Category: simonblack

October 7, 2014
Santiago, Chile

Now that European Union countries are required by law to keep tabs on illegal activities as part of their economic indicators, we decided to look at some select European countries more closely.

The new accounting rules mandated by the EU’s statistics office, Eurostat, include revenue from illegal activities related to drugs trafficking, prostitution and cigarette smuggling.

Of course, there’s no actual reliable data to measure these illegal activities, so it’s all guesswork. But hey, whatever floats your boat—or boosts your GDP.

For example, to figure out how prostitution contributed to the country’s economy, Spain’s national statistics agency counted the number of “known prostitutes” working in the country and consulted sex clubs to calculate how much they earned.

Known prostitutes? Do they have a Facebook group?

And how about if these “known prostitutes” move around the borderless Schengen area? Their contribution to GDP is probably counted several times then.

So, using these scientific methods Spain’s statistics agency announced that illicit activities accounted for 0.87% of GDP.

(Perhaps this is one of the reasons why a whopping 547,890 people left Spain last year, most of them to Latin America, according to the national statistics agency.)

This compares similarly to the UK where Britons, according to its own statistics agency, spent 12.3 billion pounds on drugs and prostitutes in 2013, or 0.79% of GDP.

That’s more than they spent on beer and wine, which only amounted to 11 billion pounds.

And you probably thought Britons were heavy drinkers. Turns out they enjoy hookers and blow even more.

On the more uptight and conservative spectrum of Europeans, Slovenian households spent 200 million euros last year on prostitutes and drugs, or 0.33% of Slovenia’s GDP.

Curiously enough, Slovenia’s Finance Minister just announced today that the country’s budget deficit will be 200 million euros higher than previously thought. Coincidence? I don’t think so.

On the more libertine extreme, in Germany estimates suggest that prostitution and drugs amounted to as much as $91 billion in 2013—or an incredible 2.5% of the total economy.

This is the sign of the times. Governments are so desperate to maintain the illusion of growth that they’re turning to desperate, comical measures.

Across the entire continent, Eurostat estimates that gross EU GDP is larger by 2.4% if all illegal activities (not just prostitution and drugs) are accounted for.

Funny thing, they also report that total real GDP growth in 2013 (the year they started counting illegal activities) was just 0.1%.

In other words, illegal activities are now the difference between economic growth and economic recession in Europe.

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October 7, 2014
Santiago, Chile

Chris Rose was dying from terminal heart disease. He didn’t have long, and before he passed, he wanted to make sure that his 18-month old son received his British passport.

When he went to pay the application fee at the British consulate in Hong Kong with cash, they told him, “Sorry we only take credit cards.”

The English teacher who had been living in Hong Kong for 20 years doesn’t have a credit card, and thus has no way of paying the passport fees for him and his son.

So they rejected him. They rejected a dying man from paying for his son’s passport with the very currency that they themselves issue. It’s obscene.

Facing intense bureaucracy and several months of waiting with no guarantee of success, he gave up on the hope that his infant son would be able to visit his grandparents back home.

It was only after the story was publicized in the local press in Hong Kong that the requirement to pay with a credit card was ‘waived on compassionate grounds.’

Think about how ridiculous this whole situation is for a moment.

First the government makes it mandatory that you have a passport in order to be able to move across arbitrary borders on the map that they have created.

Then they charge you money for the privilege of having a passport. In other words, if you want to leave the country, you have to pay up.

But then they won’t allow you to pay for it with the pieces of paper they force you to use as money.

Instead, they force you to use the government-regulated (and protected) banking industry, whether you want to or not.

Everywhere you look you can find examples like this of how politicians view people as government property to be exploited like cattle.

The Brazilian government imposes a tax of 6.38% on all purchases made by Brazilians with credit cards abroad.

This rate rose from the previous 2.38% in 2011 with a federal mandate in an effort to curb the rising trend of Brazilians traveling abroad to make purchases that are often cheaper than back home.

They don’t even try to hide the fact that they don’t want Brazilians to spend money outside of the country.

