May 15, 2012
Santiago, Chile

Over the weekend, I had the privilege of breaking bread with our workers at the farm in celebration of the phenomenal harvest season we’ve had.

Some of the workers during the grape harvest

And a celebration it was– everything from the blueberry harvest in December all the way up to the wine grape harvest that just ended, this season shattered previous production records.

Moreover, in keeping pace with (and even surpassing) the rate of inflation, the prices we’ve been able to contract from wholesale buyers are also higher than ever before.

The celebration was also partly a going away party– today is my last day in Chile, and the workers wanted to send me off with a full stomach and nasty hangover before resuming my ‘normal’ nomadic lifestyle.

While I’m definitely going to miss the farm, and Chile, I’m looking forward to getting back on the road for a while; I’m heading to the US for a few weeks, then Europe for the summer, then Africa, then Asia, and finally back to south America.

Over the last several years, this journey as a financial explorer has taken me to over 100-countries and provided countless stories, lessons, and opportunities. And if there’s one thing I’ve learned throughout all of that experience, it’s this:

The world is full of amazing places and incredible opportunities that absolutely anyone can take advantage of.

Whenever I see people stuck in a bad situation, I just want to grab them and say “It doesn’t have to be this way, just leave! There are some really amazing things out there waiting for you.”

If you feel uninspired by your current prospects, whether in your personal life, your job, business, healthcare needs, retirement, investments, etc., you’ll find a whole new universe of options when you expand your thinking internationally.

Every single country has something to offer… a competitive advantage. It might be top quality medical care, safer banks, cheap outsourcing, flexible asset protection vehicles, low-tax business structures, cheaper gold premiums, lower cost of living… or even something like great food, or a better gender ratio for singles.

The concept is simple: when you change your geography, you change your odds.

Chile is one place that really has a lot to offer just about every category of individual– from entrepreneur to retiree to skilled professional to young student.

The job market here is booming, and foreigners can easily obtain work permits. It’s gorgeous. A high standard of living can be had at a very reasonable cost. Business, investment, and entrepreneurial opportunities abound. Plus Chile is the leading incubation and venture capital hub in Latin America.

But Chile is not alone in the universe of great places to be; there are dozens of other locations around the world that are also exciting, from Qatar to Kosovo to Azerbaijan to Abu Dhabi to Paraguay to Kurdistan.

In Latin America, I also highly recommend Colombia and Brazil; both are already becoming thriving economies full of compelling employment and financial prospects.

In Asia, it’s hard to go wrong anywhere… except maybe Brunei.

Singapore may be one of the easiest places in the world for talented professionals (especially with families) to find a job and relocate. Hong Kong also has a very strong job market, and many companies in mainland China are hiring foreigners too.

For entrepreneurs and investors, Indonesia and Vietnam are both enormous markets with rapidly growing per capita wealth. Mongolia is set to become the richest nation in the world by the end of the decade. Burma is just waiting to explode.

In any of these places, there are strong possibilities to create value, achieve financial success, do something meaningful, and live a freer life. It certainly beats waiting around for your government to go bankrupt.

As a final note, I just wanted to remind you that today is the application deadline for our 2012 summer Liberty and Entrepreneurship Camp.

This one is shaping up to be the most international we’ve ever had. So far we’ve heard from students from over 50-countries– South Korea, Poland, Afghanistan, Bangladesh, Indonesia, France, Brazil, the US, Israel, Nepal, Macedonia, Tajikistan, Australia, India, the Philippines, Canada, Nigeria, and dozens more.

If you’re young, driven, global and prone to libertarian, entrepreneurial tendencies, you won’t want to miss it. And, as always, there is no charge to attend our camp.

Check out BlacksmithCamp.com for information on how to apply. Don’t delay, the deadline is today.

May 14, 2012
London, England

[Editor's note: Tim Price, frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in the UK, is filling in for Simon today.]

Imagine you are one of two people playing Monopoly. While you follow the rules religiously, the other player, who also happens to be the banker, does not.

He routinely appropriates properties. If he doesn’t like the score on the dice, he simply changes them. He continually takes as much money from the bank as he likes. Whenever the rules don’t suit he arbitrarily alters them in his favour.

Oh, and he hates to lose. Rather than concede defeat, he is perfectly willing to set fire to the table.

Imagine no longer. This is the state of the financial markets. You are playing against the world’s central banks.

For some time now, the Financial Times has been running articles (under the inauspicious label of ‘Collateral Damage’) discussing the merits or demerits of central banking. Only one contributor, Ron Paul, has challenged the status quo:

“[W]hile socialism and centralised economic planning have largely been rejected by free- market economists, the myth persists that central banks are a necessary component of market economies.”

Every other contributor thus far has sought to defend central banking as a necessary part of the system… a view that seems categorically embraced by most people. In browsing through the comments of Dr. Paul’s FT article, for example, one reader posted:

“The problem with blindly accepting Dr Paul’s diagnosis is that he lacks the necessary qualifications to make a diagnosis. Would you trust a medical diagnosis made by Ben Bernanke, Mario Draghi or Mervyn King ?”

No, I wouldn’t. But I wouldn’t trust an economic diagnosis from any of those individuals either. Given their track records, why would anyone?

Getting rid of central banks (over time, let us be realistic) would have several effects.

First, it would require insolvent commercial or investment banks to fail properly, as opposed to feeding off the blood of taxpayers indefinitely.

As an example, lest anyone regard the $2 billion loss recently announced by JP Morgan as comparatively trivial, it should perhaps be seen in the context of the same bank’s overall derivatives exposure, which is shown graphically below.

JP Morgan Chase total derivatives exposure, as expressed in $1 trillion towers of dollar bills. Source: Demonocracy.

JP Morgan’s total derivatives exposure stands at $70.1 trillion, or roughly the same size as the entire world economy. Each of the $1 trillion towers in the image is double-stacked to a height of 930 feet (283 meters).

Second, eliminating central banks would require governments to balance their books, no longer able to monetize the debt through its relations with the central banker.

Third, asset prices would revert to being determined by the market, and not by unelected economist serving the interests of bankers and politicians.

As this is clearly not going to happen anytime soon, most investment managers seem content to embrace the system and continue playing the cards they’ve been dealt.

To give you an example, the FT reported that, last year, US pension funds for the very first time put more of their assets into bonds as opposed to equities.

Like many investors, these fund managers fail to understand the risks they’re running and seem to have accepted the convention that nothing could possibly go wrong while central bankers are in charge.

Yet with Treasury yields as low as they are, this is unlikely to end well. The chart below shows the impact on investors who purchased British Gilts during the stagflation suffered in the UK during the 1970s.

Source: Frontier Investment Management

Investors who bought conventional Gilts in 1973 had to wait for 12 years to earn a positive real return on their investment.  And this is exactly the sort of financial repression we have to look forward to under the current system controlled by the political and central banking elite.

Tim Price
Director of Investment
PFP Wealth Management
Sovereign Man Contributor

May 11, 2012
Undisclosed location

Former US Republican presidential candidate Michelle Bachmann receives the Sovereign Man dumbest person of the week award for obtaining… then almost immediately renouncing… Swiss citizenship. I’ll explain:

Bachmann’s husband is a Swiss national; they’ve been married since 1978, and as a result, Bachmann eventually became qualified for Swiss citizenship as well.

She recently received confirmation of her citizenship from the Swiss authorities, a fact that was reported in some mainstream media outlets. Bachmann was subsequently criticized by her political opponents for engaging in such ‘un-American’ activities.

[This is a bizarre assertion, by the way, as the country was built on dual nationals...]

And so, just two days after the story broke, Bachmann renounced her Swiss citizenship yesterday, announcing that she is a “proud American citizen.”

This is, by far, one of the dumbest things that somebody could do. It’s possible to both be a proud citizen AND have a backup plan. Patriotism doesn’t mean blindly going all in.

Having a second passport provides a great deal of opportunities, from new banking and financial relationships to a having a fallback option for another place to live.

It’s like an insurance policy… something that you many never ‘need’, but you’ll be incredibly thankful you have in case you ever do.

And as citizenship is often conferred generationally, your progeny will also be able to enjoy the benefits. In this way, it’s like having an insurance policy for all of your future descendants. Not a bad deal.

A Swiss passport is definitely one of the best. You can travel almost anywhere visa-free. It’s a great place to have the option to live some day. The economy is actually functional. Oh, and there are no men in caves plotting to kill the Swiss.

Obtaining Swiss nationality, though, requires a great deal of time and patience; it takes well over a decade to qualify, apply, and receive citizenship, and slightly less time if you’re married to a Swiss national.

Only a handful of people are lucky enough to become naturalized Swiss citizens, and giving it up is like throwing away a winning lottery ticket…

Ironically, after her political tenure is over and Congress has managed to finally finish off the US economy, Bachmann may, having renounced Swiss citizenship, find herself one day trapped in the environment of financial repression, capital controls, and steep inflation that was created by the government she once served.

The rest of us don’t have to end up this way.

For millennia, governments on the slide have resorted to plundering their citizens in order to maintain the status quo and keep the party going a little while longer.

History is full of examples, from the Roman Empire (which resorted to direct confiscation of people’s agricultural stock) to the Greek government of today (which is now simply nationalizing people’s bank accounts in its sole discretion).

The folks who stick around waving the flag and bombastically proclaiming their patriotism just end up getting abused. Thinking, creative people have a plan B.

Today this means taking steps to diversify internationally, including obtaining a second passport.

Now, I put boots on the ground all over the world. Just in the last two months, for example, I’ve been to 14+ countries from Venezuela to Thailand to Canada to Peru.

In each of these places, I’m constantly looking for the best opportunities– lifestyle, investment, business, employment, banking, medical, personal, etc.

Residency and citizenship is high on my list… and what I can say is that it’s definitely getting harder by the day. Governments are starting to realize that a passport is one of the scarcest resources in the world, and as things continue to get a bit crazy, demand is growing.

Scarce supply, rising demand; we all know what this means. Bottom line, it’s getting harder:

- St. Kitts, generally considered a foolproof economic citizenship program, recently raised their already high price for obtaining nationality.

- In Uruguay, the standards are now very strict, and the government wants you to really prove your value to Uruguayan society. They’ve even hired a special team to go around the country to check on your physical residency.

- In Singapore, the flood of EmployeePass applications has made the government reconsider this residency program after having already discontinued the high net worth Financial Investor Scheme.

- For residency and citizenship in Paraguay, the government keeps modifying the procedures for application, and it’s taking much, much longer than it used to.

There are a lot more examples, but its true: obtaining foreign residency and getting naturalized is really getting harder.

Nobody else is going to tell you this. In fact, the plethora of idiots running around ‘selling’ passport services who have no earthly idea what they’re talking about is only spreading misinformation and making matters worse.

In reality, there are still some high quality options available, several of which I will review at the end of this month on our SMC members-only teleconference.

To give you an example, Brazil and Chile are both excellent, off the radar choices. But you really need to have the right support, someone who actually knows what s/he is doing.

The biggest lesson is– do not procrastinate. The sooner you get started, the sooner you’ll be grandfathered in under the old rules. The longer you wait, the higher the likelihood that an option won’t be available any longer.

Something to think about.

May 10, 2012
Florianopolis, Brazil

Brazil is undoubtedly a land of superlatives. One may easily defend that it is the most beautiful country in the world, or claim that Brazilians are the friendliest people in the world. And yes, even the most attractive.

Economically, the story is the same; at $2.4 trillion, Brazil’s economy is twice the size of its nearest regional rival (Mexico), and as a consumer market, it has twice the population with a far greater propensity to consume.

Moreover, foreign investment in Brazil is greater than every other country in Latin America. Combined. It’s staggering. The opportunities here are truly immense.

One of the things that’s so compelling about Brazil is that there are so many places to be; in a lot of countries, the vast majority of business and financial opportunities are concentrated in a single city.

Yet in Brazil, from Rio to Sao Paulo to Belo Horizonte to Brasilia to Salvador to Curitiba to Manaus to Porto Alegre to Recife, there are really a lot of options for major cities full of ripe opportunities.

One of these is Florianopolis, metro population 1.1 million. And in a country characterized by so many superlatives, Florianopolis may be the city of superlatives within Brazil.

It’s a laid-back beach town. It’s a vibrant university town. It’s a rapidly-growing technology hub. It has the highest reported quality of life in Brazil, among the highest in the world. It was even named ‘the best place to live in Brazil.’

And with good reason. Florianopolis is gorgeous. The weather is excellent. Cost of living is much lower than in nearby Rio de Janeiro or Sao Paulo. It’s safe. It’s connected, with nonstop flights to major cities in Brazil, as well as the region– Buenos Aires, Santiago, Montevideo.

The biggest reason to come here, though, is that Florianopolis represents Brazil’s future, probably more than any other city. This is saying a lot given that Brazil itself represents the future of the west.

It’s a young, intensely energetic place. Smart, creative, productive people from around the world, and especially from Brazil, are flocking here to create the next big thing, from energy to nanotech. Plus, some of the region’s best incubators are here to help advance new ideas.

The local culture is open to rapid change, growth, and diversity in a way that’s unusually refreshing given Brazil’s highly bureaucratic, populist leanings. I’ve also found English proficiency in Florianopolis to be much better than in many other parts of the country.

Bottom line: Florianopolis should be on your radar if…

1) You’re an entrepreneur interested in a Brazilian-based business with exposure to world markets. (note: entrepreneurs can obtain residency, and eventual citizenship, by investing roughly $80,000 USD in a Brazilian startup…)

2) Young people with a lot of drive and energy who want to be part of the next boom, but don’t necessarily have a precise idea of exactly what they want to be doing.

3) Technology professionals, including those with families, looking to relocate. There are a lot of tech jobs available here, and not a lot of locals able to fill them. (note: being hired by a Brazilian company is another way to obtain residency…)

4) Retirees. Between the weather, the safety, the medical facilities, and the gorgeous surroundings, Florianopolis is a great place to live out the Golden Years. Even better, you won’t ever have to get on a plane to visit the grandkids… they’ll be beating down your door to come visit you!

May 9, 2012
Sao Paulo, Brazil

When most people think of Brazil, it’s the incredible beaches that come to mind. Or the crazy parties of Carnival. Or the spectacular vistas and great weather. Or how indescribably gorgeous (and welcoming) the locals are.

But here’s a little known fact, and it’s something that sets Brazil apart from most other places: Brazil’s constitution prohibits the extradition of Brazilian citizens to other countries. This is a rare gem in the world… I’ll explain.

Believe it or not, most countries are happy to sell their citizens down the river to another government. If you have been charged with a crime in another country, or are even simply ‘wanted for questioning’, your home government in all likelihood will comply with the request to round you up and ship you off.

For example, only 7% of all extradition requests that the US government made to the British government between 1 January 2004 and 31 July 2009 were denied. The US government denied ZERO extradition requests from the British government over the same period.

You may also be familiar the ongoing case of Wikileaks’ founder Julian Assange, who is wanted in Sweden for “questioning” related to bizarre sex case.

The British government approved Sweden’s extradition request, though Assange has appealed the decision numerous times. He’s lost every appeal so far, and in all likelihood he’ll be on a plane bound for Sweden in the near future.

Assange is an Australian citizen, and his government has completely abandoned him.

You may also remember the more recent case of Kim Dotcom, the German founder of MegaUpload.com who was arrested in New Zealand as part of a US operation to shut down his file-sharing site. Like Assange, the German government has been silent.

This is ironic because most people are brought up to believe that their governments will protect them… that if you get into a jam overseas, they’ll send the military to rescue you.

The reality is that, far more often, governments trade their own citizens away in order to score diplomatic brownie points, even when there’s not even a crime involved.

The US-Mexico extradition treaty, for example, lists a number of extraditable offenses, such as:

- Violations of the customs laws
- Offenses against copyright or intellectual property
- Offenses related to international trade and transfers of funds or valuable metals
- Offenses relating to prohibition “unfair transactions”

We’re not exactly talking about violent criminals here; these rules so opaque that just about everyone on the planet is in violation of some offense.

