Category: simonblack

It’s been nearly a dozen years now that I’ve been living abroad as an expat.

In that period I’ve lived in at least half a dozen countries and traveled to more than 100 on all seven continents.

People often ask me questions like when am I going ‘back home’, as if my leaving the mother ship was the result of some temporary insanity.

But when I look back on that decision, it really feels like one of the best I’ve ever made in my life.

Being an expat can really be an exceptional adventure (though certainly one with its ups and downs).

As I explain to people who find the lifestyle unusual, foreigners almost always get better treatment wherever they go.

Governments treat their own citizens like medieval serfs… dairy cows to be milked dry and taxed into the grave.

But with foreigners it can be the exact opposite as governments often need to attract new investment capital or skilled labor.

They roll out the red carpet with special incentives; here in Chile, for example, the government has a lengthy tax-free regime on worldwide income for foreigners, as well as a brand new foreign investor incentive.

In Panama they created the famous ‘pensionado’ incentive program to attract foreign retirees many years ago.

Plus as a foreigner, you’re pretty disconnected from the local system.

When you’re born and raised in a country, the government talons dig deeper into your flesh every year.

But when you move to a new country, they don’t have decades of records on you.

It’s like starting over with a blank slate where you can actually live below the radar quite easily.

Foreigners can even have an easier time in the US, especially non-resident aliens.

Bloomberg recently demonstrated how the US is the #1 tax haven in the world, something that we have been saying for years here at Sovereign Man.

Foreigners can register an anonymous Delaware LLC and stash ill-gotten gains in the US banking system with total privacy. US citizens would go to jail for this.

Foreigners can also invest in US stock markets and pay absolutely zero capital gains tax. Citizens, on the other hand, can pay 23.4% up to 39% or more.

Taxation is actually a major benefit of being overseas.

Most nationalities don’t tax their non-resident citizens.

A French couple, for example, can completely (and legally) escape France’s tax insanity simply by moving to Panama.

US citizens are nearly alone in the world in being taxed on their worldwide income, even if they don’t live in the US.

But there are plenty of exceptions.

My tax bill last year was $0.00. And I expect to pay zero tax this year, all because I’ve taken advantage of the Foreign Earned Income Exclusion which allows you to earn over $100,000 tax-free subject to basic foreign residency requirements.

Your spouse can take advantage of it as well, doubling the benefit. Plus you can receive a housing deduction as well, boosting your tax savings to $80,000 or more.

Imagine having an extra $80,000 in your pocket each year.

Better yet, imagine the feeling of no longer providing financial support to a government that murders children by remote control drone strikes.

With the tax savings alone, you may achieve a huge bump in your lifestyle, especially as the cost of living abroad can be lower than back home.

Even here in Chile, which is nowhere near the top of the list of cheapest places in the world, you can buy a small organic farm for about $250,000.

That price gets you about 10 acres of mature, productive fruit trees that generate a healthy profit, plus 15 acres more for a private garden, plus a well-constructed home, plus multiple sources of water.

All of that in a lovely valley with expansive views of the Andes and 300+ days of sunshine annually, about 3 hours from the capital.

One of the things that I value most as an expat is being left alone– especially being left alone to do what I want with my own property.

I’ve had three different houses built in this country alone.

And despite all those projects, I have applied for a grand total of zero permits, licenses, and other nonsense. I just sent in crews and started working.

Granted, there were probably some regulations that I violated. But no one seems to care.

That’s been my experience in many countries around the world as a foreigner– there’s a general feeling of being totally disconnected from the state.

You may be thinking right now, “Sounds great. I’d love to escape this madness and live a better, cheaper, more profitable, more free lifestyle abroad. But I have too many constraints.”

I get it. Family. Work. Not everyone can just pick up and go.

But even if you’re not able to walk away right now, it still makes sense to have a plan.

What are the key triggers that would make you ready to walk away? What resources would you need to make that happen? Where would you go? What steps can you take in the meantime to increase your freedom?

If you start educating yourself now, you can learn enough to set goals and make a plan to achieve them.

It’s just like anything else. You’re not going to double the size of your savings without first understanding the markets and planning your investment strategy.

You’re not going to get in shape without first learning about diet and nutrition, and then planning out your meals and workouts.

Good things require a little bit of effort and investment. So does freedom. But you can get there.

If you’d like help, I’m going to be holding a webinar soon, designed to teach you about tools and tactics that are necessary in creating your own Plan B.

For now, I’m not planning to charge anything for the session, so you can sign up here for more information on how to attend absolutely free.