The message they are sending is quite clear: stay put and pay through the nose for inferior products produced by companies that have paid us off for a monopoly.

Of course, we’re starting to see protests around the world, proving that people are increasingly aware of being screwed by their governments.

But these protests are flawed.

Going out into the streets doesn’t change the system. And going to the voting booth only changes the players… not the game.

Every single election cycle people fill themselves with hope. They delude themselves into believing that everything will get better if they vote the right guy into office.

Of course, the right guy very quickly turns into the last guy. And nothing changes.

That’s because it’s the system itself that’s flawed. It’s not about any single individual.

This system awards a tiny elite with the power to kill. Steal. Wage war. Confiscate anyone’s property in their sole discretion. To tell people what they can/cannot put in their own bodies. To conjure trillions of currency units out of thin air.

But this current system can’t last.

It requires economic stability to self-sustain. And it’s already at the point where those in power have to resort to desperate tactics.

Their desperation has them coming up with ever-more creative ways to conjure economic growth. Plus they’re feeding on the tax revenues from entire generations that won’t even be born for decades.

This simply cannot sustain. Whether it happens today, tomorrow, 10 days from now, 5 years from now… is irrelevant. What’s important is the trend. It’s happening.

This is fundamentally good news. Yes, every shred of evidence suggests that the old system is on the way out. And that’s a bit scary. The unknown is always uncertain.

But what will come out on the other end will be better, brighter, and more free.

If you take a hunk of coal and put it under extreme pressure, you end up with a diamond.

Our entire civilization is being put under intense pressure. And what will come from this eventually is just as precious: a system where the individual has the power and freedom to choose. Where we are no longer viewed as government property.

In the meantime, it’s going to be a bumpy (and high-pressure) ride.

So for now, look at the objective data. Trust your senses about what’s happening. And don’t put all of your eggs in one basket.

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October 6, 2014
London, England

[Editor’s Note: Tim Price, Director of Investment at PFP Wealth Management in the UK and frequent Sovereign Man contributor, is filling in for Simon today.]

For the benefit of anyone living under a rock these past weeks, Bill Gross, the so-called “Bond King” and manager of the world’s largest bond fund (PIMCO), jumped ship before he could be shoved overboard.

PIMCO’s owners, Allianz, must surely regret having allowed so much power to be centralized in the form of one single ‘star’ manager.

In a messy transfer in which nobody came out of well, Janus Capital announced that Bill Gross would be joining to run a start- up bond fund, before he had even announced his resignation from PIMCO (but then again Janus was a two-faced god).

This was deliriously tacky behavior from within a normally staid backwater of the financial markets.

Some financial media reported this as a ‘David vs Goliath’ story; in reality it is anything but.

The story can be more accurately summarized as ‘Bond fund manager leaves gigantic asset gatherer for other gigantic asset gatherer’ (Janus Capital’s $178 billion in client capital being hardly small potatoes).

This writer recalls the giddy marketing of a particularly new economy-oriented growth vehicle called the ‘Janus Twenty’ fund in the UK back in 2000.

Between March 2000 and September 2001, that particular growth vehicle lost 63% of its value. Faddish opportunism is clearly still alive and well.

We discussed this last week, highlighting this seeming anomaly that even as there has never been so much debt in the history of the world, it has also never been so expensive.

This puts the integrity of markets clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk.

The time-honored alternative has been gold.

In fact, as the chart below shows, gold has tracked the expansion in US debt pretty handily (editor’s note: the correlation between the two is a strong +0.86).

You can see in 2011, the rise in the gold price became overextended relative to the rise in US debt. Then it decoupled and went in the opposite direction.

This is a similar trend to what occurred in the early 1980s. And if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.

A second rationale for holding gold takes into account the balance sheet expansion of central banks:

If one accepts that gold is not merely an industrial commodity but an alternative form of money, then it clearly makes sense to favor a money whose supply is growing at 1.5% per annum over monies whose supply is growing up to 20% per annum.

A third rationale for owning gold is best summed in perhaps the most damning statement to capture our modern financial tragedy.

