Category: simonblack

In 1982, a man named Jim Tisch bought seven supertankers for $42 million. He found them by cold calling companies he found in the Yellow Pages.

Yes, $42 million is a lot of money… but these tankers were each four football fields long. That’s a lot of steel. And they could carry between 2-3 million barrels of oil.

And these ships were built just eight years earlier at a cost of $50 million apiece.

Jim Tisch is the son of the legendary Laurence “Larry” Tisch, the late billionaire founder of Loews. Corp – a conglomerate that has owned hotels, movie theaters, insurance, cigarettes, oil and watches over the years.

And like his Dad, Jim had a nose for value…

Low oil prices in the early 1970’s (around $3 a barrel) caused demand to soar. To keep up with the growing demand, everyone rushed to build supertankers (which can take years to complete).

Then the Arab oil embargo in 1973 sent oil prices soaring to $12 a barrel by 1975.

The Iranian Revolution (and ousting of the Shah) followed in 1979… And Iran drastically slashed its output. Oil jumped to over $37 a barrel.

Now there was much less oil coming out of Iran (and a year later, Iraq), but the tankers were still floating in the water.

Tisch started sniffing around for tankers in the early 80s, when, according to Tisch, only 30% of the global fleet was necessary to meet demand.

That’s why he was able to buy at an almost 90% discount. As he said at a 2006 speech at Columbia University:

[S]hips were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap.

By 1990, the market for tankers was turning around… too many ships were scrapped and the volume of oil coming from the Persian Gulf was increasing.

Noting the strength, Tisch sold a 50% interest in his ships for 10 times his initial investment.

He still maintained half ownership… and collected enormous cashflows from operating those ships.

When he first stepped foot on a supertanker, Tisch said he formulated the “Jim Tisch $5 million test.” From the same speech at Columbia:

And what is the Jim Tisch $5 Million Test, you may ask? While on the ship you look to the front and then you look to the rear – then take a look to the right and then to the left –then you scratch your head and say to yourself – “Gee! You mean you get all this for $5 million?!”

In other words, sometimes a good investment is obvious…

But where do you find obvious value today?

The US stock market is at all-time highs… And companies like Netflix (that lose billions each quarter) march higher and higher.

Bond yields are still scraping the bottom…

And cryptocurrencies have soared so high many are calling it a speculative bubble. Even if you’re a believer in crypto, it’s still not prudent to allocate a large portion of your wealth to the sector at this point.

Likewise, you can’t put everything you have into cash or gold.

But if you do the work, you can find certain securities that are just as safe as cash…

That’s the entire premise behind The 4th Pillar – the value-investing service written by our Chief Investment Strategist, Tim Staermose.

Tim screens thousands of stocks across every global market to find something that – according to efficient-market theorists – shouldn’t exist… “a free lunch.”

What if I offered to sell you a $100 bill for $60… would you take that deal?

Of course you would. It’s literally free money.

But that same opportunity exists in the market today. You just have to know where to look.

That’s why Tim spends all day screening literally ever global stock market until he finds what he’s looking for…excellent companies trading for less than the net cash on the books.

Some of these companies are trading so cheaply because of a short-term problem. Others are just ignored or misunderstood by the market.

But when you’re able to buy an entire operating company for less than the amount of cash it has in the bank… Well, let’s just say that passes Jim’s $5 million test.

After all… How much risk is there if you could take a company private for way less than the amount of cash it has in the bank, cease operations and pay out the cash as a dividend?

Not much…

Remember, there’s still value in the market today… it’s just getting harder and harder to find.

You can start by screening global stock markets for companies trading for less than their net cash… Or you can see how Tim does it.

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With the nearly daily moves to record highs among the hundreds of cryptocurrencies that currently exist, talking about ‘regular’ currencies seems about as out-of-fashion as that hideous shoulder pad trend from the 1980s.

[Millennial readers: see here if you’re confused.]

But there are actually a few currencies out there worth talking about right now.

And top among them, especially for anyone holding US dollars, is the Hong Kong dollar.

The Hong Kong dollar is different because it is ‘pegged’ to the US dollar at a pre-determined rate.

Unlike the euro, pound, yen, etc. whose exchange rates fluctuate on a daily basis (and occasionally have major, violent price swings) the Hong Kong dollar is set at 7.80 HKD per US dollar, plus or minus a very narrow band.

The Hong Kong dollar has effectively traded between 7.75 and 7.85 for the past three decades– a variation of about 0.64%. This barely registers as a rounding error.

Now, there are a handful of other currencies which are also pegged to the US dollar.

Venezuela’s government fixes its bolivar currency to the US dollar at an official rate of roughly 10:1. (Though when I was in the country a few weeks ago the Black Market rate was 30,000:1.)

In Africa, the government of Eritrea pegs its currency (the Nakfa) to the US dollar at a rate of 13.5:1.

Even Cuba’s government pegs its “convertible peso” to the US dollar at 1:1 (less some absurd exchange fee).

But none of these currencies is a viable alternative to the US dollar. The US government’s finances may be in shambles, but Eritrea’s, Cuba’s, and Venezuela’s are in much worse condition.

Hong Kong is a rare exception in the world.

The Hong Kong Monetary Authority, the country’s central bank, is among the best capitalized on the planet.

