South Africa’s brand new president wants to confiscate land from white farmers

Sovereign Man
South Africa’s brand new president wants to confiscate land from white farmers

If you’ve been following much international news, you’ve probably heard that, after literally years of scandal, abuse, and incompetence, South Africa’s president Jacob Zuma was finally forced to resign last week.

This is a big deal for South Africa.

The country has been suffering for nearly a decade under Zuma’s corruption.

And people are certainly hoping that the new President, Cyril Ramaphosa, will represent a positive, new chapter for South Africa.

Yesterday Ramaphosa addressed the nation’s parliament in Cape Town and made clear that his priority is to heal the divisions and injustice of the past, going all the way back to the original European colonists in the 1600s taking land from the indigenous tribes.

Ramaphosa called this “original sin”, and stated that he wants to see “the return of the land to the people from whom it was taken… to heal the divisions of the past.”

How does he plan on doing that?

Confiscation. Specifically– confiscation without compensation.

The expropriation of land without compensation is envisaged as one of the measures that we will use to accelerate redistribution of land to black South Africans.

Ramaphosa minced no words: he’s talking about taking land from white farmers and giving it to black South Africans.

Astonishingly, he followed up that statement by saying, “We will handle it in a way that is not going to damage our economy. . .”

Wow, what a relief. For a minute it sounded like South Africa wants to do what Zimbabwe did several years ago.

Oh wait a minute.

That’s exactly what Zimbabwe did.

Seeking to correct similar colonial and Apartheid-era injustices in his country, Zimbabwe’s president Robert Mugabe initiated a land redistribution program in 1999-2000.

Thousands of white-owned farms were confiscated by the government, and the farmers were forced out.

Bear in mind that Zimbabwe used to be known as the breadbasket of southern Africa. Zimbabwe’s world-class farmers were major food exporters to the rest of the region.

But within a few years of Mugabe’s land distribution, food production plummeted.

Without its professional, experienced farmers, the nation went from being an agricultural export powerhouse to having to rely on handouts from the United Nations’ World Food Programme.

Hyperinflation and a multi-decade depression followed.

If there’s an economic model in the world that you DON’T want to follow, it’s Zimbabwe.

And you’d think that the politicians in neighboring South Africa would know that.

They had a front-row seat to the effects of Mugabe’s land redistribution, not to mention they had to absorb millions of starving Zimbabwean refugees who came across their borders.

Yet this is precisely the policy that they want to adopt.

However you might feel about social justice, it seems pretty clear that copying Zimbabwe is a pretty stupid idea… and will only end up hurting the people they claim to be helping.

Yet the president claims that they want to initiate a land redistribution program that won’t impact the economy or South Africa’s food security.

Yeah sure. And I want to be the starting quarterback of the Dallas Cowboys next season.

But sadly you won’t see Simon Black throwing any touchdown passes anytime soon.

That’s because we have to live in a world with certain realities and limitations.

One of those realities is that land distribution, even if you believe the intentions to be noble, never works.

And of course, the most important reality is that anyone who willfully chooses to copy Zimbabwe’s economic model deserves to suffer the consequences of their stupidity.

[You can watch his remarks yourself here: the fun starts around 30:45]

President Cyril Ramaphosa responds to SONA2018 debate
by Africa News Network 7 TV on YouTube

 Trends & News
Meet the Italian government’s Orwellian new automated tax snitch

Sovereign Man
Meet the Italian government’s Orwellian new automated tax snitch

By the end of the 3rd century AD, the finances of ancient Rome were in terminal crisis.

Years and years of debasing the currency had resulted in severe hyperinflation– a period of Roman history known as the Crisis of the Third Century (from AD 235 through AD 284).

During the time of Julius Caesar, for example, the Roman silver denarius coin was nearly 98% pure silver.

Two centuries later in the mid-100s AD, the silver content had fallen to 83.5%.

And by the late 200s AD, the silver content in the denarius was just 5%.

As the money continued to be devalued, prices across the Empire skyrocketed.

Wheat, for example, rose in price by over 4,000% during the first three decades of the third century.

Rome was on the brink of collapse. And when Emperor Diocletian came to power at the end of the third century, he tried to stabilize the economy with his ill-fated Edict on Wages and Prices.

Diocletian’s infamous decree fixed the price of everything in the Empire. Food. Lumber. Salaries. Everything.

And anyone caught violating the prices set forth in his edict would be put to death.

Another one of Diocletian’s major policies was reforming the Roman tax system.

He mandated widespread census reports to determine precisely how much wealth and property each citizen had.

They counted every parcel of land, every piece of livestock, every bushel of wheat, and demanded from the population increasing amounts of tribute.

And anyone found violating this debilitating tax policy was punished with– you guessed it– the death penalty.

Needless to say, Diocletian’s reforms didn’t work.

Every high school economics student knows that wage and price controls don’t work… and that excessive taxation bankrupts the population.

But that doesn’t stop governments from trying the same tactics over and over again.

Fast forward about seventeen centuries and Italy is once again in the same boat.

The Italian government is one of the most bankrupt in the world; its debt level is an unbelievable 132% of GDP– and rising.

In other words, the Italian government’s debt is substantially larger than the value of the entire Italian economy.

It’s almost as bad as Greece, and it grows worse each year as the national government routinely runs budget deficits.

Their only solution, of course, is hiking taxes and increasing regulation… exactly the opposite of what they should be doing.

And, just like the ancient Romans, the government is on a witch hunt for anyone they think (in their sole discretion) might be dodging taxes.

They already have a system in place called the redditometro, an automated tool for the tax authorities to comb through income and expense records of Italian residents.

The algorithm finds anyone whose expenses were higher than his/her income and presumes that s/he has been evading taxes.

The irony here is pretty profound given that the Italian government itself has expenses that are higher than its income.

After all, that’s how it ended up with such a prodigious debt level.

Earlier this month, however, the Italian tax authorities rolled out a brand new tool called risparmiometro. And this one is really insidious.

Risparmiometro goes through ALL financial records– credit card transactions, bank accounts, investment accounts, etc. to determine whether or not someone has too much savings relative to his/her occuption.

Think of the implication.

Under the redditometro system, if you spend too much money, they think you’re evading taxes.

But under the risparmiometro system, if you save too much money, they think you’re evading taxes.


But it gets better.

Risparmiometro (the new tool) also looks at bank activity to see how frequently you’re using the account.

And if you’re not using the account frequently enough, the government assumes that it’s because you’re dealing in cash… and evading taxes.

I have no doubt that there’s a substantial amount of tax evasion in Italy.

I spend several weeks in the country every summer, and I see how much people and businesses are suffering.

And they’re definitely coming up with creative ways to survive.

But rather than take the necessary steps to liberate the economy, the government continues to double down on more taxes and more regulation… and then invest their remaining energy to develop new tools to spy on their citizens.

Two key points here:

1) Nearly ALL bankrupt governments invariable resort to this tactic at some point.

2) It’s also a great way to engineer a banking crisis.

Think about it– Italy’s banks are already teetering on collapse. Some have already failed, others are almost there.

If Italians know that the government is spying on every transaction they make (or don’t make), who in his/her right mind would want to keep money in an Italian bank?

Anyone with half a brain will be moving funds to Switzerland or Austria.

Italy’s banks are so fragile, though, that they won’t be able to survive if even a small percentage of their depositors flee.

So as the Italian government rolls out this new tool in the latest campaign of its tax jihad, they’re all but guaranteeing widespread bank failure.

It’s genius.

 LM: Tax Reduction  Taxes
088: The dangerous, false logic of “Common Sense”

Sovereign Man
088: The dangerous, false logic of “Common Sense”

On the morning of May 18, 1927 in Bath Township, Michigan, a 55-year old municipal worker named Andrew Kehoe used a timed detonator to set off a bomb he had planted at the local school.

Kehoe was Treasurer of the School Board, so he had unfettered access to the school.

According to friends and neighbors, he was having personal issues with his wife (who he had murdered days prior) and extreme financial difficulties. He was also severely disgruntled about having lost a local election the previous autumn.

Whatever his reasons, Kehoe took out his rage on the 38 schoolchildren he killed that day.

It remains the deadliest attack on a school in US history.

Sadly, it wasn’t the first– there were numerous reports of school shootings throughout the 1800s and before.

And as we all know too well, it wouldn’t be the last.

Last week’s shooting in Florida is another tragic stain in the pages of US history. And it’s completely understandable that emotions are running high now.

People are demanding action. They want their government to “do something.”

The problem, of course, is what we’ve been talking about so far this year in our daily conversations: emotional decisions tend to be bad decisions– and that includes public policy.

We keep hearing the phrase “Common Sense Gun Laws,” for example.

And that certainly sounds reasonable. Who could possibly be against common sense?

[As an aside, I do wonder why “common sense” is only reserved for the gun control debate. Why doesn’t anyone demand common sense airport security? Or a common sense federal budget?]

But it’s never quite so simple.

Many of these “common sense” solutions are emotional reactions.

As an example, the Florida shooter in last week’s tragedy is only 19 years old. So now one of the proposals being tossed around is to have a minimum age limit to be able to purchase a firearm.

I suppose if the shooter happened to have been 70 years old, people would be talking about having a maximum age limit instead.

Yet neither of these “common sense solutions” really solves the problem.

A big part of this is because no one really knows what’s causing the problem to begin with.

We know that there are far too many people committing acts of violence in schools and other public places.

