Category: simonblack

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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If there were ever any doubt about how completely RIGGED the banking system is against depositors, allow me to introduce the following:

Exhibit A: Governments are working to make banks LESS safe

Yesterday an unelected bureaucrat that no one has ever heard of made a stunning announcement that has sweeping implications for anyone with a bank account.

Dombrovskis is Europe’s top financial services official, so he controls bank regulations in the European Union.

He issued a stern warning to global bank regulators yesterday that he is prepared to reject any further plans they might have to tighten bank capital requirements.

This might sound rather dry, but it’s incredibly important.

“Bank capital” is the most critical component of any bank balance sheet.

Capital is like a bank’s rainy day fund; when things start to go bad, a bank’s capital provides a margin of safety to ensure that their depositors’ funds are safe.

Strong banks have ample capital and are able to withstand crises.

Weak banks with low levels of capital collapse. And that’s precisely what happened in 2008.

Most banks across the west had very low levels of capital. They had spent years making appallingly stupid ‘no money down’ loans with 0% teaser interest rates to borrowers with pitiful credit.

When that bubble burst, the banks lost billions of dollars. And it turned out that most of the banks at the time had razor thin levels of capital.

If you’re wondering why, the answer is quite simple: the less capital a bank maintains, the more money it can invest… so poorly capitalized banks tend to make more money.

Lehman Brothers was quite profitable.

But the bank infamously had capital worth just 3% of its total assets… meaning that if Lehman’s investments fell by just 3%, they would be wiped out.

Lehman’s investments fell by a lot more than 3%… so the bank’s capital was totally insufficient to weather the storm. The bank folded, and a huge crisis erupted.

Regulators vowed to never let that happen again.

And in the years since, the Basel Committee on Banking Supervision, the primary global bank regulator, has been pushing banks to increase their capital levels higher.

European banks in particular still have pitiful balance sheets.

Their investment portfolios are stuffed full of negative-yielding bonds issued by bankrupt European governments.

And their capital levels are still so low with many of them that there are whispers of taxpayer funded bailouts, from Italy’s Monte dei Paschi to Germany’s global titan Deutsche Bank.

But despite these pitiful bank fundamentals, Dombrovskis is rejecting the Basel Committee’s latest push to make banks safer.

According to the Financial Times, Dombrovskis is specifically complaining that the Basel proposals might lead to a “significant” increase in the amount of capital that banks would maintain.

… so in other words, the head of European financial services thinks it’s a bad idea for banks to have an extra margin of safety.

Bank profits are being prioritized over depositor safety, even at a time when so many of the banks are seeking taxpayer-funded bailouts.

In the eyes of the bureaucracy, bank profits come before depositor safety… which makes it completely obvious how rigged the system is against you.

Exhibit B: The Volker Rule farce

In another effort to make banks safer, the US government passed the Volker Rule as part of their new post-crisis financial regulation.

The Volker Rule forces banks to sell their riskiest assets, i.e. the stuff they shouldn’t have been buying to begin with, especially with their depositors’ savings.

Problem is, those risky assets aren’t worth very much, and the banks are having a hard time finding a buyer willing to pay them 100 cents on the dollar.

So rather than take the loss, banks in the US keep requesting extension after extension.

They’ve already had six years to offload their assets. Now the deadline has been extended all the way to 2022.

Yet in the meantime, the banks get to continue holding those assets on their balance sheet at 100 cents on the dollar, even though they’re clearly not worth a fraction of that.

The whole thing is a giant scam designed to conceal obvious bank losses… a neat little arrangement between the political elite and banking elite.

Exhibit C: No one from Wells Fargo is going to jail

Wells Fargo is getting a very public slap on the wrist for falsifying customer bank accounts in its efforts to meet their sales goals.

And in addition to the embarrassment they’ll probably pay a series of steep damages, most of which will go to the government and class action lawyers.

But don’t hold your breath for any senior executives to be criminally indicted.

If you or I engaged in what Wells Fargo did, we’d already be turning big rocks into little rocks wearing a DayGlo orange jumpsuit.

There’s a word for what they did. It’s called fraud. And the people at the top were either part of the scam, or they were too stupid to recognize an obvious crime.

Once again, it’s proof of a system that’s totally rigged in favor of the banking elite… literally at your expense.

Modern banking is truly bizarre.

