Category: simonblack

I’ll start with a confession.

Based on the returns I’ve just prepared for 2015, my tax bill for the year amounts to exactly $0.00.

In fact, for the second year in a row, I legitimately owe zero tax. And I’m damn proud of that.

(And no, it’s not from any illegal tricks. I’ll explain how I did it later.)

Not a shred of my efforts goes to help finance bombs, wars, debt, and utterly useless waste.

April is the month where hundreds of millions of people all over the world, including the United States and Canada, file their annual tax returns.

And it raises an important question: what are you really paying for?

Occasionally I hear from friends in very high-tax places (like Norway) who tell me that they enjoy paying taxes, or at least, that they don’t mind very much.

And this may be true in a few countries where people feel like they’re receiving benefits like healthcare, education, a well-funded pension, etc.

But what tangible benefits do you receive in exchange for your federal tax dollars in the Land of the Free?

You pay for a hopelessly unfunded Social Security program that’s tantamount to a Ponzi scheme.

Even by the government’s own numbers, Social Security has no chance of existing, at least in its present form, by the time most taxpayers reach the age of eligibility.

So you’ll pay for your entire working life into a program that won’t be there for you. I’d hardly call this a benefit.

Aside from bankrupt entitlement programs like Social Security and Medicare, taxpayers also fund plenty of bombs and war.

Military spending is the next biggest line item in the US federal budget at roughly $600 billion, though it often balloons far beyond that figure through clever accounting tricks.

If you’re ready to jump to the conclusion that being a major superpower requires a massive military budget, I won’t bother arguing.

But I hope we can agree that it makes sense to spend funds wisely.

As it turns out, this isn’t happening. In 2013 the US Defense Department got caught blatantly cooking the books in order to conceal epic levels of fraud, waste, and incompetence to the tune of trillions of dollars.

This absurd level of waste is very much the case across all of government, whether it was the infamous $2 billion spent on the Obamacare website, or the $856,000 spent to train mountain lions to run on treadmills, or the $1 billion the military spent to destroy $16 billion worth of perfectly good ammunition.

After military spending, the next budget item is INTEREST on the DEBT.

According to the Treasury Department’s Bureau of Public Debt, last year the government spent over $400 billion on interest!

Again, this is hardly a benefit.

Of course, people always point to things like roads and think this is somehow a benefit of paying taxes.

Maybe so. But the Highway Trust Fund that is supposed to build and maintain the roads is flat broke, due to be insolvent in less than 60 days.

So much for the roads.

It’s also easy for some people to think that, if we all pitched in a bit more and paid more tax, these huge fiscal imbalances would be eliminated.

What total nonsense. The institution of government has an uninterrupted track record of wasting taxpayer funds.

If everyone paid more tax, they’d simply find creative ways to waste more money.

Just look at the data: nearly every year the government’s tax revenue goes UP. And yet, so does federal spending!

If you look at the big picture, it’s clear that, at best, you are writing a check that goes into a fiscal black hole.

More realistically, your funds are being squandered on waste and war. It’s pathetic.

And this problem isn’t resolved by having everyone pay more.

If you really want to do something about it, the best method is to starve the beast.

And that’s a big part of being a Sovereign Man: taking legal steps to legitimately reduce what you owe.

Note: this has nothing to do with the ‘Sovereign Citizen’ movement that advocates not paying tax by simply ceasing to file a tax return.

Even if you feel legally and morally right about not filing a tax return, never forget that taxes in the Land of the Free are collected at the point of a gun.

So if you don’t file, you could easily wind up wearing a Day-Glo orange jumpsuit in a Federal Prison Camp. It’s not worth it.

There are dozens if not hundreds of perfectly legitimate ways to reduce what you owe.

For example, anyone can set up and maximize retirement contributions to an IRA or 401(k), thus reducing what you owe in taxes.

In my case, because I live abroad, the Foreign Earned Income Exclusion and Foreign Housing Exclusion have helped reduce my own tax bill down to zero.

The best part is that I get to choose how to spend my own money.

Last year I used my tax savings to help a wounded veteran who had been abandoned by the federal government.

He lost his leg on patrol in Afghanistan, but the government wouldn’t pay for the experimental surgery he needed to start walking again. I was able to help.

I’m already looking for the next person I can help with this year’s tax savings.

The standard narrative we are told by the government and their lapdog media is that tax avoidance is something that self-centered rich assholes do so that they can buy more Ferraris.

This is complete propaganda.

Taking legal steps to reduce what you owe is all about ensuring that your labor goes to the causes that YOU believe in, rather than funding spy agencies and bombing raids on children’s hospitals.

This sense of independence is what being a Sovereign Man is all about.

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Over the weekend, just as I was arriving back to Chile after a few weeks away, the sky above Santiago opened up and started to dump heavy rain on the city.

I was already in the car on the way down to one of our farms once the rains began.

But apparently the downpour was so heavy it caused an epic, almost biblical flood of some of the major rivers in the area.

It was pretty nasty in Santiago; the city just isn’t used to rainfall of that level.

Parts of one of the main highways were totally submerged. Major retail and office buildings were flooded and had to close.

The power grid went down sporadically in a lot of neighborhoods.

And the city’s water system virtually shut down, so millions of people had to go a few days without access to running water.

I’m not trying to paint a picture of chaos and pandemonium; Chile has seen its share of natural disasters, and they tend to deal with such things in a civilized manner.

But still– who wants to go a few days without access to water and electricity?

