Category: simonblack

In today’s podcast, I share the details of a deal a well-known private bank just offered me (and its roster of other high-net worth clients).

It’s a bad deal in every way… the asset in question is valued insanely high, there’s likely a ton of debt attached to this deal and I doubt anyone who invests will make their money back.

Still, I’m confident this deal will get done. It’s classic top-of-the-cycle economics.

If you look back throughout history, during every boom, there’s one asset that gets insanely bubble.

In the 90’s, it was tech stocks.

In the 2000’s, it was real estate.

And I tell you what that asset class is today… and why, just like every time in the past, this will end in recession.

I also looked back to see how long it takes for the economy to correct after the Fed starts raising interest rates.

You should listen in for the reveal… But I will tell you, the Fed started raising interest rates in December 2015. And, if history is any indicator, a recession could happen very, very soon.

Luckily, as an individual investor, you don’t have to participate in this madness. You’re allowed to wait it out on the sidelines.

Because better deals will be on the way. And you’ll have the opportunity to buy incredibly high-quality assets for pennies on the dollar.

That’s what I’m doing. And I share a few ideas toward the end of today’s discussion.

You can listen in here…

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On March 29, 1879, a widely circulated newspaper called the American Register published a scathing editorial stating that “it is doubtful if electricity will ever be [widely] used” because it was too expensive to generate.

Several months later, the Select Committee on Lighting and Electricity in the British House of Commons held hearings on electricity, with experts stating that there was not “the slightest chance” that the world would run on electric power generation.

It’s not that electricity didn’t exist at the time. It did. Serious study and research had been devoted to electricity since the 1600s.

But even by 1879 it was still considered an expensive fantasy.

Then on New Years Eve of that same year, Thomas Edison publicly unveiled his incandescent light bulb in Menlo Park, California.

At the time he allegedly stated “We will make electricity so cheap that only the rich will burn candles.”

Three years later in 1882, Edison would switch on the world’s first public electrical utility.

And by the end of the decade he would go on to found General Electric, which remained one of the most important companies in the world until a bunch of buffoons ran it into the ground in the early 21st century.

We know, of course, what happened with electricity: it eventually became ubiquitous… slowly, then rapidly.

By 1908, 26 years after Edison switched on the first public electric utility, still only about 10% of US households were on the grid.

But then the pace of adoption accelerated. By 1941, 80% of households were on the grid.

So the first 10% took 26 years, and the next 70% took just 33 years.

For subsequent technologies the adoption curve was even steeper.

The refrigerator, for example, took just two decades to increase its prevalence in US households from 10% to 80%.

Mobile phones were even faster, soaring from 10% to 80% in just 14 years, from 1994 through 2008.

This is an important point: newer technologies are being adopted at faster and faster rates… once they reach a minimum critical mass.

The adoption of cryptofinance and distributed ledger technology (DLT) may likely follow this trend.

As we just discussed yesterday, banks are in desperate need of a giant kick in the ass– what technophiles refer to as ‘disruption’.

Banks have had a monopolistic stranglehold on their customer’s money for centuries.

And as we constantly see in the headlines, banks are not shy about abusing this privileged trust.

Crypto and DLT destroy their monopoly by decentralizing and disintermediating financial transactions.

After all, it’s 2018. There’s no reason anymore to put a bunch of middlemen between you and your savings.

Sending money should be as easy as sending an email… and the technology to do so should be as widespread as email itself.

Crypto and DLT make this all possible. And history would suggest that we could see widespread adoption of those technologies just 10-years after they reach a minimum critical mass.

For argument’s sake, let’s suppose that ‘minimum critical mass’ means that roughly 10% of individuals and businesses regularly use the technology for financial transactions.

A study from Cambridge University in March 2017 estimated the number of active Bitcoin users at between 2.9 million and 5.8 million.

That’s up from zero in 2009… so impressive growth for sure.

But even an optimistic view of those numbers would suggest that crypto and DLT use is far below a minimum critical mass for their widespread adoption to accelerate.

Clearly there’s still a long way to go until these technologies are as ubiquitous as email or mobile.

The question is– how much longer will it take to reach that critical mass?

The mobile phone industry may be an illustrative example.

The earliest cell phones were developed between 1971 and 1973. But it took more than 20 years for their usage to go from 0% to 10% of the population. (But then just 14 years to go from 10% to 80%.)

So using mobile phones as a benchmark, and given that crypto is already a decade old, it may be another 10 years before we reach that minimum critical mass.

The flip side of this means that we could still have another decade of incredibly compelling opportunities to explore, which I’d categorize as follows:

1) Core technology. In the earliest days of a major technological trend, there are always opportunities to develop, improve, and iterate the core technology that underpins that trend.

It always starts out with individuals– a guy like Steve Wozniak building circuit boards in his garage.

But eventually those opportunities are taken over by huge companies… and as time goes on it becomes more difficult for the little guy to compete.

