Category: simonblack

Here’s a great example of how, no matter what’s happening in the world, there’s always an abundance of compelling, lucrative opportunities.

Lately the British pound has plunged to historic lows.

The pound recently touched a 31-year low against the US dollar, and an all-time low against the euro.

And earlier this month the pound shed nearly 3% of its value in the course of a single day.

That’s simply not supposed to happen to a major currency.

A move of just 1% for a major currency is considered shocking. Currencies are supposed to be stable, not ultra-volatile like a penny stock.

Yet these sharp swings keep happening to the pound, mostly out of Brexit fears.

Emotion has taken over. There’s no rational basis for the pound being this cheap—merely panicked selling on the assumption that everyone else is going to be selling.

This is a broken market. And I imagine it must be nerve-wracking to be living in the UK and watching your currency knocked around like some third-world peso.

Yet anytime markets break down like this and emotions take over, great opportunities almost invariably emerge.

We’ve discussed our deep value investment strategy before; financial markets in some parts of the world are so fractured that it’s possible to buy shares of a profitable business for less than the amount of cash it has in its bank account.

That qualifies as a no-brainer– an extremely LOW risk way to generate a built-in profit.

Some colleagues and I are taking this a step further, in fact, and working on a deal to purchase a controlling stake in a listed company that is selling for a fraction of the value of its assets.

(SMPI and Total Access members– watch out for more information on this one.)

These types of opportunities exist almost everywhere that markets have broken down, and the UK is no exception.

I’ll highlight a few simple examples that don’t involve investing tens of millions of dollars.

One asset class that makes sense to consider is collectibles, things like rare coins or wine.

Like gold and silver bullion, collectibles are real assets. And scarce. They’re not making any more 1982 Chateau Petrus.

With collectibles, I prefer to stick to assets with a wide base (i.e. nothing too niche) that are fairly easy to buy and sell.

Art and antiques, for example, can be difficult to value and sell without going to an appraiser and broker.

But certain luxury watch brands, on the other hand, can be sold in minutes, especially the historic high-end Swiss manufactures like Patek Philippe, Rolex, Jaeger-LeCoultre, IWC Schauffhausen, and Vacheron Constantin.

Many of these watches are hand-made and they are NOT mass-produced, so they’re scarce and extremely popular.

Right with the British pound at around $1.22, luxury watches being sold in London and priced in pounds can be had at a steep discount to their US dollar prices across the ocean.

A recent year Patek Phillippe Calatrava model (5119G) is selling for about GBP 12,300 in the UK right now, or right around $15,000.

(And that doesn’t include the benefit of receiving a VAT refund.)

This same watch can easily sell for more than $20,000 in the US.

You could even sell it yourself on Amazon or eBay at a steep discount to that price and still make a very healthy profit.

Technically it should even be possible to sell the watch first in US dollars, and then purchase it in pounds from a UK vendor once you collect the money from your buyer.

That way you can generate a solid profit without actually using any of your own money.

It’s easy to be fearful when markets break down, when terrifying political candidates emerge, and when it seems like World War III is breaking out.

But as a result of all that fear, there are countless opportunities like this to generate low risk, built-in profits.

And thanks to our modern technology, these opportunities are available to anyone in the world who has access to the Internet… and a little bit of hustle.

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

The consumption of financial media can be dangerous. Mixed with overpriced global brands, it can be deadly. In August 2000, Fortune Magazine published an article entitled ‘Ten stocks to last the decade’. As befits something written during the latter stages of the TMT boom, Fortune’s recommendations concentrated on Technology, Media and Telecoms stocks. Their ‘Ten stocks to last the decade’, and their stock prices at the time of original publication, were:

Stock	Price
Nokia	$41.06
Nortel Networks	$79.25
Enron	$83.75
Oracle	$82.375
Broadcom	$240.75
Viacom	$69.00
Univision	$48.00
Charles Schwab	$40.00
Morgan Stanley	$104.06
Genentech	$167.06

How did these ‘Ten stocks to last the decade’ fare? The following table shows their stock prices on 19 December 2012.

