087: You won’t want to miss this crypto podcast

As I write this, bitcoin is trading at $8,600.

That’s down more than 50% from the December highs of $20,000.

But is this selloff a natural correction, or something to be worried about?

That’s one of the questions I ask my guest Tama Churchouse in today’s podcast.

Tama was an investment banker for a decade, most recently with JPMorgan. Then he went on to manage a family office. And in 2013, he started buying and learning about bitcoin.

He started writing a small note to friends and family about the crypto market and it caught on. He decided to make it a full-time job.

And that’s led Tama to become one of the most connected writers/investors in the crypto space.

He actually just returned from one of the most exclusive crypto gatherings in the world… It’s called the Satoshi Roundtable. It’s invitation only and about 100 people make the cut.

The attendees are CEOs of major crypto firms and some of the core developers for major cryptos – it’s the who’s who of the industry.

Tama was invited because he serves on the board of one of the top blockchain firms in the world.

And during our discussion, he shares a few insights from what he heard in these closed-door meetings (and how these leaders in the field, many of whom are billionaires, feel about the crypto selloff).

Tama also explains why he thinks bitcoin is here to stay, but why 95% of all cryptos will ultimately be worth zero.

As you know, I’ve been writing a lot this year about avoiding big mistakes.

We discuss this in regard to crypto and Tama shares what he thinks is the easiest way to avoid making big mistakes in the sector.

And, of course, Tama and I share what we think 2018 holds for the crypto market (his view on this is great – it’s something I hadn’t heard before).

This is one of the best podcasts I’ve recorded in awhile. And I’d encourage you all to check it out.

I always tell people to learn as much as possible about crypto before buying even one cent of bitcoin. And I guarantee you’ll leave this podcast better-educated and more informed on the crypto space.

You can tune in here.

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This may be the beginning of the Great Financial Reckoning

Less than two weeks ago, the United States Department of Treasury very quietly released its own internal projections for the federal government’s budget deficits over the next several years.

And the numbers are pretty gruesome.

In order to plug the gaps from its soaring deficits, the Treasury Department expects to borrow nearly $1 trillion this fiscal year.

Then nearly $1.1 trillion next fiscal year.

And up to $1.3 trillion the year after that.

This means that the national debt will exceed $25 trillion by September 30, 2020.

Remember, this isn’t some wild conspiracy theory. These are official government projections published by the United States Department of Treasury.

This story alone is monumental– not only does the US owe, by far, the greatest amount of debt ever accumulated by a single nation in human history, but $25 trillion is larger than the debts of every other nation in the world combined.

But there are other themes at work here that are even more important.

For example– how is it remotely possible that the federal government can burn through $1 trillion?

Everything is supposedly totally awesome in the United States. The economy is strong, unemployment is low, tax revenue is at record levels.

It’s not like they had to fight a major two front war, save the financial system from an epic crisis, or battle a severe economic depression.

It’s just been business as usual. Nothing really out of the ordinary.

And yet they’re still losing trillions of dollars.

This is pretty scary when you think about it. What’s going to happen to the US federal deficit when there actually IS a financial crisis or major recession?

And none of those possibilities are factored into their projections.

The largest problem of all, though, is that the federal government is going to have a much more difficult time borrowing the money.

For the past several years, the government has always been able to rely on the usual suspects to loan them money and buy up all the debt, namely– the Federal Reserve, the Chinese, and the Japanese.

Those three alone have loaned trillions of dollars to the US government since the end of the financial crisis.

The Federal Reserve in particular, through its “Quantitative Easing” programs, was on an all-out binge, buying up every long-dated Treasury Bond it could find, like some sort of junkie debt addict.

And both Chinese and Japanese holdings of US government debt now exceed $1 trillion each, more than double what they were before the 2008 crisis.

But now each of those three lenders is out of the game.

The Federal Reserve has formally ended its Quantitative Easing program. In other words, the Fed has said it will no longer conjure money out of thin air to buy US government debt.

The Chinese government said point blank last month that they were ‘rethinking’ their position on US government debt.

And the Japanese have their own problems at home to deal with; they need to scrap together every penny they can find to dump into their own economy.

Official data from the US Treasury Department illustrates this point– both China and Japan have slightly reduced their holdings of US government debt since last summer.

Bottom line, all three of the US government’s biggest lenders are no longer buyers of US debt.

There’s a pretty obvious conclusion here: interest rates have to rise.

It’s a simple issue of supply and demand. The supply of debt is rising. Demand is falling.

This means that the ‘price’ of debt will decrease, ergo interest rates will rise.

(Think about it like this– with so much supply and lower demand for its debt, the US government will have to pay higher interest rates in order to attract new lenders.)

