Category: simonblack

Things keep getting worse for pensions…

If you’ve read Notes recently, you know the pension fund crisis is one of our major themes. Simply put, these giant pools of capital responsible for paying out retirement benefits to workers are BROKE.

According to the World Economic Forum, pension funds around the world are short around $70 TRILLION. State, federal and local pensions in the US are $7 trillion short… and a recent report by Boston College estimates 25% of private US pensions will go broke in the next decade.

This is all happening because investment returns have been too low.

Pension funds need to earn about 8% per year to meet their obligations. And they traditionally do that with a conservative mix of bonds and stocks.

But with interest rates near the lowest levels ever, it’s impossible for pension funds to achieve that 8% with their usual tools (over the past year, they’ve only been earning around 5.5%).

So they’re getting desperate…

Illinois, one of the brokest states in the US, actually wants to issue billions of dollars in bonds to plug the hole in its pensions.

And, across the board, pensions are taking on WAY more risk in hopes of breaking even…

Since 2008, public pensions have increased their allocation to risky assets by 10%.

10% may not sound like much, but it’s a huge move by these conservative funds.

It translates into TRILLIONS more invested in exotic speculative investments.

So while the teachers and firefighters of the world are counting on pensions to conservatively invest their retirement savings, they’re trying to flip speculative real estate to juice returns (that strategy has actually increased sixfold).

Pensions are broke. They know that they will not earn enough money to pay their obligations. So they’re swinging for the fences. They don’t have another choice.

Sure, piling into risk assets has juiced returns for the past decade. But we’re now 10 years into the longest bull market in history. And basically everything is expensive today (particularly stocks and real estate).

So pensions can’t count on the same kind of returns into the future…

Ray Dalio, manager of the world’s largest hedge fund Bridgewater Associates, expects 10-year returns for a conservative US portfolio of stocks and bonds to be around 3% per year. Or in his own words, “low returns for a long time.”

(Dalio also warns of higher taxes, something we’ve talked about before).

And GMO, a world-class asset manager with a stellar track record, expects -2% per year…a far stretch from the 8% expected returns pension plans need.

Now, I’m not saying that the markets are going to crash tomorrow, or next week – or even this year – but at this stage of the cycle, taking on substantially more risk is ridiculous.

By the way, the same is true for individual investors.

In fact, about 18 months ago I started recommending our readers consider accumulating cash.

Sitting on cash when the markets hit bottom is a once-in-a-decade opportunity to get really rich.

I’m personally sitting on more cash than I ever have in my life…(and it turns out cash was the best-performing asset of 2018).

But pension plans are doing the exact opposite. They’re going all in on risk assets at the top… because they have no other choice.

 And they are completely unprepared for what’s coming.

Pension plans themselves expect to earn 7.4% per year for the foreseeable future (already a full 60 basis points below what they require).

Their worst-case scenario return is 5.4% a year… I don’t know what their worst case looks like. But considering the potential for trade wars, a global slowdown, political infighting, nuclear war… 5.4% seems outright rosy.

There’s a high probability we see stocks plunge 40-60% this year or next. But pensions are living in some parallel universe where they’ll continue to earn 5% a year.

Of course, gambling the savings of regular working people at market highs will only lead to one thing… catastrophic losses.

If you want proof of that, look at what happened in Japan last week, home to the world’s largest pension fund. Its Government Pension Investment Fund lost $136 billion dollars in just 3 months.

The reason? A massive drop in the value of stocks and other “risky assets” (sounds familiar…?).

That’s the worst rate of decline the fund has ever experienced.

Now, it would be naive not to expect to see similar scenarios in other parts of the world over the next years, because the problems are the same…

Pension fund managers are oblivious to reality… and this is how they gamble the savings of generations of workers.

The authors of the Boston College report conclude that these ludicrous estimates “could yield required contributions that are ultimately inadequate to meet benefit obligations and, thus, threaten the financial stability of public plans”

The contributions workers pay into the system are based on these unrealistic, overly optimistic numbers that have no way in the world of ever happening.

Which means millions of workers counting on that money for retirement will never be paid.

It’s clear as day: pensions are broke. The money they promised simply won’t be there.

That’s why we think it’s critical you take things into your own hands.

As an individual investor, you have options big pension funds don’t have – like investing in loans backed by assets (like wine, gold or real estate).

Or you can simply sit on cash and earn 2% while you wait for the correction to go bargain shopping.

And where things are today, we think these options make a lot of sense.

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By July of last year, just three stocks (Amazon, Netflix and Microsoft) were responsible for 71% of the S&P 500’s returns.

Through the third quarter, tech stocks were responsible for 95% of the S&P’s gains.

Amazon alone was responsible for about one-third of the index’s move.

And we long warned about the follies of blindly investing your capital into these incredibly popular and often overvalued firms (we also advised you to start raising cash).

Especially when a number of these companies were burning through cash at unprecedented rates…

Netflix LOST $3 billion in cash last year (and added another $4 billion in debt, bringing its total to over $10 billion). The company is currently trading at over 130x earnings.

