Category: simonblack

You’ve probably heard the saying “The Early Bird Gets the Worm. . .”

It turns out that expression is completely wrong, both literally and figuratively.

This morning I was watching these new baby chicks run around and play on the lawn.

If you’ve never seen chickens up close and personal, their lives are pretty simple; they basically just wander around all day pecking at the ground looking for some insect or seed to eat.

(At least, that’s what’s supposed to happen; most chickens destined for grocery aisles live in tiny cages and never see daylight.)

Every time one of them would find a seed or worm in the ground, the nearby chicks would immediately dash over and start tugging at the food.

One would steal the worm from the other and run off with it in its beak, upon which the other chicks would pounce and steal the worm again.

It was hilarious to watch, it just needed the Benny Hill theme.

But there was one chick who had it in her instinct to separate from the pack.

She didn’t have to go far– just far enough to be uninteresting to the rest of the chicks who couldn’t see past their own beaks.

Sure enough, after a while the solo chick discovered a treasure trove of worms nearby a compost pile.

While the other chicks were fighting over scraps, this one had a whole worm colony to herself.

That’s why the saying isn’t true. It’s not the early bird who gets the worm.

It’s the one who has the courage and independence of mind to avoid the crowd and go where everyone else isn’t.

Life, business, and investing aren’t so different than nature: we humans seldom succeed and prosper by following the crowd and doing what’s popular.

As I wrote to you last week, recent data show record numbers of small investors are piling in to stocks at a time when the market is near its all-time high.

Moreover, many of the biggest and most popular companies are in unsustainable financial positions.

Johnson & Johnson, for example, one of the largest companies in the S&P 500, had operating cashflow of $18.7 billion in 2016 according to its own annual report.

Yet the company spent far more than it earned– $22.8 billion– on dividends, share buybacks, debt repayment, and critical capital expenses.

This clearly doesn’t add up.

Similarly, AT&T’s 2016 report shows they generated a massive $39.3 billion in operating cashflow.

Yet the company spent even more– $44 billion– on dividends, debt service, and critical capital expenses.

Disney posted $13.2 billion in operating cashflow in 2016; but they spent $16.7 billion on dividends, debt service, capital expenses, and share buybacks.

And, pitifully, General Electric didn’t even have positive operating cashflow.

These are the honest to goodness results among some of the largest, most heavily weighted companies in the S&P 500 index.

And they’re representative of the much larger sample.

Iron Mountain is one of the hundreds of companies in the S&P 500 index that few people have ever heard of.

Yet the trend holds — Iron Mountain’s 2016 annual report shows operating cashflow of $544 million, but $835 million in capital expenses and dividends.

Stericycle is another small company within the S&P 500 index whose $547 million in 2016 operation cashflow was dwarfed by $2.1 billion debt service, capital expenses, and dividends.

While there are obviously some bright spots like Apple and Google whose businesses generate plenty of “free cashflow”, there’s clearly something wrong when so many companies are far out-spending what they make.

Yet this is precisely what people are buying when they dump their capital and retirement savings in the S&P 500.

Most rational investors probably wouldn’t buy even a single mature business that has negative free cash flow, let alone dozens or hundreds of them.

But for some reason it’s piling into an index fund that pools so many loser businesses together is considered some prized investment strategy.

Under these conditions in seems worth looking at different asset classes altogether.

Or even looking abroad.

Some friends of mine in the US recently told me that there’s a relatively new show called Criminal Minds: Beyond Borders.

Apparently each episode deals with some US citizen getting killed overseas… basically reinforcing the absurd stereotype that everything outside ‘Marica is inherently dangerous.

No doubt a lot of retail investors feel the same… that anything worth investing in is already in America, and that anything overseas is risky.

This is an incredibly short-sighted mentality that keeps people financially tethered to an irrelevant anachronism like geography.

The reality is that the world is a big place full of undervalued opportunities.

And there are plenty of big worms out there for anyone willing to put a little distance between you and the herd.

Source

from Sovereign Man http://ift.tt/2qppCsH
via IFTTT

Yesterday I recorded a new podcast with my US-based tax attorney to talk about the Trump administration’s new tax plan… or as I like to call it, the plan to have a plan.

Clearly they’re trying to do something positive and significant.

But to say that their strategy is light on details at just a single page would be a massive understatement.

Rather than rehash and recap what has already been covered in the media, my attorney and I dove into some of the more important issues: what’s NOT in the plan, what are the major details to sort out, and what’s SAFE?

Personally, I’m extremely skeptical of major tax reform… though I’d be happy to be proven wrong.

As I’ve written a number of times, the last time the tax code was updated was 1986.

Tech-savvy consumers were still using 5 ¼ inch floppy disks. Many of our readers hadn’t even been born yet.

The 1986 tax code was perfectly reasonable for an industrialized economy dominated by large companies like General Motors.

Today, technology makes it possible for companies to generate income across the world through products and services that are entirely digital.

Yet today’s companies are still forced to use the same hopelessly outdated tax code.

It’s such an embarrassing anachronism, it would be like the US government using those 1980s era 5 ¼ inch floppy disks to run its nuclear program.

Oh wait…

The reason I’m skeptical, though, is that each and every line item in the tax code has a certain group of beneficiaries that’s willing to fight tooth and nail to keep it.

