Category: simonblack

The most powerful banker in the world, JPMorgan Chase CEO Jamie Dimon, just released his annual letter to shareholders.

Behind Warren Buffett’s annual missive, Dimon’s letter is probably the most read and deliberated executive report out there.

For one, Dimon is one of the most connected and respected men in finance.

And given his bank’s massive size (it earned $24.4 billion on $103.6 billion in revenue last year) and reach (it’s a giant in consumer/commercial banking, investment banking and wealth management), Dimon has incredible visibility and intel on what’s going on around the world.

This year Dimon used a large chunk of his 46-page letter to share his thoughts on government and public policy, saying it’s hard to look at the last 20 years in America “and not think that it has been getting increasingly worse.”

And if you’d like to hear how Dimon suggests we fix regulation, immigration, taxation, infrastructure, education and every other problem in America today, it’s all in there.

I’m not really interested in his political views. Dimon runs one of the biggest banks in the world, so I’m much more interested in his insights into the economy and financial markets.

Fortunately, Dimon didn’t waste all of his letter on politics.

He says the US economy seems healthy today and he’s bullish for the “next year or so.”

He sees lower unemployment, higher capital spending, wage growth, low housing supply and “relatively strong” consumer and corporate credit aiding growth.

Well, it’s easy to have rose-colored lenses when your profits come from lending money… because there’s more debt in the world today than ever before.

Both corporations and consumers are sitting on a record amount of debt. And as I pointed out earlier this week, the fastest growing bank asset last year was subprime loans… meaning that the -quality- of debt is getting worse and worse.

Then there’s the US government, whose debts just passed $21 trillion for the first time in history.

And they’re projecting adding another trillion dollars of debt each year into the foreseeable future.

Later in his letter, Dimon admits that the US is facing some serious economic headwinds today.

For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences.

Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.

According to Dimon [my emphasis added]:

Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal.

We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.

To that point, the Dow dropped over 700 points intraday. Then it dropped over 500 points on Wednesday, before ending the day slightly higher.

But this extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already.

And if we see the bottom fall out in stocks, you can be sure the Fed will change course, as Dimon suggests.

While nobody has a crystal ball when it comes to the markets, Dimon seems pretty sure we’re in for more volatility and higher interest rates. Again, given his position, he knows what he’s talking about.

One scenario that would require higher rates from the Fed is higher inflation:

If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.

As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.

Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve.

But now that QE has ended, the US government just lost its biggest lender.

Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt.

That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…

So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.

We’ll leave you with one final point from Jamie Dimon. He acknowledges markets have a mind of their own, regardless of what the fundamentals say.

And he sees a real risk “that volatile and declining markets can lead to a market panic.”

The most powerful banker in the world believes we’ll see more volatility and higher interest rates in the future. And he sees a chance of an all-out panic.

Given that scenario, I’m happy to watch this from the sidelines. As we’ve talked about before, this is a really good time to think about increasing your cash position.

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They say that goldfish have the shortest memory in the Animal Kingdom… something like 3-seconds.

But it turns out this isn’t actually true.

Researchers at the Israeli Technion Institute of Technology conducted an experiment in 2009 proving that even the tiniest fish could be trained to recall certain sounds after as long as FIVE MONTHS.

According to another study from the University of Chicago, Dolphins ostensibly have the best memories in the Animal Kingdom, and in an experiment were able to recall a distinct whistle after 20 YEARS.

Then there are bankers… financius dumbassus, a curious species not fully related to the Animal Kingdom, somewhat descended from protozoa, who display truly bizarre behavior when it comes to memory function.

Case in point: Throughout the mid-2000s, bankers engaged in woefully short-sighted, self-destructive behavior by loaning their depositors’ money to risky borrowers who put no money down to buy overpriced houses.

These loans called ‘subprime mortgages’. And before long, some even more self-destructive bankers began packing thousands of these subprime mortgages together into gigantic bonds, which bankers would trade among themselves.

Everybody in the financial system was in on it.

The mortgage brokers raked in huge fees for closing individual loans.

The investment bankers made money packaging the loans into subprime bonds.

And the ratings agencies (like S&P and Moody’s) made money slapping pristine “AAA” ratings on these bonds, essentially promising the world that they were RISK FREE.

Looking back they obviously weren’t risk free.

Banks were making risky loans to borrowers who had a history of not paying their debts based on the premise that home prices only increase in value.

And when home prices started to fall, the entire apparatus collapsed in late 2008.

