Category: simonblack

This morning I had the pleasure of spending an hour of my life tracking down a missing wire transfer that had been sent to a large, multinational bank more than two weeks ago.

I’m sure you’ve been there, being passed around various departments like the village bicycle, each time having to re-explain the entire situation to someone brand new.

Finally someone found the missing funds, and the person told me me they would release the money later today. But that it would still take 3-5 business days for the funds to hit the recipient’s account.

This is infuriating. It’s 2017. Seriously. It’s not like they have to load a pallet full of cash onto a cargo ship and float it across the ocean.

Banking is completely digital now, and transfers should be instantaneous. At most it shouldn’t take longer than a few hours.

As we hung up the phone I thought, “I can wait for cryptofinance to put you guys out of business.”

It’s true. There’s going to come a day when financial technology eradicates the entire banking system and renders it as obsolete as blacksmiths pounding on horseshoes.

Sending money overseas through the banking system can take several days and cost $20, $50, even $200 or more.

And while cryptocurrency transfers over the blockchain are taking longer today than they used it, transactions are still settled in a few hours, sometimes just a few minutes.

Transfer costs across the blockchain have increased as well. But you’re still talking about a dollar or less.

Compared to the conventional banking system, transferring funds via the blockchain is much more efficient.

The same goes with savings; it’s possible to deposit money directly within the blockchain instead of the banking system. No more fees, no more hassles.

And as long as you take the proper safeguards (just as you would take safeguards to protect your online bank account), holding funds in the blockchain is perfectly safe.

But… it’s not all rainbows and buttercups in the world of cryptofinance. This is a nascent concept, and plenty of unresolved challenges remain.

For starters– complexity.

Bitcoin has clearly become more user-friendly in its eight years of existence, and the other cryptocurrencies and blockchains will certainly follow that trend.

But if you look at Ethereum, right now the world’s second biggest blockchain platform, you need to be a HIGHLY experienced software developer in order to create one of its ‘smart contracts’.

Then there’s the issue of volatility… which may be the single biggest impediment to cryptocurrency adoption.

Again, look at the Ether token that runs on the Ethereum blockchain; on January 1st of this year the Ether price was less than $10. Today it’s nearly $350.

That’s a 35x jump in just over six months.

It’s hard to find another asset with that sort of performance. Ever.

Even John Law’s doomed Mississippi Company stock in the 1700s only increased 20x in a year.

In fact, Ether has outperformed the 17th century Dutch tulip bubble, the 18th century South Sea Bubble, and the 20th century dot-com bubble.

With cryptocurrency, the swings are violent in both directions. It’s NOTHING for Bitcoin or Ether to move up/down 10% in a single week. That level of volatility is almost expected now.

Again, this is a problem– volatility is a major hurdle to adoption.

As an example, big retailers (like Wal Mart) have razor-thin profit margins of less than 3%.

So if Wal Mart were to accept Bitcoin, it’s entirely possible that the Bitcoin price could drop more than 3% before Wal Mart converts the Bitcoin to US dollars… meaning Wal Mart would either lose money or pass the excess cost onto the consumer.

Either way, someone’s paying for the volatility.

Long-term, these challenges are likely going to be solved. Cryptocurrency has only been around for a few years– it needs more time.

I look at something like the Swiss franc, which is 167 years old and used by roughly 8.5 million people within a very tiny geography.

The total market size of the Swiss franc is about $1 trillion based on the central bank’s most recent statement of M3 money supply.

By contrast, the combined market size of Ether and Bitcoin (the two largest cryptocurrencies), is about $75 billion.

Yet their user bases already exceed 15 million with absolutely no geographic limitations. And they’re growing every day.

The Swiss franc, of course, has minimal volatility and zero complexity.

So it stands to reason that when these remaining challenges for cryptocurrency are solved, their supply/demand fundamentals could support prices that are far higher than today’s.

But not yet. There’s still plenty of uncertainty, and a ton of work to do.

For now try to ignore the hype… and the spiraling prices.

Don’t feel like you’re going to ‘miss out’ if you don’t buy crypto today.

A lot of people thought the same thing in the late 90s, that they didn’t want to miss the chance to make money in tech stocks.

Bear in mind the market crashed in 2000, and some of the top performing tech companies like Google and Facebook didn’t IPO until years later.

Right now the most important thing to do is UNDERSTAND cryptocurrency– how it works, the possibilities and challenges, applications and risks.

The same rule applies with any investment– don’t buy anything unless you really understand it, whether it’s a stock, bond, apartment building, or cryptocurrency.

The right education can open the door to new, lucrative investment opportunities. And it can make the difference between a great decision and a terrible one.

So don’t worry about the bitcoin and ether prices right now. There will be more opportunity to make money in crypto.

Instead, focus on the best investment you can possibly make: the one you make in yourself and your own education.

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In the latest episode of the completely psychotic breakdown of Western values, Canada’s government has just passed a law that champions sexual identity over science.

It’s called C-16, “An Act to Amend the Canadian Human Rights Act and the Criminal Code”.

Both of these codes prohibit discrimination against individuals based on race, gender, sexual orientation, religion, etc.

And this new law includes gender identity in that list.

