Government’s already-dismal budget forecast just got 106% worse

Yesterday the Office of Management and Budget released a new report called the “Mid-Session Review” of the US federal budget.

It’s something they’re required by law to do– periodically review and update the government’s budget and track the changes.

The last government budget update was released in February. And according to the February budget, the government’s deficit for this fiscal year was going to be a whopping $873 billion.

Now they’re projecting to close this fiscal year (which ends on September 30th) with a deficit of $890 billion… which means they’re over-budget by just under 2%.

2% is actually pretty good. But here’s the problem: when they first unveiled the FY2018 budget in March of last year, they projected the annual deficit to be ‘only’ $440 billion.

So between their initial projections in March 2017, and their current projections in July 2018, this year’s budget deficit increased by more than 100%.

And that’s pretty pitiful.

But it gets worse.

Last March, they projected a total budget deficit of $526 billion for Fiscal Year 2019.

But according to the revised projections they published yesterday, the budget deficit for Fiscal Year 2019 will now be $1.085 TRILLION… 106% worse than projected.

And, whereas last year the government was forecasting DECLINING deficits in Fiscal Years 2020, 2021, etc., until miraculously reaching a positive budget SURPLUS of +16 billion in 2026, their updated projections now show TRILLION DOLLAR DEFICITS next year. And the year after that. And the year after that. Etc.

Bear in mind that even though this revised budget is a colossal train wreck, the projections still don’t factor in the possibility of a recession. War. Major emergency. Natural disaster. Financial crisis.

These forecasts assume that all big picture and macroeconomic trends are going to be fantastic for the next decade.

We’ve lately been talking about the concept of assets being ‘priced to perfection’.

‘Priced to perfection’ is a financial term meaning that assets are valued as if business conditions will be perfect forever.

Investors simply assume that the business plan will be successfully achieved without any difficulty, that sales will be strong, consumers will be happy, the economy will remain robust, etc.

And as a result of these pie-in-the-sky assumptions, investors pay record high prices for assets.

Well, these budget projections are priced for perfection.

They don’t take into account the possibility of any number of major risks that are looming, not to mention the enormous capital investments that are necessary in the United States.

US infrastructure, for example, is in desperate need of serious multi-trillion dollar maintenance.

Then there’s that pesky issue of Social Security, which presently has a funding gap of tens of trillions of dollars, according to the government’s own financial statements.

If you factor in even a fraction of these costs, the budget numbers… which are already gruesome… fall off a cliff.

The government has no Plan B. In fact, their Plan A, literally, is to have trillion+ dollar deficits and expect that there won’t be any consequences.

This is ludicrous.

There has never been a major superpower in the history of the world, from Ancient Rome to the French monarchy of Louis XIV, that has been able to run wild budget deficits without paying a serious toll… or passing those costs on to the people.

Sooner or later these bills have to be paid, whether that means higher taxes, dramatically reduced benefits, serious inflation, a loss of confidence in the currency, etc.

There are hundreds of ways this could play out, and it’s impossible to predict precisely how or when.

We only know for certain that there WILL be an impact.

It will likely take several years. But expecting to be able to run trillion dollar deficits and an insolvent pension fund without any consequences forever and ever until the end of time is totally absurd.

This is why, even though the government doesn’t have one, it makes all the sense in the world for -you- to have a Plan B.


from Sovereign Man

Billionaire Druckenmiller: “Can we try capitalism? Real capitalism. Give it a chance”

Over the weekend I came across a recent speech given by hedge fund billionaire Stanley Druckenmiller that really lays out the pitiful state of free markets around the world.

Druckenmiller gave the speech a few months ago upon receiving the 2018 Alexander Hamilton award– which is given to a figure that best carries out the spirit of one of America’s Founding Fathers.

The Alexander Hamilton Institute promotes free markets, free trade and limited government.

And Druckenmiller’s speech below is an excellent discussion of where our economy stands today and how government intervention is grossly distorting the economy– not just in the US, but around the world.

I couldn’t agree more with his sentiment. I’ve edited the piece for length, so this is just a series of excerpts. But there’s a link to the full speech at the bottom:


Can we try capitalism? Real capitalism. Give it a chance.

Not the increasingly bastardized version we have been practicing the last two decades.

And then let’s just see whether a capitalist economic system is the most effective way to bring about broad-based prosperity and the flourishing of human dignity.

For eight years I watched the Obama administration disparage the efficacy and fairness of capitalism.

The influence of government increased in every aspect of our lives.
The cost of regulation doubled. Corporate America was attacked in the name of social equality.

And our healthcare system, hard to believe, was made even more inefficient.

Now, I did not support Donald Trump. But, after he was elected, I was at least hopeful that it would represent an inflection point in the trend away from capitalism.

But . . . we missed the golden opportunity to offset some revenue loss and address generational equity when Congress passed tax reform.

Instead, government debt, which has doubled over the last decade, is set to increase to levels only reached during World War II over the next decade.

So we will have sacrificed our future during a relatively peaceful economic period . . . simply because politicians can’t say no.