It’s easy to take basic utilities for granted when all we have to do is flip a switch and the lights come on… or turn a faucet and water comes out.

A lot of us have grown up in an environment where we’ve never even had to think about the enormous effort from thousands of people and millions of tons of resources it takes to make that happen.

That is, of course, until the power and water go out. Then we start thinking a lot about it.

It’s like health, in a way. Few people wake up feeling grateful for being in good health that morning.

But the moment illness strikes we long for that feeling of wellness.

In my case, the flooding didn’t affect me at all. We got a lot of rain down here at the farm, and the power went up and down sporadically, but it didn’t matter one bit.

In addition to generating a healthy commercial profit, the farm where I am right now can also produce its own food, water, and electricity.

In fact, most of our farms are totally self-sufficient in this way. And it just makes a lot of sense.

Being self-sufficient means that no matter what happens in the world, we’ll be able to deal with anything from a position of strength.

But as we discussed yesterday, part of being a Sovereign Man is having a strong sense of independence and self-reliance.

From a financial perspective, that doesn’t necessarily mean being super rich, but rather educating one’s self to build an independent source of income.

It also means having greater independence from the banking system so that you have more control over your savings.

(This is why I’ve long recommended holding physical cash and precious metals, rather than keeping 100% of your savings in a bank with shaky fundamentals.)

From a personal perspective, this concept of self-reliance also means taking steps to reduce your dependence on the big grid.

I feel a bit strange saying this, because I’m not a doom-and-gloom, ‘the end of the world is nigh’ sort of person.

I’m actually quite optimistic about the world and all the opportunities I’ve seen traveling to 120 countries.

But the world is certainly changing, and that carries a degree of risk.

The big titanic governments that ruled that past are rapidly going broke. That, too, carries a degree of risk.

And as our experiences in Chile over the weekend attest, sometimes the unexpected happens.

As a Sovereign Man, I’d rather be in control of my own fate.

And that means not having to depend 100% on the complicated logistics of transporting coal across the country in order for the lights to come on.

If that system works, I can still use it. If it doesn’t work, it won’t affect me.

This is not to say that everyone should live on a self-sufficient farm and grow their own food (though it is a very nice lifestyle).

Start small. And cheap. Buy some bottles of water and store them some place in your home, out of sight and out of mind.

Or even still, just fill up some old bottles with tap water. It’s practically free.

Don’t feel weird about it– it’s not crazy to keep a little bit of extra water around the house at almost zero cost. And you certainly won’t be worse off for having it.

It’s like holding a bit of physical cash: there’s basically zero cost for doing it.

But in the event that any of these risks become a reality, it’ll be one of the smartest things you do.

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“The nonsense and frustrations we all witness in this industry every day is a red hot ember that drives us, a prime motivator to push back against the endless firehose of bullshit that the Wall Street machinery manufactures. The single biggest and most profitable product that the Finance Factory cranks out every day is bullshit, and each version of it is slicker and better and more dangerous than whatever came before.

“Our research business model is to create a countervailing narrative to this endless flow of money-losing foolishness. We know that not everyone will be saved, but we can at least provide enough information, data and commentary that an intelligent web surfing investor can find ways to save themselves from the Finance Factory’s finest foolery.”

– Barry Ritholtz.

The human brain is a pattern recognition engine. We see patterns even and especially when they don’t exist. Scientists call this pareidolia: the perception of a face on the surface of Mars, or of a religious icon on a piece of burnt toast. Financial journalism is hardly immune to it. Perhaps most journalism relating to markets is guilty of some form of narrative fallacy, what Nassim Taleb calls “our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.” We crave certainty and we cannot stand the idea that there may be ultimately little or no very rational explanation for much of what occurs in the financial markets on a daily basis.

Thomas Schuster of the Institute for Communication and Media Studies at Leipzig University has crafted one of the more devastating critiques of financial journalism which will strike a chord with any investor who has read a market bulletin and howled in despair at the barrage of non sequiturs and sweeping presumptions contained within it:

The media select, they interpret, they emotionalize and they create facts.. The media not only reduce reality by lowering information density. They focus reality by accumulating information where “actually” none exists.. A typical stock market report looks like this: Stock X increased because.. Index Y crashed due to.. Prices Z continue to rise after.. Most of these explanations are post-hoc rationalizations.. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.

Then there is the sort of financial journalism that advocates economic policy. It is one thing to publish a commentary that cobbles together inanities accounting – badly or entirely wrongly – for why the market did what it just did. Such commentary is largely harmless. It is another thing to promote specific policy actions that will have real world consequences, or wilfully to misrepresent market behaviour so as to traduce the explanation of prices.

Martin Wolf in the Financial Times, 12 April 2016, wrote a column entitled:

‘Negative rates are not the fault of central banks’.
The following ‘observations’ are taken from that article. Most of them are questionable.

“Save the savers” is an understandable complaint by an asset manager or finance minister of a creditor nation. But this does not mean the objection makes sense. The world economy is suffering from a glut of savings relative to investment opportunities. The monetary authorities are helping to ensure that interest rates are consistent with this fact. Ultimately, market forces are determining what savers get. Alas, the market is saying that their savings are not worth much, at least at the margin..

Some will object that the decline in real interest rates is solely the result of monetary policy, not real forces. This is wrong. Monetary policy does indeed determine short-term nominal rates and influences longer-term ones. But the objective of price stability means that policy is aimed at balancing aggregate demand with potential supply. The central banks have merely discovered that ultra-low rates are needed to achieve this objective.

