How many more banking scandals will it take to make a change

This morning after my plane landed from Bangkok, I was having breakfast in the business lounge in Sydney and glanced at the local paper, The Australian.

The front-page headline told the story of yet another banking scandal:

“Cartel case nets six bankers”

The article was about how six prominent investment bankers in Australia colluded to defraud investors.

This comes the day after Australia’s financial regulator hit Commonwealth Bank with an AUD $700 million (~USD $525 million) fine for aiding criminal organizations to launder money.

And earlier this week the United States government slammed French bank Société Générale with a $1 billion fine for rigging interest rates and bribing Libyan government officials.

I’ll pause and acknowledge the obvious– banks are constantly screwing their consumers and violating the public trust.

That much is a given.

It’s been proven time and time again that banks lie, cheat, steal, and otherwise do whatever they have to do to make more money at our expense.

They manipulate markets. They make wild bets with their customers’ savings. They engage in accounting tricks to make themselves appear financially healthier than they really are.

And if that weren’t enough, the banks have the audacity to treat us, the customers, as if we’re the criminals.

Completely normal, innocent bank transactions are viewed with suspicion and heavily scrutinized.

And if you’re adventurous enough to test this point, try withdrawing a few thousand dollars of your own money in cash and see if you feel like a valued customer.

Even for banks that behave with a modicum of decency, there’s still the simple fact that an average deposit account pays a laughable, minuscule amount of interest.

JP Morgan, Bank of America, and Wells Fargo all currently offer rates between 0.01% and 0.04% for checking and savings accounts.

Sure, interest rates in general are obviously low. But they’re no longer zero– the Federal Reserve has been gradually raising rates over the last 2 ½ years. Even short-term Treasury Bills pay nearly 2% on an annual basis.

Yet despite these steady increases, the biggest banks haven’t budged on how much interest they pay to their depositors.

In light of all this, there’s literally no reason to leave the bulk of your savings in a bank, especially with so many alternatives for savings and lending, including short-term bonds, blockchain, and Peer-to-Peer loan websites.

Yet in some sort of bizarre financial Stockholm Syndrome, most people still keep the vast majority of their savings in the very same banks who have a history of defrauding them.

This is pretty strange behavior. These banks are stealing your money, whether directly (Wells Fargo) or indirectly (in the case of the interest rate mismatch).

It’s not like this is some closely-guarded secret either. It’s all over the news, and the banks have admitted their guilt.

So people who don’t make any financial changes are deliberately choosing their captors over common sense.

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Nobody knows where the next crisis will erupt… here’s how to prepare

Last week, Paolo Savona, an Italian man no one outside the country had ever heard of, was denied the position of finance minister.

Italy’s President denied his appointment because Savona is anti-euro. The President believes Italy should remain part of the euro.

I wrote a Notes about the entire situation last week.

But the point I discuss in today’s podcast is that this situation should not have been a major deal… but it wreaked havoc across global markets. Even some of the world’s safest assets sold off.

So if this turmoil in Italy can cause such chaos, what will happen when there’s a MAJOR crisis?

How should you prepare?

The event that will end this 10-year bull market will catch almost everybody by surprise. That’s the nature of the beast.

So you must take time now, while you’re still thinking clearly, to come up with a game plan of how you’ll handle the next downturn. Because when the event comes, and stocks crater, it will already be too late… emotions will take over.

On the podcast, I discuss the types of questions you should be asking yourself and the decisions you should be making today.

I also share some of my experiences from my recent travels to Australia, the Philippines and Bangkok.

You can tune in here.

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America’s Long-Term Challenge #4: Erosion of the Middle Class

We’ve all seen the headlines: the middle class in the United States (and much of Europe for that matter) has been in decline for years.

CNN May 18, 2018: “Almost half of US families can’t afford basics like rent and food”
Marketwatch June 2, 2018: “50 million American households can’t even afford basic living expenses”
Wall Street Journal February 13, 2018 : “US households shoulder record $13.15 trillion debt”

This is the opposite of what we’ve witnessed here in Asia– an astonishing, almost unprecedented rise in the middle class.

In China, just 4% of the population was middle class in 2000 according to consulting firm McKinsey. By 2012, China’s middle class had exploded to 68% of the population.

Vietnam’s middle class has nearly doubled just since 2013. And there are similar trends across the region.

This is a pretty big deal, signaling not only a game-changing shift in global wealth and power, but also trouble ahead for millions of households on the edge.