Plus the government is awash with cash and routinely runs substantial budget surpluses.

Hong Kong has virtually zero debt, and nearly $1 trillion Hong Kong dollars ($126 billion) in net foreign reserves.

That’s a public savings account worth roughly 40% of the country’s GDP.

Hong Kong’s Net International Investment Position, which is essentially a reflection of the government’s ‘net worth’ is about $1.25 TRILLION, or 380% of GDP.

This is nearly unparalleled. By comparison, the US government’s net worth is NEGATIVE $65 trillion– roughly NEGATIVE 350% of GDP, versus Hong Kong’s POSITIVE 380% of GDP.

One country is broke. The other is a financial fortress.

And while the US government’s liabilities keep mounting, Hong Kong’s foreign reserves keep increasing.

Between the two, it’s pretty obvious that Hong Kong is in vastly superior financial condition. And that’s what makes the Hong Kong dollar so compelling.

By holding Hong Kong dollars, you essentially get all the US dollar benefit without having to take the US dollar risk.

If the US dollar remains strong, the Hong Kong dollar remains strong. The two are virtually interchangeable.

But unlike holding US dollars (where your savings is linked to a bankrupt country), Hong Kong dollars are backed by one of the most solvent, fiscally responsible governments in the world.

So if there were ever a US-dollar crisis, Hong Kong could simply de-peg its currency… meaning anyone holding Hong Kong dollars would be insulated from the consequences of the US government’s pitiful finances.

It’s like having a free insurance policy… which is what an effective Plan B is all about.

Right now is a good time to think about moving some savings into Hong Kong dollars.

The Hong Kong dollar spent the last several years at the extreme ‘strong’ end of its trading range (7.75 HKD per US dollar).

It’s now back to 7.80, right in the middle of normal trading range, so it’s a slightly better entry point.

If you find that the Hong Kong dollar is not for you, in general it still makes sense to diversify at least a portion of your assets away from your home country’s currency…

… especially if your currency happens to be overvalued.

The US dollar has been artificially strong over the past few years. IT began a multi-year surge back in 2014 for no apparent reason.

GDP growth was tame, US debt kept piling… there was no fundamental, logical reason for the US dollar’s sudden strength.

I took advantage of this anomaly by trading overvalued US dollars for high quality assets (businesses, shares, real estate) in countries with undervalued currencies– like Australia, Chile, Colombia, Georgia, UK, Russia, Canada, etc.

This strategy decreased my risk and increased the odds that the investments will perform well.

As an example, I bought some assets denominated in British pounds (GBP) immediately after the Brexit vote when the pound sank below $1.20. The pound is now around $1.32, about 10% higher.

So even without factoring in the share price appreciation or dividends, those GBP investments have already made 10% in US dollar terms.

In Australia, I acquired a private business at a time when the Australian dollar was at a multi-year low. Similarly, the Aussie dollar is up 10% since then, so there’s already a built-in gain.

The US dollar has definitely lost some ground this year and isn’t as strong as it was in 2015 and 2016.

But the US dollar index is still at a higher level than its long-term, trade-weighted average, so there’s more room for the dollar to weaken.

This means it’s still a good idea for US dollar holders to consider some high quality foreign assets… and at a minimum, think about that free Hong Kong dollar ‘insurance policy’.

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In 1906, American entrepreneur William T. Grant opened his very first “W.T. Grant Co 25 cent store” in a small town outside of Boston.

The store became popular and fairly profitable. So Grant opened another. And another.

Three decades later, Grant’s retail empire was generating $100 million in sales (an enormous sum back then). And by the time of Grant’s death in 1972, there were over 1,000 stores bearing his name.

Investors loved W.T. Grant Company stock for its reliable profits and high dividends.

Many of our subscribers may remember W.T. Grant. The chain was among the largest in the US at its peak.

And then something completely unexpected happened…

In 1976, W.T. Grant Company declared bankruptcy.

At the time, it was the second biggest bankruptcy in US history. And, like the downfall of Lehman Brothers and other big Wall Street institutions at the onset of the 2008 financial crisis, it was a shock to the world.

How could a company as big and profitable as W.T. Grant Co. go bust?

In the autopsy that followed the bankruptcy, accountants found that while the company was generating substantial PROFIT, it was not generating any CASH FLOW.

These two terms sound the same, but they’re dramatically different.

Profit, or more specifically net income, includes all sorts of bizarre accounting rules that don’t actually make sense in the real world.

Due to these rules, companies are often required to adjust revenue and expenses for things like “depreciation”, or “foreign exchange gains and losses”.

These are all merely accounting terms that don’t directly and immediately affect cash balances. But they can dramatically impact “profitability.”

Here’s one example from my own experience: a few years ago, the large agriculture company that I founded here in Chile purchased a farm.

We bought it for far below the property’s market value.

It was a great deal for the business. BUT… accounting rules required that our company record a PROFIT based on the difference between what we paid for the property and what it was worth.

This idiotic rule made it seem like we achieved a profit simply for buying a property.

This makes no sense. In the real world, we would only earn a profit by SELLING the property for a higher amount than we paid. You can’t profit before you sell something.

It’s rules like this that make profit an unreliable metric.

CASH FLOW is much more accurate.

