Category: simonblack

September 1, 2014
London, England

[Editor’s note: This missive was penned by Tim Price of PFP Wealth Management in the UK, a frequent contributor to Sovereign Man]

“Sir, Arnaud Montebourg, the former French economy minister and the sourest note in the Hollande repertoire, dares to complain of “absurd” austerity policies ? (“Hollande purges cabinet following leftwing revolt”, August 26.) If those policies are absurd, it is because they were not accompanied by the structural reforms so badly needed to make the French economy healthy. I am speaking of long outdated redundancy and seniority labour laws, oppressive regulations for the business sector and the unbearable bureaucratic roadblocks that stand in the way of start-ups.

“To these, one can also add the traditional Gallic mindset of envy, if not outright hostility, towards those French citizens and other Europeans who are willing to work longer, harder and smarter and want to make good money; a mindset that Mr Montebourg never hesitated to parade before the world. Now that he and his cohorts on the left of the Socialist party have departed the government, perhaps François Hollande can move forward and leapfrog France from the 19th to the 21st century.”
– Letter to the FT from Stan Trybulski, Branford, Connecticut, 28th August 2014.

“There’s a great deal of ruin in a nation.”
– Adam Smith.

“You will never understand bureaucracies until you understand that for bureaucrats, procedure is everything and outcomes are nothing.”
– Thomas Sowell.

Much of what we think we know isn’t necessarily so. The invention of the printing press with movable type? Traditionally credited to fifteenth-century Germany and Johannes Gutenberg, it was actually invented in eleventh-century China. Paper also originated in China long before it was used in the West. As did paper money and toilet paper (albeit today, these are pretty much interchangeable). English agriculturalist Jethro Tull is widely credited with the discovery of the seed drill in 1701. It was in fact invented by the Chinese 2,000 years beforehand. The first blast furnace for iron smelting is associated with Coalbrookdale – tragically close to schools in the West Midlands. It was actually introduced by the Chinese before 200 BC. The Chinese were also first to use the fishing reel, matches, the magnetic compass, playing cards, the toothbrush and the wheelbarrow. Perhaps even golf. So how did a society apparently so dynamic and innovative by comparison with the West then enter a centuries’ long decline?

Niall Ferguson, in his excellent book ‘Civilization’ (Penguin, 2012) puts forward six “identifiably novel complexes of institutions and associated ideas and behaviours” that account for the cultural and economic outperformance of the West between, say, the 16th and 20th centuries:

• Competition
• Science
• Property rights
• Medicine
• The consumer society
• The work ethic

He defines these trends as follows:

1. Competition: “a decentralization of both political and economic life, which created the launch-pad for both nation-states and capitalism”.
2. Science: “a way of studying, understanding and ultimately changing the natural world, which gave the West (among other things) a major military advantage over the Rest”.
3. Property rights: “the rule of law as a means of protecting private owners and peacefully resolving disputes between them, which formed the basis for the most stable form of representative government”.
4. Medicine: “a branch of science that allowed a major improvement in health and life expectancy, beginning in Western societies, but also in their colonies”.
5. The consumer society: “a mode of material living in which the production and purchase of clothing and other consumer goods play a central economic role, and without which the Industrial Revolution would have been unsustainable”.
6. The work ethic: “a moral framework and mode of activity derivable from (among other sources) Protestant Christianity, which provides the glue for the dynamic and potentially unstable society created by “killer apps” 1 to 5”.

For our purposes we are most interested in Ferguson’s first “killer app”, Competition. But we will also refer to it in a slightly different context – “the lack of bureaucracy”. As the chart below shows, from 1000 AD to its high water mark in the 1960s, UK GDP relative to China’s was a one-way bet. Since then, however, the trend has gone into reverse.

Source: Niall Ferguson / Penguin Books

What can account for this dramatic reversal of economic fortunes? Economic reforms in China, led by Deng Xiaoping in the late 1970s, are likely to be responsible for at least part of the turnaround. But the relentless and sclerotic expansion of the State in Britain has also played a role.

UK general government expenditure (green) and private expenditure (black) as a proportion of GDP

Source: David B. Smith / Steve Baker MP

As the chart above shows, at the turn of the last century, UK state spending accounted for roughly 10% of the economy and the private sector accounted for the rest. But as the welfare state has swelled, government spending has mushroomed to account, now, for something like half or more of the entire economy. And state spending, by and large, is inefficient spending – at least by comparison with the inevitably more disciplined for-profit sector. In other words, our relative economic prospects have declined in inverse proportion to the expansion (metastasis) of the State. In turn, bureaucratic parasitism likely accounts for productivity differentials in the eurozone; the German State accounts for roughly 45% of its economy, the French State 56%.

