Category: simonblack

First it was Pets.com, and all the unbelievably stupid Internet businesses in the 1990s.

Investors were so eager to buy dot-com stocks, all you had to do was put an “e” in front of your business or product and you’d immediately be worth millions.

It didn’t matter that most of these companies didn’t make any money. Investors kept buying.

Later on after the dot-com bubble burst, another big craze developed in junior mining stocks– shares of small exploration companies looking for big mineral deposits.

The epicenter of the junior mining industry is in Vancouver, Canada, and the stock exchange there (TSX-V) throttled to record highs.

Shares of companies with literally no profits, no revenue, and no assets were worth tens of millions of dollars.

Then that bubble burst.

A few years later, a new hot craze developed– in cannabis companies.

The market has been flooded with companies (many of them curiously based in Canada’s poor climate and high cost structure) with plans to grow medicinal marijuana.

Their stock prices have soared, with valuations in some cases exceeding $1 billion.

Every time the bubble bursts with these big trends, most of the companies get wiped out.

Only a handful survive– primarily the ones who focused on building long-term, sustainable businesses instead of chasing a quick buck.

From the ashes of the dot-com bubble, companies like Amazon, Godaddy, eBay, etc. emerged in-tact and are still successful today.

Similarly, while many junior mining companies went completely bust, a handful are still operating and quite profitable.

And there will be a few extremely successful cannabis companies over the next several years who step over the remains of their innumerable, defunct competitors.

Clearly today’s big craze is crypto and blockchain.

Like the dot-com bubble in the 90s, you could add the concept of blockchain to just about anything and have a ‘business’ worth millions, no matter how idiotic the original idea.

(Someone will soon pitch me an idea for an app to publish grocery lists into the blockchain. It’s absurd.)

And like all the other big investment fads in the past, most of the companies in this space won’t exist a few years from now.

There are lot of reasons for that, starting with the fact that building a business is hard.

I’ve done it successfully a few times. And unsuccessfully more times that I care to remember: it’s incredibly difficult, so the odds are against most of these companies anyhow.

But more importantly, these big investment fads always attract people looking to make a quick buck. And that doesn’t work in the long-run.

Case in point: earlier this week a company called HIVE Blockchain Technologies went public.

It’s stock price is already up over 3x… since MONDAY, from an opening of 62 cents to $1.89.

Just prior to that, the company closed a private placement at 30 cents… and a few months ago the company was selling shares between 1 and 3 cents.

In other words, a handful of speculators made more than 600x their money in just a few months with a company that has ZERO revenue, simply because ‘Blockchain’ is so popular right now.

This has become the norm in the world of crypto and blockchain.

ICOs, another hot crypto fad, have been racking up huge returns of their own.

‘Tokens’ issued by crypto startups that have no profit or revenue are seeing similar gains of 2x to 10x or more in a very short period of time.

In the case of HIVE, the company is in the business of mining cryptocurrency.

And based on its current stock price, HIVE is worth close to $400 million.

Yet its own financial statements report that they have not generated a penny in revenue.

What’s more, the company’s “illustrative results” show that they -could- make around $7 million per year.

So investors are already paying 57x that amount before the company even gets started.

Even more curious, HIVE’s only real asset is its client relationship with a company called Genesis, one of the largest crypto mining companies in the world (and also a major shareholder in HIVE).

Genesis has more than a million customers who pay an up-front, flat-fee to have the company mine cryptocurrency on their behalf.

HIVE is now essentially a customer of Genesis.

So investors are essentially buying shares of HIVE at a price that’s 57x what the company says it -could- be making (but isn’t) by having Genesis mine cryptocurrency for them.

Seems like investors could save themselves the trouble (and forgo the 57x share price markup) by simply becoming direct customers of Genesis themselves.

Who knows… maybe HIVE is the real deal. Maybe it’s the rare eBay or Amazon that emerges from the bubble in-tact and successful.

But this is a pretty clear example of the irrationality that ensues every single time there’s some white-hot investment fad.

After a hiatus of many, many, many moons, I blew the dust off my microphone and recorded a new podcast about this topic.

It wasn’t so much a podcast as a heated rant against this ridiculous bubble… and a clear explanation of precisely WHY so many crypto assets are generating unbelievable returns.

You can download it here.

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Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money than has ever been in the financial system than ever before.

Economists measure money supply, something they call “M2”. And M2 is at record high levels– nearly $9 trillion higher then at the start of the crisis in 2008.

Now, one might expect that, over time, as the population grows and as the economy grows, the amount of money in the system would increase.

But even on a per-capita bases, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

Again, that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity or artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in a business. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil as a great example.

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported profit (net income) of nearly $40 billion, with Free Cash Flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

And at the time, Exxon’s debt was $6.6 billion.