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This week I’ve been down in Southern Chile with the Board of Directors of our agricultural company.

It’s summertime right now, and the weather is absolutely gorgeous.

Last night, after a long day visiting one of the farms I had a chance to sit down with Tim Price to share a bottle of our very own Sovereign Valley wine and record a podcast.

It’s been about two months now since the last episode, so I invite you to listen to our comeback with the Podcast Awakens.

Over the course of a few glasses we dive into discussion about oil prices, financial markets, and an entire investment class that most people haven’t even heard of. One that’s likely to do VERY well this year.

We invite you to clink glasses with us and listen in as we share the best kept secret in finance.

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Let’s take a moment to compare the world today to before the Global Financial Crisis struck roughly eight years ago.

In this short period of time, US federal government debt has DOUBLED.

The Federal Reserve now holds $2.4 trillion of that debt, up from $479 billion.

Interest rates, which were between 2-4%, are today just a hair above zero.

The Federal Deposit Insurance Corporation, which is expected to guarantee bank accounts, now has liabilities 530% greater than the cash and cash equivalents they are holding, compared to just 14% before the crisis.

Meanwhile, the banks that were deemed “too big to fail” 8 years ago are now even bigger, yet engaging in similarly foolish practices and accounting tricks.

In “saving” the system, all governments did was prevent anything from being actually fixed.

And in the process, they exhausted all the tools at their disposal.

The system is more precarious than ever, and eventually these bankers’, politicians’, and bureaucrats’ bad decisions will catch up with them.

To prevent your life’s savings from being the victim of others’ stupidity and misjudgement, one important (and obvious) step is to consider moving a portion of your savings into a safer, more stable jurisdiction abroad.

How can an overseas bank account see you safely through crisis? Let me explain—

Protection from Financial Shocks

Threat 1: Your bank is highly illiquid and potentially insolvent.

Think your bank actually has your money? Guess again.

Most people don’t give a second thought to where they deposit their money, assuming that if it’s been approved by the government as a financial institution that it must be safe.

Unfortunately that didn’t work back in 2008, and it won’t work now.

Most Western banks in the West, encouraged by government guarantees, keep very little in reserves and loan as much as the possibly can.

This can give them very high returns when the market is going strong, but is a dangerous bet in case things go south.

If confidence in a bank wanes and a large number of customers decide they want their cash, a bank could become completely illiquid.

And if the market falters and a significant number of the banks’ loans and investments go bad, they could quickly become insolvent.

Both of these things can literally happen overnight, and suddenly depositors can find themselves cut off from their savings. Or worse.

Unfortunately the FDIC, which insures these deposits, is in no position to bear this burden as the FDIC itself admits that it is undercapitalized.

Securing your assets in this case comes not just from putting your savings into any institution overseas, but into a foreign bank with ample reserves in a stable, well-capitalized jurisdiction.

Shifting yourself from a high-risk to a low-risk environment simply means that you’re less likely to face this threat to your savings in the first place. It’s just logical.

Protection from Asset Seizure

Threat 2: Your assets can be frozen in an instant.

You may not even know it, but US banks filed 1.6 million suspicious activity reports (SARs) last year. Chances are that your bank submitted one about you.

Even withdrawing or transferring a low 5-figure amount can trigger the bank to submit a suspicious activity report, as they are forced to spy on and rat out their customers.

If some government agency decides that your financial transactions are potentially linked to illicit activity they can seize your account with just one click. They don’t need to have any proof of actual illicit activity to do so, it is solely up to their discretion.

Of course you can sue them to try to prove your innocence, but with your accounts frozen what funds would you use to do that?

Here, having an account overseas in a foreign jurisdiction means that for whatever reason, your home government can’t freeze with just a phone call.

It’s a great way to keep some funds out of their immediate control.

Protection from Capital Controls

Threat 3: Bankrupt governments almost invariably resort to capital controls. Are you willing to bet it all that this time is different?

It’s widely known how deeply in debt the US government is. And despite what politicians might think, governments cannot keep borrowing and printing forever. Some day their credit will run out.

Historically when people start to sense that things are going south economically in their country, they start moving their money towards the exits.

It’s precisely what’s happening in places like Greece, and even China, where depositors are pulling billions out of the banking system.

Governments take steps to prevent this from happening by imposing capital controls.

They restrict foreign exchange transactions, wire transfers, and even withdrawals, all to prevent you from taking money out of their precious banking system.

Moving a portion of your savings to a safer jurisdiction with minimal debt can substantially reduce this risk.

