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.
March 23, 2015
Sovereign Valley Farm, Chile
It’s officially autumn in South America. And almost as if on cue, the weather changed overnight.
Temperatures are much cooler now. The sun is less intense. And I can already see the leaves on the trees changing color.
This is a huge change from just a week ago when we were still harvesting fresh fruit in the summer heat.
Now that autumn is here, our focus has shifted at the farm. We’re no longer concentrating on the harvest and have instead turned our attention to expanding the farm.
It is precisely because of these seasons… these natural cycles… that we know exactly what to plan, and when.
Fall and winter in central Chile are optimal times to prepare soil, install fertigation infrastructure, and plant new trees. Spring is the perfect time for maintenance and harvest preparation. And summer is time to make money.
Investing is not so different.
There’s a time for preparation. There’s a time for planting seeds. And there’s a time to sell everything and make a boatload of money that you earned over the last several seasons of hard work.
Like agriculture, you have to invest in the right season.
It would be extremely foolish to prepare the soil after the heavy winter rains set in, or to plant new seedlings in the ground during the peak summer heat when I should be harvesting.
Similarly, it’s extremely foolish to be charging into the market at all-time highs when all the indicators suggest that it’s time to sell… and perhaps plant elsewhere.
And that’s the great thing about our planet— somewhere in the world it’s always planting season.
Here in South America our seasons are the exact opposite as they are up north. July and August are peak winter months. So while farmers up north are harvesting an making money, we’re planting and preparing.
Stock markets tell a similar story.
Over the last four years, US stocks (the Dow Jones Industrial Average) are up nearly 50%. Yet in US dollar terms, stocks in Chile are down 42%. This makes Chilean stocks a relative bargain.
Like agriculture, these things are seasonal.
The US dollar is in a phase right now where it is exceptionally strong against nearly every other currency in the world. And a flood of money has been piling into US assets, including stocks, bonds, and property.
Plain and simple, it’s harvest time in the US. And it’s time to start planting investment seeds elsewhere in the world.
Chile is just one example (and a good example at that– Chile is a commodity exporting country with zero net debt and a very bright future). But plenty of others exist.
Since its high in May 2008, Brazil’s stock market is down 64.2% in US dollar terms. In Russia, the US-dollar denominated RTS index is down 65% over the same period.
But it’s more than shares of profitable companies trading at multi-year lows… or in many cases selling for a tiny fraction of the values of their assets.
There are also places in the world where property is dirt cheap.
Again, here in Chile, our fund is acquiring highly productive farmland that’s selling for multi-year lows… especially in US dollar terms.
Residential property here is also a bargain. Just a few miles from where I sit right now is a gorgeous 11-acre property and an ample 3-bedroom home where the asking price is just $72,500. That’s far less than the cost of construction.
Across the pond in South Africa, colleagues there have been sending me some absolutely gorgeous properties that are in distress or have already been taken over by the bank.
What’s more is that the South African rand is hovering near an all-time low, so in US dollar terms these properties are phenomenally cheap… beautiful, oceanfront estates selling for less than the cost of construction.
We’re also seeing the same thing now in Southern Europe where the euro is at a 12-year low.
Bottom line—if you hold, earn, or invest US dollars, this is an absolute gift. The dollar is strong, and simultaneously many high quality assets around the world are selling at rock bottom prices.
When you consider the fundamental weaknesses of the US dollar, it’s clear that this is temporary… a seasonal, cyclical uptrend that won’t last.
Now is the season to harvest profits in the United States… and to start putting them to productive use in other countries that are on sale and ready to plant.
March 20, 2015
Sovereign Valley Farm, Chile
Imagine going to the bank to withdraw some cash.
Having some cash on hand is always a prudent strategy, and especially today when more and more bank deposits are creeping into negative territory, meaning that you have to pay the banks for the privilege that they gamble with your money.
You tell the teller that you’d like to withdraw $5,000 from your account. She hesitates nervously and wants to know why.
You try to politely let her know that that’s none of the bank’s business as it’s your money.
The teller disappears for a few minutes, leaving you waiting.
When she returns she tells you that you can collect your money in a few days as they don’t have it on hand at the moment.
Slightly irritated because of the inconvenience, you head home.
But as you pull into your driveway later there’s an unexpected surprise waiting for you: two police officers would like to have a word with you about your intended withdrawal earlier…
If this sounds far-fetched, think again. Because it could very well become a reality in the Land of the Free if the Justice Department gets its way.
Earlier this week, a senior official from the Justice Department spoke to a group of bankers about the need for them to rat out their customers to the police.
What a lot of people don’t realize is that banks are already unpaid government spies.
Federal regulations in the Land of the Free REQUIRE banks to file ‘suspicious activity reports’ or SARs on their customers. And it’s not optional.
Banks have minimum quotas of SARs they need to fill out and submit to the federal government.
If they don’t file enough SARs, they can be fined. They can lose their banking charter. And yes, bank executives and directors can even be imprisoned for noncompliance.
This is the nature of the financial system in the Land of the Free.
And chances are, your banker has filled one out on you—they submitted 1.6 MILLION SARs in 2013 alone.
But now the Justice Department is saying that SARs aren’t enough.
