March 4, 2015
When I arrived to Bangkok the other day, coming down the motorway from the airport I saw a huge billboard—and it floored me.
The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
Given that the Bank of China is more than 70% owned by the government of the People’s Republic of China, I find this very significant.
It means that China is literally advertising its currency overseas, and it’s making sure that everyone landing at one of the world’s busiest airports sees it. They know that the future belongs to them and they’re flaunting it.
And it’s true. The renminbi’s importance in global trade and as a reserve currency is increasing exponentially, with renminbi trading hubs popping up all over the world, from Singapore to London to Luxembourg to Frankfurt to Toronto.
Multinational companies such as McDonald’s are now issuing bonds in renminbi, and even sovereign governments are issuing debt denominated in renminbi, including the UK.
Almost every major global player out there, be it governments or major multinationals, is positioning itself for the renminbi to become the dominant reserve currency.
But here’s the thing. Nothing goes up and down in a straight line. And China is in deep trouble right now. The economy is slowing down and the enormous debt bubble is starting to burst.
A lot of people, including the richest man in Asia, are starting to move their money out of the country.
So while the long-term trend is pretty clear – China becoming the dominant economic and financial superpower – the short-term is going to look incredibly rocky.
We talk about this in today’s short podcast with Sovereign Man’s Chief Investment Strategist, Tim Staermose, which includes a few ways to actually make money from China’s short-term unwinding.
March 3, 2015
Only hours ago, Gallup released a new poll showing that only a small minority (just 17%) of Americans still view the US as the world’s economic superpower.
Echoing former US Treasury Secretary Larry Summers’ quip, “There is surely something odd about the world’s greatest power being the world’s greatest debtor,” it appears that economic reality is finally beginning to set in for Americans.
Yes, it turns out there are consequences when you habitually indebt future generations in order to buy bombs, drones, and body scanners.
There are consequences when you regulate every aspect of society, from how much people can earn on their savings, to what they can/cannot put in their own bodies.
The decline of the United States as the world’s dominant superpower was always inevitable. No nation or empire can hold the top spot forever.
History is full of examples of once-dominant superpowers that have declined (and even collapsed altogether).
Italy was the center of power and wealth in the world, not once but twice. France. Spain. England. Many nations have had their time as #1. The US is no different.
While many Americans are starting to realize that this is happening, what many probably don’t realize is what else happens as a result.
The last 2,000 years of global finance shows that the dominant superpower generally sets the global reserve currency.
Early civilizations used the Byzantine gold solidus for centuries given that the Byzantine Empire was the dominant power at the time.
But as Byzantium’s power rapidly faded, the government played dangerous games with their currency, prompting the rest of the world to find an alternative.
Italy rose to the occasion. As the most prominent rising power in Europe’s early renaissance, ducats and florins quickly replaced the solidus as the dominant reserve currency.
Spain’s later rise to power saw the ‘real de ocho’ dominate global trade. Britain’s rise to power in the 19th century saw the pound sterling become the supreme global currency.
And for the last seventy years, the US dollar has been the world’s dominant reserve currency.
Make no mistake—as US power shifts, so will the dollar’s reserve status. And this changes everything.
The dollar’s reserve status is why so many foreigners buy US government debt despite its extreme level.
It’s why the Federal Reserve’s balance sheet can explode by 500% without hyperinflation gripping the nation.
It’s why Americans can borrow at absurdly low interest rates in order to finance a higher standard of living that they wouldn’t otherwise be able to afford.
All of this goes away as US power wanes. And folks who don’t see the trend coming will probably see their lives turned upside down.
But this doesn’t mean the world is coming to an end. It’s not. The world is changing. And rapidly.
This is not some doom and gloom scenario. On the contrary, it’s ridiculously exciting. Great change brings about great opportunity for anyone who is willing to look at the big picture.
On one hand, it’s important to protect what you’ve got. A major change in the reserve currency will bring about significant turmoil in the financial system.
We could easily see multiple currency crises, bank failures, and capital controls.
But there are some simple, rational steps you can take to ensure you’re not a victim.
If your country is flat broke, then move a portion of your savings offshore to a strong bank in a country with no debt. Simple.
Likewise, move a portion of your retirement funds abroad to a safe place where your insolvent government can’t “help you” manage it.
Definitely put on your seatbelt. Develop a Plan B.
But then once your livelihood is secure (here’s the best part), look forward to the incredible business, investment, and lifestyle opportunities that will come from this great change.
Just imagine how prosperous you would have become if you had known what was to come in Rome before 476? Or France before 1789? Or the US before…?
There will be chances to build generational wealth betting on these big trends… for those who are willing to be a few years early rather than a minute too late.
March 3, 2015
Those who have traveled will understand me when I say that you can instantly feel what local people’s attitudes towards you are just from the way they look at you.
It’s hard to describe specifically what the differences are… you just feel it.
As a traveler this can have a huge impact on how you feel about a place, while as an expat it can make all the difference. It’s hard to ever feel at home in a place where people watch you when you walk by as if you’re some bizarre alien.
That’s not to say that you want to avoid anywhere you might stand out, because while in some places those glances can mean hostility or wariness, in others they can mean curiosity and adoration instead. And it’s always great to be where it’s the latter.
In fact, I’ve found that in some places, the fact that I look foreign actually gets me better treatment.
This is exactly how I feel whenever I arrive here in the Land of Smiles, where I’m quickly reminded of how the country got that nickname.
From the moment I step off the plane I’m met all around with deep bows and pleasant greetings.
Famed for their warmth, the Thais heartily welcome foreigners into the country to enjoy their beautiful beaches, vibrant culture, and incredible food.
But as friendly and accepting as the Thais are, a barrier always remains between them and everyone else.
This distinction is particularly apparent when it comes to business—which is quite evident in how policymakers didn’t mince words at all in coming up with the Alien Business Law.
This law, which dictates foreign business operations in the country, sets strict limits on what industries a non-Thai company can engage in and limits ownership stakes in Thai businesses by foreigners to 49%.
Thus the best option available for most foreigners is to find a local Thai partner who holds a majority stake of the company.
It works, but it’s a complicated process that requires a great deal of trust in a local partner.
However, if you happen to be a citizen of the US, Australia, or Japan, there’s a big, giant loophole.
Each of these countries has signed special agreements with Thailand that changes all of that.
US citizens, for example, can take advantage of the 1966 Treaty of Amity, which enables US companies to receive national treatment in Thailand.
This means that a US citizen can do business in Thailand through a US company that s/he 100% owns, instead of using a convoluted and expensive structure to own a minority stake of a Thai company. US companies are also allowed to wholly own their Thai subsidiaries or branches.
There are still some sectors that remain off-limits, like banking and real estate. But it’s an easy way for US (and Japanese, Australians) to do business in Southeast Asia’s largest economy.
The application process is fairly straightforward.
Applying requires little more than filling out an application, providing some identification and company statements, and waiting a month or so for approval.
Though Thailand has recently undergone a number of political changes, this treaty has a long history and seems to face no challenges.