My team and I have spent time combing through Federal Reserve data trying to explain this trend. And it’s worth starting with an obvious question: what does it mean to be ‘middle class’ ?

This varies from country to country. To be middle class here in Thailand is something entirely different than to be middle class in Denmark.

But in general, being middle class means you’re neither rich nor poor.

You earn enough money to be able to pay the bills without want or worry, enjoy modern conveniences and recreation, and still have some funds left over for savings and investment.

This a very delicate balance. And maintaining it depends heavily on the rate of inflation.

If wages rise faster than prices, the middle class thrives. If prices rise faster than wages, the middle class perishes. And that’s what’s been happening in the west, especially in the US.

Here’s a great example: housing. For the vast majority of people it’s their biggest expense. Most of us spend more on rent or mortgage than anything else.

Housing prices have obviously increased over time. But what’s really interesting is how much more rapidly home prices have increased over wages.

In late 2011, for example, the average home cost around 3.56 times the average salary in the US, according to data published by the Federal Reserve Bank of St. Louis.

By the end of 2017, the average home cost 4.73 times the average salary, even though mortgage rates were essentially unchanged.

In other words, even when you adjust for the fact that people are earning more, housing became 33% more expensive in just six years– and that doesn’t account for increases in property taxes, home owners association dues, insurance premiums, etc.

It’s the same with rent: back in 2000, the average monthly rent in the United States was 7.38 times the average weekly wage.

By 2017, rents had risen to 8.66 times the average weekly wage, an increase of 17%.

So even though people are technically earning more money, their money buys them less and less house.

Medical care costs show the same trend: in 2000, average annual medical care spending in the United States accounted for 10.8% of the average salary.

By the end of 2016, medical care consumed 15.5% of income, a proportional increase of 43%.

So again, people are earning more. But despite those wage increases, they’re spending 43% more on medical care than they used to.

My team and I spent some time analyzing the Department of Commerce’s “Personal Consumption Expenditures” (PCE) data series; the PCE is an account of consumer spending, and it is the Federal Reserve’s primary metric in measuring inflation.

In an ideal world, inflation would be 0%, i.e. prices would be stable, and the PCE wouldn’t budge. But that’s rarely the case.

Inflation (as measured by PCE) has averaged 2.4% per year for the past decade, and 4.8% per year since 1980.

Now, one would hope that, as consumer prices increased, wages would at least keep up.

But that hasn’t happened.

According to the Commerce Department’s data, inflation has exceeded wage growth for 33 out of the past 38 years, averaging a loss of 1.35% per year.

This is crucial. One or two years of losing 1.35% of your income’s purchasing power would be no big deal… just a rounding error.

But decades of this sustained erosion can really take a toll on the middle class. And it did.

In aggregate, inflation has outpaced wage increases by 66% since 1980. This means that the average American salary buys 66% less than it used to four decades ago.

People have made up for it by going into debt.

Back in 1980, the average amount of debt per worker in the US was 1.96 times his/her monthly salary.

Today the average American worker’s debt is 5.00 times his/her monthly salary.

Same theme– yes, people are earning more. But the amount of debt that they owe relative to their wages is more than 2.5x greater.

Simply put, this isn’t the path to prosperity. There are precisely zero examples from history of a major power achieving long-term economic success by slowly degrading its middle class.

This is a very long-term story.

Just like the gargantuan size of the national debt, the major funding crisis plaguing US pension funds (including Social Security), and the steady debasement of the currency, this slow erosion of the middle class will take years and years to play out.

But the impact of all these trends cannot be understated, as they will truly shape the history of things to come, both in the United States, and across the world.

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Three critical lessons from Europe’s recent mini-meltdown

Trying to trace the origins of the latest political crisis in Italy is like… well… trying to trace the origins of the decline of the Roman Empire.

There simply is no good starting point.

You can’t talk about the decline of Rome without a lengthy discussion of how destructive Diocletian’s Edict on Wages and Prices was in the early 4th century.

But you’d have to go further back than that and discuss all the lunatic emperors preceding him, all the way back to Caligula.

But you can’t talk about Caligula without bringing up the effects of the civil war between Octavian and Marc Antony… which was a direct result of the previous civil war between Julius Caesar and Pompeius Magnus.

Before long you’ve gone back in time more than 500 years trying to figure out why the Roman Empire collapsed.

Modern Italy isn’t so different. After all, this is a country so unstable that it’s had 64 governments in the seven decades since the end of World War II, averaging a new government every 14 months.

