Out here in Eastern Washington’s Yakima Valley are beautiful, seemingly endless fields of abundance and wealth.
But not ‘wealth’ in the conventional sense. I’m not talking about paper money that’s conjured out of thin air by central bankers.
I’m talking about real wealth. Real assets.
Growing up in a lower middle class household where my parents had to work three jobs each just to pay the rent, I never understood what any of that meant.
Like most people, I used to think that ‘wealth’ was how much money you had in your bank account. And for us there was never enough.
It took me years to realize that wealth doesn’t have anything to do with bank balances… it has everything to do with value creation.
And there is perhaps no better example than agriculture.
Agriculture is one of the most fundamental forms of creation. And it’s so simple. You put seeds in the ground, and something real (and valuable) grows.
It’s an amazing process.
I first got involved in agriculture several years ago when I acquired a large farm in central Chile and saw first hand how much wealth (both physical and financial) could be created.
Planting fruit trees on raw land, for example, is like any other successful startup.
It took Facebook and Google a few years to get their businesses off the ground before they could start producing positive cashflow.
Agriculture can be the same way: it takes a bit of time for the trees to grow. But after a few years, they’ll produce fruit (and profits) for decades to come.
The key difference is that with agriculture, nature does most of the heavy lifting.
Plus, every single person on the planet needs to eat. Not even Facebook and Google have that kind of reach.
This is what makes agriculture such a great investment. The fundamentals are incredibly compelling… almost chilling.
The supply of arable farmland, especially on a per-capita basis, declines every year.
And many major agriculture-producing regions around the world are experiencing extreme water crises.
Yet at the same time, world population growth creates greater demand for food, and rising wealth in developing nations drives more food consumption per person.
Think about it: poor people in poor countries consume very few Calories per day.
When economic conditions change and their financial situations improve, they not only start consuming more Calories, but the quality of those Calories changes.
Instead of consuming grains and vegetables that don’t require much land to grow, they’ll start eating more meat (which requires MUCH more land to produce).
This trend is pretty simple: there are more people demanding more food that requires more land at a time when the amount of land available per person is declining.
With such obvious fundamentals, it seems clear that agriculture is a great long-term investment.
It has been that way for a while. As we’ve discussed before, apple trees have outperformed Apple stock for decades.
Even something as mundane as timber outperformed conventional asset classes like stocks and bonds for 27 years.
It seems crazy that agriculture is even considered an ‘alternative’ investment. This is about as real and fundamental as it gets.
And again, it can be quite profitable. But it helps to have a global perspective.
A few years ago I founded one of the largest agriculture businesses of its kind in South America to acquire high quality farmland in central Chile that produces fruits and nuts.
(That’s actually why I’m here in Washington– I’m meeting with some major North American fruit producers based in the valley.)
Growing in Chile has tremendous advantages. While top-quality farmland here can fetch $8,000 to $25,000 per acre, we’ve paid less than $2,000 per acre in Chile.
Not to mention, our labor and operating costs are much lower in Chile.
Plus, because we are in the southern hemisphere and harvest when it’s winter in North America and Europe, the prices that we get paid are quite a bit higher.
This is turning into a fantastic business. But what’s really amazing about agriculture is that the return on investment is even higher when you go small-scale.
For example, you can buy a pack of 10 organic tomato seeds for about two bucks.
Plant them in the ground (or in a planter box on the window sill) and let nature do most of the work.
Those seeds will produce plants, which in turn will produce tomatoes.
Even a pitifully neglected plant can produce 15 pounds of tomatoes, which can either be eaten or sold.
Either way, at $1.50 per pound, you’ve created $225 worth of value across all ten plants from your $2 investment in less than 5 months. Not bad.
(By the way, each tomato produces dozens of seeds, each of which can be planted to grow even more tomatoes. So from a single seed you could create limitless value.)
If you have a house with a yard, you can take things a step further and plant some fruit or nut trees that are appropriate for your local climate.
Not only does this create wealth from the fruit it produces, but it would also likely increase your property value.
This is real wealth. Real profits. Real value. And no matter how hard they try, central bankers cannot control how much fruit your trees produce.
Almost one year ago to the day, I introduced you to Joe— a US Army combat veteran who lost his leg while deployed to Afghanistan in 2010.
Joe’s story was unfortunately all too familiar… except for one major twist.
Joe’s particular wound was so severe that the Army had to amputate nearly all of his right leg, practically up to his hip.
Now, it’s a rather sad statement that the United States of America is home to the most advanced prosthetic technology in the world.
But since Joe only had four inches of leg bone remaining, no existing prosthetic device could fit him. He needed something even more advanced.
He found out about a procedure called Osseointegration, which essentially involves fusing a titanium rod into the hip, and then attaching a prosthetic leg to that rod.
Joe was an ideal candidate for Osseointegration, and he asked the US government for support.
But the FDA in its infinite wisdom decided that the procedure was too risky for Joe.
Nevermind the fact that it was perfectly fine for Joe to take the risk and get his leg blown off in Afghanistan to begin with.
No… the FDA bureaucrats felt that Joe wasn’t grown-up enough to make his own decisions. So they declined to approve Osseointegration.
Now, Osseointegration was a perfectly valid procedure in other parts of the world—Australia, Germany, Sweden, etc. But not in the Land of the Free.
So if Joe wanted to get his leg fixed, the government told him he was on his own, that he’d have to go to one of those countries and pay for the procedure himself.
By the way, it was going to cost $70,000.
That’s about the time that I found Joe, roughly a year ago. He was trying to raise money on the Internet, and wasn’t coming close to making a dent in the bill.
I was infuriated by his story… how some callous, bumbling, idiotic bureaucracy had denied him the procedure and left him to fend for himself.
I was in a position to help, so I did.
As I’ve written before, one of the benefits of living overseas is that you can generate six-figure income and pay little to no tax.
It’s called the Foreign Earned Income Exclusion. And it’s not some creepy loophole for selfish billionaires.
It’s just part of the tax code that millions of Americans living abroad can benefit from.
I’ve been able to shield plenty of income from tax with the Foreign Earned Income Exclusion…
… income that would have otherwise been used by the US government to send guys like Joe (not to mention countless civilians) to get their legs blown off.
So instead of income being taxed and earmarked for destructive purposes, I used my tax savings to buy Joe a new leg.
Last night we had dinner together, and I couldn’t believe his progress.
He’s walking around now with his new leg, totally unsupported. He doesn’t even need a cane, let alone crutches.
He recently got married and told me that he was able to dance with his wife at their wedding.
He’s even going to participate in a 5K in the next couple of weeks. Incredible.
But perhaps most importantly, there’s been a major knock-on effect from his procedure.
Joe is actively going to medical conferences now, showcasing how effective the procedure has been for him.
And in part because of Joe’s efforts and clear medical success, the US government is starting to permit other amputees to undergo Osseointegration.
I was stunned when he told me this last night.
All of this has happened in less than a year: his life has turned completely around, and even the federal government has now reversed its position on Osseointegration given Joe’s clear evidence that the procedure works.
This drove home such an important lesson: the most powerful change we can make has nothing to do with how we vote, but rather what we choose to do with our finances.
If your income is heavily taxed and goes to support government lunacy, you’ll end up with even more government lunacy.
But if you take the perfectly legal steps to reduce the amount of taxes that you owe, your money can be invested in the change that actually matters to you.
There are so many ways to do this.
Anyone can maximize tax-advantaged retirement contributions, itemize deductions on 1040 Schedule A, or even re-domicile certain business income to a tax-free state.
You can take federal tax deductions and receive credits for everything from medical expenses, university tuition, unreimbursed vehicle expenses for legitimate business purposes, job hunting expenses, side-business expenses, and more.
A little bit of extra effort pays off, and doing this just makes sense.
Slashing your tax bill is certainly the easiest return on investment you’ll ever make.
But more importantly, if you disagree with the way that government wastes your money on war and destruction, reducing the tax revenue they have to squander is the most powerful weapon you have to truly affect change.
PS. There really are dozens of ways to cut your taxes. If you want to learn more about the Foreign Earned Income Exclusion you can read about here.
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]
On 23 June 2016, this British citizen will be voting to leave the European Union.
To me it’s clear: the EU has not only become too big for its own good, it’s too big to do hardly anything good.
Back in 1975 when the UK first confirmed membership in the EU (when it was called the European Economic Community), it made sense.
Britain has always thrived on international trade, and the EU promised more trade.
But that’s not what happened. The EU didn’t turn into a peaceful, efficient, multi-national trading bloc that enables commerce and prosperity.
Rather it has become an ever-expanding, unaccountable bureaucracy ruling over vastly disparate nations who are increasingly at odds with one another.
And it is precisely the size of this Leviathan that’s the problem… something that was first identified several decades ago by economist Leopold Kohr.
