Category: simonblack

Human beings have come up with some crazy ideas for money and finance over the years.

Conch shells. Beads. Animal skins. Salt. Rice. All of these were used as a form of money at one time or another.

But the strangest by far has got to be the Rai Stones of Yap Island.

Yap is a tiny speck in the western Pacific, a few hours by plane from the Philippines and Guam.

Long ago, islanders began using gigantic limestone discs called Rai Stones as a form of money

Rai Stones were large– the size of a mid-sized car– so they were seldom moved.

And they could be anywhere… at the bottom of the ocean, in the middle of the jungle.

So rather than roll your Rai Stones down to a local bank, or pile them up in the back yard, everyone on the island just sort of knew who owned which Rai Stones.

And whenever there was a transaction, word got around that ownership of a particular Rai Stone had changed hands.

It was crude, but it worked.

This is the hallmark of any well-functioning financial system: the ability to properly account for private property ownership.

Think about it– when you buy a house, there’s a deed that’s recorded in the local clerk’s office. When you buy a car, a certificate of title is issued.

This makes the chain of ownership very clear and unmistakable. You know with 100% certainty that whatever you buy is exclusively yours.

But strangely enough, this isn’t the way it works when you buy stocks in the Land of the Free.

There’s a concept in the US financial system called “Street Name Registration”.

This means that when you open a brokerage account and buy shares of Apple, your broker registers those shares in THEIR name, not yours.

In other words, your broker officially owns the shares.

On their internal books, the broker maintains a liability that they owe you the shares. But the Apple stock isn’t your asset. It’s the broker’s.

The reason they do this is convenience. It’s easier for them to buy and sell stock on your behalf if the shares are held in their name.

This strikes me as totally ludicrous.

Imagine if when you buy a new car the dealer registered the title in HIS name instead of yours; or if your home was held in the name of your real estate broker.

This makes no sense. Financial securities should work like any other asset: when you buy it, it’s yours. Simple.

That’s how it works here in Australia, where they have a system of direct ownership; it’s called the Clearing House Electronic Sub-register System, or CHESS.

That’s a fancy way of saying that, in Australia, when you buy or sell stocks, ownership of the shares passes to you directly.

The database is maintained electronically, and brokers have no control over these records.

This ensures there is no feckless intermediary standing between you and your assets.

It’s such an easy concept– to actually own the stocks that you buy. But that’s not the way the financial system is set up in the US.

The even bigger issue is that Street Name Registration in the US leads to serious problems whenever there’s financial turmoil.

Banks and brokers have a bad habit of ‘borrowing’ from their customers. They call it ‘hypothecation’ and ‘re-hypothecation’.

Essentially, brokers routinely take the shares that they’ve purchased on your behalf (and registered in their own name) and pledge them as collateral in other deals over and over again to boost their profits.

Assuming everything else goes OK, problems seldom arise.

But as soon as the financial system hits a speed bump (like it did in 2008), it can get very bloody for the original investor who put up the money.

Bottom line, you might not own what you think you own.

And given all the serious challenges facing the financial system, it makes sense to pay attention to how your investments are registered.

It may be worth checking with your broker to see if you can do ‘direct name registration’, whereby they re-title the investments in your own name.

This would help ensure that if your broker ever ran into trouble down the road, you would still have control of your assets.

You might also want to consider investing in better jurisdictions like Australia where you can have a lot more certainty over the assets that you own.

Besides, there are plenty of great investment opportunities down here.

The Australian dollar is at a multi-year low against the absurdly overvalued US dollar. So assets are already quite cheap.

Besides, the commodity recession has pushed valuations so low that many Australian companies are trading for less than the amount of cash they have in the bank.

This has been a winning investment strategy for us (and premium members), with returns in excess of 30%. More on this another time.

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

In his book What works on Wall Street, James O’Shaughnessy analysed a variety of strategies that delivered market-beating returns in the US stock market.

Value investing proved to be one of the most outstanding.