Specifically, OPERATING CASH FLOW tells us how much money a company makes from its business.

It strips out all the silly rules and focuses purely on how much cash a business generates from its operations.

Then there’s FREE CASH FLOW, which is the amount of money left over for investors AFTER a company makes all of the necessary investments it requires for future growth.

Cash flow is what counts. If a company has negative cash flow, it will eventually go under.

Profit can be misleading. And that’s what happened to W.T Grant Co. It was profitable but had negative cash flow.

Today there’s another famous business in similar circumstances– our old friend Netflix.

Quarter after quarter, Netflix reports a profit. Just yesterday afternoon the company had its quarterly earnings call, posting a profit of $553 million. Not bad.

Yet when anyone dives just a little bit deeper into the numbers, Netflix’s cashflow is absolutely gruesome.

The company’s Operating cashflow is negative. In other words, after stripping out all the unrealistic accounting nonsense, Netflix’s core business LOSES MONEY.

In fact Netflix’s operating cash flow has been negative FOR YEARS. And the amount of money they’re losing is increasing.

Netflix’s business has lost $1.3 billion so far through the first nine months of 2017. That’s 52% worse than the $916 million operating cashflow deficit they suffered in the first nine months of 2016, and nearly three times worse than the $504 million operating cashflow deficit during the first nine months of 2015.

Throughout this period, the number of Netflix subscribers has steadily grown, now well in excess of 100 million.

And every time Netflix reports a big surge in subscribers, the stock price soars.

This is truly bizarre. Just look at the cash flow numbers: as the number of Netflix subscribers has grown over the years, the company losses have grown even more.

It reminds me of that old saying from the 1990s dot-com bubble– “We lose money on every sale, but make up for it in volume.”

But it gets worse.

The company’s negative Operating Cash Flow doesn’t include the billions of dollars that it spends on content.

And on its quarterly earnings call yesterday, executives announced they will spend a whopping $8 billion on original content next year.

That’s $8 billion that they don’t have. And don’t forget the $1.4 billion operating cash flow deficit.

Where are they possibly going to find this money? Simple. Debt. Netflix will pile on more and more debt despite racking up enormous cashflow deficits.

Now, to be fair, it’s not unusual for a business to lose money for a period of time as part of a longer-term plan to generate strong cashflow.

But just look at this industry: it seems like EVERYONE is diving in to this original content game.

Apple. Facebook. Amazon. CBS. Disney. Google. Sony. Time Warner. Hulu. Each of these organizations has developed a streaming service with original content.

And some of them (especially Google and Facebook) have an endless war chest thanks to their cash-gushing core businesses.

Google’s parent company (Alphabet) reported free cash flow of $11.6 billion in the second quarter alone. So they could easily outspend Netflix and still have billions of dollars left over.

All of this competition is going to be great for consumers; these companies are collectively spending tens of billions of dollars to entertain us. And they’re going to lose money doing it.

But for investors this is sheer madness. Don’t be the sucker paying for other people’s entertainment.

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Something pretty miraculous happened recently.

It appears that Jamie Dimon, CEO of JP Morgan Chase, went nearly TWO WEEKS without bashing Bitcoin.

This must be a record for Mr. Dimon, who seems to have barely been able to last an hour without calling out Bitcoin as a “fraud”, or a refuge for criminals and North Koreans.

Mr. Dimon finally broke his Zen-like meditative silence late last week, once again returning to the familiar assaults we’ve come to expect from the world’s most powerful banker.

On Thursday, Dimon downplayed the importance of Bitcoin during a teleconference with journalists, and then said he wouldn’t talk about cryptocurrency anymore.

One day later, Dimon was talking about cryptocurrency again, this time at the annual meeting of the Institute for International Finance.

Dimon’s rant was in top form, and he went back to his core material– governments won’t allow Bitcoin to exist, it’s only useful for criminals, etc.

He was later joined by his sidekick Larry Fink, Chairman and CEO of Blackrock (the largest investment management firm in the world with over $5.7 trillion under management).

Fink stated succinctly that Bitoin is “an index for how much demand for money laundering there is in the world.”

Now, these are clearly not dumb guys. Dimon and Fink are princes of Wall Street. They know finance.

But it’s pretty obvious they haven’t done their homework on cryptocurrency… since there’s really no objective evidence to support their assertions.

Dimon’s idea that Bitcoin is a “great product” for criminals is simply WRONG. Bitcoin is terrible for criminals.

Why? Easy. Bitcoin is not fully anonymous. Every single Bitcoin that has ever been mined… and every single transaction in Bitcoin that has ever been made… is recorded in the Blockchain.

In other words, it’s all public information.

That’s not to say that people’s names and addresses are recorded in the Blockchain; instead, a typical transaction record includes information about Bitcoin Wallet IDs, block numbers, etc.

[Visually, it looks something like this: http://ift.tt/2gK89rN]

But for people with enough resources (i.e. governments), the transactions can be traced back to the source.

Here’s an easy example.

Let’s say Alvin the Arms Dealer signs up for a new account at Coinbase– the most popular exchange in the world.

Alvin links his Coinbase account to his bank account at, say, hmmm… JP Morgan Chase, and puts in an order to buy 100 Bitcoin.

The money transfers from JP Morgan to Coinbase, and Alvin’s Coinbase wallet is credited with 100 Bitcoin.