Great. Nothing wrong with that. All they’re basically saying with these amendments is that transgendered individuals have the same inalienable rights as everyone else.

It’s sad that they actually have to pass a law to enshrine someone’s human rights… and one day our descendants will wonder why that was even necessary, just as today we are appalled that the institution of slavery ever existed.

But as usual there are some problems with the law. Not just the new law, in fact, but with Canada’s entire Human Rights Act.

I found a number of articles online stating that this new law “criminalizes the incorrect use of gender pronouns,” i.e. if someone born a “he” chooses to be “she”, and you say “Mr.” instead of “Ms.,” you’re going to jail.

To be clear, that’s NOT what this new law says. But the danger lies in the incredible ambiguity of the entire Human Rights code.

Section (14)(1), for example, states that “it is a discriminatory practice . . . to harass an individual on a prohibited ground of discrimination. . .” which includes race, religion, etc. and now sexual identity.

This is where things start to become unglued.

Because if your brain is wired anything like mine, you’re probably thinking, “OK, fine, but what constitutes ‘harassment’ ?”

I’m glad you asked. Because Canada’s Human Rights Commission gives us a rather ominous definition:

“[Harassment] involves any unwanted physical or verbal behaviour that offends or humiliates you.”

So in theory, yes, using incorrect gender pronouns could constitute harassment if it offends somebody, and this is a violation of Canada’s Human Rights and Criminal codes.

I’m unclear when ‘not being offended’ became an inalienable human right.

I’m a prolific student of history, but I’m afraid I must have missed that chapter in the development of Western Civilization.

Look, I’ll always be for anyone’s right to choose the way they want to live, as long as you don’t aggress against other people or their property.

You want to sleep with goats? Go for it. As long as they’re not my goats.

Having said that, I shouldn’t be forced to care.

I don’t expect others to change their behavior because of my lifestyle decisions, and I shouldn’t have to change my behavior because some snowflake might be offended.

For me the real clincher in Oh Canada’s new law is its long-winded legislative summary that tramples all over basic science.

Section 1.1.1 tells us, for example, that some people “self-identity with a non-traditional or non-stereotypical concept of gender.”

“Non-stereotypical”? It’s f*cking science.

It’s perfectly fine for people to be whatever they feel. But that doesn’t change the laws of nature: human beings have 23 pairs of chromosomes, one of which determines gender.

Aside from rare cases of genetic deformation, an X+Y sex chromosome means having a male wee-wee. An X+X chromosome means having a female wee-wee.

What exactly is the stereotype here?

Are magnetism and trigonometry also stereotypes?

Has Western Civilization really reached the point where basic science and human anatomy are set aside to ensure that someone doesn’t get offended?

Apparently we have.

If you have any doubts about this, check out how Bill Nye the Science Guy explained X&Y chromosomes to children in 1994.

Pretty simple: XY = boy, XX = girl.

But that was in 1994 when science still mattered.

Today that very segment has been stricken from the episode by Disney’s Buena Vista Television unit, and is available on Netflix only in its edited version.

So if you try watching the show on Netflix, the discussion about gender and chromosomes is no longer there.

Meanwhile, Bill Nye has a new show on Netflix. But instead of actual science, he’s teaching children about “gender spectrum”, “sex junk”, and “butt stuff”.

(Clearly Mr. Nye is on to a revolutionary breakthrough in the scientific method!)

Nye’s gyrating musical guest also gives viewers some sage advice: “Give someone new a handy . . . then give yourself props.”

This is what passes as “science” today; and government / media are rewriting the basic laws of nature to ensure that a handful of people aren’t offended.

(I’m offended at how easily other people are offended. But something tells me my grievance would fall on deaf aurally-challenged ears within Canada’s parliament.)

Have you reached your breaking point yet?

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Apparently while I was in the air yesterday flying between Asia and Europe, the financial system proved once again that it believes in magic beans.

The latest absurdity is that the government of Argentina sold $2.75 billion worth of bonds yesterday afternoon.

It’s not strange or unusual for a government to sell bonds; it happens multiple times across the world nearly every single day of the year.

What’s totally insane about yesterday’s bond sale in Argentina, though, is the duration of these particular bonds.

Remember that a bond is similar to a loan; as an investor, you’re basically loaning money to whichever government issues the bond.

And, like a loan, a bond has a maturity date– the date at which the government is supposed to pay you back the “face value” of the bond.

Car loans often have a 3-7 year term. Student loans can easily go 10 or 15 years. A home mortgage can last 30 years.

It’s the same with government bonds, which often have a term up to 30 years.

Needless to say, the longer the term, the riskier the bond. Plenty of things can go wrong if you give governments enough time to screw up.

As an example, I own a bank, and I’m obliged to park a portion of my bank’s assets in US government bonds.

So I buy the SHORTEST term bonds that exist: 28-day T-Bills.

As I’ve written many, many times before, the US government is flat broke, so there’s no way I’m loaning Uncle Sam money for 30 years. Or 10 years. Or even 5 years.

There’s way too much that can hit the fan over a longer term period of time.

But I’m reasonably comfortable that Donald Trump isn’t going to default on my bonds within the next 28 days.