Another objection is that ultra-low, even negative, real rates are counterproductive, even in terms of demand. One rejoinder to this argument is that the ECB raised rates in 2011, with disastrous results. The broader objection is that higher rates shift incomes from debtors to creditors. It is highly likely that the former would cut spending more than the latter would raise it. Furthermore, by impairing the creditworthiness of borrowers, the policy would have two further malign effects: it would force borrowers into bankruptcy, with bad consequences for intermediaries and creditors; and it would reduce the expansion of credit. Thus, the argument that raising interest rates would be expansionary is highly implausible. Naturally, savers argue the opposite. They would, wouldn’t they?

Sometimes the devil emerges in plain sight. Strange market forces that are set by central bank fiat and maintained by it. It is central banks that control short term policy rates and it is central banks whose policies of quantitative easing ensure that the yield curve, too, is a policy tool of the State.

Not every FT subscriber takes Martin Wolf’s absurd economic policy guidance lying down. The following was the response from ‘MarkGB’:

There’s nothing for it, Mr Wolf, I am forced to admit that you are totally right.

Negative interest rates are not the fault of central banks. Indeed it is churlish to assume that the people who stride the world stage with their optimal control panels should have the slightest degree of control over anything, optimal or otherwise. Clearly they haven’t.

As regards targeting inflation or creating employment it is equally clear that they haven’t got the foggiest idea about any of that either. They are clueless and therefore blameless. So to hold them accountable for any of that is totally unreasonable of us.

But the biggest injustice of all is to imagine that the people who spend their lives agonising over interest rates, people who rush for a microphone to talk about them every time Ray Dalio sneezes, people who write books about how they saved the world with interest rates and their love child QE…To suggest that those people are responsible for negative rates is just plain wrong…and highly negative by the way.

No, NIRP is the fault of two well-known meddlers in human affairs – the tooth fairy and the invisible spaghetti monster. These are the villains who crept into Alan Greenspan’s study one night in the early nineties and whispered in his ear…’cheap money makes people borrow and spend…it makes things look good on the surface…the pols like that…Don’t worry about paying it back, that’s for another day…’

Yes folks, the invisible spaghetti monster and the tooth fairy have trained a whole generation of Neo- Keynesian Astrologers with Friedman rising and their moon in Krugman…to believe that they are in control of everything but responsible for nothing.

They are the real villains of the piece. Unfortunately they don’t know the least thing about productivity, investment or wealth creation either – their PhD supervisor was Santa Claus and they think it’s all down to him.

So yes, Mr Wolf, you are right – negative interest rates are not the fault of Central Bankers.

To end on a slightly different note, let me say this:

This is no way in a million years that a free market would EVER result in negative interest rates. They are a man-made contraption, a sign of intellectual as well as monetary bankruptcy, a product of groupthink and hubris. Rationalise as you will, justify as you like – markets don’t DO negative interest rates – idiotic central planners and corruptible politicians create the conditions for them, then implement them, then deny responsibility for them.

But there is investing in the markets as we would like them to be – free and untouched by the price controls advocated by misguided neo-Keynesians and socialist policy wonks – and there is investing in the markets as they are today. Bonds, for example, are now an uninvestable asset class – unexploded ordnance in the minefield. Cash in the bank represents a growing counterparty risk combined with a derisory or negative yield. That leaves listed equities as the primary investment choice for anybody seeking income or capital growth.

But many equity markets have seen their valuations artificially manipulated higher by the price controls explicit in QE, ZIRP and NIRP. The only rational response is to seek out pockets of high quality value equity as yet unaffected by the malign distortions of the printing press. They may be few in number but they undoubtedly exist. You are unlikely to read about them, unsurprisingly, in articles from the mainstream financial media.

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It was early spring in 1971 when an obscure American folk singer wrote a song that would change his life forever.

Sitting at a café in Saratoga Springs, New York, Don McLean scribbled the lyrics to a long ballad about an experience he had as a 13-year-old boy.

It began with a radio bulletin that said that Buddy Holly had died in a plane crash. The boy was crushed. But the man used this emotion to write a song that would take the world by storm.

Of course, that song was “American Pie.”

It stayed atop the Billboard music charts for more than a year. And it turned this once obscure folk singer into a global sensation.

More than that – McLean was immediately set for life: he still makes more than $300,000 a year from that song.

Imagine getting paid hundreds of thousands of dollars a year for something you did in 1971!

This story holds the key to one of the greatest business model ever invented: the idea that you can create something once and get paid on it for life.

It’s the royalty business.

In case you’re not familiar with the term, a royalty is a cash payment that you receive over and over again from an asset that you created, developed, or own.

For example, songwriters collect a royalty every time a song they write is played, purchased, downloaded or streamed. That’s why McLean still makes money from American Pie.

Royalties are also common in natural resources. Royalty companies often provide financing to oil and mining companies… and those borrowers pay a royalty on every ounce of gold or gallon of oil that the land produces.

Authors earn a royalty every time somebody buys their book. Inventors receive royalties from their patents.

And people who own royalties don’t have to do anything else to make money… except cash the checks.

The powerful cashflow of this model can be incredibly appealing to investors, and there are even some companies that specialize in acquiring assets that produce royalty income.

In his November 2014 edition of Price Value International, for example, Tim Price recommended a company called Franco-Nevada Corporation that specializes in gold-focused royalty income.

Back then it was very cheap, and Tim’s subscribers have made nearly 50% including both dividends and gains in the stock price… far outpacing most traditional gold miners.

