Category: simonblack

[Editor’s note: Sovereign Man team member Peter Keusgen, lead editor of our private investment service, is filling in while Simon is en route to New York City today.]

I’m sitting in a café in an upscale part of Sao Paulo, Brazil, a short walk from the Renaissance Hotel, watching the news come in about the impeachment of Brazil’s president Dilma Rousseff.

And I believe the reason I’m in this café is the same as the reason for Rousseff being impeached: a totally backwards, bureaucratic, inefficient government and financial sector.

Let me elaborate.

This is my first time to Brazil; Simon Black sent me here earlier this week to conduct deeper due diligence on a private company that we are considering investing in.

The business is EXTREMEY promising and growing rapidly, which is really a tremendous accomplishment in this country.

Right now, Brazil is in its worst recession in 80 years. That’s means a lot in a country that has had horrific hyperinflation and burned through at least half a dozen currencies.

There’s a lot of noise right now about corruption and nepotism (hence the impeachment of Dilma Rousseff).

But the real problem here is the bureaucracy. Brazil is legendary for it.

When I speak to the business people here, they claim that taxes are their biggest headache. Not the amount of taxes that they owe– the number of taxes.

There can be dozens of taxes that productive citizens have to pay, and that can cripple a small business.

Brazil’s infamous bureaucracy is difficult for foreigners to deal with as well. Which brings me to why I’m at a coffee shop near the Renaissance Hotel.

I left my hotel this morning in search of an ATM. As luck would have it, there was an HSBC branch nearby.

That ended my string of good luck for the day.

The international ATM connection was down, so I couldn’t withdraw any cash.

‘No worries’, I thought, ‘I’ll just go inside the bank to exchange my money.’

So I locked my bag in the lockers provided (it’s not permitted to bring bags into the bank) and went inside to exchange money.

But no. Apparently this bank doesn’t have a license to change money.

Not much of an international bank…

They recommended that I change money at a hotel. OK great. I was going to a hotel anyways, so I told my taxi to take me to the nearest one.

But the hotel only had a limited license to exchange money for its guests, and I wasn’t a guest of that particular hotel.

So to exchange money, I’d have to go to another hotel which had a license to exchange currency for foreigners.

So my miserable Odyssey continued with a 20-minute cab ride to the Renaissance Hotel, the nearest option, and I used the last of my local currency to pay the driver.

Downstairs at the Renaissance, sure enough, was the exchange booth. I presented my passport and a US $100 bill and was given the rate of 2.86 Brazilian real per dollar.

Whoa. Wait a minute. The spot rate was 3.44 Brazilian real per dollar.

So the money exchange booth was charging me 17%! It was unbelievable.

It seems that as there are so few places to exchange money that the handful of businesses who are licensed have an effective oligopoly on the market.

With the competition eliminated, their license to exchange money has become a license to screw people.

On top of that, the process took forever. I was given a receipt with 58 lines and two signatures that was more than a foot long (no exaggeration).

It’s obvious that with so much paperwork there’s clearly a mountain of bureaucracy holding down the system.

I’ve spent years of my life in developing countries in Southeast Asia where people can’t wait to exchange their money for foreign currency.

In Myanmar, for example, dollars can be exchanged freely anywhere within 1% of the spot rate.

And even though they didn’t even have ATMs until a few years ago in Myanmar, today you can withdraw money in downtown Yangon from a bank located on the other side of the planet.

There’s a long standing joke in the international investment community that Brazil is the country with the most potential– and always will be.

In other words, no one expects that Brazil will ever get its stuff together and start realizing its potential.

A lot of people think that changing Presidents is going to solve the problem. It rarely does… not just in Brazil, but anywhere in the world.

Governments create rules and regulations, not wealth and prosperity.

What really moves the needle is technology, production, and savings… and the abilities of entrepreneurs to bring those resources together to solve problems.

And that’s why I’m here. The business we’re looking at provides a great platform for Brazilian companies to streamline and drastically cut out this costly bureaucracy.

It’s an amazing solution to a huge problem, and the company’s growth rate is astonishing.

That’s what entrepreneurship is all about– solving big problems. Problems are opportunities in disguise… and Brazil has plenty of both.

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Right before I walked on stage last night in front of an audience of roughly 2,500 people, I said to myself, ‘This isn’t how I thought my day would turn out…’

Hours before, I met up with Robert Kiyosaki at his hotel in Santiago to have a drink and catch up; he’s in town giving a series of seminars and invited me to come over and hang out for a bit.