Make no mistake: higher interest rates will have an enormous impact on just about EVERYTHING.

Many major asset prices tend to fall when interest rates rise.

Rising rates mean that it costs more money for companies to borrow, reducing their leverage and overall profitability. So stock prices typically fall.

It’s also important to note that, over the last several years when interest rates were basically ZERO, companies borrowed vast sums of money at almost no cost to buy back their own stock.

They were essentially using record low interest rates to artificially inflate their share prices.

Those days are rapidly coming to an end.

Property prices also tend to do poorly when interest rates rise.

Here’s a simplistic example: if you can afford the monthly mortgage payment to buy a $500,000 house when interest rates are 3%, that same monthly payment will only buy a $250,000 house when rates rise to 6%.

Rising rates mean that people won’t be able to borrow as much money to buy a home, and this typically causes property prices to fall.

Of course, higher interest rates also mean that the US government will take a major hit.

Remember that the federal government already has to borrow money just to pay interest on the money they’ve already borrowed.

So as interest rates go up, they’ll be paying even more each year in interest payments… which means they’ll have to borrow even more money to make those payments, which means they’ll be paying even more in interest payments, which means they’ll have to borrow even more, etc. etc.

It’s a pretty nasty cycle.

Finally, the broader US economy will likely take a hit with rising interest rates.

As we’ve discussed many times before, the US economy is based on consumption, not production, and it depends heavily on cheap money (i.e. lower interest rates), and cheap oil, in order to keep growing.

We’re already seeing the end of both of those, at least for now.

Both oil prices and interest rates have more than doubled from their lows, and it stands to reason that, at a minimum, interest rates will keep climbing.

So this may very well be the start of the great financial reckoning.

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Meet the world’s next central banker: Mark Zuckerberg

Within the last week, Facebook announced a ban on all advertisements about bitcoin, initial coin offerings and other cryptocurrencies.

Facebook (along with Google) virtually controls Internet advertising. So their policies have enormous influence over consumer behavior.

Banning ICO advertisements on its platform, for example, will certainly have a negative impact on the amount of money flowing into new ICO’s.

Facebook said it instituted this ban to “protect its users” from financial scams in the cryptocurrency sector. At least, that’s the “official” reason.

And in fairness, there is a ridiculous amount of fraud out there — countless scammy ICO’s and appallingly stupid tokens and coins.

But it’s also possible that Facebook’s main driver in this move goes beyond its desire to protect the well-being of its nearly 2 billion users.

It was only a month ago that Mark Zuckerberg said Facebook would study encryption and the blockchain to “see how best to use them in our services.”

And one of the speakers at the crypto conference that one of our team members attended in New York City yesterday confirmed Facebook is investing a ton of capital into blockchain right now.

It stands to reason that Facebook’s decision to ban crypto advertisements may be rooted in eliminating its own competition, i.e. Facebook may be working on its own proprietary blockchain and cryprocurrency to deploy on its own platform.

One possibility is that Facebook could adopt a similar model to Steemit – a decentralized social network that operates on the blockchain.

It’s up to Steemit’s users to police the site, not a central authority. And the platform rewards its users for good content with small amounts of cryptocurrency and penalizes users for spam and “fake news.”

This would solve a huge problem for Facebook, which has already come under fire from governments across the world for not doing enough to moderate user content including “fake news,” “hate speech,” etc.

Facebook has already hired an army of content moderators, but this is barely been able to make a dent in solving the company’s problem.

So adopting a model like Steemit ,which rewards users with specialized crypto could certainly make sense.

This wouldn’t be the company’s first foray into the arena, either.

When social games like Farmville were popular (maybe they still are, who knows), gamers could pay for e-goods with an in-game currency. Then Facebook created its own currency for people to trade in and out of Farmville and other games.

A full-blown Facebook Token is the logical next step.

Given Facebook’s worldwide dominance, its tokens would have the potential to become enormously popular, practically overnight, and used in everyday transactions in the real world.

The big hope with Bitcoin is that it may one day disrupt conventional fiat currencies. Maybe so. But Bitcoin still has a steep adoption curve before it becomes truly disruptive.

Facebook Tokens, on the other hand, would be adopted by hundreds of millions of people right from the start.

You’d be able to buy and sell products in Facebook Tokens, send money and remittances, pay contract employees overseas, and engage in all sorts of cross-border transactions.

This would essentially make Mark Zuckerberg the world’s central banker… the one person with control over the first truly global currency.

Given that he already controls the #1 media source in the world and has substantial influence over consumer behavior, launching a Facebook Token would solidify his position as the most powerful person on the planet.

