Month: September 2014

September 29, 2014
Santiago, Chile

“The proletarians have nothing to lose but their chains. They have a world to win. Workers of the world, unite!”

Most people remember Karl Marx’s most potent points and phrases, and the mountain of corpses his disciples left behind, especially in the 20th century.

However, most forget or don’t even know the specific policies that Marx advocated.

Within his 1848 Communist Manifesto, Marx outlined a list of ten short-term demands. These, he thought, would be the precursor to the ideal stateless, classless communist society.

Ironically in today’s world, Marx’s demands look pretty much mainstream.

That is because nearly every single item on the list has been implemented to varying degrees in the United States.

Think that couldn’t be possible in the Land of the Free? Just take a look.

Topping Marx’s list is the abolition of private property.

True, private property exists, but only until the state wants to take it. With its powers of eminent domain, the government can and does confiscate people’s property when it wants for public use.

Your property isn’t unconditionally yours. Just think of property taxes, for example.

If it’s actually YOUR private property, then why would you need to pay tax on it? And why do they have the authority to take it from you if you don’t pay?

Likewise, while we haven’t seen the complete abolition of inheritance (another Marx demand), the government can take up to 40% of your estate when you die.

So ultimately your estate is not your own. You don’t get to control what happens to your wealth and possessions when you die. It’s just a matter of proportion.

Marx also demanded the centralization of transportation and communication. Check, and check.

Try broadcasting over the airwaves in the Land of the Free without a license and special permission.

Practically the entire electromagnetic spectrum is tightly controlled by the state, centralized by a handful of government agencies.

Same with the network of roads and highways. Because, after all, without government, who would build the roads…

Another point of Marx is state-guided agricultural production and combination of agriculture and manufacturing.

And the Land of the Free does not disappoint. Though its activities may not be as prominent in the news, the US Department of Agriculture is easily one of the busiest government departments.

With a budget of $146 billion a year, and much more for subsidies, USDA tirelessly works to dictate every major and miniscule activity in the sector.

Next on the list, is equal liability of all to labor. If you have at any point wondered, as I have, why politicians are always pushing jobs for the sake of jobs, rather than value and wealth creation—now you know why.

Between minimum wage laws and the constant stream of legislation that promises jobs for all, it is clear that politicians have wholly internalized this Marxian ideal.

Now, you might think that this is just a fluke, just a coincidence that some US policies resemble what’s on Marx’s list of demands.

But then you see these demands, which have not only been fully implemented in the US already, but are thoroughly entrenched in the national psyche:

First, there’s free education for all children, to enable the uniformity of thought. Check.

Then there’s a heavy progressive income tax. Yep, I’m pretty sure you’re familiar with this one, which has actually become so mainstream, that to have any system other than this would be considered revolutionary. Check.

Third, is the confiscation of the property of emigrants (expatriates) and rebels.

Between the IRS bullying of political opposition groups and the imposition of exit taxes for those that renounce their citizenship, the United States is firmly set up to discourage dissent and escape. Check.

And last but not least, the centralization of credit in the hands of the state, by means of a national bank. Check.

Remember, Karl Marx thought central banking was a great idea—the same guy who thought that individual success and private property were evil.

Think about that the next time the Federal Reserve comes up with a plan to help businesses and fix the economy.

So now you know, America isn’t communist. It’s only about 70% communist. No reason to worry.

PS- I also want to encourage you to check out these articles about the obscene peaks in stock and bond markets:

1) This has got to be the top

2) Retail investors are pouring into stocks at their all-time high

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September 29, 2014
Bali, Indonesia

[Editor’s note: This note was penned by Sovereign Man’s Chief Investment Strategist Tim Staermose.]

A few days ago, Bill Gross, the world’s most famous bond fund manager, sensationally resigned from PIMCO, the firm he co-founded in 1970.

Trouble had been brewing behind the scenes at PIMCO for months, and speculation was rife that all was not well at the bond behemoth.

Gross’s resignation, and decision to join the much smaller competing firm Janus Capital seems conform this.