They’ve created a system whereby we entrust our hard-earned savings to institutions that never miss an opportunity to abuse that trust.

In making a deposit at a bank, we become merely an unsecured creditor.

And in exchange for taking on that counterparty risk they provide almost zero transparency in what they’re doing with the money.

Even still, they work in partnership with their friends in government (where a very swift revolving door exists) to legally conceal their true financial condition.

Your reward for all this risk? A whopping 0.1%, if you’re lucky.

Why take the chance?

Think about withdrawing at least a portion of your savings. Gold and physical cash are great alternatives.

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Yesterday we talked about one small market in the US… but in fact there are dozens of cities across the world where property prices entering (or already in) a bubble.

San Francisco. Amsterdam. Stockholm.

Vancouver is infamous for its astonishing real estate bubble, which the government has tried to slow by slapping a nasty transfer tax on certain property transactions.

In London, prices are 15% higher than the previous real estate market peak in 2007. Yet income levels are 10% lower.

It’s the same in Hong Kong, Frankfurt, and a number of other major cities– real estate prices have surpassed their all-time highs, yet income growth is flat (or negative).

People in Denmark are particularly troubled– Danish home prices are well above their peak levels from 2006.

As a result, Danes have had to borrow extraordinary amounts of money in order to survive.

At more than three times disposable income, Danish household debt has set a new record among OECD nations.

Australia and New Zealand are experiencing a similar story.

The “average” home in Auckland now costs NZD $1 million (roughly USD $725,000), and household debt has soared to a record 163% of income.

In Australia, where home prices are also frothy, household debt is even worse at over 180% of income.

Then there’s China, where total debt has ballooned by 465% over the past decade.

China’s real estate market has grown become so ridiculous that a new project in the city of Shenzhen launched over the weekend selling tiny “pigeon lofts” of roughly 65 square feet for about $132,000.

The building sold out in single day.

Of course, it’s not just real estate. Debt itself is in a major bubble, worldwide.

Overall debt across the world has exploded, with more than $5 trillion of new debt issued in the first nine months of 2016 alone, putting this year on track to beat the previous record set in 2006.

Issuance of corporate debt this year has already passed its previous record high.

In the US, student debt and credit card debt are at record highs.

And many governments around the world, from Japan to Italy to South Korea to the United States, are surpassing all-time highs in their public debt levels.

Even in ‘safe’ countries like Canada, where national government debt is still low, both household debt and provincial government debt are at record highs.

Yet despite their shaky balance sheets, government bond prices are at all-time highs, and interest rates are at record lows (even below zero in some countries).

Investors are basically paying out the nose to loan money to bankrupt governments.

In addition, balance sheets at the world’s six major central banks (Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China, Swiss National Bank, and Bank of England) have hit record highs.

And commercial banks in the US have defied the “too big to fail” warnings and expanded their balance sheets to an all-time high that’s 46% higher than the 2008 pre-crisis level.

Many major stock markets are also showing signs of a bubble.

In the US, stock market valuations are right back to their 2007 levels, the previous all-time high prior to 2008’s spectacular crash.

And major stock indexes are at or near their all-time highs at a time when corporate profits have been falling for at least four straight quarters.

None of this makes any sense.

It’s clear that central banks have conjured trillions of dollars out of thin air, flooding the world with money and record low interest rates.

This money has fueled asset price booms in nearly every asset class and major market on the planet.

And devoid of any real supply and demand fundamentals, those asset price booms generally turn into dangerous bubbles.

No one can predict with any certainty when (or even how) this madness will end.

We just know that it will end, as has been the fate of all booms and bubbles throughout history.

Legendary hedge fund manager Julian Robertson recently said in an interview that this global bubble created by central banks “will be pricked, and we will all be hurt by it.”

I totally disagree.

That’s the wonderful thing about being a human being.

We have free will.

We have the power to educate and exercise that wonderful organ of soft nervous tissue called a brain, and use it to solve problems… like making sure we’re not victims of this bubble.

I’m not talking about trying to predict the future.

Or selling everything, hiding in a bunker, and missing out on all the wonderful opportunities that exist.

I’m talking about being smart.

Rational, thinking people take steps to understand the substantial risks that exist.

That’s the cornerstone of any good plan. Consider the downside first so that whatever you do makes sense no matter what happens (or doesn’t happen) next.

As an example, many of our premium members are invested in a special program that generates 12% returns paid quarterly, backed by assets that are worth more than 3x their investment capital.