Finally, let me address a distortion that is one of the greatest threats to a properly functioning capitalist system.

For years now a mix of financial repression and central bank intervention has made long-term interest rates largely determined by government fiat.

Bond-buying by central bankers, commonly referred to as Quantitative Easing (QE), has become so ingrained in current thinking that it is now in the Fed’s conventional toolkit– a tool once reserved for a depression or financial crisis is now to be used at the first inkling of the next recession.

For those of us old enough to have seen the dangers of price controls, they led to shortages, wasted resources, and disincentives to invest in what consumers want.

They inevitably led to an allocation of resources by political actors in another great afront to capitalism.

So, it is most surprising that forty years after wage and price controls were sadly rejected by every economic textbook and policymakers, today we have settled to allowing the most important price of all, long-term interest rates, to be regularly distorted by [the central bank.]

The excuse of this radical monetary policy has been the obsession with a fixed 2.0% inflation targeting rule.

The decimal point shows the absurdity of the exercise: anything below 2.0% was a failure and risked deflation– the boogeyman of the 1930s– to be avoided at all costs.

This has meant that years after the Great Recession ended the Fed has not only kept interest rates below inflation but have accumulated an unprecedented $4.5 trillion on their balance sheet by doing QE.

Global central banks, in part to keep their currencies from appreciating of these overabundant dollars, have followed with $10 trillion of their own.

Now, the irony of this is over the last 700 years inflation has averaged barely over 1% and interest rates have averaged just under 6%. So, we are seeing an unprecedented, ultra-monetary, radical monetary expansion during a time of average, average inflation over the last number of centuries.

Moreover, the three most pernicious deflationary periods of the past century did not start because inflation was too close to zero. They were preceded by asset bubbles.

If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years. I shudder to think that the malinvestment that occurred over this period.

Corporate debt has soared, but most of it has been used for financial engineering. Bankruptcies have been minimal in the most disruptive economy since the Industrial Revolution.

Who knows how many corporate zombies are out there because free money is keeping them alive?

Individuals have plowed ever-increasing amounts of money into assets at ever-increasing prices, and it is not only the private sector that is getting the wrong message, but Congress as well.

Of all the interventions by the not-so-invisible hand, not allowing the market to set the hurdle rate for investment is the one I see with the highest costs.

Competition is a better tool than price control for protecting consumers. That applies to Amazon AND the bond market.

[Editor’s note: you can read the full speech here:]


from Sovereign Man

Netflix lost $17.8 million for each of its 112 Emmy nominations

It was only a few day ago that Netflix was riding high.

The streaming company had been nominated for a whopping 112 Emmy awards, more than any other network.

And they’d further managed to unseat HBO’s 17-year reign as the undisputed king of Emmy nominations.

That’s all fine and good. Netflix certainly has some great shows.

But reality started to set in yesterday afternoon when the company reported its quarterly financial results… and the numbers were definitely two thumbs down.

For some painfully idiotic reason, analysts seem to judge Netflix by a single benchmark: the number of subscribers.

If subscriber growth is strong, Netflix stock soars.

I say this is ‘painfully idiotic’ because Netflix loses money year after year. The more subscribers they bring in, the more money they lose.

At the end of 2015, for example, Netflix had 75 million subscribers. But its Free Cash Flow was NEGATIVE $920 million.

The following year, Netflix had grown its subscriber base to 93 million. Yet its Free Cash Flow had sunk even further to negative $1.65 billion.

By the end of 2017, Netflix subscribers totaled 117 million. But the company burned through $2.02 billion.

So when you do the math, you see that each Emmy nomination this year cost Netflix $17.8 million.

That’s a lot worst than last year, when Netflix’s 92 nominations at the 2017 awards cost them $16.0 million.

Clearly the more ‘successful’ Netflix becomes, whether in the quality of its content, or in attracting subscribers, the more money they lose.

Yet the stock surges ever higher. It’s truly bizarre.

Well, it all came crashing down yesterday when Netflix announced growth figures that no longer defied gravity.

Total subscribers came in at below the level that analysts had forecast… and the selling began almost immediately.

In after-hours trading, the stock plummeted by more than $50, around 12%.

Now, maybe the stock rebounds today. Or maybe it falls even more. Day to day fluctuations are impossible to predict.

What we do know for certain is that businesses exist to make money for their shareholders. That’s sort of the point.

And, sure, some business models do require losing money for a few years and burning through cash before achieving positive Free Cash Flow.

But Netflix doesn’t appear to have any plans to make money in the foreseeable future.

Instead, they’re going deeper into debt to spend more money on content.

By Netflix’s own estimates, the company expects to burn $4 billion of cash this year.

Bear in mind the company also has to compete with the likes of Disney, CBS, AT&T, Apple, Amazon, etc., all of which have their own streaming services and typically have much deeper pockets.

Facebook just launched a new video feature called IGTV on Instagram to compete with YouTube, and they’re spending $1 billion on original content this year. That’s peanuts for Facebook.

