Category: simonblack

June 23, 2014
Undisclosed location

No one ever thinks about the water. Or the toilet paper, as it were.

But these are among the many, many staples that become luxuries when one’s nation is in crisis.

Hours ago, the local gas company in Kiev (Kyivenergo) announced that they would be shutting off the hot water supply to most of the city.

While the official reason for the hot water shutoff is that Kyivenergo (the energy supplier to Kiev) owes a debt to the Ukrainian state gas company (Naftogaz) of over $100 million.

It’s just a quirky little coincidence that this debt suddenly became materially important only one week after Russia shut off natural gas supplies to Ukraine.

Funny thing is that Ukrainian politicians for years had been telling people not to worry about this.

You see, Ukraine has its own domestic natural gas supplies. And they tell people that the domestic gas is strictly for the people and their utilities (like hot water).

Russian gas, according to this story, is imported for businesses to use. But that domestic gas is sacrosanct, only for the people.

Clearly this turned out to be a big fat lie.

Bear in mind, it was just a few weeks ago that utility companies announced that the price of cold water would jump from 3.18 hryvnas per cubic meter to 6.22– a 95% increase, practically overnight.

So there’s an entire city now taking cold showers… and paying twice the price for the privilege! Insult. Injury.

I have several Ukrainian employees with family still in the country; they’re telling me how their loved ones are now finally starting to look at their options to get out of dodge.

It’s strange when you think about it– war, revolution, inflation, etc. All of that was OK. Cold showers?!?! “Honey pack the bags, it’s time to leave.”

I jest of course; all of this is accumulated pain that eventually culminates in reaching one’s breaking point… especially when a rational look into the future suggests this situation will not resolve itself anytime soon.

You know the outlook isn’t so great right now because Ukraine’s Vice Premier Minister is telling people that they can survive the -winter- (still months away) without Russian gas imports.

While I’m sure everyone appreciates the ‘turn that frown upside down’ approach, they’d probably just rather take a hot shower and not be lied to about the nation’s ability to sustain shrinkage.

A few key lessons I wanted to pull out of this:

1. Politicians always lie. They will tell you that your nation is stronger than it really is, that your country is prepared for whatever may come, that your benefits will never be cut, etc.

And even though they may be well-intentioned, these are not promises that can be kept… especially by a nation in crisis.

2. A nation in crisis affects just about everything. It’s not just about numbers and data, or even Molotov cocktails. It’s hot water and toilet paper. It’s food on the shelves. It’s the stuff we all take for granted that suddenly doesn’t function anymore.

3. Even though the obvious warning signs are there, most people wait until it’s too late (or at least suboptimal) before considering their options.

When you wait until a full blown crisis, you have to rush through critical decisions in haste instead of planning things out slowly, rationally.

Rational people have a plan B because we all have a breaking point. Do you know what you would do if you reached yours?

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June 20, 2014
Bangkok, Thailand

What do you get when you mix Bitcoin Jesus, Marriott, St. Kitts, and terrorists?

I’m afraid we’ll all find out soon.

It wasn’t but a month ago that I told you about the US government’s opening salvo against the St. Kitts economic citizenship program.

They’re trying to patch up a small scratch that’s turning into a sucking chest wound; thousands of Americans are now renouncing their citizenship and divorcing themselves from the US government.

And along the way, many of them tend to pass through St. Kitts, make a $250,000+ investment, and obtain citizenship there.

For some, this seems like a radical idea. For others, it sounds incredibly liberating.

After all, once these former Americans renounce and become ex-tax slaves, they’re able to live in dozens of countries around the world without having to cough up a huge slice of their earnings to finance war, drones, the NSA, etc.

This is a big leak for the US government… so they seem to have set their crosshairs very squarely on St. Kitts.

I told you about this last month– the Financial Crimes Enforcement Network (FinCEN) fired off an opening salvo, ripping the government of St. Kitts for its “lax controls”, and asserting that “illicit actors” were obtaining citizenship.

This is code, of course, for terrorists.

And since we’re all programmed to quiver in fear at the thought of men in caves, the government can do whatever it wants just by uttering the T-word. After all, the Land of the Free is now a nation that values security far more than liberty.

I signed off last month telling you there would be substantial changes to the program as a result of this. And I was right.

As a start, the government of St. Kitts is now confirming that they have curtailed their ‘fast track’ option… something where people used to be able to pay extra for speedier processing.

It’s also clear that the processing time is going to be much slooooooower.

