Category: simonblack

Last night I got robbed.

Not in the literal sense of the word. There weren’t armed men in masks holding me up on the sidewalk in Panama City.

(I’ve been coming here for 13 years and have never once felt unsafe…)

It was at the cashier’s cage at the Veneto Casino.

After a few hours with a friend at the roulette table where I was happy to have walked away at breakeven, I was shocked to find out that the government of Panama takes a 5.5% tax when you cash in your chips.

In other words, if you cash in $100 in chips, you receive $94.50 back.

I had no idea. And I was furious.

This really drives home a major misconception about Panama. The country is being paraded around the mainstream media right now, with protestors ignorantly mocking Panama’s ‘zero-tax’ regime.

Most of these people have no idea what they’re talking about. This casino tax is one of Panama’s many taxes.

They have transfer taxes and dividend taxes and stamp taxes and individual income taxes.

Most ironically, the Panamanian corporate tax rate is 25%.

That’s higher than socialist DENMARK, as well as the United Kingdom (which is supposedly leading the charge against global tax havens.)

The primary difference is that Panama has what’s called a territorial tax system.

This means that the Panamanian government taxes its residents only on income that’s earned within Panama.

So, if you’re running a hotdog stand on the sidewalk in Panama City, you’re going to be taxed.

And whoever owns the amazing speakeasy I went to last night will be taxed on the food and beverage sales from our dinner.

But if you live in Panama and generate your income from overseas, that money is NOT taxed by the Panamanian government.

It’s pretty simple. And sensible.

Think about it—why would any government think they have a claim to tax income earned overseas, especially when that income has already been taxed by a foreign government?

If you live in Panama and trade stocks in Germany, you’re already paying steep taxes to the German government.

What sense would it make for the Panamanian government to tax that same income a second time?

Panama’s tax system is a much more practical model for the 21st century than the way that most other governments tax their residents.

Most countries have worldwide taxes, whereby residents are taxed on every penny they earn around the world.

So if you are a Canadian tax resident but earn all your money in Ireland, the Canadian government will tax you on that income, even though the source of revenue has absolutely nothing to do with Canada.

Worldwide taxation is practically feudal.

It presumes we’re all medieval serfs tied to the land rather than intelligent professionals who can do business in a highly connected world.

And it’s absurd that this system of worldwide taxation is still so prevalent in 2016.

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“What is it about this place that makes it so poor?”

It was a simple question posed to me by a friend as we walked the streets of Managua, Nicaragua earlier this week.

Nicaragua is a lovely place. But it’s poor. Very poor. It’s the least developed economy in Central America… and that’s saying something.

But it’s worth considering: what makes an economy like Nicaragua so poor? And what makes others so wealthy?

Having traveled to nearly 120 countries, I’ve seen the full range of rich and poor nations. And I’ll tell you, it has nothing to do with natural resources or anything like that.

I often have meetings with senior ministers and government officials around the world who tell me all about the amazing resources they have in their country.

“We have so much forestry land,” or, “Our bauxite reserves are among the highest in the world…”

Irrelevant. Venezuela has incredible oil reserves. Yet they’ve been living in poverty for years.

(Now that oil prices are down the Venezuelan government has had to declare every single Friday a holiday because they can’t afford to keep the lights on.)

Ukraine has some of the most exceptional farmland on the planet. But the country is totally broke.

150 years ago, Hong Kong was a tiny village of illiterate fisherman.

50 years ago in Singapore they used to defecate in the streets, and visitors would have to step over rivers of feces in the downtown area.

25 years ago Estonia was still part of the crumbling Soviet Union.

None of those places has any resources to speak of. But they’ve become among the wealthiest in the world.

What’s the difference between Hong Kong and Ukraine? Singapore and Venezuela? Estonia and Nicaragua?

One of the things I’ve learned in my travels over the years is that wealthy nations do have some common characteristics.

The first set is cultural. Wealthy nations have a culture that values hard work. Knowledge. Productivity. Innovation. Risk-taking. Saving. Self-reliance.

I’m not trying to say that people in poor countries don’t work hard. Far from it.

The point is that if working hard and saving money are strong CULTURAL values (which tends to be the case in Asia), a country is going to do better.

Second, wealthy nations have much better institutions. The rule of law is strong. Private property rights are strong. Corruption is limited. Regulation is sensible. Taxation is reasonable and efficient.

It’s simple; no one wants to do business in a corrupt dictatorship.

Bad institutions drive away foreign investors. And as capital is one of the critical components of economic growth, choking off external investment suffocates an economy.

Last (and most importantly), wealthy nations have an “inclusive” economy.

This means that people aren’t medieval serfs toiling away for the establishment. If someone develops skills, works hard, and takes risks, they’ve got a good chance of moving up the socioeconomic food chain.

Economists call this “income mobility”. In the United States it’s known as the “American Dream”.

Yet all three of these factors are starting to disappear in the US… and in the West in general.

