No one has ever lost this much money in all of human history

As you you’ve no doubt seen by now, shares of Facebook plunged around 19% this morning.

In fact it was down as much as 25% in after-hours trading, wiping out $120 billion of wealth in a matter of minutes.

To be clear, that is the largest single-day loss of value ever seen in the history of the world.

(And Mark Zuckerberg’s net worth fell by $17 billion as a result… though I doubt he’s going to be missing too many meals anytime soon.)

The company announced disappointing earnings and slowing growth, which spooked investors.

And while most of the mainstream media is focused on what this means for Facebook and other tech stocks, I’m much more concerned about what this means for -all- assets.

In fact, I think today marks a MAJOR turning point for the “everything bull market” that’s been going on for ten years.

Stocks in particular have been rising for years, led primarily by the most popular “FAANG” tech companies– Facebook, Apple, Amazon, Netflix, and Google.

These companies have been pushed to absurd limits.

Netflix is always a great example: the company loses billions of dollars each year and burns through shareholders’ money, yet the market has constantly pushed its stock to new heights.

Then one day Netflix reported less-than-stellar growth, and the stock tanked. Poof. Billions of dollars of shareholder wealth vanished in an instant.

Now it’s happened to Facebook.

This is an important lesson: when a bubble bursts, there can be a lot of pain… very quickly.

By the way, it’s useful to point out that the FAANG companies have essentially been propping up the entire stock market.

Other sectors, like banking, pharmaceuticals, transportation, homebuilders, etc. have all been struggling.

But because these FAANG companies comprise such a disproportionately large share of a stock index like the S&P 500, the strong performance of just those five companies has lifted the rest of the market.

Now, the invincibility of at least 2 out of those 5 high-flying tech companies has been pierced.

Think about that: investors have lost confidence in 2 out of the 5 companies that have almost single-handedly been propping up the rest of the market.

That’s a pretty compelling sign that the top may be behind us.

It’s not just stocks either: take a look at real estate, which has also been in a bull market for most of the last decade.

Just recently the US Census Bureau and Department of Housing and Urban Development announced that new home prices in the United States continued to slide for the third straight month, to a level not seen since February 2017.

Sales of new homes have dropped to an 8-month low.

Now real estate is extremely local; the market in San Francisco is entirely different than in Tulsa.

But, nationwide, there’s strong evidence to suggest that real estate is either in decline… or grinding to a halt.

This makes sense when you step back and look at the big picture. Nothing goes up in a straight line forever. Not stocks. Not real estate. Not anything.

There always have to be periods of corrections… booms followed by busts.

And when you see so much compelling evidence that a bust is coming, it makes sense to find intelligent ways to sit on the sidelines… because there will be phenomenal buying opportunities to come.


from Sovereign Man

Second passports now a “trophy” for the ultra-wealthy

I have to chuckle a bit…

The mainstream media is now picking up on the idea of a second passport; and even adopting the Sovereign Man ethos of having a “Plan B.”

Bloomberg published a widely-distributed article with the headline:

Where the Super-Rich Go to Buy Their Second Passport

The article begins…

Cheaper than a Gulfstream, nimbler than a superyacht, a second passport—or a third or fourth—has become another trophy for the ultra-wealthy.

The article even quoted a lawyer specializing in second citizenships as saying:

If you have a yacht and two airplanes, the next thing to get is a Maltese passport… It’s the latest status symbol. We’ve had clients who simply like to collect a few.

There’s even an accompanying video that shows beautiful people drinking cocktails in exotic locations and doing backflips off a cliff into Caribbean-blue water.

Finally, there’s a table of the 10 “CIP” – citizenship by investment – programs available around the world. These are countries that will grant you citizenship (which comes with a passport) for cash, an investment in a local business or real estate or some combination of the three.

Austria tops the list with a total cost of nearly $24 million for a passport. Cyprus is next at $2.375 million.

And the article was picked up by news outlets all over the US, India, China and the UK. It’s no surprise… it’s sexy to think of international playboys yachting around the Caribbean to collect citizenships.

But, if you haven’t already guessed, the idea of the super wealthy collecting passports as a status symbol is laughable to me. I know it happens. If you’re a billionaire, dropping $26 million for an Austrian and Cypriot passport is nothing.

But the idea that a second passport is only for billionaires is absurd. I believe having a second passport is important for everyone, because it grants you more freedom.

I got my first, second passport from Italy over 17 years ago… and, by the way, it was completely free.

I was able to get an Italian passport, one of the most valuable in the world, because I have Italian ancestors (more on this in a moment).

And I didn’t do it as a status symbol. I did it because having a second passport is the ultimate insurance policy.