That’s starting to happen with crypto: niche development opportunities that were once dominated by small teams of programmers are now attracting competition and resources from mega-companies (like JP Morgan).

It’s still possible to succeed in this area. But it will become increasingly difficult over the next several years.

2) Selling shovels to gold miners. These are the people and businesses who build core infrastructure and facilitate the technology’s adoption.

In the early days of the Internet, it was America Online.

This is a very compelling area in crypto right now, and there are a lot of major firms (Fidelity, Goldman Sachs) that are building infrastructure to make it easier to buy and sell cryptocurrency.

3) Application of the technology.

Think Amazon: Jeff Bezos took a new technology (the Internet) and applied it to a 5,000-year old business model (physical retail sales). He’s now the richest man in the world. And some of the most prominent names in retail are going bust.

This is, by far, the most exciting opportunity in the sector.

It’s not about speculating on some coin or ICO anymore; the real opportunity is in applying the technology to other industries.

And given the relatively low rate of adoption for the technology at the moment, this opportunity is WIDE open.

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What I’m about to tell you is a true story that highlights just how pathetic the banking system has become.

A few months ago I was presented with a compelling opportunity to invest with a prominent, well-established private business based in the UK.

And, after extensive due diligence, I decided to make the investment… around $4 million.

Because this particular investment happened to be denominated in US dollars, though, the funds were routed through the United States via one of the major Wall Street banks.

We’ve talked about this before– the vast majority of global trade and commerce is denominated in US dollars and clears through the US banking system.

As an example, the agriculture company that I founded in Chile a few years ago is rapidly becoming one of the largest blueberry producers in the world.

We sold blueberries to a big wholesaler in Ireland this season– and they paid us in US dollars. Their payment was routed from their bank in Ireland, through the US banking system, to our bank in Chile.

Nothing about that deal had anything to do with the United States. But regardless, the money still had to pass through a US bank. And that’s how the global financial system has functioned for 70+ years.

Yet over the past decade, banks in the US have really started to abuse their status as critical financial intermediaries.

A big part of this is because banks are under intense pressure from the federal government to stamp out money laundering, terrorist financing, tax evasion, and any criminal activity they can find.

These are reasonable objectives to pursue… but their execution has been dismal.

Unable to tell for certain whether that $5,000 wire transfer to Aunt Sally was for legitimate purposes or part of some grand tax evasion scheme, banks have defaulted to being suspicious of everyone and everything.

Deposit or withdraw a few thousand dollars in cash to/from your own account? Suspicious.

Make an investment in a private business they’ve never heard of? Suspicious.

Transfer funds to an account overseas? Suspicious.

Raise money from investors to launch a new business? Suspicious.

In my case the bank thought sending money to the UK was suspicious; apparently these guys think London is the hotbed of financial terrorism.

(I’d rather not say exactly which bank was giving us so much trouble since they’re basically all the same… but to give you a hint, the name begins with “Wells” and ends with “Fargo.”)

That’s the part that really gets me.

It’s not like the money was being sent to ISIS in Syria or Jihadis-R-Us in Afghanistan.

This transfer was coming from an impeccable source and going to a well-established, regulated business in one of the most advanced countries in the world.

It would have taken a five-year old about 30 seconds to Google everything and realize, “Oh right, this all makes sense.”

Yet instead some munchkin-brain in the bank’s compliance department decided he “wasn’t comfortable with the transfer” (as we were told).

And so, without any actual reason or evidence, Mr. Rock Star Compliance Guy denied a perfectly legitimate transaction. And then, just to be extra certain that he was saving the world, froze the funds.

I had to put one of my staff on a plane and fly her 8 hours to the United States just to get the money unstuck… a completely ridiculous waste of time and money.

It’s one thing to be vigilant against terrorism. It’s entirely another to constantly work against your own customers without exercising any common sense or basic professionalism.

It didn’t used to be this way. There once was a time when bankers were sophisticated business people and shrewd investors who understood the needs of commerce… and the customer.

But banks are no longer run by bankers. They’re run by oblivious bureaucrats who scrutinize every transaction looking for any excuse to say NO, forcing legitimate businesses to walk around on egg shells just to conduct simple transactions.

A big cause for this is that banks don’t need to do any real business anymore to make money.

They get to borrow practically unlimited funds at nearly interest-free from the central bank, and then loan that same money right back to the federal government at a higher rate of interest.

They provide mortgages to home buyers… then flip those mortgages to one of the federal government housing agencies like Fannie Mae, essentially guaranteeing the bank a zero-risk profit.

They get to milk their customers with all sorts of unnecessary fees, paying a whopping 0.02% interest on deposits in return.

They even get to steal from their customers through outright fraud– fraud which, despite all their compliance and scrutiny, conveniently fails to be detected by internal watchdogs.