That has to be some kind of world record.

And to accurately diagnose how Italy ended up in such dire financial and political turmoil, you’d have to go back a -very- long way.

But for the sake of brevity, we’ll just go back to March. Italy held elections, and the “5-Star Movement” political party won the most seats… but not a clear majority.

This required them to establish a coalition with other political parties, which took weeks of haggling and negotiating.

But finally the 5-Star Movement was able to hammer out a deal and present a formal plan to Italy’s head of state, President Sergio Mattarella.

The President of Italy is almost purely a ceremonial role, like the Queen of England. But he does have the authority to reject key government appointments, including Prime Minister and Finance Minister.

And that’s exactly what he did– specifically opposing the nominee for Finance Minister, an economist named Paolo Savona.

Savona is a huge critic of the euro, and President Mattarella thought him too dangerous for the post.

Again, while the origins are more complicated than that, this is the basic plotline behind the most recent crisis.

Late Thursday night the Italian government announced a compromise, supposedly bringing an end to the uncertainty.

But to me, none of that matters. What I find -really- important is what an enormous impact this soap opera had across the world. And I think there are three critical lessons to take away:

1) On the day that the finance minster was rejected, financial markets worldwide tanked.

Italy’s stock market plunged 5%, which is considered a major drop.

But curiously, the stock market in the US fell as well, with the Dow Jones Industrial Average shedding 400 points. Even markets in China and Japan had significant drops as a result of the Italy turmoil.

Now, it’s easy to see why Italy’s markets fell. And even the rest of Europe. But the entire world?

Granted, a lot of people made a really big deal out of this event, concluding that it signals the end of the euro.. or Europe itself… or some other such drama.

Sure, maybe. But it’s almost impossible to foretell a trend as significant as ‘the end of the euro’ based on a single event.

At face value, the rejection of a cabinet minister in Italy should have almost -zero- relevance on economies as large and diversified as the US, China, and Japan.

To me, this is another sign that we’re near the peak of the bubble… and possibly already past it.

Markets are so stretched, and investors are on such pins and needles, that even a minor, insignificant event induces panic.

And it makes me wonder: if financial markets are so tightly wound that something so irrelevant can cause such an enormous impact, how big will the plunge be when something serious happens?

2) It wasn’t just stocks either. Bond markets were also keenly impacted.

Bear in mind that stocks are volatile by nature; prices move much more wildly than other asset classes.

But bonds, on the other hand, are supposed to be safe, stable, boring assets. Especially government bonds in highly developed nations.

In Italy the carnage was obviously the worst.

Investors dumped the 2-year Italian government bond, and yields (which move opposite to prices) surged from 0.9% to 2.4% in a matter of hours.

Simply put, that’s not supposed to happen. And it hadn’t happened in at least three decades.

Again, though, even in the United States, yields on the US 10-year note dropped 16 basis points overnight, from 2.93% to 2.77% (which means US bond prices increased).

That’s considered MAJOR volatility for US government bonds.

To put it in context, the only day over the past few YEARS that saw 10-year yields move more than that was the day after Donald Trump won the US Presidential Election in 2016.

So it was a pretty big deal.

Again, this leads me to wonder: if safe, stable assets like government bonds can react so violently from such an insignificant event, how volatile will riskier assets be when there’s an actual crisis?

Just imagine what’s going to happen to all the garbage assets out there (like unprofitable, heavily indebted businesses) when a real downturn kicks in.

3) Perhaps most importantly, nobody saw this coming.

Even just six months ago, it’s doubtful anyone would have predicted that the rejection of Italy’s finance minister would cause a global financial panic.

And yet it happened.

This is one of the most critical lessons of all: whatever causes the next major downturn can be something completely obscure and unpredictable. And no one realizes it until it’s too late.

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You might qualify for this unique second passport. But the window closes soon…

Today I’m going to share a unique, European-based idea that could set you up for decades to come… and could even benefit your children and grandchildren.

But it’s only available until the end of 2018.

First, let’s acknowledge that Europe is in a bit of a mess. I won’t dive into the nasty details of the political drama (you can find a good summary here).

But in short, a populist (and anti-EU) political party called the 5-Star Movement put forward Paolo Savona to be Italy’s finance minister.

Savona is an economist and former banker who is highly “Eurosceptic”, meaning he thinks that it’s a terrible idea for Italy to keep the euro as its currency.