O’Shaughnessy took a variety of metrics – the price/sales ratio (PSR), price/cashflow, price/book and price/earnings – and then collated the 50 stocks from the broad US market which displayed the highest, and lowest, for each metric. He then annually reweighted his two lists, and ran this portfolio of ‘growth’ and ‘value’ over a period of 52 years, ending in December 2003 (shortly before the third edition of his book was published in 2005).

The results of O’Shaughnessy’s experiment are shown below.

(Source: ‘What works on Wall Street’ by James O’Shaughnessy)

Your hypothetical $10,000, starting 52 years ago, invested in the 50 stocks with the highest price/sales ratio (PSR) compounded up to $19,118. That may seem like a pretty good return, until you see what you could have won, by owning the 50 stocks with the lowest price/sales ratio from the same market. Your hypothetical $10,000 ended up with a terminal value of $22,012,919. Did someone say ‘value beats growth over the longer term’? Similar outperformance comes whether you’re assessing stocks by price/cashflow, price/book, or price/earnings. In each case, over the longer term, ‘value’ doesn’t just beat ‘growth’. It wipes the floor with it.

Perhaps the 52-year period in question was a statistical anomaly. But we doubt it. More likely, the statistical aberration is the recent outperformance of bonds versus stocks, during an environment in which the supply of bonds has never been higher in recorded human history.

The perversity of the O’Shaughnessy study is that it flies in the face of the idea that markets are rational or efficient. Logically, by taking more risk – in paying up to own ‘growth’ stocks at higher multiples than the market average – one should expect to achieve higher returns. But O’Shaughnessy shows that this didn’t happen.

Which highlights the attractiveness of ‘value’ as an investment strategy at a time when many equity markets have become, in our view, unsustainably expensive as a result of monetary stimulus and the success – so far – of ‘Smart Beta’ and ‘growth’ strategies. ‘Value’ investing typically offers investors what Benjamin Graham called a “margin of safety”, on the basis that high quality companies are being bought at a discount to their inherent value. ‘Growth’ stocks, on the other hand, are clearly being bought at a premium.

The renowned ‘value’ investor Seth Klarman once said,

“The hard part is discipline, patience and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.”

With bonds now being essentially an uninvestable asset class, now is the time to swing. But only for the right kind of stocks.

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Over 4,000 years ago during Sargon the Great’s reign of the Akkadian Empire, it took 8 units of silver to buy one unit of gold.

This was a time long before coins. It would be thousands of years before the Lydians in modern day Turkey would invent gold coins as a form of money.

Back in the Akkadian Empire, gold and silver were still used as a medium of exchange.

But the prices of goods and services were based on the weight of metal, and typically denominated in a unit called a ‘shekel’, about 8.33 grams.

For example, you could have bought 100 quarts of grain in ancient Mesopotamia for about 2 shekels of silver, a weight close to half an ounce in our modern units.

Both gold and silver were used in trade. And at the time the ‘exchange rate’ between the two metals was fixed at 8:1.

Throughout ancient times, the gold/silver ratio kept pretty close to that figure.

During the time of Hamurabbi in ancient Babylon, the ratio was roughly 6:1.

In ancient Egypt, it varied wildly, from 13:1 all the way to 2:1.

In Rome, around 12:1 (though Roman emperors routinely manipulated the ratio to suit their needs).

In the United States, the ratio between silver and gold was fixed at 15:1 in 1792. And throughout the 20th century it averaged about 50:1.

But given that gold is still traditionally seen as a safe haven, the ratio tends to rise dramatically in times of crisis, panic, and economic slowdown.

Just prior to World War II as Hitler rolled into Poland, the gold/silver ratio hit 98:1.

In January 1991 as the first Gulf War kicked off, the ratio once again reached 100:1, twice its normal level.

In nearly every single major recession and panic of the last century, there was a sharp rise in the gold/silver ratio.

The crash of 1987. The Dot-Com bust in the late 1990s. The 2008 financial crisis.

These panics invariably led to a gold/silver ratio in the 70s or higher.