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Here’s what the ‘Warren Buffet of Crypto’ told us yesterday

If you’ve been on the Internet in the past six months, you’ve no doubt seen loads of ads touting “crypto geniuses” that have found the next token that’s going to explode…

One guy in particular seems to be following me around to every website I visit, claiming to have some special insight into the “truth” about crypto.

But the truth is, nobody has a crystal ball.

Ultimately, what’s going to drive crypto prices is what drives all asset prices in the long-run – supply and demand.

Most cryptocurrencies have a fixed supply. For example, there will only be 21 million bitcoins mined. Ever. (Today there are about 17 million in circulation).

And because there’s a fixed supply, prices should be determined by long-term demand.

Every crypto expert you talk to will have his/her own opinion on which coin is going to the moon… and why. But it’s important to form your own opinion.

With crypto, the fundamental question you should ask yourself is will there be more demand or less demand in the future?

And if you believe there will be MORE demand in the future, the next question is– which coins have superior technology?

This is an important question. Every coin has different software code with different features and limitations.

For example, Bitcoin has a big limitation in that its network can only process a few transactions per second.

Compare that to Visa or Mastercard, which can process 24,000 transactions per second – nearly 10,000 times more.

One of our team members attended a crypto conference in New York City yesterday… and of course the room was filled with self-proclaimed geniuses.

But there were a few legitimate standouts who had a much more rational view.

One of them was Barry Silbert.

Silbert founded a company called SecondMarket, an exchange for private company stock, which he sold to Nasdaq in 2015. Then he founded a company called Digital Currency Group (DCG).

He’s spent the last several years learning about and investing in the sector, includindg in various cryptocurrencies, as well as crypto companies like Coindesk.

He also founded the Bitcoin Investment Trust (GBTC), which is essentially a Bitcoin ETF.

Silbert’s firm owns $600 million worth of crypto, 95% of which is in bitcoin, Ethereum Classic and Z-Cash.

He thinks over time, that bitcoin will become a form of ‘Digital Gold,’ the industry standard for storing value in crypto.

Z-cash, Silbert explained, will be the industry standard for privacy. And Ethereum Classic will be the standard for ‘smart contracts’.

More bluntly, Silbert explained that most other coins will go to zero over time. The reason is because they don’t have any functional purpose.

Now, remember that Silbert’s opinion is exactly that: his opinion.

There are plenty of other investors in the crypto space who would say something completely different. And their logic would be equally sound.

But Silbert’s point about utility is important: why should anyone own a token that doesn’t have any purpose. Look at CryptoKitties, for instance. Where’s the value?

(Or even worse, F*ckToken, which has a $2 million market cap)

This value question goes back to what I said in the beginning about demand analysis. Will there be more demand in the future for F*ckToken and CryptoKitties, or less demand?

In the long-run, demand has to be driven by some sort of utility. The coin must present some special benefit that other coins and tokens don’t have… and that people will actually NEED.

Coins and tokens that lack this important characteristic will likely fail.

And when they do, it will seem so obvious in retrospect.

This is an easily avoidable mistake… and an important point we’ve been repeating for a long time: with crypto, as with anything else, stay rational.

A decision to BUY should be based on an informed, educated analysis about future demand… not an emotional frenzy because the price is surging.

Similarly, a decision to SELL should be rational and based on the presence of new information or a different analysis, not simply because the market is in a panic.

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No. It’s not over

Last night I was checking out tickets for some upcoming travel.

I’ll be headed to Colombia soon to check on the progress of a large cannabis investment we’ve made there, then off to Miami for an event with our Total Access members.

After that it’s Puerto Rico to meet with some officials there and check out some exciting investment opportunities on the island.

And then finally back to Asia where we’re setting up a new factory for a business I recently acquired.

So you can imagine my pleasant surprise when I found a ticket for all that travel for just $2800– in business class.

That’s an unbelievable deal; just last month I had a similar itinerary that cost me more than $10,000. So I couldn’t believe my luck.

Hey, who doesn’t like a great bargain?

It’s in our nature as human beings. Whether we’re purchasing a new car, shopping at a ‘Going out of Business’ sale, or planning a vacation, we always feel great when we get a steep discount.

Except, of course, when it comes to investing.

For whatever reason, our ‘value gene’ switches off when it’s time to invest our hard earned savings.

Rather than buy the highest quality assets at the lowest possible prices, people tend to pile into expensive, popular investments that they don’t really understand.

This is clearly not a great strategy to become wealthy… or to stay that way.

I doubt anyone would feel particularly smart if they consistently bought outrageously priced, full-fare plane tickets.

But that’s exactly what people are doing when they buy stocks, bonds, property, and other assets at record highs.

To be clear, it’s not about price. It’s never about price. It’s about value, i.e. what are you receiving in return.