There’s another company called Mills Music Trust still that has an impressive yield of 10% (i.e. the amount of annual dividends it pays to its shareholders is roughly 10% of the stock price).

That’s an amazing yield. But good luck buying shares– the stock has a market cap of just $5 million in the OTC market, and the shares rarely trade.

One of the things I really like about royalties is that they’re REAL assets that produce income, just like agricultural property or a profitable private businesses.

In times of inflation, the value of your asset goes up, thus protecting your savings.

In times of deflation, the cashflow that the asset produces is extremely valuable.

But the real potential with royalties isn’t with publicly traded stocks– it’s in owning private assets that generate income… like American Pie.

It used to be very difficult to do this; owning royalties meant you had to know someone, or be in the business.

Agents, managers and record labels bought royalty rights from singers and songwriters like Don McLean.

But if you weren’t part of the music business, it was very difficult to get in on these types of lucrative cash cows.

Fortunately the entire financial system is changing.

Modern technology has made it possible to bring together people like Don McLean who own royalties, along with investors who want to buy royalties.

It’s a similar concept to Peer-to-Peer lending platforms that match borrowers and lenders, or crowdfunding sites that match entrepreneurs with prospective investors.

It’s no longer industry insiders and big banks that have the deals all to themselves.But today I don’t want to talk about buying royalty companies. I want to talk about an exciting new opportunity that allows you to buy royalty assets directly from the creators and current owners.

You can cut out the middleman and collect these rich cash royalties yourself.

Now, as an artist or patent holder, you can go to a website and offer a portion of your intellectual property to sell to an investor.

And as an investor you can shop for any number of royalty-producing assets.

For example, RoyaltyExchange.com recently auctioned off another music royalties from iconic bands like the Bee Gees and Eurythmics.

(One recent songwriter royalty sold for 7x last year’s earnings, which translates to a yield of roughly 14%.)

The site is currently auctioning a share of the royalties from comedy films like Dumb & Dumber, and There’s Something About Mary.

That’s the other exciting about royalties based on copyright. Unlike patents, which usually last for 10-20 years… copyright royalties last for much longer… up to 70 years after the death of the creator. That’s why you see popular songs like “Happy Birthday” earn millions of dollars of royalties every year for more than 50 years.

It means that whenever these movies are rented or played on TV stations around the world, the royalty owners get paid.

It’s like being a toll-collector on the pop-culture highway, so the potential is quite interesting. And these photos have another 50+ years of copyright left on them… so if you buy them… you could be getting paid until 2066! (These are the types of assets that could pay for your grandchildren to go to college.)

As we discuss frequently, part of being a Sovereign Man is having income independence. This means owning or creating valuable assets that produce independent cashflow.

Again, this could include assets like real estate or private businesses.

This is an incredibly important part of the “Plan B” strategy we always talk about. And owning royalty-producing assets may make sense for you to consider as part of that.

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Last night I got robbed.

Not in the literal sense of the word. There weren’t armed men in masks holding me up on the sidewalk in Panama City.

(I’ve been coming here for 13 years and have never once felt unsafe…)

It was at the cashier’s cage at the Veneto Casino.

After a few hours with a friend at the roulette table where I was happy to have walked away at breakeven, I was shocked to find out that the government of Panama takes a 5.5% tax when you cash in your chips.

In other words, if you cash in $100 in chips, you receive $94.50 back.

I had no idea. And I was furious.

This really drives home a major misconception about Panama. The country is being paraded around the mainstream media right now, with protestors ignorantly mocking Panama’s ‘zero-tax’ regime.

Most of these people have no idea what they’re talking about. This casino tax is one of Panama’s many taxes.

They have transfer taxes and dividend taxes and stamp taxes and individual income taxes.

Most ironically, the Panamanian corporate tax rate is 25%.

That’s higher than socialist DENMARK, as well as the United Kingdom (which is supposedly leading the charge against global tax havens.)

The primary difference is that Panama has what’s called a territorial tax system.

This means that the Panamanian government taxes its residents only on income that’s earned within Panama.

So, if you’re running a hotdog stand on the sidewalk in Panama City, you’re going to be taxed.

And whoever owns the amazing speakeasy I went to last night will be taxed on the food and beverage sales from our dinner.

But if you live in Panama and generate your income from overseas, that money is NOT taxed by the Panamanian government.

It’s pretty simple. And sensible.

Think about it—why would any government think they have a claim to tax income earned overseas, especially when that income has already been taxed by a foreign government?

If you live in Panama and trade stocks in Germany, you’re already paying steep taxes to the German government.

What sense would it make for the Panamanian government to tax that same income a second time?

Panama’s tax system is a much more practical model for the 21st century than the way that most other governments tax their residents.

Most countries have worldwide taxes, whereby residents are taxed on every penny they earn around the world.

So if you are a Canadian tax resident but earn all your money in Ireland, the Canadian government will tax you on that income, even though the source of revenue has absolutely nothing to do with Canada.

Worldwide taxation is practically feudal.

It presumes we’re all medieval serfs tied to the land rather than intelligent professionals who can do business in a highly connected world.

And it’s absurd that this system of worldwide taxation is still so prevalent in 2016.

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“What is it about this place that makes it so poor?”

It was a simple question posed to me by a friend as we walked the streets of Managua, Nicaragua earlier this week.

Nicaragua is a lovely place. But it’s poor. Very poor. It’s the least developed economy in Central America… and that’s saying something.

But it’s worth considering: what makes an economy like Nicaragua so poor? And what makes others so wealthy?

