Category: simonblack

When all the tribes of Israel still lived in their holy land, they practiced something called the Jubilee.

According to the Book of Leviticus, the Jubilee existed because the Israeli land actually belonged to their god Yahweh…. and the current owners were just borrowing it (sounds like land ownership today – try not paying your property taxes and see who really owns your land).

So every 49 years, the Israelites would celebrate by freeing slaves, redistributing property and forgiving debts.

Of course, a 49-year cycle where debt is forgiven and land is returned to previous owners is ridiculous… markets can’t function under this system. Imagine buying a piece of land and not knowing if you have to give it back down the road… or lending someone money with the possibility that those debts just disappear and you get nothing back for the risk you took.

The Jubilee originated sometime around 1406 BC, so you would think it’s ancient history.

Fast forward 3500 years…

The US government is a record $21 trillion in debt and running $1 trillion annual deficits.

US corporations have a record $9 trillion in debt – with nearly half of that debt maturing in the next five years (meaning the businesses either have to roll that debt into a new loan or pay it back).

Consumer debt – which includes credit card debt, auto loans and student debt – is already at a record high and should pass $4 trillion in 2019.

But the largest portion of consumer debt is student debt. Yes, Americans have borrowed $1.5 TRILLION to earn degrees of questionable use.

As I wrote in a previous Notes:

According to the latest stats, the average student loan debt in the US is nearly $40,000.

But that’s just average…

There are more than two million former students in the Land of the Free with more than $100,000 of debt… around 415,000 people have more than $200,000 of student debt.

And the US Department of Education guarantees 90% of that debt. Which means you, the taxpayer, guarantee that debt. If the borrower defaults, YOU’RE on the hook.

 What are the chances millennials will make good on the debt? Not great…

According to a recent Fed study, millennials are much poorer and indebted than previous generations.

Even if they are financially able to repay student loans, you then have to question their will to do so when you can do so many other cool things with the money…

Like this  YouTube bro  who made a video bragging about using his financial aid money to take his girlfriend on a trip to Thailand.

Already we’re seeing student loan defaults creep up…

Loans issued in 2012 are defaulting at a faster rate than ever before. Interest rates are only rising.

Over 44 million Americans owe student loans, and according to the Federal Reserve, 11.2% of them are delinquent (at least 90 days late) or in default.

It’s hard enough to pay back your loans if you study medicine to become a doctor, or something else that could lead to a relatively high paying career.

But now 22-year olds are graduating with $200,000 of debt, and all they have to show for it is an undergraduate degree in underwater basket weaving.

No direction. No plan. Just a useless degree.

Then there’s the adults who are still swimming in student debt…

There are even almost 2 million Americans over the age of 62 who still owe a combined $62 billion in student loans. That’s over 32 grand per borrower over 62.

I don’t think Social Security is going to cover that… even if by some miracle it stays solvent.

Given these headwinds, we’ve been wondering how on earth this crushing student debt load will ever be paid back.

And I think we just got our answer.

This month, Secretary of Education Betsy Davos agreed to forgive $150 million worth of student debt.

It’s a mini Jubilee.

Here’s the thing… Betsy Davos did NOT want to forgive this debt. She fought to change the rules, but an Obama era forgiveness policy was enforced by the courts.

So if one of the meanest women in government can’t stop this debt from being forgiven… just imagine if we had someone like Bernie Sanders or Kamala Harris steering the ship.

And who do you think is going to come after Trump?

Trump was America’s response to Obama. And the next pendulum swing will be even greater to the left.

So we just saw the first $150 million… and there’s another $1.465 trillion to go in the debt jubilee.

If you ever wondered why I think it’s a moral obligation to pay as little taxes as possible, this is it.

If you want to give the government your dollars to fund YouTube bro to go to Thailand, go ahead.

I’ll be in Puerto Rico, paying a 4% corporate tax rate and 0% capital gains.

Maybe I’ll see you down here.

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In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.

It wasn’t the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:

Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.

Those certificates could then be transferred to other people… and the government would make payments to whoever held the certificate at the time.

In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.

This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.

When a government’s fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.

It’s not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.

Just like the price of Apple shares, the prices of government bonds rise and fall all the time.

One of the most important factors affecting bond prices is interest rates: when interest rates rise, bond prices fall. And when rates fall, bond prices rise.

And this law of bond prices and interest rates moving opposite to one another is as inviolable as the Laws of Gravity.

Back in the 12th century when Venice started issuing the first government bonds, interest rates were shockingly high by modern standards, fluctuating between 12% and 20%. In France and England rates would sometimes rise beyond even 80% during the Middle Ages.

Needless to say, it didn’t take long for banks to get in on the action; they realized very quickly that by controlling government debt, they effectively controlled the government.

The dominance of the banks over the government cannot be overstated.

