August 20, 2014
Sometimes I am convinced it was completely by design, and not a weird little coincidence, that one of Germany’s most sprawling red light districts is just steps away from the European Central Bank.
This fact becomes comically obvious right around happy hour… as self-congratulatory ECB economists and their bureaucratic bank underlings crowd the bars and cafes after work which are simultaneously frequented by pimps, thugs, and other assorted low-lifes.
One would be forgiven for legitimately asking the question: which of these professions has done more damage to humanity?
My [fiat] money’s on the bankers.
These are the same financial luminaries who, recently, crowded aboard the good idea bus and decided to take interest rates NEGATIVE.
Their logic was that prices aren’t rising enough. This was actually the headline this morning that ran across the Rai (Italian news) ticker while I was consuming some egg-like substance at the hotel breakfast buffet this morning in Rome.
The newsman said something to the effect of “Low inflation makes economic problems worse in Europe.”
Ah, yes. Precisely. The problem isn’t an absurd level of over-regulation, massive unsustainable debt, insolvent banking systems, idiotic politicians, etc.
THE problem plaguing the entire continent… the problem behind sluggish growth for all these years… is that consumers aren’t getting screwed fast enough.
It’s hard to even know where to begin with such an epic level of stupidity. First of all, it’s not even true.
Having just spent the last few months traveling across most of the continent, I was astounded to see the speed with which prices had risen in many places.
I just capped off a week-long vacation with my fellow teammates at Sovereign Man in Italy… same place as last year… and I was charged a whopping 50% increase over last year’s rates.
But this sort of truth doesn’t matter to an economist who actually believes in his ‘science’. It is this ‘science’ of economics which tells us that outsized government debts are irrelevant. That awarding the power to conjure paper money out of thin air is a sound, credible system.
Yet it’s not working. Much of Europe (like Italy) has fallen back into recession.
Even here in Germany, which is supposed to be some sort of econo-mythical superhero carrying the rest of Europe around on its shoulders, the government just announced that the economy contracted last quarter.
Whatever these economic policymakers are doing, it’s obviously not working. So naturally the solution is to try more of the same. Much more.
They’ve already taken certain interest rates into negative territory. The expectation now is that they’ll ratchet rates even further into negative territory.
In doing so, they are effectively screwing hundreds of millions of people. Every single person on the continent who is a responsible saver. Every pensioner. Every retired schoolteacher. Every student. Everyone who works hard for a living and can already barely make ends meet.
Their lives are all about to get a lot more difficult.
Even for the well-heeled, life has become quite stressful. Think about it– there’s almost no place left anymore to hold your savings.
Putting cash in a bank practically GUARANTEES that you will lose money on an inflation-adjusted basis. Stocks are at precarious all-time highs. Bonds are at all-time highs. Many real estate markets are back in bubble territory.
These people have destabilized nearly every major asset class in existence.
On the balance, I’d rather deal with the seedier characters in this neighborhood rather than the suitpanted PhDs pretending to do honorable work.
I want to share more with you about this… not only my thoughts, but those of my colleague Tim Price.
Tim is a regular contributor to this column and one of the few people in professional finance for whom I have tremendous respect.
Tim joined us earlier this week on our group vacation in Italy, and I fortunately had the presence of mind to record our conversation; his insights are absolutely not to be missed.
I encourage you to give a listen here:
August 19, 2014
Imagine yourself hanging off a cliff, clutching to a single rope.
There you are, dangling over the abyss, completely dependent on the strength of that rope. The rope could fray or it could be cut, and there you would go, tumbling straight down.
So to be safe, you would prefer to have more than one rope connecting your suspended body to safe, stable ground, wouldn’t you? Because at least that way, if something happened to the one rope, you would still have something to hold on to.
For most of us in the world, we are born tethered to a single national identity. The passport is our rope. It’s our lifeline, and we depend on it wholly.
Some are blessed with a strong stable rope, which can enable one to feel secure, travel freely, and do business easily.
However, for some, their ropes are beginning to fray from years of being worn down by debt, corruption, and instability.
For those with a weak rope, it’s essential to work on getting more as quickly as possible. That means, a second citizenship, which in addition to providing greater safety, can also give you greater freedom to travel, work, and invest.
No matter how strong you think your rope is now, it is always a good idea to get another one.
A number of countries, including the US and France, have recently been exercising their ability to simply cancel citizens’ passports. Cutting off their freedom to travel entirely.
At the very least, it doesn’t hurt to have a back up plan. You’re never worse off by having multiple options at any given time.
There are a number of ways to go about obtaining another citizenship. The top three methods are either by ancestry, money, or time.
Ancestry is by far the fastest, easiest, and most cost effective way of obtaining a second citizenship, but most people don’t even realize that it’s an option for them.
Take a quick check down your family line to see if you happen to have any family members that were either Italian, Irish, or Polish.
These are not the only countries to offer citizenship based on ancestry, but they are some of the easiest and can be gained not only from your parents, but even your grandparents or further down the ancestry line.
For each of these three, you will need to compile the necessary documents to prove that your ancestor was a citizen of the country at the time of your birth.
Each country has subtle differences in the acceptability of claims, so I recommend that you find a suitable immigration lawyer in the country to help you through the process.
For members of Sovereign Man: Confidential we recently released a thorough report on the specifics of obtaining Italian citizenship by descent and our personally approved contact on the ground, with extensive experience in helping people through the process—including a unique fast track loophole.
There’s really no reason to delay… you wouldn’t wait until your rope was on its very last thread before you began to look for another one would you?
Having a second citizenship and passport provides you with more freedom and opportunity. It’s the ultimate wild card with which you’re not dependent on only one country. Sometimes it can literally save your life.
August 18, 2014
The sniper took a breath in as he put the fleeing form of Peter Fechter into the crosshairs of his rifle.
As he exhaled, he squeezed the trigger, landing his bullet squarely in the young boy’s back.
Watching Peter’s body fall, he mentally congratulated himself on what he’d just done to protect his nation.
It was just after 2pm, August 17, 1962 when Peter’s body hit the ground at the foot of the Berlin Wall.
There he lay in broad daylight for a full 50 minutes, screaming for help, before he was finally carted away.
What had Peter Fechter done to threaten the nation and deserve this public execution?