In 2008, in fact, the gold/silver ratio surged from below 50 to a high of roughly 84 in just two months.

We’re seeing another major increase once again. Right now as I write this, the gold/silver ratio is 81.7, nearly as high as the peak of the 2008 financial crisis.

This isn’t normal.

In modern history, the gold/silver ratio has only been this high three other times, all periods of extreme turmoil—the 2008 crisis, Gulf War, and World War II.

This suggests that something is seriously wrong. Or at least that people perceive something is seriously wrong.

There are so many macroeconomic and financial indicators suggesting that a recession is looming, if not an all-out crisis.

In the US, manufacturing data show that the country is already in recession (more on this soon).

Default rates are rising; corporate defaults in the US are actually higher now than when Lehman Brothers went bankrupt back in 2008.

These defaults have put a ton of pressure on banks, whose stock prices are tanking worldwide as they scramble to reinforce their balance sheets against losses.

I just had a meeting with a commercial banker here in Sydney who told me that Australian regulators are forcing the bank to increase its already plentiful capital reserves by over 40% within the next several months.

This is an astonishing (and almost impossible) order.

The regulators wouldn’t be doing that if they weren’t getting ready for a major storm. So even the financial establishment is planning for the worst.

Good times never last forever, especially with governments and central banks engineering artificial prosperity by going into debt and printing money.

These tactics destroy a financial system. And the cracks are visibly expanding.

So while the gold/silver ratio isn’t any kind of smoking gun, it is an obvious symptom alongside many, many others.

Now, the ratio may certainly go even higher in the event of a major banking or financial crisis. We may see it touch 100 again.

But it is reasonable to expect that someday the gold/silver ratio will eventually fall to more ‘normal’ levels.

In other words, today you can trade 1 ounce of gold for 80 ounces of silver.

But perhaps, say, over the next two years the gold/silver ratio returns to a more historic norm of 55. (Remember, it was as low as 30 in 2011)

This means that in the future you’ll be able to trade the 80 ounces of silver you acquired today for 1.45 ounces of gold.

The final result is that, in gold terms, you earn a 45% “profit”. Essentially you end up with 45% more gold than you started with today.

So bottom line, if you’re a speculator in precious metals, now may be a good time to consider trading in some gold for silver.

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Every time I come to Viet Nam, I’m always astounded at the incredible growth and opportunity here.

This time around I’m reviewing a number of suppliers to buy raw materials from for a new business we’re acquiring in Australia.

Just a few years ago those supply contracts would have easily been awarded to companies in mainland China.

But today Viet Nam is beating the pants off the Chinese.

In large part due to China’s long-term growth over the past 10+ years, wages and input costs in mainland China have increased dramatically.

China might still represent the best value for the money when manufacturing high-end electronics like iPhones.

But due to the rise in input costs, China can’t compete when making socks or producing fabric. They’re no longer cost competitive.

That business is going to Viet Nam, one of the cheapest places in Asia to produce.

In many respects Viet Nam is the ‘new’ China, or at least where China was a few decades ago.

There are 90 million people in this country. Most of them are very young– Viet Nam boasts one of the youngest demographics in the region.

(Conversely, China’s demographics are precariously upside down thanks to decades of its absurd One Chile Policy. This is going to be a HUGE problem down the road.)

Wages are much lower in Viet Nam, and there’s an enormous amount of manufacturing capacity.

As a result the country’s exports have grown dramatically, by as much as 3,000% in the last two decades; much of that growth is from the last few years.

This economic growth is having a visible impact on the country.

Every time I come here it’s noticeably better– more advanced, more developed, more modern, and more free.

And for expats in particular, the country is amazing.

Rent costs nothing. Food costs nothing. Domestic help costs nothing. Mobile and broadband costs nothing.

The lifestyle you can achieve here on a very modest budget is incredible.

And it’s a lot of fun here. Ho Chi Minh and Hanoi are both wonderful, thriving cities, along with Nha Trang, Hoi An, and Da Nang.