For example, $50,000 might seem like a lot of money to most folks, and the thought of spending that much on anything might cause someone to bristle.

But if you could buy a brand new penthouse apartment in midtown Manhattan for $50,000, you would immediately feel like you were getting tremendous value.

Conversely, $5 is a pretty trivial sum to most people. But if someone tried to sell you used toilet paper for $5, you’d probably turn them down on the spot (unless you were in Venezuela).

Value is never about how much you pay. It’s about how much you get for your money.

And when it comes to investments these days, you don’t get a whole lot.

Here’s a great example:

Mastercard is a company that’s quite popular with investors. As a business, it made around $5 billion last year in ‘Free Cash Flow’.

(Free Cash Flow essentially refers to the amount of company profit that’s available to be paid out to shareholders each year… so it’s a great way to measure return on investment.)

And, at least until a few days ago, Mastercard had an ‘enterprise value’ of about $175 billion.

In other words, if you just happened to have an extra $175 billion lying around the house, you could theoretically buy Mastercard and make it your own private company.

Suppose you actually did that… and spent $175 billion. That’s the price.

The value, i.e. what you receive in return, is $5 billion in annual free cash flow.

As a percentage of your purchase price, that $5 billion works out to be just 2.85%.

That’s a pretty flimsy return. After all, business can be quite risky. And 2.85% hardly seems sufficient to compensate for that risk.

Now consider other options.

Interest rates have surged over the past several months, so the investment returns on bonds have really started to increase.

The United States 10-year note, for example, which is widely considered ‘risk free’ by the market, was yielding as high as 2.86% yesterday afternoon.

In other words, the boring, steady, ‘risk free’ bond had a higher rate of return than a volatile, risky business.

That doesn’t make any sense. And it demonstrates how little VALUE investors are receiving.

By any objective metric, stocks have long been OVERvalued.

Investors are paying more for every $1 in corporate revenue than they ever have before… EVER.

The ratio of Enterprise Value to EBITDA (a good proxy for cash flow) for the average company in the S&P 500 is also at a record high.

The ratio of Stock Market Capitalization to GDP, i.e. the total size of the stock market relative to the size of the economy, is also at a record high.

The list goes on and on.

And of course there are countless individual examples– like Netflix.

That company consistently loses billions of dollars and racks up billions more in debt. Yet it is one of the most expensive and popular investments in the world.

On Friday, it seems the market finally woke up to this absurdity. In the past few days, the Dow Jones Industrial Average has plunged more than 1700 points.

It seems that people are finally starting to become aware that rising interest rates are going to have a serious impact on the stock market.

(Think back to the Mastercard example; why would anyone own stocks if they can get a better return with less risk in the bond market?)

This market rout may continue today.

Or, it’s possible that all the fools come rushing back in and bid stock prices back to record high levels.

The only thing we know for certain is that, as sure as night follows day, there will always be corrections and bear markets.

Nothing goes up or down in a straight line forever.

The market has had years of gains and is at the point where none of it makes sense anymore.

So it’s due for a major correction. Whether or not THIS is the big one, we can be certain that it’s coming. Plan accordingly.

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This tiny corner of Rhode Island shows us the future of Social Security

The United States Court of Appeals for the First Circuit gave us an interesting glimpse of the future last week when it ruled on an obscure case involving government pension obligations.

Ever since the mid-1990s, police officers and fire fighters in the town of Cranston, Rhode Island had been promised state pension benefits upon retirement.

But, facing critical budget shortfalls over the last several years that the Rhode Island government called “fiscal peril,” the state legislature voted to unilaterally reduce public employees’ pension benefits.

Even more, these cuts were retroactive, i.e. they didn’t just apply to new employees.

The changes were applied across the board; workers who had spent their entire careers being promised certain retirement benefits ended up having their pensions cut as well.

Even the court acknowledged that these changes “substantially reduced the value of public employee pensions provided by the Rhode Island system.”

So, naturally, a number of municipal employee unions sued.

And the case of Cranston’s police and fire fighter unions made it all the way to federal court.

The unions’ argument was that the government of Rhode Island was contractually bound to pay benefits– these benefits had been enshrined in long-standing state legislation, and they should be enforced just like any other contract.

The state government disagreed.

In their view, the legislature should be able to change laws, even retroactively, whenever it suits them.

Last week the First Circuit Court issued a final ruling and sided with the state of Rhode Island: the government has no obligation to honor its promises.

News like this will never make major headlines.

But here at Sovereign Man our team pays very close attention to these obscure court cases because they often set very dangerous precedents.

This one certainly does. Because Social Security is in even WORSE condition that the State of Rhode Island’s perilous pension system.

We talk about this a lot in our regular conversations.