Nothing at all.
The boy was just an 18-year-old bricklayer, who wanted a chance at freedom, when he became the first person to die trying to escape over the Wall.
52 years later, the same things are still happening, and not in totalitarian East Germany, but right in the United States itself.
This time, the 18-year-old victim’s name was Michael Brown, an unarmed hospital worker, who was gunned down by police on the streets of Ferguson, Missouri.
After both young casualties, people were incited to protest in anger against the brutality of the state, and in both cases, the people had tear gas rained down upon them.
Who could possibly still believe that the police are there to protect and serve the people?
No matter the justifications they came up with, it’s was suddenly clear that the Wall was built to keep people in, not to keep others out.
Just the same, the police today are not there to keep you safe from criminals, but to keep the biggest criminals—the politicians—safe from you.
Though on the surface the current protests in Ferguson are about race, they reveal a much deeper truth about the situation. As they protest, the people are following their instincts, and their instincts are telling them not to trust the state.
We’re seeing people’s trust in the state beginning to crumble, not just with police, but with one government agency after another. More and more people are waking up to the fact that none of these institutions are really there to protect them.
The NSA says it’s there to keep you safe from terrorists, but in reality they’re spying on you to protect their power over the populace.
The Fed says it’s there to make the economy more stable, but they intentionally fuel economic volatility in ways that benefit their friends.
The FDA says it’s there to protect people from unsafe foods, but their regulations and endorsements of certain ingredients actually make your food more dangerous.
There’s an invisible wall going up around us, everywhere in Western civilization. People are starting to realize it and that’s why there’s so much anger. But rather than getting angry or emotional, it’s time to get ready.
Rational people have a plan B.
Because if you wait too long, you’ll wake up one day and see that the Wall has been built, and suddenly stands far greater than your ability to escape it unscathed.
August 15, 2014
Back in March serious allegations came out of the Senate that the CIA was monitoring and even hacking Senate computers. They were denied vehemently at the time by CIA director John Brennan, who went so far as to say “that’s just beyond the scope of reason.”
Unsurprisingly, of course, the CIA has now come out saying that, yes, they did in fact spy on Senate aides’ computers. Oh, and that they’re sorry. Very sorry.
This is stuff that would have been a major scandal not too long ago, causing a public outcry for the heads of those responsible.
Today, it seems par for the course. It’s taken for granted that governments around the world, spearheaded by Uncle Sam, monitor communication via email, phone, social networks, webcam etc. en masse.
And nothing happens.
Despite Edward Snowden’s decision last year to basically condemn his life to that of a fugitive and branded “traitor” by shedding a major spotlight on just exactly how brazenly and extensively the US government invades the privacy of people all around the world, the reaction, at least in the US, was muted.
As the saying goes, ‘The dogs bark, but the caravan goes on.’
Even though government surveillance is becoming more and more invasive, there are ways to shield yourself from prying eyes.
If you agree with the premise that every person has the right to protect their personal matters and privacy from the Big Brother, there are free options to use out there that can ensure your communications, your digital presence and activity, and your data remain secure and private.
For calls, for example, the company Open Whisper Systems has developed apps that protect the privacy of your voice conversations.
If you’re an Android user, Red Phone is an open source app that secures your calls with end-to-end encryption. It uses your normal phone number and default dialer so you make calls just as you normally would, with no additional layers or steps necessary to protect your privacy.
To secure your text messages, the same company also has an app TextSecure that does just that.
If you’re an iPhone user, the developers of Red Phone and TextSecure took care of you too.
You can achieve the same result by using a free app called Signal – Private Messenger. Just as Red Phone, Signal makes end-to-end encrypted calls through Wi-Fi or mobile data, instead of your phone network.
Protecting your calls and texts from prying eyes and ears is just one piece of the puzzle if you want to take back your privacy.
There are so many different layers that you can protect—from your internet browsing to online searches, email, your data storage, payments etc.
We cover all these different aspects and options in our free Digital Privacy Black Paper.
I encourage you not only to implement the stuff we talk about in the Black Paper in order to take back your privacy, but to also share it with your friends and loved ones.
August 14, 2014
Remember in the first Bourne movie when Jason wakes up after being rescued from the Mediterranean Sea?
Suffering from amnesia he doesn’t remember who he is, or what had happened to him. The only clue he has is a tiny surgically implanted projector that displays a safe deposit box number for a bank in Zürich.
For a very long time Switzerland was the hallmark of privacy, especially financial privacy. Swiss banks were known as discrete, prudent and savvy financial partners.
The country’s tradition of bank secrecy goes back all the way to the Middle Ages and was first officially codified in the Banking Law of 1934, which made it a criminal act for a Swiss bank to reveal the name of an account holder.
The reasoning for strict financial privacy and even numbered accounts was simple.
Personal financial matters between bankers and savers should have confidentiality protection, the same as is given to health and legal matters between doctors and patients or lawyers and their clients.
However, after the enormous amount of pressure that the Swiss have been exposed to in recent years, especially from the US and the EU, they’ve rolled over.
In October 2013, the Swiss government stated that it intended to sign an international agreement under the auspices of the OECD that would align Swiss banking practices with those of others.
Thus effectively ending the special secrecy that clients of Swiss banks had enjoyed in the past.
It’s important to understand just how monumental this shift is—for the Swiss to give up their bank secrecy is the equivalent change in the national psyche to Americans giving up their guns.
Swiss banks therefore have lost their allure, sending many of their clients fleeing for other privacy-oriented jurisdictions—Singapore, Hong Kong, Luxembourg, Lebanon, Panama, Cayman Islands etc.
And yet, it’s important to note, that even in those places, real financial privacy within the conventional banking system no longer exists.
Globally, financial nudity is now the norm in banking.
Even jurisdictions that nominally still have financial privacy laws on their books are casting them aside under pressure from the US, and without much of a fight.
If you still want to retain a certain degree of financial privacy, it’s necessary to hold some of your assets outside of the conventional banking system.
Own alternative assets. Real estate. Gold and silver. Collectibles, such as stamps, rare coins etc. Art. Fine wine. Private businesses. Etc.
I know what you’re thinking—where’s bitcoin on that list?
While bitcoin is a great concept and an incredible technology, it doesn’t exactly fulfill our security criteria.