That’s why Brazil’s Constitutional guarantee is so refreshing. Brazil has a long history of rejecting extradition requests for citizens… and if Assange and Dotcom had thought that far ahead, they’d be sitting on the beach in Rio right now instead of wearing electronic ankle bracelets under house arrest.

Needless to say, this requires obtaining Brazilian citizenship… which, if you’re in a hurry, you can qualify for in just 12-months. More on that in a future letter, I’ve got a plane to catch!

[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today from Jakarta.]

May 8, 2012
Jakarta, Indonesia

If you swallow the line parroted by the mass media in the West (my adopted country of Australia being the prime offender), you’d think Indonesia was a strict Islamic state where terrorists run around bombing nightclubs frequented by tourists.

And you probably have a mental image of an economic backwater reliant on exports of natural resources such as coal and palm oil to pay its bills.

Rubbish.

Toss all your clichéd, preconceived assumptions about Indonesia out of the window immediately.

Jakarta, Indonesia’s capital city, is a modern, sophisticated metropolis populated by friendly, tolerant people of many cultures and religions.

The world’s biggest Buddhist temple is in Indonesia. There are more Christians here (28 million) than the entire populations of Australia and New Zealand combined.

Oh, and there are more registered users of Facebook than in almost every other country in the world! Not exactly the hotbed of ultra-conservative Islam.

More broadly, Indonesia is already the third-biggest market in Asia after China and India, with 240 million people. In seven of the past eight years, its economy has grown by more than 5%. On current growth rates, it’s doubling every 11 or 12 years.

“Growth slows in 1st Quarter,” read the headline in the paper this morning. Yeah. From 6.5% the previous quarter, to 6.3% in the quarter ended March 31st. Boo hoo.

There’s not a single economic policymaker in the West who wouldn’t kill for economic growth like that. But in Indonesia, the figure was mildly disappointing.

As Simon and I frequently point out, though, the official statistics are usually worthless… you have to trust what your eyes and ears tell you on the ground. And the reality certainly backs up the figures—Indonesia is buzzing.

This is clearly a place that’s on the rise.  It’s already almost a trillion-dollar economy.  Fifty percent of the population is under the age of 30 and yet to enter their peak working and consuming years.

Millions of new workers enter the labor force each year.  Yet, unemployment is falling… to 6.3% on the most recent statistics, down from 6.8% 12 months before.

Indonesian wages are lower than they are in China now (US$160 a month is typical), and there are many multinational companies starting to relocate production here.

The engine room of the Indonesian economy is NOT low-value-added exports of natural resources.  It’s domestic consumption demand, which accounts for 53% of the economy; and, investment, which accounts for 32% of GDP.

What’s more, policymakers are cognizant that adding value to the country’s natural resources at home, before exporting them, could be another important driver of growth.

Indeed, Indonesia has just imposed duties on the export of most raw metal ores.  The duties do not apply to refined products, and are designed to encourage investment in domestic treatment and refining facilities.

It may or may not work.  But, let’s face it—there are worse problems to have than figuring out what to do with an abundance of raw materials.

This, combined with a young and growing labor force, as well as room for great improvement in its infrastructure, are all good reasons to be bullish on the long-term economic future of Indonesia.

Moreover, from what I’ve seen so far, the rampant credit creation and likely overbuilding that characterize the sky-lines in places such as Manila and Bangkok right now, are not evident in Jakarta.  At least not yet…

May 7, 2012
Asuncion, Paraguay

Long-time readers know that I’m unabashedly bullish on agriculture. The supply and demand fundamentals for food speak for themselves, but let’s briefly review:

On the demand side:

1) World population isn’t getting any smaller for now. Even some of the most Malthusian models show a continued rise in global population for the next few decades until peak resources and economic conditions begin to thin the herd. In the meantime, demand for basic sustenance will continue to rise.

2) More importantly, millions of people in the developing world are being lifted from poverty into the middle class. More wealth means demand for more Calories. Not only does this increase general food demand, but often specific demand for things like beef which require far greater resources to produce.

On the supply side:

1) While industrial farming techniques and genetic modification have dramatically increased productive yield, cultivated land is on the decline. The UN Food and Agriculture Organization estimates that, over the last several decades, cultivated land per capita has declined by 43% worldwide.

2) Topsoil erosion, anomalous weather, and lack of water availability are becoming especially problematic in certain countries, further reducing the supply of arable land.

3) Rising input costs (particularly oil prices) have pushed many farmers out of business in recent years, reducing the already low number of people who dedicate their lives and land to feeding everyone else.

And of course, there’s the monetary side… arguably the most important factor:

1) Central bankers continue to expand their balance sheets and create more money at an alarming rate. This pushes up the price of real assets like agricultural commodities as there is simply too much paper chasing to scarce resources.

2) Meanwhile, politicians have enacted completely idiotic policies to subsidize and encourage inefficient biofuels, further reducing food output.

It’s true that technology may very well save the world from its agricultural woes one day, but this is unlikely to take place over the next few years.

As such, the above points suggest that, at a minimum, food prices are bound to keep rising.

I see this over and over again throughout the world as I travel, particularly in developing countries where food purchases often comprise more than half of a typical household budget.

Rising food prices mean that people are forced into making very difficult choices. And history teaches us that, while people generally put up with a lot of BS from their governments, all bets are off if a food crisis strikes.

From the French Revolution (Let them eat cake!) to the Arab Spring, messing with someone’s ability to put food on the table for his family has almost always caused a restructuring of the social contract.

Politicians understand this. It’s why some governments (Saudi Arabia, Kuwait) provide retail food subsidies, and why others (Russia, Argentina) foolishly mandate food export bans… or even try price fixing.

Between the obvious supply and demand challenges, the political and monetary idiocy that exacerbates the problems, and the potential revolutionary spark, it makes sense to have a position in agriculture.

The most comprehensive way to do this, by far, is to own agricultural property. Sure you could buy ETFs and futures contracts, but just like in the gold market, such instruments are full of counterparty risk and exposed to a manipulated financial system.

Owning a farm or ranch is like owning physical gold. Instead of trading one kind of paper (fiat currency) for another (ETFs), buying agricultural property or physical gold is essentially trading paper for a real asset.

Regionally, the best deal in the world right now on a risk-adjusted basis for farmland or grazing land is definitely Latin America, specifically Chile, Uruguay, and here in Paraguay.

Paraguay is, in fact, still the cheapest place in the world I’ve seen for agricultural property… particularly in the dry Chaco area where you can pick up an acre of land for the price of a couple of pizzas.

To give you an example, a friend of mine is looking at a 5,000-acre plot in the central Chaco for less than $300,000.

On the other side of the country near the quaint town of Paraguari, I’ve seen a small 50-acre, fully planted personal farm with a spacious home for just over $100,000. Based on my math, they’re selling the house for the cost of construction and giving away the land for free. Not a bad deal…

The carrying capacity, growing conditions, and soil quality in Paraguay are lower than in most of Uruguay and central Chile, but the net yields (particularly for cattle, soy, corn, and stevia) are still strong.

The dark side to Paraguayan agriculture is that ultra-cheap prices have attracted the likes of Monsanto, which is using some of Paraguay’s countryside as proving grounds for its genetically modified seeds.

Overall, though, Paraguay is definitely worth the trip if you’re interested in foreign agricultural property. The barrier to entry is quite low given the ridiculously cheap prices and reasonable foreign asset ownership rules, while the potential for both yield and speculative upside are quite high.

May 4, 2012
Santiago, Chile

Tomorrow morning, an expected 30,000 faithful Berkshire Hathaway shareholders will file into the CenturyLink Center in downtown Omaha to hear their leader wax philosophically on just about every topic imaginable.

You have to give credit where credit is due: Warren Buffett is damn good at picking stocks and finding undervalued treasures; plus his jovial, grandfatherly demeanor make him pretty hard to dislike.

It’s for these reasons that Buffett has achieved, at least when it comes to financial matters, a moral authority and credibility previously reserved for the likes of Nelson Mandela. When he speaks, the public takes it as truth.

Yet for a man who has been so right about his portfolio, he’s completely misguided about so much else.

Buffett has been one of the loudest champions of higher taxes… which, as we explored earlier this week, only provides the government with even more resources to squander.

Calling for higher taxes is in no way patriotic… it’s idiotic. Why give the people who are notoriously corrupt and incompetent even more ammunition to drive the economy into the ground?

Buffett fails to realize that, in the US, more tax revenues mean more bombs, more bailouts, more child-molesting TSA agents. In the UK, more tax revenues mean more nanny state nonsense. In Greece it means– well, never mind, they’re too broke to even print tax forms in Greece.

Perhaps more strikingly, though, Buffett has been dead wrong about gold.

He famously quipped that all the gold in the world could be melted down into a cube that would fit inside an American baseball infield… and that you could do nothing with such a hunk of metal save look at its glossy shine.

It’s not terribly surprising that Buffett is so wrong on precious metals having (1) lost his ass in the silver market in the 1990s, and (2) been one of the biggest beneficiaries of the Federal Reserve’s long-term destruction [inflation] of the US dollar.

It’s just as well. The longer Buffett keeps telling people that gold is a useless investment, the longer it delays the mania phase.

Given how much silver jumped in the 90s on the news that Buffett was buying, I hate to think what would happen to gold prices if the same happened today.

Personally, I’m happy for the opportunity to trade my paper for gold at today’s relatively low prices… and I sincerely hope Buffett goes on another anti-gold tirade this weekend to scare potential buyers away.

Last but not least, I would be completely remiss if I didn’t mention the Oracle’s failed prophesies on the US housing market. Wrong, wrong, and wrong.

Buffett has written a number of times that the US housing market would turn around in… 2010. Make that 2011. Make that 2012. Oops.

In his annual letter to shareholders from earlier this year, Buffett finally admitted that he was “dead wrong” predicting the end of US housing woes, but is still convinced that a turnaround is in the works.

His reasoning? Coitus.

Buffett’s latest hypothesis is that good ole’ fashioned American sex drive will cause a population boom that generates demand for housing:

“People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”

There you have it: America is going to fornicate its way out of the housing crisis.

Never mind that the woefully dismal unemployment rate among young Americans (ostensibly the source of said hormones) precludes their ability to pay for, and generate, meaningful housing demand… even despite their hormones.

Can someone please show Warren Buffett what a condom is? It’s not like people have stopped having sex for the last three years… it’s the family planning that’s been put on hold.

According to the National Center for Health Statistics and the Center for Disease Control, the US birth rate is at an all-time low, and dropping fast. Moreover, the cost of raising a child keeps rising steadily.

When you’re the richest man in the world, you don’t have to think about these things. But regular people do. Regular people put off having kids when we’re unemployed and without housing. We put off having multiple kids when the future is uncertain and healthcare costs are spiraling out of control.

Declining birth rates are typical in civilizations which hit massive economic speed bumps, from Japan’s lost decades to the Roman Empire. This time is not different.

The danger with Buffett’s running commentary from taxes to gold to housing to general ‘pro-America’ bombast, is that the masses listen to him. He is a rare likeable billionaire who ‘drives around Omaha looking for the best deal on Cherry Coke.’

The false hope that he’s selling keeps many people from acknowledging reality: that the game is being reset, and the rules have completely changed.

With all due respect to Mr. Buffett’s integrity and stock-picking abilities, he is a vestige of the old system ruled by central bankers and corrupt politicians where you get rich surfing a tidal wave of fiat currency. You get mega rich doing so while picking great companies.

This system is collapsing more by the day, and the sooner it happens, the sooner the real recovery can begin. It’s those who acknowledge this reality and prepare for it who will come out on top in the end.

May 3, 2012
Hong Kong

[Editor's note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

One of the most important habits of highly successful investors is that, when market conditions call for it, they have the ability to sit on their butts and do absolutely nothing.

Great investors wait patiently for the next slam-dunk opportunity to present itself.  They do not jeopardize their capital in half-baked ideas, nor risk money on investments in which they do not have conviction.

As the famous early 1900s stock speculator Jesse Livermore put it, “It never was my thinking that made the big money for me. It always was my sitting.”

Or, as the contemporary billionaire investor, Jim Rogers puts it:  ”I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”

It’s good advice at any time, but especially apt right now as there are few OBVIOUS opportunities in the market.

The problem with so much of the investment management industry, however, is that they are paid to “do something.”  And their mandates typically say that they must be “fully invested.”  So, as money keeps pouring into mutual funds, fund managers have to buy things.

However, as an individual investor focused on absolute returns, as opposed to returns relative to a benchmark index, you have the luxury of being able to do nothing.

And sometimes, in investing, there really isn’t anything to do — other than sitting patiently and scouring the market for the next obvious trade or investment.

Right now in the markets, I see no obvious speculations.  There are no ”slam dunks,” such as when silver went parabolic and rose from $30 to $50 in a matter days early last year, and I went short.  Or, when platinum prices fell well below gold prices towards the end of last year and I went long.

The few obvious opportunities– such as betting against the worthless paper issued by insolvent governments in the Western hierarchy-may take too much time to play out to qualify as a ‘slam dunk’ right now.

Besides, fighting the Fed certainly does entail quite a bit of risk…  especially since all the money being conjured out of thin air by central banks has to end up somewhere. For now, that somewhere is the bond market– if only by default (no pun intended).

One day, the institutional market will wake up and find a sound alternative. Yet predicting when that day will be is not something that is obvious to me.  In the meantime, I am happy to sit on my butt and wait, just as Jesse Livermore, Jim Rogers, many other successful speculators and investors in history have done.

Of course, even “doing nothing” also entails making decisions.  What’s the best way to hold cash?

My own method is a system I developed based on takeover arbitrage, a model that even Warren Buffett has called a ‘cash equivalent’. Our 4th Pillar subscribers have been able to enjoy double digit returns through this system without having a single day in the red, ever.

Precious metals also make a lot of sense for those with a long-term view of their investment capital; gold and silver are among the best ways to hold savings if you distrust politicians and central bankers.

Holding physical metal can be cumbersome for funds earmarked for investment, though. The conversion back and forth to paper currency can be costly and time consuming.

If you’re looking to keep your risk capital plugged in to the financial system, Hong Kong dollars are an interesting option to consider; right now, the currency is pegged at 7.80 to the US dollar +/- a small band of variance.

In the event of a major deleveraging event that pushes the US dollar higher (like we saw in 2008), the Hong Kong dollar will strengthen against everything else concurrent with the US dollar’s rise.

If, on the other hand, the US dollar sinks away to its value in wallpaper or BTUs, the Hong Kong dollar will likely be released from its peg, reducing the inflationary loss on your capital.

It may also be a worthwhile to consider diversifying across a basket of currencies from stronger economies like the Australian dollar or Philippine peso. Simon has been vocal about the Chilean peso and Mongolian tugrik as well.

Of course, the minute I think there is an obvious, slam-dunk opportunity in which we can deploy our capital to make a solid gain with limited risk, I’ll let you know. In the meantime, I strongly suggest sitting on the sidelines.

Until next time,

Tim Staermose, Chief Investment Strategist
Sovereign Man

May 2, 2012
Santiago, Chile

Stephen King (yes, that Stephen King) is fired up. Angry. Furious. Why? Because he doesn’t get to pay enough income tax.

It’s not enough that King could simply write a check, voluntarily, to the government. He wants to make sure that -everyone- is forcibly coerced under threat of imprisonment to pay their ‘fair share’… as defined in the government’s sole discretion.

In a profanity-laden tirade that was recently published in the Daily Beast, King blusters away about the duty and responsibility of ‘the rich’ to pay more to the tax man.

King’s rant is like the philosophical reflections of a drunken sailor, vacillating between amusing babble and outright gibberish.

He starts off by railing against NJ governor Chris Christie’s waistline, then blasts the billionaire Koch brothers for being too charitable to a cause that King doesn’t care for, and then closes his piece by comparing the fate of rich people to that of Marie Antoinette.

It’s a meandering diatribe from an otherwise gifted and creative mind. And as entertaining as it may be, King is just plain wrong… and there’s one simple reason: his appeal that people should be paying higher taxes as a measure of patriotism is a logical fallacy.