Miriam Beard’s book History of the Businessman, for example, describes medieval politicians in the Italian city-state of Genoa as having to pledge loyalty to the banks before they were allowed to take office.

Thus began the deep, long-standing relationship between banks and the government:

Banks buy government debt– helping to finance spending packages that keep them in power.

And the government bails out the banks when they get into trouble.

You scratch my back, I scratch yours.

All along the way, of course, they both use other people’s money. YOUR money. Governments bail out the banks with taxpayer funds. Banks fund the government with their depositors’ hard-earned savings.

Of course, it’s so absurd now that they’ve simply resorted to creating money out of thin air to benefit the both of them… which is precisely what central banks do.

A decade ago during the 2008 global financial crisis, central banks around the world created trillions of dollars, euros, yen, etc. worth of currency and effectively gave it all away to their respective governments and commercial banks.

In the Land of the Free, the US Federal Reserve conjured $4 trillion out of nothing and “loaned” most of it to the federal government at record low interest rates.

But here’s the weird part: if you remember that inviolable law of bond prices– when interest rates go up, bond prices fall.

And that’s exactly what’s been happening.

The Fed bought trillions of dollars worth of government bonds at a time when interest rates were at historic lows.

Then, starting about two years ago, the Fed began slowly raising interest rates.

But each time the Fed raised rates, the value of the government bonds that they had purchased would fall.

This seems insane, right? By raising rates, the Fed was creating massive losses for itself.

I’ve written frequently that, as the Fed continues raising interest rates, it will eventually engineer its insolvency.

Well, that’s now happened.

Yesterday the Fed released its latest quarterly financial statements, showing that the value of their bonds is now $66.5 billion LESS than what they paid.

And that $66.5 billion unrealized loss is far greater than Fed’s razor-thin $39 billion in capital.

This means that, on a mark-to-market basis, the largest and most systemically important financial institution in the world is objectively insolvent.

(It’s also noteworthy that the Fed’s financial statements show a NET LOSS of $2.4 billion for the first nine months of 2018.)

This is all truly remarkable… and highlights how utterly absurd the financial system is.

Our society has awarded an unelected committee the ability to conjure trillions of dollars out of thin air and render itself insolvent to support the ongoing, mutual back-scratching of governments and banks, all at your expense.

But what’s even more remarkable, though, is how little anyone has noticed.

You’d think the front page on every financial newspaper would be “FED INSOLVENT.”

But it’s not. No one seems to notice that the Fed is insolvent. Or, for that matter, that most Western governments are insolvent.

It’s crazy. It’s as if it doesn’t matter that the government of the largest economy in the world loses a trillion dollars a year, has $22 trillion in debt, $30+ trillion in unfunded pension liabilities, or suffers a debt-to-GDP ratio in excess of 100%.

Or that the central bank of the largest economy in the world is insolvent on a mark-to-market basis according to its own financial statements.

There seems to be an expectation that none of this matters and it will continue to be rainbows and buttercups forever and ever until the end of time despite some of the most compelling evidence to the contrary.

It’s difficult to imagine a consequence-free future with data like this.

Peaks, corrections, crises, etc. are often preceded by similar dismissive, willful ignorance and irrational optimism.

It would be foolish to presume that this time is any different.

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The anti-terrorism unit suited up.

This was an international affair… a deal between the USA and New Zealand, two members of the Five Eyes intelligence alliance.

Helicopters, tactical suits, high caliber firearms—the whole shebang. They busted in the doors and successfully raided the multi-million-dollar compound.

What was this… capturing the next in line after Bin Laden? Busting an international human trafficking ring?

Actually, elite New Zealand law enforcement was acting at the request of the United States to arrest a guy named Kim Dotcom.

Kim Dotcom is a large, jovial man of German-Swedish origins. He founded Megaupload, an online platform that allowed us to basically watch movies online for free.

Unfortunately for Kim, a lot of that content included American movies, with American copyrights.

US artists didn’t get their money, which meant the US government didn’t get its tax dollars.

But Kim Dotcom was a German citizen hanging out in New Zealand. So tough luck for the USA, right?

Wrong. US jurisdiction extends globally… and the government is getting its pound of flesh.

Violate US copyright laws, and get your door kicked in by a SWAT team, even half a world away.

Then there was the Australian, living in London who shared leaked, classified and sensitive documents with the public.

I’m talking about the founder of WikiLeaks, Julian Assange.

He walked into the Ecuadorian embassy in London six years ago, asking for asylum. There was a Swedish warrant out for his arrest, alleging rape charges. He faced extradition to Sweden, and feared he would then be turned over to US authorities… who wanted Assange taken down for exposing the extent of the spying the US government was carrying out on its own citizens.

For years it was suspected that there was a sealed US indictment against Assange. Last month, the proof emerged when the US accidentally revealed the filing, but not the specific charges.