It’s a pseudo-anonymous digital currency that’s not really private. Every transaction is out there in the public domain and is just as traceable as using your MasterCard.
Remember—advocating for financial privacy and banking secrecy doesn’t have anything to do with evading taxes, it’s a fundamental right that every person should enjoy.
I have always considered tax evasion to be against the very core of what we’re trying to do at Sovereign Man, which is to increase people’s freedom and their choice of options.
Evading taxes does just the opposite. All it does is to bring you into the crosshairs of law enforcement agencies, ultimately reducing your freedom and wellbeing.
August 13, 2014
For hundreds of years the Byzantine Empire coined the most popular reserve currency in the history of the world.
Merchants all over Europe, the Mediterranean, the Middle East, and further, used it in trade for centuries.
It was called the solidus, and was introduced by Constantine I in 312 AD.
The solidus held steady at 4.5 grams of 24-carat gold for nearly seven centuries. Hence its Latin name – ‘solid’. The durability of its purity is nearly unprecedented in the history of money.
Its weight, dimensions and purity remained constant until the 10th century when the government began to debase it.
The debasement was gradual at first, then accelerated rapidly.
In a matter of decades its gold content was reduced to almost zero as the Byzantine Empire was scrambling for cash to finance its numerous wars.
Consequently, Emperor Alexios I Komenos drastically overhauled the Byzantine coinage system in 1092 and introduced a new gold coin, the hyperpyron.
It too was soon subject to gradual debasement. And by the mid 1200s the hyperpyron’s gold content fell drastically again.
As the saying goes, fool me once, shame on you. Fool me twice, shame on me.
The rest of Europe had seen this movie before. And when they saw the gold content in the hyperpyron fall, they quickly lost confidence.
By that time, the Byzantine Empire was weak—a shadow of its former power.
Meanwhile, several small kingdoms in Italy were rising in prosperity, especially Florence, Genoa, and Venice.
The Florentines and the Genoese took up the task and minted a new gold coin called the florin, which at 3.5 grams of pure gold was the most wildly circulated trade currency in Europe and around the Mediterranean for a while.
The Venetian ducat gained wide international acceptance in the 1400s. The ducat contained 99.47% of fine gold—the highest metallurgical purity possible at the time.
As the Venetian merchants traveled far and wide the ducat became an internationally accepted trade currency throughout the world.
Even though he didn’t live in Venice, for example, Leonardo da Vinci was paid by the King of France in Venetian ducats—exactly 400 ducats per year, which in today’s dollars equals to roughly $56,000 (and he didn’t pay any tax…)
The ducat was ultimately supplanted by the Spanish dollar (real de a ocho, or Pieces of Eight) with the onset of the Age of Exploration.
Pieces of Eight became so widespread in international trade that they were legal tender in the United States until the mid 19th century.
The clear lesson here is that this stuff changes.
It’s common for the world’s most powerful country to issue a currency that becomes adopted around the world as the standard for international trade.
But whenever that country reaches a point of epic, terminal decline, and especially when it rapidly debases its currency, the rest of the world seeks an alternative.
The US has been enjoying this special privilege for decades now.
The US dollar is the most widely used currency in the world for international trade. Central banks and sovereign governments around the world hold trillions of US dollars.
And while these changes never happen overnight, it’s clear that the dollar is quickly losing this status.
The French Finance Minister recently called for a ‘rebalancing’ of currencies in global trade settlement. The British, French, Canadians, and Swiss are all on board with this trend.
As are, clearly, the governments of Russia, China, and India. Nearly the entire world understands this trend. Everyone but the United States government.
They’ll be the last ones left in the room after nearly everyone else has headed for the exit, oblivious to their own destruction.
People who understand this shift and get out in front of it will make fortunes.
Those who play Ostrich, stick their heads in the sand, and keep all of their eggs in one frail basket are taking the gamble of their lifetimes.
August 12, 2014
If you’ve been a reader of Sovereign Man for any length of time you’ve probably read about our annual youth camp.
Each summer, we bring students from all over the world to a beautiful lakeside resort in Lithuania where my colleagues and I coach them about liberty, investing, and entrepreneurship.
This year’s camp just ended just yesterday. And I’m proud to say it was the best one we’ve ever had.
These camps always leaves me energized and incredibly optimistic.
Because if there’s one trend that holds true throughout history, it’s that, despite all the challenges and problems in the world, human beings rise.
We overcome adversity. We adapt. We advance. And we eventually turn challenges into opportunities.
And it’s young people like the ones we have at our camps which will inherit the opportunities to solve many of those problems.
I’m convinced, for example, that within two decades, today’s banks will be completely irrelevant. So will our version of ‘money’.
It’s today’s young people who will create the companies, platforms, and technologies that will revolutionize this system.
I have a very long-term view on everything. And one of the reasons why I organize and foot the bill for this event each year is because I want to be involved with bright young minds who will be making a difference in the world.
I want to tell you more about what happened at this year’s camp: about the most important skills to develop, plus what I told them about my vision for the future.
August 11, 2014
[Editor’s note: Tim Price, frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management, is filling in while Simon is teaching at his entrepreneurship camp.]
On September 9th, 1965, US Navy pilot James Stockdale was shot down over North Vietnam and seized by a mob.
He would spend the next seven years in Hoa Lo Prison, the infamous “Hanoi Hilton”.
The physical brutality was unspeakable, and the mental torture never stopped. He would be kept in solitary confinement, in total darkness, for four years.
He would be kept in heavy leg-irons for two years and put on a starvation diet.
When told he would be paraded in front of foreign journalists, he slashed his own scalp with a razor and beat himself in the face with a wooden stool so that he would be unrecognizable and useless to the enemy’s press.
When he discovered that his fellow prisoners were being tortured to death, he slashed his wrists to show his torturers that he would not submit to them.
When his guards finally realized that he would die before cooperating, they relented.
The torture of American prisoners ended, and the treatment of all American prisoners of war improved.
Jim Collins, author of the influential study of US businesses, ‘Good to Great’, interviewed Stockdale during his research for the book. How had he found the courage to survive those long, dark years ?
“I never lost faith in the end of the story,” replied Stockdale.
“I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining moment of my life, which in retrospect, I would not trade.”