Stock	Price as at 14.8.2000	Price as at 19.12.2012
Nokia	$41.06	$4.21
Nortel Networks	$79.25	$0.00
Enron	$83.75	$0.00
Oracle	$82.375	$34.09
Broadcom	$240.75	$33.16
Viacom	$69.00	$54.00
Univision	$48.00	$0.00
Charles Schwab	$40.00	$14.47
Morgan Stanley	$104.06	$19.09
Genentech	$167.06	$95 (Taken Over)

Clearly, Fortune Magazine is unlikely to be winning any investment awards any time soon. Unless it buys them.

All in all, the Fortune portfolio lost 65% of its value over the subsequent decade. Three of its favoured companies went bankrupt, and one was bailed out.

In the words of the legendary value investor Benjamin Graham,

“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons [by Wall Street]. And sometimes–in fact very frequently—they make mistakes by buying good stocks in the upper reaches of bull markets.”

(Emphasis ours.)

Is there a chance that investors today run the risk of making the same mistake–of overpaying for good stocks during a period when the stock market is, perhaps, somewhat artificially high, courtesy of seven years of egregious and otherwise ineffectual monetary stimulus?

Example. Unilever is a good, if boring, company. It sells soap, shampoo and a variety of foodstuffs. It is also extremely popular with equity fund managers who regard the shares as bond proxies–safe, dependable, low volatility earners. The problem with this groupthink is that–as Benjamin Graham warned–
once the crowd bids up shares beyond a certain point, they no longer offer any “margin of safety”.

Unilever shares have now, arguably, reached that point. They trade on a p/e ratio of 23 times and a price to book ratio of 8. They are not cheap in any Benjamin Graham sense of the word.

And in its well—publicised spat with Tesco last week, the company now seems to be behaving like a cynical, opportunistic, price-gouging profiteer.

(Marmite, for example, is manufactured in Burton-upon-Trent in Staffordshire. As far as we are aware, Burton-upon-Trent does not have its own currency which has suddenly depreciated against sterling which might justify a 10% price hike.)

Unilever is, of course, free to charge whatever it likes for its products. By the same token, consumers are perfectly free to boycott Unilever products and buy something cheaper, and perhaps more appealing. That goes for the shares, too.

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On May 12, 1780, John Adams wrote to his wife Abigail,

“I must study politics and war that my sons have the liberty to study mathematics and philosophy. . . in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain.”

(… to which I would add, “so that their children can hide from the world in their safe spaces.”)

There may be no other quote that so succinctly surmises the rise and fall of empire.

In the early days, people have no illusions about the hard work and dedication required to create a civilization out of nothing.

Yet as a country approaches the zenith of its wealth, the mentality begins to shift.

People become less focused on production and more on consumption… enjoying the benefits of all that hard work.

Towards the end, there’s hardly anyone left alive who can even remember the days that the nation had to work hard and produce.

All anyone has ever known now is consumption… being the ‘richest country in the world’, and enjoying all the benefits that come along with that title.

This is why there’s so much debt.

Wealthy nations have become so accustomed to their lifestyles that, rather than buckle down, work hard, and produce more to keep the good times going, they’d rather simply borrow from future prosperity to pay for consumption today.

In fact, in its semi-annual Global Financial Stability Report released just a few days ago, the International Monetary Fund tells us that overall global debt is at an all-time high, now at over 225% of total world GDP.

Rich countries are leading the way with average debt at an even higher 277% of GDP, a level that makes it “difficult to grow out of the problem.”

Famous economists in rich western countries have come up with all sorts of catchy reasons why no one should worry about the debt–

Reasons like, “because we owe it to ourselves,” or “because we can print our own money…” abound.

People have been spouting this illogic for years to the point that it has become dangerously axiomatic through sheer volume of repetition.

If you say something enough, it eventually becomes true… no matter how wrong it happens to be.

The reality is that debt is incredibly dangerous. Even the ancients understood this.

Much of early theology and human civilization, from the Hebrews to the Romans, focuses on debt repayment and jubilee.

Even the concept of karma in Buddhism and Hinduism is about maintaining a positive moral balance sheet.

Debt is a killer. And the reason why is precisely because one person’s debt is simultaneously someone else’s asset.

Right now if you have, say, a $100,000 bank deposit, you have an asset. But the bank has a debt– they owe you $100,000! It’s your asset, but the bank’s liability.

Similarly, if you have a $1 million mortgage, you have a $1 million debt.