So, we’ve got a Aussie journalist who might get arrested in the UK (which has an extradition agreement with the US) for a crime allegedly committed in Sweden… all because the US government has a hard on for this guy.

But this journalist made the mistake of providing the world with the valuable insight that the authoritarian US government was surveilling its own citizens.

And, again, the US wants its pound of flesh.

Just recently, the US has once again flexed its global might to throw someone in jail.

As you’re likely aware, Trump is in the middle of some tense trade war negotiations with China.

Interesting timing that the Chief Financial Officer of the Chinese tech company Huawei, Meng Wanzhou, was just arrested at the request of US authorities. The company allegedly violated US sanctions against Iran by selling technology to the country.

But here’s the thing… Wanzhou wasn’t on American soil. She was arrested in Canada. The Canadian government is bringing the US case against Meng, who could be extradited to the US to face charges.

So a Chinese citizen, working for a Chinese company, complying with Chinese law, was arrested on Canadian soil… because she allegedly violated US law. (She was recently released on bail – after a 3-day bail hearing, and two weeks in jail).

We know these webs of where the “guilty” is from, where they were living, where they were arrested and on whose behalf is all confusing.

The point is, if you challenge the US government, prepare for your new accommodations in a 6 by 8 foot cage.

It’s crazy. You know I actually had pork the other night, yet somehow Saudi Arabia hasn’t arrested me for violating its laws against non “halal” food.

The US going after Dotcom and Assange is bad enough. But truth be told, these guys poked the bear.

Assange published sensitive, American documents which authorities claim has threatened national security.

Dotcom’s platform made American artists lose out on their royalties.

I still don’t think it’s right to apply American law worldwide… but what do you expect America to do? It’s not surprising.

But the USA’s latest move should disgust anyone with even a distant memory of what freedom was.

If the company did business with Iran, this has nothing to do with the United States. It’s not illegal according to Chinese or Canadian law to do business with Iran. That’s a US law.

If the US wants to escalate trade wars or impose more tariffs to punish the company… fine, whatever.

But to bring criminal charges against company leadership just for doing their job is a terrifying development, even for the brazen US world police.

The USA is the self-declared dictator of the planet. Forget sovereign nations, US law applies worldwide.

And they will kidnap and extradite you from New Zealand, London, Canada, or wherever else they can get their hands on you.

If they want you, they will get you.

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One of the most brilliant businessmen of our time decided to do nothing.

In 1997, after being kicked out of his own company, Steve Jobs took back the reins of Apple.

At the time, Apple had less than 4% of the personal computer market. And the market didn’t think Apple could do anything more than corner its little niche (while Windows/Intel maintained the lion’s share).

Business professor Richard Rumelt spoke to Jobs in the summer of 1998… He parroted the belief of the time…

“Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?”

Jobs answer was unexpected, but simple… “I am going to wait for the next big thing.”

Jobs knew there wasn’t anything compelling at the time.

One of the greatest visionaries of our time, didn’t try to force a strategy or BS Rumelt with business school jargon about “sticking to Apple’s core competencies” or “improving margins through synergies”…

He just waited until he spotted the next BIG opportunity.

At the time, in the late 90’s, the PC market was changing rapidly. And Jobs knew there would be major, technological advances that he could capitalize on… he had already successfully done it with the Apple II, the Macintosh and at Pixar.

And only two years after Jobs decided to “wait for the next big thing,” he introduced the iPod, which revolutionized the music industry. Then he did it again with the iPhone. The rest is history…

The result of Jobs’ do-nothing strategy pushed Apple to become the first publicly traded company with a $1 trillion valuation.

I’m telling you this story because, often times, in both business and investing, the best strategy is to simply do nothing.

Warren Buffett, the greatest investor in history, is a strong adherent to that strategy.

Buffett says that if every investor was given a punch card with 20 slots, representing the 20 investments you could make in your lifetime, their results would no doubt improve.

It’s great advice. And we’ve been saying the same thing for awhile now.

We work very hard for our money. And it makes sense to treat it with great care.

If you don’t see a compelling investment, there’s no need to force it. Sometimes the best thing is to do nothing.

The markets are crazy today. Almost every asset is at or near an all-time high (measured by the CAPE ratio, price-to-revenue, total stock market to GDP, you name it…).

It’s pretty clear things are either a top, or they’re forming a top.

Nobody has a crystal ball, but in the absence of any really compelling opportunities, it makes sense to sit on the sidelines.

And it turns out, you may not even be giving up that much return by doing so…

There was a really interesting study published by Arizona State University professor Hendrik Bessembinder.

Bessembinder looked at the performance of publicly traded companies over the past 92 years. There were plenty of ups and downs over that period.

He wanted to see if buying and holding stocks performed any better than owning one-month Treasury bills.

The result is pretty shocking…

He found that only 4% of listed companies were responsible for 100% of the net gain for the entire stock market.