And ultimately, when they screw it all up, they get to whine about how they’re too important to fail and demand a taxpayer-funded bailout.

With all of these guaranteed profits and safety nets, banks don’t actually have much incentive to do any real banking business anymore aside from multi-billion dollar deals with Apple and AT&T.

So it’s much easier and lower risk for them to adopt a guilty-until-proven-innocent attitude and be an obstacle to business and commerce.

Mine is just one small example of their financial barbarism… and far from an isolated case. These things happen countless times each day.

And it’s a good reminder to not keep all of your eggs in one basket… including a bank.

Remember that any money you deposit at a bank technically becomes the bank’s money. It’s their asset, and they’ll do whatever they please with it, including restricting your most basic transactions.

So it’s a reasonable idea to keep a month or two’s worth of living expenses denominated in physical assets like cash and gold in a secure place. This is a form of savings that’s 100% under YOUR control.

The good news is that cryptofinance technology could rapidly make banks obsolete faster than anyone realizes. More on that tomorrow.

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It’s considered the worst merger in history.

Back in January 2000, AOL bought Time Warner for $162 billion, which was considered an astonishing amount of money back then.

Their goal was to create a tech/media giant. And they failed miserably.

Time Warner was having a difficult time establishing an online presence, so they thought they would benefit from AOL’s 26 million dial-up subscribers.

And AOL, the leader in “online” at the time, was supposed to benefit from Time Warner’s cable network and content.

At the time – peak dotcom madness – tech firms could do no wrong, and investors praised the ambitious merger.

But January 2000 was literally THE top of the market. The dot-com bubble burst almost immediatley afterwards. Recession followed.

In addition, AOL was bleeding subscribers as cheaper and faster broadband Internet providers stole market share.

By 2002, the merged companies were performing so poorly that they had to take a $99 billion write-off– the largest in corporate history– to account for the deterioration of AOL’s business.

They say history doesn’t repeat, but it often rhymes. And today the tech world and media world are once again in a frenzy to merge.

Earlier this month, telecom giant AT&T completed its acquisition of media titan Time Warner following a 2-year ordeal to obtain government approval.

Now, the fact that these two private companies had to fight in court against the government simply to be able to merge is pretty ridiculous.

But this letter isn’t about the heavy hand of government.

It’s about debt.

Because, including the whopping amount of debt that AT&T inherited, the deal between the two companies was valued at $108 billion.

$108 billion. That’s an awful lot of money that AT&T paid for Time Warner.

Yet in exchange for such a princely sum, Time Warner will only contribute around $1 billion in annual Free Cash Flow to AT&T.

This is crucial to understand.

Remember that, in simple terms, Free Cash Flow represents the final profit available to shareholders after all capital investments, taxes, and other expenses have been deducted.

Plus, because Free Cash Flow filters out most accounting gimmicks, it’s one of the better representations of a company’s true profitability.

So that means AT&T bought Time Warner for about 100x Free Cash Flow, equivalent to a yield of just 1%.

AT&T believes, however, that certain ‘synergies’ exist between the two companies, which could increase that Free Cash Flow level to $3 – $3.5 billion.

Yet even if they’re successful in achieving that target, AT&T’s effective return will only rise to 3%.

That’s the best case scenario… which is hardly worth writing home about.

I mean, seriously, you could do better than that buying government bonds. Why take on so much risk for such a trivial return?

But in order to achieve this 3% target return, AT&T had to (a) dilute its existing shareholders, and (b) take on tens of billions of dollars in debt.

According to AT&T’s own press release, the company now has $180.4 billion of net debt.

And we needn’t go back too far in the past to highlight how ridiculous this is.

In 2010, AT&T generated $15.4 billion in Free Cash Flow. And at the time it had $57.5 billion in net debt.

By the end of 2017, the company’s free cash flow had increased 20% to $18.5 billion.

Yet its debt more than DOUBLED to $125 billion.

Think about that– a 20% increase in Free Cash Flow, yet a 100% increase in debt.

And now, post-merger, the company is increasing debt another 44% to $180 billion, while Free Cash Flow is increasing about 5%.

This is a massive imbalance. The role of any company’s management is to allocate resources in a way that safely maximizes returns for shareholders.

Yet AT&T seems to be doing the opposite– taking on riskier levels of debt to generate diminishing returns.

They’re not alone.

Already, global corporate debt excluding financial institutions stands at a record $11 trillion. And just like AT&T, debt has grown much faster than Free Cash Flow.

There’s also currently a bidding war between Disney and Comcast for just a portion of 21st Century Fox’s assets.

The bid is now $71.3 billion, though it’s possible the final amount could be MUCH higher… and another ridiculous multiple of Fox’s Free Cash Flow.

According to the Wall Street Journal, the combined AT&T/Time Warner and Comcast/Fox entities would carry a combined $350+ billion of debt.

That’s larger than the size of the Colombian economy.