But now there’s a new development. Bitcoin entrepreneur Roger Ver, aka Bitcoin Jesus, has launched a new business which allows people to invest in the St. Kitts program using Bitcoin, including a real estate investment at the St. Kitts Marriott resort.

I think this is a great idea, particularly for folks who are sitting on huge Bitcoin gains and already bought their fill of duvet covers on Overstock.com.

But Uncle Sam has already made his feelings on Bitcoin quite clear; like the St. Kitts passport, they view Bitcoin as the plaything of criminals, terrorists, tax evaders, and money launderers.

(Apparently legitimate people shouldn’t have multiple passports or own Bitcoin…)

And I’m concerned this will give them even more ammunition to put pressure on St. Kitts. So, yes, I’m expecting even more changes to the program in the coming months.

Having said that, there will still be a lot of great options for obtaining a second passport.

Remember, a second passport is like an insurance policy. Not a lame one that the government requires you to have by law, but one that might really save your ass some day.

But for most folks, it honestly doesn’t make sense to plunk down hundreds of thousands of dollars for a passport, especially if that’s a meaningful percentage of your assets.

There’s a Jason Bource allure to having a box full of passports. But is it worth all that money? No.

Besides, if you’re lucky, you can trace your bloodline back to an ancestor from Italy, Ireland, Poland, Hungary, etc. and obtain citizenship for almost nothing.

You can also trade time instead of money and become a naturalized citizen of any number of places– Belgium, Singapore, Uruguay, Chile, etc.

And, yes, if you don’t mind swapping hardware with someone, there are also plenty of places (Brazil is a great example) where walking down the aisle can get you a passport as well.

There are plenty of pasport options out there for rational, clear-thinking people. And having one is important. Sure, you might not ever need it. And you might never need a seat belt either.

But if the day comes when you do, you’ll be damn glad you have a second passport.

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June 20, 2014
Bangkok, Thailand

With a nod to the absurd, Federal Reserve Chair Janet Yellen freely admitted earlier this week that the Fed really has no idea what’s going to happen to the economy.

Bear in mind this is the person who controls interest rates in the United States, effectively setting the ‘price of money’ for the most widely used currency in the world.

This is key– because the price of money (interest rates) influence the prices of so many other things. Real estate. Business investment. Automobile sales. Agricultural commodity prices. Oil prices. Etc.

Of course, there’s a knock-on effect. Consider, for example, how many products and services are influenced by the price of oil… fertilizers, plastics, shipping, etc. And then how many products and services are influenced by the price of shipping… like everything in the world that’s imported / exported.

So in setting the price of money, Ms. Yellen is influencing the price of just about everything.

Yet she and her fellow members of the Federal Open Market Committee (FOMC) admittedly don’t have a clue where the economy’s going.

This stands in stark contrast to what investors are used to. Back in the 90s, Fortune put former Fed Chair Alan Greenspan on the cover with a headline– “It’s HIS economy, stupid”.

That’s how clear it was back then. Greenspan was the benevolent wizard… the ‘maestro’ in masterful command pulling the strings of the largest economy in the world. And investors had all the [misplaced] confidence in the world in this arrangement.

So you’d think that with such a demonstration of ignorance that investors would be heading for the hills, right?

Not so. The big banks and institutional investors (who appointed most of the FOMC members to begin with) rewarded the Fed’s stunning admission and lack of foresight with… record high stock prices.

If I could quote our long-lost Billy Mays– BUT WAIT, THERE’S MORE!

The Fed also reduced its GDP growth forecasts for the US economy from 2.9% to 2.2%. In case you’re not too fast on the ‘calc’ icon, that’s a 24% proportional reduction in GDP growth. Not exactly a drop in the bucket.

AND, of course, there’s the recent data that inflation has ticked up, even according to their own official numbers. Of course Ms. Yellen proceeded to downplay the inflation, writing it off as ‘noise’.

So this morning I received yet another analysis from a large private bank I deal with; the report’s headline– FED: Growth down, optimism up.

Hmmm. Spot the oxymoron here. (OK fine, paradox)

Growth is down. Inflation is up. The grand wizards don’t have a clue. Yet people are excited about this?

I feel like there’s an alternate universe out there where this sort of paradox would make sense… some magical 5th dimensional world where up is down and men breathe through their nipples. (why else are they there, gents?)

But alas, this is not some alternate universe… ’tis the sad state of our FUBARTASTIC financial system.