America’s self-reliant, risk-taking, hard working, pioneering culture helped propel it to become the wealthiest nation on the planet.

But these traits are rapidly vanishing, displaced by a culture that values instant gratification, consumer debt, and government handouts.

The institutions are faltering as well. Rule of Law is less predictable, with the government changing the rules in its sole discretion whenever it likes.

They pass new rules every day governing everything from what you can/cannot put in your own body, to how you are allowed to raise your own child, with much of it enforced at gunpoint.

And through an official form of theft known as Civil Asset Forfeiture, government agencies now steal more private property from people than all the thieves and burglars in the country combined.

This is banana republic stuff.

Most of all, though, it’s the economic structure that’s eroding.

The inclusive economy of America is vanishing. It’s becoming ‘extractive,’ meaning that the system is designed for the benefit of the establishment and rigged against the individual.

You can see this most notably in finance; central bankers have held interest rates down to practically zero for eight years in order to bail out large banks and the federal government.

Yet in doing so, they have decimated the prospects for retirees, responsible savers, and most of all, young people.

It’s no wonder that the Middle Class no longer comprises the largest segment of the US population, according to Pew Research.

Larry Fink, CEO of Blackrock (the largest asset management firm in the world) said that a typical 35-year old will now need to set aside 3x as much money for retirement as his/her parents did, simply because interest rates are so low.

And William Dudley, President of the Federal Reserve Bank of NY (and one of the most important Fed officials) recently remarked how the US is falling behind in terms of income mobility.

“The chance of achieving the American Dream,” he told his audience, “is not the highest for children born in America.”

That’s a pretty amazing statement, and it highlights how obvious (and important) these trends are.

Again, we’re not talking about ‘What If’. We’re talking about ‘What Is.’ And it has profound implications for your long-term prosperity.

Let’s explore this further in today’s podcast, as we discuss why this trend is really a massive opportunity in disguise to break away from convention and live a life with much greater freedom and prosperity.

Listen in here.

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

“We don’t see a recession coming in the United States.”
– Abby Joseph Cohen in a recent Bloomberg interview.

US corporate profits are experiencing a “gut wrenching slump”, according to SocGen’s Albert Edwards, in a research note published last Thursday (‘US whole economy profit slump makes a recession now virtually inevitable’).

“And with the US corporate sector up to its eyes in debt, the one asset class to be avoided – even more so than the ridiculously overvalued equity market – is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default.”

The US profits data are certainly disappointing, as the chart below makes clear.

Source: Datastream, SocGen Cross Asset Research

It also seems likely that US corporate profits, as a percentage of GDP, are in the process of mean reverting after reaching all-time highs, as this chart from the St. Louis Fed shows:

As to prospects for US corporate debt, especially high yield.. Suffice to repeat the maxim that more money has been lost reaching for yield than at the point of a gun. That is likely to hold true especially when cash interest rates and bond yields have been artificially suppressed by the world’s central banks. What is an investor to do?

First, a pertinent snapshot from history.

On May 29th, 1969, Warren Buffett sent out his annual letter to the partners of the Buffett Partnership, Ltd. Within it he wrote:

“..it seems to me that.. opportunities for investment.. have virtually disappeared, after rather steadily drying up over the past twenty years.. and a swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) more speculative market.”
Buffett was winding up the partnership. He could barely have been more candid in his explanation as to why:

“I just don’t see anything available that gives any reasonable hope of delivering.. a good year and I have no desire to grope around, hoping to “get lucky” with other people’s money. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

The stock market then dropped for the next five years.

As individual investors, not a single one of us is under the remotest obligation to play a game we don’t understand. That requirement does apply, however, to any institutional manager labouring under the curse of the benchmark. Being forced to play an irrational game without conviction may account for the peculiarly dismal fund manager performance reported during Q1 2016 in a survey compiled by Bank of America Merrill Lynch. Just 19% of US large-cap managers beat the S&P 500 Index – the worst showing for any quarter in a series going back to 1998. Only 6% of growth funds beat their benchmark. Only 19.6% of value managers outperformed their own index.

The obvious caveat is that one calendar quarter is not, by itself, freighted with overmuch statistical significance, nor should it ever be. But the extent of the comparative underperformance does raise the question of whether the fund management industry as a whole is fit for purpose. Because in a survey covering a much longer period of 10 years (the SPIVA US Scorecard for year-end 2015), conducted by S&P Dow Jones Indices, 82.1% of large-cap managers, 87.6% of mid-cap managers, and 88.4% of small-cap managers failed to outperform on a relative basis.

While Warren Buffett was out of the US stock market between 1969 and 1973, many stocks fell by a dramatic margin but their impact on the indices was largely cancelled out by the relentless rise of the so-called ‘Nifty-Fifty’ glamour stocks – arguably the equivalent of today’s ‘FANGs’. And then even the ‘Nifty-Fifty’ succumbed to the forces of gravity and sheer economic logic, and by end-1973 the market was looking cheap again, and Buffett was back at work within it.

