Category: simonblack

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.

The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.

The idea caught on, and pretty soon, everyone was doing it.

As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.

Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them.

FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.

But it didn’t take very long for the madness to start again.

By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.

Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.

It was madness.

By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.

And of course, we know what happened the next year: the entire financial system came crashing down.

Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea.

By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.

In fact, delinquency rates for ALL mortgages across the country peaked at 11.5% in 2010, which only extended the crisis.

But hey, at least that’s never going to happen again.

Except… I was looking at some data the other day in a slightly different market: student loans.

Over the last decade or so, there’s been an absolute explosion in student loans, growing from $260 billion in 2004 to $1.31 trillion last year.

So, the total value of student loans in America today is LARGER than the total value of subprime loans at the peak of the financial bubble.

And just like the subprime mortgages, many student loans are in default.

According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost the same as the peak mortgage default rate in 2010.

This is particularly interesting because student loans essentially have no collateral.

Lenders make loans to students… but it’s not like the students have to pony up their iPhones as security.

That’s what made the subprime debacle so dangerous.

Millions of homes were underwater, so when borrowers didn’t pay, lenders didn’t have sufficient collateral to cover their loan exposure.

With student loans, there is no collateral. Lenders have no security to recoup their loans.

So when students don’t pay, someone is going to take a hit.

That ‘someone’ will likely be you.

That’s because hundreds of billions of dollars of these student loans are either owned or guaranteed by the United States government.

So as borrowers stop making payments, it’s the taxpayer who will suffer yet another massive loss.

Let’s be honest, though, there’s something seriously screwed up with this system.

Young people are pushed into this system by a society that places an irrationally high value on university degrees.

Kids are told for their entire lives that if they study hard to get into a good school, there will be a great career waiting for them.

For many young people this turned out to be a total lie.

In fact, Federal Reserve data once again show that, for at least 25% of college graduates, salaries are no higher than for people with just a high school diploma.

Racking up so much debt hardly seems worth it.

It seems bizarre to begin with that an 18-year old will know what s/he wants to do in life, to the point that they should take on $50,000 in debt for a piece of paper that might not even make them marketable.

What did any of us really know at age 18? And how many of us could have accurately predicted our life’s path?

Very few.

And yet there’s an absurd amount of pressure to force young people into this system that heaps debt upon them.

If you’re a young person about to go down this path of debt, I’d suggest two alternatives:

1) Look overseas.

There’s a multitude of top-ranked universities around the world that you can attend for a fraction of what you might pay at home. See here, and here.

2) Seek mentorship.

The master-apprentice relationship worked well for thousands of years. And it’s so simple.

If you want to be successful, learn from successful people.

If you want to be great at something, find someone who’s already great at it and learn from them.

And if you’re not sure, find someone who you respect admire… someone whose activities and values excite you… and make yourself indispensable to that person

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During the winter of 1796, a Frenchman named Eugene Francois Vidocq was sentenced to eight years of hard labor after being convicted of document forgery.

It was a remarkably harsh punishment for a non-violent crime, especially in Vidocq’s case as there was not even a victim.

Yet this took place during the chaos that ensued after the French Revolution. The scars from the Reign of Terror still remained.

Long sentences were typical, and Vidocq could have just as easily been put to the guillotine. There were countless other examples just like him.

Victor Hugo’s protagonist Jean Valjean from Les Miserables is loosely based on Vidocq.

In the novel, Valjean is sentenced to five years in prison for stealing a loaf of bread so that his family wouldn’t starve.

It wasn’t much better in the rest of Europe.

By the end of the 1700s in England, the number of capital offences stood at 220.

Back then you could be hanged for stealing any item worth more than 12 pence, about $20 in today’s money.

This is one of the many reasons why so many peasants fled their home countries in Europe to come to America.

America stood for liberty and opportunity… not oppression and punishment.

In fact, the US Constitution even had special amendments forbidding cruel and unusual punishment, and enshrining fairness, justice, and due process.

And the Constitution itself only listed three original federal crimes: counterfeiting, treason, and piracy.

But a lot has changed over the past two centuries.

Today there are thousands of federal crimes, not to mention countless rules and regulations at federal, state, and local levels that carry jail time.

It’s absurd.

There’s the case of Palo Alto resident Kay Leibrand, for example, a 61-year old cancer patient and grandmother who was arrested a few years ago because her xylosma bushes were more than two feet tall.

Or Ansche Hedgepeth, a young girl who was arrested in Washington DC for eating French fries at a metro station when she was just 12-years old.

Or George Norris, a 67-year old grandfather in poor health who was sentenced to 17-months in prison for importing orchids without the proper paperwork.

Mr. Norris’s health continued to decline as he was not able to receive proper treatment while in prison.

Over the weekend I read a particularly disturbing story about a man named Shannon Hurd.

Hurd had suffered from a severe drug addiction and had had a few run-ins with the law, including illegal possession of a firearm, and “theft over $500”.

Several years ago he was convicted of robbery for stealing $14 and given a life sentence in a maximum-security prison.

Hurd eventually developed kidney cancer and received pitiful treatment; he died in prison two weeks ago.