Politicians have been able to swell the State thus far only with assistance by two groups: with the involuntary support of taxpayers, and with the connivance of central bankers. Popular resentment of what is laughably termed ‘austerity’ threatens the ongoing indulgence of the first group; the almost terminal straining of market forces by the latter runs the risk of a disorderly collapse of confidence in bond markets, after which continued Western deficit spending would be virtually impossible.

We seem to be close to the endgame. Even as perversely, record-low bond yields (indiscriminately – across markets as diverse as Austria, Belgium, Germany, Holland, Finland, Ireland, Italy and Spain) have sent desperate investors scurrying into stocks instead, those same investors are, with extra perversity, displaying a similar lack of discrimination and not even attempting to locate relative value within markets. Extraordinarily, the Wall Street Journal points out that

“Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren’t run by stock pickers or star managers. The inflow has pushed the mutual-fund giant to almost $3 trillion in assets under management for the first time. The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners… Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds… Through July, passively managed stock funds have seen a net $128.4 billion in investor in flows, compared with $18 billion for traditional stock funds…”

Nor is this lack of judicious investment a product of bullish US market sentiment. The same arbitrary index-following – at all-time highs – is being pursued in the UK. Trade magazine FTAdviser reports that

“Retail investors put more money into tracker funds in July than in any other month since records began, according to the latest IMA data.”

Index-tracking may have merit at the bottom of the market, but at the top?

Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place.

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September 1, 2014
Dallas, Texas

Imagine this scene:

“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight.”

“The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before…”

This is how an American business executive described living through Mexico’s devaluation of the peso exactly 38 years ago on September 1, 1976.

Looking back, it was so obvious.

Mexico had a mounting debt, destructive policies, and a woefully unsustainable fixed exchange rate with the US dollar. All the writing was on the wall.

But most people ignored the warning signs and kept their money in pesos.

Mexican President Luis Echevarria even went out on the radio to reassure people that the currency was safe.

Finally, under intense fiscal pressure, the government reached its breaking point. And on August 31, 1976, they made the decision to devalue the peso.

People woke up the next morning on September 1st to a 50%+ decline.

Coincidentally today is also the 75th anniversary of the Nazi invasion of Poland, the event that ultimately dragged the world into war.

Germany had already invaded Austria and Czechoslovakia in the months before.

By May 1939 Hitler had stated very plainly, “the decision remains to attack Poland at the first opportunity.”

Even a week before the invasion, Hitler told his military commanders, “I have prepared . . . my ‘Death’s Head’ formations with orders to kill without pity or mercy all men, women, and children of Polish descent or language.”

Germany had 60 divisions massed on the Polish border ready to invade.

Yet people in Poland were told to keep calm, remain in place, and have confidence in their leaders.

Finally, on August 30, the Polish government ordered a partial mobilization to meet the German threat.

Needless to say, it was too little, too late. Germany invaded only hours later.

This is a familiar story that repeats across history. Despite obvious warning signs, people almost universally allow themselves to ignore reality.

It’s human nature to want to believe that everything is going to be OK. And when our political leaders whisper soothing words of hope and optimism, we take the bait.

Looking back, it was plain as day that Mexico was going to devalue the peso. Everything about the economy and currency was totally unsustainable. Deep down people knew it.

Similarly, it was plain as day that Hitler was going to decimate Poland. And people knew it.

Yet millions allowed their confidence to be misplaced in leaders who assured them that everything was OK.

Are we so different today?

The raw numbers tell us that most banks in Europe are insolvent. Bank in the US are dangerously illiquid.

Most western governments are bankrupt. Pension and social security funds are insolvent.

Financial markets are at precarious valuations. And the dollar is beginning to unravel as the dominant reserve currency.

These are data-driven assertions. And my guess is, deep down, your instincts are also telling you that something is seriously wrong with the system.

Yet we’re all told to keep calm by our leaders. There’s nothing to see here, nothing to worry about.

Looking back, it’s all going to seem so obvious. If a major, global currency crisis hits within the next 12-months, people will think, “duh, how did I not see that coming?”