After a couple of hours of great conversation, I accompanied him to the venue where the audience was eagerly waiting for him to speak.

Robert’s seminal work Rich Dad, Poor Dad changed so many lives and completely shattered the staid, traditional notions of finance and success.

Perhaps one of his biggest ideas from the book is that most school systems simply do not prepare people for success.

You don’t learn critical lessons in school like how to invest money, how to start a successful business, how to create value and improve the lives of other people.

Instead, you learn how to be a good taxpayer.

And as usual, Robert’s remarks were spot-on last night.

After about an hour, Robert invited me up on stage to speak to the crowd about the incredible risks in the financial system that we face, as well as all the amazing opportunities in the world right now.

I took the audience back in time 10,000 years.

Prior to what we commonly call the Agricultural Revolution, our ancient ancestors never knew where their next meal would come from.

They were constantly hunting, always roaming from place to place in search of food.

But around 10,000 years ago, human beings discovered that they could plant seeds in the ground and grow their own food… and LOTS of it.

That changed everything.

For the first time in history, our ancestors could consistently produce far more food than they could consume.

The surplus of all the extra food they didn’t consume became the very first form of savings, something they were able to leverage to build the roots of the civilization that we enjoy today.

For several years now I have called this concept the Universal Law of Prosperity. It’s very simple: in order to prosper, you have to produce more than you consume.

The ancients figured this out thousands of years ago.

And though you won’t find the Universal Law of Prosperity listed in any finance or economics textbook, it is the most important law in those fields.

The Universal Law of Prosperity applies to everyone: individuals, families, companies, governments, banks, etc.

If you and I spend more money than we earn, eventually we’re going to go bankrupt.

If a business doesn’t generate enough revenue to pay its expenses, it’s going under.

And governments who routinely run budget deficits will one day run into serious trouble.

Yet if you look out across the world, you’ll see willful violations of the Universal Law of Prosperity everywhere.

Government debt has exploded in recent years as a result of their inability to live within their means. This is the case especially in the West.

Interest rates are now near zero, or even negative in many parts of the world, which only encourages businesses, individuals, and governments to borrow more.

Our entire financial system is based on debt and consumption.

You always hear, for example, how the American consumer drives the US economy.

You don’t ever hear anyone say that the American manufacturer… or the American capitalist… drives the US economy. It’s all about consumption, not production.

This constitutes a willful violation of the Universal Law of Prosperity.

And it’s simply foolish to assume that these imbalances between production and consumption can continue forever and ever without consequence until the end of time.

Look- the world isn’t coming to an end. There are obvious (and substantial) risks in our financial system, and there will be consequences.

When everything is based on debt… when nearly every government and central bank is insolvent… it just makes sense to take basic steps to protect yourself from these risks.

There are literally hundreds of things you can do, and we’ve talked about some of the easiest options in this letter.

Keep some physical cash in a safe instead of depositing ALL of your savings in the banking system.

Hold precious metals.

Own productive assets, whether a profitable business or a few apple trees that you planted in your backyard.

Invest globally. More than a billion people are being lifted out of poverty and into the middle class in developing countries.

Technology is advancing at an astonishing pace.

We have the ability to live better, longer, more meaningful lives, and to create wealth and value in a way never before seen in human history.

This isn’t a message of doom and gloom. The world is full of so much opportunity right now.

Bottom line- taking rational steps like these in the face of such clear trends just makes sense.

PS-

Robert is a fantastic speaker and all-around great person, and I’m fortunate that I’ve been able to get to know him well over the past couple of years.

If you haven’t read his book Rich Dad, Poor Dad, I highly encourage you to get a copy and read it right away.

Used copies are available on Amazon for as little as $2.65.

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By all accounts Bernhard Gubser was living the American Dream.

Born in Switzerland he moved to the Land of the Free in the early 1980s to work at an international shipping company based in Laredo, Texas.

Eventually Mr. Gubser worked his way up to be President of the company and began traveling around the world to expand the business.

He became a naturalized citizen of the United States in the 1990s, something that would eventually cost him $1.35 million.

As a Swiss native, Gubser had a Swiss bank account. And as he was routinely spending a lot of time in Switzerland for business, and he felt that he might one day retire there, he kept the account open.

But the federal government has a rule: US taxpayers must disclose their foreign bank accounts each year to the Treasury Department.