Kohr was an Austrian Jew who only narrowly escaped Hitler’s Germany just before the outbreak of the Second World War.
He had been born in Oberndorf in central Austria, a village of just 2,000 or so.
And Oberndorf’s tiny size came to play a crucial role in Kohr’s thinking about the wealth of nations.
Kohr’s premise was simple: when you get too big, you start having serious problems.
This applies to political unions, from the Roman Empire to the EU, as well as to companies.
Even Warren Buffett has warned that large companies will eventually find it difficult to grow.
Kohr graduated in 1928 and went off to study at the London School of Economics with the likes of fellow Austrian Friedrich von Hayek.
In September 1941, Kohr began writing what would become his masterwork, ‘The Breakdown of Nations’.
He wrote that instead of expanding, Europe should be shrinking back into small political regions (like Switzerland) with a commitment to private property rights and local democracy.
“We have ridiculed the many little states,” wrote Kohr sadly, “now we are terrorised by their few successors.”
Simply put, size creates unavoidable limits… and problems.
And as the European Union has grown ever larger, it smashes horribly into Kohr’s thesis.
We can see this with the spate of problems in Europe ranging from horrific youth unemployment to major border crises to negative interest rates across the continent.
Of all the world’s population centers, Europe is the slowest growing (i.e. most rapidly shrinking) in the world.
The promises of growth and prosperity proved hollow. Yet the Eurocrats want to give Europeans even more: more regulation, more negative interest rates, more size.
Perhaps ECB Governing Council member Vitas Vasiliauskas sums this up the best from his comments last week:
“Markets say the ECB is done, their box is empty. But we are magic people. Each time we take something and give to the markets – a rabbit out of the hat.”
Vasiliauskas is the perfect embodiment of the EU bureaucracy: they believe they are special people capable of performing miracles.
The arrogance and hubris in this statement are overwhelming and tell you everything you need to know about the unelected, unaccountable people who control our lives.
If you want to understand this issue even more, I highly recommend the documentary Brexit: The Movie.
It’s a well-presented masterpiece of government overreach that would likely win an award for Best Comedy if it weren’t sadly true.
If you’re pressed for time, here’s a 60-second snippet detailing the tens of thousand of regulations that crowd our daily lives:
Recently I was having drinks with a friend of mine who is an ultra-successful US real estate developer and investor.
He told me that his team had just closed a large real estate transaction worth hundreds of millions of dollars, and they got a sweetheart deal from the bank.
The bank is loaning them almost all of the money at an interest rate of around 2%.
But it gets better.
If the Federal Reserve raises interest rates, he has the option of locking in the rate that he has now… so his interest rate will basically never go up.
But if the Federal Reserve lowers interest rates, the rate that he pays on the loan will go down.
In other words, he got an amazing deal from the bank… and it might even get better. But it will never get worse.
Now, this is obviously fantastic for the borrower.
But for the bank, this is an absolute sucker’s bet. There’s almost zero upside.
The bank is putting up the vast majority of the money, their return on investment is next to nothing, and the tiny return they are getting might even go down.
More importantly, if interest rates go up, or if inflation increases, the bank is going to lose a LOT of money.
Of course, the bank isn’t going to lose its own money. Banks never use their own money when they make these crazy loans.
No. Instead, they use their depositors’ money. YOUR money.
So while this is clearly a great bank if you are borrowing money, it would be crazy to be a depositor at this bank. That’s YOUR capital at risk.
This insanity is pervasive across most western banking systems.
They take in depositor funds, keep VERY little of it in reserve, and then go make the most asinine financial speculations with their customers’ savings.
So when banks make stupid bets, it’s ultimately the depositors who bear the risk.
And in exchange for that risk, you are paid a rate of practically 0%. It makes absolutely no sense.
Now, banks are supposed to have ‘Resolution Plans’ to ensure that their risky bets won’t put depositors at risk.
But just last month the Federal Reserve and Federal Deposit Insurance Corporation issued a scathing report criticizing the resolution plans of many major US banks.
Among the usual suspects were banks like JP Morgan, Bank of America, and Wells Fargo, all of whom had resolution plans deemed to be “not credible”.
On top of all of these risks, banks still maintain woefully substandard balance sheets.
Liquidity is a major problem at US banks, which typically hold the tiniest percentage of customer deposits (often as little as 1% to 3%) in cash equivalents.
The rest of your hard-earned savings (97%+) is gambled away on crazy loans and other investment fads.
Look, it doesn’t take a rocket scientist to see that this banking system clearly has a lot of risk.
Bank liquidity is shockingly low. Bank solvency is questionable. Bankers continue making seriously risky bets with your money.
And even eight years after the last crisis, major banks still don’t have credible plans to deal with the consequences when their risky bets don’t work out.
(Note- this is just the FINANCIAL risk. We haven’t even begun to talk about the legal risk, i.e. how easy it is to have your savings account seized or frozen.)
If you look at the data objectively, it’s obvious that it makes no sense to keep 100% of your savings locked up in this system.
As we’ve discussed before, holding physical cash is one option. You can dramatically reduce your bank counterparty risk by cutting out the financial middleman.
Another excellent option to consider is establishing a bank account offshore in a stronger, more credible, debt-free foreign jurisdiction.
Look at Hong Kong as an example.
As a jurisdiction, the government of Hong Kong has ZERO net debt, and the central bank is easily one of the most well-capitalized on the planet.
The average bank in Hong Kong maintains plentiful liquidity at 18.3% of customer deposits (which is 3 to 6 times higher than most US banks).
Capital reserves at Hong Kong banks are also strong, averaging 13.5% of the banks’ total balance sheets (this is twice as conservative as most US banks).
Plus Hong Kong’s deposit insurance fund is actually solvent and maintains its required capital levels.
It’s a night-and-day difference.
In the US banking system, the government is bankrupt, the central bank is insolvent, the deposit insurance fund is undercapitalized, the banks are illiquid, and they’re making high-risk loans that put customers and taxpayers on the hook.
In Hong Kong, the government has no net debt, the central bank is extraordinarily well capitalized, the insurance fund is solvent, and the banks are highly liquid and with plentiful capital reserves.
If you look at the data objectively, it’s obvious which of these two jurisdictions is the safer place to hold at least a portion of your savings.
(That said, the world is a big place, and there are plenty of examples aside from Hong Kong.)
Contrary to the media propaganda, having a foreign bank account isn’t about dodging taxes or anything shady.
Rather, it can be a rational, common sense, no-brainer solution to address the serious risks in your home country’s banking system.
I come to New York City every year because it’s where the annual meeting of the Atlas 400 group is held.
If you’ve not heard of Atlas, it’s a social club… primarily for like-minded, high achieving, self-made individuals.
I always go out of my way to attend the annual meeting because the other members are some of the most interesting people I know.
The late Jim Rohn used to say that you are the product of the five people you spend the most time with.
And while I’m not certain this is entirely true, I do think it makes sense to surround yourself with high quality individuals that you can learn from.
That’s why I come here each year. And I learned so much this weekend from the high caliber of people in attendance.
I learned from one of the world’s foremost collectibles experts, for example, what are the ‘no brainer’ collectibles investments right now that are likely to go up dramatically in value over the next few years.
One of the most astute financial minds I know walked us through a detailed scenario outlining how the financial system can (and likely will) rapidly unwind.
These weren’t even his own conclusions; the people in the group are incredibly well-networked, and this particular gentleman has been advised by senior members of the financial establishment.
We had an incredibly inspiring presentation by a cutting-edge genomics firm, co-founded by the doctor who first decoded the human genome; they’re very close to revolutionizing medicine and making it possible for all of us to live longer, higher quality lives.
And there was another presentation about effective philanthropy and some of the best ways to give back.
I also made a brief presentation to the group about ongoing discussions I’ve been having with senior government ministers about a unique second passport program.
Bottom line, there’s a little bit of everything at these events.
I wanted to pass this information on to you, so this morning I sat down and recorded what I learned this weekend in today’s podcast.
But in addition to those lessons, I also articulate my thoughts about what’s happening in this country.
Hundreds of years ago, America used to be the Land of Opportunity where people who worked hard and took risks could be richly rewarded for their efforts.
This idea attracted some of the most productively-minded people in the world, and vast fortunes were made as a result.
Even in government, politicians made astute decisions that enhanced the national prosperity.
In the early 1800s, for example, when the US was still in its infancy, the government purchased 827,000+ square miles of land from France for less than $15 million.
It became known as the Louisiana Purchase, and today that amount would be valued at roughly $263 million in 2016 dollars.
When adjusted for inflation, that’s the equivalent of buying land today in the US at just over 40 cents per acre.