You’d think that the entire financius dumbassus species would have learned from this experience.

But you would be wrong.

And that’s because financius dumbassus has an incredibly short memory.

Not even a decade after these loans nearly brought down the entire global economy, SUBPRIME IS BACK.

In fact it’s one of the fastest growing investments among banks in the United States.

Over the last twelve months the subprime volume among US banks doubled, and it’s already on pace to double again this year.

Bottom line– financius dumbassus is once again back to its old ways… making risky loans to borrowers with pitiful credit.

What could possibly go wrong?

Leave it to financius dumbassus to try the same thing again and expect a different result. It’s textbook insanity.

Of course, they don’t call it ‘subprime’ anymore. Now it’s called “non-QM”, meaning “non qualified mortgage.”

But it’s exactly the same thing– borrowers who don’t qualify for a conventional loan because of their pitiful credit and inability to make a down payment.

It’s as if they think they’ll be able to avoid the same consequences simply by changing the name. It’s genius!

As a friendly reminder, financius dumbassus isn’t making these suprime/non-QM loans with its own money.

Oh no. They’re making these loans with their depositors’ money. YOUR money.

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Nearly 4,000 years ago in the mid 18th century BC, the King of Babylon passed away, leaving the throne to his 18-year old son Hammurabi.

Hammurabi was smart enough to know that his kingship would be incredibly short if he didn’t do something quickly to assert his power.

So as his first order of business, Hammurabi made a bold proclamation that won him incredible support from his people: he forgave ALL citizens’ debt that was owed to the government… including high-ranking government officials.

This proved to be enormously popular. Ancient Babylon had a highly advanced system of credit, and the average Babylonian was heavily indebted.

Interest rates were regulated by the government at between 20% to 33%, though these limits were often circumvented by clever lenders who knew how to bend the rules.

Babylonian laws were written in favor of the lender; no one was allowed to borrow a single shekel unless he agreed to be held personally and completely responsible to repay the loan.

Babylonian lenders could even seize a member of the debtor’s family, holding them for up to three years, to enforce repayment.

So you can just imagine what a relief Hammurabi’s proclamation was to the average guy.

It’s quite remarkable what a prominent role debt has played in the history of our species.

Going back another 2,000 years before Hammurabi to ancient Sumeria, a man was legally entitled to sell his wife into slavery, or hand her over to his creditors, in order to repay his debts.

The Book of Leviticus tells us that the Hebrews mandated debt forgiveness every 50 years, what was known as the Year of Jubilee.

Under the laws of debt in medieval Hindu culture, children and grandchildren were forced to assume the debts of their ancestors (which typically carried 20% interest), leading many people to vehemently attempt to disprove their blood relationship to a recently-departed parent.

Ancient Greece was also a heavily indebted culture, to the point that unsustainable debt burdens seemed to constantly put Athens at risk of popular revolution.

And Ancient Rome, even by modern standards, had a comprehensive, cutting-edge bankruptcy code, which included an orderly sale of a borrower’s property in order to satisfy his unpaid debts, while keeping his person and family in-tact.

We see this theme over and over again throughout our history; yet despite thousands of years of human progress, we have not lost our proclivity for debt.

It seems to be in our DNA to borrow from future prosperity in order to finance consumption today.

Case in point: according to a 2016 study by the Finra Investor Education Foundation, only 2 in 5 Americans is able to spend LESS than they earn.

In other words, 60% of the country is barely making ends meet.

Another report in 2016 from the Pew Research Center showed that, while incomes are essentially stagnant, typical household spending continues to rise.

And data from the Bureau of Labor Statistics released late last year similarly show that 50% of American households spend more than their income.

That’s tens of millions of households who have to make up the difference between their incomes and living expenses by taking on debt.

That’s why consumer debt in the United States has risen to an all-time high. Student loans are at an all-time high. Auto loans are at an all-time high. Credit card debt is at an all-time high.

And delinquency rates are once again on the rise for the first time since the end of the 2008-2009 financial crisis.

But it’s not just individuals who can’t live within their means.

Corporations have also taken on record levels of debt– now more than $6 trillion in the US, and $68 trillion worldwide.

This includes ‘safe’, stable companies like McDonalds who have ruined their once-pristine balance sheets with billions of dollars of debt, to companies who perennially lose money and burn through cash.

Tesla is a great example.

Over the past four years, the company has lost $9 BILLION in negative free cash flow.