Up until a few years ago, few people knew about this rule.

It wasn’t until around 2010, when the US government finally realized they were flat broke, that they started making a big deal about offshore reporting requirements and penalizing people with undisclosed accounts.

Gubser maintains that as soon as he found out about the requirements, just like most people, he immediately began to file the offshore disclosures.

The federal government took a different view, dinging him with a penalty of $1.35 million, roughly half of his life’s savings.

As they say, of course, ignorance of the law is not an excuse.

And Gubser is paying a $1.35 million penalty because he didn’t know.

Neither did Tim Geithner, as it turned out. Several years ago the former Secretary of the Treasury was found to have “accidentally” underpaid his taxes.

In this case, ignorance of the law was a perfectly valid excuse. Geithner was only required to pay back what he owed without additional consequence.

Hillary Clinton has been in the spotlight for having removed official, confidential, and classified documents from the State Department to her personal email server while she was Secretary of State.

She claims she didn’t know.

The President of the United States has closed ranks around her insisting that it was an honest mistake and that no crime was committed.

Funny thing, as anyone who’s ever held a security clearance in the Land of the Free knows, before being allowed access to confidential documents you sign a non-disclosure agreement known as the SF312.

I’ll never forget my own experience with the SF312 when I received a Top Secret clearance in the military. It was pretty sobering.

In the intelligence world, people joke that the SF312 is when you ‘sign your life away’, because the entire document threatens you with all kinds of penalties and imprisonment for mishandling of classified information.

Among the many federal laws governing classified information, Section 793(f) of the US criminal code criminalizes gross negligence resulting in the mishandling documents.

So whether or not Ms. Clinton ‘intended’ to violate the law is irrelevant.

And if it were anyone else who unwittingly spent months or even years mishandling classified information, we would be turning big rocks into little rocks wearing Dayglo orange jumpsuits.

I’m not trying to single out Hillary Clinton. The larger point is that the rules don’t apply for the political establishment

Yet for everyone else, they ruin people’s lives for the most mundane, victimless violations of obscure rules.

And every day they create more and more rules.

Just this morning the US federal government published 423 pages of new rules, regulations, and proposals.

That’s on top of the 704 pages published yesterday and the 688 pages published on Friday.

It makes me want to vomit when I think about how quickly they churn out regulations that squash individual liberty… yet still maintain that ignorance of the law is not an excuse.

It’s not radical to be repulsed by this double standard.

It’s not conspiratorial to look at objective data and recognize how personal freedom is in such obvious decline.

It’s not negative or pessimistic to be truly honest with yourself and ask, ‘is this really the country I remember from years ago?’

And it’s not unpatriotic to take simple, legitimate steps to reclaim your freedom and long-term prosperity from this obvious trend.

PS. There’s one thing that’s inspiring about this story. Bernhard Gubser isn’t taking this lying down. He’s fighting back and suing the federal government. The results of this case may provide a landmark precedent in how the government is able to come after taxpayers.

I’ll have more on this very soon.

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Warren Buffet has famously said many times that the vast majority of investors shouldn’t bother picking stocks.

Instead, he’s advised everyone from Lebron James to his own children to simply buy an S&P index fund and hold it ‘for the next 50 years.’

He’s probably right; most people probably should just buy an S&P index fund. But not because it’s a superior investment.

It’s because most people simply aren’t educated about business, finance, and investing.

Proper financial education isn’t taught in public schools, so for a lot of folks, investing is an alien concept.

Learning about investment means seeking an independent education. A real education. And it’s amazing what a real education can do.

Whereas the average person is relegated to an insipid index fund, an educated investor can generate phenomenal wealth and prosperity.

Buffett himself is a great example of this.

Real education is a major part of being a Sovereign Man– achieving greater freedom and prosperity by learning more about both the problems AND the solutions.

After all, the greatest investment you can make is the investment you make in yourself. And that means education.

One of the people I’ve been fortunate to learn from is Tim Price– a London-based investor and fund manager whose Buffett-like approach to investing is exemplary.

Below is a recent note from Tim Price in which he explains this ethos, and educates readers on the tremendous advantage we all have as small investors.

_____

From Tim Price, Director of Investment at PFP Wealth Management in London:

The shareholders of Berkshire Hathaway have just celebrated their latest ‘Woodstock for capitalists’ in the form of the company’s annual general meeting.