Plus Viet Nam’s coastline is one of the most exquisite on Earth. Definitely put it on your bucket list.

Viet Nam may become one of the top expat destinations in the world as more people are drawn to the high quality, inexpensive lifestyle in a country with substantial opportunity.

Last year Viet Nam’s government continued its trend of loosening a number of restrictions.

And in addition to making it easier for locals to work hard, produce, and thrive, they even made it much easier for foreigners to visit, stay, invest, acquire shares and property, etc.

(Incidentally, property rental yields in Viet Nam tend to be high, and companies listed on the stock exchange sell for big discounts to their net tangible assets.)

It’s incredible that those opportunities exist today.

It wasn’t that long ago when Viet Nam was one of the most closed, despotic, impoverished countries in the world.

Things finally started to change in the late 1980s when the Communist government opened up and encouraged private business ownership and free market incentives.

There’s still a long way to go.

Blatant corruption in government is rampant, almost comical. It’s still very much a jungle, both literally and figuratively.

But the trend is obvious.

Viet Nam has gone from being ‘the Cuba of Southeast Asia’ to a country with more opportunity, fewer restrictions, and one of the fastest growing middle classes in the world.

It just goes to show how powerful freedom can be: prosperity rises when a nation progresses from ‘unfree’ to more free.

(Sadly the opposite trend in freedom and prosperity is playing out in the West.)

Keep Vietnam on your radar, it’s definitely a trend you want to know about.

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Just stunning.

German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH.

Europe, of course, has been battling with negative interest rates for quite some time.

What this means is that commercial banks are being charged interest for holding wholesale deposits at the European Central Bank.

In order to generate artificial economic growth, the ECB wants banks to make as many loans as possible, no matter how stupid or idiotic.

They believe that economic growth is simply a function of loans. The more money that’s loaned out, the more the economy will grow.

This is the sort of theory that works really well in an economic textbook. But it doesn’t work so well in a history textbook.

Cheap money encourages risky behavior. It gives banks an incentive to give ‘no money down’ loans to homeless people with no employment history.

It creates bubbles (like the housing bubble from 10 years ago), and ultimately, financial panics (like the banking crisis from 8 years ago).

Banks are supposed to be conservative, responsible managers of other people’s money.

When central bank policies penalize that practice, bad things tend to happen.

Traditionally when a commercial bank in Europe wants to play it safe with its customers’ funds, they would hold excess reserves on deposit with the European Central Bank.

In the past, they might even have been paid interest on those excess reserves as an extra incentive to be conservative.

Now it’s the exact opposite. If a bank holds excess reserves on deposit at the ECB to ensure that they have a greater margin of safety, they must now pay 0.3% to the ECB.

That’s what it means to have negative interest rates. And for the bank, this eats into their profits, especially when they have tens of billions in excess reserves.

Talk about being between a rock and a hard place.

On one hand, banks stand to lose a ton of money in negative interest. On the other hand, they put their customers’ deposits at risk if they don’t hold extra reserves.

Well, the Bavarian Banking Association has had enough of this financial dictatorship.

Their new recommendation is for all member banks to ditch the ECB and instead start keeping their excess reserves in physical cash, stored in their own bank vaults.

This is officially an all-out revolution of the financial system where banks are now actively rebelling against the central bank.

(What’s even more amazing is that this concept of traditional banking– holding physical cash in a bank vault– is now considered revolutionary and radical.)

There’s just one teensy tiny problem: there simply is not enough physical cash in the entire financial system to support even a tiny fraction of the demand.

Total bank deposits exceed trillions of euros. Physical cash constitutes just a small percentage of that sum.

So if German banks do start hoarding physical currency, there won’t be any left in the financial system.

This will force the ECB to choose between two options:

1) Support this rebellion and authorize the issuance of more physical cash; or

2) Impose capital controls.

Given that just two weeks ago the President of the ECB spoke about the possibility of banning some higher denomination cash notes, it’s not hard to figure out what’s going to happen next.

