October 8, 2015
In 49 BC, a defiant Julius Caesar stood in front of his army at the River Rubicon and made the biggest decision of his life.
It was strictly forbidden by Roman law for a general lead his army out of its province and into Rome. And the Rubicon marked the boundary.
“Alea iacta est!” (The die is cast!) he said, and led his army across the river into civil war.
The phrase “crossing the Rubicon” has stuck for more than 2,000 years, signifying a risky and dangerous point of no return.
This week, the United States government crossed the Rubicon.
In a fit of complete arrogance, a federal judge ruled that he has ‘jurisdiction’ over one of the biggest banks in mainland China, Bank of China (BOC), and demands that the bank turn over financial records to his court.
The judge is hearing a case brought by the luxury brand Gucci against an alleged Chinese counterfeiting ring for selling fake handbags in the United States.
The claim is that the Chinese defendants are sending their ill-gotten gains back to Bank of China in the mainland. And the judge wants to see their account activity.
Bank of China, as you can probably guess, is predominantly owned by the Chinese government.
So it goes without saying that this demand (not a request) is a direct affront at China’s sovereignty.
The only leverage the judge has is that Bank of China has a branch in New York City; it is officially a licensed bank in the US.
So if Bank of China doesn’t comply, the judge could theoretically order that their US license be revoked.
Once again, the United States is using its financial system as a weapon.
Since US dollars are the most widely used reserve currency in the world, every bank on the planet needs some access to the US banking system.
Whether you’re in London, Riyadh, Sydney, or Shanghai, the most widely traded commodities, bonds, and financial contracts in the world are primarily denominated in US dollars.
Plus most global trade takes place in US dollars.
So not only are banks forced to hold US dollars, they require access to the US banking system in order to clear and settle US dollar transactions.
Large international banks have what are known as ‘correspondent bank accounts’ or ‘nostro accounts’ with US banks.
So a big bank in Denmark, for example, may have a correspondent account with JP Morgan or Citibank in New York in order to facilitate its dollar transactions.
And sometimes foreign banks may even apply for their own US banking license, as in the case of Bank of China.
But if a bank were to be kicked out of the US banking system, it would be incredibly detrimental to its ability to hold and transact in US dollars. And hence quite difficult to participate in global trade and finance.
This financial leverage is an unbelievable advantage for the United States, and is a result of the rest of the world placing a great deal of trust in the US government.
But the government has shown time and time again that they are willing to abuse that trust and use their advantage as a weapon– one that is more powerful than the US military.
Just last year, the Treasury Department fined French bank BNP Paribas a whopping $9 billion for doing business with countries that the US doesn’t like, such as Cuba.
Of course, Cuba and the US are BFFs now. But I doubt BNP is getting a refund anytime soon.
And naturally, if BNP didn’t pay up, the US could threaten to evict them from its financial system.
It’s simply amazing that the US did that to its own ally.
Now they’re going after China, its biggest competitor.
The Chinese are already working on a parallel, competitive financial system.
They set up the Asian Infrastructure Investment Bank to compete with the vestigial IMF and World Bank.
And they’re nearing completion on an international payment system and clearing network to compete with SWIFT and the US financial system.
It’s called CIPS.
And once it’s up and running, there will likely be a rapid increase in the worldwide use of China’s currency for financial transactions– transactions that used to be executed in US dollars.
Sticking it to Bank of China like this only gives the Chinese government even more reason to wage war on the US financial system through CIPS.
The reduced demand for US dollars completely destroys America’s last remaining advantage.
If they can’t force the rest of the world to use the US banking system, then they won’t be able to force the rest of the world to hold US dollars or buy US government debt.
It weakens America considerably.
And when future historians write the history of the decline of the United States, there will no doubt be a chapter on how the US government made it a matter of national policy to consistently abuse the power entrusted to them by the global banking community.
Of course, Julius Caesar didn’t learn that lesson either.
After crossing the Rubicon, he won a long civil war, after which the Roman Senate made him dictator for life.
And fearing he would abuse it, he was assassinated just a few weeks later by the very people who entrusted him with that power.
October 7, 2015
Forget Norway. Japan. Iceland. Switzerland. Or any of the other places around the world that are notorious for being painful on the wallet.
Venezuela is now the most expensive country in the world, hands down.
To give you an idea, the cost of a 15-minute taxi ride to the beach yesterday afternoon totaled an eye-popping $158.
(I paid less than that to rent a helicopter in Colombia last week.)
With all of its vast mineral resources, Venezuela should be the most prosperous country in Latin America by far. And it once was.
But years of corruption, incompetence, and central planning have taken their toll.
Normally, when huge companies like Exxon Mobil extract oil out of the ground, they reinvest a portion of their profits back into improving their operations.
They spend money on more infrastructure, technology, and exploration. In short, they invest in the future.
But in Venezuela, guys like Hugo Chavez and his successor Nicolas Maduro spent years funneling oil revenues into idiotic social programs designed to keep themselves in power.
Venezuela did not invest in the future. Now its oil infrastructure is rotting. Production is in serial decline. And the oil price has collapsed to boot.
This is bad news for a government that generates a huge proportion of its revenue from oil exports.
And just like how the United States and most of the West can’t balance their budgets without going even further into debt, Venezuela’s government also spends far more than it generates in revenue.
Especially now. With the government’s budget deficit at 14% of GDP, they’re barely able to make their debt payments this month without defaulting.
In fact, Venezuela is so screwed up that the government doesn’t have a hope of balancing its budget unless the oil price is between $100 and $120 per barrel.
Thus, they’ve had to resort to even more destructive ways of making ends meet.
Like most governments, that means printing money.
The problem is: the Venezuelan bolivar isn’t used as a reserve currency around the world like the US dollar or euro.
That is what has enabled the US to get away with its relentless printing so far, as much of the resulting inflation is simply exported abroad.
Instead, here when they print bolivars, Venezuelans are stuck with all of it. Zimbabwe style.
Inflation in Venezuela has been among the highest in the world, with some private estimates as high as 800%.
Once that became a problem, their solution was to introduce price controls, which failed miserably. Venezuela infamously tried fixing prices in the grocery stores and ended up with crippling shortages of everything from beef to toilet paper.
Then they decided to try capital controls by forcing a completely absurd ‘official’ exchange rate to the local currency.
And that’s what makes this country so expensive.
The official rate of the bolivar is 6.3 per US dollar. But the black market rate is over 60x higher.
Last night I met up with a local guy who had sacks of cash hidden all around his house, and I changed $50 for 20,000 bolivares. That’s a rate of 400 per US dollar.
It’s an unbelievable difference. 6.3 under the official rate. 400 in the black market.
My taxi ride yesterday really cost me 1,000 bolivares. Using the black market rate, that’s a pittance at just $2.50. But using the official rate, it’s $158.
So depending on which exchange rate you use, Venezuela can either be one of the cheapest countries in the world, or the most expensive.
But as you can imagine, exchanging currency in the black market carries SEVERE penalties.
And that’s not all they’re doing to prevent people from protecting themselves against a rapidly depreciating bolivar.
They’ve even tried blocking access to Bitcoin-exchange websites to prevent people from purchasing crypto-currency.
(Though these efforts are easily defeated by using a VPN.)
Desperate to make ends meet in an environment where they see their savings and standards of living deteriorate by the day, many people have been driven to crime.
Caracas used to be a paradise; now it’s one of the most dangerous cities in the world.
It’s a damn shame too, because this is a really wonderful country. And were it not for the crime, Venezuela would be a top retirement destination, attracting many an expat looking to live like royalty on $1,000 per month.
But that’s not the case. Instead, Venezuela is sinking to rock bottom, and people here are suffering immeasurably.
All of this was brought on by yet another experiment in ‘central planning for the greater good’ gone dreadfully wrong.
Too much spending created too much debt and too much money printing, which in turn created too much inflation.
Inflation then led to price controls. Capital controls. Media controls. Destroying people’s standards of living. Appalling levels of violent crime.
They say the road to hell is paved with good intentions. Venezuela is a case in point, and shows just how short that road can actually be.
Westerners always think that these sorts of consequences can’t happen where they live, as if the laws of the financial universe only apply south of the border.
It’s not to say that the West will become Venezuela.
But if your government is already making its way down this path, taking on $60+ trillion in debt and printing limitless quantities of money, it’s seriously foolish to assume that that it will not end up somewhere similar.
October 6, 2015
Just in case anyone still foolishly believes that there’s a shred of decency left in the ‘justice’ system in the Land of the Free, I would humbly present exhibit A: Edward Snowden.
In a recent interview with the BBC, Edward Snowden disclosed that he has offered numerous times to the US government to return to the United States, face trial, and if necessary, spend time in prison.
It hasn’t mattered that hundreds of thousands of people have signed petitions asking President Obama to pardon Mr. Snowden.
Those petitions have been totally ignored.
So Snowden is preparing to return and face trial, negotiating terms with Uncle Sam to ensure that he’s treated fairly.
As he told the BBC, “So far they’ve said they won’t torture me. Which is a start, I think. But we haven’t gotten further than that.”