It ensures that no matter what, you always have a place to go. To live. To work. To do business. To retire. And in some cases, even seek refuge.

It also allows you more banking options, so you can move money out of your home jurisdiction (protecting your friends from frivolous lawsuits and overreaching governments).

And even if you never end up needing or using your second passport, you will never be worse off for acquiring one.

That’s the whole idea about what I (and now Bloomberg) call a Plan B… there are simple steps you can take to put yourself in a position of strength, no matter what is happening in the world. And you won’t be worse off for taking these actions.

It’s been the core principle behind Sovereign Man since we began over nine years ago.

But back to second passports…

Buying a citizenship is only one way to obtain your second passport. By the way, I struck a deal with a Caribbean nation, making Sovereign Man the lowest cost provider of a second passport anywhere in the world. It’s a service we only offer to our Total Access members – our highest level of membership.

Like me, you can also get citizenship through ancestry. If you have ancestors from England, Italy, Ireland, Hungary and a host of other nations… you could get a valuable, second passport for free.

You can also move to certain countries, apply for residency, then earn a citizenship through naturalization – like Chile (where I currently live), or in Panama.

So don’t let Bloomberg’s portrayal of a second passport as only for the mega wealthy discourage you. It’s a perfectly reasonable, and often very affordable, thing to do. And very few things in this world offer you more freedom or protection.

If you want more information on second passports and the different ways you can obtain them, you can use this free resource on the Sovereign Man website.


from Sovereign Man

Two giant US pension funds admit there’s a BIG problem

I’ve been talking a lot about the looming pension crisis…

My short thesis is, if you’re depending on a pension for your retirement, it’s time to start looking elsewhere.

Pensions are simply giant funds responsible to paying out retirement benefits to workers.

And today, the nation’s 1,400 corporate pension plans are facing a $553 billion shortfall. And, according to Boston College, about 25% will likely go broke in the next decade.

Think about that… A full one-quarter of US, non-government employees expecting a pension to fund their retirement will likely get zilch.

And it’s even worse for the government…

According to credit-rating agency Moody’s, state, federal and local government pension plans are $7 trillion short in funding.

The reason for this crisis is simple – investment returns are too low.

Pensions invest in stocks, bonds, real estate, private equity and a host of other assets, hoping to generate a safe return.

But with interest rates near their lowest levels in human history, it’s been difficult for these pensions to generate a suitable return without taking on more and more risk.

And that’s another big problem with pensions – their investment returns are totally unrealistic.

Most pension funds require a minimum annual return of about 8% a year to cover their future liabilities.

But that 8% is really difficult to generate today, especially if you’re buying bonds (which is the largest asset for most pensions). So pensions are allocating more capital to riskier assets like stocks and private equity.

And so far it’s working.

The California State Teachers’ Retirement System (CalSTRS) and California Public Employees’ Retirement System (CalPERS) both earned more than 8% for the second fiscal year in a row. CalPERS is the largest public pension in the US. And, together, the two funds manage $575 billion for 2.8 million public workers and retirees.

Two 8%+ years isn’t the norm. Over the past 10 years ending June 30, CalSTRS returned an annualized 6.3% a year – well below its target. And CalPERS has returned a dismal 5.1% over the same period.

And that’s been with the tailwind of one of the longest equity and fixed-income bull markets in history.

It’s clear these inflated gains can’t last.

And the two California pension giants are even admitting the game is up.

No, no more 8% target return, as we teeter on the edge of what could be the largest market correction of our lifetime.

CalSTRS is making the bold move to drop its future goal to… 7%.

And CalPERS is ratcheting down its return goals in steps to… wait for it, 7% by 2021.

Listen, it’s a nice gesture for these big funds to lower their expected returns and admit things are tough out there.

But 7% is still totally unrealistic. And that’s not even taking into account the tough times I see ahead for markets. Pensions haven’t been able to hit a 7% in the best of times.

As of June 2017, the 10-year annualized median return for all public pensions tracked by the Wilshire Trust Universal Comparison Service was 5.57%,

That’s nearly 250 basis points below the 8% target.

But there’s another way pensions make money… they collect funds from active workers and taxpayers.

When these funds drop their return expectations, it has real life implications. With a lower, projected return, a pension fund needs more cash to pay out its future liabilities.

For example, CalPERS, which is dropping its expected return to 7% by 2021, said the state and school districts paying into the pension will have to pay at least $15 billion more over the next 20 years once the 7% target kicks in.

So, people depending on a pension not only likely won’t get the money owed to them in the future… but they’ll also get stuck paying more into the system today. It’s a true lose/lose.

