Category: simonblack

In the late 1400s, the city-states of Italy were among most dominant powers in the world.

Most of the city-states had abandoned the feudal system that persisted across Europe.

So Italy was one of the only places on the continent where anyone, including foreigners, could work hard, take risks, and become wealthy.

People could start businesses and own private property– revolutionary concepts in the 1400s.

Italy was truly the America of its day, and people from all over Europe flocked to the city-states in search of wealth and freedom.

Scientific, medical, and technological advancement flourished, as did commerce and banking.

The Medici Bank in Florence was by far the largest bank in Europe in the 1400s, and they helped popularize a double-entry system of accounting and the widespread use of credit, both of which still define modern banking.

Early Renaissance banks realized that hauling giant bags of gold coins across the countryside to settle payments with one another was expensive and risky.

Instead, every time they made or received a payment, the banks would adjust their accounting ledgers and then periodically get together to make sure everyone’s numbers matched up.

Italian banks perfected this technique and developed a comprehensive set of accounting rules that everyone followed.

When the bank Monte dei Paschi di Siena was founded in 1472, they adopted this system as well.

What’s interesting is that Monte dei Paschi di Siena still exists today (just barely).

And they’re basically still using the same system.

Despite all of our modern technology, commercial banking has changed very little over the past 5+ centuries.

Even today, whenever banks transact with one another, they’re merely making accounting entries in their ledgers.

It’s not like there’s actually any money that changes hands. Banks don’t FedEx cash or coin to one another to settle up. It’s all just digits on an electronic balance sheet.

The biggest “advance” in modern banking has been the involvement of government and central banks.

Back in the Renaissance, banks spent years building up a solid reputation as conservative, responsible custodians of other people’s money.

They had to earn their customer’s trust the old-fashioned way. It wasn’t handed to them by some government agency.

Today, few people give a single thought about their bank.

We’ve been programmed to sign over our life’s savings to a complete stranger simply because the government says it’s OK.

That same government has lied to us about everything else imaginable, ranging from the existence of Weapons of Mass Destruction to whether or not he had “sexual relations with that woman.”

Yet this government-sanctioned trust is routinely abused.

Hardly a month goes by these days without a major banking scandal.

Wells Fargo is in the spotlight right now for having fraudulently manufactured new accounts without customers’ consent (and then charging FEES on top of that).

And right this moment Wells Fargo is scrambling once again for submitting a questionable solvency plan to the Federal Reserve.

But that’s just the tip of the iceberg.

Banks have been caught red-handed colluding to manipulate interest rates, exchange rates, and commodities prices.

They force law-abiding customers to jump through bureaucratic hoops to prove that we aren’t criminal terrorists, but then giant banks like HSBC and Barclays literally do business with terrorist groups.

They maintain very loose controls, allowing “rogue traders” to lose billions of dollars on stupid bets.

And they maintain a strict culture of secrecy.

As depositors, we don’t have the foggiest idea what our banks are actually doing with our money.

Their financial statements provide cursory summary numbers for categories like “LOANS” or “INVESTMENTS”.

But there’s no detail for us to see whether those loans and investments are safe and conservative… or whether they’ve put our savings in danger once again.

Banks also notoriously abuse accounting tricks to massage their numbers and hide losses.

One common technique that banks have used over the last few years is reclassifying their bond investments.

Typically a bank has to report the gains and losses of its bond investments each quarter.

But banks have the option to reclassify their bond investments into a different category called “hold to maturity,” in which they no longer have to report the losses.

As you can imagine, when bond values decline, many banks conveniently reclassify their portfolios, thus hiding the losses.

Amazingly enough, this deceit is totally legal under modern accounting rules.

Look, I’m not suggesting that banks are about to collapse. Some of them are in great shape.

And others… yeah, they’re about to collapse. Like Monte dei Paschi di Siena, and most of the rest of the Italian banking system.

What’s important is to realize that banking is a black box with zero transparency, NOT the risk-free fantasy that we have been told.

We can see this right now in Italy.

If a bank goes under, shareholders will be wiped out first.

But as a depositor, you’re actually a creditor of the bank– an unsecured creditor who has nothing more than a claim on your account balance.

Most countries, including Canada, the United States, and most of Europe, have passed “bail-in” legislation to penalize a bank’s creditors in the event they collapse.

Europe’s Union Bank Recovery and Resolution Directive became effective on January 1st, and the Federal Reserve is issuing a new bail-in rule next week.

So, depositors can be on the hook for a bank’s losses as well, just as we saw in Cyprus back in 2013.

Depositors are supposedly protected by deposit insurance like the FDIC.

But a single bank failure can easily wipe out these insurance funds (which happened in 2008).

And most governments are now too broke to recapitalize them.

Bottom line: It matters where you put your money. They evidence is pretty obvious that banks are not risk-free.

Why take the chance?

You can quickly mitigate these risks at practically zero cost by holding a portion of your savings in a safer, better capitalized bank… or outside the banking system in physical cash or gold.

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Around the time of Passover in 67 AD, the Jews of Judea were in the midst of a major rebellion against the occupying Roman Empire.

Riots and violence were commonplace, and an organized rebel force of more than 25,000 men fought regularly against the imperial legions.

But a small group of zealots decided that conventional warfare wasn’t good enough.

So they went to the nearby town of Ein Gedi in modern-day Israel and killed 700 civilians.

This was one of the first recorded terror attacks in history.