It’s a sad reflection on the values of a country that someone who blows the whistle on the government committing egregious crimes and violating its own constitution has to flee to Russia in order to escape oppression.
It’s even worse that the government in the Land of the Free rescinded his passport.
But it’s utterly shocking that any negotiation about his return has to start by taking TORTURE off the table.
The fact that torture even has to be mentioned is utterly pathetic. And it pretty much tells you everything you need to know about justice in America… and what happens if you dare cross the government.
October 6, 2015
Last night after a flurry of legal meetings and property tours throughout the day, I had drinks with a Canadian real estate developer who set up shop here in Medellin a few years ago.
He told me a great story about his family background– he comes from a long line of real estate developers going back several generations.
His grandfather emigrated from Germany to Canada in the 1940s to escape the coming war in Europe, and, at the time, Canada was a business and investment paradise.
For experienced professionals, there was so much untapped opportunity back then; Canada was clearly on an upward trend in the 1940s, and yet it was seriously underdeveloped.
The next several decades saw a major boom in Canada, and the family became extremely successful.
Now his grandson is in Medellin, which the family feels has similar potential as British Colombia back in the ‘40s. So they’re plying their skills and experiences here.
It’s an interesting example of the opportunities that are available to smart, talented people when they bring their skills and energy to rapidly developing countries.
Were my colleague to have remained in Canada, the competition from other developers would be fierce. And the prices astronomical. It would take millions just to get started.
Here, he’s built six buildings and has had very little competition. Plus he can execute bold projects with minimal capital.
We discussed Colombian property at great length last night, and I agree that real estate is a very attractive asset class here, especially in Medellin.
I prefer commercial, warehouse, and agricultural property. But for personal reasons, I took a tour yesterday of several residential apartments. It’s hard to even believe how great these deals are.
My benchmark for “cheap” residential property that’s high quality and well-located is about $1,000 per square meter. That’s about $92 per square foot.
Remember that while Medellin is a city of several million people, it is the second largest city in Colombia, i.e. not the political or commercial capital.
So by comparison, in places like San Antonio, Charlotte, Toulouse, Porto, Shenyang, Recife, Quebec, Brisbane, etc., property prices can range from $2,500 to over $15,000 per square meter.
In Medellin yesterday, I saw gorgeous apartments at prices under $1,000 per square meter. And I’m talking VERY luxurious places.
One apartment in the nicest part of town had a pristine view of a park below; it was a two-story penthouse apartment with marble floors, its own private swimming pool, and private elevator.
The price for nearly 6,000 square feet of luxury living? Less than $400,000. Or about $66 per square foot.
This wasn’t an anomaly; I spent half the day looking at similar properties with similar price points.
There are a few reasons for this.
One is the currency; the US dollar is extremely overvalued right now at a time when the Colombian peso is undervalued. This creates significant opportunity.
Second is the ‘Colombia stigma’. It still exists. And, at least for now, it’s keeping mainstream investment away. I expect, however, that this will change rather abruptly and the rest of the world will get very excited about Colombia.
Last is that this is primarily a cash market.
Central bankers don’t manipulate home prices in Medellin like they do in the United States because it’s less common for buyers to borrow extensively.
People pay cash for homes, so that keeps the property market from becoming a bubble… which means that pricing is based on real supply and demand.
I fully expect demand to increase as more and more people discover this place.
Supply, on the other hand, is fixed. And getting tighter. Medellin’s mountainous geography constrains growth, and this is likely going to heavily influence prices over the long term.
So for now, this place is one of the most attractive residential property markets I’ve seen in the world. I can almost guarantee this won’t last.
[SMC members—stay tuned for a more detailed report about specific property investments here, as well as the incredibly easy way I’ve found to obtain residency in Colombia at minimal cost.]
October 5, 2015
Roughly 100 kilometers outside of Medellin, Colombia’s second largest city, is a veritable paradise.
I spent an incredible weekend with some friends there, high up in the Andes riding horseback and exploring the quaint coffee villages of Colombia’s beautiful highlands.
It was amazing. The weather is just perfect. The high altitude at about 6,000+ feet keeps it cool, but it rarely gets cold… and never freezes.
It’s constantly warm, but seldom hot. So there’s absolutely no need for heating or air conditioning.
My friend’s stately home up in the mountains was entirely open air. And, shockingly, there were no bugs or annoying mosquito bites either.
It’s extremely sunny as well. There’s very little rainfall. Yet water is abundant in the region from multiple sources.
Combined with the dark volcanic soil, the agricultural diversity is nearly as substantial as California’s or central Chile’s, with the added benefit of a 365-day growing season.
(though the lack of cold does prevent the cultivation of most non-tropical fruit and nut trees…)
We went to a nearby village and met local business owners and artisans; one was a shoemaker who produces genuine leather boots from scratch, custom-fit to your foot, for less than $40.
Another, larger town of 20,000+ inhabitants was so clean and polished, I thought it easily the nicest I had ever visited in my life.
Everything was so cheap. I bought a newly-made leather belt for a few bucks. Lunch was a delicious meat grill where you’d be hard-pressed to spend more than five dollars on an entrée.
The coffee afterwards at a local artisan café was a whopping 30 cents, and the décor so chic it could have been in Milan.
Overall it was an amazing experience. Yet despite how impressed I was with the region, the part that really excites me is how uncomfortable it was to get there.
You see, it was only 100 kilometers, or about 65 miles, from Medellin But the journey took nearly three hours. And it wasn’t pleasant.
Colombia is a vast country of more than 50 million inhabitants. Yet its “highway system” consists of zigzagging single-lane roads where you’re lucky to average 20 or 30 miles per hour.
It’s scarcely 300 kilometers from Medellin to the capital city of Bogota. The journey should take under three hours. Instead it takes eight.
This is the case with most of the infrastructure in Colombia.
There used to be a fantastic train network crossing all of Colombia’s major cities and economic zones. But it’s been entirely abandoned.
Mobile and Internet connectivity is basic.
Overall the country is very underdeveloped. And there’s good reason for it: Colombia has been at war for decades.
There was a bloody, ten-year civil war starting in 1948. Then there’s been a long, drawn-out conflict with Marxist guerillas since the 1960s.
Plus an incredibly violent fight with drug cartels that lasted for more than 25 years.
They’ve had mafia. Paramilitaries. It just never stopped.
With so much chaos and violence in the country, investors ran away as quickly as they could.
And any major public works project was effectively dead in the water. They knew that if they built a new road, some paramilitary or guerilla group would blow it up.
So there has been very little investment in infrastructure as a result.
But that’s all changing now. Colombia has changed.
Crime is down dramatically. The drug conflicts have subsided. The FARC’s strength is down more than 80%, and they are currently negotiating a final peace treaty to end the war.
So the country is doubling down on massive infrastructure projects.
The new proposed roads have been dubbed ‘prosperity highways’, and construction has already begun.
There will be a vast network of modern highways crisscrossing the country, running from Colombia’s Pacific coast to its Caribbean coast, through all major towns and cities.
(There’s one highway that will cut the journey time between Medellin and the area where I spent the weekend down to just one hour…)
All of this investment is going to have a major benefit to the Colombian economy.
In addition to the domestic impact of tens of billions of dollars in infrastructure spending, the speed of business and logistics is going to improve dramatically.
And there will be so much more.
With peace comes more development. More hydroelectric projects (many of which are already underway) to improve the electrical grid.
More mining and oil exploration. More tourism. Entirely new industries.
I’ve seen the same thing in Myanmar, which is starting to emerge from decades of isolation.
I’ve seen it in Iraqi Kurdistan. Sri Lanka. Bosnia, Kosovo, Croatia, and Serbia.
Peace has a funny way of showering a country with prosperity.
And it’s going to make Colombia one of the most interesting places to be in the world in the coming years.
October 2, 2015
Growing up in the US I heard the same stories as everyone else about Colombia.
Corruption. Drugs. Kidnapping and ransom. Narcoterrorists. Pablo Escobar.
From the ivory towers in our suburban enclave, it seemed ludicrous why any sane individual would risk life and limb to visit such a dangerous place.
Hollywood drove the point home every chance they had.
When Harrison Ford’s character from the 1994 film Clear and Present Danger went to Colombia, for example, it was a nonstop onslaught of death and destruction.
And maybe that really was the way things were 25+ years ago. But the Colombia of today is totally different.
It’s astonishingly safe. Stable. Civilized. Extremely pleasant. It’s gotten noticeably better each time I’ve visited over the last 7+ years.
I don’t want to sell you a line of bull and pretend that Colombia is devoid of challenges.
Violent crime still exists, and paramilitary groups still operate in limited capacity in rural areas.
A tourist was killed recently as well… though this strikes me as a hollow criticism given that hardly a month goes by anymore in the US without a mass shooting.
The country risk in Colombia is clearly not zero. But the risk is nowhere near what it used to be… or what people still believe it to be.
Yet even though things are so much better now, the Hollywood reputation from a quarter of a century ago still lingers, which means that the perceived risk is very high.
The actual risk, on the other hand, is dramatically lower. Colombia is incredible, far better than most folks could possibly believe without seeing it for themselves.