Now, I’m not suggesting you drop everything and go start a business in Thailand, although it’s definitely a very interesting place, with lots of opportunities. Especially to cater to the huge expat population here, or the growing middle class with money to spend—Thais are big consumers themselves.
Rather, I want to open your mind to the fact that as countries, especially in the bankrupt West, are putting up more and more restrictions and limitations on what we as sovereign human beings can do, there are always solutions and ways to overcome every obstacle.
Sometimes they come in the form of government loopholes themselves, such as the Thai-US Amity Treaty or international tax agreements between countries that you can use to your advantage to keep more of what you earn.
Other times they come in the form of the rapidly advancing technology and innovation that’s rendering the old social, political, and financial order obsolete.
And sometimes they are the age-old tactics of not putting all your eggs in one basket and betting your whole life on the fortunes of one single political entity.
All you have to do is open your eyes to alternatives and be curious and bold enough to pursue them.
March 2, 2015
Whenever I land in Bangkok, I instantly feel the buzz. This is a city that’s alive, unlike any other in the world.
Commerce is everywhere and sometimes it feels that the whole city is one big marketplace.
Bangkok is known across the world for its exhilarating social life, but that same incredible energy is put towards business and entrepreneurship as well.
While the official startup scene might be relatively new, the entrepreneurial spirit is clearly an intrinsic part of the culture.
That’s why the unemployment rate in Thailand is so low (the official rate is an incredible 0.56%), especially when you account for people hustling in the ‘informal sector’.
If you want to get into business here, you simply set up your own food stall or street shop, and you’re in business in no time. I’ve even seen foreigners on Sukhumvit Road hauling around their own fruit carts in the evenings.
Lately, the number of startup-related events in Bangkok has really surged.
But in reality, they’re not trying to create an entrepreneurial community, they’re just making the existing one more connected by building an ecosystem.
And if the domestic business culture here weren’t enough, Bangkok is also a magnet for expat entrepreneurs.
More expats are living in Thailand than just about anywhere else in the world; and many of these people are actually making their dream lifestyles a reality through online and offline businesses.
They choose to come here because they can live well at just a fraction of the cost that they could back home. Delicious food, nice digs, tropical weather, and a great social life—all at a substantial discount.
Especially for online businesses, the connections here are great; there’s an entire cadre of young entrepreneurs who have made a home in Thailand—primarily in Bangkok, Chiang Mai, and Phuket.
And an increasing number of VC firms are now flocking to the scene. Both local VCs and those with Silicon Valley experience are springing up, including that of InVent and Ardent Capital.
Open to entrepreneurs both from Thailand and abroad you can have great access to training, mentorship and seed capital through incubators, such as HUBBA, MAD, and True Incube.
One of the most prominent, AIS The StartUp, the Thai telcom’s own incubator, is now hosting its third generation of startups.
For those accepted to the program, they don’t offer simply a space to work in and a bit of cash, but genuine support from the company itself, which of course includes access to its 41-million customer base.
Winners even get a 39 million baht (US$12 million) prize.
Clearly this is not your average amateur startup scene.
A lot of cities in the world have a lot to offer entrepreneurs, but to have everything a startup needs in terms of culture, excitement, budget, and opportunity all in one place—Bangkok is hard to beat.
February 26, 2015
Warren Buffett once famously chided that all the gold in the world would form a cube of 67 feet (20 meters) on each side.
In doing so, he was attempting to argue that there was no point in owning gold since all the gold in the world would be an unproductive, useless hunk of metal.
What’s ironic (and completely lost on the venerable Mr. Buffett) is that you could make the same argument about the paper-based financial system.
It’s estimated that the derivatives market now exceeds $1 QUADRILLION (15 zeros) in notional value. If you were to somehow accumulate and stack up $1 quadrillion, the pile would be thousands of feet high and hundreds of yards long… much bigger than the cube of gold.
It’s a similar story with government debt, which exceeds $56 trillion worldwide.
Now, it may be a cute thought experiment to blast gold as a useless hunk of metal. But the reality is that gold will never require a taxpayer-funded bailout. It won’t crash the financial system. And it won’t enslave future generations to higher taxes and inflation.
On the balance, at least as a means of preserving assets over the long-run, ‘useless’ certainly beats ‘destructive’.
(Actually gold can be put to productive use and generate a rate of return—it’s just that such platforms are extremely rare. I’ll share some exciting developments on this front with you soon.)
My friends at Silver Bullion (a state-of-the-art precious metals depository here in Singapore) recently put together a great infographic which visualizes all of this—over $1 quadrillion in the paper financial system stacked against the known supply of gold and silver in the world.
They were kind enough to let me send this out to you, I hope you enjoy.
February 25, 2015
In December, Sovereign Man’s Chief Investment Strategist advised our Sovereign Man Confidential members on a position to take on the RMB. This week we found that this trade is already up by as much as 300%.
Now looking at the latest news from China we see that our advice still stands, and even stronger than before.
Chinese treasuries were reduced by over $30 billion over the course of 2014, and that trend is continuing at full speed in 2015:[Editor’s Note: this article was translated by a member of our team, bolding is ours. Read the original article in Chinese here.]
The renminbi remains weak, which has put China in a real dilemma. Wealthy Chinese people are getting worried and are transferring a lot of money to foreign countries, while foreign investors are increasingly skeptical about China.
The central bank in Beijing fixes the initial value for the renminbi, the center point for the currency’s daily trading range. It is roughly the same value, 6.12 to 6.13 to the dollar.
What’s happening now though is that as soon as the markets open in Shanghai, the renminbi sinks close to the bottom of the currency’s trading band, roughly 2 percent lower. Only frequent intervention by the central bank — buying renminbi and selling dollars — prevents the Chinese currency from falling even further.
The weakness in the renminbi is a growing worry for government policymakers and corporate executives.
The currency’s decline reflects the money flowing out of the country. Wealthy Chinese are moving large sums overseas, troubled by President Xi Jinping’s anti-corruption campaign and the country’s slowing economy. Foreign investors are also growing more skeptical of China.
For many years, China kept the renminbi weaker than economic fundamentals dictated, to help its exporters stay competitive in foreign markets. But a weak renminbi is no longer an unalloyed advantage.
Chinese banks and companies have borrowed overseas an estimated $1 trillion in mostly short-term, dollar-denominated debt over the last five years. They were betting that the renminbi would continue its decade-long gradual appreciation, which would have made their debts in dollars less expensive to repay. But the depreciating renminbi makes that debt more costly.
That puts central bank officials in a quandary. “They cannot afford to let it depreciate too quickly,” said Liu Li-gang, a China economist at ANZ, a big Australian bank. “Firms could be pushed into default.”
Almost no one expects a sudden, disorderly fall in the renminbi. At $3.84 trillion, China’s foreign exchange reserves dwarf every other country’s, accounting for a sixth of the entire world’s supply. China can easily fend off any attempt to “break the renminbi” in currency markets.
