Category: simonblack

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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A friend of mine who’s an equities analyst at a large brokerage firm recently sent out pretty ironic note to all of his private clients.

He focuses on the financial sector, so his job is basically to analyze bank stocks and figure out which ones his investors should buy.

To determine this, he does a deep dive on banks’ financial statements, assessing everything from their capital levels to their non-performing loan ratios.

That’s a fancy way of saying that financial analysts who concentrate on bank stocks conduct a LOT of research to make sure the banks are SAFE and will be in good shape in the long-term.

What struck me as so ironic about his most recent report was how FEW banks are actually safe these days.

Bank balance sheets, particularly in western nations, have eroded substantially over the last few years.

Capital reserves are in the toilet… meaning the banks themselves have very little tucked away for a rainy day fund. If asset prices start to fall, western banks could easily slip into insolvency.

Liquidity ratios are also appalling. Banks keep an incredibly LOW ratio of high quality liquid assets (including cash) on reserve as a percentage of customer deposits.

So if any meaningful portion of the banks’ customers wanted to withdraw their funds out of the system, the banks simply wouldn’t have the money.

My friend’s conclusion about bank stocks was that very few of them are worth owning.

Some are at risk of going under. And the others will be too busy trying to raise their capital ratios, unable to generate much profit or pay dividends to their shareholders.

But this raises a very interesting point: investors spend a lot of time analyzing bank stocks to see whether or not they should invest.

Yet very few people analyze the banks themselves to see whether or not to deposit money there.

This is totally backwards.

Banks are, for better or worse, our financial partners. They’re holding the money.

And while this model is changing rapidly, banks remain an absolutely critical part of our lives.

But there’s almost ZERO analysis that goes into selecting a bank. These decisions are usually made because the bank is conveniently located across the street, not due to its fundamentals.

Crazy. Banking as an industry has been about as deceitful as the political establishment. They never miss an opportunity to cheat their own customers.

They conspire to fix interest rates in their favor. They manipulate asset prices. They inflate fees and commissions for foreign exchange.

They treat us like criminal terrorists when we have the audacity to ask for our own money back.

They take our hard-earned savings and make the most mindless and destructive loans. And then when the whole house of card collapses they claim that they’re too important and demand to be bailed out at taxpayer expense… only to shower themselves with fat bonus checks.

And they consistently make the same mistakes over and over again, while using clever accounting tricks to hide their true financial condition.

Handing over our life’s savings to an institution with such an abysmal track record demands a modicum of analysis.

And if you pop the hood and look at the inner workings of your bank, more than likely you’re not going to be happy with what you see.

Again, most banks, particularly in the West, have extremely low levels of liquidity. So perhaps it’s no surprise how many western nations are establishing “bail-in” rules.

This means that the next time your bank runs into trouble, they’re pre-authorized to steal their depositors’ savings instead of going to the government for a bailout.

You’d think that with this kind of history and level of risk we would give a bit more thought before handing over all of our money.

To make the best decision on where to put your savings, why not think like a savvy investor and take look at your banks’ finances?

You can get started right now, as large banks usually publish annual financial reports online.

(If your bank is private and refuses to provide its balance sheet to you on request, that’s all you need to know about that bank. Take your money and run.)

In a bank’s financial report you want to look for two main things: the bank’s liquidity and its solvency.

A liquid bank is one that holds plentiful liquid assets and cash equivalents on hand to be able to honor all withdrawal requests.

An easy way to determine this is by dividing the bank’s cash and cash equivalents by its total customer deposits.

Liquid banks are safer, and this ratio is key in a financial crisis. Illiquid banks will be the ones ‘bailed in’ by their depositors.

Simultaneously, a solvent bank is one whose assets are far greater than its liabilities. It’s like having a large net worth.

Depending on what a bank is invested in, the value of its assets can drop significantly when there’s a market shock. And if the drop is great enough it can quickly become insolvent.

Healthy banks hold strong capital reserves on their balance sheets and maintain a high ‘net worth’. You can calculate this by looking at a bank’s total capital divided by its assets.

The higher the percentage, the safer the bank.

These are just two very basic numbers to look at when determining the safety of your bank. And it’s imperative to start asking questions. After all, there’s a lot at stake.

If you don’t feel comfortable with the results, think about changing banks. And leave out geography in your decision.

It’s 2016, not 1916. Your money can ‘live’ on the other side of the planet from you. And you might find that a foreign bank is MUCH safer than where your money is currently.

More on that soon.

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After every major financial crisis there’s always a retrospective analysis where we can look back and identify “the top”.

Looking back at the tech bubble of the 1990s, for example, all of my friends in technology point to the acquisition of Netscape by AOL for $4.2 billion as the obvious top of the tech bubble.

We’ve discussed many times before how 2016 is looking a whole lot like 2008, right before Lehman went under.

And the next time around, as people look back and try to find the top in retrospect, the following news may certainly be one of the candidates—

Yesterday we found out that the government of Ireland is set to issue a bond with a duration of 100 years. An entire century!

Just think of how much has happened in the last hundred years. How many wars. How much debt. How many crises.