Regardless of the threat, whether it come from the financial system or your government, you can take steps to protect yourself by diversifying your assets and securing them in a safer, more stable jurisdiction abroad.

This is an incredibly important step in a solid plan B.

It’s also by far the easiest step one can take, as there are many overseas accounts that you can start without even leaving your living room.

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On August 24 in the year 79 AD, one of the most famous natural disasters in history struck the Ancient Roman city of Pompeii, and its surrounding area.

We have an eye-witness account from Gaius Plinius Caecilius Secundus, whose letter to Roman historian Tacitus vividly describes how the eruption of Mount Vesuvius rained down hot, black cinders and smoldering ash onto the towns below.

Pompeii was buried in about six meters of volcanic ash, and the town’s inhabitants were frozen in time in the exact positions that they stood when they died.

Curiously, despite the volcano nearly wiping out the nearby civilizations, the Ancient Romans rebuilt more towns at the foot of the volcano.

Yet unsurprisingly Vesuvius continued erupting.

The eruption of 472 AD was so severe that volcanic ash fell as far away as Constantinople, over 1,000 km away.

Forty years later the eruptions were so damaging that surviving locals were exempted from taxation.

Mount Vesuvius has barely let up since ancient times, erupting 12 times in the last two centuries alone.

Italian officials are now starting to sound the alarm bell, suggesting that Vesuvius could erupt again, this time endangering the 3+ million inhabitants of nearby Naples, and especially the 600,000 inhabitants within the volcano’s danger zone.

I can’t help but see the obvious parallels in our modern financial system.

This system almost came crashing down eight years ago under the weight of so much stupidity and debt.

Bank balance sheets were stuffed full of worthless garbage, like giant pools of no-money-down mortgages and home loans made to dead people.

Central banks have also been blamed for keeping interest rates far too low for far too long, spurring excessive and idiotic financial excess.

Governments also had a major role to play in the crisis, completely abandoning all fiscal discipline and going deeply into debt.

And consumers fanned the flames by overextending themselves and running up record levels of personal debt.

Yet after the great eruption of the financial system in 2008, the Romans of our time made the most bizarre decision to rebuild at the foot of the volcano.

They ‘fixed’ a financial cataclysm caused by too much debt, and interest rates that were too low, with even more debt, and even lower interest rates.

In other words, they’ve done the exact same things that caused the first crisis, but in far greater volume.

Yet somehow they expect a different result.

No one, of course, knows precisely WHEN Mt. Vesuvius may erupt again. Or when the next financial eruption will occur.

But researchers can certainly monitor geological activity to look for warning signs.

Plus people living within the danger zone can take some sensible steps to ensure they’re ready in case an eruption should occur.

So can we. And when you look around the financial system, those warning signs are everywhere.

Just in the last few days we’ve seen that corporate bond defaults are at the highest level since 2009.

The Italian Finance Minister is publicly acknowledging that Italy’s banking sector is woefully undercapitalized.

Many trade statistics, including railroad cargo and airfreight volumes, sea freight rates, and the World Trade Monitor index, signal drastically reduced global trade.

The Federal Reserve, on a mark to market basis, is now completely insolvent.

And at least one veteran central banker has forecast an ‘avalanche of bankruptcies’ and suggested that central banks no longer have any remaining ammunition to fight off a financial crisis.

These are all rather obvious, recent indications that the next eruption may be approaching.

Fortunately, moving out of the danger zone doesn’t need to be complicated.

If your banking system is pitifully illiquid or even undercapitalized, don’t keep all of your savings there. Simple.

It’s 2016. Today it’s possible to move some savings to a stronger, more stable jurisdiction overseas, all without leaving your living room.

You can establish an account to hold precious metals, or even physical cash, in one of the safest depositories in the world, all while you’re sitting in your underwear.

The breadth of opportunities that we have available to us thanks to our modern technology is extraordinary.

And these are solutions that make sense no matter what happens.

I hardly consider myself worse off because I produce my own organic food.

Or because I have multiple passports allowing me to live, work, travel, and invest easily in dozens of places across the world.

Or because I hold a portion of my savings at an incredibly well-capitalized bank in a jurisdiction with no debt that has never had a banking failure ever.

Financial crises and eruptions have occurred over and over again since ancient times.

Governments and policymakers keep making the same mistakes and expecting different results.

But you and I now have more options at our disposal to do something about it than ever before in history.

This is exciting, and taking action should be a no-brainer.

To help you get started, I’ve asked my team to pull some of the most educational articles from our archives to send to you this week while I’m in southern Chile with the Board of Directors of our agricultural company.