To the mortgage company that receives the interest payment each month, however, that $1 million loan is their asset.

So in fairness, a record amount of debt in the world also means that there’s a record amount of assets.

Here’s the problem: The laws of the financial universe can be bent… but they cannot be broken.

So whenever debt levels grow too large, especially when debt is being squandered on consumption and growing at a far faster rate than the economy itself, then there must be a default.

Yet a default itself is not necessarily a bad thing.

In a default, there’s supposed to be an orderly liquidation process in which a delinquent borrower’s assets are sold off and redistributed to the lenders.

So wealth isn’t necessarily lost, merely transferred from borrower to lender.

But that doesn’t always happen.

When lenders are smart, they make loans backed by high quality collateral.

Think about what a typical home loan is supposed to be: the borrower puts down 20% of the purchase price as a down payment, and the bank loans the remaining 80%.

This means that the bank’s investment is backed by a house (collateral) which is worth 25% more than the initial principal balance of the loan.

This way the bank has an ample margin of safety to recoup its investment in the event that the borrower defaults.

But what happens when the collateral is worthless? Or when there’s no collateral at all other than some delusion about how great the borrower is?

That’s when the entire system runs into major problems.

Think back to the financial crisis: banks weren’t making conservative loans.

They were offering borrowers 105% financing, more money than the homes were worth.

By 2008 bank balance sheets were stuffed full of non-performing loans where the buyers had stopped paying… yet the collateral was worth far LESS than the loan balances.

Poof. Nearly everyone took a bath, and trillions of dollars of wealth was lost in the crisis.

So the real danger isn’t the amount of debt itself, but whether or not there’s any collateral or high-quality assets backing the debt.

Looking at the record $152 trillion in global debt, it’s clear that much of this is backed by nothing but the false promises of once-wealthy nations.

Western governments have spent years increasing their debts, but instead of wisely investing the proceeds in assets for the future, they’ve squandered most of it on war, waste, and consumption.

So when the inevitable occurs and there’s a default, bondholders have almost no collateral to recoup their losses. Trillions of dollars of wealth will be lost.

It’s often considered crazy and treasonous to even imagine a default.

Yet to deny the possibility requires a belief that wealthy nations can continue increasing their debts until the end of time without consequence.

And that may be the craziest idea of all.

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The King of Thailand died yesterday, and the military junta running the country has declared an entire year of mourning.

I saw a quick headline from The Economist which screamed, “The death of the Thai king throws the country into turmoil.”

Really?

This must be a different country from the one I know.

I’ve been traveling to Thailand 3-4 times per year over the past decade, and we have staff who have been living there for at least that long.

It’s perfectly clear to us what impact a new king is going to have on Thailand: there will be a new face on the currency.

And that’s about it.

It’s true that the late King was widely revered, elevated to god-like status by his people.

But in Thailand, as in most places, “he who has the guns makes the rules.” And that has long been the military.

Over the past 15 years, the powerful elite in both the military and wealthy families who actually control the country have engineered several coups to put their own people in power and ensure their interests wouldn’t be interrupted upon the King’s death.

And given that the Crown Prince and heir apparent has spent most of his life outside of Thailand, it’s unlikely there will be any meaningful change to the status quo.

Lately he has been living in Germany with, at least until last year, his pet poodle FuFu who was promoted to the rank of Air Chief Marshall in the Royal Thai Air Force.

Air Chief Marshall FuFu died last year and was cremated after four days of Buddhist funeral rites.

So something tells me the Thai political system isn’t going to be receiving a much-need enema anytime soon.

The military and powerful elite have spent the past several years preparing for this moment to ensure that everything will be, as Thai people like to say, “same same, but different.”

In other words, nothing more than a different face on the currency.

There has been worry and concern for years that Thailand would plunge into chaos upon the king’s death… or that Thai assets and financial markets would collapse.

Stocks had in fact been sliding for days after the rumors began circulating that the king was gravely ill.

Then, as soon as he passed away, stocks actually started to climb, with the MSCI Thailand Capped ETF surging since the King’s death.

Shares of Thai Airways, for instance, are up 15% this morning.

So it appears that predictions of Thailand’s demise have been somewhat exaggerated.