Our goal at Sovereign Man is to put our readers in a position of strength.

And if you’re expecting a pension to pay for your retirement, you need a contingency plan today.

Last month, I outlined a series of steps you can take, right now, to improve your financial situation – like improving investment returns and alternative retirement account structures.

Personally, I’ve been selling assets to raise cash. In fact, I’m sitting on more cash than at any other point in my life.

I’m sitting in cash because I’m worried we could see another recession very soon.

And being liquid at a market bottom is one of the best ways to get really rich – you can buy the world’s best assets for pennies on the dollar.

But here’s the best part… I’ve structured my cash holdings so I’m still earning a solid return – better than a lot of these pension funds. But I’m remaining liquid and taking on very little risk.

If you want to know more about what I’m doing with my own money, and why I’m sitting on so much cash, just click here…


from Sovereign Man

One of the most outrageous investment deals I’ve ever been offered

One of the biggest banks in the world – a name you would certainly know – just pitched its top clients on a major investment.

The deal was only offered to its private clients (with at least $50 million in net assets); and as I started reading through the opportunity, I started to understand why…

We talked about this in a recent podcast: this particular deal was a $500 million real estate investment.

Essentially the deal was to buy and renovate a building in New York City. And when I dove into the numbers, I could see they were paying a record high price for the property, and over $1,000 per square foot to renovate it.

None of this made any sense to me.

It often costs less than $100 per square foot– ten times less– to BUILD a place from scratch.

They were spending $1,000 per square foot just on renovations. That’s insane.

And it comes at a time when the price of real estate in Manhattan has never been more expensive.

And here’s the best part…

The bank expects this to be a five-year project. So, even if we’re not currently at THE top of the market, reaching the top within the next five years is almost a certainty.

Real estate, like all assets, moves in cycles. Properties go through boom and bust periods, ups and downs. They typically last 7-10 years, though sometimes shorter or longer.

We’ve been in an up-cycle for 10 years. This means that, when the building is complete in five years, they’re probably going to be selling into the bottom of the market.

I’m scratching my head because these aren’t stupid people. The bankers aren’t stupid. The investors aren’t stupid.

And yet, this entire deal is just crazy.

What’s really crazy is that they’ll succeed in raising the fund. This deal is going forward.

It’s a sign of the top, to me, that a deal like this even exists. The fact that it’s probably going to get funded makes it even worse. This is one of those anecdotes that shrieks an extreme top of the cycle.

And this is just one example. Signs of the top are everywhere you look…

Just open the pages of the Wall Street Journal and you’ll see plenty of headlines that make you wince, like this one:

Perks for Plumbers: Hawaiian Vacations, Craft Beer and ‘a lot of Zen’

The demand for construction is so high (and you can’t build a building without plumbers) that companies are offering plumbers expensive beer and Hawaiian vacations to come to work.

Oil workers in the Permian Basin are getting 100% pay raises. The percentage of the population getting elective, cosmetic surgery is at an all-time high. People are buying pleasure boats and yachts at a record clip.

These are the things people buy when they are feeling really confident and rich.

And of course, there’s the $500 million deal to buy an obscenely expensive NYC skyscraper, renovate it and sell it into a declining market.

I think it’s time to be cautious. Excessive boom cycles are invariably followed by busts, and it’s foolish to think that this time is any different.


from Sovereign Man

Government’s already-dismal budget forecast just got 106% worse

Yesterday the Office of Management and Budget released a new report called the “Mid-Session Review” of the US federal budget.

It’s something they’re required by law to do– periodically review and update the government’s budget and track the changes.

The last government budget update was released in February. And according to the February budget, the government’s deficit for this fiscal year was going to be a whopping $873 billion.

Now they’re projecting to close this fiscal year (which ends on September 30th) with a deficit of $890 billion… which means they’re over-budget by just under 2%.

2% is actually pretty good. But here’s the problem: when they first unveiled the FY2018 budget in March of last year, they projected the annual deficit to be ‘only’ $440 billion.

So between their initial projections in March 2017, and their current projections in July 2018, this year’s budget deficit increased by more than 100%.

And that’s pretty pitiful.

But it gets worse.

Last March, they projected a total budget deficit of $526 billion for Fiscal Year 2019.

But according to the revised projections they published yesterday, the budget deficit for Fiscal Year 2019 will now be $1.085 TRILLION… 106% worse than projected.

And, whereas last year the government was forecasting DECLINING deficits in Fiscal Years 2020, 2021, etc., until miraculously reaching a positive budget SURPLUS of +16 billion in 2026, their updated projections now show TRILLION DOLLAR DEFICITS next year. And the year after that. And the year after that. Etc.