Facebook also bought a company called SportsStream in 2013 which allows it to stream live sports; they’ve also negotiated contracts with Major League Baseball, Union of European Football Associations (UEFA), and others.

Amazon is also streaming live sports… and even video games. Plus Amazon is rolling out its own highly acclaimed original content.

Even Google is now in the original content business, having launched Youtube Red recently (and it’s most excellent Cobra Kai series.)

Then there’s HBO, which also cranks out fantastic original content… but also manages to make plenty of money for its parent company.

It’s not to say that Netflix can’t pull it off, or that the company is going under.

But it seems silly for a company that has such stiff competition, such major headwinds, such a serious cash burn, to be valued at such a ridiculously high price.

Sure, there is a chance that Netflix is able to best Google, Amazon, Apple, Facebook, CBS, AT&T, Disney, etc., and manage to (at some point in the future) generate huge Free Cash Flow for its shareholders.


But the stock is priced as if they’ve already succeeded as if it’s ten years later and Netflix has beaten the pants off its competitors.

One of the most important lessons I learned about investing long ago is that you only pay what something is worth RIGHT NOW.

(As a value investor, in fact, I prefer to pay far LESS than what an asset is worth right now.)

You don’t pay what an investment -could- be worth in the future after a ton of work, time, and a little bit of luck.

Years ago I used to invest heavily in real estate, and I can remember people trying to sell me a building by bragging about how much it could be worth once I’ve replaced the roof and cleaned out all the deadbeat tenants.

Yep, the building could definitely be worth a lot more.

But I wasn’t about to write a check for what it -could- be worth. I was only willing to pay what it was worth at that time… which was a hell of a lot less.

We call this phenomenon being ‘priced for perfection’ when an asset is selling as if the business plan has already been accomplished.

It’s a great way to lose money.

When a company is priced for perfection, it only takes one tiny pin to pop that bubble.

That’s what happened yesterday with Netflix: they missed their subscriber numbers, and $16 billion of wealth was wiped out in a matter of minutes.

If anything, it’s a good indication for how quickly an asset that’s priced for perfection can crash.

And there are a lot of those out there.


from Sovereign Man

IRS to revoke 362,000 passports from US citizens

About two and a half years ago, I told you about a particularly nasty piece of legislation that President Obama quietly signed into law towards the end of his administration.

They called it the “FAST Act”, which stood for Fixing America’s Surface Transportation.

Yet despite $300 billion earmarked for infrastructure repairs, they didn’t manage to fix very much of America’s surface transportation.

The legislation did, however, have two major effects:

1) The FAST Act authorized the US government to plunder excess capital from the Federal Reserve… which is about as stupid as thing as anyone could possibly do.

The Federal Reserve is America’s central bank; they control the value and fate of the US dollar… which is still the most dominant currency in the world.

You’d think that having some excess cash on the Federal Reserve’s balance sheet would be viewed as wise and conservative.

But not Congress.

These guys are so broke, they’ll grab every penny they can get. Even from their own central bank.

So they buried a provision into the FAST Act demanding that the Federal Reserve hand over any excess capital to the Treasury Department at the end of every calendar year.

They started doing that almost immediately, in December 2015. And in 2016. And in 2017.

This is one of the reasons why, to this day, the Federal Reserve is borderline insolvent… which hardly inspires confidence.

Now, I could go on for quite some time about what an idiotic idea this was.

But believe it or not, there was an even worse section of the FAST Act– one they only started implementing recently:

2) Section 32101 of the FAST Act required the US State Department to revoke or deny the passport of any taxpayer that the IRS deems to have “seriously delinquent tax debt.”

They define seriously delinquent tax debt as owing $50,000 or more.

Well, it took them a couple of years, but the IRS has finally started enforcing this law.

Earlier this month the IRS acknowledged that they had sent at least 362,000 names to the State Department to start revoking or denying passports.

And that’s just the beginning.

The IRS is sending these names out ‘in batches’, so there will be many more to follow. They hope to be finished by the end of the year.

Now, there are so many things wrong with this.

For starters, it’s pretty clear there’s no due process here. It’s purely an administrative matter. Which means there’s limited oversight.

Your name could accidentally end up on some list because the IRS couldn’t keep its own records straight. Or there was a problem with the data integrity. Or someone simply mismatched one John Smith for another.

The IRS literally has billions of records being managed by antiquated technology that’s prone to data breaches.

The idea that they could come up with a list of hundreds of thousands of people without making a single mistake is just farcical.

But, again, there are few real checks and balances. You end up on a list… at which point you’re arguing with an entirely different agency about why your passport has been revoked. It’s a bureaucratic nightmare.

The larger point, though, is what this really means about citizenship.

Think about it– a passport is the most common document to evidence an individual’s citizenship.

And… poof… they can take it away from you with the click of a button.

To me, if they can take something away so easily, then it wasn’t really yours to begin with.

It’s like property.

If you own your home… think again. Even if you have your mortgage fully paid off, you still have to pay property tax.