“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

This is from Jean-Claude Juncker, former Prime Minister of Luxembourg and current President-Elect of the European Commission.

It’s clear there is a vacuum where bold political action should reside. Elected leaders continue to kick the can down the road and ignore dangers to the system.

And in this vacuum, central bankers have stepped in to fill the void via bond yields that are below the rate of inflation.

They say that to a man with a hammer, everything looks like a nail.

To a central banker facing the prospect of outright deflation, the answer to everything is the printing of ex nihilo money and the manipulation of financial asset prices.

This makes it incredibly difficult to shake off the suspicion that navigating the bond markets over the coming months will require almost supernatural powers in second-guessing both central banks and one’s peers.

For what it’s worth this is a game we won’t even bother playing.

Our pursuit of the rational alternative – proper forms of money and compelling deep value in equity markets – continues. More to follow on this.

[Editor’s note: Stay tuned this week for more information about Tim’s new monthly investment service, Price Value International.]

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October 3, 2014
Santiago, Chile

Some of our team members at Sovereign Man are on the ground in Hong Kong and are witnessing first-hand the turmoil that’s been going on there for the past two weeks.

It all started on September 22 with grievances over the decision from the Chinese government in Beijing not to allow the people of Hong Kong to have free and fair elections in 2017.

Events reached a new stage over the previous weekend when the police used pepper-spray, batons and tear gas against unarmed and peaceful protesters standing up for freedom.

Today, protesters forced the government complex to shut down by setting up barricades around it, as a response to Hong Kong’s Chief Executive Leung Chun-ying’s refusal to step down.

What’s remarkable is how peaceful and courteous the whole thing is.

There are signs on closed roads and subway stations that apologize for the inconvenience caused. Protesters are collecting their own trash and are even recycling it—even though the government’s cleaning department is reportedly refusing to cooperate and collect it. They have well-organized centers in each of the occupied sites with essential supplies—from water to medical assistance.

Nobody is using this as an opportunity to be violent or cause trouble.

Most of the protesters are students and there’s a clear divide between the young and the old currently. Most young people are very enthusiastic and support the protests, while many older people think the young are being manipulated by third parties to push their own agendas.

But most are just irritated because their businesses and traffic have been affected.

A lot of older people have also resigned themselves to accept that the eventual takeover of Hong Kong from Mainland Communists is inevitable—something the energetic young are clearly very opposed to.

In the last days there has been some turbulence caused by anti-protesters who oppose the student-led campaign. It’s rumored that thugs have been paid HK$800 (about USD$100) each to stir chaos and trouble by starting fights with protesters to give the police an excuse to use force against otherwise non-violent protesters.

The government is even using advanced propaganda tactics to sway the sentiment against the “rioting” students. Independent media outlets have revealed fake photoshopped images and reports of broken police cars and other alleged damages of rioting.

The government’s strategy is to largely wait for the protests to wane. And indeed by 8:30 pm local time today many occupied areas were cleared up.

Despite that, violent clashes between protesters and anti-protesters have intensified, however. The police, ironically, is not doing anything to restrain troublemakers. Instead, they’re using this as an excuse to arrest everyone and kick the protesters out.

On the ground it looks like the movement is ebbing. In Tsim Sha Tsui, one of the main shopping areas in Hong Kong, the police carried away an old man—the single remaining protester occupying the site.

The latest is that the protesters have canceled planned talks with the government, blaming authorities for failing to protect them from violent opposition attacks.

To be continued…

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People around the world are now being sparked into action, sick and tired of limitations on their freedoms.

We have a number of members from our team with boots on the ground in Hong Kong, where people are politely, but fiercely protest ing the state. They are not alone.

Globally, the system has to change. History shows us that this always happens.

World super powers, the prevailing social contract and the monetary system––none of these can last indefinitely.

We are now living in a unique time in history where all three of these systems are on the way out.

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October 2, 2014
Santiago, Chile

In 1324, Mansa Musa, the tenth emperor of the Mali Empire, set off from Western Africa on his pilgrimage to Mecca.