Now, whenever banks suspect something ‘suspicious’ is going on, they want them to pick up the phone and call the cops:
“[W]e encourage those institutions to consider whether to take more action: specifically, to alert law enforcement authorities about the problem, who may be able to seize the funds, initiate an investigation, or take other proactive steps.”
So what exactly constitutes ‘suspicious activity’? Basically anything.
According to the handbook for the Federal Financial Institution Examination Council, banks are required to file a SAR with respect to:
“Transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more…”
It’s utterly obscene. According to the Justice Department, going to the bank and withdrawing $5,000 should potentially prompt a banker to rat you out to the police.
There’s something else about this that I want to point out, though: this may be a very early form of capital controls in the Land of the Free.
This is the subject of today’s Podcast. You can listen in here:
March 19, 2015
Sovereign Valley Farm, Chile
Early last week, I had the privilege of sitting down for dinner with Robert Kiyosaki and his wife Kim.
Now, if you’ve never read any of their books, I highly recommend you go check them out, especially Robert’s first book: Rich Dad, Poor Dad.
Rich Dad, Poor Dad changed everything for me.
When I first read it over 15-years ago, it crystallized everything that I had been feeling deep down… but hadn’t been able to articulate into concrete thought or action.
Suddenly everything made so much sense. It was like the missing link— the final piece of the puzzle that I needed.
And spending time with Robert and Kim last week was a great opportunity to thank them for having such a significant influence on my life.
As we spoke over dinner, the topic turned to the importance of education. And no, not conventional ‘pay $100,000 for a piece of paper’ education. REAL education. How the world actually works.
Robert wrote about this in his first book: the entire paradigm of ‘study hard, go to a good school, get a good job, and work your way up the ladder’ is totally defunct.
Children go to state-controlled schools seldom learning any real skills about business or finance. And they’re specifically discouraged from questioning authority or the world around them.
Instead they learn to be good little citizens and subordinate themselves to the state… to follow the rules and happily comply when government bureaucrats regulate every aspect of our lives.
This system further pushes young people to indebt themselves to the tune of $100,000 or more for a university piece of paper that will take them up to 25 YEARS of indentured servitude to pay off.
You’ll then spend your entire working life toiling away in a declining economy paying increasing taxes into a system that won’t be there when it comes time for you to collect.
Social Security and pension funds will run out LONG before you reach retirement age.
Bottom line, if you are under the age of 30 in particular, you are the ultimate dairy cow for your government– an asset to be milked… then abandoned when you are no longer of use.
But here’s the real irony: while all of this may sound gloomy, we are living in a time of extraordinary opportunity… at least for those who can embrace change.
The old ways of doing things are finished… and people chained to the past will be dragged down with it.
Take Eastman Kodak for example, which was once one of the largest companies in the world. But it went bust because it failed to adapt to the digital age.
Thanks to modern technology, we no longer need to live and work in our country of citizenship.
We now have relationships with people on the other side of the planet that in many cases we’ve never met in person. Complete strangers fall in love now over the Internet before they’ve ever had a first kiss.
It’s now possible to have customers and employees in other countries, or collaberate on shared tasks with co-workers and partners who live seven time zones away.
The entire world is open and available; self-employed professionals, investors, and entrepreneurs can now make money ANYWHERE.
Yes… to people who are properly educated and equipped with the right mindset, this is an incredibly exciting time to be alive, full of amazing opportunities.
Now, the conventional education system is designed to keep people down… to keep people afraid, ignorant of the world, and skeptical of anything they didn’t learn in school or see on TV.
That’s why, for the past six years, my colleagues and I have been trying to fix the ‘real education’ deficit.
Every summer we hold a free, intensive workshop called the Blacksmith Liberty and Entrepreneurship Camp; it’s specifically for young people (generally between the ages of 18 and 30).
I bring in some of the most successful business executives and entrepreneurs I know, and we spend five days mentoring students about freedom, business, and entrepreneurship.
Perhaps even more importantly, students who attend our camp often become the closest of friends.
They encourage one another. They give advice and support. And in many cases, they go on to start businesses together.
This is powerful stuff, especially for motivated young people looking to join an influential network AND gain practical knowledge from ultra-successful entrepreneurs.
If I didn’t mention already, it’s free. There’s no charge for students to attend.
But you do need to apply. We receive applications from hundreds of prospective students each year from all over the world. And we only have a few dozen slots available.
The application deadline is coming up: March 31st.
So if you’re looking for something that could be potentially life-changing, or you know someone who could benefit from this, definitely learn more about it from our website, SovereignAcademy.org.
March 17, 2015
Late last week the UK announced that it will be joining the new China-led Asian Infrastructure Investment Bank (AIIB) as a founding member. Yesterday, Germany, France and Italy decided to follow their lead and join as well.
Watching its friends drift one by one over to the Chinese, the US government’s attitude is transforming from “please, baby, don’t leave me” now to lashing out with frustrated threats and whining.
It’s almost pathetic to see the US government behaving like a spoiled child trying to win back the attention of his friends who’ve flocked to check out the another kid’s shiny new toy.
For the past few decades the US has dominated world finance, trade, politics and security (or perhaps more accurately, insecurity…).
It was an undisputed superpower with a commanding presence in all aspects of society—from the US dollar being the most widely used currency to American culture dominating movie theaters, TV sets, and radios all over the world.
