Lessons in investment warfare

winston churchill Lessons in investment warfare

“Let us learn our lessons. Never, never, never believe any war will be smooth and easy, or that anyone who embarks on that strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.

“Antiquated War Offices, weak, incompetent or arrogant commanders, untrustworthy allies, hostile neutrals, malignant fortune, ugly surprises, awful miscalculations – all take their seats at the Council Board on the morrow of a declaration of war. Always remember, however sure you are that you can easily win, that there would not be a war if the other man did not think he also had a chance.”

– Winston Churchill, ‘My Early Life’, quoted by Charles Lucas in a letter to the FT, 23rd July 2014.

And there is a war being conducted out there in the financial markets, too, a war between debtors and creditors, between governments and taxpayers, between banks and depositors, between the errors of the past and the hopes of the future. How can investors end up on the winning side ? History would seem to have the answers.

For history, read in particular James O’Shaughnessy’s magisterial study of market data, ‘What Works on Wall Street’ (hat-tip to Abbington Investment Group’s Peter Van Dessel). O’Shaughnessy offers rigorous analysis of innumerable equity market strategies, but we are instinctively and philosophically drawn most strongly towards the value factors highlighted hereafter.

The chart below shows the results accruing to various strategies across the All Stocks universe – all companies in the Standard & Poor’s Compustat database with market capitalisations above $150 million, a dataset which comprises between 4,000 and 5,000 individual companies. The analysis takes in over half a century’s worth of data.

Making the (fairly reasonable) assumption that the data in this study is sufficiently broad to mitigate the effects of shorter term market “noise”, the results are unequivocal. Buying stocks with high price-to-sales (PSR) ratios; buying stocks with high price / cashflow ratios; buying stocks with highprice / book ratios; buying stocks with high price /earnings (PE) ratios; all of these are disastrous strategies relative to the performance of the broad index itself. Caution: these all happen to be ‘growth’ strategies.

Graph842014 Lessons in investment warfare

But the converse is also true – in spades. Buying stocks with low price-to-sales ratios; buying stocks with low price / book ratios; these are both outstandingly successful strategies over the longer term, converting that initial $10,000 into over $22 million in each case. Buying stocks on low price / cashflow ratios is also a winning strategy. The relatively simple ‘high yield’ and ‘low p/e’ strategies also comfortably outperform the broad market. Note that these are all ‘value’ strategies.

This leads O’Shaughnessy to question the legitimacy of the so-called Capital Asset Pricing Model, in which investors are compensated for taking more risk:

“..the higher risk of the high P/Es, price-to-book, price-to-cashflow, and PSRs went uncompensated. Indeed, each of the strategies significantly underperformed the All Stocks Universe.”

Perhaps the market is indeed less efficient than certain academics would have us believe. The world’s most successful investor, Warren Buffett, would seem to think so. As he was quoted in a 1995 issue of Fortune magazine,

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

And note that careful addition of the word “always”. Buffett wasn’t even going so far as to suggest that the markets are never efficient, but rather that the patient investor can take advantage of Mr. Market’s occasional lapses into the realms of absurdity, whether in the form of bullishness or outright despair.

O’Shaughnessy frames the returns from these various ‘growth’ and ‘value’ strategies more explicitly in the chart below.

Graph2842014 Lessons in investment warfare

Special pleaders on the part of ‘growth at any cost’ might argue that the time series is insufficient. But if 52 recent years – easily an investor’s lifetime – taking in at least two grinding bear markets are not enough, how much would be.

Again, the conclusions are clear. Buying stocks on low price-to-sales ratios is a winner, tying with stocks on a low price-to-book ratio with an annualised return over the longer term of 15.95%. Low price-to-cashflow is also a stellar performer. Buying stocks with a high yield also beats the broad market, as does buying stocks with low price / earnings ratios. Again, these are all explicit ‘value’ strategies.

Since we appear to be living through something of a speculative bubble (a bubble inflated quite deliberately by explicit central bank action), it is worth recalling one prior instance of ‘growth’ outperforming. As O’Shaughnessy points out.