And, sure, a lot of the time they use firearms. But we’re also seeing murderous rampages with cement trucks, U-Hauls, and everyday appliances like pressure cookers.

Any of these can be turned into a weapon of mass destruction.

But the debate only focuses on firearms.

One side presupposes that more regulations and fewer guns will make everyone safer.

The other side of the debate, of course, argues that more guns and fewer regulations will make everyone safer.

The reality is that there’s no clear evidence that either side is correct.

Australia is often held up as an example of a nation that passed strict gun laws (including confiscation) in 1996 following several mass shootings.

And yes, gun violence dropped precipitously. Australia now has one of the lowest murder rates in the world.

But contrast that with Serbia, for example, which is the #2 country in the world in terms of guns per capita (the US is #1).

Serbia has a strong gun culture and fairly liberal laws. Yet its gun violence rate is incredibly low, on par with Australia’s.

There are plenty of examples in the world of places that passed strict gun laws, and violence decreased (Colombia).

Others where violence INCREASED after passing strict gun laws (Venezuela, Chicago).

Other examples of places which have LOW levels of gun violence, yet liberal laws (Serbia). And still others with LOW levels of gun violence and fairly strict laws (Chile).

The point is that you can look at the data 10,000 different ways and never really find a clear correlation. So there HAS to be something else going on.

Is it cultural? Perhaps.

Japan, for example, has extremely strict firearms laws. You can’t even own a sword without special permission.

And Japan, of course, has very limited gun violence. But this is not a violent culture to begin with.

You probably recall back in 2011 after the devastating earthquake and tsunami, Japanese people sat quietly outside of their collapsed homes and waited for authorities. No looting. No pillaging.

Contrast that with the city of Philadelphia earlier this month, where people were out rioting, looting, and setting property on fire… simply because their football team won the Super Bowl.

Perhaps there’s something about the US that has people so tightly wound they dive into violence at the first opportunity.

Maybe it’s all the medication people take. Or the crap in their food. Who knows. But it’s worth exploring the actual SOURCE of the problem rather than treating a symptom.

The larger issue, though, is that this “common sense” mantra is tied exclusively to LAWS.

Guess what? There are already laws, rules, regulations, and procedures on the books. They’re not working.

In the November 2017 mass shooting in Sutherland Springs, Texas, the shooter was able to purchase weapons because the Air Force erroneously failed to record his military court-martial.

And with the Florida shooting, the FBI had the suspect on a silver platter and did nothing.

It’s clear that the laws on the books aren’t being properly implemented. Yet the solution people want is MORE LAWS.

How about better execution? How about applying that all-important “common sense” to the way laws are carried out?

This is conspicuously missing from the debate.

There’s almost no conversation about what’s actually CAUSING the violence.

Instead, people are focused on a manifestation of that problem (guns) and demanding more laws to control that symptom even though the existing laws are being pitifully executed.

This is a pretty horrendous way to solve a problem.

[We discuss this more in today’s podcast, along with plenty of other extremely uncomfortable realities. Listen in here.]

Bitcoin back above $10,000

Sovereign Man
Bitcoin back above $10,000

Cryptocurrencies exist in dog years.

That’s how my colleague Tama Churchouse explained the rapid innovation and massive volatility in bitcoin and other cryptocurrencies.

The technology is advancing so quickly that one year in the crypto sector is like seven years anywhere else.

And the price action reflects this breakneck pace.

Bitcoin returned 1,318% in 2017. The S&P 500, for comparison, returned less than 19%.

But bitcoin’s rise comes with massive volatility…

After hitting its all-time high of nearly $20,000 on December 17, bitcoin plummeted 65% to $6,914 on February 5.

Yesterday, the price of bitcoin rose back above $10,000 – a 46% rally.

The crypto skeptics were calling for the end of bitcoin as the price plunged. The ideologues brushed it off as a natural correction.

The truth is, nothing goes up in a straight line. Bitcoin had gone beyond parabolic in 2017 – rising from $5,800 to nearly $20,000 in just over one month from November to December.

And the rise was largely driven by emotional, retail buyers. You probably heard the “reports” that bitcoin was all anyone discussed over Thanksgiving. Coinbase, the largest crypto brokerage, reportedly added 100,000 accounts over the holiday.

As you know, I don’t pay attention to bitcoin’s price.

I only pay attention to the supply/demand dynamics.

There will only ever be 21 million bitcoin in existence. So, ultimately, demand will drive the market.

And I believe demand for bitcoin and other cryptocurrencies will be higher in the future.

Going back to bitcoin existing in dog years… Who knows what technological advances we’ll see in the sector over the next decade.

Venture capitalist Marc Andreesen, the founder of the first, consumer web browser Netscape, says one of his biggest regrets was not building a native payment system into the web (instead, we just use our credit cards to buy goods online today).

Imagine the next time you saw a pair of shoes you liked online, you could simply click a button and seamlessly send a fraction of a bitcoin to pay for them (instead of going through the typical check out process and entering all of your personal and credit card info).

Andreesen tried to make that happen. The original hypertext transfer protocol (http) included a code for payments. For example, you’ve seen the 404 error code when a website isn’t found. But there’s also a code 10.4.4 402 designated as “payment required.” It never went live.

In 2015, Coinbase CEO Brian Armstrong said he’s working toward that goal…

“It would be a Chrome extension or a fork of Firefox or Chrome that would carry a balance of bitcoin inside the browser,” Armstrong told WIRED. “Then we would create some websites—or encourage the creation of them—that would bring back the 402 code.”

Armstrong gave the example of a news site that cuts off its content in the middle, then asks if you’d like to finish reading the article. With this payment system, you could simply click “OK” and it would automatically debit a small fee from your crypto wallet.

There’s also talk in the crypto world of “tokenizing everything.” It’s just a way of securitizing assets with digital tokens on the blockchain. You could own and trade portions of cash flowing real estate, art, businesses and anything else via a digital token.

It would open up markets in historically illiquid assets and assets that are difficult to title, transfer and/or divide.

Even though the technology is advancing at a rapid pace, and the implications are staggering, it’s still likely that most crypto assets will be worthless in the future.

It’s important to consider the utility of any crypto you own or are considering buying. And you must have a bias toward quality.

In my discussion with Tama, he said he believes 2018 will be the year when the crypto markets bifurcate. Participants will start paying much more attention to the quality of the assets they’re buying… the garbage will get thrown out.

I’d encourage you to listen to my full discussion with Tama. He believes now, after the pullback, is a good time to buy “blue chip” crypto assets.

You can tune in here.

 LM: Crypto Currency  Investing
Terrified of Bitcoin, banks forced to innovate for the first time in 40+ years

Sovereign Man
Terrified of Bitcoin, banks forced to innovate for the first time in 40+ years

Yesterday morning, several banks in Australia started rolling out a new payment system they’re calling NPP, or “New Payments Platform.”

Until now, sending a domestic funds transfer in Australia from one bank to another could take several days. It was slow and cumbersome.

With NPP, payments are nearly instantaneous.

And rather than funds transfers being restricted to the banks’ normal business hours, payments via NPP can be scheduled and sent 24/7.

You can also send money via NPP to mobile phones and email addresses. So it’s a pretty robust system.

Across the world in the United States, the domestic banking system has been working on something similar.

Domestic bank transfers in the Land of the Free typically transact through an electronic network known as ACH… another slow and cumbersome platform that often takes 2-5 days to transfer funds.

It’s pretty ridiculous that it takes more than a few minutes to transfer money. It’s 2018! It’s not like these guys have to load satchels full of cash onto horse-drawn wagons and cart them across the country.

(And even if they did, I suspect the money would reach its destination faster than with ACH…)

Starting late last year, though, US banks very slowly began to roll out something called the Real-time Payment system (RTP), which is similar to what Australian banks launched yesterday.

[That said, the banks themselves acknowledge that it could take several years to fully adopt RTP and integrate the new service with their existing online banking platforms.]

And beyond the US and Australia, there are other examples of banking systems around the world joining the 21st century and making major leaps forward in their payment system technologies.

It seems pretty clear they’re all playing catch-up with cryptocurrency.

The rapid rise of Bitcoin and other cryptocurrencies proved to the banking system that it’s possible to conduct real-time [or near-real-time] transactions, and not have to wait 2-5 days for a payment to clear.

Combined with other new technologies like Peer-to-Peer lending platforms, fundraising websites, etc., consumers are now able to perform nearly every financial transaction imaginable– deposits, loans, transfers, etc.– WITHOUT using a bank.

And it’s only getting better for consumers… which means it’s only getting worse for banks.

All of these threats from competing technologies have finally compelled the banks to innovate– literally for the FIRST TIME IN DECADES.

I’m serious.

When the CEO of the company launching RTP in the US announced the platform, he admitted that the “RTP system will be the first new payments system in the U.S. in more than 40 years.”

That’s utterly pathetic. The Internet has been around for 25 years. Even PayPal is nearly 20 years old.

Yet despite the enormous advances in technology over the past several decades, the last major innovation in bank payments was back when Saturday Night Fever was the #1 movie in America.

Banks have been sitting on their laurels for decades, enjoying their monopoly over our savings without the slightest incentive to improve.

Cryptocurrency has proven to be a major punch in the gut. The entire banking system keeled over in astonishment over Bitcoin’s rise, and they’ve been forced to come up with an answer.

And to be fair, the banks have reclaimed the advantage for now.

NPP, RTP, and all the other new protocols are faster and more efficient than most cryptocurrencies.