This was overly empowering, giving the US government a sense of omnipotence that it greatly abused. There’s a limit, however, to how much of an irresponsible, reckless bully you can be until your actions catch up to you.
Decades of unsustainable policies have left the US government drowning in debt that can never be honestly repaid. The government’s own numbers show that official debt and unfunded liabilities (to its retirees and medical care recipients) have already surpassed $60 trillion, and are still rising.
Years and years of unrestrained money printing and central bank fiddling have lost the US dollar its formerly undisputed position as the world’s primary reserve and trade currency.
Increasingly suffocating regulations that dictate everything from what people can put into their bodies, to how they can educate their children, to who foreign companies can or cannot do business with are destroying what was once the land of opportunity and The Land of the Free.
The US has even become so arrogant and unscrupulous in its position that it’s shutting down, or threatening to shut down, foreign banks that don’t even have a US presence and have broken no local laws where they operate. Though the banks have no reason to obey the rules of the US government, that doesn’t deter them. In their mind, the whole world should be subject to their dominion.
But now, people all over the world are seeing that there are new players are on the rise. Times are changing. The US isn’t the only option anymore.
Increasingly they’re turning to China, who, by some metrics, is already the largest economy in the world.
And there’s nothing the US government can do about it.
The changes are picking up speed. It’s mainstream news everywhere—with the US now being left by its allies for the new kid on the block.
There is no question that things will change dramatically in the West in the coming years. After all, everything is different when you’re no longer number one.
For an idea of what’s to come, just look to Europe to see how unsustainable policies unravel when you don’t have the backing of the world’s reserve currency.
But here’s the thing—these massive changes shouldn’t scare you.
The world isn’t ending. It’s just changing. And those who recognize what’s happening and embrace it will prosper. For there will be tremendous opportunities to be seized throughout this process.
Modern technology means that all of our lives don’t have to be trapped within one single bankrupt country.
You can move your savings abroad to safety.
You can structure your business and assets so that you keep more of your hard-earned income for yourself and your family.
You can seek investment opportunities out there that aren’t subject to central-bank induced bubbles.
You can plan ahead and establish an alternative residency in a safe and thriving place, where you might even qualify for a second passport down the line.
Bottom line—the world is changing. And the power is in your hands to either do something about it and prosper or to stay put, ignore it, and watch as your life turned upside down.
March 17, 2015
If you’ve ever been to Bangkok, you’ll know that this place has some of the most notoriously horrendous traffic on the face of the earth.
It makes the worst LA gridlock look like Plano, Texas.
Any seasoned traveler to Thailand has to plan around it. You never leave the airport and head into town at 5pm.
Doing so, you’re just asking for trouble.
Sure enough, I was asking for trouble the last time I flew into Bangkok two weeks ago. It was the only flight available, so I came in at a rather inopportune moment.
My driver, to his credit, was trying to do everything he could to circumvent the traffic. Either he just couldn’t sit still or he was trying to prove to me that he was working hard on my behalf.
So at every chance he could, he would turn down a little narrow alley somewhere trying to get around the jam. But every time we would just hit more traffic or find ourselves stuck at a dead end.
Undeterred, he kept this up, over and over and over again, as he tried to find a clean path to the hotel.
Each time we took a turn for a shortcut it raised my hopes up a little bit, thinking that somehow we’d take the right turn and it’d be smooth sailing from there.
But it never worked. Every time we simply ended up in the same place as we were before. Gridlock.
After about an hour and twenty minutes of frustration, I’d had it, and I told the guy, “Look, let’s just stay here. Let’s just wait. Because anywhere we go, it’s just going to be the same thing.”
Because sometimes in life, there are no shortcuts. We just have to sit there and take the pain.
Sitting there in traffic, I had an opportunity to meditate and reflect on life. And I realized that the situation I was in was a great analogy for what’s happening with the world economy.
For the last couple of decades those in charge have been building up huge bubbles, one after another, by merely kicking the can down the road.
They went from the Asian financial crisis, to the Long-Term Capital Management bailout, to the NASDAQ bubble, to the real estate bubble, to the banking bubble, to the sovereign debt bubble, and now to this central banking bubble where balance sheets of major central banks have just exploded in recent years…
Every time there’s a little problem, a recession or some banking failure, they try to take shortcuts. Doing anything they can to avoid taking the pain and to look like they’re proactively doing something about the problem.
They slash interest rates to zero, they conjure an extraordinary amount of money, and pave the way for trillions of dollars, euros, and yen to be misallocated in the system.
And when it all starts to collapse, they try to take yet another shortcut.
But all it does is lead to another crisis. To exactly the same place where they were before—total gridlock.
Today, the vast majority of banks in the West are highly illiquid and thinly capitalized. Even central banks themselves are borderline insolvent.
The US Federal Reserve, which is absurdly viewed as the backstop to all the world’s financial problems, has been talking all this tough language about tapering and raising rates, and yet ironically the Fed’s balance sheet is about as high as it’s ever been.
In fact, certain Fed liabilities are at record levels. They never took the pain.
The best thing they could’ve done was to just let it happen. To let things fail.
When governments and businesses severely misallocate capital, the market has a neat little way of clearing out the bad decisions.