Tesla – another market darling we questioned – was losing over $700 million in cash a quarter (though it recently turned cash flow positive). But the company recently had to lay off 10% of its workforce and cut the price of its Model 3 to attract demand.

Still, their share prices soared.

And that’s just the public markets. Venture capital investors were getting even wilder…

After a recent, $2 billion investment, WeWork, the shared office space company, is currently valued at $47 billion.

The company must be valued on “energy and spirituality” as Adam Neumann, the CEO said (he literally said that). Because the firm lost $723 million in the first half of 2018. And its bonds have already been downgraded to junk.

But it gets worse… news arose the company’s CEO was personally buying buildings and leasing them back to WeWork.

So while his investors are dumping billions into a cash-losing company, he’s buying real estate.

As if it wasn’t clear before, we know who Adam is looking out for – investors are not only footing the bill while he serves kombucha and free tequila to hipsters… they’re literally putting money in his pocket.

But in the fourth quarter of 2018, interest rates spiked. When you can earn more money in safer assets like cash and debt, blindly throwing cash at money-losing firms becomes less attractive.

And investors worried we may finally head towards a recession after a 10-year bull market in everything.

We saw the market’s growth engine (FAANG) tank…

It wasn’t just the high-flying floozies like Tesla and Netflix (which fell 24% and 44% from their peaks).

Huge, steady and profitable companies also plunged… Apple fell nearly 40% from its September highs. The company said it would stop publishing iPhone unit sales (it’s never reassuring when a company decides to get less transparent with investors).

And Facebook dropped by 43%.

Hundreds of billions of dollars in shareholder value were erased in just a few months.

The prices have recovered a bit from the recent lows. But the lesson is, these falls can happen faster and be more severe than anyone expects.

We saw some of the most popular and largest stocks in the world nearly get cut in half because the Federal Reserve raised interest rates by a few basis points.

What happens when we have a real reason to be worried?

Remember what happened in 2008. Millions of people got wiped out… they lost their retirement savings in a matter of works.

And the entire market could easily fall by 50% or more again. And you seriously need to ask yourself… what would you do in that scenario?

The key is to start thinking about this now, before the crash comes. Because in the heat of the moment, you’ll be panicked and emotional.

We believe things are in a general decline today. Nobody’s got a crystal ball, but last year, we predicted October would be the top. So far, that’s been the case.

Honestly, things could go up or down from here. So you’ve got to be well positioned no matter what does or doesn’t happen.

For now, you just need to be smarter and more conservative. If something’s not a screaming deal, then don’t do it.

In the meantime, look for some simple ways to safely earn more on your money.

If your cash is sitting in a bank and earning 0.05%, move it to Treasury bills and earn 2% more each year on your cash. There’s no downside to that.

I’ve also arranged several asset-backed loans for my Total Access members. We’re earning double-digit, annual interest on a loan backed by a piece of real estate worth multiples the loan amount.

Plus, I know the borrowers. They’re creditworthy and responsible.

But if they don’t pay, I already have custody of the asset, so there’s no legal process to taking the property over. That’s a pretty safe way to earn 12%.

I also invested in a startup a few years back… it was risky, but I knew the potential reward was massive.

The company, which is in the cannabis space, recently went public at about 50x where we initially invested. A number of our readers became millionaires…

Not bad for a 2.5 year investment period.

That’s why I like private companies. You can call up management on the phone and get the information you need to make a decision.

The point is, pay very close attention to your risks today – regardless of the investment. How much risk are you taking relative to the return?

Ten years in to the longest bull market in history, FAANG may not provide the best risk-adjusted returns.

But as individual investors, there’s a whole world of opportunities available to us that the larger, institutional players can’t access.

There are still deals out there. You just have to look a bit harder.

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Levi Strauss never actually wore a pair of his famous blue jeans.

Although his iconic name has been plastered on the back pockets of millions of people, Strauss himself was a businessman. And in the 1870s, jeans were strictly for laborers.

Those jeans, of course, made him famous… and very, very wealthy.

Sure, Levi’s product was good. But the real secret to his success was his willingness to chase opportunity.

At 18, he left his native Germany for America. He learned the merchant trade in New York City.

Soon after, he moved to Kentucky to peddle wares to pioneer settlers.

Then Strauss followed the crowd to San Francisco for the California Gold Rush.

But he wasn’t looking for the yellow metal like everyone else. He just wanted to sell them the products they needed to work and survive (everything from bedding to mining tools).

Then one of Strauss’ customers, a tailor, approached him in 1872 about a pair of pants he had created with rivets at the stress points. One year later, blue jeans were born.

The willingness to go where the crowds don’t go, and to seize unusual opportunities, is one way to gain success in business.

And it’s particularly important if you’re doing business in frontier markets, like Levi Strauss…

Like Strauss, my friend Andreas grew up in what he calls the “backwoods” of Germany.

From a young age, Andreas wanted to get out and expand his opportunities.

He started by working as a banker in Hamburg. But that didn’t scratch the itch.