Hurd may not have been a model citizen, but it leaves me questioning whether that was true justice.

Then there’s Glenn Ford, who spent 30-years in prison for a crime he didn’t commit.

He was eventually exonerated and released, though the state of Louisiana denied him any compensation for three decades of wrongful imprisonment.

Ford died shortly after his release due to cancer that had gone untreated while he was in prison.

It would be disgusting to hear about such stories in central Africa or Uzbekistan.

The fact that these conditions exist in the Land of the Free is absolutely appalling.

According to statistics from the Justice Department, there are nearly 2.2 million inmates in the US prison system today, with an additional 4.5 million on parole or probation.

Insane. Even at the height of the Soviet Union there were only 1.7 million people in the Gulag.

Yet data from the Federal Bureau of Prisons shows that the vast majority of inmates are serving time for non-violent crimes.

An overwhelming 46.4% of inmates are in federal prisons for drug-related offenses. 8.4% for immigration offenses. 6.5% for fraud.

Lance Saltzman is currently serving a life sentence without parole for stealing a firearm from the home of his violent stepfather who had a history of physically abusing (and even shooting at) Saltzman’s mother.

Ronald Lee Washington is currency serving a life sentence without parole after being convicted of shoplifting two Michael Jordan jerseys.

Washington had been convicted in the past of petty, non-violent theft, all to support his drug habit.

Now he’s costing the taxpayers more than $30,000 per year, which is the average annual cost to house, feed, and guard an inmate.

Even the hardest, most uncompassionate people might realize that there are probably more cost effective ways to rehabilitate someone.

Yet this is what passes as “justice” now in the Land of the Free.

You can hardly get through a single day without violating half a dozen obscure regulations that you’ve never heard of.

And in addition to this over-criminalization of non-violent (and often victimless) acts, many of these obscure rules carry incredibly steep punishments.

It’s Jean Valjean all over again.

I’m reminded of the story I sent you a week and a half ago about my friend Ben, the Silicon Valley entrepreneur who learned first hand that the system isn’t designed to protect him.

Ben’s car had been stolen, and he was astonished at how little the police seemed to care.

They were far more concerned with their paperwork and office gossip than finding his stolen car, which he literally had pinpointed with a GPS device.

Being the value creator that he is, Ben closed his comments by asking the question, “How can we fix this?”

How do you fix such a rigged, oppressive, inefficient system?

Like all solutions, it starts with acknowledging the root problem: You are not free.

Despite all the flags, songs, and lifetime of propaganda, the simple fact remains that a free society does not constantly threaten its citizens with violence or criminalize nearly every aspect of their existence.

Step two in solving this problem: Make sure you’re not a victim of it.

More on that in the coming days.

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I serve on the Board of Directors of a large Singapore-based company that’s in the gold and silver business.

And, last night during our quarterly conference call, the management team gave me a lot of intriguing information.

Sales of physical gold and silver are collapsing across the entire industry.

At the US Mint, for example, sales of US Eagle gold coins fell by 67% between February 2016 versus February 2017.

And sales of US Eagle silver coins are down 75% over the same period.

The World Gold Council’s data also shows a substantial decline in physical precious metal demand in 2016, particularly with bars, coins, and jewelry.

Suppliers and refiners in the precious metals business are echoing these numbers, lamenting that sales are extremely slow and margins are falling.

For our Singapore company, this decline is irrelevant.

They have their own proprietary, state-of-the-art storage facility and a number of cutting-edge service like bullion-backed peer-to-peer loans, so business is great.

But I would expect that a number of other bullion dealers will probably go bust if this downturn lasts much longer.

The one conundrum is that this trend does NOT correlate with the price of gold.

In US dollar terms, the gold price is up 16% since the beginning of 2016.

So it would be reasonable to conclude that sales of physical bars and coins are up as well.

But they’re not.

The reason is because there’s a HUGE difference between physical gold and “paper” gold.

When people talk about the gold price, they’re really quoting the price of gold contracts at exchanges around the world in London, Shanghai, Chicago, etc.

Traders aren’t actually buying and selling physical gold.

These gold contracts are merely paper financial instruments, like stocks and bonds, that traders use for speculation.

When some conflict breaks out in Africa, the knee-jerk reaction is for traders to buy gold contracts.

And when central bankers announce that the economy is totally awesome, traders dutifully dump their gold contracts.

But they’re really just buying and selling highly leveraged paper assets. Nothing physical changes hands.

It’s the same with gold ETFs; these are merely financial instruments to gamble on the paper price of gold.

Investors who truly understand the benefits of owning gold, and don’t simply want to speculate on the price, buy physical bars and coins from a dealer.

And quite often there’s a massive difference in fundamentals between the demand for physical coins and the paper price.

During the 2008 financial meltdown, the paper price of gold and silver plunged.

Speculators and traders were hit by margin calls and forced to sell their contracts.

But demand for physical coins was incredibly strong; savvy investors were looking for a safe haven.

There was a total disconnect between the paper price and physical demand.

That’s now happening again, but in reverse. The paper price is rising, but physical demand is falling.

Management told me last night that they’ve been invited to speak at several investment conferences attended by family offices and high net worth individuals.