Bear in mind that even though this revised budget is a colossal train wreck, the projections still don’t factor in the possibility of a recession. War. Major emergency. Natural disaster. Financial crisis.

These forecasts assume that all big picture and macroeconomic trends are going to be fantastic for the next decade.

We’ve lately been talking about the concept of assets being ‘priced to perfection’.

‘Priced to perfection’ is a financial term meaning that assets are valued as if business conditions will be perfect forever.

Investors simply assume that the business plan will be successfully achieved without any difficulty, that sales will be strong, consumers will be happy, the economy will remain robust, etc.

And as a result of these pie-in-the-sky assumptions, investors pay record high prices for assets.

Well, these budget projections are priced for perfection.

They don’t take into account the possibility of any number of major risks that are looming, not to mention the enormous capital investments that are necessary in the United States.

US infrastructure, for example, is in desperate need of serious multi-trillion dollar maintenance.

Then there’s that pesky issue of Social Security, which presently has a funding gap of tens of trillions of dollars, according to the government’s own financial statements.

If you factor in even a fraction of these costs, the budget numbers… which are already gruesome… fall off a cliff.

The government has no Plan B. In fact, their Plan A, literally, is to have trillion+ dollar deficits and expect that there won’t be any consequences.

This is ludicrous.

There has never been a major superpower in the history of the world, from Ancient Rome to the French monarchy of Louis XIV, that has been able to run wild budget deficits without paying a serious toll… or passing those costs on to the people.

Sooner or later these bills have to be paid, whether that means higher taxes, dramatically reduced benefits, serious inflation, a loss of confidence in the currency, etc.

There are hundreds of ways this could play out, and it’s impossible to predict precisely how or when.

We only know for certain that there WILL be an impact.

It will likely take several years. But expecting to be able to run trillion dollar deficits and an insolvent pension fund without any consequences forever and ever until the end of time is totally absurd.

This is why, even though the government doesn’t have one, it makes all the sense in the world for -you- to have a Plan B.


from Sovereign Man

Billionaire Druckenmiller: “Can we try capitalism? Real capitalism. Give it a chance”

Over the weekend I came across a recent speech given by hedge fund billionaire Stanley Druckenmiller that really lays out the pitiful state of free markets around the world.

Druckenmiller gave the speech a few months ago upon receiving the 2018 Alexander Hamilton award– which is given to a figure that best carries out the spirit of one of America’s Founding Fathers.

The Alexander Hamilton Institute promotes free markets, free trade and limited government.

And Druckenmiller’s speech below is an excellent discussion of where our economy stands today and how government intervention is grossly distorting the economy– not just in the US, but around the world.

I couldn’t agree more with his sentiment. I’ve edited the piece for length, so this is just a series of excerpts. But there’s a link to the full speech at the bottom:


Can we try capitalism? Real capitalism. Give it a chance.

Not the increasingly bastardized version we have been practicing the last two decades.

And then let’s just see whether a capitalist economic system is the most effective way to bring about broad-based prosperity and the flourishing of human dignity.

For eight years I watched the Obama administration disparage the efficacy and fairness of capitalism.

The influence of government increased in every aspect of our lives.
The cost of regulation doubled. Corporate America was attacked in the name of social equality.

And our healthcare system, hard to believe, was made even more inefficient.

Now, I did not support Donald Trump. But, after he was elected, I was at least hopeful that it would represent an inflection point in the trend away from capitalism.

But . . . we missed the golden opportunity to offset some revenue loss and address generational equity when Congress passed tax reform.

Instead, government debt, which has doubled over the last decade, is set to increase to levels only reached during World War II over the next decade.

So we will have sacrificed our future during a relatively peaceful economic period . . . simply because politicians can’t say no.

Finally, let me address a distortion that is one of the greatest threats to a properly functioning capitalist system.

For years now a mix of financial repression and central bank intervention has made long-term interest rates largely determined by government fiat.

Bond-buying by central bankers, commonly referred to as Quantitative Easing (QE), has become so ingrained in current thinking that it is now in the Fed’s conventional toolkit– a tool once reserved for a depression or financial crisis is now to be used at the first inkling of the next recession.

For those of us old enough to have seen the dangers of price controls, they led to shortages, wasted resources, and disincentives to invest in what consumers want.

They inevitably led to an allocation of resources by political actors in another great afront to capitalism.

So, it is most surprising that forty years after wage and price controls were sadly rejected by every economic textbook and policymakers, today we have settled to allowing the most important price of all, long-term interest rates, to be regularly distorted by [the central bank.]