Fundamentals no longer matter. Common sense is now a totally foreign entity. High frequency traders and algorithms dominate the marketplace, brokers steal customer funds to cover their own losses, banks sell their customers ‘shitty deals’ and take the other side of the trades.

And everyone is drinking from the same spiked punch bowl where bad news is good news, good news is good news, and a single clueless committee has all the power.

Looking at this ridiculous market, I really I find it hard to believe that the odds are stacked particularly well in favor of the little guy.

Bottom line: if you’re in the markets, invest with caution. And if you have the courage to swim against the school, bear in mind there’s a whole world of alternative investments– primarily things like private businesses that are far less susceptible of being directly manipulated.

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March 23, 2014
Sovereign Valley Farm, Chile

When it comes to investing money, there’s no such thing as a sure thing.

Even the ‘safest’ investment in the world (US Treasuries) is anything but safe.

I mean… on what planet does it make sense to loan your hard-earned cash to the biggest debtor that has ever existed in the history of the world?

Once you deduct taxes, the net return you’ll receive won’t keep pace with the official rate of inflation. It’s an insane investment… hardly ‘risk free’.

There’s risk in everything we do. There’s risk in making investments. There’s risk in doing nothing and simply holding cash.

This is one of the reasons why I like real assets. It’s very difficult for farmland to go to zero. And if I buy wisely and carefully, I can decrease my downside risk substantially.

It’s not often that the stock market brings us such opportunities.

Most stock markets around the world now depend on the whims of central bankers, not fundamentals.

And they’re so frothy with paper money that stock valuations are astronomical. There’s just no value left.

This is a huge reason why I don’t invest in stocks. But the opportunity in Russia today is so remarkable, even I had to make an exception.

Amid all the sanction talk since this whole Crimea debacle kicked off, Russia’s MICEX stock market index has tanked. So has the Russian ruble.

This decline has very little to do with a change in fundamentals and everything to do with political posturing. The White House went as far as to tell people to NOT buy Russian stocks. Apparently they listened.

The average large cap stock in Russia now has a price/earnings ratio of just 5.32 (compared to 17.20 for the S&P 500 in the US).

Plus the average price / book ratio in Russia is just 0.62. Peanuts.

Look at Gazprom as an example, which has a price/book ratio of about 0.33 and a P/E ratio of 2.33.

Gazprom’s market cap is roughly $80 billion. But it’s NET assets are worth about $260 billion. Plus the company generates a whopping $33 billion per year in profit.

This means (theoretically) that if you had an extra $80 billion laying around, you could buy Gazprom, sell off the assets, and put $180 billion in your pocket.

Obviously that couldn’t actually happen in real life. But it gives you a sense of the value at stake.

And when you can buy productive assets in an emotionally-charged, inefficient marketplace for substantially less than what they’re actually worth, it substantially reduces the downside risk, especially if you are holding for the long-term.

This is a major bargain that rarely comes along, especially given that there is very little which threatens these companies’ long-term earnings or dividends.

Gazprom is still going to produce oil and gas.

But if Russian stock prices AND the ruble recover, foreign investors will be looking at tremendous profits.

Even if stock prices stagnate, though, these companies are still generating significant profits and paying out dividends to their investors. So you’ll be getting paid handsomely to wait.

There are a number of Russian companies (like Gazprom) which trade on the Pink Sheets or foreign exchanges like the LSE.

But if you prefer to keep things uncomplicated, there are a number of ETFs which exclusively hold Russian stocks, like the SPDR S&P Russia Fund (RBL).

 

 

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March 23, 2014
Bali, Indonesia

Palladium is like the Rodney Dangerfield of precious metals. It never gets any respect.

If you ask someone about precious metals, in fact, just about everyone has heard of gold and silver. And occasionally platinum.

But palladium is one of those obscure precious metals that few people think about, or even know about.

Aside from actually having its own currency code (XPD), palladium is widely used in a variety of industrial applications, from spark plugs to catalytic converters to hydrocarbon ‘cracking’ to electronic components.

And here’s something most people don’t know: most of the world’s palladium is mined in Russia.

Since October 2013, Palladium prices have had a moderate boost—about a 5.3% increase in five months.

But given what’s happening in Russia, prices could soar. In fact, with trade sanctions looming, palladium could be taken off the world market indefinitely.

As the following chart shows, palladium has just broken out to a new 52-week high and is showing strong upward momentum.

Moreover, if you look at the 5-year chart, it could be about to break out to even longer-term highs.