Bitcoin, for example, can only handle around 3-7 transactions per second. Ethereum Classic maxes at around 15 transactions per second. Litecoin isn’t much better.

By comparison, there were 25 BILLION funds transfers in 2016 using the ACH network in the US.

Based on the typical holiday schedule and the banks’ 8-hour working days, that’s an average “throughput” of roughly 3500 transactions per second.

So, now that banks have finally figured out how to conduct thousands of transactions per second in real-time, they clearly have superiority.

But that superiority is unlikely to last.

It takes banks decades to innovate. They have enormous bureaucratic hurdles to overcome. They have endless committees to appease, including the Federal Reserve’s “Faster Payments Task Force.”

And most importantly, given that most banks are still using absurdly antiquated software, any new systems they develop have to be carefully designed for backwards compatibility.

Cryptofinance and other financial technology companies have no such limitations.

As my colleague Tama mentioned in the podcast we released yesterday, the cryptocurrency space sort of exists in ‘dog years’.

Things move so quickly that one year in crypto is like 7 years for any other industry.

Right now there is almost a unified push across the crypto sector to solve the ‘scalability’ problem, i.e. to securely transact a near limitless number of transactions in real time.

Those solutions will almost undoubtedly come from technologies that you haven’t heard very much about yet.

Hashgraph and Radix, for example, are two such ventures working on extremely elegant payment solutions that break the mold of previous cryptos.

Rather than build upon standard cryptocurrency concepts like blockchain, Proof of Work, and Proof of Stake, both Hashgraph and Radix have created their own algorithms from scratch.

This is the bleeding edge of the bleeding edge of a massively disruptive sector that has existed for less than a decade.

And there are literally dozens of other companies and technologies aiming for similar heights.

Some of them will undoubtedly succeed. And still other ventures that won’t even be conceived for years will have yet more disruptive power in the future.

The banks don’t stand a chance. The future of finance absolutely belongs to crypto.

 Trends & News
You won’t want to miss this crypto podcast

Sovereign Man
You won’t want to miss this crypto podcast

As I write this, bitcoin is trading at $8,600.

That’s down more than 50% from the December highs of $20,000.

But is this selloff a natural correction, or something to be worried about?

That’s one of the questions I ask my guest Tama Churchouse in today’s podcast.

Tama was an investment banker for a decade, most recently with JPMorgan. Then he went on to manage a family office. And in 2013, he started buying and learning about bitcoin.

He started writing a small note to friends and family about the crypto market and it caught on. He decided to make it a full-time job.

And that’s led Tama to become one of the most connected writers/investors in the crypto space.

He actually just returned from one of the most exclusive crypto gatherings in the world… It’s called the Satoshi Roundtable. It’s invitation only and about 100 people make the cut.

The attendees are CEOs of major crypto firms and some of the core developers for major cryptos – it’s the who’s who of the industry.

Tama was invited because he serves on the board of one of the top blockchain firms in the world.

And during our discussion, he shares a few insights from what he heard in these closed-door meetings (and how these leaders in the field, many of whom are billionaires, feel about the crypto selloff).

Tama also explains why he thinks bitcoin is here to stay, but why 95% of all cryptos will ultimately be worth zero.

As you know, I’ve been writing a lot this year about avoiding big mistakes.

We discuss this in regard to crypto and Tama shares what he thinks is the easiest way to avoid making big mistakes in the sector.

And, of course, Tama and I share what we think 2018 holds for the crypto market (his view on this is great – it’s something I hadn’t heard before).

This is one of the best podcasts I’ve recorded in awhile. And I’d encourage you all to check it out.

I always tell people to learn as much as possible about crypto before buying even one cent of bitcoin. And I guarantee you’ll leave this podcast better-educated and more informed on the crypto space.

You can tune in here.

 LM: Crypto Currency  Podcast
087: You won’t want to miss this crypto podcast

Sovereign Man
087: You won’t want to miss this crypto podcast

As I write this, bitcoin is trading at $8,600.

That’s down more than 50% from the December highs of $20,000.

But is this selloff a natural correction, or something to be worried about?

That’s one of the questions I ask my guest Tama Churchouse in today’s podcast.

Tama was an investment banker for a decade, most recently with JPMorgan. Then he went on to manage a family office. And in 2013, he started buying and learning about bitcoin.

He started writing a small note to friends and family about the crypto market and it caught on. He decided to make it a full-time job.

And that’s led Tama to become one of the most connected writers/investors in the crypto space.

He actually just returned from one of the most exclusive crypto gatherings in the world… It’s called the Satoshi Roundtable. It’s invitation only and about 100 people make the cut.

The attendees are CEOs of major crypto firms and some of the core developers for major cryptos – it’s the who’s who of the industry.

Tama was invited because he serves on the board of one of the top blockchain firms in the world.

And during our discussion, he shares a few insights from what he heard in these closed-door meetings (and how these leaders in the field, many of whom are billionaires, feel about the crypto selloff).

Tama also explains why he thinks bitcoin is here to stay, but why 95% of all cryptos will ultimately be worth zero.

As you know, I’ve been writing a lot this year about avoiding big mistakes.

We discuss this in regard to crypto and Tama shares what he thinks is the easiest way to avoid making big mistakes in the sector.

And, of course, Tama and I share what we think 2018 holds for the crypto market (his view on this is great – it’s something I hadn’t heard before).

This is one of the best podcasts I’ve recorded in awhile. And I’d encourage you all to check it out.

I always tell people to learn as much as possible about crypto before buying even one cent of bitcoin. And I guarantee you’ll leave this podcast better-educated and more informed on the crypto space.

You can tune in here.

 LM: Crypto Currency  Podcast
This may be the beginning of the Great Financial Reckoning

Sovereign Man
This may be the beginning of the Great Financial Reckoning

Less than two weeks ago, the United States Department of Treasury very quietly released its own internal projections for the federal government’s budget deficits over the next several years.

And the numbers are pretty gruesome.

In order to plug the gaps from its soaring deficits, the Treasury Department expects to borrow nearly $1 trillion this fiscal year.

Then nearly $1.1 trillion next fiscal year.

And up to $1.3 trillion the year after that.

This means that the national debt will exceed $25 trillion by September 30, 2020.

Remember, this isn’t some wild conspiracy theory. These are official government projections published by the United States Department of Treasury.

This story alone is monumental– not only does the US owe, by far, the greatest amount of debt ever accumulated by a single nation in human history, but $25 trillion is larger than the debts of every other nation in the world combined.

But there are other themes at work here that are even more important.

For example– how is it remotely possible that the federal government can burn through $1 trillion?

Everything is supposedly totally awesome in the United States. The economy is strong, unemployment is low, tax revenue is at record levels.

It’s not like they had to fight a major two front war, save the financial system from an epic crisis, or battle a severe economic depression.

It’s just been business as usual. Nothing really out of the ordinary.

And yet they’re still losing trillions of dollars.

This is pretty scary when you think about it. What’s going to happen to the US federal deficit when there actually IS a financial crisis or major recession?

And none of those possibilities are factored into their projections.

The largest problem of all, though, is that the federal government is going to have a much more difficult time borrowing the money.

For the past several years, the government has always been able to rely on the usual suspects to loan them money and buy up all the debt, namely– the Federal Reserve, the Chinese, and the Japanese.

Those three alone have loaned trillions of dollars to the US government since the end of the financial crisis.

The Federal Reserve in particular, through its “Quantitative Easing” programs, was on an all-out binge, buying up every long-dated Treasury Bond it could find, like some sort of junkie debt addict.

And both Chinese and Japanese holdings of US government debt now exceed $1 trillion each, more than double what they were before the 2008 crisis.

But now each of those three lenders is out of the game.

The Federal Reserve has formally ended its Quantitative Easing program. In other words, the Fed has said it will no longer conjure money out of thin air to buy US government debt.

The Chinese government said point blank last month that they were ‘rethinking’ their position on US government debt.

And the Japanese have their own problems at home to deal with; they need to scrap together every penny they can find to dump into their own economy.

Official data from the US Treasury Department illustrates this point– both China and Japan have slightly reduced their holdings of US government debt since last summer.

Bottom line, all three of the US government’s biggest lenders are no longer buyers of US debt.

There’s a pretty obvious conclusion here: interest rates have to rise.

It’s a simple issue of supply and demand. The supply of debt is rising. Demand is falling.

This means that the ‘price’ of debt will decrease, ergo interest rates will rise.

(Think about it like this– with so much supply and lower demand for its debt, the US government will have to pay higher interest rates in order to attract new lenders.)

Make no mistake: higher interest rates will have an enormous impact on just about EVERYTHING.

Many major asset prices tend to fall when interest rates rise.

Rising rates mean that it costs more money for companies to borrow, reducing their leverage and overall profitability. So stock prices typically fall.

It’s also important to note that, over the last several years when interest rates were basically ZERO, companies borrowed vast sums of money at almost no cost to buy back their own stock.

They were essentially using record low interest rates to artificially inflate their share prices.

Those days are rapidly coming to an end.

Property prices also tend to do poorly when interest rates rise.

Here’s a simplistic example: if you can afford the monthly mortgage payment to buy a $500,000 house when interest rates are 3%, that same monthly payment will only buy a $250,000 house when rates rise to 6%.

Rising rates mean that people won’t be able to borrow as much money to buy a home, and this typically causes property prices to fall.

Of course, higher interest rates also mean that the US government will take a major hit.

Remember that the federal government already has to borrow money just to pay interest on the money they’ve already borrowed.