Ten years later, Exxon’s annual report for the full year of 2016 showed revenue of $226 billion, net income of $7.8 billion, free cash flow of $5.9 billion, and an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon in 2016 g 40% less revenue [due to the decline in oil prices].

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’s profits, and those profits are 80% less, then the share of the business should also decline.

Except– that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has fallen dramatically as well.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

With company after company we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying way more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed created over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries”, i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And amazingly enough they’re exciting about it.

This doesn’t makes sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed formally announces that, after nearly a decade, they’re going to start vacuuming up a lot of that money they printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

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[Editor’s note: This letter was co-written with Tim Price, co-founder of the VT Price Value portfolio and editor of Price Value International.]

In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.

Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.

The investment had already made Newton a lot of money, he was up more than 100% in a very short time.

In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.

Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.

There was only one problem: the share price of the South Sea Company kept climbing.

All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.

The market then collapsed, and he lost virtually all his life savings.

The experience is said to have given rise to his bemused response:

“I can calculate the movement of stars, but not the madness of men.”

It’s now been roughly ten years since the Global Financial Crisis began.

In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.

The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.

Stocks are at all-time highs. Bonds ar at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.

Yet asset prices keep climbing.

Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently announced that he is closing his hedge fund.

Hendry is a famous critic of this monetary absurdity and consequent asset bubble.

“It wasn’t supposed to be like this.. markets are wrong,” Hendry told investors.

Of course, the market is under no obligation to be right. Ever.

Hendry’s view is accurate– nearly every objective metric shows that the market is incredibly overpriced.

Clint Eastwood’s infamous character Dirty Harry once remarked that a man needs to know his limitations. We think we know at least some of ours: we can’t time markets.

And the only thing we know with any certainty, as sure as night follows day, is that there are always corrections– both booms AND busts.

A decade’s worth of QE and ZIRP has fuelled a runaway train, and at some point there will be a correction.

Does it make sense to stand in front of the train? Or is it better to, as Isaac Newton did, leap aboard for some final thrills?

We prefer neither.

Instead we’re diversifying as pragmatically as we can, working diligently to find undervalued companies run by honest, talented managers.

It requires more hard work and patience than buying some overpriced index fund or whatever the popular investment du jour happens to be.

But nobody ever said this investing business was supposed to be easy.

Earlier this year my publishers invited me to write the foreword to their definitive edition of Reminiscences of a Stock Operator, a thinly disguised biography of the legendary trader Jesse Livermore.

Livermore was extraordinary. Born in 1877, Livermore ran away from home as a child and soon began trading stocks.

By the time he was 20, he had already amassed a fortune of $3 million, more than $75 million in today’s money.

Livermore sold short, i.e. bet that stock prices would fall, just prior to the 1907 crash, as well as the 1929 crash.

His bets were so lucrative that, going into the Great Depression, Livermore had a fortune of more than $100 million, or about $1.4 billion today.

But Livermore wasn’t just great at making money from overheated markets. He was also a master of losing money.

This book is widely and rightly regarded as an investment classic. It is also crammed with valuable observations about the practice of speculation and successful trading.

Among them, the importance of being patient and disciplined:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.”

Sitting. As in, doing nothing. As in… neither standing in front of the train, nor jumping on board.

Hedge fund managers like Hugh Hendry don’t have this option. They have to be invested. They have to report to their investors every quarter… and if they’re not making money, investors bail.

But as an individual, you are not accountable to anyone but yourself.

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity.

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On Tuesday afternoon, Jamie Dimon, the CEO of banking giant JP Morgan, let loose on Bitcoin.

He was speaking at the Barclays Financial Services conference, and when asked whether his bank employs any Bitcoin traders, he responded-

“If we had a trader who traded Bitcoin, I’d fire them in a second,” calling any trader who deals in the cryptocurrency “stupid”.

He went on to say that Bitcoin is a “fraud” and “won’t end well”.

Now, Dimon is a brilliant executive and banker. He knows his stuff. But… fraud? Really?

My dictionary defines fraud as “wrongful or criminal deception intended to result in financial or personal gain.”

That term seems to more aptly describe the banking industry that Dimon represents.

From Wells Fargo’s illegal opening of fake customer accounts to the constant manipulation of interest rates, exchange rates, and asset prices, outright FRAUD is standard practice among big banks.

Dimon also stated that Bitcoin is primarily appealing for criminals– “if you were a drug dealer, a murderer, stuff like that. . .”

Again, this is a totally baseless and confounding statement. 10+ million Bitcoin users are drawn to the cryptocurrency for a multitude of reasons.

For some, the fact that it is decentralized is a major factor. For others, it’s the low transaction cost.

Sending an international wire transfer through the banking system, for example, can take three days and cost $100. With Bitcoin it takes an hour and costs less than a dollar.

Sure, criminals might use Bitcoin. They also use Amazon.com gift cards and government bonds.