Having traveled to nearly 120 countries, I’ve seen the full range of rich and poor nations. And I’ll tell you, it has nothing to do with natural resources or anything like that.

I often have meetings with senior ministers and government officials around the world who tell me all about the amazing resources they have in their country.

“We have so much forestry land,” or, “Our bauxite reserves are among the highest in the world…”

Irrelevant. Venezuela has incredible oil reserves. Yet they’ve been living in poverty for years.

(Now that oil prices are down the Venezuelan government has had to declare every single Friday a holiday because they can’t afford to keep the lights on.)

Ukraine has some of the most exceptional farmland on the planet. But the country is totally broke.

150 years ago, Hong Kong was a tiny village of illiterate fisherman.

50 years ago in Singapore they used to defecate in the streets, and visitors would have to step over rivers of feces in the downtown area.

25 years ago Estonia was still part of the crumbling Soviet Union.

None of those places has any resources to speak of. But they’ve become among the wealthiest in the world.

What’s the difference between Hong Kong and Ukraine? Singapore and Venezuela? Estonia and Nicaragua?

One of the things I’ve learned in my travels over the years is that wealthy nations do have some common characteristics.

The first set is cultural. Wealthy nations have a culture that values hard work. Knowledge. Productivity. Innovation. Risk-taking. Saving. Self-reliance.

I’m not trying to say that people in poor countries don’t work hard. Far from it.

The point is that if working hard and saving money are strong CULTURAL values (which tends to be the case in Asia), a country is going to do better.

Second, wealthy nations have much better institutions. The rule of law is strong. Private property rights are strong. Corruption is limited. Regulation is sensible. Taxation is reasonable and efficient.

It’s simple; no one wants to do business in a corrupt dictatorship.

Bad institutions drive away foreign investors. And as capital is one of the critical components of economic growth, choking off external investment suffocates an economy.

Last (and most importantly), wealthy nations have an “inclusive” economy.

This means that people aren’t medieval serfs toiling away for the establishment. If someone develops skills, works hard, and takes risks, they’ve got a good chance of moving up the socioeconomic food chain.

Economists call this “income mobility”. In the United States it’s known as the “American Dream”.

Yet all three of these factors are starting to disappear in the US… and in the West in general.

America’s self-reliant, risk-taking, hard working, pioneering culture helped propel it to become the wealthiest nation on the planet.

But these traits are rapidly vanishing, displaced by a culture that values instant gratification, consumer debt, and government handouts.

The institutions are faltering as well. Rule of Law is less predictable, with the government changing the rules in its sole discretion whenever it likes.

They pass new rules every day governing everything from what you can/cannot put in your own body, to how you are allowed to raise your own child, with much of it enforced at gunpoint.

And through an official form of theft known as Civil Asset Forfeiture, government agencies now steal more private property from people than all the thieves and burglars in the country combined.

This is banana republic stuff.

Most of all, though, it’s the economic structure that’s eroding.

The inclusive economy of America is vanishing. It’s becoming ‘extractive,’ meaning that the system is designed for the benefit of the establishment and rigged against the individual.

You can see this most notably in finance; central bankers have held interest rates down to practically zero for eight years in order to bail out large banks and the federal government.

Yet in doing so, they have decimated the prospects for retirees, responsible savers, and most of all, young people.

It’s no wonder that the Middle Class no longer comprises the largest segment of the US population, according to Pew Research.

Larry Fink, CEO of Blackrock (the largest asset management firm in the world) said that a typical 35-year old will now need to set aside 3x as much money for retirement as his/her parents did, simply because interest rates are so low.

And William Dudley, President of the Federal Reserve Bank of NY (and one of the most important Fed officials) recently remarked how the US is falling behind in terms of income mobility.

“The chance of achieving the American Dream,” he told his audience, “is not the highest for children born in America.”

That’s a pretty amazing statement, and it highlights how obvious (and important) these trends are.

Again, we’re not talking about ‘What If’. We’re talking about ‘What Is.’ And it has profound implications for your long-term prosperity.

Let’s explore this further in today’s podcast, as we discuss why this trend is really a massive opportunity in disguise to break away from convention and live a life with much greater freedom and prosperity.

Listen in here.

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[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]

“We don’t see a recession coming in the United States.”
– Abby Joseph Cohen in a recent Bloomberg interview.

US corporate profits are experiencing a “gut wrenching slump”, according to SocGen’s Albert Edwards, in a research note published last Thursday (‘US whole economy profit slump makes a recession now virtually inevitable’).

“And with the US corporate sector up to its eyes in debt, the one asset class to be avoided – even more so than the ridiculously overvalued equity market – is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default.”

The US profits data are certainly disappointing, as the chart below makes clear.

Source: Datastream, SocGen Cross Asset Research

It also seems likely that US corporate profits, as a percentage of GDP, are in the process of mean reverting after reaching all-time highs, as this chart from the St. Louis Fed shows:

As to prospects for US corporate debt, especially high yield.. Suffice to repeat the maxim that more money has been lost reaching for yield than at the point of a gun. That is likely to hold true especially when cash interest rates and bond yields have been artificially suppressed by the world’s central banks. What is an investor to do?

First, a pertinent snapshot from history.

On May 29th, 1969, Warren Buffett sent out his annual letter to the partners of the Buffett Partnership, Ltd. Within it he wrote:

“..it seems to me that.. opportunities for investment.. have virtually disappeared, after rather steadily drying up over the past twenty years.. and a swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) more speculative market.”
Buffett was winding up the partnership. He could barely have been more candid in his explanation as to why:

“I just don’t see anything available that gives any reasonable hope of delivering.. a good year and I have no desire to grope around, hoping to “get lucky” with other people’s money. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”

The stock market then dropped for the next five years.