That’s one of the reasons I travel so much– I put boots on the ground and see firsthand what’s really happening… and determine for myself what the REAL risks and opportunities are.
And real opportunities do exist anytime there is a major difference between perceived risk and actual risk.
Look at the US banking system, for example.
The perceived risk is very low. Few people ever question the sanctity of hallowed financial institutions in the Land of the Free.
But the actual risk is much higher.
US banks’ own financial statements are a testament to their dangerously low levels of liquidity, and the pitifully disingenuous accounting tricks they use to hide losses.
When the actual risk is much higher than the perceived risk, it’s time to get out.
In Colombia’s case, it’s the opposite. The actual risk is much LOWER than the perceived risk.
Colombia is ‘priced’ like it’s still that same ultra-dangerous country it was back in the 1980s, suggesting the high-risk perception persists.
Its reputation… the Colombia stigma… has been a major drag on asset prices for years. Which means that for anyone who understands what’s really happening in this country, high quality assets are available at a major discount.
Especially right now.
Because on top of the Colombia stigma, the emerging global recession has caused a decline in asset prices, including stocks, real estate, and the currency.
In US dollar terms, the Colombian peso has passed 3,000 per dollar, more than 30% weaker than its average over the last 10+ years.
I’ve been writing extensively about how overvalued the US dollar is.
Colombian assets, on the other hand, are dramatically undervalued.
Herein lies is the opportunity: trading an overvalued paper currency with pitiful fundamentals for undervalued, high quality assets in a country with a bright future.
If you’re adventurous, get on a plane. You won’t be disappointed.
Colombia is fantastic, and you’ll be pleasantly surprised, not only at what you find, but at the high quality private businesses and properties that are available for an unbelievable bargain.
(More on this next week).
If your schedule’s too tight to make a trip down, consider taking a bit of Colombia exposure in your investment portfolio.
There are a number of Colombia ETFs available to buy without leaving your living room that offer ownership in Colombia’s largest and most successful businesses.
Many of these companies are trading at multi-year lows, selling at a discount to their net asset values, and pay strong dividends upwards of 5%.
No one has a crystal ball, and it’s possible that Colombia might become even cheaper. Or stay cheap for years.
But at these levels today, the country is already an incredible bargain.
Either way, it should be on your radar.
Colombia is starting to get more attention, and that’s only going to continue. Soon, I expect this place will become the next great tourism, lifestyle, and investment hotspot.
As long as the Colombia stigma persists, it’s one of the best-kept secrets in the world.
But it won’t remain that way for long.
September 30, 2015
Sovereign Valley Farm, Chile
Yesterday the leading presidential candidate in the Land of the Free released his tax plan in the Wall Street Journal.
And the Donald certainly did not disappoint his supporters.
His tax plan is bold, aiming to drastically simplify the tax code and reduce the number of individual income tax brackets down to four.
He aims to cut taxes for all individuals who earn less than $25,000 dollars, and reduce the top marginal rate to 25% for those earning more than $150,000.
The corporate tax rate would also be cut to 15%, down from a marginal rate as high as 38%.
The Internet is now abuzz with economists analyzing Mr. Trump’s proposals, assessing the economic impact and making grandiose calculations on whether or not they would be “revenue neutral”.
Criticism already abounds with many saying that his tax plan would vanquish overall tax revenue by many trillions of dollars, leaving the Land of the Free in an even deeper financial hole.
These arguments and discussions are entirely misplaced.
According to government data that I retrieved this morning from whitehouse.gov, since World War II, tax revenue as a percentage of GDP has averaged 17.2%, with very minimal deviation.
Over that period, tax rates have been all over the place.
The top marginal tax rate has been as low as 28% in the 1980s and as high as 94% right at the end of WWII.
Meanwhile, over the course of US history, the top corporate tax rate has been as low as 1% and as high as 53%.
And yet in all this time, despite enormous variations in tax rates, overall tax revenue as a percentage of GDP has barely budged.
If you think about the economy as a giant pie, this means that the government’s slice of that pie is almost invariably between 17% and 18%, regardless of how high or how low they set tax rates.
So any discussion about whether Mr. Trump’s proposal will affect overall tax revenue is completely pointless.
Because seven decades of historical data show that his tax proposal won’t affect the government’s piece of the pie at all.
You’d think that with such incontrovertible historical data, the conversation would turn to the obvious question: how does one make the pie bigger?
Looking back at the data, slashing tax rates can make a big difference.
In 1988 when the US government restructured its tax code, they eliminated several tax brackets and cut both corporate and individual tax rates.
Yet real GDP growth doubled.
Human nature is a funny thing. We all tend to work a little harder if we know there’s a brighter light at the end of the tunnel. So slashing taxes is a nice start.
But there are much larger elements in that economic growth recipe.
It’s hard to make a bigger pie when you’ve got a national debt of $19 trillion; when you spend almost as much money on interest than on ‘defense’; and when you blow nearly the entirety of your tax revenue just on interest and mandatory entitlement programs like Social Security.
It’s harder still to create a bigger pie when the volume of laws, codes, rules, and regulations is enough to fill entire football stadiums.
US regulations have made its entire population guilty of crimes they’ve never heard of, often for the most innocent and innocuous activities.
Operating lemonade stands without a permit, collecting rainwater, failing to file a government survey are just a few activities now treated as criminal conspiracies.
And yet the government continues to publish upwards of a 1,000 pages PER DAY of new rules, regulations, and other proposals.
This isn’t rocket science.
If you look at places that have been patently successful in growing their economies from nothing, they’ve done it by cutting taxes, abstaining from regulation, and leaving people alone to work hard and become successful.
Singapore and Hong Kong are two examples.
They have almost no resources to speak of: no vast deposits of oil and gas, no huge tracts of land and fertile agricultural property like America has.
In fact, Singapore even has to import fresh water from Malaysia.
Yet they’re two of the wealthiest places in the world thanks to low taxes, minimal regulations, zero net government debt– all things that the United States was once known for.
September 29, 2015
Sovereign Valley Farm, Chile
Nearly four months ago on June 2nd, something very unusual happened in Edmonton, Alberta, Canada.
The price of propane actually became negative, hitting an unbelievable -0.625 cents per gallon.
It’s hard to believe that the price of a productive commodity could become so beat down by the market that producers would practically have to pay you to take it off their hands.
Now that’s cheap. And completely nuts.
This actually happens from time to time with certain commodities. And there are a number of reasons for it.
A negative price might imply a dramatic oversupply where the cost of storing the commodity exceeds the benefit from owning it.
Sometimes even something like real estate can have a negative value—perhaps when a building is in such decrepit condition that the cost of tearing down the structure exceeds the land value.
But sometimes a negative price simply means that markets are completely broken.
The primary function of a marketplace is what’s called ‘price discovery’. This is an incredibly important role where buyers and sellers collectively determine the true value of a product, service, or asset.
Think of it like an auction: if you really want to know what that old baseball card is worth, put it on eBay and let the market tell you.
The problem is that, these days, markets are so heavily manipulated that the price discovery mechanism has been broken.
Consider that the most important ‘price’ in the world is the price of money, i.e. interest rates.
The price of money dictates, or at least heavily influences, the price of so many other major assets and commodities. Stocks. Bonds. Oil. Home prices.
And yet, rather than leave this all-important price to be set by the market, the price of money is established by an unelected committee of central bankers.
So by setting the price of money, they are effectively influencing the price of just about EVERYTHING. Including propane in Alberta.
Then of course there’s the more nefarious price manipulation, much of which is coming to light now.
There was the appalling LIBOR scandal back in 2012 when multiple banks confessed to criminal charges of conspiring to fix interest rates.
Investors in the United States have filed a number of lawsuits alleging that banks and brokers have rigged the market for US Treasury bonds.
The US Federal Energy Regulatory Commission has recently accused French oil company Total and British firm BP of manipulating natural gas prices.
And both the US Department of Justice and the Swiss Competition Commission are investigating several banks for colluding to manipulate gold and silver prices.
So in addition to markets being broken, there’s also an extraordinary amount of manipulation going on… which means that, quite often, prices mean absolutely nothing.
Consider gold and silver, two obvious long-term stores of value whose prices have been in decline.
Bear in mind these are paper prices, i.e. prices set in broken commodities markets, heavily influenced by central banks, and criminally manipulated by investment banks.
So is this price really a valid indicator of their worth? Not by a long shot.
Think about the ever-widening gulf between the ‘paper’ price of silver and the ‘physical’ price of silver… evidenced by the massive shortage in real, physical silver right now.
The paper prices of gold and silver are set (and manipulated) in financial markets through commodities exchanges.
It’s not like traders are huddled around bags of coins bidding on which one of them will haul it away.
Instead they’re dealing with contracts… pieces of paper (or electrons) passed around by traders and bankers.
In fact, the gold and silver contracts traded in commodities exchanges are designed especially for people who have no intention of ever taking physical possession of the metal.
Case in point: the paper price for silver traded in Chicago is based on a contract that is supposed to end with physical silver being delivered to the buyer.
But the contract specifications set by the exchange allow up to 10% FEWER ounces of silver to be delivered than what was specified in the contract.