According to the Board of Trustees for Social Security (which includes the US Treasury Secretary, the US Secretary for Health & Human Services, and the US Secretary of Labor), the Social Security trust funds “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”

Once again– that’s the Treasury Secretary of the United States saying that Social Security will run out of money in 16 years.

You’d think this would be shouted from the rooftops, especially given how long it takes to save for retirement.

Yet instead the news is ignored or flat-out rejected by people who simply want to believe either that it’s not a problem, or that the government has some magical solution.

The First Circuit just showed us what the solution is: cutting benefits.

And now the government has legal precedent to do so.

They can retroactively slash whatever benefit they want in their sole discretion regardless of what legislation exists, or what promises have been made in the past.

Let’s be smart about this: the clock is ticking. Sixteen years may seem like a lifetime away, but with respect to retirement, it’s nothing.

Securing a comfortable retirement takes decades of careful planning, and a lot of folks are going to have to catch up.

Fortunately there are a lot of options available, but you’re going to have to take deliberate action.

For example, you could set up a more robust structure to help you put away even more money for retirement and invest in safer, more lucrative assets that are outside the mainstream.

A number of our readers, for example, are safely earning double-digit returns in secured, asset-backed lending deals with their properly structured IRA and 401(k) vehicles.

Here are a couple of options to consider.

This problem is completely solvable. But you’re going to have to solve it for yourself. You can’t rely on the government to fix it.

The First Circuit Court affirmed last week without a doubt that government promises aren’t worth the paper they’re printed on.

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Why Albert Einstein thought we were all insane

In the early summer of 1914, Albert Einstein was about to start a prestigious new job as Director of the Kaiser Wilhelm Institute for Physics.

The position was a big deal for the 35-year old Einstein– confirmation that he was one of the leading scientific minds in the world. And he was excited about what he would be able to achieve there.

But within weeks of Einstein’s arrival, the German government canceled plans for the Institute; World War I had broken out, and all of Europe was gearing up for one of the bloodiest conflicts in human history.

The impact of the Great War was immeasurable.

It cost the lives of 10 million people. It bankrupted entire nations.

The war ripped two major European powers off the map– the Austro Hungarian Empire, and the Ottoman Empire– and deposited them in the garbage can of history.

Austria-Hungary in particular boasted the second largest land mass in Europe, the third highest population, and one of the biggest economies. Plus it was a leading manufacturer of high-tech machinery.

Yet by the end of the war it would no longer exist.

World War I also played a major role in the emergence of communism in Russia through the 1917 Bolshevik revolution.

Plus it was also a critical factor in the astonishing rise of the Nazi party in Germany.

Without the Great War, Adolf Hitler would have been an obscure Austrian vagabond, and our world would be an entirely different place.

One of the most bizarre things about World War I was how predictable it was.

Tensions had been building in Europe for years, and the threat of war was deemed so likely that most major governments invested heavily in detailed war plans.

The most famous was Germany’s “Schlieffen Plan”, a military offensive strategy named after its architect, Count Alfred von Schlieffen.

To describe the Schlieffen Plan as “comprehensive” is a massive understatement.

As AJP describes in his book War by Timetable, the Schlieffen Plan called for rapidly moving hundreds of thousands of soldiers to the front lines, plus food, equipment, horses, munitions, and other critical supplies, all in a matter of DAYS.

Tens of thousands of trains were criss-crossing Europe during the mobilization, and as you can imagine, all the trains had to run precisely on time.

A train that was even a minute early or a minute late would cause a chain reaction to the rest of the plan, affecting the time tables of other trains and other troop movements.

In short, there was no room for error.

In many respects the Schlieffen Plan is still with us to this day– not with regards to war, but for monetary policy.

Like the German General Staff more than a century ago, modern central bankers concoct the most complicated, elaborate plans to engineer economic victory.

Their success depends on being able to precisely control the [sometimes irrational] behavior of hundreds of millions of consumers, millions of businesses, dozens of foreign nations, and trillions of dollars of capital.

And just like the obtusely complex war plans from 1914, central bank policy requires that all the trains run on time. There is no room for error.

This is nuts. Economies are comprised of billions of moving pieces that are beyond anyone’s control and often have competing interests.

A government that’s $21 trillion in debt requires cheap money (i.e. low interest rates) to stay afloat.

Yet low interest rates are severely punishing for savers, retirees, and pension funds (including Social Security) because they’re unable to generate a sufficient rate of return to meet their needs.

Low interest rates are great for capital intensive businesses that need to borrow money. But they also create dangerous asset bubbles and can eventually cause a painful rise in inflation.

Raise interest rates too high, however, and it could bankrupt debtors and throw the economy into a tailspin.