So as interest rates go up, they’ll be paying even more each year in interest payments… which means they’ll have to borrow even more money to make those payments, which means they’ll be paying even more in interest payments, which means they’ll have to borrow even more, etc. etc.

It’s a pretty nasty cycle.

Finally, the broader US economy will likely take a hit with rising interest rates.

As we’ve discussed many times before, the US economy is based on consumption, not production, and it depends heavily on cheap money (i.e. lower interest rates), and cheap oil, in order to keep growing.

We’re already seeing the end of both of those, at least for now.

Both oil prices and interest rates have more than doubled from their lows, and it stands to reason that, at a minimum, interest rates will keep climbing.

So this may very well be the start of the great financial reckoning.

 Trends & News
Meet the world’s next central banker: Mark Zuckerberg

Sovereign Man
Meet the world’s next central banker: Mark Zuckerberg

Within the last week, Facebook announced a ban on all advertisements about bitcoin, initial coin offerings and other cryptocurrencies.

Facebook (along with Google) virtually controls Internet advertising. So their policies have enormous influence over consumer behavior.

Banning ICO advertisements on its platform, for example, will certainly have a negative impact on the amount of money flowing into new ICO’s.

Facebook said it instituted this ban to “protect its users” from financial scams in the cryptocurrency sector. At least, that’s the “official” reason.

And in fairness, there is a ridiculous amount of fraud out there — countless scammy ICO’s and appallingly stupid tokens and coins.

But it’s also possible that Facebook’s main driver in this move goes beyond its desire to protect the well-being of its nearly 2 billion users.

It was only a month ago that Mark Zuckerberg said Facebook would study encryption and the blockchain to “see how best to use them in our services.”

And one of the speakers at the crypto conference that one of our team members attended in New York City yesterday confirmed Facebook is investing a ton of capital into blockchain right now.

It stands to reason that Facebook’s decision to ban crypto advertisements may be rooted in eliminating its own competition, i.e. Facebook may be working on its own proprietary blockchain and cryprocurrency to deploy on its own platform.

One possibility is that Facebook could adopt a similar model to Steemit – a decentralized social network that operates on the blockchain.

It’s up to Steemit’s users to police the site, not a central authority. And the platform rewards its users for good content with small amounts of cryptocurrency and penalizes users for spam and “fake news.”

This would solve a huge problem for Facebook, which has already come under fire from governments across the world for not doing enough to moderate user content including “fake news,” “hate speech,” etc.

Facebook has already hired an army of content moderators, but this is barely been able to make a dent in solving the company’s problem.

So adopting a model like Steemit ,which rewards users with specialized crypto could certainly make sense.

This wouldn’t be the company’s first foray into the arena, either.

When social games like Farmville were popular (maybe they still are, who knows), gamers could pay for e-goods with an in-game currency. Then Facebook created its own currency for people to trade in and out of Farmville and other games.

A full-blown Facebook Token is the logical next step.

Given Facebook’s worldwide dominance, its tokens would have the potential to become enormously popular, practically overnight, and used in everyday transactions in the real world.

The big hope with Bitcoin is that it may one day disrupt conventional fiat currencies. Maybe so. But Bitcoin still has a steep adoption curve before it becomes truly disruptive.

Facebook Tokens, on the other hand, would be adopted by hundreds of millions of people right from the start.

You’d be able to buy and sell products in Facebook Tokens, send money and remittances, pay contract employees overseas, and engage in all sorts of cross-border transactions.

This would essentially make Mark Zuckerberg the world’s central banker… the one person with control over the first truly global currency.

Given that he already controls the #1 media source in the world and has substantial influence over consumer behavior, launching a Facebook Token would solidify his position as the most powerful person on the planet.

 LM: Crypto Currency  Trends & News
Here’s what the ‘Warren Buffet of Crypto’ told us yesterday

Sovereign Man
Here’s what the ‘Warren Buffet of Crypto’ told us yesterday

If you’ve been on the Internet in the past six months, you’ve no doubt seen loads of ads touting “crypto geniuses” that have found the next token that’s going to explode…

One guy in particular seems to be following me around to every website I visit, claiming to have some special insight into the “truth” about crypto.

But the truth is, nobody has a crystal ball.

Ultimately, what’s going to drive crypto prices is what drives all asset prices in the long-run – supply and demand.

Most cryptocurrencies have a fixed supply. For example, there will only be 21 million bitcoins mined. Ever. (Today there are about 17 million in circulation).

And because there’s a fixed supply, prices should be determined by long-term demand.

Every crypto expert you talk to will have his/her own opinion on which coin is going to the moon… and why. But it’s important to form your own opinion.

With crypto, the fundamental question you should ask yourself is will there be more demand or less demand in the future?

And if you believe there will be MORE demand in the future, the next question is– which coins have superior technology?

This is an important question. Every coin has different software code with different features and limitations.

For example, Bitcoin has a big limitation in that its network can only process a few transactions per second.

Compare that to Visa or Mastercard, which can process 24,000 transactions per second – nearly 10,000 times more.

One of our team members attended a crypto conference in New York City yesterday… and of course the room was filled with self-proclaimed geniuses.

But there were a few legitimate standouts who had a much more rational view.

One of them was Barry Silbert.

Silbert founded a company called SecondMarket, an exchange for private company stock, which he sold to Nasdaq in 2015. Then he founded a company called Digital Currency Group (DCG).

He’s spent the last several years learning about and investing in the sector, includindg in various cryptocurrencies, as well as crypto companies like Coindesk.

He also founded the Bitcoin Investment Trust (GBTC), which is essentially a Bitcoin ETF.

Silbert’s firm owns $600 million worth of crypto, 95% of which is in bitcoin, Ethereum Classic and Z-Cash.

He thinks over time, that bitcoin will become a form of ‘Digital Gold,’ the industry standard for storing value in crypto.

Z-cash, Silbert explained, will be the industry standard for privacy. And Ethereum Classic will be the standard for ‘smart contracts’.

More bluntly, Silbert explained that most other coins will go to zero over time. The reason is because they don’t have any functional purpose.

Now, remember that Silbert’s opinion is exactly that: his opinion.

There are plenty of other investors in the crypto space who would say something completely different. And their logic would be equally sound.

But Silbert’s point about utility is important: why should anyone own a token that doesn’t have any purpose. Look at CryptoKitties, for instance. Where’s the value?

(Or even worse, F*ckToken, which has a $2 million market cap)

This value question goes back to what I said in the beginning about demand analysis. Will there be more demand in the future for F*ckToken and CryptoKitties, or less demand?

In the long-run, demand has to be driven by some sort of utility. The coin must present some special benefit that other coins and tokens don’t have… and that people will actually NEED.

Coins and tokens that lack this important characteristic will likely fail.

And when they do, it will seem so obvious in retrospect.

This is an easily avoidable mistake… and an important point we’ve been repeating for a long time: with crypto, as with anything else, stay rational.

A decision to BUY should be based on an informed, educated analysis about future demand… not an emotional frenzy because the price is surging.

Similarly, a decision to SELL should be rational and based on the presence of new information or a different analysis, not simply because the market is in a panic.

 Investing  LM: Crypto Currency
No. It’s not over

Sovereign Man
No. It’s not over

Last night I was checking out tickets for some upcoming travel.

I’ll be headed to Colombia soon to check on the progress of a large cannabis investment we’ve made there, then off to Miami for an event with our Total Access members.

After that it’s Puerto Rico to meet with some officials there and check out some exciting investment opportunities on the island.

And then finally back to Asia where we’re setting up a new factory for a business I recently acquired.

So you can imagine my pleasant surprise when I found a ticket for all that travel for just $2800– in business class.

That’s an unbelievable deal; just last month I had a similar itinerary that cost me more than $10,000. So I couldn’t believe my luck.

Hey, who doesn’t like a great bargain?

It’s in our nature as human beings. Whether we’re purchasing a new car, shopping at a ‘Going out of Business’ sale, or planning a vacation, we always feel great when we get a steep discount.

Except, of course, when it comes to investing.

For whatever reason, our ‘value gene’ switches off when it’s time to invest our hard earned savings.

Rather than buy the highest quality assets at the lowest possible prices, people tend to pile into expensive, popular investments that they don’t really understand.

This is clearly not a great strategy to become wealthy… or to stay that way.

I doubt anyone would feel particularly smart if they consistently bought outrageously priced, full-fare plane tickets.

But that’s exactly what people are doing when they buy stocks, bonds, property, and other assets at record highs.

To be clear, it’s not about price. It’s never about price. It’s about value, i.e. what are you receiving in return.

For example, $50,000 might seem like a lot of money to most folks, and the thought of spending that much on anything might cause someone to bristle.

But if you could buy a brand new penthouse apartment in midtown Manhattan for $50,000, you would immediately feel like you were getting tremendous value.

Conversely, $5 is a pretty trivial sum to most people. But if someone tried to sell you used toilet paper for $5, you’d probably turn them down on the spot (unless you were in Venezuela).

Value is never about how much you pay. It’s about how much you get for your money.

And when it comes to investments these days, you don’t get a whole lot.

Here’s a great example:

Mastercard is a company that’s quite popular with investors. As a business, it made around $5 billion last year in ‘Free Cash Flow’.

(Free Cash Flow essentially refers to the amount of company profit that’s available to be paid out to shareholders each year… so it’s a great way to measure return on investment.)

And, at least until a few days ago, Mastercard had an ‘enterprise value’ of about $175 billion.