But they told me that there’s very little interest in owning physical precious metals among these wealthy investors.

Everyone seems to want to dump all of their money in US stocks or real estate, expecting that they’ll easily make 20% despite both markets being at all-time highs.

This strikes me as total madness. Few people ever prospered buying what was popular and expensive.

There seems to be no fear in the market… no regard for sense or safety.

And my contrarian instincts tell me that this complacency is a great reason to own physical gold and silver right now.

Remember that gold is primarily a form of savings.

You could hold your savings in a bank account, denominated in paper currency like dollars or euros or renminbi.

Or you could hold savings in physical cash. You could even own government bonds.

Each of these is a form of savings.

But so is gold and silver. (And cryptocurrency, for that matter.)

The difference is that gold and silver cannot be conjured out of thin air by a central bank.

And unlike cash, or money in a bank, precious metals actually keep pace with inflation over time.

I remember having a conversation once with a famous investor who told me that he didn’t know what was going to happen in the future…

… and THAT’S why he owned gold– for the “I don’t knows.”

Will there be a trade war with China in the next few years? A shooting war? A major debt crisis? Another terrorist attack? “I don’t know.”

Gold and silver are fantastic insurance policies against the “I don’t knows” due to the metals’ 5,000 year history of value and marketability.

There’s no need to go overboard and keep 100% of your net worth in precious metals.

But given the obvious risks on the horizon that we discuss regularly, and these bizarre demand trends, it’s a great time to consider adding to your physical precious metals savings.

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Last night a good friend of mine came over for dinner.

He’s originally from Poland, and growing up there he heard a lot of bizarre stories about what it was like during the Nazi invasion and World War II.

In 1939, even as 1.5 million German soldiers prepared to invade, the general mood in Poland couldn’t have been more carefree.

My friend’s grandfather once told him that, just prior to the Nazi invasion, the schools in Poland announced they were suspending classes… but only for two weeks, because that’s how long they expected the war to last.

Incredible.

It’s as if everyone acknowledged there would be -some- conflict… but totally underestimated its impact and magnitude.

All the “experts” had forecast a clean and speedy victory, and that life would go on as normal soon.

They couldn’t have been more wrong.

My friend is utterly bewildered that his family didn’t have the foresight to escape prior to the invasion.

But they remained in Poland, along with millions of others, and willfully chose to ignore an obvious threat that ended up having life-changing consequences.

This week we’ve been discussing another obvious threat that most people willfully choose to ignore– the appalling level of US debt.

It’s amazing– as a percentage of GDP, the US has racked up more debt than most impoverished countries in Africa.

The trend holds across the West: Japan, Italy, Greece, France, UK, etc. all share unsustainable indebtedness.

But as we discussed yesterday, government debt is a long-term threat, especially for the United States whose dollar is still the world’s dominant reserve currency.

Despite the debt ceiling fiasco, it’s unlikely there will be a major debt crisis tomorrow. This threat will continue to build.

There are some threats, however, that are much more immediate, and I want to spend the next few days addressing those, starting with this one:

The US stock market is hopelessly overvalued.

By nearly every objective metric, US stocks are ridiculously expensive.

The average Price/Earnings ratio across the S&P 500 exceeds 26.5; there have been exactly TWO times in the last century when the ratio was higher: the 2000 dot-com bust, and the 2008 crash.

Similarly, the Cyclically Adjusted P/E ratio (or CAPE, which smooths out earnings over a 10-year period) has only been higher two other times in history– during the 2000 dot-com bust, and in 1929 just prior to the Great Depression.

There are dozens of other indicators.

Company “insiders”, i.e. senior managers and directors of large corporations, must file a public disclosure every time they buy and sell shares of their companies.

It’s usually a good sign when the CEO of a major company is buying shares; s/he is an insider and knows what’s going on, so their confidence is a positive sign.

Well, according to public data filed with the Securities and Exchange Commission, insider buying is at its LOWEST level in THREE DECADES.

In other words, the people at the top of the corporate food chain who have privileged information about their businesses are NOT buying.

(What do these CEOs know that we don’t?)

Yet the market doesn’t seem to care. There hasn’t even been a slight correction.

In fact the S&P 500 has now gone 105 straight days without a 1% decline.

This is EXTREMELY unusual. Stocks routinely undergo small corrections and sell-offs that cause the index to decline 1% in a single day.

Historically speaking this happens every several weeks.

Going 105 days in a row without a 1% decline is the second highest record EVER, and the most in 22 years.

And the last time the S&P 500 went anywhere near 100 days without a 1% decline was prior to the 2008 crash.

Then there are more technical indicators.

Volatility, a common measure of “fear” in the market place, is at eerily low levels.

And an analysis of S&P 500 options published by the Wall Street Journal yesterday shows that investors are completely unconcerned about a major correction in US stocks.

As the Journal summarized, “These markets know no fear.” There’s an incredible amount of complacency despite obvious warning signs.

Japan is an interesting case study in financial complacency.

During that country’s boom in the 1970s and 1980s, Japan’s Nikkei 225 stock index rose to extraordinary heights.

The index hit 38,957.44 on December 29, 1989… a 500% increase from its level in 1980.