Collins was silent for a few minutes. The two men walked along, Stockdale with a heavy limp, swinging a stiff leg that had never properly recovered from repeated torture.
Finally, Collins went on to ask another question. Who didn’t make it out ?
“Oh, that’s easy,” replied Stockdale. “The optimists.”
Collins was confused.
“The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’
And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’
And Easter would come, and Easter would go. And then Thanksgiving. And then it would be Christmas again. And they died of a broken heart.”
As the two men walked slowly onward, Stockdale turned to Collins.
“This is a very important lesson. You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
At the risk of stating the blindingly obvious, this is hardly a ‘good news’ market. Ebola. Ukraine. Iraq. Gaza.
In a more narrowly financial sphere, the euro zone economy looks to be slowing, with Italy flirting with a triple dip recession, Portugal suffering a renewed banking crisis, and the ECB on the brink of rolling out QE.
What are the implications for global stocks?
On any fair analysis, the US market in particular is a fly in search of a windscreen.
Using Professor Robert Shiller’s cyclically adjusted price / earnings ratio for the broad US stock market, US stocks have only been more expensive than they are today on two occasions in the past 130 years: in 1929, and in 2000.
Time will tell just how disappointing (both by scale and by duration) the coming years will be for US equity market bulls.
But we’re not interested in markets. We’re interested in value opportunities incorporating a margin of safety.
If the geographic allocations within Greg Fisher’s Asian Prosperity Fund are any guide, those value opportunities are currently most numerous in Japan and Vietnam.
The Asian Prosperity Fund is practically a poster child for the opportunity inherent in global, unconstrained, Ben Graham-style value investing.
Its average price / earnings ratio stands at 9x (versus 17x for the S&P 500); its price / book ratio stands at just one; average dividend yield stands at 4.2%.
And this from a region where long-term economic growth seems entirely plausible rather than a delusional fantasy.
Vice Admiral Stockdale was unequivocal: while we need to confront the “brutal facts” of the marketplace, we also need to keep faith that we will prevail.
To us, that boils down to avoiding conspicuous overvaluation and embracing equally conspicuous value – where poor sentiment is likely to intensify subsequent returns.
In this uniquely oppressive financial environment where the skies are darkening with the prospect of a turn in the interest rates, optimism could be fatal.
August 7, 2014
In an unbelievable display of arrogance and self-importance, the Australian government recently announced the most sweeping changes to their national security legislation since 9/11.
The new laws will give the Australian government more powers to monitor all types of communication, both phone and internet.
What’s more, telecom companies will be required to store searchable metadata of all activity for two years, enabling the authorities to access details of every phone call made and every website visited.
Powers for “extended detention” and ‘preventative detention’, (pre-crime) have also been extended.
I’m sure it makes you feel better knowing that you could be preventively detained without actually committing any crime—you know, just in case…
It will also become a crime now to travel to a country where terrorists are ‘conducting hostile activities’ unless you have a ‘legitimate excuse’.
Just how these travel bans will be decided upon is unclear. Is Ukraine off limits? Spain? Northern Ireland? Thailand? Russia?
All of this is supposedly necessary because, according to the government, there are 125 Australian citizens currently part of terrorist groups overseas.
Even if correct, 125 people represent 0.0005% of the population of Australia. So for 125 people, the other 24+ million must be subjected to a Big Brother police state.
It all makes even less sense when your read the official justifications for it. Australia’s Prime Minister Tony Abbott said that:
“We are under a lot of budget pressure at the moment, but the community won’t thank us if we skimp unreasonably on national security.”
Ironically, he admits they don’t have the money for it. But they’re going to come up with an ADDITIONAL $630 million (a significant amount of money in Australia) to boost domestic spying and police state programs… all for 125 people.
But the prize for the dumbest comment you’ll hear this week goes to another pearl of wisdom from the Australian Prime Minister:
“The terrorist threat in this country has not changed, nevertheless it’s as high as it’s ever been.”
Now, as a native English speaker, I’m not entirely sure what he’s trying to tell me.
The government didn’t spend this money last year, and nothing happened.
But now since, according to the PM, nothing has changed, suddenly the government has to spend an additional $630 million to terrorize and spy on citizens.
What a brilliant piece of logic wrapped up in political Newspeak.
Basically they’re telling everyone that they should just be afraid… and that the government must spy on citizens in order to protect them.
This is how it always happens… and we can watch yet another country slide rapidly into a police state.
August 6, 2014
When you think about “strong banking”, what country comes first to mind?
A few years ago, the most obvious answer would be Switzerland.
Today, however, Switzerland’s reputation for banking is nowhere near where it once was.
Starting in 2009, the US, as chief financial bully, led the charge in assaulting the country’s banking sector and dragging it down brick by brick.
The pummelling has continued ever since, culminating in the end of banking secrecy in the country altogether.
Meanwhile, as Switzerland endured one blow after the next, the Chinese renminbi (RMB) quietly slipped past the steadfast Swiss franc to become a more popular currency for use in trade settlements.
Eager to restore some of its former banking luster, Switzerland has taken note of this and is rapidly positioning itself to become a major center of European RMB trade.
So the government of Switzerland recently signed a bilateral currency swap agreement with China, enabling the two countries to buy and sell up to 150 billion RMB or 21 billion Swiss Francs of each other’s currencies.
Switzerland is just the latest to join the queue, as nearly 25 other central banks already signed similar agreements with China.
Every few weeks, and with increasing frequency, we’re hearing news of the next country that is accepting China’s future financial primacy.
There’s no denying that both sovereign nations and market participants are accepting the validity of the RMB as a major trade currency. This is no longer an anomaly, but part of an obvious trend.
To be fair, it’s not that the RMB is a shoe-in for the next global reserve currency—because the country and its currency undoubtedly both have problems.
What’s really being revealed with these latest developments is relative confidence.
It may not be clear whether or not the RMB will make it to the top, but what is clear to everyone is that the USD is going down.
Here we see ambitious countries like the UK and Switzerland proactively trying to adapt to and take advantage of the changing financial climate.
The sole tactic of the US government, on the other hand, is to lash out at countries which make them feel threatened.
They rally the whole world against Russia for acts of war. They blast China as a currency manipulator.
