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Treasury Department reports $1.2 TRILLION loss in 2017

February 27, 2018

Treasury Department reports $1.2 TRILLION loss in 2017

Earlier this month, the United States government released its annual financial report for the year 2017.

This is something the government does every year, similar to how large companies like Apple, or Warren Buffett’s Berkshire Hathaway, publish their own annual reports.

Unlike Berkshire and Apple, though, whose financial reports typically show strong, positive results, the US government’s financial statements are a complete horror show.

Right at the beginning of the report, the government explains that it’s “net loss” for the year was an unbelievable $1.2 TRILLION.

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Read that number again.

$1.2 trillion. That’s simply staggering.

It’s larger than the size of the entire Australian economy… and constitutes a loss of more than $2.2 million per minute.

This is not a conspiracy theory or irrational fantasy.

This is the Treasury Secretary of the United States of America publicly announcing that the federal government lost $1.2 trillion on page ‘i’ of its annual financial report.

What’s even more alarming is that 2017 was a great year.

There was no war. No recession. No epic financial crisis.

In his introductory letter, in fact, the Treasury Secretary proudly stated that “[t]he country enjoyed a pick-up in [economic] growth in 2017. Unemployment is at its lowest level since February 2001, consumer and business confidence are at two-decade highs, and inflation is low and stable.”

In short, everything was awesome in 2017.

Even the government’s overall revenue was a record high $3.3 trillion for the year.

Yet despite all that good news… despite all those positive developments and record revenue… they STILL managed to lose $1.2 trillion.

…click on the above link to read the rest of the article…

Why the most-recent selloff was just the beginning

February 22, 2018

Why the most-recent selloff was just the beginning

On October 19, 1987, the Dow experienced its biggest one-day percentage loss in history – plunging 22.6%.

The day will forever be known as “Black Monday.” The selloff was so fast and so severe, nothing else even comes close.

The second worst percentage loss for the Dow was October 28, 1929 (also Black Monday) when the exchange fell 12.82%. It fell another 11.73% the next day (you guessed it… “Black Tuesday”). Then the Great Depression hit.

A lot of people blame portfolio insurance for the severity of the market drop in 1987.

At the time, portfolio insurance had become a super popular product for the largest institutional investors. Portfolio insurance would “hedge” their portfolios by selling short S&P 500 futures (which profit when the market falls) when stocks fall by a certain amount. The idea was the gains from selling the S&P futures would offset the losses from the falling prices of the underlying portfolio.

If stocks fell more, the big investors would sell more futures.

The problem with portfolio insurance is it was programmatic. And when the losses inevitably came, it created a feedback loop. Selling begot selling.

But what initially ignited that selling back in 1987?

Matt Maley is a former Salomon Brothers executive who was on the trading floor for Black Monday. He shared his thoughts with CNBC last year to mark the 30th anniversary of the event.

Maley reminded us of the popularity of another strategy in those days – merger arbitrage. This was the time of Gordon Gekko, when corporate raiders would borrow tons of money – typically via high-yield bonds – to buy other firms.

Merger arbitrage is simply buying shares of the takeover candidate and shorting shares of the acquiring firm. It’s a speculative strategy that tries to capture the spread between the time the deal is announced and when it (hopefully) closes.

…click on the above link to read the rest of the article…

Meet the Italian government’s Orwellian new automated tax snitch

February 21, 2018

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.

…click on the above link to read the rest of the article…

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

February 6, 2018

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.

…click on the above link to read the rest of the article…

Message from Planet Japan: The good times never last forever

January 29, 2018

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.)

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 tenets 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.

…click on the above link to read the rest of the article…

Customs And Border Protection Clarifies: You Have No Rights While Traveling

January 15, 2018

Customs And Border Protection Clarifies: You Have No Rights While Traveling

The government is like a poorly trained dog. If you let one bad behavior go, it just escalates until they bite.

The government has been searching electronics like cell phones and laptops at the border since early in the Bush administration. But because the 9/11 attacks were fresh, and because the practice was not widespread, it went largely unnoticed.

Fast forward to fiscal year 2015 and the Customs and Border Protection searched 8,503 airline passengers’ electronic devices. In FY 2016 they searched 19,033. And in FY 2017 CBP searched the devices of 30,200 travelers.

The CBP obtained no warrants for these searches. Many people searched were foreign travelers to the U.S. but last year over 6,000 were American citizens.

In response to growing complaints Customs and Border Protection revised their policy. Last week they issued a new directive. But in some ways, it is worse.

For starters, their guidance claims the authority to search a traveler’s electronic devices “with or without suspicion.”