Following the news, the market reaction was extraordinary.

Stock in PIMCO’s parent company Allianz, the giant German insurance company, fell 6.7%. And there was a ridiculous 43% surge in Janus shares.

It’s a perfect illustration of how there is MUCH more to market moves than fundamentals.

In a nutshell, investors are guessing about where money might flow as a result of Bill Gross leaving PIMCO.

People seem to think that tens of billions of dollars will follow him out the door to Janus Capital, and that’s what primarily drove these moves.

But even more wild than that is the rather significant move in the US Treasury market, worth nearly $17 trillion.

This is a testament to how absurd the system has become– that one man’s decision about where to work can cause wild gyrations in the biggest, most liquid securities market on the planet.

I think it’s a very clear sign that the bond market has reached its peak.

Historically, this is exactly the sort of thing that happens at top of any market: shake-outs, surprises, news coming to light about less than savory business practices (PIMCO is under investigation from the SEC), and so on.

Gross himself has been calling the top of the bond market for a couple of years now, most recently when 10-year US Treasury yields hit a nadir of 1.67% in April 2013.

Regardless, it’s hard to see that there is any investment benefit in lending money to the most indebted government in the history of the world at interest rates that are below the rate of inflation.

In a world rife with overvalued assets, bonds are one of the most overvalued asset classes of all.

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September 29, 2014
London, England

[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in the UK.]

“Politicians and diapers have one thing in common. They should both be changed regularly, and for the same reason.” – Anonymous.

The French statesman George Clemenceau once commented that war is too important to be left to generals.

At this stage in the game one might be tempted to add that monetary policy is far too important to be left to politicians and central bankers.

We get by with free markets in all other walks of economic and financial life – why let the price of money itself be dictated by a handful of bureaucrats?

It should be striking that government bonds, in nominal terms, have never been this expensive in history, even as there have never been so many of them. The laws of supply and demand would seem to have been repealed.

As evidence for the prosecution we cite the US Treasury bond market, the world’s largest.

The US national debt currently stands at $17.7 trillion. With a ‘T’.

Benchmark 10 year Treasuries currently offer a yield to maturity of 2.5%. US consumer price inflation currently stands at 1.7%. (We offer no opinion as to whether US CPI is a fair reflection of US inflation.)

On the basis that US “inflation” doesn’t change meaningfully over the next 10 years, US bond investors are going to earn an annualized return just a smidgen above zero percent.

Now it may well be that US Treasury yields have further to fall. As SocGen’s Albert Edwards puts it,

“Our ‘Ice Age’ thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course.”

We nurse no particular view in relation to how the government bond bubble (for it surely is) plays out.

It could be that yields grind relentlessly lower for some time yet. Or perhaps they burst spectacularly on the back of the overdue return of economic common sense.

But as Warren Buffett himself once said, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

The central bank bond market poker game has been in train for a good deal longer than half an hour, and the stakes have never been higher.

Sometimes, if you simply can’t fathom the new rules of the game, it’s surely better not to play.

That’s why we’re not in the business of chasing US Treasury yields, or Gilt yields, or Bund yields, ever lower – we’ll keep our bond exposure limited to only the highest quality credits yielding the highest possible return.

Even then, if Fed tapering does finally dissipate in favor of Fed hiking (stranger things have happened, though we can’t think of any off the top of our head), it will make sense to eliminate conventional debt instruments from client portfolios.

But such madness is not limited to the world of bonds. Malign, unthinking mental slavery has fixed itself upon the equity markets, too.

It’s extraordinary that as stock markets have powered ahead, index trackers have enjoyed their highest ever inflows.

The latest IMA data show that more UK retail money was put into tracker funds in July than in any other month since records began.

In other words, retail investors are pouring into the market at its all-time high.

We accept the ‘low cost’ aspect of tracker funds and ETFs; we take serious issue with the idea of buying stock markets close to or at their all-time.

But there is a middle way between the Scylla of bonds at all-time low yields and the Charybdis of stocks at all-time high prices. Value.

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