This means that it’s ultimately the government who really owns your property. You’re just renting it from them.

And if they believe (in their sole discretion) that you owe them property tax, they’ll take the property away from you.

Likewise, the enforcement of the FAST Act shows that you’re not even really a citizen. You’re just renting your citizenship from the government.

And if they believe (in their sole discretion) that you owe them income tax, they’ll take it away from you.


from Sovereign Man

It’s been another tough week for Tesla…

It’s been a tough week for Tesla.

Bloomberg Businessweek reported Tesla factory workers were given Red Bull to stay awake to meet aggressive Model 3 production goals (and told to walk through a raw sewage spill to keep the line moving).

Also, because Tesla has delivered 200,000 cars to US buyers, customer tax credits are getting chopped in half from $7,500 per vehicle to $3,750.

(This means that customers who buy electric vehicles from Mercedes-Benz or BMW will receive the full tax credit, making those rivals more attractive.)

Not to mention, Tesla already has to contend with a $50,000 electric BMW i3 that has been leased for as little as $54/month.

At such a trivial price point, that’s pretty tough competition.

But the biggest blow for Tesla came from an ex-employee, now Securities and Exchange Commission whistleblower, Martin Tripp.

Tripp was fired by Tesla last month after allegedly hacking into the company’s computers, leaking false info to the media and stealing secrets (all of which Tripp denies).

Musk accused Tripp of “damaging sabotage” in an internal memo. He then engaged Tripp in an email spat that went public, telling him “you have what’s coming to you” and calling him “a horrible human being.”

On July 11, Tripp fired back by formally filing a tip with the SEC alleging Tesla lied to investors and used damaged batteries in its cars (which, come to think of it, do have a tendency to spontaneously combust.)

Tripp’s alleges Tesla:

– Knowingly placed battered with dangerous puncture holes in cars and tracked them through the end of the assembly line process

– Overstated the number of Model 3s being produced each week by as much as 44% (Tripp went so far as to say Tesla even inflates the numbers on the production counter on the factory floor)

– Lowered safety standards, including placing battery cells too close to each other, which risks future combustion

– Reused parts that were deemed scrap/waste in vehicles

Clearly, Tripp’s accusations might be completely bogus. But he’s not the first to allege that Tesla has misled investors either.

After all, Tesla has been under federal investigation in a year-long government probe before… which is a pretty big deal.

And they didn’t bother letting investors know.

So if Tripp’s allegations are true, Musk would be caught red-handed lying to investors about production numbers (which has a direct impact on the stock price) and disregarding safety issues to save a buck (which can kill people).

It’s convenient this is all coming out after Musk’s pay package, worth as much as $50 BILLION, was approved by shareholders… the largest CEO pay package in the history of the world.

Despite these potentially crippling allegations, Tesla’s stock price barely moved yesterday. Clearly the market doesn’t care.

And Musk continues his PR mission, offering to help the trapped Thai soccer team and, most recently, offering to help Flint, Michigan residents with contaminated water, tweeting:

Please consider this a commitment that I will fund fixing the water in any house in Flint that has water contamination above FDA levels. No kidding.

Listen, I’m not knocking the guy for trying to do some good. And in truth, I like a lot of what Elon Musk has done.

But if my shareholders just granted me a pay package worth $50 billion, you can bet I’d be laser-focused on creating value for them…

Or, at least generating some profits.

Don’t forget, Tesla has racked up $5 billion in operating losses under Musk.

And the company is likely going to need to raise somewhere between $5-$10 billion in the next couple of years to stay afloat.

We know it won’t actually make money by ramping up its production (for which its employees are having to pull all-nighters and walk through sewage) because the company actually loses money on each car it sells.

Remember the investor letter from hedge fund Vilas Capital Management, which is short Tesla and in April said “Tesla is going to crash in the next 3-6 months.”

From Vilas’ April note:

Given that the company lost $20,000 per [vehicle] last year, due to the fact that it cost more to build, sell, service, charge and maintain these cars than they collected in revenue. . . we predict it will impossible for Tesla to make a profit on a $35,000 to $50,000 car.

So despite:

– a potentially lethal allegations filed with the SEC claiming that Tesla is lying to shareholders and knowingly putting its customers in danger

– employees complaining of horrible working conditions

– burning through billions of dollars of shareholder capital

– and a CEO who won a $50 billion pay package seemingly more worried about his public image than actually making money for investors…

. . . Tesla’s stock is still not falling!

This is a pretty clear sign of investor euphoria.

As Warren Buffett says, when people get greedy, it’s time to be fearful. Not only is the action in Tesla a sign of greed, it’s also a sign of complete ignorance of reality.


from Sovereign Man

How to retire in style even with Social Security going broke

We’ve spent a lot of time in our regular conversations talking about the looming retirement crisis around the world.

The data is horrific. Pension and Social Security programs in nearly every developed nation are woefully undefunded.

In the United States, senior government officials including the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and Human Services, have stated unequivocally that Social Security’s trust funds will run out of money in 2034.

