Category: simonblack

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.

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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.

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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.

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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.

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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.

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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.

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To paraphrase that great scene from Airplane, it looks like I picked the wrong week to unplug from the Internet.

Aside from a few hours when we docked in Honduras last week, I was on a self-imposed Internet exile and went several days devoid of any communication with the outside world.

I missed a major scandal at the Fed, another terror attack in Europe, the start of a US military campaign in Syria, political chaos in South Africa, and more.

But it was totally worth it.

I was on a cruise ship for most of the week speaking at a high-end investment conference, and it was as fantastic experience.

Most conferences are pathetic money grabs and giant wastes of time, so I turn down just about every request that my office receives to speak at other people’s events.

But this one was organized by my friends Robert Helms and Russell Gray, two very classy and knowledgeable investors who always put on great events.

What I enjoyed the most is that, in addition to speaking and having the opportunity to teach hundreds of people, I also had the opportunity to learn.

Learning is our great gift as a species… one of the things that separates us from animals.

Humanity rose from nothing because of our ability to learn, and our ability to pass on what we learned to the next generation.

As the infinitely quotable historian Will Durant wrote,

“Civilization is not inherited; it has to be learned and earned by each generation anew; if the transmission should be interrupted for one century, civilization would die, and we should be savages again. So our finest contemporary achievement is our unprecedented expenditure of wealth and toil in the provision of higher education for all.”

‘Education’ doesn’t mean ‘university’. It means learning from other intelligent, talented people.

This is especially true in our modern Digital Age where wealth is derived from knowledge and information, not land and capital.

Hundreds of years ago aristocratic landowners dominated the economy.

Decades ago it was the business elite who controlled the capital and manufacturing capacity.

Today it’s knowledge and ideas that win.

Google (okay, ‘Alphabet’) started as nothing more than an algorithm to improve Internet search.

19-years later it’s one of the largest, most powerful companies in the world.

Ditto for Facebook, whose simple idea of connecting users propelled it to become worth more than $400 billion in just 13-years.

In fact Facebook is 20% more valuable than Johnson & Johnson, the largest manufacturing conglomerate in the world.

(Bear in mind that JNJ has been in business for more than a century longer than Facebook; it was founded in 1886 when Grover Cleveland was President of the United States.)

Or consider Blockchain, the financial technology that virtually eliminates the need for consumers to hold their savings in the banking system.

The simplest Blockchain is a mere 200 lines of code. That’s it.

So in other words, the centuries-old, multi-trillion dollar banking industry is at risk of being disrupted by just 200 lines of code.

It’s extraordinary.

Knowledge and ideas are real wealth today, and that’s why I always welcome the opportunity to share my own and learn from others.

One of the most impressive things I saw last week was Robert Kiyosaki, author of the life-changing book Rich Dad, Poor Dad, sitting in each session as a student.

Robert’s books have sold 50+ million copies. He owns hundreds of millions of dollars worth of high quality, cash-producing real estate.

He’s incredibly wealthy, and he just turned 70-years old.

Yet Robert remains a student and freely acknowledges that he still has so much to learn.

He strolled into the classroom each morning with stacks of books that he’s been reading and piles of notes that he’s been taking.

It was amazing.

The general theme of the event was that Winter is Coming; there are clear signs of trouble ahead.

Hearing from the Chief Economist of Fannie Mae (the quasi-government agency that dominates the housing market) was sobering.

His presentation was packed with data indicating that US housing is “overpriced” and “very late in the cycle”.

Other presenters discussed the looming stock market correction, coming bank failures in Europe, etc.

My own remarks focused on the current or projected insolvency of the US government, Federal Reserve, and major trust funds like Social Security.

But as I told the audience, it’s time for optimism.

Yes, the real estate market is overpriced and the stock market is due for a gigantic correction.

Yes, nearly every major western government and pension fund is hopelessly insolvent, and central banks are nearly insolvent–

— and these circumstances will likely give rise to tactics like dramatically higher taxes, capital controls, and the chaotic pain that comes from default.

In short, there are serious, serious problems in the system.

But that doesn’t mean the world is coming to an end. Our species has seen much worse.

There’s bound to be a major reset in the financial system, just as there have been so many others in the past, from the adoption of the gold florin in 1252 to the establishment of the Bretton Woods system in 1944.

And as with previous resets, there will be winners and losers.

Even during the episode of hyperinflation in the Weimar Republic in the 1920s (and the consequent reset) there were winners and losers.

While most people got wiped out financially, a few people became fantastically wealthy because they saw what was coming, protected themselves, and positioned their investments to gain.

Losers become victims.

They put their entire livelihoods at risk due to a misguided faith that the system is rock solid and will never fail.

Winners protect their downside risk and go after the abundance of opportunity that comes from rapid change.

The difference between the two comes down to education… and the will to take action.

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For the last several days I’ve been speaking at an investment conference organized by my friends Robert Helms and Russell Gray.