In other words, if you just happened to have an extra $175 billion lying around the house, you could theoretically buy Mastercard and make it your own private company.

Suppose you actually did that… and spent $175 billion. That’s the price.

The value, i.e. what you receive in return, is $5 billion in annual free cash flow.

As a percentage of your purchase price, that $5 billion works out to be just 2.85%.

That’s a pretty flimsy return. After all, business can be quite risky. And 2.85% hardly seems sufficient to compensate for that risk.

Now consider other options.

Interest rates have surged over the past several months, so the investment returns on bonds have really started to increase.

The United States 10-year note, for example, which is widely considered ‘risk free’ by the market, was yielding as high as 2.86% yesterday afternoon.

In other words, the boring, steady, ‘risk free’ bond had a higher rate of return than a volatile, risky business.

That doesn’t make any sense. And it demonstrates how little VALUE investors are receiving.

By any objective metric, stocks have long been OVERvalued.

Investors are paying more for every $1 in corporate revenue than they ever have before… EVER.

The ratio of Enterprise Value to EBITDA (a good proxy for cash flow) for the average company in the S&P 500 is also at a record high.

The ratio of Stock Market Capitalization to GDP, i.e. the total size of the stock market relative to the size of the economy, is also at a record high.

The list goes on and on.

And of course there are countless individual examples– like Netflix.

That company consistently loses billions of dollars and racks up billions more in debt. Yet it is one of the most expensive and popular investments in the world.

On Friday, it seems the market finally woke up to this absurdity. In the past few days, the Dow Jones Industrial Average has plunged more than 1700 points.

It seems that people are finally starting to become aware that rising interest rates are going to have a serious impact on the stock market.

(Think back to the Mastercard example; why would anyone own stocks if they can get a better return with less risk in the bond market?)

This market rout may continue today.

Or, it’s possible that all the fools come rushing back in and bid stock prices back to record high levels.

The only thing we know for certain is that, as sure as night follows day, there will always be corrections and bear markets.

Nothing goes up or down in a straight line forever.

The market has had years of gains and is at the point where none of it makes sense anymore.

So it’s due for a major correction. Whether or not THIS is the big one, we can be certain that it’s coming. Plan accordingly.

 LM: Investing  Investing
This tiny corner of Rhode Island shows us the future of Social Security

Sovereign Man
This tiny corner of Rhode Island shows us the future of Social Security

The United States Court of Appeals for the First Circuit gave us an interesting glimpse of the future last week when it ruled on an obscure case involving government pension obligations.

Ever since the mid-1990s, police officers and fire fighters in the town of Cranston, Rhode Island had been promised state pension benefits upon retirement.

But, facing critical budget shortfalls over the last several years that the Rhode Island government called “fiscal peril,” the state legislature voted to unilaterally reduce public employees’ pension benefits.

Even more, these cuts were retroactive, i.e. they didn’t just apply to new employees.

The changes were applied across the board; workers who had spent their entire careers being promised certain retirement benefits ended up having their pensions cut as well.

Even the court acknowledged that these changes “substantially reduced the value of public employee pensions provided by the Rhode Island system.”

So, naturally, a number of municipal employee unions sued.

And the case of Cranston’s police and fire fighter unions made it all the way to federal court.

The unions’ argument was that the government of Rhode Island was contractually bound to pay benefits– these benefits had been enshrined in long-standing state legislation, and they should be enforced just like any other contract.

The state government disagreed.

In their view, the legislature should be able to change laws, even retroactively, whenever it suits them.

Last week the First Circuit Court issued a final ruling and sided with the state of Rhode Island: the government has no obligation to honor its promises.

News like this will never make major headlines.

But here at Sovereign Man our team pays very close attention to these obscure court cases because they often set very dangerous precedents.

This one certainly does. Because Social Security is in even WORSE condition that the State of Rhode Island’s perilous pension system.

We talk about this a lot in our regular conversations.

According to the Board of Trustees for Social Security (which includes the US Treasury Secretary, the US Secretary for Health & Human Services, and the US Secretary of Labor), the Social Security trust funds “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”

Once again– that’s the Treasury Secretary of the United States saying that Social Security will run out of money in 16 years.

You’d think this would be shouted from the rooftops, especially given how long it takes to save for retirement.

Yet instead the news is ignored or flat-out rejected by people who simply want to believe either that it’s not a problem, or that the government has some magical solution.

The First Circuit just showed us what the solution is: cutting benefits.

And now the government has legal precedent to do so.

They can retroactively slash whatever benefit they want in their sole discretion regardless of what legislation exists, or what promises have been made in the past.

Let’s be smart about this: the clock is ticking. Sixteen years may seem like a lifetime away, but with respect to retirement, it’s nothing.

Securing a comfortable retirement takes decades of careful planning, and a lot of folks are going to have to catch up.

Fortunately there are a lot of options available, but you’re going to have to take deliberate action.

For example, you could set up a more robust structure to help you put away even more money for retirement and invest in safer, more lucrative assets that are outside the mainstream.

A number of our readers, for example, are safely earning double-digit returns in secured, asset-backed lending deals with their properly structured IRA and 401(k) vehicles.

Here are a couple of options to consider.

This problem is completely solvable. But you’re going to have to solve it for yourself. You can’t rely on the government to fix it.

The First Circuit Court affirmed last week without a doubt that government promises aren’t worth the paper they’re printed on.

 Trends & News
Why Albert Einstein thought we were all insane

Sovereign Man
Why Albert Einstein thought we were all insane

In the early summer of 1914, Albert Einstein was about to start a prestigious new job as Director of the Kaiser Wilhelm Institute for Physics.

The position was a big deal for the 35-year old Einstein– confirmation that he was one of the leading scientific minds in the world. And he was excited about what he would be able to achieve there.

But within weeks of Einstein’s arrival, the German government canceled plans for the Institute; World War I had broken out, and all of Europe was gearing up for one of the bloodiest conflicts in human history.

The impact of the Great War was immeasurable.

It cost the lives of 10 million people. It bankrupted entire nations.

The war ripped two major European powers off the map– the Austro Hungarian Empire, and the Ottoman Empire– and deposited them in the garbage can of history.

Austria-Hungary in particular boasted the second largest land mass in Europe, the third highest population, and one of the biggest economies. Plus it was a leading manufacturer of high-tech machinery.

Yet by the end of the war it would no longer exist.

World War I also played a major role in the emergence of communism in Russia through the 1917 Bolshevik revolution.

Plus it was also a critical factor in the astonishing rise of the Nazi party in Germany.

Without the Great War, Adolf Hitler would have been an obscure Austrian vagabond, and our world would be an entirely different place.

One of the most bizarre things about World War I was how predictable it was.

Tensions had been building in Europe for years, and the threat of war was deemed so likely that most major governments invested heavily in detailed war plans.

The most famous was Germany’s “Schlieffen Plan”, a military offensive strategy named after its architect, Count Alfred von Schlieffen.

To describe the Schlieffen Plan as “comprehensive” is a massive understatement.

As AJP describes in his book War by Timetable, the Schlieffen Plan called for rapidly moving hundreds of thousands of soldiers to the front lines, plus food, equipment, horses, munitions, and other critical supplies, all in a matter of DAYS.

Tens of thousands of trains were criss-crossing Europe during the mobilization, and as you can imagine, all the trains had to run precisely on time.

A train that was even a minute early or a minute late would cause a chain reaction to the rest of the plan, affecting the time tables of other trains and other troop movements.

In short, there was no room for error.

In many respects the Schlieffen Plan is still with us to this day– not with regards to war, but for monetary policy.

Like the German General Staff more than a century ago, modern central bankers concoct the most complicated, elaborate plans to engineer economic victory.

Their success depends on being able to precisely control the [sometimes irrational] behavior of hundreds of millions of consumers, millions of businesses, dozens of foreign nations, and trillions of dollars of capital.

And just like the obtusely complex war plans from 1914, central bank policy requires that all the trains run on time. There is no room for error.

This is nuts. Economies are comprised of billions of moving pieces that are beyond anyone’s control and often have competing interests.

A government that’s $21 trillion in debt requires cheap money (i.e. low interest rates) to stay afloat.

Yet low interest rates are severely punishing for savers, retirees, and pension funds (including Social Security) because they’re unable to generate a sufficient rate of return to meet their needs.

Low interest rates are great for capital intensive businesses that need to borrow money. But they also create dangerous asset bubbles and can eventually cause a painful rise in inflation.

Raise interest rates too high, however, and it could bankrupt debtors and throw the economy into a tailspin.

Like I said, there’s no room for error– they have to find the perfect balance between growth and inflation.

Hedge fund billionaire Ray Dalio summed it up perfectly last month when he said,
“It becomes more and more difficult to balance those things as time goes on. . . It may not be a problem in the next year or two, but the risk of not getting it right increases with time.”

Today there’s a changing of the guard at the Federal Reserve– Janet Yellen is leaving her post as chair, and she’s being succeeded by Jerome Powell.

Yellen leaves her post having brought down the unemployment rate in the United States to 4.2%, which certainly sounds nice.

Yet at the same time, workers’ wages (when adjusted for inflation) have hardly budged under her tenure.

Americans’ savings rate has been cut in half. Consumer debt and student loans are at all-time highs.

And dangerous asset bubbles have expanded, from stocks to bonds to property.

The risk of them getting it wrong is clearly growing.

That’s why having your own Plan B is so important.

It’s a simple concept: don’t keep all of your eggs in one basket, especially when the people who control the basket have such a tiny margin of error.