One of the more interesting takeaways from the event is that, according to Warren Buffett (the company’s chairman), Berkshire Hathaway is now far too big to produce substantial returns.

Buffett spent decades buying wonderful businesses that were profit machines, yet required very little capital investment.

He’s routinely discussed the company’s acquisition of See’s Candies in 1972 as an example.

Berkshire purchased See’s for $25 million at a time when See’s profits were less than $5 million annually.

In recent years See’s profits have been north of $80 million. Yet Buffett hardly had to invest a dime in additional capital to grow See’s profits.

That’s a great business for Buffett– one that isn’t ‘capital intensive’.

Today, though, Berkshire is buying businesses that require tremendous amounts of capital– railroads and pipelines.

When asked about this, Buffett explained that Berkshire is now effectively too big to invest in those great, low-capital businesses.

In other words, Berkshire Hathaway has too much money to manage. They HAVE to make capital intensive investments simply because they have so much capital to place.

Buffett has made this observation before, that size can be a barrier to high investment returns.

In an interview with BusinessWeek in 1999, Buffett almost bragged saying:

“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

But Berkshire Hathaway today is a $350 billion company, and elephants don’t gallop.

Buffett’s success as a capital allocator over a period of more than fifty years has clearly paid off for his longstanding shareholders.

But perhaps his most impressive achievement has been the transparency with which he’s discussed how he did it, primarily through his annual shareholder letters.

Buffett educates anyone who’s willing to learn about his value investing approach, encouraging everyone to ignore irrational markets and buy high quality assets as inexpensively as they can.

This brings up the question of size once again.

Value investing almost by definition is limited in terms of asset size and subsequent investment capacity.

If you have $350,000 to invest, you have the pick of the finest publicly-available value investments on the planet, no matter how small the market.

If you have $350 billion, you’re relegated to expensive railroads and government bonds.

That’s why the most disciplined value investors make a conscious decision to cap the size of their funds in order to concentrate on maximizing investment returns.

Simply put– smaller investors have a considerable advantage… if you know where to look.

So where is the most compelling value opportunity today?

First, you need a market or sector that has been out of favor for years.

If all the talking heads on business TV networks are screaming BUY BUY BUY, or touting the new ‘hot’ sector, that’s the place you want to avoid.

Next, look for a market that has been largely shunned by both domestic and foreign investors. Buy what other investors hate, especially when that emotion is based on ‘feeling’ rather than concrete data.

Once you’ve located the right market or sector, then seek attractive, bottom-up valuations, i.e. low price/earnings and price/book ratios.

One example is the resource sector.

As commodities prices have fallen dramatically, the market capitalizations of many small mining companies (including several profitable ones) have been pushed below their net cash levels.

Most of these companies have market valuations of $100 million or less.

For individual investors, it’s easy to buy shares. But institutions like Goldman Sachs or Berkshire Hathaway that have tens of billions to invest are simply too large to get in on these deals.

Japan is another great example.

Mikahil Gorbechev was still running the Soviet Union the last time Japan had a major financial boom. Investors hate Japan.

And yet, company valuations in Japan are incredibly attractive, especially the ‘mid-cap’ companies that are similarly too small for most institutional mega-investors.

As Greg Fisher, manager of the Halley Asian Prosperity Fund, points out, Japanese stocks have two key catalysts to growth:

First, many Japanese companies know their market valuations are “ridiculous” and are acting on that through stock buybacks and rising dividends.

Second, the dividends paid by Japanese companies are becoming increasingly attractive in an environment of negative interest rates.

In Japan, owning a stock yielding 5% is preferable to paying negative interest to the bank.

Both of these should have the effect of pushing up share prices considerably.

There are many more examples around the world: Vietnam, Russia, agricultural property in certain markets, etc.

The larger point is to ignore the mind-numbing conventional investment wisdom and expand your universe.

There are substantial opportunities in the world for educated value investors. And right now, we as individual investors have a tremendous advantage.

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I’ve often joked very tongue-in-cheek that Donald Trump is the only person qualified to be President simply because he’s declared bankruptcy four times.

Trump himself talks up his own debt credentials, saying “I’m the King of Debt,” and “I know more about debt than practically anybody.”

He’s flat wrong, of course.

Trump may have racked up billions in debt for his companies, but Barack Obama has racked up more debt for America than anyone else in the history of the world.

That said, Trump does have mad street cred when it comes to debt.