A few years later, the US government bought Florida from the Spanish for the equivalent of just $89 million in 2016 dollars.
What unbelievable deals.
Back then the government spent taxpayer funds to buy valuable, productive land for just pennies per acre. (Again, those prices are adjusted for inflation…)
Today they spend over $2 billion to build a website that doesn’t work.
It’s a night and day difference that highlights just how out of control things have become, and how far from its origins the Land of the Free has fallen.
But this is not a bad news story by any means.
And in today’s podcast, we explore these obvious trends, the no-brainer solutions, and the incredible opportunities that surround us in the world today.
Yesterday I had one of those nightmare travel experiences that just makes you want to scream.
Lan Airlines has a nonstop flight from Santiago to New York City, and I booked it months ago.
Normally my travel schedule is very last minute; I don’t really know where I’ll be two weeks from now, let alone six months from now.
The only two events for the entire year that I actually put on the calendar are my entrepreneurship camp in Lithuania, and the annual meeting for the Atlas 400 group that takes place in New York.
So this trip has been on my calendar for a while.
And yesterday I did what I have done hundreds of times before– I went to the airport well in advance of the cut-off time to check-in for my flight and head out of the country.
I’m not one of these people who shows up 3 hours before a flight. I have better things to do with my time, and as I typically fly business class, the check-in procedures are pretty swift.
Normally I’ll even check-in online so that I can go straight to the gate, but Lan’s website wasn’t working for me yesterday, so I had to stop by the desk.
When I arrived, the check-in agent told me that the flight was already “closed”.
That was my first sign that something was wrong: airlines typically close international flights precisely 60 minutes prior to departure. I arrived 70 minutes prior to departure, so there should have been plenty of time.
“No problem,” I told them, having been in this situation many times before. “Just re-open the flight and check me in.”
“We can’t, sir,” they replied, “We’ve already given your seat away to someone else.”
The conversation rapidly deteriorated from there. The check-in agents told me there was NO WAY they could get my seat back, and that I would be unable to fly.
I immediately figured out what happened: Lan had oversold the flight.
Airlines do this all the time. If they have capacity on a plane for, say, 350 people, they’ll often sell 360 seats (or more) hoping that a number of passengers won’t show up.
If too many people show up and they don’t have enough seats, they’ll reinvent their own rules and start closing the flights early as an excuse to bump the excess passengers.
In this case, I ended up being one of the unlucky people who got bumped.
I’ve been on hundreds of flights in my life and have traveled extensively for more than a decade to 120+ countries, so I recognize that these things happen from time to time.
The real insult, though, was the complete disregard of most of the staff. I remember asking the head check-in supervisor, “OK, so what are my options to get to New York…?”
To which she looked at me and callously replied, “You have no options,” and went right back to updating her Facebook status.
I ended up sorting myself out with the help of a sympathetic Lan employee named Miguel, so I should be arriving to New York in time for at least part of the Atlas 400 annual meeting.
I will unfortunately miss tonight’s welcome dinner and the chance to catch up with old friends in the group.
I also had a meeting scheduled this afternoon with some high level government ministers to discuss their country’s economic citizenship program, so we’ll have to go through the hassle of rescheduling.
And, oh yeah, there’s the financial cost too. New York is an expensive place to stay, and since my room was pre-paid and non-refundable, this little mishap set me back $2,000.
But as I was reflecting on the experience later, it made me realize that this is the perfect metaphor for government entitlement programs like Social Security.
I bought this ticket months ago. In other words, I paid into the system in advance in exchange for their promise that my seat would be there when it came time for me to collect.
And all along the way, they continued making promises to me, sending emails about the in-flight meals and seat selection…
… just in the same way that politicians keep making promises about Social Security.
But it turns out that the airline didn’t actually have enough resources. They had too few seats, and had made too many promises to too many people.
All the resources (seats) they DID have had already been doled out to the people who were at the front of the line.
But when people like me showed up a bit later to collect the seat that had been promised to them (i.e. anyone under the age of 50 who expects to collect Social Security), suddenly they had no more resources available.
They arbitrarily changed their own rules to deny me what I had paid for in advance… and then looked me straight in the eye and said, “You have no options.”
That, in a nutshell, is the future of Social Security, and effectively all underfunded government pensions.
As we’ve written about before, most Western government have very little chance of being able to keep the promises they’ve made to their citizens, especially when it comes to retirement.
There are solutions, though.
We’ve talked about a number of different options in the past for alternative investments and better retirement structures, and this will continue to be a theme in this letter.
Having a Plan B for your retirement just makes sense; you won’t be worse off having an additional pool of savings or income stream.
But building a great Plan B takes time. And the earlier you get started, the better off you’ll be.
Here are some resources to help you get started:
[Editor’s note: Sovereign Man team member Peter Keusgen, lead editor of our private investment service, is filling in while Simon is en route to New York City today.]
I’m sitting in a café in an upscale part of Sao Paulo, Brazil, a short walk from the Renaissance Hotel, watching the news come in about the impeachment of Brazil’s president Dilma Rousseff.
And I believe the reason I’m in this café is the same as the reason for Rousseff being impeached: a totally backwards, bureaucratic, inefficient government and financial sector.
Let me elaborate.
This is my first time to Brazil; Simon Black sent me here earlier this week to conduct deeper due diligence on a private company that we are considering investing in.
The business is EXTREMEY promising and growing rapidly, which is really a tremendous accomplishment in this country.
Right now, Brazil is in its worst recession in 80 years. That’s means a lot in a country that has had horrific hyperinflation and burned through at least half a dozen currencies.
There’s a lot of noise right now about corruption and nepotism (hence the impeachment of Dilma Rousseff).
But the real problem here is the bureaucracy. Brazil is legendary for it.
When I speak to the business people here, they claim that taxes are their biggest headache. Not the amount of taxes that they owe– the number of taxes.
There can be dozens of taxes that productive citizens have to pay, and that can cripple a small business.
Brazil’s infamous bureaucracy is difficult for foreigners to deal with as well. Which brings me to why I’m at a coffee shop near the Renaissance Hotel.
I left my hotel this morning in search of an ATM. As luck would have it, there was an HSBC branch nearby.
That ended my string of good luck for the day.
The international ATM connection was down, so I couldn’t withdraw any cash.
‘No worries’, I thought, ‘I’ll just go inside the bank to exchange my money.’
So I locked my bag in the lockers provided (it’s not permitted to bring bags into the bank) and went inside to exchange money.
But no. Apparently this bank doesn’t have a license to change money.
Not much of an international bank…
They recommended that I change money at a hotel. OK great. I was going to a hotel anyways, so I told my taxi to take me to the nearest one.
But the hotel only had a limited license to exchange money for its guests, and I wasn’t a guest of that particular hotel.
So to exchange money, I’d have to go to another hotel which had a license to exchange currency for foreigners.
So my miserable Odyssey continued with a 20-minute cab ride to the Renaissance Hotel, the nearest option, and I used the last of my local currency to pay the driver.
Downstairs at the Renaissance, sure enough, was the exchange booth. I presented my passport and a US $100 bill and was given the rate of 2.86 Brazilian real per dollar.
Whoa. Wait a minute. The spot rate was 3.44 Brazilian real per dollar.
So the money exchange booth was charging me 17%! It was unbelievable.
It seems that as there are so few places to exchange money that the handful of businesses who are licensed have an effective oligopoly on the market.
With the competition eliminated, their license to exchange money has become a license to screw people.
On top of that, the process took forever. I was given a receipt with 58 lines and two signatures that was more than a foot long (no exaggeration).
It’s obvious that with so much paperwork there’s clearly a mountain of bureaucracy holding down the system.
I’ve spent years of my life in developing countries in Southeast Asia where people can’t wait to exchange their money for foreign currency.
In Myanmar, for example, dollars can be exchanged freely anywhere within 1% of the spot rate.
And even though they didn’t even have ATMs until a few years ago in Myanmar, today you can withdraw money in downtown Yangon from a bank located on the other side of the planet.
There’s a long standing joke in the international investment community that Brazil is the country with the most potential– and always will be.
In other words, no one expects that Brazil will ever get its stuff together and start realizing its potential.
A lot of people think that changing Presidents is going to solve the problem. It rarely does… not just in Brazil, but anywhere in the world.
Governments create rules and regulations, not wealth and prosperity.
What really moves the needle is technology, production, and savings… and the abilities of entrepreneurs to bring those resources together to solve problems.
And that’s why I’m here. The business we’re looking at provides a great platform for Brazilian companies to streamline and drastically cut out this costly bureaucracy.
It’s an amazing solution to a huge problem, and the company’s growth rate is astonishing.
That’s what entrepreneurship is all about– solving big problems. Problems are opportunities in disguise… and Brazil has plenty of both.