And in early February, I’ll put together a special webinar to teach you about some of the most critical components of creating your own Plan B. More to follow.

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December 16, 2014
Castries, Saint Lucia

Last night, the Russian central bank announced a shock decision to hike up its key interest rate from 10.5% to 17%, effective immediately. Incredible.

On Monday alone the ruble declined more than 9% against the dollar, and almost 50% in 2014. It looks like a massacre.

If you listen to conventional financial news, they’ll all tell you that you’d have to be insane to own anything in Russia right now—stocks, bonds, currency, etc.

They’ll tell you that the ruble is in freefall, and that the dollar is the place to be.

But if you have been a reader of this column for any length of time, you know that I am a very data-driven person.

So… just for kicks, I decided to dive into the numbers and make an objective comparison between the US dollar and the Russian ruble.

The results might surprise you.

First of all, I start off with the premise that ALL paper currencies are fundamentally flawed.

Our global monetary system is absurd—the idea of letting unelected central bankers conjure as much money as they want to out of thin air is simply insane.

But it is true that some fiat currencies have better fundamentals than others. And if you want to understand the health of a currency, it’s imperative to look at the ISSUER of that currency, i.e. the central bank.

As with any bank, one of the most important metrics in determining a central bank’s financial health is its level of solvency.

Specifically we look at the bank’s capital (i.e. net assets) as a percentage of its total balance sheet.

The US Federal Reserve only has a basic capital ratio of 1.26%. Talk about razor thin. (This is down from 4.5% just a few years ago)

That means if the value of the Fed’s assets declines by only 1.26%, the issuer of the world’s dominant reserve currency becomes insolvent.

Now, what happens to the liabilities of an insolvent entity? They decrease in value. Just like how Greek bonds (the liabilities of the Greek government) collapsed a few years ago.

What are the Fed’s liabilities? Open your wallet. Those green pieces of paper aren’t ‘dollars’. Just look. They have “Federal Reserve Note” (i.e. debt) printed on them.

So the Fed’s pitiful financial condition directly affects the value of the dollar over the long-term.

On the other hand, the Russian central bank’s ratio is 12.5%—literally almost TEN TIMES GREATER than the Fed.

Capital cushion is crucial because when the unsuspected happens, this is what can help keep you afloat.

Think about it: you might be able to keep going without savings, perhaps even accumulating debt, but only until something happens out of the blue.

Until your car breaks down, or you need to go to the hospital, for example. Then all of a sudden, your lack of capital can become a serious issue.

Another important metric is gold. As I mentioned, since all fiat currencies are fundamentally flawed, it’s important to see the amount of REAL ASSETS that a central bank holds in reserve.

To make an apples-to-apples comparison, we look at a central bank’s GOLD reserves as a percentage of the money supply, i.e. how much gold backs the money supply.

In Russia, it’s 6.2%. And rising. Last year it was 5.5%, and the central bank is continuing to heavily stockpile more.

How much gold backs the dollar?

Precisely zero point zero percent. Zilch. Nada.

The Fed doesn’t own gold. It loudly proclaims this on its own website: “The Federal Reserve does not own gold.”

It holds ‘certificates’ which are redeemable for US dollars. But there’s not a single ounce of gold backing the US dollar.

So… with no gold and pitifully razor thin solvency levels, it really wouldn’t take much of a shock to topple the dollar.

By comparison, the ruble is much better capitalized and actually has something backing it.

Now, I’m not necessarily advocating to buy the ruble, but hard, publicly available numbers clearly demonstrate the discrepancy between “sentiment” and objective data.

And at a time when the ruble and the whole Russian economy have been beaten down so much that Apple alone is now worth more than the whole Russian stock market, Russian assets certainly make for an interesting speculation.

The bottom line, however, is—if you wouldn’t own the ruble, then what are you doing holding 100% of your assets in the dollar?

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December 16, 2014
Sydney, Australia

[Editor’s note: This letter was penned by Sovereign Man’s Chief Investment Strategist, Tim Staermose]

As I was preparing to go and meet a friend who runs a nascent fund management business in Sydney yesterday, I noticed there was a lot of unusual activity going on a block or so from my downtown hotel.

Turns out an armed man had entered a busy café in the heart of Sydney’s central business district and was holding a bunch of people hostage.

The location was obviously chosen for maximum media exposure. It was right opposite the studios of Channel 7, one of Australia’s three big commercial television stations, and right in the center of the city, near offices, and the Pitt Street shopping district, which ordinarily would have been teeming with Christmas shoppers.