Alvin now sends those 100 Bitcoin to his friend Marvin the Money Launder.

Marvin sells the Bitcoin at another exchange, and deposits the US dollars into his own bank account.

EVERY SINGLE ONE OF THESE TRANSACTIONS has been posted to the blockchain.

And if the FBI or INTERPOL really looks into it, they’ll be able to trace Marvin’s bank deposit back to Alvin’s initial purchase of Bitcoin at Coinbase. Boom. Smoking gun.

In other words, if you’re the FBI, you should HOPE that criminals use Bitcoin. They’ll be easier to catch.

But any criminal with half a brain [oxymoron, I know] is already aware of these issues. So they’ll probably stick to Amazon.com giftcards… which is a MUCH easier way to launder money.

The other laughable point that Dimon makes is that ‘governments won’t allow Bitcoin to exist’.

He believes that governments want to remain in control of money, so at some point they’ll merely outlaw Bitcoin. And poof… demand will vanish.

This is a completely naive view.

Marijuana been illegal under US federal law for DECADES. And yet demand only grows.

Pirating movies is also illegal. And those rules have been aggressively enforced since the passage of the Digital Millennium Copyright Act nearly 20-years ago.

But illegal downloads of movies, music, software, etc. still constitute roughly 25% of all Internet traffic, according to a study commissioned by NBC Universal.

Bitcoin would be even harder to control. You don’t even need to be connected to the Internet in order to receive or store Bitcoin. So fat chance they’ll be able to enforce a ban.

Any attempt to get rid of Bitcoin would be about as successful as preventing people from smoking weed or pirating the latest Game of Thrones episode.

But… Uncle Sam does have one weapon… one way they could potentially disrupt Bitcoin.

Some day the US government and Federal Reserve might actually wake up and realize that crypto is the future.

And when that day comes, the obvious tactic would be to create their own version of the Blockchain that uses “crypto-dollars”.

Cryptodollars would be equivalent to US dollars. So $1 in physical cash = $1 in your bank account = 1 cryptodollar.

Cryptodollars would be legal tender and accepted everywhere in the country– Wal Mart, Amazon, etc., but without any of the wild gyrations and fluctuations that we see in the Bitcoin price.

The introduction of cryptodollars would clearly have an impact on the demand for Bitcoin.

Hardcore users would certainly still hold Bitcoin, so it wouldn’t go to zero.

But casual users might very well abandon Bitcoin in favor of cryptodollars due to the convenience of being able to spend them anywhere.

The added benefit to the US government is that a crypto-dollar blockchain would solidify the dollar’s status as the international reserve currency.

So they definitely have compelling reasons to do this.

Now, it might never happen. Or it could take years.

But the possibility exists. So keep that in mind before going ‘all in’ on crypto.

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Today’s Notes is a bit different…

I recorded a conversation I had with my colleague Sean Goldsmith about my recent travels to Venezuela. I explain how I exchanged my US dollars on the black market for Bolivar (with a taxi driver I’d never met before)… and how the situation in Venezuela will get worse before it gets better. Plus, I share observations and stories of things I saw on the ground in one of the world’s poorest and most dangerous countries.

Then we discuss the tragedy in Puerto Rico… and why I think Puerto Rico is still one of the greatest opportunities in the world today. They’ve run the numbers, and their tax incentives like Act 20 and Act 22 are helping the island. I expect the amazing incentives will stay in place. And, although the hurricane was devastating, the financial aid that comes along with the storm is a catalyst to get Puerto Rico back on its feet.

You can listen to our conversation below.

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The Great Financial Crisis happened because Wall Street was financing homes for people who couldn’t afford them.

Leading up to the GFC, there was a voracious appetite from investors for “AAA”-rated mortgage debt. So lenders would make lots of loans to subprime borrowers and sell them to Wall Street. Wall Street would pool them together and one of the major ratings agencies (like Moody’s or Standard & Poor’s) would stamp the steaming pile of garbage with AAA.

AAA by Moody’s definition means the investment “should survive the equivalent of the U.S. Great Depression.” In other words, it’s rock solid.

The reasoning was that one subprime mortgage was risky. But if you bundled thousands together, you get AAA… Because they couldn’t all go bad at once. And, hey, you can’t lose money in real estate.

The rating agencies weren’t as dumb as they appeared, though… Investigations following the crisis showed lots of incriminating emails, like this one from a Standard & Poor’s exec:

“Lord help our fucking scam . . . this has to be the stupidest place I have worked at.”

Like everyone else, they played along because they wanted to make money.

To generate enough mortgages to meet demand, lenders would do anything…

– Sell a house for no money down

– Offer a teaser rate (which temporarily reduces monthly payments, then jumps to market rates)

– And even offer to pay part of your mortgage for a couple months (most small lenders could sell a loan to Wall Street in a month or two, erasing their liability. If the origination payment was more than cash out of pocket, they still came out ahead).

They called the worst of the subprime loans “NINJAs” as in “No income, No job, No assets.”

When they couldn’t actually write enough mortgages to meet demand, Wall Street got creative. They started bundling together bundles of mortgages, something called a CDO-Squared. Then they created synthetic CDOs, which were just derivatives of subprime mortgages and even other CDOs (essentially a
way for people to gamble on the mortgage market without actual mortgages).