The following table, courtesy of Kokkie Kooyman of Sanlam Investment Management, is instructive. Although Buffett had elected to wind up his limited partnership in 1969, he kept his business interests in the Berkshire Hathaway holding company as a going concern. The table shows the comparative value of $10,000 invested in Berkshire Hathaway stock, and in the S&P 500 Index, beginning in 1971.

By 1974, notwithstanding the new-found valuation opportunity extant in the broader market, Berkshire Hathaway stock was down by 43%, versus a decline of 25% in the S&P 500. By 1975 the discrepancy was even more marked. Berkshire was down by 46% even as the S&P 500 had recouped all of its losses and then some. Forget just one quarter of comparatively poor performance. What about an accumulated four years of it? Would you have sold? Of course, we know with the benefit of hindsight, and this table of subsequent returns, that selling Berkshire Hathaway in 1975 would have been a disastrous decision. As the famed value manager Peter Cundill once observed,

“The most important attribute for success in value investing is patience, patience and more patience. The majority of investors do not possess this characteristic.”

Which means that the majority of investors, like those US managers cited above, are destined to achieve inferior longer term returns.

Constant media coverage of (and the fund industry’s own focus on) the US stock market has crowded out coverage of many other markets that have been in the wilderness for years. Fund manager David Iben, in a note entitled ‘The Big Long’, points out that after the 2007 bubble and subsequent waves of QE, malinvestment “is now prevalent in finance, energy, commodities, consumer discretionary goods, emerging markets..” Investors fretted that stock prices were unsustainably high in 2007, a view validated by the ensuing crash. But “eight years later, prices are even higher for many US stocks, for high-end real estate, art, collectibles, tuition, healthcare and entertainment.” And tens of trillions of bonds are trading at the highest prices in the history of mankind. But as Iben suggests, this is not the beginning of a bear market – for many underlying investments, outside the major US indices, we are already in the late stages of a bear market.

MSCI All Country World Index ex-US, for example, looks somewhat different from MSCI World (which itself has a 59% weighting to the US):

Or consider the Baltic Dry Index:

Or the Market Vectors Junior Gold Miners ETF:

Value is in the eye of the beholder. It remains a function of where you look. If your gaze is fixed only on the US stock markets, the chances are you’re not likely to see much obvious value on offer. If your field of view is geographically unconstrained, the chances are you can now see plenty of opportunities worthy of consideration. As Shelby Davis said, “Bear markets make people a lot of money, they just don’t know it at the time.” The bear market in the US may or may not be about to start. The bear market elsewhere has already been with us for years. Time to be bullish – provided it’s in the right markets.

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What’s the dumbest thing you can possibly imagine your government doing?

It’s a serious question– think about it for a moment.

Now, whatever you come up with, I’m about to present an option that will probably blow it out of the water.

This morning, pharmaceutical mega-companies Pfizer and Allergan announced that they were bowing to US government pressure and terminating their $160 billion merger that was announced a few months ago.

Big deal, right? Who cares whether or not a couple of drug companies merge?

I’ll explain, because this is really incredible:

Pfizer is based in the United States, where the corporate tax rate is one of the highest in the world at 35%.

Allergan is based in Ireland where the corporate tax rate is 12.5%, and can be as low as 10% for companies engaged in manufacturing.

So the plan was simple. The two companies would merge together and maintain Allergen’s headquarters in Dublin.

That way the new corporation would be subject to the low Irish tax rate rather than the high US tax rate.

It was a great move for shareholders.

Every tax dollar that the company saves is an extra dollar that can be reinvested for growth, or returned to stockholders to spend or save as they see fit.

Those stockholders include countless individual investors, as well as large mutual funds that manage the savings of millions of people.

All of those shareholders were set to benefit from the merger.

But the US government didn’t like that idea. They want all the money for themselves.

So two days ago the US Treasury Department decided to squash the deal.

There were no laws passed. Congress didn’t have a debate or propose any new legislation.

Nor were any courts involved. There was no judge, jury, or legal pleading.

The Obama administration simply set aside the law and changed the rules in its sole discretion to force the deal to break down.

It was an extraordinary example of how the rule of law counts for absolutely nothing in the Land of the Free anymore.

They ignore their own laws whenever they want in order to be able to do whatever they want. This is banana republic stuff.

But to add injury to insult, aside from the offense to freedom and general stability, it was also a financially destructive thing for them to do.

Look at Allergan, one of the two companies involved in the merger.

Even though Allergan is headquartered in Ireland, it still does owe some US tax.

Remember, these are large, multinational companies that end up paying tax in dozens of countries around the world.

Allergan’s actual US tax bill has averaged about $290 million per year over the last five years (which is about $50 million more than Pfizer pays in US tax).

$290 million might sound like a lot of money. But in reality it only paid for about 6 hours and 18 minutes worth of INTEREST on the US federal debt last year.

So this is really a trivial sum for a government that burns through cash like a drunken sailor.