And just imagine what the next hundred years looks like.

It seems absolutely insane to take a bet on anything for an entire century, let alone a government that basically went bankrupt just a couple of years ago.

Ireland was one of the worst off in the 2008 financial crisis and it seems foolish to think that they’ve turned themselves around so quickly and to the point that they’re credit-worthy for an entire century.

That’s such a long period of time, you can’t even guarantee that the country will even exist after so long.

Worse yet, the coupon rate that these bonds carry is a measly 2.35%.

It remains to be seen how the market will price this bond, but it’s safe to say that investors who are crazy enough to buy this debt will be poorly compensated for the risk that they take.

This is just another stark reminder of how broken the financial system has become.

Where the most idiotic ideas—like loaning money to a bankrupt government for a hundred years, at a rate that’s likely below inflation—can be dressed up and passed off as a credible investment.

We’ve seen how this plays out.

This is little different than giving no-money down loans to unemployed, homeless people as happened during the last bubble.

And just like last time, when we look back from the future, it will all seem so obvious.

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Yesterday I received a rather desperate phone call from a relative of mine named Sam.

I used to spend a LOT of time with Sam growing up. And back then he was an amazing guy.

Sam was the kind of person who was so charismatic that you felt happy and excited just being around him.

He was an incredibly positive person with a keen interest in helping others.

I remember how frequently he used to start some meaningful project to benefit his community, or quite often less-fortunate people thousands of miles away that he had never met.

Sam was also incredibly successful. He was just one of those people who always seemed to be able to make money. And over the course of his life he amassed substantial wealth.

Sam was constantly learning and creating; he was in to art, science, technology… a real Renaissance man.

Most of all, Sam was a person of rock-solid integrity. He stood up for his values, and the rest of us deeply respected him.

I’m really grateful to have had his mentorship for so long, and I know that I’m a better person as a result of his influence.

But starting around 15 years ago, Sam started to change.

He went through a major personal crisis… the kind of thing you hope to never have to experience in life.

It was absolutely terrible. And the entire family rallied around him in support.

I personally spent several years of my life going to bat for Sam, and I sacrificed a lot for him. The whole family did.

But Sam never recovered. In fact he just got worse.

He started making the most incredibly bizarre financial decisions, squandering away his wealth in ways that just seemed completely crazy to the rest of the family.

He had dozens of businesses at that point, and ALL of them were losing money.

But he refused to make any changes. He refused to tighten the business spending. In fact he started spending even more, squandering what little wealth he had left.

We tried to help. Some of his accountants approached us at one point and gave us a snapshot of Sam’s finances. It was gruesome.

This guy had easily been the wealthiest person we had all known. But he had been reduced, at least on paper, to poverty.

His debts were astronomical, and he hardly had any savings or assets left other than his house and a few fancy antiques.

But Sam refused to believe it; he insisted on living like the multi-millionaire he had always been, even though he no longer had any income to support his lifestyle.

It was so bad that the entire family had to chip in and start putting money into his bank account on a monthly basis.

But whatever amount we could muster was barely enough to cover Sam’s most basic living expenses, let alone all the luxury he was accustomed to.

And we couldn’t even begin to make a dent in Sam’s debt burden, which was growing by the day. We found out later that he had even gone into debt with some pretty shady characters.

We tried intervening again and again. But Sam wouldn’t listen.

And despite all the help and support we had extended him, Sam ultimately turned on his own family, attacking the people who loved him most.

He used to ring us up, and sometimes even show up on our doorsteps in the middle of the night, demanding money… screaming that we had an obligation as a family to pay him.

He even got violent with some of my relatives; with others he broke into their houses and stole from them.

At some point there was a complete mental breakdown, and he became totally paranoid. He started taking letters from the mailbox and reading our mail.

And he even ratted out a few of my relatives to the authorities for some petty violations of the municipal code.

A few members of the family started to distance themselves from Sam; at that point the guy was a loose cannon and becoming dangerous.

We found out later that he started embezzling funds from his companies. He’d taken money out of his employees’ pension accounts for his own personal use.

And he’d leaned heavily on his reputation in the business community to build a giant fraudulent pyramid scheme.

It was really sad.

Sam had changed. There were always good days and bad days, and sometimes I would occasionally see flashes of the old Sam.

But for the most part his desperation had made him petty, deceitful, and abusive, even with his own family.

And the man I had once known– that strong, honorable Sam who always stood up for what was right– was long gone.

He and I had once been so close, and he was such an important mentor in my life.

But at a certain point I had to recognize that there were too many things about another person’s life that were beyond my ability to fix.

I will always love my Uncle Sam and be grateful for his life lessons and the fond memories of our time together.

But I finally had to move on with my own life and become free of his destructive behavior.

It was a hard decision. But I know it was the right one.

It’s natural to want to help family; but to continue enabling someone so abusive only makes his problem worse.

And I realized that the old Sam still exists. He’s within me. And all the rest of the family.

The best thing I can really do for him is to emulate all the good qualities he used to have… and continue to live by most important values that Sam once stood for.

PS-

Sam may be your Uncle too… because Sam is America.

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