The excuse of this radical monetary policy has been the obsession with a fixed 2.0% inflation targeting rule.

The decimal point shows the absurdity of the exercise: anything below 2.0% was a failure and risked deflation– the boogeyman of the 1930s– to be avoided at all costs.

This has meant that years after the Great Recession ended the Fed has not only kept interest rates below inflation but have accumulated an unprecedented $4.5 trillion on their balance sheet by doing QE.

Global central banks, in part to keep their currencies from appreciating of these overabundant dollars, have followed with $10 trillion of their own.

Now, the irony of this is over the last 700 years inflation has averaged barely over 1% and interest rates have averaged just under 6%. So, we are seeing an unprecedented, ultra-monetary, radical monetary expansion during a time of average, average inflation over the last number of centuries.

Moreover, the three most pernicious deflationary periods of the past century did not start because inflation was too close to zero. They were preceded by asset bubbles.

If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years. I shudder to think that the malinvestment that occurred over this period.

Corporate debt has soared, but most of it has been used for financial engineering. Bankruptcies have been minimal in the most disruptive economy since the Industrial Revolution.

Who knows how many corporate zombies are out there because free money is keeping them alive?

Individuals have plowed ever-increasing amounts of money into assets at ever-increasing prices, and it is not only the private sector that is getting the wrong message, but Congress as well.

Of all the interventions by the not-so-invisible hand, not allowing the market to set the hurdle rate for investment is the one I see with the highest costs.

Competition is a better tool than price control for protecting consumers. That applies to Amazon AND the bond market.

[Editor’s note: you can read the full speech here:]


from Sovereign Man

Netflix lost $17.8 million for each of its 112 Emmy nominations

It was only a few day ago that Netflix was riding high.

The streaming company had been nominated for a whopping 112 Emmy awards, more than any other network.

And they’d further managed to unseat HBO’s 17-year reign as the undisputed king of Emmy nominations.

That’s all fine and good. Netflix certainly has some great shows.

But reality started to set in yesterday afternoon when the company reported its quarterly financial results… and the numbers were definitely two thumbs down.

For some painfully idiotic reason, analysts seem to judge Netflix by a single benchmark: the number of subscribers.

If subscriber growth is strong, Netflix stock soars.

I say this is ‘painfully idiotic’ because Netflix loses money year after year. The more subscribers they bring in, the more money they lose.

At the end of 2015, for example, Netflix had 75 million subscribers. But its Free Cash Flow was NEGATIVE $920 million.

The following year, Netflix had grown its subscriber base to 93 million. Yet its Free Cash Flow had sunk even further to negative $1.65 billion.

By the end of 2017, Netflix subscribers totaled 117 million. But the company burned through $2.02 billion.

So when you do the math, you see that each Emmy nomination this year cost Netflix $17.8 million.

That’s a lot worst than last year, when Netflix’s 92 nominations at the 2017 awards cost them $16.0 million.

Clearly the more ‘successful’ Netflix becomes, whether in the quality of its content, or in attracting subscribers, the more money they lose.

Yet the stock surges ever higher. It’s truly bizarre.

Well, it all came crashing down yesterday when Netflix announced growth figures that no longer defied gravity.

Total subscribers came in at below the level that analysts had forecast… and the selling began almost immediately.

In after-hours trading, the stock plummeted by more than $50, around 12%.

Now, maybe the stock rebounds today. Or maybe it falls even more. Day to day fluctuations are impossible to predict.

What we do know for certain is that businesses exist to make money for their shareholders. That’s sort of the point.

And, sure, some business models do require losing money for a few years and burning through cash before achieving positive Free Cash Flow.

But Netflix doesn’t appear to have any plans to make money in the foreseeable future.

Instead, they’re going deeper into debt to spend more money on content.

By Netflix’s own estimates, the company expects to burn $4 billion of cash this year.

Bear in mind the company also has to compete with the likes of Disney, CBS, AT&T, Apple, Amazon, etc., all of which have their own streaming services and typically have much deeper pockets.

Facebook just launched a new video feature called IGTV on Instagram to compete with YouTube, and they’re spending $1 billion on original content this year. That’s peanuts for Facebook.

Facebook also bought a company called SportsStream in 2013 which allows it to stream live sports; they’ve also negotiated contracts with Major League Baseball, Union of European Football Associations (UEFA), and others.

Amazon is also streaming live sports… and even video games. Plus Amazon is rolling out its own highly acclaimed original content.

Even Google is now in the original content business, having launched Youtube Red recently (and it’s most excellent Cobra Kai series.)

Then there’s HBO, which also cranks out fantastic original content… but also manages to make plenty of money for its parent company.