Right before I walked on stage last night in front of an audience of roughly 2,500 people, I said to myself, ‘This isn’t how I thought my day would turn out…’
Hours before, I met up with Robert Kiyosaki at his hotel in Santiago to have a drink and catch up; he’s in town giving a series of seminars and invited me to come over and hang out for a bit.
After a couple of hours of great conversation, I accompanied him to the venue where the audience was eagerly waiting for him to speak.
Robert’s seminal work Rich Dad, Poor Dad changed so many lives and completely shattered the staid, traditional notions of finance and success.
Perhaps one of his biggest ideas from the book is that most school systems simply do not prepare people for success.
You don’t learn critical lessons in school like how to invest money, how to start a successful business, how to create value and improve the lives of other people.
Instead, you learn how to be a good taxpayer.
And as usual, Robert’s remarks were spot-on last night.
After about an hour, Robert invited me up on stage to speak to the crowd about the incredible risks in the financial system that we face, as well as all the amazing opportunities in the world right now.
I took the audience back in time 10,000 years.
Prior to what we commonly call the Agricultural Revolution, our ancient ancestors never knew where their next meal would come from.
They were constantly hunting, always roaming from place to place in search of food.
But around 10,000 years ago, human beings discovered that they could plant seeds in the ground and grow their own food… and LOTS of it.
That changed everything.
For the first time in history, our ancestors could consistently produce far more food than they could consume.
The surplus of all the extra food they didn’t consume became the very first form of savings, something they were able to leverage to build the roots of the civilization that we enjoy today.
For several years now I have called this concept the Universal Law of Prosperity. It’s very simple: in order to prosper, you have to produce more than you consume.
The ancients figured this out thousands of years ago.
And though you won’t find the Universal Law of Prosperity listed in any finance or economics textbook, it is the most important law in those fields.
The Universal Law of Prosperity applies to everyone: individuals, families, companies, governments, banks, etc.
If you and I spend more money than we earn, eventually we’re going to go bankrupt.
If a business doesn’t generate enough revenue to pay its expenses, it’s going under.
And governments who routinely run budget deficits will one day run into serious trouble.
Yet if you look out across the world, you’ll see willful violations of the Universal Law of Prosperity everywhere.
Government debt has exploded in recent years as a result of their inability to live within their means. This is the case especially in the West.
Interest rates are now near zero, or even negative in many parts of the world, which only encourages businesses, individuals, and governments to borrow more.
Our entire financial system is based on debt and consumption.
You always hear, for example, how the American consumer drives the US economy.
You don’t ever hear anyone say that the American manufacturer… or the American capitalist… drives the US economy. It’s all about consumption, not production.
This constitutes a willful violation of the Universal Law of Prosperity.
And it’s simply foolish to assume that these imbalances between production and consumption can continue forever and ever without consequence until the end of time.
Look- the world isn’t coming to an end. There are obvious (and substantial) risks in our financial system, and there will be consequences.
When everything is based on debt… when nearly every government and central bank is insolvent… it just makes sense to take basic steps to protect yourself from these risks.
There are literally hundreds of things you can do, and we’ve talked about some of the easiest options in this letter.
Keep some physical cash in a safe instead of depositing ALL of your savings in the banking system.
Hold precious metals.
Own productive assets, whether a profitable business or a few apple trees that you planted in your backyard.
Invest globally. More than a billion people are being lifted out of poverty and into the middle class in developing countries.
Technology is advancing at an astonishing pace.
We have the ability to live better, longer, more meaningful lives, and to create wealth and value in a way never before seen in human history.
This isn’t a message of doom and gloom. The world is full of so much opportunity right now.
Bottom line- taking rational steps like these in the face of such clear trends just makes sense.
Robert is a fantastic speaker and all-around great person, and I’m fortunate that I’ve been able to get to know him well over the past couple of years.
If you haven’t read his book Rich Dad, Poor Dad, I highly encourage you to get a copy and read it right away.
Used copies are available on Amazon for as little as $2.65.
By all accounts Bernhard Gubser was living the American Dream.
Born in Switzerland he moved to the Land of the Free in the early 1980s to work at an international shipping company based in Laredo, Texas.
Eventually Mr. Gubser worked his way up to be President of the company and began traveling around the world to expand the business.
He became a naturalized citizen of the United States in the 1990s, something that would eventually cost him $1.35 million.
As a Swiss native, Gubser had a Swiss bank account. And as he was routinely spending a lot of time in Switzerland for business, and he felt that he might one day retire there, he kept the account open.
But the federal government has a rule: US taxpayers must disclose their foreign bank accounts each year to the Treasury Department.
Up until a few years ago, few people knew about this rule.
It wasn’t until around 2010, when the US government finally realized they were flat broke, that they started making a big deal about offshore reporting requirements and penalizing people with undisclosed accounts.
Gubser maintains that as soon as he found out about the requirements, just like most people, he immediately began to file the offshore disclosures.
The federal government took a different view, dinging him with a penalty of $1.35 million, roughly half of his life’s savings.
As they say, of course, ignorance of the law is not an excuse.
And Gubser is paying a $1.35 million penalty because he didn’t know.
Neither did Tim Geithner, as it turned out. Several years ago the former Secretary of the Treasury was found to have “accidentally” underpaid his taxes.
In this case, ignorance of the law was a perfectly valid excuse. Geithner was only required to pay back what he owed without additional consequence.
Hillary Clinton has been in the spotlight for having removed official, confidential, and classified documents from the State Department to her personal email server while she was Secretary of State.
She claims she didn’t know.
The President of the United States has closed ranks around her insisting that it was an honest mistake and that no crime was committed.
Funny thing, as anyone who’s ever held a security clearance in the Land of the Free knows, before being allowed access to confidential documents you sign a non-disclosure agreement known as the SF312.
I’ll never forget my own experience with the SF312 when I received a Top Secret clearance in the military. It was pretty sobering.
In the intelligence world, people joke that the SF312 is when you ‘sign your life away’, because the entire document threatens you with all kinds of penalties and imprisonment for mishandling of classified information.
Among the many federal laws governing classified information, Section 793(f) of the US criminal code criminalizes gross negligence resulting in the mishandling documents.
So whether or not Ms. Clinton ‘intended’ to violate the law is irrelevant.
And if it were anyone else who unwittingly spent months or even years mishandling classified information, we would be turning big rocks into little rocks wearing Dayglo orange jumpsuits.
I’m not trying to single out Hillary Clinton. The larger point is that the rules don’t apply for the political establishment
Yet for everyone else, they ruin people’s lives for the most mundane, victimless violations of obscure rules.
And every day they create more and more rules.
Just this morning the US federal government published 423 pages of new rules, regulations, and proposals.
That’s on top of the 704 pages published yesterday and the 688 pages published on Friday.
It makes me want to vomit when I think about how quickly they churn out regulations that squash individual liberty… yet still maintain that ignorance of the law is not an excuse.
It’s not radical to be repulsed by this double standard.
It’s not conspiratorial to look at objective data and recognize how personal freedom is in such obvious decline.
It’s not negative or pessimistic to be truly honest with yourself and ask, ‘is this really the country I remember from years ago?’
And it’s not unpatriotic to take simple, legitimate steps to reclaim your freedom and long-term prosperity from this obvious trend.
PS. There’s one thing that’s inspiring about this story. Bernhard Gubser isn’t taking this lying down. He’s fighting back and suing the federal government. The results of this case may provide a landmark precedent in how the government is able to come after taxpayers.
I’ll have more on this very soon.
Warren Buffet has famously said many times that the vast majority of investors shouldn’t bother picking stocks.
Instead, he’s advised everyone from Lebron James to his own children to simply buy an S&P index fund and hold it ‘for the next 50 years.’
He’s probably right; most people probably should just buy an S&P index fund. But not because it’s a superior investment.
It’s because most people simply aren’t educated about business, finance, and investing.
Proper financial education isn’t taught in public schools, so for a lot of folks, investing is an alien concept.
Learning about investment means seeking an independent education. A real education. And it’s amazing what a real education can do.
Whereas the average person is relegated to an insipid index fund, an educated investor can generate phenomenal wealth and prosperity.
Buffett himself is a great example of this.
Real education is a major part of being a Sovereign Man– achieving greater freedom and prosperity by learning more about both the problems AND the solutions.
After all, the greatest investment you can make is the investment you make in yourself. And that means education.
One of the people I’ve been fortunate to learn from is Tim Price– a London-based investor and fund manager whose Buffett-like approach to investing is exemplary.
Below is a recent note from Tim Price in which he explains this ethos, and educates readers on the tremendous advantage we all have as small investors.
From Tim Price, Director of Investment at PFP Wealth Management in London:
The shareholders of Berkshire Hathaway have just celebrated their latest ‘Woodstock for capitalists’ in the form of the company’s annual general meeting.