In 1991, 1992, 2004, and 2009, Trump filed under Chapter 11 of the US Bankruptcy Code to reorganize his business debts.

Each of these constitutes a default, i.e. a violation of the original terms between the borrower and the lender.

And as I joke (only half-kidding), that’s precisely what America needs: default.

Stop kicking the can down the road, admit that you can’t pay your obligations, hit the reset button, and get on with it already.

Yet anytime I talk about US government debt, there’s invariably a voice in the crowd that says, “yeah, but we owe it to ourselves. . .”

This is one of the biggest lies in finance.

People have actually become convinced that the US government’s $19+ trillion nominal debt, and $60+ trillion total debt, doesn’t seem to matter because ‘we owe it to ourselves.’

First of all, is this true? Sort of.

According to the Treasury Department, foreigners hold roughly $4 trillion of US government debt.

The rest of it—the vast majority of US debt—is owed to various domestic agencies, banks, and citizens.

The #1 owner of US government debt, in fact, is Social Security… in other words, all current and future American retirees.

Next comes the central bank– the Federal Reserve, which holds $2.46 trillion worth of US government debt according to its most recent balance sheet.

Just on the heels of the Fed are other US government agencies (like the Defense Department and the FDIC) which also own US debt.

Then, of course, are all the thousands of banks and pension funds in the United States, which routinely buy US government debt.

And last but not least are all the individuals and companies across America who own US government debt as part of their portfolios.

So, yes, a minority portion of US debt is owed to foreigners.

What eludes me is why anyone thinks this is OK…

It’s like saying, “well I owe grandma a million bucks, but she won’t mind if I don’t pay.”

Ummm. Come again?

The US government is totally unable to pay its debt. The debt has been rising for decades, and they haven’t been able to run a budget surplus in 20 years.

Not to mention they have to borrow money just to pay interest on the money they’ve already borrowed at a time when interest rates are at historic lows.

Debt is already over 100% of GDP, and even the government itself predicts this number to rise.

At this point default is an almost mathematical certainty. The question is– default on whom?

Defaulting on the debt owed to Social Security means that hundreds of millions of current and future retirees have their lives turned upside down.

Defaulting on the Federal Reserve means that the Fed will become formally insolvent, creating a massive currency crisis in the Land of the Free.

Defaulting on other government agencies means that the Defense Department (among others) won’t have any more money to operate… so they’ll just end up increasing your taxes to make up the difference.

Defaulting on banks and pension funds would cause every bank to fail, creating an unprecedented financial catastrophe.

So the fact that ‘we owe it to ourselves’ means the debt is even MORE important. And that’s what’s so scary.

Think about it– it would actually be better if the US government owed 90% of its debt to the Chinese.

In that case, they would simply make the Chinese out to be evil, and then selectively default on that debt.

The rest of the world would probably go along with it, and America would get a pass. US citizens, banks, corporations, etc. would be largely unaffected.

But that’s not going to happen.

There’s a lot of tough talk about negotiating the debt with the Chinese… but this is all hot air.

Even if they default on the Chinese, they still owe tens of trillions to Americans that they have absolutely no hope of paying.

Some people think, ‘well can’t they just restructure the debt?’

No. First of all, restructuring is just a fancy way of saying ‘default’.

It means that you’re not going to honor the terms of the original agreement, and instead work out more favorable terms to pay off the debt.

But… what terms can possibly be more favorable?

Uncle Sam is already paying record low interest. There’s nothing left to restructure… no terms they can renegotiate which are more favorable than they already have.

Bottom line, the US government can’t possibly meet its obligations… so the only hope is to default.

They’ll either outright default and cause any number of major crises in the financial system or the American retirement system.

Or they’ll default on the promises they’ve made to their taxpayers, including the solemn obligation to maintain a sound currency (something they already abandoned long ago.)

Look, understanding this reality doesn’t mean that you’re negative or pessimistic.

There’s nothing pessimistic about acknowledging basic arithmetic.

It’s also no cause for panic. It might take years for these consequences to be realized.

But that’s no excuse to follow their lead and kick the can down the road. Building a great Plan B takes time, and it’s founded on one very simple principle:

It makes absolutely no sense to hold EVERYTHING in your life—your home, savings, investments, business, retirement funds, etc. in a country where the government truly is the King of Debt.

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Today the IRS published the latest figures on renunciation, showing that yet another 1,158 Americans have renounced their citizenship in the first quarter of 2016.