It’s pretty remarkable to even be able to borrow that amount of money, let alone for assets which produce relatively small returns.

This is one of the telltale signs of being near the top of a bubble– when companies throw caution to the wind and take on substantial risk for minimal benefit.

It’s worth thinking back to the housing crisis and financial meltdown a decade ago.

Prior to the collapse, banks spent years loaning money at practically 0% to borrowers with bad credit.

And more than that, these risky borrowers didn’t even have to put down any money. Banks commonly loaned up to 105% of a property’s purchase price… and used their depositors’ savings to do it.

Bear in mind, banks often made less than 1% on these mortages.

So just like the AT&T example today, banks from a decade ago took on huge levels of risk in exchange for miniscule returns…

… until eventually the entire system blew up.

That’s not to say there’s some imminent financial catastrophe looming.

But it would be silly to ignore the impact of adding hundreds of billions of dollars worth of debt to acquire assets which contribute comparatively tiny returns.

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In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires.

Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury.

So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere.

Augustus wanted to end this practice by setting up a special fund specifically for military pensions.

And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations.

Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare.

He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money.

But as you can probably already guess, the money didn’t last.

Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes.

Within a few centuries, the fund was gone.

This is a common theme throughout history… and still today: pension funds are almost invariably mismanaged to the point of catastrophe.

We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time.

Congress has even formed a committee that’s preparing for massive pension failures.

And here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund.

According to the Pennsylvania state auditor, the pension was 65.7% funded in 2011, i.e. the fund had enough assets to pay about two-thirds of its long-term obligations.

Now, that alone should have been enough to sound the alarm bells.

But by 2013, two years later, the fund’s solvency rate had dropped to 49.7%. And by 2015, it was just 38.5%.

Incredible. 38.5%. At that level, there’s simply no chance the city will ever be able to meet its obligations to retired police officers.

A few years ago, city politicians took notice of this enormous funding gap and tried to take some small steps to patch it up.

Specifically, the city proposed excluding an officer’s overtime in the calculation of his/her pension benefit.

It was a small change and certainly wouldn’t solve the bigger problem. But it would at least buy the fund a few more years of solvency.

So naturally the union sued.

And earlier this month a Pennsylvania court ruled against the city, i.e. Wilkes-Barre must continue calculating pension benefits the old way.

This helps no one; it only accelerates the demise of an already insolvent pension.

Oh, and it’s not just their police pension either. Wilkes-Barre’s pension for firefighters is hardly better off, just 46.1% funded.

Unfortunately, these pension problems aren’t unique to Wilkes-Barre. City and state pension funds across the country… and the world… are in similar, dire straits.

The city of San Diego has a $6.25 billion shortfall on obligations promised to current and retired employees.

The State of New Jersey has $90 billion in unfunded pension liabilities.

And of course, Social Security has unfunded liabilities totaling tens of trillions of dollars.

The situation isn’t any different in Europe.

Spain’s Social Security Reserve Fund has been heavily invested in Spanish government bonds for several years– bonds that had an average yield of NEGATIVE 0.19%.

You read that correctly.

Unsurprisingly, Spain’s pension fund is almost fully depleted.

The United Kingdom has trillions of pounds worth of unfunded public pensions.

Even conservative Switzerland has a public pension that’s only 69% funded – a seemingly fantastic number by today’s dismal standards.

Last year, the Swiss government proposed a plan to save its pensions, asking to increase the retirement age for women by one year (from 64 to 65, the same as men), and increase VAT by 0.3%.

But the plan was rejected by Swiss voters in a national referendum– the third time in 20 years that pension reform failed to pass.

And that’s really the key issue here: pension plans are almost universally toast.

Most of the time, politicians just ignore the problem and try to kick the can down the road to the next administration.

But occasionally they try to do something to help.

Yet whenever they do… voters reject the plan. Or the union sues. Or something else happens that prevents much-needed reforms from passing.

This merely accelerates the inevitable: these pensions are going bust.

I’m not trying to be sensational– these are mathematical realities echoed by the officials who oversee these funds.

For Wilkes-Barre’s police pension, it’s the Pennsylvania State Auditor who says the program is only 38.5% funded.

With Social Security, it’s the United States Secretary of the Treasury who says the program’s trust funds will soon be depleted.

Social Security even provides a date, like the expiration on a carton of milk, after which Social Security will go bad.

These warnings are all publicly available information, not some wild conspiracy theory. And that’s really what they are: warnings.

At this point, continuing to believe that these pensions will be solvent forever is completely ludicrous.

The only rational option is to take matters into your own hands. For example:

– Start saving more. You’d be shocked at what an enormous difference it can make to save an extra $1,000 per year when compounded over several decades.

– Learn to be a better investor. Averaging an additional 1% annual return for your retirement savings can add up to hundreds of thousands of dollars over the course of 20-30 years.