One of the more interesting takeaways from the event is that, according to Warren Buffett (the company’s chairman), Berkshire Hathaway is now far too big to produce substantial returns.
Buffett spent decades buying wonderful businesses that were profit machines, yet required very little capital investment.
He’s routinely discussed the company’s acquisition of See’s Candies in 1972 as an example.
Berkshire purchased See’s for $25 million at a time when See’s profits were less than $5 million annually.
In recent years See’s profits have been north of $80 million. Yet Buffett hardly had to invest a dime in additional capital to grow See’s profits.
That’s a great business for Buffett– one that isn’t ‘capital intensive’.
Today, though, Berkshire is buying businesses that require tremendous amounts of capital– railroads and pipelines.
When asked about this, Buffett explained that Berkshire is now effectively too big to invest in those great, low-capital businesses.
In other words, Berkshire Hathaway has too much money to manage. They HAVE to make capital intensive investments simply because they have so much capital to place.
Buffett has made this observation before, that size can be a barrier to high investment returns.
In an interview with BusinessWeek in 1999, Buffett almost bragged saying:
“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
But Berkshire Hathaway today is a $350 billion company, and elephants don’t gallop.
Buffett’s success as a capital allocator over a period of more than fifty years has clearly paid off for his longstanding shareholders.
But perhaps his most impressive achievement has been the transparency with which he’s discussed how he did it, primarily through his annual shareholder letters.
Buffett educates anyone who’s willing to learn about his value investing approach, encouraging everyone to ignore irrational markets and buy high quality assets as inexpensively as they can.
This brings up the question of size once again.
Value investing almost by definition is limited in terms of asset size and subsequent investment capacity.
If you have $350,000 to invest, you have the pick of the finest publicly-available value investments on the planet, no matter how small the market.
If you have $350 billion, you’re relegated to expensive railroads and government bonds.
That’s why the most disciplined value investors make a conscious decision to cap the size of their funds in order to concentrate on maximizing investment returns.
Simply put– smaller investors have a considerable advantage… if you know where to look.
So where is the most compelling value opportunity today?
First, you need a market or sector that has been out of favor for years.
If all the talking heads on business TV networks are screaming BUY BUY BUY, or touting the new ‘hot’ sector, that’s the place you want to avoid.
Next, look for a market that has been largely shunned by both domestic and foreign investors. Buy what other investors hate, especially when that emotion is based on ‘feeling’ rather than concrete data.
Once you’ve located the right market or sector, then seek attractive, bottom-up valuations, i.e. low price/earnings and price/book ratios.
One example is the resource sector.
As commodities prices have fallen dramatically, the market capitalizations of many small mining companies (including several profitable ones) have been pushed below their net cash levels.
Most of these companies have market valuations of $100 million or less.
For individual investors, it’s easy to buy shares. But institutions like Goldman Sachs or Berkshire Hathaway that have tens of billions to invest are simply too large to get in on these deals.
Japan is another great example.
Mikahil Gorbechev was still running the Soviet Union the last time Japan had a major financial boom. Investors hate Japan.
And yet, company valuations in Japan are incredibly attractive, especially the ‘mid-cap’ companies that are similarly too small for most institutional mega-investors.
As Greg Fisher, manager of the Halley Asian Prosperity Fund, points out, Japanese stocks have two key catalysts to growth:
First, many Japanese companies know their market valuations are “ridiculous” and are acting on that through stock buybacks and rising dividends.
Second, the dividends paid by Japanese companies are becoming increasingly attractive in an environment of negative interest rates.
In Japan, owning a stock yielding 5% is preferable to paying negative interest to the bank.
Both of these should have the effect of pushing up share prices considerably.
There are many more examples around the world: Vietnam, Russia, agricultural property in certain markets, etc.
The larger point is to ignore the mind-numbing conventional investment wisdom and expand your universe.
There are substantial opportunities in the world for educated value investors. And right now, we as individual investors have a tremendous advantage.
I’ve often joked very tongue-in-cheek that Donald Trump is the only person qualified to be President simply because he’s declared bankruptcy four times.
Trump himself talks up his own debt credentials, saying “I’m the King of Debt,” and “I know more about debt than practically anybody.”
He’s flat wrong, of course.
Trump may have racked up billions in debt for his companies, but Barack Obama has racked up more debt for America than anyone else in the history of the world.
That said, Trump does have mad street cred when it comes to debt.
In 1991, 1992, 2004, and 2009, Trump filed under Chapter 11 of the US Bankruptcy Code to reorganize his business debts.
Each of these constitutes a default, i.e. a violation of the original terms between the borrower and the lender.
And as I joke (only half-kidding), that’s precisely what America needs: default.
Stop kicking the can down the road, admit that you can’t pay your obligations, hit the reset button, and get on with it already.
Yet anytime I talk about US government debt, there’s invariably a voice in the crowd that says, “yeah, but we owe it to ourselves. . .”
This is one of the biggest lies in finance.
People have actually become convinced that the US government’s $19+ trillion nominal debt, and $60+ trillion total debt, doesn’t seem to matter because ‘we owe it to ourselves.’
First of all, is this true? Sort of.
According to the Treasury Department, foreigners hold roughly $4 trillion of US government debt.
The rest of it—the vast majority of US debt—is owed to various domestic agencies, banks, and citizens.
The #1 owner of US government debt, in fact, is Social Security… in other words, all current and future American retirees.
Next comes the central bank– the Federal Reserve, which holds $2.46 trillion worth of US government debt according to its most recent balance sheet.
Just on the heels of the Fed are other US government agencies (like the Defense Department and the FDIC) which also own US debt.
Then, of course, are all the thousands of banks and pension funds in the United States, which routinely buy US government debt.
And last but not least are all the individuals and companies across America who own US government debt as part of their portfolios.
So, yes, a minority portion of US debt is owed to foreigners.
What eludes me is why anyone thinks this is OK…
It’s like saying, “well I owe grandma a million bucks, but she won’t mind if I don’t pay.”
Ummm. Come again?
The US government is totally unable to pay its debt. The debt has been rising for decades, and they haven’t been able to run a budget surplus in 20 years.
Not to mention they have to borrow money just to pay interest on the money they’ve already borrowed at a time when interest rates are at historic lows.
Debt is already over 100% of GDP, and even the government itself predicts this number to rise.
At this point default is an almost mathematical certainty. The question is– default on whom?
Defaulting on the debt owed to Social Security means that hundreds of millions of current and future retirees have their lives turned upside down.
Defaulting on the Federal Reserve means that the Fed will become formally insolvent, creating a massive currency crisis in the Land of the Free.
Defaulting on other government agencies means that the Defense Department (among others) won’t have any more money to operate… so they’ll just end up increasing your taxes to make up the difference.
Defaulting on banks and pension funds would cause every bank to fail, creating an unprecedented financial catastrophe.
So the fact that ‘we owe it to ourselves’ means the debt is even MORE important. And that’s what’s so scary.
Think about it– it would actually be better if the US government owed 90% of its debt to the Chinese.
In that case, they would simply make the Chinese out to be evil, and then selectively default on that debt.
The rest of the world would probably go along with it, and America would get a pass. US citizens, banks, corporations, etc. would be largely unaffected.
But that’s not going to happen.
There’s a lot of tough talk about negotiating the debt with the Chinese… but this is all hot air.
Even if they default on the Chinese, they still owe tens of trillions to Americans that they have absolutely no hope of paying.
Some people think, ‘well can’t they just restructure the debt?’
No. First of all, restructuring is just a fancy way of saying ‘default’.
It means that you’re not going to honor the terms of the original agreement, and instead work out more favorable terms to pay off the debt.
But… what terms can possibly be more favorable?
Uncle Sam is already paying record low interest. There’s nothing left to restructure… no terms they can renegotiate which are more favorable than they already have.
Bottom line, the US government can’t possibly meet its obligations… so the only hope is to default.
They’ll either outright default and cause any number of major crises in the financial system or the American retirement system.
Or they’ll default on the promises they’ve made to their taxpayers, including the solemn obligation to maintain a sound currency (something they already abandoned long ago.)
Look, understanding this reality doesn’t mean that you’re negative or pessimistic.
There’s nothing pessimistic about acknowledging basic arithmetic.
It’s also no cause for panic. It might take years for these consequences to be realized.
But that’s no excuse to follow their lead and kick the can down the road. Building a great Plan B takes time, and it’s founded on one very simple principle:
It makes absolutely no sense to hold EVERYTHING in your life—your home, savings, investments, business, retirement funds, etc. in a country where the government truly is the King of Debt.
Well, it finally happened.
After months of innuendo, the European Central Bank (ECB) announced last night once and for all that they will no longer produce the 500 euro note.