Ironically for Jamie Dimon, criminals even use JP Morgan bank accounts to launder their money, considering that the bank has paid BILLIONS in fines over the last few years for failing to detect their customers’ illegal activities.

To be fair, Dimon does raise a valid point about Bitcoin’s (and most major cryptocurrencies’) unbelievable price runups.

Bitcoin is up nearly 4x since the beginning of this year, and nearly 30x over the past four years.

That’s not supposed to happen. And it’s always precarious to buy or speculate in anything that’s at its all-time high.

Speculation is, after all, what’s driving most of this boom.

The original Bitcoin ‘White Paper’ from 2008 described the concept as a “peer-to-peer version of electronic cash” to “allow online payments to be sent directly from one party to another without going through a financial institution.”

In other words, Bitcoin was intended to be a medium of exchange for the digital world. Send money. Receive money. Buy things online. E-commerce.

That was a hell of an idea that makes a lot of sense.

But that’s not what Bitcoin is primarily being used for today.

Instead, Bitcoin is a source of speculation– people are buying something they don’t understand based purely on an expectation that the price will increase, at a time when the price is already near a record high.

Clearly such irrational behavior will create wild, violent, emotional price swings.

And that’s exactly what’s been going on over the last year. In fact Bitcoin’s price has fallen more than $1,000 (nearly 25%) just in the last few days.

Again, that’s not supposed to happen… not in an orderly market.

But this is not an orderly market.

There are too many mad speculators who think they’re geniuses for owning Bitcoin despite not knowing a hash from a block… yet they hold a extremists’ fanaticism that their prized asset will go up forever.

That’s ludicrous. Nothing goes up (or down) in a straight line. There will always be booms and busts. And the bigger the boom, the bigger the bust.

The key problem with the Bitcoin price is that it’s so difficult to determine what’s fair value.

Most other assets– stocks, bonds, real estate, etc. can be valued by some objective means.

If I want to buy a 5,000 square foot property that cost $650,000 to build, I at least have some basis of comparison to determine how much I’d be willing to pay.

Similarly, whenever I buy a private company, my analysts and I pour over the financial statements to determine its net asset value and see how much free cashflow the business generates.

Based on this analysis, we can come up with a bid.

Even currencies have certain indicators to determine whether they’re undervalued or overvalued.

The Economist, for example, routinely publishes its Big Mac Index to compare the price of a McDonald’s Big Mac around the world, and hence provide an objective valuation for currencies.

This is just one trivial example; the point is that there are countless ways to analyze various assets.

Bitcoin lacks most of those fundamentals. There’s no Big Mac Index for Bitcoin, no balance sheet or free cash flow.

One fundamental that stands out is “market cap,” i.e. the value of all Bitcoin currently in circulation.

Right now it’s about $60 billion, with a user base of more than 10 million [though a ton of those people are speculators and not real ‘users’]

By comparison the Danish krone currently has a market cap (i.e. M2 money supply) of $205 billion, yet a population of only 6 million people.

Gold has a market cap of roughly $7 trillion, over 100x the size of Bitcoin. And while gold also has no balance sheet or cash flow, it is owned by governments and central banks all over the world.

Whether Dimon likes it or not, Bitcoin is the future.

Our modern monetary system is based on an anachronistic 19th century idea of awarding unelected central bankers totalitarian authority over the money supply.

And our ‘modern’ banking system is a 13th century idea backed by mid-20th century technology.

It’s pretty pathetic, really.

Bitcoin, despite its flaws and mob of speculators, represents the first true advance in financial technology for the Digital Age.

This technology has endless possibilities to disrupt entrenched industries that have been screwing their customers for decades.

That fact alone makes it worth learning about.

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On August 2, 2004, Bank of America broke ground on its 2.2 million square foot, NYC headquarters – the Bank of America Tower.

The all-glass tower would rise 57 stories above midtown Manhattan, with a giant spire taking the height to 1,200 ft. It’s currently the fourth-tallest building in New York City, and it cost $1 billion.

The next year, investment bank Goldman Sachs broke ground on its $2.4 billion headquarters in downtown NYC.

The investment bank brought an entire village to its Battery Park City digs – including several restaurants from famed restaurateur Danny Meyer, a wine store, a florist, a bakery and a barber shop.

Goldman also bought a nearby hotel (which included a movie theater) and a parking garage.

But before either bank moved into their new headquarters, the Great Financial Crisis of 2008 hit. Bank of America and Goldman’s share prices fell by 93% and 79%.

In 1999, a real estate analyst named Andrew Lawrence introduced the “Skyscraper Indicator.” He notes the world’s biggest buildings are typically erected on the eve of a crisis.

It all started with a building called 40 Wall Street.

At the same time, another new building, The Chrysler Building, was planning a secret spire so it could claim the title of the world’s tallest tower.