Italy’s President, Sergio Mattarella, believes that Italy should remain with the euro. So he denied Savona and the party’s appointment for Prime Minister, opting for more mainstream appointments.

That’s when all hell broke loose. The 5-Star Movement and its allies the League were outraged, and some called for President Mattarella’s impeachment.

Now Italy’s government is in deadlock. And we could potentially see another election soon, with the populist alliance gaining even more power.

Financial markets are concerned that the problems in Italy (one of Europe’s largest economies) could spill into the wider euro area.

Billionaire George Soros summed it up saying that Europe is in the midst of an “existential crisis” and that “everything that could go wrong has gone wrong.”

But the investment idea I’ll share with you today will allow you and your family to prosper regardless of how bad the turmoil in Europe gets.

I’m not talking about a traditional investment, like buying stocks or bonds.

I’m talking about obtaining a passport.

Europe happens to be home to a number of countries that grant citizenship to descendants of their nationals.

For example, if you have Irish grandparents, it’s possible for you to obtain Irish citizenship too.

We’ve discussed a number of these options in the past. The one I want to tell you about today is Luxembourg– the tiny nation bordered by France, Germany and Belgium.

You’re probably not aware, but you can get a Luxembourg passport if you can trace your ancestry back to the country.

And while you may doubt you have any relatives from Luxembourg, there’s a better chance than you realize…

On the topic, a client came up to me at our recent event in Puerto Rico saying he was granted citizenship in Luxembourg because of the research we recently sent to our premium readers.

In the 19th century, Luxembourg lost one-third of its population to emigration. While the industrial revolution made other European countries rich, Luxembourg remained poor and rural. So its citizens left for the United States en masse in search of a better life.

The Luxembourg government crossed these people off their list of citizens without any notice.

But on October 23, 2008, the government of Luxembourg passed a new nationality law. The text stated that any person who had a direct-line ancestor born in Luxembourg in its modern borders (and who was alive on January 1, 1900) could now reclaim the citizenship their ancestor lost.

But the government only allowed a ten-year window to claim that citizenship.

And that window closes at the end of 2018. Bottom line, if you have a Luxembourg citizenship to claim, you must turn in your citizenship paperwork by December 31, 2018.

This eligibility applies to ANYONE… as long as you can trace your lineage back to Luxembourg.

Besides Luxembourgish, French and German are two other widely spoken languages in Luxembourg.

That’s why immigration officials in the early 1900s often wrongly documented Luxembourger immigrants as German or French.

Over time, many families grew to believe they had German or French heritage, while in reality they hail from Luxembourg.

(Wrongly denoting people as German instead of Luxembourger was especially common in the US.)

So, if you think you have German or French ancestry, but are not 100% sure, you might qualify.

Same thing if you think you’re Dutch. The Grand Dutchy of Luxembourg (as the country was once known) used to be part of the Kingdom of Netherlands, so people were often wrongly recorded as Dutch.

I always recommend you obtain a second passport as part of your “Plan B.” It’s a no brainer.

A second passport guarantees more freedom by granting you more options—to travel, live, work, invest, do business.

Even just for pure safety reasons… have you ever noticed that no one ever hijacks an airplane and threatens to kill all the citizens of Luxembourg?

Ultimately a second passport is like an insurance policy. You might never need it. But in the event you ever do, it may be one of the most valuable things you could ever have.

In other words, there’s no downside… regardless of what happens (or doesn’t happen) in Italy, or the rest of Europe.

And obtaining one through ancestry is the easiest, most cost effective ways possible.

Typically it also means that you can pass down your Luxembourg citizenship to your children and grandchildren as well. So future generations can benefit from the bit of legwork that you do today.

That’s a pretty big deal. There aren’t many things you can do in your life that will have a lasting impact on your family for generations to come. But this does.

And if you don’t qualify for Luxembourg citizenship, there are plenty of other countries that offer citizenship by ancestry like Italy and Poland.

If you want more information on these countries and their citizenship programs, I’d encourage you to check out this free article.

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The most interesting way to buy gold today

[Editor’s note: In today’s Notes from the Field, I want to share an excerpt from our premium intelligence – Sovereign Man: Confidential. We recently spoke with one of the world’s top gold experts. And he shared a specific gold investment that’s trading near historical lows and is one of the best ways to buy gold today, in my mind. I doubt you’ll hear about this anywhere else. Read on for the details…]

The beauty, value and heft of a gold coin in your hand is a real pleasure, and it holds real value. I’ve got a fair number of them in my home safe. They’re immediately accessible, valuable and liquid. If I have to, I can quickly turn them into cash.