The “experts” presumed that Japan’s growth would last forever; Americans were terrified that the Japanese were going to take over the world.

But then the Japan bubble burst. Stocks started to fall, and they never regained those heights ever again.

Even today, the Nikkei 225 index is at 19,577, nearly 50% BELOW ITS PEAK from 28 years ago.

Anyone who bought into the 1989 complacency, or even at any point in the mid-1980s, has never recovered.

The “experts” would say this is impossible in the US.

But as we’ve discussed before, we live in a world where the impossible keeps happening, where the most unlikely prospects become reality.

This isn’t a hypothetical problem, or some long-term issue that might unfold in the future.

This is now. Stocks are expensive now.

And the potential consequences to your wealth and retirement make this threat too substantial to ignore.

Sure, it’s possible that stocks keep rising forever.

But it’s hard to imagine you’ll be worse off if you at least consider selling what’s popular and expensive, and choosing safer assets that still deliver very strong returns.

We’ll talk about some examples soon.

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Thousands of years ago, as far back as 3000 BC, the ancient Egyptians had developed a highly advanced system of writing using hieroglyphic symbols.

The used hieroglyphs for numbers as well.

A single line, for example, represented the number 1. Two strokes represented 2. Nine strokes for the number 9.

Since the Egyptians had not yet invented the “zero” in 3000 BC, representing the number 10 required a new symbol– a sort of upside down horseshoe.

So the number 99, for example, required eighteen different symbols: nine upside down horseshoes for the number 90, and another nine strokes for the number 9.

There was another symbol for 100, another for 1,000, and so forth.

The largest number in ancient Egypt was 1 million. As historian Will Durant wrote,

“The sign for 1,000,000 was a picture of a man striking his hands above his head, as if to express amazement that such a number should exist.”

Today the national debt in the Land of the Free is just shy of $20 trillion.

It makes me wonder what symbol the ancient Egyptians would have used to represent such an absurd figure. Hope and change?

Even the concept of trillion is difficult for our minds to fully grasp as there is very little within our physical human experience which relates to it.

“Trillion” almost seems like a fantasy… a made-up number like “a bajillion” or “zillion”.

And yet, the debt is very real.

Of course, we’re told that the debt isn’t important.

Modern “experts” who win our society’s most esteemed prizes for intellectual achievement tells us that the debt doesn’t matter “because we owe it to ourselves.”

This is pitiful logic.

It’s true that “only” $6 trillion– 30% of US debt is owned by foreigners.

The rest is owned primarily by the Federal Reserve, Social Security trust funds, US banks, large US companies, and the federal government itself.

But I fail to see how this is relevant. A debt owed is a debt owed.

It’s not like the US government could simply default on the Federal Reserve in cavalier fashion; that would render the central bank completely insolvent and cause a major currency crisis.

Defaulting on the trillions of dollars owed to Social Security and other pension funds would effectively destroy the livelihoods of hundreds of millions of people.

Defaulting on the debt owed to banks in the United States would cause the biggest financial crisis in US history.

Defaulting on the $1+ trillion owed major US corporations would bankrupt a number of large businesses and cause a deep recession.

And defaulting on the Department of Defense would simply be idiotic; Congress would have to immediately bail out the military with emergency funds.

So it’s difficult to find any comfort in this “we owe it to ourselves” nonsense.

The truth is that the debt absolutely matters.

It’s not some casual rounding error; it’s a major issue that already sucks up hundreds of billions of dollars in tax revenue each year just to pay INTEREST.

And that’s at a time when the government’s average interest rate is just 2%… an all-time low.

But now interest rates are starting to rise from their historic lows.

The 30-year bond yield is proportionally 50% higher than its record low from just nine months ago.

It wasn’t even that long ago, just prior to the financial crisis in late 2007, that the government’s average interest rate was around 5%.

And even that number was considered incredibly low compared to previous decades.

Yet if the average interest rate returned to just 5% (which would still be FAR below the historic average), the government would spend more than $1 trillion each year just to pay INTEREST.

Naturally they’d have to borrow even MORE money, which would add even more to the debt and make their interest payments go up even more.

History is full of examples of debt bankrupting dominant superpowers, going all the way back even before the ancient Egyptians.

This time is not different.

Debt is a ticking time bomb. And in this case, given the widespread consequences across the world, the bomb is nuclear.

Don’t get me wrong– nothing is going to happen tomorrow.

I’m not here to spread fear and panic about some imminent collapse. There’s too much of that garbage on the Internet.

But it is incredibly foolish to ignore such a prodigious risk.

Imagine there’s literally a nuke sitting on your desk right now; you don’t know when it will go off… probably not for several years at least.

But would you honestly stick around to find out?

Sure, maybe by some miracle the situation will resolve itself. Maybe every foreign government wakes up tomorrow and simultaneously forgives US debt.

(And maybe the Dallas Cowboys decide to recruit me as their starting quarterback…)

We can hope for the best.

But you won’t be worse off taking astute, conservative steps to distance yourself from such obvious risks… steps that make sense no matter what happens (or doesn’t happen) in the future.

Consider retirement, for example.