Tesla has made up for these losses by taking on enormous amounts of debt, to the point that its interest payments in the 4th quarter of 2017 totaled a whopping 33% of gross profit (up from 15% a year prior).

[Bear in mind, this is just ‘gross profit’. Tesla’s NET income was resoundingly negative.]

This means that more and more of Tesla’s sales are being gobbled up by interest payments… making it doubtful that the company can survive.

Curiously, founder/CEO/cult leader Elon Musk just tweeted an April Fool’s joke yesterday that Tesla was declaring bankruptcy… making light of his company’s dire financial condition as if he either doesn’t understand or doesn’t care.

And in addition to giant corporations who are addicted to debt, there’s the government itself, which recently crossed the $21 TRILLION mark in total debt.

Last week alone, in fact, the US government auctioned off $300 BILLION in debt… in just one week.

The Treasury Department estimates $1 trillion in new debt this year, another $1 trillion the following year, and another $1 trillion the year after that.

And none of those projections accounts for the possibility of recession, crisis, war, etc. Those figures are based on ‘business as usual.’

They’re further projecting that, in a few years, interest payments on the national debt will comprise more than 20% of the federal budget… more than defense spending.

Nor do these figures even begin to consider the enormous obligations from bailing out Social Security, fixing the multi-trillion dollar infrastructure problem, or the huge burdens owed by state and local governments.

It’s pretty obvious what’s happening: Consumers. Businesses. Governments. Everyone is in debt up to their eyeballs.

It doesn’t take a rocket scientist to figure out that this is dangerous and unsustainable. No one knows when… but at some point, there WILL be serious consequences.

And there’s 5,000+ years of human history to prove it.

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It’s about time. Someone has finally discovered what the adult entertainment industry has been missing for so many years: blockchain.

It’s true: a bunch of porn stars have recently gotten together to launch Bunny Software Ltd, a new cryptofinance startup that aims to ‘disrupt’ how people pay for pornography.

Instead of charging your credit card for that Pornhub Premium account, now you can charge your credit card for Bitcoin… then trade Bitcoin for Bunny Tokens, then trade your Bunny Tokens for porn.

Seems like quite a bit of extra work to go through– especially considering there are already a number of ways to discreetly make purchases online.

Dozens of services exist, for example, that offer disposable credit card numbers to help anonymize online transactions.

They’re cheap. Safe. Efficient. And proven.

But in the heady world of cryptofinance, none of those benefits matters.

The only thing people seem to care about is whether or not you’re doing something with the Blockchain.

If you are, then your business must obviously be a winner… even when there is absolutely no rational reason why your product or service would even need the blockchain.

Remember– the Blockchain is essentially a de-centralized ledger… a public database that isn’t controlled by any single individual.

Think about your bank account as an example.

Every record of every financial transaction you’ve ever made at your bank is kept in a giant database… a database that is controlled by the bank.

The blockchain, however, isn’t controlled by any single individual. It’s a database whose contents are securely distributed among everyone who uses it.

There are certainly some spectacular uses of the blockchain, especially in finance.

Stock purchases. Property titles. Shareholder records.

But that doesn’t mean that EVERYTHING should be in the Blockchain.

I mean, seriously, do we really need to upload our weekly grocery lists, or childrens’ report cards, into the Blockchain?

Some data doesn’t need to be made public. Or decentralized. Or distributed.

But in their zeal to grab onto the hottest financial trend in the world right now, people are coming up with the most idiotic uses of the Blockchain.

I recently read an article on Bloomberg about an ex-Google employee that wants to use Blockchain to track pigs from the field to the grocery store shelf.

I’ve read about other guys using Blockchain to track tips that people pay to bloggers.

IBM is studying how to use the blockchain to track cannabis distribution.

There’s just no end to these useless applications of the Blockchain.

And now we’ve got Bunny Tokens… a way for people to pay for porn using the Blockchain.

The company recently launched an ICO to raise money.

And if you spend some time on Bunny’s website you’ll learn that the board consists of several porn stars and a porn director.

You also learn the company has already partnered with a few businesses whose names are so explicit I can’t mention them here.

Yet after reading through 42-page white paper and watching their pitch videos, I realized that Bunny isn’t relying on a sound business plan or any actual technology to attract investors.

Sex sells. And BunnyToken is using porn stars its board members to bait the crypto rich into investing.

The message is clear: “Don’t worry about how we’re going to make money. Instead, just watch this video of a Russian porn actress explaining why you should invest in Bunny’s ICO.”