I would consider buying palladium today, with a stop-loss order to protect your capital, at $759. That means if the market should prove this thesis wrong, the loss would be limited to just 4%.

I think the near-term upside target is the 5-year high of $855. That’s about an 8% gain from where we are today.

An upside of 8% versus a downside of 4% makes palladium a good risk/reward trade, given that the odds of the higher-price outcome are much better than the odds of the lower-price outcome.

But if tensions between the West and Russia escalate and trade sanctions stay in place for a prolonged period, $855 could be a very conservative upside target for palladium.

The last time Russia withheld palladium supplies from world markets back in 2000, the price rose 151% from a low of $433 in January 2000 to over $1,090 an ounce by January 2001.

In a scenario like that, palladium would be an incredibly profitable trade.

One easy way to take a position in palladium is via the ETFS Physical Palladium Shares (PALL on the New York Stock Exchange).

A new physical palladium ETF sponsored by Standard Bank has also just launched in South Africa.

And Absa Bank, which already sponsors the world’s largest platinum-backed ETF, has also announced it will launch a palladium ETF called NewPalladium. It will list on the Johannesburg Stock Exchange on March 27th.

These new palladium ETF launches, coming at a time of tightening supply due to Russian sanctions, could easily add more upward momentum to palladium prices, as they will withdraw supply from the market to physically back their shares.

However, if you want to avoid the possibility of any counterparty risk, there’s no substitute for owning the physical metal yourself.

The Royal Canadian Mint has in the past minted palladium versions of its very popular and instantly recognizable Maple Leaf bullion coins.

You can also buy 1 troy ounce palladium bars from most major dealers.

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Jim Rickards, author of one of my favorite books Currency Wars and his upcoming book “The Death of Money: The Coming Collapse of the International Monetary System”, joins me today to discuss the death of money.

You’ll hear about:

• Why a collapse of the international monetary system is coming
• Why it will be bigger than last time, and bigger than central banks
• Why he thinks the Fed can’t print their way out of the next crisis
• And why you won’t like the solution

Liked this? Subscribe on iTunes and share it with a friend below:

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March 20, 2014
Sovereign Valley Farm, Chile

A few months ago, I told you about a bold report published within the IRS that absolutely blasted the agency’s mafia tactics.

In its 2013 annual report to Congress, the Office of the Taxpayer Advocate wrote that the IRS shows “disrespect for the law and a disregard for taxpayer rights.”

Further, the report says that the current system “disproportionately burdens those who [make] honest mistakes,” and that “tax requirements have become so confusing and the compliance burden so great that taxpayers are giving up their U.S. citizenship in record numbers.”

We all know the stories. The IRS has nearly infinite power to do whatever it wants, including freezing you out of your own bank account without so much as a phone call, let alone due process.

In the Land of the Free, people think they’re innocent until proven guilty. This is total BS. If you are only suspected of wrongdoing, you can be locked out of your entire savings.

This is an incredible amount of authority to wield.

But the British government has just gone even further.

Buried in its most recent budget package is a curt little paragraph that reads “The Government will modernise and strengthen [the tax agency’s] debt collection powers to recover financial assets from the bank accounts of debtors who owe over £1,000 of tax.”

Read that one more time just to let it sink in.

The British government is setting an absurdly low threshold at £1,000… about $1,650 in back taxes.

And they’re saying that if the tax authorities believe you owe even just a minor tax debt, they will not only FREEZE your assets, they’ll dip into your bank account and TAKE whatever they want.

Judge, jury, and executioner. They get to decide in their sole discretion if you owe them money, and they get to take as much as they want to satisfy the debt.

It’s unbelievable.

I can’t even begin to imagine why any Brit in his/her right mind would continue to hold a substantial amount of savings in UK banks.

You are practically begging for the government to relieve you of your hard-earned savings.

Even if you haven’t done anything wrong, and have paid up everything that you owe, the slightest clerical error could have them plunging their filthy hands into your account.

These issues are worldwide. Whether you’re in the US, UK, France, Cyprus, etc., when governments go bankrupt, these are precisely the sorts of tactics they resort to.

Rational, thinking people need to be aware of this trend. And it behooves absolutely everyone to come up with a plan B. Because at the rate things are going, Plan B may very soon become Plan A.

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March 20, 2014
Sovereign Valley Farm, Chile

As any long-time reader of this column knows, we routinely draw from historical lessons to highlight that this time is not different.

Throughout the 18th century, for example, France was the greatest superpower in Europe, if not the world.