It’s not to say that Netflix can’t pull it off, or that the company is going under.

But it seems silly for a company that has such stiff competition, such major headwinds, such a serious cash burn, to be valued at such a ridiculously high price.

Sure, there is a chance that Netflix is able to best Google, Amazon, Apple, Facebook, CBS, AT&T, Disney, etc., and manage to (at some point in the future) generate huge Free Cash Flow for its shareholders.


But the stock is priced as if they’ve already succeeded as if it’s ten years later and Netflix has beaten the pants off its competitors.

One of the most important lessons I learned about investing long ago is that you only pay what something is worth RIGHT NOW.

(As a value investor, in fact, I prefer to pay far LESS than what an asset is worth right now.)

You don’t pay what an investment -could- be worth in the future after a ton of work, time, and a little bit of luck.

Years ago I used to invest heavily in real estate, and I can remember people trying to sell me a building by bragging about how much it could be worth once I’ve replaced the roof and cleaned out all the deadbeat tenants.

Yep, the building could definitely be worth a lot more.

But I wasn’t about to write a check for what it -could- be worth. I was only willing to pay what it was worth at that time… which was a hell of a lot less.

We call this phenomenon being ‘priced for perfection’ when an asset is selling as if the business plan has already been accomplished.

It’s a great way to lose money.

When a company is priced for perfection, it only takes one tiny pin to pop that bubble.

That’s what happened yesterday with Netflix: they missed their subscriber numbers, and $16 billion of wealth was wiped out in a matter of minutes.

If anything, it’s a good indication for how quickly an asset that’s priced for perfection can crash.

And there are a lot of those out there.


from Sovereign Man

IRS to revoke 362,000 passports from US citizens

About two and a half years ago, I told you about a particularly nasty piece of legislation that President Obama quietly signed into law towards the end of his administration.

They called it the “FAST Act”, which stood for Fixing America’s Surface Transportation.

Yet despite $300 billion earmarked for infrastructure repairs, they didn’t manage to fix very much of America’s surface transportation.

The legislation did, however, have two major effects:

1) The FAST Act authorized the US government to plunder excess capital from the Federal Reserve… which is about as stupid as thing as anyone could possibly do.

The Federal Reserve is America’s central bank; they control the value and fate of the US dollar… which is still the most dominant currency in the world.

You’d think that having some excess cash on the Federal Reserve’s balance sheet would be viewed as wise and conservative.

But not Congress.

These guys are so broke, they’ll grab every penny they can get. Even from their own central bank.

So they buried a provision into the FAST Act demanding that the Federal Reserve hand over any excess capital to the Treasury Department at the end of every calendar year.

They started doing that almost immediately, in December 2015. And in 2016. And in 2017.

This is one of the reasons why, to this day, the Federal Reserve is borderline insolvent… which hardly inspires confidence.

Now, I could go on for quite some time about what an idiotic idea this was.

But believe it or not, there was an even worse section of the FAST Act– one they only started implementing recently:

2) Section 32101 of the FAST Act required the US State Department to revoke or deny the passport of any taxpayer that the IRS deems to have “seriously delinquent tax debt.”

They define seriously delinquent tax debt as owing $50,000 or more.

Well, it took them a couple of years, but the IRS has finally started enforcing this law.

Earlier this month the IRS acknowledged that they had sent at least 362,000 names to the State Department to start revoking or denying passports.

And that’s just the beginning.

The IRS is sending these names out ‘in batches’, so there will be many more to follow. They hope to be finished by the end of the year.

Now, there are so many things wrong with this.

For starters, it’s pretty clear there’s no due process here. It’s purely an administrative matter. Which means there’s limited oversight.

Your name could accidentally end up on some list because the IRS couldn’t keep its own records straight. Or there was a problem with the data integrity. Or someone simply mismatched one John Smith for another.

The IRS literally has billions of records being managed by antiquated technology that’s prone to data breaches.

The idea that they could come up with a list of hundreds of thousands of people without making a single mistake is just farcical.

But, again, there are few real checks and balances. You end up on a list… at which point you’re arguing with an entirely different agency about why your passport has been revoked. It’s a bureaucratic nightmare.

The larger point, though, is what this really means about citizenship.

Think about it– a passport is the most common document to evidence an individual’s citizenship.

And… poof… they can take it away from you with the click of a button.

To me, if they can take something away so easily, then it wasn’t really yours to begin with.

It’s like property.

If you own your home… think again. Even if you have your mortgage fully paid off, you still have to pay property tax.

This means that it’s ultimately the government who really owns your property. You’re just renting it from them.