Now Andreas lives and works in the Southeast Asian nation, Myanmar — formerly known as Burma.

Sandwiched between India and Thailand, Myanmar spent decades nearly as cut off from the world as North Korea… its economy was suffering under decades of socialist, military rule.

Then, about ten years ago, Myanmar looked around and realized that while its neighbors China and India were on an economic upturn, it was missing out on the party.

So it decided to overhaul its government and open up to foreign investors.

Andreas took a job there in 2011. And since then, he has had a much bigger and more varied career in the Wild, Wild East than he ever could have had as a banker in Germany.

Why? Because Myanmar — just like Kentucky and San Francisco in the 1850s — is a true frontier market.

Coca-Cola didn’t exist there until a few years ago. Neither did a decent, Western-style hotel. Or Western-style coffee shops.

But today, the business and investment opportunities are taking off. Andreas jokes that he starts a new business in Myanmar every year, simply because there’s so much demand to meet as the market expands and opportunities arise.

For example, there’s a rapidly expanding digital/fintech market.

Nearly 36 million people in Myanmar live in houses with smartphones. At the same time, most of them don’t make enough money to open a traditional bank account.

The solution? Skip the banks and dive straight into fintech.

That’s exactly what a Norwegian telecom operation called Telenor did. They came in and teamed up with Yoma, a Burmese private lender.

Their joint venture, Wave Money, got its license in August 2016 and became the first non-bank to provide mobile financial services in the country.

Now, Wave Money is THE way that people in Myanmar send money back and forth. The company went from zero customers in 2016 to some 1.5 million in 2018.

And this is just one example of foreigners making money by solving problems in a frontier market.

There are too many opportunities in Myanmar to list in this one piece. (We recently wrote about them more extensively in Sovereign Man: Confidential.) In short, the country needs basically everything from a business and services perspective.

And it’s still difficult for foreigners to invest in the country. If you want to open a business there, you need a local partner (Andreas agreed to speak with our premium subscribers that were interested).

The country’s tiny stock market (with only five listed companies) is still closed to foreigners – though that may change in March.

Don’t get me wrong– I’m not suggesting anyone get up and move to Myanmar… or that the country is without any problems. Myanmar has a laundry list of them, just like every other country in the world.

You also don’t have to start multiple businesses to take advantage of key growth opportunities abroad; there are plenty of other ways.

Buying real estate is a great example; there are certain markets where property prices are shockingly cheap, rental demand is strong, and future growth prospects are white hot.

That’s how I ended up starting an agriculture business in Chile back in 2014: land prices (at least, back then) were literally 90% cheaper than what it costs in the US.

Five years in, the company has become a regional powerhouse. And the value of the farmland has soared, with everyone from major endowment funds to investment banks trying to buy up huuuuge tracts of land.

Even outside of real estate, sometimes it’s possible to benefit from a foreign country’s growth dynamics merely by opening a bank account.

Some places are growing so rapidly that the demand for capital is incredibly high.

This means that local banks will often pay MUCH higher interest rates on deposits than you’re accustomed to.

(And you might also find that a foreign bank is far better capitalized than the Bank of Smoke and Mirrors where your money is currently held back home.)

The key lesson here is that there are a lot of different approaches. But it all starts with expanding your thinking internationally. Doing so can bring you big rewards, both personally and financially.

Source

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What I’m about to say may sound totally crazy at first. But keep reading, because I think you’ll agree that it’s dead-on accurate.

There’s a recession coming.

No, that’s not some Chicken Little “The Sky is Falling” statement. Far from it. It’s just a fact: economies and financial markets always go through boom and bust cycles.

There are good years and lean years, up years and down years.

(This is perhaps no different than life itself. Few people have the perfect day, every day. Sometimes it feels like we’re on top of the world. And sometimes it feels like the universe is conspiring against us.)

According to the National Bureau of Economic Research, in fact, the average length of the ‘good period’ in which the economy expands during this up/down cycle is 56 months.

That’s followed by an average 11 months of economic contraction, upon which the whole cycle starts again.

Well, it’s been TEN good years now.

After the worst crisis since the Great Depression wiped out trillions of dollars of wealth around the world, most developed economies hit bottom in March 2009… and then started slowly inching their way forward again.

So that’s technically 119 months of economic expansion… which means the world is way overdue for a significant correction.

Even if you ignore economic history, there are signs everywhere.

Nearly every major asset class around the world– stocks, bonds, real estate, etc.– is selling near an all-time high, and being priced at levels that just don’t make sense.

The US stock market’s Price-to-Earnings ratio, for example, which is a measure of how much investors are willing to pay for every dollar of a company’s profit, has rarely been higher.

Other stock market ratios, like Price-to-Revenue, Price-to-Book, Cyclically-Adjusted Price/Earnings, have rarely been higher.

Even Warren Buffett’s preferred metric, which measures the value of the entire stock market relative to the size of the economy, has only been this high one other time in history– just before the dot-com bubble burst in 2000.

Just about any way you slice it, the stock market is overvalued.

It’s the same with bonds, whose values rise when interest rates are low.