This was no Spartan journey. He was accompanied on his way by a procession of 60,000 men and 12,000 slaves, each of whom carried up to four pounds in gold bars.

Musa is might just have been the richest person of all time, with an accumulated wealth estimated at $400 billion valued in today’s increasingly worthless dollars.

But it wasn’t just kings and emperors who held gold. Gold has been the most widely-used medium of exchange in world history… across all points of the globe.

Ibn Battuta was a 14th century traveler and explorer whose famous grand adventure spanned 75,000 miles over the course of 24 years, much like Marco Polo’s.

Everywhere he traveled– North Africa, Middle East, Central Asia, India, Southeast Asia, China – gold was either the dominant currency or an easily accepted medium of exchange.

This barbarous relic has stood the test of time across cultures around the world for millennia as a form of wealth.

Most people in the West have completely lost sight of this.

They view the value of gold through the lens of paper currency, i.e. an ounce of gold is ‘worth’ 1,215 US dollars.

This is a deeply flawed perspective.

Looking at the gold price moving up and down in US dollars is something like sitting in a rowboat on choppy waters believing that it’s the beach that’s moving up and down.

Einstein might say that it’s all relative, but only one has any real stability.

But perspectives can and do change.

There once was a time when most people believed that the entire universe revolved around the Earth.

This was a flawed (and arrogant) view, and it was eventually corrected.

Thinking that the global economy revolves around the US dollar is just as flawed and arrogant. And it will soon be discredited just the same.

History tells us that dominant monetary systems invariably have an expiration date.

From the Byzantine solidus to the British pound, this is especially true when a superpower enters into decline and plays destructive games with its currency.

Today’s system where an unelected central banking elite conjures trillions of dollars and euros out of thin air is no different. It has an expiration date too.

Change is never easy. People don’t like it, and will resist change even if their current situations are terrible. Inertia is the most powerful force in the universe after all.

Desirable or not, it’s happening. The US dollar’s days are numbered.

Now, gold, with its millennia-long history is making a comeback. We’re not just talking about it as a store of wealth or a speculation, but as a regular form of currency.

Moving us back in this direction, Singapore Exchange launched a new arrangement this week where institutional-sized gold contracts will settled not in cash, but in 1kg bars of gold.

This means that each of these contracts is intended to deliver and store gold in Singapore on behalf of large financial institutions, central banks, and even governments.

Sure, Singapore wants to advance itself as THE gold hub of Asia. We’ve been writing to our premium members about this for years

But more importantly, it’s quite telling that major insiders within the financial system itself are pursuing this contract.

They’re effectively setting up a new system, in Asia, to afford governments and central bankers the opportunity to trade in their US dollars for something real.

Just like yesterday’s post about the renminbi/euro convertibility, this is truly a canary in the coalmine moment for the future of the US dollar… as well as gold’s emerging role in the financial system of tomorrow.

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October 1, 2014
Santiago, Chile

The Chinese central bank, People’s Bank of China, issued a press release announcing the authorization of direct trading between the renminbi and the euro on the inter-bank foreign exchange market.

This is huge. The euro is the second most traded currency in the world, after the US dollar. The European Union is already China’s biggest trading partner and this is a major step in further increasing trade and investment ties with the EU as there is now a direct exchange rate between the two currencies, without the need to use the US dollar as the conduit.

The renminbi is quickly marching down the path of internationalization as the Chinese currency is now directly exchangeable with the US dollar, Australian dollar, New Zealand dollar, Japanese yen, British pound, Russian ruble, and Malaysian ringgit.

The use of renminbi in international trade settlement nearly tripled in value worldwide over the past two years according the The Society for Worldwide International Financial Telecommunications (SWIFT), and over one third of financial institutions around the world already use renminbi for payments to China and Hong Kong.

This is  another sign of how the system is changing. And it’s a major one. As the following chart from Deutsche Bank clearly shows, the last two centuries or so of Western domination in the global economy is nothing but an anomaly on a long timeline of history.