– Consider a more robust retirement structure like a Solo 401(k) or self-directed SEP IRA that allows you a greater breadth of investment options– everything from real estate to crypto to private equity.

– And it may even be possible to stash $50,000+ per year in self-employment “side” income, (selling products on Amazon, driving for Uber, etc.) into that retirement account.

The signs are clear… anyone depending on social security or a pension for their retirement is in trouble. It’s time to take this issue into your own hands.

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By the time Louis XIV passed away in 1715, seven decades of his absurd extravagance had nearly bankrupted France.

His reign was marked by constant warfare and the most excessive spending imaginable, from opulent palaces (including Versailles) to a costly welfare state– public hospitals, parks, monuments, museums.

Louis XIV had turned France into the world’s leading power. But it came at a heavy cost.

The national debt was nearly as large as the entire French economy itself, and the government’s annual budget deficit was appalling.

France was bleeding cash. And so in 1719, the government tried a new idea to shore up its finances.

First, they issued a formal decree granting a full monopoly over nearly all of France’s international commerce and trade to a company called Compagnie du Mississippi, i.e. the Mississippi Company.

The government gave full control of the deal to a Scottish banker named John Law; Law was to sell shares of the Mississippi company to the public, and funnel the proceeds to the government.

The initial share sale was a phenomenal success. Law promised investors that the Mississippi Company would pay an annual dividend equivalent to about 120% of the share price.

It was an extraordinary prospective return. And investors literally lined up outside of Law’s house to apply for shares.

Almost immediately a bustling secondary market for the shares emerged, and countless people of every age, gender, and social status spent their days buying and selling stock in the Mississippi Company.

The investor hysteria was so extreme that the share price of the Mississippi Company would sometimes rise 20% in the course of a few hours.

A quaint plaza near John Law’s home became the unofficial stock exchange for Mississippi Company shares, and there are legendary stories of the investor frenzy there.

In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote about a local cobbler who was able to rent out his stall in the plaza for an extraordinary sum of money, and about a hunchback who earned a great living charging speculators to use his hump as a writing surface to sign contracts.

EVERYONE was making money. It was commonplace that illiterate farm laborers would turn their meager savings in substantial fortunes, practically overnight.

Of course, hardly anyone knew what they were buying– whether there was an actual business plan, whether management was competent, or whether the deal could generate any profit.

Those seemed to be irrelevant details. The only two things that mattered were the fact that the share price was going up, and that the New World had enormous potential.

So the speculation persisted.

At the end of 1720, the bubble finally burst, not even two years from the time that it started.

A few people made money– those who got in early and weren’t stupidly greedy. But most people lost everything. And John Law fled to Belgium.

Now, it’s difficult to read about the Mississippi Company Bubble and not think about the modern roller coaster ride of cryptocurrency.

Please don’t misunderstand– I’m not anti-crypto.

I was an early adopter of Bitcoin and have made a number of investments in promising crypto startups.

But even the most die-hard crypto fanatic should acknowledge the irrational frenzy in late 2017 that saw cryptocurrency prices soar to new heights on an almost daily basis.

And just like the Mississippi Bubble, it was fed by countless speculators feverishly throwing their money at an asset based on the facts that crypto has enormous potential, and it was going up in price.

Apparently, crypto fever got so bad that a hospital in the UK set up a program for Cryptocurrency Addicts.

The Castle Craig Hospital website has a self-assessment tool with a number of questions, for example–

• Am I spending large amounts on cryptocurrency?
• Do I spend a lot of time thinking about different types of cryptocurrency?
• Have I ever fibbed to other people about how much time or money I spend trading in cryptocurrency?
• Do I become restless or irritable if I try to cut down my screen time related to cryptocurrency?
• Do I carry on trading in cryptocurrency after losing money – to try to gain it back?

And more.

The fact that this treatment program even exists is a testament to the sheer volume of fanatics who are consumed with the prospect of getting rich quick on the next cryptoflavor du jour.

When there’s that many people who believe they can become extraordinarily wealthy in a short amount of time by merely acquiring an asset that’s a tiny representation of a future trend, you can rest assured that most of the easy money has already been made.

And that’s really the point: we’re no longer in the earliest, most nascent stages of the crypto game.

You hear about Bitcoin now on the nightly news. It’s mainstream.

So the idea that there’s still a high likelihood of making a 10,000x return on some random coin or token at this stage in the game is just plain naive, especially when the investment thesis is simply “crypto is the future.”

Yes, the broader concepts of crypto and distributed ledger technology are the future, just as the New World represented tremendous opportunity back in 18th century France.

But just like the Mississippi Bubble, that larger trend doesn’t automatically mean that F*ckToken and T!tCoin are worthwhile investments.

Now, I’m not saying that you can’t make money in crypto anymore. Far from it.

As we talked about last week, there are still unimaginable fortunes to be made from this trend.

