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Ten years after the crisis… they’re doing the same thing and expecting different results

Ten years after the crisis… they’re doing the same thing and expecting different results

“Holy Crap– turn on your TV! This is crazy!”

It was Sunday, September 14, 2008. Exactly 10 years ago to the day.

My friend Jeff called me and told me to turn on the television—where I saw dozens of people on the streets of Manhattan filing out of a skyscraper carrying boxes full of their office junk.

They were all employees of Lehman Brothers, one of the largest investment banks in the world.

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Lehman was hours away from filing bankruptcy in what would go down as THE biggest bankruptcy in US history.

The next day the US stock market tanked. And for most of the next several weeks, all global financial markets were a roller coaster of surreal panic and chaos.

I don’t know if you can remember the general mood back then. I can. It was fear.

People were terrified of what was happening in the economy. The real estate market had dried up. The stock market had crashed. Some of the most hallowed financial institutions in the world went bust in the blink of an eye.

It’s now officially been a decade since the collapse.

And the typical sentiment among economists, politicians, and central bankers is that the economy has come roaring back.

There’s certainly a lot of evidence to support this assertion—

Several financial markets around the world have hit all-time highs. Stocks. Real estate. Bonds. They’re all generally selling for record high prices.

Earlier this week the US Census Bureau announced that median household income in the Land of the Free had increased by 1.8% between 2016 and 2017.

(That’s hardly a life-changing pay raise for workers… but it’s better than nothing.)

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

These people lost one-third of their savings in a single week (not in crypto)

These people lost one-third of their savings in a single week (not in crypto)

It happens every year around this time when I hold the annual Liberty and Entrepreneurship Camp that I’ve been sponsoring for the past nine years.

The event is incredible: I bring in top entrepreneurs and business executives, plus students from all over the world– places like Ivory Coast, Brazil, Singapore, Russia and the United States.

It’s five days of mentorship that seemingly goes round-the-clock. It’s exhilarating… but exhausting.  And the Notes from the Field schedule always suffers as a result.

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I’ll tell you more about the event later this week.  But in the meantime, I thought it was more pressing to talk about the unbelievable situation currently unfolding in Turkey… because it’s pretty extraordinary what’s happening right now.

As you may know, Turkey has imprisoned a US pastor named Andrew Brunson for alleged terrorism and espionage.

Obviously the US government wants him back. So Uncle Sam has slammed Turkey with economic sanctions.

Turkey’s economy was already wobbly before the sanctions. The country is suffering the effects of debilitating debt and persistent recession.

Now the economy is getting absolutely destroyed.

Turkey’s currency, the lira, is down some 45% this year. Just yesterday the lira was down a whopping 7%.

If you don’t speculate in currencies very much, a 7% move in a single day is basically unprecedented. It almost never happens. So this is a pretty big deal.

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

The latest casualty in the global pension catastrophe is…

The latest casualty in the global pension catastrophe is…

In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires.

Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury.

So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere.

Augustus wanted to end this practice by setting up a special fund specifically for military pensions.

And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations.

Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare.

He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money.

But as you can probably already guess, the money didn’t last.

Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes.

Within a few centuries, the fund was gone.

This is a common theme throughout history… and still today: pension funds are almost invariably mismanaged to the point of catastrophe.

We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time.

Congress has even formed a committee that’s preparing for massive pension failures.

And here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund.

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

A Hard Rain’s a-Gonna Fall

A Hard Rain’s a-Gonna Fall

The prospects for the rest of the year are awful

Après moi, le déluge

~ King Louis XV of France

A hard rain’s a-gonna fall

~ Bob Dylan (the first)

As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response.

“The Fed just announced: We want economic growth, and we don’t care if there’s inflation… have they ever said that before?”

He then famously uttered the line “You gotta love a put”, referring to the Fed’s declared willingness to print $trillions to backstop the economy and financial makets.

Nine years later we see that Tepper was right, likely even more so than he realized at the time.

The other world central banks followed the Fed’s lead. Mario Draghi of the ECB declared a similar “whatever it takes” policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country’s entire bond market. And no central bank has printed more than the People’s Bank of China.

It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn’t diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected ‘thin-air’ money ever:

Total Assets Of Majro Central Banks

In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.

And everyone learned to love the ‘Fed put’ and stop worrying.

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

America’s long-term challenge #3: destruction of the currency

America’s long-term challenge #3: destruction of the currency

On April 2, 1792, George Washington signed into law what’s commonly referred to as the Mint and Coinage Act.

It was one of the first major pieces of legislation in the young country’s history… and it was an important one, because it formally created the United States dollar.

Under the Act, the US dollar was defined as a particular amount of copper, silver, or gold. It wasn’t just a piece of paper.

A $10 “eagle” coin, for example, was 16.04 grams of pure gold, whereas a 1 cent coin was 17.1 grams of copper.

The ratios between gold, silver, and copper were all fixed back then.

But if we apply today’s gold price of $1292 per troy ounce, we can see that the current value of the original dollar as defined by the Mint and Coinage Act of 1792 is roughly $66.75.

In other words, the dollar has lost 98.5% of its value since 1792.

What’s incredible about this constant, steady destruction of the currency is how subtle it is.

Few people seem to notice, because modern day central bankers try to “manage” inflation between 2% to 3% per year.

2% to 3% per year is pretty trivial. But it happens again the next year. And the year after that. And the year after that.

After a decade or so, it really starts to add up.

But there’s an important, other side of the equation: income.

Costs are clearly rising. And it’s fair to say that incomes have been rising too. But which one has risen more?

In 1982, back when I was a toddler, the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website.

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

The coming boom in gold prices. . .

The coming boom in gold prices. . . 

In June 1884, a local farmer named Jan Gerritt Bantjes discovered gold on his property in a quiet corner of the South African Republic.

Though no one had any idea at the time, Bantjes’ farm was located on a vast geological formation known as the Witwatersrand Basin… which just happens to contain the world’s largest known gold reserves.

Within a few months, other local farmers started discovering gold… kicking off a full-fledged gold rush.

Just over a decade later, South Africa became the largest gold producer in the world… and the city of Johannesburg grew from absolutely nothing to a thriving boomtown.

This area is singlehandedly responsible for 40% of all the gold discovered in human history – some 2 billion ounces (or $2.6 trillion of wealth at today’s gold price).

And while the Witwatersrand Basin is still being mined to this day, it’s not as active as it used to be.

Gold production in Witwatersrand peaked in 1970, when miners pulled a whopping 1,000 metric tons of gold out of the ground.

A few decades later in 2016, the same area produced just 166 tonnes– a decline of 83%.

That’s not unusual in the natural resource business.

Whereas it takes nature hundreds of millions of years to deposit minerals deep in the earth’s crust, human beings only require a few decades to pull most of it out.

This creates the constant need for mining companies to explore for more and more major discoveries.

Problem is– that’s not happening. Mining companies aren’t finding anymore vast deposits.

According to Pierre Lassonde, founder of the gold royalty giant Franco-Nevada and former head of Newmont Mining–

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million-ounce gold deposit, at least ten 30+ million ounce deposits, and countless 5 to 10 million ounce deposits.

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

Treasury Department reports $1.2 TRILLION loss in 2017

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

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

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

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

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

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

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

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

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…

Olduvai IV: Courage
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Olduvai II: Exodus
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