There always seem to be these experts who predict dire chaos and consequences immediately following some event—just like Brexit, just like Colombians’ rejection of the FARC peace treaty.

It almost never happens that way.

The most severe consequences are seldom triggered by a single event, but rather years… decades of bad decisions and negative trends that build into a giant tidal wave of inevitability.

The same principle applies to the US presidential election next month.

No matter who wins, the world isn’t going to explode.

Nor is it going to be all sunshine and buttercups.

Regardless of which candidate the Electoral College chooses to become the next President of the United States, there is no stopping the inevitability of US default, its $20 trillion debt, or the insolvency of Social Security and Medicare.

Same same, but different.

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First of all, I want to say thanks for all the well-wishes.

I’ve been flat on my back for the past several days with a particularly nasty case of the flu that I likely contracted en route to Los Angeles last week.

Picking up the occasional bug is one of the hazards of spending a lot of time on planes… plus I have some special luck with airlines for always being seated next to a guy who sneezes with the explosiveness and ferocity of a biological terrorist.

But, now that I’m better and getting brought up to speed, one of the things that caught my attention this morning was that the US government’s debt level has soared to just a hair under $19.7 trillion.

To give it some context, that’s up over $120 billion in just six business days.

It’s almost as if Barack Obama is intentionally and desperately trying to breach the $20 trillion mark before he leaves office in January.

Of course, this hasn’t been reported anywhere because the media is too busy pretending to be shocked that Donald Trump is a womanizer.

And yet the debt is a much, much bigger story… though admittedly one that is far less entertaining.

The election is merely a fight over who gets to be the band conductor while the Titanic sinks. And the debt is precisely the reason for this.

Total US public debt has skyrocketed over the last eight years by $9 trillion, from $10.6 trillion to $19.7 trillion.

And in the 2016 fiscal year that just closed two weeks ago, the government added a whopping $1.4 trillion to the debt, the third highest amount on record.

Plus, they managed to accumulate that much debt at a time when they weren’t even really doing anything.

It’s not like the government spent the last year vanquishing ISIS or rebuilding US infrastructure. They just… squandered it.

Now, Nobel Prize-winning economist Joseph Stiglitz says we shouldn’t worry about America’s prodigious debt, and anyone who fusses over it doesn’t understand economics.

Stiglitz claims that we wouldn’t judge a private company like Apple based solely on its debt.

We’d look at other factors like assets, income, and growth before making an assessment of the company’s financial health.

And he’s right.

Singapore, for example, is a country with an extremely high level of debt. At first glance, it looks dangerous.

But if you dive deeper into the government’s balance sheet, you see an enormous abundance of cash reserves.

So taking into account just its cash assets, Singapore has absolutely ZERO net debt.

The US, on the other hand, is not in this position.

The Treasury Department publishes regular financial statements detailing its income, expenses, assets, and liabilities.

You already know the income numbers– the government loses billions of dollars per year, and the trend is negative.

As for its balance sheet, the government reports just $3.2 trillion in assets against $21.4 trillion in liabilities, for a NET position of NEGATIVE $18.2 trillion.

Now, when we’re dealing with trillions, it’s clearly not an exact science.

There are many economists who argue that the federal highway system, military, and federal tax authority should count as “assets” that are worth trillions of dollars.

Maybe so. But to be fair, one should also count the trillions of dollars of repairs needed on the highway system as liabilities.

Or the trillions more in cost of wars. Or the $40+ trillion in unfunded liabilities from Medicare, Social Security, etc.

It’s also important to note that America’s debt is growing at a far quicker rate than its economy.

When President Obama took office, US public debt was about 73% of GDP. Today it’s 105%. So even as the economy has grown, the debt has grown much faster.

Any way you look at it, the US government is already insolvent, and its situation is becoming worse.

This leaves essentially two options.

We can choose to willfully ignore this obvious trend and delude ourselves into thinking that the continued expansion of US debt will forever be consequence-free;

Or, we can acknowledge the tiny possibility that maybe, just maybe, there may be some adverse consequence, and plan accordingly.

That’s the great thing about risks– we can take out insurance to protect against their consequences.

That’s why we have fire insurance to protect our homes, life insurance to protect our families.

Of course, there is no policy from Met Life or GEICO which will protect you from capital controls, a default on Social Security, or Global Financial Crisis 2.0.