But consider just one of the consequences of the deal getting squashed: Allergan’s stock (traded on the New York Stock Exchange) plummeted.

According to the Financial Times, over $20 billion worth of shareholder value was wiped away in just minutes.

Now, before the Bernie Sanders crowd cheers that evil capitalists have been served their just desserts, think about the implications.

INCOME tax is not the only tax in the Land of the Free.

The US government also taxes capital gains, e.g. the tax you pay on gains when you sell an investment for more than it cost you.

Capital gains tax rates in the US are as high as 20%, not including the 3.8% Obamacare surcharge.

Let’s assume a more conservative federal capital gains tax of 15%.

This means that, since the US government wiped out $20 billion in market value from Allergan, there’s $20 billion LESS in capital gains available for them to tax.

In other words, the US government just cost itself $3 BILLION in potential tax revenue (15% x $20 billion).

Incredible.

For a government that seems so bent on getting every dollar they can, you’d think they would’ve done everything to support the Pfizer-Allergan merger.

After all, it would have meant much more capital gains tax.

But no. They still haven’t figured out that when corporations arrange their tax affairs in a way that’s in the best interest of shareholders, EVERYONE can win.

Instead they did something astonishingly short-sighted.

They cost themselves billions in capital gains tax for the sake of a few hundred million in income tax.

And most importantly they left absolutely no doubt that the Rule of Law in the Land of the Free amounts to absolutely nothing.

It would be pretty hard to come up with something dumber than that.

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It’s been way too long since I’ve visited Managua, and since I was already nearby in Colombia, I thought it would make sense to come check out Nicaragua once again.

One of the people on my staff has a father from Nicaragua, and we were able to obtain a Nicaraguan passport for her as a result.

This is one of the things I encourage everyone to consider: having a second passport makes so much sense.

It means that, no matter what happens, you’ll always have a place where you’re welcome to visit, live, work, or invest.

And aside from a few places like Singapore or Israel where there may be military obligations when you obtain citizenship, there’s usually zero downside in having another passport.

The easiest way to obtain one is if you’re lucky enough to have an ancestor (best if it’s a parent) from a foreign country.

Many countries around the world, from Nicaragua to Italy to Australia, will award citizenship if you have a parent who is a national of that country.

Then there are other places like Poland, Hungary, and Ireland where you can claim citizenship if your ancestors go back multiple generations to grandparents, and potentially beyond.

Even if you’re not part of the lucky bloodline club, there are still other options available to obtain a passport.

For example, you could register for legal residency in a country like Panama (where I’m headed later this week.)

The process of obtaining residency is straightforward (and our recommended immigration attorney gets the job done very efficiently).

Plus once you’re approved, you don’t actually have to spend time in Panama; even with minimal time on the ground you can still maintain your residency status in the country.

And after five years, you’re eligible to apply for naturalization and a passport.

Ultimately having a second (or third, fourth, fifth, etc.) citizenship means having more options. And more options means more freedom.

You can travel to more places, you can live in more places, you can do business in more places.

Most of all, though, having multiple passports is a fantastic insurance policy.

Look, I’m not a pessimistic person. But it’s quite obvious that freedom in the West is in steep decline.

The FBI’s own numbers prove that the US government stole more wealth and private property from its citizens last year through Civil Asset Forfeiture than all the thieves and burglars in the US combined.

The government passes hundreds of pages of innocuous rules and regulations every single day that you’ve likely never heard of; and yet many of them can carry extreme civil, monetary, and even criminal penalties.

Speaking of passports, you can’t even apply for a passport in the Land of the Free anymore without being threatened with fines and imprisonment.

It’s as if everything they do has to be through fear, intimidation, and coercion.

Something broke a long time ago in the relationship between the government and its people.

The government “of the people, by the people, for the people” was replaced with a government that’s rigged against the individual for the benefit of a tiny elite.

You can’t fix this problem by going down to a voting booth and casting a ballot for yet another candidate who promises hope and change.

But you can take steps to make sure that you’re not just some dairy cow to be milked by the establishment.

And you can reduce your exposure to the major financial risks they’ve created after accumulating so much debt.

I call this having a Plan B. And one of the major components of this is obtaining a second residency or passport.

There are so many options available, and most of the really good ones only require a small investment. So your return on investment is extremely high.

The best part about all of this is that, in addition to the benefits to your own freedom and finances, a second passport can extend to your family.

Think about it– once you become a citizen, your children can become citizens. Their children, in turn, can become citizens.

This means that potentially all your descendants down the line can benefit from the action you take today.

In this context, a second passport could very well be one of the best and most lasting investments you can possibly make, and real gift to all future generations of your family.

P.S. We’ve put together some of the most important, foundational elements of a Plan B into a brand new service, Sovereign Man: Explorer.