While this may not be setting a record for a single quarter, the trend is quite clear.

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Well, it finally happened.

After months of innuendo, the European Central Bank (ECB) announced last night once and for all that they will no longer produce the 500 euro note.

The 500 euro note is the highest denomination of physical currency in the euro zone, and they’ve been talking about phasing it out for quite some time.

(The next highest is the 200 euro note, then 100. These will still be produced… for now.)

Of course, according to their reasoning, only bad people who engage in criminal activity, tax evasion, and terror financing use 500 euro notes.

All of us law-abiding little people have no need for such high denomination cash.

That’s a very convenient view for the ECB to take given that they’ve led the crusade to make interest rates negative.

Right now the ECB’s negative interest rates predominantly apply to the wholesale banking system.

In other words, commercial banks are charged interest on the reserves they hold with the ECB.

This is an absolutely insane practice.

As a depositor, you WANT your bank to hold plenty of reserves with the central bank instead of gambling away your deposits on risky loans and investments.

But now if any bank in the Eurozone does choose to act conservatively, they have to pay penalty interest to the ECB.

Many banks in Europe are starting to pass on these negative interest rates to their customers, and it’s beginning to cause a breakdown in the financial system.

Think about it– who would willingly PAY for the privilege of depositing their funds in an extremely illiquid and potentially insolvent bank?

Rational people are already sensing the absurdity of this conundrum, and the solution is simple: hold physical cash.

We’ve talked about this before– there are entire banks and insurance funds that are choosing to hold portions of their reserves in physical cash.

And with 500 euro notes, they can store a LOT of savings in a compact space.

Even in a small safety deposit box, you could hold over 1.8 million euros worth of 500 euro notes. This is more than enough for most people.

But the ECB doesn’t want this.

The corrupt ruse of our modern banking system depends entirely on the public continuing to use it.

There simply isn’t enough physical cash in the banking system to support withdrawals of more than a few percent of total deposits.

So if more than a small percentage of depositors wanted cash, the banking system would be in trouble.

More importantly, the vast majority of bank deposits are held in various bond and loan portfolios.

So in the event of a significant uptick in cash withdrawals, banks would have to start dumping assets in order to free up the necessary funds for their customers.

And if multiple banks had to simultaneously dump assets to raise cash, that would cause a steep decline in the market prices of those assets.

Banks would suffer huge losses as a result. Many would go under.

Needless to say the financial establishment has every incentive to ensure this doesn’t happen.

Their solution? Start phasing the large denominations of cash that pose a threat to their system.

And the ECB started formalizing this with last night’s announcement.

To be clear, 500 euro notes are not ‘banned’. The ECB tells us that current 500 euro notes in circulation will still be honored as legal tender.

Again… that’s for now.

The next step for them would be to quietly take these bills out of circulation until one day there’s simply no more of them available.

Then they can rinse and repeat with the 200 and 100 euro notes.

All of this is tantamount to capital controls– a way for central banks to trap your savings inside a worthless financial system.

As we’ve talked about before, holding physical cash is a great tool in a Plan B to reduce your exposure to problems in the banking system.

If you hold cash and there’s another 2008-style panic, you’re going to be OK.

This is a smart solution no matter WHERE you are in the world– Europe, the US, etc.

Even here in Chile where the banks are well capitalized, I routinely stop by the ATM machine on my way to the office in the morning to withdraw physical cash.

But as I’ve written in the past, cash alone is no panacea. And this move by the ECB shows that cash does have limitations.

Real assets, and in particular gold and silver, are also important elements of a Plan B.

Don’t think about gold as an investment. Think about it as a form of money– one that doesn’t depend on a central bank, or even a solvent banking system to have value.

In many respects it’s an insurance policy. And with the risks this obvious and writing very clearly on the wall, it makes sense to have some for yourself.

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There’s something about being insanely rich that people will believe every word that comes out of your mouth no matter how bizarre.

And no, I’m not talking about Donald Trump. Warren Buffett is an even better example.

As one of the richest men in the world, Buffett’s opinions carry almost Biblical impact, even when they might be completely ridiculous.

Just a few days ago, for instance, he quipped that drinking Coca Cola is better for him than eating broccoli.

He’s also famously expressed contempt for owning gold, suggesting instead that people should simply own a US stock market index fund (like the S&P 500) and hold it for 50 years.