As individual investors, not a single one of us is under the remotest obligation to play a game we don’t understand. That requirement does apply, however, to any institutional manager labouring under the curse of the benchmark. Being forced to play an irrational game without conviction may account for the peculiarly dismal fund manager performance reported during Q1 2016 in a survey compiled by Bank of America Merrill Lynch. Just 19% of US large-cap managers beat the S&P 500 Index – the worst showing for any quarter in a series going back to 1998. Only 6% of growth funds beat their benchmark. Only 19.6% of value managers outperformed their own index.

The obvious caveat is that one calendar quarter is not, by itself, freighted with overmuch statistical significance, nor should it ever be. But the extent of the comparative underperformance does raise the question of whether the fund management industry as a whole is fit for purpose. Because in a survey covering a much longer period of 10 years (the SPIVA US Scorecard for year-end 2015), conducted by S&P Dow Jones Indices, 82.1% of large-cap managers, 87.6% of mid-cap managers, and 88.4% of small-cap managers failed to outperform on a relative basis.

While Warren Buffett was out of the US stock market between 1969 and 1973, many stocks fell by a dramatic margin but their impact on the indices was largely cancelled out by the relentless rise of the so-called ‘Nifty-Fifty’ glamour stocks – arguably the equivalent of today’s ‘FANGs’. And then even the ‘Nifty-Fifty’ succumbed to the forces of gravity and sheer economic logic, and by end-1973 the market was looking cheap again, and Buffett was back at work within it.

The following table, courtesy of Kokkie Kooyman of Sanlam Investment Management, is instructive. Although Buffett had elected to wind up his limited partnership in 1969, he kept his business interests in the Berkshire Hathaway holding company as a going concern. The table shows the comparative value of $10,000 invested in Berkshire Hathaway stock, and in the S&P 500 Index, beginning in 1971.

By 1974, notwithstanding the new-found valuation opportunity extant in the broader market, Berkshire Hathaway stock was down by 43%, versus a decline of 25% in the S&P 500. By 1975 the discrepancy was even more marked. Berkshire was down by 46% even as the S&P 500 had recouped all of its losses and then some. Forget just one quarter of comparatively poor performance. What about an accumulated four years of it? Would you have sold? Of course, we know with the benefit of hindsight, and this table of subsequent returns, that selling Berkshire Hathaway in 1975 would have been a disastrous decision. As the famed value manager Peter Cundill once observed,

“The most important attribute for success in value investing is patience, patience and more patience. The majority of investors do not possess this characteristic.”

Which means that the majority of investors, like those US managers cited above, are destined to achieve inferior longer term returns.

Constant media coverage of (and the fund industry’s own focus on) the US stock market has crowded out coverage of many other markets that have been in the wilderness for years. Fund manager David Iben, in a note entitled ‘The Big Long’, points out that after the 2007 bubble and subsequent waves of QE, malinvestment “is now prevalent in finance, energy, commodities, consumer discretionary goods, emerging markets..” Investors fretted that stock prices were unsustainably high in 2007, a view validated by the ensuing crash. But “eight years later, prices are even higher for many US stocks, for high-end real estate, art, collectibles, tuition, healthcare and entertainment.” And tens of trillions of bonds are trading at the highest prices in the history of mankind. But as Iben suggests, this is not the beginning of a bear market – for many underlying investments, outside the major US indices, we are already in the late stages of a bear market.

MSCI All Country World Index ex-US, for example, looks somewhat different from MSCI World (which itself has a 59% weighting to the US):

Or consider the Baltic Dry Index:

Or the Market Vectors Junior Gold Miners ETF:

Value is in the eye of the beholder. It remains a function of where you look. If your gaze is fixed only on the US stock markets, the chances are you’re not likely to see much obvious value on offer. If your field of view is geographically unconstrained, the chances are you can now see plenty of opportunities worthy of consideration. As Shelby Davis said, “Bear markets make people a lot of money, they just don’t know it at the time.” The bear market in the US may or may not be about to start. The bear market elsewhere has already been with us for years. Time to be bullish – provided it’s in the right markets.

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What’s the dumbest thing you can possibly imagine your government doing?

It’s a serious question– think about it for a moment.

Now, whatever you come up with, I’m about to present an option that will probably blow it out of the water.

This morning, pharmaceutical mega-companies Pfizer and Allergan announced that they were bowing to US government pressure and terminating their $160 billion merger that was announced a few months ago.

Big deal, right? Who cares whether or not a couple of drug companies merge?

I’ll explain, because this is really incredible:

Pfizer is based in the United States, where the corporate tax rate is one of the highest in the world at 35%.

Allergan is based in Ireland where the corporate tax rate is 12.5%, and can be as low as 10% for companies engaged in manufacturing.

So the plan was simple. The two companies would merge together and maintain Allergen’s headquarters in Dublin.

That way the new corporation would be subject to the low Irish tax rate rather than the high US tax rate.

It was a great move for shareholders.

Every tax dollar that the company saves is an extra dollar that can be reinvested for growth, or returned to stockholders to spend or save as they see fit.

Those stockholders include countless individual investors, as well as large mutual funds that manage the savings of millions of people.

All of those shareholders were set to benefit from the merger.

But the US government didn’t like that idea. They want all the money for themselves.

So two days ago the US Treasury Department decided to squash the deal.