Like I said, there’s no room for error– they have to find the perfect balance between growth and inflation.

Hedge fund billionaire Ray Dalio summed it up perfectly last month when he said,

“It becomes more and more difficult to balance those things as time goes on. . . It may not be a problem in the next year or two, but the risk of not getting it right increases with time.”

Today there’s a changing of the guard at the Federal Reserve– Janet Yellen is leaving her post as chair, and she’s being succeeded by Jerome Powell.

Yellen leaves her post having brought down the unemployment rate in the United States to 4.2%, which certainly sounds nice.

Yet at the same time, workers’ wages (when adjusted for inflation) have hardly budged under her tenure.

Americans’ savings rate has been cut in half. Consumer debt and student loans are at all-time highs.

And dangerous asset bubbles have expanded, from stocks to bonds to property.

The risk of them getting it wrong is clearly growing.

That’s why having your own Plan B is so important.

It’s a simple concept: don’t keep all of your eggs in one basket, especially when the people who control the basket have such a tiny margin of error.

The right Plan B makes sense no matter what happens, or doesn’t happen, next. If they get it right, you won’t be worse off. But if they get it wrong, you’ll still prosper.

I truly hope they don’t get it wrong.

But if they ever do, people may finally look back and wonder how we could have been so foolish to hand total control of our economy over to an unelected committee of bureaucrats with a mediocre track record… and then expect them to get it right forever.

It’s pretty insane when you think about it.

As Einstein quipped at the height of World War I in 1917, “What a pity we don’t live on Mars so that we could observe the futile activities of human beings only through a telescope. . .”

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See if you can flip this switch in your thinking

[Editor’s Note: Today’s Notes, originally published one year ago, is about one of the most impactful things I do each year. If you know a young entrepreneur who may be interested in what we’re doing, please forward this piece along. It could change their lives…]

I’ve always been a big believer in entrepreneurship.

But not in the sense that most people think of that word.

My dictionary defines “entrepreneur” as “a person who organizes and operates a business, taking on greater than normal financial risks in order to do so.”

I think this definition is totally wrong.

Entrepreneurship doesn’t have anything to do with owning or starting a business, let alone taking on great risk.

You can be an entrepreneur whether you’re an artist, charity volunteer, self-employed professional, entertainer, designer, teacher, or factory worker.

It’s all about your mindset.

An entrepreneur is fundamentally a value creator and problem solver: someone who creates something from nothing in order to solve a problem.

Essentially an entrepreneur is solution-oriented action taker– a person who works to fix problems rather than simply complain about them.

It sounds simple enough.

But when you think about it, this mindset goes against thousands of years of human development.

Since ancient times our species has been programmed to tolerate and accept problems… sometimes even ignore them.

Whether it’s barbarians at the gate, the astonishing decline of civil liberties, or even just the leaky faucet that won’t stop dripping, we have learned how to adapt and cope with obvious problems… and wait for –other people- to take action.

It’s the “Help! Someone do something!” mentality. This is for victims.

Entrepreneurship is about having the initiative to boldly step forward and take action– which is fundamentally what personal freedom is all about.

We spend a lot of time in this daily letter talking about solutions to big problems, problems like illiquid banks, insolvent governments, negative interest rates, etc.

You’ll probably recognize that the solutions we recommend are all about the individual.

We don’t ever talk about relying on the government to fix problems. They’re the ones who cause the problems.

Instead, we talk about taking matters into our own hands, distancing ourselves from the risks, and increasing our independence and self-reliance.

It’s an entrepreneurial approach to solving big problems at the individual level.

You don’t have to be a billionaire or start multiple companies like Elon Musk in order to adopt this mindset.

Musk is definitely a great example of an entrepreneur.

But that’s because, if you think about it, all of this ventures, from Tesla to SpaceX to his time at PayPal, spring from the same mindset: the initiative and willingness to create value, solve problems, and TAKE ACTION.

This same thinking can apply to a factory supervisor who takes the initiative to boost his production line’s efficiency…

… or to an office worker who takes the initiative to create a social media presence for her employer without being asked to do so.

Everyone comes across opportunities every day, big and small, to take action, create value, and solve problems.

Being an entrepreneur is about willfully flipping the switch in your mind, so that instead of merely noticing problems, you ask yourself, “How do I make this better?”

Certainly, sometimes the solutions themselves require special skills.

Even more, sometimes the solutions create an opportunity to start a business or create intellectual property, which in turn can lead to tremendous personal wealth.

These, too, are skills.

Starting a business is a skill. Managing a business is a skill. Designing products that solve problems and create value is a skill.

Sadly these are not skills that are generally taught in our government-controlled school systems.

But they are skills, nevertheless. Skills that can be learned. By ANYONE.