Curiously, though, gold has vastly outperformed both the S&P 500 and Dow Jones Industrial Average over the past half-century.

While the S&P 500 index is up 24.3x in that period and the Dow Jones Industrial Average is up 18.2x, gold has appreciated 36.6x.

Even when taking into account the effects of dividends, fund expenses, cash drag, taxes, etc. the evidence still doesn’t support Buffett’s assertion. Yet people believe him.

But perhaps one of Buffett’s most popular opinions is that America is simply awesome and will only get better.

He’s spoken and written extensively in his annual reports that America is the #1 place to be in the world, that the massive opportunity in the Land of the Free will only get better, and that the United States has “never been greater”.

Buffett is right that the United States is an amazing place.

It was founded as a land of opportunity where hard work, risk taking, and a little bit of luck resulted in incredible prosperity.

And some of those elements do still exist.

But Warren Buffett’s outlook on the United States is underpinned by an assumption that the next 50 years will look like the previous 50 years.

That’s clearly not the case.

When Warren Buffett’s company Berkshire Hathaway was rapidly expanding in the 1960s and 1970s, the US government’s debt level was low and the dollar was strong.

Since then there have been MILLIONS of pages of regulations created in the Land of the Free, trillions of dollars worth of debt accumulated, and countless dollars conjured out of thin air.

Buffett is well known for having a very long-term view on things. For him, the typical holding period for owning stocks is ‘forever’.

And that’s a great outlook to have when the fundamentals are in your favor, i.e. if you own shares of a great company with honest, competent management.

But you can’t hold the view that in the long-run everything will always be better.

15 years ago Yahoo, Motorola, and Nokia were three of the top technology companies in the world.

Apple was still years away from launching the iPhone. Few people had heard of Google. And Mark Zuckerberg was still in high school.

But these circumstances changed. Quickly.

Nations and economies also change. History is very clear on this point: wealth and power shift.

Just because a country might be at the top today doesn’t mean it will be that way forever, especially when the nation’s fundamentals and economic headwinds grow worse each year.

So with due respect to Warren Buffet’s investment acumen, there are decades of economic trends, millions of pages of regulations, and thousands of years of human history proving that his outlook on America is wrong.

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Just after sunrise on April 19, 1775, a large contingent of British military troops arrived to the town of Lexington, Massachusetts.

They were under orders to search for and confiscate all weapons and munitions from the colonials– something the British army had done countless times before.

In many ways it was a routine operation. And yet, that morning, roughly 80 local militiamen stood blocking their path.

Paul Revere had ridden through Lexington only hours before to warn residents of the approaching threat.

There was a lot of yelling and tension between the two sides, and amid all the confusion, someone fired his musket. Then another. Then another.

(Historians are still unclear which side shot first, though much of the evidence points to Han Solo.)

And though few people realized it at the time, those turned out to be the opening shots of the American Revolution.

This is how revolutions often start– people who have reached their breaking points engage in a small acts of defiance that quickly escalate out of control.

We’ve seen this pattern over and over again.

The Arab Spring uprising in 2011 started with a Tunisian fruit cart merchant who lit himself on fire. Revolution ensued.

The 2014 revolution in Ukraine started when police violently clashed with peaceful anti-government demonstrators.

Revolutions, of course, can take many forms. There are social revolutions, political revolutions… and even financial revolutions.

That’s what we’re seeing today: financial revolution.

Now that interest rates are negative in many parts of the world, the financial system has become an incredibly destructive force.

Negative rates adversely impact the livelihoods of just about everyone, from the average guy on the street all the way to the banks themselves.

A few key players have reached their breaking points and are starting to engage in acts of defiance.

I told you recently how the Bavarian Banking Association in Germany advised its member banks to hold physical cash instead of reserve deposits with the European Central Bank (ECB) at negative interest.

Some major insurance funds are also jumping on board, choosing to hold physical cash instead of bank deposits earning negative interest.

In its effort to avoid negative interest rates, the Canton of Zug in Switzerland asked its citizens to delay paying their taxes.

Now even the political and media establishments in Germany are rebelling against the ECB, saying that negative interest rates chip away at the savings of pensioners.

In response, the ECB opted for the ‘blame the victim’ approach, pointing the finger at all of us little people because we’ve been saving too much money.

So according to the unelected bureaucrats who printed all the money to begin with, people have been saving too much.

Consequently, everyone must be punished with negative interest rates. And you’re your fault.