There were no laws passed. Congress didn’t have a debate or propose any new legislation.

Nor were any courts involved. There was no judge, jury, or legal pleading.

The Obama administration simply set aside the law and changed the rules in its sole discretion to force the deal to break down.

It was an extraordinary example of how the rule of law counts for absolutely nothing in the Land of the Free anymore.

They ignore their own laws whenever they want in order to be able to do whatever they want. This is banana republic stuff.

But to add injury to insult, aside from the offense to freedom and general stability, it was also a financially destructive thing for them to do.

Look at Allergan, one of the two companies involved in the merger.

Even though Allergan is headquartered in Ireland, it still does owe some US tax.

Remember, these are large, multinational companies that end up paying tax in dozens of countries around the world.

Allergan’s actual US tax bill has averaged about $290 million per year over the last five years (which is about $50 million more than Pfizer pays in US tax).

$290 million might sound like a lot of money. But in reality it only paid for about 6 hours and 18 minutes worth of INTEREST on the US federal debt last year.

So this is really a trivial sum for a government that burns through cash like a drunken sailor.

But consider just one of the consequences of the deal getting squashed: Allergan’s stock (traded on the New York Stock Exchange) plummeted.

According to the Financial Times, over $20 billion worth of shareholder value was wiped away in just minutes.

Now, before the Bernie Sanders crowd cheers that evil capitalists have been served their just desserts, think about the implications.

INCOME tax is not the only tax in the Land of the Free.

The US government also taxes capital gains, e.g. the tax you pay on gains when you sell an investment for more than it cost you.

Capital gains tax rates in the US are as high as 20%, not including the 3.8% Obamacare surcharge.

Let’s assume a more conservative federal capital gains tax of 15%.

This means that, since the US government wiped out $20 billion in market value from Allergan, there’s $20 billion LESS in capital gains available for them to tax.

In other words, the US government just cost itself $3 BILLION in potential tax revenue (15% x $20 billion).

Incredible.

For a government that seems so bent on getting every dollar they can, you’d think they would’ve done everything to support the Pfizer-Allergan merger.

After all, it would have meant much more capital gains tax.

But no. They still haven’t figured out that when corporations arrange their tax affairs in a way that’s in the best interest of shareholders, EVERYONE can win.

Instead they did something astonishingly short-sighted.

They cost themselves billions in capital gains tax for the sake of a few hundred million in income tax.

And most importantly they left absolutely no doubt that the Rule of Law in the Land of the Free amounts to absolutely nothing.

It would be pretty hard to come up with something dumber than that.

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It’s been way too long since I’ve visited Managua, and since I was already nearby in Colombia, I thought it would make sense to come check out Nicaragua once again.

One of the people on my staff has a father from Nicaragua, and we were able to obtain a Nicaraguan passport for her as a result.

This is one of the things I encourage everyone to consider: having a second passport makes so much sense.

It means that, no matter what happens, you’ll always have a place where you’re welcome to visit, live, work, or invest.

And aside from a few places like Singapore or Israel where there may be military obligations when you obtain citizenship, there’s usually zero downside in having another passport.

The easiest way to obtain one is if you’re lucky enough to have an ancestor (best if it’s a parent) from a foreign country.

Many countries around the world, from Nicaragua to Italy to Australia, will award citizenship if you have a parent who is a national of that country.

Then there are other places like Poland, Hungary, and Ireland where you can claim citizenship if your ancestors go back multiple generations to grandparents, and potentially beyond.

Even if you’re not part of the lucky bloodline club, there are still other options available to obtain a passport.

For example, you could register for legal residency in a country like Panama (where I’m headed later this week.)

The process of obtaining residency is straightforward (and our recommended immigration attorney gets the job done very efficiently).

Plus once you’re approved, you don’t actually have to spend time in Panama; even with minimal time on the ground you can still maintain your residency status in the country.

And after five years, you’re eligible to apply for naturalization and a passport.

Ultimately having a second (or third, fourth, fifth, etc.) citizenship means having more options. And more options means more freedom.

You can travel to more places, you can live in more places, you can do business in more places.

Most of all, though, having multiple passports is a fantastic insurance policy.

Look, I’m not a pessimistic person. But it’s quite obvious that freedom in the West is in steep decline.

The FBI’s own numbers prove that the US government stole more wealth and private property from its citizens last year through Civil Asset Forfeiture than all the thieves and burglars in the US combined.

The government passes hundreds of pages of innocuous rules and regulations every single day that you’ve likely never heard of; and yet many of them can carry extreme civil, monetary, and even criminal penalties.

Speaking of passports, you can’t even apply for a passport in the Land of the Free anymore without being threatened with fines and imprisonment.

It’s as if everything they do has to be through fear, intimidation, and coercion.

Something broke a long time ago in the relationship between the government and its people.

The government “of the people, by the people, for the people” was replaced with a government that’s rigged against the individual for the benefit of a tiny elite.

You can’t fix this problem by going down to a voting booth and casting a ballot for yet another candidate who promises hope and change.

But you can take steps to make sure that you’re not just some dairy cow to be milked by the establishment.

And you can reduce your exposure to the major financial risks they’ve created after accumulating so much debt.

I call this having a Plan B. And one of the major components of this is obtaining a second residency or passport.

There are so many options available, and most of the really good ones only require a small investment. So your return on investment is extremely high.

The best part about all of this is that, in addition to the benefits to your own freedom and finances, a second passport can extend to your family.

Think about it– once you become a citizen, your children can become citizens. Their children, in turn, can become citizens.