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In the middle of a heated battle against my jetlag yesterday, I finally decided to exercise the nuclear option and turn on CNBC in order to stay awake.

I figured someone would say something completely ridiculous, and it would get my blood boiling enough to power through the next couple of hours.

Within minutes I saw a top economist for Moody’s (one of the largest rating agencies in the world) saying that there are absolutely zero signs of recession.

Boom. I was suddenly so wide-awake it was like that adrenaline scene from Pulp Fiction.

I couldn’t believe what I had just heard. Moody’s. No recession. Seriously?

In addition to being criminally complicit in committing widespread fraud that fueled the housing bubble ten years ago, Moody’s takes advantage of every opportunity to show the world that they don’t have a clue when it comes to economic forecasts.

It’s like what Churchill said about democracy– it’s the worst form of government, except for all the others.

Well, Moody’s is the worst rating agency and economic forecaster… except for all the others.

These are the same guys (along with their colleagues at S&P, Fitch, etc.) who totally missed the boat on the housing market and slapped pristine credit ratings on subprime mortgage bonds.

They also missed the boat on the subsequent banking crisis, giving strong ratings to Lehman Brothers and AIG right up through September 2008.

Lehman, of course, went bust that month. And AIG had to be bailed out by the taxpayer.

Moody’s and the gang also missed the rest of the global financial crisis, the collapse of Iceland, Greece’s bankruptcy, and just about every other significant financial event since… forever.

These guys are so drunk on their own Kool-Aid that in October 2007, Moody’s announced that “the economy is not going to slide away into recession.”

In December 2007, they called the bottom in the housing market, suggesting that prices would not fall any further.

Of course, the following year, the entire world was engulfed in the biggest financial crisis since the Great Depression.

Moody’s didn’t see it coming. Wall Street didn’t see it coming. The Federal Reserve didn’t see it coming. Governments didn’t see it coming.

Everyone assumed that the good times would last forever.

So when the agency that consistently fails to predict recession predicts that there will be no recession, you can pretty much guess what’s going to happen next.

This is what virtually assures negative interest rates in America.

Central banks almost invariably cut interest rates amid economic slowdown.

And over the last seven recessions in the Land of the Free, the Federal Reserve has cut interest rates an average of 5.68%.

The smallest cut was in the 1990 recession when the Fed lowered rates by 2.5%. The greatest was in 1982 when the Fed slashed rates by a massive 9%.

Think about it– rates right now are just 0.25%. So even with a tiny cut the Fed is almost guaranteed to take interest rates into negative territory in the next recession.

We can see the effects of this in Europe and Japan where negative interest rates already exist.

Negative interest rates destroy banks. It eats into bank profits and forces them to hold money losing toxic assets.

Bank balance sheets become riskier, and people start trying to withdraw their money as a result.

In Japan (which just recently made interest rates negative), one of the fastest selling items is home safes, which people are buying in order to hold physical cash.

In Europe (where negative interest rates have existed for a while longer), bank controls have already been put in place to prevent people from withdrawing too much of their own money out of the banking system.

This is a form of capital controls– a tool that desperate governments use to trap your savings within a failed system and steal your prosperity.

Wherever you see negative interest rates you are bound to see capital controls close behind.

In light of this data there are fundamentally two courses of action.

1) Hope. Pretend that everything is going to be OK until the end of time.

2) Action. Take sensible steps BEFORE any of the metaphor hits the fan.

One of the easiest things you can do is withdraw some physical cash out of the banking system.

Buy a safe and hold 50s and 20s (they might ban the Benjamins, so avoid $100 bills). And don’t take out more than a few thousand dollars at a time.

It’s hard to imagine you’re worse off for keeping a safe full of cash.

Even if nothing bad ever happens in the banking system, you can still use the cash. And all you’re missing out on is 0.01% interest in your checking account. Big deal.

But if the trend continues and capital controls arise, the value of cash (and gold for that matter) will go through the roof. And you’ll wish you had acquired some while you still had the chance.