“Between January 1, 1997 and March 31, 2000, the 50 stocks from the All Stocks universe with the highest P/E ratios compounded at 46.69 percent per year, turning $10,000 into $34,735 in three years and three months. Other speculative names did equally as well, with the 50 stocks from All Stocks with the highest price-to-book ratios growing a $10,000 investment into $33,248, a compound return of 44.72 percent. All the highest valuation stocks trounced All Stocks over that brief period, leaving those focusing on the shorter term to think that maybe it really was different this time. But anyone familiar with past market bubbles knows that ultimately, the laws of economics reassert their grip on market activity. Investors back in 2000 would have done well to remember Horace’s Ars Poetica, in which he states: “Many shall be restored that are now fallen, and many shall fall that are now in honour.”

“For fall they did, and they fell hard. A near-sighted investor entering the market at its peak in March of 2000 would face true devastation. A $10,000 investment in the 50 stocks with the highest price-to-sales ratios from the All Stocks universe would have been worth a mere $526 at the end of March 2003…

“You must always consider risk before investing in strategies that buy stocks significantly different from the market. Remember that high risk does not always mean high reward. All the higher-risk strategies are eventually dashed on the rocks..”

This might seem to imply that there is safety simply in the avoidance of explicitly high-risk strategies, but we would go further. We would argue today that central bank bubble-blowing has made the entire market high-risk, with a broad consensus that with interest rates at 300-year lows and bonds hysterically overpriced and facing the prospect of interest rate rises to boot, stocks are now “the only game in town”. We concede that by a process of logic and elimination, selective stocks look way more attractive than most other traditional assets, but the emphasis has to be on that word “selective”. We see almost no attraction in stock markets per se, and we are interested solely in what might be called ‘special situations’ (notably, in ‘value’ and ‘deep value’ strategies) wherever they can be identified throughout the world. We note, in passing, that markets such as those of the US appear to be virtually bereft of such ‘value’ opportunities, whereas those in Asia and Japan seem to offer them in relative abundance. In this financial war, we would prefer to be on the side of the victors. If history is any guide, the identity of the losers seems to be self-evident.

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Argentina Economy Minister: “Who believes in the rating agencies?”

shutterstock 92687836 Argentina Economy Minister: Who believes in the rating agencies?

August 1, 2014
Tallinn, Estonia

What a disaster.

For the second time in the last fifteen or so odd years, Argentina has defaulted on its debt. And as we reported a few weeks ago, there was no easy way out.

Years ago, most of the creditors that Argentina had stiffed in 2001 agreed on a settlement; they accepted a much lower payment than they were actually owed, figuring that getting -some- money back was better than nothing.

But a handful of bondholders, known collectively as the ‘holdouts’, didn’t take the deal.

These were the people who, you know, actually wanted to get paid what they are obliged to receive.

This is the basic equation of credit. One person lends money. The other person borrows money. In any reasonable deal, the lender is supposed to have some sort of recourse to recover his/her capital when the borrower defaults.

If you default on a mortgage, the bank takes the house. Stop making car payments and they send the repo guy to take your vehicle. When a business fails, bondholders can often liquidate the company’s assets.

Argentina has plenty of assets. The government has nationalized just about everything they can get their hands on, including the really despicable theft of a Spanish oil company’s assets.

Clearly this is a government that feels perfectly fine taking other people’s assets when it suits them. But they’re not willing for others to do the same.

So the holdouts sued.

Eventually they found a sympathetic judge in the United States who ordered Argentina to STOP making payments to all the other bondholders until the government could reach an agreement with the holdouts.

I know what you’re thinking– what gives some judge in the United States authority over a sovereign nation?

Nothing. Except that he threatened them with the kiss of death: if Argentina failed to comply with his instructions, he would banish them from the US banking system.

Now… imagine you’re the finance minister of some developing nation out there, watching this all unfold in the newspapers.

Would reading about all of this inspire more confidence in the US government? Would it make you want to continue relying on the US banking system? Use the dollar? Or even hold Treasuries?

Probably not.

The Argentina debacle is a lot of things. But one important lesson is that the rest of the world is watching very closely… and thinking, “No way do I want to end up like that.”