And in London, the London Bullion Market Association’s “Good Delivery” rules allow silver bars to be up to 25% less than what was specified in the contract.
And it certainly raises the question– who would possibly purchase 1,000 ounces of silver if the exchange was only required to deliver 750?
Anyone who actually wants to own real gold and silver would rather buy from a local coin dealer.
Futures contracts are for bankers and traders. Paper prices are for economists and reporters.
The current shortage of silver, particularly in North America, is a much better reflection of its value than heavily manipulated commodities markets.
All these contracts and prices truly reflect is how broken the financial system really is… which is actually precisely why you would want to own more gold and silver.
Seriously, how messed up is our financial system when asset prices across the world can be so easily rigged by the very institutions that demand our trust?
This system is pure insanity, as are its prices.
As such, I don’t let their prices guide my life. It wouldn’t bother me if the price of gold went negative, just like propane in Alberta.
After all, I’m not trading paper currency for gold, just to trade it back for more paper currency if the ‘price’ goes up.
The idea behind buying gold is to swap paper money for something real.
Banks can rig its price all they want; gold’s true value comes from its function as a long-term form of savings and a hedge against a broken financial system.
And the more ridiculous the system gets, the more valuable it becomes.
September 28, 2015
Sovereign Valley Farm, Chile
On May 28, 1816, Thomas Jefferson penned a letter to his friend John Taylor deeply criticizing the use of debt to fund a government’s excessive operations:
“[T]he principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale,”
Public debt is a weapon of mass destruction that constitutes theft upon future generations.
And as Jefferson argued in the letter, every new generation has the right to be born onto this planet unencumbered by the debts racked up by their ancestors.
But that’s not the way it is anymore.
Governments, like many individuals, no longer follow the Universal Law of Prosperity: produce more than you consume.
Instead there’s a sense of entitlement.
Politicians seem to believe that because the US is the dominant superpower, its balance sheet doesn’t matter, and the government can spend as much as it wishes.
All of this is enabled by a financial system where unelected central bankers conjure money out of thin air and loan it to the federal government so that no hard choices ever really need to be made.
(This system reflects Jefferson’s words in the same letter that “banking establishments are more dangerous than standing armies. . .”)
But this is incredibly dangerous and short-term thinking.
By its own financial statements, the government of the United States is insolvent.
Several of its major trust funds and institutions are already insolvent, or quickly heading that way:
- The United States Highway Fund is insolvent
- The Disability Insurance Trust Fund of Social Security is scheduled to become insolvent within months.
- The Pension Benefit Guarantee Corporation, a sort of FDIC for pension funds, is insolvent.
- And the FDIC itself, which is supposed to insure the entire US banking system, is pitifully undercapitalized, with an insurance fund that fails to meet the minimum statutory requirements set forth by law.
These examples don’t even scratch the surface, and the total level of government insolvency, just at the federal level, goes into the tens of trillions of dollars.
In response, the people in charge of this mess have continually and habitually ignored it.
There was the incredibly embarrassing debt ceiling crisis of 2011 when Congress maxed out the national credit card. Back then the debt was ‘only’ $14 trillion.
And they dealt with the problem by ignoring it.
Then in 2013 it all blew up again in yet another debt-ceiling crisis when the national debt hit $17 trillion.
Yet still they slapped an absurd band-aid fix on the problem, enabling them to kick the can down the road once again.
Now here they are again in 2015.
Congress hit the debt ceiling back in March, and ever since, the Treasury Department has resorted to “extraordinary measures”, i.e. stealing from pension funds, to keep the lights on.
Their solution is to have once again waited until nearly the last minute to kick the can down the road– this time with a ‘stopgap funding measure’ that will make the issue blow up again in early December, barely two months from now.
It’s not like they didn’t have six months, or two years, or four years, or several decades to figure this out.
But it never happens… because the culture in banana republics like this is to ignore problems until they become so enormous they are beyond solving.
This gang of sycophants has had innumerable chances to fix the problem that they themselves created. And they failed at every occasion.
Expecting anything different from them is foolish.
Here’s how this ends: one day they’re going to kick the can to the end of the cul-de-sac and there will be no more road remaining.
That’s when real action will need to be taken.
But at that point, the only options on the table will be default. Confiscation. Capital controls.
All of which are enormously destructive and have the potential to tear through society like a wild boar.
In the same letter from 1816, Jefferson wrote about the dangers of reckless overspending and borrowing from banking establishments to go into debt:
“I contemplate it as a blot left in all our constitutions, which, if not covered, will end in their destruction.”
Jefferson may soon be proven right.
Amazingly enough, however, for anyone paying attention, the warning signs are as plain as day.
The government is practically jumping up and down waving its hands to show that they’re (a) incompetent, and (b) completely insolvent.
This isn’t exactly news.
It’s also not news that insolvent nations run into major, game-changing problems.
Cyprus nationalized bank accounts. Iceland imposed severe capital controls. Greece has resorted to every humiliating indignity imaginable. Argentina has seized private pensions.
And yet, people in the west still fail to connect the two dots. They think ‘those things can’t happen here.’
Well, they can. No nation is immune to the powerful gravitational pull of debt… and stupidity… both of which are in abundance in government.
Are the chances of a complete meltdown 100%? Of course not. There is very little certainty in this world.
But to believe that the chances of financial calamity are non-existent is a fool’s fantasy that’s just begging for people’s life savings to get wiped out.
These are major risks with a likelihood that is far higher than people expect. They should be treated as such… with sensibility and reason, not panic.
There’s no downside risk in ensuring that you don’t become a victim to such obvious financial dangers.
And certainly no benefit in pretending they don’t exist.
September 25, 2015
Sovereign Valley Farm, Chile
A few days ago a young entrepreneur came to me with her big idea for a business.
This happens a lot, sometimes even 3-4 times per week.
And while our selection rate is very low, I pay attention to each and every pitch in our effort to find the real gems, because, in my view, a profitable private business is one of the best assets you can hold.
Unlike stocks, the value of a private business (outside of the ‘tech’ sector) is generally based on what really counts: profit.
Private businesses can do well in both inflation AND deflation; and they aren’t subject to the whims of central bankers.
It’s a tremendous asset class to own, and our team spends a lot of time sniffing out the best deals. Hers was not one of them.
I listened patiently as she went through her pitch, and at the end she offered us a special opportunity to buy 20% of her business for $250,000.
There was just one problem.
She didn’t have a business. There were no employees, no team, no product, no prototype, no design, no revenue, no testing, no website, no assets.
She didn’t even have a company or a bank account.
She had nothing but an idea.
And based on her calculations, she thought her idea was worth $1 million.
(This is what’s known as a ‘pre-money valuation’. The ‘post-money’ valuation would be $1 million plus the $250,000 investment capital = $1.25MM. We would own 20% of that, or $250k/$1.25MM)
Yes, it’s true that a great business is the best asset you can own.
But as I tell students at our annual entrepreneurship camps, the most important aspect of any business is execution– the ability to turn an idea into a plan and methodically bring everything to life.
You can have the most fantastic idea. But without execution, an idea is worth absolutely nothing.
Needless to say we passed on the deal.
But the conversation was a clear reminder of how little value there is to money anymore. There’s simply too much of it in the system.
Central bankers have spent years printing trillions of dollars. In the United States, the Fed’s balance sheet is 5x bigger than it was seven years ago.
But it’s not like the US economy is 5x bigger. Or 5x as much productivity. Or 5x as many goods and services.
No, there’s just 5x as much paper floating around the financial system.
(Though technically not even paper. Our money is electronic– a series of ledgers in bank databases, as if your life savings is represented in a single cell somewhere on Janet Yellen’s spreadsheet.)
Over that same period, they’ve decreased interest rates to effectively 0%.
And after yesterday’s speech, the Fed has even opened the door to making rates negative.
Just consider what that means.
Money, like anything else, has a price. When you want to consume a hamburger, you pay the price of a hamburger.
If you want to consume money (i.e. borrow to buy a house or build a factory), you have to pay the price of money.
That price is the interest rate.
By setting interest rates at zero, the Fed is telling the world that money is free, i.e. that the US dollar is worth nothing.
(Negative interest rates imply the dollar is worth less than nothing.)
After my conversation with this young entrepreneur, that seems abundantly clear.
With no execution, her idea is fundamentally worthless. But she wants one million dollars for it.
So based on my math, if $1 million = her idea = worthless, then the value of a single US dollar is 1/1,000,000 of worthless.
Look, we’re in a period right now where US dollars are relatively ‘strong’… against oil, foreign currencies, etc.
People often think that when something is strong, whether a nation or a currency, that it will be strong forever.
This is a major fallacy.
It wasn’t even four years ago that the Japanese yen peaked at 76 per US dollar. Today it has weakened to 120.
In July 2008 the euro was worth almost $1.60. Now it’s $1.11.
It’s all part of a cycle. Currencies, like nations, rise, peak, and decline.
That’s absolutely going to happen to the dollar as well, especially when so much objective, everyday evidence suggests that it is excessively overvalued.