Like the entrepreneurial mindset itself, this requires the willingness and initiative to take action… in this case, to learn.

Books are a great start, and I can provide a comprehensive list in a subsequent post.

But I wanted to let you know about another option… one that we’ve found to be quite powerful.

By the way, it’s free. I pay for it myself.

I’m talking about our annual youth summer entrepreneurship camp.

(“Youth”, like entrepreneurship, is a state of mind… past attendees have ranged in age from 17 to 45.)

For five days each summer, my colleagues and I conduct an intensive workshop that focuses on teaching critical entrepreneur skills to select attendees who want to use what we teach them to make an impact.

It takes place at a beautiful lakeside resort in Lithuania and attracts incredibly talented, driven people from all over the world.

We only have about 50 slots available, and I’ve had the burden of selecting from countless applicants for the past eight years.

But if you’re truly interested in learning these skills, or improving on the skills that you’ve already learned, I invite you to learn more about what we’re doing.

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“We choose debt. . .”

I’ve long held a working theory that US voters are completely predictable in Presidential elections.

The idea is that Americans almost invariably tend to swing wildly every few election cycles, voting for the candidate who is as close to the opposite of the current guy as possible.

Let’s go back a few decades to, say, Jimmy Carter.

In 1976, the country was sick and tired of the corruption, scandal, and disgrace of Richard Nixon’s administration (which at that point had been inherited by Gerald Ford).

Jimmy Carter was pretty much the opposite of Richard Nixon– a youthful outsider versus an aging crony.

After four years of economic disaster, Americans swung in the opposite direction from Carter, choosing an older, polished conservative in Ronald Reagan who represented strength and stability.

That trend lasted for twelve years– two terms with Reagan, and one term with his successor George HW Bush, after which the country swung in the other direction again– to Bill Clinton.

Clinton was another young, energetic liberal, pretty much the opposite of the elderly, curmudgeonly Bush.

After eight year of Clinton and his personal scandals, the country swung again to George W. Bush, a God-fearing, fundamental conservative who wouldn’t cheat on his wife. He represented Clinton’s opposite.

And after eight years of war and economic turmoil, the country swung once again to Bush’s opposite– a youthful, charismatic, black outsider.

Eight years later, the 2016 election was won by a man who is as far from Barack Obama as it gets.

Now, however you feel about the current guy, it’s safe to say that the country is probably going to wildly swing in the opposite direction in either 2020 or 2024.

Last night the world got a sneak peak at what that might look like– Congressman Joe Kennedy III, the 37-year old grandnephew of John F. Kennedy.

The young Congressman clearly represents Trump’s opposite and seems to embody so many of the gargantuan social movements that are coming to a head– the Dreamers, #metoo, BlackLivesMatter, etc.

Now, I typically hate talking about something as trite as politics and elections; elections merely change the players. It’s the game that’s rotten.

But in the Congressman’s rebuttal last night after the State of the Union address, he said something that I found quite alarming, almost inconceivable.

He lamented that the government has turned America into a “zero-sum game” where benefits received by one group must come at the expense of another– fund health insurance by cutting funding for education; build new highways by slashing teachers’ pensions.

He cited a number of examples, and then told his audience, “We choose both!”

Given the thunderous applause at that remark, everyone seemed to agree that the wealthiest, most prosperous nation in the world should never have to make a single tough financial decision.

Americans should have everything they want. And somehow, the money to pay for it all will just magically appear.

I found this astonishingly naive. He should have said, “We choose debt!” Because that’s the only way they’ll be able to pay for any of it.

Bear in mind the US government is already nearly $21 trillion in the hole and spending hundreds of billions of dollars each year just to pay interest on the debt.

In Fiscal Year 2017, in fact, the Treasury Department reports that interest payments on the debt hit a new high of $458,542,287,311.80.

That’s about 15% of federal government tax revenue… just to pay interest.

On top of that, the government spent another $2.15 trillion on Social Security and Medicare, and $720+ billion on defense spending.

So– just between interest, Social Security, Medicare, and Defense, they spent $3.3 trillion.

Total tax revenue was only $3 trillion to begin with.

So before they paid for ANYTHING else… National Parks, Homeland Security, infrastructure, foreign aid, or even paid the electric bill at the White House, they were hundreds of billions of dollars in the hole.

On top of that, the federal government has entire trust funds that are completely insolvent.

Both the Federal Highway Fund and the Disability Insurance fund, for example, have been bailed out within the last two years.

And there are several more, from the Pension Benefit Guarantee Corporation to Social Security itself.

This amounts to literally tens of trillions of dollars in liabilities; according to the Treasury Department’s own estimates from Fiscal Year 2016, its long-term liabilities amount to $46.7 trillion.