For many readers, you might still be decades away from retirement.

Given current data and trends, it’s entirely possible that the US government’s finances will have deteriorated into a default scenario by then.

So it’s hard to imagine that you’ll be worse off for setting up a better, more robust retirement vehicle today… a structure that allows you FAR more latitude to generate stronger, safer returns while minimizing exposure to this debt bomb.

There are so many other options– cash, gold, cryptofinance, better banks, safer investment choices.

We’ll talk about more of these in the coming days.

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In the year 1517, one of the most important innovations in financial history was invented in Amsterdam: the government bond.

It was a pretty revolutionary concept.

Governments had been borrowing money for thousands of years… quite often at the point of a sword.

Italian city-states like Venice and Florence had been famously demanding “forced loans” from their wealthy citizens for centuries.

But the Dutch figured out how to turn government loans into an “investment”.

It caught on slowly. But eventually government bonds became an extremely popular asset class.

Secondary markets developed where people who owned bonds could sell them to other investors.

Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.

In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

This practice caught on across the world. International markets developed.

English investors bought French bonds. French investors bought Dutch bonds. Dutch investors bought American bonds.

(By 1803, Dutch investors owned a full 25% of US federal debt. By comparison, the Chinese own about 5.5% of US debt today.)

Throughout it all, debt levels kept rising.

The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.

But people kept buying the bonds, convinced that the Dutch government will never default.

Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.

It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68% of tax revenue just to service the debt.

Well, in 1814 the impossible happened: the Dutch government defaulted.

And the effects were devastating.

In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

That, of course, is just one example.

History is full of events that people thought were impossible. And yet they happened.

Looking back, they always seem so obvious.

Duh. The Dutch were spending 68% of their tax revenue just to service the debt. Of course they were going to default.

But at the time, there was always some prevailing social influence… some wisdom from the “experts” that made otherwise rational people believe in ridiculous fantasies.

Today is no different; we have our own experts who peddle ridiculous (and dangerous) fantasies.

Case in point: this week, yet another debt ceiling debacle will unfold in the Land of the Free.

You may recall the major debt ceiling crisis in 2011; the US federal government almost shut down when the debt ceiling was nearly breached.

Then it happened again in 2013, at which point the government actually DID shut down.

Then it happened again in 2015, when Congress and President Obama agreed to temporarily suspend the debt ceiling, which at the time was $18.1 trillion.

That suspension ends this week, at which point a debt ceiling of $20.1 trillion will kick in.

There’s just one problem: the US government is already about to breach that new debt limit.

The national debt in the Land of the Free now stands at just a hair under $20 trillion.

In fact the government has been extremely careful to keep the debt below $20 trillion in anticipation of another debt ceiling fiasco.

One way they’ve done that is by burning through cash.

At the start of this calendar year in January, the federal government’s cash balance was nearly $400 billion.

On the day of Donald Trump’s inauguration, the government’s cash balance was $384 billion.

Today the US government’s cash balance is just $34.0 billion.

(Google has twice as much money, with cash reserves exceeding $75 billion.)

This isn’t about Trump. Or even Obama. Or any other individual.

It’s about the inevitability that goes hand in hand with decades of bad choices that have taken place within the institution of government itself.

Public spending is now so indulgent that the government’s net loss exceeded $1 trillion in fiscal year 2016, according to the Treasury Department’s own numbers.

That’s extraordinary, especially considering that there was no major war, recession, financial crisis, or even substantial infrastructure project.

Basically, business as usual means that the government will lose $1 trillion annually.

Moreover, the national debt increased by 8.2% in fiscal year 2016 ($1.4 trillion), while the US economy expanded by just 1.6%, according to the US Department of Commerce.

Now they have plans to borrow even more money to fund multi-trillion dollar infrastructure projects.

Then there’s the multi-trillion dollar bailouts of the various Social Security and Medicare trust funds.

And none of this takes into consideration the possibility of a recession, trade war, shooting war, or any other contingency.

This isn’t a political problem. It’s an arithmetic problem. And the math just doesn’t add up.

The only question is whether the government outright defaults on its creditors, defaults on promises to its citizens, or defaults on the solemn obligation to maintain a stable currency.

But of course, just like two centuries ago with the Dutch, the mere suggestion that the US government may default is tantamount to blasphemy.

Our modern “experts” tell us that the US government will always pay and that a debt default is impossible.

Well, we’re living in a world where the “impossible” keeps happening.

So it’s hard to imagine anyone will be worse off seeking a modicum of sanity… and safety.

Do you have a Plan B?

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Today I’m going to introduce you to my friend Ben, easily one of the most unique, intelligent people I know.

I first met Ben at my summer Liberty and Entrepreneurship camp several years ago.

He had recently dropped out of Harvard after winning the prestigious Peter Thiel fellowship, which has an incredibly competitive selection rate of less than 1%.

He was working on an intriguing new business, and after conducting our own due diligence, my fellow camp instructor Craig Ballantyne and I both invested a six figure sum.

Ben is extremely talented, and it’s been a great deal so far.

The company will likely break $10 million in revenue this year and return strong free cash flow to shareholders.

But that’s just the business and brainy side of Ben.