Yet there are countless options to protect against these consequences.

The premise is simple: if your country is broke, don’t keep 100% of your assets there.

If your banking system is precariously illiquid and questionably solvent, don’t keep 100% of your savings there.

Most of all, it never, ever hurts to have a Plan B and give yourself additional options.

For example, you may be able to take some steps to legally reduce your tax bill; move some funds to a safer, better capitalized bank abroad that pays a higher rate of interest; or obtain a second passport based on your grandparents’ Irish or Polish nationality.

It’s hard to imagine that you’ll be worse off for having taken any of these steps.

And like any great insurance policy, these steps not only protect you against risk, but also give you the chance to make more money and prosper.

(That’s why the ultra-wealthy often invest in insurance policies as an asset class.)

Having a Plan B doesn’t mean hiding in a bunker with a tin-foil hat. Anyone expecting the end of the world is going to be waiting a very long time.

But taking some risk off the table is something that smart, rational people do, especially in light of such overwhelming data.

 

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Back in the 1970s, the BBC started broadcasting a children’s show called ‘Why Don’t You?’ Its full title: ‘Why Don’t You Just Switch Off Your Television Set And Go Out And Do Something Less Boring Instead?’ Out of the mouths of babes. Rolf Dobelli, the best-selling author of ‘The Art of Thinking Clearly’ has gone one better. In his essay ‘Avoid News’ he advocates abandoning news across all forms of media altogether.

The psychologist Paul Andreassen has shown that people who receive frequent news updates on their investments earn lower returns than those who get no news:

“Andreassen divided students into two groups. Each group selected a portfolio of stocks and knew enough about each stock to come up with what seemed like a fair price for it. Then Andreassen allowed one group to see only the changes in the prices of its stocks. Students in that group could buy and sell if they wanted, but all they knew was whether the price of a stock had gone up or down. The second group was allowed to see the changes in price and was also given a constant stream of financial news that supposedly explained what was happening with each stock. Surprisingly, the less informed group did far better than the group that was given all the news. The reason, Andreassen suggested, was that news reports tend to overplay the importance of any particular piece of information. When a stock fell, its fall was typically portrayed as a sign that further trouble lay in wait, while a stock that was on the rise seemed to promise nothing but blue skies ahead. As a result, the students who had access to the news overreacted. Because they took each piece of information as excessively meaningful, they bought and sold far more frequently than the people who were just looking at the price.”

Most of us consume news every day without even thinking about the damage we are doing to ourselves. Financial news may be among the most damaging of all. As Thomas Schuster of Leipzig University puts it:

“The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.”

Acres of column inches and hours of airtime have already been dedicated to searching for the cause of last week’s so-called “flash crash” in which sterling got whacked on the foreign exchanges. Again. R2D2 and C3PO may know how and why it happened, but the rest of us are pre-destined to be blathering around in the dark. Human beings are simply hard-wired to look for stories, and the financial media are very good at creating them. Our brains abhor a vacuum devoid of meaning, so man’s search for narrative will likely last for as long as we do.

The reality is that for most of the time, about almost everything that takes place in the financial markets – and elsewhere – nobody really knows.

Dobelli argues that news is to the mind what sugar is to the body. We are in this sad state because:

-“..200 years ago we invented a toxic form of knowledge called “news”. The time has come to recognise the detrimental effects that news has on individuals and societies, and to take the necessary steps to shield yourself from its dangers.

-At core, human beings are cavemen in suits and dresses. Our brains are optimised for our original hunter-gatherer environment where we lived in small bands of 25 to 100 individuals with limited sources of food and information. Our brains (and our bodies) now live in a world that is the opposite of what we are designed to handle. This leads to great risk and to inappropriate, outright dangerous behaviour.

-In the past few decades, the fortunate among us have recognised the hazards of living with an overabundance of carbohydrates (obesity, diabetes) and have started to shift our diets.. News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. Unlike reading books and long, deep magazine articles (which requires thinking), we can swallow limitless quantities of news flashes, like bright- coloured candies for the mind.

-Today, we have reached the same point in relation to information overload that we faced 20 years ago in regard to food intake. We are beginning to recognise how toxic news can be and we are learning to take the first steps toward an information diet.”