Before long, all sorts of rumors began flying. I began getting texts and emails from worried friends and family from all over the world.

I sauntered past the crowds gathering around the “exclusion zone” the police had set up and went to my meeting, avoiding police roadblocks on the way.

What was immediately apparent to me was that NOBODY really knew what was going on. And despite people leaping to all sorts of wild conclusions, all the reporting on the incident was mere speculation.

The police may have known more facts, but they were not letting any news filter out.

Everyone was in the dark, leading to speculation that it was a “terrorist attack” organized by militants affiliated with “Islamic State,” or IS.

That the gunman had made some of his hostages hold up a banner in the window with a verse from the Koran sent the whole world into a tizzy.

Though this banner has in recent times been misappropriated by certain jihadist and militant groups – from discussions with my Muslim friends – in reality it is nothing more than the Muslim equivalent of a Christian holding up a crucifix.

The Prime Minister of Australia came onto live TV and gave a press conference talking tough about national security, about not caving in to threats to our “way of life,” and so on, and urged people to “carry on with the lives as normal.”

No one seemed to be listening, though. All the offices around the area evacuated their staff and told them to go home for the day.

I tried to go to the bank to deposit a check. No luck. All the banks in the CBD had also shut for the day. They even shut the Apple Store, which on a normal day is usually packed.

Tragically, overnight two of the hostages were killed, along with the lone gunman, in what I would term a botched police operation. But the mainstream media are spinning it somewhat differently.

The hostage taker turns out to be a long-term Australian resident who came as a refugee from Iran in the 1980s, and has had numerous arrests and run-ins with the police.

Far from being a part of an organized Islamic terrorist group, the man seems to be a lone loony tune.

Tragically, lives were lost.

But contrary to the Australian Prime Minister’s call to “carry on as normal,” fear and paranoia won the day. The whole of downtown Sydney was shuttered.

And my larger concern is that this will become a rallying cry to implement all sorts of draconian security requirements in the future.

It’s a controversial topic. And we’d be interested to hear… what do you think?

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December 15, 2014
Castries, Saint Lucia

On October 9, 1939, Friedrich Nottebohm applied to become a naturalized citizen of Liechtenstein.

Nottebohm had been living in Guatemala since 1905, and as World War II started heating up, he became concerned that his German nationality might cause problems for him down the road.

It turns out he was right.

After attempting to enter Guatemala in 1943, he was denied entry as an enemy alien and later sent to an internment camp in the US. The Guatemalan authorities did not recognize his Liechtenstein naturalization and still regarded him as German.

After he was detained, the government of Liechtenstein petitioned the International Court of Justice on Nottebohm’s behalf against unjust treatment by the government of Guatemala.

In court, the government of Guatemala argued that Nottebohm was not a citizen of Liechtenstein for the purposes of international law since his ties to the country were tenuous at best.

He had been living in Guatemala for 34 years and maintained strong ties to Germany, whereas he had spent only enough time in Liechtenstein to get his papers and showed no intention of building further ties to the country.

The court sided with Guatemala, assessing that there was not a genuine link between Nottebohm and Liechtenstein, and that he would be treated as German for the purposes of international law.

That’s one of the risks in obtaining a second citizenship through an expedited, usually investment related process. Things can change quickly.

For example, St. Kitts and Nevis, another Antilles island nation close by to where I am right now, probably has the most well-known and popular “citizenship by investment” program.

You can become citizen of St. Kitts in as little as six months by investing as little as $250,000 in the country’s Sugar Industry Diversification Fund.

The program is very popular with people from all over the world—US citizens who want to divorce themselves from Uncle Sam, Russians, Middle Easterners, and Chinese.

Why? Because a St. Kitts passport has traditionally been a solid travel document, offering visa-free access to Europe, Canada, and much of Asia.

I wrote earlier this year that the US government had put St. Kitts in crosshairs because of this citizenship program. They accused St. Kitts of “lax controls” and saying that “illicit actors” are using the program to obtain St. Kitts passports.

I warned that the program’s days may be numbered, and that many of the benefits may soon be curtailed.

Sure enough, it’s already happening.

A few weeks ago, Canada became the first major destination to revoke visa-free access for St. Kitts passport holders with immediate effect.

As you can imagine, they cited ‘security concerns’ for doing so.

In light of such absurd doublethink, having a second passport makes more sense than ever.

A second passport means that you’ll always have a place to go– to live, travel, do business, invest, bank etc.

