Category: simonblack

It’s been a busy week for the Bank of Japan…

The market believed Japan’s central bank would back off its massive bond-buying program and negative interest-rate policy with yesterday’s policy decision (it didn’t), so investors were dumping bonds in advance of the meeting. That sent yields on 10-year Japanese government bonds (JGBs) soaring from 0.03% to 0.11% in just under two weeks.

So the BOJ stepped in, for the third time in one week, saying it would buy unlimited government bonds to keep yields down. That’s the strategy behind Japan’s latest form of quantitative easing called “yield-curve control.” Essentially, it’s stepping in to buy bonds any time yields rise above 0.1%.

So, when yields hit 0.11%, an 18-month high, the bank bought another $14.4 billion in bonds.

But this is just the latest iteration of Japan’s aggressive and unprecedented QE. Since 2012, Japan has been hell bent on keeping its interest rates near zero.

The BOJ printed yen to buy basically all of the $9.5 trillion of JGBs outstanding. When it ran out of bonds, BOJ started buying stocks. Now it’s a top 10 shareholder in 40% of Japanese listed companies. And today, it’s vowed to spend unlimited money to keep yields below 0.1%.

Never mind what the planned exit strategy is (which will no doubt be catastrophic), let’s take a quick look at Japan’s debt situation – which is growing by the day.

Japan, the world’s third-largest economy, has total debt of more than ONE QUADRILLION YEN. And government debt currently sits at a whopping 224% of GDP, making it more leveraged than even Greece, whose debt-to-GDP is around 180%.

Japan spent 24.1% of TOTAL REVENUE (appx. 23.5 trillion yen) last year on servicing its debt – that includes interest and paying down principal. Those figures are right off the government’s website. And that percentage has no doubt gone higher this year.

Think about that…

Japan’s debt service eats up one-quarter of the entire budget with interest rates around 0.1%.

They cannot afford higher interest rates by even a fraction of a percent.

If interest rates in Japan went to just, say, 1%, debt service would literally exceed all of government tax revenue.

For the longest time, Japan has experienced deflation. So ultra-low rates have been palatable… if the purchasing power of your money increases every year, you’re probably willing to buy an investment that only returns 0.05% – you’re still maintaining purchasing power.

But Japan is currently seeing inflation of around 1% a year, and the BOJ’s target is 2% – given their complete commitment to the program, I’d say they achieve it eventually.

If inflation is running at 2% a year, who wants to own something paying out less than 0.1%? No rational person would take that trade because you’re guaranteed to lose money.

So you sell those bonds. Then interest rates rise (which Japan absolutely cannot afford). So the BOJ intervenes. That stokes inflation.

I think you see the cycle here…

Now the BOJ has waged war against rising interest rates three times in the past week. That’s a HUGE deal. Remember, the government already owns the majority of JGBs and TONS of Japanese equities.

But it continues to prop up the market by conjuring money out of thin air.

This is the third-largest economy in the world… and it is a complete disaster in the making.

The BOJ’s latest actions give you a sense of how close to the end we may be.

But what is the end game if Japan goes bust?

In June, I wrote about the mini-meltdown we experienced after the President of Italy opposed the nomination of a finance minister named Paolo Savona.

If that sounds boring and worthless, that’s because it is.

Still, the market freaked out because a tiny, economically inconsequential country had a small blip in its electoral process.

What do you think would happen if the world’s third-largest economy collapsed under the weight of its own debt?

Imagine the chaos and panic that would ensue.

The Japanese government is fighting for its life right now (with absolutely ZERO concern for its other financial obligations). And it’s continuing to add unlimited debt into the future.

This won’t end well.

And it’s time to start loading up on the safest assets you can find.

Source

from Sovereign Man https://ift.tt/2OAJXY8
via IFTTT

In a major victory for common sense, a group of cosmetologists defeated an insanely stupid regulation passed down by the state of Louisiana.

Louisiana, just like the other 49 states in the Land of the Free, governs licensing requirements for dozens… hundreds of professions… ranging from athletic trainers to tour guides to barbers and cosmetologists.