He’s also an extraordinarily compassionate and optimistic person.

Ben is ridiculously grateful every single day for simple pleasures that most people take for granted. Running water. Electricity. Salt.

Ben lives in the San Francisco area and has unfortunately had too many first-hand experiences with the city’s rising crime rate.

He’s had his car broken into and vandalized a number of times, and recently his car was actually stolen.

Ben was able to track it down using a GPS device and mobile phone app, ultimately finding the vehicle abandoned because the perpetrator had run out of gas after joyriding all day.

Being the optimistic person that he is, Ben wasn’t even upset. He believes that the man committed this crime out of economic necessity, and felt grateful that he’d never been put in a similar position.

But then, literally the NEXT DAY, the SAME guy stole Ben’s car. Again.

Something tells me this guy won’t win the “Criminal of the Year” award.

What follows is Ben’s story– the story of an incredibly optimistic, forgiving person who always gives people the benefit of the doubt.

But after this experience, even Ben is losing faith in the institutions that are supposed to keep society safe.

It’s not a dig at any particular individual. There are plenty of good cops who want to help, and plenty of bad cops who are violent scumbags.

It’s about the institution itself– one that’s bureaucratic, ineffective, and fails to accomplish its purpose.

Here’s an excerpt from Ben’s story, which he shared on Facebook:

I woke up this morning at 8:15 am, checked for my car, saw that it was stolen again and being driven around San Francisco by the same perpetrator who broke in yesterday and abandoned the vehicle after it ran out of gas.

I call 911 immediately, inform them of the situation.

But they tell me that, even though I literally have a GPS tracker in my car, and know exactly where it is, and that it’s being driven by perpetrators right now, I’ll need to file a police report before they can do anything.

Later, at the police station, the officer who helps me acts entirely unconcerned, spending plenty of time gossiping with the other police officers as well as texting on her phone.

No one seems actually concerned that there is literally someone driving my vehicle around right now in San Francisco that they *could* apprehend, but won’t.

After being stuck at the police headquarters for close to an hour while helplessly watching the perpetrators drive all around the greater San Francisco area, I make up an excuse and tell her that I need to leave.

She writes down my case number and lets me go.

So that was almost two hours we wasted, just getting there and filling out paperwork.

Yesterday when I called 911 I waited for over 3 hours for a police officer to show up. But no one ever came.

Cops in a nearby city told me a story of SFPD getting a “burglary in action” call, which they took *nine* hours to respond.

Now, I’m a pretty optimistic person and willing to give people the benefit of the doubt in a *lot* of cases, and also understand where they’re coming from.

I don’t even care that these guys stole my car; this is an economic crime – if they were rich, they wouldn’t be going around stealing cars and risking years in jail.

I’m fortunate I didn’t have to grow up poor and surrounded by bad influences.

But if it’s THIS hard to get the police to help me while I have a GPS device tracking exactly where the car is, and they fail to do anything about it while I’m mired in paperwork, and I have to literally track the suspects down myself in some absurd vigilante justice situation, how can I trust the system?

What happens when it comes to far more serious crimes that are not economic in nature, but threaten life and bodily harm?

Murder, rape, violent assault.

No wonder the vast majority of rapes go unreported and unpunished.

If it’s this hard to successfully apprehend a criminal in a case like this, how can anyone possibly have faith that the police or government will be able to respond effectively?

And this is only the tip of the iceberg in the justice system. After they’re apprehended, everyone gets away anyway in those less clear cut cases.

Simon again.

The end of the story is that Ben recovered his vehicle, thanks primarily to modern technology and his own persistence to force the cops to do their jobs.

Of course, now his car is in a police impound lot while they go through even more of their bureaucracy.

He’s clearly lost confidence in the system.

But Ben, being the entrepreneurial value creator that he is, always looks to solve problems rather than complain about them.

And he closed his Facebook post with a call to action: “This bothers me a lot. This is not okay. What can we do about this?”

I have a few ideas. Let’s discuss next week.

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It happened again– another spying scandal in the Land of the Free.

Yesterday Wikileaks released 8,761 CIA documents detailing the agency’s hacking of smart phones, routers, computers, and even televisions.

These files reveal that the CIA can and has hacked devices that were supposedly secure– iPhones, iPads, and Android devices.

The documents further reveal that the CIA is deliberately infecting personal computers with spyware, including Windows, Mac OS/X, Solaris, Linux, and other operating systems.

They’re also hacking WiFi routers to deploy software that monitors Internet activity, and have even figured out how to bypass anti-virus software so that their spyware cannot be detected.

They’ve also managed to make the rest of the world believe that Russian hackers, not the CIA, are behind all this malware and spyware.

It’s like a restatement of that old Mission: Impossible line– “Should any of your IM force be caught or killed… we’ll blame Russia.”

The CIA is pretty shameless about its activities, nicknaming its various hacking programs “Assassin”, “Medusa”, and “Brutal Kangaroo”.

One of the deepest revelations is that the agency is able to hack Internet-connected televisions, including Samsung smart TVs, through a program called “Weeping Angel”.

Basically the CIA can turn your TV into a listening device, recording conversations in the room and transmitting the audio to a CIA server.