The right Plan B makes sense no matter what happens, or doesn’t happen, next. If they get it right, you won’t be worse off. But if they get it wrong, you’ll still prosper.

I truly hope they don’t get it wrong.

But if they ever do, people may finally look back and wonder how we could have been so foolish to hand total control of our economy over to an unelected committee of bureaucrats with a mediocre track record… and then expect them to get it right forever.

It’s pretty insane when you think about it.

As Einstein quipped at the height of World War I in 1917, “What a pity we don’t live on Mars so that we could observe the futile activities of human beings only through a telescope. . .”

 Trends & News
“We choose debt. . .”

Sovereign Man
“We choose debt. . .”

I’ve long held a working theory that US voters are completely predictable in Presidential elections.

The idea is that Americans almost invariably tend to swing wildly every few election cycles, voting for the candidate who is as close to the opposite of the current guy as possible.

Let’s go back a few decades to, say, Jimmy Carter.

In 1976, the country was sick and tired of the corruption, scandal, and disgrace of Richard Nixon’s administration (which at that point had been inherited by Gerald Ford).

Jimmy Carter was pretty much the opposite of Richard Nixon– a youthful outsider versus an aging crony.

After four years of economic disaster, Americans swung in the opposite direction from Carter, choosing an older, polished conservative in Ronald Reagan who represented strength and stability.

That trend lasted for twelve years– two terms with Reagan, and one term with his successor George HW Bush, after which the country swung in the other direction again– to Bill Clinton.

Clinton was another young, energetic liberal, pretty much the opposite of the elderly, curmudgeonly Bush.

After eight year of Clinton and his personal scandals, the country swung again to George W. Bush, a God-fearing, fundamental conservative who wouldn’t cheat on his wife. He represented Clinton’s opposite.

And after eight years of war and economic turmoil, the country swung once again to Bush’s opposite– a youthful, charismatic, black outsider.

Eight years later, the 2016 election was won by a man who is as far from Barack Obama as it gets.

Now, however you feel about the current guy, it’s safe to say that the country is probably going to wildly swing in the opposite direction in either 2020 or 2024.

Last night the world got a sneak peak at what that might look like– Congressman Joe Kennedy III, the 37-year old grandnephew of John F. Kennedy.

The young Congressman clearly represents Trump’s opposite and seems to embody so many of the gargantuan social movements that are coming to a head– the Dreamers, #metoo, BlackLivesMatter, etc.

Now, I typically hate talking about something as trite as politics and elections; elections merely change the players. It’s the game that’s rotten.

But in the Congressman’s rebuttal last night after the State of the Union address, he said something that I found quite alarming, almost inconceivable.

He lamented that the government has turned America into a “zero-sum game” where benefits received by one group must come at the expense of another– fund health insurance by cutting funding for education; build new highways by slashing teachers’ pensions.

He cited a number of examples, and then told his audience, “We choose both!”

Given the thunderous applause at that remark, everyone seemed to agree that the wealthiest, most prosperous nation in the world should never have to make a single tough financial decision.

Americans should have everything they want. And somehow, the money to pay for it all will just magically appear.

I found this astonishingly naive. He should have said, “We choose debt!” Because that’s the only way they’ll be able to pay for any of it.

Bear in mind the US government is already nearly $21 trillion in the hole and spending hundreds of billions of dollars each year just to pay interest on the debt.

In Fiscal Year 2017, in fact, the Treasury Department reports that interest payments on the debt hit a new high of $458,542,287,311.80.

That’s about 15% of federal government tax revenue… just to pay interest.

On top of that, the government spent another $2.15 trillion on Social Security and Medicare, and $720+ billion on defense spending.

So– just between interest, Social Security, Medicare, and Defense, they spent $3.3 trillion.

Total tax revenue was only $3 trillion to begin with.

So before they paid for ANYTHING else… National Parks, Homeland Security, infrastructure, foreign aid, or even paid the electric bill at the White House, they were hundreds of billions of dollars in the hole.

On top of that, the federal government has entire trust funds that are completely insolvent.

Both the Federal Highway Fund and the Disability Insurance fund, for example, have been bailed out within the last two years.

And there are several more, from the Pension Benefit Guarantee Corporation to Social Security itself.

This amounts to literally tens of trillions of dollars in liabilities; according to the Treasury Department’s own estimates from Fiscal Year 2016, its long-term liabilities amount to $46.7 trillion.

I find it simply extraordinary how few people in power seem to have a grasp on the magnitude of these long-term challenges.

Instead, the solution is to give everything to everyone without ever having to make a single responsible financial decision.

It’s total lunacy, a new form of American socialism that will be the final nail in the fiscal coffin.

And if history is any indicator, it’s coming… possibly as early as 2020.

 Trends & News
GE just signaled the next crisis and nobody’s paying attention

Sovereign Man
GE just signaled the next crisis and nobody’s paying attention

Earlier this month, General Electric took a $6.2 billion charge to its insurance unit for the fourth quarter. And the company said it will set aside another $15 billion over seven years to bolster reserves at GE Capital.

The charge had to do with long-term care policies (to pay for nursing homes and other late-life care) GE holds on its books.

So, one of the oldest and most highly-regarded companies in America just made a small, $21 billion miscalculation. Oops.

Keep in mind, GE’s entire market cap is only $140 billion.

The insurance charge, along with costs tied to the US tax plan, led GE to a $9.64 billion loss in the fourth quarter.

Then last week, GE announced the Securities and Exchange Commission (SEC) was investigating the company’s accounting practices (specifically how the company books revenue from long-term service contracts on things like power-plant repairs and jet-engine maintenance).

But this isn’t GE’s first run in with the SEC…

The company’s accounting practices have long been considered a “black box.” The New York Times even published a story in 2009 comparing the company to Enron – the energy giant brought down by fraudulent accounting.

And is all started with GE’s legendary former CEO Jack Welch.

Welch would regularly beat Wall Street’s earnings estimates by a penny or two. And he was named manager of the century by Fortune Magazine for his ability to pump GE’s stock.

And while Welch is lauded for his “six sigma” management, it seems his real talent was using GE’s many divisions to move assets around and goose earnings to hit short-term numbers.

The creative accounting caught up with GE in 2009, when the company paid $50 million to settle SEC allegations it had used improper accounting methods to boost numbers in 2002 and 2003.

Among the strategies GE used to make its 2003 numbers was selling railroad cars to banks, with side deals and verbal promises to assure the banks they couldn’t lose money on the deal.

Enron used the same trick in 1999 when it “sold” Nigerian barges to Merrill Lynch, allowing the company to fake a $12 million profit.

Today GE is a $140 billion company (shares are down by nearly half over the past 12 month). The company has nearly $160 billion in debt. And in fiscal year 2016, the company lost $41 billion in cash.

GE’s financial performance makes my favorite whipping boy, Netflix, look like a piker.

GE got here, in part, because the government guaranteed all of the company’s debts until 2012 to help it survive the Great Financial Crisis.

Then the Fed lowered interest rates and printed trillions of dollars to goose the economy.

Instead of using this beneficial environment to repair its horrible balance sheet, GE spent some $50 billion buying back stock and paying dividends… and allowed Welch’s successor, Jeff Immelt, to walk away with $211 million (despite the company erasing $150 billion of market cap value during his tenure).

GE has gotten away with this behavior because we’re in the middle of one of the largest asset booms in history. The markets are at all-time highs. And nobody asks the tough questions when they’re making money.

It doesn’t take a giant pin to prick the bubble. It just takes something unexpected… Nobody ever knows what will set off the next crisis.

But in GE’s case, you can bet there isn’t just one cockroach.

Plus, interest rates are rising today (the 10-year Treasury is above 2.7%) and the Fed is taking away the quantitative easing punch bowl. What will happen to overly indebted companies like GE (who are likely covering up more huge losses) when the credit dries up and debt service gets way more expensive?

Mind you, GE already can’t afford its debt.

GE is just one example of a potential crisis in the making.

Maybe a bank sets off the next crisis…

I just read a Wall Street Journal piece about “drive by appraisals.” When the big institutional investors, like private equity giant Blackstone, started buying tens of thousands of individual homes, they needed a quick way to appraise the properties to get loans.

Blackstone and its lender, Deutsche Bank, settled on these drive by appraisals, where brokers give their price opinion of the property. These assessments, called broker price opinions (BPOs) were outlawed by congress after the crisis.

But the prohibition doesn’t apply to investors buying tens of thousands of homes (of course you don’t want to have an accurate asset value for collateral behind really big loans).

Sometimes brokers will even outsource the process to India, where companies will use Google Earth and real estate website to come up with home values.

BPOs have been used to value homes backing more than $20 billion of bonds sold by companies like Blackstone.

As Warren Buffett says, “you never know who’s swimming naked until the tide goes out.”

Just know, there are major losses – and likely fraud – hiding out there today. But it’s gone largely ignored because of the one-way market we’ve experienced since 2010.

GE and these drive by loans are just two examples. And the worst is yet to come.

 Trends & News
Message from Planet Japan: The good times never last forever

Sovereign Man
Message from Planet Japan: The good times never last forever

After having traveled to more than 120 countries in my life, the only person I know who’s been to more places than I have is Jim Rogers.

Jim is a legend– a phenomenal investor, author, and all-around great guy.

(His book Adventure Capitalist is a must-read, chronicling his multi-year driving voyage across the world.)

Some time ago while we were having drinks, Jim remarked that he occasionally tells people, “If you can only travel to one foreign country in your life, go to India.”