If your home country ever becomes another historical statistic and engages in all the old favorites of bankrupt nations– war, capital controls, price controls, etc., you won’t be trapped.

It’s one of the best insurance policies you could ever have. And if planned properly, you can ensure that there’s absolutely zero downside.

But these “citizenship by investment” programs are under intense scrutiny right now. Aside from St. Kitts, the economic citizenship program in Malta has also taken a lot of fire.

In light of this trend, it may not be worth forking out hundreds of thousands of dollars on a second passport. Yet there are still a number of options to obtain one.

First, instead of trading money for a passport, you can much more easily trade time.

In countries like Panama or Belgium, for example you can apply to become a naturalized citizen after a few years of residency, and you don’t have to spend any meaningful time in the country to qualify.

Or you could do so in Chile where it’s still incredibly easy to establish residency for just about anyone, and the requirements for permanent residency and subsequent naturalization are very lenient.

Second, if you’re flexible, you could consider having baby in a place like Brazil where children born in the territory become immediate citizens, and parents are able to apply for naturalization after an abbreviated residency period.

The easiest option, though, is if you have ancestors from a country that issues citizenship based on bloodlines. That’s usually the easiest, fastest and cheapest way of obtaining a second citizenship and passport.

UK, Ireland, Hungary, Spain, Italy, etc. There are so many options in this case, it’s worth looking at the family tree to see if you quality.

Bottom line, there are plenty of options out there.

And as the clampdown on quick citizenship by investments schemes continues, pursuing one that gives you a much more substantial connection to the country of your chosen second citizenship is the way to go.

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December 15, 2014
London, England

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

“[W]e want to use our reserves more constructively by investing in development projects around the world rather than just reflexively buying US Treasuries. In any case, we usually lose money on Treasuries, so we need to find ways to improve our return on investment.”
– Unnamed senior Chinese official, cited in an FT article, ‘Turning away from the dollar’, 10th December 2014.

“Mutually assured destruction” was a doctrine that rose to prominence during the Cold War, when the US and the USSR faced each other with nuclear arsenals so populous that they ensured that any nuclear exchange between the two great military powers would quickly lead to mutual overkill in the most literal sense.

Notwithstanding the newly dismal relations between the US and Russia, “mutually assured destruction” now best describes the uneasy stand-off between an increasingly indebted US government and an increasingly monetarily frustrated China, with several trillion dollars’ worth of foreign exchange reserves looking, it would now appear, for a more productive home than US Treasury bonds of questionable inherent value.

Until now, the Chinese have had little choice where to park their trillions, because only markets like the US Treasury market (and to a certain extent, gold) have been deep and liquid enough to accommodate their reserves.

The above FT article points to three related policy developments on the part of the Chinese authorities:

1. China’s appetite for US Treasury bonds is on the wane;
2. China is ramping up its overseas development programme for both financial and geopolitical reasons;
3. The promotion of the renminbi as a global currency “is gradually liberating Beijing from the dollar zone”.

The US has long enjoyed what Giscard d’Estaing called the “exorbitant privilege” of issuing a currency that happens to be the global reserve currency.

The FT article would seem to suggest that the days of exorbitant privilege may be coming to an end – to be replaced, in time, with a bi-polar reserve currency world incorporating both the US dollar and the renminbi.

(The euro might be involved, if that demonstrably dysfunctional currency bloc lasts long enough.)

Here’s a quiz we often wheel out for prospective clients:

1. Which country is the world’s largest sovereign miner of gold?
2. Which country doesn’t allow an ounce of that gold to be exported?
3. Which country has advised its citizenry to purchase gold?

Three questions. One answer. In each case: China.

Is it plausible that, at some point yet to be determined, a (largely gold-backed) renminbi will either dethrone the US dollar or co-exist alongside it in a new global currency regime?

We think the answer is yes, on both counts.

Meanwhile the US appears to be doing everything in its power to hasten the relative decline of its own currency.

There is a new ‘big figure’ to account for the size of the US national debt, which now stands at $18 trillion.

That only accounts for the on-balance sheet stuff. Factor in the off-balance sheet liabilities of the US administration and pretty soon you get to a figure (un)comfortably north of $100 trillion.

It will never be paid back, of course. It never can be. The only question is which poison extinguishes it: formal repudiation, or informal inflation.

Perhaps both.

So the direction of travel of two colossal ‘macro’ themes is clear (the insolvency of the US administration, and its replacement on the geopolitical / currency stage by that of the Chinese).

The one question neither we, nor anybody else, can answer precisely is: when?