But banks, traders and many companies increasingly expect at least gradual depreciation. In preparation, they are starting to shift money out of China and place bets instead on a weakening renminbi.
The problem for Chinese policymakers, which is increasingly apparent in their official statements, is that vigorously defending the renminbi carries a potentially high price in slower economic growth. Using foreign exchange reserves to support the currency—spending dollars to buy up renminbi—means the central bank is effectively taking billions of renminbi out of circulation, preventing it from flowing through the economy, where it can bolster growth.
February 25, 2015
This is a great example of ‘sovereign risk’:
One of my close friends here in Singapore opened a brokerage account last year with Interactive Brokers.
If you’re not familiar, Interactive Brokers is a leading securities broker based in Greenwich, Connecticut. You can trade stocks, currencies, options… all that stuff.
Now, my friend is not a US resident (he lives here in Singapore), nor is he a US citizen.
He opened his account through their Asian branch in Hong Kong, funded the account from here in Singapore, and then bought some Canadian stocks listed on the Toronto stock exchange.
Nothing about his investments had anything to do with the United States.
So you could imagine his surprise when he received a recent email from Interactive Brokers informing him that his account was about to be “escheated to the state”.
Yeah, I had to look it up too.
It turns out that if you don’t have a specific amount of “qualifying activity” then your account is considered dormant and will be turned over to the state.
Now- my friend had bought his stocks. He was quite comfortable with his positions.
He’s not a day-trader or anything like that—he is happy to simply buy shares of undervalued companies and own for the long-term.
So he bought the shares and walked away from the account for a while—a true ‘buy and hold’ strategy.
He didn’t feel compelled to log in every day to check the price. Besides, there are only a zillion other websites where you can check stock prices.
But it was precisely for this reason—his nature of being a responsible, long-term investor—that he did not have any ‘qualifying activity’.
That’s why he received a notification from his broker saying that his account was “at risk of being classified as abandoned and subject to forfeiture. . .”
Interactive Brokers went on to write: “Based upon a review of your account UXXXX284, there has been no such qualifying activity and it is therefore subject to being classified as abandoned if you do not act quickly.”
“If we fail to hear from you the account will be escheated to the state and closed.”
Needless to say he thought is was a joke. Or spam. But it was the real thing.
Apparently the government is in pretty desperate need of cash.
More importantly, it’s a sad testament to the nature of investing today that any responsible, long-term investor is automatically presumed to be dead.
It’s as if they expect us to be like little lab rats constantly running around the financial maze looking for new crumbs of cheese.
The amazing thing is that they waited so long to send him a warning.
I mean, if he had been on vacation or not checking his email, his account would have been liquidated and turned over to the state.
He was fortunate enough to have caught it. I imagine there are plenty of others who were not so lucky.
Look, we’ve said it over and over again: Sovereign Risk is the biggest risk out there.
You cannot EVER underestimate the desperate tactics and procedures of bankrupt governments.
They’ll come up with every creative way possible to relieve you of your assets, even when it means declaring you dead and ‘escheating’ your funds to the state.
At a minimum, know the rules. (i.e. if you have a US-based brokerage account, log in right away and generate some activity).
More importantly, consider moving at least a portion of your assets abroad to a safe, stable, low-debt jurisdiction that doesn’t have the same desperation.
February 24, 2015
At the end of September 2011, just days before his passing, the company that Steve Jobs founded had a $25 billion cash hoard. Nearly half of this was stashed overseas.
What’s more, Apple was running billions in profit through multiple Irish subsidiaries, neither of which were taxable by the US government.
Steve Jobs departed this life owning 5.5 million shares of Apple (and another 138 million shares of Disney, which employed similar offshore practices).
So his personal share of the untaxed offshore booty was obviously substantial.
Did this make him ‘unpatriotic’?
Was the guy who revolutionized five industries and touched the lives of billions of people some nefarious traitor because he held so much money offshore?
Of course not.
Despite all the absurd, highly negative media attention centered on shaming companies and individuals who go offshore, it’s one of the most sensible, rational steps anyone can take.
Every taxpayer on the planet looks for legal ways to reduce way they owe, or at least claim every deduction and exemption they’re entitled to.
No one files a 1040 saying, “Yeah, I’m not going to claim the child tax credit or medical expenses this year…”
Arranging one’s affairs for tax optimization is normal.
People shop at duty free stores specifically to save money and not pay sales tax.
Others live in one place (New Hampshire, for example) and commute to another (Boston) to save on state income tax.
Doing the same thing for a company is hardly different.
Apple started its shift by moving its profit center from California to Nevada, thus saving the company 8.84% in California state income tax.
From Nevada, the company then set up its Irish subsidiaries, saving the lion’s share of the federal corporate tax rate.
People blast Apple (and Microsoft, Google, GE, etc.) as unpatriotic for taking advantage of the legal options available to them.
This is simply an ignorant assertion. Critics have completely forgotten that the pretext of the American Revolution was largely motivated by taxation.
I would suggest that it is US politicians who are unpatriotic. They penalize productive citizens and businesses with one of the highest tax rates in the world.
At 39%, the United States of America has a higher corporate tax rate than Norway (27%). Or ‘Communist’ China (25%). And yes, even Russia (20%).
Moreover, I would suggest that going offshore is actually patriotic.
You see, these tactics aren’t just available to Apple and Microsoft. Even small businesses can legally take advantage of comprehensive tax treaties and offshore sales companies, especially if you are operating an online business.
Legally reducing your tax bill means putting less money in the hands of people who have an uninterrupted track record of destruction and failure.
They have an abysmal history of managing other people’s money. They blow it all on bombs, drones, wars, and unsustainable social welfare programs.
People in the Land of the Free grow up being taught that voting is a patriotic duty.
If you believe this to be true, then note that the most powerful votes you can cast are the ones you make with your feet… and your money.
Every single day you are essentially ‘voting’ for the products and services that you value. If you buy an iPad, this is like casting a vote for Apple with your dollars.
This market-based approach is much more powerful than standing in a booth and being forced to choose between two complete idiots.
In the market, the best products and services receive the most votes, and hence, stay in business.
The worst companies don’t receive enough votes to stay in business, and they ultimately go under (but not before getting a $536 million loan guarantee from the Department of Energy).
Politics can work the same way.
Rather than vote in the booth for new people, we can simply vote with our money and actions to restrict the resources they have available.
This isn’t scandalous, shameful, or even remotely unpatriotic.
Rather, using legal means to slash the amount of tax that you pay is the most powerful, conscious way you can cast a vote that really matters: a vote of No Confidence.
February 23, 2015
In 1494, a 47-year old Franciscan friar named Luca Pacioli invented something that was revolutionary.
Pacioli was, in fact, a friend and contemporary of Leonardo da Vinci, and the two collaborated frequently.
So you’re probably guessing that Pacioli was a co-designer in Leonardo’s famed flying machine, or a new architectural technique.
On the contrary.
Pacioli’s invention was the double-entry accounting system; in fact he’s known by bean counters today as the father of accounting.