The other 96% performed just as well as one-month Treasury bills.

So over the past 92 years, you could get the same return as you would get from 96% of all listed companies by just holding T-bills.

As much as I begrudge loaning the federal government any money, it’s certainly safe to say that T-bills are one of the most liquid and least volatile assets in the world. It’s a cash equivalent.

I’m not sure if the government has the ability to repay its 30-year bonds. But I’m pretty sure Trump won’t default in the next 28 days.

And, while you’re waiting for the next big thing, you can still earn 2.25% in one of the world’s safest assets.

That makes a lot of sense to me.

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The thick black smoke… the smell of burning rubber… overturned smoldering cars.

Looters smashed out shop windows and took whatever they could carry away. Ancient landmarks were desecrated.

Soldiers patrolled the wreckage as tanks are parked on the street corners.

Have aliens attacked? Was a third world dictator deposed? Did the government demand the sacrifice of the first born of each household?

Nope. France increased taxes on gas by a few cents per gallon. That is what sparked the “yellow vest” riots that have burned through Paris.

Here’s the strange part… the same thing made them pop champagne a couple years ago.

People celebrated in the streets when the Paris Climate Accord was ratified, excited that governments were finally doing something to curb climate change.

Two years ago, the Arc de Triomphe was lit up with the message, “Accord DeParis c’es fait!” meaning “Paris agreement is done!”

Now the Arc de Triomphe is graffitied with the message, “We’ve chopped off heads for less than this.”

What changed?

It’s not that I think taxes on gas should be raised. It is just remarkable that such a small tax increase could spark such pandemonium.

Everyone demands the government step in to deter carbon emissions. And when that happens, everyone freaks out.

Inevitably, political solutions to large problems get watered down by politicians, or stopped by mass hysteria.

It’s the same story all over the world. Consider Japan…

Japan has a demographic problem, to put it mildly.

Each Japanese woman is only having about 1.4 babies over the course of her lifetime. Any fertility rate under 2 means the population is dwindling.

1.4 means the population is about to drop off a cliff.

Japan has the largest percentage of over 65 year olds in the world—almost a third of its population. Soon there won’t be nearly enough people paying into the retirement system to take care of the aging population.

Of course it’s not just Japan having pension problems… pensions around the world are woefully underfunded.

But it’s not just pensions in Japan. They don’t even have enough people to fill jobs to care for the elderly.

So Japanese Prime Minister Shinzo Abe introduced a new program to bring foreigners in to fill low skilled jobs.

This is a small step towards easing strict requirements to get residency in Japan. They need to prove they or a relative supporter are worth at least $1,600 per month. And they still have to know how to speak Japanese to qualify for the program.

The culture is very isolationist, even xenophobic. Only about 2% of Japanese residents are foreign born.

If the Prime Minister’s drastic measures are approved later this month, Japan will allow a whopping 345,000 new foreign workers into the country.

That is a 0.27% increase in population… Nice try Japan.

There’s never much political will to solve these problems while you actually can…

And when you finally can’t ignore them anymore, it’s way too little and pathetically late.

So unless Prime Minister Abe wants to make the initiative personal, and start impregnating vast swaths of the Japanese population with some version of prima nocta… his solution is a drop in an ocean of problems.

But if a politician does anything that might actually solve the problem, watch their approval ratings plummet.

For years Vladimir Putin has maintained extremely high popularity. He was re-elected with 77% of the vote this past March.

But even shirtless horseback riding can’t save his approval rating after he raised the retirement age for pension benefits by five years (a move that needed to be done in order to save the Russian retirement system).

This is one of those hard truths about pensions and Social Security that we have been talking about… Something has got to give.

That could be raising the retirement age or cutting benefits. But there is no magic spell that will put pensions back on track.

Now Russian men must wait until 65 to retire with benefits, and women 60.

After announcing this change, Putin’s approval rating dropped over 20 points from the election, to 56%. That’s low for a Russian authoritarian like Putin. Those who disapprove almost doubled from 17% to 33%.

So there are your solutions. You get watered-down, ineffective actions from politicians. Or you get pissed-off rioting crowds that stop anything from changing.

The politicians don’t want to rock the boat. And the people don’t want to hear the truth.

So if you want change, you’ve got to form your own solution.

Hopefully it won’t include flipping cars and smashing windows.

It should include becoming a better investor. Save a little more, get a little better return, and end up with hundreds of thousands of dollars extra a few decades later.

Otherwise, you’re leaving your fate up to pension fund directors who are betting your money on risky real estate, like we talked about last week.

You can also take advantage of different structures for retirement savings, like a solo 401(k) or a self directed IRA.

These dramatically increase your contribution limits and expand your investment options.

The politicians will always chicken out, or water down any real change when it’s crunch time.

And the people will absolutely lose their minds when a real solution is implemented, or when the day of reckoning comes.