There are other statements that beg the response: “when?”

Government bond yields have already entered a ‘twilight zone’ of practical irrelevance to rational and unconstrained investors.

But when do they go into reverse? When will the world’s most frustrating trade (‘the widow-maker’, i.e. shorting the Japanese government bond market) start finally to work?

When will investors be able to enter or re-enter stock markets without having to worry about the malign impact of central bank price support mechanisms?

Here’s another statement that begs the response: “when?”

The US stock market is already heavily overvalued by any objective historical measure.

When is Jack Bogle, the founder of the world’s largest index-tracking business, Vanguard, going to acknowledge that advocating 100% market exposure to one of the world’s most expensive markets, at its all-time high, might amount to something akin to “overly concentrated investment risk”?

Lots of questions, and not many definitive answers. Some suggestions, though:

• At the asset class level, diversification—by geography, and underlying asset type—makes more sense than ever. Unless you strongly believe you can anticipate the actions and intentions of central banking bureaucrats throughout the world.

  Warren Buffett once said that wide diversification was only required when investors do not understand what they are doing.

  We would revise that statement to take into account the unusual risks at play in the global macro-economic arena today: wide diversification is precisely required when central bankers do not understand what they are doing.

• Expanding on the diversification theme, explicit value (“cheapness”) today only exists meaningfully in the analytically less charted territories of the world. Stock markets in Russia and China, for example, are trading at book value or less, while North American markets 3x more.
• Some form of renminbi exposure makes total sense as part of a diversified currency portfolio.
• US equities should be selected, if at all, with extreme care; ditto the shares of global mega-cap consumer brands, where valuations point strongly to the triumph of the herd.
• And whatever their direction of travel in the short to medium term, US Treasuries at current levels make no sense whatsoever to the discerning investor. The same holds for Gilts, Bunds, JGBs, OATs.
• Arguments about Treasury yields reverting to a much lower longer term mean completely ignore a) the overwhelming current and future oversupply, and b) the utter lack of endorsement from one of their largest foreign holders.

Foreign holders of US Treasuries, you have been warned. The irony is that many of you are completely price-insensitive so you will not care.

There are other reasons to be fearful of stock market valuations, notably in pricey Western markets, over and above concerns over the debt burden.

As Russell Napier points out in his latest ‘The Solid Ground’ piece,

“In 1919-1921, 1929-1932, 2000-2003, 2007-2009 it was not a resurgence in wages, Fed-controlled interest rates or corporate taxes which produced a collapse in corporate profits and a bear market in equities.

“On those four occasions equity investors suffered losses of 32%, 85%, 41% and 51% respectively despite the continued dormancy of labour, creditors and the state. It was deflation, or the fear of deflation, which cost equity investors so much. There is a simple reason why deflation has always been so damaging to corporate profits and equity valuations: it brings a credit crisis.

“Investors forget at their peril what can happen to the credit system in a highly leveraged world when cash-flows, whether of the corporate, the household or the state variety, decline. In a deflationary world credit is much more difficult to access, economic activity slows and often one very large institution or country fails and creates a systemic risk to the whole system.

“The collapse in commodity prices and Emerging Market currencies in conjunction with the general rise of the US$ suggests another credit crisis cannot be far away. With nominal interest rates already so low, monetary remedies to a credit seizure today would be much less effective. Such a shock, after five and a half years of QE, might suggest that the patient does not respond to this type of medicine.”

And since Christmas fast approaches, we can’t speak to the merits of frankincense and myrrh, but gold, that famous “6,000 year old bubble”, has always been popular, but rarely more relevant to the investor seeking a true safe haven from forced currency depreciation and an ever vaster mountain of unrepayable debt.

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December 12, 2014
Santiago, Chile

Long ago I sold almost all my possessions and left the Land of the Free.

It was a decision of optimism and adventure—I realized that there were much richer and more rewarding opportunities to do business, invest, and spend time abroad.

The only asset I keep there is a condominium in Dallas. It’s the same place I purchased more than a decade ago to be close to my father when he was diagnosed with inoperable brain cancer.

I left after he passed away, but I kept the condo so that I could have a place nearby my mother and stepfather (who still live in the area) in case the need ever arose.

Over a decade ago when I bought the place, my Homeowners’ Association dues were just barely $200 per month. And I got a lot of value for that.

Back then the dues paid for water, cable, security, gym membership… all sorts of stuff.

Since then the HOA dues have been rising steadily. This year I’ve been paying $450.38 per month.

Yet now I just received a letter notifying me that the fees will be increasing once again starting January 1st to $495.42.