Unnecessary or poorly run businesses are shut down, making room for people with new ideas and better management. Prices are bid down so low that those who were prudent and have built up savings are able to jump in and buy assets on the cheap.
Yes, the transition may be painful, but overall the economy and society is better off.
Sometimes the best action is—inaction.
March 17, 2015
William Shakespeare was definitely not one for following the rules.
The playwright was famed for the ways in which he bent the English language in unusual ways to create some of the most significant literary works to date.
It was part of his genius, really, in that he didn’t allow himself to be limited by things like syntax rules that others abided by.
And, it seems, grammar was not the only thing he structured to better suit himself.
In fact, he also successfully managed to arrange his whole life and assets in order to not have to pay taxes on either his income or property.
He earned an estimated annual salary of about £200, which given that the pound was backed by silver at the time, would be about $39,360 in today’s silver prices.
And no, I’m not talking in terms of being adjusted for inflation. This is what his actual salary would be worth today if it were kept in the actual silver coinage, because unlike the paper stuff in our wallets, precious metals actually hold their value over time.
For the time, he made good money, which he then used to invest in land and a number of businesses, oftentimes held in partnership or under others’ names.
Official records have him down as having a humble calling, labeling him as being a “poor player”, with goods in London “to the value of [only] £5”.
He managed this by owning property only in the countryside, which enabled him to take advantage of the lower rates of taxation outside of the city, while only renting in London so as to not have any known and thus taxable assets there.
He also frequently travelled between the countryside and the city so as to not be too firmly established as a resident in either.
What is obvious to me is that he was an exceptionally independent minded human being, and he knew how to do what was best for himself and his family. He was not going to be held down by any rules that he didn’t want to be held by.
This is a feature that I find both rare and admirable.
People often relate international diversification and structuring your assets efficiently to some cloak and dagger dealings and tax evasion.
The truth is the exact opposite. The whole point is to follow legal ways that enable you to keep more of your hard-earned money and hold it in a safe place.
So what steps can you take to be able to hold on to more of your income?
If you’re a business owner, and you’ve not done this already, the most obvious step would be to incorporate your business in a lower tax jurisdiction.
A great option, especially for those in Europe, or those who might benefit from access to the European market, is Estonia.
The country’s corporate tax rate is at a moderate flat rate of 20%, nearly half the United States’ 39.1%.
But what makes Estonia a truly fantastic place to incorporate is that you only have to pay the tax if the company pays out dividends. So as long as you keep reinvesting profits into the company, your tax rate is effectively 0%!
And now thanks to the country’s new e-residency program, if you establish yourself as an Estonian e-resident, you can start and manage your own Estonian company from anywhere in the world.
For American citizens in particular, another great option is that of Puerto Rico—an IRS-approved option of paying almost zero tax.
As an individual, the same things apply. Greater financial gains can be made by simply establishing yourself in a lower tax jurisdiction. This can mean moving to a state with no income tax, or even moving abroad, easily saving you 20% or more of your income.
In Shakespeare’s own words, “It is not in the stars to hold our destiny but in ourselves.” Are you ready to take action?
March 13, 2015
Late yesterday, the government of the United Kingdom announced that they would be applying to join the Chinese-led Asian Infrastructure Investment Bank… as a founding member.
This is huge.
Right now, the United States dominates the global financial system.
But after years of endless wars, spying, debt, money printing, bailouts, and insane regulations, the rest of the world has had enough. And they’re looking for an alternative.
China is coming up with an answer.
The soon-to-be-live Chinese International Payment System (CIPS) will provide a way for banks to transfer funds to one another without having to use the US banking system… or the US dollar.
China is also the ringleader behind both the BRICS development bank (called the New Development Bank, or NDB) as well as the Asia Infrastructure Investment Bank (AIIB).
Both of these are multilateral development banks that aim to end the dominance of the western-controlled World Bank and IMF.
NDB includes all the BRICS nations– Brazil, Russia, India, China, and South Africa.
Founding members of the AIIB include China, India, Indonesia, Kazakhstan, Mongolia, etc. They’re typically all rapidly growing and/or resource-rich developing nations.
New Zealand was the first western nation to join AIIB back in October. And yesterday afternoon, Britain announced its intention to become the second.
(Of course in the UK’s eyes they’re the first since New Zealand still belongs to the Queen!)
This is a massive, embarrassing blow to the United States, and to the future of the US dollar.
It’s pretty obvious when you look at the dozens of signatories to the NDB and AIIB charter documents: the rest of the world is sick and tired of the United States dominating the global financial system.
And by putting these new development banks and alternative payment systems together, they’re actually doing something about it.
Even America’s own allies have supported this anti-dollar movement.
Last summer the French Finance Minister explained to reporters how completely unnecessary it was for a European aircraft manufacturer to sell jets to European airlines in US dollars (instead of euros).
He also slammed the US government for arrogantly fining French bank BNP a whopping $9 billion for doing business with countries that the US doesn’t like.
(Side note: one of the ‘evil’ countries BNP did business with was Cuba, and they were heavily punished for this, even though BNP broke no law in France. But now all of a sudden the US and Cuba are buddy-buddy again. Is BNP going to get a refund?)
His conclusion? It’s time for a ‘rebalancing’ of the global financial system away from the US dollar. Other political allies of the United States have echoed similar sentiment.