This was a major and much needed innovation at the time.
In the 15th century, Italy was dominating global trade and commerce.
Yet unlike in the centuries before where merchants were primarily transporters and traders of exotic goods, 15th century merchants had essentially become proto-bankers whose primary business was extending and trading credit.
This was a major change in the way that business was done, and it absolutely demanded a new way to keep track of it all.
That’s exactly what Pacioli invented. And his system of accounting is still being used today, over 500 years later.
This was a seminal moment in business history—the near simultaneous birth and convergence of credit-based money, banking, and accounting that would eventually become the global financial system.
It revolutionized everything.
Back then, just as today, few people really understood it. And those who did were often clever enough to find loopholes in the system to hide their fraud. Especially banks.
There are some really stunning (and sometimes hilarious) examples of early banks who learned how to cook their books and misstate their capital using Pacioli’s system.
Curiously very little has changed. Banks still use accounting tricks to hide their true condition.
Bloomberg showcased one such technique last year, exposing the way that many US banks are rebooking their assets from “available for sale (AFS)” to the “held-to-maturity (HTM)” designation.
This is a very subtle move that means nothing to most people.
But to banks, it’s a highly effective way of concealing losses they’ve suffered in their investment portfolios.
Banks ordinarily buy bonds and other securities with the purpose of generating a return on that money until they have to, you know, give it back to their depositors.
That’s why they’re called “available for sale,” because the bank has to sell these assets to pay their depositors back.
But here’s the problem– many of these investments have either lost money, or they soon will be. And banks don’t want to disclose those losses.
So instead, they simply redesignate assets as HTM.
It’s like saying “I don’t care that these bonds aren’t worth as much money as when I bought them because I intend to hold them forever.”
Thing is, this simply isn’t true. Banks don’t have the luxury of holding some government bond for the next 30-years.
This is money they might have to repay their customers tomorrow, which makes the entire charade intellectually dishonest.
That doesn’t stop them.
JP Morgan alone boosted its HTM mortgage bonds from less than $10 million to nearly $17 billion (1700x higher) in just one year. This is a huge shift.
Nearly every big bank is doing this, and is doing it deliberately. This is no accident. And there’s only one reason to do it—to use accounting minutia to conceal losses.
But the accounting tricks don’t stop there. And in many cases they’re fueled by the government.
One recent example is how federal regulators created a new ‘rule’ which allows banks to consciously reduce the risk-weighting they assigns their assets.
The Federal Financial Institution Examination Council recently told banks that, “if a particular asset . . . has features that could place it in more than one risk category, it is assigned to the category that has the lowest risk weight.”
This gives banks extraordinary latitude to underreport the risk levels of their investments.
Bankers can now arbitrarily decide that a risky asset ‘has features’ of a lower risk asset, and thus they can completely misrepresent their investments.
Bottom line, it’s becoming extremely difficult to have confidence in western banks’ financial health.
They employ every trick in the book to overstate their capital ratios and understate their risk levels.
This, backed by a central bank that is borderline insolvent and a federal government that is entirely insolvent.
It certainly begs the question—is it really worth keeping 100% of your savings in this system?
I would respectfully suggest finding a new home for at least a portion of your savings.
After all, it’s 2015. You no longer need to bank in the same place as you live and work.
It’s possible to establish an account offshore—at a safe, stable, well-capitalized bank overseas in a country with no debt.
You might even find that the bank will pay you a reasonable interest rate that actually exceeds inflation (shocking!).
And in many cases you may be able to do all of this without leaving your living room.
It’s hard to imagine anyone would be worse off.
February 23, 2015
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and editor of Price Value International.]
“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.”
– From Supermoney by Adam Smith.
It was not supposed to be like this. As we highlighted last week, after the Great Debt Bubble, there has been no Great Deleveraging. In fact, as the McKinsey Global Institute showed in their February 2015 report,
“After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage. It has not happened. Instead…
“Debt continues to grow. Since 2007, global debt has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points.”
Herbert Stein’s Law mandates that if something cannot go on forever, it will stop. The great Austrian economist Ludwig von Mises expressed the same sentiment and came to a somewhat gloomier conclusion:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
As the McKinsey data show, the voluntary abandonment of further credit expansion has clearly not occurred. If Mises is correct, and we are minded to consider that he is, then draw your own conclusions.
We have now become used to so many years of utterly extraordinary monetary experimentation and policy-making on the hoof that there is a danger that Alice-in-Wonderland central banking activity simply gets taken for granted as the natural state of affairs.
This is the same type of absurd but incremental behaviour that gets frogs in pans boiled alive with their tacit approval.
Blithe sceptics to this line of thought will no doubt argue that if seven years of making-it-up-as-we-go-along monetary policy hasn’t derailed the system, then perhaps the system won’t get derailed.
Perhaps it’s even un-derailable. But this sounds suspiciously like Ben Bernanke’s own flawed thinking when he suggested in July 2005 that: “We’ve never had a decline in house prices on a nationwide basis.”
In other words, because something has never happened before, it never will.
(This from the same person who observed in March 2007 that “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”)
No, the insoluble problem facing every investor today is not just that the system is unsustainable. It clearly is. The problem is that we lack a means of forecasting accurately when the system is likely to break apart.
The financial market is a complex, adaptive system, reliant on confidence, the ongoing robustness of which is completely unforecastable. That confidence has been robust is not in question.
The creation of trillions of dollars, pounds, euros, yen and renminbi worth of ex nihilo money has yet to dent confidence entirely in an unbacked paper money system (notwithstanding the 345% gain in the dollar price of gold since the start of the millennium).
Just before the turn of the millennium, inside the late Peter L. Bernstein’s excellent history of risk, ‘Against the Gods’, we came across the following quotation by the Swiss mathematician and physicist Daniel Bernoulli: when managing money for wealthy people,
“The practical utility of any gain in portfolio value inversely relates to the size of the portfolio.”
Bernoulli (1700-1782) has a good claim to being one of the world’s first behavioural economists, in that he observed that investment performance for the wealthy is not exactly the same as investment performance for the non-wealthy.
For the objectively wealthy, or super-wealthy, any further gain in portfolio value has to be seen in the context of maintaining the original value of the portfolio. Since human beings are typically loss averse, maintaining the original purchasing power of the pot is much more important than generating further incremental gains, especially in an environment where the pursuit of those further gains risks existentially jeopardising that original pot.
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
But for us the question is somewhat academic since we’re not remotely interested in index-tracking. Other investors, however, evidently are. Among the top 10 ETF purchases by customers of Barclays Stockbrokers last week were funds tracking:
- The S&P 500 (iShares and Vanguard)
- The FTSE 100 (iShares and Vanguard)
- The FTSE 250
- The Euro Stoxx 50
We foresee all kinds of risks in taking indexed exposure to stock markets close to or at their all-time highs. Index-tracking funds offer many things. Relatively low cost market exposure, for one.
But as and when stock markets go into reverse, purchasers of low cost trackers will find that they have been penny-wise and pound foolish, because low cost trackers offer precisely zero discernment or discretion when it comes to market direction. If the market goes down, they go down with it.