But they became complacent, believing that they had some sort of ‘divine right’ to reign supreme, and that they could be as fiscally irresponsible as they liked.

The French government spent money like drunken sailors; they had substantial welfare programs, free hospitals, and grand monuments.

They held vast territories overseas, engaged in constant warfare, and even had their own intrusive intelligence service that spied on King and subject alike.

Of course, they couldn’t pay for any of this.

French budget deficits were out of control, and they resorted to going heavily into debt and rapidly debasing their currency.

Stop me when this sounds familiar.

The French economy ultimately failed, bringing with it a 26-year period of hyperinflation, civil war, military conquest, and genocide.

History is full of examples, from ancient Mesopotamia to the Soviet Union, which show that whenever societies reach unsustainable levels of resource consumption and allocation, they collapse.

I’ve been writing about this for years, and the idea is now hitting mainstream.

A recent research paper funded by NASA highlights this same premise. According to the authors:

“Collapses of even advanced civilizations have occurred many times in the past five thousand years, and they were frequently followed by centuries of population and cultural decline and economic regression.”

The results of their experiments show that some of the very clear trends which exist today– unsustainable resource consumption, and economic stratification that favors the elite– can very easily result in collapse.

In fact, they write that “collapse is very difficult to avoid and requires major policy changes.”

This isn’t exactly good news.

But here’s the thing– between massive debts, deficits, money printing, war, resource depletion, etc., our modern society seems riddled with these risks.

And history certainly shows that dominant powers are always changing.

Empires rise and fall. The global monetary system is always changing. The prevailing social contract is always changing.

But there is one FAR greater trend across history that supercedes all of the rest… and trend is the RISE of humanity.

Human beings are fundamentally tool creators. We take problems and turn them into opportunities. We find solutions. We adapt and overcome.

The world is not coming to an end. It’s going to reset. There’s a huge difference between the two.

Think about the system that we’re living under.

A tiny elite has total control of the money supply. They wield intrusive spy networks and weapons of mass destruction. The can confiscate the wealth of others in their sole discretion. They can indebt unborn generations.

Curiously, these are the same people who are so incompetent they can’t put a website together.

It’s not working. And just about everyone knows it.

We’re taught growing up that ‘We the People’ have the power to affect radical change in the voting booth. But this is another fairy tale.

Voting only changes the players. It doesn’t change the game.

Technology is one major game changer. The technology exists today to completely revolutionize the way we live and govern ourselves.

Today’s system is just a 19th century model applied to a 21st century society. I mean– a room full of men making decisions about how much money to print? It’s so antiquated it’s almost comical.

But given that the majority of Western governments borrow money just to pay interest on money they’ve already borrowed, it’s obvious the current game is almost finished.

When it ends, there will be a reset… potentially a tumultuous one.

This is why you want to have a plan B, and why you don’t want to have all of your eggs in one basket.

After all, why bother working so hard if everything you’ve ever achieved or provided for your children is tied up in a country with dismal fundamentals?

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March 19, 2014
Santiago, Chile

Truth can be a damn difficult thing to digest sometimes.

Some of us have been there. You get that news from the doctor that you, or a loved one, has just been diagnosed with a serious disease, and it hits you like a ton of bricks.

Several years ago my father was diagnosed with a brain tumor known as a Glioblastoma (GBM). A GBM diagnosis is essentially a death sentence– it’s one of the most aggressive tumors in existence, and it grows in the part of the body that modern medicine understands the least.

I clearly remember the neurosurgeon telling us, “There have been some miraculous advances in medicine over the last 20-years related to the treatment of cancerous tumors. Unfortunately, this tumor is not one of them.”

It was a tough pill for everyone to swallow… especially my father.

Our natural defense mechanism as human beings is to deny reality. These sorts of things happen to other people, not to us.

It’s this same defense mechanism that leads people to ignore the obvious fiscal realities of their home country despite overwhelming objective evidence.

After all, debt-fueled collapse happens to other countries. Not to us.

We go our entire lives being told that our country is different. We’re special.

We have televised ‘experts’ going on TV explaining why our debts and deficits don’t matter. And Nobel Prize-winning pseduoscientists complaining that our debts and deficits aren’t big enough.

But deep down you know the truth.

In the Land of the Free, the Government Accountability Office (GAO) recently released its 2013 Financial Report of the United States government.

This is the government’s best attempt at an honest accounting of its books. And even though they use a different accounting system that gives them special advantages, the picture is still remarkably bleak.