But at this point, those new fortunes are awaiting investors and entrepreneurs who are at the forefront of developing the technology and applying it to the countless, game-changing possibilities in public and private industry.

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It’s hard to imagine, but today is actually Sovereign Man’s 9th birthday.

Nine years ago, on June 19, 2009, I sent out the first ever Notes from the Field email.

To commemorate the occasion, I thought I’d republish that first article… because I think it still captures the challenges we face, as well as the boundless solutions ahead of us.

I hope you enjoy.

=====

William “Bud” Post is flat broke.

He has dealt with lawsuits, jail time, bankruptcy, and now lives on food stamps.

It seems strange to think that he used to be a multi-millionaire… but it’s true. In 1988 he won $16.2 million from the Pennsylvania lottery (valued at $30 million in today’s increasingly worthless money), and Bud became drunk on his own wealth.

You’ve probably heard similar stories—the struggling, working class lottery hopeful hits it big in the Powerball only to return to the trailer park, broke, within a few years.

In irresponsible hands, wealth can evaporate faster than Nancy Pelosi’s approval ratings… and the lottery winners like Bud generally make bad decisions.

They become careless and foolish with their wealth, spending enormous sums of money on opulent consumer goods, gambling trips, and nights in the champagne room.

Banks line up to provide them with generous lines of credit that they blow on useless toys or handouts to a fawning entourage.

At the height of this bubble, someone like Bud has fame, wealth, power, friends, women, houses, yachts… but no foundation for the future.

Each trip to the ATM is a missed opportunity to make a smart decisions… but Bud never cared. He thought the money would last forever. He thought the banks would always give him a loan. He thought his friends would never leave him.

Then one day Bud went to the ATM and found that his balance was ZERO. He went to the bank for a loan and was declined. The money was gone. His friends had disappeared.

The lawsuits started rolling in. Suddenly poor Bud found himself with absolutely nothing but distant memories of drunken consumption.

Sound familiar? It should. Bud is the United States of America.

America hit the lottery after World War II. We had defeated the Germans, nuked the Japanese, and remained the only developed country in the world that had not been devastated by the war. The US instantly became the richest kid on the block, and like Bud, spent the next several years in an alternate universe devoid of rational thinking.

Decades of poor financial decisions were made based on the idea that the money would never run out.

LBJ fought a costly war in Vietnam while building the Great Society.

George W. Bush fought two wars and told America to go shopping.

Barrack Obama thinks he can provide universal healthcare while bailing out every malignant company in America.

The common theme here is the avoidance of difficult choices. When Bud went to buy a new car and saw five that caught his eye, he bought all of them and built a bigger garage.

America’s politicians have made a similar series of irrational choices for decades, and now the money is gone… all that remains is America’s winner syndrome.

We’ve been winners for so long we don’t know any other reality. We live in a bubble world where the United States is the biggest, richest, smartest, most powerful country on earth, even though mounting evidence suggests otherwise.

We continue to spend like Bud as if we are wealthy lottery winners, still assuming our God-given right to avoid tough decisions.

Individually, such delusional behavior and separation from reality are symptoms of a severe mental illness.

If the collective body of America’s politicians were a psychological patient, he would be locked up as a danger to himself and society.

We call this affliction winner’s syndrome, and it continues to plague the decision making process in the halls of Congress. The only antidote is a healthy dose of reality and rationality.

At any point, Bud could have pulled himself out of his downward spiral with a little clear thinking, a little less ‘yes we can,’ and a little more ‘maybe we can’t…’

Clear thinking could still save America. If we take it on the economic chin, allow our businesses to fail, and restructure the economy, the United States will come out of this slump stronger than before.

Unfortunately, there are no near-term indications of rationality in Washington… though while the country may be on a slide, clear thinking could still save you– and that’s where we come in.

Clear, rational thinking in today’s world means considering the full range of global opportunities to invest, protect yourself and safeguard your assets.

We specialize in these opportunities; we travel the world in search of the best lifestyle choices, financial deals, privacy options, and asset protection strategies, some of which we’ll share with you in this daily letter.

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Whether this is your first day, or you’ve been with us since the beginning, thanks from the bottom of my heart for being part of this thriving community.

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On January 23, 1995, President Bill Clinton signed into law a piece of legislation that had been almost unanimously approved by both the United States Senate and the House of Representatives.

It was called the Congressional Accountability Act of 1995– CAA.

The idea behind the CAA was to force Congress to abide by the same rules of workplace health and safety that private companies have to follow.

And one notable example was sexual harrassment; until the CAA was passed, sexual harrassment rules didn’t really apply to Congress.

Here’s where it gets crazy, though: the CAA established an agency called the Office of Compliance to adjudicate various workplace complaints.

And the law further directed the Treasury Department to allocate taxpayer funds to pay claims and damages resulting from such workplace complaints.