This is a HUGE reason why other countries are now starting to form their own international finance system. They’d rather rely on China and Russia than the Land of the Free.

And the US government is practically begging them all to run away like scalded dogs, further accelerating the decline of the US and the dollar’s dominance.

Argentina’s economic minister summed it up best from New York the other day when a reporter asked him about how a potential default would affect the rating agencies’ outlook on his country.

He said, “Who believes in the rating agencies?” After all, these were the guys who completely missed the 2008 financial crisis… who were slapping AAA ratings on toxic debt, and never accepted responsibility for it.

Why do they still have such a dominant role in the global financial system? And for that matter, why does the dollar?

Why indeed. And as the US keeps up this kind of behavior, it won’t for long.

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Estonia- 0% corporate tax and still kicking ass. Why can’t the US learn from this…?

tallinn estonia 102832 10tf689 Estonia  0% corporate tax and still kicking ass. Why can’t the US learn from this…?

July 31, 2014
Tallinn, Estonia

In the absurdly best-selling book The 7 Habits of Highly Effective People, author Stephen Covey wrote about abundance vs. scarcity.

With the abundance mindset, people confidently view the world as full of resources and opportunities… that there’s more than enough to share… and that more success is coming soon.

The opposite is the scarcity mindset, where people view everything as scarce and finite. If you’re winning it’s because I’m losing.

The scarcity mindset reinforces that there’s never enough time, never enough money. And since we can never be sure about the future, we have to ration every last possible resource and grab every bit for ourselves.

This ‘scarcity’ mindset pretty much sums up tax policy in most ‘rich’ Western nations.

In the US, tax revenue as a percentage of GDP has been almost exactly 17.7% of GDP since the end of World War II.

It hasn’t mattered how much they’ve raised tax rates; when tax rates go up, overall tax revenue, i.e. the government’s slice of the GDP pie, stays about the same.

For years they’ve been bleeding cash.

Yet rather than say “How can we support abundance? How can we help set the right conditions to make the PIE bigger,” they punish and intimidate everyone.

The Land of the Free is one of the only supposedly civilized nations in the world where you can be criminally convicted and thrown in jail over tax discrepancies.

They maintain one of the LEAST competitive corporate tax rates in the world, and then blame the companies who have a problem paying that much.

They need the money. There’s never enough. So they’re obsessed with bullying citizens for every last penny they can get their hands on.

It’s classic scarcity mentality.

Thousands of miles away, Estonia is one of the few countries that gets it.

Estonia has reduced taxes to a low, flat rate of 21%. And this number has been falling; from 26% in 2004, it hit 21% in 2008 and has remained at this level since.

One major innovation here is that Estonian companies are only taxed when they actually make a distribution.

In other words, a company that reinvests its profits back into the business pays ZERO tax.

Not to mention there are tremendous incentives and financing programs available for startups. So building a business here is definitely a great option.

Plus there’s no estate tax– the Estonian government isn’t looking for its ‘fair share’ when you die. There’s no gift tax or wealth tax either. It’s Paul Krugman’s worst nightmare.

But perhaps most importantly, the ENTIRE tax code itself is just 43 pages, and filing a return can be done online in just minutes.

In contrast, the US tax code could fill entire football stadiums. And tax preparation wastes tremendous resources that could otherwise be put to productive use.

But here’s the incredible thing: Estonian tax revenues, GDP, and standard of living have been rising year after year.

And at roughly 10% of GDP, Estonia has a laughably low debt. In fact, Estonia has the LOWEST general government debt of any country in the EU.

In Estonia they have truly worked to make the pie bigger. It’s an abundance mentality, plain and simple.

Now, let’s pretend for a minute that you’re flat, crazy, dead broke. And there’s a guy down the street who really has his stuff together.

He has a nice house, he’s saved money, he’s conservative, and he’s doing quite well.

Wouldn’t it make sense to learn from this person?

Wouldn’t it make sense to spend a little time checking out what they’ve done right, what they’ve learned, and see how you could apply that to your own life?

Sure it does.

But not if you’re the US government. Or France, Spain, Italy, etc.

Their only approach is to ignore the obvious success of other countries who have figured it out.