What this means is that if you are holding US dollars, you have a once-in-a-decade chance to trade something that is fundamentally worthless and objectively overvalued, for something that is real and undervalued.
In our case, we’ve loaded up on productive farmland here in Chile.
We’re also working on buying a profitable business in Australia at a time when the Aussie dollar has been punished.
Next week, I’m off to Colombia, where the peso has sunk below 3,000, to look at property.
If you have limited funds, there are shares of foreign companies (junior mining stocks, resources companies, macro ETFs in places like Indonesia and Colombia, etc.) that are trading for less than their net asset values AND pay solid dividends.
No one has a crystal ball, so it’s impossible to say precisely when it will turn. This part of the cycle could last weeks, months, or years.
Even if it does take years, though, it’s hard to imagine being worse off for buying a profitable business or shares of a well-managed company that pays a 6% dividend.
These are sensible investments no matter what.
But at some point down the road, the inescapable gravitational pull of fiscal reality will pull the dollar back down.
And just as the dollar’s strength has become way OVERvalued, the next part of the cycle will probably punish the dollar just as much.
Which makes this time, right now, a gift. Use it to build for the future, because it won’t last.
Sovereign Valley Farm, Chile
September 24, 2015
There’s not a doubt in my mind that one of the greatest scams in the world is modern banking.
When you think about it, every element of the system is stacked against us.
By making a deposit we are loaning our hard-earned savings to a bank, for which they pay us a whopping 0.1% interest.
In some parts of the world now they even charge us interest for the privilege of loaning them our money.
Banks then take our hard-earned savings and gamble it all away in the latest investment fad, no matter how stupid and destructive it might be.
When they screw up, they’re deemed ‘too big to fail’, and the government steps in to indebt future generations who won’t even be born for decades in order to bail out the banks’ stupidity.
Banks are also unpaid government spies and are required by law to rat us out to federal agents should they decide in their sole discretion that what we are doing with our own money is “suspicious”.
Banks have no loyalty to the customer. They serve their government masters first and foremost.
Should some government bureaucrat so much as make a phone call, they will freeze you out of your life’s savings in a heartbeat.
And hardly a month goes by where a bank isn’t indicted on some criminal charge to defraud their customers.
They’ve admitted to rigging bond markets, interest rates, foreign exchange rates, and selling their customers’ data to high-frequency traders.
And for their misdeeds they get a few slaps on the wrist and a fine that fills the government’s coffers.
Too big to fail, too big to jail. It would almost be funny if it weren’t so obscene.
Yet despite every shred of evidence that this system is at odds with customers’ best interests, very few people ever question the sanctity of their banks’ credibility and financial condition.
It’s just assumed that banks are stable, sound, and conservative.
Nothing could be further from the truth.
In today’s podcast I highlight an extremely clever accounting trick that banks have been using for the last few years to hide the true nature of their finances.
Here’s the short version: Banks have the ability to choose how they treat their bonds for accounting purposes.
If they classify their bonds as “available for sale”, or AFS, the bank is forced to disclose any losses under ‘comprehensive income’, which negatively affects their capital levels.
But banks don’t want to do that. They’re gearing up to take a HUGE bath as the values of their bond portfolios collapse.
And rather than show the world how pitifully capitalized they really are, banks have opted to reclassify huge sections of their bond portfolios into a different category called “hold to maturity”, or HTM.
HTM assets don’t require banks to write off any losses against their capital reserves.
So the banks just get to keep pretending that they’re safe.
So far US banks have rotated hundreds of billions of dollars worth of bonds from AFS into HTM. And they’re just getting started.
It’s an unbelievable scam. And everyone’s in on it. All the big banks. The regulators. The government. The Fed.
You’ll be amazed to see the data I present in today’s podcast; one of the largest banks in the US, for example, went from having 0.0% of its assets as AFS, to having nearly 50%.
I can’t stress this enough, you really need to see dangerous scam with your own eyes. Find out the truth here:
September 22, 2015
About ten days ago, I had the pleasure of going through final procedures to obtain my permanent residency permit here in Chile.
Sitting in the waiting lounge of the Civil Registry office in downtown Santiago, I found myself struck by the mix of people.
Many of them were from Venezuela, people who are fleeing extreme hyperinflation and food shortages back home. They’re coming here in search of a better life.
It’s sort of a modern day version of the Irish Potato Famine.
Back in the mid 1800s, Ireland was going through one of the worst famines in its history.
Between a plant disease that wiped out their food supply, and short-sighted government policies that only made things worse, millions of Irish were left starving and homeless.
The smart ones escaped to the Land of Opportunity: the United States.
It wasn’t an easy journey back then. One in five died from disease or malnutrition during the voyage to America.
And once they landed life didn’t get much easier.
There was no free ride, no handouts, no support… nothing. They were entirely on their own, left to work hard and take risks in order to move up in the world.
But that was then.
Today the US no longer lifts its lamp beside the golden door, as inscribed at the foot of the Statue of Liberty.
But other countries around the world like Panama, Singapore, and Chile, have displaced America to become more welcoming to any foreigner willing to work hard.
As I’ve written before, Chile is one of the easiest places in the world for foreigners to obtain legal residency with full rights to live, work, invest, and start a business.
(And after five years of residence, you’re eligible to become a Chilean citizen and obtain one of the most valuable passports in the world.)
The cost of starting a business here can be as little as around $20. And with a new business, the first 25 employees you have can ALL be foreign.
There’s no special hoops to jump through; in fact, I’ve done this with our entire team down here in Chile, obtaining legal work visas for people from places like Slovenia, Thailand, Lithuania, Ukraine, New Zealand, Canada, Argentina, the Philippines, and more, all with just a single page work contract.
As a business manager, it’s amazing to be able to hire anyone I want from all over the world, instead of being constrained by what’s available in the local labor market.
This is an extremely rare benefit to business, especially as more and more countries erect huge barriers to entry.
Much of the reason why Chile remains so open is because it’s difficult for foreigners to freeload.
In Chile, you have the right to enter and work. And that’s about it. No one is going to take care of you. You’ve got work hard and succeed on your own.
All they’re offering is opportunity, which comes at no cost to anybody.
And what the country gets as a result are motivated people from around the world eager to put their energy towards being productive.
This to me is one of the strongest indicators of the country’s future potential: looking at how a country treats hard-working people (including its own citizens) tells me a lot about where that country is going.
Deutsche Bank study shows stocks, bonds, and real estate in 15 countries at all-time highs going back to 1800
September 21, 2015
[Editor’s Note: Tim Price, London-based wealth manager and frequent contributor to Notes from the Field, is filling for Simon today.]
As a child I was fascinated by the concept of a neutron star, the tiny but immensely dense thing that’s left after a massive star explodes.
Imagine something eight times as massive as our sun packed into a sphere with a six mile radius.
Gravity compresses the surviving material so profoundly that its protons and electrons are squashed into neutrons.
Just how dense? A single teaspoon’s worth of a neutron star would weigh a billion tons.
That presupposes you could actually get close enough to extract a teaspoon’s worth. In reality, the gravitational pressure would reduce your body to a very thin smear on the surface of the star.
Very little escapes the gravitational force of a neutron star.
I never expected to encounter a neutron star but the policymakers at the US Federal Reserve have been kind enough to engineer one for us, and its gravity is so powerful it has collapsed the yields of just about every financial asset on the planet.
Investors around the world are now faced with overpriced stocks, overpriced bonds, and overpriced everything.
The Economist cites a Deutsche Bank study pointing out that for 15 countries going back as far as 1800, the average prices of stocks, bonds, and residential real estate now stand at all-time highs.
“Worse still,” writes the economist, “[Deutsche Bank] reckons the average real return from equities over the next ten years will be negative. The same is true for Treasury bonds, European corporate bonds and US residential property.”
Deutsche are not alone; renowned asset managers GMO recently published their own 7-year average annual real return asset class forecasts.
For US large cap stocks, US small cap stocks, US bonds and international bonds, the firm forecasts those all annual returns to be negative.
Of course, it’s not just the US.
Central bankers around the world have engaged in their own Quantitative Easing (QE), Zero Interest Rate Policy (ZIRP) and even Negative Interest Rate Policy (NIRP).
Like CERN– the Geneva-based European Organization for Nuclear Research that’s home to the Hadron Collider, global monetary policy has been something of an international collaboration.
The problem is that underneath the thin veneer of amity and cooperation, the currency wars are heating up.
In the mind of a central banker, it’s a zero-sum game: ‘America grows at the expense of Europe, therefore Europe must undercut America with even lower interest rates.’
They don’t seem to grasp the simple concept that competitive destructive policy is still destructive, and that it’s possible they all fail together.
In fact, they seem to be engineering that outcome.
The objective data show that stocks, bonds, and property are at all-time highs simultaneously as global economic growth is slowing.
Yet with interest rates at zero (or even negative), central banks have no ammunition remaining to fight anything.
And after the Fed blew a pivotal opportunity to begin normalizing interest rates last week, they may not have any credibility remaining either.
(After all, what message does it send to markets that your economy is too fragile to raise interest rates by even a tiny 0.25% ?)