We all know that the US government has racked up a substantial debt; as of this morning, total outstanding public debt is $17,546,814,482,078.90. ($17.5 trillion)

But it’s not all about the debt. Debt is not necessarily evil… and it’s important to look at the situation qualitatively in addition to quantitatively.

Let’s drop a few zeros and consider this in terms of personal finance.

Assume you had $1.75 million in total debt. That sounds like a lot to most people.

But if you had $3 million in liquid assets to offset the debt, plus $500,000 in annual income to pay interest, living expenses, and just about any contingency that could come your way, you’d be in great shape.

It would be even better if that $1.75 million in debt financed a lucrative real estate investment which was generating a 25% cash-on-cash return for you.

But that’s not the case for the US government.

Despite the Obama administration touting a budget deficit of “only” $680 billion in 2013, the GAO’s more accurate accounting shows a total government cost of $3.8 trillion on total revenue of $2.8 trillion.

In other words– the administration wasn’t exactly honest with the American people– the deficit was more like $1 trillion, not $680 billion. But it gets worse.

The GAO added up ALL the US government’s assets in 2013. Aircraft carriers. The highway system. Land. Cash and financial assets. The total is $2.97 trillion.

The liabilities, on the other hand, total $19.88 trillion. This includes the official public debt, plus all sorts of IOUs and loan guarantees.

This means the net EQUITY of the US government is minus $16.9 trillion.

Moreover, the US government’s cash position is a mere $206 billion… roughly 1.1% of its public debt. This isn’t enough to cover net interest payments for the next year.

Unlike a savvy investor who borrows cheap money to purchase productive assets, the US government borrows money to pay interest.

Quantitatively AND qualitatively, the data point to an inevitable conclusion: despite all the propaganda, this is NOT a risk free environment.

And understanding these trends and consequences is absolutely critical to your long-term financial survival.

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March 18, 2014
Bali, Indonesia

[Editor’s Note: Tim Staermose, Sovereign Man’s Chief Investment Strategist, is filling in for Simon today.]

Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China.

What’s going on in China reminds me a lot of what I witnessed firsthand when I lived in South Korea in the 1990s, before that economy’s crash in 1998.

Just as China now, South Korea was an immature, state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.

Fuelled by a steady diet of cheap money, these companies kept adding capacity with no regard to profitability or return on capital. They simply focused on producing more stuff and expanding their size. They employed more people, and everyone was happy.

But, all the while, they were borrowing more and more money, until eventually they collapsed under the debt load when liquidity dried up.

Before Korea, the exact same thing happened in Japan, and a giant, unsustainable debt binge brought the “miracle economy” to its knees.

But the Korean and Japanese debt bubbles are nothing compared to what we see in China today.

Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects.

Floor space per capita in China is now 30 square meters (about 320 sq. ft.) per person. Japan was at that level in 1988. And the economy burst the following year.

More astounding, this $16 trillion in credit is DOUBLE the $8 trillion in credit that China created in the previous 5,000+ years of its existence.

The Chinese government recognizes it has a problem. It realizes it can no longer keep the dam from breaking. And in the past week, it bit the bullet.

In the last two weeks, Chaori Solar and Haixin Steel were allowed to default, i.e. they weren’t bailed out.

This is the first time in China’s modern history they’ve had a default, let alone two. They can no longer keep the game up, and the dominoes are beginning to topple.

I cannot stress this enough. What we’re witnessing is a major paradigm shift.

Of course, the Chinese government claims they can control the impact of these “relatively minor” corporate defaults.

But as we saw during the sub-prime crisis in the Unites States, the complex web of inter-linkages in the financial system means they are playing with fire.

I expect many more defaults in China in the coming weeks and months. I expect some important Chinese financial institutions to get into trouble.

And I expect the Chinese government will completely lose control over the situation.

My recommendations are 2-fold:

1. If you have any exposure to Chinese stocks, or the Chinese Yuan, I strongly suggest you reconsider.

2. If you have investments in iron ore or copper producers, get out.

But it’s not all doom and gloom. It’s going to take time for China to suffer through this crisis. But, if the Chinese government lets the dominoes fall where they may, the country will be better off in the long term.

The lessons from markets such as South Korea and Indonesia, in aftermath of the 1997-1999 Asian economic crisis, are clear.

If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over.

And there will be lots of money to be made buying good-quality Chinese shares during the crisis. But, for now, it’s time to brace for the downturn.

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