The 500 euro note is the highest denomination of physical currency in the euro zone, and they’ve been talking about phasing it out for quite some time.
(The next highest is the 200 euro note, then 100. These will still be produced… for now.)
Of course, according to their reasoning, only bad people who engage in criminal activity, tax evasion, and terror financing use 500 euro notes.
All of us law-abiding little people have no need for such high denomination cash.
That’s a very convenient view for the ECB to take given that they’ve led the crusade to make interest rates negative.
Right now the ECB’s negative interest rates predominantly apply to the wholesale banking system.
In other words, commercial banks are charged interest on the reserves they hold with the ECB.
This is an absolutely insane practice.
As a depositor, you WANT your bank to hold plenty of reserves with the central bank instead of gambling away your deposits on risky loans and investments.
But now if any bank in the Eurozone does choose to act conservatively, they have to pay penalty interest to the ECB.
Many banks in Europe are starting to pass on these negative interest rates to their customers, and it’s beginning to cause a breakdown in the financial system.
Think about it– who would willingly PAY for the privilege of depositing their funds in an extremely illiquid and potentially insolvent bank?
Rational people are already sensing the absurdity of this conundrum, and the solution is simple: hold physical cash.
We’ve talked about this before– there are entire banks and insurance funds that are choosing to hold portions of their reserves in physical cash.
And with 500 euro notes, they can store a LOT of savings in a compact space.
Even in a small safety deposit box, you could hold over 1.8 million euros worth of 500 euro notes. This is more than enough for most people.
But the ECB doesn’t want this.
The corrupt ruse of our modern banking system depends entirely on the public continuing to use it.
There simply isn’t enough physical cash in the banking system to support withdrawals of more than a few percent of total deposits.
So if more than a small percentage of depositors wanted cash, the banking system would be in trouble.
More importantly, the vast majority of bank deposits are held in various bond and loan portfolios.
So in the event of a significant uptick in cash withdrawals, banks would have to start dumping assets in order to free up the necessary funds for their customers.
And if multiple banks had to simultaneously dump assets to raise cash, that would cause a steep decline in the market prices of those assets.
Banks would suffer huge losses as a result. Many would go under.
Needless to say the financial establishment has every incentive to ensure this doesn’t happen.
Their solution? Start phasing the large denominations of cash that pose a threat to their system.
And the ECB started formalizing this with last night’s announcement.
To be clear, 500 euro notes are not ‘banned’. The ECB tells us that current 500 euro notes in circulation will still be honored as legal tender.
Again… that’s for now.
The next step for them would be to quietly take these bills out of circulation until one day there’s simply no more of them available.
Then they can rinse and repeat with the 200 and 100 euro notes.
All of this is tantamount to capital controls– a way for central banks to trap your savings inside a worthless financial system.
As we’ve talked about before, holding physical cash is a great tool in a Plan B to reduce your exposure to problems in the banking system.
If you hold cash and there’s another 2008-style panic, you’re going to be OK.
This is a smart solution no matter WHERE you are in the world– Europe, the US, etc.
Even here in Chile where the banks are well capitalized, I routinely stop by the ATM machine on my way to the office in the morning to withdraw physical cash.
But as I’ve written in the past, cash alone is no panacea. And this move by the ECB shows that cash does have limitations.
Real assets, and in particular gold and silver, are also important elements of a Plan B.
Don’t think about gold as an investment. Think about it as a form of money– one that doesn’t depend on a central bank, or even a solvent banking system to have value.
In many respects it’s an insurance policy. And with the risks this obvious and writing very clearly on the wall, it makes sense to have some for yourself.
There’s something about being insanely rich that people will believe every word that comes out of your mouth no matter how bizarre.
And no, I’m not talking about Donald Trump. Warren Buffett is an even better example.
As one of the richest men in the world, Buffett’s opinions carry almost Biblical impact, even when they might be completely ridiculous.
Just a few days ago, for instance, he quipped that drinking Coca Cola is better for him than eating broccoli.
He’s also famously expressed contempt for owning gold, suggesting instead that people should simply own a US stock market index fund (like the S&P 500) and hold it for 50 years.
Curiously, though, gold has vastly outperformed both the S&P 500 and Dow Jones Industrial Average over the past half-century.
While the S&P 500 index is up 24.3x in that period and the Dow Jones Industrial Average is up 18.2x, gold has appreciated 36.6x.
Even when taking into account the effects of dividends, fund expenses, cash drag, taxes, etc. the evidence still doesn’t support Buffett’s assertion. Yet people believe him.
But perhaps one of Buffett’s most popular opinions is that America is simply awesome and will only get better.
He’s spoken and written extensively in his annual reports that America is the #1 place to be in the world, that the massive opportunity in the Land of the Free will only get better, and that the United States has “never been greater”.
Buffett is right that the United States is an amazing place.
It was founded as a land of opportunity where hard work, risk taking, and a little bit of luck resulted in incredible prosperity.
And some of those elements do still exist.
But Warren Buffett’s outlook on the United States is underpinned by an assumption that the next 50 years will look like the previous 50 years.
That’s clearly not the case.
When Warren Buffett’s company Berkshire Hathaway was rapidly expanding in the 1960s and 1970s, the US government’s debt level was low and the dollar was strong.
Since then there have been MILLIONS of pages of regulations created in the Land of the Free, trillions of dollars worth of debt accumulated, and countless dollars conjured out of thin air.
Buffett is well known for having a very long-term view on things. For him, the typical holding period for owning stocks is ‘forever’.
And that’s a great outlook to have when the fundamentals are in your favor, i.e. if you own shares of a great company with honest, competent management.
But you can’t hold the view that in the long-run everything will always be better.
15 years ago Yahoo, Motorola, and Nokia were three of the top technology companies in the world.
Apple was still years away from launching the iPhone. Few people had heard of Google. And Mark Zuckerberg was still in high school.
But these circumstances changed. Quickly.
Nations and economies also change. History is very clear on this point: wealth and power shift.
Just because a country might be at the top today doesn’t mean it will be that way forever, especially when the nation’s fundamentals and economic headwinds grow worse each year.
So with due respect to Warren Buffet’s investment acumen, there are decades of economic trends, millions of pages of regulations, and thousands of years of human history proving that his outlook on America is wrong.
Just after sunrise on April 19, 1775, a large contingent of British military troops arrived to the town of Lexington, Massachusetts.
They were under orders to search for and confiscate all weapons and munitions from the colonials– something the British army had done countless times before.
In many ways it was a routine operation. And yet, that morning, roughly 80 local militiamen stood blocking their path.
Paul Revere had ridden through Lexington only hours before to warn residents of the approaching threat.
There was a lot of yelling and tension between the two sides, and amid all the confusion, someone fired his musket. Then another. Then another.
(Historians are still unclear which side shot first, though much of the evidence points to Han Solo.)
And though few people realized it at the time, those turned out to be the opening shots of the American Revolution.
This is how revolutions often start– people who have reached their breaking points engage in a small acts of defiance that quickly escalate out of control.
We’ve seen this pattern over and over again.
The Arab Spring uprising in 2011 started with a Tunisian fruit cart merchant who lit himself on fire. Revolution ensued.
The 2014 revolution in Ukraine started when police violently clashed with peaceful anti-government demonstrators.
Revolutions, of course, can take many forms. There are social revolutions, political revolutions… and even financial revolutions.
That’s what we’re seeing today: financial revolution.
Now that interest rates are negative in many parts of the world, the financial system has become an incredibly destructive force.
Negative rates adversely impact the livelihoods of just about everyone, from the average guy on the street all the way to the banks themselves.
A few key players have reached their breaking points and are starting to engage in acts of defiance.
I told you recently how the Bavarian Banking Association in Germany advised its member banks to hold physical cash instead of reserve deposits with the European Central Bank (ECB) at negative interest.
Some major insurance funds are also jumping on board, choosing to hold physical cash instead of bank deposits earning negative interest.
In its effort to avoid negative interest rates, the Canton of Zug in Switzerland asked its citizens to delay paying their taxes.
Now even the political and media establishments in Germany are rebelling against the ECB, saying that negative interest rates chip away at the savings of pensioners.
In response, the ECB opted for the ‘blame the victim’ approach, pointing the finger at all of us little people because we’ve been saving too much money.
So according to the unelected bureaucrats who printed all the money to begin with, people have been saving too much.
Consequently, everyone must be punished with negative interest rates. And they’re your fault.
That’s like a rapist saying, “she deserved it.” It was an appalling response, and astonishingly stupid.
You’re supposed to save money. That’s what the Universal Law of Prosperity is based on: produce more than you consume. Save more than you spend.
Penalizing savers is the exact opposite of what bureaucrats should be doing.