There are two general types of gold coins – bullion and numismatics.

Bullion coins are the most well-known in the market– US Eagles, Canadian Maple Leafs, etc. These coins are valued almost exclusively on their gold content. For example, a one-troy-ounce Canadian Maple Leaf gold coin typically sells for very close to the spot price of gold… you pay a little more for the workmanship that went into creating the coin and a small premium to the dealer for his services. (A troy ounce, which likely derives its name from the Troyes market in France, is equal to 31.103 4768 grams, or about 1.0971 regular ounces.)

Bullion coins are usually manufactured annually by the government’s mint. So they’re not considered rare. But they’re the cheapest and most-liquid way to invest in physical gold.

Then you have numismatic coins — also known as rare or collectible coins. Examples include:

• Pre-1933 $20 or $10 Eagle/Liberty coins
• Peace Silver Dollars
• British Sovereigns

Like bullion, numismatics also have value because of their metal content. But the biggest determining factor in their price is their rarity. Unlike with bullion coins, government mints aren’t churning out any more 1933 Indian Head Buffalo (Bison) “Hobo” nickels.

In addition to rarity, collectible coins are also valued based on their condition, and whether or not they were circulated. Some of the most sought after coins sell for millions of dollars apiece.

The ultimate authority on numismatics is my friend, renowned coin expert Van Simmons of David Hall Rare Coins. He literally helped create the standard for grading and pricing collectible coins. In 1985, Van co-founded a company called Professional Coin Grading Service (PCGS) to standardize coin grading based on factors such as luster, color and preservation.

And PCGS has evaluated nearly 40 million coins – and continues to grade more and more each and every day. So, trust me when I say Van knows a thing or two about collectibles. (And if you have coins that you want evaluated, do not clean them first. Graders like to see coins in their natural state.)

Now, you might not have $20,000, $45,000 or $65,000 to drop on more premium collectible coins. But that’s OK because there are lots of deals in the lower-end of the market today.

Right now, due to the fact that the gold price has been fairly stagnant for the last several years, certain collectibles are selling for incredibly cheap premiums, as low as $50 over spot price of gold.

This is a big deal: You’re essentially paying bullion prices for a collectible.

Think about that: you can buy a rare coin which has TRUE scarcity for nearly the same price as brand-new coins that are churned out year after year. And you’ve essentially got a free call option on the market realizing its rarity value…

Van says MS 64 $20 St. Gaudens gold pieces are one of the best deals on the market today, selling at historically low premiums over spot. (The sculptor, Augustus Saint-Gaudens, died before the coin was ever struck, which adds to the mystique.) The MS in the description means “Mint State,” and corresponds to the numerical grades MS60 through MS-70. These are the highest-quality numismatics, ones that have never been in circulation. A Mint State coin can range from one that is covered with marks (MS-60) to a flawless example (MS-70).

You can get these coins for about $1,450 today.

But consider this… When gold was $275 an ounce in the late 80’s, these coins sold for $2,000 apiece.

In 2011, when the price of gold was around $1800, these coins were selling for about $2,460.

So the premium was as high as $1,700 per coin (not including broker fees). Today, that premium is around $100 a coin.

If gold price heat up again and demand increases, the premium for this coin could easily increase back to $300 to $500 above spot. In other words, you’d make money TWO ways – due to the increase in gold prices and due to the increase in premium.

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094: How to wait out the financial mania in safety

In today’s podcast, I share more thoughts on Puerto Rico including my experiences opening a business there.

While the island has its problems, I’m still bullish on the long-term future given Puerto Rico’s incredible tax incentives (especially after meeting with their government leader and seeing how open they are to productive people moving in).

I also harp on the latest drama in Argentina…

Less than a year after issuing 100-year bonds, the country (which has a long history of default) is in economic turmoil. And the largest investors who bought these bonds – including JPMorgan and Fidelity – are sitting on huge losses.

These huge investors are so starved for yield, that they willingly lent money to a default-prone government for 100 year. But, as individuals, we have much better options to earn a decent return… with DRASTICALLY less risk.

I share a few of those options near the end of today’s discussion.

You can listen here…

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Why you’re likely exposed to one of the dumbest investments in history

Last June, in one of the most egregious displays of economic insanity, Argentina was able to raise $2.75 billion by selling bonds with a ONE HUNDRED YEAR maturity.

Even more miraculously, the bond turned out to be wildly popular with investors.