Many people who sound the bombastic call of patriotism presuppose that we’re all born with a certain obligation to society… to a piece of dirt that was here long before human beings walked the earth, and will be here long after we’ve vanquished ourselves from the planet.

This is total bunk. Human beings are born free. No one comes into this world owing anybody anything, especially by some complete accident of birth.

But even if you assume to be true that we’re all born with a burden to pay, King is still missing the point.

There’s a certain amount of aggregate wealth in the economy that can be applied towards any number of activities. Wealth can be invested, consumed, saved, etc. King argues that a much greater percentage of that wealth should fill the government coffers.

Bear in mind, though, that for every dollar, euro, pound, or yen that goes to the government, it’s one fewer that’s available to buy his latest book; to renovate a bathroom; to make a crowd-sourced startup investment; to pay for the kids’ tennis lessons; to donate to an organization of your own choosing; etc.

The higher tax argument implies that politicians know how to spend money better than we do; that they have some kind of moral authority to determine which causes are worthy, and which are not, and that their determinations supersede our own.

King (and most other notable tax proponents like Warren Buffett) are terribly confused in that they think giving more money to the government to make these decisions is somehow giving more money to the ‘country’. It’s not.

Again, even if you presuppose that we all have an obligation to a piece of dirt, paying more taxes is merely giving more money to politicians. You and I aren’t getting any of King’s money. The ‘environment’ isn’t getting any of King’s money. It goes to the politicians.

And if there is one category of individuals that has shown throughout history, repeatedly, that it is completely and utterly incompetent at spending other people’s money and determining which are the most ‘just’ causes, it is politicians.

More bombs, more wars, more political favors, more debt, more bailouts, more child molesting TSA thugs, more porno-watching SEC regulators, more legislation to take over the Internet and confiscate passports, more gun-happy government agencies with civil asset forfeiture and police authority… this is what politicians do with our money.

Continuing to nurse their largess, corruption, and pitiful decision-making is not the mark of patriotism– it is the mark of insanity, a la Albert Einstein (doing the same thing over and over again and expecting a different result).

By paying higher taxes, you’re feeding the beast. By arguing for higher taxes, King is the animal handler.

If you truly feel an obligation to society and to a piece of dirt, then starve the beast. Let the politicians run it all into the ground, watch the system collapse, and then come back in to create value in the exciting aftermath.

Ranting and raving about society’s duty to continue supporting the most obtusely corrupt system in modern history only delays the inevitable…and hence delays the recovery. It takes a lot of courage, but a real Patriot would walk away.

May 1, 2012
Santiago, Chile

Friedrich von Hayek, a major figure in the Austrian school of economics, wrote in his seminal work the Road to Serfdom,

“By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable.”

It’s hard to ignore Hayek’s prescient warning when you hear about the US government’s newest (and 17th) spy agency that it wants to roll out… because hey, 16 spy agencies just isn’t enough.

Or the Transportation Security Administration ‘aggressively screening’ a 7-year old girl with Cerebral Palsy at JFK Airport in New York (causing the family to miss their flight)… and then later issuing a statement defending its agents’ actions.

Or Congress authorizing the IRS and State Department to revoke US citizens’ passports on suspicion of tax delinquency; as of last week, the bill has passed both the House and Senate, and is now awaiting a final agreement before going to the President for signature.

Then there was the National Defense Resources Preparedness executive order that President Obama signed last month– an order which gives the federal government autocratic power to seize and redistribute all agricultural resources in the event of a national emergency.

When you step back and look at the big picture, the writing on the wall seems so clear, so obvious. In Western Europe and the United States in particular, bankrupt, insolvent governments will resort to any means necessary in order to maintain the status quo: keeping them in power at our expense.

This means continuing to reduce personal liberty, eliminate economic freedom, vanquish privacy, debase the currency, stifle innovation, eradicate financial opportunity, and destroy the savings and livelihoods of millions of people.

These tactics are not new, this time is not different. Empires on the slide have always resorted to cannibalism– feeding off the productive class in order to keep the party going a little while longer.

In the fourth and fifth centuries (AD), for example, the Western Roman empire resorted to centrally planned labor allocation, price fixing, rapid currency devaluation, capital controls, civil asset forfeiture, and tax rates that were so high that the few citizens who remained welcomed the invading barbarian hordes with open arms.

Most of the smart, productive Romans had already moved on to greener pastures long before. As the situation worsened, more and more people began to leave until there was a mass Exodus of over 90% of western Rome’s population in its final decades.

Similarly, the Ottoman Empire, having reached the zenith of its expansion in the 16th century, established a massive, unsustainable bureaucracy that was far more costly than any other administrative hierarchy in history, including Rome’s.

Soon Ottoman bureacrats began to see the people as existing to provide them with position… rather than their position existing to support the people. Sound familiar?

Huge spending in the Ottoman Empire gave way to a massive public debt (on which they defaulted in 1875), which eventually begat currency debasement, inflation, an absurd tax system, and a substantial reduction in civil liberties.

History shows that freedom is almost always the price that societies pay to maintain the status quo and keep their rulers in power. When the system finally collapses under its own weight, though, things can go from bad to worse as the people cry out for CHANGE.

The French, for example, traded an absolute monarch in Louis XVI for an absolute dictator in Robespierre. Similarly, the Russians traded the empire of ‘Bloody’ Tsar Nicholas II for the Red Terror of Soviet Russia.

As the Russian Marxist revolutionary Leon Trotsky said in 1937, “The old principle of ‘who does not work shall not eat’ has been replaced by a new one– who does not obey shall not eat.”

Two words: Screw that.

Everybody has a choice to make. On one hand, we can either bury our heads in the sand, pretend that everything is OK, and continue being the boiling frog in the pot… just like the poor schmucks who stuck around Rome until the 5th century getting taxed out of their minds and watching their livelihoods inflate away.

On the other, we can recognize that the rise and fall of empires is part of history’s normal cycle… that it’s been happening for millennia, and this time is no different. We can look to the rest of the world and understand that, for all of the turmoil, this is one of the most exciting times to be alive and that the world is full of incredible opportunities.

Just like the Romans who left for Byzantium, the Ottomans who left for Europe, the Europeans who left for North America, there are always regions in the world that are rising while others are falling.

It’s the people who get there first after acknowledging reality and basic historical truth that can reap the greatest reward.

April 30, 2012
London, England

[Editor's note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]

In a week that saw Britain slide into its first double-dip recession since 1975, we quite fittingly also saw evidence of the sort of insular bigotry and protectionist narrow-mindedness that one associates with that same ugly, painful decade, when Barry Sheerman, Member of Parliament, said:

“I’m getting increasingly worried about the free movement of people across Europe. It’s a very competitive world out there, and my constituents resent that.”

The signs of unravelling are not confined to British shores. French voters in the presidential elections shocked markets by

(a) favouring the socialist Francois Hollande; and
(b) giving almost a fifth of their votes to the far-right extremist Marine Le Pen.

Meanwhile in another turn of the sovereign debt screw, Spain was downgraded toward reality. And the Dutch government collapsed altogether.

Amazingly, the people of Europe just don’t seem that keen on austerity. Yet it’s worth asking– why hasn’t the recession of today produced the same sense of crisis from the 1970s?

Chris Dillow of the Guardian newspaper suggests that average real wages are much higher now, so although standards of living are falling, they’re falling from a much higher level that softens the pain (even though the real pain of austerity hasn’t even really arrived yet).

But there is one outcome from the 1970s that is genuinely to be feared… the risk of which seems to be rising every day, if it has not indeed already arrived: Stagflation.

Stagflation– the utterly painful combination of stagnating growth and steep inflation that marked the 1970s– and will be the natural side effect of extended central bank quantitative easing during a period of widespread deleveraging.

In other words, stagflation is the consequence of printing money that nobody wants.

Moreover, an outbreak of serious stagflation will decimate conventionally managed debt and equity portfolios. And given that most people invest with the crowd, with conventional investments or conventionally managed portfolios, stagflation will wipe the savings and livelihoods from untold masses.

But, we live in strange times– times, for example, that reward bankers handsomely for bankrupting the economy. This is why the likes of so many politicians and financial commentators are able to insist with impunity that central bankers should ‘keep printing more money’ despite never having provided a scintilla of evidence that such tactics work.

Case in point– in a letter to the Financial Times from April 26, 2012, economist Roger Alford remarked:

“The utterly disparate time horizons and the very different experience and skills required… make it virtually impossible for any one person to have the experience and depth of understanding to provide effective leadership [as head of a major central bank].”

Intellectually constrained by his faux science “profession”, Mr. Alford does not take this argument to its logical conclusion: if the institution is so difficult to govern and the role so difficult to effect, why have it in the first place ?

We know the answer to this question. Central banks exist to protect the banking system and to finance the government’s debts at all costs… even if it means bankrupting the taxpayer and productive economy.

Yet the urgent need for austerity and an insoluble sovereign debt crisis make for uneasy bedfellows.

By definition, we cannot shrink our way back to the sort of growth required to service the West’s accumulated debts. Something has to give.

That something will ultimately be social and political disorder on a continent-wide basis, particularly as the taxpayer becomes increasingly frustrated in his obligations to fund the rapidly growing and untenable costs of Big Government.

Such disorder is almost universally feared– by politicians, by markets, by institutions. As the London-based marcoeconomic research consultancy Capital Economics recently commented:

“The last thing that the markets need right now is increased political uncertainty at the heart of Europe at a time when the economic outlook is already bleak…”

The only reasonable response to this is: tough. If social and political disorder is what it takes to shift an unsustainable status quo in which vampire banks and clueless bureaucrats suck the life out of the productive economy, bring it on.

Tim Price
Director of Investment
PFP Wealth Management
Sovereign Man Contributor

April 26, 2012
Santiago, Chile

“Should we crawl into bed with the IRS?”

Thanks to the steady barrage of US government regulation ranging from the obtusely insipid Dodd-Frank financial reform to the impossible-to-implement Foreign Account Tax Compliance Act (FATCA), banks everywhere have to make this decision.

In short, Congress has arrogantly passed legislation to control foreign banks on foreign soil. FATCA, for example, requires that every single bank on the planet enter into an information-sharing agreement with the IRS.

Banks that don’t comply will face severe penalties, including being subject to a steep withholding tax on funds sourced through the US.

In the long-run, Congress will have put the final nail in the coffin of the US banking system as the market will simply establish an alternative destination to source, clear, and transfer funds.

For now, though, many banks are simply walking away from US customers altogether… throwing their hands up and saying “we would rather not do business with this entire market rather than deal with Uncle Sam ever again…”

To be clear, this is a bank-by-bank decision that each one is making individually. And we’re seeing -a lot- of banks around the world, from Singapore to Panama to the Cayman Islands, say ‘thanks but no thanks’ to US customers.

But, as the saying goes, whenever one door closes, another one opens. OK, maybe not exactly 1 for 1… but there are still plenty of options around the world where US taxpayers can establish foreign bank accounts to diversify their savings abroad.

Not a bad place to visit your money...

[As an aside, establishing a foreign bank account is one of the most important steps to take in order to safeguard your livelihood. It's critical to move a portion of your savings to a jurisdiction that is not under the control of the bureaucrats in your home country, so that your funds cannot be frozen with a single mouse click or phone call.]

While I’m not able to list (for the most part) individual banks, the following jurisdictions have multiple banks that are still happy to work with US customers. I should know, I have an account in most of these places:

1) Andorra. This tiny low-tax nation nestled high in the mountains between France and Spain has long been a favorite of well-heeled Europeans. Today, despite all the turmoil in the rest of Europe, Andorra has one of the most well-capitalized banking systems on the continent.

2) St. Vincent and the Grenadines. This country is more famous for being the filming location for Pirates of the Caribbean rather than as an international banking center. The banking sector is still quite small, and as a result, banks are still willing to do the extra paperwork required to deal with US customers in order to boost their balance sheets.

3) Mongolia. Perhaps one of my favorite places in the world to bank, you can get paid upwards of 13% interest in Mongolia, easily the fastest growing economy in the world.

4) Belize. Even though it’s just a short flight from a number of cities in the US, several banks in Belize will open accounts for US citizens through the mail without you having to leave town.

5) Hong Kong. One of the original international banking centers, Hong Kong remains one of the most efficient places in the world to bank. It’s cheap, it’s fast, and you have unfettered access to opportunities in mainland China. Many of the big name banks, including HSBC, will still open accounts for US citizens.

6) The Bahamas. With the local economy already so closely tied to the United States, most banks in the Bahamas have made the decision to stay in bed with Uncle Sam rather than rock the boat.

7) Chile. Among the most well-capitalized banks in Latin America, Chile’s banking system marches to the beat of its own drum. It’s very difficult (though possible) to open an account without obtaining residency first, but fortunately it’s a straightforward process to obtain residency in this thriving country.

8) Turks and Caicos. Like the Bahamas, T&C’s economy is heavily dependent on the United States for trade, tourism, and its financial sector (which constitutes 30% of all economic activity). While a few private banks have closed their doors, some larger multinationals (like Scotiabank) still readily accept US customers.

April 25, 2012
Santiago, Chile

I was approached recently by a member of our Sovereign Man community who filed the paperwork to relinquish US citizenship some time ago. Long story short, after an incomprehensibly long wait, the US government finally sent him a reply: Application DENIED.

Absolutely shocking. That you even have to ‘apply’ to relinquish what you never signed up for is intellectually insulting. That you cannot do so freely, and immediately, is nothing short of totalitarian.

It’s still an embryonic movement, though more and more US citizens are being driven to divorce their country. Last year nearly 1,600 people gave up US citizenship, up from 1,485 in 2010, 731 in 2009, and 226 in 2008.

While some renunciants have philosophical misgivings about being American, most do it for tax reasons. There’s a growing number of expats who, despite living abroad for years, are still paying huge portions of their income to Uncle Sam.

What’s more, the filing requirements are getting more and more onerous. US citizens living overseas have to keep up with all sorts of changes to the tax code that they may not be privy to, and the penalties for noncompliance are severe.

I can’t tell you how many friends I have who are US citizens living abroad that had no idea they were supposed to file the Report of Foreign Bank Account (FBAR) form every year; or the new FATCA form 8938; or those with businesses that must file form 8858 or 5471.

Usually these things come with pretty nasty penalties, possibly up to $10,000 per instance of failure to file.

Then there’s the latest, greatest tax target: accidental US citizens. This group consists of foreigners who happen to be dual nationals because they were born in the US or have an American parent.

These foreigners have spent their entire lives outside the US.  They know absolutely nothing about US tax code. Now they’re getting Dear John letters from the US government saying-

“I see you are a US citizen but have never filed your taxes. Please enclose a check for the following absurd amount of money, which includes interest and penalties for the last 20-years…”

Such tactics smack of desperation… typical of the same sorts of cannibalistic moves that failing, bankrupt governments throughout history have exacted upon their people.

Citizenship is nothing more than accident of birth. Yet in the modern nation-state paradigm, governments lay claim to citizens from the time they’re born as if we’re property.

Children are saddled with obligations that they never signed up for– taxes, compulsory military service, a debilitating national debt, etc.

Most countries at least have procedures to voluntarily surrender citizenship for those who choose to opt out of the system; in the United States, it is contained in section 349 of the Immigration and Nationality Act.

The process usually takes place overseas at a US consulate– you have to fill out a series of forms, swear an oath in front of a government official, and eventually file a final tax return. Some people even have to pay a steep ‘exit tax’ on the value of their assets.

I know dozens who have done this, and from what my friends tell me, many of the consular officials attempt to impugn, insult, or otherwise intimidate people looking to surrender their citizenship. It’s their last-ditch effort to keep the milk cows from escaping the dairy farm.

For example, one official tried terrorizing a friend of mine last year in South Africa, saying, “This smells like TAX EVASION to me!”

Despite all the forms, the bureaucracy, and the intimidation tactics, I had never heard of a case where someone’s properly submitted ’application’ to surrender citizenship has been denied (bar Ken O’Keefe). Until now.

But in what may be the most distinguishing mark of a totalitarian state, the US government has now officially prevented someone from freely leaving the system. The Soviet Union comes to mind.