There are people who benefit from all the deductions that the administration wants to eliminate. There are even people who will fight to keep the widely-hated Alternative Minimum Tax and Estate Tax.

And the larger problem, of course, is that millions of taxpayers and businesses have made plans and structured their affairs in a way to conform to the current tax code.

Pulling the tablecloth out from underneath them and suddenly changing the rules could end up causing some serious blowback.

So it’s enormously difficult to please a firm majority. And even if they manage to pull this off, they’ll still be accused of not being ‘revenue neutral.’

This is the part I find to be completely absurd.

The tax code is going to affect hundreds of millions of people and businesses in the largest, most complex economy in the world.

Economist cannot possibly predict with any accuracy how a radical overhaul of the tax code is going to impact the US government’s tax revenue ten years from now.

Nevertheless, this is going to be one of the primary arguments against the plan.

One of the points my attorney and I discussed is what will remain safe, i.e. what they’re NOT going to touch.

Retirement accounts are CLEARLY in that category.

If you have an IRA or 401(k), that’s not going to be touched. It would be politically disastrous for everyone.

This means that establishing a robust retirement structure like a self-directed SEP IRA, or a solo(k), is still a fantastic option, regardless of what they do with the rest of the code.

With a self-directed SEP IRA, for example, you create a new retirement plan with a contribution limit that increases from $5,500 to as much as $54,000 per year.

That’s almost 10-fold. Plus the contributions are tax-deductible, meaning you can aggressively (and LEGALLY) reduce the amount of income tax that you owe.

Meanwhile, the idea of a self-directed IRA structure is that your retirement plan owns precisely ONE asset: an LLC.

(You’ll need to find an IRA custodian that accepts self-directed structures, like IRA Services.)

You (or your spouse, parent, financial advisor, etc.) become the MANAGER of the LLC, which essentially gives you far greater discretion in how your retirement funds are invested.

Rather than be stuck in an overpriced stock market, for example, your self-directed IRA plan can own income-producing real estate, farmland, private businesses, cryptocurrency, secured debt, etc.

Under the current tax code there are a number of restrictions that are known as “prohibited transactions”. Those are probably here to stay.

You cannot use your IRA funds, for example, to invest in your own business, pay yourself any fees or compensation, buy/sell property that you personally own, or that is owned by immediate family members.

That’s why it makes sense to talk this over with a professional. But the benefits are absolutely worth having that discussion.

For now, I invite you to listen in to our conversation about the tax code, i.e. the plan to have a plan. It’s available here.

Source

from Sovereign Man http://ift.tt/2oTmBQe
via IFTTT

Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.

Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.

Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.

(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)

The company went on to burn through just about every penny of its investors’ capital.

There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.

At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.

This is rapidly becoming a familiar story in Silicon Valley.

For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.

Yet so many of those companies haven’t managed to turn a profit. Ever.

There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.

(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)

But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.

Snapchat’s investment prospective summed it up best:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

It’s as if the more money these startups lost, the more popular they became with investors.

Clearly that was unsustainable.

In business, profit (or even more specifically, “levered free cash flow”) is the most important metric.

No company is born profitable; it takes time for entrepreneurs to create and build a financially sustainable business.

In the meantime, startups sometimes need outside investment capital to keep going.

Early stage investors take a risk that the company’s founders and management will be able to execute on a plan that turns a big idea into profit.

But there’s supposed to be a plan. There’s supposed to be an objective to reach profitability as quickly as possible.

Silicon Valley investment firms ignored this basic principle for years, dumping their investors’ savings down the toilet into loser companies with no hope of profitability.

It was a bubble, plain and simple… and now that bubble seems to have burst.

According to Dow Jones Venture Source, venture capital firms in Silicon Valley pared down their investments in tech startups by 30% in the last several months after reaching peak insanity in late 2015.

Unprofitable, unsustainable companies that used to easily be able to raise capital during the bubble years are now struggling to find new investors.

Many are starting to go out of business. For others that manage to successfully raise more capital, the terms are much more strict and conservative.

It’s a new reality, and one that makes more sense: lower valuations, a push for profitability, less insanity.

It makes me wonder, though– if the startup bubble in Silicon Valley can burst, why shouldn’t the bubble in the larger stock market?

In some respects there’s very little difference between the two.

The average stock is trading at a record high valuation despite tepid performance.

And some of the most popular companies are as financially unsustainable as Clinkle was.

Netflix might be my favorite example.

The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.

Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.

Netflix just keeps losing more and more money.

Remember, “Free Cash Flow” is a MUCH better indication of a company’s financial health than profit because it takes into consideration all the capital they must reinvest back into the business.

In the case of Netflix, management must constantly make new ‘capital investments,’ i.e. acquire more content to deliver to their viewers.

If they don’t keep updating their content library, Netflix will go out of business.

So the company has been steadily accumulating huge losses and burning through cash.

They make up the shortfall by going deeper into debt, which is clearly unsustainable.

Don’t get me wrong– as a consumer, I love Netflix.

But it seems nuts that a company with such an unsustainable financial model could be so popular with investors and worth an all-time high $66 billion.

Something is wrong with this picture.

And these investment fundamentals just don’t seem that different than the insanity from the Silicon Valley startup scene over the last few years.

The Silicon Valley bubble has already burst. Given so many similarities, it seems foolish to bet that the stock market bubble will stay inflated forever.

Source

from Sovereign Man http://ift.tt/2pimnCZ
via IFTTT

In a poll conducted a few days ago by NBC News / Wall Street Journal, a record 57% of Americans responded that they want MORE government in their lives, and that the government should be doing more to solve people’s problems.

That’s the highest percentage since they started asking this question in 1995.

In fact, 57% is nearly double what people responded in the mid-90s.

Furthermore, the number of Americans who feel the opposite, i.e. responded that the government is doing too many things that should be left to private businesses and individuals, fell to a near record-low 39%.

Bottom line: people want more government.

It’s hard to even know where to begin with this.

First- more government is nearly an impossibility.

As I’ve written several times in the past, the US federal government already spends almost all of its tax revenue on mandatory entitlements like Social Security, and interest on the debt.

They could literally cut nearly everything we think of as government– national parks, Homeland Security, even the IRS– and still not make a dent in paying down the national debt.

According to the US government’s own financial statements, their net operating loss in 2016 was an unbelievable $1.05 TRILLION.

Think about that– they lost more than a trillion dollars in a completely unremarkable year.

They weren’t waging world war, funding a major infrastructure project, or dealing with an economic crisis.

It was just business as usual. And they STILL lost over a trillion dollars.

More government is going to cost even more money that they don’t have… which means even more debt and even more pain in the future.

The usual refrain is to pay for more government programs by raising taxes on the rich, or big corporations, or whoever the evil villain du jour is.

Anyone who thinks this actually works needs to study history.

Simply put, RAISING TAXES DOES NOT RAISE TAX REVENUE.

I wish every Bernie Sanders voter could understand this very simple fact:

Since the end of World War II, US federal government tax revenue as a percentage of GDP has been nearly constant at 17%.

In other words, while the actual dollar amount of tax revenue goes up every year due to inflation and economic expansion, the government’s slice of the total economic pie is 17%.

Yet during the previous eight decades, actual -tax rates- have been all over the board– sometimes rates were higher, sometimes rates were lower.

Back in 1963, for example, the highest marginal tax rate on individuals exceeded an unbelievable 90%.

I’m sure there are plenty of Americans who would love to see the wealthiest citizens paying 90% again.

Yet in 1963, even with rates that high, the total amount of tax revenue that the US government collected was 16.7% of GDP.

In 1988 when the highest tax rate was slashed to just 28% under Ronald Reagan, total tax revenue 17.3% of GDP.

It doesn’t matter if tax rates were high or low– the actual tax revenue that the government collects stays constant at around 17% of GDP.

This raises a point that these socialists never seem to understand:

If the government’s slice of the pie never seems to change no matter how high or how low tax rates are, shouldn’t they focus on making the pie bigger?

Duh.

And it seems intuitive that higher taxes obstruct economic growth (i.e. make the pie smaller) because there’s less money in people’s pockets to spend and invest.

Then, of course, we have to touch on the issue of competence.

It’s absurd to want a government that has a nearly interminable track record of overreach, waste, and failure, to be even MORE involved in people’s lives.

We’re talking about the same institution that wastes taxpayer money to study monkeys on treadmills…

… or spent $1 billion to destroy $16 billion worth of perfectly good ammunition…

… or $2 billion to build a website.

It’s extraordinary that these people are already in charge of educating our children, regulating our savings, and now our medical care.

It’s even more appalling that given such dismal performance people want more.

As the old saying goes, the classic definition of insanity is trying the same thing over and over again and expecting a different result.

A final point I’ll mention is that it’s concerning to see people in the Land of the Free and Home of the Brave expect the government to solve their problems.

What ever happened to self-reliance? The pioneering spirit? Good ole’ American can-do ingenuity?

In truth there are countless ways for a motivated person to solve problems. Or at least to make forward progress.

For example, to all these kids that have their hands out demanding free university education, I always ask the same questions:

How many books did you read in the last twelve months?

How many FREE online courses from Harvard and MIT did you take?

Are you actually doing anything to help yourself? Or are you just whining on social media about how no one is giving you anything for free?

America was founded as a place where people take responsibility for themselves.

But this now seems to be an outdated, minority view.

The Land of the Free is truly becoming the Land of Getting Free Stuff.

Source

from Sovereign Man http://ift.tt/2oY66ok
via IFTTT

A few days ago Charles Schwab, the investment brokerage firm, announced that the number of new brokerage accounts soared 44% during the first quarter of 2017.

More specifically, Schwab stated that individual investors are opening up stock trading accounts at the fastest pace the company has seen in 17 years.

17 years.

Anyone remember what happened 17 years ago?

Oh right. The Dot-com bubble burst.

After years of unbelievable gains in the 1990s, the NASDAQ Composite index peaked at 5,132.52 on March 10, 2000.

Simultaneously, during the first quarter of 2000, investors were rushing to open new brokerage accounts invest their savings in the stock market.

The NASDAQ Composite subsequently fell nearly 80% over the next 2 ½ years, wiping out trillions of dollars of wealth from retail investors.

The last phase of any bubble is almost invariably the euphoric shopping spree of an irrational public that buys stocks, real estate, etc. at record highs, foolishly believing that prices will keep rising indefinitely.

That’s what happened in 2000.

And that’s what seems to be happening today.

Investors are once again clamoring to buy expensive, popular stocks at price levels never before seen in the history of the stock market.

Company valuations are sky-high.

At 26.44, the S&P 500’s Price/Earnings ratio is the highest EVER, except for two occasions: the 2008 crash, and the 2000 crash.

At 28.93, the “Shiller P/E ratio”, which looks at company valuations over a longer-term, 10-year period and adjusts for inflation, is at the highest level EVER, except for two occasions: the 2000 crash, and the 1929 crash.

Price to sales ratios are near the highest levels in at least 50 years.

Price to book ratios haven’t been at this level since the 2008 crash.

And the stock market cap to GDP ratio is the highest since the 2000 crash.

(If you don’t understand those terms, I would highly encourage you to read this book. This small investment in your education might be the best you’ll ever make.)

Billionaire investor Paul Tudor Jones described these expensive stock market valuations as “terrifying” earlier this month at a closed-door asset management conference hosted by Goldman Sachs.

Yet for some reason individual retail investors still believe that stock prices will continue to rise.

According to Yale University’s Stock Market Confidence Index, for example, over 90% of individual investors believe that the stock market will rise in the next 12 months.

This sentiment isn’t actually based on any data; it’s simply how people -feel-.

These are classic bubble conditions: record-high prices, unsustainable valuations, baseless euphoria, and a surge in activity from retail investors.

In fairness, it’s possible that corporate profits surge by unimaginable rates; this would bring stock valuations back to reality.

But that’s unlikely.

Corporate profits are more or less tethered to the overall economy. If GDP growth is flat, corporate profits will be flat.

Real GDP growth in the US basically went flat in 2016 at just 1.6%.

And the Federal Reserve Bank of Atlanta estimates that the US economy grew at a pitiful 0.5% annualized rate in the first quarter of 2017.

Consumer spending, the mainstay of the US economy, slumped in the first three months of this year.

Plus, interest rates are starting to rise, which increases borrowing costs for both businesses and individuals.

Given such anemic conditions it seems a risky to bet everything on a sudden shock-and-awe surge in corporate profits.

So we’re right back where we started– an overvalued market exhibiting classic signs of a bubble.

I’m not suggesting that some major crash is imminent.

It’s entirely possible that this bubble can get even bigger; the stock market might rise another 10%, 20%, or more.

But it’s also possible we’ll see a drop of 40%+ from these levels. Remember, the NASDAQ Composite fell 78% from its peak in 2000.

Rational individuals always consider their downside first. Fear of loss should be far greater than the fear of missing out.

Quite simply if the reward isn’t worth the risk, don’t do it. Find something else. Or do nothing and simply wait on the sidelines.

The universe of options is a lot bigger than simply “US stocks”, and there’s an abundance of great opportunity outside of the mainstream.

Lately I’ve been involved in a number of secured lending deals where I’m able to earn between 10% to 12% per year with almost zero risk.

This strikes me as a great alternative to the stock market; I’d rather make a fixed 10% with minimal risk than potentially make 15% or 20%, but risk a 50% loss.

I’ve also been buying cash-producing royalties, which in my view is one of the most undervalued asset classes in the world. (More on that another time…)

Bottom line, there’s no sense in taking on enormous risks to make a few bucks.

The world is a big place. And with so much technology and connectivity at our disposal, there are plenty of safe, lucrative alternatives out there to consider.

Source

from Sovereign Man http://ift.tt/2pLCtEX
via IFTTT

Finally, the breakthrough.

After months of experimentation and failure, I finally managed to crack the code and successfully distill my first batch of homemade ethanol.

I botched the job the first seven times and ended up with useless buckets of goo, so I’m pretty excited right now.

It turns out that it’s not even that hard.

I started with unused fruit that literally falls off the trees in my organic orchard.

Nature does most of the work; the fruit eventually decomposes down to its basic sugars, at which point the addition of yeast turns the sugar into alcohol.

The last step is the distillation process which separates the alcohol from the rest of the mix. (A basic distillation kit costs less than $30.)

And voila, the end result is pure ethanol. OK maybe not 100% pure, I’m still not Walter White. But it does the job.

The uses for ethanol are endless.

It’s a great antiseptic for medical purposes. Ethanol can be further turned into white vinegar, or mixed with our homemade lavender oil and diluted into a household cleanser.

It can be consumed to kill brain cells. It can be burned for heat. It can be even used as a gasoline substitute to power a flex-fuel motor vehicle.

That’s probably the most exciting part– not having to depend on the outside world for the fuel that I put in my car.

Talking about this stuff makes me seem like I’m some rabid survivalist hiding out in a bunker waiting for the end of the world.

I’m not. I think the world is awesome and full of incredible opportunities.

I’ve seen it with my own eyes after traveling to 120+ countries and having started or acquired so many great businesses.

Clearly there are obvious consequences of a fatally flawed financial system and far too much government debt.

But that doesn’t mean the world is coming to an end. It’s changing.

And I’m quite optimistic about the future, especially for people who take control of the outcome by protecting their downside risk and going after the abundance of opportunity that comes from dramatic change.

That’s what the idea of personal sovereignty is all about: taking control.

That means reducing our dependence on what we cannot control and taking charge of what we can.

Being able to grow my own fuel is a small example.

I’m not recommending that you produce ethanol (though you probably already have enough starter material in your garbage bin.)

But each of us has aspects of our own lives over which we can easily take greater control.

It could be health, for example, which would mean making better decisions about what we eat and exercising more.

Doing this will have a far greater impact on our health than any government health plan could ever achieve.

Many of us could probably also take greater charge of our finances.

Again, rather than waiting for some politician or central bank to engineer prosperity and economic growth, learning more about investing and business will have a far greater impact.

With a small investment of time and money in your education, you could easily learn the skills that are necessary to become, say, a successful real estate investor, or to start your own e-commerce business.

I’m not talking about becoming a multi-billionaire. This is about generating additional cashflow, $500 to $5,000 per month.

It’s not rocket science, and this outcome is completely achievable for ANYONE.

In other words, no one has to wait for an act of Congress or new central bank policy to make more money. We have the power to control our own economic prosperity.

Taking charge of retirement is another obvious example.

We routinely discuss how pension funds across nearly all western governments are completely underfunded.

According to an analysis from Citibank, the largest western economies including Germany, France, Italy, Japan, etc. have pension gaps totaling roughly $80 trillion.

The US Social Security system makes up nearly half of that amount, and even the government itself tells us that Social Security’s trust funds will run out of money in about 17 years.

So if you plan on being retired at some point beyond 2034, you absolutely have to reduce your dependence on Social Security and take control of your retirement.

Again, there are countless ways to do so.

You could set up a self-directed SEP IRA, for example, and contribute up to $54,000 to your retirement each year from that new business we talked about earlier.

Plus you’ll derive fantastic tax benefits from doing so.

Banking is another obvious area over which we can take back control.

As I often write, depositors are nothing more than unsecured creditors of their banks.

We have zero control, oversight, or knowledge over how our banks gamble away our savings on the latest risky investment fad.

But taking back control is easy; there are plenty of options. You could simply withdraw a little bit of physical cash and hold a few thousand dollars in a safe.

Or you could buy gold. Or even cryptocurrencies like bitcoin or etherium.

All of this means that, no matter what happens or doesn’t happen next, you’ll thrive.

If Social Security goes bust, your retirement will still be great.

If your bank turns out to be another Lehman Brothers, you’ll still have independent funds.

In my case, I’ll always have a steady supply of energy, organic food, and now, fuel for my vehicle.

I cannot overstate the power and confidence that you’ll feel once you’re in control.

It’s an incredible feeling. And it’s totally achievable.

All it takes is a little bit of education… and the will to act.

Source

from Sovereign Man http://ift.tt/2oqCL3h
via IFTTT

On October 22, 1986, the world was an entirely different place.

The Soviet Union still loomed, as did the threat of nuclear annihilation.

Most people had no idea how to use a computer, let alone even heard of the “Internet” (which at the time was still a military communications project.)

Hardly anyone had ever seen a cell phone. And with a $4,000 price tag, even fewer people owned one.

Microsoft stock had recently IPO’d, making 30-year old Bill Gates one of the richest men on the planet.

And the most powerful supercomputer ever created, the Soviet M13, could perform 2.4 billion “floating point operations per second”, which is a fraction of what an iPhone 5 can do today.

1986 was a totally different world. It was also the last time that the US tax code was comprehensively updated.

And that was a big deal.

Prior to the 1986 tax reform, the previous US tax code had been enacted in 1954.

Needless to say the world had changed a lot between 1986 and 1954.

From 1954 to 1986, the federal tax code had become enormously complex; rather that rewriting the code, Congress had spent decades making countless changes, tweaks, and additions.

By the late 1960s the tax code was completely incomprehensible and grossly overcomplicated.

But it still took them decades to fix it.

In 1986 they hit the reset button; the primary goal was to simplify the tax code and rewrite it for (what was then) the ‘modern world.’

Over the past four decades they’ve made the exact same mistakes.

Congress has made countless small changes, tweaks, and additions to the point that the current tax code is once again completely incomprehensible and grossly overcomplicated.

Tax preparation service H&R Block has been aggressively advertising that they are using IBM’s Watson, one of the most advanced AI technologies ever invented, to do people’s taxes.

That pretty much sums up how complicated the tax code has become… that a leading tax prep service is now relying on advanced AI to get the job done.

Taxes are a nightmare in the Land of the Free.

It’s not simply the amount of tax that people and businesses have to pay (which is quite high, especially if you’re a small business owner.)

And it’s not simply the lack of benefit you receive in exchange for paying your taxes (more debt, more government waste.)

The nightmare of taxation is also about the waste of so much time, money, and stress on such a demeaning activity.

Tax preparation sucks innumerable hours and tens of billions of dollars out of the economy each year that could be used far more productively.

I have friends in foreign countries from Estonia to Singapore who are successful investors and entrepreneurs that spend literally minutes each year preparing their taxes, filing online, and paying a low, reasonable sum.

If they were in the US, the nuances of their international business and investment activities would have them buried in paperwork.

Additionally, the US tax code is packed full of provisions that provide strong incentives and disincentives which dramatically alter people’s decision-making.

The current US tax code provides huge incentives for Americans to get married and have children, showering families with extra benefits that don’t apply to single taxpayers.

And given the generous deductions for interest and depreciation, it also provides strong incentives to invest in real estate.

Yet the tax code actually provides disincentives for investing in gold (which is subject to a higher 28% tax on capital gains).

So basically the government wants us to have babies, buy houses, but avoid gold.

Most of all, the majority of the tax code is simply obsolete; it was written in 1986 at the peak of the Industrial Age.

Back then the biggest companies in the world back then were General Motors, Exxon, Ford, Chevron, General Electric, and DuPont… pretty much all oil and manufacturing.

Today it’s companies like Apple, Google, Microsoft, Facebook, Amazon, etc.

Our world is dominated by digital technology that eradicates international borders.

E-commerce and digital products didn’t even exist in 1986.

Yet entrepreneurs and business people are somehow expected to cram 21st century business models into an industrial era tax code.

It simply doesn’t compute.

Of course, the burden is always on the taxpayer to navigate the obsolete complexities of the tax code.

And if you screw up, they threaten you with debilitating financial penalties and even jail time.

Sounds like a fair system to me!

What’s incredible is that they’ve been talking about reforming and simplifying the tax code for years… and years…

Everyone knows it needs to happen. But it still hasn’t. And likely won’t.

That’s because, as my tax attorney explained to me long ago, every single line of the tax code, no matter how outdated or obscure, is backed by some special interest group.

Developers want to keep the interest and depreciation deductions. Family advocacy groups want to keep the child tax credits.

And they’ll all fight tooth and nail for their prized tax provisions.

I truly hope I’m wrong. But I wouldn’t hold your breath on some major tax code reset.

Yet as I often write, there are still endless options at your disposal to legally reduce what you owe… without adding any complicated burdens.

Establishing a more flexible retirement plan is one obvious option.

Switching to a solo 401(k) plan could triple your tax benefit, while a self-directed SEP IRA could increase your tax benefit by nearly 10x.

You still have until midnight tonight to make a contribution that will apply to 2016.

Remember, you can always contribute to your existing IRA today, and then switch to a better plan down the road.

Don’t miss tonight’s tax deadline– it’s literally free money.

Source

from Sovereign Man http://ift.tt/2oJklM1
via IFTTT

Last week the Internet was ablaze with disgust after a man was physically dragged off a United Airlines flight.

What’s amazing, though, is that there are countless cases of another industry abusing its customers in far, far worse ways than the airlines.

I’m talking, of course, about the banking industry.

1. Banks treat you like criminal suspects too.

Sure, United had a man dragged away like he was a rape suspect being hauled off to jail.

But banks treat their customers like criminal suspects on a daily basis.

If you think I’m exaggerating, try walking into your bank and asking to withdraw $20,000 in cash.

See how quickly they start acting like police investigators, demanding to know what you intend to do with your own savings.

Thanks to a law called the Bank Secrecy Act, banks are legally required to fill out “Suspicious Activity Reports” on their customers and send them to the government.

Banks filed nearly 1 million suspicious activity reports in 2016 alone.

Think about that; United treated one passenger like a criminal suspect. Banks treated 1 million customers like criminal suspects last year.

2. Banks nickel and dime you even more.

The airline industry is constantly being ridiculed for its incessant and ridiculous fees. Selecting a seat, checking a bag, booking over the phone, even ‘payment fees’.

My favorite is the ‘fuel surcharge,’ which most airlines imposed back in 2007-2008 to compensate for the high price of fuel after oil prices surged past $120.

Of course, when oil fell to below $30, they didn’t get rid of the fuel surcharge.

Airlines rake in tens of billions of dollars each year on these fees that absolutely infuriate their passengers.

But once again, banks are no different, endlessly nickeling and diming their customers with unnecessary fees… especially if you’re a small business owner.

Some of the most infuriating are fees for sending and receiving money.

To send a domestic wire transfer, for example, banks charge a fee of $25 to $35.

Yet the actual -cost- of banks sending each other money through the Federal Reserve system is just pennies– as low as 3 cents per transaction.

So banks are literally charging more than ONE THOUSAND TIMES as much for a wire transfer as it costs them.

3. Overbooking? Try fractional reserve banking

Last week’s United incident highlighted the common practice of overbooking, in which airlines deliberately sell more seats for a flight than actually exist.

If there are 150 seats on a plane, an airline might sell 160-165 seats on the assumption that 5% of ticketed passengers won’t show up.

In other words, they make money by selling something that doesn’t actually exist… which isn’t a problem until all the passengers show up.

Well, this happens in the banking industry as well; banks routinely make loans and charge interest on money that doesn’t actually exist.

It’s called “Fractional Reserve Banking”, a type of financial system that only requires banks to hold a tiny portion (or none) of their customers’ deposits in reserve.

If you deposit $100,000 at a bank, for example, the bank might hold 5% of that money in reserve, and loan out the remaining $95,000.

That $95,000 will eventually be deposited in the bank, upon which the bank will hold 5% of that amount ($4,750) and loan out the remaining $90,250.

This continues again and again until the bank has made $2 million in loans on a single $100,000 deposit.

The other $1.9 million doesn’t actually exist. But the bank is raking in the interest.

Just like airline overbooking, fractional reserve banking is a risky practice. And we saw in 2008 how quickly the entire system unraveled.

But that’s OK because. . .

4. Banks are in bed with the government too.

After the 9/11 attacks, the already-troubled airline industry was quickly sliding into bankruptcy, so the US government provided a $15 billion bailout through the Air Transportation Safety and Stabilization Act.

Airlines, as it turned out, were too big to fail.

Seven years later, the banks received a bailout worth more than $1.7 TRILLION, over 100x what the airlines received.

So no matter how stupid or risky their practices are, banks expect the taxpayer to bail them out.

5. Yet they brazenly screw their own customers

One of the things that was most disturbing about the United episode was how quickly the situation escalated to violence.

After overbooking the flight, United offered $800 in vouchers to passengers who voluntarily got off the plane.

$800, apparently, was the magic number. After breaching that limit they resorted to violence.

It shows a pitiful lack of respect for human dignity and a terrible violation of the public trust.

It’s the same in banking.

Hardly a month goes by without some major banking scandal– colluding on interest rates and exchange rates, manipulating asset prices, manufacturing fake accounts…

It never stops.

At least airlines pretend to compete with one another and engage in the occasional ‘fare war’.

Banks actually conspire to screw their customers.

And even when they get caught there are hardly any consequences.

One guy got dragged off a plane and the Internet lost its mind. But banks abuse their customers on a daily basis. Where’s the outrage?

If people are angry about United, they should give serious thought to their financial system.

Sadly there are no real alternatives to the airline industry.

If you need to get from Vancouver to London, you pretty much have to fly.

But with banking, there’s a whole world of solutions.

Everything from deposits to lending to exchange services can already be done better, faster, and cheaper outside of the banking system.

With options like Peer-to-Peer platforms, Blockchain services, or even physical cash and precious metals, there’s no reason to keep 100% of your savings in a system that is rigged against you.

Source

from Sovereign Man http://ift.tt/2pJam8A
via IFTTT

Recently the Congressional Budget Office published a scathing report that the US government debt-to-GDP ratio will double over the next 30-years.

Few government agencies are as blunt as the Congressional Budget Office.

In fact the agency’s report plainly states that “the prospect of such large and growing debt poses substantial risks for the nation. . .”

Echoing this sentiment, a former director of the Congressional Budget Office called the US debt:

“a serial horror story in which the greatest economic power ever to grace the globe sails directly into self-inflicted crisis, suffering and decline.”

Debt matters.

Nearly every major superpower over the last thousand years, from the French Bourbon monarchy to the Ottoman Empire, was eventually crushed under the weight of its debt.

The CBO has been sounding the alarm bells for years warning successive administrations that there will be serious, serious consequences in the future.

The irony is that the CBO is probably being overly optimistic.

I pulled some of their older projections from several years ago, and while they nailed the trend, they totally underestimated how severe the debt crisis would be.

In January 2007, for example, the CBO issued its annual budget and economic outlook in which they made 10-year projections about the national debt.

So, 10 years ago, the CBO estimated that by 2017, the “debt held by the public” would be $4.2 trillion, which they estimated would be 24.6% of GDP.

(Note that the CBO tends to focus on “debt held by the public”, but this number is only a portion of the total national debt.)

Now it really is 2017.

So how much is the actual debt held by the public today?

$14.35 trillion, or 76.5% of GDP… more than three times what the CBO projected back in 2007.

(Bear in mind that TOTAL government debt in the US is $20 trillion, around 106% of GDP.)

In other words, the CBO’s projection was wrong by $10 TRILLION.

That’s not to take anything away from the CBO; as the old saying goes, predictions are hard, especially about the future.

The agency is clearly doing its best to objectively highlight the obvious (and dangerous) trend of rising debt levels in the Land of the Free.

Their math just happens to be off by an order of magnitude.

It’s not just the CBO either.

As I frequently write to you, each year the Board of Trustees of the various Social Security trust funds releases a report detailing the dismal finances of that program.

In the Trustees’ 2005 report, for example, they projected that the trust funds would be “fully depleted,” i.e. completely run out of money, in the year 2043, nearly four decades later.

Eh, who really cared… 40 years was such a long time away.

The next year in the 2006 report, however, their estimated year of depletion changed to 2040… 34 years in the future.

By 2010, it had changed again to 2037… 27 years into the future.

And from last year’s 2016 report, the estimate changed yet again to 2034, just 18 years into the future.

Notice the trend? In a little more than a decade, the Trustees’ estimated date when the trust funds would be fully depleted has accelerated by 9 years.

In other words, the closer we get to the date, the more accurate their calculations become, and the faster they believe the trust funds will go bust.

Again, it’s hard to fault the trustees.

They have the right message: Social Security is going broke. They just happen to have been too optimistic in their timing.

It mystifies me how this is not front-page news on a daily basis.

I mean, the implications are enormous; the people who run the Social Security program are saying, flat out, that they’re running out of money and the program will have to curtail benefits.

And the guys within the government who watch over the budget are shouting from the rooftops that the national debt poses substantial risks.”

I imagine most people would probably agree that this stuff matters.