As ridiculous as this all sounds, though, the company has already raised $3 million. And they’re just getting started.

Across the entire crypto sector, more than $9 billion has been through ICOs.

And as I told you earlier this month, nearly half of all 2017 ICOs have already failed.

That failure rate will only increase with time.

Remember that ICOs aren’t even an asset class. That’s the craziest part of all.

Companies looking to raise cash simply need to publish a white paper explaining how their incomprehensibly silly use of the blockchain will ‘disrupt’ some industry.

And then the money starts rolling in.

Instead of traditional equity, though, companies sell “tokens” that are essentially pre-paid credits to be used within their very limited eco-system.

Imagine your neighbor wants to open an ice cream shop and came to you for investment capital.

But instead of offering you a stake in the business, he promises you a bunch of gift certificates that you can use to buy ice cream.

That’s basically what these ICO tokens are– gift cards.

Whether or not these tokens will have any value in the future depends entirely on the executives’ abilities to grow and build a sustainable business.

If your neighbor is a moron and runs the ice cream shop into the ground, your gift card will be worthless.

Similarly, if Bunny’s board of porn stars fall a little bit short of Richard Branson’s business acumen, the company will fail, and Bunny Tokens will go to zero.

And even if by some miracle, Bunny becomes a real business, token holders have no stake in the company.

That’s precisely the problem with most of these ICOs… too much downside, not enough upside.

And the entire sector is littered with stupidity, fraud, and senseless investors who aren’t thinking rationally.

What could possibly go wrong?

If you’ve been a reader for more than a few weeks, you know that I’m not anti-crypto.

I was a very early adopter of Bitcoin and have made a number of crypto investments over the years… including a six figure investment just a few weeks ago.

But this is about avoiding big mistakes.

And most of these ICOs are huge mistakes… incredible opportunities to lose money.

99% of them are going to zero because they’re not real businesses.

They’re just a quick fad… an easy way to dress up some silly idea in grown-up clothes and pass it off as a credible investment.

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I’m doing my best to take a few days off this week, and have the pleasure of spending time with some friends here in a fairly remote corner of Vietnam’s magnificent coastline.

This is one of the most pristine places I’ve ever been– a high-end resort nestled at the top of a mountain in the middle of nowhere overlooking Vietnam’s postcard-perfect Vinh Hy Bay.

I’ve traveled extensively through Vietnam over the years, from Hanoi in the north, to Saigon in the south, and all along the coast. And the country has always impressed me with its raw beauty.

But what’s always been even more impressive to me is how productive and industrious Vietnam has become.

Remember, this place is supposed to be Communist. And like all Communist experiments, this one nearly ended in economic catastrophe. Vietnam was among the poorest countries in the world just 30 years ago.

But in 1986, on the brink of economic meltdown, the government launched a series of sweeping economic reforms they called ‘doi moi’.

Suddenly it became possible for private individuals to start their own businesses, invest capital, and keep what they earned.

The economy started to boom practically overnight, and it’s been growing consistently at 6% to 8% annually for more than three decades.

The primary driver of the Vietnamese economy, of course, is production. Manufacturing. Exports. Etc.

In fact Vietnam is now a dominant manufacturer across dozens of industries and stands to gain if there’s a protracted trade war between the United States and China.

What’s also interesting about Vietnam is that the savings rate is one of the highest in the world– Vietnamese save an overwhelming percentage of their incomes to invest in the future.

So in other words, Vietnam’s economic model is based on saving and production.

This stands in stark contrast to the Western economic model which is based on debt and consumption.

In the United States (and much of Europe), for example, consumer spending comprises roughly 70% of all economic activity.

So consumption, not production, is the single largest component of GDP.

No one ever talks about American producers or entrepreneurs driving economic growth. It’s all about the consumer.

And savings rates in the West are appallingly low… sometimes even negative.

People go into debt to spend money they don’t have to buy things they don’t need to impress people they don’t like.

It’s totally absurd. Yet this is the primary economic growth model for most Western nations.

Consumption, of course, extends far beyond individuals.

Just look at government spending as an example.

The US government’s total debt level now exceeds $21 trillion. And just this week alone, the US government is issuing $300 BILLION in new debt.

To put that number in perspective, the entire US national debt was around $300 billion when John F. Kennedy was President of the United States.

Now they’re issuing that much debt in a single week.

Where does it all go?

The government spends trillions of dollars each year… and a lot of it gets wasted on some of the most comical misuses imaginable.