Even if you think the TV is off, it’s not.

CIA hackers have been able to spoof the on/off display and set the television to a “false off” mode.

Bottom line, no device that’s connected to the outside world is truly safe.

And future Wikileaks publications may show that the intelligence community is hacking home automation devices, Internet-connected automobiles (including driverless vehicles), and artificial intelligence like Amazon’s Alexa.

It’s hard to be shocked at this point that the government is spying on its own allies and citizens.

This is just the latest in a pattern of brazen surveillance and flagrant Constitutional violations on the part of the US intelligence community.

But that’s precisely what I find MOST concerning– the LACK of concern over these new CIA documents.

People have such a low expectation of their government now, and have become so accustomed to the government routinely violating their civil liberties, that there’s hardly any public outrage anymore about these spying scandals.

More importantly, the lack of concern is indicative of what freedom means in the Land of the Free today.

Here’s a great example–

Young people are traditionally the most politically charged activists in the country.

But where are the protests across university campuses demanding freedom and privacy?

It’s not happening.

That’s because university students are too busy protesting against ideas they don’t want to hear about.

At Middlebury College last week, a small liberal arts school in Vermont, a small mob of student protestors physically assaulted a conservative speaker because his ideas offended them.

They couldn’t simply skip the lecture and allow interested students to attend.

No, they had to engage in violent censorship, oppressing any idea that doesn’t conform to their narrow agenda.

The only thing these cry bullies are interested in hearing is apologetic white men groveling over their privilege.

This is the new reality in the Land of the Free: freedom has deteriorated into some gender studies professor’s socialist fantasy.

Constitutionally guaranteed liberties have become irrelevant.

Forget about “free speech”.

Any intellectual dissent from the intolerant Social Justice view is now considered “hate speech”.

And the Fourth Amendment, which establishes “the right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures,” has become a distant memory.

As a child who grew up in the 80s during the height of the Cold War, I imagine there would have been widespread disgust if a similar scandal had been exposed.

Spying on citizens and allies? That’s what the Soviet Union did.

But today, everything else is more important.

Transgender bathrooms. Silencing hate speech. Forcing elementary school children to feel guilty about their white privilege. Political correctness in extremis. #everyone-else-but-white-people’s-lives-matter.

This is what dominates the social conversation now in the Land of the Free.

Privacy is no longer a Western value.

After all, people narcissistically upload their entire lives to social media (as if anyone cares what they’re having for dinner) so that Mark Zuckerberg can auction off our details to the highest bidder.

And it is precisely this decline that I find most disturbing.

Some people hold the idiotic belief that, “If I have nothing to hide, I have nothing to fear.”

This is dangerous logic, for so many reasons.

Even the use of the word ‘hide’ is ridiculous… as if the fact that I don’t upload photos of my nether regions to Instagram means that I’m “hiding” something.

We all keep things private. It’s why we wear clothing, don’t discuss our personal finances in polite company, and worry when our social security number is stolen.

But more importantly, if it doesn’t matter that the CIA is monitoring people’s most intimate moments, then does anything matter?

They keep moving the line, probing deeper and deeper into our lives and enveloping the nation inside an Orwellian surveillance state.

And it doesn’t stop… because we’re in the midst of a complete breakdown of western values.

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

It was at the height of the dot-com bubble in 1999 that The Onion famously satirized the epically irrational stock market:

“Anabaena, a photosynthesizing, nitrogen-fixing algae with 1999 revenues estimated at $0 billion, will offer 200 million shares on the NASDAQ exchange next Wednesday under the stock symbol ALG. The shares are expected to open in the $47-$49 range.”

At the time, given how many unprofitable companies were going public, it could have just as easily been an article in the Wall Street Journal.

But memories in finance are short.

As economist John Kenneth Galbraith wrote,

“There can be few fields of human endeavour in which history counts for so little as in the world of finance.

Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

Short memories indeed.

It seems that enough investors have got together to give Snapchat a market valuation of $27.5 billion.

Bear in mind, “Snap” is a deeply unprofitable company which offers shareholders zero voting rights, and whose corporate logo is a vomiting ghost.

Perhaps Stanley Weiser was right when he suggested that a fool and his money are lucky enough to get together in the first place.

One can hardly blame Wall Street for giving irrational investors what they want: if the ducks are quacking, feed them.

But Snap is far from being the only US company that’s irrationally overvalued.

As we have observed on numerous occasions recently, US stock markets are not cheap.

Robert Shiller’s cyclically adjusted P/E ratio for the S&P 500 (CAPE) now stands at 29 times:

See if you can spot the last time that the market peaked at this valuation. Clue: it was Black Tuesday, 1929.

As the chart shows, there has been only one time in US financial history that the Shiller P/E ratio has been higher than it is today.

Unfortunately, the period in question sets an ominous precedent.

Because the only time that the Shiller P/E rose above today’s level was during the dot-com bubble that the Onion satirized back in 1999.

That bubble was marked by its own absurdities, including the sock puppet mascot of Pets.com, a company which went from IPO to bust in 268 days.

(The dot-com bubble burst just three months after the Onion’s piece.)