Instead their scarcity mentality pushes them to continue confiscating, intimidating, and terrorizing in a desperate, failed attempt to make ends meet.

It’s quite sad. But this is our reality.

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In some parts of Europe, they are literally giving away land…

For Sale Sign In some parts of Europe, they are literally giving away land…

July 30, 2014
En route to Estonia

The last few years have not been kind to European property markets, to put it mildly.

Ireland, Spain, and Portugal, for example, experienced property bubbles and collapses even more severe than what happened in the US. It was gruesome.

But while some areas have recovered, others are still barely limping along 6+ years later.

Before reviewing the places in Europe that are cheap at the moment, let’s first define terms: what is ‘cheap’? I look at this in a few ways–

1. My universal truth: Anytime you can buy good quality property for less than the cost of building it—that’s cheap. It’s like buying a dollar for fifty cents.

(Construction costs vary from place to place, as high as $2,000 per square meter in the UK to less than $800 per square meter in Hungary.)

Of course, you always want some sort of catalyst for future growth. Just because something is cheap doesn’t mean it can’t stay cheap forever…

2. From a macroeconomic point of view, cheap property markets have a low ‘price to income ratio’, essentially the ratio between the median home price and the median salary in the area.

If you can buy a home for 1 or 2 times the average salary, that’s cheap place to become a homeowner.

3. High yields can also be an indication of cheap property markets. This is effectively calculated as a property’s net operating income (rental income less expenses) divided by its purchase price.

Savvy real estate investors borrow money at, say, 5%, and invest in properties that have yields of 10%. The higher the yield, the faster the initial investment will recoup itself, after which the underlying asset (property) will be yours for “free”.

(There are a lot more ways to look at ‘cheapness’ that I don’t have room to cover here.)

Real estate was one of the main things I was looking at over the past few weeks as I’ve been traveling all over Europe. Here’s what I discovered:

* Ireland—A year ago Ireland was definitely the place to find the best deals on property. The government set up a ‘National Asset Management Agency’ (NAMA) to offload all the country’s distressed properties.

But now they’ve managed to sell most of them and are now winding down the program.

* Portugal—Portugal’s property market has substantially benefited from its Golden Residency Visa program that was aimed at property buyers.

This is a program where you can purchase property and obtain tax-free residency; it’s been a major success and has attracted a number of Chinese and Russian residents.

Since Portugal is a fairly small market, it didn’t take much demand to move the needle and recover from the rock bottom depths.

Properties in Portugal are still reasonably priced, but they’re nowhere near shockingly cheap anymore.

Spain—I’m astounded at the cheapness of properties in Spain, particularly in Anadlucia and Valencia.

As of last month, the official statistics showed 1.7 million properties for sale, and a tremendous vacancy rate. Sellers are still desperate for action.

For example, I saw one property with a small home (about 1,000 square feet) on 40 acres of beautiful land selling for about 100.000 euros ($130,000).

In other words, they were basically selling the home for the cost of construction and throwing in the land for free! And I kept seeing this over and over again as I traveled across the country.

But one thing that surprised me– on a pure yield basis, the best property deals in Western Europe right now are actually in the United Kingdom.

In England’s second biggest city of Birmingham, average income yields are around 13% to 14%.

Banks still provide mortgages for up to 75% of the property value at rates of roughly 5%. This means you could borrow at 5% and make 14% on the property. Not bad.

Certain places in Europe are definitely worth looking into at the moment. Because aside from attractive prices, there are several good reasons to own foreign real estate.

Owning property is a great way to trade paper currency for something that has real value and can generate long-term income streams. It’s also a great inflation hedge.

More importantly, ownership of foreign property held personally is not a reportable asset for US taxpayers. This makes property a great way to move and hold savings overseas.

And in many cases (like Spain, Portugal, Latvia, Greece, etc.) purchasing property is rewarded with residency, giving you more freedom and more options in case you decide it’s ever time to get out of dodge.

It’s hard to imagine that someone would be worse off trading paper currency for a beautiful property acquired at less than the cost of construction that is generating significant cash flow and providing an option for tax-free residency in a sunny country overseas.