So rather than tag along for the ride, we much prefer to follow the ‘value’ route (to capital preservation and growth, in that order).
Index benchmarking is utterly inappropriate, we would suggest, for the private investor, for whom the ultimate reference rate should be cash, since cash remains the only asset that cannot decline in nominal terms. Or at least that used to be the case, before acronyms like QE, ZIRP and now NIRP (Negative Interest Rate Policy) steamrollered over all assets in their path, like financial terminators.
If we define ‘value’ as inherent quality plus attractive valuation, it has relevance to both debt and equity market investing today. Bond markets as a whole are clearly grotesquely overvalued but may remain so or become even more overvalued because there is an 800lb gorilla in the market determinedly gobbling them up.
As of March 2015, the ECB will be buying €60 billion worth every month. We doubt whether there’s that much quality debt on offer in the euro zone. But there may be elsewhere, not least because most of the world’s creditor countries lie outside the euro zone.
In equity markets, we see almost no compelling value in US stocks, which if nothing else are intensely well covered (we mean by number of analysts, not necessarily by quality of coverage) by Wall Street.
We see compelling pockets of genuine value, however, in markets like Japan, which simply aren’t well covered by the analyst community, which has been scared off by 20 years of bear market conditions.
We then supplement our debt and equity exposure with uncorrelated investments (namely systematic trend-followers), which we have always regarded as bellwether holdings, and with real assets, notably the monetary metals, gold and silver.
The result: four discrete asset classes that will behave in different ways under different market conditions.
High quality debt offers income and a degree of capital preservation (especially in an environment of outright deflation).
High quality ‘value’ equity offers income and the potential for attractive capital growth (especially in an environment of modest inflation).
Systematic trend-followers are broadly market neutral, but with the potential to deliver outsized gains in an environment of systemic financial distress (most trend-followers generated double or triple digit percentage returns in 2008, for example).
And real assets, again, offer the potential to deliver outsized gains in an environment of systemic financial distress or high inflation, or both.
Unlike most of our fund management peers, we accept that we can’t predict the future. Unlike many of them, we are at least preparing for it.
But that brings us back to our initial dilemma. We think the system is desperately unsound, so we take out what insurance we can, whilst still retaining a stake in a variety of markets (on our terms admittedly, rather than according to somebody else’s irrelevant benchmark).
But insurance only works if you have it when the crisis erupts. You don’t buy house insurance after the roof catches fire.
February 20, 2015
Los Angeles, California
File this under ‘you can’t make this stuff up.’
Lenovo Group, the largest computer manufacturer in the world, has made a rather stunning admission that they have been pre-installing tracking software on their PCs.
The tracking software is made by a company called Superfish, which apparently paid some “very minor compensation” to Lenovo for putting the software on people’s computers.
The Superfish program is a total disaster.
It has image recognition algorithms which essentially monitor what a user is looking at… then suggests relevant ads based on what it thinks you might like.
This is not only REALLY high up on the creepy scale, it also completely destroys Internet security.
Whether you’re buying something online or accessing Internet banking, the Superfish program essentially cuts the secure link between you and sensitive websites that you’re trying to access.
According to the first user who found the vulnerability a few weeks ago, “[Superfish] will hijack ALL your secure web connections (SSL/TLS) by using self-signed root certificate authority, making it look legitimate to the browser.”
This means that the tracking software basically fools a web browser into believing that a connection is secure when it’s not… all for the purpose of pushing more ads in your face.
This scheme is so powerful that even if users uninstall the Superfish software, the security breach still remains.
This is so flagrant I have to imagine that even the NSA is shocked.
After its initial approach of being completely unapologetic and dismissal, Lenovo is now groveling for forgiveness.
The company’s Chief Technology Officer now says, “We messed up badly here,” and “We made a mistake.”
Duh. But untold amounts of consumers out there have been totally violated.
There are a few interesting points to make here–
1) Privacy isn’t dead. But it’s extremely difficult to maintain. There are so many forces out there trying to pry whatever little privacy remains from us, one has to fight tooth and nail to preserve it.
2) There’s no transparency in the system; we never really know what’s going on behind the scenes with big institutions.
Governments and politicians will lie to our faces. They’ll tell us to be excited and that everything is fine; then behind the scenes they’ll plan for capital controls and huge tax increases.
No one has any idea what kind of toxic crap banks have on their balance sheets. They’ll post record profits and tell us how successful they are. But internally they know that it’s only a matter of time before they collapse (as we saw in 2008).
Even major tech brands are betraying the public in the dark of night with crazy spyware or selling us all out to government agencies.
There are very few, if any, big institutions out there that we can trust anymore.
And maybe that’s how it should be.
It’s a shark-filled world with bad people who do bad things. Perhaps it’s all the better that a trusted brand becomes the poster child for betrayal.
Because if Lenovo is doing this, are we supposed to be so naïve to presume that Google, Apple, AT&T, etc. are not?
February 18, 2015
San Diego, California
It’s not very often that you hear a senior government official refer to their economic situation using the word ‘crisis’.
Yet with uncharacteristic bluntness of any government official anywhere, at least one senior Chinese government official is sounding the alarm bells.
And he would know.
Guan Tao oversees the foreign exchange of China’s $4 trillion stockpile of reserves, so he has an incredibly unique view of capital flows and currency movements in and out of the country.
Currency movements and capital flows are extremely interesting indicators.
They don’t necessarily tell you that there’s a problem. They tell you that people have figured out there’s a problem.
Look at Greece, for example.
The government is bankrupt, another default is looming, and the country is literally about to run out of money. It’s pretty obvious that there’s been a problem for a very long time.
But the central bank data in Greece now shows that roughly 8% of all customer deposits have vanished from the Greek banking system so far this year.
That’s an astonishing figure.
Again, a currency movement like this doesn’t tell you that there’s a problem. All the other data can tell us that.
The currency movements out of the banking system tell us that the people of Greece have figured it out… that they’ve lost confidence in the system.
This is extremely important… because the entire global financial system is only held together by a very thin layer of confidence.
Nearly every western government is bankrupt. Central banks are borderline insolvent. Banking systems are extremely illiquid.
Everything about this system is fundamentally weak. And the only reason that people aren’t panicking is because no one else is panicking.
Like a very thin piece of glass, the tiniest chip can turn into a crack… and ultimately shatter the confidence in this system. That’s exactly what happened in 2008.
Major currency movement and capital flows tell us that people are starting to panic.
It’s happening in Greece. And it’s happening in China.
Mr. Tao informed the audience that the capital flight from China in December alone amounted to $20 billion, and that was just from official channels. The true amount could be four times greater.
This is significant for a number of reasons:
a) It’s happening.
Tens of billions of dollars are fleeing China, which is arguably the largest economy in the world. This does not bode well at all for the global economy.
b) They’re admitting it.