But planners for the Empire State Building had them both beat.

The year was 1929.

Certainly there’s a part of the Skyscraper Indicator which shows ‘peak hubris.’ Big companies have to show off how rich and successful they are.

But more importantly, huge skyscrapers are also an indication that it’s way too easy to borrow huge sums of money.

And that ‘easy money’ is also an indicator of the top.

Right now we’re seeing this architectural hubris moving west… to Silicon Valley.

In San Francisco there’s a $1.1 billion, 1,070-foot high tower, set to open next year.

And Salesforce, the customer relationship management software giant, bought the naming rights. Salesforce paid the developer, Boston Property, $560 million to lease part of the building for 15.5 years.

When the company announced it would put its name on the building, it had never turned an annual profit.

Coincidentally, Salesforce also put its name on an NYC tower located at 3 Bryant Park – next door to Bank of America.

But it’s not just Salesforce that’s on a spending spree.

Amazon has a $4 billion campus in Seattle. In front of the tower, you’ll find three giant, glass spheres. The tallest is 90 feet high and 130 feet in diameter.

The spheres will have trees, waterfalls, rivers and even treehouse spaces. The company hired a world-class horticulturist to populate the 70,000-square foot space with tropical plants from around the world.

Amazon won’t say how much it spent on the spheres. But King County, where Amazon HQ is located, estimates total improvements to the block (including the tower) at $284 million.

“The tech industry is trying now to express itself through buildings,” said Gundula Proksch, a professor of architecture at the University of Washington.

Businesses don’t exist to “express themselves” through architecture. They exist to maximize returns for shareholders.

And Silicon Valley is famously inept in producing profits… like our old friend Netflix, which lost $2 billion last quarter.

Or Snapchat. Uber. Tesla. Box. Twitter. Zynga. Groupon. Lyft. LinkedIn (which was acquired by Microsoft last year). Workday. Pinterest. Square.
This list goes on and on.

Uber is most noteworthy.

The company, having lost billions upon billions of dollars of its shareholders’ money, is spending another $250 million on its new headquarters in the
San Francisco area.

And Apple (which actually IS profitable) just held its first public event at its new $5 billion ‘spaceship campus’ yesterday.

All of this comes at a time when stock markets both in the United States and around the world are at record highs.

And, according to a recent investor survey from Wells Fargo and Gallup, confidence and optimism among US investors is at its highest level in 17 years.

17 years ago, of course, was 2000… the year that the great dot-com stock market bubble burst (after which the NASDAQ index fell 78%).

At the same time, we can see very expensive valuations–

One important example is the S&P 500’s Price/Sales ratio.

This ratio tells investors how expensive a company’s stock price is relative to the amount of revenue that it generates.

Ideally you’d want to buy shares in a company whose value (stock price) is a very low multiple to its revenue.

Yet according to data going back more than 50 years, the Price/Sales ratio across the entire US market is at its most expensive level ever.

Personally I am a very risk averse person– I don’t like losing money.

I’m only willing to take significant risks when the potential for return can be 50:1 or more (like speculating in select, early-stage businesses).

To me, this stock market is simply too expensive. And I’m not willing to risk being down 20% to 50%, for the prospect of earning 20% to 50%.

Those odds just don’t stack up.

I’m not suggesting there’s some imminent crash looming.

No one has a crystal ball. And this market can continue being irrational for months or years to come.

(Though throughout history, this Skyscraper Indicator has been pretty accurate…)

The only thing we know for certain is that markets are cyclical. Right now we’re in a boom.

As always, it will be followed by a bust. We just don’t know when.

But in the meantime I’d rather earn 10% to 15% on more conservative, alternative investments where the risk of loss is almost zero… waiting patiently for the right buying opportunity to come along.

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Late yesterday afternoon the federal government of the United States announced that the national debt had finally breached the inevitable $20 trillion mark.

This was a long time coming. It should have happened back in March, except that a new debt ceiling was put in place, freezing the national debt.

For the last six months it was essentially illegal for the government to increase the debt.

This is pretty brutal for Uncle Sam. The US government hasn’t run a budget surplus in two decades; they depend on debt in order to keep everything running.

And without the ability to ‘officially’ borrow money, they’ve basically spent the last six months ‘unofficially’ borrowing money by plundering federal pension funds and resorting to what the Treasury Department itself calls “extraordinary measures” to keep the government running.

Late last week the debt ceiling crisis came to a temporary armistice as the government agreed once again to temporarily suspend the debt limit.

Overnight, the national debt soared hundreds of billions of dollars as months of ‘unofficial’ borrowing made its way on to the official books.

The national debt is now $20.1 trillion. That’s larger than the size of the entire US economy.

You’d think this would be front page news with warnings being shouted from the rooftops of America.