And if they believe (in their sole discretion) that you owe them property tax, they’ll take the property away from you.

Likewise, the enforcement of the FAST Act shows that you’re not even really a citizen. You’re just renting your citizenship from the government.

And if they believe (in their sole discretion) that you owe them income tax, they’ll take it away from you.


from Sovereign Man

It’s been another tough week for Tesla…

It’s been a tough week for Tesla.

Bloomberg Businessweek reported Tesla factory workers were given Red Bull to stay awake to meet aggressive Model 3 production goals (and told to walk through a raw sewage spill to keep the line moving).

Also, because Tesla has delivered 200,000 cars to US buyers, customer tax credits are getting chopped in half from $7,500 per vehicle to $3,750.

(This means that customers who buy electric vehicles from Mercedes-Benz or BMW will receive the full tax credit, making those rivals more attractive.)

Not to mention, Tesla already has to contend with a $50,000 electric BMW i3 that has been leased for as little as $54/month.

At such a trivial price point, that’s pretty tough competition.

But the biggest blow for Tesla came from an ex-employee, now Securities and Exchange Commission whistleblower, Martin Tripp.

Tripp was fired by Tesla last month after allegedly hacking into the company’s computers, leaking false info to the media and stealing secrets (all of which Tripp denies).

Musk accused Tripp of “damaging sabotage” in an internal memo. He then engaged Tripp in an email spat that went public, telling him “you have what’s coming to you” and calling him “a horrible human being.”

On July 11, Tripp fired back by formally filing a tip with the SEC alleging Tesla lied to investors and used damaged batteries in its cars (which, come to think of it, do have a tendency to spontaneously combust.)

Tripp’s alleges Tesla:

– Knowingly placed battered with dangerous puncture holes in cars and tracked them through the end of the assembly line process

– Overstated the number of Model 3s being produced each week by as much as 44% (Tripp went so far as to say Tesla even inflates the numbers on the production counter on the factory floor)

– Lowered safety standards, including placing battery cells too close to each other, which risks future combustion

– Reused parts that were deemed scrap/waste in vehicles

Clearly, Tripp’s accusations might be completely bogus. But he’s not the first to allege that Tesla has misled investors either.

After all, Tesla has been under federal investigation in a year-long government probe before… which is a pretty big deal.

And they didn’t bother letting investors know.

So if Tripp’s allegations are true, Musk would be caught red-handed lying to investors about production numbers (which has a direct impact on the stock price) and disregarding safety issues to save a buck (which can kill people).

It’s convenient this is all coming out after Musk’s pay package, worth as much as $50 BILLION, was approved by shareholders… the largest CEO pay package in the history of the world.

Despite these potentially crippling allegations, Tesla’s stock price barely moved yesterday. Clearly the market doesn’t care.

And Musk continues his PR mission, offering to help the trapped Thai soccer team and, most recently, offering to help Flint, Michigan residents with contaminated water, tweeting:

Please consider this a commitment that I will fund fixing the water in any house in Flint that has water contamination above FDA levels. No kidding.

Listen, I’m not knocking the guy for trying to do some good. And in truth, I like a lot of what Elon Musk has done.

But if my shareholders just granted me a pay package worth $50 billion, you can bet I’d be laser-focused on creating value for them…

Or, at least generating some profits.

Don’t forget, Tesla has racked up $5 billion in operating losses under Musk.

And the company is likely going to need to raise somewhere between $5-$10 billion in the next couple of years to stay afloat.

We know it won’t actually make money by ramping up its production (for which its employees are having to pull all-nighters and walk through sewage) because the company actually loses money on each car it sells.

Remember the investor letter from hedge fund Vilas Capital Management, which is short Tesla and in April said “Tesla is going to crash in the next 3-6 months.”

From Vilas’ April note:

Given that the company lost $20,000 per [vehicle] last year, due to the fact that it cost more to build, sell, service, charge and maintain these cars than they collected in revenue. . . we predict it will impossible for Tesla to make a profit on a $35,000 to $50,000 car.

So despite:

– a potentially lethal allegations filed with the SEC claiming that Tesla is lying to shareholders and knowingly putting its customers in danger

– employees complaining of horrible working conditions

– burning through billions of dollars of shareholder capital

– and a CEO who won a $50 billion pay package seemingly more worried about his public image than actually making money for investors…

. . . Tesla’s stock is still not falling!

This is a pretty clear sign of investor euphoria.

As Warren Buffett says, when people get greedy, it’s time to be fearful. Not only is the action in Tesla a sign of greed, it’s also a sign of complete ignorance of reality.


from Sovereign Man

How to retire in style even with Social Security going broke

We’ve spent a lot of time in our regular conversations talking about the looming retirement crisis around the world.