This means that potentially all your descendants down the line can benefit from the action you take today.

In this context, a second passport could very well be one of the best and most lasting investments you can possibly make, and real gift to all future generations of your family.

P.S. We’ve put together some of the most important, foundational elements of a Plan B into a brand new service, Sovereign Man: Explorer.

Inside, you’ll have access to everything you need to ensure that in just a few weeks you’ll have:

1. Your residency application completed (and be on your way to qualifying for a second passport)
2. A portion of your savings protected in a well-capitalized foreign bank
3. Precious metals held in one of the safest vaults in the world (a great hedge against the looming financial crisis)
4. And clarity on exactly what to do next to protect your loved ones, your assets, and your freedom.

Click here to take 35% off the retail price of Sovereign Man Explorer.

 

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What an amazing weekend.

We just finished up a wonderful event here in Medellin for members of our Total Access group.

(Total Access is the highest level of Sovereign Man membership, and we routinely hold trips like this to introduce members to business and investment opportunities all over the world, and to the interesting, influential people within our network.)

As an example, we started on Thursday night with a reception for our members attended by prominent Colombian business executives, politicians, and artists.

Then Friday morning we kicked off the formal program by addressing the elephant in the room.

As you’re likely aware, Colombia has been engaged in a civil war for several decades with communist revolutionary groups like the FARC.

This conflict produced a dangerous web of narcoterrorism, paramilitary crime rings, and appalling levels of violence.

20 years ago, Colombia had a well-deserved reputation as the most dangerous country in the world.

But that was then. Today is a dramatically different story.

Most notably, Colombia is very close to concluding a peace treaty with the FARC.

The Colombian government has sent five private citizens to Havana, Cuba to sit at the negotiation table with FARC leaders to iron out the remaining details.

One of those negotiators (who is also one of the most successful business leaders in Colombia) joined us this weekend in Medellin, so we were able to hear about what’s happening with the peace negotiations straight from the horse’s mouth.

His remarks on the peace process and Colombia’s past struggles were truly inspirational.

And while I’m not at liberty to put the details of what he told us in print, it’s clear that both sides truly want a lasting peace.

This has extraordinary implications for Colombia.

Hammering this point home, our next guest was legendary investor Jim Rogers, who flew in all the way from Singapore to join our group.

Jim is literally the only person I know who has traveled to more countries than I have.

And he has witnessed first hand how peace can fuel prosperity in a nation.

War isn’t profitable for anyone except defense contractors.

With peace, people can once again get back to the business of producing, saving, and investing with confidence. That’s what builds an economy.

This is already starting to happen in Colombia, and we expect much more growth in the coming years.

The real turning point was the administration of former President Alvaro Uribe who was able to successfully wind down major military operations against the FARC.

Colombia’s middle class started growing almost immediately as a result, as did foreign investment and international tourism.

If the country is able to stay on track over the next decade, Colombia could become one of the greatest economic success stories of our time.

It’s also a really nice place to be.

Medellin in particular is a vibrant, cosmopolitan city. It’s unique. Artsy. Cultural. Innovative. Even a little bit quirky.

I call it the Austin, Texas of South America.

And it’s dirt cheap, especially now as the US dollar is so overvalued.

Our members were all shocked at how cheap it was to eat out at Medellin’s many fantastic restaurants, and at the absurdly low cost of real estate.

Medellin’s property market, in fact, is still one of the cheapest in the world on a price-per-square meter basis.

One of our speakers, a foreign entrepreneur who has moved to Medellin, told the audience about his 5-bedroom, 3,500 square foot penthouse apartment in the nicest part of town that he bought for just over $200,000.

I’ve been coming to Medellin for years and it gets better every single time.

And yet the reputation lingers.

Colombia is still frequently derided today as a dangerous haven for narcoterrorism, kidnapping, and wanton murder.

We’re not going to wear rose-colored glasses: serious problems still exist. But it’s nothing compared to the old days.

Herein lies the opportunity.

As an investor, I always try to find places where there’s a huge difference between the ACTUAL risk and the PERCEIVED risk.

Most western banking systems are a great example.

As we often discuss in this letter, western banks are extremely illiquid and poorly capitalized.

Their insurance funds fail to meet the minimum requirements and are unable to bail out the system.

The governments that are supposed to back them up are themselves insolvent. And the central banks that support the entire system are insolvent on a mark-to-market basis.

Plus, many western governments have recently passed legislation allowing banks to steal customer deposits the next time they run into trouble.

Yet there’s very little concern out there about banks. In other words, the PERCEIVED risk, i.e. how risky people think the banks are, is much lower than the ACTUAL risk.

Anytime that’s the case, when the actual risk is HIGHER than the perceived risk, it’s time to get out.

Colombia is the opposite. The perceived risk is very high. People think this place is a death trap.

The actual risk is MUCH lower. And our members found that out this weekend when they toured the city and surrounding countryside.

Anytime the actual risk is LOWER than the perceived risk, it’s time to get in… because the crowd is going to be close behind you.

That’s the opportunity in Colombia, and why this place should be on your radar now. Because this vast disparity in risk perception won’t last.

PS–

I think Medellin and the surrounding area could be a really great place to retire, and I’m convinced it will be a major expat destination some day. It’s worth checking out as a Plan B option.

But given Colombia’s current tax structure and other major hassles, I would avoid buying real estate as a pure investment.

There are far, far better sectors to invest in with higher returns and greater tax efficiency. Premium members– stay tuned for more.

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