So basically investors willingly forked over billions of dollars to a country that has a history of defaulting on its debt, confiscating private assets, and engaging in rampant corruption… for an entire century.

It’s as if everyone was oblivious to Argentina’s past. The country has defaulted twice just in the last twenty years, and eight times since its independence in 1816.

So the chances that Argentina DOESN’T default within the next century (or even the next decade) is slim to none. And slim’s out of town.

11 months later, reality is starting to set in.

Investors have begun to realize that Argentina doesn’t actually have any money, that inflation is more than 25%, and the central bank has blown through $8 billion (more than twice the amount of the bond issuance) trying to prop up their weak currency.

Oh yeah, and the Argentine government has asked the International Monetary Fund (IMF) for an emergency $30 billion credit line to remain solvent.

The worse things get for Argentina, the deeper the bond plunges in value; earlier this month it was worth about 83 cents on the dollar.

And while making 100-year loans to an insolvent country with a long history of default is especially insane, it’s important to realize there are a lot of “Argentinas” out there today.

For example, more than 20% of the companies in the Russell 2000 index and nearly 10% of S&P 500 companies need to borrow money just to pay interest on their debts.

Plus a full 50% of the entire, investment-grade corporate debt market ($2.5 trillion in paper) is rated just one notch above junk.

And what do troubled governments and companies do to get out of this jam of too much debt? They borrow more money…

But that becomes more difficult and expensive as interest rates rise.

Rising interest rates mean heavily indebted companies and governments have to borrow even MORE money just to pay interest on the money they’ve already borrowed.

And this cycle only compounds the problem.

Now, you might be thinking, “OK Simon, but big deal. I’m not dumb enough to buy Argentina’s bonds, or invest in loser companies.”

Great. And that’s probably true.

But due to the interconnectedness of our modern financial system, even if you’re not DIRECTLY buying a toxic asset, you’re probably exposed to someone else who is.

Think about it: even if just you own a basic index fund, you’re exposed to dozens of insolvent companies.

Your life insurance company. Your pension fund. Your bank. The fixed-income mutual fund where you invested your retirement savings.

Any of these could have easily scooped up a bunch of Argentina bonds. Or loaned money to any number of countless insolvent businesses or governments.

Ever heard of JP Morgan? They loaned money to Argentina.

So did Fidelity and Invesco. And those are just a few of the big names.

You don’t have to be crazy enough to buy a toxic asset. You’re probably already exposed merely if one of your financial counter-parties was crazy enough to do so.

It was the same phenomenon back 15-years ago prior to the Global Financial Crisis.

In the early 2000s, banks were providing no-money-down mortgages to borrowers with pitiful credit, then rolling thousands of these loans together into gigantic bonds.

These bonds became some of the most popular investments in the world.

My guess is that you probably didn’t own a single one of those toxic bonds.

But your bank did.

So did your pension fund. Brokerage. Or some company that you might have invested in, like Lehman Brothers or AIG.

(Lehman went bankrupt, and AIG has never recovered from its losses.)

You were financially exposed to somebody else’s stupidity.

And due to the incredible lack of transparency in the banking system, the truth is, you’ll NEVER know if you’re exposed to these risks.
Bernie Madoff is an even better example…

Some people lost every penny they had, and they hadn’t even heard of Bernie Madoff.

But they had money in a pension fund that invested in some feeder fund that gave money to Bernie.

They were three degrees of separation away from Madoff and they STILL got wiped out.

The reality is, you’re exposed to this stupidity whether you realize it or not because you’re probably exposed to someone else who’s invested in this financial lunacy.

That’s one of the reasons I’m holding so much cash outside of this complex, interconnected system.

Specifically, I’ve been buying 28-day Treasury bills for most of the last eighteen months.

These T-bills are basically like a 4-week certificate of deposit that’s held by the Treasury Department.

I make just under 2% per year, and I know exactly who my counterparty is: Uncle Sam.

That’s compared to 0.02% in a checking account, and I have no idea what’s on that bank’s balance sheet.

Now, if you’ve been a reader of this letter for more than a week, you know I have zero confidence in the US government’s ability to repay its massive debts over the next several decades.

And I think you have to be certifiably insane to buy a 30-year bond issued by the US government. That’s way too far out into the future.

But 28 days? That’s pretty low risk. However you feel about Donald Trump, he’s probably not going to default by next month.