Inside, you’ll have access to everything you need to ensure that in just a few weeks you’ll have:

1. Your residency application completed (and be on your way to qualifying for a second passport)
2. A portion of your savings protected in a well-capitalized foreign bank
3. Precious metals held in one of the safest vaults in the world (a great hedge against the looming financial crisis)
4. And clarity on exactly what to do next to protect your loved ones, your assets, and your freedom.

Click here to take 35% off the retail price of Sovereign Man Explorer.

 

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What an amazing weekend.

We just finished up a wonderful event here in Medellin for members of our Total Access group.

(Total Access is the highest level of Sovereign Man membership, and we routinely hold trips like this to introduce members to business and investment opportunities all over the world, and to the interesting, influential people within our network.)

As an example, we started on Thursday night with a reception for our members attended by prominent Colombian business executives, politicians, and artists.

Then Friday morning we kicked off the formal program by addressing the elephant in the room.

As you’re likely aware, Colombia has been engaged in a civil war for several decades with communist revolutionary groups like the FARC.

This conflict produced a dangerous web of narcoterrorism, paramilitary crime rings, and appalling levels of violence.

20 years ago, Colombia had a well-deserved reputation as the most dangerous country in the world.

But that was then. Today is a dramatically different story.

Most notably, Colombia is very close to concluding a peace treaty with the FARC.

The Colombian government has sent five private citizens to Havana, Cuba to sit at the negotiation table with FARC leaders to iron out the remaining details.

One of those negotiators (who is also one of the most successful business leaders in Colombia) joined us this weekend in Medellin, so we were able to hear about what’s happening with the peace negotiations straight from the horse’s mouth.

His remarks on the peace process and Colombia’s past struggles were truly inspirational.

And while I’m not at liberty to put the details of what he told us in print, it’s clear that both sides truly want a lasting peace.

This has extraordinary implications for Colombia.

Hammering this point home, our next guest was legendary investor Jim Rogers, who flew in all the way from Singapore to join our group.

Jim is literally the only person I know who has traveled to more countries than I have.

And he has witnessed first hand how peace can fuel prosperity in a nation.

War isn’t profitable for anyone except defense contractors.

With peace, people can once again get back to the business of producing, saving, and investing with confidence. That’s what builds an economy.

This is already starting to happen in Colombia, and we expect much more growth in the coming years.

The real turning point was the administration of former President Alvaro Uribe who was able to successfully wind down major military operations against the FARC.

Colombia’s middle class started growing almost immediately as a result, as did foreign investment and international tourism.

If the country is able to stay on track over the next decade, Colombia could become one of the greatest economic success stories of our time.

It’s also a really nice place to be.

Medellin in particular is a vibrant, cosmopolitan city. It’s unique. Artsy. Cultural. Innovative. Even a little bit quirky.

I call it the Austin, Texas of South America.

And it’s dirt cheap, especially now as the US dollar is so overvalued.

Our members were all shocked at how cheap it was to eat out at Medellin’s many fantastic restaurants, and at the absurdly low cost of real estate.

Medellin’s property market, in fact, is still one of the cheapest in the world on a price-per-square meter basis.

One of our speakers, a foreign entrepreneur who has moved to Medellin, told the audience about his 5-bedroom, 3,500 square foot penthouse apartment in the nicest part of town that he bought for just over $200,000.

I’ve been coming to Medellin for years and it gets better every single time.

And yet the reputation lingers.

Colombia is still frequently derided today as a dangerous haven for narcoterrorism, kidnapping, and wanton murder.

We’re not going to wear rose-colored glasses: serious problems still exist. But it’s nothing compared to the old days.

Herein lies the opportunity.

As an investor, I always try to find places where there’s a huge difference between the ACTUAL risk and the PERCEIVED risk.

Most western banking systems are a great example.

As we often discuss in this letter, western banks are extremely illiquid and poorly capitalized.

Their insurance funds fail to meet the minimum requirements and are unable to bail out the system.

The governments that are supposed to back them up are themselves insolvent. And the central banks that support the entire system are insolvent on a mark-to-market basis.

Plus, many western governments have recently passed legislation allowing banks to steal customer deposits the next time they run into trouble.

Yet there’s very little concern out there about banks. In other words, the PERCEIVED risk, i.e. how risky people think the banks are, is much lower than the ACTUAL risk.

Anytime that’s the case, when the actual risk is HIGHER than the perceived risk, it’s time to get out.

Colombia is the opposite. The perceived risk is very high. People think this place is a death trap.

The actual risk is MUCH lower. And our members found that out this weekend when they toured the city and surrounding countryside.

Anytime the actual risk is LOWER than the perceived risk, it’s time to get in… because the crowd is going to be close behind you.

That’s the opportunity in Colombia, and why this place should be on your radar now. Because this vast disparity in risk perception won’t last.

PS–

I think Medellin and the surrounding area could be a really great place to retire, and I’m convinced it will be a major expat destination some day. It’s worth checking out as a Plan B option.

But given Colombia’s current tax structure and other major hassles, I would avoid buying real estate as a pure investment.

There are far, far better sectors to invest in with higher returns and greater tax efficiency. Premium members– stay tuned for more.