Don’t be part of that crowd.

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Last year, when Argentina offered a 100-year bond, I argued it was plain insanity.

Argentina sold $2.75 billion of the debt… but the issue was nearly four times oversubscribed.

How could investors place so much faith in a country that spent most of its post-independence history defaulting on its debts. Plagued by a series of populist governments since the mid-20^th century, Argentina defaulted twice in the last twenty years, and eight times since its independence in 1816.

And guess what… It’s crisis time in Argentina. Again.

Since the beginning of 2018, the Argentine economy has been in a tailspin, with inflation running at a whopping 30%. Interest rates in the country are currently 60% (the government is hoping high interest rates will tame inflation and stabilize the Argentine peso).

But despite these efforts, the peso has fallen by 50% versus the US dollar and the euro this year.

And the International Monetary Fund (IMF) recently upped its rescue loan to Argentina to  $57 billion – the biggest rescue package the organization has ever provided.

So, one year into owning Argentina’s 100 year bonds, investors are already questioning the country’s solvency.

If you ask me, anyone buying that debt deserves whatever punishment they get. You can basically set a clock to Argentina’s defaults.

But crisis brings opportunity, and Argentina is no exception.

If you hold dollars or euros, Argentina is on sale today. And you can have a fantastic lifestyle there for very little money.

This most romanticized South American country comes at about half the price when compared to its neighbors, Uruguay and Chile. And today, it is even cheaper than much-less-developed Paraguay.

To get the real feel on the ground I sent one of my analysts on a trip across Argentina.

He confirmed that Argentina offers a lifestyle comparable to what you’d find in the in Southern Europe… but for a fraction of the cost.

In Buenos Aires – probably the best-known South American city – today you will pay:

• $5 or less for an Uber to go anywhere in the city
• $30-$35 for a great steak dinner for two with a bottle of wine
• $5.50 for a big breakfast in a cozy café

Of course, you don’t have to spend money so “lavishly.” A simple lunch in Buenos Aires’s business district costs less than $4 today, and a subway ride is a whopping 35 cents.

One negative is that it’s not cheap to buy properties in Buenos Aires. Argentines don’t trust their currency (with good reason) and are pricing properties in the best neighborhoods in dollars, not pesos. And since the beginning of the year, those dollar prices barely moved.

Although I’m sure if you were serious about buying a property, you could still pick something up for well below the advertised price.

If you want a great deal in Buenos Aires today, you need to rent. Unlike prices for buying a home, prices to rent are always priced in pesos. That means, in dollars, rents plummeted about 50% since the beginning of the year.

You can get a lovely Airbnb flat for $35 a night, and a very nice two-bedroom apartment for under $1,000 a month – both in the best part of the city.

And the cost of living outside of Buenos Aires plummeted even further.

Sure, some countries in Asia are similarly low-cost, but literally no other country in the Western Hemisphere can hold a candle to the lifestyle-vs-cost equation, especially after you account for how nice and developed Argentina is.

Unlike many countries in Asia, Argentina has style.

Two-thirds of all Argentineans trace their origins to Italy. Like Italians, Argentines look good, dress well, love everything beautiful, and are proud of their European culture… to the point of snobbery, in fact. They often turn their nose up at other South Americans.

And just like Italians, Argentines tend to be warm, welcoming, and easy to connect with.

If you can work remotely – it’s hard to land a decent-paying job in Argentina – and dreamed about living in Southern Europe but didn’t like the price tag of Rome or Barcelona, then Buenos Aires (and the rest of Argentina) could be your perfect alternative today.

Your money will go much further in Argentina than in Italy or Spain.

And I didn’t even mention the best part yet – If you spend a little over two years in the country, you can qualify for a passport there. Argentina remains one of the most liberal places in the world when it comes to citizenship, allowing naturalization after just two years of residency.

And according to our recent research, an Argentinean passport is the second best in Latin America only after Chile.

Argentina has long been favorited by digital nomads escaping Northern hemisphere’s winters.

I recommend you take it a step further and actually move there for a couple of years to qualify for a passport.

Combine price, quality of lifestyle and speed of citizenship, and Argentina is one of the best choices for your Plan B today.

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We have been talking about the pension crisis for years now. It’s without a doubt one of the biggest, financial disasters.

These pools of capital, responsible for paying out retirement benefits, are terribly underfunded. So anyone depending on a pension in their retirement years should seriously consider a Plan B – and sooner rather than later.

We aren’t alone in sounding the alarm on pensions.

The World Economic Forum reported that in 2015, worldwide pensions were underfunded by $70 TRILLION. That is larger than the top 20 economies in the world, combined.

In the US alone, federal, state, and local government pensions are $7 trillion short on the funding they need to pay what they have promised.

And none of this includes Social Security’s almost $50 trillion of unfunded obligations.