As someone who earns a living in part from providing financial commentary and analysis, I am well aware that this advice might seem hypocritical. But I am also convinced that Dobelli is right, and that by reducing (if not necessarily eliminating) our intake of news, we will all be better off physically, emotionally, and spiritually. To sum up his thesis:

• News misleads us systematically
• News is irrelevant
• News limits our understanding
• News risks impairing our physical health
• News increases cognitive errors
• News inhibits thinking
• News changes brain behaviour, not for the better
• News devours our time
• Facts are often wrong and forecasts always wrong
• News is manipulative
• News makes us passive
• News kills creativity.

As a longstanding news consumer I do not expect to go cold turkey overnight. But I am certainly cutting down. Rather than eliminate news altogether, which seems wildly impractical, especially for active investors, there is surely an argument for distilling news consumption down to a focused number of high quality providers, advisors, and commentators. We aspire to be amongst the latter.

And if financial journalists think we happen to be picking on them, well, they’re partly right. The financial media earn a chapter to themselves in Investing Through the Looking Glass. But this is an equal opportunity book. A sound kicking is also administered to bankers, central bankers, economists, and fund managers. (We even propose investment solutions as well as identifying systemic problems.) This may be the perfect Christmas book, and fun for all the family.

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“This is a global problem,” said billionaire hedge fund manager Ray Dalio yesterday to a packed audience of central bankers.

“Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States.”

I can only imagine the mood in the room was a bit tense after that comment.

Mr. Dalio, founder of the $160 billion investment firm Bridgewater Associates, was invited to speak at the Federal Reserve Bank of New York’s 40th Annual Central Banking Seminar yesterday.

Rather than gush about how wonderful the Fed’s zero interest rate policies have been since the financial crisis, Dalio gave them a fire hose of reality.

His primary thesis was that the debt supercycle that has lasted for decades is coming to an end, and that there’s going to be a “big squeeze”.

“The biggest issue,” he said, “is that there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”

The largest economies in the world– Japan, Europe, the United States, and China are racking up record amounts of debt and absolutely nearing those limits.

Just this morning the International Monetary Fund warned that global debt has hit an all-time high of $152 TRILLION.

That’s an astounding figure that’s nearly TWICE the size of the world economy.

But it’s more than that, because in addition to nominal debt, there are further obligations that must be paid– like healthcare and pension programs which are largely underfunded.

We’ve been discussing this a lot lately; in the US, Social Security is completely underfunded and will become cashflow negative in just a few more years.

Soon after it will entirely run out of money.

Dalio summed it up by telling his audience, “There are too many promises that can’t be kept, not only in the form of debt, but also in the form of health care and pension costs. . .”

In other words, not only is government debt, corporate debt, and household debt at record levels worldwide, but pension and healthcare obligations have become impossible to pay.

Bear in mind that all of this is happening at a time when economic growth and productivity are slowing.

This means that while debt is piling up, the ability to service those obligations is actually decreasing.

Central bankers have been desperately trying to hold the system together by keeping interest rates at record lows and printing trillions of dollars.

But as Dalio pointed out to his audience of central bankers, their strategy is also “approaching its limits.”

Yesterday we discussed why central banks are between a rock and a hard place.

If the Fed doesn’t raise interest rates quickly, they’ll be forced to make interest rates negative in the next recession.

But if the Fed does raise interest rates, they’ll cause a massive decline in asset prices, and potentially even engineer the recession that they’re trying to prevent.

Dalio again: “[I]t would only take a 100 basis point [1%] rise [in interest rates] to trigger the worst price decline in bonds since the 1981 bond market crash.”

So no matter which direction central banks go, i.e. to raise or not to raise interest rates, there are severe consequences.

This is why Dalio expects a “big squeeze.” And it won’t be pretty.

A crash in bond prices could easily wipe out bank balance sheets around the world, especially across Europe where most of the banks are already insolvent.

This is the reality of our financial system, not some theory or conjecture. It is dangerously overleveraged and quickly reaching its limits.

And as Dalio began his remarks, it’s no longer controversial to make these assertions.

The question is– what to do about it?

The most important thing is to have some perspective. The world isn’t coming to an end.