In Jim’s view, India presents the greatest diversity of experiences– mega-cities, Himalayan villages, coastal paradises, and a deeply rich culture.

My answer is different: Japan.

To me, Japan isn’t even a country. Japan is its own planet… completely different than anywhere else in ways that are incomprehensible to most westerners.

(Watch my friend Derek Sivers explain it to a TED audience here.)

Weird, or just different? | Derek Sivers
by TED on YouTube

On one hand, this is a culture that strives to attain beauty and mastery in even mundane tasks like raking the yard or pouring tea.

Everything they do is expected to be conducted to the highest possible standard and precision.

They start the indoctrination from birth; Japanese schools typically do not employ janitors and instead train children to clean up after themselves.

Later in life, the Japanese salaryman is expected to practically work himself to death (or suicide) for his company.

Obedience and collectivism are core cultural values, and the tenants of Bushido are still prevalent to this day.

One of the most remarkable examples of Japanese culture was the aftermath of the devastating 2011 earthquake (and subsequent tsunami) in the Fukushima prefecture.

It was the worst natural disaster in Japanese history, causing nearly as much damage as the atomic bombs over Hiroshima and Nagasaki in 1945.

Yet rather than panic and pillage, the Japanese sat patiently outside of their ravaged homes waiting for direction from the local authorities.

Then again, this is also the place that brought us ‘Hello Kitty,’ and where men have to be admonished to not grope young girls on the subway.

The Japanese paradox also applies to its economy, which has effectively been in stagnation for nearly 30 years.

Japan’s government debt is more than 1 QUADRILLION yen (over $10 trillion) and more than twice the size of the entire economy.

This debt is so large that in the 2018 budget that was just released last month, the government reported that it will take more than 40% of tax revenue to make debt payments this year.

Despite such gruesome figures, however, there is no panic here on Planet Japan.

The government has told everyone to not worry, and that seems to be good enough.

Banks and and investment funds continue to plow their depositors savings into government bonds– which, by the way, carry NEGATIVE interest rates.

In other words, investors are loaning money at rates which are less than zero to a government that’s so heavily indebted it has to spend 40% of its tax revenue just to make debt payments.

This is pure insanity. But on Planet Japan, it’s perfectly normal behavior to engage in ritualistic financial suicide.

It wasn’t always this way.

After being demolished by the Allies in World War II, Japan set out to rebuild itself.

And the growth that came out of the next several decades was so astonishing that it became known as the economic miracle.

Japan ultimately became the world’s second largest economy after the United States.

And there certainly was cutting edge technology and productivity that contributed to that success.

Back then, some of the most popular consumer products in the world like Nintendo’s original game console, or the Sony Walkman, were Japanese.

And Japan’s production efficiency was the envy of the world.

But underpinning all that growth, especially during the later part of the boom in the 1980s, was a tidal wave of paper money.

Japan’s central bank was growing the country’s money supply at a dangerously unsustainable rate.

And, as with most cases where central banks conjure too much money out of thin air, the Bank of Japan created a dangerous asset bubble.

With so much money in the system, the prices of nearly everything– stocks, real estate, etc. skyrocketed.

The asset boom made people feel very wealthy, and that the good times would last forever.

They didn’t. Japan’s Nikkei 225 stock index finally peaked at nearly 39,000 points on December 29, 1989.

And over the next few years, the giant economic bubble rapidly deflated as the central bank gradually ‘tightened’ the money supply and raised interest rates.

Within two years the Nikkei 225 had lost half of its value. Within a few years more it had fallen to as low as 8,000.

Even today, nearly THIRTY YEARS later, Japan’s stock market is still 40% below its all-time high.

During the boom, some Japanese investors and businesses were astute enough to trade some of their overvalued yen for undervalued foreign assets while they still had the chance.

They bought real estate in California, businesses in Europe, etc. These investments ensured their prosperity even after the Japanese market collapsed.

But most Japanese kept all of their eggs in one basket. And they still haven’t recovered their losses.

There are very interesting lessons here. Namely– the good times NEVER last forever.

Markets never simply go straight up. There are always inevitable corrections.

Problem is, most folks tend to believe that market corrections will be very short lived, as if asset prices will fall 20% or 30% and then be right back to where they were before after a year or two.

Few of us can imagine the value of their retirement accounts collapsing– and NEVER recovering.

But Planet Japan shows us that the market can crash– and stay in the gutter– for DECADES…

… and that, when asset prices are at all-time highs, a prudent person ought to consider taking some money off the table and seeking undervalued alternatives.

 Trends & News
Common sense investing wisdom from Mr. Miyagi

Sovereign Man
Common sense investing wisdom from Mr. Miyagi

Almost exactly a year ago to the day, on January 23, 2017,

: Up. Down. Up. Down.

Nearly everything conforms to these cycles– stocks, real estate, commodities, Bitcoin, and the US dollar itself.

And understanding this cyclical nature is an important element in avoiding big mistakes.

It’s in our nature to buy assets when their prices are rising and near the top of their up cycle.

And we tend to sell in a panic when prices are falling, i.e. near the bottom of their down cycle.

In reality it should be the opposite– we should be sellers when prices are rising and buyers when prices are falling.

But as we’ve been discussing lately, this requires emotional detachment… and patience to wait out the cycle.

(These cycles can sometimes last for several years. So only buy what you’re comfortable holding for a LONG time.)

Obviously it’s impossible to nail the timing– no one rings a bell at the top or the bottom. And only a fool pretends to have a crystal ball.

But… even though you might not hit the exact top, it’s hardly ever a bad thing to take some money off the table to lock in some gains.

Similarly, you won’t be worse off acquiring a fantastic, undervalued asset at a cheap price, even if you don’t buy at the precise bottom.

In upcoming letters we’ll talk about the dollar’s down cycle… and what types of assets will do very well– including precious metals, commodity currencies like the Australian dollar, and other real assets.

How the new tax bill hurt one of the greatest ways for Americans to slash taxes

Sovereign Man
How the new tax bill hurt one of the greatest ways for Americans to slash taxes

Puerto Rico won’t repay any of its $72 billion of debt until 2022…

The US territory declared bankruptcy last May. A combination of a shrinking population, bloated pensions and a job crisis (in 2006, the US government repealed tax incentives that attracted manufacturers to the island) caused Puerto Rico to go broke.

Even in its fragile economic state, PR was planning on paying creditors $3.6 billion through 2022.

Then Hurricane Irma and Maria destroyed the island last September.

In addition to the physical damage, the storm also accelerated the island’s population shrinkage… before the storm, Puerto Rico estimated it would lose 0.2% of its population of 3.4 million each year over the next five years. Now, the government projects its population will shrink by 7.7% (more than a quarter million people) just in 2018.

Today, four months after the storm, 450,000 Puerto Ricans (roughly 15% of the population) are still without power.

Yesterday, facing a $2-$3 billion budget shortfall, Governor Ricardo Rosselló announced the island would pay back zero debt over the next five years.

Despite the horrible situation, I remained bullish on Puerto Rico’s future. Because the island has one of the greatest tax incentives I’ve ever seen for Americans – Act 20 and Act 22 – which would continue to attract new businesses and residents.

I’ve written plenty about Act 20 and 22 in Notes (you can read a more complete definition here).

In short, Act 20 (the export services act) allows certain businesses to domicile in Puerto Rico and pay a 4% corporate tax rate.

Act 22 (for individual investors) allows Puerto Rican residents to pay zero tax on investment gains.

You could move your business to PR (without relocating yourself) and let your profits build up minus the miniscule, 4% tax. Then, when you’re ready to pay yourself a large dividend, you would simply move to PR long enough to become a resident (for about a year), pay yourself a dividend… and pay ZERO tax.

As soon as you received the payment, you could move wherever you wanted.

For Americans, who are taxed on their global income, this was the single-best way to drastically reduce taxes I’d ever seen – and it was written into US tax law.

But Trump’s tax plan may deal Puerto Rico a financial blow during its weakest time…

Act 20 and 22 remain. And while Puerto Rico’s tax incentives are still attractive, it will be more difficult for many Americans to take full advantage.

First, the new US corporate tax rate is 21% under the new law (down from 35%)… so the tax savings you’d enjoy in Puerto Rico are relatively less attractive based on that alone.

But the real sticking point is the new “global intangible low-taxed income” (GILTI tax). The GILTI tax essentially says you pay an effective tax rate of 10.5% on money you earn in a foreign corporation.

Even though Puerto Rico is a US territory, under the new tax plan, it’s considered a foreign country for GILTI tax purposes.

And because you need to hold a Puerto Rican company in your own name, as an individual, in order to take advantage of Act 20, the GILTI tax is a full 21% – bringing the effective rate to around 24% (4% of the income goes to Puerto Rico and the remaining 96% is taxed by the IRS at 21%).

You can still take full advantage of Act 20 and Act 22 (letting your money compound minus a 4% corporate tax, then paying yourself a dividend and paying 0% tax). But you actually have to reside in Puerto Rico the entire time.

Governor Rosselló believes the US government will change the rules for Puerto Rico to aid in the island’s recovery. But, for now, that’s how my personal attorney and I read it. We’ve spent countless hours analyzing the new tax bill (I actually read all 1,097 pages).

But don’t worry.

Again, you can still enjoy massive tax savings in Puerto Rico if you move to the island.

The tax bill also presents lots of other opportunities for business owners to cut their taxes to the bone.