So take a guess when Argentina’s new bonds will mature– 10 years? 30 years? 50 years?

Try 100 years. An entire century.

Bear in mind that Argentina’s bonds are considered “junk” because of the default likelihood.

In fact Argentina has defaulted twice in the last twenty years, and eight times since its independence in 1816.

At this rate, the country will default four more times over the next century before this bond matures.

And that doesn’t even take into consideration the country’s history of socialism, despotism, genocide, confiscation of foreigners’ assets, capital controls, wealth taxes, falsification of economic data…

But the risks don’t stop there.

Because in addition to taking a huge bet on Argentina, the suckers who bought these bonds yesterday are also taking on US dollar risk.

Argentina didn’t sell its bonds in local currency. The bonds are priced in US dollars.

This means that investors will receive interest payments in US dollars, and final repayment in US dollars… 100 years from now.

This strikes me as especially idiotic. (A better option for investors would have been gold…)

Given the US government’s pitiful financial condition, it seems foolish to bet that the dollar will still be the world’s #1 reserve currency in 2117.

Or that US dollar inflation won’t have eaten away all the returns.

Hell, the dollar might not even exist in 100 years.

But if it weren’t enough to be taking both the Argentina risk AND the US dollar risk, investors are also paying a big premium near the very top of the market.

If you’ve never invested in bonds before, the most important thing to remember is that bond prices and interest rates have an inverse relationship.

So if interest rates go up tomorrow, the value of the bond that you buy today will decline.

And if interest rates keep going up over the coming years (and century), this Argentina 100-year bond will becomes worth less and less.

How likely are rising interest rates?

Well, considering that interest rates are currently near the lowest level they’ve been in the 5,000 year recorded history of our species, falling bond prices are practically guaranteed.

This means that the price investors paid yesterday is more than likely the highest that the bond will ever be valued at… ever.

So basically investors paid a record high price to buy junk debt from a country with a history of default in a currency backed by the largest debtor that has ever existed in the history of the world.

What could possibly go wrong?

It’s almost worth getting cryogenically frozen just to see how comically bad this turns out.

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This is the very first article I’m writing to you on the brand new Macbook Pro that I just purchased here in Hong Kong.

It’s the fully loaded version with 16GB of RAM, a 1 TB SSD hard drive, and 3.5 GHz i7 processor.

Given that I actually run Linux on may laptop and barely do anything outside of word processing a bit of programming, the purchase was probably overkill. But I got such a great deal it was hard to pass up.

You see, Hong Kong has some of the best prices in the world on just about EVERYTHING.

That’s because Hong Kong charges ZERO sales tax or VAT. And there’s no import duty charged on products shipped in from overseas.

Nearly everywhere else in the world you’re going to pay some sort of duty, excise tax, and/or sales tax.

In Hong Kong none of that exists. So shopping here basically means receiving a built-in 10% discount from not having to pay any of the taxes and duties.

That’s why anytime I have a high-ticket purchase coming up (like a laptop or new mobile phone), I almost invariably wait until I know I’ll be in Hong Kong on business.

And Hong Kong’s generous tax model doesn’t stop with shopping; the region also boats one of the most competitive corporate tax rates in the world (between 15% and 16.5%), and extremely favorable individual tax rates that cap out at 17%.

Hong Kong is also a “territorial” tax system, which means that the government does NOT any tax income which is earned abroad.

Plus there’s zero dividend tax, zero capital gains tax, and zero inheritance or estate taxes.

You’d think that a place with such a minimal tax burden would be flat broke. And yet the Hong Kong government is awash with cash.

A few months ago, in fact, the HK financial secretary announced a budget surplus of HKD $92.8 billion– around $11.9 billion US dollars.

Remember that Hong Kong is a tiny place with a small population– so USD $11.9 billion is a lot of money.

If you extrapolate that amount to the US population, it would be as if the US government announced an annual budget surplus of $500 BILLION.

(According to the Treasury Department’s financial statements, Uncle Sam’s actual budget performance last year was an operating LOSS of $1.05 TRILLION.)

Moreover, Hong Kong’s financial secretary announced that their total fiscal reserve was nearly HKD $1 trillion, around $120 billion USD.

That’s their rainy day fund– roughly USD $16,000 for every man, woman, and child in the region.

Again, adjusted for population, this would be the equivalent of the US government reporting a $5.4 trillion fiscal surplus.

(Meanwhile The US Treasury’s financial statements show the government has a NEGATIVE net worth of MINUS $19 trillion.)

These night-and-day differences continue with Hong Kong’s solvent pension fund which recently gave its recipients a raise.

In the US, the annual reports for Social Security and Medicare indicate that both programs are massively underfunded by more than $40 TRILLION and will be fully depleted in just over a decade.

Comically the one thing that Hong Kong routinely screws up with its budgets is their estimates; the government consistently UNDERESTIMATES how big the surplus will be.

Last year, for example, they projected the current year’s surplus would be H$ 11 billion. It ended up being HK$ 92 billion.

When was the last time you remember that happening ?

In the West most major western governments haven’t run a budget surplus in years… even DECADES.

Greece just got bailed out again; that country is going on nearly a decade of being in perpetual financial crisis.