It certainly does make one wonder to what desperate lows they will sink to next.

April 24, 2012
Santiago, Chile

I awoke this morning to an excited email from a longtime friend who wrote,

“Guess who is going to be officially confirmed as a Polish citizen next month? Yours truly! Now, it’s just matter of waiting to be assigned the Polish version of a social security number and pick up the physical passport. ”

No doubt, if you’re part of the lucky bloodline club because your grandparents happen to have been a certain nationality at birth, it’s possible that their citizenship might pass on to you.

This is, by far, the fastest, easiest, and most cost effective way to obtaining a second citizenship.

Let’s pause for a moment, though, and explore why one would want second citizenship.

When you have all of your eggs in one basket, i.e. you live, work, bank, invest, buy real estate, store your gold, structure your company, operate your business, surf the web, etc. all within the same country of your citizenship, you’re taking on a lot of ‘sovereign’ risk.

If one thing goes wrong in that country, whether you end up on some 3-letter agency’s list, or you get sued because your neighbor’s stupid kid fell in your swimming pool, suddenly all of those assets and interests are at risk.

With the click of a mouse button, a single phone call, or the whisk of a fountain pen, any judge or bureaucrat can shut you out. They can put a lien on your home, freeze your bank account, confiscate your personal property, shut you out of your email, shutter your business, seize your gold, etc.

This is the whole point of international diversification… what I call ’planting multiple flags’. If you use the system against itself and spread those assets and interests around the globe– banking in Hong Kong, structuring a company in Nevis, basing an email account in Norway, storing gold in Singapore, etc.

With this level of diversification, suddenly those assets no longer fall under the control of a single government.

The ultimate in this international diversification is obtaining second citizenship; aside from being a fantastic insurance policy, it’s a ticket to a whole new world of opportunity and freedom.

To give you an example, buried deep within Senate Bill 1813 are provisions that would allow the US government to rescind the passports of US citizens if they are deemed to be seriously delinquent in their tax obligations.

As tax matters are typically administrative issues, however, there would be no court hearing to see if there has actually been any wrongdoing, no judicial appeal. Just punishment.

Such provisions hardly seem appropriate in the Land of the Free, yet the bill is a testament to how far the basic liberties of the American people have been eroded over the years.

In this capacity, a second passport would provide instant options. For someone who has been wrongfully impugned, a second passport is like a get out of jail free card.

Moreover, it gives you the right to live and work in another country (or perhaps several), increasing your options and potential new experiences around the world. You’ll find that you can do business in more places, travel more freely, and have greater comfort and security in your life.

As I’m fond of saying, nobody ever hijacks an airplane and threatens to kill all the Lithuanians. There are no evil men in caves plotting to blow up buildings in Uruguay. There are no angry crowds in Karachi protesting civilian casualties from Panama’s unmanned drone fleet.

And perhaps most importantly, there are no banks or brokerages around the world closing their doors to Slovenians simply because nobody wants to do business with their government.

Now, there are a number of ways to obtain a second citizenship… but again, the quickest and cheapest route is if you happen to be part of the lucky bloodline club.

Certain countries observe what’s called ‘jus sanguinis’, or right of blood, which means that citizenship is determined by lineage rather than place of birth. Some countries even extend the right of citizenship to grandchildren of nationals… meaning that if you have a grandparent from one of these countries, you could be entitled to citizenship as well.

Some of these countries are:

1) Poland. The rules for receiving Polish citizenship from a grandparent are a bit convoluted, but if you have Polish ancestors in your bloodline, it may be worth contacting a firm like CK Law Office (cklawoffice.eu) in Warsaw; they’ve helped a number of Sovereign Man readers obtain Polish passports.

2) Italy. Not quite as complicated as the Polish nationality law, Italy also confers citizenship to descendants of certain Italian nationals going back two generations. You can find out more at MyItalianCitizenship.com

3) Ireland. As we have discussed before, Ireland has perhaps the most clear laws in conferring citizenship to descendants of Irish nationals. You have to do the legwork in finding the right documents, check out www.AnClanGael.com for assistance.

4) Germany. It’s not exactly a cheery subject, but Germany confers citizenship for children and grandchildren of former Germans who were deprived of their citizenship status between January 30, 1933 and May 8, 1945 on racial, political, or ethnic grounds.  You can read more about it here.

5) India. While not quite full citizenship, individuals with Indian ancestors as far as three generations back (great grandparents) can apply for a Person of Indian Origin (PIO) Card. A PIO Card entitles the holder to live, work, attend school, own property, etc. on parity with an Indian citizen. The only restrictions are voting or holding public office.

April 23, 2012
London, England

[Editor's note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]

Roy Ward Baker’s 1958 classic film A Night To Remember, recounts the final night of the RMS Titanic based on survivor interviews from Walter Lord’s 1955 book of the same name.

One scene from the movie depicts a lounge in one of the upper class quarters of the ship as it slowly sinks beneath the waves. Notwithstanding the vessel listing alarmingly, a motley band of toff revelers are determined to go out in the finest style. Some continue to play at cards with a fatalistic resolve while others determinedly quaff spirits direct from the bottle.

Having considered for some time the most appropriate metaphor for the current market environment, we think this may be it: one may be doomed, but one can still party on.

Having already hit the iceberg, one major problem we see is the common perspective for both investors and the asset management industry to view debt and equity as the entire universe of investor choices available.

The reality is (a) that investors can pursue other distinct types of assets (we would single out real assets as an obvious and relevant alternative), and (b) that there can and will be times when both debt and equity markets together underperform, in both relative and absolute terms (the relative benchmark being cash since developed government debt can in no way now be considered a risk-free asset class).

We may be fast approaching a macro environment that threatens conventional portfolios with exactly that outcome– a bear market in both stocks and bonds simultaneously. In other words, the authorities could attempt to throw a bull market party for both bonds and common stocks, but nobody would show up. The ticket to entry is simply too expensive.

Having long exhausted the armory of conventional policies to keep the unsustainably indebted show on the road, increasingly desperate politicians are doing increasingly desperate things, be that gifting money to the IMF in a brazen display of fiscal denial that we can ill afford (US, UK) or simply stealing from other sovereigns (Argentina).

Project ‘End Up Like Japan’ continues to advance well throughout the western economies. The euro zone continues to perform like a group of drowning men lashed together for buoyancy.

Here in the UK, the Bank of England has the dubious privilege of being able to print money with abandon, and it is taking every opportunity to duly abuse the purchasing power of Britons with savings. We continue to hear Mr Takashi Ito’s sad refrain, published as a letter to the FT back in August 2010:

“…after a huge housing bubble bursts, there is nothing to do except suffer many years of economic indignity.”

Politicians, of course, are not in the business of sitting idly by while the country collectively suffers that economic indignity (the savers, at least). They must be seen to be doing something.

The ironic triumph of the Keynesians means that, in trying to save the economy, our central bank may end up destroying it completely by means of the printing press; as a consequence, we now get to experience some of the full-on horror of the Japanese malaise.

As the debt burden and currency debauchery game rise together toward some form of climactic end-game, the sense of politicians simply not getting the point is almost comical. Just when it were most needed, evidence of urgency from government is invisible.

So in a portfolio sense, we close all water-tight doors. Debt holdings are restricted to those of only the most objectively creditworthy borrowers. Equity exposure is kept modest and restricted to only the most defensive. (Sustainable and relatively high dividend yields help.)

We diversify further into the highest quality currency available, namely bullion. That this approach has not necessarily delivered whopping returns over the past 12 months is not an immediate cause for concern to us since we’re most focused on straightforward survival.

We also repeat our increasingly urgent suggestion that investors in debt and equities (especially debt) enjoy the party but dance near the door. Developed market debt investors have enjoyed a 30+ year bull trend in interest rates (and credit creation), but the fat lady in the next room
has started tuning up.

To put it another way, the ship is listing badly but has not yet sunk. Do you have a lifeboat, or a bottle of brandy?

Tim Price
Director of Investment
PFP Wealth Management
Sovereign Man Contributor

April 20, 2012
[Undisclosed location]

Here’s a fun way to cap off your week.

The Congressional Budget Office has just released three very telling infographics which, unintentionally, spell out a pretty dreary picture of US government finances.

The first graphic shows US federal revenue, both in raw numbers ($2.3 trillion in 2011) and expressed as a percentage of GDP (15.4%).

There are a lot of interesting things about this graphic. Check out the massive downward swing of payroll tax receipts starting in 2009… coinciding not only with the dismal rate of employment in the country, but also the demographic trend of having fewer and fewer baby boomers paying in to the system.

It’s also interesting to note that, by comparison, 2011 US tax revenue is roughly twice what is was 20-years prior. Yet over the same period, the federal debt has ballooned nearly five-fold.

The next graphic is mandatory spending– essentially Social Security, Medicare, federal unemployment, and federal retirement programs. Note: this doesn’t include things like defense, interest on the debt, etc.

At $2.0 trillion, these mandatory entitlements comprise a massive 87% of all taxes collected. Put another way, they constitute 13.6% of America’s 2011 GDP. Incredible.

The last graphic shows ‘discretionary’ spending– another $1.3 trillion. The bulk of this is defense ($699 billion), itself nearly 5% of GDP. The rest of it goes to child molesting TSA agents, government-administered education, and all the legions of three letter agencies.

At the very bottom corner is a most disingenuous statement that says ”Net Interest not included.”  In other words, they didn’t bother to include the $454,393,280,417.03 (nearly half a trillion dollars) that the US government spent on interest last year.

To put this number in perspective, the US paid more in interest last year than the entire GDP of Saudi Arabia, or the combined GDPs of the smallest 82 economies in the world. Not exactly a trivial number… unless you’re Tim Geithner.

A few days ago, Geithner quipped on NBC’s Meet the Press that there is ”no risk” of the US turning into Greece over the next few years due to such extraordinary fiscal imbalances.

This is the same guy who said there was no risk of the US losing its AAA credit rating, and that inflation on a global level is “not high on the list of concerns…”

Whether it’s lies, ignorance, or arrogance is irrelevant at this point. The situation is what it is. It’s not going to go away just because the political leadership denies it.

Each one of us has a choice. We can either bury our heads in the sand, just like they’re doing… or embrace reality and take control of our own financial futures.

April 19, 2012
Hong Kong

[Editor's note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

One of the defining characteristics of EVERY boom is the presence of a small elite seeking to enrich itself through graft, corruption, and unethical behavior.

When the music stops and the boom busts, these same people are frequently put to the sword of public opinion.  Think Bernie Madoff, Ken Lay, and Silvio Berlusconi.

The Chinese economic “miracle” of the past three decades will prove to be NO EXCEPTION.

I’m convinced that history will one day show that corrupt Communist party officials, in cahoots with shady developers and construction moguls, systematically plundered the Chinese economy, getting rich off the hard work and savings of the average person.

It’s been happening on an unimaginable scale… and the fuse for the whole rotten mess to explode may have just been lit with this Bo Xilai scandal. To review, briefly:

- Bo Xilai, the former mayor of China’s largest city of Chongqing, was once one of the rising stars of the Communist party and being groomed for a top spot in the Politburo.

- Wang Lijun was his police chief and right hand man.

- Together, Bo and Wang waged a high profile campaign to stamp out organized crime in the region, jailing and even executing supposed underworld bosses and corrupt businessmen.

(As it appears now, they may have simply been eliminating their competition.)

- The two had an apparent falling out, allegedly over evidence that Bo’s wife was involved in the death of British expat Neil Heywood.

- Heywood had been a longtime confidant of the Bo family. His death late last year was originally ruled as a heart attack, however there is now so much conflicting evidence that many are suggesting Heywood was going to come forward with extensive records of Bo’s shady business dealings.

- After being stripped of his rank by Bo, Wang went to both the US consulate and British High Commission seeking asylum in exchange for information about Bo’s impropriety. He was politely rejected.

- Bo has now been relieved of his powers amid a flurry of evidence and allegations that he and Wang siphoned off hundreds of millions of dollars from Chongqing’s economic boom and secreted the funds out of the country.

- Meanwhile Bo’s wife is under arrest for suspicion of murdering Mr. Heywood. Mr. Wang is also in the custody of Chinese authorities.

- Bo’s son, a lavish partier who attends $90,000/year graduate school and drives around campus in European supercars, is hiding out in the United States.

The top echelons of the communist party are now working overtime to snuff out the scandal lest their own financial dealings and personal dirty linen be aired in public.

But, they’re fighting an uphill battle.  The rapid spread in China of micro-blogging services (like Twitter) mean that the party’s censors have a real battle on their hands.

Sordid details have already emerged of an affair between Gu Kailai and Heywood, and the word is that Bo had him poisoned with cyanide.  There are also allegations that the Bo family has siphoned hundreds of millions of dollars out of China into a web of companies controlled via offshore tax havens.

Blocking the use of the names of key figures in the scandal was one thing the censors tried.  It didn’t work.  The bloggers are always one step ahead, and they simply devised code names for all the key figures involved.

All this serves to illustrate what is widely known but never openly talked about: in China, just as in most countries, there are two distinct sets of rules.  One for the powerful elite, and one for everyone else. It’s a delicate balance that always works… until it doesn’t.

This affair has real potential to widely expose just how greedy, corrupt, and colossally abusive China’s elite has been for years. That it comes at a time when China’s economy is slowing will probably multiply the effect.

If a self-immolating Tunisian fruit merchant had the power to spark a wave of revolution across the Middle East, it certainly stands to reason that this scandal may create similar indignation for the ruling class in China… and thus shake the system to its core.

April 18, 2012
Madrid, Spain

The US Passport Act of 1926 is an obscure piece of legislation that was enacted decades ago when the idea of passports starting catching fire around the world.

Subsequently absorbed into US Code Title 22, the law was originally intended to authorize and issue passports for US citizens to travel abroad.

Several years ago, the law was modified to provide the Secretary of State with the authority to revoke or deny a passport to any US citizen convicted of engaging in immoral acts with minors overseas.

Until now, this has been the only instance of excluding a US citizen from travel abroad. But if Senator Barbara Boxer gets her way, there’s going to be one more.

As part of Senate Bill 1813 (known as MAP-21), Congress has inserted language that would oblige the Secretary of State to revoke or deny a passport to any US citizen that the IRS Commissioner deems as having ‘seriously delinquent tax debt.’

For the purposes of MAP-21, ‘seriously delinquent tax debt’ is defined as an amount in excess of $50,000 in which a notice of lien or levy has been filed in public records.

Bear in mind, this is strictly an administrative procedure; there is no due process. By comparison, even pedophiles go in front of a judge before losing their passports.

Something is wrong with this picture.

News of the 1676-page bill has broken across mainstream media outlets. Forbes, Fox Business, the Atlantic, Businessweek… everyone is reporting on this now.

So far, though, no one in Washington has shown any attention of backing down.

I’ve taken the time to actually read the entire bill myself… I wanted to ensure that I understood it fully before telling you about it. And believe it or not, there are even dumber provisions within.

For starters, in what may be one of the most depraved Big Brother moves on record, section 31406 of the bill makes it mandatory for ‘black box’ event recorders to be installed in every new passenger vehicle starting with model year 2015.

Section 31504 requires the development of special alarm systems designed to remind drivers that there are other passengers in the vehicle. Duh.

Then there are provisions for more taxpayer funding to subsidize the massively loss-making Amtrak… plus calls to develop more national, regional, and state-owned railways across the country.

Perhaps most important, though, is Title II of the bill– ‘Stop Taxhaven Abuse.’

Long story short, if the US government decides in its sole discretion that a foreign jurisdiction is impeding tax enforcement, Uncle Sam can shut them out of the US financial system, no questions asked.

It’s just another measure to turn foreign banks into unpaid spies of the federal government… and limit financial freedom for US citizens.

This is a bully move, plain and simple. Most of the global financial system depends on US banks for correspondent accounts. When you wire money from Cambodia to Brazil, for example, the funds pass through New York.

But these kill switch provisions are actually on very shaky legal ground. As several banker and attorney friends of mine in popular offshore jurisdictions like Panama and Labuan have told me, the new bill violates a host of trade agreements.