Titus Flavius Josephus, an ancient historian (whose works are frequently disputed) described this massacre in his book The Jewish War, and goes on to explain that Sicarii committed mass suicide rather than be taken prisoner by the Romans.

Terrorism, radicalism, and fanaticism have existed for thousands of years; there have always been people willing to commit unspeakable acts of violence as a means to achieve their goals.

And sadly, though our species has evolved since ancient times, these traits still exist in a dangerous minority that struck at least three times just yesterday alone.

Most of us who don’t have our mental wires crossed can’t understand their belief systems– both ancient and modern-day terrorists alike are not only willing to die, but quite often HAPPY to die for their causes.

Today’s politicians are remarkably ill-equipped to deal with this kind of threat.

Their solution is to fight violent radicals by forming committees, issuing press releases, and passing mountains of legislation.

Case in point: The National Defense Authorization Act of 2017, which is sitting on President Obama’s desk awaiting signature, consists of over 3,000 pages of rules, regulations, and pet projects.

3,076 pages to be exact.

Hell, when dropped from the right altitude, that’s a lethal weapon.

To give you an example of exactly how these people could possibly fill 3,076 pages, there’s a new rule among the bill’s many, many, many passages that redefines administrative leave procedures for civilian contractors.

FINALLY! We’re safer already!

Just imagine all the terrorists quaking in their boots, petrified of carrying out another act of violence, knowing that American’s administrative leave policy has been refurbished.

Another gem is section 1224, which provides authorization to arm Syrian rebels with state-of-the-art weapons from the US military.

I’m not talking about small arms and ammunition. This is the heavy-duty stuff.

Apparently Congress didn’t learn its lesson when a bunch of the weapons they gave to the Iraqi military conspicuously ended up in the hands of ISIS.

Nor did they learn their lesson back in 2010 when it was found that the DEA had completely lost track of the thousands of weapons they supplied to Mexican cartels.

But don’t worry, the law provides plenty of safeguards.

For example, once the military supplies weapons to a Syrian rebel (who are obviously very easy to tell apart from ISIS terrorists), they have to file a report, including: “an explanation of the purpose and expected employment of such systems.”

Are these people serious?

Do they think that these high-tech precision munitions will be used to make coffee?

It’s amazing that this is what passes as Defense policy… THIS is how they plan on spending hundreds of billions of dollars to keep you safe– sending useless reports to their central bureaucracy.

Then, of course, there’s section 1287, my personal favorite.

Section 1287 requires that, within 180 days of the bill being signed to law, a new agency called the Global Engagement Center will be created under the State Department.

The Global Engagement Center’s job is to combat FAKE NEWS around the world, with sweeping powers to train and fund legions of journalists and bloggers to inundate the world with US propaganda.

Politicians have been praising the idea for the Global Engagement Center as a landmark new tool to keep Americans safe.

This is totally bogus; the US government has had propaganda and psychological warfare resources for decades.

Back in my intelligence days, I spent several months working right next to the Psychological Operations guys.

And outlets like Radio Free Europe and Radio Liberty have been in existence since the 1940s; both were funded by the CIA for decades.

So it’s not like it’s anything new for the US to be spreading propaganda.

What is new is creating and consolidating a whole lot of new power and authority into a single office to undermine any independent sources that don’t conform to the official narrative.

The Global Engagement Center is basically the Ministry of Truth.

This doesn’t make you safer. It makes you less free.

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One of the quirks about being an expat in a faraway land is that, whenever something unusual happens in your home country, your local friends look to YOU for answers.

You become, by default, the de facto expert of your home country’s nuances.

Case in point: this weekend we had an intercompany Christmas party down here at the farm for two of the businesses that I run.

(Sadly there may be some video floating around YouTube of me singing “Lost that lovin’ feeling”)

The first is Sovereign Man, whose Chile-based staff consists of highly eclectic, internationally-minded folks from the US, Russia, Ukraine, Lithuania, Germany, Australia, Argentina, etc.

Then there’s the agricultural business that I co-founded in 2014; it’s one of the fastest growing companies in the industry, and we currently have around 350 employees, most of whom are Chilean.

Even though I’ve spent more than the last decade traveling to over 120 countries and living outside of the United States, I’m one of the only US citizens that these guys know.

So you can probably imagine that I’ve spent the last few months fielding their questions about Donald Trump and the US election.

Now the conversations has turned to the Electoral College, which meets today.

It’s difficult to explain to foreigners why the United States, which they perceive as the most advanced country in the world, still uses an electoral system that was designed in the 1780s.

It’s even more difficult to explain to foreigners why Hollywood celebrities are trying to interfere with America’s political process.

In Latin America, celebrities do normal celebrity stuff.

They score goals on the soccer field, date pop starlets, and engage in childish antics that make the cover of sports and entertainment magazines.

But nobody actually takes these people seriously.

Nor do the local celebrities have a self-righteous sense of entitlement to influence a national election. They stick to their TV shows and Gooooooooooooooals.

But a lot of my employees have seen this video of Hollywood celebrities trying to convince 37 “Electors” from the Electoral College to NOT vote for Donald Trump.

I don’t have a good answer to explain to a foreigner why Martin Sheen feels like he’s entitled to influence the outcome of the election– seemingly because he once played at President on television…?

It would be like Jane Seymour, who used to play Dr. Quinn Medicine Woman, feeling entitled to influence national healthcare legislation.