But now we can see words are turning into action.
Britain might be too polite to tell the US straight up– “Look, you have $18.1 trillion in official debt, you have $42 trillion in unfunded liabilities, and you’re kind of a dick. I’m dumping you.”
So instead they’re going with the “it’s not you, it’s me” approach.
But to anyone paying attention, it’s pretty obvious where this trend is going.
It won’t be long before other western nations jump on the anti-dollar bandwagon with action and not just words.
Bottom line: this isn’t theory or conjecture anymore. Every shred of objective evidence suggests that the dollar’s dominance is coming to an end.
It’s happening. Time to plan for it.
March 12, 2015
If you’re an Internet entrepreneur looking for the best country or jurisdiction to register a company for an online business, you definitely need to know about Curaçao.
This place is doing something incredibly unique: they’ve actually created a clear regulatory framework on specifically HOW Internet-based businesses and e-commerce companies should be taxed.
I’ll explain why this is so cutting-edge.
Most governments around the world are still living in the past… especially when it comes to taxation.
Look at the US, for example: the last major tax code revision was nearly three decades ago.
In 1986, the tax code established a clear set of rules defined by the brick-and-mortar way that business was done back then.
At the time, nobody had even heard of the Internet, let alone conceived of e-commerce.
Now everything has changed.
People are doing more and more of their shopping online, engaging in all sorts of commerce online, and even running their entire businesses digitally and through the cloud.
Internet entrepreneurs have employees on the other side of the world that they’ve never met.
Many sell digital products and services that aren’t ‘manufactured’ anywhere.
And they can establish different components of their business (from the location of their servers to where credit card transactions are processed) in different countries across the globe.
There’s very little in the current tax code that applies to any of this. As has so often been the case throughout history, technology has completely leapfrogged legislation.
Curiously, it was the tiny Caribbean island of Curaçao which became one of the first countries to bring its tax code into the 21st century. And their approach was incredibly unique.
Curaçao’s government realized that competition is stiff. In the 21st century, it’s nothing for a business to pick up and redomicile to a friendlier tax regime. It can happen almost instantly.
So right off the bat they knew they had to keep the tax rate extremely low and attractive.
They knew that ZERO was too low. Being a tax-free jurisdiction almost guarantees that you’ll end up on some OECD or IRS blacklist.
So the tax rate they set on corporate profits was 2%… something that wouldn’t qualify them as a tax haven, but would be low enough to be a rounding error for any reasonable entrepreneur.
More importantly, rather than being just another low-tax island, Curaçao also looked at ways it could actually provide value to 21st century businesses.
The answer was pretty clear: bandwidth.
The Internet businesses they hoped to attract all need bandwidth. So Curaçao invested in fiber to the point that its data centers now have among the fastest, most highly connected data centers in the region.
Internet here is very strong. So instead of just being a Curaçao company in name only, businesses can actually host their servers here as well.
This helps any Internet business justify WHY the company is based in Curaçao.
These are all huge distinctions from anywhere else in the region: (a) not being listed as a tax haven, and (b) actually having robust local services which support the business.
Bottom line, Curaçao is a very solid option to consider, and the government is really rolling out the red carpet for foreigners.
I’ve joined a small group here for the next couple of days to get more boots on the ground intelligence and contacts on the island; we’ve already heard directly from the Prime Minister, the Minister of Finance, and the head of the central bank—they are really eager to tell this story.
If you’re a premium member, stay tuned for more information soon.
March 12, 2015
One of the largest telecommunications companies in the world is now offering a unique new ‘feature’.
For “only” $29 per month, AT&T is promising customers of its new broadband service that it won’t track their search and browsing history.
First of all, privacy shouldn’t be a privilege that you’d have to pay for. Second, how can anyone be sure that they’ll keep their promise?
After all, telecom companies and Internet service providers have a long history of willfully handing over your sensitive private data to either the highest bidder or the heavy hand of the government.
Here are easy steps to ensure that your search and browsing history remains private and is not sold off to advertisers who then serve you targeted ads.
If you’re an Android user, you can turn off Google’s “AdID” system by going to your Google Settings app (Note—NOT to your phone’s settings; you’ll probably have to look under your full list of apps to find Google Settings app).
Within the Google Settings app tap the “Ads” section and on the new screen you’ll see the option to “Opt out of interest-based ads”. You can also reset your advertising ID afterwards, which will make you appear as a new user.
Within iOS, go into Settings, find Privacy, and then scroll all the way down and tap Advertising.
There, you can slide and turn on the button “Limit Ad Tracking”, which will prevent ad companies from tracking your phone usage and serving you targeted ads.
Just as with Android you can also tap on the “Reset Advertising Identifier”, which will delink your anonymized identifier with your personal data on Apple’s servers.
You can further limit your tracking by turning off location-based ads on your iPhone, iPad, or iPod touch.
Make sure you pass this information along to your friends and family as well.
March 11, 2015
Panama City, Panama
I’m starting to feel like a proud uncle. I flew in to Panama yesterday afternoon and thought, “look at how much you’ve grown!”
Things were so different the first time I came to Panama in 2004.
It was quieter. Underdeveloped. Backward. And cheaper. You could buy an oceanfront condo for $50,000 in the nicest part of town.