Again, it’s ridiculously unusual for a senior government official, ESPECIALLY IN CHINA, to admit to an audience, “yeah, people are taking their money and getting the hell out of dodge.”
Moreover, Tao even told his audience that China’s financial conditions “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.”
(Our Chief Investment Strategist said the exact same thing last year.)
Such brutal honesty is certainly welcome. But it’s akin to career suicide.
c) If people are taking their money out of China, with all of its growth and savings, what does that say about other bankrupt nations?
Europe is a complete basket case and will likely go from bad (Greece) to worse (Italy).
Japan is a terminal failure, currently spending over 25% of its tax revenue just to pay interest.
And, perhaps just due to process of elimination, everyone seems to be looking to the United States as the beacon of growth and stability right now.
I’m sorry but this just doesn’t compute.
The US Federal Reserve on a mark-to-market basis is borderline insolvent. The US Federal government actually IS insolvent (based on their own financial statements).
The US banking system is EXTREMELY illiquid and has once again loaded up on risky loan packages (more on this in another letter).
How exactly is this safe?
It’s not. In fact, it’s downright ugly. And not even less ugly than the others.
Bottom line, there are very few safe places out there. Each of the governments has royally screwed up, and at this point, they’re all interconnected.
Greece and Italy cannot fail without devastating much of Europe. Europe cannot suffer without causing problems in China. China cannot slow down without causing major problems in the rest of the world.
Everything is connected.
So it’s simply wishful (and foolish) thinking to simply presume that the US, with its $18 trillion debt level and nearly insolvent central bank, can somehow be ‘all good’ while other nations are hemorrhaging cash.
Be mindful of the risks in the system. Don’t hold everything in the illiquid banking systems of bankrupt countries.
These are important decisions: where you hold your savings matters. Seek out countries with low (or zero) debt that have well-capitalized, highly liquid banks.
And if you haven’t done so already, definitely consider trading in at least a portion of your paper currency for a real asset like gold and silver.
February 17, 2015
San Diego, California
Jim Morrison used to sing: “No one here gets out alive”. And while few people really expect to die, it happens to all of us.
Death, like Hemingway wrote of going bankrupt, happens gradually then suddenly.
Given the inevitability, it’s always a good idea to have a plan for what’s going to happen afterwards.
Besides, not adequately preparing for what happens to your assets after your death can unintentionally leave your heirs in a difficult situation.
Despite governments taxing you all throughout your life on your income, property, and investment returns, they don’t stop there.
Even (or especially) in death, governments continue to plunder. Estate and inheritance taxes around the world can be absolutely breathtaking.
The real problem lies in the difference between how the assets are passed vs. how they are taxed.
Here’s a common example: you pass away having owned a property worth $1 million.
Depending on where you lived (and died), your children could inherit the property and be stuck with a tax bill even though they didn’t actually inherit any money.
This would put them in a very difficult situation where they would need to liquidate the family property in a fire sale just to be able to pay the inheritance tax.
In other cases, depending on where you live (and die), some governments mandate precisely HOW your assets can be allocated.
It’s called ‘forced heirship’. And it means the state gets to decide that X% of your assets go to your spouse, Y% to your children, etc.
Essentially you lose the discretion to decide where you want your own assets to go after you pass on. It’s unbelievable.
There are certain states (Louisiana) and countries (France) where forced heirship is the rule.
Between this and the actual taxes themselves, the consequences of leaving these loose ends untied are rather significant.
All it takes to mitigate the risk is a bit of advanced planning. Because for every bonehead tax and law, there’s a solution to get around it.
In the Land of the Free, domestic trusts are common estate planning tools that are used to avoid estate taxes and take control of what gets passed on.
In France, a structure like an SCI (Societe Civile Immobiliere) can be used to avoid estate tax, as can the new Brussels IV rules when they come into force this August.
These are all completely legal solutions, and there are really a lot of options.
What’s critical is to remember to update your estate plan if you move.
These laws vary dramatically from place to place. So an estate plan that works well in Texas might not work as well in California.
This goes double if you move abroad.
Whatever steps you took to safeguard your estate in British Colombia won’t amount to much if you retire and live out your days in South America (where most countries have forced heirship laws).
One way of getting around these rules is by holding your assets in a foreign trust. This can be expensive to set up, however.
(Premium Members— remember that you received a free Offshore Trust Kit with your Sovereign Man: Confidential membership, which can save you thousands of dollars in setting up this asset protection structure.)
But perhaps a cheaper, easier alternative is to hold your assets in a foreign company registered outside of the jurisdiction where you’re living.
Specifically, choose a jurisdiction that does not have a public record of the shareholders (such as Nevis or the Marshall Islands).
For example, if you live in Chile, you can own assets and property through a Marshall Islands company.
The government of Chile has no earthly idea who owns the Marshall Islands company.
And in the event of your death, they would have no idea who the owner of the foreign company is.
So even after your death, the actual owner of the property (the company) doesn’t change. This way there’s no estate tax triggered on local assets, and it keeps governments away from meddling in your private affairs.
February 16, 2015
En route to the Land of the Free
Two years ago, Mr. Chan saw an opportunity.
Thanks to tight government control of the Internet, launching a website in China is an intensely bureaucratic affair.
It takes much more than just buying a domain and hosting it.
In China, you first have to register your domain with your ID at the Ministry of Internet Communication.
Then you wait.
Afterwards, IF you get approved, there are all sorts of protocols and censors who demand your compliance.
And of course, the moment you say something the state doesn’t like, they can take your site down instantly.
Whenever government bureaucracy gets as out of control as this, there is always an opportunity to provide faster, simpler, better alternatives.
And that’s exactly what Mr. Chan did.
Originally from China’s Shangdong province, Mr. Chan traveled to Cambodia where he set up a company to provide offshore web service to customers in China.
His company has flourished; he’s now one of the leading offshore hosting providers, and he is able to give his customers greater privacy that’s out of reach of state censors.
In addition to protecting his customers’ privacy, though, he also protects his own.
Mr. Chan has structured his business operations outside of China, plus he has registered the company in a jurisdiction where he can use nominee directors and shareholders.
In other words, he is not officially listed anywhere as a shareholder or company director.
Believe it or not, this is completely legal in many jurisdictions, including in the United States of America (aka the #1 offshore tax haven in the world).
Current law in many US states and other offshore jurisdictions allows the use of nominees (like attorneys) to put their names on company documents, thus masking who the real owners and directors are.
In addition to his business, Mr. Chan also banks overseas, holding his money in strong, well-capitalized, debt-free jurisdictions like Singapore that are outside of his government’s control.
He is also diversifying himself personally to ensure he is not reliant on a single government.
For example, Mr. Chan has spent the last several years as a resident of Cambodia. And since he has made qualifying investments and spent sufficient time in the country, he is months away from obtaining Cambodian citizenship.
He also recently came to Chile where my team began assisting him with obtaining residency there.
It’s a good thing that he started early.
You see, one of the things that Mr. Chan told us is that China is now following the US’s lead down the dark path of global taxation.