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My team and I are holding a very special event for members of our Sovereign Man: Total Access group for the next few days here in Medellin, Colombia.

Medellin is a spectacular city. It’s vibrant and growing, and it has a fantastic energy. I’ll tell you much more about this, and what we’re up to, next week.

But before I sign off for a couple of days to focus on our event, I wanted to leave you with some gentle wisdom that I re-read on the plane ride up here the other day.

Roughly 2,600 years ago, Chinese philosopher Lao Tzu wrote Tao Te Ching, the most important text of the Taoist tradition that encourages harmonious living.

I first read his book more than 20 years ago, well before I started seeing the world with open eyes.

This time around it had a much greater impact

Lao Tzu was one of the early libertarians; his philosophy is anti-state and anti-authority, and many of the passages seem especially prescient right now.

There’s one in particular that I wanted to share:

When the palaces are full of excessive splendor,
The fields are full of weeds and the granaries are empty.
To dress in elegant clothing, carrying fine weapons,
Gorging in food with wealth and possessions in abundance—
this is called boasting of thievery.

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[Editor’s note: Tim Price, London-based wealth manager and frequent Sovereign Man contributor is filling in while Simon is en route to Colombia.]

Successful investing requires having an edge. If you do not know what your edge is, you do not have one.

One doesn’t need to be a rocket scientist, or even a die-hard contrarian to have an edge. But given the competition from vast numbers of rival investors, it pays to go down the road less travelled.

Malcolm Gladwell, in his book David and Goliath, examines precisely this approach.

Goliath, a Philistine, challenges the Israelites to “single combat”, a stylized way of engaging with the enemy that avoids the heavy bloodshed that comes from open battle:

“Choose you a man and let him come down to me! If he prevail in battle against me and strike me down, we shall be slaves to you. But if I prevail and strike him down, you will be slaves to us and serve us.”

Goliath expects to be met by an equal. He is a giant, at least six foot nine tall, wearing a tunic made up of hundreds of overlapping bronze scales, probably weighing more than a hundred pounds.

Bronze shin guards protect his legs. Bronze plates protect his feet. He wears a dense metal helmet.

He has three separate weapons, each perfect for close combat. His javelin is also made of bronze, and capable of penetrating either shield or armor. He has a sword at his hip.

And his primary weapon is a type of short-range spear with a metal shaft “as thick as a weaver’s beam”.

Given his sheer size, not to mention the fate of his nation riding on his shoulders, you could say that Goliath was ‘too big to fail’.

So it’s no surprise that the Israelites don’t exactly hurry to respond to Goliath’s challenge.

Finally, David appears. But he refuses sword and armor, on the basis that he’s not used to them.

Instead he reaches down and picks up five smooth stones and puts them in a shoulder bag. He then walks down into the valley to confront Goliath, carrying his shepherd’s staff.

The way Gladwell tells it, we have all been misled about the David and Goliath story.

Goliath is expecting to fight David in single combat, hand to hand.

But David has no interest in honouring the rituals of single combat. He strides off to Goliath intending to fight as light infantry instead. Then he reaches into his shepherd’s bag for a stone.

A skilled slinger in the ancient world was as deadly as an expert sniper.

Medieval paintings show slingers bringing down birds in mid-flight. Irish slingers were said to be able to hit a coin from as far away as they could see it.

The Romans even invented a special set of tongs so that they could extract slingshot embedded in their enemies.

The historian Robert Dohrenwend writes that

“Goliath had as much chance against David as any Bronze Age warrior with a sword would have had against an opponent armed with a .45 automatic pistol.”

The soldiers alongside David thought of power as physical might. But power can come in other forms: in breaking rules, or in substituting speed and surprise for strength.

Not being burdened down by heavy armor, David doesn’t walk to meet Goliath, he runs.

Gladwell also suggests that Goliath, for all his size, had abnormal vulnerabilities, too.

He asks David to come to him. He is led down into the valley by an attendant. He doesn’t even see David until he’s up close to him.

Gladwell suggests that Goliath might be suffering from acromegaly – a disease caused by a benign tumour in the pituitary gland.

The tumour causes the body to overproduce human growth hormone – which would explain Goliath’s extraordinary size. (Robert Wadlow, the tallest person in history, who died eight foot eleven inches tall, suffered from the condition.)

And a common side-effect of acromegaly is poor vision.

Seen in these terms, Goliath never stood a chance.

This is our financial system today.

Banks. Pension funds. Institutional investors. They are all Goliaths in one way or another.

As an example, Bank of America – Merrill Lynch has just published its latest fund manager survey.

This is a regular survey of large investment funds in the finance industry; the respondents are 209 fund managers participated who control $591 billion in aggregate.

They include pension funds, insurance companies, mutual funds and hedge funds.

Each is heavily constrained by a ‘mandate’. Pension funds, for instance, are typically obligated to own long-dated bonds, including European government bonds that have negative yields.