* Premium members: watch out for forthcoming actionable alerts on this topic.

** Note: most of the above pertains to residential property. There are some great deals on commercial and retail in other jurisdictions, as well as agricultural property. I still find Ukraine and Georgia to be the best value in Europe for ag land, more on that another time.

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Boots on the ground in Ukraine: I needed to see this for myself

KRAINE CRISIS 586 Boots on the ground in Ukraine: I needed to see this for myself

July 29, 2014
Kharkiv, Ukraine

Looking back over the past ten years, I can’t even begin to describe all the experiences I’ve had in Ukraine.

For a while, I actually owned a business based here. I’ve been travelling here frequently for years. I still have many friends here. Some of our employees are based here. And Kiev is one of the cities in the world that I know best.

Yet even after all of that, I still can’t make heads or tails of this place.

Consider this: by 2004, people in Ukraine were desperate from economic hardship and de facto mafia rule.

They held a runoff election in November of that year– an illusion of choice– between Viktor Yanukovich and Viktor Yushenko. Yushenko was viewed as the breath of fresh air. The ‘change’ candidate.

And when it became clear that Yanukovich had rigged the election in his favor, people went out into the streets to demand change.

They called it the Orange Revolution. And it ended after two months of bloodshed when Yushenko, the ‘good guy’ was finally sworn in as president. Happy days were to follow. Hope and change, all that jazz.

Fast forward a few years.

By 2010, Yushenko had proven himself to be an utter disappointment. Corrupt. Incompetent. Out of touch. When he ran for re-election that year, President Yushenko garnered a pitiful 5% of the vote.

This is amazing when you think about it: the candidate that the people of Ukraine went out into the streets and spilled their blood for received just 5% of the votes in his re-election.

So who did the people elect that year? Viktor Yanukovich… the very person they had fought against in 2005.

Yanukovich was a known criminal. Literally, a convicted felon. Ukrainians spilled their blood fighting against him in 2004… then elected him President in 2010.

Unsurprisingly Mr. Yanukovich spent the next several years pillaging the country of every possible resource for his own benefit. And a few years later– revolution #2.

People went back out in the streets to fight against government forces and oust Yanukovich. Since then, the currency has tanked. Banks are nearly insolvent. GDP is falling. And there’s insurrection in the East.

Now they have a new President– a chocolate billionaire who formerly sat on the executive council of the Ukrainian central bank. And he’s mobilizing the entire country to fight the rebels, fight the Russians.

People are forced into serving in the very same government forces they were fighting against just months ago, all to re-annex a region of the country that isn’t even of Ukrainian ethnicity.

The entire world is getting involved now. With the downing of MH-17, it has become impossible to stay neutral… and the US in particular is doing everything it can to escalate the situation.

Actions have consequences.

And just as the assassination of Archduke Franz Ferdinand 100 years ago led politicians to make a series of pitiful, short-sighted decisions that led the world into the most destructive war it had ever seen, today’s ‘leaders’ are raising the stakes towards an even more destructive kind of war.

This new kind of war is fought with bits and bonds rather than steel. But it’s one that affects almost everyone on the planet.

Change is very clearly afoot. And it’s time to start paying very close attention to the canary in the coalmine.

Just as I was in Iraq a few weeks ago to see the ISIS mess for myself, I had to come back to Ukraine and see what’s happening with my own eyes.

Join me in our newest podcast episode to explore this further– what to watch out for, how it may unfold, and what you can do about it:

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It looks like Hong Kong may soon end its link with the US dollar. It’s about time.

hkd 100 hong kong dollars 2 It looks like Hong Kong may soon end its link with the US dollar. Its about time.

July 28, 2014
Kharkiv, Ukraine

It was a different world in 1983.

Michael Jackson invented the Moonwalk. Return of the Jedi opened in theaters across the world. IBM released its most advanced personal computer yet– the XT, with a standard 10 megabyte hard drive.

And after nearly a decade of eratic swings and collapses, the Hong Kong government pegged its currency (the Hong Kong dollar) to the US dollar at a rate of 7.80 HKD per USD.