And across the Atlantic the US government breached its debt ceiling several months ago and has had to resort to ‘extraordinary measures’ to keep from defaulting.

By their own calculations the federal government is set to completely run out of money in just three months.

The most shocking part about that is how little anyone seems to care. You’d think this would be front-page news every single day. And in Hong Kong it probably would be.

It’s as if everyone has become numb to America’s pitiful financial state and arrogantly believes things can persist like this forever.

Of course, it won’t last forever.

The West is about debt and consumption. Hong Kong (and much of Asia) is about savings and production.

It’s really not difficult to see where this leads over the long-term.

If you understand this trend, one option to consider is holding a portion of your savings in Hong Kong dollars.

On top of being an incredibly low-tax jurisdiction, Hong Kong also boasts one of the most well-capitalized central banks in the world (the Hong Kong Monetary Authority, or HKMA.)

Whereas in the US and Canada the central banks are nearly insolvent, HKMA has massive foreign reserves backing up its money supply.

In fact HKMA has far more foreign reserves than there are Hong Kong dollars in circulation. That’s almost unheard of.

This makes the Hong Kong dollar a much safer alternative to most other fiat currencies.

But since the Hong Kong dollar is currently pegged to the US dollar, there’s minimal currency fluctuation.

If the good times last forever and the US dollar stays strong (or even rises), the Hong Kong dollar will rise with it. You won’t be worse off.

But should the US dollar ever start heading towards its intrinsic value, HKMA can discontinue the peg.

It’s like having a free insurance policy for your savings– definitely something to consider.

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Yesterday I spent all afternoon meeting with government officials here in the Philippines, and I’m still in shock. I’ll explain–

About a year and a half ago I purchased a fairly large manufacturing business that is oddly enough based in Australia.

It’s been a fantastic investment so far, primarily because it generates so much cashflow relative to the price I paid.

With big public companies listed on a major stock market, it’s not uncommon to pay 20x, 50x, even more than 100x a company’s annual profits.

For example, as I write to you early in the morning here in Manila right now, Amazon’s stock sells for 180x its annual profits.

In other words, if you were theoretically to acquire 100% of Amazon’s shares, at current levels it would take you 180 years to recoup your investment.

(This presumes you put all the profits in your pocket, but doesn’t account for the effects of dividend taxation.)

Obviously most investors expect Amazon to keep growing.

But even if Amazon’s earnings were to grow at an annual rate of 25% per year (which would be unprecedented), it would still take almost two decades to recoup your investment.

Private businesses, on the other hand, typically sell for extremely low multiples of their earnings, often as low as 3-4x.

You can see the difference in value pretty clearly: recoup your investment in 180 years (or even 20 years) versus 3 years.

Plus there’s often so much more opportunity for growth.

With a private business you can greatly influence the outcome and dramatically grow the company’s bottom line… something you’ll never be able to do investing in stocks.

And that brings to why I’m in Manila again.

Right now our company is manufacturing its products in Australia… which is crazy.

Australia is legendary for its high business costs, with a minimum wage that is about to exceed A$18/hour (around USD $13.50).

It’s not exactly a low-cost manufacturing hub.

Moreover, there’s endless taxation, paperwork, inspections, etc. that make it almost impossible to do business efficiently.

Plus it’s incredibly difficult to fire underperforming workers in Australia.

If you have an employee who’s lazy, milks the system, or even refuses to show up for work, it’s a time-consuming and expensive process to get rid of them.

Of course, the federal and local governments in Australia always tell us how much they support business and want to create manufacturing jobs…

… yet they’re constantly coming up with insane bureaucracy that has the opposite effect.

In fact, the biggest pro-business move the government has made in the last 18-months has been a tiny reduction in the corporate tax rate from 30% down to… wait for it… 27.5% !

So the CEO and I have spent the last several months shopping around other options, primarily in Asia.

And some places have really rolled out the red carpet.

Vietnam in particular offers a LOT of attractive incentives to foreign investors and entrepreneurs to relocate their companies there.

But, at least for our particular business, nowhere have the incentives been more alluring than here in the Philippines.

Yesterday the government laid out the package for us.

0% corporate profits tax. 0% Value-Added Tax. 0% duty on any equipment we import. 0% export tax. 0% local business tax.

In fact the only tax we’ll end up paying is some trivial payroll contribution that ends up being less than $40 per month per employee. It’s nothing.

(Clearly the low cost of labor here is also attractive. I could pay double the market wage here and it would still be 80% cheaper than what we pay in Australia.)

Based on these fiscal incentives, even if our business doesn’t increase its sales by a single penny, the labor and tax savings alone will DOUBLE our earnings.

I’d never be able to do that buying shares in Amazon. But with a private company, I’m able ot make some strategic decisions that have an enormous impact.

And honestly I haven’t seen a program this good since I established a company in Puerto Rico to take advantage of the island’s amazing 4% tax incentive.

I’ve also been shocked at how helpful and supportive these officials in the Philippines have been so far.

I’ve never had a government official hand me a card and say, “Call me at home anytime if you have questions.”

Well, last night my CEO and I were planning out the business strategy and we had questions.

So we called. And called again. And kept calling each time we had additional questions.