Other funds may be forced to follow a particular market index, even if that index is a sure loser.

Like Goliath, they have tremendous size, but very little ability to see or to maneuver.

But you and I are not managers in the BAML survey, and we certainly don’t have to play by their rules.

We don’t have to own assets if we don’t see value in them. We don’t have to slavishly follow the composition of any given index or benchmark that forces us to hold yesterday’s winners irrespective of how expensive their shares are.

We’re under no obligation whatsoever to be part of the herd. And that’s what gives the individual investor so much power. Freedom. This is our edge.

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The Internet practically exploded this morning after a detailed report was published proving that dozens of corrupt politicians around the world have been stealing public funds and hiding the loot overseas.

In other news, the Pope is Catholic.

Not to make light of this, but this hardly comes as a surprise. There’s some Grade A filth in positions of power who routinely funnel public funds into their own pockets.

Whether they secret the funds offshore, buy expensive flats in London, purchase Bitcoin, or stuff cash under their mattresses seems hardly relevant.

The real issue is that systems of government routinely put morally bankrupt individuals in control of trillions of dollars of cash.

Seriously, what do people expect is going to happen?

Yet this never seems to be concern. The media outcry always seems to focus on the manner in which public officials hide their assets, not the fact that the funds were stolen to begin with.

This report targets the illicit use of offshore corporations, specifically those set up by a single law firm in Panama.

In reality, this issue hardly boils down to one firm.

There are thousands of law firms all around the world, including in the UK and the United States, that register companies for their clients.

Some of those companies end up being used for nefarious purposes, including fraud and theft.

But it’s crazy to presume that corrupt officials and con artists are the only ones who would ever need a company in one of these “shady” jurisdictions.

(Those “shady” jurisdictions, by the way, include Wyoming, South Dakota, and Delaware.)

Alongside the report is a video with a scantily clad porno actress named Lisa Ann, star of “Who’s Nailin’ Paylin,” a satire in which Ms. Ann spoofs former Vice Presidential candidate Sarah Palin engaged in sexual… congress.

No I am not making this up.

In her video, the porn starlet explains that only arms dealers and scumbags set up asset protect vehicles like anonymous shell companies, which can include something like a Delaware LLC.

Never mind that people in the Land of the Free are living in the most litigious society in human history.

Or that last year the US government stole more money and private property from its citizens through civil asset forfeiture than all the thieves and felons in the country combined.

Given such obvious realities, you’d have to be crazy to NOT take steps to protect your savings.

But if a porn star says that you’re a scumbag who ‘gets in the way of justice’ by setting up a Delaware LLC to safeguard your assets and reduce your legal liability, it must be true.

So let it be written.

Look, the anger and disgust of seeing corrupt people getting away with a crime is understandable, particularly when that crime is stealing from taxpayers.

But nobody ever seems to attack the real problem– that these people are ever put in positions enabling them to steal taxpayer funds to begin with.

Instead the spotlight is always on how they hide it. That’s like focusing on what color T-shirt the ax murderer was wearing.

My concern is that is if corrupt officials shift tactics and start buying gold, there will be calls to outlaw gold. Or if they start holding cash, there will be even louder calls to ban cash.

These reports are incredibly damning for the dozens, even hundreds or thousands of bad actors who abuse the system.

But at the same time they create a mass hysteria that puts law-abiding taxpayers who value their financial privacy into the same category as some corrupt African dictator.

Listen in to today’s podcast as we discuss this trend even more, what I call the “New Dark Ages”.

We’ve entered a time where privacy and personal freedom are trivial inconveniences rather than the bedrock cultural values they used to be.

For example, I question when our society degenerated to the point that a porn star gets to tell us what we should and should not be able to do with our own private property. . .

I’d advise you to turn DOWN the volume. This podcast is probably the most intense I’ve ever done. Listen in here.

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

“By virtue of exchange, one man’s prosperity is beneficial to all others.” – Frédéric Bastiat.

It remains one of the most powerful metaphors in economics. In 1850 Frédéric Bastiat gave the world the story of the broken window. The son of a shopkeeper accidentally breaks a pane of glass in the shop. A crowd gathers at the scene. Pretty soon, the onlookers jump to the conclusion that it’s an ill wind that blows nobody any good. Admittedly, the shopkeeper is out of pocket by the cost of a window. But the glazier just summoned will reap the benefit. Where would poor glaziers be in a world without broken windows? Imagine all the good uses to which the glazier can put his new-found windfall from repairing the damage. Think what he could buy. All that new money circulating through the economy. Perhaps we might all be better off if more windows got broken on a regular basis?

“Stop there!” cries Bastiat, addressing the crowd directly.

“Your theory is confined to that which is seen; it takes no account of that which is not seen.”

Hence the title of Bastiat’s essay: ‘That which is seen, and that which is not seen’.