This was a big move for Hong Kong. The Hong Kong dollar had originally been backed by silver until 1935 when, facing a shortage of precious metals, they pegged it to the British pound.

This made sense in 1935 as the British pound sterling was still (barely) the world’s top reserve currency.

But things changed. In 1972, Hong Kong broke from the pound and adopted a new peg to the US dollar.

This didn’t last either. After just two years, the US government’s rising debt and inflation forced Hong Kong to abandon the US dollar peg.

At that point Hong Kong was well-known and stable… so why bother pegging the currency at all? The HKD floated freely in the marketplace, just like any other currency.

It went well for them at first. But by the early 1980s, the Hong Kong dollar had become much weaker due to jitters over the island’s reunification with China.

Finally, in 1983, they re-established a peg with the US dollar. And at the time, this probably made a lot of sense.

In 1983, Fed Chairman Paul Volker had established tremendous international credibility, both for the US dollar as well as the Federal Reserve. And most of all, Hong Kong was in need of a strong anchor.

But 31 years later the world is entirely different.

Michael Jackson is no longer with us. The world has sat through three completely lame Star Wars prequel movies. Even the cheapest mobile phone has more storage capacity than the IBM XT.

And both the Fed’s and America’s credibility have waned.

Today Hong Kong is one of the world’s richest economies. When compared with the US, nearly every objective fundamental about Hong Kong’s economy is stronger.

Its fiscal balances are higher. The government runs a budget surplus. Government debt is a rounding error. It’s a night and day difference. There’s no reason why these two currencies should be linked.

Theoretically, Hong Kong’s currency should be much stronger than the peg allows. But its purchasing power is being artificially supressed.

This means that residents of Hong Kong pay more for products and services than they should, including basic staples like food (90% of which is imported).

But after three decades, things are starting to get interesting.

Just recently the Hong Kong dollar hit the upper limit of its allowable range– exactly 7.7500. And the Hong Kong Monetary Authority has had to spend billions of dollars to defend the peg.

The reasons are unclear, though it’s entirely possible that investors are attacking the peg, similar to what happened to the pound back in the 1990s. We could be in the early stages of such an assault.

Even if not, it’s time for a change.

These currency pegs are not set in stone; Hong Kong has changed its own peg several times. And the basic fundamentals which led them to the US dollar in 1983 have changed completely.

The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own.

Bottom line, there’s no longer any benefit in maintaining the peg. Yet the costs (inflation, asset bubbles) are too high. This will eventually right itself.

For the last several years, we’ve been recommending that our readers hold Hong Kong dollars– especially if you normally hold US dollars.

The currency is still pegged to a very narrow band, so the most it would fluctuate is 1.27%.

But if the Hong Kong government revalues the Hong Kong dollar, the gain could easily be 30% or more if they simply revalue to the level of the renminbi.

Given the limited downside risk, this is a very safe bet to make.

The best way to do it? Open a bank account in Asia.

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No Inflation Friday: Dollarized Panama issues price controls for basic goods

shutterstock 134656568 No Inflation Friday: Dollarized Panama issues price controls for basic goods

July 25, 2014
Prague, Czech Republic

Less than four weeks after starting his new job, Panama’s President Juan Carlos Varela already has a serious challenge to deal with: empty grocery shelves.

This is largely a self-inflicted wound that was bound to happen.

Fresh on the heels of his victory in May, the then President-elect announced that one of his first orders would be to regulate prices for staple food products.

He followed through on his promise, establishing price controls on certain brands of roughly two dozen items like chicken, rice, eggs, and bread.

And within a matter of weeks, many grocery store shelves are already empty, at least for the regulated items.

It’s not quite Venezuela or Cuba where it can be downright impossible to buy a roll of toilet paper. But it’s more proof that price controls almost always backfire.

The larger issue here is why the Panamanian government is controlling prices to begin with. The answer is simple: inflation.

According to the Panamanian government, the price of basic foods rose 4.1% from April 2013 to April 2014.

Over the last five years, in fact, food prices have risen more than 24%.

And when average wages are little more than a few hundred dollars a month, a 24% increase in food prices really hurts.

Now, inflation isn’t a particularly unusual phenomenon in Central America, or in developing countries in general.