Over the years as I’ve traveled back and forth here (and even lived here for a spell), it was obvious how much Panama was growing… and how quickly.
Between the rapid increase of trade, the Panama Canal expansion, and droves of foreigners moving here looking for a better life, Panama’s GDP growth was one of the highest in the world throughout the last decade.
You can see it on the ground. The skyline here in the capital has entirely transformed, and the city itself has become cosmopolitan (yet still entirely affordable).
Expats here live very well. English is widely spoken, the medical services are excellent, a high standard of living is available at a reasonable cost, and the nightlife is fantastic—from top quality restaurants to more exotic adult adventures.
Panama was one of the first countries in the world to establish a program specifically aimed attracting retirees.
They promised special discounts and a number of attractive benefits to anyone who could demonstrate a certain level of retirement income.
The program worked, and foreigners showed up en masse. (Although many retirees are still waiting for some of those promised special discounts…)
Over the next several years, the government established all sorts of immigration programs hoping to attract investors—from forestry to agriculture to finance.
(With a whopping 52 ways to obtain residency, it’s clear the residency visa requirements in Panama are incredibly easy.)
Then in 2012, they created an even easier way to become a resident: simply letting people in.
They called it the Friendly Nations Visa. And it’s just about the easiest way in the world to obtain residency in any country.
The list now includes over 40 countries, including the US, Australia, most European countries, Israel, Japan, Hong Kong, Korea, Singapore, South Africa, and several Latin American countries.
Citizens of any of these countries can obtain residency in Panama extremely easily by merely demonstrating ‘economic activity’ in the country.
This doesn’t mean that you necessarily have to do any business in Panama; you can satisfy this requirement by registering a Panamanian corporation and making a reasonable deposit at a local bank.
Conveniently, you can include children up to the age of 25, disabled relatives, and dependent parents in your application.
And once you submit your residency application, you’re free to leave the country and come a few months later to collect your documents and ID card.
Moreover, you don’t have to actually live in Panama. You don’t need to maintain a home.
In fact, Panama’s immigration code now only requires that the visa be renewed after two years (which should be done in Panama). Aside from that, you don’t really need to spend any time here.
But then again, this is a really great place to spend time. And there are nonstop flights to cities all over the US, Canada, Europe, Latin America, and the Caribbean, so it’s a great place to travel from.
Another pleasant thing about Panama is its territorial tax system.
In other words, Panamanian residents and companies only have to pay local tax on their Panamanian-sourced income.
If you operate a hotel or restaurant here, you’re going to pay tax. But if you’re an independent investor or run a business (especially online) that generates income outside of Panama, you won’t pay a dime.
I know, just imagine—being able to waltz in here, obtain residency easily, and then have to suffer through a very high standard of living in a cosmopolitan city while paying no tax. The horror!
There is a catch, though.
Just like with everything, residency programs are subject to supply and demand dynamics.
Panama’s economy will eventually start to cool off. Real estate prices will get too high. And we’ll hear grumblings about “foreigners driving the prices up.”
It’s inevitable. This program won’t be around forever.
Here’s the bottom line: having a second residency makes sense. It’s a great insurance policy to keep in your back pocket.
After all, if things ever get so bad where you live that you feel like you need to get out of Dodge, you don’t want to start figuring out ‘Where do we go?’ while you’re packing your bags.
Having a plan B makes sense. And a second residency is part of a Plan B—especially when it’s so damn easy to establish.
Panama is a great option to consider. And given that it probably won’t be around forever, I’d definitely encourage you to learn more about it and decide if it’s right for you.
(Again, there are other options—Chile, Philippines, Andorra, Belgium, etc.)
SMC members: there’s plenty of actionable premium content available to you already. I’ll re-send you some links in the coming days.
If you haven’t taken us up on being a premium member yet, try our entry-level product, Sovereign Man: Starter.
Panamanian residency is one of the prime cornerstones of this product; you’ll learn what you need to know before making a decision, as well as WHO to contact.
In addition, you’ll get great recommendations for offshore banking and gold storage.
Check it out here: https://secure.sovereignman.com/starter/
March 11, 2015
Panama City, Panama
If Vladimir Putin is remotely capable of laughter (the jury is out on that one…) then he’s probably doing so right now.
Russia is once again Arch-Enemy of the United States. It’s like living through a really bad James Bond movie, complete with cartoonish villains.
And for the last several months, the US government has been doing everything it can to torpedo the Russian economy, as well as Vladimir Putin’s standing within his own country.
The economic nuclear option is to kick Russia out of the international banking system. And the US government has been vociferously pushing for this.
Specifically, the US government wants to kick Russia out of SWIFT, short for the Society of Worldwide Interbank Financial Telecommunications.
That’s a mouthful. But SWIFT is an important component in the global banking system because it lays the foundation for banks to communicate and transfer funds with one another.
It’s a network protocol of sorts. Whenever a bank in Pakistan does business with a bank in Portugal, the funds will clear through the SWIFT network.
According to the SWIFT itself, they link over 9,000 financial institutions worldwide in over 200 countries, which transact 15 million times per day.
Bottom line, being part of SWIFT is critical to conducting business with the rest of the world. And if Russia gets kicked out of SWIFT, it would be a disaster.
Now, SWIFT is technically organized as a ‘Cooperative Society’ and governed by a board of directors.