This is what fosters incredible competition among central banks to outdo the others’ destructive interest rate policies, until each of them has produced their own neutron star of monetary policy.
And what do you get when neutron stars collide? A black hole of finance, brought to you by the very central bankers who were charged with maintaining stability.
Based on Deutsche Bank’s analysis, this may very well sum up the coming decade of investing, at least with conventional asset classes like stocks, bonds, and mutual funds.
September 18, 2015
Sovereign Valley Farm, Chile
It’s a big holiday today in Chile, what they call Fiestas Patrias.
It’s sort of like their 4th of July or Canada Day. And it’s a big deal here… easily as important a holiday as Christmas or New Year’s.
Down here at the farm, all the dozens of workers have the holiday off, and I tended to the chores myself this morning.
The strawberries are already starting to bear fruit, a sign of another good year.
Unfortunately our free-roaming chickens have been invading my garden and helping themselves to the fruit.
So to thwart this criminal behavior I’ve decided to build a wall around the strawberries… and make the chickens pay for it.
In all candor, though, it’s amazing to be able to grow my own food.
Out here I know that the whims of central bankers are completely irrelevant. These trees and soil are going to keep pumping out organic food.
It’s seriously profitable, too. If you had bought Apple stock at its IPO in 1980, you’d be up over 200x your money. And that is truly phenomenal performance.
But had you instead planted an apple tree back in 1980, that investment of roughly $1 would have yielded you THOUSANDS of dollars over the last 35 years.
This is one of the things that makes agriculture one of my favorite investments. With a little bit of care, patience, and maintenance, nature can provide an extremely high return on investment.
And no matter what, people need to eat, regardless of what happens in any economy, there will always be a market for food.
This is one of the things that makes productive land a great investment in both inflation and deflation.
Right now central bankers around the world are terrified of deflation; this is one of the reasons why the Fed left interest rates at 0% in their meeting yesterday.
In deflation, cash is king. It gains value against everything else… so the best thing to own is either a big pile of cash, or an asset that can generate cash.
Productive farmland certainly fits that bill: it’s a cash-producing asset.
But in an inflationary environment, you want to own a real asset– something that can hold its value against mindless central bank policies.
Again, agricultural real estate is a great option… one of the realest of assets.
As a real asset that produces cash, it fits well in either scenario, including if we get BOTH inflation AND deflation at the same time.
Another asset that ticks these boxes is a productive business.
And I’m not talking about stocks.
I mean privately held, profitable businesses. You’re far better off owning a profitable lemonade stand than shares of Netflix (currently trading at over 200x earnings).
If Janet Yellen wakes up tomorrow and decides to raise interest rates, Netflix stock is going to tank. But this won’t affect the profits of your lemonade business at all.
Granted, investing in stocks is certainly easier. That’s why so many people do it.
Owning a piece of a profitable private business is harder. It means you either have to start one from scratch, or you have to find a credible entrepreneur who will sell you a share of his/her business.
But these deals are out there.
I have a friend in the fitness industry, for example, who bought a boot camp fitness franchise for about $70,000. It makes about $10,000. Per month.
No, I’m not suggesting that you go out and start a boot camp franchise. Or even buy a few acres of farmland.
The larger point is that conventional investments are no longer the safest place to put your money, nor are they the only option.
Stocks are heavily manipulated by central banks, commercial banks, and politicians. One person opens his/her mouth and it can rock the market 5% in a day.
Banks are no better. Most banking systems in the west are dangerously illiquid and have undercapitalized reserves.
Yet holding your money in a bank might even cost you interest in Europe. And in the US, you’re looking at a whopping 1% for a 1-year CD.
Conversely, you can make 4% now on a 1-year investment through a peer-to-peer lending platform where your money is backed at a 2:1 ratio by GOLD.
In other words you invest $10,000 and receive 4% interest in one year, with your money backed by $20,000 worth of gold.
That’s seriously low risk, in exchange for receiving a return that’s 4x higher than a typical CD rate at your bank.
There are much better options than there ever used to be. It just takes some unconventional thinking, the right kind of education, and the courage to ignore the crowd.
Sovereign Valley Farm, Chile
September 17, 2015
First of all, I really want to say thanks to all of our extremely kind and thoughtful readers who emailed us to make sure that we’re all OK.
If you hadn’t heard, there was a rather substantial earthquake in Chile yesterday that made international news.
While the horses may still be a bit spooked, our team is fine, the farms are fine, and we very much appreciate the kind words and thoughts.
If this were a different country my answer could have been dramatically different.
Yesterday’s earthquake measured an 8.3 at its epicenter with a very shallow depth of just 11 kilometers.
Parenthetically, a lot of people think that the intensity of an earthquake is just its score on the Richter scale, but in fact there are many other factors involved.
Shallow earthquakes can be much more destructive even with a lower magnitude, and 11 kilometers is considered quite shallow. So this one was pretty big.
A few months ago an earthquake of lesser magnitude struck Nepal and devastated much of the country… because they weren’t prepared.
In Chile it’s different.
Earthquakes are just part of the deal when you live here. So even when powerful earthquakes strike, the impact is not ruinous.
They don’t ignore the risks.
My own house was specifically designed to withstand powerful earthquakes, and we built in strong cross-bracing and other countermeasures.
It’s no accident that it’s still standing this morning.
Coincidentally, while my house was shaking last night, hopefuls for the US presidency debated last night about how to make America great again.
They spent three hours bickering and quibbling while nary a word was spoken about the real challenges.
Right now nearly every Western government is completely bankrupt.
This is not hyperbole– these are facts ripped from the pages of their own financial reports.
Most Western central banks are borderline insolvent, again based on their own published balance sheets.
Western banking systems are dangerously illiquid, and pension systems around the world are fraudulently underfunded.
It took decades to get into this mess, and it’s a total farce to believe that the way out is to simply go down to the voting booth and cast a ballot.
It’s even more insane to think that after generations of bad decisions that a single person can restore grandeur and prosperity in a few months, or even years, especially when almost everything the government does makes things worse.
Again, the numbers paint a very clear picture here.
Since 2008, US official debt has doubled, and their own budget projections show they have no plan to pay down a penny of it. Ever.
And how can they, when the government blows through almost all of its tax revenue just on entitlement programs and interest on the debt?
They could eliminate entire departments of government and still not make a dent in the budget deficit.
As I wrote to you yesterday, the only ‘solution’ is to default– either default on the people who loaned America money, or default on their obligations to the American people.
Either way, a lot of people are getting the shaft.
Don’t allow yourself to be a victim of other people’s stupidity. Remember that rational people have a Plan B, especially in light of such obvious risks.
If all the objective data shows that your government is completely insolvent, and that your banking system is dangerously illiquid, why would you keep 100% of your money there?
Instead, it probably makes sense to consider moving at least a portion of your savings to a safe, stable banking system overseas in a country that has no debt. (Yes it exists!)
Even if you want to believe they can still fix everything, it’s hard to imagine that you’ll be worse off for taking sensible steps to prepare for reality.
Here in Chile, they don’t ignore the obvious risk of earthquakes.
In the developed West, however, people are ignoring what could turn out to be some of the biggest risks of their lives.
You can’t fix your broken government.
But with a little bit of awareness and a few sensible steps, you can ensure that no matter how strong the force, your house will always remain standing.
September 16, 2015
Sovereign Valley Farm, Chile
Six months ago, on March 16, 2015, the government of the United States of America once again reached its statutory debt limit.
In other words, the Land of the Free had maxed out its credit card and was legally barred from borrowing a penny more.
That’s pretty sad when you think about it.
The supposedly richest country in the world is such a deadbeat that they had borrowed the maximum amount of money as permitted by its own law.
They call it the ‘debt ceiling’. And the only way to borrow more is for Congress to pass a new law… something that, embarrassingly enough, has occurred dozens of times over the past few decades.
The US is undoubtedly addicted to debt.
So much so, in fact, that even when the government hits the debt ceiling, it still doesn’t deter them from borrowing.
Rather than shocking them into taking drastic action to reduce the debt, they just find creative ways to keep borrowing that don’t –technically- count towards the debt ceiling.
In the words of the United States Secretary of the Treasury, they’re known as ‘extraordinary measures’.
And in a letter to Congress that he sent last Thursday, Secretary Lew described “the extraordinary measures we have taken to avoid default,” which include grabbing money from federal retirement funds.
It’s truly pathetic– to be so dependent on debt that even when you legally breach your credit limit, your only option is to start stealing from your employees.
That’s not how it works in the real world. Responsible adults have to figure out a way to make ends meet.
Too much month at the end of the money means making tough decisions, and, at a minimum, is treated as a personal crisis.
For the US government, however, overspending is an entitlement that’s now built into the system.
It’s just business as usual for these guys… and it’s truly incredible how cavalier they are about such a devastating weakness.
Here’s some hard facts: there are basically three categories of government spending.
First is what’s called Discretionary Spending. This is what Congress debates about endlessly—deciding how much money each department of government will receive every fiscal year.
Then there’s the Mandatory Spending. These are programs like Social Security, Medicare, etc. which are set by law.