Moreover, it may prove to be the final nail in the coffin for US dominance in global banking… it’s almost as if Congress is daring the international community to come up with a better alternative.

As China opens its currency and economy more and more each day, it seems painfully obvious that a new solution is coming soon.

Meanwhile, US citizens would do well to start focusing on taking action while the window is still open. This involves seeking a second passport (lest you have yours revoked), moving gold out of the country, and establishing a foreign bank account.

April 17, 2012
Vilnius, Lithuania

In the terminal collapse of the Roman Empire, there was perhaps no greater burden to the average citizen than the extreme taxes they were forced to pay.

The tax ‘reforms’ of Emperor Diocletian in the 3rd century were so rigid and unwavering that many people were driven to starvation and bankruptcy. The state went so far as to chase around widows and children to collect taxes owed.

By the 4th century, the Roman economy and tax structure were so dismal that many farmers abandoned their lands in order to receive public entitlements.

At this point, the imperial government was spending the majority of the funds it collected on either the military or public entitlements. For a time, according to historian Joseph Tainter, “those who lived off the treasury were more numerous than those paying into it.”

Sound familiar?

In the 5th century, tax riots and all-out rebellion were commonplace in the countryside among the few farmers who remained. The Roman government routinely had to dispatch its legions to stamp out peasant tax revolts.

But this did not stop their taxes from rising.

Valentinian III, who remarked in 444 AD that new taxes on landowners and merchants would be catastrophic, still imposed an additional 4% sales tax… and further decreed that all transactions be conducted in the presence of a tax collector.

Under such a debilitating regime, both rich and poor wished dearly that the barbarian hordes would deliver them from the burden of Roman taxation.

Zosimus, a late 5th century writer, quipped that “as a result of this exaction of taxes, city and countryside were full of laments and complaints, and all… sought the help of the barbarians.”

Many Roman peasants even fought alongside their invaders, as was the case when Balkan miners defected to the Visigoths en masse in 378. Others simply vacated the Empire altogether.

In his book Decadent Societies, historian Robert Adams wrote, “[B]y the fifth century, men were ready to abandon civilization itself in order to escape the fearful load of taxes.”

Perhaps 1,000 years hence, future historians will be writing the same thing about us. It’s not so far-fetched.

In the economic decline of any civilization, political elites routinely call on a very limited playbook: more debt, more regulation, more restriction on freedoms, more debasement of the currency, more taxation, and more insidious enforcement.

Further, the propaganda machine goes into high gear, ensuring the peasant class is too deluded by patriotic fervor to notice they’re being plundered by the state.

And just in case anyone falls out of line or starts thinking too much, they give a handful of people badges, weapons, and the authority to terrorize the population.

Whether direct taxation in the form of outright theft, or indirect taxation in the form of inflation, these tactics have been used for millennia to maintain privilege for an elite few at the expense of everyone else.

This time is not different.

At $780 billion, the US government’s budget deficit for just the first six months of FY2012 is more than the entire GDP of Indonesia. This is absurdly unsustainable, yet there is no end in sight to reckless spending habits… let alone paying back what’s owed.

Meanwhile, a whopping $5.5 -trillion- worth of US debt is maturing over the next three years. And it’s unlikely that foreigners will continue to generously loan their hard earned savings to Uncle Sam at sub-inflation rates.

Further, given the millions of new entitlement recipients, it’s unlikely that intragovernmental agencies like Social Security will have the cash flow available to mop up any meaningful portion of this debt.

That leaves the old tried and true options– direct confiscation from the people through debilitating taxes and capital controls, and indirect confiscation through painfully higher inflation.

Like the 5th century Romans before us, people may be ready to abandon civilization itself to escape the burdens placed on them by today’s ruling class. Only, by the time this happens, it may be too late to start doing anything about it.

April 16, 2012
Vilnius, Lithuania

The consistent theme from my travels so far in Europe– the UK, Scandinavia, Lithuania– has been noticeably higher prices. Shockingly so, in some instances.

London, where I spent a rather pleasant and rare sunny weekend with friends and colleagues, has gone from being ‘stupid’ pricey, to just plain absurd. Tube prices, taxi fares, food prices, restaurant bills, train fares… it all keeps going up.

And to cap it all off, the British government’s VAT increases have ensured that absolutely everyone is paying a little bit more.

Here in Lithuania, the buzz around town is the spiraling gasoline prices, which have shot past $7/gallon in local currency. The bootleg fuel industry is thriving here as smugglers bring in cheaper fuel from neighboring Belarus and sell it at a 30% discount.

Needless to say, such practices are heavily frowned upon by the local government looking to get its fair share. Fuel smuggling operations now involve such an intricate network of audacious deception and bribery, it ranks up there with the tall tales of America’s famed Prohibition-era bootleggers.

Now, the official story for rising prices across Europe usually involves some insipid excuse about tensions with Iran or weather. And in nearly every instance, the government propaganda machines simply insult people’s intelligence and understate inflation by an entire order of magnitude.

Yet as John Maynard Keynes, the high priest of modern monetarism, once said, “There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Prescient words from the man whose General Theory constitutes the playbook from which modern politicians and central bankers routinely pillage the livelihoods of billions of people across the planet.

Currency debasement, though, has a long and distinguished history.

In his 1958 work State and Currency in the Roman Empire to 300 A.D., Sture Bolin outlines the systematic (and almost constant) debasement of the silver denarius coin of ancient Rome, which I have reproduced below:

Subsequent emperors became even more clever at debasing the currency; Caracalla (reign 211-217 AD) created a new coin, the Antoninianus, which had a face value far greater than its weight and metal content.

Under Gallienus (reign 260-268 AD), the Antoninianus was composed of less than 5% silver. By the time of Aurelian in 270 AD, further debasement was essentially impossible… though they kept trying.

Such debasement led to rampant inflation in the empire. A slave under the reign of Commodus that cost 500 denarii was five times as expensive under Septimius Severus. A second century modius of wheat (about 1/4 bushel) sold for 1/2 denarius. By the time of Diocletian’s price fixing in 301 AD, the nominal price was 200 times more expensive.

In Roman Egypt, where the best documentation on pricing has survived, a measure of wheat which sold for 200 drachmae in 276 AD increased to more than 2,000,000 drachmae in 334 AD, roughly 1,000,000% inflation in a span of 58-years.

In his 1960 work Roman Coins, historian Harold Mattingly remarked about Roman inflation that “[t]he Empire had, in all but words, declared itself bankrupt and thrown the burden of its insolvency on the citizens.”

Other historical examples abound, but Mattingly’s assessment sums it up the best. Any government that resorts to debasing the currency is making a conscious decision to stick the people with the consequences of its insolvency.

In the starkest example of modern times, the United States government is insolvent to the tune of tens of trillions of dollars and hemorrhaging cash on a daily basis.

Meanwhile, the US dollar has lost 95% of its value while under the management of the Federal Reserve since 1913.

Today, the Fed’s balance sheet has expanded to nearly $3 trillion of shaky, questionable assets… while posting a mere $55 billion in capital, roughly 1.8%. This is about the same level to which Lehman Brothers was leveraged before its own spectacular collapse in 2008.

Yes, there’s a reason the fuel smuggling business is thriving in Lithuania and prices in London have become absurd. Like the Roman Emperors of the past, today’s political elite is throwing the burden of its insolvency onto the people.

And as history further shows, when you cannot trust them with your currency, you certainly cannot trust them with your liberty.

April 13, 2012
London, England

Jim Rogers has famously commented that, if you were smart in the 18th century, you moved to France. If you were smart in the 19th century, you moved to England. If you were smart in the 20th century, you moved to the US. And if you’re smart in the 21st century, you move to Asia.

It’s an absolutely true statement. Each time I’m in Asia, I’m overwhelmed at not only the massive opportunity that abounds for productive, creative, intelligent people, but also what a huge difference there is in cultural sentiment.

From Singapore (where I just departed last night) to Vietnam to Mongolia to the Philippines, Asia is full of optimism and confidence, not doom and gloom.

The reason is simple. Asian economies are based on production and savings. Western economies are based on consumption and debt. The market is simply reshuffling wealth, capital, and opportunity appropriately.

What’s nice is that, like our ancestors before us who moved abroad in search of a better life, anyone can choose to take advantage of this trend.

For someone seeking employment, for example, Asia is full of prospects for both workers and professionals. English teachers are in incredibly high demand across the continent. Experienced professionals are routinely awarded with handsome executive compensation, raking in huge salaries from Abu Dhabi to Beijing.

I had dinner last night with a friend in Singapore who was telling me that he would gladly pay a $1 million salary to the right person to manage his successful business. As he told me, “Money is no object, I just can’t find the right person.”

Aside from employment prospects, unique investment opportunities abound. I had a meeting with some private bankers in Singapore yesterday who were telling me about a number of really fantastic options they had available for clients.

For example, if a client wants to own precious metals, the bank can purchase and securely store physical gold bars… but then provide a line of credit back to the client at an absurdly low rate of interest.

In other words, you could purchase $1 million worth of gold, but then have access to an $800,000 line of credit, backed by the gold, at just 1%. In Vietnam, you can even generate a yield storing your gold at the bank.

Low interest rates are great for borrowers, and this is the case in places like Hong Kong and Singapore… even on investment, consumer, and commercial loans.

One friend in Hong Kong is about to buy an office building and pay a whopping 1.5% interest. Another in Singapore borrows money at 1% interest for his trading account; he then invests the borrowed funds in high quality, short-term corporate bonds that pay 9% interest, making a tidy 8% on money that isn’t even his.

Opportunities for entrepreneurs are also substantial; business thrives where there is access to capital and a growing, affluent customer base. This is Asia.

The number of people being lifted out of poverty and into the middle class in India, China, and southeast Asia is staggering. So is the number of new millionaires being minted.

I have friends who are building generational empires in Mongolia, easily the fastest growing economy in the world. Meanwhile, some of the world’s top entrepreneurs are now making their homes in Singapore, including Facebook co-founder Eduardo Saverin.

No doubt, there’s a lot of cultural inertia and resistance to this idea; empires always resist the notion that they’re no longer #1. But facts are facts, and the truth is quite simple: the most extraordinary opportunities in the world are across the Pacific. If you’re hungry, the choice is obvious.

April 11, 2012
Hoi An, Vietnam

[Editor's note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here.

This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes.

Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest.

Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings.

Today that’s all but a footnote in history. Except in Vietnam.

Vietnam’s economy enjoyed a strong boom in the mid-2000s thanks to economic liberalization and foreign capital inflows. Within a few years, the economy overheated and inflation became rampant.  Then came the global financial crisis.

The Vietnamese government’s response, as it has been with governments all over the world, was to print more money.  This further exacerbated the inflation problem and undermined confidence in the currency.

The unfortunately named Vietnamese dong has been devalued to the point where it now has an absurd number of zeros.  Over the past 3 years it has lost some 30% of its value against the US dollar– it now takes about 21,000 dong to buy just one US dollar.

Against stronger currencies such as the Aussie dollar and Canadian dollar, the dong has plunged even further.

As such, it comes as no surprise that the Vietnamese people don’t trust their government’s paper money.  They prefer to earn dollars and keep their savings in gold. Banks have jumped on board, encouraging gold deposits by offering attractive interest rates.

Property prices are frequently quoted in gold as well. It’s cultural– the average guy on the street is very aware of gold and probably knows the price.

The government doesn’t like this at all because it can’t print dollars or gold.  So, it is discouraging their use, forcing non-tourist business owners to exclusively use the dong.

The government has also introduced regulations to discourage gold hoarding.  Technically, it’s not permissible now for Vietnamese banks to pay interest on gold deposits anymore, but it still happens in practice.

So much for Warren Buffet’s assertion that gold is just a silly cube that doesn’t pay any yield.

It’s ironic that places like Vietnam are considered poor, backward, and undeveloped by the West… and yet it’s precisely these same people who are smart enough to culturally reject worthless government-issued paper currency in favor of something that is naturally scarce and lacks counterparty risk.

We should all be so wise…

Until next time,

Tim Staermose, Chief Investment Strategist
Sovereign Man

April 10, 2012
Singapore

View of Marina Bay, Singapore from my 39th floor hotel room

The flight from Bangkok to Singapore is a quick 2-hours south down the Malay peninsula… though it might as well be 2-years given their differences; Singapore and Thailand are about as distinct as Switzerland and India– it’s yin & yang. Order vs. Chaos. Safety vs. Insanity.

I spend a fair amount of time in both places and tend to get this question a lot– which is better for living in? Which is better for basing a business? It’s a tough question, but I’ll try.

Singapore (like Switzerland) is essentially perfect. Everything works. It’s efficient, clean, and ridiculously safe.  Crime rates in Singapore are incredibly low, and violent crime is almost unheard of. This is extraordinary for a place with so much ethnic diversity.

The economy here is perennially strong; I’ve often written that Singapore is ablaze with opportunity for workers, professionals, entrepreneurs, and investors who are willing to trek across the Pacific.

Best of all, the government runs a very flat, transparent operation. There’s hardly anything you can’t do online, and bureaucracy is minimal. Taxes are also extremely low as Singapore is locked in a never-ending battle with Hong Kong over low-tax bragging rights.

For almost all of the expats I know who live here, Singapore is the -only- place to be. It’s great for families, finance professionals, and entrepreneurs who don’t want to slog it out in the mud with UNICEF in some third world country.

On the other hand, Singapore could also be described as vapid, or even sterile. Nightlife is a bit dull, and nothing terribly exciting happens. People work, earn, and shop. Most of the key areas around town lack character and soul; it’s a bit like new Las Vegas in that way.

On an intellectual level, Singapore definitely ticks all the boxes. There are few other places on the planet, if any, which offer access to so many amazing opportunities, economic vibrance, social stability, and extremely high living standards.

As a friend of mine told me this evening, “I love it with all of my head…”  It’s a rational choice. I usually tell people that Singapore makes a great home… for your money.

On a deeper emotional and spiritual level, however, it may fail to resonate. For my personal taste, I need a bit more picante in my life.

In this capacity, Bangkok is the polar opposite of Singapore; it’s a freewheeling, in your face, super-corrupt wild west. In many ways, Bangkok is like the Tangiers of Asia– a place that attracts
international arms dealers and beach-going tourists alike.

Last night while out with some friends, a relative newcomer to Thailand started a question, “Here in Bangkok, can you–”

“– Yes,” we interrupted. In Thailand, the answer is always yes.
Anything goes.

The culture is also completely different. Despite Thailand’s reputation for revolution and debauchery, locals are fundamentally peace-loving Buddhists. They’re comfortable in their poverty and find happiness in simple pleasures.

In Singapore, society tends to be dominated by money– making money, investing money, spending money. This entire country is practically designed to promote financial success above anything else. It’s no coincidence they’re among the wealthiest people on earth.

To borrow from Warren Buffet, doing business in Thailand should come with a warning label. I tried it once a few years ago… it’s not pretty. The business environment in Thailand is based on coercion, corruption, and deceit. In Singapore, it’s all about the market.

Bottom line, in Thailand, you’re going to be in for a wild, roller coaster ride… especially when the King finally kicks the bucket. You can expect months of turmoil as the royals, military, and politicians wrestle for control of the country.

In Singapore, you can bet on a very stable, comfortable future where job prospects and other professional opportunities are bound to be plentiful.

April 9, 2012
Bangkok, Thailand

One of the things that sets Thailand apart from nearly every other place on the planet is how absurdly cheap things are given the high quality of service.

This becomes crystal clear to even the most casual observer who wanders in to one of the country’s thousands of massage studios, where, for a whopping $5, a local will put his/her heart and soul into rubbing your feet for an hour.

This isn’t something that most people in developed countries would do at any price. And yet, here in Thailand, there is no shortage of folks happy and willing to make those knots go away for the price of a Frappuccino.

Another area where this price/quality anomaly is apparent is in healthcare. Private medical and dental care in Thailand is top notch… in many cases (as I will explore below) far superior to what you might receive back home. Yet it costs a fraction as much.

It’s not just in Thailand; several countries across Asia– South Korea, India, Singapore, and even mainland China– have emerged as the top places in the world to seek treatment. The reasoning is quite simple.