The timing is no accident as China is experiencing its lowest growth rates in 24 years, making the leadership increasingly anxious.
The enforcement of global taxation could have huge implications for Chan, but he’s not too worried.
Because the moment his Cambodian passport comes through he will simply renounce his Chinese one.
Mr. Chan knows that swapping passports won’t change who he is as a person. He won’t feel any less Chinese for doing so.
It’s amazing to see a culture that doesn’t have the same western emotional attachment to a government-issued piece of paper.
In China, people don’t conflate love of country with love of government.
Plus, prudence, preparation, and diversification are all deeply ingrained in the Chinese mindset.
This is why so many Chinese already bank abroad, have their businesses structured overseas, and have established residencies or second citizenships abroad.
They don’t fool themselves that their government is a benevolent force for the good.
Unlike their western counterparts, the Chinese actually know that they’re not free. And they do something about it.
They’ve learned that it makes all the sense in the world to be prepared and have alternative options.
If the government poses a threat, you take action to reduce the threat. If your government is bankrupt, you take steps to reduce your exposure. Simple.
This is what rational people do. They don’t reassure themselves that the government is going to fix it.
They take prudent steps that make sense no matter what happens.
Having some savings in a well-capitalized bank abroad, out of reach of your home government and dangerous gambling practices of your local banks, is incredibly wise.
Structuring your business overseas properly can often bring immense tax savings, not to mention greater privacy and asset protection.
Having another residency in a thriving place overseas where you enjoy spending time means that you always have an alternative if you need it.
All of these things can provide you with more safety and opportunity to prosper and be free, whether you are in China, Greece, or the United States of America.
February 12, 2015
Puerto Varas, Chile
Twenty-seven years ago at the 1988 Republican National Convention in New Orleans, George H. W. Bush accepted his party’s nomination to run for President of the United States.
(This was when he announced Dan Quayle as his running mate, to which Senator John McCain later remarked “I can’t believe a guy that handsome wouldn’t have some impact.”)
In his acceptance speech, the elder Bush famously told America that he wanted a “kinder, gentler nation.”
It took nearly three decades, but it seems that his wish has finally come true. Sort of.
Yesterday afternoon, the Commissioner of the Internal Revenue Service appeared in front of the House Way and Means Oversight Subcommittee… and apologized to taxpayers, specifically those who have had their assets seized and bank accounts wrongfully frozen.
He actually used that word.
“To anyone who is not treated fairly under the [tax] code, I apologize.”
This is pretty astounding.
You see, in the Land of the Free, the Internal Revenue Service, along with hundreds of other state and federal agencies, have the power to seize your assets and freeze your bank accounts, almost instantly in many cases.
You don’t need to be convicted of a crime. You don’t even need to be doing anything illegal.
If you (or your assets) are simply at the wrong place at the wrong time… or if someone so much as suspects that maybe, just maybe, you might be doing something wrong, your assets can be frozen.
Bear in mind, this isn’t anything that goes to court. No one puts you on trial or gives you the opportunity to defend yourself.
It’s a purely administrative action. They just go and do it. And they’re not shy about using their authority.
One case highlighted in front of the subcommittee was of Mr. Andrew Clyde, a gun-shop owner in Athens, Georgia.
Mr. Clyde’s is an obvious criminal terrorist whose heinous, immoral act against society was making a series of deposits into his bank that were all less than $10,000.
His bank viewed this as potentially suspicious activity; US law requires banks to report deposits of more than $10,000. But if they see customers routinely depositing amounts less than that, they assume that customers are doing this deliberately to avoid reporting requirements.
This assumption alone can cause many banks to snitch on their customers, tipping off the IRS that something ‘suspicious’ is happening.
This is all the IRS needs to seize people’s assets. And, once frozen, citizens must go through lengthy and expensive battles to get back their money.
In many cases, it’s not even worth the fight. There’s no guarantee of success. And even if someone gets robbed of $100,000 or more, it might not be worth spending 2-3 years away from running his/her business to get the money back.
The cost of doing so would be greater than the reward of recouping the lost cash.
But here’s the even bigger irony: the IRS believes that if people don’t step forward and fight them, then it is a de facto admission of guilt.
In other words, only criminals don’t fight to get their money back. Only the guilty make a rational cost/benefit analysis in determining whether they should indefinitely neglect their businesses and wage an expensive and uncertain legal battle against the most intimidating organization in US history.
So despite the rather hollow apology from the IRS, it’s clear these guys still need a reality check.
One key lesson to highlight here:
If you hold savings at a bank in the United States, you need to understand that your bank is an unpaid spy of the federal government. They WILL report you for anything you do that they view as potentially suspicious.
Moreover, they are required by law to file a certain number of ‘Suspicious Activity Reports’ each year. So even if you’re not doing anything suspicious, if you simply stand out a bit more than the next guy, you’re going to get reported.
Oh yeah, they won’t tell you about it either.
Bottom line, even if you’ve never broken the law, you could potentially be frozen out of your savings. No one ever believes it will happen to them… until it does.
So make sure you have at least some form of savings somewhere else. Establish a foreign bank account. Hold some gold at a private, non-bank facility. Or even build up a small stash of cash savings.
This way, should the worst happen, you’ll at least have access to some emergency savings to tide you over.
February 12, 2015
Puerto Varas, Chile
Ten years ago, the legendary American mathematician Edward Lorenz paid a visit to the University of Maryland’s Atmospheric and Oceanic Science Department.
As retold by Professor Christopher Danforth of the University of Vermont—
At some point during his stay, [Lorenz] penned the following on a piece of paper: “Chaos: When the present determines the future, but the approximate present does not approximately determine the future.”
Chaos, of course, is the field of mathematics that deals with finding order in what otherwise may appear to be random. Stock market prices. Weather patterns. Even warfare and politics.
Lorenz was a pioneer in this area, famously coining the term ‘Butterfly effect’. This observation suggests that a tiny butterfly flapping its wings may cause minuscule changes in the air which ultimately lead to a major storm system.
In other words, nothing is consequence-free. Everything affects everything else. And Lorenz’s definition of chaos perfectly sums up where the world is right now.
We can see that nearly every Western nation is broke. Many central banks are borderline insolvent. Most Western banking systems are poorly capitalized and highly illiquid.
This approximate present will not approximately determine the future. Nothing is going to happen tomorrow. There will likely be no giant collapse this afternoon.
But as Lorenz suggests, there will come a time when these conditions have a major impact on what happens down the road. What happens now absolutely will determine the future.
Over the last few years, words like ‘unsustainable’ and ‘unprecedented’ have been used copiously when referring to government debt levels and monetary policy.
And with good reason. Because it absolutely IS unsustainable to go deeper into debt year after year. It absolutely IS unsustainable to maintain interest rates at negative levels, or levels that fail to keep up with inflation.
These conditions may not drive immediate consequences. But eventually a major storm system will form.
Consider this—just days ago, the yield on some of Nestle’s corporate bonds went into negative territory to minus 51 basis points.
This means that investors are willing to PAY Nestle 0.51% per year for the privilege of loaning the company money.