But what sets Panama apart is that the country is dollarized.

In its entire 111-year history as a sovereign nation, in fact, Panama has never issued its own currency.

Locals and foreigners alike pay US dollars for goods and services across Panama just as you would in Houston, Jacksonville, or Las Vegas.

This means that the country is subject to all the whims and consequences of US monetary policy; when the Fed conjures money out of thin air, the negative effects are quickly exported to Panama.

Yet while it suffers all of the downside of quantitative easing, Panama enjoys very little of the upside.

Of the jobs that the Fed claims they have created by printing $3.7 trillion over the last few years, zero of those have ended up in Panama.

Not to mention, the Panamanian government doesn’t have an endless supply of foreigners lining up to buy its debt.

So to get a true sense of US dollar inflation… and where it’s headed in the Land of the Free… one only need look at dollarized countries like Panama.

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Obama’s dumbest move to date… seizing a foreign bank??

obama laughing Obamas dumbest move to date... seizing a foreign bank??

July 24, 2013
Barcelona, Spain

Ten dark suited men entered the premises of FBME bank in Cyprus on Friday afternoon and took it hostage.

It must have looked like a scene from the Matrix. And given the surrealism of how this conflict is escalating, maybe it was.

The men were from the Central Bank of Cyprus (CBC). And they commandeered FBME because an obscure agency within the US government recently issued a report accusing the bank of laundering money.

It just so happens that FBME… and Cyprus in general… is where a lot of wealthy Russians hold their vast fortunes.

Bear in mind, there has been no proof that any crime was committed. There was no court hearing. No charges were read. It wasn’t even the government of Cyprus who accused them of anything.

There was just a generic report penned by some bureaucrat 10,000 miles away.

Funny thing—when HSBC got caught red-handed laundering funds for a Mexican drug cartel last year, the US government gave them a slap on the wrist. HSBC got off with a fine.

Yet when the US government merely hints that FBME could be laundering money, the bank gets taken over at gunpoint.

Welcome to warfare in the 21st century. It’s not about battleships and ground troops anymore.

This time the adversaries are battling each other using what ultimately affects everyone: money.

And on this battlefield the US doesn’t really have many options.

  • US banks still form the nucleus of the global financial system, but this is quickly being replaced.
  • Just last week the BRICS nations met in Fortaleza, Brazil to launch the origins of a brand new, non-US financial system.
  • The US is still the largest economy in the world, but will likely lose this status to China by the end of the year.
  • The US dollar is still the most widely used currency in global trade, but even America’s closest allies (Canada, Western Europe) recognize that the time has come to move beyond the dollar.

So while the US is still running around and barking at others, it is quickly losing its capacity to bite.

Their only tactic is to haphazardly attack Russian interests wherever they can.

They’re sanctioning Russian companies. They’re trying to torpedo international support for Russia. And now they’ve resorted to plundering Russian assets held in other sovereign nations.

Imagine you’re Qatar. Or China. Or Kuwait. Or Singapore. Or anyone else who holds substantial amounts of US debt.

All of these countries understand the lesson loud and clear: when the US doesn’t like you, they will do everything they can to make your life difficult.

Does this inspire confidence? If you’re holding hundreds of billions of dollars of US Treasuries, does this really improve your level of trust in the US?

Probably not.

By terrorizing Russian interests, the Obama administration is begging the rest of the world to reconsider their misplaced trust in the United States.

All these foreign countries really have to do if they want to retaliate is start dumping their US Treasuries. Or simply stop rolling over when the notes mature.

That will cause catastrophic consequences in the United States. Interest rates will soar, inflation will kick in, and the government will be even closer to default than it already is.

Inexplicably, Mr. Obama is practically begging the world to do this. It’s tremendously arrogant.

It’s like the economic warfare equivalent of Napoleon pompously leading his overstretched, exhausted army into Russia.

And neither Napoleon nor Obama gave the slightest consideration to the big picture consequences.

At $17.6 trillion in debt, the US is trying to wage economic war without any ammunition. It’s not something that is going to work out well for them.

I’m off to Ukraine this weekend; stay tuned for further dispatches from the front lines.

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