In the latest Sovereign Man: Confidential (published today), I explain what I think is the single-best way for some Americans to reduce their taxes and indefinitely defer paying taxes on their income (while still using that money to buy property, assets, stocks, even crypto).

You can let the gains on these assets compound tax free… then pay yourself a dividend whenever the time is right (and be taxed at normal, dividend rates).

You can learn more about Sovereign Man: Confidential here.

My attorney and I are still analyzing the new tax bill. And I’ll continue to provide SMC readers with the best, new structures and strategies to reduce their tax bill.

 LM: Tax Reduction  Taxes
Is there any new information that didn’t exist two weeks ago?

Sovereign Man
Is there any new information that didn’t exist two weeks ago?

The year was 1720. And one of the smartest people to have ever lived had just made one of the dumbest financial mistakes imaginable.

Sir Isaac Newton was a genius in every sense of the word.

He practically invented the science and mathematics that is at the foundation of nearly every bit of modern technology that we enjoy today.

Newton was such an intellectual superhero that even Albert Einstein idolized him.

In fact Einstein wrote in a 1919 paper that “[Newton’s] clear and wide ideas will forever retain their significance as the foundation on which our modern conceptions of physics have been built.”

Yet Newton was a complete moron when it came to investing.

During his lifetime, the British Empire was becoming a major superpower and had colonies all over the world.

With so much new international trade under its control, Britain’s prosperity soared.

A handful of companies like the East India Company provided opportunities for investors to share in that prosperity. But the public was always clamoring for more.

So in the early 1700s, the British government chartered a new company– the South Sea Company– and awarded it a total monopoly on British trade in South America.

It seemed like a veritable goldmine, and investors clamored to buy shares.

Isaac Newton was one of those investors.

And initially it was a fantastic investment; Newton bought in early 1720, and within a few months he’d doubled his money. So he sold his entire stake.

Then something interesting happened.

The South Sea Company’s share price kept climbing… higher and higher.

In fact, almost right after Newton sold out, the South Sea Company’s share price climbed exponentially, reaching a peak of nearly GBP 1,000 by mid-1720.

(That would be worth nearly $300,000 today.)

Newton felt like a total buffoon for sitting on the sidelines while all of his colleagues were still makings tons of money in the stock.

So he got back in.

And, anxious to make back the profits he’d missed out on, Newton doubled down, investing an even bigger amount in the shares.

You know what happens next–

The South Sea Company turned out to be a complete bust. It turns out that Britain never really developed much trade with South America.

Yet the company had blown through most of the money, and there was nothing left for the shareholders. So the stock price quickly crashed.

Newton was broke. He lost his life savings, just seven years before his death.

Now, I’ve told this story a few times in this letter… because it’s so powerful.

Even one of the smartest people who ever lived made a terrible and completely avoidable mistake because he was driven by emotion instead of reason.

This has very much the case with cryptocurrencies over the past several months.

The prices of nearly every token and cryptocurrency have soared, and investors have clamored to chase their share of the easy profits.

Our advice in this column has always been to stay rational. Understand what you’re buying. And why.

Conduct your own independent supply and demand analysis, determining for yourself whether you think there will be MORE demand, or LESS demand, for that particular cryptocurrency in the future.

Think about the risks. Invest only what you can afford to lose.

It’s all simple but important advice.

But what I really wanted to talk about today was SELLING.

Over the past two weeks, Bitcoin has dropped from $17,700 a coin to as low as $9,600 (a 45% loss). It’s now recovered to around $10,200 as I write this letter.

Within the last three weeks, the price of Ripple collapsed 63% from nearly $3 to just over $1; it’s now around $1.25.

No doubt a lot of people are panicking. And when investors panic, they sell.

Just like people tend to buy assets that are rising in price, we tend to sell assets that are falling in price.

What I wanted to stress today is that the same lessons should apply, i.e. don’t sell because of an emotional panic.

Sell because you have a rational reason.

If you purchased cryptocurrency because you studied the market and formed a long-term view, ask yourself a question– has anything changed?

Sure, the price of Bitcoin (or Ether, etc.) has fallen. A lot.

But does that mean your analysis was wrong? Is there any new information today that didn’t exist two weeks ago about the future of cryptocurrency?

Maybe. Maybe not. But it’s worth asking yourself those questions before selling.

Sometimes the price of an asset collapses because there really is new information.

In September 2008, for example, the stock price of investment bank Lehman Brothers collapsed… because the market learned that the Lehman was insolvent.

This was critical new information, and a great reason to sell.

But often times investors hit the sell button simply because other people are selling.

So, once again, consider– if your cryptocurrency purchase was based on a sound analysis, is there any new information that suggests your analysis was wrong?

Or are you itching to sell simply because other people are panicking?

Again– I’m not suggesting you hold. Or sell. Or buy.

I’m suggesting that you be sure in your reasons for taking any action. After all, it’s your savings at stake.

 LM: Crypto Currency  Investing
The time when Kiefer Sutherland beat me to the punch

Sovereign Man
The time when Kiefer Sutherland beat me to the punch

Back in 2013 I had an idea for a movie.

The basic premise was that some unknown domestic terrorist group executes an attack on the United States government by blowing up the Capitol during the President’s State of the Union Address.

It’s a little silly, but I even wrote a small treatment for it, including this scene–
ATTACKER speeds off to a parking garage where he ditches the bike, takes off his black motorcycle attire and helmet, revealing a three-piece suit. He drops the motorcycle stuff in a steel waste bin along with an incendiary grenade, lighting the contents on fire, then casually pulls the fire alarm. You never see his face.

After the attack is perpetrated, the US is effectively left without a government given that nearly every member of Congress, the President, Vice President, most of the cabinet, the Joint Chiefs, and the Supreme Court was all in that building.

The only guy who survives is the ‘designated survivor,’ some member of the President’s cabinet who’s supposed to head up a new government.

I never did anything with the treatment because I couldn’t quite figure out how I wanted the story to end. So it sat on my computer for years collecting digital dust.

A few years later I stumbled across a popular new TV show starring Kiefer Sutherland called Designated Survivor.

It had the same premise– terrorists blow up the Capitol building during the State of the Union address, effectively destroying the entire government.

Sutherland’s character is some low-ranking cabinet secretary who was the designated survivor, and he is urgently sworn in as President during the first episode.

The show is a bit of an action thriller as they try to uncover the plot of who these domestic terrorists are.

And that was the big difference.

My version of the idea back in 2013 was as a dark comedy.

I know that probably sounds horrible… but my main thinking was to showcase how utterly useless and ridiculous most of the government’s bureaucratic functions are.

My premise was that, after the attack, there would be an initial panic. The stock market would crash and citizens would freak out.

But after a bit of time they’d realize, “Wait a minute, the world didn’t come to an end.”

The grocery stores still had food on the shelves, the gas stations still had fuel, the power companies were still pumping out electricity, Apple was still making iPhones.

Nothing really changed. The Armageddon that everyone was anticipating never materialized.

More importantly, the LACK of government forced people to take on certain responsibilities for themselves.

Without the SEC to lull investors into an absurd false sense of security that financial markets were ‘safe’, people actually had to start doing real due diligence on their investments.

Without the USDA letting the Big Food companies sell everyone poison like High Fructose Corn Syrup while the government tells us that it’s all safe, people actually start paying attention to what they eat.

There’s no FDA to squash potentially life-saving cancer treatments, no FEMA to bungle emergency relief efforts, no Department of Education to turn the youth of a nation that was once self-reliant and entrepreneurial into a bunch of dumbed-down serfs.

Meanwhile, at least in my version of the story, the guy who was the designated survivor was a total buffoon.

Not that the character was stupid… but just so out of touch that, once he became President, his priorities were all about trying to re-assert mindless bureaucracy.

The script would work in real life examples of government waste that the new President would champion– like the $30,000 that the federal government really spent last year on a production of Shakespeare’s Hamlet… starring dogs instead of humans.

Anyhow, you get the idea.

I was thinking about this a lot over the weekend now that the US government has once again shut down.

Aside from being an utter embarrassment, though, the shutdown isn’t totally dissimilar to my version of the story.

There’s been all sorts of fear surrounding the possibility of a shutdown. And now that it’s here, it turns out there’s not really much of a major impact.

There’s still food on the shelves and gas at the pumps. The economy is still functioning.

There are simply fewer people to slow it all down.

And let’s be honest– it’s not a complete government shutdown. Any function deemed ‘essential’ is still at work, including the military, federal courts, air traffic control, etc.

Social Security recipients will keep receiving their benefits too.

But any government function deemed ‘nonessential’ has been shut down… which raises an interesting question:

Why does the government do anything that’s non-essential to begin with?

Every single function they take on sucks resources out of the economy. They squander and waste the majority of those resources, then end up giving people a $2 billion website that doesn’t work.

Clearly this is a government in need of serious downsizing.

Any other organization in the world with a history of such gargantuan waste would be forced to strip itself down to its core and limit itself to only the most essential functions.

Sadly, though, the public attention seems to be focused on how terrible this shutdown is and how these politicians need to come together to reopen the government.

Are you kidding me? This is a gift. Keep it closed.

The last time the government shut down in October 2013, the US economy posted its highest quarterly GDP growth in years.

And when the economy shut down TWICE in the fourth quarter of 1995, the US economy posted a whopping 7.2% growth rate in the following quarter.

The evidence is pretty clear– the longer these politicians bicker and argue, the better off everyone else will be.

Here’s to hoping they keep their doors closed for a very, very long time.

 Trends & News