There are 25 available board seats, and each seat is allocated for a three-year term to a specific country.
The United States, Belgium, France, Germany, UK, and Switzerland each hold two seats. A handful of other countries hold just one seat. And of course, most countries don’t hold any seats at all.
Here’s what’s utterly hilarious—
On Monday afternoon, not only did SWIFT NOT kick Russia out… but they announced that they were actually giving a BOARD SEAT to Russia.
This is basically the exact opposite of what the US government was pushing for.
But this story is even bigger than that.
Because at the same time that the US government isn’t getting its way with SWIFT, the Chinese are busy putting together their own version of it called CIPS.
CIPS stands for the China International Payment System; it’s intended to be a direct competitor to SWIFT, and a brand new way for global banks to communicate and transact with one another in a way that does NOT depend on the United States.
We’ll talk about CIPS in more details in a future letter. But in brief, it addresses some serious weaknesses, inefficiencies, and technological challenges of SWIFT.
And it should be ready to go later this year.
Make no mistake, this is the beginning of the end of the US dollar’s global hegemony. It’s time to stop hoping that it won’t happen and time to start preparing for it.
March 10, 2015
San Juan, Puerto Rico
Last night I had the distinct pleasure of addressing a group of distinguished investors who are traveling together at sea for the next week or so on a special retreat.
The boat was docked in San Juan for the evening, and I flew halfway across the world to specifically meet with them.
I seldom speak at events, and my team and I typically turn down every request we receive. But I made a special exception in this case given the caliber of the group. And I’m glad I did—it was a hell of an evening.
I’m off to Panama in a couple of hours after I meet with a local attorney here to discuss Puerto Rico’s incredibly attractive tax incentives, and then I’ll be in Curaçao later this week.
It’s been a real whirlwind of travel lately… but totally worth it. And I wanted to share a piece of it with you today before I head out to the airport.
My remarks last night were about what’s happening in the world—the huge trends that are shaping both the present and the future.
The dominant superpower in the world is changing. Debilitated by an untenable debt position that the government itself estimates at nearly $60 TRILLION. The US is rapidly losing its economic superpower status.
Moreover, the US dollar-denominated global financial system is changing. Led by China, the rest of the world is quickly lining up to back a new system that takes the power away from the United States.
And given the massive impact of the digital age, even the way that we organize ourselves as a society is changing.
We no longer need to live in the same place as our co-workers or customers. We can develop meaningful relationships with people on the other side of the planet, and stay in touch with friends and family who live far away.
This isn’t the first time the world has seen these changes. History is generous with examples of once great empires that have fallen… reserve currencies that have been abandoned… and radical changes in the way that societies are organized.
History also shows that these changes are rarely smooth or peaceful.
Last night in my remarks we went back in time in an effort to look into the future and understand what will likely happen… and what we can do about it now.
(Curiously my remarks started with a 16th-century sex orgy. But you’d be surprised how applicable it is for today…)
March 9, 2015
San Juan, Puerto Rico
[Editor’s note: At the end of the article you’ll find a link to a free report we’ve put together on this important topic.]
It seems almost everywhere you look these days, bankrupt governments are raising taxes.
But no matter where you are, there are always solutions to do something about it.
For example, if you’re an Australian taxpayer, you can move to Norfolk Island and pay minimal tax. If you’re British, you can structure your assets in Gibraltar or the Channel Islands.
What most people don’t realize is that the US tax code, as onerous as it is, provides a no-brainer solution as well.
If they meet certain criteria, US taxpayers with official residency in Puerto Rico – which is a self-governing US territory – are NOT required to pay US federal tax on income they earn in Puerto Rico.
Now, living in Puerto Rico does oblige people to pay taxes in Puerto Rico, which has its own set of tax laws.
And until a couple of years ago it didn’t really make sense to move to Puerto Rico to save on taxes; Puerto Rican taxes used to be just as high, if not higher, than US taxes.
But over the past few years the government of Puerto Rico, desperate to jumpstart its economy, passed a number of attractive tax incentives.
Among these are Act 20 and Act 22, which provide for corporate tax rate of just 4% for companies exporting services outside of Puerto Rico, as well as a full exemption for individuals from taxes on most types of investment income.
Here’s why this is really incredible:
You can set up a Puerto Rican company that provides services to customers worldwide. (This is ideal for online businesses.)
And you’ll only pay tax of 4% on your profit. It’s almost nothing.
Now, you yourself as the owner of the company don’t actually have to move to Puerto Rico to take advantage of this.
You can still live in the United States (or anywhere else, really) and set up a separate company that receives a market-based fee for certain tasks it performs on behalf of the Puerto Rican company.
A US-based company would pay US tax on the fee it charges. But the majority of the profits would accumulate in the Puerto Rican company at just a 4% corporate tax rate.
And those profits held by the Puerto Rican company would not be taxable by the IRS.
Year after year you generate profit, never once paying a dividend to yourself back in the United States.
Over time, the profits build up in the Puerto Rican company. And after a few years you may find that there’s a substantial treasure trove of cash that has never been distributed.
It’s at this point that you can pick up and move to Puerto Rico to take advantage of the second incentive.
Because as long as you follow some basic rules to obtain and maintain official residency, you’d then be able to pay out ALL of the profits to yourself without paying a dime of tax—either to the IRS, or to the Puerto Rican government.