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Before there was an America, before there was a Britain, before even Rome and Ancient Greece, there was Assyria.

For more than five centuries, the Assyrian empire was the wealthiest, strongest superpower in the world.

If you could go back thousands of years during the reign of Ashurbanipal and suggested even the possibility that the Assyrian Empire would decline (let alone cease to exist) you would have probably been executed.

The mere thought was heresy.

Of course, once empires reach their apogees they always assume that they’re entitled to the top spot forever.

But the historical record is filled with former superpowers who fall victim to their own narcissism. And yet the pattern continues to repeat.

Today is no different. The political and financial establishment in the Land of the Free refuses to acknowledge the obvious data evidencing America’s decline in wealth and power.

One of those members of the establishment is Warren Buffett, America’s self-appointed Minister of Economic Good Cheer.

With grandfatherly charm, Buffett always seems to find the silver lining.

And that’s certainly great– there are a lot of reasons to be optimistic.

But to anchor one’s optimism in this absurd notion of “once a superpower, always a superpower” is absolutely nuts.

In his annual report to shareholders released just a few days ago, Buffett makes an almost biblical proclamation that “America’s social security promises will be honored and perhaps made more generous.”

So let it be written.

Fact is, Social Security’s own annual report states that its shortfall is at least $42 trillion.

This liability is staggering.

To put the number in context, even if Buffet gave the entirety of his $66 billion fortune to Social Security, he would only be able to plug the gap for a whopping 43 days.

This system is beyond repair. And to presume that all of Social Security’s promises can be honored is simply insane.

As I wrote last week, the US government released its own financial statements just a few days before Buffett.

Not only did Uncle Sam post an even greater level of insolvency than the year before at MINUS $18.2 trillion, but the government even received a failing grade from its auditors.

Bankrupt balance sheet. Negative cashflow. Dubious management integrity.

If America were a private company, Buffett would have sold it long ago. And he certainly wouldn’t be encouraging others to buy it.

But that that’s exactly what he does every year.

In this year’s report, Buffet tells us that it’s been a mistake for 240 years to bet against America.

But here’s the thing: looking at reality… looking at publicly available data, drawing obvious conclusions, and taking sensible steps to reduce the risks, isn’t “betting against America”.

Having a Plan B doesn’t make you Chicken Little. It doesn’t make you a traitor. It doesn’t mean that you think the end of the world is nigh.

It’s what responsible adults SHOULD be doing.

Sure, it may have been a mistake to bet against America for 240 years.

But it’s been an even bigger mistake to bet against history for more than 5,000.

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On January 26, 1841, two years into the First Opium War between China’s Qing Dynasty and the British Empire, Commodore Sir Gordon Bremer hoisted the British flag above Possession Point in Hong Kong.

At the time the island’s population numbered less than 10,000. Most were illiterate fishermen.

Hong Kong was also devoid of any meaningful natural resources except for well-placed geography.

So when the war ended in 1842 and British diplomats formally annexed Hong Kong into their empire, they turned it into a free port almost immediately.

This means that no taxes were charged on goods traded in Hong Kong—an anomaly back then.

Governments routinely squeezed trading posts for tax revenue, taking a cut of all goods shipped through the port.

Governments still do this today, charging custom duties and other taxes on imported goods crossing their borders.

As a free port, Hong Kong immediately attracted entrepreneurs and speculators from all over the world to set up their operations.

People were attracted to the low tax environment, and the fact that the imperial government bureaucrats were over 5,000 miles away.

Trade quickly flourished. And as commercial activity grew, the island prospered and rapidly became more developed.

People migrated to Hong Kong based on the premise that, just like in America, they could work hard and make a life for themselves.

Within 20 years the population had increased over ten-fold. And it kept growing.

Hong Kong became a boomtown, earning a reputation as a swashbuckling paradise for risk-takers.

This freewheeling, Wild East attitude paid off.