Congress doesn’t have to debate anything with these programs, the money just automatically gets sucked out of the Treasury, just like your monthly mortgage payment.
Last is interest on the debt, which, sadly, is so big that it has its own category.
Right now the system is so screwed up that if you add up the Mandatory Spending programs AND interest on the debt, the total is nearly as big as ALL of the government’s tax revenue.
In other words, you could eliminate nearly every department of government—Homeland Security, the State Department, etc. and the US government would still likely be running a deficit.
And that problem is only going to get worse. By the government’s own estimates, the long-term shortfall in its major mandatory entitlement programs is more than $42 trillion.
If you add the $18 trillion (and rising) in US debt, America’s total liabilities exceed $60 trillion.
This is not a drill. This is real world, and the situation is dire.
Oh there’s just one more thing.
The Treasury Department (by its own admission) is running out of money.
In the same letter to Congress from last week, Secretary Lew disclosed that the Treasury Department’s cash balance had fallen below its minimum level.
He also mentioned that his extraordinary measures were running out, urging Congress to please please please raise the debt ceiling for the 79th time since 1960.
The Treasury Department is out of options. And candidly, the government itself is running out of options.
Now, tonight there’s apparently another debate of leading Presidential candidates.
If asked what they’ll do about the US debt, there will probably be a lot of high-sounding language and tough talk.
But at the end of the day, the cold reality is that the government has no choice but to default.
They could default on their creditors like China who have purchased trillions in US debt. But that would only temporarily solve the problem, not to mention cause a catastrophic financial crisis across the entire world.
Or they could default on the Federal Reserve, which also owns several trillion dollars in US debt. Though that would cause an unprecedented currency crisis and a run on the US dollar.
Most likely, they’ll default on the promises they’ve made to their citizens.
Namely, they’ll default on their obligation to maintain a sound and stable currency; and their obligation to provide retirement income from the Social Security program that people will have spent their entire lives paying into.
This is something you can absolutely count on.
Of course they’re going to tell you that if you’re dissatisfied, the only thing you can do is go to the voting booth and cast a ballot.
And in the meantime they’ll parade a bunch of candidates around who will tell you every lie that you want to hear.
“Social Security is fine.”
“We can get the debt under control.”
It’s all a bunch of BS.
The truth is that while the government has no good options remaining, you have very powerful options and solutions at your disposal as long as you have the courage to look at objective data and stop believing their lies.
This is no time for ‘hope’. Rational people have Plan B. It’s time to make sure yours is airtight.
September 15, 2015
Seven years ago on September 15, 2008, one of the oldest investment banks in America filed for bankruptcy.
Lehman Brothers had been started a family of German entrepreneurs who had recently emigrated to the United States in the mid-1800s.
They started as just a simple general store in Montgomery, Alabama, but in time grew to become one of the dominant cotton traders in the country… and eventually one of the largest financial firms in the world.
Lehman Brothers grew so large that when they went bust seven years ago, they nearly dragged down the entire financial system with them.
And that’s when the Federal Reserve and the US government stepped in with trillion dollar taxpayer-funded bailouts, interest rate cuts, and quantitative easing.
Back then it was a different world.
The US government’s total debt was ‘only’ $9.6 trillion. Today it’s over $18 trillion… and once they raise the debt ceiling (which is inevitable) the debt will rise overnight to over $19 trillion– twice as much in seven years.
The Fed in 2008 was also quite different.
The entirety of its balance sheet was just $924 billion. And the total of its reserves and capital amounted to $40 billion, roughly 4.3% of its total assets.
Today the Fed’s balance sheet has ballooned to $4.5 trillion, nearly 5x as large. Yet its total capital has collapsed to just 1.3% of total assets. And falling.
This is a hugely important figure– think of it like the Fed’s “net worth”.
The Fed, just like anyone else, needs to have a positive net worth, i.e. the value of the Fed’s assets needs to exceed their liabilities.
In the Fed’s case, its liabilities are all the trillions of dollars in currency units that they’ve created, known as ‘Federal Reserve Notes’.
And its assets are things like US government bonds.
Over the last several years during its multiple quantitative easing programs, the Fed has essentially created trillions of Federal Reserve Notes (i.e. ‘money’) and used those funds to buy US government bonds.
In conjuring all that new money out of thin air, they created about $3.5 trillion worth of liabilities, which were offset by the $3.5 trillion worth of bonds they purchased.
In total, the Fed’s “net worth” hardly budged. And as a percentage of their total assets, their net worth really tanked.
This is known as leverage. And by any definition, the Fed is highly, dangerously leveraged.
In fact, when Lehman Brothers went under in 2008, its total capital was 3% of its balance sheet. The Fed’s is less than half of that.
Now, today the Fed is meeting to discuss the question– to raise, or not to raise interest rates?
And when I looked at the numbers, I realized something interesting is about to happen.
The universal law of bond markets is quite simple: bond prices and interest rates move inversely to one another.
In other words, when interest rates go up, bond prices go down.
Think about it like this: let’s say the prevailing interest rate in the marketplace is 5%, and I have a bond that pays 5%.
Right now if I wanted to sell it, my bond is worth $100.
But then tomorrow morning the Fed decides to raise interest rates from 5% to 10%. Yet my bond still pays 5%. Is it still worth $100?
No chance! Why would anyone pay me the same price for a 5% bond, when now they can go down the street and get 10%?
The only way I can sell my bond is if I drastically slash the price.
That’s what happens when interest rates go up– the value of existing bonds goes down.
Now think about the Fed. They’re sitting on $4.5 TRILLION worth of existing bonds, most of which they purchased when interest rates were basically zero.
So what happens if the Fed raises rates? The market value of their entire bond portfolio will fall.
And given the razor-thin capital the Fed has in reserve, they can only afford a tiny 1.3% loss on their bond portfolio before they too become insolvent.
So the grand irony of today’s Fed meeting is that by raising interest rates, the Federal Reserve will be creating its own insolvency.
And that, ladies and gentlemen, pretty much sums up the absurdity of our financial system.
With a balance sheet so over-leveraged, the Fed effectively has no policy tools left to fight a major crisis.
They have no room to lower interest rates (they’re already at zero!) and if they raise interest rates, the Fed becomes insolvent.
And what’s even more amazing is that the US is being viewed as the ‘safe haven’ right now.
In many instances the dollar has hit ALL-TIME highs against other currencies in this misguided view that the US is the safe place to be right now.
The actual data, on the other hand, tells a completely different story.
The US isn’t the safe haven. The Fed isn’t the safe haven.
But looking around the world, Japan isn’t a safe haven either.
China sure as hell isn’t a safe haven. Europe isn’t a safe haven. And even Switzerland has negative interest rates.
We may be approaching a bifurcation point very rapidly where if the world realizes that the US dollar is in the same boat, there will be absolutely no safety anywhere in the traditional financial system.
September 14, 2015
Sovereign Valley Farm, Chile
Every few centuries a new technology is invented and adopted that fundamentally changes everything about how a society is structured and organized.
The Agricultural Revolution allowed early humankind to stop being nomadic hunters and establish the roots of civilization in a single location.
The invention of the moveable type printing press in the 1400s (the Internet of its day) created a rapid spread of ideas that spawned lasting political revolutions across Europe.
The Industrial Revolution lifted millions of people out of poverty, empowered the middle class, and finally ended the feudal system.
Today it’s the Digital Revolution, which, along with robotics, genomics, and AI, is already creating fundamental changes in society.
Now, to say that the world is constantly changing is a statement of the obvious.
But the changes we’re experiencing right now have never been seen before in all of history.
Because in addition to major social changes, we’re also seeing a change in the world’s dominant superpower.
This happens from time to time throughout history.
The Italian city-states. The Ottoman Empire. Spain. France. Britain. All of these great empires held the top spot in the world for a time. Sometimes centuries.
But each was ultimately displaced by another rising power. Nations, like people, have natural life cycles. They rise, peak, and decline. It’s completely normal.
The United States as the world’s dominant superpower today is in its own period of decline.
Over the past 55 years, the US government posted a budget surplus a grand total of TWO times (one of which was a razor-thin surplus of just 0.01% of GDP), showing that this downward slide has been essentially uninterrupted.
There’s simply too much debt, military folly, and pitifully unsustainable entitlement programs for it to get back on track.
To quote former US Treasury Secretary Larry Summers, “There is surely something odd about the world’s greatest power being the world’s greatest debtor.”
Both of these trends are also playing a role in precipitating a reset within the third: finance.
Every few decades, the dominant financial system in the world is replaced, usually tracked by the rise and fall of global reserve currencies.
The current financial system, based on central bank innuendo and false political promises, is decades old.
Wreaking havoc on markets and decreasing the living standards of the majority of the population today, it’s clear that it’s time for a reset.
This is already in motion as we are seeing significant challenges to the US dollar’s dominance, with the Chinese dumping their US Treasury securities, and the establishment of the Asian Infrastructure Investment Bank.
You’ve seen and felt all of these trends, but what you may not realize is just how unique this is.
We’re seeing a shift in the world’s dominant superpower at the exact same time there’s a shift in the global financial system, and reserve currency, and game-changing technology. And even more trends that we haven’t even discussed.