Well, interest rates were literally at their lowest levels in 5,000 years of human history for most of the last decade.

And even though rates have risen a bit in the last 2-3 years, there are still trillions of dollars worth of bonds in the world that have NEGATIVE yields.

Companies whose finances are sinking faster than Virginia Governor Ralph Northam’s approval ratings are still able to borrow billions of dollars at practically nothing percent.

Even bankrupt governments are able to borrow money at unbelievable terms.

Argentina notably borrowed billions of dollars back in 2017 by issuing a ONE HUNDRED YEAR bond. Bear in mind that the country had defaulted several times just in the previous few decades.

But countless investors with their goldfish memories still lined up, and there was far more demand for the bond than Argentina’s government could accommodate.

(Amazingly enough, just one year later the government was already having trouble making interest payments and had to request an IMF bailout. Who could have possibly seen that coming?!?!)

Over in the Land of the Free, the average checking account now pays just 0.06% interest, while the rate of inflation is hovering around 2%.

This means that anyone who tries to be responsible and save money for the future is WORSE OFF after adjusting for inflation.

Not that anyone has any savings anyhow.

According to Federal Reserve data, the median bank balance in the US is barely $3,000, while a recent survey from BankRate showed that 23% of Americans have almost no savings at all.

Meanwhile, debt levels continue to rise. Government debt is at an all-time high around the world, led by the US government’s prodigious $22 trillion debt, far larger than the size of the entire US economy.

Corporate debt is at an all-time high. Student debt is at an all-time high. Consumer debt is at an all-time high.

Mortgage debt is also at an all-time high, now totaling $15.3 trillion. And that’s because property prices have hit another all-time high. Housing affordability, meanwhile, is at its lowest point in a decade.

You get the idea. Just about everything is overheated. And the economy is overdue for a big correction.

This economic correction is inevitable. It’s only a question of when: this year? Next year?

This is what concerns me.

You may remember that the last financial crisis in 2008 hit just two months before the national election in the United States. The economy instantly became the ONLY election issue that mattered.

It’s entirely possible that this will happen– a big recession and market correction hits just before the 2020 election, catapulting a legion of socialists into office.

Bear in mind that an economic crisis is like any other crisis: an opportunity for politicians to capitalize on people’s fear to pass dangerously ambitious legislation that wouldn’t stand a chance under normal circumstances.

Think back to 9/11. People were so panicked and terrified that they didn’t notice or care that the government passed Orwellian legislation like the USA PATRIOT Act.

Well, this time around there are already countless socialists clamoring for 70% tax rates, wealth taxes, etc.

And if they’re swept into office by a major economic crisis, they’ll have free reign to pass their entire agenda– higher taxes, nationalized healthcare, debilitating business regulations, etc.

This is a very real possibility: we’re overdue for a recession and the socialist are already waiting in the wings to seize power.

It’s strange to say, but I’m HOPING that a recession starts soon; if there’s a recession this year (instead of next), then it would likely be over before it becomes a major election issue.

But as we used to say in the military, hope is not a course of action. And that’s why I’m preparing for what I think will be the greatest redistribution of wealth in modern history.

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Earlier this morning, New Jersey Senator Cory Booker became the latest socialist to throw his hat in the ring for the US Presidency…

He announced his candidacy with a new website and two-minute video full of the usual collective hoopla.

Bear in mind that Booker raised taxes by 20% while serving as mayor of the City of Newark, and as Senator he has been vocally in favor of everything from nationalized healthcare to so-called ‘baby bonds’ where the US Treasury manages savings accounts for new-born babies.

Booker joins an unparalleled group of socialists that are all coming for your wealth… Kamala Harris, Elizabeth Warren, and Kristen Gillibrand.

And like the other candidates who have already called for a 70%+ progress income tax and a flat tax on wealth, Booker will no doubt support higher taxes.

(Booker has already proposed an increase to the US federal estate tax, a.k.a. ‘death tax’, to an unbelievable 65%!)

We’re still waiting for Bernie Sanders to officially announce– though he did make headlines yesterday calling for his own massive increase to the estate tax…

I mean… this group is so socialist I’m starting to think that someone is going to enter the exhumed remains of Karl Marx into the US Presidential race.

If you’ve been reading Notes, you know I believe the rise of socialism is one of the most important and threatening themes today.

There’s a big reason for this: wealth and income inequality continue to grow.

Over the last ten years, wealth of the richest billionaires more than doubled. Meanwhile the total wealth of the bottom 50% of the world’s population shrunk by 11% just in the last twelve months.

It’s always important to understand that this is nothing new. Throughout history, wealth has always been amassed by a small minority through either talent, brains, ambition, graft, or dumb luck.

And time is generally on their side. Wealthy people become wealthier year after year because they’re able to invest almost all of their net worth.

The average person in the middle class or working class can’t do that– they earn a fixed salary and have to spend almost all of it (if not more) on living expenses, leaving very little capital left over to invest.

They also have very little time left over to start a new business, or even learn new skills that could lead to higher income.