China and the Indian subcontinent have always been the two major population centers of the world, as well as global economic powerhouses. Spectacular Chinese decline over the course of the 19th century was a result of an archaic state of the Chinese society, as well as its unwillingness to open up and adjust to the world that has clearly changed with the advent of the industrial revolution and the first major wave of globalization.

This resulted in the British Empire being propelled to the top spot as the world’s superpower. World Wars changed that and the United States became the undisputed top dog in the 20th century.

Now, this historical anomaly is being rectified and China is again reclaiming its spot in the world, with the Chinese currency following suit.

For anyone following this trend closely, this is a very exciting time to be alive. Major changes like this happen rarely; perhaps every hundred years or so. And these changes offer incredible opportunities for those attuned to them, and a tremendous amount of turmoil for those ignoring the trend.

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October 1, 2014
Santiago, Chile

Edmundas B. was in Tel Aviv when he got the idea for a startup to better connect web designers and developers with their clients.

Grabbing his mobile phone and laptop, he quickly set up an LLC, for his startup TrackDuck, back in his home country of Lithuania.

He’d previously tested setting up businesses in Tel Aviv and Tallinn, both of which are quite prominent tech startup locations in the world, but in the end he decided to move TrackDuck back to Vilnius.

Why?

Because Lithuania is a small country with big aspirations, and with the right attitude to make them happen.

Being quite small and unknown, Lithuania has had to work hard to build up an attractive reputation.

The best places in the world to live and do business are often some of the smallest, for precisely this reason. Not only are the governments generally more in touch with their populations, but they’ve got to try much harder to appeal to outsiders.

When countries are actively competing for you and your business, you are always the winner.

They want your business and so they’re willing to make things easier for you to start it there. That is why in Lithuania it takes up to 100 euros and less than a week to start a business.

Even after starting up, they want to keep you, which is why the country is home to one of the lowest tax regimes and slimmest bureaucracies in the European Union.

Here you can have the benefit of direct access to the coveted European market, whilst minimizing your costs as a business.

Even as an individual, relocating to Vilnius is great for your budget. For those who like Europe, but not the prices, Vilnius is in the Top 5 least expensive EU capitals for living costs. So you are able to get European standards of living at a fraction of the cost. And you’re a short and cheap flight away from the rest of the continent.

Eager to take advantage of all this, a number of tech and online startups have sprung to relocate their operations to Vilnius. A significant number of Russian startups are amongst this list, but businesses are coming in from all over. This includes prominent online web-development platform Wix.com, based in Tel Aviv, which recently moved its app development department to Vilnius.

As a part of the European Union, talent as well as capital can and does easily flow in from any part of the region.

Locals are highly skilled, with not only university degrees as the norm, but English and usually Russian language proficiency as well. It’s generally common for students to spend their summers working abroad, and in the UK in particular, making for easy communication and capable people.

Investors are taking notice of Lithuania as well, with Accel Partners and Insight Venture Partners recently putting $27 million into a local Lithuanian startup Vinted.

In general, Vilnius is simply an artsy-cool place to be. In just this past summer alone there were over 60 festivals in the lush forests that cover the whole country, attracting people from all over to join in the Lithuanian vibe.

This vibe certainly crosses over into the startup scene, with frequent startup events in the capital. Whether it be for entrepreneurship, art, or music, you will always find something new and interesting to be a part of in Vilnius.

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September 30, 2014
Santiago, Chile

He had a vision for what the state could be.

His vision was a state that was intricately involved in every person’s life from cradle to the grave.

It was responsible for their education, it was their place of work and source of income, and it would monitor and guide the entertainment for all of the society.

Life would be characterized by the government provision of care and support throughout. People would grow to rely upon the state in every aspect of their lives, and they would have no reason to seek out alternatives.

Eventually people would become dependent on the state’s survival for their survival. Thus their lives would then be dedicated to the ‘greater good’, with the individual existing simply for the state.

This terrifying vision of a dystopian society could only be the construct of an author like George Orwell or Ayn Rand, right? Something you would only see elaborated on the pages of fiction.

In fact, this was the vision of Otto von Bismarck, Chancellor of Imperial Germany in the 19th century.