As we all know, it ended in disaster… because the people who took out the mortgages they couldn’t afford to buy overpriced homes stopped paying. And the CDOs, CDOs-squared and synthetic CDOs (which had been spread around the world) went bust.

Remember, it all started with selling people homes they couldn’t afford. Which brings me to today…

There’s a record high $1.4 trillion of student debt in the US. And millennials are struggling to pay off those balances.

The National Association of Realtors polled 2,000 millennials between the ages of 22-35 about student debt and homeownership… Only 20% of those surveyed owned a home… Of the 8 in 10 that didn’t own, 83% of them said student debt was the reason. And 84% said they’d have to delay a home purchase for years (seven years being the median response).

And that’s all bad for the home-selling business. Once again, the lenders are getting creative…

Miami-based homebuilder, Lennar Homes, recently announced it would pay a big chunk of a student loan for any borrower buying a home from them.

Through its subsidiary Eagle Home Mortgage, the company will make a payment to a buyer’s student loans of as much as 3% of the purchase price, up to $13,000.

Debt has become such a keystone of our society, that the only way we can afford something is to swap one type of debt they can’t afford with another type of debt.

A recent study by the Pew Charitable Trust showed 41% of US households have less than $2,000 in savings – a full one-third have zero savings (including 1 in 10 families with over $100,000 in income). Another study showed 70% of Americans have less than $1,000 in savings.

The point is, America is broke… A single, surprise expense like a flat tire or a doctor’s visit would wipe most people out.

And it’s only getting worse.

Back in August, I calculated the average household account at Bank of America (which has $592 billion in consumer deposits from 46 million households)… It’s only $12,870 per household… And that includes savings, investments, retirement… EVERYTHING.

Also keep in mind, that’s the average… So accountholders with huge balances skew the numbers higher.

It’s no wonder Americans have $1.021 trillion in credit card debt – the most in history.

Auto loans are also at a record high $1.2 trillion.

And let’s not forget the US government, which is in the hole more than $20 trillion. The US’ debt is now 104% of GDP… And total debt has grown 48% since 2010.

The liability side of the balance sheet keeps expanding. Meanwhile assets and productivity aren’t keeping up.

But people continue buying homes, cars, TVs and college educations by taking on more and more debt… And now, by swapping one type of debt for another.

Wealth is built on savings and production. Not on playing tricks with paper and going deeper into debt.

I can’t tell when this house of cards falls. But rest assured, it will come tumbling down.

Will you be ready when it does?

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In the late 1500s, an Englishman named William Lee invented a revolutionary knitting machine that could efficiently do the work of dozens of men.

Given how important the garment industry was at the time in English, Lee’s invention was truly disruptive.

But Queen Elizabeth wasn’t so excited.

When Lee came to visit her to demonstrate the power of his new technology, the Queen grimaced, lamenting that the machine would put too many people out of work… and she refused his request for a patent.

So Lee went to France, where King Henry IV was highly supportive of the technology and issued a royal patent.

I was thinking about this story recently when I read about the government of Vanuatu announcing that they will begin accepting Bitcoin in exchange for citizenship.

If that sounds strange, let me explain–

Vanuatu is one of several nations that offers citizenship to foreigners in exchange for making an ‘investment’ in the country.

Malta. Cyprus. Saint Kitts & Nevis. Etc. These countries all offer what are known as ‘citizenship by investment’ programs.

(And dozens of countries, including the United States, offer ‘residency by investment’ programs, where foreigners receive legal residency in exchange for an investment.)

As I’ve written before, however, sometimes these programs would be more accurately described as ‘citizenship-by-donation’.

Because, in many cases, you’re not really making an investment. You’re just writing a big check to the government.

Malta’s Individual Investor Programme requires foreigners to donate 650,000 euros to the government. And that’s only one of the qualifications. In Cyprus it’s more than 2 million euros.

Vanuatu has had a number of similar programs over the years. It’s MUCH cheaper, though you’ll still end up spending north of $200,000 between the fees and investment.

Dominica’s program is probably the best value for the money, with a donation of just $100,000 (not including fees).

And Saint Kitts is offering a bit of a ‘special’ right now through March 2018, providing citizenship in exchange for a $150,000 donation to their hurricane relief fund (that’s down from the normal $250,000 investment in their Sugar Industry Diversification Fund).

Vanuatu is the first country to accept Bitcoin in exchange for citizenship… which I find pretty shrewd.

There are countless ‘Bitcoin Millionaires’ out there who bought a boatload of the cryptocurrency years ago and are now sitting on hefty gains with limited options to spend it.

So Vanuatu’s economic citizenship program will likely end up being a popular outlet for Bitcoin’s early adopters, causing a surge in applications (and much-needed revenue).

The irony is that this will put Vanuatu in the cross-hairs of illicit hackers.

Even governments in more advanced countries lack in-house crypto expertise who truly understand Bitcoin cold storage and proper handling of private keys.

It’s doubtful that tiny Vanuatu has those resources either.

Consequently, I imagine we may soon hear about the Vanatu government’s Bitcoin wallet being hacked. The potential treasure trove is simply too big for hackers to ignore.