Today Hong Kong is one of the wealthiest places in the world, with a GDP per capita and standard of living that outpaces most of the West.

It’s modern and advanced; the city skyline is beautiful– there are 50% more skyscrapers here than in New York City.

Taxes in Hong Kong are still among the lowest in the world.

Yet the government is awash with cash and regularly sends surpluses back to its citizens.

They maintain almost unparalleled financial reserves.

And instead of having to pay interest on debt, Hong Kong generates substantial income from interest and investment gains on its huge pool of savings.

Hong Kong is far from perfect. But this illiterate fishing village did pretty well for itself. And it’s not hard to figure out why: freedom.

“Freedom” is an often-misunderstood word.

As G. Edward Griffin, author of the wonderful book The Creature from Jekyll Island told us over the weekend, people think that they’re free as long as they’re not in jail.

And while that may be true, it doesn’t scratch the surface of what it means to be free.

Freedom also means being able to make mistakes… to take risks… and either suffer the consequences of bad decisions or enjoy the rewards of good ones.

This has been a huge part of Hong Kong’s success. And it used to be part of America’s as well.

This isn’t rocket science. The Universal Law of Prosperity is very clear– in order to build wealth you have to produce more than you consume.

But the more rules, regulations, and taxes there are, the more difficult it is to produce.

This is precisely the economic problem in the Land of the Free today.

They’ve created a political system that churns out 80,000+ pages of regulations each year, making people less free and more encumbered to produce.

And these regulations require more government, which can only be funded by more debt and more tax revenue.

Yet at the same time, their monetary system of ultra-low interest rates encourages people to spend money and go into debt.

This system makes the US, and most Western countries, easy to be a consumer. But it’s becoming more difficult to be a producer.

They reinforce this early, sending police to shutter children’s lemonade stands who didn’t apply for a permit. Or calling Homeland Security on teenagers selling snow-shoveling service door-to-door.

This entire system is rigged against the Universal Law of Prosperity.

And when all the incentives make it easier to consume than produce, it’s not hard to figure out where this destructive path will ultimately lead.

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

“My interest is in the future because I am going to spend the rest of my life there.” – Charles Kettering.

Perhaps the most extraordinary and important presentation you will ever see can be found on YouTube, here. Dr Albert A Bartlett, Professor Emeritus at the Department of Physics at the University of Colorado at Boulder, shares his observations about the power of the exponential function – what happens when the supply of anything grows, and compounds, at a fixed rate over time. As Dr Bartlett warns,

“The greatest shortcoming of the human race is our inability to understand the exponential function.”

Here is an example from the world of bacteria.

“Bacteria grow by division so that 1 bacterium becomes 2, the 2 divide to give 4, the 4 divide to give 8, etc. Consider a hypothetical strain of bacteria for which this division time is 1 minute. The number of bacteria thus grows exponentially with a doubling time of 1 minute. One bacterium is put in a bottle at 11:00 a.m. and it is observed that the bottle is full of bacteria at 12:00 noon. Here is a simple example of exponential growth in a finite environment. This is mathematically identical to the case of the exponentially growing consumption of our finite resources of fossil fuels. Keep this in mind as you ponder three questions about the bacteria:

1. 1)  When was the bottle half full? Answer: 11:59 a.m.
2. 2)  If you were an average bacterium in the bottle, at what time would you first realize that you were running out of space? Answer: There is no unique answer to this question, so let’s ask, “At 11:55 a.m., when the bottle is only 3% filled and is 97% open space, would you perceive that there was a problem? Some years ago someone wrote a letter to a Boulder newspaper to say that there was no problem with population growth in Boulder Valley. The reason given was that there was 15 times as much open space as had already been developed. When one thinks of the bacteria in the bottle one sees that the time in Boulder Valley is 4 minutes before noon!Suppose that at 11:58 a.m. some farsighted bacteria realize that they are running out of space and consequently, with a great expenditure of effort and funds, they launch a search for new bottles. They look offshore on the outer continental shelf and in the Arctic, and at 11:59 a.m. they discover three new empty bottles. Great sighs of relief come from all the worried bacteria, because this magnificent discovery is three times the number of bottles that had hitherto been known. The discovery quadruples the total space resource known to the bacteria. Surely this will solve the

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I had an amazing time this weekend sharing the stage at an investment conference in Miami, with other speakers like Robert Kiyosaki, Peter Schiff, and G. Edward Griffin among others.