Imagine that. You have to pay someone else to loan them money, instead of the other way around.
But this goes far beyond Nestle.
According to the Financial Times, there is now $3.6 TRILLION worth of government debt around the world with negative interest rates.
And yes, there are banks now (primarily in Europe) which require depositors to pay them interest… and even bizarre cases of negative interest rate mortgages (i.e. the bank pays you to borrow money).
This is beyond absurd. There are zero incentives to save and produce, and every incentive to borrow and consume. It should be completely obvious that this system is entirely broken.
But it’s more than that.
As the negative interest rate bandwagon continues to pick up steam, people WILL reach their breaking points. They’ll be forced into an “anywhere but a bank” option to hold their cash.
Think about it—if your bank is charging YOU interest to be a customer, wouldn’t you rather just rent a safety deposit box and stuff it full of cash? It would be a hell of a lot cheaper.
Now imagine dozens of people showing up to your bank demanding cash withdrawals.
Then dozens more. Hundreds. Thousands. Even more.
Quite simply, this is enough to cause a collapse of the entire banking system. Why? Because as we have written so many times before, banks do not have the money.
Most banks have razor thin liquidity—as a percentage of customer deposits, many Western banks hold less than 3% in cash equivalents… and an even smaller amount in physical currency.
If there were a sudden rush from people wanting to pull their money out of the banking system, whether to hold physical currency, precious metals, bitcoin, or any other alternative, it could cause a run on the banks.
And since most of them are in absolutely pitiful financial condition, they would absolutely collapse.
Perhaps most ironically, judging by their actions, governments and central banks are almost pushing for this to happen. They’re slashing deposit rates and bond yields, practically daring the public to take its money out.
They obviously think we’re a bunch of suckers. But they’re dead wrong.
This is the topic of today’s podcast. Needless to say, it’s important. We’ll discuss this problem in more detail, as well as a number of solutions that I want you to know about:
February 11, 2015
Puerto Varas, Chile
On August 13, 1961, the government of the German Democratic Republic (East Germany) began to establish an “Anti-Fascist Protection Rampart”.
The idea was to, you know, protect people… from fascist terrorists who intended to do harm in the country.
Just weeks after government officials stated that they had ‘no intention of erecting a wall’, they closed the border and started reinforcing the defenses with barbed wire. Concrete came soon after.
When it was finally erected, the wall stood for decades as a symbol of tyranny over freedom.
And in the ensuing period, people within the Iron Curtain suffered the misery of secret police, centrally planned bread production, and some of the worst indignities imaginable.
This is starting to happen once again… now in Ukraine. The ongoing conflict with Russia has fueled a resurgence in totalitarianism.
Two days ago, the government registered a draft to ‘improve’ the criminal code of Ukraine, essentially making it a crime to even question Russia’s aggression against Ukraine.
In other words, if you don’t buy the Ukrainian government’s official (and US-funded) propaganda, you’re looking at up to three years in prison.
In addition, the Ukrainian government has been arresting people who criticize the war, and they’ve established a hotline where people can rat out anyone with anti-government views.
They’ve also forcibly impressed citizens into military service (and thrown people in jail who refuse).
And as of this morning, the government of Ukraine started… “reinforcing”… the defenses of Kiev with eight barricaded checkpoints.
Why? In order to protect citizens from terrorist attacks.
Walls are never, ever erected to keep people out. They’re built to trap people inside.
This is a country whose economy is in shambles. The currency continues to plummet to levels never seen before. The government is inches away from default. A deep recession is mounting. And the banking system is extremely fragile.
This is an epic disaster. And anytime that happens, history shows that governments reach into a very limited playbook. Their answer is to dig their heels in even further and tighten controls.
Capital controls. Exchange controls. Wage and price controls. Border controls. People controls.
They lie. They deceive. They wave flags and tell people about their patriotic duty to suffer and die.
I hope my friends in Ukraine see the writing on the wall and get the hell out of there.
And I hope anyone else paying attention heeds the lesson that desperate actions by politicians have consequences. And these consequences aren’t worth waiting around for.
Rational people don’t wait for disaster to strike. Rational people have a plan B.
And yes, even if you think everything is just fine and dandy at home, when all the objective evidence indicates that your nation is a warmongering terminal bankruptcy case, having a plan B sometimes means having another place to go.
It’s an insurance policy. You hope like hell you’ll never need it. But it’s not a conversation you’ll want to start having while you pack your bags.
The world is a big place and there are lots of great options out there. Start thinking about yours now while time is still on your side. That can all change in an instant.
February 10, 2015
Puerto Varas, Chile
Carrying cash is a really risky affair these days.
Nearly everywhere I travel in the world (typically 30-40 countries each year), there are signs and warnings about carrying too much cash.
Customs agents often ask me “how much cash are you carrying”, and you hear stories about people having excess cash confiscated.
In the Land of the Free, civil asset forfeiture laws allow police forces to confiscate cash from citizens, even at routine traffic stops. And they haven’t been shy about using this power.
It’s so easy for them. After all, who can you really turn to if you’ve been robbed by the police?
Bottom line, don’t do it. If you need to move money abroad, there are far better ways to do so.
I’ve written previously about a few, including gold, rare collectible coins, and bitcoin.
(Note that gold is still considered a monetary instrument, and thus like cash is subject to declaration if the face value you’re traveling with exceeds $10,000—i.e. if you travel with 200 $50 gold Buffalo coins, you’re required to declare them.)
Foreign real estate is another excellent option to consider, and it’s one that’s very low risk.
These days, bankers in the United States are essentially unpaid spies of the federal government. It’s their job to report ‘suspicious transactions’ to Uncle Sam. They are required to by law.
If you want to send a lot of money abroad to some dummy corporation that you’ve set up in a known tax haven, then you can just about guarantee that you’re going to get reported.
But if you tell your banker that you’re buying lakefront property in Chile, or some ski chalet in central Europe, as a vacation home, then the suspicion level drops like a stone.
And unlike a foreign bank account or financial asset, which requires disclosure to the IRS, overseas property held in your own name does not need to be declared.
This affords you a certain degree of financial privacy that is increasingly hard to come by in today’s world.
Additionally, foreign property is a real asset. It’s not something that can be conjured by central bankers.
And unlike the cash that’s probably sitting in your bank earning negative interest, property can generate cash flow. Or at least has potential for appreciation that keeps up with inflation.
This makes foreign real estate an excellent store of value: a safe place to park your savings.
It’s like having a foreign private safety deposit box… but with a view.
Moreover, if you choose real estate in a thriving economy with solid fundamentals and long-term growth potential, it can also make for an excellent speculation.
Perhaps best of all, foreign property is outside of your home government’s jurisdiction. They have no control over it, so they cannot confiscate it, put a lien on it, or evict you.
Beyond that it might help you diversify even further, as buying real estate abroad in some cases can enable you to obtain residency or even a second passport.
Even if that’s not an option, at the very least it makes it easier to open financial accounts in the country.