But people are starting to figure this out. The resentment is growing, even within the financial system itself.
Remember that modern ‘money’ is backed by nothing but unelected bureaucrats and their insipid economic theories.
The only way this system works is when there’s unquestionable confidence in the people running it, almost to the point of blind obedience and wilful ignorance.
When that confidence wanes, the financial system can spiral out of control very quickly.
We may be reaching that point soon and could look back on this period as the opening shots of the Financial Revolution.
If you recognize that the financial system is destructive and want to make a change, your most powerful option is to stop using it.
Or at least reduce your dependence on it.
Part of being a Sovereign Man is having a strong sense of freedom and independence… and that includes financial independence.
Last week we talked about the importance of holding physical cash.
You won’t be worse off for taking some savings out of the banking system.
And you’ll be protected against problems like negative interest, bank bail-ins, or withdrawal controls.
(All of these, by the way, already exist or have happened recently.)
But cash is not a panacea. Because if there really is a major reset in the financial system, your paper money might lose significant purchasing power.
That’s why it makes sense to hold gold and silver in addition to cash.
If there are greater problems in the monetary system, your precious metals will turn out to be an extraordinary insurance policy.
(Silver is a better bargain right now based on historical ratios, but it’s hard to imagine you can go wrong with either one.)
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]
In their efforts to jam the square peg of financial theory into the round hole of human nature, economists have perpetrated some pretty stupid things.
But few of them are dumber than the efficient market hypothesis (EMH).
EMH states that it is impossible to beat the market because the efficiency of the market means that prices always incorporate and reflect all relevant information.
Why was the Dow Jones Industrial Average worth 22.6% less on Tuesday October 20, 1987 than it had been the previous day?
Why is Warren Buffett worth $67 billion?
Must be all that efficiency.
Buffett himself claims, “I’d be a bum on the street with a tin cup if the markets were always efficient.”
EMH and its bastard cousin CAPM (the Capital Asset Pricing Model), continue to send students of finance down intellectual blind alleys.
CAPM is a model that describes the relationship between the risk and expected return of an asset in a diversified portfolio.
CAPM requires reality to be bent using what can politely be termed “assumptions”, including the assumptions that:
1) All investors are of the species homo economicus, i.e. they are seeking to maximise returns
2) All investors are rational and risk-averse, instead of the emotional creatures we really are.
3) All investors are well diversified across a broad range of investments
4) All investors have an equal and non-influential relationship with prices
5) All investors can lend and borrow without limit at a risk-free rate
6) Transaction costs and taxes do not exist
7) All assets are liquid and perfectly divisible
8) All investors have identical expectations
9) All investors have access to infinite information simultaneously.
These assumptions are, of course, nonsense. And yet EMH and CAPM continue to be taught.
Perhaps there are business schools out there that still advise their students that the Earth is flat.
CAPM’s silliest assumption is that all investors are the same.
It requires only a superficial acquaintance with the financial markets to know that this can hardly be the case.
The financial markets are where sovereign wealth funds interact with private investors.
The former can often be insensitive to price; the latter, never.
Within the financial markets pension funds, with a theoretical investment horizon of decades, rub up against computer algorithms looking to front-run other investors by fractions of milliseconds.
And clearly, different investment entities have different objectives.
The motivation of a central banker is likely to be distinct from that of a robot (assuming they are not one and the same).
Of course, these motivations can and do change.
There was once a time when central bankers fought inflation like the very devil. Now central bankers are desperate to create it.
When the game changes, we have a choice. Try to adapt, or stop playing.
It’s not just that we’re entering uncharted waters; in a world of negative interest rates and negative bond yields, the entire investment landscape has changed. Investment strategy must reflect that.
Although a “risk-free” rate no longer exists, we should probably still try and steer close to the shore, even if we may not be able to see it.
If the game has changed, learn the new rules.
With the financial weather now a function of economic policy, different laws apply. Old investment models are obsolete.
And within a policy-controlled market, genuine diversification – of risks, as well as anticipated returns – will matter more than adherence to a traditional asset allocation template that is no longer fit for purpose, because it was formulated in a positive carry world.
[Editor’s note: This letter was penned by Tim Staermose, Sovereign Man’s Chief Investment Strategist and editor of the 4th Pillar Investment Alert.]
If you know me personally, you know I have a lot of hair.
So when I go get a haircut, I always feel bad that the price is the same for me as for people who are almost bald… so I tip accordingly.
Recently when I went for a long-overdue haircut in Bali, I paid about US$1.50, plus a generous 50% tip of roughly 75 cents.
Ahead of me in line was an older European gentleman. He went for the works. Haircut, shave, and scalp massage. His total cost: about US$3.80.
It got me thinking about trading, investing and the relative value of things.
The same service at the barber in Europe, Australia, or North America would undoubtedly have cost 10 to 20 times as much.
So, this was clearly fantastic value – right?
Well, I would argue that it actually depends on your yardstick.
Here in Indonesia an average wage can be as little as $150 to $300 a month. So a $1.50 haircut represents about 0.5% to 1% of the average monthly wage.
In the US, the average monthly wage is about $3,900 according to the Department of Labor. 0.5% to 1% is $19.50 to $39.
That’s more or less what a haircut will cost you in the US, depending on where you live.
So as it turns out, in both the US and Indonesia, a haircut runs 0.5% to 1% of average monthly income.
So, while I’d argue that my haircut in Bali was very good value in ABSOLUTE terms, in RELATIVE terms it wasn’t a screaming bargain after all.
Fortunately (or deliberately arranged that way, actually), my income is earned entirely overseas, at “rich economy” rates.
So for me personally, the cost of living in Indonesia – including haircuts – is an absolute bargain.
That brings me back to investing: professional money managers often seek investments that offer good relative value.
A stock might be cheap relative to its competitors. Or it might be cheap relative to its historical trading range.
Or, it could be cheap relative to alternative investments like government bonds.
But who cares if a stock is ‘relatively’ cheap if everything you compare it to is expensive?
It’s not particularly good value to buy a stock that’s slightly less overpriced than its competitors.
That’s the problem with most mainstream investments nowadays; they’re only being viewed in relative terms.
In absolute terms, stocks in most major markets are incredibly overpriced.
Thankfully, as small individual investors, we can think for ourselves. In seeking independent forms of income, we can look across the world for the best bargains to find absolute value.
In particular, we want to buy shares in companies that are screaming bargains.
One of the most lucrative corner of the market for me has always been companies that are selling for less than their ‘net cash’ in the bank.
(Net cash refers to the company’s bank balance minus any debt.)
I have always found that if you can buy such a company and have a modest degree of patience, almost invariably you can make a very nice profit.
Sometimes this happens quickly.
This was the case with a company called Queste Communications (QUE on the Australian Securities Exchange) that I made a small fortune with back in 2003.
It was just after I’d bought my first house. So I only had about A$14,000 of savings left to my name. I put ALL of it into Queste.
It was a small technology company whose shares had crashed in the dot-com bust.
The crash was so deep that the company’s stock price was about 4 cents; yet the amount of cash it had per share amounted to 14 cents.
So by buying the shares, I was spending 4 cents to purchase 14 cents in cash.
Needless to say I bought as many as I could afford. Within a few months the stock price had more than tripled (and even then was selling below its cash backing).
In all, I got back A$51,723.21 on a A$14,000 investment. Not bad for a small-time investor, as I was back then.
These sorts of deals have been my focus for years and comprise the majority of our recommendations in the 4th Pillar Investment Alert.
Right now I’m finding the Australian market to be fertile hunting grounds.
My methodology is slow and deliberate; my research team and I pour over hundreds of companies’ quarterly reports; you can find these yourself on the ASX website.
It takes a lot of time, but after going through those reports, we uncover all the gems… well-managed companies that are selling for less than their bank balances.
There’s a LOT more analysis that goes in to the decision to find our top recommendations…
… but, broadly, this should give you a basic understanding of our approach and how you might be able to apply it to your own investments to find incredibly lucrative ABSOLUTE value.
This 4th Pillar investment strategy is a no-brainer, and the track record is fantastic. We’re having a special sale– take over 40% off the regular price.
This promotion ends tomorrow. Try out the 4th Pillar Risk Free.
It occurred to me this morning that there’s at least a 99% chance that you and I have never met.
We’ve had some absolutely spectacular events all over the world where we’ve been joined by giants like Ron Paul, Jim Rogers, Robert Kiyosaki, Marc Faber, and many more.
But even better, these events have given me the opportunity to meet thousands of our readers.
Sovereign Man readers are some of the most interesting people in the world. People who truly care about freedom, peace, and prosperity.
But given the hundreds of thousands of people who have signed up for this daily letter over the years, I realize that I haven’t had the chance to get to know the vast majority of our readers.