The good news, though, is that this will likely spur other governments to start doing the same thing (once they nail down their cryptosecurity strategies). And that’s a big deal.

Vanuatu’s decision to accept Bitcoin payments shows that there will always be competition among governments.

Some governments have already decided to impose bans of cryptocurrencies or their exchanges.

Just this morning, for example, the Russian central bank said it will block Bitcoin exchange websites.

Other government may also move in that direction.

But there will always be other governments– often in economically underdeveloped countries– which embrace what others ban.

Online gambling is a great example. The US started banning Internet gambling websites more than 15 years ago and chased away a thriving industry.

Malta capitalized on the opportunity and developed favorable legislation to become a safe haven for online gambling companies.

Today the industry accounts for more than 10% of Malta’s economic activity. It was a big loss for the US and a huge gain for Malta.

Taxes are another great example; while some countries stupidly raise taxes and hang a “Closed for Business” sign at the border, other countries welcome business with open arms, slashing their taxes and providing generous investment incentives.

Bitcoin will be no different. Some governments will idiotically chase away the wealth, investment, and opportunity that comes from blockchain and cryptofinance.

Others will embrace it. They’ll become safe havens.

And the great thing about cryptocurrency is that it’s so easily transportable. We’re talking about something that exists online.

It’s not like some Bitcoin exchange website has to pick up and move a factory. Shifting operations from one country to another is much simpler for cryptocurrency businesses than for most traditional industries.

And as long as this type of inter-governmental competition exists between countries, as it has for centuries, they won’t be able to make a dent in the industry with their regulations.

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On April 30, 1934, under pressure from Italian-American lobby groups, the United States Congress passed a law enshrining Columbus Day as a national holiday.

President Franklin Roosevelt quickly signed the bill into law, and the very first Columbus Day was celebrated in October of that year.

Undoubtedly people had a different view of the world back then… and a different set of values.

Few cared about the plight of the indigenous who were wiped out as a result of European conquest.

Even just a few decades ago when I was a kid in elementary school, I remember learning that ‘Columbus discovered America’. There was no discussion of genocide.

It wasn’t until I was a sophomore at West Point that I picked up Howard Zinn’s People’s History of the United States (and then Columbus’s own diaries) and started reading about the mass-extermination of entire tribes.

Columbus himself wrote about his first encounter with the extremely peaceful and welcoming Arawak Indians of the Bahama Islands:

“They do not bear arms, and do not know them, for I showed them a sword, they took it by the edge and cut themselves out of ignorance. They have no iron… They would make fine servants… With fifty men we could subjugate them all and make them do whatever we want.”

And so he did.

“I took some of the natives by force in order that they might learn and might give me information of whatever there is in these parts.”

Columbus had already written back to his investors in Spain, Ferdinand and Isabella, that the Caribbean islands possessed “great mines of gold.”

It was all lies. Columbus was desperately attempting to justify their investment.

In Haiti, Columbus ordered the natives to bring him all of their gold. But there was hardly an ounce of gold anywhere on the island. So Columbus had them slaughtered. Within two years, 250,000 were dead.

Now, this letter isn’t intended to rail against Columbus. Point is, I never learned any of this information in school. Decades ago, no one really did.

But today, people are starting to be aware of what Columbus did. And our values are vastly different today than they were in 1937. Or in 1492.

Decades ago… and certainly hundreds of years ago… the idea of a ‘superior race’ still prevailed, endowed by their creator with the right to subjugate all inferior races.

This readily-accepted belief was the pretext of slavery and genocide.

Even as recently as the early 1900s, there were entire fields of ‘science’ devoted to studying the technical differences among various races and drawing data-driven conclusions about superiority.

Phrenologists, for example, would take precise measurements of people’s skulls– the circumference of the head, the ratio of forehead to eyebrow measurements, etc.– and deduce the intellectual capacity and character traits of entire races.

Jews could not be trusted. Blacks and Asians were inferior. These assertions were based on ‘scientific evidence’, even in nations like Sweden, the United Kingdom, and United States.

Today we’re obviously more advanced than our ancestors were. We know that their science was complete bullshit, and our values are totally different.

There are entire movements now (particularly among university students) to remove statues, rename buildings, and re-designate holidays.

Frankly this is a pretty slippery slope. If we judge everyone throughout history based on our values today, we’ll never stop tearing down monuments.

Even someone as forward-thinking as Thomas Jefferson owned slaves. And that’s a LOT of elementary schools to rename.

More importantly, there will come a time in the future when our own descendants judge us harshly for our short-sighted values.

Fortunately we no longer have faux-scientists today writing dissertations about racial superiority.

But we do have entire fields of ‘science’ that will truly bewilder future historians. Economics is one of them.

Our society awards some of its most distinguished prizes for intellectual achievement to economists who tell us that the path to prosperity is to print money, raise taxes, and go into debt.

Economists tell us that we can spend our way out of recession, borrow our way out of debt, and that there will never be any consequences from conjuring trillions of units of paper currency out of thin air.

They created a central banking system whereby an unelected committee of economists possesses nearly totalitarian control of the money supply… and hence the power to influence the price of EVERYTHING– food, fuel, housing, utilities, financial markets, etc.

Economists have managed to convince the world that inflation, i.e. rising prices, is actually a GOOD thing… and that prices quadrupling and quintupling during the average person’s lifespan is ‘normal’.