I was amazed simply that they answered the phone at home, after hours… let alone at the breadth and depth of knowledge on so many topics ranging from taxation to the legal environment to operations and logistics.

My biggest takeaway is that these guys really seem to understand that they have to compete in order to attract business.

Not just with words, but with actions.

Capital, talent, and business will always go where they are treated the best and where the conditions are the most favorable.

Most Western governments have totally forgotten this.

They keep passing their destructive rules and decrees, failing to realize that we’re not living under the Feudal System anymore.

We’re all free to pursue better opportunities anywhere else in the world, whether that means moving ourselves, our savings, our assets, and/or our businesses.

In some cases (like moving assets) you don’t even need to leave your living room.

The exciting thing is that there’s an increasing number of jurisdictions right now that are competing for you, including here in the Philippines, Puerto Rico, and many, many more.

And given the power of modern technology, taking advantage of these opportunities is easier than it’s ever been before in human history.

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This one is almost too ridiculous to believe.

Recently a new bill was introduced on the floor of the US Senate entitled, pleasantly,

“Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.”

You can probably already guess its contents.

Cash is evil.

Bitcoin is evil.

Now they’ve gone so far to include prepaid mobile phones, retail gift vouchers, or even electronic coupons. Evil, evil, and evil.

These people are certifiably insane.

Among the bill’s sweeping provisions, the government aims to greatly extend its authority to seize your assets through “Civil Asset Forfeiture”.

Civil Asset Forfeiture rules allow the government to take whatever they want from you, without a trial or any due process.

This new bill adds a laundry list of offenses for which they can legally seize your assets… all of which pertain to money laundering and other financial crimes.

Here’s the thing, though: they’ve also vastly expanded on the definition of such ‘financial crimes’, including failure to fill out a form if you happen to be transporting more than $10,000 worth of ‘monetary instruments’.

Have too much cash? You’d better tell the government.

If not, they’re authorizing themselves in this bill to seize not just the money you didn’t report, but ALL of your assets and bank accounts.

They even go so far as to specifically name “safety deposit boxes” among the various assets that they can seize if you don’t fill out the form.

(Yet another reason to consider storing cash, gold, and silver in an overseas safety deposit box.)

This is unbelievable on so many levels.

It’s crazy to begin with that these people are so consumed by the fact that someone has $10,000 in cash.

But it’s even crazier that they’re threatening to take EVERYTHING that you own merely for not filling out a piece of paper, without any due process whatsoever.

Oh, and on top of civil asset forfeiture penalties, there are also criminal penalties.

Right now according to current law they can imprison you for up to FIVE YEARS for not filling out the form. Five years.

But apparently that doesn’t go far enough to protect us against evil men in caves.

So this bill aims to double the criminal penalty to TEN years in prison.

And if that weren’t enough, this bill also gives them with new authority to engage in surveillance and wiretapping (including phone, email, etc.) if they have even a hint of suspicion that you might be transporting excess ‘monetary instruments’.

Usually wiretapping authority is reserved for major crimes like kidnapping, human trafficking, felony fraud, etc.

Now we can add cash to that list.

It’s not just government spy agencies to worry about, either.

Banks in the US are already unpaid government spies, required by law to fill out suspicious activity reports on their customers.

Then Congress started expanding those requirements to include other businesses and industries that might come into contact with cash.

Stock brokers. Casinos. Currency exchanges. Precious metals dealers. Pawnbrokers. The Post Office.

According to the law (section 5312 of US Code Title 31), those industries are also required to spy on their customers for the government.

But under this new bill, they want to forcibly recruit even more unpaid spies, including any business which issues or redeems ANYTHING that’s prepaid.

Prepaid credit cards. Prepaid phones. Prepaid retail gift cards. Prepaid coupons.

So, Amazon.com, which issues and redeems prepaid gift cards, will be required under this bill to file reports to the government.

For that matter, TGI Fridays and Chuckee Cheese will also become unpaid government spies since they both issue and redeem prepaid vouchers.

Truly these Senators have figured out how to strike at the heart of ISIS.

Further, their bill wants to pull any business which “issues” cryptocurrency under the anti-money laundering regulatory umbrella.

Here’s where these people demonstrate that they have no idea what they’re talking about.

No one “issues” Bitcoin. There’s no Bitcoin central bank. There’s no Chairman of Bitcoin who decides on a whim to increase the supply.

Bitcoin is created automatically amounts that are pre-determined by its code. It’s software.

So the Senate is essentially trying to force the Bitcoin core software to comply with money laundering regulations.

How pathetically clueless.

The bill also attempts to drop a major bomb on Bitcoin by including it in the list of monetary instruments that must be reported when entering or leaving the US.

So theoretically if you leave the US with more than $10,000 in Bitcoin or Ether, you’d have to confess this fact to the authorities or otherwise face the aforementioned penalties, i.e. prison time, civil asset forfeiture, etc.

HOORAY FREEDOM!

As you can see, this bill criminalizes or delegitimizes the most mundane and harmless financial activities, all under the guise of keeping us safe.

Of course nothing in this bill is about keeping people safe.

ISIS couldn’t care less about forms and penalties.

This bill is nothing more than another weapon in their ongoing War on Cash… and now cryptocurrency too.