I find it simply extraordinary how few people in power seem to have a grasp on the magnitude of these long-term challenges.

Instead, the solution is to give everything to everyone without ever having to make a single responsible financial decision.

It’s total lunacy, a new form of American socialism that will be the final nail in the fiscal coffin.

And if history is any indicator, it’s coming… possibly as early as 2020.

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GE just signaled the next crisis and nobody’s paying attention

Earlier this month, General Electric took a $6.2 billion charge to its insurance unit for the fourth quarter. And the company said it will set aside another $15 billion over seven years to bolster reserves at GE Capital.

The charge had to do with long-term care policies (to pay for nursing homes and other late-life care) GE holds on its books.

So, one of the oldest and most highly-regarded companies in America just made a small, $21 billion miscalculation. Oops.

Keep in mind, GE’s entire market cap is only $140 billion.

The insurance charge, along with costs tied to the US tax plan, led GE to a $9.64 billion loss in the fourth quarter.

Then last week, GE announced the Securities and Exchange Commission (SEC) was investigating the company’s accounting practices (specifically how the company books revenue from long-term service contracts on things like power-plant repairs and jet-engine maintenance).

But this isn’t GE’s first run in with the SEC…

The company’s accounting practices have long been considered a “black box.” The New York Times even published a story in 2009 comparing the company to Enron – the energy giant brought down by fraudulent accounting.

And is all started with GE’s legendary former CEO Jack Welch.

Welch would regularly beat Wall Street’s earnings estimates by a penny or two. And he was named manager of the century by Fortune Magazine for his ability to pump GE’s stock.

And while Welch is lauded for his “six sigma” management, it seems his real talent was using GE’s many divisions to move assets around and goose earnings to hit short-term numbers.

The creative accounting caught up with GE in 2009, when the company paid $50 million to settle SEC allegations it had used improper accounting methods to boost numbers in 2002 and 2003.

Among the strategies GE used to make its 2003 numbers was selling railroad cars to banks, with side deals and verbal promises to assure the banks they couldn’t lose money on the deal.

Enron used the same trick in 1999 when it “sold” Nigerian barges to Merrill Lynch, allowing the company to fake a $12 million profit.

Today GE is a $140 billion company (shares are down by nearly half over the past 12 month). The company has nearly $160 billion in debt. And in fiscal year 2016, the company lost $41 billion in cash.

GE’s financial performance makes my favorite whipping boy, Netflix, look like a piker.

GE got here, in part, because the government guaranteed all of the company’s debts until 2012 to help it survive the Great Financial Crisis.

Then the Fed lowered interest rates and printed trillions of dollars to goose the economy.

Instead of using this beneficial environment to repair its horrible balance sheet, GE spent some $50 billion buying back stock and paying dividends… and allowed Welch’s successor, Jeff Immelt, to walk away with $211 million (despite the company erasing $150 billion of market cap value during his tenure).

GE has gotten away with this behavior because we’re in the middle of one of the largest asset booms in history. The markets are at all-time highs. And nobody asks the tough questions when they’re making money.

It doesn’t take a giant pin to prick the bubble. It just takes something unexpected… Nobody ever knows what will set off the next crisis.

But in GE’s case, you can bet there isn’t just one cockroach.

Plus, interest rates are rising today (the 10-year Treasury is above 2.7%) and the Fed is taking away the quantitative easing punch bowl. What will happen to overly indebted companies like GE (who are likely covering up more huge losses) when the credit dries up and debt service gets way more expensive?

Mind you, GE already can’t afford its debt.

GE is just one example of a potential crisis in the making.

Maybe a bank sets off the next crisis…

I just read a Wall Street Journal piece about “drive by appraisals.” When the big institutional investors, like private equity giant Blackstone, started buying tens of thousands of individual homes, they needed a quick way to appraise the properties to get loans.

Blackstone and its lender, Deutsche Bank, settled on these drive by appraisals, where brokers give their price opinion of the property. These assessments, called broker price opinions (BPOs) were outlawed by congress after the crisis.

But the prohibition doesn’t apply to investors buying tens of thousands of homes (of course you don’t want to have an accurate asset value for collateral behind really big loans).

Sometimes brokers will even outsource the process to India, where companies will use Google Earth and real estate website to come up with home values.

BPOs have been used to value homes backing more than $20 billion of bonds sold by companies like Blackstone.

As Warren Buffett says, “you never know who’s swimming naked until the tide goes out.”

Just know, there are major losses – and likely fraud – hiding out there today. But it’s gone largely ignored because of the one-way market we’ve experienced since 2010.

GE and these drive by loans are just two examples. And the worst is yet to come.

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