So their situation stagnates, especially as inflation creeps higher. Meanwhile the wealthiest individuals can keep reinvesting and compounding their gains.

That way, over time, wealthy people almost invariably become wealthier.

But 6,000 years of human history shows us that whenever too much wealth becomes concentrated at the top, it always gets redistributed by either socialist policies or violent revolution.

That’s what’s happening today.

And this new batch of Presidential candidates, gunning for the 2020 seat, want higher taxes, guaranteed employment, free education, free healthcare, universal basic income…

These are all wonderful concepts. But somebody has to pay for it all.

Already, even with an economy that’s been booming for the past several years, the US government is $22 trillion in debt and running $1+ trillion deficits. A recession, which is becoming more likely by the day, on its own would push the deficit into multi trillions of dollars.

And a host of socialist programs would send the thing into orbit.

This trend is only building. We’ll soon be living through one of the greatest redistributions of wealth in modern history.

The real insanity here is that, again, history shows that these approaches don’t work.

Elizabeth Warren wants to implement a wealth tax. But wealth taxes don’t work. Even Denmark, which people love to hold up as the shining example of Socialism, dumped its wealth tax because it just doesn’t work

But hey, why let facts get in the way of a terrible idea?

These people also want the government to run America’s already-crumbling healthcare system… because, if you can’t trust your life to the folks who spent $2 billion on a failed website, who can you trust?

To borrow from an old World War I saying, right now the situation is serious, but it’s not hopeless.

There’s still time to buttress your life and your livelihood against the second coming of Karl Marx.

Source

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We write a lot about global debt levels at Sovereign Man.

In fact, the very first Notes from the Field I ever wrote, in June 2009, was about how broke the US was… and the severe consequences that eventually face a nation that recklessly spends money it doesn’t have.

And debt has been a major theme in this publication ever since.

As you know, since the Great Financial Crisis in 2008, debt levels have only gotten worse. But not just for governments.

Sovereign debt, corporate debt and consumer debt are all at all-time highs.

The US government has $22 trillion of debt and is running $1 trillion+ deficits every year. There’s a record $15 trillion of corporate debt. And the US consumer has racked up around $4 trillion of debt (not including mortgages).

And you don’t have to take my word for it that this is all going to end badly…

Last week, one of the most respected hedge fund managers in the world came out with a warning scarier than anything we could have dreamed of.

Seth Klarman runs the $28 billion hedge fund, Baupost Group. The guy is famously secretive (and conservative). So the fact that he went out of his way to make this public statement means you should pay attention.

Also, Klarman’s fund is closed (he’s actually been returning money), so he’s not doing this to scare people into investing in his fund.

In a 22-page letter to his investors, Klarman warned that government debt levels, particularly in the US (where debt exceeds GDP), could lead to the next global financial crisis.

“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he wrote.

In addition to debt levels, Klarman is worried about the increasing social unrest (something we’ve written about in detail) and the public’s inability to decipher who is telling the truth these days between politicians and the media… both of which make it difficult for a capitalist system to thrive.

Who knows what will ultimately bring the system crashing down, but let’s focus on the US government’s exploding deficits…

In 2018, the federal government’s deficit hit $1 trillion. But these are “good times,” with soaring asset prices, solid corporate profits and record-low unemployment.

What happens when a recession inevitably occurs. Our friend Jim Grant of Grant’s Interest Rate Observer, says the deficit will blow out to $2 trillion.

So, $22 trillion in the whole and a $1 trillion deficit in a good year. Not to mention, interest rates are rising, which means all of this debt is just getting more expensive.

Eventually, people will simply refuse to lend Uncle Sam any more money… because they know there’s no way they’ll be repaid.

And we’re already seeing signs of that.

According to the Wall Street Journal, in the first eight months of 2018, overseas buyers of US Treasurys only bought half the amount they did over the same period in 2017.

From Klarman:

“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford…”

And when fewer people want your bonds, that means it’s more expensive to borrow. But the government can’t afford to pay any more…

The government already spends 28% of its revenue just on interest (at a time when interest rates are near all-time lows).

Ultimately, Klarman believes the debt (along with the massive wealth disparity caused by a 10-year asset price boom) will lead to social unrest…

“It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”

Again, this isn’t Sovereign Man speaking… it’s a bespectacled hedge fund manager out of Boston.

Another line from Klarman that comes straight from Notes… “By the time such a crisis hits, it will likely be too late to get our house in order.”

But Klarman isn’t the only billionaire alerting the public right now…

At the recent Davos gathering, Ray Dalio, founder of the world’s largest hedge fund, said he thinks the next downturn will be worse than the Great Depression.

And like Klarman, Dalio says the problem comes down to too much debt…

“The biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits”.

The world is drowning in debt. And there’s no austerity measures in sight. In fact, a rising tide of socialist politicians want to explode government spending (paying for free healthcare, education and everything else under the sun).

We don’t know when this monetary experiment will end. The European Central Bank and Bank of Japan both essentially reneged on their plans to start tightening monetary policy. And yesterday, the Federal Reserve has signaled it will stop hiking rates.