That’s like a rapist saying, “she deserved it.” It was an appalling response, and astonishingly stupid.

You’re supposed to save money. That’s what the Universal Law of Prosperity is based on: produce more than you consume. Save more than you spend.

Penalizing savers is the exact opposite of what bureaucrats should be doing.

But people are starting to figure this out. The resentment is growing, even within the financial system itself.

Remember that modern ‘money’ is backed by nothing but unelected bureaucrats and their insipid economic theories.

The only way this system works is when there’s unquestionable confidence in the people running it, almost to the point of blind obedience and wilful ignorance.

When that confidence wanes, the financial system can spiral out of control very quickly.

We may be reaching that point soon and could look back on this period as the opening shots of the Financial Revolution.

If you recognize that the financial system is destructive and want to make a change, your most powerful option is to stop using it.

Or at least reduce your dependence on it.

Part of being a Sovereign Man is having a strong sense of freedom and independence… and that includes financial independence.

Last week we talked about the importance of holding physical cash.

You won’t be worse off for taking some savings out of the banking system.

And you’ll be protected against problems like negative interest, bank bail-ins, or withdrawal controls.

(All of these, by the way, already exist or have happened recently.)

But cash is not a panacea. Because if there really is a major reset in the financial system, your paper money might lose significant purchasing power.

That’s why it makes sense to hold gold and silver in addition to cash.

If there are greater problems in the monetary system, your precious metals will turn out to be an extraordinary insurance policy.

(Silver is a better bargain right now based on historical ratios, but it’s hard to imagine you can go wrong with either one.)

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[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

In their efforts to jam the square peg of financial theory into the round hole of human nature, economists have perpetrated some pretty stupid things.

But few of them are dumber than the efficient market hypothesis (EMH).

EMH states that it is impossible to beat the market because the efficiency of the market means that prices always incorporate and reflect all relevant information.

Why was the Dow Jones Industrial Average worth 22.6% less on Tuesday October 20, 1987 than it had been the previous day ?

Why is Warren Buffett worth $67 billion ?

Must be all that efficiency.

Buffett himself claims, “I’d be a bum on the street with a tin cup if the markets were always efficient.”

EMH and its bastard cousin CAPM (the Capital Asset Pricing Model), continue to send students of finance down intellectual blind alleys.

CAPM is a model that describes the relationship between the risk and expected return of an asset in a diversified portfolio.

CAPM requires reality to be bent using what can politely be termed “assumptions”, including the assumptions that:

1)  All investors are of the species homo economicus, i.e. they are seeking to maximise returns

2)  All investors are rational and risk-averse, instead of the emotional creatures we really are.

3)  All investors are well diversified across a broad range of investments

4) All investors have an equal and non-influential relationship with prices

5) All investors can lend and borrow without limit at a risk-free rate

6) Transaction costs and taxes do not exist

7) All assets are liquid and perfectly divisible

8) All investors have identical expectations

9) All investors have access to infinite information simultaneously.

These assumptions are, of course, nonsense. And yet EMH and CAPM continue to be taught.

Perhaps there are business schools out there that still advise their students that the Earth is flat.

CAPM’s silliest assumption is that all investors are the same.

It requires only a superficial acquaintance with the financial markets to know that this can hardly be the case.

The financial markets are where sovereign wealth funds interact with private investors.

The former can often be insensitive to price; the latter, never.

Within the financial markets pension funds, with a theoretical investment horizon of decades, rub up against computer algorithms looking to front-run other investors by fractions of milliseconds.

And clearly, different investment entities have different objectives.

The motivation of a central banker is likely to be distinct from that of a robot (assuming they are not one and the same).

Of course, these motivations can and do change.

There was once a time when central bankers fought inflation like the very devil. Now central bankers are desperate to create it.

When the game changes, we have a choice. Try to adapt, or stop playing.

It’s not just that we’re entering uncharted waters; in a world of negative interest rates and negative bond yields, the entire investment landscape has changed. Investment strategy must reflect that.

Although a “risk-free” rate no longer exists, we should probably still try and steer close to the shore, even if we may not be able to see it.

If the game has changed, learn the new rules.

With the financial weather now a function of economic policy, different laws apply. Old investment models are obsolete.

And within a policy-controlled market, genuine diversification – of risks, as well as anticipated returns – will matter more than adherence to a traditional asset allocation template that is no longer fit for purpose, because it was formulated in a positive carry world.

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