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America’s long-term challenge #3: destruction of the currency

On April 2, 1792, George Washington signed into law what’s commonly referred to as the Mint and Coinage Act.

It was one of the first major pieces of legislation in the young country’s history… and it was an important one, because it formally created the United States dollar.

Under the Act, the US dollar was defined as a particular amount of copper, silver, or gold. It wasn’t just a piece of paper.

A $10 “eagle” coin, for example, was 16.04 grams of pure gold, whereas a 1 cent coin was 17.1 grams of copper.

The ratios between gold, silver, and copper were all fixed back then.

But if we apply today’s gold price of $1292 per troy ounce, we can see that the current value of the original dollar as defined by the Mint and Coinage Act of 1792 is roughly $66.75.

In other words, the dollar has lost 98.5% of its value since 1792.

What’s incredible about this constant, steady destruction of the currency is how subtle it is.

Few people seem to notice, because modern day central bankers try to “manage” inflation between 2% to 3% per year.

2% to 3% per year is pretty trivial. But it happens again the next year. And the year after that. And the year after that.

After a decade or so, it really starts to add up.

But there’s an important, other side of the equation: income.

Costs are clearly rising. And it’s fair to say that incomes have been rising too. But which one has risen more?

In 1982, back when I was a toddler, the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website.

So a Mustang today is around 4x as expensive as it was 36 years ago.

US Labor Department data from 1982 shows that average earnings were $309 per week, or $16,086 per year. That was enough to buy 2.45 Mustangs.

Today’s earnings are $881 per week, or $45,812 per year. That’s only enough to buy 1.78 Mustangs.

So when denominated in Ford Mustangs, people’s incomes have fallen 27.3% since 1982.

More recently than that, say, back in 2005, an entry level Mustang cost $19,215 at a time when average wages were $40,664 per year– or 2.12 Mustangs per year.

So even since 2005, average income levels have fallen 16%.

Obviously this trend doesn’t just apply to Ford Mustangs.

If we look at housing in the United States, we can see that the median home price in 2003 was $186,000 (according to Federal Reserve data) at a time when the Labor Department reported average weekly wages of $620.

So that was roughly 0.173 houses per person per year.

Today the median home price is $328,000, with average wages of $881, or 0.139 houses per person per year.

That’s a decline in income of 19.6% over the last 15 years.

Again, it’s a slow, subtle destruction. But over time, inflation REALLY adds up. Over the long-term, the average person becomes poorer.

We can view this trend anecdotally as well. Back in the 1950s and 1960s, it was common for a man to go out into the work force and support his entire family.

On a single salary, the average American family could afford a home, a car, modern technology at the time, savings, and even a summer vacation.

Today it’s normal for both spouses in a family to have full-time jobs, just to make ends meet.

Data from Pew Research shows that 70% of American households (married couples with children) back in 1960 were single income, i.e. only the father worked.

Today, 60% of households have BOTH spouses working.

And given the other statistics we routinely see about how the average US household has very little savings and is loaded down with debt, they’re barely making it even with TWO incomes.

That’s because inflation has slowly robbed people’s livelihoods.

What’s truly bizarre is that this exact same inflation is actually OFFICIAL POLICY.

Both central bankers and politicians deliberately try to engineer inflation, and they formally disclose this to the public.

The Fed announces its “inflation targets”, and economists panic if inflation is too low… or even worse, if there’s “deflation” and prices fall.

The government actually has a vested interest in inflation. They like rising prices because the national debt is so obscenely large.

The idea is that, if the government borrows $10 billion today on a 30 year term, they want the value of that $10 billion to be as little as possible three decades from now.

So a slow, steady destruction of the currency is actually to their benefit; the government wants to be able to inflate the debt away.

But as consumers, we prefer falling (or at least stable) prices. Price stability ensures that people’s purchasing power remains the same.

Rising prices are destructive, rewarding those who go into debt (like the government) at the expense of anyone who has been responsibly saving.

Think about it– if you put $100 in a savings account 10 years ago, you wouldn’t be able to buy as much with it today as you could have back then. Saving money actually COSTS you purchasing power.

The month-to-month and year-to-year variations on inflation will be all over the board. But the long-term trend is pretty clear: prices continue to rise.

And it’s fair to say that no nation or empire in history has ever been able to prosper by slowly destroying the value of its currency.

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HUGE opportunity in Puerto Rico… and the developed country whose looming debt crisis is far worse

We just finished a really -sensational- conference here in San Juan over the weekend showcasing Puerto Rico… with all of its challenges and opportunities.