The National Institutes of Health, for example, spent $1,552,145 of your money to develop a video game that teaches parents how to feed their kids vegetables.

Then there was the $544,338 that the Justice Department spent to spruce up its LinkedIn profile.

And those are just two very tiny examples.

There are also really big, egregious examples, like that $2 billion Obamacare website fiasco.

Or the $1 billion that the Defense Department spent to destroy $16 billion of perfectly good ammunition.

This is all useless, wanton consumption. And it doesn’t take a rocket scientist to figure out the long-term consequences.

Countries whose economic models are based on savings and production will prosper.

Countries whose economic models are based on debt and consumption will suffer.

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Just a few days ago, shareholders of Tesla approved an almost comical pay package for their cult leader CEO Elon Musk that could potentially put $50 BILLION in his his pocket over the next decade.

Let’s put this figure in perspective: at $5 billion per year, Musk would make more than every single CEO in the S&P 500. COMBINED.

In other words, if you add up the salaries of all the CEOs of the 500 largest companies in America, it would still be less than the $5 billion per year that Mr. Musk stands to earn.

That’s pretty astounding given that Tesla’s own 2017 4th quarter financial report (page 24) states that Elon “does not devote his full time and attention to Tesla”.

Or more importantly, that under Musk’s leadership, Tesla’s chronic financial incontinence has racked up more than $4.97 billion in operating losses for its shareholders.

Or that the company has been under SEC investigation (without bothering to disclose this fact to shareholders).

Yet they saw fit to reward him with the largest CEO pay package in the history of the world.

This is precisely the type of behavior that is only seen during periods of extreme irrationality when financial markets are at their peak… and poised for a serious correction.

I’ll close this brief letter today quoting John Thompson, Chicago-based value investor and Chief Investment Officer of Vilas Capital Management.

Thompson is one of the few hedge fund managers who has consistently outperformed the market, and his fund is betting big against Tesla. What follows are some passages about Tesla from Thompson’s recent investor updates:

I think Tesla is going to crash in the next 3-6 months. . .

. . . partially due to their incompetence in making and delivering the Model 3, partially due to falling demand for the Model S and X, partially due to the extreme valuation, partially due to their horrendous finances that will imminently require a huge capital raise, partially due to a likely downgrade of their credit rating by Moody’s from B- to CCC (default likely) which should scare their parts suppliers into requiring cash on delivery (a death knell), partially due to the market’s recent falling appetite for risk, and partially due to our suspicions of fraudulent accounting activities, evidenced by 85 SEC letters/investigations and two top finance people leaving in the last month. . .

Tesla, without any doubt, is on the verge of bankruptcy.

The company cannot survive the next twelve months without access to capital from Wall Street Banks or private investors.

We estimate that Tesla will need roughly $8 billion in the next 18 months to fund operating losses, capital expenditures, debts coming due, and working capital needs.

However, it appears that due to past SEC investigations and current investigations (which terrifyingly have not been disclosed by the company), it will likely be difficult for Tesla to access public markets.

According to a recent analyst report, there have been 85 SEC requests for additional information and disclosures in the last 5 years.

This compares to Ford Motor Company’s total of zero over the same time frame. This means that Tesla is pushing many, many boundaries.

When a company is under formal investigation, it is difficult, if not impossible, to raise capital from public markets as these investigations must be made public, which generally craters the equity and debt values.

Therefore, Tesla investors better hope there are a number of Greater Fools in China or elsewhere to keep the company solvent.

At some point, the music stops and there aren’t any open chairs.

No matter how good a social investment makes you feel as it is going up, extreme anger will result if most or all of your money is permanently lost, especially when it is due to false and misleading statements by senior company officers.

This is when the [Department of Justice] steps in and escorts untruthful managements to their new living quarters.

. . . As a reality check, Tesla is worth twice as much as Ford* yet Ford made 6 million cars last year at a $7.6 billion profit while Tesla made 100,000 cars at a $2 billion loss.

Further, Ford has $12 billion in cash held for “a rainy day” while Tesla will likely run out of money in the next 3 months.

. . . I have never seen anything so absurd in my career.

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I was in the gym earlier today trying to ward off the effects of trans-Pacific travel and 12 hours of time zone changes when the news flashed across the TV that the US government was issuing another round of tariffs against China.

This may be the dumbest move they could possibly make.

It’s so stupid, in fact, that I couldn’t contain myself in print. For this, I had to go to audio… and record a pretty epic rant on the absurdity of tariffs.