The convergence of all of these trends at the same moment is the MEGA-trend.
The last time this happened was… never.
And it is bringing with it a whole host of unusual and unprecedented risks, which we’re already starting to see.
Financial markets are topsy-turvey, rising and collapsing in double digits within a few hours. That’s not supposed to happen.
Entire nations are going bankrupt. Radical and socialist politicians are surging.
Banking systems are on exceptionally shaky footing. Interest rates in many countries are actually negative.
And there are massive financial bubbles everywhere we look.
These risks are very real, and this is absolutely no time to be asleep at the wheel.
But behind each of these risks are incredible opportunities, and that’s what makes these changes so exciting.
In forgotten corners of financial markets, there are successful, profitable companies that are selling for HUGE discounts to their book values… and in some cases for less than the amount of cash they have in the bank.
Next-generation financial assets (including gold, silver, and even cryptocurrencies) are selling at historic discounts.
And alert individuals have the chance to invest in game-changing technologies that will dominate the next 100 years.
This is all incredibly exciting for anyone who’s actually paying attention.
There are huge risks. And huge opportunities. It’s important to be prepared for both.
Book 10 of Virgil’s Aeneid is one of the earliest references to the phrase “audentis Fortuna iuvat,” which is most commonly translated as “Fortune favors the bold.”
Perhaps. But if history is any guide, Fortune favors the prepared.
September 10, 2015
Yesterday was a pretty big day.
First (and perhaps most importantly) my post-Italy no carb detox came to an end. Hooray for that.
Second, I signed the papers and closed on a new apartment here in Santiago.
It’s a great time to be buying in Chile for anyone spending US dollars. The peso is weak, as is the economy. So asset prices are very cheap.
Simultaneously, by any objective metric, the US dollar is enormously overvalued. So I ‘sold’ what was overvalued and bought what was undervalued.
It was a great deal– it’s a spacious penthouse flat encompassing an entire floor in the nicest part of town, all for less than what a down payment would cost me in the US or Europe.
Hell, given the million-dollar price tag for some parking spots in New York City now, you could have several of my apartments for that much.
I don’t have any illusions about a personal residence being an ‘investment’. But if I need to sell at some point down the road, I expect to do quite well.
Not that I’m going anywhere anytime soon. Between our thriving agricultural project and the dozens of employees we have across three companies, I’m definitely planting a giant flag in Chile for the foreseeable future.
And buying an apartment here certainly underscores that sentiment.
This is a big move for me because I’ve been nomadic for so long; the last time I bought a personal residence was well over a decade ago when I left the military.
My father (my biological father, as I also have a step father) had terminal brain cancer of a particularly nasty variety known as glioblastoma.
So when I left the Army, I thought it a good idea to move back to Dallas to be closer to him and the rest of the family, and I ended up buying a condo in the upscale Turtle Creek district.
That was back in early 2004– nowhere near the 2006 housing bubble peak.
Besides, property prices in that area never went bonkers to begin with, so the price I paid was quite reasonable.
My father died two years later, and, as I had already been traveling substantially at that point, I put the condo up for rent and left the city for good.
That was nearly ten years ago.
I still own the place; in fact, it’s the only asset I still have in the US. But recently someone from the property management company approached me and asked if I would be willing to sell.
“Sure,” I replied, “depending on how much.”
She did some calculations and came back to me with a figure so ridiculous I had to independently verify it with multiple real estate agents.
And I don’t mean “ridiculous” in a good way.
She told me that my property was basically worth 10% LESS than what I had paid more than a decade ago.
Come again? I could hardly believe it.
Then I started doing some thinking… and looking back at old records. The amount of rent that I’m receiving now is actually 15% LESS than what I got back in 2006.
Yet simultaneously both my property taxes AND home owners’ dues have more than doubled.
It’s one of the worst possible outcomes. And it illustrates a key point: it’s possible to have BOTH inflation AND deflation at the same time.
In this case, it’s a clear example of asset price DEFLATION with cost (or retail price) INFLATION.
So in other words, the stuff that makes me wealthier LOSES value, while the stuff that takes money out of my pocket INCREASES in cost.
This is not a unique situation; there are scores of examples throughout modern financial history.
During the Asian Financial Crisis in the 1990s, for example, many of the Asian Tigers experienced this dual inflation/deflation phenomenon.
I’ve seen it recently across my travels, including in southern Europe and even here in Chile.
Central bankers are at the end of their rope. They’ve conjured literally trillions of currency units out of thin air, creating epic risk bubbles that nearly anyone with a pulse recognizes as unsustainable.
One of the great financial debates of our time is whether all the unprecedented central bank monetary policy around the world will cause inflation or deflation.
It’s an irrelevant argument.
The question is whether the endgame results in inflation or deflation.
I’m here to tell you that we absolutely can have BOTH. And we likely will.
As my own experience suggests, it may already be creeping up on us.
September 8, 2015
Sovereign Valley Farm, Chile
By late 2002, the national currency of Brazil (known as the “real”) was practically in free fall.
In barely six weeks the real had lost nearly a quarter of its value, and in mid-October 2002, the real hit its weakest level in history at 4 per US dollar.
Thing is, the weakness in the Brazilian currency thirteen years ago wasn’t based on any rational, objective data.
It’s not like the Brazilian government had accumulated $18 trillion in debt, or another $42 trillion in unfunded liabilities.
In fact Brazil’s debt to GDP ratio was less than 50% at the time (compared to over 200% for, say, Italy).
Most of the ‘crisis’ was simply an emotional reaction to what was happening next door in Argentina, which had recently defaulted on its debt.
Foreign investors lumped all of Latin America together and started dumping everything– stocks, bonds, currency.
Many well-heeled Brazilians panicked.
And, believing that the real was on a one-way street to total destruction, they moved their money into the ‘safety and security’ of US dollars.
This turned out to be the wrong move.
Over the several years, the panic quieted and investors realized that none of their fears were backed up by any actual data.
Growth returned. And by August 2008, the real hit an all-time high of 1.55 per US dollar.
Investors who thought they were ‘smart’ by selling the real at its all-time low and buying the US dollar at its all-time high had managed to lose over 60% of their wealth in six years.
This highlights a rather strange sentiment of human psychology: investors seem to prefer buying assets when they’re expensive, and selling them when they’re cheap.
It has to do with a deep flaw in our ability to properly assess risk.
In any situation, there’s always the PERCEIVED risk and the ACTUAL risk.
Perceived risk is based on feeling and emotion. Actual risk is based on data. You can probably guess which one is more accurate.
We can see signs of this in nature; when small animals feel threatened, they’ll often puff themselves up and make intimidating growls, all in an attempt to increase their predator’s perception that a fight would be risky.
The western banking system is another example.
The US government is broke. The US Federal Reserve is nearly bankrupt. The US banking system is pitifully illiquid.
And the FDIC’s insurance fund fails to meet the minimum level of capitalization as required by its own regulation.
This is a system where the ACTUAL risk is quite high. Yet the PERCEIVED risk is shocking low since the public believes that everything in the banking system is OK.
That’s generally the time to be selling… or at least heading toward the exit– when the actual risk is much higher than the perceived risk.
Conversely, when the actual risk is much LOWER than the perceived risk, it’s time to buy.
That’s the case today in developing markets. Especially here in Latin America.
Two obvious examples are Chile and Colombia.
Colombia is still tainted with a reputation of cocaine and kidnapping, even though the country moved on from that long ago. Still, the perceived risk is very high.
Chile generally stays out of the news, and thus it is hard for ignorant investors to distinguish the country from its neighbors.
Both economies are commodity exporters.
And given the weakness in commodity prices, the market perceives the risk for all commodity exporters to be high.
But this is feeling. Emotion. Not fact.
The data show that both countries are among the most reliable and fastest growing in the region with rapidly expanding middle classes and solid public finances.
Chile, for instance, has zero net debt, a solvent pension system, and a banking system with strong levels of capital and liquidity.
Both have robust and growing domestic economies as well.
There’s certainly an economic slowdown right now. But looking at the currency markets, both the Chilean peso and the Colombian peso have lost roughly 40% of their value over the last few years.
That strikes me as absurd.
Are these economies 40% weaker? Is their long-term potential 40% worse?
Doubtful. The fundamental growth trends are still very much intact.
The only difference is that for anyone with incredibly overvalued US dollars to spend, assets in these places are dirt cheap– whether it’s real estate, or shares of well-managed productive companies.
On a related note, I was recently reading an analyst report about mining giant BHP Billiton, in which the analyst lamented the usual risks that weak commodities will hurt the company’s earnings…
… but in the end he admitted that the company had a great balance sheet, management team, and business model.
Right now BHP is trading nearly at the value of its net tangible assets and paying a 7% dividend yield.
And the analyst concluded, almost begrudgingly, that this was a once in a generation (if not once in a lifetime) opportunity to buy into a great company at such a cheap valuation.
I won’t be cliché and say that Latin America (particularly Chile and Colombia) is now a once in a lifetime opportunity. Or even once in a generation.
But given the historical data, it’s pretty clear that this is at least a once in a decade opportunity.