That’s 10%. And that’s on top of a similar increase that I received on my medical insurance premium (after which I promptly dumped the company and switched to a much better international plan——premium members, watch out for an alert on this.)

What’s more, property taxes have gone up every single year that I’ve owned this condo.

(And in case you’re wondering, the unit is worth $20,000 LESS than what I bought it for years before the property bubble formed.)

If we are to trust the official inflation numbers the government puts out, the long-term rate of inflation hovers at around 2% per year.

But you and I both know that prices have been going up much more than that.

And even if you use their own official monkey numbers, wages haven’t kept up.

Think about it: let’s say a loaf of bread costs $1, and you make $50,000 per year. When denominated in bread, your salary is 50,000 loaves.

Next year the price of bread rises to $1.10. Your salary goes up to $51,000. Your new salary in bread is 46,363 loaves.

Even though your salary has actually increased, your standard of living when denominated in loaves of bread has decreased by 7.2%.

Certainly this is a simplistic example. But it shows that inflation is really just a form of theft.

At best, it’s an invisible tax—a transfer of wealth from responsible savers in the middle class to heavily indebted governments.

Through inflation, governments are able to reduce the real value of their debts. And at $18 trillion, the United States government is in serious need of doing so.

That’s why they lie about inflation. And it’s a lie that matters.

At 2% inflation, the average person will see prices double two times in his/her life. In other words, if the price of a widget is $1 on the day you’re born, it will probably cost at least $4 by the time you depart this earth.

Yet if inflation is ratcheted up just by a single percentage point to 3%, then you’ll see prices rise nearly EIGHT fold over the same period. And at 4%, roughly SIXTEEN fold.

Inflation is an extremely destructive force over the long-term for individuals.

Bankrupt governments have every incentive to create it. And they have even more incentive to lie about it.

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December 12, 2014
Santiago, Chile

In the Grand Bazaar in Istanbul during the Ottoman Empire it was a familiar site to see a muhtesib or “market inspector” making his way through the stalls.

They were in charge of making sure that everything in the marketplace adhered to state regulations.

Accompanied by some members of the police force, every day they went around, carefully inspecting the activities of each seller to ensure that they were complying with the rules.

If they weren’t in compliance, the muhtesib would set his police thugs on them.

From regulation on the production and distribution of goods, to building codes, and price controls, these average people had their every action controlled by the government.

It didn’t take long for the Ottoman Empire to lose its competitive edge under the weight of these massive bureaucratic burdens.

This has happened to dozens of formerly dominant empires throughout history. And it’s happening in the Land of the Free today.

We may not have the same traditional market square with the imposing presence of the muhtesib. But don’t be fooled, he’s there.

The Competitive Enterprise Institute estimates that the total cost of complying with America’s federal regulations last year was $1.86 trillion.

That’s about $15,000 per household, more than what the average household pays on food, clothing, or shelter each year.

And the number of regulations is rapidly rising.

You might be rather surprised to know that there are a whopping 10,610 bills and resolutions currently before the 113th United States Congress.

But it’s more than that.

What a lot of people don’t realize is that executive agencies have their own ‘rule making’ authority.

Every single business day, in fact, dozens of new rules and regulations are proposed, almost none of which ever become public.

Just today alone, the current issue of the US government’s daily journal of rules (called the Federal Register) is 214 pages. And that’s actually pretty slim for Uncle Sam.

Over the last few days, we’ve seen new regulations about proper handling of Irish potatoes and toy magnet sets. It’s absurd.

For even the tiniest issue, bureaucrats and politicians jump to the rescue.

They “protect” us from bad haircuts, ugly interior designs, and slow-speaking auctioneers (just three examples of the over 1,000 occupations that require government licenses in the Land of the Free).

It’s as if they’re some kind of superhero here to save us from ourselves.

I can just picture it now—Bureaucrat Man! Swooping in to save the day with yet another regulation or piece of legislation!

Smashing anyone who tries to rent his/her apartment on Airbnb, Bureaucrat Man saves the citizens of New York from becoming victims of “greedy landlords”.

In San Francisco he makes sure that you’re qualified enough to—walk dogs, demanding that anyone walking more than four dogs have a valid ($375) permit.

In Florida, Bureaucrat Man ensures that giving food to the homeless is done according to rules and regulations; otherwise you get arrested for your act of indecency, just like a 90-year old man was recently.

Heck of a job, Bureaucrat Man. Noble in his intentions, incompetent in his actions, and ruthless in his enforcement.

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