And all of this as if the US wasn’t dropping bombs by remote control drone… or heavily manipulating its own currency.
This has accomplished nothing other than to demonstrate just how weak and insecure the former financial superpower has become.
Continuing to believe that the dollar is going to maintain its global reserve status is now not only foolish, but financially hazardous. To countries, businesses and individuals.
Those that accept these changes and try to get out in front of this trend will do incredibly well. They are the ones who will survive intact when the financial system resets.
Those who ignore the trend do so at their own peril.
August 5, 2014
Roughly a month ago, my colleague Tim Price wrote an article exposing CYNK Technology Corp.
The day we published, the stock (OTC: CYNK) had a market cap in excess of $1 billion; it rose to more than $6 billion at its peak.
All this with one employee, no assets, no revenue, no website, and no product… What could possibly go wrong?
The CYNK bubble was, of course, the result of carefully planned deceit and clever promotion by a handful of people who stood to make a lot of money on the trade.
CYNK’s overvaluation was so outrageous that at one point the company was worth more than US Steel, the 13th largest steel producer in the world with 42,000 employees, $17 billion in revenue, and $414 million in operating cashflow.
Needless to say, CYNK was a complete and total scam. And it’s appalling that anyone actually believed it.
But when you think about it, CYNK’s stock wasn’t really any dumber than owning US Treasuries.
Across the entire global financial system, US government debt is considered the global “risk-free” benchmark against which other assets are measured.
Yet every shred of objective evidence suggests that the US is one of the LEAST creditworthy borrowers in the world.
The US government’s own numbers show they have net worth of NEGATIVE $16.9 trillion. And the Congressional Budget Office projects this figure getting far worse.
But still, the golden tale is spun: the US can never default on its debt.
People are told that US government can always raise taxes in order to pay back the debt.
But the numbers show a completely different story.
Since the end of World War II, ALL tax rates in the US have varied wildly. Individual income tax rates, for example, have been as high as 90%.
Yet the government’s total tax revenue has always hovered at around 17.7% of GDP.
It’s never mattered how much they raise tax rates; so this assertion that the government can simply raise tax rates to pay back the debt is a total farce.
Even worse, investors somehow take comfort that the United States can just print more dollars, as if hyperinflation is a credible debt management strategy.
But truth be damned, investors keep buying US Treasuries.
It doesn’t matter that inflation-adjusted, tax-adjusted interest rates GUARANTEE that you will lose money.
It doesn’t matter that the US is the largest debtor in the history of the world.
It doesn’t matter that they cannot raise tax revenues to pay back the debt.
It doesn’t matter how close they’ve come so many times to default.
It doesn’t matter that the economy is supposedly so great that the Fed cannot possibly bring itself to raise interest rates by even 0.25%.
And it doesn’t matter that they have yet another looming crisis in six months when the debt ceiling suspension ends.
(Congress even required, by law, that the Treasury Department NOT build up a cash reserve in the event of a government shutdown. It’s sheer lunacy…)
Somehow this is still considered “risk free”. But just as they did with CYNK, reality always catches up.
In the case of CYNK, it only took about a month for the bubble to inflate and burst.
The Treasury bubble, on the other hand, was built on credibility earned over decades by previous generations.
They defeated the Nazis. They stood up to the Soviet Empire. They designed magnificent infrastructure. And they went out and built it with their bare hands.
They celebrated Jonas Salk and Albert Einstein, not some self-absorbed reality TV starlets.
And they didn’t have safety nets or expect to be taken care of at taxpayer expense.
It was far from perfect. But previous generations earned the world’s trust. Modern day politicians have blown through it.
Now all they have left is their snake oil sales pitch. And a mountain of obligations that closed July 2014 at a record high $17.69 trillion.
August 4, 2014
There’s nothing more permanent than a temporary government measure, as the old saying goes.
I was reminded of it when I came back to Kiev over the weekend and that the Ukrainian government imposed a series of “temporary” taxes to help the war effort.
And boy does this government need money.
According to both Ukrainian and Russian news sources, several hundred solders were left without weapons or ammunition and crossed the border into Russia.
The Ukrainian news suggests that this was a forced withdrawal after being routed by rebel forces. The Russian news suggests that the troops were seeking asylum, no doubt tired of war.
So the Ukrainian government is in a hurry, trying to raise at least $1 billion (a lot of money here).
They’ve jacked up wage taxes, natural resource taxes, and even taxes on farming exports.
But even if they collect the money they’re aiming for, Ukraine and its government are in a serious pinch.
For the last few months, even before the turmoil began, Ukraine has been in an inflationary cycle. Both retail and asset prices were spiraling higher.
Now they’ve entered a stagflationary period. The currency has gone into freefall. Unemployment is rising. The economy is contracting (6% by phony government estimates). And inflation is a whopping 19%… and rising.
These people are getting abused. And the worst is yet to come.
The banking system is borderline insolvent. The head of the local Citigroup branch here said that the non-performing loan ratio in Ukraine is as high as 40%.
And potentially up to 4% of all bank assets are now locked down in Crimea, which may or may not even be part of Ukraine any longer.
If the banking system collapses (and many here suspect it will), this place will become unglued. Asset prices will collapse, yet retail prices will surge even higher.
I can already see it on the street; so many businesses have closed. Hopeless unemployed youths are now roaming the city or joining the war effort.
And the entire populace has been mobilized to support the fight.
Of course, it’s pretty damn easy to cheer on the bloodshed when it’s not your blood. War can seem glorious when you only have to read about it in the newspapers.
There’s so much more I need to tell you about—the only way for me to capture this was in another podcast, probably the most emotional I’ve ever done.
Come listen for yourself:
Ukraine: I can already see it on the street; so many businesses have closed. Hopeless unemployed youths are now roaming the city or joining the war effort.
And the entire populace has been mobilized to support the fight.
Of course, it’s pretty damn easy to cheer on the bloodshed when it’s not your blood. War can seem glorious when you only have to read about it in the newspapers.
There’s so much more I need to tell you about—the only way for me to capture this was in another podcast, probably the most emotional I’ve ever done.
“Let us learn our lessons. Never, never, never believe any war will be smooth and easy, or that anyone who embarks on that strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.