Unfortunately by then it will be too late.

It takes only a little foresight and planning to insulate yourself from an event that can have disastrous consequences.

If you knew the Mexican peso was at an unsustainable level, why would anyone continue to hold pesos?

Similarly, if all the objective data suggests that the dollar is in store for an epic decline… and that the entire world is on a path to shift away from the dollar, why in the world would any rational person base his entire life savings in dollars?

It takes little effort to actually do something about it. Hold stronger currencies overseas. Own real assets. Move your retirement account abroad where your bankrupt government can’t steal it.

These are common sense steps, just like putting on a seatbelt when you get into a car.

The time to act is now. Why play Russian roulette when the odds are clearly in favor of the house?

Don’t try to time it. Nobody has a crystal ball. It’s irrelevant whether the trend unfolds over weeks, months, or years. It’s pretty clear where this is all headed.

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August 29, 2014
En route to the United States

Pop quiz: What do actor Jet Li, opera singer Maria Callas, writer T.S. Eliot, financier John Templeton, actress Elizabeth Taylor, and Queen Noor of Jordan all have in common?

They are all former US citizens who went through the formal process of relinquishing or renouncing their citizenships. (Liz Taylor actually restored her US citizenship in the late 1970s)

Until a couple of years ago, there wasn't much of a fuss about this. It was a rare occurrence for someone to renounce his/her citizenship.

Fast forward a few decades. The US government is now flat broke (actually in the red to the tune of $17 trillion) and resorting to chasing people to the ends of the earth to get their fair share of your lifetime earnings.

I have many friends overseas who are 'accidental Americans'. A Panamanian, for example, who by accident of birth ended up a US citizen because her father was born in the Panama Canal Zone. 

She lives her entire life in Panama... studying, working, building a business. Then one day she receives a note from the IRS demanding money.

They inform her that, as a US citizen, she is required to pay taxes on her worldwide income to Uncle Sam even though she has barely set foot on US soil. Then they command her to settle up.

Even for folks born and raised in the US, tax compliance has become epically aggressive.

The US tax code is among the most complicated on the planet. Yet the Land of the Free is one of the only 'civilized' countries in the world where even a simple misunderstanding can win you a new career turning big rocks into little rocks whilst wearing a Day-Glo orange jumpsuit. 

In matters of taxation, you are presumed guilty unless you can prove your innocence. 

They have threatened senior citizens with imprisonment and confiscated peoples' entire life savings merely for failing to file a form. 

For example, Anton Ginzburg was fined $1.5 million by the US Department of Justice in 2011. And frankly he got off easy. He faced up to five years in prison.

What was Mr. Ginzburg's heinous crime? What nefarious deeds had this criminal mastermind perpetrated against a peaceful society?

He didn't file a disclosure form to report his Swiss bank account. 

Note-- Mr. Ginzburg wasn't accused of tax evasion. He was fully compliant in paying his fair share to the US government. He simply didn't file a form. 

This isn't how a free society should function. 

If a government has to collect taxes by terrorizing its people or sniffing out accidental citizens, something is obviously wrong with the tax policy. AND they way they spend it.

After all, who in good conscience wants to go their entire working lives supporting a government that wastes tax dollars on bombs, drones, spying on citizens, and bankrupting unborn generations?

It's no wonder why the number of Americans renouncing their citizenship is increasing exponentially... and will likely continue to do so.

Back when Elizabeth Taylor and T.S. Eliot did it, it was so rare there was really no process. And no fee.

In fact, renouncing US citizenship was free of charge until a couple of years ago. Then, overnight, the State Department imposed a $450 fee.

Yesterday they increased it once again-- to $2,350. That's a 422% increase.

In its explanation, the State Department whined that the costs of processing renunciations had simply become too high. 

It's curious that a government which denies inflation even exists would complain about the consequences of it.

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August 28, 2014
Bangkok, Thailand

For many people, where we are born has a tremendous impact on our lives.

For example, being born in certain countries might mean that we are obliged to serve in the military, or go fight and die in some foreign war.

In others, it might mean that we are required to pay taxes on our worldwide income, even if we don’t even set foot in that country.

These are obligations that people don’t sign up for. We are born into them, by pure accident. No one has control over where he/she was born.

But if you’re a soon-to-be parent, you do have total control over this decision.

And it’s an important one, because your child will go his/her entire lives affected by the costs and benefits of it.

For the 100+ million babies born each year, I expect most parents don’t give a single thought to –where- their children should be born.

But just imagine—if you pick the right country, you could set your child up for an entire lifetime of benefit.

In certain countries, being born there entitles your child to citizenship (and a second passport), something that will give him/her tremendous options, freedom, and flexibility for his/her entire life.

Here are a few examples to consider:

Brazil

If a child is born in Brazil, that child is a Brazilian citizen. And a Brazilian passport one of the best travel documents in the world, with visa-free or visa-on-arrival access to 146 countries.

Brazil is a huge melting pot and one of the few places in the world where anybody—all races and ethnicities—can blend in and look local.

One of the nice benefits of Brazil is that it is a natural ‘get out of jail free’ card.

Brazil does not extradite its citizens to foreign countries. So just imagine how much easier Edward Snowden’s life would be if he had Brazilian citizenship as well.

Obviously this is a benefit that no one hopes their child will ever need. But if they should, it could be the ultimate insurance policy.

Chile

Chile is another place where children born within the country, in most cases, are citizens. And it’s a great option.

Chile already is a major economic force in South America and I’m certain that its future is only going to get brighter over the long-term.

In terms of passport quality, Chileans are already entitled to travel all over the world visa-free, including to the United States.

In addition, since Chile is a member of the Asia Pacific Economic Cooperation and associate MERCOSUR nation, Chilean nationals receive a lot of additional travel, residency, and business benefits around the world.

Canada

Canada, like the US, provides unconditional birthright citizenship to any child born within its borders. And it’s a great option, especially for an American who wants to give birth in an English-speaking country close to home.

There are several unique benefits to Canadian citizenship, including the vast visa-free travel network, access to public medical care (for those who are so inclined), and a tax system that doesn’t chase non-resident citizens to the ends of the earth.

Panama

Like Brazil, Panama is a tremendous melting pot of various races and ethnicities. Anyone can pass as Panamanian.

Article 9 of Panama’s Constitution clearly outlines that anyone born on Panamanian soil is a citizen of the country. Parents of Panamanian citizens can apply for naturalization after three years of residency.

Among the great benefits of Panama is its tax system—it’s strictly territorial. So the only income ever taxed in Panama is money that is earned directly on Panamanian soil from Panamanian sources.

It’s also comforting to know that Panama has some of the best hospitals in Latin America—internationally accredited, and some even operating in partnership with famed US hospitals… all at prices far lower than one would pay in the US.

Barbados

This former British colony currently stands as an option for parents seeking birthright citizenship for their children (for now).

With visa-free or visa-on-arrival access to 138 countries a Barbadian passport is actually just shy of the Brazilian one in terms of travel quality.

It’s also interesting to note that as a citizen of Barbados, your child would also be eligible for special access and privileges with the United Kingdom, and may even be eligible to apply for a British passport if there’s British ancestry in your family tree.

All of this may sound like a daunting, radical step to many people. But it needn’t be.

I’d encourage anyone to consider the prospect of spending several months abroad as an opportunity for growth and personal development.

Plus with a bit of planning and research, this could be something that your children, their children, and so on, could benefit from.

It’s rare that we get the chance in life to have such a profound positive impact on our future descendents with a single decision.

Photo credit to: “The Baby and the Sea” by Maria Rosario Sannino, CC BY 2.0

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High quality, low cost, no hassle medical care in Thailand

August 27, 2014
Bangkok, Thailand

I’m still a little bit stunned by what just happened.

30 minutes and $73 later, I just walked out of what was -technically- a hospital, but was much closer to an upscale business lounge at a modern airport.

I had a quick procedure done to fix up a nagging issue sustained in my military days (seemingly a lifetime ago). I was dreading it, but it was over in minutes, and I already feel great.

Back where I come from, the same procedure would go for ten times that. I would have wasted away in a waiting room filling out endless paperwork, then spent countless hours arguing with an insurance company.

Here at Bumrungrad Hospital in Bangkok, I barely had time to sit down before they called me in to meet with the doctor.

As my hands were full with my turkey club sandwich and drink from Au Bon Pain, the nurse anticipated me fumbling with the door and rushed over to open it for me with a traditional Thai bow (the one that rhymes with wow, not whoa), smiling the whole way. I almost felt guilty.

Then the doctor. Educated in the US at a tier 1 school for both undergraduate degree and medical school. Perfect English. Kind, attentive demeanor. Funny. Thorough. Oh yeah… and she’s gorgeous.

The nurse came in and offered some refreshment– a kind of healthy fruit and vegetable juice that was surprisingly tasty.

And then we got down to the actual procedure, which was over in minutes. We made a few jokes and exchanged goodbyes, then I went downstairs with the single piece of paper they gave me and handed it to the cashier.

They told me ahead of time that it would cost 2,500 Thai baht. She rang up a total slightly less than that figure– 2,350 baht, about $73.

‘Hmmm…’ I thought to myself. ‘They underpromised and overdelivered… How rare in any industry, especially medical care.’

I glanced at my phone– it was 30 minutes from the time I arrived. I didn’t wait around for a single minute. I didn’t fill out any forms. I signed just one piece of paper acknowledging the risks of my procedure.

And the price I paid was a tiny fraction of what it would have cost in my home country; this one procedure alone was nearly worth the flight out here.

I’m grateful that places like this exist. Bumrungrad is far from perfect. But the quality of the treatment is excellent, as is the value for price.

And boy does it beat having to sell a kidney in order to pay for medical treatment at a hospital built by some soulless designer with a penchant for whitewashed walls and linoleum tile floors.

Every time I’m here I’m always amazed… that the United States, with all of its intellectual and financial capital, cannot match Thailand.

US industry can provide so many other high quality products and services to vast consumer markets for a reasonable price. Why not something as important as medical care?

The US government has asked the same question. And its answer is, predictably, more regulation and central planning.

Giving people access to affordable, high quality medical care may be a nice idea in theory. In practice, every ‘solution’ they’ve centrally planned, from food safety to education to energy policy, has been disastrous.

Can we really expect the government’s increased involvement and regulations over medical care to be any better?

If you’re bothered by the idea of any government lording over your private health matters, consider looking abroad.

We talk a lot in this column about the concept of international diversification. Where you hold you savings. Where you invest. Where you earn money. Where you store digital assets. Etc.

It’s 2014. There’s no reason to live, work, bank, invest, operate a business, etc. in the same place. You can pick and choose the best places for each of these facets of your life, custom-tailored to your situation, wherever it is treated best.

Why hold savings at an insolvent bank earning interest at rates that don’t come close to keeping up with inflation, when you can shift some funds overseas at a strong, stable bank abroad earning 6% with no currency risk?

Medical care is no different. Just as your capital should go where it is treated best, your health should go where it is cared for best.

Don’t feel like you have to resign yourself to a system whose incentives are stacked against you. There are options. This is one of them. It just takes opening one’s mind to a global perspective.

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August 26, 2014
Shanghai, China

A few days ago I had a conversation with the Chief Operating Officer for our agricultural fund in Chile.

We were discussing water, and he told me that roughly 60% of California right now is suffering “extreme drought” conditions. 30% of the state is in “severe drought”. And 10% of the state is only under “drought”.

In other words, roughly the entire state– the 8th largest economy in the world– is facing a severe shortage of water.

But if you think that’s bad, China is about to take over the spotlight yet again.

A study by China’s Ministry of Water Resources found that approximately 55% of China’s 50,000 rivers that existed in the 1990s have disappeared.

Moreover, China is over-exploiting its groundwater by 22 billion cubic meters per year; yet its per-capita water consumption is less than one third of the global average.

This is astounding data.

More than 400 major cities in China are short of water, with some 110 facing “serious scarcity”.

Beijing and other northern cities get most of their water from underground aquifers. Over the last five decades, China has had to drill increasingly deeper to gain access to water.

Another challenge China faces is logistics. More than 60% of China’s water is in the southern part of the country, but most of the usage is in the north and along the coastlines.

When you consider that this is a country that has almost one fifth of the world’s population and is soon to become the world’s biggest economy, this is rapidly becoming a global problem.

The Chinese are of course well aware of this and are trying to mitigate the consequences by diversifying internationally, or as I call, planting multiple flags.

In China’s case, it’s a ‘water flag’.

Since the most efficient way to save water is not to use it, a sensible strategy is to import water-intensive goods and commodities. Corn and wheat are great examples.

China has been acquiring land across Africa and South America; last week when I was in Ethiopia, the place was crawling with Chinese delegates in the ag business.

The goal is to increase China’s food supply, reduce its dependence on the US for grain imports, and reduce its domestic water demand.

China has the economic capacity to do this. Most nations don’t.

Globally, some two billion people face a water deficit, and dozens of countries have to import water.

Throughout history, water has been the most important resource in the world and a major cause for conflict.

As far back as the ancient Sumerians, wars would break out over control of water supplies in Mesopotamia.

Today, 47% of the world’s non-polar land mass is supplied by rivers shared by two or more states simultaneously. This is an always present but latent source of potential conflict.

We can see that in South East Asia where the Mekong countries bicker over who has the right to build dams and otherwise exploit the river.

All of those countries, plus Bangladesh, India and Myanmar are furious with China’s plans to commandeer more of upstream river sources for itself.

In Ethiopia, where I was just a few days ago, the Grand Ethiopian Renaissance Dam project on the Blue Nile is causing a major diplomatic row with Egypt.

The Egyptians see themselves as the historical “rightful owners” of the Nile River, and they’re in desperate need of the water.

Water availability has enormous political, military, economic, and social implications. And it’s foolish to simply sweep this reality under the rug.

My guess is that tens of thousands of our readers may live in a city experiencing severe water shortages. It’s easy to ignore the problem and trust politicians to fix it. But this is a dangerous course of action.

First of all, stock up. Water keeps, so you won’t be worse off for having a little extra in case there’s a small disruption.

Bigger picture, it may make sense to consider a small bolt hole in a country with abundant per-capita water resources (Georgia, Uruguay, parts of Chile, etc.)

And for investors, owning productive agricultural property in these locations will likely prove to be an excellent investment as farmland in many parts of the world dries up.

More on that another time.

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August 26, 2014
London, England

[Editor’s note: This missive was penned by Tim Price of PFP Wealth Management in the UK, a frequent contributor to Sovereign Man]

Few films have managed to convey the feeling of approaching menace more effectively than Jeff Nichols’ 2011 drama, ‘Take Shelter’.

Its blue collar protagonist, Curtis LaForche, played by the lantern-jawed Michael Shannon – whose sepulchral bass tones make his every utterance sound like someone slowly dragging a coffin over a cello – begins to suffer terrifying dreams and visions.

He responds by building a storm shelter in his back yard. It transpires that his mother was diagnosed with schizophrenia at a similar stage in her own life.

Are these simply hallucinations ? Or are they portents of darker things to come ?

Nichols, the film’s writer and director, has gone on record as stating that at least part of the film owes something to the financial crisis:

“I think I was a bit ahead of the curve, since I wrote it in 2008, which was also an anxious time, for sure, but, yeah, now it feels even more so. This film deals with two kinds of anxiety. There’s this free-floating anxiety that we generally experience: you wake in bed and maybe worry about what’s happening to the planet, to the state of the economy, to things you have no control over. In 2008, I was particularly struck with this during the beginning of the financial meltdown. Then there’s a personal anxiety. You need to keep your life on track—your health, your finances, your family..”

There’s a degree of pretention in claiming to have a reliable read on the psychology of the marketplace – too many participants, too much intangibility, too much subjectivity.

But taking market price index levels at face value, especially in stock markets, there seems to be a general sense that since the near-collapse of the financial system six years ago, the worst has passed.

The S&P 500 stock index, for example, has just reached a new all-time high, leaving plenty of financial media commentators to breathlessly anticipate its goal of 2,000 index points.

But look at it from an objective perspective, rather than one of simple-minded cheerleading: the market is more expensive than ever – the only people who should be celebrating are those considering selling.

There are at least two other storm clouds massing on the horizon (we ignore the worsening geopolitical outlook altogether).

One is the ‘health’ of the bond markets. Bloomberg’s Mark Gilbert points out that Germany has just issued €4 billion of two year notes that pay no interest whatsoever until they mature in 2016.

The second is the explicitly declining health of the euro zone economy, which is threatening to slide into recession (again), and to which zero interest rates in Germany broadly allude.

The reality, which is not a hallucination, is that years of Zero Interest Rate Policy everywhere, and trillions of dollars, pounds, euros and yen pumped into a moribund banking system, have created a ‘Potemkin village’ market offering the illusion of stability.

In their June 2014 letter, Elliott Management wrote as follows:

“..Stock markets around the world are at or near all-time nominal highs, while global interest rates hover near record lows. A flood of newly-printed money has combined with zero percent interest rates to keep all the balls suspended in the air.

“Nonetheless, growth in the developed world (US, Europe and Japan) has been significantly subpar for the 5 1⁄2 years following the financial crisis. Businesses have been reluctant to invest and hire. The consumer is still “tapped out,” and there are significant suppressive forces from poor policy, including taxes and increased regulation.

“Governments (which are actually responsible for the feeble growth) are blaming the shortfall on “secular stagnation,” purportedly a long-term trend, which enables them to deny responsibility..

“The orchestra conductors for this remarkable epoch are the central bankers in the US, UK, Europe and Japan.

“The cost of debt of all maturities issued by every country, corporation and individual in the world (except outliers like Argentina) is in the process of converging at remarkably low rates.

“In Greece (for goodness sake), long-term government debt is trading with a yield just north of 5%. In France, 10 year bonds are trading at a yield of 1.67%.

“..Sadly, financial market conditions are not the result of the advancement of human knowledge in these matters. Rather, they are the result of policymaker groupthink and a mass delusion.

“By reducing interest rates to zero and having central banks purchase most of the debt issued by their governments, they think that inflation can be encouraged (but without any risk that it will spin out of control) and that economic activity consequently can be supported and enhanced.

“We are 5 1⁄2 years into this global experiment, which has never been tried in its current breadth and scope at any other time in history.. the bald fact is that the entire developed world is growing at a sluggish pace, if at all.

“But governments, media, politicians, central bankers and academics are unwilling to state the obvious conclusion that their policies have failed and need to be revised. Instead, they uniformly state, with the kind of confidence only present among the truly clueless, that in the absence of their current policies, things would be much worse.”

Regardless of the context, stock markets at or near all-time highs are things to be skeptical of, rather than to be embraced with both hands.

Value investors prefer to buy at the low than at the high. The same holds for bonds, especially when they offer the certainty of a loss in real terms if held to maturity.

But as Elliott point out, the job of asset managers is to manage money, and not to “hold up our arms and order the tide to roll back”.

So by a process of logic, selectivity and elimination, we believe the only things remotely worth buying today are high quality stocks trading at levels well below their intrinsic value.

We recently wrote about the sort of metrics to assess stocks that can be reliably used over the long run to generate superior returns.

Among them, low price / book is a stand-out characteristic of value stocks that has generated impressive, market-beating returns over any medium term time frame. So which markets currently enjoy some of the most attractive price / book ratios ?

Consider the relative attractiveness of the Japanese, US, Vietnamese and UK markets, as expressed by the distributions of their price / book ratios.

Over 40% of the Japanese market trades on a price / book of between 0.5 and 1. We would humbly submit that this makes the Japanese market objectively cheap. The comparative percentage for the US market is around 15%.

Even more strikingly, nearly 60% of the Vietnamese stock market trades on a price / book of between 0.5 and 1. The comparative figure for the UK market is approximately 20%.

Conversely, nearly 60% of the US market trades on a price / book of above 2 times. We would humbly submit that this makes the US market look expensive.

There is clearly a world of difference between a frontier market like Vietnam which is limited by way of capital controls, and a developed market like that of the US which isn’t.

But the price / book ratio is a comparison of apples with apples, and US stock market apples simply cost more than those in Japan or Vietnam. We’d rather buy cheap apples.

On any objective analysis, we think the merits of genuine value stocks are now compelling when set against any other type of investment, both on a relative and absolute basis.

Increasingly desperate central banks have destroyed the concept of safe havens. There is now only relative safety by way of financial assets.

The mood music of the markets is becoming increasingly discordant as investors (outside the euro zone at least) start to prepare for a turn in the interest rate cycle.

There is a stark choice when it comes to investment aesthetics. Those favoring value and deep value investments are, we believe, more likely to end up wearing diamonds.

Those favoring growth and momentum investments are, we believe, more likely to end up wearing the Emperor’s new clothes.

We do not intend to end up as fashion victims as and when the storm finally hits.

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August 25, 2014
Shanghai, China

I was sitting on the plane waiting for take off when the captain came on and uttered words you never want to hear in aviation:

“Ladies and Gentlemen, I have some bad news.”

It turned out that a German construction crew had dug up some WWII-era unexploded ordinance, and since it was so close to the Frankfurt airport, they were going to have to shut down all air operations until a EOD crew could take care of it.

With such a tight layover, there was no chance I would make my connecting flight to Ethiopia. And that was a major bummer, because I had a lot of meetings to catch in the morning as soon as I landed.

But it got me thinking– World War II ended nearly 70 years ago. Yet the ramifications of this event… and the consequences of a single person’s decisions from decades past… still affect people’s lives to this day.

Sure, the macro picture is clear. Because of World War II, the US became the world’s largest superpower. The dollar became the world’s reserve currency. US banks came to dominate the global financial system.

But even little, simple things were affected.

There we were– a plane full of people trying to get from point A to point B. And we couldn’t. All because, decades ago, Hitler decided to invade his neighbors and dare the world to stop him.

Of course, this wouldn’t have happened if Germany hadn’t been bankrupted after World War I… an obscene, terrible war waged by fatcat politicians who thought it would be a quick, glorious war.

Sitting there for the 90 minute delay, I had all the time in the world to think about this.

These people in charge– the central bankers and politicians– make decisions that have long-lasting implications, both big picture and small.

Even where you’d least expect it… something as simple and innocuous as a routine passenger flight decades later… gets disrupted because of idiotic decisions made today.

And that’s just the small stuff.

The big picture is far worse. Like World War II, the decisions made today have the power to change our way of life forever. It’s already happening.

Because of so many poor decisions made today by US politicians and central bankers, the rest of the world is rapidly starting to drop the dollar as the preferred reserve currency and adopt alternatives.

This is no longer theory or conjecture. It’s happening. And the implications will last through the next century.

Moreover, the decisions that political leaders are making today are turning ‘rich’ western nations into highly extractive economies… exactly the sort of system I see on the ground in Africa.

These are places where a tiny elite takes most of the wealth and privilege for themselves at the expense of everyone else.

In Africa it’s often done at the point of a gun. In the West, the corruption is far more sophisticated. But the theft is there, plain as day for anyone paying attention.

I invite you to explore this with me more in today’s podcast; in addition, I’ll give you my boots on the ground take from Ethiopia and explain how that country is a stark proxy for what’s happening in the West.

Today’s Podcast: http://ift.tt/1mIblxV

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August 23, 2014
En route to Shanghai

Only hours ago the US government announced that a Chinese fighter jet had intercepted an American military patrol plane over international waters east of China’s Hainan Island.

A Pentagon spokesman called China’s actions “unsafe and unprofessional”, and blasted such unprovoked aggression.

There was no mention as to why a US surveillance plane was just off the Chinese coast to begin with. They’re just playing the victim… and rather loudly at that.

Needless to say, the Chinese government has a slightly different story. I asked one of our Sovereign Man team members in mainland China to translate the following article from Sina News.

The first part of the article praises the pilot’s skill and boldness, as well as the efficiency and superiority of Chinese aviation technology.

The Jian-11B fighter, in fact, is 100% Chinese. There is no foreign engine or major component.

As for the rest of the article– I present it below with only one comment– it should be obvious to anyone paying attention that the US is no longer the world’s dominant superpower. It’s certainly obvious to the Chinese.

——–

Stop thief: China rejects the U.S. government calling our aircraft “dangerously close”
(Source: Sina News, http://ift.tt/1pTsGbW)

Sure enough, it is the American government who stamps its foot first after a similar event.

First the famous anti-China military scholar Bill Gertz played his “danger close” speech for the Washington Free Beacon.

And then the Pentagon also followed and said that it was a “dangerous intercept”. The White House called it “deeply worrying provocation”.

Adm. John Kirby, the Defense Department spokesman, said Washington protested to the Chinese military through diplomatic channels, and called the maneuvers “unsafe and unprofessional.”

Deputy National Security Adviser Ben Rhodes said it was “obviously a deeply concerning provocation and we have communicated directly to the Chinese government our objection to this type of action.”

Such remarks are laughable. As we all know, the United States is the world’s largest hegemonic force and biggest rogue country.

Their various reconnaissance aircraft have been wandering around foreign airspace for decades and watching the military secrets of other countries like a disgusting thief spying over his neighbor’s fence.

However, when the neighbor comes back with a big stick, the thief will turn tail and run away, blaming the neighbor.

When you show people weakness, they will bully you. When you show people strength, they will respect you.

We [the newspaper] believe the Chinese Air Force and Naval aviation should maintain a high level of vigilence and morale in southeast coastal region to prevent the further US action.

America has lost face and does not want to show the world they are sick. They have been lording over other countries for so long, and they will never let it go after they eat this loss.

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