Global central banks, it seems, have already given up on their weak attempts to tighten… fearing the economy wouldn’t hold up.

If they step back on the gas of QE, I believe that’s the point when people lose faith in fiat… and the US dollar specifically.

And while this all goes down, the central banks (who control the printing press) have been buying gold at the fastest pace in years. You may want to consider doing the same.

Gold is one of the few asset classes that hasn’t risen to absurd heights. But it may be coming back to life… the metal rallied to an eight-month high this week.

Source

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There are over 21 months to go until the 2020 US presidential election.

And every day more and more socialist candidates throw their hat in the ring. They all want to be the one to take down Donald Trump.

But how do you set yourself apart in such a crowded, and outspoken, field?

Bernie Sanders set the bar in 2016 when he championed Medicare for all and free college. But that’s mundane for the latest crop of candidates.

Senators Cory Booker and Kirsten Gillibrand want a federal guaranteed jobs program to hand out cushy government jobs with benefits to anyone who wants one.

Of course, paying for this program (and the many others floated recently) takes a lot of money. Where will that cash come from? You, of course…

Earlier this month New York Mayor Bill de Blasio gave us a preview of what his platform would look like. He said, “Brothers and sisters, there’s plenty of money in the world… it’s just in the wrong hands.”

70%, progressive income tax? Sure, Kamala Harris is in. Same goes for Julian Castro… after all, he notes, the highest tax rate used to be 90%.

Rest assured, if any of these candidates gets the job, massively higher tax rates are coming.

But none of the proposed taxes would be as damaging as the one proposed by Elizabeth “you didn’t build that” Warren…

Warren wants to skip taxing income and go straight to confiscating WEALTH.

After all, the rich have already amassed a lot of wealth, so you may as well take it…

Warren’s plan is to to tax people 2% per year on NET ASSETS over $50 million (and 3% over $1 billion).

The wealth tax would tax people twice – once on their income and again on the assets they own – even cash in the bank.

(It just so happened that her proposal for a wealth tax came out the same day the most expensive property ever sold in the US was acquired by billionaire Ken Griffin for $238 million…)

The wealth tax is a terrible idea.

Even the most oppressive tax regimes in Europe (like Sweden and Denmark, where the top tax bracket is 63% and capital gains are taxed at 43%) have abandoned the wealth tax.

That’s right, even the most ardent, socialist countries realized that a wealth tax doesn’t work. As a matter of fact, nine countries in Europe abandoned the tax.

Why? Because people were leaving in droves to avoid paying the oppressive levy.

In France, 513 wealthy households left the country every year for 35 years because they were tired of paying a wealth tax – taking an estimated $175 billion of assets with them.

But when the wealth leave, they take more than their money… they also stop investing and creating jobs.

So France also lost 400,000 jobs (adding 2% to unemployment)

Even worse, Sweden raised $500 million with their wealth tax, but lost $166 billion from capital leaving the country.

 The wealth tax simply does not work. In fact, it hurts any country that imposes one, because…

Rich people are excellent at legally avoiding taxes. And they’re also the most mobile.

We’ve seen what happened in Europe with the wealth tax. And the same thing will happen in America if Elizabeth Warren gets her way.

Even if you agree that Swedish-style taxation is good and that a wealth tax would raise revenue for socialist programs, you’re still missing the most important point…

Politicians always have a plan to RAISE money, but there’s never any talk of execution.

Why should we believe this new tax revenue would be any different than the TRILLIONS the government throws down a black hole?

The war on terror hasn’t ended. The Great Society didn’t solve poverty. The war on drugs is a failure… and the government spent $2 billion on a broken Obamacare website and half a million defending Congressmen from sexual assault accusations.

And it gets worse… trillions of dollars have been literally blown up, spent on bombs for the middle-east which, oops, also killed a bunch of kids, brides, and other “collateral damage.”

Point is… the government’s execution is almost always poor… but they believe throwing more money at it will fix the problem.

ANYTHING you do with your money is more productive (not to mention moral) than what the government does with it.

The scariest part of all this isn’t the proposed taxes. It’s the idea behind them…

This is no longer about raising money for socialist programs. It’s about punishing the rich and giving the rest of the people their fair share.

But there’s no wall yet to keep us in. And rest assured… just like in Sweden and France, the rich will flee the US to friendlier tax jurisdictions.

As you know, I think your best option is probably Puerto Rico… and its Acts 20 & 22 tax incentives (which allow for a 4% corporate tax and 0% tax on capital gains and interest).

I’m living on the beach paradise, watching this all play out knowing my capital is safe.

I hope you’ll consider joining me. Also, I just recorded a podcast about my personal experiences in Puerto Rico. You can listen to it here…

You can hear all about my personal experience here, in last week’s podcast.

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Mexico is in the midst of a crisis again.

And no, it doesn’t have anything to do with the border wall that caused the US government to be hopelessly deadlocked for more than a month.

Or the economy. Or murders and violence. Or drug trafficking. Or bird flu.

Nope. Mexico is battling an enormous problem with its oil pipelines.

In a way that almost sounds ridiculous.

But oil thieves have been drilling holes in Mexico’s extensive network of oil and gas piplelines across the country to steal fuel and sell it on the black market.

State-owned oil company PEMEX found more than 12,500 illegal holes in the pipelines last year.

And these oil thieves went as far as building a 2-mile long pipe themselves to divert oil directly from the refineries.

Selling oil on the secondary market is a highly lucrative business in Mexico. And some farmers who take up a job as lookouts for the thieves can earn more than five times their regular income doing so.

The work is also incredibly dangerous… more than 80 people recently died in a pipeline explosion north of Mexico City when they were trying to siphon off gas.

But Mexico’s new president has decided to do something about this.

And in typical, political brilliance, he ordered the pipelines to be shut down.

So now, instead of transporting oil and gas via pipelines, they’ll ship everything via truck and rail.

There are only a few TINY issues with that solution: it costs up to 14 times more to send fuel via trucks. And more importantly, it takes weeks longer to arrive at the stations.

The result? Severe gasoline shortages.

Across the entire country, including in the biggest cities of Mexico City and Guadalajara, more than 1,000 gas stations have been closed. Many of those still open have limited purchases of gas up to five gallons per person.

And the lines to get to them can reach up to a mile-long.

People have now started hoarding gasoline and re-selling it on the black market.

So much for cracking down on oil theft.

The result is millions of people with no access to gas. They cannot go to work, see their families, or go about their lives as they did just a few days ago.

It’s almost starting to look like Venezuela – the storybook example of what happens to a country gripped by corrupt socialism.

Around 20 years ago, Hugo Chavez came to power and enacted political reforms that granted him and his government enormous power. And he started massive, socialist programs in Venezuela that the country couldn’t afford.

And despite the country’s rich natural resource sector, it went broke.

Now Venezuela has hyperinflation (bringing the average, monthly wage to around $32/month). And people are running out of food, water, medicine and toilet paper. Venezuelans are fleeing the country en masse.

Things couldn’t get much worse in Venezuela. And the people, fed up with this long-running socialist disaster, just elected a new president, Juan Guaidó, who is now battling for power with Maduro. Buyt we’ll leave that story for another day.

The point is, you can look at Venezuela and say “what a bunch of idiots.” Or you can point to Mexico and say the same.

But let’s hold up a mirror to the situation in the US today…

The Treasury Department should soon release its annual financial report for the fiscal year ended September 30 (notice the government gives itself four months to prepare its statements – a full, three months longer than it gives private companies).

I already know what the report will show… that the government’s insolvency has only grown.

Social security is broke, pensions are broke, entitlement spending is eating up a larger and larger portion of tax revenue (while tax revenue is falling).

At the same time, we’ve seen this rise of hardcore, self-avowed socialists in the US… and these folks want to throw more money at this broken system (without any semblance of a plan, at least not one they’ve cared to share with us).

And they’re going to pay for all of this with your tax dollars…

At this point, it’s become passé to call for confiscatory levels of taxation, more regulation and government control and the confiscation of private assets.

You’ve got the governor of California, Gavin Newsom, who wants to centrally plan housing. He wants to tax people and let the government dole out houses.

Then you’ve got de Blasio in NYC who wants to take profits out of the hands of the people that earned it… and put it right into his hands.

Of course these socialist ideas to make the rich pay their “fair share” aren’t going to fix anything.

Placing more money in the hands of the government, instead of the private sector, will only accelerate these fiscal problems.

Remember, we’ve seen how socialist governments fix problems in Venezuela and Mexico. Do you think the result will be any different in the US?

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It’s been more than a month since the federal government shut down.

We all know the familiar story of the 800,000+ workers, and the millions of contractors, who are not receiving paychecks.

(Plus there are millions of other workers and small businesses in the private sector whose incomes depend at least partially on the government– and they’re all suffering as well.)

But now the shutdown is starting to affect cybersecurity.

Because it turns out that there are now at least 200 federal websites whose SSL certificates have expired ever since government employees were furloughed.

If you’re not familiar, SSL (and its updated version TLS) are standard encryption technologies that ensure information passed between Internet users and the websites they visit is secure.

Without SSL and TLS, your data (including credit card or other personal information) could easily be intercepted by hackers.

And nearly every website you visit now, from Google to our own SovereignMan.com, uses this encryption.

Each site has to have a “certificate”, which is really just a digital file that forms part of the encryption key. These certificates expire from time to time and must be renewed… ideally by competent professionals who know what they’re doing.

Like I said before, there are now at least 200 US government websites whose SSL certificates have expired.

But most agencies no longer have competent professionals on hand to update the certificates.

Instead, the IT guys are sitting at home waiting for the shutdown to end.

Remember that when the government shut down, federal employees were grouped into two categories: ESSENTIAL and NON-ESSENTIAL.

The non-essential employees were sent home and told to wait it out, with a warning that it’s actually against the law for them to even log in to their work emails.