“Antiquated War Offices, weak, incompetent or arrogant commanders, untrustworthy allies, hostile neutrals, malignant fortune, ugly surprises, awful miscalculations – all take their seats at the Council Board on the morrow of a declaration of war. Always remember, however sure you are that you can easily win, that there would not be a war if the other man did not think he also had a chance.”
- Winston Churchill, ‘My Early Life’, quoted by Charles Lucas in a letter to the FT, 23rd July 2014.
And there is a war being conducted out there in the financial markets, too, a war between debtors and creditors, between governments and taxpayers, between banks and depositors, between the errors of the past and the hopes of the future. How can investors end up on the winning side ? History would seem to have the answers.
For history, read in particular James O’Shaughnessy’s magisterial study of market data, ‘What Works on Wall Street’ (hat-tip to Abbington Investment Group’s Peter Van Dessel). O’Shaughnessy offers rigorous analysis of innumerable equity market strategies, but we are instinctively and philosophically drawn most strongly towards the value factors highlighted hereafter.
The chart below shows the results accruing to various strategies across the All Stocks universe – all companies in the Standard & Poor’s Compustat database with market capitalisations above $150 million, a dataset which comprises between 4,000 and 5,000 individual companies. The analysis takes in over half a century’s worth of data.
Making the (fairly reasonable) assumption that the data in this study is sufficiently broad to mitigate the effects of shorter term market “noise”, the results are unequivocal. Buying stocks with high price-to-sales (PSR) ratios; buying stocks with high price / cashflow ratios; buying stocks with highprice / book ratios; buying stocks with high price /earnings (PE) ratios; all of these are disastrous strategies relative to the performance of the broad index itself. Caution: these all happen to be ‘growth’ strategies.
But the converse is also true – in spades. Buying stocks with low price-to-sales ratios; buying stocks with low price / book ratios; these are both outstandingly successful strategies over the longer term, converting that initial $10,000 into over $22 million in each case. Buying stocks on low price / cashflow ratios is also a winning strategy. The relatively simple ‘high yield’ and ‘low p/e’ strategies also comfortably outperform the broad market. Note that these are all ‘value’ strategies.
This leads O’Shaughnessy to question the legitimacy of the so-called Capital Asset Pricing Model, in which investors are compensated for taking more risk:
“..the higher risk of the high P/Es, price-to-book, price-to-cashflow, and PSRs went uncompensated. Indeed, each of the strategies significantly underperformed the All Stocks Universe.”
Perhaps the market is indeed less efficient than certain academics would have us believe. The world’s most successful investor, Warren Buffett, would seem to think so. As he was quoted in a 1995 issue of Fortune magazine,
“I’d be a bum on the street with a tin cup if the markets were always efficient.”
And note that careful addition of the word “always”. Buffett wasn’t even going so far as to suggest that the markets are never efficient, but rather that the patient investor can take advantage of Mr. Market’s occasional lapses into the realms of absurdity, whether in the form of bullishness or outright despair.
O’Shaughnessy frames the returns from these various ‘growth’ and ‘value’ strategies more explicitly in the chart below.
Special pleaders on the part of ‘growth at any cost’ might argue that the time series is insufficient. But if 52 recent years – easily an investor’s lifetime – taking in at least two grinding bear markets are not enough, how much would be.
Again, the conclusions are clear. Buying stocks on low price-to-sales ratios is a winner, tying with stocks on a low price-to-book ratio with an annualised return over the longer term of 15.95%. Low price-to-cashflow is also a stellar performer. Buying stocks with a high yield also beats the broad market, as does buying stocks with low price / earnings ratios. Again, these are all explicit ‘value’ strategies.
Since we appear to be living through something of a speculative bubble (a bubble inflated quite deliberately by explicit central bank action), it is worth recalling one prior instance of ‘growth’ outperforming. As O’Shaughnessy points out.
“Between January 1, 1997 and March 31, 2000, the 50 stocks from the All Stocks universe with the highest P/E ratios compounded at 46.69 percent per year, turning $10,000 into $34,735 in three years and three months. Other speculative names did equally as well, with the 50 stocks from All Stocks with the highest price-to-book ratios growing a $10,000 investment into $33,248, a compound return of 44.72 percent. All the highest valuation stocks trounced All Stocks over that brief period, leaving those focusing on the shorter term to think that maybe it really was different this time. But anyone familiar with past market bubbles knows that ultimately, the laws of economics reassert their grip on market activity. Investors back in 2000 would have done well to remember Horace’s Ars Poetica, in which he states: “Many shall be restored that are now fallen, and many shall fall that are now in honour.”
“For fall they did, and they fell hard. A near-sighted investor entering the market at its peak in March of 2000 would face true devastation. A $10,000 investment in the 50 stocks with the highest price-to-sales ratios from the All Stocks universe would have been worth a mere $526 at the end of March 2003…
“You must always consider risk before investing in strategies that buy stocks significantly different from the market. Remember that high risk does not always mean high reward. All the higher-risk strategies are eventually dashed on the rocks..”
This might seem to imply that there is safety simply in the avoidance of explicitly high-risk strategies, but we would go further. We would argue today that central bank bubble-blowing has made the entire market high-risk, with a broad consensus that with interest rates at 300-year lows and bonds hysterically overpriced and facing the prospect of interest rate rises to boot, stocks are now “the only game in town”. We concede that by a process of logic and elimination, selective stocks look way more attractive than most other traditional assets, but the emphasis has to be on that word “selective”. We see almost no attraction in stock markets per se, and we are interested solely in what might be called ‘special situations’ (notably, in ‘value’ and ‘deep value’ strategies) wherever they can be identified throughout the world. We note, in passing, that markets such as those of the US appear to be virtually bereft of such ‘value’ opportunities, whereas those in Asia and Japan seem to offer them in relative abundance. In this financial war, we would prefer to be on the side of the victors. If history is any guide, the identity of the losers seems to be self-evident.
August 1, 2014
What a disaster.
For the second time in the last fifteen or so odd years, Argentina has defaulted on its debt. And as we reported a few weeks ago, there was no easy way out.
Years ago, most of the creditors that Argentina had stiffed in 2001 agreed on a settlement; they accepted a much lower payment than they were actually owed, figuring that getting -some- money back was better than nothing.
But a handful of bondholders, known collectively as the ‘holdouts’, didn’t take the deal.