It just doesn’t matter to them today. Or tomorrow. Or next year.

It’s easy to put off obvious and dangerous consequences that won’t strike until several years into the future.

Such short-term thinking is in our nature as human beings.

It’s why we eat garbage foods that poison our bodies… because the life-threatening diabetes and heart disease won’t hit us for another couple of decades.

This is a dangerous gamble, especially considering that there are countless solutions to distance yourself from the impact of your government’s serial irresponsibility.

For example, there are plenty of options to establish a far more flexible, robust retirement structure like a self-directed SEP IRA or solo 401(k).

These plans allow you to save more money for retirement, cut your administrative costs, and realize far better returns in alternative asset classes.

As an example, instead of stuffing all of your retirement savings in an overpriced stock market, your IRA or 401(k) could own a profitable private business or royalty stream that consistently pays strong, healthy cash flow month after month.

This way, when Social Security does go broke, you won’t be affected one bit.

No one else can make this a priority in your life but you.

I’ll say it again: all it takes is the right education, and the will to act.

Source

from Sovereign Man http://ift.tt/2pdhY3P
via IFTTT

On the plane ride back to Chile last night, I was sitting next to a particularly chatty woman who wanted to know my whole life story and what I was doing in Mexico.

I played along and explained to her that I had been on a cruise for the past week speaking at an investment conference.

“Oooooooh,” she said, and then inquired what I had been speaking about.

That’s when the conversation became just a little bit uncomfortable.

I walked her through the big picture, explaining how the US government is totally bankrupt, that Social Security is running out of money, and that the Federal Reserve is rapidly engineering its own insolvency.

That didn’t seem to be the idle chit-chat she was looking for.

Then I told her how we educate people about ways to distance themselves from the consequences, and how to make better investments that generate strong returns while taking minimal risk.

Things became really unglued when I arrived to the topic of taxation.

“The highest return on investment you’ll ever make,” I told her, “is taking legal steps to reduce your taxes.”

She looked dumbfounded.

“Think about it; cutting your tax is like boosting your investment return by 10%, 20%, or more, without taking on any risk. You’ll never generate that kind of return so easily anywhere else.”

Then, as expected, she exploded with the usual brainwashed, vitriolic disgust, accusing me of being ‘unpatriotic’ because I take legal steps to slash my tax bill.

I’ll never understand this close-minded mentality.

It’s not exactly a controversial statement to suggest that governments waste an unbelievable amount of money.

In the Land of the Free, for example, the federal government’s National Institutes of Health wasted millions of dollars taxpayer funds a few years ago to study monkeys and mountain lions running on treadmills.

Then there was the $1 billion that the US military spent to destroy $16 billion worth of perfectly good ammunition.

And of course the $2 billion Obamacare website fiasco.

There are countless other examples, it just never stops.

They’ve spent billions of dollars to wage wars, invade other nations, and pay for drone strikes that ‘accidentally’ destroyed schools and children’s hospitals.

The reality is that there’s very little you can do about this.

We’re taught in our government-controlled education system that when we disagree with the decisions that our politicians make, we’re supposed to go down to the polling station and vote for change.

This seldom produces any significant results.

In truth your vote has precisely zero influence over the national agenda. But what you do have total control over are your own actions and finances.

If you have misgivings about how the government squanders your money, you’ll be a lot better off reducing the amount that you pay them.

I fail to see how ‘patriotism’ has anything to do with this.

Does anyone seriously believe that ‘patriotism’ is defined by the amount of money you throw into a failing system?

Or that it’s somehow ‘unpatriotic’ to follow the law and take legal steps to reduce what you owe?

Are people being unpatriotic when they maximize their IRA contributions or shop in a duty-free store?

Cutting your tax bill is a sensible thing to do.

Rather than continue to finance wars, debt, body scanners, and drone strikes, you can put that money to work in a way that actually benefits yourself, your family, and anyone else you choose.

Each year I put my tax savings to work in a variety of productive ways.

I’ve financed the recovery of a village in Nepal that was devastated by an earthquake.

I paid more than $70,000 to fund an experimental surgery for a disabled veteran who lost his leg in Afghanistan.

(As a result of the procedure he was able to dance at his wedding and has participated in a 5k race.)

I’m currently putting a promising young orphan through school.

And I co-founded and regularly fund a charity that provides entrepreneurship education for young people each year.

All of these things are possible because I’ve applied perfectly legitimate provisions in the tax code to reduce the amount that I owe.

So instead of my money going to pay for more war and waste, the funds are put to much better use where I can see real, tangible, positive results in people’s lives.

Every situation is different.

If you’re an investor who lives off capital gains and dividend income, there are certain ways to reduce what you owe (consider Act 22 in Puerto Rico…)

If you have an online business, you could set up a properly-structured foreign company to indefinitely defer your corporate profits tax.

If you have a brick-and-mortar business, you could establish a captive insurance company which could save you literally millions in tax.

And just about -everyone- can maximize contributions to an IRA or 401(k), especially if you establish a more flexible structure.

Bottom line, whatever your situation, there are always plenty of legal options to reduce what you owe… and hence put that savings to work in far more beneficial ways.

Source

from Sovereign Man http://ift.tt/2nByCgl
via IFTTT