It’s been great so far, and my fellow speakers here include the legendary Robert Kiyosaki, G. Edward Griffin, Peter Schiff, and many more.

One of the key themes so far in the event is that there are likely problems ahead for the US real estate market.

On the first day I had a great conversation with the Chief Economist of Fannie Mae, who was also speaking at the conference.

If you’re not aware, Fannie Mae is a quasi-government agency that is heavily involved in the US housing sector.

I asked him point blank– what do you think of US housing right now? He answered succinctly: “It’s overpriced.”

His presentation went DEEP into the data, showing that US housing is “late in the cycle,” meaning that prices may soon reach their peaks and then suffer a substantial correction.

Property prices nationwide across the United States have been rising at a much more rapid rate than wages and salaries. This is totally unsustainable.

A number of prominent real estate investors and developers have also spoken anecdotally that they’re no longer buying.

One gentleman who owns and operates more than 10,000 apartment units told us that he can no longer find any properties that meet his investment criteria.

Everything is overpriced, and investment returns are falling.

Even more amazing, he told us that banks financed his most recent deals at unbelievable terms– they loaned him hundreds of millions of dollars to fund his real estate projects at just 3%, on an interest-only basis.

This is crazy.

Considering that the official rate of inflation in the United States is nearing 3%, the banks practically loaned him the money for free.

Think about it– he pays 3% interest, but the money loses nearly 3% of its value each year due to inflation… so essentially the money is zero cost.

What an unbelievably stupid loan for the banks to make: as I remarked to the audience, the banks are once again putting their customers’ funds at risk and receiving zero return in exchange.

This is another sign of a major bubble, similar to what happened ten years ago in the last crash.

Property prices rose far too much, far too quickly… and banks were making completely irresponsible loans with their customers’ money.

We’re now seeing signs that the same things are happening once again.

No one here expects that any crash or major correction in US property prices is imminent.

But in general, the consensus here is that you’re better off being a seller in the US right now rather than being a buyer.

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In the late in the 5^th century BC, the government of ancient Rome came up with a new idea that has lasted for thousands of years.

I’m not talking about their roads, republican form of government, or water sanitation.

Their bold idea was to start paying retirement benefits to Roman soldiers.

This was a pretty big deal. In ancient times, you worked until you died. There was no such thing as retirement.

But under the praemia militiae, retired legionnaires could be secure in their futures when they completed their service to the republic.

Roman pensions were generous. During the reign of Augustus, a retired legionnaire received a pension of 12,000 sesterces, worth nearly $40,000 in today’s money.

Eventually Roman soldiers came to depend on their pensions; they no longer viewed the money as a privileged benefit. Pensions became an entitlement.

The problem was, though, that the government made too many promises; there were too many retirees, and Rome hadn’t set aside enough money to pay them.

In time, the government’s inability to pay military retirees became a major source of social unrest, fueling the demise of the republic and rise of the Empire.

So just as the ancient Romans invented the first pensions, they also invented the first pension crisis. It wouldn’t be the last.

Most major governments find themselves in a similar position today.

According to a 2016 report from Citibank entitled “The Coming Pension Crisis,” the 35 developed nations which comprise the OECD (including the US, Canada, Japan, most of Europe, etc.) have pension shortfalls totaling $78 TRILLION.

To put this in context, $78 trillion is more than the size of the entire world economy.

And the shortfalls get worse each year.

It’s not just big national governments either.

State / provincial governments, local governments, and even countless private companies have underfunded pensions that are rapidly running out of cash.

In the United States, Social Security releases an annual report every summer describing the program’s pitiful finances in excruciating detail.

They don’t mince words: “projected [costs] will exceed total income . . .  starting in 2020,” and, “trust fund reserves decline until reserves become depleted in 2034.”

You can literally circle a date on your calendar when Social Security’s trust funds are depleted.

Frankly I think their projections are optimistic.

Remember that the program is funded by taxpayers who are currently in the work force.

12.4% of your paycheck gets funneled to Social Security, and that money goes in the pockets of current beneficiaries.

There is a rather interesting long-term trend, however, that robots and artificial intelligence will replace a lot of human workers.

From self-driving cars to algorithmic financial advisers, millions of people may find themselves out of work in the future.

The problem for Social Security is that robots don’t pay tax. So the program will lose a LOT of tax revenue as a result.

This is clearly a long-term issue; nothing is going to happen to Social Security tomorrow. And that’s why few people really think about it.

Except that… this is RETIREMENT. We’re SUPPOSED to think long-term about retirement.

And if you think long-term about your retirement, it becomes pretty obvious that Social Security probably isn’t going to be there for you, especially if you’re in your mid-40s or younger.

Fortunately we have time to prepare.

It starts with a shift in mindset: the government won’t be able to take care of you. You have to be self-reliant.

One way is to start saving, and to do so with a better retirement structure.

A conventional IRA, for example, allows you to contribute up to $5,500 if you’re under the age of 50.

If you switch to a 401(k), however, you can contribute up to $18,000 per year.