The data is horrific. Pension and Social Security programs in nearly every developed nation are woefully undefunded.

In the United States, senior government officials including the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and Human Services, have stated unequivocally that Social Security’s trust funds will run out of money in 2034.

More importantly, there simply aren’t enough workers in the work force to sustain the program over the long-term.

It’s something known as the ‘worker-to-retiree ratio’; essentially, Social Security requires a certain number of workers paying into the system for every retiree receiving benefits.

In 1960, for example, the ratio in the US was 5.1 workers paying into the system for each retiree receiving benefits.

By 2000, the ratio had fallen to just 3.4 workers per retiree. And today Social Security estimates it’s just 2.6 workers per retiree.

Do the math– it just doesn’t add up.

Social Security tax in the US amounts to 12.4% of a worker’s salary. So when the financial burden of a single retiree’s benefits is paid by just 2.6 workers, the resulting tax revenue won’t be sufficient to pay benefits unless:

1) Taxes on those workers are dramatically increased, and/or

2) Benefits for retirees are slashed.

It will probably be a combination of the two.

Bottom line, the people who run this program are telling the entire world that Social Security will soon run out of money; and they’re publishing alarming statistics about the steep decline in the worker-to-retiree ratio.

This isn’t some wild conspiracy theory. These are facts coming from the government itself.

And given that most people probably hope to retire at some point in their lives, this REALLY matters.

It would be utterly foolish, in light of such objective information, to simply assume that the problem will resolve itself and Social Security will be just fine.

Are you really willing to bet your future livelihood that a bunch of short-sighted Congressmen are suddenly going to do what’s necessary for their constituents?

This problem is fixable. But it means taking matters into your own hands: You can’t fix Social Security. But you can ensure that your own retirement is funded.

Step 1– Start puting more money away for retirement.

This is even more important if you’re younger; anyone under the age of 40 ought to exclude Social Security altogether in his/her retirement calculus.

Now- here’s the good news: it’s easier than ever to generate extra income on the side.

I’m not suggesting you rush out and start driving for Uber tomorrow morning (though that is a perfectly legitimate way to earn some extra money).

But it’s worth exploring the litereally hundreds of options, ranging from real estate services like AirBnb, HomeAway, and FlipKey, to gigs like Upwork and Elance, to e-commerce marketplaces like Amazon or eBay.

Amazon is actually a great example.

By investing a few weeks in your education, it’s possible to learn how to set up and manage a largely automated e-commerce store on Amazon.

It doesn’t need to earn millions of dollars. In fact, it’s better if the business is NOT super successful; you only really need to earn around $1,000 per month in order to reach your contribution limit to a specific retirement plan that I’ll tell you about in a minute.

And it’s entirely feasible to have a small store earning $500 to $1,000 per month without requiring a whole lot of ongoing time or work on your part.

(If Amazon’s not your thing, there are plenty of other ways to earn that kind of money in the Digital Age / Gig Economy.)

$1,000 per month might seem trivial. But it can really go a LONG way in securing your retirement.

That brings me to step 2: Set up a better retirement structure.

It’s one thing to set aside more money for retirement. It’s entirely another to do so in a special, tax-advantaged vehicle.

For example, US Tax Code provides for a structure called a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account.

A SIMPLE IRA allows people with self-employment income (like running an Amazon business, or driving for Lyft) to put ALL of their net earnings, up to potentially $15,500 per year, in a tax-deferred retirement account.

Like all retirement plans, SIMPLE IRAs have certain rules and restrictions to qualify. For example, you must have earned at least $5,000 per year for at least two years in order to be eligible.

But if you have a long-term view, that’s a fairly low hurdle.

There are other alternatives like a SEP IRA and solo 401(k), which have different contribution criteria and qualification eligibility.

But the basic idea is to generate self-employment income through a gig or automated business, and dump as much of that income as possible into a robust retirement structure where the investment gains can grow on a tax-deferred basis.

And that brings me to Step 3: Become a better investor.

The math here is very simple. If you save $10,000 per year for your retirement, for 25 years, and achieve an average annual investment return of 10%, you’ll have $983,471 when you retire.

But if you’re able to boost your average annual investment return by just 1%… because you make smarter decisions and avoid major mistakes, you’ll have $1,144,133 when you retire.

It’s a difference of more than $160,000. Not exactly inconsequential.

Yet it’s completely achievable.

If you’re looking for a place to get started, I’d strongly recommend Benjamin Graham’s classic book The Intelligent Investor, and Seth Klarman’s Margin of Safety.


from Sovereign Man