Even the private sector isn’t in great shape. US corporate pensions are a combined $553 billion in the hole. And one quarter of those funds are expected to go broke within a decade.

Most pensions require about an 8% annual return to break even (and make all the payments they’ve promised)… historically, these funds could achieve decent returns with a mix of conservative, fixed-income investments. But after a decade of ultra-low interest rates, achieving an 8% return in bonds would be a dream.

So these pensions are forced to take on more and more risk just to break even (oh, and deal with corrupt government officials)…

They’re essentially taking the teachers’ and firemen’s retirement money and betting it on black… hoping to dig themselves out of the enormous hole they’re in.

That means buying more stocks (at what may be the top of the market)… and investing in global real estate (another hugely inflated asset)…

Remember, pension funds are supposed to be some of the most conservative investors on the planet. Millions of people rely on them to make prudent investments to provide them with a decent income in retirement, not to make large, risky bets hoping for outsized returns.

But pensions are desperate. And they’re swinging for the fences just to make ends meet.

Pensions have nearly doubled their allocation to real estate since 2006 (investing an extra $120 billion into the sector).

But a certain type of real estate investment called “opportunistic investments” has grown sixfold over the same period.

“Opportunistic investments” is just a fancy term for being a real estate developer. In other words, pension funds are basically building spec properties now.

At least with a normal real estate investment, the funds can buy an asset and earn a reliable income stream. But now they’re buying speculative land, developing it (often taking on debt to do so) and hoping to flip it to someone at a higher price somewhere down the line.

This is wrong for so many reasons.

Remember that outrageous real estate deal I was offered back in July?

A big bank was raising $500 million to buy a building in midtown Manhattan… then they wanted to spend another $1,000 per square foot on renovations.

I immediately passed. Why would I buy a building in one of the most expensive cities in the world, at a market high… then spend a fortune (and several years) renovating the property… then pray we don’t have a market downturn so I can sell the property to a higher bidder.

Well, now we know who likely took the $500 million allocation – pension funds.

Calstrs, one of the largest pension funds in the US, has allocated $5.7 billion to opportunistic real estate. And they think they’re going to make 13% to 30% on these investments (compared to 6% to 9% with traditional real estate).

What could possibly go wrong here?

Ten years into a raging bull market, pension funds aren’t just buying expensive real estate… They are buying expensive real estate and taking on debt to develop it. And they are hoping that years from now when the property is finished, the market will still be in a position to buy what they have built at a higher price.

Everything needs to go right for pensions to make money on these investments. But I see a lot more that can go wrong.

I was able to pass on this deal. But the millions of Americans depending on a pension for retirement don’t have that luxury… they’re at the mercy of the pension managers to make decisions for them.

And they are not making sound decisions today.

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I guess none of this should surprise me anymore.

Our old friends at Wells Fargo are involved in yet another banking scandal. And this one is really bad… people wrongfully lost their homes and ended up on the street.

But before I get into the details of this particularly atrocious mishap, let’s have a quick recap of Wells’ “greatest hits.”

Back in April, Wells was hit with a $1 billion fine for selling 570,000 clients auto insurance they didn’t need and also charging mortgage borrowers erroneous fees.

By the bank’s own estimates, as many as 20,000 of those clients may have had their cars repossessed as a result of their inability to pay for the insurance Wells Fargo illegally stuck them with.

On the topic of repossessing vehicles, last November, the bank came under fire for illegally repossessing vehicles owned by members of the military.

Then in October, Wells Fargo got grilled by federal regulators after recommending investment products that were “highly likely to lose value.” The bank also pushed tons of customers into higher-fee retirement accounts that were bad for customers but more lucrative for the bank.

That same month, the bank fessed up to “erroneously” charging late fees to more than 100,000 borrowers, even though the delays were the bank’s fault.

In 2016, employees at some of Wells Fargo’s California branches got busted for selling sensitive customer info, like Social Security numbers, to identity thieves.

And in late 2016 and throughout 2017, Wells Fargo had its notorious “fake account” scandal, where its employees opened extra accounts for millions of customers so they could hit their sales goals and earn a bonus.

And then there’s the time Wells Fargo froze my account for sending a simple wire transfer.

I don’t know what else to say about Wells Fargo (and basically every other big bank) anymore… other than I’m outraged with their behavior.

Consider Wells Fargo’s latest scandal…

This week, the bank said a “computer glitch” caused 545 of its customers to lose their homes.

The “glitch,” according to papers the bank filed with the Securities and Exchange Commission, caused the bank to incorrectly deny 870 loan modifications (around 60% of which went into foreclosure).

Basically, people asked the bank to change their mortgage to make it more affordable, and requests that should have been approved weren’t… with the process taking months before the borrower got the final “no.”

Seriously?

“Oh… sorry about that. Sorry you lost your house, your family and your job. Our bad… computer glitch, you know how it goes. Real sorry.”