Or if you own a small business, you can establish a SEP IRA and contribute potentially up to $54,000 per year to your retirement.

Obviously most people might not have an extra $50k each year to save for retirement.

But just putting away an extra $1,000 per year can result in a difference of more than $100,000 when compounded over 30 years.

Even more importantly, think about establishing a much more ROBUST retirement structure that allows you greater flexibility in how/where you invest.

Most retirement plans are confined to your back yard. If you have a US retirement plan, you’re allowed to invest in government bonds and the US stock market.

But what if US stocks are overvalued? What if you don’t want to loan money to the government?

With a more robust structure like a self-directed IRA or solo 401(k), you’ll be able to open up an entire universe of new investment opportunities.

Private investments. Cashflowing royalties. Cryptocurrencies. High interest foreign bank accounts. Safe, secured lending opportunities.

All of these options are available with a more robust retirement plan, allowing you the chance to generate higher returns without the cost of paying some Wall Street firm to manage your account.

Consider this– if you’re able to save an extra $2,000 per year and generate, on average, 2% more per year (i.e. 10% versus 8%), you will end up making an additional $610,000 for your retirement over 30-years.

This matters. A lot.

Some small changes today could easily make the difference between financial stability and financial chaos down the road.

This isn’t some wild conspiracy theory.

The government itself is telling us that Social Security is running out of money. They’re even telling us when.

And all it takes to fix this problem is a little bit of education… and the will to take a few basic steps.

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[Editor’s note: This letter was written with Tim Price, London-based wealth manager and co-founder of Price Value Partners.]

It was just over two years ago that “The Grilled Cheese Truck, Inc.” began trading in the US stock market under ticker symbol GRLD.

GRLD was exactly what it sounds like– a truck that sells grilled cheese sandwiches.

Yet despite a history of heavy losses, the stock market valued the company at an extraordinary $107 million.

Skeptical investors would have been sharp to call that the peak of the market.

Yet the irrational exuberance continued.

Earlier this year, Snap Inc., a profitless mobile app which offers its shareholders ZERO voting rights, went public with a $28 billion valuation.

That too seemed like the peak of the market’s insanity. But that turned out to be a premature feeling as well.

Now we see none other than Iron Mike Tyson shilling for a Vanuatu/Latvian brokerage firm, enticing small investors with offers of 400x leverage.

It seems all we are lacking at this point is a Fortune magazine cover with a “DOW 100,000” headline.

Maybe it is the peak. Or perhaps the gains will continue.

Fortunately our job isn’t to make precise predictions; it is to assess risk and avoid taking any which (a) is unnecessary, and (b) fails to offer returns that vastly compensate for the probability of loss.

We have pointed out before that the US stock market’s average Price / Earnings ratio is at highs typically not seen except prior to spectacular declines.

See the chart below, which shows the “Cyclically Adjusted” Price-to-Earnings ratio, or CAPE, at 29. The long-term average is 17.

Cyclically Adjusted P/E ratio for the S&P 500 Index, 1880-2017

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Since 1880, the CAPE has only been at this level twice before– the first time prior to the Great Depression, and the second time prior to the dot-com crash.

To us, the prospect of gaining an additional 10%… or even 30% in US stocks pales in comparison to the prospect of losses from a major correction.

As Alhambra Investment Partners point out, investment analysts were forecasting back in October that US companies in the S&P 500 would generate $29 in earnings for the 4th quarter of 2016.

As the Q4 earnings reports started rolling in last month, the estimate dropped to $26.37.

Since that time, with now almost all companies now having reported, the current figure is $24.15 – a decline of 8.4% in just four weeks.

That’s bad news for passive “index” investors who are, by default, exposed to every single one of the companies in the S&P 500– most particularly the expensive ones.

Most people don’t realize this, but the S&P 500 does not equally weigh its 500 constituent companies.

In fact, the price of the #1 weighted stock (Apple) influences the S&P 500 index over 240x more than the least weighted stock (Autonation).

In general, more expensive stocks count more than inexpensive stocks.

So if you buy a traditional index fund, you are allocating the majority of your capital to popular companies, and very little capital to overlooked gems that are inexpensive and undervalued.

This is the opposite of what value-oriented investors should be doing.

As Ian Lance of RWC Partners points out,

“Passive [index] investors in 2000 were allocating large chunks of their money to bubble stocks like Cisco, Sun and Yahoo, and also to accounting frauds like Enron and Worldcom which were on their way to zero.”

We have little experience gambling, but we’re pretty sure that you can’t prosper by betting on every number at the roulette table.

That’s essentially what index investing is. And, like casino games, the market is rigged against individual investors.

You’re already fighting an uphill battle against high-frequency traders and dishonest bankers. Overpaying for expensive, popular assets doesn’t help.

Never forget that the world is a big place.

And if your stock market is irrationally overvalued, you have the freedom to allocate your time, effort, and capital to more attractive, undervalued investments elsewhere.

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