1. Cost is obvious.

Prices for complex procedures are typically half as much as western prices. Bumrungrad International Hospital, Thailand’s most famous medical tourism destination, has a great site publishing median prices for many common procedures.

Total hip replacement, for example, runs about $18,500 in Thailand… versus about $40,000 in the United States. Breast augmentation at Bangkok Hospital will cost around $3,200… versus $5,000 to $15,000 in North America and Europe.

The cost savings also carries over to pharmaceuticals, from blood pressure medication to OTC analgesics. I was feeling a bit under the weather this weekend and bought a pack of Tylenol plus throat lozenges at a local pharmacy for just $2.

2. On that note, many pharmaceuticals are frequently available over-the-counter in foreign markets.

Any gringo who has ever been to Mexico or Panama may have noticed everything ranging from Codeine to Viagra to Amoxicillin available for purchase OTC. It’s similar in Asia.

3. The quality of care overseas is often unparalleled.

Marquee hospitals in Asia (like Bumrungrad) are more like 7-star hotels than anything else– exquisite lobbies, concierge service, gourmet restaurants, luxury accommodations, nurses that are more like butlers, etc.

You’re not just some number in a system– you receive a great deal of personal attention from physicians, not the typical ‘slam, bam, pay the man’ that people in the west are accustomed to.

Not only is this approach refreshing, it also tends to improve the quality of treatment when the doctor spends more than 30-seconds with you.

4. There is no FDA.

One of the most important things to understand about healthcare overseas is that cutting edge, life-saving technologies are embraced without being regulated to death.

Without doubt, western governments (led by the United States) are stifling medical innovation. The regulation is too much of a hassle, and it’s just too damned expensive to negotiate the maze of FDA trials.

As such, there is a wider range of treatment options available overseas… especially in Asia.

To give you an example, a new surgical approach which combines focused ultrasound with magnetic resonance imaging has been shown to eradicate certain cancerous growths without actually having to operate on the patient.

This could potentially be a game changer… for the rest of the world. You’re not going to see it in the US for quite some time, if ever, thanks to the FDA.

Another area that the FDA has stifled is gene therapy. While genetic researchers languish in the US, China has pulled ahead as the clear global leader in genetic therapy, treating everything from cancer to Parkinson’s.

This is usually a huge surprise for people who have been conditioned to believe that the US has the most cutting-edge treatment in the world.

5. Asia is also the epicenter of traditional, non-western medical care.

If you’re not one to get pumped full of drugs when you get sick, Asia is home to some of the world’s earliest healing methods. And again, you’re not going to see herbs and supplements being regulated out of the market.

6. Privacy is far greater overseas.

When you’re dealing with a private hospital in Asia, there is no government healthcare system monitoring your records… no insurance conglomerate looking over your shoulder marking down pre-existing conditions.

7. It’s fun.

Naturally, when you can hop on a plane to receive top quality medical treatment, save a bundle of money, and visit a beautiful, exotic country in one fell swoop, this is an experience you definitely want to have.

April 6, 2012
Pattaya, Thailand

After an exhausting series of meetings in Bangkok, my partners and I are going to spend a long weekend relaxing on the beach in Pattaya before heading out to Laos, Malaysia, and Singapore next week.

I’ve always liked this place; it’s easily the most internationally diverse city in the world on a per-capita basis. Even though the population is only about 300,000, people from all over the world live here– Brits, Europeans, Russians, Arabs, Africans, North Americans, Chinese, etc.

If you walk down the street, you’ll see store front signs in German, Russian, Chinese, English, Thai, Arabic, even Norwegian. The diversity is astonishing… and given how peaceful and laid back the city is, it’s quite refreshing.

Let’s move on to this week’s questions:

First, Ed asks, “Simon- You recently mentioned your annual Liberty and Entrepreneurship youth camp coming up this summer. My 21-year old son is really bright, and I’d like for him to learn from you guys; can you write more about the curriculum and what sort of student you’re looking for?”

Sure. As I mentioned, each year my partners and I hold a 4-day camp devoted to teaching free market economics, libertarian philosophy, and hands on lessons about investing and entrepreneurship to a select group of about 50 students.

Our goal is simple. We aim to change lives by helping students build the appropriate foundations to create value in the world, and hopefully inspire them to break away from a conventional career path.

The students come from all over the world– China, Ukraine, Canada, Brazil, New Zealand, India, United States, Slovenia, Tajikistan, Switzerland, etc., and are between the ages of 18 and 25.

The camp is designed to be actionable and practical; my fellow instructors and I lead a number of classroom and small group sessions teaching critical skills that will help them take a quantum leap in their personal and professional growth.

In the past, we’ve covered topics like starting online businesses, direct marketing techniques, raising capital, network infiltration, etc. More examples are on the camp’s website.

There is no prequalification to attend other than having energy and enthusiasm; we have had students with a variety of experience, and some without any experience at all other than a deep desire to learn.

There is NO COST to attend the camp; students only need to cover their travel expenses to get there… though in extreme circumstances, we will award scholarships to defray travel expenses.

This is easily one of the most rewarding things that I’m involved with, and every year it’s the best part of my summer. In some cases, a few of the students have even become part of our team, and we always leave the door open for bright, talented young people to join us.

You can find out more about what we’re doing at www.BlacksmithCamp.com. The application process is simple– but space is limited. If you’re interested in attending (or know a family member who could benefit from this), I really want to encourage you to submit a video application right away.

Next, Kathy asks, “Simon, I read somewhere that Singapore recently eliminated its residency programs for foreigners who want to live in the country. Is this true?”

No. Singapore eliminated a fast track program for high net worth investors. But unless you have at least $10 milllion, it doesn’t apply. There are still a number of ways to obtain residency in Singapore.

Perhaps the most straightforward are the Employee Pass programs whereby you register a local company, and then apply for residency as the director of your company. Spouse and dependents are allowed to apply as well.

While there is no set legal timeframe, in practice, applicants who have been living in Singapore for six-months under one of the Employee Pass options can apply for permanent residency.  Subsequently, after two years of permanent residency, you can apply for citizenship.

A Singaporean passport is, by far, the best travel document in the world. But citizenship does come at a cost– Singapore still has a draft, and it’s possible you could be obligating yourself and/or your children for military service if you don’t plan carefully.

Also, Singapore does not allow dual nationality.

Last, Adi asks, “Simon, can you highlight countries or other financial jurisdictions which still offer a banking secrecy and political stability at reasonable costs?”

In large part, ‘banking secrecy’ doesn’t really exist anymore. The OECD witch-hunt led by France and the United States has managed to stamp out just about every semblance of privacy that remained in the financial system.

There are still some places like Andorra that have stable, well-capitalized banking systems and continue to offer numbered accounts; these are accounts in which your identity is known only to the banker, and the name on your account is just a number.

Any capital within the conventional banking system, however, is susceptible of being monitored by governments. That’s why real financial privacy lies with anonymously deposited precious metals– gold coins locked in an anonymous vault in a place like Vienna’s Das Safe facility. Totally off the radar.

April 5, 2012
Hanoi, Vietnam

[Editor's note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

For the past eight days I’ve been spending time with friends in Vietnam; I’ll be leaving in a few days to link up with Simon in Thailand, but for now, I’m really impressed by Vietnam. The country has a great deal going for it.

In the ancient town of Hoi An and the capital city Hanoi, the lifestyle is generally very laid back and relaxed.  Excellent cafes and restaurants, offering both local fair and foreign food, are everywhere. Nearly all offer free, reliable WIFI connections.

Prices are very reasonable even in the fancier western-style places, and they border on ridiculously cheap in the local ones.  For a great lunch today of grilled pork and rice noodle soup accompanied by a huge plate heaped high with fresh local herbs to accent the flavors, friend and I paid $3. Total. For TWO.

In Hoi An, a popular tourist town about thirty minutes’ drive south of Da Nang, at the northern end of what was once South Vietnam, our group of five adults and five children dined out in style each evening. We always ordered multiple courses, and several rounds of drinks. Yet the bill seldom exceeded $100.

A fifteen-minute taxi ride to the beach from our hotel in town cost $3.75.  In Hanoi, the metered taxi rate works out to about $0.85 per mile.  And the drivers I’ve dealt with have all been scrupulously honest.

Another thing that’s very noticeable here is that no one expects tips. I suppose it may have been different if the Americans had won the war.

Taxis may be plentiful and cheap, but in order to really explore any city, I prefer walking. And though the weather here can be hot and humid, Hanoi has many lakes and is actually very pleasant to explore on foot.

It also feels extremely safe. My friends here have three young daughters aged from two to six. When I went out with them, the two older ones were able to ride their bikes around their neighborhood without a care in the world.

My friends rent a 3-story, 4-bedroom, 2-bathroom house with a courtyard and several balconies for just $1,150 a month– HALF what I pay for a tiny 2BR apartment in Hong Kong.  And that’s in the up-market Tay Ho (West Lake) district popular with wealthy locals and expats.

Looking around Vietnam today, it’s hard to fathom that forty years ago the United States was still fighting an incredibly costly ideological war over what was then a communist backwater. Thankfully, Hanoi was left largely intact. The Americans never mounted wholesale bombing campaigns over the Vietnamese capital.

Of course, before the “American War,” as they call it here, Vietnam was a colony of France. And while many ordinary Vietnamese suffered under the colonial regime, French colonial influence undeniably left some positives behind.

The wide tree-lined boulevards, lakes, and magnificent colonial architecture, as well as the vibrant cafe society which define present-day Hanoi, are largely a product of the French colonial legacy.

Bottom line…  Hanoi has a lot to offer if you have the ability to live the PT lifestyle, either because your job is location-independent, or because you have the financial means to support yourself from passive income.

And that applies whether you’re carefree and single, or you have a young family like my friends who are based here. For the right person, the quality of life you can enjoy here for the small amount of money you have to pay is really very difficult to beat.

Until next time,

Tim Staermose, Chief Investment Strategist
Sovereign Man

April 4, 2012
Hong Kong

Strolling around the streets of Hong Kong last night trying to (unsuccessfully)  ward off the jet lag, I was a bit surprised to stumble upon the local ‘Occupy’ movement.

A small group, maybe a few dozen at most, has pitched a mini tent village in the open-air atrium of HSBC’s headquarters on Queen’s Road in central Hong Kong.

When I stopped by for a little chat, the group was delighted to tell me all about their anti-capitalist movement. I nodded politely and asked several questions in an effort to understand their philosophical grounding.

No doubt, they smell something rotten in the system. They sense a great injustice in the world and feel like they need to do something about it. Unfortunately, their actions are completely misguided.

They don’t realize that ‘capitalism’ is a distant myth compared to the kleptocratic Keynesian fiat bubble that we’re living in… and they’ve completely missed the driving force of central bankers and idiotic politics that encouraged bad decision making.

On the surface, these are complicated topics… and there’s so much populist propaganda out there, it’s easy for the ‘Occupiers’ to draw the wrong conclusions.

But blaming capitalism for the world’s economic ills is like blaming the guy who invented gunpowder for nuclear holocaust. Sure, you could make an argument that the two are loosely related, but the real blame lies with the system itself– a system which awards perverse power and control to an elite few.

As I’ve often written, future historians will look back on our time with utter incredulity and wonder how we could allow such a system to take over… to allow a tiny handful of men to control the lives and livelihoods of billions of people.

Certainly, injustice in the world is great. There are a lot of people who are suffering, people who have had their lives turned upside down from state-sponsored corporate welfare.

Holding out for the government to fix it, though, is like waiting for a thief to give your stuff back. It’s not going to happen. They’re instrumental in perpetuating the problem.

At the end of the day, we only have ourselves to rely on.

This morning as I was jogging around Hong Kong’s Soho district, I saw the personification of self-reliance in a 70-year old woman.

She was pushing a heavy cart uphill, loaded down with all sorts of boxes and bags. It was easily twice her size, but she was powering through, slow and steady up the hill.

When I stopped to help, she initially waived me off, but I insisted. Little did I realize we weren’t just going up the street… we were going all the way to the top, several hundred meters at least.

When we reached her corner, the lady thanked me and began cerimoniously unpacking and laying out her gear. It was all just useless knick-knacks that she had acquired and was prepared to haggle over with passers-by in order to make a few bucks that day.

It was extraordinary; at about 6am, on a holiday no doubt, this woman in her 70s was pushing a cart uphill by herself so that she could stand on a street corner all day to sell some little trinkets.

The dichotomy was extraordinary… and it’s an important lesson.

Yes, the kids are right– there is great injustice in the world.  But if they really want to fix things and look out for future generations, the best thing they can do is follow the woman’s example of self-reliance.

We all have a finite amount of resources– time, money, energy. Spending those resources on camping out and lamenting the symptoms of the problem (rather than the fundamental issue) is counterproductive and wasteful. The system can’t be fixed; it’s going to collapse on its own soon enough.

Rather, we should be focusing on taking care of ourselves, our families, and setting ourselves up for success when the system is reset and the rules are rewritten.

PS-

As I’ve mentioned before, our annual youth liberty and entrepreneurship in Lithuania is designed specifically to teach these kinds of skills to energetic, motivated young people– how to thrive and succeed in the Brave New World that’s emerging.

If you’re between 18-25 and interested in taking a crash course in developing essential skills, I really want to encourage you to read more about what we’re doing and apply at www.BlacksmithCamp.com; the application deadline is May 15th.

April 3, 2012
Hong Kong

Six centuries ago, when London and Paris were irrelevant, plague-infested backwaters, and New York City wasn’t even on the map, the greatest city in the world was Nanjing– the capital of the Great Ming.

At the time, Nanjing was not only the most populous city on the planet, it was also the pinnacle of civilization. Art, science, technology, and commerce flourished in the Ming Dynasty’s liberalized economy, which constituted a full 31% of global GDP at the time.

(By comparison, the US economy is roughly 25% of global GDP today…)

Taxes were low, the currency was strong, and overseas trade thrived. For a time, Nanjing truly was the center of the world.

Over the next several hundred years, the tide shifted. The Ming Dynasty fell, and power was transferred further west to the Ottoman Empire, and eventually to Europe which had finally emerged from the Dark Ages as the most advanced civilization on Earth.

Pointless crusades and inquisitions gave way to a surge in medical, technological, and scientific breakthroughs. By the late 17th century, western civilization had asserted its primacy in the global pecking order.

This phenomenon has lasted for several hundred years now… but as history has shown repeatedly, power centers frequently shift. The world is now witnessing yet another transition of power, this time from west to east, as the US-led western hierarchy suffocates within its own debt-laden Keynesian fiat bubble.

Most westerners refuse to believe it. They can’t envision an era in which the west doesn’t lead the world… in everything. And yet, that time is already upon us. Perhaps nowhere is this more pronounced than in finance:

1) Hong Kong, from whence I write this missive, has been home to the most public offerings in the world ever since overtaking New York in 2009. In 2010, more than $57 billion was raised in Hong Kong IPOs, roughly twice as much as New York.

From Italian luxury house Prada to the luggage maker Samsonite to Swiss metals house Glencore to the US handbag maker Coach, big names have been attracted to Hong Kong. Rovio, the creator of the popular Angry Birds game, is expected to list in Hong Kong as well.

Whereas it was once the obvious choice to list in the US (or London), Hong Kong has now become the best option for most businesses seeking public capital.

2) According to the Financial Times’ Banker intelligence unit, Singapore leads every other major financial center in the world in financial sector foreign investment.

The top three, in fact, are Singapore, Dubai, and Hong Kong. Singapore receives more financial sector foreign investment than New York, London, Frankfurt, and Switzerland combined.

Money goes where it is treated best… and the market is telling us that Singapore is the right destination.

3) According to a new study from the Inter-American Dialogue, China is now dominating emerging market development finance, especially in Latin America.

In the past, countries like Brazil, Ecuador, and Venezuela went to the World Bank and IMF when they needed money. But now these vestigial organizations of the old western hierarchy are becoming a sideshow to Chinese financial muscle.

The study shows that, since 2005, Chinese banks have loaned more money and made more loan commitments to Latin America than the World Bank and International Development Bank combined… and they’re doing it at higher interest rates.