Or Scrooge McDuck wanting to set monetary policy.

This isn’t about celebrities voicing an opinion; it’s about brazenly trying to manipulate the election.

Ironically, the media has slammed Russia and its President Vladimir Putin for allegedly trying to manipulate the election.

So if Russia messes with the political process to advance Donald Trump (as the official narrative goes), it’s evil.

Yet when Martin Sheen blatantly tries to manipulate the election against Donald Trump with a pathetic piece of propaganda, the New York Times is noticeably silent.

Look, it’s fair to debate the merits and drawbacks of the incoming President, as well as the anachronistic Electoral College system itself.

But in trying to manipulate the process, these celebrities and their media cohorts prove they’ve failed to understand anything that’s just happened.

People are sick and tired of self-righteous elites trying to control the system.

This is what voters have been viscerally rejecting.

It’s a big reason why Donald Trump was elected to begin with, why Brits voted for Brexit, and why Italians rejected constitutional reform.

They’ve had entitled, out of touch moral crusaders pushing them around for years.

These people act as if they’re taking up some honorable burden to make decisions on your behalf because you’re too stupid and infantile to make up your own mind.

It’s insulting. Voters are tired of it. And these whiny celebrity activists are just digging themselves deeper.

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On January 17, 1917, as the Great War raged in Europe, the government of the United States signed a deal to purchase the Virgin Islands from Denmark.

The agreement transferred Denmark’s territories in the West Indes, “including the islands of Saint Thomas, Saint John and Saint Croix together with the adjacent islands and rocks.”

Good thing they picked up those rocks!

The US government paid “a sum of twenty-five million dollars in gold coin of the United States.”

$25 million was clearly a lot more money back then than it is today.

But given the change in the gold price over the years, $25 million worth of gold in 1917 is valued just under $1.5 billion today.

That’s still an amazing deal.

It means that, adjusted for inflation to 2016 dollars, the US government paid about $175 per acre for the Virgin Islands.

Today, an acre of land on one of the islands could easily set you back around $400,000.

So the USVI purchase ended up being a pretty solid return on investment.

Of course, that was an era when the US government made lots of astute deals.

They bought the Louisiana territory from Napoleon in the early 1800s for peanuts, a price equivalent to about 40 cents per acre when adjusted for inflation to 2016 money.

They bought Florida from the Spanish, Alaska from the Russians, etc. All of these were phenomenal purchases.

Today they spend billions of dollars to build a website. The inefficiency and incompetence is almost unbelievable.

It’s also important to note that the Virgin Islands purchase was transacted in gold during a time when gold was still money.

Today, debt is money. Literally.

Look at a $1 bill, for example. It says “Federal Reserve Note.”

“Note” is just another name for debt in finance and accounting parlance.

The US dollar was originally defined by the Mint and Coinage Act of 1792 as 24.1 grams of pure silver.

Today’s dollar is simply a liability of the Federal Reserve. It’s debt.

Debt is also money at an institutional level.

For example, US government debt, all $19.9 trillion of it, is considered a “cash equivalent”.

That’s an accounting term which means that if you have $1 million in US government bonds, it’s the same as if you had $1 million at a bank, or even in physical cash.

US government debt is commonly held by commercial banks, central banks, large multinational companies, and even foreign governments as a type of cash reserve.

And it’s not unusual for these institutions to transact with one another using US government debt as a form of payment or collateral.

Large institutions will settle transactions and literally “pay” each other with US government bonds in the same way that you hand a $5 bill to the barista at Starbucks to buy a cup of coffee.

So US government debt is a widely-accepted medium of exchange, i.e. form of money.

This is incredibly bizarre, especially given how rapidly the US government is increasing its debt.

As of today, the US national debt is $19.9 trillion. And that’s up from $19.6 trillion on October 1st when the 2017 fiscal year began.

In other words, in the last ten weeks alone, the US government increased its debt by more than 200x the amount of money that they spent acquiring the Virgin Islands in 1917, even after adjusting for inflation.

And there’s no end in sight for this trend.

This coming Monday and Tuesday, the US government will auction off and issue another $52 billion in new debt over the course of just two days.

And as this chart from the Treasury Department shows, they have over 100 debt auctions scheduled just over the next 3 ½ months.

It just never stops.

The frequency, magnitude, and speed with which they’re piling on debt has been a VERY long-term trend.

And it’s one that is not possibly sustainable.

Just look at how quickly interest rates have jumped. Back in July, the yield on 10-year Treasury notes was 1.32%.

Today, just a few months later, it’s double that level at 2.63%. And that’s still incredibly cheap by historical standards. Rates could go much higher.

Higher interest rates increase the government’s borrowing costs. Higher borrowing costs mean more money is needed to pay interest.

Bear in mind that the US government’s budget has been deeply in the red for DECADES.

They have to borrow money just to pay interest on the money they’ve already borrowed.

So as interest rates rise, they’ll have to borrow even MORE money to pay the additional interest.

And that additional borrowing will mean that they’ll have to pay even MORE interest, which means they’ll have to borrow even MORE money…

This cycle is pretty obvious. And given the rapid rise in interest rates, it may have already started.

Look- I’ve written about this before. It’s fine to hope for the best. And hope seems to be at a multi-year high in the Land of the Free right now.

US consumer confidence, at least according to the government, is at a nine year high.

Markets have soared, pushing investor confidence to all-time highs.

Confidence is great. Success is even better.