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What I’m about to tell you isn’t some wild conspiracy. Or fake news.

It’s raw fact, based on publicly available data from the US Federal Reserve.

This data shows a very simple but concerning trend: banks in the United States are becoming less safe. Again.

And they’re doing it on purpose. Again.

Few people ever give much thought to the safety and security of their bank.

After all, banks go out of their way to instill an overwhelming sense of confidence that they’re rock solid.

They spend tons of money on ornate lobbies in giant buildings. They buy the naming rights to football and baseball stadiums.

And hey, they’re insured by the government.

But it turns out that none of these elaborate distractions means anything when it comes to bank safety.

Safety is actually pretty easy to calculate.

Think about the business of banking– it’s simple. Banks take deposits, and then use that money to make loans and various investments.

For a bank, those deposits represent the amount of money they owe to their customers.

So obviously the total value of a bank’s loans and investments (i.e. its assets) should exceed its total deposits.

This is known as solvency. A solvent bank has SUBSTANTIALLY more assets than it owes in deposits.

That way, if a loan or investment goes bad, the bank will still be able to repay its depositors.

The other safety factor is liquidity, which basically means that, eventually the bank is going to have to give some of the money back.

Perhaps a depositor decides to initiate an electronic funds transfer to another bank… or makes a withdrawal at an ATM.

The bank should have sufficient cash on hand to be able to meet these needs.

Banks that lack proper liquidity can rapidly run into catastrophic problems, forcing them to fire sale assets in order to raise cash, which in turns could trigger a solvency crisis.

In both of these scenarios, solvency and liquidity, cash is king.

(Note that “cash” can mean both physical currency sitting in a vault, as well as a bank’s electronic deposits at Federal Reserve and other cash equivalents.)

For solvency, cash is about as risk-free as it gets.

Anything that a bank does with your money is going to carry some level of risk. Buying bonds. Car loans. Student loans. Business loans. Residential mortgages.

These all carry certain risk of default. Cash doesn’t.

So a bank with higher levels of cash will typically have much lower risk to its solvency.

Simultaneously, a bank with a strong cash position is also liquid, and hence more likely to be able to honor its customers’ transactional needs.

Bottom line, a safe, conservative bank maintains high levels of cash, especially relative to the total amount of deposits.

But that’s not happening in the Land of the Free.

The Federal Reserve’s most recent report on “Assets and Liabilities of Commercial Banks in the United States” published last Friday showed a continuing trend in the erosion of bank safety.

This is a weekly report, so there’s tons of data. And the trend goes back now at least 2.5 years.

Since late 2014, for example, Fed data show that total cash assets at US banks has been in steady decline, dropping roughly 25% over that period.

But at the same time, total deposits at the banks has actually increased around 15%.

So you can see the issue: cash is falling while deposits are increasing. This is the OPPOSITE of what a responsible bank should be doing.

A conservative bank seeks to INCREASE or at least MAINTAIN the level of cash it has on hand as a percentage of customer deposits.

Banks in the US have been doing the opposite– decreasing their cash holdings while deposits have been rising.

Proportionally, the aggregate cash-to-deposit ratio in the US has fallen by 32% since late 2014.

That’s a steep drop.

So what exactly have they been doing with that money, i.e. the money they should be holding in cash?

The truth is we’ll never know.

Banking is a giant black box. We are provided scant detail about what these people are actually doing with our money.

Sure, they’re making loans. But what loans? To whom? Are the borrowers creditworthy? Is there valuable, high-quality collateral? Does the interest rate make sense to compensate for the risk?

No one knows. Not even the banks themselves know.

When you have hundreds of billions (or even trillions) of dollars of assets on your books, it’s impossible to really know what you own.

So we’re basically all in the dark.

I’m not telling you this to suggest that there’s some major crisis looming or that you should yank all of your money out of the US banking system.

But it’s important to understand that banks are not as risk-free as they lead on.

This huge drop in the cash-to-deposit ratio is a conscious decision. It doesn’t happen by accident. Banks are choosing to hold less cash, i.e. be less safe.

(And the government which supposedly guarantees it all is itself insolvent to the tune of negative $60+ trillion. But that’s another story.)

Why take the chance? Why keep 100% of everything that you’ve ever earned locked up in a system that is actively making itself less safe…

… not to mention the industry’s uninterrupted history of fleecing its customers?

There are too many other alternatives out there.

You could consider transferring a portion of your savings overseas to a stronger, more conservative bank abroad.

Or you could become your own banker by holding some savings in physical cash in a safe at your home or a non-bank safety deposit box facility.

Cryptocurrency is an option (though you’ll have to stomach the extreme volatility for now).

Or even something as mundane as buying Amazon.com gift cards.

There are countless options to distance yourself from this system if you simply have the willingness to see the big picture.

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[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and manager of the VT Price Value Portfolio.]

If you have been voting for politicians who promise to give you goodies at someone else’s expense, then you have no right to complain when they take your money and give it to someone else, including themselves.

Economist Thomas Sowell

It is difficult to know where to begin.

In our election last week, 262 British parliamentary seats fell to a party led by Jeremy Corbyn, a self-confessed Socialist.
Corbyn has also publicly supported the IRA, Hizbollah and Hamas.