We’ve talked about this before– Puerto Rico is an attractive place to live and do business thanks to some forward thinking tax incentives which stem from its unique status as a US territory.

All US territories, including Puerto Rico, American Samoa, US Virgin Islands, etc. are technically part of the United States.

But unlike the 50 states, US territories have their own tax systems and are NOT subject to US federal income tax.

So whereas a resident of California will pay BOTH California state income tax as well as US federal income tax, a resident of Puerto Rico (in most cases) will ONLY pay Puerto Rican tax.

Until a few years ago there was very little difference; tax rates in Puerto Rico have traditionally been VERY high, so no rational person would have moved to the island trying to avoid taxes.

Then, in 2012, the Puerto Rican government began passing a series of tax incentives; the most famous of them are Acts 20 and 22, though there are many more.

Act 22 allows qualifying individuals to move to Puerto Rico and pay 0% tax on certain investment income.

This is perfect if you’re an investor, trader, or possibly even a crypto speculator. You can buy and sell securities and pay 0% capital gains, living in Puerto Rico TAX FREE.

And because you’re domiciled in Puerto Rico, you’ll owe no tax to the IRS either.

The other one is Act 20, under which entrepreneurs can move to Puerto Rico, set up a qualifying business, and be subject to a corporate tax rate of just 4%.

And if you’re domiciled on the island, dividends that you pay to yourself are tax free… which means your effective tax rate on corporate and dividend income altogether is just 4%.

Several years ago I was skeptical of these incentives; I figured that the government would just reverse the laws and clawback the taxes.

But that didn’t happen. In fact, all of the incentive laws have survived a change of administration, and the new administration has expanded them even more.

The tax incentives have also held up in court as well, so they’ve really been tested thoroughly.

What’s interesting about Puerto Rico right now is that the island has been in a heap of trouble.

Starting in August 2015, the government began a wave of defaults on official debt; total obligations, including government bonds, related debt, and pension liabilities, is about $140 billion.

That’s a lot of money in Puerto Rico; the size of the entire economy here is just $105 billion… so the liability is incredible.

This debt crisis has caused a significant recession over the last several years.

The Hurricane Maria came in and basically wiped the place out. It took months just to restore power to most of the island… and they’re still not at 100%.

Between the storm and the long-term economic morass, locals have been leaving the island left and right.

Several hundred thousand people moved away just in the second half of last year, and the population has fallen by more than 10% since 2000.

In light of a natural disaster, major debt crisis, and a declining tax base, a lot of governments would have resorted to radically increasing tax rates… what I call ‘economic cannibalism.’

But that’s not what they did here.

In Puerto Rico they doubled down on the tax incentives– expanding them, making them more attractive, and working on cutting rates for ALL workers and businesses.

We had some of the most senior officials from the government at our event– including the Acting governor and several key cabinet secretaries, literally passing out business cards making personal invitations to our investor group.

Their message was clear: Puerto Rico is open for business. There are challenges, but also a tremendous amount of opportunity.

And they’re willing to work hard to make sure that talented people have access to those opportunities… and can KEEP what they EARN.

The senior ranking politician on the island, in fact, told us privately that he views himself as a Libertarian, and his goal is to cut regulation and shrink the size of government.

So far their efforts are working.

Thousands of productive people have already come to the island through the various tax incentive programs.

(One of my many businesses, in fact, is based in Puerto Rico; there have definitely been a few bumps in the road dealing with some local bureaucracy, but overall it’s been a solid experience.)

And the Secretary of Economic Development and Commerce told us that applications are up 200% year over year.

This is a VERY good trend that should create more economic activity, more jobs, and more wealth for everyone.

Peter Schiff came to the event as well; he’s an old friend of mine and also has a similar business in Puerto Rico, and he talked about his experiences living and doing business on the island.

He also made some interesting points about Puerto Rico’s debt.

The media makes a big deal about the fact that Puerto Rico has so much debt. And it does.

But who has even more debt than Puerto Rico? The United States of America.

At $21 trillion, the US national debt is FAR larger than Puerto Rico’s.

And if you add America’s unfunded pension liabilities (according to the Treasury Department’s own data), the total debt is $70 trillion.

That’s over $200,000 for every man, woman, and child in America.

Yet in Puerto Rico, the per-capita obligation is about $45,000.

Puerto Rico is getting all the bad press right now for its debt crisis.

But it’s only a matter of time before the world realizes that the US federal government is in far worse shape.

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