Make no mistake, the consequences are severe, especially for the unprepared. But our species has suffered far worse incidents than the collapse of a debt supercycle.

Moreover, there’s nothing that’s going to happen immediately. China, Japan, Europe, and the US aren’t going to default tomorrow morning.

This is a slow-moving train where the consequences pile up little by little.

Today we can already see early stage capital controls in Europe, corporate defaults in China, multiple debt-ceiling crises in the US, and negative interest rates around the world.

None of these things existed ten years ago. And in a few more years, today’s financial conditions will seem tame by comparison.

Yet while this snowball keeps getting bigger, no one can possibly predict precisely WHEN or HOW it will finally strike.

That’s why perspective is so important.

Anyone who hunkers down expecting the financial apocalypse could be waiting a while… and simultaneously missing out on some compelling opportunities.

Similarly, people who delude themselves into believing that everything is going to be just fine will likely have their entire lives turned upside down by an erupting financial crisis.

It is possible to strike a balance.

As an example, we’ve talked a lot about holding physical cash.

If the objective data proves that your banking system is illiquid and questionably solvent, then why take the risk and keep all your money there, especially when all you’re being paid is 0.1% interest anyhow?

You can take a LOT of that risk off the table by simply withdrawing a few months worth of savings and holding some cash.

Similarly, if you know that your currency is underpinned by record amounts of debt and promises that are impossible to keep, why not take some of that risk off the table with an asset like gold that has a 5,000 year history of preserving wealth?

It’s hard to imagine you’ll be worse off holding a bit of physical cash or a universal asset like gold or silver.

But if the worst happens, those holdings could turn out to be the best insurance policy you’ve ever had.

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In the modern history of the US economy over the past seven decades, the longest period of time the country has gone without a recession was 10 years.

Since the end of World War II there have been 11 recessions in the United States of America, so the average time in between recessions is 6 years and 5 months.

The average length of recession was 336 days; the longest recession in modern history was 18 months in 2008-2009, and the shortest was 6 months in 1980.

And whenever a recession hits, the all-knowing, all-powerful Federal Reserve attempts to stimulate the economy by cutting interest rates, typically multiple times.

The smallest interest rate cut was 2.03% during the 1990-1991 recession.

The largest interest rate cut during a recession was 9.84% during the 1981-1982 recession.

The average interest rate cut during a recession is 4.03% based on sixty years of Federal Reserve data.

In fact in every single recession in modern US history, interest rates were always MUCH lower at the end of the recession than they were at the beginning.

So if historical averages are any indicator, the next recession should begin some time between now and mid-2019, with an interest rate cut of 2% to 4%, presuming it’s just a mild to average recession.

This isn’t some wild fantasy.

Even the government’s own Congressional Budget Office recently revised its projections, stating that America’s prodigious (and rapidly growing) $19.5 trillion national debt “blunts” the prospect for meaningful economic growth.

Now, here’s the problem–

Interest rates right now are at historic lows. The effective Federal Funds Rate as of the first of this month was just 0.29%.

So unless the Fed raises rates by a LOT, and does so VERY quickly, the United States is virtually guaranteed negative interest rates in the next recession.

Negative rates, of course, are almost invariably accompanied by capital controls– legal restrictions to trap savings in a failed financial system.

We’re already seeing early signs of capital controls in Europe and Japan where interest rates are already negative.

European depositors suffer bank withdrawal restrictions, plus there’s strong momentum to ban physical cash (the natural remedy of negative interest rates).

This is just the beginning. And as anyone who has lived under capital controls can attest, they are destructive to your savings and standard of living.

Unfortunately negative interest rates are the most likely course of action.

Because if the Fed actually does start raising interest rates beyond some ceremonial 0.5% to 0.75% range in 2016 or 2017, they risk destabilizing the entre system.

Higher interest rates mean asset prices will fall, including real estate, stocks, and bonds.

That’s a huge problem for the Fed, which owns trillions of dollars worth of bonds and real estate securities.

In addition, the Fed is extremely leveraged, with capital of less than 1% of its total balance sheet.

So if asset prices fall by just 1% after the Fed raises interest rates, they will become insolvent.

It’s hard to even imagine the fallout and consequences of the world’s most important central bank going bust.

Higher rates also risk bankrupting the federal government, which is already borrowing record amounts of money just to pay interest on what they’ve already borrowed.