They’ve also succeeded in making policy-makers terrified of deflation (falling prices) even though just about any rational individual would naturally prefer falling (or at least stable) prices to rising prices.

Economists make the most ridiculous assertions, like “The debt doesn’t matter because we owe it to ourselves…” as if it’s perfectly acceptable for the US government to default on its citizens.

Or that the US economy is so strong because the American consumer spends so much money, i.e. consumption (and not production) drives prosperity.

The public believes all this nonsense because the ‘scientists’ say it’s true.

The scientists also come up with fuzzy mathematics to support their assertions. Last Friday, for example, the Labor Department reported that the US economy lost 33,000 jobs in September.

Yet miraculously the unemployment rate actually declined, i.e. fewer people are unemployed despite there being fewer jobs in the economy.

None of this makes any sense. Fewer jobs means lower unemployment. Spend more money. Print more money. Borrow more money. Debt is wealth. Consumption is prosperity.

All of this is based on ‘science’.

We may rightfully take umbrage with the values and ideas of our ancestors.

But it’s worth turning that mirror on ourselves and examining our own beliefs… for there will undoubtedly come a time when our own descendants wonder how we could have been so foolish.

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There was a time, centuries ago, that France was the dominant superpower in the world.

They had it all. Overseas colonies. An enormous military. Social welfare programs like public hospitals and beautiful monuments.

Most of it was financed by debt.

France, like most superpowers before (and after), felt entitled to overspend as much as they wanted.

And their debts started to grow. And grow.

By the eve of the French revolution in 1788, the national debt of France was so large that the government had to spend 50% of tax revenue just to pay interest to its lenders.

Yet despite being in such dire financial straits the French government was still unable to cut spending.

All of France’s generous social welfare programs, plus its expansive military, were all considered untouchable.

So the spending continued. In 1788, in fact, the French government overspent its tax revenue by 20%, increasing the debt even more.

Unsurprisingly revolution came the very next year.

There are presently a handful of countries in the world today in similar financial condition– places like Greece, which are so bankrupt they cannot even afford to pay for basic public services.

But the country that has the most unsustainable public finances, by far, is the United States.

The US government’s ‘Fiscal Year’ runs from October 1st through September 30th. So FY2017 just ended last Friday.

During that period, according to the Department of Treasury’s financial statements, the US government took in $2.95 trillion in federal tax deposits.

And on top of that, the government generated additional revenue through fees and ‘investments’, including $62 billion in interest received on student loans, and $16 billion from Department of Justice programs like Civil Asset Forfeiture (where they simply steal property from private citizens).

So in total, government revenue exceeded $3 trillion.

That sounds like an enormous amount of money. And it is. That’s more than the combined GDPs of the poorest 130 countries in the world.

But the US government managed to spend WAY more than that– the budget for the last fiscal year was $4.1 trillion.

So to make up the shortfall they added $671 billion to the national debt– and this number would have been even larger had it not been for the debt ceiling fiasco.

Plus they whittled down their cash balance by $194 billion.

So in total, the federal government’s cash deficit was $865 billion for the last fiscal year.

And, again, that number would have been even worse if not for the debt ceiling that legally froze the national debt in place.

That’s astounding.

Just like in 2016 (where the cash deficit was $1 trillion), this past fiscal year saw no major recession. No full-scale war. No financial crisis or bank bailout.

It was just another year… business as usual.

And yet they still managed to overspend by nearly $1 trillion, with costs exceeding revenue by more than 20% (just like the French in 1788).

What’s going to happen to these numbers when there actually is a major war to fund? Or major recession? Banking crisis?

More importantly, they’ve been overspending like this for decades without any regard for the long-term consequences.

That’s why the national debt exceeds $20 trillion today. And including its pension shortfalls, the government estimates its total ‘net worth’ to be NEGATIVE $65 trillion.

Thousands of people are joining the ranks of Social Security and Medicare recipients each day, pushing up the costs of those programs even more.

Yet their Boards of Trustees warn that both Social Security and Medicare are quickly running out of money, raising the specter of a major bailout.

Plus there’s trillions of dollars more in needed spending to maintain the nation’s infrastructure. The list of long-term expenses goes on and on.

The obvious truth is that none of this is sustainable.

From the Roman Empire to the French in 1788, history tells us that the world’s dominant superpower almost invariably spends itself into decline, ignoring the consequences along the way.

It would be foolish to presume that this time will end up any different… especially given that there’s zero sign of any changes to the trajectory.

Congress has already put forward a new spending bill for this Fiscal Year– another 4+ trillion, not including any emergency spending that might arise (like hurricane relief, for example).

So we’re already looking at another nearly $1 trillion loss for the coming fiscal year, especially given that there’s almost no growth to tax revenue.

Don’t take this the wrong way– the sky is definitely not falling. The world isn’t coming to an end. And the US isn’t going to descend into financial chaos tomorrow morning.

But at a certain point, a rational person has to take note of such obvious and overwhelming data, and take some basic steps to reduce your exposure to the consequences.

For example, if your country is objectively insolvent, it probably doesn’t make sense to keep 100% of your assets and savings within its jurisdiction…

… especially if your government has a proud history of Civil Asset Forfeiture, AND you happen to be living in the most litigious society that has ever existed in the history of the world.