The six francs paid to the glazier for effecting his repairs are what is seen. The crowd can speculate to its heart’s content to what luxurious end those francs might be expended. But what is not seen is what the shopkeeper might have done with those six francs if he had not had to pay them to the glazier in the first instance. He would, perhaps, have bought some new shoes, or a book for his library.

“To break, to spoil, to waste, is not to encourage national labour; or, more briefly, destruction is not profit.”

Government projects may seem to create work for some, but there is also a someone who must pay for them, and that someone is normally the taxpayer. And if the capital is raised from the bond market, it doesn’t come directly from today’s taxpayer – it is extracted from tomorrow’s.

Such projects may also divert spending from a more deserving group. Some government spending might even involve the outright destruction of wealth.

There are, after all, only three ways in which money can be spent. You can spend your own money on yourself. You can spend your own money on other people. Or you can spend other people’s money on other people.

The last is the spending prerogative of government. And government is not the best allocator of capital. Milton Friedman wryly suggested in 1980 that if you put the federal government in charge of the Sahara Desert, within five years there’d be a shortage of sand.

As the world economy gets more and more financialised, and as more and more capital starts flowing in ways that are less than wholly transparent, Bastiat’s metaphor only becomes more powerful over time.

And more misunderstood. The economist Paul Krugman, for some reason allowed a regular forum in The New York Times, wrote in the aftermath of the Japanese earthquake and tsunami of 2011, that “the nuclear catastrophe could end up being expansionary.. remember, World War II ended the Great Depression”.

Krugman would also claim that the threat of an invasion by space aliens could bring the US economy out of recession within eighteen months.

Not to be outdone, the economist Larry Summers, formerly senior economic adviser to President Obama, told CNBC that Japan’s earthquake and tsunami “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.” As Bloomberg’s Caroline Baum somewhat tartly responded, “Too bad Japan had to wait sixteen years for another opportunity.”

UK politicians are currently scrambling over each other to point fingers of blame for the collapse of prospects in what remains of the British steel industry – which has been in slow but terminal decline for decades.

Government is not the best creator of jobs, either; its best economic efforts should normally be devoted to keeping out of the way and letting a free market do its job. Saving Tata Steel’s interests in the UK is, sadly, a lost cause.

China’s surplus capacity in steelmaking is now bigger than the entire steel production of Japan, America and Germany combined. The Economist notes that in 2015, British steelmakers contributed less than 1% of world supply. Helping steel workers retrain is the right thing to do. Throwing taxpayers’ money at keeping doomed steel mills alive is not.

Peter Tasker, writing for the Nikkei Asian Review, highlights the purchase of Japan’s Sharp by Hon Hai Precision Industry, better known as Foxconn. The deal marks the end of Sharp’s 104-year history as an independent business.

Tasker also cites Renault’s 1999 acquisition of Nissan Motor as the “model for a successful foreign takeover”. The company’s newly drafted CEO, Carlos Ghosn, introduced a rigorous rationalization programme, slashed surplus capacity, and dramatically cut the number of the company’s suppliers.

Today Nissan is one of the world’s most successful car companies. But there is no shortage of Japanese companies with a legacy of operational resilience going back centuries. Tasker cites by way of example the Sumitomo Group (founded a century before the United States), Sudo Honke, Japan’s oldest sake brewer (formed in 1141) and Hoshi Ryokan, a hot springs hotel established in 718. “Such businesses have survived for so long because they have provided what customers wanted through centuries of upheaval.”

But foreign investors seem to have given up on Japan, and have resorted to their old habits of treating its stock market like some kind of ATM machine.

John Seagrim of CLSA points out that for the week ending 11th March, foreign investors sold ¥1.58 trillion of Japanese stocks, the biggest weekly sale of Japanese equities since records began. The magic of markets, however, is that for every seller, there must be a buyer. Trust Banks and pension funds have been net buyers of Japanese stocks for 13 of the last 18 weeks. And not everybody regards foreign players in Japan as particularly sophisticated. Interviewed on Bloomberg, Brian Heywood of Taiyo Pacific Partners says that he welcomes the selling by overseas investors, because it largely represents dumb money:

“When the market punctures, there are companies that we want to add to. The market overreacts. We know the company. We’re at 3 percent and we’d like to be at 6 percent. We use it as an opportunity.. Over the last several years, Japan’s market grew more than almost any other equity market, and it’s still one of the cheapest markets in the world. It had margin expansion but it had valuation compression.”

Japan’s ¥137 trillion Government Pension Investment Fund – the largest pension fund in the world – has more than doubled its domestic equity allocation, from 12% to 25%. Now that Japanese interest rates have gone negative, and Japanese bond yields look distinctly unattractive, being also mostly negative, it seems increasingly likely that Trust Banks and other Japanese pension funds will follow the GPIF’s lead and raise their equity holdings. A secular shift towards greater institutional ownership of the market, allied to compelling valuations, accounts for Japan remaining the single largest country allocation in our global value fund.

When it comes to capital allocation, you can go with the dead hand of the State, or you can follow the market’s invisible hand. We favour the latter.

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