The guidance now claims passengers are “obligated” to turn over their devices as well as passcodes for examination. If they fail to do so, agents can seize the device.

That is all considered a “basic search.” Agents must have suspicion in order to conduct an “advanced search.” This includes copying information from devices, or analyzing them with other equipment.

Finally, CBP agents can not “intentionally” search information stored on the cloud, versus on the device’s hard drive.

What this means:

It actually adds insult to injury that the new guidance starts: “CBP will protect the rights of individuals against unreasonable search and seizure and ensure privacy protection while accomplishing its enforcement mission.”

Nothing could be further from the truth. This is clearly a violation of the Fourth Amendment protections against unreasonable search and seizure. This violates the privacy of everyone searched.

…click on the above link to read the rest of the article…

The day I found out it was all rigged

January 8, 2018

The day I found out it was all rigged

May 6, 2010 started off as a pretty boring day.

The most exciting stories from the morning’s newspapers were reviews of the upcoming Iron Man 2 film.

But all that changed at around 2:45pm when, without warning, the stock market crashed, and the Dow Jones Industrial Average dropped 1,000 points within minutes.

It was unprecedented… especially because there was absolutely no reason why stocks should have fallen so much.

It’s not like Apple had declared bankruptcy, or the Central Bank had jacked interest rates up to 50%. Up until that point it had been pretty quiet in the markets.

As it turned out, the reason behind the crash was that the investment banks’ fancy trading algorithms had gone completely haywire.

Several of the largest banks had developed autonomous software that was capable of trading billions of dollars without the need for human beings.

And at 2:45PM that day, their software started to fail… inexplicably selling stocks to the point that prices collapsed nearly 10% in minutes.

They called it the Flash Crash, and, even though stocks had largely recovered by the end of the day, the banks lost an enormous amount of money.

Then something interesting happened. Within a few days, the major exchanges announced that they would CANCEL many of the trades that took place during the Flash Crash window.

In other words, they were handing the banks their money back.

I never forgot that moment… because I received an email from my broker informing me of the news.

They were canceling a profitable trade that I had placed during the Flash Crash window, effectively giving it back to the banks.

When the banks’ trading algorithms performed well and they all made money, the profit was theirs to keep.

…click on the above link to read the rest of the article…

Why the next stock market crash will be faster and bigger than ever before

October 23, 2017

Why the next stock market crash will be faster and bigger than ever before

US stock markets hit another all-time high on Friday.

The S&P 500 is nearing 2,600 and the Dow is over 23,300.

In fact, US stocks have only been more expensive two times since 1881.

According to Yale economist Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio – which is the market price divided by ten years’ average earnings – the S&P 500 is above 31. The last two times the market reached such a high valuation were just before the Great Depression in 1929 and the tech bubble in 1999-2000.

Some of the blame for high valuation goes to the so-called “FANG” stocks (Facebook, Amazon, Netflix and Google), whose average P/E is now around 130.

But there’s something different about today’s bull market…

Simply put, everything is going up at once.

Leading up to the tech bubble bursting, investors would dump defensive stocks (thereby pushing down their valuations) to buy high-flying tech stocks like Intel and Cisco – the result was a valuation dispersion.

The S&P cap-weighted index (which was influenced by the high valuations of the S&P’s most expensive tech stocks) traded at 30.6 times earnings. The equal-weighted S&P index (which, as the name implies, weights each constituent stock equally, regardless of size) traded at 20.7 times.

Today, despite sky-high FANG valuations, the S&P market-cap weighted and equal-weighted indexes both trade at around 22 times earnings.

Thanks to the trillions of dollars printed by the Federal Reserve (and the popularity of passive investing, which we’ll discuss in a moment), investors are buying everything.

In a recent report, investment bank Morgan Stanley wrote:

We say this not as hyperbole, but based on a quantitative perspective… Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001.

…click on the above link to read the rest of the article…

Science tells us this is all true

October 9, 2017

Science tells us this is all true

On April 30, 1934, under pressure from Italian-American lobby groups, the United States Congress passed a law enshrining Columbus Day as a national holiday.

President Franklin Roosevelt quickly signed the bill into law, and the very first Columbus Day was celebrated in October of that year.

Undoubtedly people had a different view of the world back then… and a different set of values.

Few cared about the plight of the indigenous who were wiped out as a result of European conquest.

Even just a few decades ago when I was a kid in elementary school, I remember learning that ‘Columbus discovered America’. There was no discussion of genocide.

It wasn’t until I was a sophomore at West Point that I picked up Howard Zinn’s People’s History of the United States (and then Columbus’s own diaries) and started reading about the mass-extermination of entire tribes.