In other words, if things go well, the investors achieve a safe 12% return.

If the deal goes south, there is AMPLE collateral to ensure that they don’t lose a penny, and that collateral is already under the investors’ legal control.

Another example– some colleagues and I are working on a deal right now to take over a large foreign company at a steep 70% discount to its net asset value.

This is a really safe bet. Even if the asset prices fall, I have a tremendous margin of safety to ensure I don’t lose.

And if the asset prices remain stable, there’s a 70% built-in gain right from the beginning.

These types of opportunities are out there. They just take a little bit more work to find them.

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I used to watch wrestling when I was a kid… I come from the age of Hulk Hogan, Ultimate Warrior, and Randy “Macho Man” Savage.

Huddling close to the television each weekend, my friends and I would cheer for our favorite stars and their signature moves.

My dad ruined it all one day when I was about 6 years old; he pulled me aside and said casually, “You know it’s all fake, right?”

I was stunned. It seemed so real… the matches, the hits, the drama.

Every time Hulk Hogan would be at the point of near-exhaustion, and then rally to victory from the chants and cheers of the crowd, I had believed it all.

When I actually started paying attention it became obvious that professional wrestling was a farce staged purely for entertainment purposes.

Funny thing– even though I knew it was fake, I continued to watch wrestling for several more years, until I was probably 10 or 11. It was, after all, still entertaining.

That’s how I felt last night watching the Presidential debate.

It was pure entertainment… a guilty pleasure that ranks somewhere between Wrestlemania and stuffed-crust pizza.

I know a lot of people feel the same way, that debates are meaningless vacuums of intelligent discourse which are simultaneously entertaining and awkward to watch, like witnessing two intoxicated lovers engage in a very public, dramatic breakup.

Sadly, this is what passes as a critical component of the political process in the most advanced economy in the world.

I recognize that people feel they have an important choice to make, whether to give the system a deserved enema or maintain the status quo… and that perhaps they’ll glean some insight into the candidates’ agendas by watching the debates.

In reality you’ll find more substance in a fourteen year old’s Twitter feed.

There’s no talk of actual plans, metrics, priorities, or details… just a bunch of zingers and platitudes.

That’s not how things are supposed to work in the real world.

I run several companies– agriculture, manufacturing, publishing, and now banking, with a total of roughly 350 employees.

Our management teams lay out concrete plans to the stakeholders articulating the specific goals and vision of each business, how we achieve those objectives, and what specific metrics can measure our performance.

Plus regular updates report on our progress, any deviations to the plan, and whether or not we are on-time and on-budget.

This isn’t rocket science or some radically innovative concept. It’s what any competent, ethical business manager does.

But that’s not how government works, and it’s not how the political system works.

Whenever I visit the US, people frequently ask me who I’m voting for.

It came up over dinner on Saturday night in Connecticut with Peter Schiff and his wife Lauren.

I typically joke that Trump is the only qualified candidate because he’s declared bankruptcy so many times… and with nearly $20 trillion in government debt, you want to have someone in office who knows which paperwork to file.

But my honest answer is that I don’t vote.

For starters, it doesn’t actually matter who’s in office.

The government spends nearly the entirety of the tax revenue it collects just to pay interest on the debt and cover mandatory entitlement programs like Social Security and Medicare.

They could literally cut everything we think of as government, from the military to the Internal Revenue Service, and it would barely make an impact.

Plus, even the government’s own optimistic projections show that the debt will continue to grow at a much faster pace than the economy itself.

So any choice ultimately leads to the same set of extreme economic consequences.

But it’s more than that.

As I explained to my friends, voting only validates a rotten system that has not only abandoned its primary stakeholders, but is now rigged against them.

Besides, what are we really voting for anyhow?

People typically cast a ballot for the person they believe will bring the most prosperity.

But this is ludicrous when you think about it. Can we really expect that some politician thousands of miles away will magically increase our incomes?

No. WE are the ones who have the most influence to grow our own prosperity.

From learning new skills to making better investments, starting businesses, cutting taxes… we have nearly unlimited ways to become more prosperous and provide a better life for our families.

So the truth is that there’s only one viable candidate to make your dreams and ambitions a reality. That’s you.

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I’m in New York City this week meeting with the Prime Minister of a Caribbean nation about his country’s citizenship-by-investment program.