Yet curiously the story has scarcely been covered.

Today’s front page of the New York Times tells us about Hurricane Irma, North Korea, and alcoholism in Iran.

Even the Wall Street Journal’s front page has zero mention of this story.

In fairness, the number itself is irrelevant. $20 trillion is merely a big, round, psychologically significant number… but in reality no more important than $19.999 trillion.

The real story isn’t the number or the size of the debt itself. It’s the trend. And it’s not good.

Year after year after year, the US government spends far more money than it collects in tax revenue.

According to the Treasury Department’s own figures, the government’s budget deficit for the first 10 months of this fiscal year (i.e. October 2016 through July 2017) was $566 billion.

That’s larger than the entire GDP of Argentina.

Since the government has to borrow the difference, all of this overspending ultimately translates into a higher national debt.

Make no mistake, debt is an absolute killer.

History is full of examples of once-dominant civilizations crumbling under the weight of their rapidly-expanding debt, from the Ottoman Empire to the French monarchy in the 1700s.

Or as former US Treasury Secretary Larry Summers used to quip, “How long can the world’s biggest borrower remain the world’s biggest power?”

It’s hard to project strength around the world when you constantly have to borrow money from the Chinese… or have your central bank conjure paper money out of thin air.

And yet tackling the debt has become nearly an impossibility.

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt.

Those four line items alone account for nearly NINETY PERCENT of all US government spending.

Cutting Social Security or Medicare entitlements is political suicide.

Not top mention, both of those programs are actually EXPANDING as 10,000 Baby Boomers join the ranks of Social Security recipients every single day.

Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare.

The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year.

And last there’s interest on the debt, which absolutely cannot be cut without risking the most severe global financial meltdown ever seen in modern history.

So that’s basically 90% of the federal budget that’s here to stay… meaning there’s almost no chance they’re going to be able to reduce the debt by cutting spending.

But perhaps it’s possible they can slash the national debt by growing tax revenue?

Possible. But unlikely.

Since the end of World War II, the US governments’ overall tax revenue has been VERY steady at roughly 17% of GDP.

You could think of this as the federal government’s ‘slice’ of the economic pie.

Tax rates go up and down. Presidents come and go. But the government’s slice of the pie almost always remains the same 17% of GDP, with very small variations.

With data this strong, it seems rather obvious that the solution is to allow the economy to grow unrestrained.

If the economy grows rapidly, tax revenue will increase. And the national debt, at least as a percentage of GDP, will start to fall.

Here’s the problem: the national debt is growing MUCH faster than the US economy. In Fiscal Year 2016, for example, the debt grew by 7.84%.

Yet even when including the ‘benefits’ of inflation, the US economy only grew by 2.4% over the same period.

In other words, the debt is growing over THREE TIMES FASTER than the economy. This is the opposite of what needs to be happening.

What’s even more disturbing is that this pedestrian economic growth is happening at a time of record low interest rates.

Economists tell us that low interest rates are supposed to jumpstart GDP growth. But that’s not happening.

If GDP growth is this low now, what will happen if they continue to raise rates?

(And by the way, raising interest rates also has the side effect of increasing the government’s interest expense, essentially accelerating the debt problem.)

Look– It’s great to be optimistic and hope for the best. But this problem isn’t going away, and it would be ludicrous to continue believing this massive debt is consequence-free.

There’s no reason to panic or be alarmist.

But it’s clearly time for rational people to consider this obvious data… and start thinking about a Plan B.

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File this one away under ‘utterly repulsive’.

As you probably heard, yesterday the US-based credit reporting agency Equifax announced a massive cyberattack that affects as many as 143 million consumers.

Names. Birth dates. Addresses. Social Security Numbers. Even some credit card numbers were stolen.

Literally over one third of the entire US population is at risk of identity theft now thanks to Equifax’s bungling.

Bear in mind this is the THIRD TIME in 16 months that Equifax has been hacked– there was another breach earlier this year, and another in May 2016.

Even worse– this wasn’t an overnight attack. Hackers spent MONTHS probing the Equifax network, burrowing deeper into the system and gaining access to more and more data with each attempt.

Yet Equifax’s defenses failed to detect anything.

Finally on July 29, a whopping TEN WEEKS after the attacks started, Equifax realized that something was wrong.

Senior executive responded to the data breach by… selling their stock.

Yes, in the days following their discovery of the hack, three of the company’s executives sold nearly $2 million worth of stock.

Bear in mind, these “insider sales” have to be reported to the Securities and Exchange Commission, so there is a public record every time a company executive sells stock.

These executives would have known this, and that the public would find out they sold their stock right after the data breach was discovered.

This suggests to me that these guys are either complete idiots… or they simply don’t care… both of which seem par for the course at Equifax.

Moreover, given that the company is responsible for making the SEC filings, it’s obvious that Equifax knew about these executives selling their stock. Clearly they don’t care either.