And most of the time the licensing requirements are just plain idiotic.

In Louisiana, for example, the State Board of Cosmetology had formerly required an unbelievable 750 hours of training (which costs thousands of dollars) simply to be able to thread eyebrows.

(If you’re like me and totally unfamiliar with eyebrow threading, check out this video. You’ll probably agree that 750 hours of training is totally ridiculous.)

And so, in conjunction with the Institute for Justice, several Louisiana-based cosmetologists filed a lawsuit against the Board.

The Board backed down… passing a new regulation exempting eyebrow threaders from such pointless licensing requirements.

One down. 2,214 to go.

That’s right. According to the Institute of Justice’s study License to Work, there are over two thousand licensing requirements across the Land of the Free… and that’s just for low income jobs like manicurists or floor sanders. We’re not even talking about doctors and dentists here.

Another study from the Brookings Institute shows that nearly 30% of US workers require some sort of state license. That’s up from just 5% in the 1950s.

Many of the licenses truly defy any logic whatsoever.

The State of Michigan, for example, sees fit to require 467 days of education and training to receive a barber’s license, but only 26 days to be a licensed Emergency Medical Technician.

The State of California requires aspiring tree trimmers to have 1,460 days of education and training. But pre-school teachers only require 365 days.

The District of Columbia requires 2,190 days of education and training to be an Interior Designer, but ZERO days to be a school bus driver.

The State of Iowa requires 1,460 days for athletic trainers, but just 370 for dental assistants.

What exactly are these people trying to tell us about their priorities? Trees and furniture are more important than children? Hair is more important than health? Abs are more important than teeth?

It’s all quite bizarre.

But there is one occupation I noticed that is conspicuously absent from this list.

And it’s a big one.

Not a single state in the union has a licensing requirement for this profession.

And that’s an incredible irony given that this occupation gets to tell the rest of the occupations how much training they require.

Did you figure it out?

It’s politicians.

Just think about it: Barbers and manicurists require hundreds of hours of training.

But the people who have the power to pass idiotic legislation, waste taxpayer funds, declare war, tell us what we can/cannot put in our own bodies, and regulate every aspect of our lives, don’t even have to be literate.

(And judging by some of the laws they pass, that may very well be the case.)

Source

from Sovereign Man https://ift.tt/2Aqldif
via IFTTT

Like a lot of major cities in the United States, the city of Philadelphia is in pretty rough financial condition.

One of the city’s biggest problems is its woefully underfunded public pension, which has a multi-billion dollar funding gap.

In 2001, Philadelphia’s pension fund was still in decent shape with a funding level of 77%, meaning that it had sufficient assets to meet 77% of its long-term obligations.

By 2017 the funding level had dropped to less than 50%.

Part of this is just blatant mismanagement; while most of the market soared in 2016, for example, Philadelphia’s pension fund lost about $150 million on its investments, roughly 3.17% of its capital.

It’s interesting that, along the way, the city has actually tried to fix the problem. Between 2001 and 2017, the amount of money that the city contributed to the pension fund actually increased by 230%.

Yet despite increasing contributions to the fund, the fund’s solvency level keeps shrinking.

Mayor Jim Kenny summed it up the grim situation in his budget address last year:

The City’s annual pension contribution has grown by over 230 percent since fiscal year 2001. . . These increasing pension costs have caused us to cut important public services while the pension fund’s health has grown weaker. In fact, our pension fund has actually dropped from 77 percent funded to less than 50 percent funded during the same time our contributions were so rapidly increasing.

So, desperate for revenue, the local government has been relying on an old tactic to get their hands on every spare penny they can.

The city of Philadelphia owns the local gas company– Philadelphia Gas Works (PGW). It’s essentially a local government monopoly.

And over the last few years, PGW developed an automated system to comb its billing records, find delinquent accounts, and file a lien on those properties.

If you’re not familiar with real estate law, a ‘lien’ is a formally-registered security interest in which your property serves as collateral for a debt.