Plus, higher rates may slow down the US economy where both productivity and GDP growth have ground to a halt, even now when interest rates are at historic lows.

Talk about a rock and a hard place.

If the Fed raises rates significantly they will create all sorts of financial catastrophes, including engineering its own insolvency and stoking a recession that they’re trying to prevent.

But if they don’t raise rates then they’ll be forced to implement negative interest rates in the next recession.

This isn’t some far-fetched prediction, simply a common sense view of publicly available data and modern financial history.

The alternative is to assume that the Fed possesses some magical fairy dust to fix everything without any consequences…

… or that there will never be a recession ever again until the end of time.

This is absurd thinking.

Look- it’s pretty obvious where things are headed. This isn’t a political problem. It’s an arithmetic problem. And the math doesn’t add up.

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It’s official.

The United States government closed out the 2016 fiscal year that ended a few days ago on Friday September 30th with a debt level of $19,573,444,713,936.79.

That’s an increase of $1,422,827,047,452.46 over last year’s fiscal year close.

Incredible. By the way, that debt growth amounts to roughly 7.5% of the entire US economy.

By comparison, the Marshall Plan, which completely rebuilt Western Europe after World World II, cost $12 billion back in 1948, or roughly 4.3% of US GDP at the time.

The initial appropriation for the WPA, perhaps the largest of Roosevelt’s New Deal “make work” programs that employed millions of people, cost 6.7% of US GDP.

And, more recently, the US $700 billion bank bailout at the beginning of the 2008 financial crisis was the equivalent of 4.8% of GDP.

So basically these people managed to increase the national debt by a bigger percentage than the cost of the New Deal, Marshall Plan, and 2008 bank bailout.

What exactly did you get for that money?

Did they spend $1.4 trillion on achieving world peace, eradicating poverty, saving the planet, or some other pipedream?

Did they finally fix America’s crumbling infrastructure that has been in desperate need of repair?

Did they send a gigantic tax refund check to every man, woman, and child in the country?

Actually the answer is (D), none of the above. They squandered it all.

In fact, the 2016 fiscal year had the THIRD largest increase in government debt in US history.

The only two previous times in which the debt increased more than the 2016 fiscal year were during the financial crisis.

But there was no financial crisis in 2016.

The government didn’t have to spend hundreds of billions of dollars to bail out the banks.

All things considered, 2016 was a pretty normal fiscal year for the federal government. There were no major emergencies to drain taxpayer funds.

Yet they still managed to blow $1.4 trillion because this level of waste and spending is now baked into the system.

Even if they dramatically slashed spending and got rid of entire departments of the federal government, they would still be hemmhoraging cash at a rate far greater than the economy can now possibly grow.

Social Security and Medicare are now the largest parts of that financial sinkhole, and according to their own projections, their drain on the budget is growing each year.

All other government spending COMBINED pales in comparison to Social Security and Medicare.

So if you add up military spending, homeland security, national parks, and President Obama’s jet, it’s just a fraction of what they spend on Social Security and Medicare.

These programs consume the vast majority of US tax revenue, forcing the government to borrow mind-boggling amounts of money to fund its operations, even in good times.

(Just imagine how much the debt will grow when times get tough again.)

What’s even more crazy is that Social Security and Medicare aren’t even properly funded. Both are rapidly running out of money.

The programs’ annual trustee reports show that their primary trust funds will become completely depleted starting in the next few years.

In fact one of Social Security’s major trust funds for Disability Insurance was actually fully depleted last year.

So even though these programs are already draining taxpayer resources and forcing the government to take on more and more debt, they are in need of a HUGE bailout.

This leaves precisely ONE option: default… but on whom?

It’s possible the government could try to borrow the $42 trillion that they calculate is necessary to make these programs solvent again.

That seems extraordinarily unlikely.

But even if it were possible to print and/or borrow that much money, it would either create a terminal currency crisis, or force the US government to default on unaffordable interest payments, throwing the financial system into chaos.

The other option is to simply default on the future beneficiaries of these programs, telling people, “Hey sorry, we wasted all of your money and there’s nothing left.”

So their choice comes down to either screwing the banks or screwing the taxpayer.

Gee I wonder which option they’ll pick…

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