More importantly, there simply aren’t enough workers in the work force to sustain the program over the long-term.

It’s something known as the ‘worker-to-retiree ratio’; essentially, Social Security requires a certain number of workers paying into the system for every retiree receiving benefits.

In 1960, for example, the ratio in the US was 5.1 workers paying into the system for each retiree receiving benefits.

By 2000, the ratio had fallen to just 3.4 workers per retiree. And today Social Security estimates it’s just 2.6 workers per retiree.

Do the math– it just doesn’t add up.

Social Security tax in the US amounts to 12.4% of a worker’s salary. So when the financial burden of a single retiree’s benefits is paid by just 2.6 workers, the resulting tax revenue won’t be sufficient to pay benefits unless:

1) Taxes on those workers are dramatically increased, and/or

2) Benefits for retirees are slashed.

It will probably be a combination of the two.

Bottom line, the people who run this program are telling the entire world that Social Security will soon run out of money; and they’re publishing alarming statistics about the steep decline in the worker-to-retiree ratio.

This isn’t some wild conspiracy theory. These are facts coming from the government itself.

And given that most people probably hope to retire at some point in their lives, this REALLY matters.

It would be utterly foolish, in light of such objective information, to simply assume that the problem will resolve itself and Social Security will be just fine.

Are you really willing to bet your future livelihood that a bunch of short-sighted Congressmen are suddenly going to do what’s necessary for their constituents?

This problem is fixable. But it means taking matters into your own hands: You can’t fix Social Security. But you can ensure that your own retirement is funded.

Step 1– Start puting more money away for retirement.

This is even more important if you’re younger; anyone under the age of 40 ought to exclude Social Security altogether in his/her retirement calculus.

Now- here’s the good news: it’s easier than ever to generate extra income on the side.

I’m not suggesting you rush out and start driving for Uber tomorrow morning (though that is a perfectly legitimate way to earn some extra money).

But it’s worth exploring the litereally hundreds of options, ranging from real estate services like AirBnb, HomeAway, and FlipKey, to gigs like Upwork and Elance, to e-commerce marketplaces like Amazon or eBay.

Amazon is actually a great example.

By investing a few weeks in your education, it’s possible to learn how to set up and manage a largely automated e-commerce store on Amazon.

It doesn’t need to earn millions of dollars. In fact, it’s better if the business is NOT super successful; you only really need to earn around $1,000 per month in order to reach your contribution limit to a specific retirement plan that I’ll tell you about in a minute.

And it’s entirely feasible to have a small store earning $500 to $1,000 per month without requiring a whole lot of ongoing time or work on your part.

(If Amazon’s not your thing, there are plenty of other ways to earn that kind of money in the Digital Age / Gig Economy.)

$1,000 per month might seem trivial. But it can really go a LONG way in securing your retirement.

That brings me to step 2: Set up a better retirement structure.

It’s one thing to set aside more money for retirement. It’s entirely another to do so in a special, tax-advantaged vehicle.

For example, US Tax Code provides for a structure called a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account.

A SIMPLE IRA allows people with self-employment income (like running an Amazon business, or driving for Lyft) to put ALL of their net earnings, up to potentially $15,500 per year, in a tax-deferred retirement account.

Like all retirement plans, SIMPLE IRAs have certain rules and restrictions to qualify. For example, you must have earned at least $5,000 per year for at least two years in order to be eligible.

But if you have a long-term view, that’s a fairly low hurdle.

There are other alternatives like a SEP IRA and solo 401(k), which have different contribution criteria and qualification eligibility.

But the basic idea is to generate self-employment income through a gig or automated business, and dump as much of that income as possible into a robust retirement structure where the investment gains can grow on a tax-deferred basis.

And that brings me to Step 3: Become a better investor.

The math here is very simple. If you save $10,000 per year for your retirement, for 25 years, and achieve an average annual investment return of 10%, you’ll have $983,471 when you retire.

But if you’re able to boost your average annual investment return by just 1%… because you make smarter decisions and avoid major mistakes, you’ll have $1,144,133 when you retire.

It’s a difference of more than $160,000. Not exactly inconsequential.

Yet it’s completely achievable.

If you’re looking for a place to get started, I’d strongly recommend Benjamin Graham’s classic book The Intelligent Investor, and Seth Klarman’s Margin of Safety.


from Sovereign Man

Another billionaire says we’re running out of gold

A few months ago I sent you a note explaining that major gold discoveries are shrinking.

Simply put, mining companies are no longer finding vast, new deposits of gold to replace their aging mines.

I quoted Pierre Lassonde, the billionaire founder of gold royalty giant Franco-Nevada and former head of Newmont Mining:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million-ounce gold deposit, at least ten 30+ million-ounce deposits, and countless 5 to 10 million ounce deposits.

But if you look at the last 15 years, we found no 50-million-ounce deposit, no 30-million-ounce deposit and only very few 15 million ounce deposits.

Pierre Lassonde is one of the most well-respected and knowledgeable mining experts in the world. And he thinks we’re reaching ‘peak gold’.