In another weak, spineless, immoral decision, Equifax waited six weeks between discovering the hack and informing the public.

I find this appalling.

Equifax has access to our most sensitive data. And by the way, they collect this data WITHOUT OUR CONSENT.

No credit reporting agency ever asked me if I’m OK with them storing every bit of information about me, including information that can easily be used to engage in potentially life-wrecking fraud.

And when this information was stolen, they sat on the news for weeks.

In what is perhaps the most insipid, pathetic apology in recent memory, Equifax CEO Richard Smith released the following zinger in prepared remarks:

“I apologize to consumers and our business customers for the concern and frustration this causes.”

This is the sort of insensitive, out-of-touch PR bullshit that makes people despise the system. How about a shred of raw honesty instead?

“Due to our utter incompetence and failure to learn from recent mistakes, we totally screwed 143 million people who never even consented to us monitoring them. And rather than even let them know right away, we quietly took care of ourselves first. We have that little respect for the public.”

The worst part about all of this is that you can’t opt out.

If you’re tired of Google tracking your every click across the Internet, for example, you can simply stop using their services (and start using competitors which don’t track you– like DuckDuckGo.com)

Or if you get tired of being screwed by the banks, you can choose to hold cash, buy pre-paid cards, or open an account overseas at a conservative, well-capitalized foreign bank.

Point is you can typically opt out of the system.

Except with the credit reporting system. If you get screwed by Equifax, you have almost no recourse.

There are three major credit reporting agencies– TransUnion and Experian being the other two– and they have a stranglehold over all consumer data.

Banks and credit card companies (among others) make heavy use of this data to decide whether or not to loan you money.

And this does make sense: it’s a lot easier to make a loan decision if you can review a potential borrower’s credit history.

But that’s all theory.

In practice, in addition to their utter incompetence when it comes to safeguarding data, the credit reporting agencies also have a LONG history of inaccuracy.

The US government’s Federal Trade Commission issued a report in 2013, in fact, showing that one in five Americans discovered a material error in his/her credit report.

That’s a pretty big failure rate for an industry that’s supposedly been in the business of maintaining accurate information SINCE 1899!

And that’s precisely the problem– the need for an accurate credit history is obvious. But the entire method behind gathering, storing, [not] verifying accuracy, etc. is totally antiquated.

It’s a slow, cumbersome, bureaucratic system that boasts business practices from the mid-20th century at best.

Think about it: it’s 2017. How absurd is it that consumers are still identified by the Social Security Numbers and birth dates?

With all of the digital technology we have at our disposal, is this the best that the credit reporting industry can come up with? Relying on a 9-digit number that was created in the 1930s? Seriously?

The complete lack of innovation in this industry ranks almost as highly as its incompetence and immorality.

It also means that credit reporting is RIPE for DISRUPTION.

The basic model in credit reporting is to properly identify consumers, collect information about their loan history, and make that history available to lenders.

All the tools required to do this in the digital world already exist.

For example, consumer loan payments could be published directly to the Blockchain, which would ensure objective reporting and 100% accuracy of your credit history.

Consumers could even have a choice whether or not to participate in this system.

There are so many tools available to fix these problems, none of which are being used by the Big Three reporting agencies.

That’s why they probably won’t be around in ten years.

And when you see how financial technology can be applied to other industries like Credit Reporting, it’s easy to understand just how big Blockchain and cryptocurrencies can become.

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In 1869, a 48-year old Jewish immigrant from the tiny village of Trappstadt in Germany’s Bavaria region hung a shingle outside of his small office in lower Manhattan to officially launch his new business.

His name was Marcus Goldman, and the business he started, what’s now known as Goldman Sachs, has become the preeminent investment bank in the world with nearly $1 trillion in assets.

They didn’t get there by winning any popularity contests.

Goldman Sachs has been at the heart of nearly every major banking scandal in recent history.

The company has settled lawsuits on countless charges, ranging from exchange rate manipulation, stock price manipulation, demanding bribes from their own clients, front-running retail customers, and just about every shady business practice that would put money in their pockets.

Yet throughout it all, Goldman Sachs has been protected from any serious punishment by its friends in highest offices of government.

Four out of the last eight US Treasury Secretaries, including the current one, have formerly been on the payroll of Goldman Sachs.

Three current Federal Reserve Bank presidents are Goldman Sachs alumni.

The current president of the European Central Bank and the current head of the Bank of England are both former Goldman Sachs employees.

You get the idea.

On its face, there’s nothing wrong with government staffing its departments with top executives from the private sector; taxpayers would probably rather have someone who knows what s/he’s doing behind the desk rather than some random guy off the street.

But the consequent favoritism that results from this revolving door is blatant and repulsive.