Afterwards, you can head right back to the US in the following tax year having legally paid no tax on your gain.
Let this sink in for a moment.
Moving to the beach for a few months can literally save you hundreds of thousands, even millions of dollars. And it’s a completely legitimate strategy.
Again, there are some straightforward rules to follow—
- In general, you need to spend about 6 months in Puerto Rico in order to be able to receive the dividends tax-free;
- You need to ensure that your official ‘tax home’ is in Puerto Rico once you move
- Part of this entails filing form 8898 to the IRS to notify them of your move
- While you’re living there, ensure you have a ‘closer connection’ to Puerto Rico than to the US. Don’t just move on paper. Move for real.
(Note—you don’t have to be American to take advantage of this; it’s possible for any nationality to capitalize on the tax incentives in Puerto Rico… with the added benefit that Puerto Rico does not have the typical ‘tax haven’ stench.)
One thing that’s important to understand is that it’s not all cookies and rainbows here in Puerto Rico. The island faces some serious fiscal and debt issues.
(That’s why these incentives were created—to attract more capital to Puerto Rico.)
Unemployment here is very high. Banks are starting to fail. And the government has just announced its intention to impose a value added tax in its effort to collect more tax revenue.
But despite these challenges, this strategy does work. It’s completely legal. And, honestly, Puerto Rico is a really nice place to be.
Bottom line: this is definitely something that investors and entrepreneurs should consider.
I’m skeptical that the Puerto Rican government will keep this window open indefinitely.
I think they’ll ultimately stop granting tax incentives to new residents… but existing residents under the program will be grandfathered in.
That’s why it’s always better to act sooner rather than later when a good thing is on the table.
If you’re looking for more information, we have a great free report on the subject that we’re happy to share with you. And if you’re a premium member of Sovereign Man: Confidential, you’ll be hearing more about this soon.
[It’s important to point out that this, or the information contained in the free report, should not be considered as tax advice. Consult your own tax advisors before proceeding.]
March 9, 2015
[Editor’s note: This letter was written by Tim Price, Director of Investment at PFP Wealth Management in the UK and editor of Price Value International.]
Danish sex therapist Eva Christiansen (pictured left) stands a good chance of becoming the definitive example for future historians of our current interest rate insanity.
As reported by Zero Hedge, the New York Times, and others, the 36-year-old businesswoman was approved for a small business loan at a rate of minus 0.0172 percent. The bank is actually paying her interest on the loan – albeit just over $1 a month.
Representing the flip side of this nonsense is the 27-year-old Danish student Ida Mottelson (pictured right). Her bank is now charging her 50 basis points (0.5%) to hold her money on deposit.
What’s wrong with this picture?
The Austrian economic school has a term for those things that are undertaken foolishly in the economy, perhaps because the pricing mechanism has become hopelessly distorted. It terms them ‘malinvestments’.
One dreads to consider the magnitude of malinvestments when people are paid to borrow money, charged to save money, and buying assets at all-time highs.
As an example, Mario Draghi at the European Central Bank is just about to begin a Quantitative Easing program with the aim of purchasing €1.1 trillion worth of bonds.
Banks and other institutions have already driven down the yields of many sovereign bonds into negative territory, which means that bond prices are already at their all-time highs.
It never makes financial sense to buy an asset at its all-time high—unless you anticipate some ‘greater fool’ will come along and take them off your hands irrespective of their long-term value. Enter Mario Draghi.
Awkwardly, the ECB’s bond buying program may prove to be the most ill-timed securities purchase in history given that bonds are at their highs and interest rates are now at 5,000-year lows according to data released by the Bank of England.
Lest this seem a counsel of despair, for any investor unconstrained by benchmark or regulatory fiat, there is an answer. It lies in the sad passing, just reported, of the late Irving Kahn, at the age of 109.
Kahn was a teaching assistant to Benjamin Graham, the dean of value investing and a man whose influence on and development of the principles of successful investing was second to none.
Now, more than ever, is a time to insist that our investments carry a “margin of safety” – the cushion represented by buying assets (today, most likely to be equity assets, and almost certainly not most sovereign bonds) at a meaningful discount to their inherent value.
At a time when few financial prices can really be trusted, courtesy of a tidal wave of QE that is lifting most boats, stocks possessing a “margin of safety” ensure that we run the least risk of consciously overpaying for our investments.
Irving Kahn long ago “stopped wasting time on what people claimed a stock was worth and started looking at the numbers”.
Value investing – attempting to buy dollar bills for forty or fifty cents – always makes sense, but it makes a whole lot more sense when risk-taking and asset market reflation are off the charts.
The alternative, which has become bizarrely popular among those retail investors flocking into index-tracking ETFs, is simply to gain broad market exposure. That is surely a grisly accident waiting to happen.
Fund manager John Hussman points out that “the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years.”
So the choices seem pretty clear:
1) Track absurdly expensive stock markets higher.
2) Buy government bonds at their most expensive levels in history – even as there are early signs that the interest rate cycle may finally be about to turn.
3) Or take shelter in the sort of value stocks that made Irving Kahn, Ben Graham and Warren Buffett mightily successful long-term investors.
Doesn’t seem like a particularly difficult choice to us.