So this morning I decided to record a short video from our offices in Santiago to give you a better idea about who we are and our fundamental ethos.
More importantly, I wanted to leave you with something valuable. So at the end of this video I discuss three very simple tactics that absolutely anyone can implement to dramatically reduce the risks that we face from out of control governments and an insolvent financial system.
Check it out:
After a mind-numbing, year-long process, one of the longest business deals I’ve ever been involved with in my entire life finally closed a few days ago.
I couldn’t be more excited.
Through Sovereign Man’s parent company, we purchased a wonderful, Australia-based business that’s been around for over 20 years and is a pretty iconic brand in the country.
Plus, it’s had a long history of profitability and zero debt, so it’s a safe, stable source of cashflow.
And given the price we negotiated, we’ve picked this business up at an extraordinary discount.
Just looking at the net assets of the business—its inventories, receivables, tax credits, property, etc., we paid far less than what the company is actually worth.
Moreover, we expect to make all of our money back in about one year.
These are two of my most important investment criteria: how much am I paying relative to what a company is worth (i.e. price relative to its ‘book value’)?
And how much am I paying relative to its annual profits (i.e. price relative to its ‘earnings’)?
The lower those ‘multiples,’ the better; we paid less than 1x book value, and roughly 1x earnings, so I know there’s a big margin of safety, and that we’ll quickly recoup our investment.
It’s difficult to find deals like this, and most of the time they’re only available with private companies.
In public markets where large companies’ stocks trade, these valuation metrics are just insane.
As I wrote yesterday, shares in Netflix sell for an absurd 18x book value, and 328x annual profits!
This is nuts. Clearly the Australian business we just bought is a much better bargain, and it’s why I prefer to buy private businesses rather than popular Wall Street mega-stocks.
I do recognize that it’s much more convenient for most people to buy stocks; you just click a few buttons and you own shares.
This is a lot easier than spending a year of your life and millions of dollars to acquire a private business.
But investors do pay a steep price for the convenience of buying stocks on major exchanges… namely, dramatically overpaying for the investment.
On rare occasions, however, the stock market does provide some ridiculous anomalies.
We talked about some of these yesterday– like when a high quality, well managed company’s stock trades for less than the amount of cash it has in the bank.
As an example, our Chief Investment Strategist recommended a company to our 4th Pillar subscribers last month that had a market cap of $301 million, yet an incredible $523 million cash in the bank.
In other words, the market was giving us $222 million for free. That’s an amazing deal, even better than the business that I bought…
And go figure, the stock price is already up 20% in just a few weeks.
This kind of anomaly does happen from time to time in the stock market, depending on WHERE you look.
The US market is wildly overvalued. But right now we are finding several of these incredible deals in Australia.
And that’s another major benefit, especially for US-dollar investors.
Right now the Australian dollar has been hovering near a multi-year low against the US dollar.
It’s been as high as USD $1.10 per Aussie dollar over the last few years. Today it’s about 76 cents. The long-term average is between 85 and 90 cents.
So not only can you make money when your investment generates profit and increases in value, but you can also benefit when the foreign currency appreciates.
Clearly this is volatile; currencies can go up or down. But you stand a greater chance of gain when you buy a foreign currency well below its long-term historic average…
… and when your own currency is incredibly overvalued.
That’s what’s happening right now, especially between the Australian dollar and the US dollar.
US dollars have been overvalued against most currencies around the world for more than a year.
And since Australia is a major mining country, the Aussie dollar has been hit particularly hard due to the worldwide slowdown in commodities.
This means that US dollar investors can trade their overvalued currency for cheap Australian dollars, and then buy shares of companies that are selling for less than the amount of cash they have in the bank.
So now you can actually make money in at least two different ways– from the company, AND from the currency.
This has been an incredible investment strategy– it’s a great way to generate independent income, and something that anyone can do.
Many of these undervalued companies’ stock prices are as low as $1. So even with a small portfolio, you can accumulate plenty of shares.
Plus, many of the major online brokerages offer international trading, including TD, Schwab, E*Trade, Fidelity, Interactive Brokers, etc.
(If you’re looking for greater international diversification and asset protection, you could open a brokerage account at Hong Kong-based Boom Securities– more on that another time…)
My friend Zac’s sprawling penthouse apartment is over 3,500 square feet.
It boasts five bedrooms, a library, game room, office, two large terraces, and exceptional views of the entire city.
Plus it’s located in the nicest part of town, just a short walk from all the best restaurants and nightlife.
The price he paid? Just over $200,000.
You couldn’t even build a place like that for so cheap… so Zac essentially bought his apartment for less than its cost of construction.
That’s an amazing deal.
Now, the one thing I didn’t mention is that his apartment is in the very lovely city of Medellin, Colombia.
This helps explain the cheap price.
While real estate in the developed world goes for nose-bleed valuations, apartment prices in Medellin are heavily discounted thanks to the decades-old ‘Colombia stigma’.
Yet anyone who actually bothers to spend time in the country can see that the worst is clearly over in Colombia, so the cheap prices for real estate just don’t make any sense.
Now, I’m not trying to encourage anyone to buy real estate in Colombia.
The larger theme is that making great investments demands ignoring the popular narrative and thinking both independently and unconventionally.
As we’ve been discussing lately in this letter, this is becoming more and more critical.
Last week I told you how pension funds in most western nations have appalling multi-trillion dollar funding gaps, and are thus unable to meet their obligations to future retirees.
That, of course, is in addition to the US government’s $40+ trillion Social Security shortfall.
You’re basically on your own for retirement.
And yet, as I wrote yesterday, people today have to save three times as much for retirement as their parents did thanks to zero (or negative) interest rates.
That’s pretty much impossible for most people.
Bills, family, education, medical care, taxes, insurance… most people have way too much month at the end of the money to save at all, let alone three times as much savings to stash away.
Plus, for those who can/do save, the conventional options just aren’t producing the results they used to.
The old advice of ‘buy an S&P index fund and hold it for decades’ probably doesn’t make sense anymore.
US stocks, for example, are now in the second longest bull market in modern history.
In other words, it’s extremely rare for US stocks to have risen so far for so many years, and it seems foolish to bet that this rise will continue forever.
Just like seasons of the year, financial markets tend to move in cycles– bull vs. bear, boom vs. bust. It’s been a very loooong summer for US stocks. And winter is coming.
This is a terrible conundrum.
If pension funds aren’t able to meet their financial obligations to future retirees, and conventional investments are unable to produce strong results, how is anyone supposed to adequately save for retirement?
Again, this demands independent and unconventional thinking.
My goal this week is to introduce you to some different ideas that may help.
As an example, look again at Zac’s apartment: he bought a high quality real estate asset for less than its cost of construction.
Understandably, this is not a great fit for most people.
Being an absentee property owner in a country where you’ve never been and don’t speak the language is risky.
But consider the concept for a moment: buying a high quality asset for less than its cost.
Our team has been having a lot of success over the last few years applying this concept to financial markets.
Instead of buying an apartment for less than its cost of construction, we focus on buying shares of profitable companies that are selling for less than the amount of CASH they have in the bank.
That’s not a typo.
Most stocks these days trade at absurd valuations. Netflix is a Wall Street darling. But its stock trades for an astounding 18x book value, and 328x earnings.
However there are corners of the market, particularly with smaller, lesser known companies, where shares sell for well-below book value, and even less than cash.
You can check this for yourself by looking at a company’s balance sheet (all public companies’ balance sheets are available online).
You’ll see the line item “cash and cash equivalents” in the asset column. That’s the amount they have in the bank.
Then subtract any long-term debt they might have indicated in the liabilities column.
Then compare that number to the company’s market capitalization, i.e. the total number of shares (which is also listed in the balance sheet) multiplied by the current share price.
If a company’s market capitalization is less than the amount of cash they have in the bank, you are essentially buying cash at a discount. That’s a no-brainer.
If someone offered you a dollar, would you buy it for 80 cents? Yes please! As many times as possible.
It’s hard to lose money when you’re buying a dollar for 80 cents. And our team has been averaging returns in excess of 50% with this strategy, without having to take on substantial risk.
It seems odd that opportunities like this even exist. I mean, why would a company sell for less than its bank balance?
Clearly, that’s nuts.
Then again, it’s also nuts that the US government is able to rack up a debt level of $19,198,172,774,532.79.
Or that the Japanese government spends 41% of its tax revenue just to service its debt.
Or that banks can hold as little as 1% of your deposits in reserve.
Or that interest rates in many parts of the world are NEGATIVE.
There’s so much in our financial system that’s completely insane. At least you can make money from part of it.
Bear in mind, these deals are rare– but they do exist. We’re finding several of these right now in Australia… and that leads me to another unconventional investment idea.
More on that tomorrow.