In short, if China is crazy enough to produce and sell steel to the United States at prices that guarantee they’ll LOSE MONEY, the US government shouldn’t impose tariffs. They should send the Chinese a fruit basket.

China is basically giving the US free money. Don’t be ridiculous. Take the money.

The US is NOT the loser in this situation. America is the winner. The Chinese are willing to sell steel at below their cost of production. Duh.

But the US government insists that they need to protect the American steel industry because it’s vital to national security.

Seriously? The largest, most advanced economy in the world thinks that the production of a basic commodity is vital to national security?

If that’s the case, then what else is vital to national security– the lumber industry? Hip Hop? Twitter?

Steel is a tiny industry in the US that employs around 90,000 people. Starting a trade war over this (which is historically BAD for everyone’ prosperity) is just plain silly.

This is my favorite podcast I’ve done in at least a year. You can tune in here…

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The US pension system has gotten so bad, Congress is actually planning for its failure.

As the government was working on the recent, new budget deal and subsequent boost in government spending, Congress quietly snuck in a provision that forms a committee which would use federal funds to bail out as many as 200 “multiemployer” pension plans – where employers and labor unions jointly provide retirement benefits to employees.

As is often the case, this rescue “plan” is too little too late. The US pension system is beyond repair. And if you’re depending on pension income to carry you through retirement, it’s time to consider a Plan B.

Before explaining how dire the situation actually is, let’s take a step back…

Pensions are simply giant pools of capital used to pay out retirement benefits to workers.

Typically, employers and employees contribute a percentage of the employees’ salary to a pension throughout his or her career. Then, upon retirement, the pension is supposed to pay a fixed, monthly amount to the retiree.

There are both government and corporate pension plans.

Boston College estimates the nation’s 1,400 multiemployer plans (corporate) are facing a $553 billion shortfall. And around one-quarter of those are in the “red zone,” meaning they’ll likely go broke in the next decade or so.

But Congress’ committee, assuming it works, wouldn’t even rescue the red zone plans, much less the remaining 1,200.

And it doesn’t even begin to address the real problem – the $7 trillion funding gap faced by the government’s own pensions.

Congress is stepping in because the Pension Benefit Guaranty Corporation (PBGC) – the pension equivalent to the Federal Deposit Insurance Corporation (FDIC) – is completely insolvent.

Like the FDIC, the PBGC is an insurance program funded by premiums paid by its participating members (pensions). Its entire income is made up of premiums collected and the investment income it earns on those premiums.

So, as the markets crash, not only will the PBGC’s portfolio get slaughtered… so will those of the pensions it guarantees (which will then require more funds). And as these pensions fail, the PBGC will collect less in premiums. It’s a vicious circle.

But things are plenty bad already.

The PBGC, which only covers corporate pensions, had a $76 billion deficit in 2017. It has total assets of $108 billion on its books compared to potential loss exposure of more than $250 billion.

By its own estimation, its fund to cover multiemployer pensions (which makes up $65 billion of the deficit) will be insolvent by 2025.

Pensions are in such bad shape today for the simple reason that investment returns are too low. And pensions can’t cover their future obligations.

Pension fund managers invest in assets like stocks, bonds and real estate in hopes of generating a safe return.

Most funds require a 7%-8% return in order to meet their future liabilities.

But with interest rates near record lows, these funds are having to take on more risk in order to meet their minimum return requirements. They’ve reduced their bond allocations and started buying more stocks, private equity and other riskier assets.

Some funds, like Hawaii’s pension fund, went even further and dabbled in the incredibly risky strategy of selling put options. By selling a put, you collect a small premium if markets stay calm or rise. But you’re exposed to unlimited losses if markets crash – like they did when the Dow fell 2,400 points in a week last month.

At the end of last year, equities made up nearly 54% of public pension fund portfolios. The $209 billion New York State Common Retirement Fund has over 58% of its assets in stocks. Kentucky’s $20 billion pension for teachers is 62% in stocks.

These giant funds, which are supposed to pay for public and private employees in retirement, are piling into stocks at record high valuations. And when the volatility hits, it will be devastating.

Consider that America’s largest pension fund, The California Public Employees’ Retirement System (CalPERS), lost 5% of its assets ($18.5 billion) in just 10 trading days leading up to February 9.

Pension funds should never experience that kind of volatility. But the current macro environment is forcing them to make dumb decisions in hopes of generating a minimum return.