Case in point: in 2008 when the financial system was going up in flames and most banks were suffering enormous losses, the government orchestrated a sweetheart bailout deal, of which Goldman was the primary beneficiary.

Goldman stood to lose billions of dollars from its bad investments in insurance giant AIG (which was going bankrupt).

Instead, Goldman was repaid 100 cents on the dollar, courtesy of the US taxpayer. And that’s not an isolated case.

The point is that Goldman Sachs is deeply embedded across the entire economy, nearly every major western government, and the most important financial markets in the world.

So when the bank’s CEO says that financial markets are too expensive, it’s probably time to start paying attention.

That’s exactly what happened yesterday at the Handelsblatt business conference in Frankfurt, Germany– Goldman Sachs’ CEO told the audience bluntly that world financial markets “have been going up for too long.”

And it’s true. Many major stock markets around the world are near all-time highs. Bond markets are near all-time highs. Property markets are near all-time highs.

Insolvent governments that have a history of defaulting on their debts (like Argentina) are able to issue bonds with maturity dates of ONE HUNDRED YEARS at laughably small interest rates.

Companies which perpetually lose money are seeing their stock prices soar to continual new heights.

Interest rates in many parts of the world are still negative.

And whereas the average length of a ‘bull market,’ in which asset prices rise, is just over 5 years, the current bull market has been going for 8 ½ years.

That makes it one of the longest in the history of financial markets.

There are now legions of seasoned analysts, traders, and investment bankers working on Wall Street who have literally never experienced a down year.

Little by little, a few prominent voices in finance have started to express concerns about the state of financial markets.

Yesterday’s comments by Goldman’s CEO was only the latest. Though given his status as THE market and economic insider, his remarks are perhaps the most noteworthy.

In fairness, no one has a crystal ball, especially when it comes to financial markets. Not even the CEO of Goldman Sachs.

But if these guys are telling the world that the market is overheated, you can probably imagine they’ve already started selling.

Source

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Vegetarians be forewarned… you won’t like what follows.

We slaughtered a pig yesterday at the farm. I have two freezers full of pork now, and countless strips of bacon curing in the kitchen.

I’ve written about this before– out here at the farm I’m able to organically produce almost everything that I eat… meat, eggs, rice, nuts, and just about every kind of fruit and vegetable imaginable. A lot of it gets canned and stored.

We even grow wheat which we turn into organic flour, plus oats and all sorts of other grains.

As I’ve described in the past, this is a pretty powerful feeling. I know that, no matter what happens in the world, I’ll always have a source of food.

And even if it’s all rainbows and buttercups from here on out, I get to eat clean, organic food. There’s hardly any downside.

Invariably as I meet people throughout my travels around the world, I’m always asked why I spend so much time in Chile.

I usually tell them about my business ventures here and that I founded a company that’s rapidly becoming one of the largest blueberry producers in the world.

But when I talk about the farm and growing my own food, people often respond with furrowed eyebrows and a hint of derision– “Oh, so you’re, like, preparing for the end of the world…”

It’s as if embracing a little bit of independence and self-reliance requires paranoid delusion and chronic pessimism.

Fortunately I’m no longer in middle school, so my decisions aren’t based on what the cool kids might think.

In truth I’m wildly optimistic about the future.

Yes, there will come a time when bankrupt western governments will have to suffer the consequences of their reckless financial decisions.

And if history and human nature are any guides, there will also likely be more war… whether it’s conventional, cyber, or financial.

Financial markets will spasm and crash. Then soar to new highs. Then crash again. And forever continue this boom/bust cycle.

But despite these challenges, our species has unprecedented access to technology and opportunities that were literally inconceivable just a few decades ago.

The fact that you’re even reading this was completely unimaginable when I was a kid growing up in the early 1980s.

So, yeah, plenty of challenges before us. But the future is bright for anyone with the common sense to acknowledge these risks and the willingness to take basic steps to reduce their exposure.

It’s not about fear or paranoia. Normal, intelligent, rational people have a Plan B, especially when certain risks are so obvious.

Example- if you happen to be living in the most litigation-prone, lawyered-up country that has ever existed in the history of the world… a place where frivolous lawsuits abound and horrendous penalties are the norm… WHY ON EARTH would you hold 100% of your assets, income, and livelihood there?

You might as well paint a giant bulls-eye on your bank account.

Similarly, if you’re living in a country where the government, by its own financial reports, admits that it is flat freaking broke, why put yourself in a position where they can so easily pillage your savings?

If your country’s pension fund (i.e. Social Security) announces that it is running out of money, isn’t it just plain old common sense to start independently saving for your own retirement, outside of that broken pension system?

If there’s a Category 5 hurricane heading anywhere near your location, doesn’t it make sense to have a few days of nonperishable food and water… just in case?

For that matter, doesn’t it make sense to have a bit of food and water on hand even without a hurricane in the neighborhood?