Yet his message attracted 12.9 million votes while the United Kingdom is under attack by terrorists. It simply beggars belief.

Sir Richard Dearlove, the former head of MI6, the British Secret Intelligence Service, points out that Corbyn, who seeks the office of Prime Minister, would not be cleared to join either his former agency, or GCHQ, or MI5 (the British equivalents of NSA/FBI).

It is said that you get the politicians you deserve. So what on earth did we do to deserve this?

Sadly we are not criticizing a single political party.

While Jeremy Corbyn offered the UK electorate the sort of swivel-eyed Trotskyism that ought to have died out in the 1970s along with flares and safari jackets, Theresa May has been making her own lurch towards the left.

So a plague on both your houses.

Our politics have gone mad, and our markets have gone mad with them. The plain numbers are stark.

Simon Mikhailovich of Tocqueville Bullion Reserve reminds us of those numbers with a sobering tweet:

A bit of math. With the global debt / GDP ratio at 320% and the cost of average debt service at 2%, it takes 6.4% growth per annum just to service the debt. Not happening.

The rise of Socialism will only create more of these financial challenges.

The only sensible and credible responses to the investment challenge of our times can be to diversify broadly, and then invest selectively, and defensively.

(Longstanding readers, along with our clients, will know that we put particular emphasis on Benjamin Graham-style value stocks, systematic trend-following funds, and gold.)

This is also a crisis of education.

How, aside from craven bribery, could so many young Britons flock to the sirens of socialism?

How did so many millions manage to avoid any grasp of history (or choose to ignore it)?

The millennials and Generation Z are right to be angry. They’ve been chewed up by the system.

But last week this anger manifested itself in the form of some socialist Corbyn supporters burning newspapers.

To anyone with a sense of history, the UK today feels like a very strange, and disturbing, place.

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The Federal Reserve in the United States just released a new report showing that “Total Household Wealth” in the United States has reached a record $94.8 trillion.

That’s an impressive figure.

Even more impressive is that Total Household Wealth has increased by $40 trillion since the lows of the Great Recession in 2009.

No doubt there’s probably a multitude of central bankers and bureaucrats toasting their success in having engineered such magnificent prosperity.

And it’s certainly an achievement worth celebrating. As long as you don’t look too closely at the data.

Total Household Wealth is exactly what it sounds like– the total net worth of every person in the United States, from Bill Gates down to the youngest newborn baby.

So when you add up all the 330+ million folks in the Land of the Free and tally up their combined net worth, the total is $94 trillion.

The thing is that the VAST majority of that wealth, especially the incredible growth over the last 8 years, has been from increases in just two asset classes: real estate and the stock market.

In fact, stocks and real estate alone account for roughly 2/3 of the wealth increase since 2009.

I’ll come back to that in a moment.

Now, simultaneously, we see plenty of other interesting data, also published by the Federal Reserve and US federal government.

Both the Fed and Census Bureau, for example, tell us that over 80% of businesses in the US are “nonemployer” companies, i.e. businesses which only employ one person (the owner), and often provide his/her primary source of income.

Yet according to the Federal Reserve, only 35% of these small businesses are profitable. Most are operating at a loss.

In other words, only 35% of the companies which make up 80% of American businesses are profitable.

You’re probably already doing the arithmetic– this means that a whopping 72% of all US businesses are NOT profitable.

That hardly sounds like record wealth to me.

Shifting gears, there’s the little factoid that an astounding 40% of young Americans are living with their parents– the highest percentage in the last 75 years.

And who can blame them considering student debt in the Land of the Free also hit a record $1.4 trillion three months ago, more than double the amount since the Great Recession.

Speaking of record debt, US credit card debt passed a record $1 trillion, and total US consumer credit hit a record $3.8 trillion last month.

Again, all of this hardly seems like ‘wealth’ to me.

Then there’s the issue of wages, which have remained essentially flat since the 2009 Great Recession if you adjust for inflation.

According to the US Department of Labor, inflation-adjusted wages, aka “real hourly compensation” in the US fell an annualized 0.9% last quarter, and fell a dismal 5.6% in the previous quarter.

Adjusted for inflation, the average American isn’t making any more money.

Once again, this is a pitiful excuse for ‘wealth.’

American businesses aren’t more productive either.

The same Labor Department report shows that productivity in the Land of the Free was flat in the first quarter of this year.

And productivity actually declined in 2016– something that hasn’t happened in at least the last 50 years.

Not to mention total economic growth in the Land of the Free has been pretty pitiful, logging a pathetic 1.6% last year.

And GDP growth in the first quarter of 2017 was just 1.2% on an annualized basis.

The US economy has exceed hasn’t surpassed 3% growth in more than 10-years, and it’s only happen two times so far in this millennium.

Seriously? This is “wealth”?

Look, I get it. Houses are ‘worth’ more than they used to be, and the stock market is much higher.

But these effects are heavily influenced by the trillions of dollars that was conjured out of thin air by the Federal Reserve.

ExxonMobil may be the most telling example.

In early September 2008, just prior to the financial crisis, Exxon had recently reported revenues of $72 billion, with $11.1 billion in net operating cashflow.