Luckily, if you’re a smaller investor, you still have plenty of solid investment options available – even if you’re investing with tens of millions of dollars.

I’ve told our Sovereign Man: Confidential readers about an asset-backed loan earning 13% a year. And they’ve already safely earned millions of dollars in interest.

You can also invest in super-safe stocks trading below their net cash, like Sovereign Man’s Chief Investment Strategist, Tim Staermose, does in his service, The 4th Pillar.

But these strategies get more difficult if you have hundreds of billions of dollars.

So these pension funds are forced to buy stocks and real estate at all-time highs. It stretches valuations and creates huge risk.

Still, pension fund allocations to equities are near all-time highs.

So, ask yourself, what will happen to your retirement if the stock market falls just 20%? What about 50%?

There’s zero chance these funds will be able to pay out retirement benefits. They’re taking huge risks at all-time highs and they have zero downside protection (the PGBC is broke).

It’s smart to consider some other options like a self-directed IRA, solo 401(k) or a SEP IRA – which allow you significant latitude in making better, safer and stronger investments.

Plus, they allow you to put more money away toward retirement before tax. And there’s no downside to that.

You’ve got make long-term plans for retirement. The pension system is broken. So the time to take action is now.

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‘Mrs. F.’ was 84 years old the first time she ever went to prison.

Her crime? Petty shoplifting. She stole rice, strawberries, and cold medicine.

She served her time. Got released. Then shoplifted again so that she’d go back to prison.

She’s now 89 years old serving out another 2 ½ year sentence, not too far away from where I am right now, at a women’s prison about 60 miles outside of Tokyo.

She’s not the only one.

One in five female prisoners in Japan is senior, almost all of whom have been convicted of petty crimes like shoplifting.

This is no accident. Elderly women in Japan are economically vulnerable. Half live below the poverty line. Many live by themselves and have no one to turn to for help.

So there’s a growing trend in Japan of elderly women deliberately committing petty crimes– hoping to get caught so that they’ll be sent to prison.

In prison, of course, they’re fed, clothed, housed, and even have their health care covered by the state.

It’s a pitiful, last resort form of welfare that’s likely going to become worse as Japan’s already elderly population continues to age.

It’s also a sad example of what happens when a nation’s economy goes bust after a dangerous, explosive, unsustainable boom.

Back in the 1970s and 1980s, Japan was indomitable.

This country had pulled itself out of the ashes of the atomic bomb in World War II and set itself on a path to dazzling economic growth.

Within a few decades, Japan had become one of the wealthiest nations in the world. And by the 1970s, they began flexing that economic might.

If you’re old enough you might remember the Japanese scare, especially in the early 1980s, as Japanese companies were buying up huge chunks of US real estate, businesses, etc.

Japan had all the money… and it seemed like they were going to conquer the world.

The Japanese stock market was soaring. Japanese property prices were, by far, the most expensive on the planet.

Then it all went bust in the late 80s.

It turned out that Japan’s massive economic boom had been fueled by years of unsustainable monetary policy– the central bank simply conjuring trillions of currency units out of thin air.

The country had been flooded with money. Bank balance sheets were stuffed full of trillions of yen and they began liberally loaning out– practically giving away– money to businesses and investors.

They were able to get away with it because Japan’s economy was healthier than the rest of the world’s.

The US was going through a series of deep recessions. Japan, meanwhile, was a production and export powerhouse.

So even though the Japanese central bank was printing unlimited quantities of paper money, the rest of the world readily accepted it.

Japanese financial markets soared, and large Japanese companies went on an international shopping spree, gobbling up prized assets– especially in the United States.

But by the late 1980s, the giant Japanese monetary bubble burst. Everything crashed. Stocks. Property. The economy itself.

Three decades later it has yet to recover.

We’ve talked about this before: Japan is a classic example that the good times NEVER last forever. (And it’s important to plan accordingly.)

Moreover, Japan teaches us that financial and economic downturns can last for DECADES.

A lot of people understand that stock markets and economies move in cycles– periods of boom and bust.

But there’s a common misconception that the ‘bust’ part of the cycle will be short-lived, maybe a few months, 1-2 years at most.

Japan shows that downturns can be more severe, and last longer, than anyone could possibly imagine.

Last, Japan is a monument to the serious social consequences that unfold when a long-term economic downturn strikes.

This sad story of poor, lonely, elderly women deliberately committing crimes so that they’ll be taken care of in prison is just one example.

On the other end of the age spectrum, younger people in Japan have stopped having children.