In other words, for nearly a quarter of a century, taxpayers have been footing the bill to settle monetary damages every time a member of Congress was caught groping an intern.

What’s more, section 416 of the CAA requires that all mediation, hearings, and deliberation in sexual harrassment claims (or any other workplace complaint) be kept strictly confidential, i.e. NOT disclosed to the public.

Plus a lot of the settlements come with strings attached. In one case of sexual harrassment against former Congressman John Conyers, the legal settlement required the complainant sign an agreement with strict non-disparagement clauses:

“Complainant agrees that she will not disseminate or publish, or cause anyone else to disseminate or publish, in any manner, disparaging or defamatory remarks or comments adverse to the interests of Representative John Conyers . . .”

They’re finally in the midst of passing a law to change this.

There’s a new bill that was recently introduced in the Senate called the CAA Reform Act which aims to heavily revise the originaly 1995 bill.

Among other provisions, section 111 of the CAA Reform Act will require members of Congress to pay their own damn legal settlements… so they’ll no longer be able to grope interns on the taxpayer’s dime.

It’s amazing that this was actually the law of the land for more than two decades.

The United States fancies itself as having the most advanced republican democracy in the world. But this is banana republic stuff, plain and simple.

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Earlier this week while most of the world was transfixed on the World Cup, the Trump/Kim handshake, or a multitude of other sundry events, Julius Malema, aka the Hitler of South Africa, was busy telling white people in his country that he’s not going wage genocide against them. Yet.

In an interview with TRT World News published this week, Malema said, “We have not called for the killing of white people. At least for now. I can’t guarantee the future.”

When the reporter mentioned that some people might view these remarks as a call to genocide, Malema responded, “Crybabies. Crybabies,” but later warned white South Africans that “the masses are on board” for “an un-led revolution and anarchy”.

Malema is a prominent politician in South Africa and at the forefront of his country’s movement to confiscate land from white property owners and redistribute it to the country’s black population.

No actual specifics about the plan have been revealed, of course.

So even if someone thinks this land grab is social justice, it’s at least reasonable to acknowledge the massive corruption that plagues South Africa’s government.

And presuming that a multi-billion dollar expropriation wouldn’t be fraught with graft is just plain naive.

There has also been zero acknowledgement that forced exprorpriation of private property would cause a wave of defaults on real estate mortgages, triggering a massive banking crisis and unforgiving recession.

South Africa already a prime example about the economic consequences: Zimbabwe’s own land expropriation plunged that country into an economic cataclysm spanning two decades.

Yet these all seem to be irrelevant details.

Malema even went so far as to downplay Zimbabwe’s economic catastrophe, saying “You cannot [measure] the Zimbawean revolution based on the capitalist definition.”

I’m not sure what Marxist definition he’s using to measure success.

But we do know that two decades after land redistribution in Zimbabwe (which used to be considered the breadbasket of southern Africa), more than a quarter of the population is in danger of starving to death.

So even by the most basic metrics, Zimbabwe’s policies have been a total failure. Copying them is tantamount to suicide.

It’s truly astonishing that someone so dangerous and out of touch has been able to rise to power. And even more astonishing how quickly it’s happened.

A decade ago few people had heard of Malema. Now he commands millions and grows more powerful each day.

Swift, radical changes like this are common around the world, and throughout history.

In 1913, just a few years before the Russian Revolution, the Bolsheviks were a tiny group of radicals. Four years later they had taken over the entire country.

In 1928, the Nazi party was an obscure joke, winning a mere 2.6% of the votes in the national election that year.

Not even five years later, Adolf Hitler was German chancellor and had been awarded supreme power by the Enabling Act of 1933.

Point is, the world can change very quickly.

That’s why I’ve long been a strong advocate for having a Plan B.

It’s great to maintain a positive outlook and remain hopeful for the future. I certainly do. But sometimes circumstances don’t turn out like we hope.

Sometimes a tyrant rises to power. Sometimes financial markets crash overnight. Sometimes the most unexpected outcomes become reality.

Acknowledging these possibilities doesn’t make you a pessimist or an alarmist.

Rather, it’s rational and prudent to take basic, sensible steps to protect what you care about most, and what you’ve worked so hard to achieve.

For example, if you keep 100% of your wealth and investments domiciled in the same country where you live, you’re taking on unnecessary risk… especially if your home country is heavily indebted and legendary for civil asset forfeiture and frivolous lawsuits.

One sensible tactic would be to consider moving at least a small portion of your wealth to a different jurisdiction known for strong asset protection laws.

Another idea– some people may be surprised to discover that they’re eligible for citizenship in another country due to some long-lost ancestor.

Ireland, Poland, Italy, Spain, and a number of other countries all have laws making it possible for descendents of their nationals to become citizens.

And a second passport is a great asset . It ensures that, no matter what happens, you’ll always have another option… to travel, live, work, invest, do business, and bring your family.