Columbus himself wrote about his first encounter with the extremely peaceful and welcoming Arawak Indians of the Bahama Islands:

“They do not bear arms, and do not know them, for I showed them a sword, they took it by the edge and cut themselves out of ignorance. They have no iron… They would make fine servants… With fifty men we could subjugate them all and make them do whatever we want.”

And so he did.

“I took some of the natives by force in order that they might learn and might give me information of whatever there is in these parts.”

Columbus had already written back to his investors in Spain, Ferdinand and Isabella, that the Caribbean islands possessed “great mines of gold.”

It was all lies. Columbus was desperately attempting to justify their investment.

In Haiti, Columbus ordered the natives to bring him all of their gold. But there was hardly an ounce of gold anywhere on the island. So Columbus had them slaughtered. Within two years, 250,000 were dead.

…click on the above link to read the rest of the article…

Today the music stops

September 20, 2017

Today the music stops

Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

Economists have a measure for money supply called “M2”. And M2 is at a record high — nearly $9 trillion higher than at the start of the 2008 crisis.

Now, one might expect that, over time, as the population and economy grow, the amount of money in the system would increase.

But even on a per-capita basis, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

And that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity and artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

…click on the above link to read the rest of the article…

The real story behind America’s new $20 trillion debt

September 12, 2017

The real story behind America’s new $20 trillion debt

Late yesterday afternoon the federal government of the United States announced that the national debt had finally breached the inevitable $20 trillion mark.

This was a long time coming. It should have happened back in March, except that a new debt ceiling was put in place, freezing the national debt.

For the last six months it was essentially illegal for the government to increase the debt.

This is pretty brutal for Uncle Sam. The US government hasn’t run a budget surplus in two decades; they depend on debt in order to keep everything running.

And without the ability to ‘officially’ borrow money, they’ve basically spent the last six months ‘unofficially’ borrowing money by plundering federal pension funds and resorting to what the Treasury Department itself calls “extraordinary measures” to keep the government running.

Late last week the debt ceiling crisis came to a temporary armistice as the government agreed once again to temporarily suspend the debt limit.

Overnight, the national debt soared hundreds of billions of dollars as months of ‘unofficial’ borrowing made its way on to the official books.

The national debt is now $20.1 trillion. That’s larger than the size of the entire US economy.

You’d think this would be front page news with warnings being shouted from the rooftops of America.

Yet curiously the story has scarcely been covered.

Today’s front page of the New York Times tells us about Hurricane Irma, North Korea, and alcoholism in Iran.

Even the Wall Street Journal’s front page has zero mention of this story.

In fairness, the number itself is irrelevant. $20 trillion is merely a big, round, psychologically significant number… but in reality no more important than $19.999 trillion.

The real story isn’t the number or the size of the debt itself. It’s the trend. And it’s not good.

…click on the above link to read the rest of the article…

The world’s most powerful bank issues a major warning

September 7, 2017

The world’s most powerful bank issues a major warning

In 1869, a 48-year old Jewish immigrant from the tiny village of Trappstadt in Germany’s Bavaria region hung a shingle outside of his small office in lower Manhattan to officially launch his new business.

His name was Marcus Goldman, and the business he started, what’s now known as Goldman Sachs, has become the preeminent investment bank in the world with nearly $1 trillion in assets.

They didn’t get there by winning any popularity contests.

Goldman Sachs has been at the heart of nearly every major banking scandal in recent history.

The company has settled lawsuits on countless charges, ranging from exchange rate manipulation, stock price manipulation, demanding bribes from their own clients, front-running retail customers, and just about every shady business practice that would put money in their pockets.

Yet throughout it all, Goldman Sachs has been protected from any serious punishment by its friends in highest offices of government.

Four out of the last eight US Treasury Secretaries, including the current one, have formerly been on the payroll of Goldman Sachs.

Three current Federal Reserve Bank presidents are Goldman Sachs alumni.

The current president of the European Central Bank and the current head of the Bank of England are both former Goldman Sachs employees.

You get the idea.

On its face, there’s nothing wrong with government staffing its departments with top executives from the private sector; taxpayers would probably rather have someone who knows what s/he’s doing behind the desk rather than some random guy off the street.

But the consequent favoritism that results from this revolving door is blatant and repulsive.

Case in point: in 2008 when the financial system was going up in flames and most banks were suffering enormous losses, the government orchestrated a sweetheart bailout deal, of which Goldman was the primary beneficiary.

…click on the above link to read the rest of the article…

Why you might as well paint a giant bulls-eye on your bank account

September 6, 2017

Why you might as well paint a giant bulls-eye on your bank account

Vegetarians be forewarned… you won’t like what follows.