But he’s not alone.

Last month, Rudy Fronk, Chairman and CEO of Seabridge Gold noted:

Peak gold is the new reality in the gold business with reserves now being mined much faster than they are being replaced.

Nick Holland, CEO of South Africa’s largest gold producer Gold Fields: “We were all talking about how production was going to increase every year. I think those days are probably gone.

Kevin Dushnisky, President of mining giant Barrick Gold: “Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium and long-term gold price outlook.

But the biggest warning comes from resource legend Ian Telfer, chairman of Goldcorp. In an interview with Financial Post, Telfer said:

“If I could give one sentence about the gold mining business … it’s that in my life, gold produced from mines has gone up pretty steadily for 40 years. Well, either this year it starts to go down, or next year it starts to go down, or it’s already going down… We’re right at peak gold here.

It’s hard to pinpoint a top or a bottom. But there is an interesting opportunity here since gold has fallen in price over the last several weeks thanks to an inexplicable surge in the US dollar.

The long-term fundamentals seem pretty obvious– the people responsible for supplying the world with gold are saying the world is running out of gold and that supply is declining at an alarming rate.

With a commodity like oil, technology tends to solve the problem of declining supply through more efficient production methods.

When ‘peak oil’ started becoming a problem 10 years ago, the industry developed new fracking and horizontal drilling technologies. And other industries like solar and wind began developing better substitutes for oil.

But there’s not really a substitute for gold. And the biggest players in the space are saying we’re running out.

You can read the original article from April here.


from Sovereign Man

Every $1 in debt generates just 44 cents of economic output

Exactly ten years ago, in the middle of the summer of 2008, the world was only two months away from the most severe financial crisis since the Great Depression.

At the time, the size of the US economy as measured by Gross Domestic product was around $14.8 trillion– by far the largest in the world.

And the US national debt back then was about 64% of GDP– roughly $9.5 trillion.

Fast forward a decade and take a snapshot of the same numbers: US GDP has grown nearly 35% to $19.9 trillion.

But the national debt has soared 122% to over $21 trillion.

The debt-to-GDP ratio in the United States is now 106%, meaning that the national debt is larger than the size of the entire US economy. Yet the debt keeps growing. Rapidly.

Now, debt isn’t really the problem here. The problem is the way that it’s been used.

Debt (affectionately referred to as ‘other people’s money’) can actually be a great way to enhance investment returns when used wisely and judiciously.

Private equity fund managers use debt to acquire businesses through what’s known as a ‘leveraged buy-out’, where they’ll put up a portion of the cash they need, and borrow the rest.

I did this a couple of years ago, for example, when I purchased an Australian-based business for $6 million.

A local bank offered to finance most of the acquisition with a $4.5 million loan at around 5.75%.

That meant I only needed to write a $1.5 million check for a business that was earning nearly $2 million annually.

It was a no-brainer, because I knew there would be more than enough money to make the loan payment (less than $500k annually) and still generate a substantial return on investment.

Real estate investors do the same when they purchase property.

If you have, say, $1 million, you could pay cash for a single property that costs $1 million… or you could use that money as a down payment and buy a $5 to $10 million property.

If the investment is a good one, the cash flow will more than cover the loan payments, and you’ll end up making a lot more money.

Intelligent governments (hopefully not an oxymoron) will do the same thing, borrowing money to finance infrastructure projects that generate more growth and tax revenue.

Several years ago in Panama, for example, the government borrowed billions of dollars to finance the expansion of the Panama Canal.

That’s a lot of debt to take on for such a small country. But they knew that expanding the canal would dramatically increase the revenue that it generates.

The canal was originally opened in 1914 back when cargo ships were much, much smaller.

But by the early 21st century, the US Army Corps of Engineers (which built the Panama Canal in the early 1900s) estimated that the number of cargo ships which could no longer fit in the canal’s locks accounted for 45% of global trade and shipments.

So increasing the size of the canal to accommodate those larger ships (and hence generate more revenue from the increased tolls) was a great investment… and one where debt made a lot of sense.

So Panama borrowed about $3 billion to finance the canal expansion in 2008; at the time the country’s GDP was about $23 billion.

A decade later, the Canal expansion is complete, and Panama’s economy has nearly tripled to $62 billion.

It was clearly a good investment: they borrowed $3 billion in debt and got WAY more than $3 billion in additional economic output.

Now let’s go back to the US.

In the same period, from 2008 through 2018, the US government borrowed an additional $11.6 trillion on top of the existing debt they had already borrowed.

So you’d think that there would have been AT LEAST $11.6 trillion in additional economic output, right?

But that’s not what happened in the Land of the Free.

Uncle Sam borrowed $11.6 trillion between 2008 and 2018. But the US economy only grew by $5.1 trillion.

So every $1 the government borrowed resulted in just 44 cents of economic output.

Again, you’d think that every $1 borrowed would have generated at least $1 in economic output.