These were the people who, you know, actually wanted to get paid what they are obliged to receive.
This is the basic equation of credit. One person lends money. The other person borrows money. In any reasonable deal, the lender is supposed to have some sort of recourse to recover his/her capital when the borrower defaults.
If you default on a mortgage, the bank takes the house. Stop making car payments and they send the repo guy to take your vehicle. When a business fails, bondholders can often liquidate the company’s assets.
Argentina has plenty of assets. The government has nationalized just about everything they can get their hands on, including the really despicable theft of a Spanish oil company’s assets.
Clearly this is a government that feels perfectly fine taking other people’s assets when it suits them. But they’re not willing for others to do the same.
So the holdouts sued.
Eventually they found a sympathetic judge in the United States who ordered Argentina to STOP making payments to all the other bondholders until the government could reach an agreement with the holdouts.
I know what you’re thinking– what gives some judge in the United States authority over a sovereign nation?
Nothing. Except that he threatened them with the kiss of death: if Argentina failed to comply with his instructions, he would banish them from the US banking system.
Now… imagine you’re the finance minister of some developing nation out there, watching this all unfold in the newspapers.
Would reading about all of this inspire more confidence in the US government? Would it make you want to continue relying on the US banking system? Use the dollar? Or even hold Treasuries?
The Argentina debacle is a lot of things. But one important lesson is that the rest of the world is watching very closely… and thinking, “No way do I want to end up like that.”
This is a HUGE reason why other countries are now starting to form their own international finance system. They’d rather rely on China and Russia than the Land of the Free.
And the US government is practically begging them all to run away like scalded dogs, further accelerating the decline of the US and the dollar’s dominance.
Argentina’s economic minister summed it up best from New York the other day when a reporter asked him about how a potential default would affect the rating agencies’ outlook on his country.
He said, “Who believes in the rating agencies?” After all, these were the guys who completely missed the 2008 financial crisis… who were slapping AAA ratings on toxic debt, and never accepted responsibility for it.
Why do they still have such a dominant role in the global financial system? And for that matter, why does the dollar?
Why indeed. And as the US keeps up this kind of behavior, it won’t for long.
July 31, 2014
In the absurdly best-selling book The 7 Habits of Highly Effective People, author Stephen Covey wrote about abundance vs. scarcity.
With the abundance mindset, people confidently view the world as full of resources and opportunities… that there’s more than enough to share… and that more success is coming soon.
The opposite is the scarcity mindset, where people view everything as scarce and finite. If you’re winning it’s because I’m losing.
The scarcity mindset reinforces that there’s never enough time, never enough money. And since we can never be sure about the future, we have to ration every last possible resource and grab every bit for ourselves.
This ‘scarcity’ mindset pretty much sums up tax policy in most ‘rich’ Western nations.
In the US, tax revenue as a percentage of GDP has been almost exactly 17.7% of GDP since the end of World War II.
It hasn’t mattered how much they’ve raised tax rates; when tax rates go up, overall tax revenue, i.e. the government’s slice of the GDP pie, stays about the same.
For years they’ve been bleeding cash.
Yet rather than say “How can we support abundance? How can we help set the right conditions to make the PIE bigger,” they punish and intimidate everyone.
The Land of the Free is one of the only supposedly civilized nations in the world where you can be criminally convicted and thrown in jail over tax discrepancies.
They maintain one of the LEAST competitive corporate tax rates in the world, and then blame the companies who have a problem paying that much.
They need the money. There’s never enough. So they’re obsessed with bullying citizens for every last penny they can get their hands on.
It’s classic scarcity mentality.
Thousands of miles away, Estonia is one of the few countries that gets it.
Estonia has reduced taxes to a low, flat rate of 21%. And this number has been falling; from 26% in 2004, it hit 21% in 2008 and has remained at this level since.
One major innovation here is that Estonian companies are only taxed when they actually make a distribution.
In other words, a company that reinvests its profits back into the business pays ZERO tax.
Not to mention there are tremendous incentives and financing programs available for startups. So building a business here is definitely a great option.
Plus there’s no estate tax– the Estonian government isn’t looking for its ‘fair share’ when you die. There’s no gift tax or wealth tax either. It’s Paul Krugman’s worst nightmare.
But perhaps most importantly, the ENTIRE tax code itself is just 43 pages, and filing a return can be done online in just minutes.
In contrast, the US tax code could fill entire football stadiums. And tax preparation wastes tremendous resources that could otherwise be put to productive use.
But here’s the incredible thing: Estonian tax revenues, GDP, and standard of living have been rising year after year.
And at roughly 10% of GDP, Estonia has a laughably low debt. In fact, Estonia has the LOWEST general government debt of any country in the EU.
In Estonia they have truly worked to make the pie bigger. It’s an abundance mentality, plain and simple.
Now, let’s pretend for a minute that you’re flat, crazy, dead broke. And there’s a guy down the street who really has his stuff together.
He has a nice house, he’s saved money, he’s conservative, and he’s doing quite well.
Wouldn’t it make sense to learn from this person?
Wouldn’t it make sense to spend a little time checking out what they’ve done right, what they’ve learned, and see how you could apply that to your own life?
Sure it does.
But not if you’re the US government. Or France, Spain, Italy, etc.
Their only approach is to ignore the obvious success of other countries who have figured it out.
Instead their scarcity mentality pushes them to continue confiscating, intimidating, and terrorizing in a desperate, failed attempt to make ends meet.
It’s quite sad. But this is our reality.
July 30, 2014
En route to Estonia
The last few years have not been kind to European property markets, to put it mildly.
Ireland, Spain, and Portugal, for example, experienced property bubbles and collapses even more severe than what happened in the US. It was gruesome.
But while some areas have recovered, others are still barely limping along 6+ years later.
Before reviewing the places in Europe that are cheap at the moment, let’s first define terms: what is ‘cheap’? I look at this in a few ways–
1. My universal truth: Anytime you can buy good quality property for less than the cost of building it—that’s cheap. It’s like buying a dollar for fifty cents.
(Construction costs vary from place to place, as high as $2,000 per square meter in the UK to less than $800 per square meter in Hungary.)