But it’s dangerous to let emotion take hold, willfully ignore these trends, and blindly hope that this desperate cycle of debt and incompetence will somehow have a consequence-free, happy ending.

Whether that reckoning occurs today, tomorrow, or five years from now is totally irrelevant. Maybe it never happens.

But it’s hard to imagine you’ll be worse off for taking perfectly rational steps to distance yourself from the consequences of such an obvious trend.

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If there’s one thing that’s certain in the intelligence business, it’s that there’s rarely any certainty.

That’s pretty much the first thing they teach you at spy school.

Back in the early days of my intelligence career, I had one instructor who explained it in a way that I’ll never forget.

“If you present your analysis as if it’s fact, instead of conjecture, the person who’s relying on your intelligence could end up making a bad decision that gets people killed.”

Intelligence is not about definitive conclusions. It’s about gathering data and coming up with plausible theories that connect the dots.

Sadly, sometimes those theories are influenced by personal or political agendas.

Back in 2002-2003, the Bush White House had a pretty clear predisposition that Iraq possessed Weapons of Mass Destruction (WMDs).

Miraculously, the intelligence reports conformed to that narrative.

And America went to war based on an “unassailable conclusion” from the intelligence community that Iraq had WMDs.

The facts were largely bogus, circumstantial at best. But this became the rallying cry behind every politician and media outlet’s patriotic bloodlust.

How quickly they all forget.

Here we are today with a new assertion: those dastardly Russians hacked Hillary Clinton and the Democratic National Committee (DNC).

I read it in the New York Times, so it must be true.

Once again there is a chorus of condemnation from the intelligence community and political establishment based on supposed rock-solid conclusions.

Yet once again the assertions are nothing more than theories that connect some very circumstantial dots.

Here’s the actual evidence:

The hacks were executed using two types of malware known as Cozy Bear and Fancy Bear.

(Yes that’s what they’re actually called.)

Fancy Bear is malware that takes a conventional “phishing” approach.

A phishing attack is when a hacker creates a web page that’s almost an exact copy of one that you’re used to.

For example, they’ll create a website that looks like your bank’s login page.

So if you click on a malicious link in your email that takes you to the fake page, you’ll inadvertently supply a hacker with your bank username and password.

They’ll then use that information to compromise your bank account.

Fancy Bear allowed hackers to gain access to private emails… primarily because the users at the DNC got duped into providing their login credentials.

Cozy Bear is the second piece of malware that installs itself on a computer, typically after a user clicks on a malicious web link.

One installed, the Cozy Bear malware deploys Remote Access Tools (known as RATs), providing a remote hacker access to the machine and its files.

If, however, Cozy Bear finds that the machine has advanced security software that could detect the malware and cause problems for the RATs, Cozy Bear will self-terminate.

So the first thing to point out here is that the DNC (and potentially the people who were administering Hillary’s private email server) weren’t maintaining the latest security patches and updates on their systems.

Someone at the DNC clicked on a malicious web link that installed the malware, and it didn’t self-terminate because they weren’t bothering to use advanced security software.

Duh.

This is a simple competence issue, and I’m surprised it never came up in the news.

More importantly, Cozy Bear was used against the DNC as far back as summer 2015… as in just before, or right after, Donald Trump entered the race.

So it’s hard for me to believe that Vladimir Putin was actively hacking the DNC to support a candidate that had barely (or not even yet) materialized.

Most importantly, just because cybersecurity experts detected Cozy Bear and Fancy Bear doesn’t mean that the Russians were behind the attacks.

These assertions aren’t based on concrete facts; they’re just speculating that Colonel Mustard did it in the library with the candlestick.

(Apologies to our readers who are too young to have played Clue.)

But facts (or lack of facts) don’t matter.

Whenever something bad happens, the US government blames Russia… and everyone believes it without taking any time to question the evidence.

It’s as if we’re living in some lame espionage movie from the 1980s where the Russians are always the bad guys.

Look, I have absolutely zero regard for the Russian government (as is the case with just about every country’s government).

But I find it almost hilariously short-sighted how quickly everyone rushes to judgment against the Russians. Or the Chinese. Or the North Koreans.

Sure, maybe the Russians did it. And I’m happy to believe that’s the case once clear evidence is presented.

But it’s worth acknowledging right now that their assertions are nowhere near conclusive.

It’s not like this is the first time in US history that the federal government or one of its intelligence agencies could be wrong… or… have a reason to lie.

It’s notable that last week President Obama ordered the entire intelligence community to investigate the Russian hacks.

Given the Obama administration’s numerous statements about the Russians’ complicity, and the nonstop media coverage about the “conclusive” evidence, it’s pretty clear that the outcome of the report is already pre-determined.

Just like the Iraq/WMD analysis back in 2002-2003, this investigation is biased by the boss’s predisposition that the Russians are guilty.

What I find most disturbing, though, is how they can’t let it go that the Russians influenced the election and manipulated voter sentiment.

I’m sure we can all appreciate that the hacks, no matter who perpetrated them, constitute criminal activity.

But the information that was released as a result of the hacks shined a painful and embarrassing spotlight on the inner workings of the corrupt political establishment.

So when the papers and politicians complain that the hacks influenced the election (as if the US government has never tried to influence a foreign election), they’re really just whining that voters found out the truth.

They have that little respect for your dignity.

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One of the best books I’ve ever read is the autobiography of Charlie Chaplin.

That’s probably not what you were expecting. But it’s true.

Chaplin’s book is a remarkable story of his impoverished childhood in England, subsequent migration to America, and rise to wealth and worldwide stardom.

Chaplin lived the textbook American Dream.

He came from nothing, took huge risks, and leveraged his tremendous talent, hard work, and pioneering spirit to become successful.

But that was the early 1900s. And Chaplin’s was a different America.

Today the desire to live the American Dream still persists. And of course plenty of people still become famous or successful.

Ironically Barack Obama is a great example– a mixed race guy who came from nothing to eventually become the President of the United States.

But for the average person, the American Dream is rapidly fading.

It’s not just about wealth and fame, after all. For many people, the American Dream means owning their own home, starting a business, or seeing their children do better.

But the hard numbers show that each of these elements is in decline.

1) Children are doing worse than their parents, not better.

We already know the sad story about student debt levels reaching yet another all-time high.

But there’s some interesting new research released just last week from Stanford University comparing income levels between parents and children to see who was earning more money by age 30.

For example, the research shows that, when adjusted for inflation, 91.54% of people who were born in 1940 were earning more at age 30 than their parents did at the same age.

Conversely, just 50.03% of people born in 1980 were earning more at age 30 than their parents did at the same age.

The study shows a long, steady decline in income, concluding that:

“Children’s prospects of achieving the American Dream of earning more than their parents have fallen from 90% to 50% over the past half century.”

2) Income and upward social mobility are stagnant

There’s a lot that’s been written about America’s “wealth gap”, sometimes known as wealth inequality or income inequality.

In other words, the vast chasm between rich and poor in the Land of the Free is at a level not seen since the Great Depression.

That sounds really bad, and it’s been enough to fuel a populist movement to tax the rich and redistribute wealth.

I’d respectfully point out, though, that when it comes to finance, equality is a bullshit ideal to strive for.

There will always be people of different talents, and different talents yield different rewards.

I’m never going to be able to run as fast as Usain Bolt. He has the natural talent, so he’s going to win all the gold medals.

I shouldn’t expect someone to pass a law restricting how many medals Bolt can win, nor demand that they give me a medal just for participating.

But… and this is a big but… I –should- be able to take matters into my own hands.

As long as I have the will and desire, I should be able to wake up at 4am every day to hit the track.

I might not break any world records. But with time and effort, I will get faster.

And that is precisely the point.

America used to be the place where people who worked hard could achieve higher incomes, become wealthier, and move up in life.

This is known as income or social MOBILITY.

Sadly, this is also in decline, and the trend has been heavily documented over the years.

The most recent research published earlier this month measured the increase in people’s income between two distinct 34-year periods in the United States.

Between 1946 and 1980, for example, the average American’s income increased by 95%.

Between 1980 and 2014, however, the average American’s income increased by just 61%.

For the poor and middle class, though, the numbers were even worse.

Between 1946 and 1980, income for the bottom 50% more than doubled. But between 1980 and 2014, their income increased by just 1%.

Similarly, middle class incomes increased 105% between 1946 and 1980. But between 1980 and 2014, middle class income increased just 42%.

For the top 1%, incomes increased 47% (below the average) between 1946 and 1980. But between 1980 and 2014, their incomes increased 205%.

The numbers paint a pretty clear picture: America is rapidly becoming a country where, if you were born poor, you’ll die poor. And if you’re born rich, you’ll die rich.

This is banana republic stuff… the exact opposite of the American Dream.

3) Home ownership is at its lowest level since 1965

Another part of the American Dream is owning your own home, hence ‘a man’s home is his castle.’

That too is fading, according to US Census Bureau statistics which show that the US home ownership rate is at its lowest level in more than 50 years.

Now, I’m personally in the camp that renting a home is not some terrible curse. It provides more flexibility and less maintenance hassle.

But the numbers show that the decline in home ownership doesn’t seem to be a choice so much as it is a necessity.

Home prices are now rising much faster than income levels. And given that the average American has less than $5,000 in savings, coming up with a down payment is nearly impossible.

Given the recent rapid rise in interest rates, this trend will likely persist.

This list goes on and on.

The number of new businesses being created is shrinking.

People have to change jobs much more frequently and supplement their income with ‘gigs’, rather than having a lengthy career.

Retirement savings is at appalling low levels.

However you define the American Dream, it’s fading.

And it’s time to acknowledge the American Reality.

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Did you know that until June 28, 2016, the song “Happy Birthday” was actually copyrighted material?

Yes, I’m serious. And I’m talking about THAT Happy Birthday, as in the song we all sing at birthday parties.

The original melody was written by two sisters, Patty and Mildred Hill, back in 1893. But instead of “Happy Birthday” they called it “Good Morning to All.”

The Happy Birthday lyrics started appearing in the early 1900s, and throughout the 20th century the song became popular to sing at birthdays.

Now, remember that a song– any song– is a form of intellectual property, just like a patent, manuscript, or software code.

And when you own intellectual property, other people have to pay you for the right to use it. These payments are typically known as royalties.

The Beatles’ song Yesterday, for example, was originally written by John Lennon and Paul McCartney in the early 1960s.

Yesterday is one of the most popular songs in history, and it’s been covered by more than 3,000 other artists, from Frank Sinatra to Daffy Duck.

But each of those 3,000+ artists had to pay a royalty to John Lennon and Paul McCartney for the rights to use the song.

Similarly, the owners of Happy Birthday were receiving royalties on their song as well.

If you ever saw Happy Birthday sung in a movie or TV show, the song’s owners got paid a royalty.

The last owner of the song, Warner/Chappell music, claims to have been receiving a whopping $2 million PER YEAR in royalties on Happy Birthday. Unbelievable.

Earlier this year a judge ruled that Happy Birthday is now officially in the ‘public domain’ and free for everyone to use.

But it’s interesting to think about an asset like that: there’s some up-front work involved in writing a song, and then you can collect royalty income for years. Decades.

That’s a hell of an asset to own.

Of course, most of us don’t have the musical talent to crank out a hit song that can produce royalties forever.

Fortunately, we don’t need to.

Artists can create intellectual property. But as investors, it’s possible for us to BUY it.

Just like Apple stock can change hands between buyers and sellers, intellectual property can also be bought and sold.

For example, big technology companies like Google, Apple, Facebook, etc. have purchased tens of thousands of patents from inventors and designers.

Songs are the same way.

Paul McCartney used to purchase the rights to other artists’ songs (including Buddy Holly).

McCartney even coached Michael Jackson about making the investments– and Jackson famously returned the favor in the 1980s by buying the rights to a number of Beatles songs.

Artists understand that a hit song, like any great intellectual property, can be a fantastic investment… a gift that keeps on giving.

But again, you don’t have to be a rock star to make an investment.

These days, a lot of artists are hesitant to sell their songwriter credits; they’ve heard too many boogeyman stories about other artists getting screwed.

But there is a unique type of investment where both the artist AND the investor get what they want.

It’s called an advance; it’s basically a loan that’s secured by the artist’s current or future royalties.

Rock stars will often get an advance when they sign a deal with a record label; it’s nothing more than a loan against the future earnings of the album.

Artists will also frequently seek an advance on their existing catalog of songs, backed by their royalty income.

So an artist that’s generating $1 million per year in royalties might get an advance for, say, $2-3 million.

The investor then receives ALL of the royalty income directly from the distributor until the loan is paid off.

Here’s the kicker– the interest rate on these loans is typically more than 25%!

Imagine getting a 25% return when your collateral is Yesterday, a song that has consistently generated millions of dollars in steady royalty income.

Unreal. The artist gets to keep the song. But investors are making out like bandits.

And it’s no wonder a handful of players in this space have been keeping the deals all to themselves.

But technology is now managing to upend this monopoly.

Some of my oldest and closest friends run an industry-leading website called RoyaltyExchange.com, which combines this royalty-backed advance loan with the Peer-to-Peer lending concept.

(Happily I became a shareholder in the business earlier this year.)

The website has brokered a number of major deals, from the Eurythmics to Barry White, in a way that allows individual investors to generate safe, substantial returns.

There’s more and more capital coming in to this type of asset, which pushes down the interest rates. But investors are still achieving yields of 9% to 13% on an annualized basis.

As with all things, this is definitely not for everyone.

But it’s a great example of the substantial investment opportunities that exist for people willing to look outside of the mainstream, made possible by industry-disrupting technology.

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Let’s say you have two equal size safety deposit boxes.

One box you completely fill up with stacks of $100 bills.

The other box you fill up with gold.

Which of the two is “worth” more?

It’s easy to calculate. A stack of 100x $100 bills is 6.14 inches long, 2.61 inches wide, and 0.43 inches tall.

That’s a volume of 6.89 cubic inches (112.92 cubic centimeters… and we’ll use the metric system from here on out because it really does make more sense!).

$88.55 per cubic centimeters

A stack of 100x $100 bills is worth $10,000. So the paper money’s ‘value density’ is about $88.55 per cubic centimeter.

Gold, on the other hand, is much more value dense.

A 1-kilogram bar of gold is 11.55 cm long, 5.25 cm wide, and 0.92 cm tall, for a total volume of 55.79 cubic centimeters.

$1,278.75 per cubic centimeters

As of this morning, gold is worth $37,811 per kilogram, meaning the value density of that 1kg bar is $1,278.75 per cubic centimeter.

So gold is clearly more value dense than paper money, i.e. you can store a LOT more value in the same amount of space with gold than you can with paper money.

What about silver?

A 1-kg silver bar measures 11.6 cm x 5.3 cm x 1.75 cm, for a total volume of 107.6 cubic centimeters; this is larger than the bar of gold due to its different chemical properties.

$5.11 per cubic centimeters

One kilogram of silver is currently worth $550. So the value density of silver is $5.11 per cubic centimeter– much lower than both gold and $100 bills.

I looked into a number of other currencies and assets.

500-euro notes, for example, currently have value density of $373.05 per cubic centimeter based on today’s exchange rates.

$373.05 per cubic centimeters

And the 1,000 Swiss franc note has value density of $827.14 per cubic centimeter.

$827.14 per cubic centimeters

Let’s look at fine wine: a bottle of 2005 Petrus sells for about $4,200; with a storage volume of 1,331 cubic centimeters, the wine’s value density is just $3.15.

$3.15 per cubic centimeters

The “5270G-018 Grand Complications” model of watch manufactured by Patek Philippe sells for about $145,000.

$2,013 per cubic centimeters

It measures 72 cubic centimeters in total volume, for a total value density of $2,013 per cubic centimeter.

200 rounds of 7.62mm ammunition in a bulk ammo can measures 4,014 cubic centimeters. At a cost of around $150, the ammo’s value density is about 3.7 cents.