CBS interviewed one of the victims, a guy named Jose Aguilar.

Jose fell behind on his payments after trying to fix a black mold problem in his home. He asked Wells to change the mortgage to lower his payments. While waiting for Wells to process his request, he fell further behind until the house ultimately went into foreclosure.

He and his wife split up. He had to move into a friend’s basement with his son.

Then, three years later, he got a letter from Wells Fargo saying, wait for it:

“Dear Jose Aguilar, we made a mistake… we’re sorry.”

I’m sure Jose was relieved Wells Fargo was sorry after literally ruining his life (they did give him a $25,000 check… which obviously doesn’t come close to making up for the mistake).

Once again I’ll ask… how does anyone actually do business with Wells Fargo anymore? These people are outright criminals (if you or I committed any of the acts above, we’d be behind bars).

And it’s not just Wells Fargo. Pretty much every major bank in the world has been found guilty at some point of some type of fraud.

But people still trust these criminals with their money.

The public has been institutionalized to believe you have to hold your money with a big bank.

But in reality, you have so many other choices.

Instead of holding money in a bank account, you can earn 100x more interest buying short-term Treasury Bills. You can hold physical cash or gold.

There are options to crowdfund loans of every type.

You also don’t have to trust these banks with your retirement (in fact, I hope you don’t). They limit your investment options and saddle you with erroneous, high fees for nothing.

With a little effort, you can take control of your retirement and take your money out of the hands of the major financial institutions.

If you qualify, you can open a solo 401(k) – it’s a cheap and flexible structure that allows you contribute tens of thousands of dollars each year and invest in all kinds of assets (even real estate and private equity).

You can also borrow money from your retirement account under certain circumstances.

Self-directed IRAs are also a great option (though they’re a bit costlier and less flexible).

It’s important to understand, as always, you have options… you just have to do a little more work in order to stop the abuse from Wells Fargo and the like.

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From 2000 through 2012, the price of gold increased every year, rising from around $280 an ounce to nearly $1,700. It was an unprecedented run.

Then, in 2013, gold took a nose dive, losing over 27% of its value.

It was widely reported that the Swiss National Bank, the former bastion of monetary conservatism, lost $10 billion that year just on its gold holdings.

As you probably know, central banks hold a portion of their reserves in gold. The practice goes back to when central banks actually had to have gold on hand to trade in and out of paper money (or even trade for goods and services).

And central banks still hold reserves in gold today, even though they don’t need it to transact like they used to.

So that begs the question, did the Swiss National Bank actually lose $10 billion? It still had every ounce of gold in its vaults. And gold, after all, is money.

Plus, the SNB wasn’t holding gold to speculate…

Today, central banks hold gold as a hedge against fiat money. These are the guys with their fingers on the printing press… so they know exactly the effect they have on money.

And right now, banks are buying up gold hand over fist. Central banks currently hold 20% of all the gold ever mined—33,000 metric tons.

And JPMorgan Chase says they’ll buy another 650 tons this year and next.

Why?

Gold is for the I don’t knows.

And right now, there are a LOT of I don’t knows.

Markets have been going crazy over the past few months.

After a record bull run for stocks, we are now seeing massive volatility with the Dow regularly jumping 500+ points in a single day. Just yesterday, the Dow fell a whopping 800 points.

And there’s plenty of reasons for market to be worried today. For one, we’re 10 years in to a raging bull market… and it’ getting long in the tooth.

Plus, the Fed is raising interest rates. And when the price of money gets more expensive, people get a little tighter with it. That means it’s tougher for businesses and individuals to borrow. All things equal, higher rates mean lower prices.

Before last week, Fed Chairman Powell said rates were “well below” where they should be. And the markets reacted negatively.

Then, last week, after seeing how fragile markets were, Powell said rates are “just below” where they should be.

Just that one word difference sent markets soaring. But the joy was short lived.

There’s also the trade war with China, intensified by the Trump administration tariffs.

And then at the summit in Buenos Aries last week, China and the USA suddenly came to an agreement. They will halt the tariffs for 90 days for a three-month truce in the trade war. That sent markets soaring.

Then people read some tweet from Trump and worried the tariffs might be back on… markets dumped.

If there is one thing markets hate, it is uncertainty. And there’s plenty of uncertainty to go around today.

And while we’re seeing these late-cycle swings in the market, gold is as steady as ever…

While the DOW dips and climbs by hundreds of points, gold is still hanging out just below $1,250 an ounce. And it really hasn’t made any major moves up or down since 2013.

Yet today, an ounce of gold has about the same purchasing power as it had 1,100 years ago… talk about steady.

So while every other asset is still at or near all time highs, gold is relatively cheap.

Gold has held its ground during all this market volatility.

That is exactly how you want insurance to act. It holds steady in the face of craziness, even selling for a discount when everything else is as expensive as it ever has been.