None of which is meant to suggest that the US stock market is about to crash.

The 1990s experience of the Shiller P/E shows conclusively that valuations can remain elevated for some considerable time – at demonstrably higher levels than today’s.

But it is meant to suggest that investor expectations today are unhealthily unrealistic.

One rational response to apparent overvaluation today would be to short the market instead, i.e. to bet on the market falling.

But shorting the market is a dangerous game to play, leaving open the potential of unlimited losses and the perils of market timing.

A more moderate response would simply be to look elsewhere instead in pursuit of attractive returns.

There is one developed market in the world where there are innumerable undervalued stocks still available.

In fact, over 40% of companies listed in the stock market are trading below book value.

It is a market where the biggest companies, the central bank, and the government’s own pension fund are all aggressively buying stock.

It is a market where dividends are relentlessly on the rise.

It is a market which is an oasis of calm in a world of political uncertainty.

Investments in this market form the single biggest allocation in our
fund.

The market I’m talking about is Japan. And it may be one of the most undervalued mass opportunities in the world right now.

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A few weeks ago, one of our Europe-based Total Access members reached out to ask us about a bank account he was considering for his new business.

This is important stuff.

As I’ve written before, most people spend more time thinking about what they’re going to have for dinner than even considering whether or not their bank is safe.

In finance there’s hardly anything more critical.

Never forget that the moment you deposit your savings at a bank, it’s no longer your money.

From a legal perspective that savings becomes the bank’s money; as a depositor, you have nothing more than an unsecured claim against the bank.

They don’t actually have to give you back your deposit.

Under current regulations, banks have countless ways to freeze your account in their sole discretion, or to deny your request to withdraw money.

(If you don’t believe me, try to withdraw $25,000 in cash and see what happens.)

In many ways banks are lifelong, silent financial partners.

And given their incredible power over our finances, it certainly makes sense to spend a few minutes considering our options.

In the case of our Total Access member, he was thinking about establishing an account at a mid-size European bank and wanted our opinion about its safety.

I’ll briefly explain to you a bit about how we performed our analysis so that you can do the same with your own bank.

Just about every reasonably-sized bank in the world publishes annual financial statements.

If your bank doesn’t do this, or they don’t share the financial statements with you, take your money and run away. Immediately.

Banking implies a sacred obligation of transparency.

And if they’re not willing to be candid about what they’re doing with your savings, then they shouldn’t have your business.

This particular European bank has its annual financial statements available online.

We flipped to the balance sheet and looked for some key numbers.

Under the “assets” column, we saw immediately that the bank had “cash and cash equivalents” of 126 million euros.

Typically “cash equivalents” are stable, extremely liquid assets like short-term government bonds, reserve balances at the central bank, and even physical cash they hold in their vaults.

Next we looked in the “liabilities” column at another important number: Total Customer Deposits.

This bank’s total deposits were 8.5 billion euros.

Looking at the cash equivalents again, it means that the bank was holding about 1.4% of its customer deposits in extremely liquid, stable, short-term assets.

I call this a bank’s liquidity ratio. And 1.4% is extremely low.

It means that if more than 1.4% of this bank’s customers want to withdraw their savings or move their money abroad, the bank won’t have enough liquid funds.

Sure, 1.4% might be sufficient in good times when the financial system is stable.

But if there are ever any problems in the system like we saw in 2008, a liquidity ratio as low as 1.4% means that the bank could easily fold.

Without sufficient liquidity to honor its customers’ withdrawal requests, a bank must resort to selling other assets in order to raise the cash that it needs.

After all, if a bank only holds 1.4% of its customers’ deposits in cash equivalents, then it should have at least 98.6% of customer deposits invested elsewhere.

In this particular example, the European bank had made about 5.6 billion euros in “loans”, and several billion more in “other investments”.

This is where things become very challenging for distressed banks.

Back in 2008, just about EVERY bank desperately needed to raise cash. So they started selling their ‘other investments’.

You can imagine what happened– every bank was simultaneously dumping its assets during a time of crisis when the market was already falling.

Everyone was selling, and no one was buying. Prices crashes, and the banks suffered massive losses.

This is why illiquid banks are so unsafe: there’s no guarantee that they’ll be able to recoup all of their depositors’ savings if they’re forced to sell “other investments”.

Safe banks are liquid banks. They don’t put 98.6% of their customers’ savings at risk.

More importantly, safe banks have plentiful capital reserves.

Looking at the “Equity and Capital” portion of the balance sheet, the European bank has total equity of 670 million euros.

In other words, the bank could afford to withstand 670 million in losses before being wiped out.

But at the same time, the bank has roughly 10 billion euros in total assets.

So its equity is worth about 6.7% of its assets, i.e. the bank’s assets could fall 6.7% before it becomes insolvent.

This is also low.

During a major crisis, asset prices could easily fall more than 6.7%. Stock markets and bond markets can crash in a matter of hours.

So a safe bank maintains substantial reserves going well into double-digits.

Given that this particular bank was so illiquid and thinly capitalized, my wholehearted suggestion to our Total Access member was to avoid the bank.

I’d encourage you to do the same analysis of your own bank.

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