$0.037 per cubic centimeters

August 1962 edition of the Amazing Fantasy comic book featuring Spiderman on the cover (and signed by Stan Lee) sells for nearly $38,000.

$110.14 per cubic centimeters

It’s a comic book, so it’s small, at just 345 cubic centimeters. So its value density is $110.14 per cubic centimeter.

Rare colored diamonds, as you can probably imagine, are extremely expensive. A tiny 0.11 carat “fancy vivid purplish pink” measures just 12.91 cubic millimeters, or .01291 cubic centimeters.

$818,977.53 per cubic centimeters

Most of the normal colorless or near-colorless diamonds that are sold in mass market jewelry stores are terrible investments. They’re not rare, and they’re overpriced.

But high quality colored diamonds can be extremely rare, and that scarcity drives the price much higher.

That’s why a tiny 0.11 carat colored diamond is currently listed at $10,573, making its value density a whopping $818,977.53 per cubic centimeter.

So let’s look at all of these assets in order of least to most value dense:

Value of assets in dollars per cubic centimeters:

Ammunition: $0.037
Fine wine: $3.15
1-kg Silver bar: $5.11
$100 bills: $88.55
Rare comic book: $110.14
500-euro notes: $373.05
1-kg Gold bar: $1,278.75
Luxury watch: $2,013
1,000 Swiss franc: $827.14
Colored diamonds: $818,977.53

Now, in my view, given the potential costs and challenges of the other assets, gold still remains the top choice.

Luxury watches may be more value dense than gold, but the marketplace is limited and the costs to sell are much higher.

There are gold dealers in just about every major city on the planet, so you’d be able sell a gold bar in no time at all, at very little cost.

Colored diamonds, luxury watches (and even comic books) could take much more time to sell, and you might need to pay steep commissions to close the deal.

Plus, the gold price is quoted worldwide, round-the-clock. There’s never any question about how much gold is worth.

The 1,000 Swiss franc note is more value dense than gold. And for now, Switzerland has resisted the calls to ban the note, as Europe has done with its 500-euro note.

But I wouldn’t expect that sensibility to last forever. Between the two, gold is likely safer from a regulatory perspective… and more universal.

But fortunately the decision doesn’t have to be mutually exclusive. You don’t need to choose between one and the other.

So if you’re going to fill up your safe, choose a variety of assets. You can start small– silver coins and $20 bills.

Now, there’s one asset here that I didn’t list. You might have thought of it already… it’s one that blows the rest away in terms of its value density.

I’m talking about cryptocurrency.

Bitcoin, for example, takes up precisely zero space. If you really wanted, you could memorize a string of digits and store millions of dollars in your head.

Even if you wanted to print out a 250-pixel QR code and keep it in your safe, it would take up a laughable amount of space, roughly 0.21 cubic centimeters– not much bigger than a tiny diamond.

Yet that same 250-pixel QR code could hold $1 worth of bitcoin… $100… $1,000… or even millions.

In other words, the value density is enormous.

Now, I’m not encouraging you to dump all of your savings in cryptocurrency– there are still plenty of growing pains ahead.

But it’s important to understand the many benefits of cryptocurrency… and value density is just one of them.

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In Venezuela, hyperinflation has become so pitiful that shopkeepers are no longer bothering to actually count money.

Instead, they’re weighing it…

… as in literally pulling out a scale and weighing giant stacks of money. Do you want to buy a bottle of Coca Cola? That’ll be 1 kilo of currency please.

One shopkeeper interviewed by the Guardian newspaper said he’s piling up bricks of cash so quickly he feels like Pablo Escobar.

And yet Venezuela’s hyperinflation continues growing worse; those bricks of cash are buying less every week.

This is an important lesson.

Throughout history, human beings have used countless forms of money.

Many of the ancients used commodities like silver or salt. The feudal Japanese used rice. The island natives of Yap used enormous stone wheels.

Today we use physical pieces of paper and electronic digits in a bank account. Large financial institutions and governments use bonds.

Each of these is (or was) a form of money.

But regardless of the form, money is only credible as long as everyone agrees that it has value, i.e. there’s a large enough market size of people willing to use it.

This fundamentally comes down to trust and confidence.

But Venezuela’s example shows how quickly that very thin veneer of trust and confidence can shatter, plunging a country into chaotic hyperinflation.

We’ve discussed many times before that cash, specifically physical currency, is a good asset to own.

Physical cash eliminates a LOT of counterparty risk. There’s no more middleman banker standing in between you and your savings.

This has a lot of benefit.

If it turns out that your bank has been making idiotic bets with its customer’s deposits and runs into serious financial problems, you’ll have at least a portion of your savings in physical cash, so you’ll be unaffected by their stupidity.

If you live, in the words of that great American hero Homer Simpson, in the Sue-S-A, your bank account can easily be frozen or levied in a lawsuit.

So holding some physical cash ensures that you still have a way to put food on the table for your family.

There are so many reasons to keep some savings in cash.

But it’s important to remember as well that cash has limitations.

Venezuela is the prime example: cash can lose value VERY quickly.

Modern money is nothing more than a mirage conjured out of thin air by central bankers– unelected bureaucrats who are awarded free reign over the monetary system.

Central bankers decide in their sole discretion whether or not to print money, destroy money, raise rates, lower rates… whatever they feel like doing.

Each of their actions yields consequences… and those consequences have winners and losers.

Mark Carney, head of the Bank of England, recently announced that he is willing to tolerate higher inflation and a weaker pound in order to benefit factory workers and British exporters.

So basically if you’re a factory worker or exporter, you win. If you’re a retiree on a fixed income, you lose.

In a ‘free society’, citizens are supposed to be able to vote on the leaders who make such important decisions, i.e. robbing one person’s standard of living to benefit another’s.

But that’s not how our modern financial system works.

Elected politicians don’t really hold the power. It’s unelected central banks who wield totalitarian control over the lives and livelihoods of other people.

It’s as if they’re presiding over some sort of financial death panel, determining who thrives and who gets crushed.

And I’m convinced that at some point in the future, our descendents will study this period of history with utter astonishment at how we could have allowed ourselves to be dominated by such a bizarre system.

Think about it– we even award our society’s most esteemed prize for intellectual achievement to economists who want to conjure even MORE money out of thin air, even when obvious examples like Venezuela persist.

So here’s the bottom line– definitely hold some cash, as in physical currency. Keep some in your safe.

Cash remains a great short-term hedge against problems in the banking system, and provides a number of other advantages including some minor asset protection benefit.

But think about keeping at least a portion of your savings outside of this bizarre system altogether.

Consider owning REAL assets, which could be anything from a private business to productive real estate to gold and silver.

And later this week we’ll talk about some of the most valuable real assets to hold.

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In 524 BC, a group of pirates set sail for Sifnos, an ancient Greek island famed for its vast gold and silver mines.

The mines of Sifnos were unparalleled in the ancient world.

They produced so much gold and silver that the local government at Sifnos could erect countless monuments, invest in new public works, and still easily have a substantial balance remaining at the end of each year to distribute to the citizens.

When the pirates arrived, they robbed the island of 100 talents of gold, an unfathomable sum at the time.

In the ancient world, a talent was a unit of weight equivalent to 26 kilograms, or about 836 troy ounces.

So 100 talents of gold would be worth just shy of $100 million today, ranking that ancient robbery as one of the biggest heists in history.

It’s amazing that thousands of years have passed, and yet that very same gold could still be traded in modern financial markets.

There are few other assets on the planet that have had such a long history of value, durability, and marketability.

Gold very clearly holds its value over time, whether over decades or millennia.

Now, in fairness, it’s not like any of us is going to live for 2500+ years, so realistically it shouldn’t matter if our money will maintain its value until the year 4500.

But gold has plenty of other benefits. For example, it’s also a type of insurance.

If there’s ever a major problem with your home country’s currency or monetary system (which we’ve seen over the last several years from India to Iceland, Argentina to Zimbabwe) gold will maintain its value and survive the currency crisis.

Owning some physical gold will ensure that you still have something of value in your pocket.

This is an insurance policy that you hope you’ll never need. But if you ever do, you’ll be damn glad you have it.

Another type of insurance policy we’ve discussed in this letter is physical cash.

Most people keep the vast majority of their savings in a bank, and in normal times we can access this savings online, at ATMs, and in the checkout line with our debit cards.

We view physical cash and bank balances as the same thing, i.e. $1 in a savings account is the same thing as a one-dollar bill with George Washington’s face on it.

They’re not the same thing. These are actually two distinct forms of money, they just happen to have a 1:1 exchange rate right now.

Your bank balance is nothing more than an accounting entry on a bank’s ledger.

It’s a technically a claim– an amount that the bank owes you, one of its millions of unsecured creditors.

And if there are ever any major problems at the bank, you’ll quickly see how worthless this claim can be.

Think about what happened in Cyprus back in 2013. An entire nation woke up one morning and found out that the government had frozen every account at every bank in Cyprus.

It turned out that the entire Cypriot financial system was near collapse, and the government cut people off from their funds in order to protect the banks.

At that point, bank balances were fundamentally worthless. It didn’t matter how much money you had in the bank… you couldn’t do anything with it.

But anyone who was holding physical cash could still buy food, fuel, and other necessities until the crisis subsided.

The 1:1 exchange rate between cash and bank balances broke down, literally overnight.

One day everything was normal. The next day, cash was far more valuable than anyone’s bank balance.

This is why it makes sense to hold both– gold AND physical cash.

It’s perfectly fine to stay optimistic and hope for the best. And there’s plenty to be optimistic about.

But with bank insolvencies rising (especially in Europe) and a US debt level closing in on $20 trillion, does it make sense to bet everything you’ve ever worked for on hope and optimism?

We insure ourselves against all sorts of risks.

We have fire insurance in case our houses burn down. We have life insurance in case we have an early departure.

Those risks may be extremely low. But they’re important enough that we spend money to protect ourselves against them.

The systemic risks we’re talking about may also be low. (Though I would suggest the risks are much higher than anyone realizes…)

But their impacts are extraordinary.

Yet unlike conventional insurance, these policies, i.e. cash and gold, don’t really cost anything.

Gold prices may fluctuate from day to day, but over the long-term, the metal holds its value. And it’s an asset that you’ll be able to sell, worldwide, in an instant.

It’s the same with cash.

With interest rates at historic lows and a checking account yielding 0.1%, there’s virtually no opportunity cost in holding some physical cash versus keeping all of your savings at the bank.

These are no-brainer solutions with minimal (nearly zero) cost that provide time-tested insurance against some obvious risks.

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