It makes more sense to buy something cheap, that no one is excited about, while people clamber for exciting but massively overvalued stocks like Tesla and Netflix.

Since 2008 this massive monetary experiment of quantitative easing has sent stocks and assets to dizzying, unsustainable highs.

We think this experiment is coming to an end. The day of reckoning is close.

Stocks are up and down, trade wars are on and off, interest rates could keep soaring, or level off…

What do you do for the I don’t knows?

You get some cheap gold while you still can.

And by the way, while gold is on sale, silver is an even better deal.

In ancient times, the price ratio between gold and silver was about 15:1, meaning an ounce of gold was worth about 15 ounces of silver.

But over the past decades, this ratio has been closer to 50:1—an ounce of gold sold for 50 times what an ounce of silver sold for.

Today, that ratio is about 85:1.

To be fair, this could mean gold is overvalued, not that silver in undervalued.

But when gold has the same purchasing power as a millennium ago… when it has stayed steady the past seven years and grew every year of the decade before that…

It’s a safe bet that gold goes up, and silver does too, possibly even more than gold.

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Several years ago back in 2004-2006, if you had a pulse, you could borrow money from a bank to buy a house.

In fact, bank lending standards were so loose back then that there were some infamous cases of people who DIDN’T have a pulse who were still able to borrow money.

That’s right. Some banks were so irresponsible that they actually loaned money to dead people.

Of course, it turned out that lending money to dead people… or people with terrible credit who had a history of default, was a bad idea.

And the entire financial system almost blew up as a result of this reckless stupidity.

But then something even crazier happened: the Federal Reserve came in and bailed out all the banks with trillions of dollars of free money.

That was utterly nuts. Instead of being wiped out by their idiotic mistakes, the banks learned that they would always be bailed out no matter how stupid or greedy they acted.

The key lesson was that there would be zero consequences for bad behavior.

So if the Fed is going step in with a bailout every time banks screw up, why bother being conservative and responsible?

That’s why we’re seeking the same mistakes over and over again.

Instead of loaning money to dead people, banks and funds are loaning money to dead companies who perennially lose money and go deeper into debt each year.

We talk about some of the most notorious cases like WeWork and Netflix regularly in this letter… but there are countless other examples.

Even worse, banks and other financial institutions even loaned money to Argentina (a country that has defaulted EIGHT TIMES on its debt), buying government bonds that have a maturity of 100 years!

Hey, if they screw up and the investment goes bad, they’re going to be bailed out anyhow.

That’s not the way capitalism is supposed to work. Stupid decisions are supposed to be punished.

Market crashes, recessions, and economic downturns are nature’s mechanism to wipe out all the unproductive, useless businesses… and the investors who funded them… making way for new, better businesses to flourish.

But there are always bureaucrats and politicians who feel that no one should ever lose. It’s like the economic equivalent of a participation trophy… no one should go home empty handed.

And if we print enough money and put enough safety nets in place, everyone will win, nobody will lose, and we’ll all link arms and sing kumbaya.

Economist Roger E.A. Farmer, for one, doesn’t think the Fed did enough after the financial crisis 10 years ago by dropping interest rates to zero and printing trillions of dollars to bail out the economy.

Moreover, he thinks the Fed should step in and start buying stocks to prop up the stock market.

Farmer’s idea isn’t new. Several governments around the world have already started buying stocks to maintain asset prices and keep the economy going.

Japan is a notable example.

The Bank of Japan, the biggest offender to date, is a top-10 shareholder in nearly half of the companies that trade in that country’s stock market.

It hasn’t really worked. Japan can’t seem to get out of its low-growth economic morass.

But according to Farmer, this failure is because Japanese authorities haven’t bought ENOUGH stock.

Apparently he won’t be satisfied until the Japanese government owns 100% of ALL the companies in Japan.

And he wants to apply that same strategy to the US economy.

Farmer also thinks that the US government should ban investors from trading US stocks, essentially creating a government monopoly of the stock market.

What a great idea.

While we’re at it, in fact, we should also have the government start buying  houses in order to prop up the real estate market.

The government could also bail out every small business that fails to make sure no one ever loses a job. It could buy up all the automobiles and hand them out to people who need cars to get to work.

It’s genius!

In all seriousness, this lunacy is all based on the premise that recessions and corrections are bad (and should be avoided).

That’s just plain wrong.

Recessions, corrections, depressions… they’re all critical phases in the market. The whole purpose is to wash out all the excess and punish people that have been stupid.

If you don’t have consequences for stupid actions, you erase good judgment.

And that’s the greatest hazard of all… to think that you can do whatever you want and there will always be someone to bail you out if things go bad.

Not to mention, this whole idea of the government owning all the businesses and assets has already been tried before.

It was called the Soviet Union.

Lenin would be so proud.

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