Of course, you always want some sort of catalyst for future growth. Just because something is cheap doesn’t mean it can’t stay cheap forever…
2. From a macroeconomic point of view, cheap property markets have a low ‘price to income ratio’, essentially the ratio between the median home price and the median salary in the area.
If you can buy a home for 1 or 2 times the average salary, that’s cheap place to become a homeowner.
3. High yields can also be an indication of cheap property markets. This is effectively calculated as a property’s net operating income (rental income less expenses) divided by its purchase price.
Savvy real estate investors borrow money at, say, 5%, and invest in properties that have yields of 10%. The higher the yield, the faster the initial investment will recoup itself, after which the underlying asset (property) will be yours for “free”.
(There are a lot more ways to look at ‘cheapness’ that I don’t have room to cover here.)
Real estate was one of the main things I was looking at over the past few weeks as I’ve been traveling all over Europe. Here’s what I discovered:
* Ireland—A year ago Ireland was definitely the place to find the best deals on property. The government set up a ‘National Asset Management Agency’ (NAMA) to offload all the country’s distressed properties.
But now they’ve managed to sell most of them and are now winding down the program.
* Portugal—Portugal’s property market has substantially benefited from its Golden Residency Visa program that was aimed at property buyers.
This is a program where you can purchase property and obtain tax-free residency; it’s been a major success and has attracted a number of Chinese and Russian residents.
Since Portugal is a fairly small market, it didn’t take much demand to move the needle and recover from the rock bottom depths.
Properties in Portugal are still reasonably priced, but they’re nowhere near shockingly cheap anymore.
Spain—I’m astounded at the cheapness of properties in Spain, particularly in Anadlucia and Valencia.
As of last month, the official statistics showed 1.7 million properties for sale, and a tremendous vacancy rate. Sellers are still desperate for action.
For example, I saw one property with a small home (about 1,000 square feet) on 40 acres of beautiful land selling for about 100.000 euros ($130,000).
In other words, they were basically selling the home for the cost of construction and throwing in the land for free! And I kept seeing this over and over again as I traveled across the country.
But one thing that surprised me– on a pure yield basis, the best property deals in Western Europe right now are actually in the United Kingdom.
In England’s second biggest city of Birmingham, average income yields are around 13% to 14%.
Banks still provide mortgages for up to 75% of the property value at rates of roughly 5%. This means you could borrow at 5% and make 14% on the property. Not bad.
Certain places in Europe are definitely worth looking into at the moment. Because aside from attractive prices, there are several good reasons to own foreign real estate.
Owning property is a great way to trade paper currency for something that has real value and can generate long-term income streams. It’s also a great inflation hedge.
More importantly, ownership of foreign property held personally is not a reportable asset for US taxpayers. This makes property a great way to move and hold savings overseas.
And in many cases (like Spain, Portugal, Latvia, Greece, etc.) purchasing property is rewarded with residency, giving you more freedom and more options in case you decide it’s ever time to get out of dodge.
It’s hard to imagine that someone would be worse off trading paper currency for a beautiful property acquired at less than the cost of construction that is generating significant cash flow and providing an option for tax-free residency in a sunny country overseas.
* Premium members: watch out for forthcoming actionable alerts on this topic.
** Note: most of the above pertains to residential property. There are some great deals on commercial and retail in other jurisdictions, as well as agricultural property. I still find Ukraine and Georgia to be the best value in Europe for ag land, more on that another time.
July 29, 2014
Looking back over the past ten years, I can’t even begin to describe all the experiences I’ve had in Ukraine.
For a while, I actually owned a business based here. I’ve been travelling here frequently for years. I still have many friends here. Some of our employees are based here. And Kiev is one of the cities in the world that I know best.
Yet even after all of that, I still can’t make heads or tails of this place.
Consider this: by 2004, people in Ukraine were desperate from economic hardship and de facto mafia rule.
They held a runoff election in November of that year– an illusion of choice– between Viktor Yanukovich and Viktor Yushenko. Yushenko was viewed as the breath of fresh air. The ‘change’ candidate.
And when it became clear that Yanukovich had rigged the election in his favor, people went out into the streets to demand change.
They called it the Orange Revolution. And it ended after two months of bloodshed when Yushenko, the ‘good guy’ was finally sworn in as president. Happy days were to follow. Hope and change, all that jazz.
Fast forward a few years.
By 2010, Yushenko had proven himself to be an utter disappointment. Corrupt. Incompetent. Out of touch. When he ran for re-election that year, President Yushenko garnered a pitiful 5% of the vote.
This is amazing when you think about it: the candidate that the people of Ukraine went out into the streets and spilled their blood for received just 5% of the votes in his re-election.
So who did the people elect that year? Viktor Yanukovich… the very person they had fought against in 2005.
Yanukovich was a known criminal. Literally, a convicted felon. Ukrainians spilled their blood fighting against him in 2004… then elected him President in 2010.
Unsurprisingly Mr. Yanukovich spent the next several years pillaging the country of every possible resource for his own benefit. And a few years later– revolution #2.
People went back out in the streets to fight against government forces and oust Yanukovich. Since then, the currency has tanked. Banks are nearly insolvent. GDP is falling. And there’s insurrection in the East.
Now they have a new President– a chocolate billionaire who formerly sat on the executive council of the Ukrainian central bank. And he’s mobilizing the entire country to fight the rebels, fight the Russians.
People are forced into serving in the very same government forces they were fighting against just months ago, all to re-annex a region of the country that isn’t even of Ukrainian ethnicity.
The entire world is getting involved now. With the downing of MH-17, it has become impossible to stay neutral… and the US in particular is doing everything it can to escalate the situation.
And just as the assassination of Archduke Franz Ferdinand 100 years ago led politicians to make a series of pitiful, short-sighted decisions that led the world into the most destructive war it had ever seen, today’s ‘leaders’ are raising the stakes towards an even more destructive kind of war.
This new kind of war is fought with bits and bonds rather than steel. But it’s one that affects almost everyone on the planet.
Change is very clearly afoot. And it’s time to start paying very close attention to the canary in the coalmine.
Just as I was in Iraq a few weeks ago to see the ISIS mess for myself, I had to come back to Ukraine and see what’s happening with my own eyes.
Join me in our newest podcast episode to explore this further– what to watch out for, how it may unfold, and what you can do about it: