Category: simonblack

July 21, 2014
London, England

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

They call them ‘junk bonds’ for a reason. They now constitute an offence against linguistic decency: ‘high yield’ no longer even is. Consider the chart below:

(The index in question is a benchmark for the broad high yield bond market.)

Not for nothing did the Financial Times report at the weekend that “Retail investors are getting increasingly nervous about high-yield bonds”.

In the entire history of the UK Gilt market, yields have never been as low. This suggests that Gilt buyers at current levels are unlikely to enjoy an entirely blissful investment experience.

Just to round up this analysis of bond investor hyper-exuberance, consider this last chart, which puts interest rates (in this case, the UK base rate) in their historical context:

(*The Bank Rate has comprised variously the Bank Rate, Minimum Lending Rate, Minimum Band 1 Dealing Rate, Repo Rate and Official Bank Rate.)

There is one (inverse) correlation in investment markets that is pretty much iron-clad. If interest rates go up, bond prices go down.

This is entirely logical, since the coupon payments on bonds are typically fixed. If interest rates rise, that stream of fixed coupon payments loses its relative attractiveness.

The bond price must therefore fall to compensate fixed coupon investors. So now ask yourself a question: in what direction are interest rates likely to go next ?

The bond environment, ranging from high yield nonsense to government nonsense, is now fraught, littered with uncertainty and unexploded ammunition, and waiting nervously for the inevitable rate hike to come (or bracing for a perhaps messy inflationary outbreak if it doesn’t).

There are clearly superior choices on a risk-reward basis; we think Ben Graham-style value stocks are the logical and compelling alternative.

“By sacrificing quality an investor can obtain a higher income return from his bonds. Long experience has demonstrated that the ordinary investor is wiser to keep away from such high- yield bonds. While, taken as a whole, they may work out somewhat better in terms of overall return than the first-quality issues, they expose the owner to too many individual risks of untoward developments, ranging from disquieting price declines to actual default.”

– Ben Graham, ‘The Intelligent Investor’.

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July 17, 2014
Malaga, Spain

Like a lot of kids who grew up in the 80s, my parents enrolled me in organized basketball when I was around 9 or 10 years old.

We weren’t really any good… just a bunch of kids from the Nintendo generation who would have rather been playing Jordan vs. Bird in our living rooms instead of dribbling through the real thing.

In all honesty I have to say we went two straight years without winning a single game. It must be some sort of record for the sorriest team ever assembled.

But there was this one kid… his name was Robbie… who thought he was some kind of basketball virtuoso.

I mean, this guy really thought he was Michael Jordan even though he sucked just as much as the rest of us.

But this self-delusion led him to believe that he was our team leader (we all hated him).

And Robbie had obviously watched a lot of movies because he used to throw out these lame motivational lines all the time like, “Alright boys, we’ve got ‘em right where we want ‘em…” when we’d be down 24 to 6.

And he was serious.

Despite a long, painful, losing track record unblemished by even a single success, and faced with overwhelmingly more powerful and skillful opponents, Robbie still managed to believe that he was in control of the game, and of the other players.

It was astounding. Robbie never let reality get in the way of his delusions.

Sure, there’s something to be said for optimism and playing your heart out to the bitter end.

But Robbie had taken clear denail of obvious facts and elevated it to an artform.

Judging by what I’ve just read, I’m thinking Robbie might have grown up and gone to work for the IMF.

Remember, the IMF was formed to be a critical component of the new dollar-dominated global financial system that was created after World War II.

The US has far and away the most voting power with a 17.69% share, so nothing really happens at the IMF unless Uncle Sam approves it.

This might have made sense back in the 1950s. Or even the 80s when Robbie was hogging the ball.

But things have changed. Today, the US is barely the world’s largest economy. It is far and away the world’s biggest debtor. And it constantly punishes the world with destructive monetary policy that weakens the entire system.

Nearly every other nation on the planet for YEARS has been pestering the IMF to catch up to reality.

Think about it– the combined GDPs of the Brazil, Russia, India, China (plus South Africa, known as BRICS nations) is more than the US and Europe combined.

They have 40% of the world’s population, at least 20% of its output, and on a net basis, almost none of its debt.

Yet they have almost no say over the financial system that rules them all. It’s absurd.

They warned the US and Europe for years: “Reform, or we will create our own system to compete with you.”

Now they’ve followed through on their word.

As I reported to you a few days ago, BRICS leaders met in the beautiful city of Fortaleza, Brazil earlier this week to form their new development bank and draft a reserve agreement.

In doing so, they have put the IMF on a path to total irrelevance and taken a huge step towards launching a brand new financial system.

In the summit’s press release, they stated:

“We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. ”

In response, the IMF has released a very brief statement congratulating the BRICS nations and saying that they will be “delighted” to work together.

You have to admire them for trying to put a brave face on their looming irrelevance.

But this is really just more self-delusion and total denial of reality: the IMF, and the entire dollar-based financial system it represents, are finished.

The most powerful economies in the world have just aligned against them, and the IMF is ‘delighted’.

It reminds me of Robbie: “we’ve got ‘em right where we want ‘em.”

Back in reality, anyone paying attention can look at the score and know exactly how this game is going to end.

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July 16, 2014
Malaga, Spain

If you ever find yourself vacationing in the western Pacific, I highly recommend swinging by Yap Island, home of one of the most bizarre forms of money in history.

Over a thousand years ago, natives would mine enormous chunks of limestone and carve them into gigantic circular discs.

I’m talking REALLY big… a typical disc would be 5 to 10 feet in diameter, over a foot thick, and weigh several tons.

They called them ‘Rai Stones’, and they were actually used as currency. Curiously, an indiviaul rai would be valued not based on its weight or size, but based on its story.

If many people had been killed transporting it, or if the stone had once belonged to a famous warrior, the rai would be worth more. So it was a bit of a collectible as well as a form of money.

Needless to say, the sheer size of these stones meant that they wouldn’t be moved very often. Everyone on the island just sort of knew who owned each rai, like a primative form of Bitcoin’s blockchain.

The polar opposite of this is the paper money system, something that has its origins in the Han Dynasty over 2,000 years ago.

It wasn’t quite paper, but the ancient Chinese experimented with leather-skinned money as early as the second century BC.

The idea died for over a thousand years in favor of (mostly) gold and silver. But it popped up again in the Middle Ages where Chinese merchants used short-term credit notes rather than haul around heavy coins.

When the Mongols basically took over the entire planet, they adopted this idea, much to the astonishment of their European visitors. Marco Polo writes of this in his diary with total incredulity:

“The Great Kaan causeth the bark of trees, made into something like paper, to pass for money all over his country. . . And nobody, however important he may think himself, dares to refuse them on pain of death.”

But it wasn’t until 1661 that the first modern paper money was born.

Johan Wittmacher was a Latvian merchant of Dutch descent who had a burning idea he wanted to try; he just needed a willing country.

Wittmacher moved to Sweden and tried several times to obtain a banking license. Finally, after promising a 50% profit share to King Charles X Gustav, his license for Stockholms Banco was approved in 1657.

On July 16, 1661, his bank became the first in history to issue paper banknotes– Kreditivsedlar.

These Kreditivsedlar solved a huge problem for Wittmacher. All the gold deposits he was holding on behalf of bank customers were primarily short-term. Customers would frequently withdraw coin, so he needed to keep inventory handy.

On the other hand, he wanted to increase profits by loaning out his customers’ gold. Problem was, most of the loans were longer term.

Wittmacher’s dilemma was satisfying his customers’ short-term withdrawals while still making long-term loans. The solution was paper.

When a customer would make a withdrawal, Wittmacher gave them paper notes as claims on the gold he was holding.

The customer could use the notes to pay for goods and services, and Wittmacher got to keep the gold and make more loans.

In time, the notes became a popular medium of exchange, accepted everywhere just like gold. People would pass them around as money, only occasionally showing up to the bank to redeem them for gold.

Naturally it didn’t take long for Wittmacher to start committing fraud. Before long he’d issued more notes than he had gold in his vault. And he was making more loans than the bank could afford.

After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since.

Our modern system entitles a central banking elite to conjure trillions of dollars, euros, yen, etc. out of thin air, creating massive financial distortions and enabling politicians to rack up epic debt levels.

Today’s commercial banks take in customer deposits, maintain a laughably small portion in reserve, and use the rest of our money to make idiotic loans for their maximum benefit.

Their brokerage divisions front-run customers, trade against them, lend out customers’ shares without their knowledge, and even ‘borrow’ money from customer accounts to cover their own trading losses.

When they fail, they’re bailed out by taxpayers and do the same thing all over again.

In Wittmacher’s time, this was fraud. Today it’s not only legal, it’s the industry standard.

No one is held accountable save some sacrificial lamb, and we’re told that we should simply trust in the guarantee of a bankrupt, insolvent government.

So… happy birthday paper money. It’s a hell of a system you’ve brought us.

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July 15, 2014
Malaga, Spain

Exactly 70 years ago to the day, hundreds of delegates from 44 nations were busy at work in Bretton Woods, New Hampshire creating a brand new financial system.

World War II had just ended. Europe was in ruin.

And since the US was simultaneously the largest economy in the world, the primary victor in the war, and the only major power with its productive capacity intact, it was easy to dictate terms: the dollar would dominate the new system.

Every nation would hold dollars as the primary reserve currency, and the dollar would be redeemable for gold at $35/ounce.

Also, global commerce would be conducted and settled in dollars, and these settlements would clear through the US banking system.

Naturally this created substantial demand from foreign governments who needed to begin accumulating dollars for trade and reserves.

So through a variety of programs, from the Marshall Plan to the IMF and World Bank, the US began flooding the world with dollars.

Initially everything went according to plan.

But soon the US government realized something important– foreign demand for the dollar was so strong that they could get away with printing more dollars than they had gold.

This allowed them to run all sorts of deficits and spending initiatives– more war, more welfare, more waste… all with minimal accountability.

Initially the consequences were insignificant.

Sure, the price of gold in London was a few dollars higher than in the US (they called this the ‘gold window’).

But demand for the dollar was still strong. So why bother changing?

By 1971, the situation had gotten far worse. Another decade of war, excessive spending, trade deficits, and money printing had pushed many foreign nations to their breaking points.

Foreign nations’ dollar reserves far exceeded the US government’s gold holdings. And with confidence waning, many began redeeming their dollars for gold.

Only days later, Richard Nixon put a stop to this and unilaterally terminated the US dollar’s convertibility to gold.

Think about the magnitude of this decision: Nixon was effectively defaulting on US obligations to the rest of the world– a complete betrayal of their trust.

Yet despite this massive shock that reset the global financial system, the dollar somehow managed to remain the world’s #1 reserve currency.

You’d think they would have been grateful, thanking their lucky stars that the rest of the world gave them a second chance. But no.

Over the past 43 years, the US has continued to print, devalue, and mismanage the dollar.

Along the way, they’ve created epic bubbles and financial shocks.

They’ve run up the biggest deficits and debt levels ever seen in the history of the world.

They’ve bickered internally to the point of shutting down government.

They’ve passed arrogant, painful regulations and commanded the rest of the world to comply under threats tantamount to financial homicide.

They’ve unleashed their tax and securities authorities to terrorize anyone doing business with the US.

They’ve totally ignored foreign pleas to restructure the IMF and World Bank.

They’ve slammed foreign banks with record fines simply for doing business with nations that the US doesn’t like.

They’ve waged pointless wars. They’ve spied on their allies. They’ve meddled in other nations’ affairs.

And they’ve demonstrated absolutely no willingness or ability to improve.

Simply put, other nations are done. Fed up, really. And it’s not just words.

Consider that in a matter of months, the US will be overtaken by China as the world’s largest economy.

Not to mention, the total combined GDPs of China, India, Russia, and Brazil are roughly the same as the US and EU combined.

Just as the US was the biggest player back in 1944, China is the biggest player today. So it seems clear that the renminbi will become a critical component of a new financial system.

The renminbi already has experienced rapid growth as a dollar alternative for trade; in May, cross-border settlement surged 52% from the year prior.

Renminbi settlement banks are being set up from London to Canada, and the central banks of both France and Luxembourg have signed agreements for renminbi clearing.

There have already been numerous Western companies (like McDonalds) that have issued renminbi-denominated bonds.

And even the provincial government of British Colombia issued a renminbi bond earlier this year. It was a whopping five times oversubscribed.

I’d expect within the next 2-3 years we’ll start seeing trade settlement in renminbi, even when none of the parties are in China.

Today, for example, a transaction between a Paraguayan merchant and a company in Angola will likely settle in US dollars.

Soon, I think we’ll start seeing that transaction done in renminbi. And once that happens, you’ll know it’s game over for the dollar.

Shortly after, national governments in western countries will issue renminbi bonds (perhaps Greece or Portugal will be first). And eventually, even the US government itself.

Today, 70 years after Bretton Woods, leaders from China, Russia, India, Brazil, South Africa, and several other nations are hard at work in Fortaleza, Brazil creating a new development bank that will compete against the US-controlled World Bank.

This is a major step in an obvious trend towards a new financial system. Every shred of objective data is SCREAMING for this to happen.

It’s a different world. Everyone realizes it except for the US government, which is still living in the past where they’re #1 and get to call all the shots.

The consequences of missing this boat are enormous, and it’s going to be a rude awakening for anyone not paying attention.

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July 14, 2014
Istanbul, Turkey

It’s been over a year since the banking system in Cyprus officially went bust.

On Friday, March 15, 2013, practically everyone in the country went to bed thinking that everything was just fine.

Many had probably gone to the bank that very day to do business, or logged on to an Internet banking platform.

Yet the very next morning, they woke to a completely new reality: the nation’s banks were broke, and the government was in no position to rescue them.

All the promises they had been told about government guarantees and having a ‘well-regulated’, sound banking system turned out to be lies.

The government proclaimed a bank holiday, and banks remained closed for the next several days. Accounts were frozen and ATM withdrawals were limited to only 100 euros a day.

Eventually the plan materialized: substantial portions of deposits over 100,000 euros would be confiscated in exchange for equity in the banks.

(Just imagine—Bank of America, RBC, or Lloyds takes your money and gives you stock certificates that subsequently plummet in value!)

And for everyone else, severe capital controls were instituted—some of the worst in decades.

After more than a year, some capital controls have been lifted. Though it’s still not possible to transfer money out of Cyprus without the central bank’s approval.

And what does the banking system have to show for sixteen months of capital controls, bailouts, and deposit confiscation?

It turns out that banks in Cyprus are still pitifully capitalized.

The country’s largest bank, the Bank of Cyprus, was at the epicenter of the calamity last year. And they still face a mountain of bad loans.

A staggering 55% of the bank’s loan portfolio is delinquent. And now they’re having to sell stock in order to raise an additional billion euros in capital.

Bear in mind, the shareholder equity for the bank right now is only 2.7 billion to begin with. So they’re having to increase that by a whopping 37%!

Needless to say, this is not something that a healthy bank in a healthy banking system has to do.

Wealth tax next?

There are two key lessons here:

1) Banks and governments will –never– tell you the truth about the system. They will lie all the way through to a full collapse.

2) A banking relationship cannot be taken for granted. It’s important to conduct due diligence, just as you would with any important financial decision.

We’re led to believe that banks are prudent and safe institutions. That they’re insured by the government. That they’re “risk-free”.

Subsequently, most people expend more energy in choosing a brand of toothpaste than in selecting the financial steward who controls their life’s savings.

Remember: this decision doesn’t have to be limited by national borders.

Just as you might move somewhere for more lucrative job opportunities and better schools for your kids, you can also move savings to a place with better financial opportunities and stronger banks.

It’s hard to imagine you’ll be worse off holding some funds at a foreign bank that’s 20 times more liquid and 4 times more solvent than where you bank now.

But if the worst happens and you get Cyprus’d tomorrow morning, it could turn out to be one of the smartest financial decisions you could make.

And unless the past several years have given you 100% confidence in your government and banking institutions, this is an important step I recommend you consider.

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July 10, 2014
En route to Batumi, Georgia

Earlier this summer, IMF bureaucrats went to Sofia, Bulgaria to study the country’s economic progress.

And roughly a month ago, they released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.”

Talk about epic timing. Because less than two weeks later, Bulgaria’s banking system was in the throes of a full-blown crisis.

There was a run on two of the nation’s largest banks—several hundred million dollars had been withdrawn in a matter of hours.

And the Bulgarian central bank had to step in and take over both of them or risk a collapse in the entire system.

This is the modern miracle of fractional reserve banking.

When you make a deposit, your bank only holds a tiny percentage of that cash.

The rest of it gets loaned out or invested in securities that pay a much higher rate of return than the pitiful amount you receive in interest.

Needless to say, the less money banks hold in reserve, the more money they’re able to invest… and the more profit they make.

This puts their incentives and our incentives at odds. Because as depositors, it’s better for us if the bank holds most (if not all) of our funds.

In typical form, though, governments stepped in to settle this dispute. And a century ago, they sided with the banks.

Because of this, it’s perfectly legal for banks to hold a tiny percentage of customer deposits.

So now, anytime there’s the slightest spook (as happened in Bulgaria), it creates a panic.

Naturally that’s when politicians step in to calm nerves.

In the case of Bulgaria, the EU Commission soothingly announced that “the Bulgarian banking system is well-capitalized and has high levels of liquidity compared to its peers in other member states.”

Whoa whoa wait a minute.

Are these geniuses really saying that the country experiencing a bank run due to its LACK of liquidity is MORE liquid than the rest of Europe??

Yes, that is exactly what they’re saying.

So it begs the question– if Bulgarian banks with their “high levels of liquidity” can suffer such shocks, what can happen to other European banks which are worse off?

I think the lesson here is clear: The people in charge of regulating the system and making these proclamations about bank safety are totally CLUELESS.

Of course they’re going to say that the banks are safe. Of course they’re going to compliment the system’s liquidity and solvency.

But before you entrust your savings to any financial institution, do your research and make sure they are strong enough to withstand any financial shocks.

Start with the jurisdiction first and foremost.

There are many places around the world where banks are literally an order of magnitude safer than those in the West. Hong Kong comes to mind.

Also look at a bank’s liquidity: how much cash do they have as a percentage of customer deposits? Where have they invested the rest of customer funds?

Banks with very high levels of liquidity can better withstand financial shocks. Illiquid banks will have to start selling assets and potentially go bust. Or beg for a bailout.

Some of the biggest names in banking have pitiful levels of liquidity.

JP Morgan, for example, holds 2% of its customer deposits in cash equivalents.

(Conversely I recently met with a bank in Bermuda that holds over 40%…)

This is worth paying attention to. Because the decision of where you hold your hard-earned savings matters.

And Bulgaria shows that the entire system can really be a bunch of smoke and mirrors.

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July 10, 2014
En route to Batumi, Georgia

The first recorded sovereign default was in the 4th century BC when ten Greek cities failed to honor loans from the temple of Delos.

Most of the borrowers could not pay back what they owed and the temple took an 80% loss on its principal.

(Clearly they did not have Janet Yellen or Ben Bernanke to print money and bail out the system…)

As the saying often attributed to Mark Twain goes, “History doesn’t repeat itself but it often rhymes.”

Sometimes history rhymes with surprising frequency.

Argentina has made a long habit of defaulting on their obligations; it’s happened 7 times in the last 200 years.

And now, just 13 years after their last default, there’s serious risk they’ll do so again.

Back in 2001, the Argentine economy all but collapsed. In a matter of days, the country went from mild recession to full-blown economic crisis.

The currency went into freefall. Police were out in the streets shooting protestors. Unemployment and crime rates soared overnight. And the nation defaulted on its debt—a record amount at the time.

Since then, they’ve worked out arrangements to gradually repay most of the bondholders about 30 cents on the dollar, and they’ve already started making interest payments.

But a small minority of bondholders refused that offer. They’re called ‘holdouts’. And they want more.

These holdouts have now been handed a major legal victory from none other than the US Supreme Court (the bonds were written under US law, so technically US courts have jurisdiction).

The decision prohibits Argentina from making any further interest payments to the bondholders they’ve already agreed with until they reach a settlement with the holdouts.

The last payment was due on June 30, so Argentina is already past due.

They have a 30-day grace period to resolve the matter, otherwise the nation will be in default once again.

Candidly, there’s no good way out of this.

Argentina’s economy is in recession again. Foreign reserves are drying up.

And even though the government claims tax revenues are rising, Argentina’s legendary inflation has caused the peso to depreciate by 20% against the dollar so far this year.

So on a US-dollar basis, tax revenues are falling.

There’s no good way out of this for Argentina.

If they reach a deal with the holdouts, it will take a nasty chunk of money out of their reserves.

More importantly, the RUFO clause (Rights Under Further Offers) means that if Argentina DOES reach a settlement with the holdouts, everyone else can line up for the same deal.

That could cost north of $100 BILLION, over 20% of GDP. They simply don’t have the money.

Yet if they don’t reach a deal with the holdouts, they’ll be in default in just three weeks’ time.

Either way, it likely means a fresh round of desperate measures—capital controls, price controls, and credit controls.

Most people in the country are too distracted with the national team’s World Cup performance to notice.

But ignoring the problem doesn’t make it go away. Sooner or later reality bites.

Bear in mind, Argentina was one of the wealthiest countries in the world a century ago– strong and stable with vast natural resources.

These things change. And the warning signs are all there.

The objective data tells us that Argentina is bankrupt… in the same way that the objective data tells us that most of the West is bankrupt.

Most of the West has borrowed far more than they’re credibly able to pay back; the US, France, Spain, etc. all have to borrow money just to pay interest on the money they’ve already borrowed.

In light of this data, it’s imperative to make sure that you’re not tied to a single system, a single bankrupt nation.

If you live, work, bank, invest, own real estate, operate a business, etc. all in the same country, you are essentially betting your entire livelihood on that one country.

Again, given the data, that’s quite a risk to be taking.

Spreading a portion of your assets and savings across healthy jurisdictions substantially reduces this risk.

If the worst happens—default, capital controls, price controls, bank failures, substantial inflation, etc. then your life won’t be turned upside on the whims of some politician.

Yet even if none of the darkest scenarios come true, you won’t be worse of for having taken these steps.

What’s paramount is to prepare and have options before you need them, and not end up scrambling when disaster strikes. At that point, it will be far too late.

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July 9, 2014
Erbil, Iraq

It’s been nearly 1,000 years since Iraq had some positive momentum.

Back then, Europe had plunged into the Dark Ages where intellectual and economic progress all but halted.

Baghdad, on the other hand, was the most exciting, cosmopolitan city in the world. It was the capital of the Abbasid Empire, and in their society, education was a virtue.

Scientific, technological, and intellectual achievements were highly celebrated.

Mega-libraries known as Houses of Wisdom were inaugurated all over the region. And in many cases, books were more valuable than even gold itself.

In one famous case, after they had defeated the Byzantine Empire in a long war and were negotiating a peace treaty, the Abbasids demanded annual payments of Greek manuscripts rather than gold.

But that was the peak.

In 1258, a Mongolian horde obliterated the city. They laid waste to the population, destroyed the libraries, and even threw the books into the river. It was said that the water turned black from all the ink.

The next 750+ years were not especially fortunate for this region. It took centuries to rebuild the population from the Mongol attack, during which time they were subjugated by a number of empires… or manipulated by meddlesome foreigners.

All of that external turmoil is finally behind them.

Obviously there are still internal challenges to sort out. But what they’re primarily left with here is tremendous oil wealth… and conditions for substantial economic growth.

One need look no further than here in the Kurdish region up north to get a sense of where this growth story is going.

In terms of sheer volume, most of Iraq’s oil is NOT in Kurdistan. But on a per-capita basis, there’s far more oil here than anywhere else in the country… especially now that they control Kirkuk.

That oil has driven fixed asset investment on a nearly unmatched scale. The amount of construction and infrastructure projects here far surpasses that of even China. Yet unlike China, these aren’t ghost cities. It’s real development.

Iraqi Kurdistan’s story is much closer to that of Myanmar, where I was just about two weeks ago.

Myanmar is emerging from decades of economic isolation and a total lack of development. The opening of trade and foreign investment has spawned an incredible boom there.

Both places are undergoing rapid transformation. But one primary difference is that Kurdistan has a more advanced base to start from. This place is not destitute. There’s already been quite a lot of development.

Moreover, the oil wealth here provides a much more rapid catalyst to growth.

Oil is the obvious play for many foreign investors. You might remember Tony “I want my life back” Hayward, for example.

After he got the heave-ho as CEO of BP for his bungling of the gulf coast oil spill a few years ago, Mr. Hayward joined a private company bankrolled by Nathaniel Rothschild, scion of the famous banking family.

The company became Genel Energy… which at the moment happens to be one of the biggest players in the Kurdish oil fields.

More and more companies are starting to produce here. And with good cause.

The Kurdish government has been exceptionally motivated to negotiate favorable concessions with foreigners. Plus tax rates are as low as 0% to 5% (for people who actually pay them).

There’s little doubt this place is becoming a veritable boom town. And that makes all the non-oil investments even more interesting.

Real estate. Retail. Finance. Capital equipment. These sectors all do well in periods of massive economic growth.

A decade from now, Kurdistan will look completely different than it does today– both politically and economically. And that’s seriously exciting.

In terms of the landscape, I imagine it will be like Dubai’s rapid transformation from a sleepy desert outpost to a cosmopolitan business hub. It only took about 10-15 years.

Yet Kurdistan has a major advantage– there’s potentially ten times more oil here than in Dubai. But both have essentially the same size population.

This is the mother of all rising tides. And a lot of people are going to make a lot of money. It’s definitely a place to keep on your radar.

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July 8, 2014
Erbil, Iraq

More than eleven years ago, I was among tens of thousands of troops baking in the hot sun of the Kuwaiti desert waiting for George W. Bush to make his ‘decision’.

Of course it was total baloney. The decision to invade Iraq had already been made. They just needed more time to spin their story about WMDs… and to promise the American media ‘Shock and Awe’.

The were right about the latter: the forces assembled in Kuwait constituted one of the most well-trained, well-equipped in the history of warfare.

And it was just a matter of weeks before CFLCC (Coalition Forces Land Component Command, pronounced ‘see flick’) had taken control of most of Iraq.

From a tactical perspective, this was nothing short of a modern miracle– the act of marshalling so many resources forward against enemy opposition is no small feat.

And as I’ve been back in this region for the last several days, I can’t shake that thought.

Because the story we’re being told now is that this militant group IS (same as ISIL, or ISIS) was able to take over nearly half of Iraq… in a matter of days.

This just doesn’t make sense.

IS rolled into Mosul with little more than pickup trucks and small arms, and they defeated a force nearly 20 times their size.

Granted, the Iraqi military isn’t exactly the world’s most elite.

A recent delegation from the United States came to Iraq a few weeks ago and judged the military to be mostly ‘combat ineffective’. Er, we can just file that one away under “no sh*t, Sherlock”…

This isn’t particular to Iraq, the entire region is in the same boat. The Saudi and Kuwaiti militaries are so undisciplined I expect they could be defeated by a crack paintball squad.

But we’re not talking about a tactically superior underdog besting an unwieldy, incompetent opponent… or some drawn-out, demoralizing guerilla war waged by clever insurgents.

We’re talking about straight up conventional warfare– an IS ‘army’ of 23-year old kids vs. Iraq’s conventional ground units, armored vehicles, militia, gunships and other air assets.

Even presuming that IS would eventually beat the pants off the Iraqi military, the speed with which they accomplished this is hardly credible, especially compared to the 2003 US campaign.

It doesn’t add up. And yet IS has taken city after city this way.

Not to mention, the Kurdish intelligence chief had even handed over reports back in January to the CIA, MI6, and Iraqi military, indicating that a large militant force would attempt to invade northern Iraq.

Bottom line, I expect there’s far more to this story than we’re being told… much in the same way that there’s far more than just the ‘chaos’ story that dominates the headlines.

In any situation, there are always winners and losers… so whether IS has plunged Iraq into ‘chaos’ really depends on who you ask.

The US government obviously holds the view that Iraq is disintegrating. But their fundamental premise is deeply flawed.

Iraq shouldn’t even exist. This country was conjured out of thin air by European bureaucrats after the first World War with no regard for ethnic or traditional boundaries.

British diplomat Sir Mark Sykes, an architect of Iraq, was reported to have looked over a map of the region and remarked, “I should like to draw a line from the ‘e’ in Acre to the last ‘k’ in Kirkuk.”

US politicians might call this chaos and insist that “a united Iraq is a stronger Iraq…”

But it only seems natural that a nation born from such imperialistic dogma should break apart.

Meanwhile, if you ask the Kurds, they’ll tell you things are going remarkably well.

From where I sit right now, IS forces are within a few dozen miles on three sides. But there is hardly a tenor of concern here in Erbil.

Aside from a few normal checkpoints, there has been no security clampdown, public or private.

Last night at a restaurant my friends and I passed through a metal detector… only to find that it wasn’t even plugged in. And I ran into a ‘guard’ armed with nothing more than a whistle yesterday morning.

Much of this stems from supreme confidence in the Kurdish militia (Peshmerga), a well-equipped, force that numbers into the hundreds of thousands. And they’re just as committed as IS militants.

It was Peshmerga that took oil-rich Kirkuk a few weeks ago after Iraqi units abandoned the city (again, IS wasn’t even anywhere near the place… quite odd).

So in just a month’s time, the Kurds have managed to assert their autonomy, increase their oil holdings, take back their traditional capital (Kirkuk), and maintain security.

This is definitely NOT chaos.

Quite the opposite. This country has some of the most compelling opportunity in the world right now. More on that tomorrow.

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July 7, 2014
London, England

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

Lord Overstone said it best. “No warning can save people determined to grow suddenly rich.”

Case in point– CYNK Technology Corp, a listed company that as of this morning has a market capitalization in excess of $1 BILLION.

According to official filings, the social media development company had one employee, no website, no revenue, no product, and no assets.

What has effectively united this company with prudent investors is today’s central banker.

Andy Haldane, the chief economist for the Bank of England, conceded last week that ultra-accommodative monetary policy had “aided and abetted risk-taking” by investors.

But to the central bank, it was worth using higher asset prices to stimulate the economy:

“That is how [monetary policy] is meant to work. That’s why we did it.”

Central bankers, of course, will not be held accountable when the crash finally hits, even if the accumulated dry tinder of the boom was almost entirely of their own creation.

Last week the Bank for International Settlements, the central banker for central banks, issued an altogether more circumspect analysis of the world’s current financial situation, in their annual report.

It concluded with an entirely welcome sense of caution against monetary policy’s “diminished effectiveness and side effects.”

Translation: ZIRP (Zero Interest Rate Policy – and in the case of the European Central Bank, which has taken rates negative, NIRP) is no longer working – if it ever did.

Hyper-aggressive monetary policy has side effects. Getting out of this mess is not going to be easy, and it’s going to be messy.

In an interview with fund manager John Hussman, Professor Robert Shiller summed up the situation in the markets right now:

“I am definitely concerned. When was [the cyclically adjusted P/E ratio or CAPE] higher than it is now? I can tell you: 1929, 2000 and 2007.”

And Hussman:

“The central thesis among investors at present is that they have no other choice but to hold stocks, given the alternative of zero short-term interest rates and long-term interest rates well below the level of recent decades…”

“Investment decisions driven primarily by the question ‘What other choice do I have?’ are likely to prove regrettable. What we now have is a market that has been driven to one of the four most extreme points of overvaluation in history. We know how three of them ended.”

If one chooses to invest at all, invest on the basis of valuation. Pay money. Take choice.

As an example of the sort of valuations currently available away from the herd, consider the following. You can buy the US S&P 500 index today with the following metrics:

Price / earnings: 18.2
Price / book: 2.76
Dividend yield: 1.89%

Meanwhile, Greg Fisher in his Halley Asian Prosperity Fund (which is currently closed) is buying quality businesses throughout Asia on far more attractive valuations:

Average price / earnings: 7
Average price / book: 0.8
Average dividend yield: 4.5%.

But the realistic prospect of growth is also on the table. The fund’s average historic return on equity stands at 15%.

The conclusion seems clear to us.

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