For the first quarter of 2017 the company reported revenues of $61 billion and net operating cashflow of $8 billion.

Plus, ExxonMobil managed to add nearly $20 billion in debt to its balance sheet over that same period.

So over 8-years, Exxon is making less money and has more debt. Yet its stock price is actually HIGHER.

More broadly, 66% of the largest companies in the US that have given estimates of their earnings for next quarter have issued “negative guidance”.

Companies expect to make less money. But stocks are near all-time highs.

Does this make any sense? Is that also wealth?

No.

This is nothing more than the result of paper money that has been created by central bankers, allocated to a tiny financial elite, and dumped into the stock market.

It’s the same with real estate. Sure, prices are higher. But it’s not because of fundamentals.

In terms of population, there’s only been a 7% increase in the number of households in the United States since 2009.

There’s been a commensurate increase in the supply of homes as well.

So in terms of supply/demand fundamentals, the average price nationwide shouldn’t be that much higher.

But take a look at this chart, courtesy of the Federal Reserve.

The red line shows interest rates, which have been generally falling since 1990. The blue line shows home prices, which have been rising like crazy since 2012.

It doesn’t take a rocket scientist to spot the correlation: record low interest rates mean higher home prices.

This isn’t wealth.

It’s just phony paper.

And as the Great Recession showed in late 2008, phony paper wealth can go ‘poof’ in an instant.

With that in mind, it may be time to consider taking some of that paper wealth off the table and setting it aside for a rainy day.

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Here’s the perfect example of how insane our financial system has become.

It was announced yesterday that, after a 24-hour white-knuckled ride, Spanish banking giant Banco Popular had been sold to Banco Santander for the price of just 1 euro.

Note- that’s 1 euro in TOTAL. Not 1 euro per share.

Banco Popular had once been one of Spain’s largest banks.

But just as certain banks tend to do from time to time, Popular sacrificed responsibility and good conduct for quick profits.

They spent years gambling their depositors’ savings away on idiotic, dangerous, pitiful loans. And those bad loans eventually came back to bite them.

The modern business of banking is all about pooling customer deposits together and making various loans and investments with those funds.

Safe, responsible banks make sensible investments.

They maintain extremely high loan standards. And they keep a SUBSTANTIAL rainy day fund set aside in case those loans and investments go bad.

Banco Popular did none of those things.

Back in 2006 during the height of the real estate bubble, for example, Popular maintained a liquidity ratio of less than 2% according to its annual report that year.

This means that over 98% of its customers’ savings had been gambled away on bad loans and bad speculations.

Eventually those risky loans started failing, and the bank started losing money.

Last year alone Popular lost 3.5 billion euros, which is about as much as they earned in all of the bubble years combined.

Fearing for the banks ability to continue servicing its customers, European regulators stepped in on Tuesday and forced a fire sale.

Banco Santander “won” that auction, again, paying a symbolic price of just 1 euro.

This means that Banco Santander will now inherit all the toxic loans (and consequent losses) that Popular had on its books.

The insanity here is that Santander had almost no time to conduct its due diligence, i.e. research the business to understand what they were buying.

Banco Popular had a balance sheet worth over $150 billion with hundreds of thousands of different loans.

It would take months to even begin scratching the surface of such a massive balance sheet.

By comparison, the last time I bought a business I paid $6 million and spent more than a year conducting due diligence.

Santander bought a $150 billion business and spent less than 24 hours trying to understand what they were buying.

This is nuts. And ENORMOUSLY risky for Santander.

But perhaps even more insane is that this deal is now being hailed by European governments and financial media as a wonderful solution to the looming problem of bank insolvency.

It doesn’t take a rocket scientist to understand that this problem wasn’t really solved.

It was just transferred from one bank to another. The assets are still toxic. They just happen to be owned by Santander now.

Most importantly, Banco Popular is FAR from alone.

Here in Italy, in fact, a number of smaller banks are teetering on insolvency.

And regulators have been scrambling trying to find potential suitors to copy this shotgun wedding ‘solution’.

But so far, no success.

Not a single bank in Italy has sufficient capital to absorb the toxic debts of another.

Plus the government itself is totally bankrupt.

So basically an insolvent government and insolvent large banks are trying to figure out how to bail out insolvent smaller banks.

It’s total madness.

And this is the important lesson: eventually they run out of options.

There’s no one left to bail out a bad bank… no taxpayers, no white knight, no bondholders, no shareholders. Nobody.

Except for depositors.

This is when a “bail out” becomes a “bail in”, and the depositors get stuck with the bill.

Bottom line: This matters. It’s your money at stake.

Don’t simply assume that your bank is in good condition. Examine their financial statements and find out for sure.

Don’t keep 100% of your life’s savings at a single institution. Make sure you diversify. If a bail-in ever occurs, it will be the largest depositors who get hit first.

And definitely consider diversifying geographically. Avoid keeping everything in the same country, especially if that country is bankrupt– the bail-in risk is much higher.

The world is a big place and there’s a ton of opportunity out there, including plenty of responsible, conservative places to bank.

And it’s hard to imagine you’ll be worse off because a portion of your savings is in a safe, well-capitalized bank.

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