During a panel on the future of money and banking we discussed how the financial system is rapidly losing control of its own product, i.e. money, in the same way that the music industry has lost control of its product.

In the past there used to be a handful of large record labels that controlled the distribution of music across the world.

In the same way, our financial system was set up for a handful of banks to tightly control the distribution of money across the world to the point that no financial transaction could occur without a bank inserting itself in the middle.

But like music, this model is rapidly changing.

Just as you can have now access an unlimited catalog of albums without ever setting foot in a record store, we are now in a position to conduct financial transactions entirely outside of the banking system.

Every single function of a bank, whether to save, borrow, exchange, or transfer money, can all be done better, cheaper, and more efficiently outside of the banking system.

Rather than going to a bank with hat in hand, you can now fund your startup through an online crowd-sourcing platform.

More importantly, dollar dominance is waning.

The dollar has been the dominant reserve currency since the end of WWII.

But the US government has abused this privileged position so many times, with constant bullying of other nations and threatening to excommunicate foreign banks from the US financial system.

So now other nations are quickly coming together to create an alternative system that no longer depends on America.

Jim Rickards, author of Currency Wars, spoke about a meeting that he had with senior officials at the US Department of Treasury.

Jim had expressed concerns about the dollar losing its status, or at least significant market share, as the world’s reserve currency.

And as I kept telling the audience this weekend, this isn’t a question of “what if?” it’s a question of “what is.”

The government of Iran, for example, has already decided to be paid in euros for oil instead of dollars.

And the government of Brazil almost immediately jumped on the bandwagon to trade with Iran outside of the US financial system.

These are major blows to the dollar, and all this just happened within the last couple of weeks.

Yet as Jim Rickards continued his story, senior officials at the Treasury Department refused to acknowledge that the US dollar would ever lose its status and power in the world.

Jim said he felt like he was in London in 1913, with British bureaucrats pounding the table about how the British pound sterling rules the world.

This is a total fantasy.

As we discussed in Friday’s analysis of the US government’s latest financial reports, the government is totally bankrupt to the tune of negative $18.2 trillion.

The Federal Reserve has printed itself into insolvency.

And the entire US financial system is underpinned by the greatest level of debt that has ever existed in the history of the world.

There is no nation and no currency entitled to the top spot forever. History shows that wealth and power routinely change.

And Robert Kiyosaki added that there’s never been a change this big, nor so many people unprepared.

I tend to agree. Just looking at the sheer size of the $200 trillion debt bubble, there’s never been a change of this magnitude.

And given that more than half of Americans have less than a thousand dollars in savings, it’s clear that too many people are unprepared.

In my own remarks, I discussed all the striking similarities between 2008 (when the world erupted in a massive financial crisis), and where we are today.

Our financial system is loaded with risk. Insolvent governments, insolvent central banks, dangerous levels of illiquidity, negative interest rates, early signs of capital controls.

Again- this isn’t “what if”. It’s “what is”.

G. Edward Griffin, author of the exceptional The Creature from Jekyll Island about the Federal Reserve quoted Sun Tzu, suggesting that if you “know your enemy and know yourself you need not fear the result of a hundred battles.”

I call this having a Plan B. It means understanding what the real risks are (and what they’re not). And taking sensible steps to do something about it.

After learning about the risks and solutions, and then creating a sensible Plan B, you’ll never find yourself complaining that your new bank is too safe.

Or that it’s too hard for the government to confiscate your assets.

Or that your tax bill is too low.

Or that your retirement plan is too exciting.

These are all things that make sense no matter what happens next. Or what doesn’t.

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