The essential employees, meanwhile, are inexplicably forced to keep working for no pay– which is something that was supposedly outlawed in the Land of the Free back in 1863.

About HALF of all federal employees, it turns out, are non-essential, with more than 380,000 waiting at home for the shutdown to end.

And depending on the agency, the numbers are even more pronounced.

Cybersecurity seems especially hard-hit: the National Protection and Programs Directorate, which the US Computer Emergency Readiness Team (US-CERT), has lost more than 80% of its workforce since the furlough began.

US-CERT is one of the lead players in cybersecurity; it not only heads the governments efforts to fight off foreign hackers, but it also coordinates with private companies to disseminate information about computer viruses and other cyber threats.

They’ve now collapsed into a tiny skeleton crew, leaving countless government networks vulnerable to attack.

It’s not just SSL certificates either; with so many cybersecurity staff on furlough, most agencies be able to install critical security updates.

That leaves their systems– and the treasure trove of information within them, heavily exposed to foreign hackers.

Just think about all the personal data that sits inside government networks. Tax and financial information. Family details. Address history. Travel history. Work history. They literally have your whole life in there.

In 2016, hackers obtained access to the IRS and stole information on hundreds of thousands of taxpayers.

In 2014, a breach of the US Office of Personal Management was discovered. The information of 22 million former and current government employees was hacked.

I imagine that right at this very moment there are probably dozens of foreign hacker groups, both government and private, who are having a field day with vulnerable US government networks in what will become the mother of all data breaches.

We probably won’t find out about it for months… maybe even a year or two down the road.

But someday you can expect to see news headlines about catastrophic government hack that occurred during the shutdown of 2019.

This is a great reminder, by the way, to take some basic steps to safeguard your own privacy and online security.

Let’s say you have an online account with the Social Security Administration.

And, like a lot of people, you might use that same password for several websites– like your email, social media, bank account, etc.

Well, if the Social Security network is hacked and your password stolen, that means ALL of your other accounts could be breached as well.

Don’t make this mistake.

The government is already creating a lot of cybersecurity vulnerabilities in its egomaniacal dispute over a $5 billion border wall. Re-using the same password makes you even more vulnerable.

Feel free to check out this free resource on creating a secure password, plus how and why to use a password manager, here.

And if you’re already a member of our flagship international diversification service, Sovereign Man: Confidential, I encourage you to read our ‘Secure Your Digital Life’ Guide.

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Welcome to another edition of the Sovereign Man podcast.

As we enter 2019, you’ll start to see more podcasts from us. And you also might notice a few changes. We’ve upped the production value of our chats with Simon. And we’ll continue to improve both the production and the content of our podcasts.

And we’d love to hear your feedback on our efforts.

In today’s podcast, Simon gives us an update from on the ground in Puerto Rico… and explains why you should absolutely consider moving to Puerto Rico if you have a business, earn investment income or want to freelance and significantly lower your tax bill.

Plus, Simon shares some specifics on how to get started taking advantage of Puerto Rico’s tax incentives (and who can benefit from Act 20 and Act 22).

It’s an outrageous deal to be able to live in paradise and pay essentially zero tax. So if you have any interest in Puerto Rico… and you could potentially benefit from moving yourself or your business there, please do not miss this discussion.

And make sure to subscribe to our podcast on iTunes or Google Play.

Here’s what you’ll hear about in today’s episode:

Intro – Simon talks about how amazing life is in Puerto Rico, something which surprised him. (He’s not a beach guy.)

About 3:00 in — Why moving to Puerto Rico is like moving to Florida… with major financial benefits

5:45 — What Simon gave up to move to Puerto Rico, and why it reminds him of South Park

8 minutes — Why Simon sees voting with your wallet as much more powerful than voting at the booth

10:00 — The big difference between living in a high-tax state like California and living in PR, and how the tax incentives work

18:15 — details about Act 22, including whether it works for crypto people, investments in US companies, etc.

27:27 — details about Act 20, what constitutes a “qualifying” business

31 — Can an employee on salary do this?

32:54 — Are you still paying self-employment, FICA, etc.? How do the taxes work?

36 — How does the IRS consider you a resident of PR? What do you need to do?

36:30 — Do you create an LLC or a corporation?

38:30 — How is the rise of socialism going to affect programs like these? Will these incentives last?

47:50 — Do you need to be wealthy to reap these advantages? What is the income threshold or net worth threshold to make moving to PR a good idea? (Plus, Simon’s decision not to use “rule of thumb” ever again.)

50 — The power of compound-compound (double compound) interest, and whether Einstein said that thing about it.

54: Why Simon is no longer skeptical about the PR tax incentives

57: Why the requirements for Act 20 are better than they’ve ever been (and why you should lock them in… now)

1:09: How expensive is it to live in PR? Are there “middle class” options? Plus, what life is like there

1:11: Drawbacks to living in PR

1:12 Opportunities in PR

1:20: Summing it all up — and Simon’s advice on first steps

We hope you enjoy today’s podcast and learn a lot about expanding your freedom and opportunities.

And make sure to subscribe to our podcast on iTunes or Google Play.

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