And this wasn’t just a dream. It was a strategy.

From government healthcare at birth to education in a government school, followed by a career in civil service, and a government pension in old age, the state was with you from beginning to end.

One of the most important stages in the life-long relationship between the state and the individual in Bismarck’s mind was through employment.

There you were directly working to support the government’s aims (for the greater good of course), while at the same time being wholly dependent on them for your survival.

This was the cornerstone of his plan for the strength of the empire—having a populace entirely dependent on (and thus committed to) the state.

“My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare,” Bismarck explained.

You can be sure that Bismarck would approve of modern society.

Today in the Land of the Free, everyone is required to pay into the Social Security system, and over 90% of students go to public schools.

With the passage of the Affordable Care Act, the state is exerting its control over your medical care. And now with a new bill comes the crown jewel of state employment.

Presenting Senate Bill 2726: the Strengthening Forgiveness for Public Servants Act.

If passed, the bill aims to get young people into government employment by promising to forgive their student loan debt.

Could they be any more devious?

First they’ve managed to let inflation absolutely explode, especially when it comes to the cost of university education.

Then they actively encourage students to pay for said education by going deeply into debt, often with government loans funded by the [Chinese] taxpayer.

This created a massive class of young people who are now deeply enslaved by their state debt as they vie for jobs as assistant manager at the Gap.

And now the government has created a way out. Young people need only become public servants. Emphasis on ‘servants’.

Somewhere Otto von Bismarck is smiling.

PS: Don’t forget to check out this new study. As you can probably guess, they conclude that it’s been terribly negative for the US economy.

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September 30, 2014
Santiago, Chile

Earlier this month both the New York and Philadelphia Federal Reserves published the results of a survey they conducted asking business owners how the Affordable Care Act has changed how they operate.

Bear in mind, healthcare reform was sold on the basis that it would be good for the American people and good for the US economy.

Their economic reasoning was that the amount of money currently being spent on medical care in the US would be reduced. And that spending would shift to more productive areas of the economy.

But then, earlier this year, it turned out that the exact opposite happened.

Healthcare spending as a proportion of GDP had actually gone UP rather than down after the introduction of Obamacare.

So then the government flipped the message around. Suddenly the healthcare spending increase wasn’t a sign of failure, it was a sign of success!

That extra 0.1% of GDP that came from increased government spending in the last quarter of 2013 was all that kept the US from slumping back in to recession. Thus, Obamacare had saved the economy!

Now the Fed is chiming in with its own data showing that, in general, Obamacare has had a negative impact on the labor market.

21.6% of firms surveyed said that they were going to employ fewer workers as a result of the Affordable Care Act.

And another 20.2% said they were shifting from full-time employees to a part-time workforce as a result of the law.

Only 2.3% said there was a beneficial impact to employment as a result of the Act, and a whopping 81.4% of businesses said that their per-employee costs were increasing as a result of the Act.

Moreover, 36.4% of businesses plan on increasing the prices they charge their customers as a result of the Act, essentially passing on the costs of the legislation to consumers.

As for the quality of care itself, a survey of 3,072 physicians nationwide by medical HR firm Jackson Cocker showed that 44% of physicians are not planning to participate in the ACA network. Only 32% are participating or plan to join.

And incredibly, 60% of physicians surveyed said they expected the quality of patient care to be negatively impacted as a result of ACA, vs. only 14% who thought the law would have a positive impact.

None of this sounds particularly beneficial to the economy, or to the American people.

It was a really noble and compassionate idea. All they wanted was to help people who don’t have access to quality medical care.

But the execution was a total failure, both in deed and concept.

You cannot legislate your way to high quality medical care any more that you can legislate sunshine.

It’s the entire system that’s broken.

There’s too much expensive regulation, cost prohibitive malpractice insurance brought on by frivolous lawsuits, shortages in workers with critical skills, and crippling taxes that take away much of physicians’ financial incentive to practice medicine.

There are so many things wrong with this picture, and many of them are caused by the absurd amount of laws already on the books.

This isn’t something you fix by passing even more laws. That has the exact opposite effect.

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