Why? Because developing nations have figured out that when you take the World Bank’s money, you have to put up with them telling you how to run your government. Chinese bank loans don’t come with political strings attached.

It’s extraordinary that this is happening in the US’s backyard.

4) The most obvious sign of Asia’s rise is the perhaps now forgone conclusion of China’s currency becoming a new global reserve option to compete with the dollar and euro.

Every month it seems, there is a new move to loosen China’s once-strict currency controls and open up– new central bank currency swaps, renminbi (RMB)-denominated futures contracts in Chinese exchanges, the introduction of RMB accounts at non-Chinese banks, non-Chinese companies issuing bonds in RMB, etc.

In fact, if you want to mark your calendar on the day the West concedes to Asia, it will be when the US government begins issuing Treasury securities denominated in renminbi.

None of this means that North America and Europe are falling off the edge of the earth. What it does mean is that the old system is being reset, and the rules being rewritten.

It’s not the first time in history that such a shift has occurred, and it won’t be the last. This change is nothing to fear… merely something to accept, embrace, and prepare for.

April 2, 2012
Vancouver, British Colombia, Canada

After a long trip up from Santiago and making stops in both Miami and Dallas, I arrived to Vancouver last night a bit tired… but excited for the the trip ahead. I’m leaving in just a few hours for a 2 1/2 week, 11-country tour that includes Hong Kong, Singapore, Laos, Malaysia, Thailand, and much more.

[By the way, I highly recommend the new Fairmont Pacific Rim if you find yourself in Vancouver.]

Aside from getting a lot of business done and inking a few deals that my partners and I have been working on, I’m excited to just be spending time in the region again. I enjoy strong, vibrant economies where optimism and opportunity dominate the scene– not chaos and negativity.

There are a lot of places around the world that fit this mold– their economies are healthy and people are legitimately confident about the future. From Estonia to Hong Kong to Andorra to Singapore, there are common elements in these countries that have greatly contributed to their success:

1) They’re small.
2) They have governments that generally stay out of the way.

An obscure 20th century economist named Leopold Kohr wrote extensively about these factors; my colleague Tim Price introduced me Kohr’s writing last year, and his 1957 book The Breakdown of Nations has proven quite prophetic.

In the book, Kohr extols the virtues of ‘smallness’ and indicates that most of the political challenges in the world– military over-extension, debt, poverty, bureaucratic stodginess, etc.– are caused by the unsustainable expansion of nations.

For Kohr, it is simply a matter of scale. Once a country becomes too large, any system of government will become oppressive.

Small countries, conversely, don’t have the resources to wage wars or build huge bureaucracies. They’re forced by circumstance to allow the market to work and the private sector to flourish.

Singapore and Hong Kong are great examples. They’re not waging wars, dropping bombs, or establishing far flung military bases. Both countries are devoid of any natural resources, and their only means of survival and success have been to step out of the way and let the market take over.

In a matter of decades, they have become two of the most prosperous nations on the planet, and remain among the healthiest today.

Conversely, the ‘big’ countries of today have assembled massive states which have spawned massive governments that require massive resources to administer… and quite oppressively I might add.

Democracy may look great on paper, but in modern practice of today’s ‘big countries’, it is a terrible perversion of the principles of liberty. Like Rome and the Ottoman Empire before, the individual now exists to support the state, not the other way around.

This is exactly what Kohr warned would become the ‘crisis of bigness’. Faced with economic challenges and a debilitating cost structure, big governments and bloated bureaucracies will only beget more bigness, more bloat… until the only possible outcome is collapse.

It reads like a playbook of exactly what’s happening today in the west. Already suffocating from too much debt, governments are going deeper and deeper into debt, and hiring more and more workers to administer ‘stimulus programs’ and an ever-expanding tax code.

To politicians, the solution is to expand the state and expand their authority. This is the exact opposite of what they should be doing… and as has happened numerous times throughout history, it may very well lead to an entire system reset.

March 30, 2012
Santiago, Chile

One the more interesting investments I’ve made over the last few years was buying a sizeable chunk of a successful baby products company; our products sell around the world and in top retailers like Target, Babies R Us, Bed Bath and Beyond, etc.

The managing partner forwarded me a letter yesterday from one of our international manufacturing agents; the letter explained that, over the last two years, prices have risen substantially in the developing world where many of our products are manufactured.

China, for example, has seen wage increases of 44.6% since 2010. Vietnam- 39.1%. The polyethylene resin that we use has gone up in price 40.3%.  Naturally, the rise in oil prices has also increased transportation costs substantially as well.

The letter pummeled us with this data about rising wages and input costs, and then followed it up with a polite assertion that they would be increasing their prices as a result.

It reminded me of the notices I get every year from my health insurance company– they usually start out with something like “Due to the continually rising cost of health insurance…” punctuated with a price increase on the order of about 20%.

And they say there’s no inflation.

This is a direct consequence of the rapid expansion of the money supply. When you print trillions of dollars, euros, renminbi, etc., there are consequences… namely, rising prices.

At first, it’s the developing world that suffers the most.  Central bankers in countries where the entire economy is based on cheap manufacturing feverishly expand their own money supplies in an effort to keep pace with the dollar and euro. If they don’t, the fear is that their currencies will rise, killing the manufacturing industry.

Since these countries have tiny bond markets and lack reserve currency status, all the new money they print goes straight into the local economy. This pushes prices up.

At first, it’s usually raw materials, intermediate goods, and staple commodities. I remember being in Sri Lanka last year where the price of turnips had recently gone up nearly 40%, and people were demanding higher wages.

As wages in the developing world rise, it eats into the manufacturer’s profit margins. Eventually, the manufacturers capitulate and pass the inflation back to their customers in the developed world.

You can probably guess that, since we’re now paying more to have our products manufactured, we have to raise prices for our retailers and end users.

It takes a while for all of this money to make its way through the system… but rest assured, it does come home to roost. No doubt, inflation is very much with us.

Precious metals are still the best inflation hedge, bar none. But I’m also interested in other assets that can be more than just a store of value.

That’s one of the reasons I enjoy owning an 1,100 acre farm; productive agricultural land is a great hedge that grows in nominal value to keep pace with inflation… but I also get the added benefit of an organic food supply.

To give you an example, we recently harvest over 800,000 pounds of plums, which were then dried into prunes and sold to a local distributor at a handsome profit. The harvest yield was about 20% higher than last year… and even better, the unit price I received from the distributor was about 20% higher than last year.

Meanwhile, we have a thriving organic garden, an orchard of fruit and nut trees, egg-laying chickens, and a host of livestock.

If you’re not into agriculture, another interesting inflation hedge that also has functional merit beyond a store of value is… ammunition.  Ammo has actually been a better investment than gold over the last few years, and over time, it holds its value in much the same way.

I wonder if that’s why the US Department of Homeland Security is openly purchasing up to 625 million rounds of ammunition– as an inflation hedge.  Perhaps as a matter of coincidence, buying up to 450 million .40 caliber hollow point rounds and up to 175 million .233 caliber rounds is enough to double-tap every man, woman, and child in the country.

Similarly, I’m sure the NSA’s new $2 billion Utah Data Center is just an inflation-hedge real estate play as well. At more than one million square feet, the center is designed to collect, archive, and analyze ‘yottabytes’ worth of data– our Google searches, phone calls, email traffic, etc.

[Note- a terabye (TB) is about 1,000 gigabytes (GB). A yottabye is about 1 TRILLION terabytes. To put this in perspective, the entire iTunes store constitutes about 250,000 GB... so the Utah data center should be able to host the equivalent of about 5 - 10 BILLION iTunes stores.]

Ah, the land of the free.

To close this week out on some good news, I’m pleased to announce that my partners and I will be hosting our third annual Liberty and Entrepreneurship Camp this summer.

If you’re a relatively new subscriber, each summer we host a 4-day workshop for university-aged students in the picturesque Lithuanian countryside that focuses on Austrian economics, investing, entrepreneurship, international diversification, and actionable success skills.

I bring out some of my closest friends, all successful entrepreneurs and investors, to lecture and engage in small group instruction.  Last year’s camp had an extraordinary group of 50-students from more than 35-countries around the world…. and to put it mildly, it changed many lives.

I’m interested in attracting the most motivated, energetic young people I can find… so if you’re between the ages of 18 and 25, you can read more about what we’re doing and how to apply at BlacksmithCamp.com.

March 29, 2012
Santiago, Chile

It wasn’t too long ago that nearly every human being lived their entire lives without traveling more than 10-miles from home. For the small handful of people who actually did venture out, you could make it across the globe with no official documents whatsoever.

This began to change rapidly in the 1920s. The newly formed League of Nations began meddling in the business of international travel and worked to standardize an international identification document that would be required by travelers to cross most borders.

The ominous phrase, “Papers, please”, was born from this standardization.

These days, international travel is big business for governments. Think about all the massive bureaucracies that have been created as a result of national borders: Immigration checkpoints. Customs. Border patrol. Passport offices. Even the IRS is involved in passport application procedures.

As much as it would be nice to go back to the days when people were free to criss-cross the world without such inconveniences and indignities, this just isn’t going to happen. So since we can’t go back to a zero passport world, the next best solution is a multiple passport world.

Let me explain.

Nearly everyone on the planet becomes a citizen of some country at birth… either due to the citizenship of their parents or the country that they were born in. Most people live their entire lives with this sole citizenship, and usually reside in the same country.

In a way, this is akin to having all of your eggs in one basket– living, working, banking, etc. in the same country of your citizenship. And history is full of colorful examples of those baskets breaking… from economic hardship to social turmoil to natural disaster to all-out genocide.

Ultimately, the concept of having multiple citizenships is about having more baskets… and spreading your eggs around. It means having more flexibility, no longer being constrained by the limitations of a single country. For example:

1) Safety. As I’m fond of saying, nobody ever hijacks an airplane and threatens to kill all the Lithuanians. There are no evil men in caves plotting terrorist attacks against Uruguayans. Nobody is burning Panamanian flags in the streets of Pakistan to protest innocent deaths at the hands of Panama’s fleet of unmanned Predator drones.

Simply put, some nationalities are a bit more high profile due to the actions of their governments. Others aren’t.

2) Travel freedom. Did you know that a US or Canadian passport isn’t particularly useful to travel to South America? US and Canadian citizens have to obtain a visa, in advance, just to travel to Paraguay! Or Brazil. Plus Argentina and Chile both charge ‘reciprocity fees’ on arrival (since the US and Canadian governments do the same thing.)

Other nationalities are welcomed with open arms. Singaporean citizens, for example, enjoy visa free (or visa on arrival) travel to nearly every country on the planet. Singapore is the only passport in the world that commands visa free (or visa on arrival) travel to the US, UK, European ‘Schengen Area’, China, and India.

Further, did you know that you can be barred from traveling to some Middle Eastern countries if you have an Israeli immigration stamp in your passport?

Once again, multiple passports means more options, and more freedom… in this case, the freedom to travel.

3) Business and investment freedom. If you’re a US citizen, foreign banks don’t want to deal with you, foreign brokers don’t want to deal with you, and most foreign investors don’t even want to risk getting in bed with you.

FATCA, Dodd Frank, etc. all make it too difficult for foreigners to deal with US citizens; nobody wants to risk the IRS or SEC knocking on their door. As a result, many US citizens have been kicked off the boards of foreign companies, had their foreign bank accounts closed, and been disallowed from buying into lucrative foreign IPOs.

Having another citizenship normally circumvents these hurdles.

4) ‘Citizen benefits’. If national healthcare is your thing, there can be a lot of benefit in having a second citizenship– in many cases, you’ll enter the public healthcare and pension system, giving you a potential backup in case you need it.

5) Relocation and work possibilities. With a second citizenship, you’ll always have the right to live and work in another country. Imagine, for example, having a European passport, entitling you to work anywhere in the EU. If you’re living in the US or Canada now, that could potentially open up an entire new line of lucrative opportunities to pursue.

6) The insurance policy. Ultimately, having a second passport is like having an insurance policy. You might not ever need it… but you’re going to be really glad that you have it in case you ever do.

Again, history is full of catastrophic events that have caused tremendous turmoil in nations… and people who have been trapped inside with no way out have had their lives turned upside down.

A second passport can be that ticket out… safe passage for you and your family to a new place where the opportunities are better, safer, and brighter. It’s a scenario that no one can really imagine… but history shows that few people ever do.

March 28, 2012
Santiago, Chile

Dumbfounded.

That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system.

We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one.

With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

This irrational, arrogant system presupposes by design that a central banker is smarter than everyone else; that markets are incapable of determining appropriate risk and value; that he is more effective at allocating our time, capital, and labor than we are.

Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money.  It’s extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as ‘valuable’.

It was more than 5,000 years ago that primitive commodity money was used in Mesopotamia, and it’s been over 3,000 years since metal coins began circulating.  For more than 99.2% of human civilization, money actually meant something… right up until 1971 when Richard Nixon ended any remaining link between the dollar and gold.

Ever since, the US government has refused to acknowledge precious metals as money… yet if the Treasury’s financial statements are to be believed, Uncle Sam is still holding  261,498,900 troy ounces of gold. Let’s dismiss the tungsten possibilities for now and presume that it’s real gold. At today’s prices, the value would be about $437 billion.

Meanwhile, M2 money supply at last count was about $9.8 trillion as of March 12, 2012. This means that roughly 4.46% of US dollars in circulation are ‘backed’ by gold, the rest backed by false promises and goodwill.

In the UK, the government’s Exchange Equalisation Account shows 9,971,000 troy ounces of gold on the books. At today’s market value (1,054 British pounds) and the Bank of England’s most recent statement on reserve balances and notes (259.5 billion pounds), Britain’s gold supply constitutes roughly 4.05% of pounds in circulation.

Simply put, the price of gold would have to rise 20-25 times in order for the US and British governments’ gold assets to match the supply of money in circulation.

In fairness, very few countries hold meaningful gold positions when compared to their money supplies. Even Singapore, generally regarded as having one of the healthiest balance sheets on the planet, holds a mere 2% of its money supply in gold.

(Singapore does, however, consistently run budget surpluses and control two sovereign wealth funds which manage the equivalent of 130% of GDP…)

Lebanon is an exception. According to Banque du Liban statistics, the value of Lebanon’s gold holdings is equivalent to nearly 50% of the country’s money supply. To boot, Lebanese banks tend to have very high liquidity ratios and are willing to open accounts for most nationalities.

The problem with Lebanon is that the country is deep in debt– well over 100% of GDP.

With an additional $30 billion in foreign reserves on the books (i.e. other people’s paper), though, Lebanon does have the capacity to pay off over half of its debt. And there are a number of state-owned companies that could be privatized to generate even more revenue.

Given the how sophisticated government corruption is in Lebanon, though, such solutions may never come to pass. Go figure… the one place on earth where the currency is actually backed by something becomes the next shoe to drop.

Fortunately there is another place worth considering. For now, gold only comprises about 5% of Mongolia’s $4 billion money supply. Not much. But the important thing to pay attention to is the trend.

A few months ago, the government of Mongolia nearly doubled its gold holdings to 3.5 tons. This is a huge move.

Given the massive resources in the country (coal, copper, gold, oil, uranium, etc.), Mongolia is set to become one the world’s richest countries. And I think we can expect them to continue trading out paper reserves for the gold that’s already under their soil.

It’s possible that, if the trend holds, Mongolia’s gold holdings will back 10% to 25% of the tugrik money supply in just a few years’ time. Over the same period, gold holdings in the US, UK, and Europe will probably decline to less than 2% of their perpetually inflating money supplies.

Moreover, bank accounts denominated in the Mongolian currency (tugrik) yield an impressive 13% to 15% for savers.  As far as paper goes, this one actually may be worth betting on.

March 27, 2012
Santiago, Chile

As you may be aware, there were two reasonably strong earthquakes in central Chile over the weekend. I think we must have the kindest subscribers on the planet, because our customer service team had a flood of well-wishing emails and inquiries to make sure everything was OK.