Citizenship-by-investment is exactly what it sounds like: foreigners invest a certain sum of money in a country in exchange for citizenship and a passport.

Depending on the country, the investment amount can vary from just over $100,000 (Dominica) to over $2.5 million (Cyprus).

Now, it might seem crazy to drop that kind of money on a passport.

And in most cases it would be crazy.

A second passport is an insurance policy designed to protect you against various sovereign risks.

But just as you wouldn’t spend $10,000 on a car insurance policy that covers a $40,000 SUV, it doesn’t make sense to spend $250,000 on a passport designed to safeguard total assets that are worth, say, $1 million or less.

For most people, there are far more cost effective ways to obtain this all-important insurance policy without having to write a big check… and we’ll talk about those ways soon.

For individuals with substantial assets, however, citizenship-by-investment programs offer an easy shortcut to obtain a second passport.

Demand for these programs has soared over the years, and a number of financially distressed governments have created their own legislation to join the party.

It turns out that in small countries, citizenship-by-investment programs can be incredibly lucrative and substantially move the needle.

Saint Kitts, for example, is home to one of the most popular citizenship-by-investment programs in the world (also known as economic citizenship), which starts at around $250,000.

The program is so lucrative that the government managed to slash its debt level, down from over 160% of GDP a few years ago to less than 70% today.

Much of the revenue that the government of St. Kitts used to pay down its debt came from proceeds of the economic citizenship program.

Saint Kitts is tiny– a population of 50,000 and GDP of less than $1 billion.

So if just 1,000 people make a $250,000 investment, the total proceeds amount to more than 25% of GDP. This is huge.

But for large economies like the US, Italy, Japan, etc., a few hundred million dollars is nothing.

The US government spends over $1 billion per DAY just to pay interest on the debt, so $250 million literally constitutes just a few hours worth of interest.

I told you a few days ago how the US government is racking up debt at the fastest pace since the financial crisis.

In fact the US government is set to close out the fiscal year next week with a massive $1.36 trillion increase to the national debt.

This is incredible; it’s not like they’re fighting a war, recession, or financial crisis anymore. How are they possibly spending so much money?

We also discussed how, in addition to this record expansion of the debt, the US government is also starting to run out of major lenders.

China and Japan are already starting to cut their holdings of US debt.

And Social Security, the US government’s single biggest sucker lender, is running out of money so quickly that they won’t be able to buy any more government bonds by the end of the decade.

In fact the Treasury Secretary of the United States wrote just a few months ago that Social Security will be cashflow negative by 2020, hence unable to loan any more money to the federal government.

This is a major fiscal emergency in the making.

It’s obvious that the government shouldn’t be expanding its debt, let alone this rapidly.

But on top of that, how is a government that expands its debt so rapidly during a time of relative stability going to be able to handle a crisis or recession, especially when they’re running out of lenders?

The reality is that they have very few options.

Sure, small countries can come up with creative solutions like trading citizenship for a much-needed pile of cash.

But big, heavily indebted nations don’t have the same luxury.

Their playbooks are much more limited.

A favorite tactic of financially distressed governments is imposing capital controls– a means of trapping people’s savings inside a failing financial system.

We’re already seeing this today, especially in Europe where interest rates are negative and banks are starting to pass those negative rates on to their customers.

Unsurprisingly there’s been a growing movement across Europe (and North America as well) to BAN physical cash.

This effectively forces people to keep their money in the negative interest rate banking system.

We can see other obvious warning signs as well.

In December 2015, the US government passed a law giving itself the authority to confiscate people’s passports if the Treasury Department feels in its sole discretion that a citizen owes them tax.

(The US government has basically created the exact opposite of an economic citizenship program… taking someone’s passport AWAY until they pay a bunch of money.)

Just a few weeks later, Congress passed another law seizing more than $20 billion in capital from the Federal Reserve, effectively rendering the central bank insolvent.

These are not the actions of a healthy, solvent government; they’re just small indicators that we’re already well down the path of desperation and insolvency.

It’s already started, and the real consequences are still to come– higher taxes, deeper capital controls, heavier enforcement.

This isn’t intended to be gloomy, but rather to paint a realistic picture of the risks.

The sky isn’t falling, and the world isn’t coming to an end tomorrow morning.

But the government itself is giving us the dots to connect showing that there’s a major crisis brewing in a few years’ time.

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