Due to the long-term economic downturn, Japan’s young adults don’t have the financial stability to get married and start families, and the birth rate has been declining as a result.

Last year, in fact, the number of babies born in Japan was the lowest number EVER in the 118-year history of their public records.

And this shrinking population has its own long-term consequences– a lower tax base, fewer workers paying into the pension system to support retirees, etc.

On top of it all, Japan’s long-term economic downturn has obliterated the finances of the government.

The Japanese government has to borrow appalling amounts of money in order to make ends meet each year.

The national debt here has become so large that it’s more than twice the size of the Japanese economy.

Plus it takes the government more than 20% of tax revenue each year just to pay INTEREST on its debt– and that’s at a time when rates are actually NEGATIVE.

This country is really amazing, I’ve always loved it here.

But Japan has been suffering for a long, long time, both socially and economically. The two go hand in hand.

That makes this place the most important case study in the world.

Because everything that Japan did back in the 70s and 80s to cause these long-term social and economic problems is EXACTLY what most of the West is doing now: printing money, keeping rates too low, inflating asset bubbles, going into debt, and acting like the good times will last forever.

It would be utterly foolish to believe that this time is different.

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Well, it happened again.

On Friday afternoon, the national debt of the United States hit another major milestone, soaring past $21 trillion for the first time ever.

Clearly that is an enormous number… it’s actually larger than the size of the entire US economy, which is pretty incredible.

But what’s always been the more important story about America’s pile of debt is how rapidly it’s growing.

For example, in the span of a SINGLE DAY, from Thursday to Friday, the national debt grew by $73 BILLION. In a day.

To put that number in context, $73 billion is larger than the size of most major companies like General Motors, Ford, and Southwest Airlines.

And in the month of February alone, the national debt grew by an astounding $215 billion.

$215 billion is larger than the GDP of New Zealand. Greece. Oregon. More than twice the size of the GDP of New Mexico. Just in a single month.

Most disturbingly, the national debt has grown by more than $1 TRILLION… just in the last SIX MONTHS.

I’m scratching my head right now wondering– where did they spend all that money? Was there a major economic crisis, wave of bank failures, or severe depression that required massive fiscal stimulus?

Nope. It was just business as usual.

Even better, the economy was supposedly doing totally awesome over the last six months.

And yet, even with all that positivity, the government still managed to rack up an extra trillion dollars in debt.

Amazing.

One important point to make is that debt growth is VASTLY outpacing GDP growth. And this is critical to understand.

Last year, for example, the US economy grew by 2.5% in ‘real’ terms, i.e. stripping out inflation.

Even if you include inflation in the calculation, the size of the US economy increased by 4.4%. Yet the national debt grew by 6%.

Now that might not seem like a big difference. But it is. On a proportional basis, the national debt expanded 36% faster than the US economy (even if you include inflation).

Over the course of several years, that effect compounds into something that’s quite nasty.

At the end of 2008, for example, the size of the US economy was $14.5 trillion. A decade later, the size of the economy is $19.7 trillion, 36% greater.

Yet over the past ten years, the national debt has grown from $9.4 trillion to over $21 trillion– a growth rate of 123%!

It’s really, really hard to pretend that this is good news.

But that doesn’t stop people from trying.

We’re constantly being told the same old nonsense that “the debt doesn’t matter” because we owe it to ourselves.

And, sure, it’s true that the US government owes a lot of this money to various institutions across America. Like Social Security. Or the US banking system. Or the Federal Reserve.

I find it difficult to see the good news here… as if it would somehow be beneficial to default on (and hence bankrupt) Social Security. Or the US banking system. Or the Federal Reserve.

Doing so would cause the most drastic financial cataclysm ever before seen in the United States.

So… yeah, the debt does matter.

Yet these major milestones are simply yawned off now, as if trillions of dollars in new debt is just par for the course. And that’s pretty sad.

Most people are in one of three camps when it comes to the debt.

#1: They ignore it altogether, and stick their heads in the sand (or up somewhere else).

#2: They acknowledge the debt, but tell themselves fairy tales that it doesn’t matter… or that the government is going to somehow ‘fix’ it. (which is ridiculous given that the government is the one causing the problem to begin with.)

#3: They view the situation rationally and understand that, maybe, just maybe, at some point in the future, there might possibly be some consequence to arise from the largest debt pile that has ever been accumulated in the history of the world… and they make sensible preparations just in case.

Which group are you in?

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