It’s hard to imagine you’ll worse off for having a small supply of water in the basement.

Maybe you never need it. Big deal.

But if the day comes that you ever do need it, it will be too late to go down to the grocery store and pick some up.

This is the hallmark of a great Plan B. These steps are utterly simple. Cheap. Sometimes even free. And have absolutely zero downside.

But should you ever need it, these tiny insurance policies can make a world of difference.

That’s not fear or paranoia. It’s just smart.

Source

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Earlier today the government of China banned ICOs– initial coin offerings.

We talked about ICOs last week— it’s the latest application of cryptofinance technology for companies to raise capital without having to rely on traditional methods like banks, brokers, and venture capital firms.

Through an ICO, any company can raise money by selling ‘tokens’ to investors, who typically pay with cryptocurrency like Ether or Bitcoin.

And those tokens normally represent shares in the company.

The entire transaction takes place over the blockchain, i.e. the cryptocurrencies’ decentralized ledger systems.

There are no government agencies involved. No regulators. No banks or brokers extorting huge fees. It’s just the company and its investors… a voluntary seller of tokens and voluntary buyer of tokens.

This is a good thing. So naturally the practice was banned.

It’s not just China, by the way.

In the Land of the Free, the SEC has also been busy squashing certain ICOs and warning companies that are thinking about issuing tokens.

In general, governments don’t like ANYTHING that’s independent and decentralized, so they come up with useless regulations to make everything more difficult.

Whether you’re trying to homeschool your children outside of the state-controlled miseducation system, collect your own rainwater off-grid, or use a decentralized cryptocurrency, they’ll create a bunch of regulations (and punishments) to stand in your way.

Of course, they always claim that they’re doing it to protect you.

Bang-up job, guys.

The SEC, for example, which is supposed to ‘protect’ us little investors from the big bad wolves in the financial markets, completely MISSED every major financial scandal, from Bernie Madoff to the subprime meltdown.

To be fair, it’s true that there’s an unbelievable amount of fraud and stupidity in the ICO marketplace.

People are throwing money at every new ICO that comes along with absolutely zero understanding of what they’re buying.

And more dangerously, as the ICOs have increased in value, this feedback loop only reinforces a delusional self-belief among a lot of ICO speculators that they have some sort of ‘knack’ or ‘gift’.

The hard reality is the ICO market is a total bubble.

We talked about this last week– brand new companies which have no profit, no revenue, and in some cases even no product, are seeing the value of their tokens increase 5,000% per week.

It’s absurd. And these are not isolated cases.

Out of the 68 ICOs listed on the website ICOstats.com, 63 of them have made money. The top 30 performers are up over 1,000% each, and most of those in less than a year.

Again, totally nuts.

Investing in an ICO is no different than investing in any other startup: you’re ultimately gambling on whether the managers have the skills and vision necessary to turn a good idea into a profitable enterprise.

Most of the time these startups will fail. And the occasional winner (which can soar 10,000% or more) makes up for the losers.

Yet despite the risks and extreme probability of their underlying businesses failing, nearly all of these ICOs continue soaring to new heights.

So either almost every single one of these companies is run by the second coming of Steve Jobs… OR… there’s a massive speculative bubble in the ICO market fueled by a stampede of investors looking to make a quick buck.

Look, despite the bubble, I think the ICO concept is great– it’s an innovative way to decentralize, disintermediate, and disrupt the financial system… which is currently dominated by mega-banks that have a track record of betraying our trust.

Cryptofinance provides more transparency than the traditional financial system as well.

Most people don’t realize this, but whenever you buy stocks from your broker, those shares aren’t actually registered to you.

If you buy Apple stock, for example, Apple has no idea who you are. Those shares are held in the name of your broker.

This ridiculous administrative system is known as ‘street name registration’, a pointless 19th century anachronism.

Banks came up with this system long ago because it was easier for them to keep records this way.

Yet in 2017, despite so much technology at our fingertips, they still hold OUR assets in THEIR name.

With cryptofinance, this isn’t the case. Blockchain technology ensures that YOU own your assets, and creates a permanent, publicly accessible record of the transaction.

That technology is a lot more reliable than some useless bureaucrat who claims to be protecting our interests.

People can already go online to Amazon or eBay to buy and sell millions of different products without some government agency inserting a giant bureaucracy into the process.

There’s no reason why we can’t go online to buy and sell investments in the same way.

ICOs are a big step forward in making this happen.

Yes, there will continue to be plenty of fraud and stupidity. And probably even more government clampdowns.

There may be a number of worthless businesses whose tokens take a big hit as a result of these government actions. It might even let a little bit of air out of the bubble.

But, just like cryptocurrency itself, they’re not going to be able to stop the movement. This technology is the future, and it’s only going to get bigger.

Source

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