After all, if you borrow $10 million to acquire real estate, you’d think you’d AT LEAST have an asset worth $10 million. And if it’s a good investment, hopefully more than that.

The US government used to make good investments.

In 1803, the administration of Thomas Jefferson acquired 2.1 million square kilometers of land from the French in what became known as the Louisiana Purchase.

Jefferson’s people negotiated a hell of a deal, paying the equivalent of about $300 million– just 40 cents per acre in today’s money. And yes, they used debt to finance the purchase.

Later administrations bought Florida from the Spanish, Alaska from the Russians, the Virgin Islands from Denmark, etc. These were all phenomenal deals.

Even as late as the 1950s, the bulk of the US federal budget was productivity-related investments like infrastructure. Mandatory entitlements comprised just 29% of the budget.

(Bear in mind, back then they still had plenty of entitlement programs including Social Security, the GI Bill, etc.)

By the early 21st century there were hardly any productivity-related investments remaining.

Mandatory entitlements alone account for more than 60% of the US federal budget.

And Uncle Sam managed to blow $2 billion on a website– literally six times more than the entire Louisiana Purchase cost in inflation-adjusted dollars.

With decisions like that, it’s easy to understand how $11.6 trillion in debt would only result in $5.1 trillion in economic output.

And that’s the real killer.

It’s not the debt itself. It’s the painfully wasteful decisions of what they choose to do with it.


from Sovereign Man

The state of New Jersey just signed its own death warrant

You would think New Jersey would have learned its lesson…

Two years ago, New Jersey’s richest resident – hedge fund billionaire David Tepper – decided to move himself and his business to Miami Beach.

Tepper, who personally earned more than $6 billion from 2012-2015, was tired of paying New Jersey’s top income-tax rate of 8.97% for the 20 years he lived there, in addition to the country’s highest property taxes, the estate tax and inheritance tax.

By moving to Florida, a state with ZERO income tax, Tepper stood to save hundreds of millions of dollars each year. And, as an added bonus, he’d be living in the Sunshine State.

Anyone with some common sense would have at least acknowledged the possibility that a guy like Tepper would consider moving to save a few hundred million bucks.

But New Jersey, content on milking its ultra-wealthy for tax revenue, was caught completely by surprise.

And Tepper’s departure left an enormous hole in its budget.

Think about that: the departure of literally ONE person caused big problems for New Jersey’s budget.

And Tepper wasn’t the only one leaving…

According to the New Jersey Business and Industry Association, the State of New Jersey lost a whopping 2 million residents between 2005 and 2014, earning a combined $18 billion in net adjusted gross income, i.e. income that would have been taxed by the state.

So it’s not just the masters of the universe that are tired of paying sky-high taxes. It’s also the regular wage earner and small business owner.

60% of these folks went to Florida, with a state income tax of zero.

So the message from New Jersey’s residents (well, now former residents) is pretty clear: taxes are too high.

Now, what do you think New Jersey is doing to solve this problem?

Instead of making the state friendlier to productive people and businesses, New Jersey decided to RAISE taxes on the sad saps that remain within its borders (for now).

New Jersey tax residents making more than $5 million will now pay 10.75%, up from 8.97%.

And the corporate rate on businesses with more than $1 million in net income increased from 9% to 11.5%.

(Proportionally, that’s a potentially 27% increase in the amount of tax a business might pay.)

The tax hike will give Jersey the fourth-highest marginal income tax rate on individuals and the second highest corporate rate after Iowa.

It’s the exact opposite of what New Jersey should have done.

Sadly, New Jersey is not alone in chasing away its citizens.

In the 12 months ended July 1, 2017, the State of New York lost a net 190,508 residents (bringing the total loss to 1 million people since 2010 – the largest of any state).

And people are likewise fleeing the People’s Republic of California– and its top marginal tax rate of 13.3%– in droves.

Lots of them are landing in Texas (another state with no income tax)… an average 60,000 Californians left for Texas every year from 2011 to 2015.

Any government trying to keep their productive, high-earning residents from leaving by raising taxes is absolutely foolish.

Paying zero state income tax is more attractive than paying any state income tax, much less an even higher state income tax like in New Jersey. Duh.

On the other hand, you have Puerto Rico…

In order to attract more productive residents, Puerto Rico enacted a number of incentives including Act 20 and Act 22, which allow eligible business to pay a 4% corporate tax rate and individuals to pay ZERO taxes on capital gains and dividends, respectively.

We recently hosted our Total Access members (our highest level of membership) at an event in San Juan. The Secretary of State, the Secretary of Economic Development and Commerce and several other top government officials spent the day with us.

You can read more about the event, and Puerto Rico’s incredible incentives, here.

(Puerto Rico’s incentives are enormous, so I strongly encourage you to consider the option. To give you an example, I will easily save more than $10 million in tax due to these incentives. And it’s all 100% legal.)

No surprise, these generous tax incentives are working.

The Secretary of Economic Development and Commerce told us tax incentive applications are up more than 100% year over year. And it’s just getting started.

Unfortunately, Puerto Rico’s stance is unusual.

