been—will [AIIB] adhere to the kinds of high standards that the international financial institutions developed…”
Yeah right… because the US financial system upholds such high standards of international finance. What a farce.
(Lew also told Congress that “[o]ur international credibility and influence are being threatened…” File that one under ‘no shit, Sherlock.’)
And yet, despite all the grumbling from the United States, allies are still jumping into bed with China.
Even CANADA is now ‘considering’ joining AIIB.
Now with its back against the wall, the US is finally starting to acknowledge reality… suggesting that it might possibly be willing to ‘work with’ the AIIB.
It’s embarrassing, really…
To paraphrase Gandhi in this context:
The US first ignored China’s rise and AIIB. Then they laughed at it. Then they tried to fight it. And then China won.
March 24, 2015
French paper Le Parisien didn’t mince words in the headline: “La chasse au cash est lancee”. Basically ‘hunting season on cash is launched’.
Under the auspices of fighting terrorism, France’s Minister of Finance, Monsieur Michel Sapin, has rolled out a series of eight new restrictions aimed specifically at minimizing the use of cash.
Among the new restrictions is a prohibition of making more than 1,000 euros in cash payments (down from 3,000 before).
Large cash withdrawls exceeding 10,000 euros per month will also now be monitored and reported to the French authorities.
Foreign exchange offices will now be required to obtain a copy of someone’s ID to exchange more than 1,000 euros.
There are several more beyond this. And, just for good measure, they threw in a few controls that aren’t even related to cash.
Most importantly, moving and transporting GOLD through France, even through a professional freight service, must now be declared and reported to French customs.
It’s pretty obvious what’s happening here.
Yes, of course they’re saying that they’re doing this in order to combat terrorism… because only terrorists use cash apparently.
But that’s total BS. These restrictions are capital controls, plain and simple. And they’re designed for one single purpose: to keep people’s savings trapped in the banking system.
Interest rates in most of Europe are negative… and likely becoming even MORE negative.
Many banks across Europe have already dropped their deposit rates into negative territory as well… meaning that customers must now PAY for the privilege of loaning their hard earned savings to a poorly capitalized bank.
It’s obscene. And no one in his/her right mind is going to put up with this for too long.
After all, what’s the point of paying a banker NEGATIVE 0.25% if you can simply withdraw all of your savings in cash and hold it in a safety deposit box?
And as interest rates become even more negative, more and more people will realize that they’re much better off holding physical cash instead of paying their banker.
Problem is, if even a tiny fraction of bank customers tried to withdraw all of their savings, it would bring down the entire banking system.
Banks simply do not have the money. They don’t have OUR money.
The most basic principle of modern banking is for banks to take in money from depositors and gamble away upwards of 97% of it… whether making risky loans based on the latest investment fad, or buying the bonds of bankrupt governments.
They hold a very small portion of our savings in reserve. Everything else is gone.
This means that if customers actually… you know… wanted their own money back, it would cause a giant bank run.
Banks would have to start liqudating assets in panic sales trying to raise enough money to pay back their depositors. And many would fail in the process.
And if the last several years of their ‘no banker left behind’ policies is any indicator, governments will do anything they have to do to keep banks from failing.
Hence the capital controls.
Their aim is to close every door possible… to eliminate every alternative that people have to hold savings outside of the banking system.
If you want to save your money in a bank at negative interest rates, no problem.
If you want to buy stocks and bonds (again, bankers and governments profit), no problem.
BUT… if you want to hold cash (ironically—’legal tender’), they want to make it illegal.
And if you want to own gold, they’re imposing all sorts of reporting requirements.
These are not the policies of governments with strong financial positions and stable banks. These are the policies of bankrupt governments and illiquid banking systems.
It’s happening. And as Western nations continue to go broke, it’s going to keep happening… the controls are only going to get worse. It’s time to do something about it.
If you live in a bankrupt country, definitely consider moving at least a portion of your savings abroad to a low-debt country that has a strong, liquid banking system.
There are plenty out there, especially in the Asia-Pacific region (like Hong Kong, New Zealand, etc.)
You may also want to consider digital currencies as well.
If you have misgivings about this, remember that ALL currencies are digitial. The dollar, euro, pound, etc. are all basically digital. (That’s why banks don’t have any physical cash on hand).
The primary difference is that crypto-currencies are entirely decentralized… making it very easy to cross international borders with literally millions of dollars encrypted in a string of characters that you can store on your mobile phone.
Precious metals are also great alternatives to the banking system; think about storing gold abroad in an ultra-safe country like Singapore where your wealth can be free of government confiscation and capital controls.