We slaughtered a pig yesterday at the farm. I have two freezers full of pork now, and countless strips of bacon curing in the kitchen.

I’ve written about this before– out here at the farm I’m able to organically produce almost everything that I eat… meat, eggs, rice, nuts, and just about every kind of fruit and vegetable imaginable. A lot of it gets canned and stored.

We even grow wheat which we turn into organic flour, plus oats and all sorts of other grains.

As I’ve described in the past, this is a pretty powerful feeling. I know that, no matter what happens in the world, I’ll always have a source of food.

And even if it’s all rainbows and buttercups from here on out, I get to eat clean, organic food. There’s hardly any downside.

Invariably as I meet people throughout my travels around the world, I’m always asked why I spend so much time in Chile.

I usually tell them about my business ventures here and that I founded a company that’s rapidly becoming one of the largest blueberry producers in the world.

But when I talk about the farm and growing my own food, people often respond with furrowed eyebrows and a hint of derision– “Oh, so you’re, like, preparing for the end of the world…”

It’s as if embracing a little bit of independence and self-reliance requires paranoid delusion and chronic pessimism.

Fortunately I’m no longer in middle school, so my decisions aren’t based on what the cool kids might think.

In truth I’m wildly optimistic about the future.

Yes, there will come a time when bankrupt western governments will have to suffer the consequences of their reckless financial decisions.

…click on the above link to read the rest of the article…

It’s better to turn cautious too soon…

July 31, 2017

It’s better to turn cautious too soon…

En route to Chile

One of the greatest investors in the world is getting worried…

Howard Marks is the billionaire founder of Oaktree Capital, one of the largest and most successful investment firms in the world.

A few times each year Marks write up his thoughts about financial markets– he calls them ‘investment memos’.

And he just released his latest one with a very clear message: it’s time to be cautious.

From Marks’ memo…

I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses.

Marks admits this bull market could continue. But he’s happy taking chips off the table in today’s particularly dangerous market.

Asset prices are high across the board – the S&P 500 is trading at 25 times trailing 12-month earnings compared to a long-term median of 15 – and prospective returns are low.

Meanwhile, we’re also seeing record-low complacency amongst investors.

Just this morning the Wall Street Journal published data from Yardeni Research showing that percentage of ‘bearish’ investors who believe that the market will fall is near its lowest level since 1987.

The Volatility Index (VIX), a statistic which measures ‘fear’ in the market place, is at its ALL-TIME lowest point in its entire 27-year existence – hitting 8.84 last week, compared to above 80 in 2008.

The VIX hit 8.89 on December 27, 1993. From Marks:

The index was last this low when Bill Clinton took office in 1993, at a time when there was peace in the world, faster economic growth and a much smaller deficit. Should people really be as complacent now as they were then?

Compare that today, where market pitfalls abound…

– North Korea is threatening to nuke the US
– Donald Trump is firing his entire cabinet

…click on the above link to read the rest of the article…

Italy’s newest bank bailout cost as much as its annual defense budget

June 27, 2017

Italy’s newest bank bailout cost as much as its annual defense budget

Two more Italian banks failed over the weekend– Banco Popolare di Vicenza and Veneto Banca.

(In other news, the sky is blue.)

The Italian Prime Minister himself stated that depositors’ funds were at risk, so the government stepped in with a bailout and guarantee package that could cost taxpayers as much as 17 billion euros.

That’s a lot of money in Italy– around 1% of GDP. In fact it’s basically as much as the 17.1 billion euros they spent on national defense last year (according to an estimate by Italian think tank IAI).

You don’t have to have a PhD in economics to figure out that NO government can afford to spend its entire defense budget every time a couple of medium-sized banks need a bailout.

That goes especially for Italy, whose public debt level is already 132% of GDP… and rising. They simply don’t have the money.

Moreover, the European Union actually has a series of new rules collectively known as the “Bank Recovery and Resolution Directive” which is supposed to prevent failing banks from being bailed out with taxpayer funds.

Here’s the thing– Italy has LOTS of banks that are on the ropes.

So with taxpayer resources exhausted (and technically prohibited), who’s going to be on the hook next time a bank goes under?

Easy. By process of elimination, the only other party left to fleece is the depositor.

Here’s how it works:

Let’s say a bank takes in $1 billion in deposits.

Naturally the bank doesn’t just keep $1 billion in cash sitting in its vault. They invest the money. They make loans. They buy assets.

So the bank’s balance sheet shows $1 billion worth of assets, and $1 billion worth of deposits that they owe to their customers.

But sometimes banks screw up when they invest their customers’ funds. Loans go bad. Borrowers default.

…click on the above link to read the rest of the article…

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