It’s easy (and incredibly cost effective) to move a portion of your savings to a safe, stable jurisdiction overseas that’s out of harm’s way.

Or to hold physical gold and silver in a safety deposit box overseas. Or even cryptocurrency as an alternative.

This isn’t some crazy idea for tin-foil hat-wearing doomsayers.

Rational, reasonable, normal have a Plan B.

And in light of the circumstances and all the data, it would be truly bizarre to NOT have one.

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Angelina Umansky, a 39-year-old spa owner from San Francisco, was visiting a friend in Miami two weeks ago when she heard about a new condo development downtown.

Hoping to find a vacation home, but worried that others were interested, too, Ms. Umansky arrived at the sales office at 8 a.m. the day after seeing some model units.

About 50 other buyers were already in line. Two hours later, a sales agent summoned her and said she had four minutes to decide which unit to buy. She acted fast, offering $350,000 for a two-bedroom, two-bathroom unit.

Ms. Umansky thinks she got a bargain; when she called on behalf of a friend less than eight hours later, she was told the asking price on a unit like hers had climbed to $380,000, a nearly 9 percent price increase.”

Above is the opening story from a New York Times article published February 3, 2005, pretty much the very TOP of the biggest real estate bubble in history.

But very few people realized at the time that the market was such a bubble, even though it was exhibiting all the classic signs:

People were literally lining up to buy overpriced assets. Nobody thought you could lose money in real estate back then.

And prices kept rising. Quickly.

A central Florida homebuilder, Transeastern Homes, used to hold sales events at hotels and convention centers.

Prospective customers would spend five minutes looking at a subdivision map before buying. The company would announce price increases – up to 16 a day – over a loudspeaker, putting the crowd into a frenzy.

There are stories of dozens of condo buyers camping overnight in New York City for a chance to buy an incomprehensibly expensive unit.

Fights would break out between agents at showings. Some customers would bribe builders for a chance to buy a unit.

But one of the biggest signs of the top of the real estate market was “investors” flipping pre-construction condos…

Someone would put a hefty down payment on a condo before the building even started construction.

They had no intention of ever living there. They just wanted to flip to another buyer at a higher price, often just a few weeks later, when the building was slightly further along in construction.

According to the Times, a 1,000-unit Miami condo building sold out in 36 hours back in 2004. At least 50% of the buyers were flippers.

This is the type of behavior that happens in a mania– people stop buying assets because of the investment’s strong fundamentals. They have no intention to hold. They just want to flip quickly and make easy money.

The flippers have returned today.

Instead of pre-construction condos, however, today’s flippers are participating in the most frenzied sector in the market: initial coin offerings (ICOs).

If you’re not familiar, an ICO is a way for a business to raise capital from investors.

Unlike traditional ways of raising capital, though, like venture capital funds or angel investors, businesses raise capital through an ICO by selling a digital ‘token’.

These tokens sometimes represent ownership in the business. But more often than not, the tokens confer nothing more than a prepayment for the company’s product or service.

ICOs are sort of like crowdfunding meets cryptofinance.

Imagine that you’re surfing your favorite crowdfunding site and come across a business selling some new Lego toy.

You pay $20 to pre-order the Lego toy, becoming one of the company’s many crowdfunders.

With an ICO, the company would issue you a token, representing that you are entitled to one of its Lego toys at some point in the future, presuming they ever get around to making them.

But here’s where things get strange-

These tokens trade actively in the market; speculators buy and sell these tokens, and prices have been rising at an unimaginable pace.

So it would be like taking your Lego toy token, and then re-selling it at 10x the price you paid only a few days later.

Is the Lego toy really 10x more valuable? Probably not. But this is common among ICOs.

Because of these huge returns, ICOs are attracting more and more speculators looking to make a quick buck.

Most have no idea what they’re buying, or why. They don’t care about the fundamentals of the business. Or the risk. They’re flippers.

Now hedge funds are starting to flip ICOs too.

Consider the recent ICO by messaging app Kik Interactive. The company raised around $100 million from over 10,000 contributors.

A group of early investors – including Blockchain Capital, Pantera Capital and Polychain Capital – invested $50 million in a Kik presale before the ICO.

And they received a 30% discount on the token price.

These early investors can sell 50% of their stake ($25 million) at any time – locking in a more than $10 million profit.

In addition to flipping, ICOs are getting so frothy that even celebrities are starting to endorse them.

Floyd Mayweather (the boxer) posted a photo of himself on a private jet in front of piles of $100 bills saying “I’m gonna make a $hit t$n of money on August 2nd on the Stox.com ICO.”

Paris Hilton told the world she was looking forward to participating in the LydianCoin ICO (whose founder happens to be facing jail time).

These are all signs of an extraordinary, massive bubble.

As with all bubbles, there are certainly some legitimate, well-managed businesses whose tokens might actually be worth something.

But at the same time there’s limitless garbage out there masquerading as investments.

This bubble might persist for years. Or months. Or days. No one knows.

We only know that, at some point or another, bubbles always burst.

Keep that in mind if you find yourself chasing the next hot ICO. Make a calculated decision whether or not it’s worth the risk. And recognize that there’s a decent chance you could lose your entire investment.

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