When you borrow money from the bank to buy a home, for example, the bank registers a lien over your home for the value of the mortgage.

The lien prevents you from selling the home until you satisfy the debt. It also means that if you don’t pay the debt, the lienholder (the bank, or the gas company) can seize the property.

In PGW’s case, the gas company is filing liens over people’s properties due to unpaid gas bills as little as $300.

There is essentially zero due process here. It’s not like the gas company has to go in front a jury and prove that there’s an unsatisfied debt.

They just have their automated system file some papers, and, poof, the lien is registered.

So someone could have their home encumbered for a $300 late bill that ended up being an administrative error.

More importantly, it’s curious why the gas company is filing a lien against the property… because it’s entirely possible that the delinquent customer isn’t even the property owner.

Let’s say you’re a landlord and renting out your investment property to a tenant… and the tenant doesn’t pay his gas bill: PGW will put a lien on your property, even though it’s not your bill.

Even worse, you wouldn’t even know about it, because PGW would be sending the late notices to the tenant… not to you.

At that point it turns into a total bureaucratic nightmare.

If you’re lucky enough to even find out about it, you call PGW to try and get the lien removed.

But (according to court documents), PGW tells angry landlords that they have no control over the lien process, and tell people to file a complaint with the Pennsylvania Public Utility Commission.

But then the Pennsylvania Public Utility Commission tells you that they have no jurisdiction over liens in Philadelphia, and that you should talk to the utility company.

Classic government bureaucracy. You just get bounced around between various departments and nothing ever gets resolved from a problem that you didn’t even create.

Well, a bunch of landlords finally had enough of this nonsense, so they got together and sued the city in federal court.

It seemed like a slam dunk case. Why should property owners be held liable for the actions of their tenants?

If tenants don’t pay for their own gas, the tenants should be held responsible… not the property owners.

Common sense, right?

Wrong. The landlords lost the case.

Two weeks ago the US District Court for the Eastern District of Pennsylvania ruled that the City of Philadelphia was well within its rights to hold property owners responsible… and to file a lien on the property without even notifying the owner to begin with.

This is a pretty strong reminder of how low governments will sink when they become financially desperate.

Source

from Sovereign Man https://ift.tt/2vjkBoH
via IFTTT

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

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

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

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

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

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

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

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

These companies have been pushed to absurd limits.

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

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

Now it’s happened to Facebook.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source

from Sovereign Man https://ift.tt/2Oljf5p
via IFTTT

I have to chuckle a bit…

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

Bloomberg published a widely-distributed article with the headline:

Where the Super-Rich Go to Buy Their Second Passport

The article begins…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But back to second passports…

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

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

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

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

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

Source

from Sovereign Man https://ift.tt/2LQogRQ
via IFTTT

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

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

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

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

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

And it’s even worse for the government…

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

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

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

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

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

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

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

And so far it’s working.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source

from Sovereign Man https://ift.tt/2A4k4MV
via IFTTT

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

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

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

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

None of this made any sense to me.

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

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

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

And here’s the best part…

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

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

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

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

And yet, this entire deal is just crazy.

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

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

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

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

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

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

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

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

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

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

Source

from Sovereign Man https://ift.tt/2mzEGmG
via IFTTT

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

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

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

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

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

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

And that’s pretty pitiful.

But it gets worse.

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

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

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

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

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

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

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

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

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

Well, these budget projections are priced for perfection.

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

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

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

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

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

This is ludicrous.

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

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

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

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

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

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

Source

from Sovereign Man https://ift.tt/2myyJ9K
via IFTTT

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

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

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

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

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

—–

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Editor’s note: you can read the full speech here:
https://ift.tt/2JQE1Xu]

Source

from Sovereign Man https://ift.tt/2L2glEG
via IFTTT

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

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

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

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

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

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

If subscriber growth is strong, Netflix stock soars.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maybe.

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

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

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

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

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

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

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

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

It’s a great way to lose money.

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

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

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

And there are a lot of those out there.

Source

from Sovereign Man https://ift.tt/2uG86TO
via IFTTT