The normal route, as we saw with New Jersey, is to keep squeezing until they’ve chased out all the taxpayers. Governments have done this for thousands of years, even before the Roman Empire.

But New Jersey will soon learn that its residents aren’t tied to the land like medieval serfs in the feudal system. Governments still have this antiquated view, but it’s no longer valid.

Americans who want to legally avoid state income tax can easily move to Florida, Texas, and the handful of other states with no state income tax.

And those who want to legally avoid federal income tax can move to Puerto Rico.

Most other nationalities, including Canadians, Brits, Australians, etc. can also legally avoid their home country’s income tax by relocating overseas to a place like Panama or BVI.

And given how interconnected the world is, relocation needn’t cause any significant problems for a business.

It’s 2018. Businesses can exist entirely online. You can earn your money while living in one place, servicing clients in another, and outsourcing to workers in another.

And, if need be, you can always get on a plane and find yourself on the other side of the planet tomorrow morning for a face-to-face meeting.

This is the world we live in. We’re no longer medieval serfs. We have options.

It’s pretty sad that Puerto Rico is one of the only places to have figured it out.

To be fair, Puerto Rico did have to hit rock bottom financially before making this drastic change.

But I’d guess that New Jersey won’t be far behind.


from Sovereign Man

Here’s a great example of a company using Blockchain to solve a real problem

Today I just wanted to send you a quick note to highlight a great example of a company that’s using Distributed Ledger Technology (DLT) to solve a real-world problem.

I thought this would be important given that most of the noise in the crypto space these days is still almost invariably focused on the Bitcoin price.

A quick Google search for “Bitcoin” reveals headlines from CNBC to Fortune Magazine, all about whether or not Bitcoin can come out of its price slump:

“Wall Street’s Tom Lee cuts his year-end bitcoin price target by about 20%”, and

“3 Bullish Signs Return For Bitcoin”

Similarly, “Blockchain” and “DLT” news is generally dominated by reports about various government policies:“Spain’s Securities Regulator Undertakes a
Blockchain Pilot”

“President of Uzbekistan Signs Decree on Blockchain Integration”

“Maltese Parliament Passes Laws That Set Regulatory Framework For Blockchain, Cryptocurrency And DLT”

But these stories really miss the point.

We’ve been talking about this a lot lately in our conversations: it’s been nearly a decade since Bitcoin was created. Crypto and DLT are no longer in their infancies.

A few years ago? Sure, the price of Bitcoin was big news.

Few people knew much about it, so it was noteworthy that digital currency churned out by a piece of C++ code was selling for cold, hard cash.

But today the prices of Bitcoin and other major cryptocurrencies are about as relevant as the the prices of cotton and copper; in other words– not entirely inconsequential, but hardly worthy of front-page news on a regular basis.

Even still, though, the noise continues unabated. The media hasn’t woken up yet to what this trend is all about.

It’s not about the price. And it’s not about the whatever the latest, hotshot ICO du jour happens to be.

This trend, like most major technological trends, is about all the incredible possibilities to revolutionize entire industries.

The Internet went through a similar progression. Early on, around 30 years ago, it was an exciting curiosity that few people had even heard of.

Within a decade, it had caught fire. Everyone was jumping on to the ‘information superhighway’, and investors were throwing money at every idiotic 19-year old kid with an idea for a dot-com.

Eventually that euphoric buble burst. The market (and the public) became much more sophisticated, and all the worthless businesses went under.

The ones who survived and succeeded were those who were dedicated to applying the technology to solve real challenges.

And that’s the fundamental opportunity with crypto.

While there’s an overwhelming number of bloggers and speculators who are trying to get rich quick chasing the next ICO… and no shortage of snake-oil salesmen promoting their own ICOs, there are a handful of entrepreneurs who are applying DLT and crypto technologies to solve real challenges, with the support of the investors who are backing them.

So- one small example is a company called HelloTickets, which has applied blockchain technology to the event tickets industry.

This is an industry that’s rife with fraud and abuse; concert attendees either get gouged by a monopoly like TicketMaster (that charges absurd fees for zero value-add), or they risk buying fake tickets, or dealing with scalpers, etc.

HelloTickets provides a platform for events to publish tickets into the Blockchain… which guarantees every ticket’s authenticity.

Concert-goers would never have to worry about buying fake tickets. And the concert promoters wouldn’t have to rely on an expensive middleman.

It’s a win/win.

A few days ago, HelloTickets achieved a major milestone by rolling out its blockchain ticketing solution to a festival in the UK attended by 9,000 people. It worked perfectly.

I think this is a great example because of its pure simplicity– it’s not rocket science.

HelloTickets is taking the core technology that underpins this giant crypto/DLT trend and applying it to an industry that notoriously screws the consumer. Simple. But brilliant.

There are countless other industries just like ticketing where a handful of elites have dominated and abused their customers for decades. And they’re ripe for disruption.

Industries worth literally trillions of dollars can be revolutionized with this technology, and this is where the real money is to be made.


from Sovereign Man