That’s the whole point of a Plan B. You might not ever need it. But if you can prudently reduce your risk at minimal cost, there’s absolutely no downwide in having one. It just makes sense.

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This morning I had the pleasure of being buried in a mountain of paperwork– the penalty for trying to do basically anything in the financial system these days.

It seems that everything, from sending a wire transfer to establishing a new account, comes with endless bureaucratic hoops to jump through as you’re forced to convince these people that you’re not a criminal money laundering terrorist.

In my case I was opening a new brokerage account. And as I went through the process, the questionnaire asked me about my risk tolerance.

Was I seeking low risk and low returns? Or high risk and high returns?

This is one of the oldest fallacies in investing– the idea that risk and return go hand in hand.

I remember taking a personal finance class more than 20 years ago and seeing a neat little graph in the textbook showing a straight line at a perfect 45 degree angle: the higher the risk, the higher the reward.

Sadly there was no option for “None of the above.” Because in truth I prefer strong returns with minimal risk.

And for anyone willing to put in the hard work, there are options to achieve this outcome.

We’ve been discussing this concept a lot lately because I think we’re on the verge of a major turning point.

Just consider what’s happened in the last two weeks alone:

Yesterday, the Federal Reserve raised interest rates, as expected.

But the Fed also signaled continued rate increases based on concerns about inflation and an overheated economy.

Two days earlier, the Department of Labor published data showing that inflation in the US reached a 6-year high.

And earlier this month the Labor Department reported the lowest unemployment rate in decades.

(The unemployment rate is a deeply flawed metric. But regardless, the central bank typically raises interest rates when it gets too low.)

This is all happening at a time when the federal government has racked up a record amount of debt that is only going higher.

The Treasury Department’s own estimates are that it will borrow trillions of dollars more over the next few years.

This is going to be incredibly difficult given that Uncle Sam’s most reliable lenders over the past decade (China, Japan, and the Federal Reserve) are no longer buying US debt.

And because there are fewer buyers for US government bonds, the interest rates on those new bonds will be higher. It’s basic supply and demand.

Bottom line, all of these trends lead to higher interest rates.

And for an economy that has been addicted to 0% interest rates for more than a decade, this will likely have serious consequences.

One obvious consequence is that higher interest rates tend to put pressure on asset prices.

Think about real estate as an example: most people borrow money to buy property.

If a buyer makes enough money to be able to afford a mortgage payment of $3,000 per month, that’s enough to buy a $827,000 house (assuming a 20% down payment) if interest rates are 3.5%.

But if rates rise to 5.5%, that same $3,000 per month only buys a $654,000 house.

Higher rates mean buyers can’t pay as much, so real estate prices fall across the board.

It’s similar with stocks.

For the past several years, companies have borrowed enormous quantities of money and used a lot of it to buy back their own shares.

Stock prices surged as a result of this artificial demand.

Rising interest rates should significantly diminish these debt-fueled buybacks, meaning that one of the biggest contributing factors to rising stock prices over the past few years is going away.

So no matter whether you’re buying a house or investing your retirement savings, we’re reaching a turning point where there’s a lot of risk looming over important financial decisions.

And that takes me back to risk vs. reward.

Bottom line, you don’t have to take a lot of risk to achieve higher returns.

Here’s an easy example: right now the biggest banks in the US pay almost nothing to their depositors.

Bank of America’s interest checking account pays just 0.01%. JP Morgan Chase pays a whopping 0.02% on a 1-month Certificate of Deposit.

The government of the United States, on the other hand, is currently paying almost 2% on a similar product, the 28-day T-Bill.

There’s virtually no difference in risk: loaning money to your bank, versus loaning money to the government.

To be clear, neither is risk-free. Not by a long shot. But I’m illustrating that the risk differential between the two options is essentially zero.

Yet the reward with T-Bills is 100x as great. So you’re taking similar risk but achieving a MUCH higher reward.

It seems obvious. But most people don’t think about this.

We’ve been trained to believe that our savings belongs in a bank, that our investment capital belongs in the stock market, and that higher returns require higher risk.

But there’s an entire universe of options that defies these conventions.

We talked about a few of these yesterday— including T-Bills, asset-backed Peer-to-Peer loans, and deep value investments.

Deep value is essentially buying $1 for 50 cents.

This is our Chief Investment Strategist’s primary area of expertise– he routinely finds absurdly undervalued businesses that are selling for a fraction of their liquidation value.

Think about it: if you only pay 50 cents for an asset that’s legitimately worth $1, you stand to double your money.

Yet most of the risk has already been taken off the table. So there’s not much downside remaining.

Low risk. Strong return.

Whatever you choose to do, it’s important to start paying close attention to what’s happening.

The people who drive these policy decisions are being EXTREMELY vocal.

The Federal Reserve. The Treasury Department. They’re telling us what’s coming next. Ignore them at your own peril.

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