Most people seemed to have the idea that we were digging ourselves out of rubble, that entire cities lay waste in ruin, and that some imminent tsunami was about to wipe this entire civilization off the planet.

No such luck.

Not exactly the utter chaos and devasation that was reported...

The first earthquake we had was Friday night / Saturday morning about 4:30am. It was measured at a magnitude 5.2 by the University of Chile’s seismology lab, and it had an epicenter about 40km from Santiago.

No doubt, I felt it. It woke me up at night as if I was being shaken awake by an excited friend who wanted to tell me some good news. And then it was over. I was conscious long enough to check the time, and then my head flopped back on to my pillow for a few more hours of Zzzzzz.

Sunday evening around 7:30pm, another earthquake hit. This one was measured at a magnitude of 6.8 on the Richter scale, with an epicenter a few hours south of Santiago near where my farm is located.

[The US Geological Survey says it was a 7.2. I couldn't care less what the US government says.]

Someone sent me an article later from an Edmonton, Canada based news site which made heavy use of the words ‘alarm’, ‘panic’, and ‘devastation’. Leave it to gringo news media to overblow a story thousands of miles away that they have no understanding of.

Down here, the weekend’s events were no big deal. Local news reported on the earthquakes and then moved on to more important things– like soccer, President Pinera’s trip to Asia, and the Aysen hydroelectric struggle.

Earthquakes are simply part of the landscape here. Chile is in the ring of fire, a seismic zone that runs from southern Chile up the coast to California and northern Alaska, across the Bering Strait, down the coast of China and Japan, across to Indonesia, and down to New Zealand. There’s no avoiding nature.

Chileans, however, have learned this lesson. Things here are built to last. Not so much as a picture frame fell over in my apartment, and there wasn’t a speck of damage at my farm either.

Consequently, there’s a big difference between a 6.8 earthquake in Chile, and a 6.8 earthquake in Haiti. In Chile, people stop what they’re doing briefly, say, “hey that was an earthquake”, and then go on with their lives.

As I write this note, in fact, most of my local staff is down in Talca (near the epicenter of Sunday’s quake) conducting meetings with contractors, negotiating to sell my wine grapes at a tidy profit, and carrying out business as usual. I’ve stayed back in Santiago for a few meetings and to prepare for my trip to Asia.

Sure, in a perfect world, I’d be able to snap my fingers and eliminate all earthquakes in Chile. But since I can’t do that, I simply have to learn to manage a risk that is… quite manageable.

For me, this is a much more desirable scenario than being trapped in a police state where I have very little influence over what happens. It may not be everybody’s cup of tea… and that’s fine. The world is a big place, and chances are you’ll be able to find exactly what you’re looking for.

March 26, 2012
London, England

[Editor's note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]

Acclaimed screenwriter William Goldman (The Princess Bride, among many others) famously began his autobiography with three telling words: “Nobody Knows Anything.”

The same logic would seem to apply to much conventional reporting of the financial markets. Any investor looking for informed analysis of market developments can therefore save themselves a few minutes every day by choosing not to read any of the ‘Companies and Markets’ section of the FT, which typically constitutes a fantastic piece of fiction.

(If there is a more thankless task in finance than trying to explain why certain markets did what they did yesterday, we don’t know what it is… unless it’s working in the PR department at Goldman Sachs.)

But as Soc Gen’s Dylan Grice has frequently pointed out, human beings are suckers for stories. We seek meaning from just about everything, and financial markets are no exception. Why else would otherwise rational people shell out ¬£2.50 every weekday just to read a selection of vapid and contradictory speculations about recent market price action?

At the risk of going out on a limb, here is our own inherently subjective “take” on the current market environment: Investors seem to believe that the euro zone debt metastasis has gone into remission. There is an uneasy calm to both equity and bond markets– it feels like the calm before the storm.

Both Goldman and Barclays have issued research notes recommending equities over bonds. It is certainly difficult to get excited about G7 government bond markets except from the perspective of shorting them. As Stratton Street recently observed, there are over $10 trillion in marketable US government securities, yet their average yield amounts to less than 1%.

But it might yet be dangerous to adopt Goldman’s binary response which is to advocate blanket support for stocks. This is not a black vs. white issue; just because most government bond markets are uglier than sin does not automatically justify going ‘all in’ on the stock market, even as deposit rates remain painfully thin.

We nurse an ongoing fear that equity markets are being largely supported by the inflationist antics of central banks. This may have led to many investors becoming addicted to the effects of cheap credit, and they may not like it when cheap credit is ultimately withdrawn.

But whatever is driving equity sentiment, there are undoubtedly pockets of value for those with the stamina and patience to embrace them. In Don Coxe’s latest and typically excellent letter, “All Clear?”, he highlights the opportunity in precious metals mining companies:

“If there were one over-arching theme at the BMO Global Metals & Mining Conference, it was that the gold miners are upset and even embarrassed that their shares have so dramatically underperformed bullion…

“On the one hand, they were delighted in 2011 when it was reported that since Nixon closed the gold window, a bar of bullion had delivered higher investment returns than the S&P 500 for forty years– with dividends reinvested. But some gold mining CEOs find it an insult that what they mine is more respected than their companies’ shares…

“In our view, we have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices.”

Gold remains one of the most widely misunderstood assets in the investible world. Indeed, it may be better to refer to it as a means of saving that does not expose the saver to counterparty or credit risk or to the depredations of the monetary authorities.

As Don Coxe makes clear, governments are running deficits “beyond the forecasts of all but the hardiest gold bugs five years ago; central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid gold bugs a year ago.”

The choice for the saver is essentially binary: hold money in ever-depreciating paper, or in a tangible vehicle that has the potential to rise dramatically as expressed in paper money terms.

Gold prices have now softened, offering investors yet another chance to get back on board what is perhaps the most compelling form of money- and portfolio insurance available.

Why large cap gold miners are being so undervalued by equity investors relative to gold is an open question that takes us back to the realms of stories. That the discount exists is undeniable; all that is required to crystallise that value, we believe, is patience.

March 22, 2012
Santiago, Chile

If you’re a US taxpayer, you’ll want to heed the following before dropping off your 1040 this year.

You see, in 2010, Congress and President Obama passed a series of new rules known as the Foreign Account Tax Compliance Act, or FATCA. FATCA affects every US taxpayer who does anything overseas, as well as every single financial institution on the planet. It may be the most arrogant piece of legislation ever written.

Congress had the audacity to pass a law regulating foreign banks on foreign soil. It requires every ‘foreign financial institution’ on the planet (though that term is -very- loosely defined…) to enter into an information sharing agreement with the IRS, or else face steep consequences.

Banks that don’t jump into bed with the IRS risk getting locked out of the US financial system. This is a big deal.

If you’ve ever sent a foreign wire before, you probably know that almost every bank on the planet has a ‘corresponding’ account with one of the major banks in New York.

Banco General in Panama, for example, has corresponding accounts with both Chase and CitiBank. When someone wires US dollars to Banco General, the money first hits one of those corresponding accounts in New York. If Banco General gets shut out of those accounts, it risks being cut off from the global banking system.

Needless to say, this legislation is going to rapidly reduce the significance of the US banking sector in the long run as other countries seek new financial pathways that re-route funds around New York. Congratulations, Congress!

In addition, FATCA also requires new disclosures for US taxpayers with ‘foreign financial accounts’, and it starts this year. Before you file your taxes, here are five things you need to know:

[Editor's note: The following does not constitute tax advice, rather a friendly reminder of what the requirements are. Always consult with your tax advisor.]

1) If you had a ‘Foreign ‘Financial Asset’ in 2011, you may need to file form 8938 this year.

The term ‘Foreign Financial Asset’ covers a lot of ground and is ambiguously defined.  They use terms like financial asset, financial account, and foreign financial institution to define each other.

It’s like saying, “What is dark? The opposite of light. So what is light? The opposite of dark.”

Ultimately, the onus is on the taxpayer to figure it out.

In general, foreign bank accounts and foreign brokerage accounts must be reported in Part I of the form.

In Part II of the form, taxpayers must also report interests in foreign entities that they own. For example, if you own 100% of a Cook Islands LLC, this would count as a foreign financial asset and must be reported in Part II.

*The exception here is if you are already reporting this company on form 5471 or 8865. This depends on if/how you elected to classify the entity on form 8832. For example, if you elect to classify a foreign entity as a corporation, you should report it on form 5471, not the FATCA form 8938.

2) GOLD is a bit tricky.

If you have an account with an organization like GoldMoney.com that takes in deposits from the banking system, this is akin to a financial institution and financial account. It must be reported on Part I of the form.

Perth Mint Certificates also count and should be reported as financial assets.

Physical gold stored in a safety deposit box overseas, however, is not a financial asset and does not need to be reported.

3) Foreign real estate does not need to be reported.

If you own foreign real estate -personally-, it does not count as a financial asset and does not need to be reported. If, however, you own shares of a foreign company which owns foreign real estate, you do need to report the company as a financial asset.

4) The 8938 does NOT replace the FBAR

You may already be accustomed to filing the Foreign Bank Account Reporting form TDF 90-22.1 each year to the US Treasury by June 30th. This new form 8938 does NOT replace the FBAR. You must file form 8938 in ADDITION to the FBAR.

5) There is a threshold for filing form 8938.

The two major stipulations are:

a) whether you are filing as a single taxpayer, or jointly with your spouse
b) whether you live in the United States or overseas

Then the IRS has two different thresholds– what the aggregate value of the financial assets were on the last day of 2011, and what the maximum aggregate value of the financial assets were at any time during the year.

The chart below summarizes the reporting thresholds. If you meet or exceed the threshold for your category, you’ll need to file form 8938 with your 1040 by April 18th this year.

March 21, 2012
Santiago, Chile

This is something out of an Orwellian science fiction movie.

The Italian tax authorities are now field testing a new system called ‘redditometro’, a database that automatically collects and analyzes taxpayers’ tax data vs. spending data based on automated collection of credit card and banking information.

For example, if the credit card reports show that you have an expensive gym membership… or perhaps you bought too fancy of a mobile phone, then the system will flag you if your annual tax liability isn’t commensurate with such spending habits.

Big Brother would be proud.

Preliminary results showed that a full 20% of Italian taxpayers will be initially flagged, much to the delight of agency director Attilio Befera. According to Befera, “We have €120 billion of tax evasion, and to cope with this emergency, we need to take emergency measures…”

Naturally, the way to deal with fiscal urgency is to treat everyone like a suspect. Befera has dismissed criticism from privacy groups, wrapping himself up in a blanket of duty and righteousness–’desperate times call for desperate measures’ and all that nonsense.

It’s the same rationalization you see with these lowlife government agents who molest children at airports; they look in the mirror each morning and convince themselves that they’re keeping the country safe from criminal terrorists. Their mission is noble… and that justifies the means.

Italy is in a world of hurt, no doubt. Despite all the talk of austerity and eliminating the budget deficit by 2013, recently released central bank figures from Banca d’Italia showed that the 2011 state budget balance actually deteriorated by 11.49%.

Moreover, the first numbers released so far for this year show a whopping 197% increase in central government borrowing requirements from January 2011 to January 2012. Hardly the right direction.

Throughout it all, Italy’s public debt has been steadily rising and is now closing in on 2 trillion euros, much larger than the country’s economy. Meanwhile GDP actually shrank in the 4th quarter of last year by an annualized rate of 2.6%.

In typical form, the government is sticking it to the people. Buying Italian bonds has become an issue of patriotism with strong calls and intense public pressure for citizens to plunk down their hard earned savings and bail out the government. They even have footballers and celebrities endorsing government bonds.

On the flip side of this coin are the Big Brother financial tactics– shaking down every last citizen based on a computer algorithm’s judgment of their spending habits. Given that one of the categories that the tax authorities are looking at is investment spending, buying Italian bonds may very well, in fact, get people flagged by Skynet.

If you step back and look at the big picture, this system is truly mind boggling. For years, politicians have been running wild, showering themselves with power and privilege at taxpayer expense.

When the magical fairy dust ran out and it became time to pay the toll, they’ve made it a patriotic issue for society to bail out their malfeasance, and are now proceeding to milk the people dry through Draconian tax policies and collection schemes.

Serf. Slave. Milk cow. Pick your metaphor. Their privilege, our expense. It’s an absolutely absurd system that’s ripe for change.

March 20, 2012
Santiago, Chile

Quietly, and with little fanfare, President Obama signed a “National Defense Resources Preparedness” Executive Order on Friday. As the name suggests, the order intends to shore up the country’s national defense resources in advance of a national emergency.

To be fair, this is not the first time that such an order has been written. Presidents Bush (II), Clinton, Reagan, and even Eisenhower provided directives in the same spirit as President Obama’s order– providing some level of government commandeering in times of national emergency.

In the past, these orders have related to things like production capacity for defense contractors, or giving FEMA authority to resolve disputes between other departments in federally designated emergency areas.

President Obama’s order, however, takes things much, much further.

(1) The order vastly expands the role of Homeland Security… as if these knuckleheads didn’t already have too much influence in people’s lives. Apparently highways, shopping malls, airports, bus stations, Wal-Marts, hotels, train stations, etc. aren’t enough for DHS. Now the Secretary of DHS will:

a) “advise the President on issues of national defense resource preparedness”.

This one is really clear. Under normal circumstances, matters related to defense would fall under the Secretary of Defense… or perhaps the National Security Advisor. Giving such responsibility to DHS suggests that the government is expecting an emergency from within.

b) “provide for the central coordination of the plans and programs… under this order, and provide guidance to agencies assigned functions under this order…”

DHS now has authority to direct the emergency preparedness of every other government department. The Secretary of Homeland Security has effectively become the Emergency Czar.

c) have oversight of “all other national defense programs, including civil defense and continuity of Government.”

In case it wasn’t clear before, the people who molest children and radiate travelers will have total and complete control in some event defined as a national emergency in the sole discretion of the President.

(2) The order further provides for an effective nationalization of the entire US economy in the event of an emergency.

The Secretary of Labor, for example, will “collect and maintain data necessary to make a continuing appraisal of the Nation’s workforce needs for purposes of national defense” and then “formulate plans, programs, and policies for meeting the labor requirements of actions to be taken for national defense purposes.”

In other words, the Labor Department becomes the Ministry of Plenty, and all the good little citizens will be forcibly reallocated to other jobs. This turned out really well for the Soviets.

(3) The purpose of this order, for example, is to “take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;”

It goes on to list ‘adequate resources’ to include things like:

(i) “all forms of energy including petroleum, gas (both natural and manufactured), electricity, solid fuels… solar, wind, other types of renewable energy, atomic energy”, etc.

(ii) “all usable water, from all sources, within the jurisdiction of the United States, that can be managed, controlled, and allocated to meet emergency requirements…”

(iii) “all commodities and products… that are capable of being ingested by either human beings or animals…”

(iv) “drugs, biological products, medical devices, materials, facilities, health supplies, services and equipment required to diagnose, mitigate or prevent the impairment of, improve, treat, cure, or restore the physical or mental health conditions of the population.”

Hmmmm. Food. Water. Energy. Medicine. Security. All the stuff that human beings need at a basic level to survive. Except that Obama’s executive order puts all of these resources under control of the government and allocates them exclusively to meet the needs of government.

In this capacity, we are all merely subordinates to the interests of the state… and it should be absolutely clear at this point where normal people stand in the grand pecking order: Citizens are resources to be exploited and sacrificed in order to ensure the continuity of government.

In the event of some catastrophe, you will be stripped of basic resources so that the government can survive. A free society cannot exist under a system in which the state exercises such control… or has the authority to exercise such control.

Taken in conjunction with the NSA’s new Utah spy center (which will collect and archive the complete contents of every email, tweet, Facebook post, Google search, phone call, and text message) and the National Defense Authorization Act, it’s clear that the Obama administration is expecting trouble from within.

And with good reason. By every possible calculation (except flat-out fraud), the US government is completely insolvent, and its balance sheet is growing worse by the day. The dollar is beginning to be seriously challenged as the global reserve standard, and every effort politicians make to ‘fix’ the economy only makes things worse.

As a matter of convenience, people are willing to deal with a lot of pain. They’ll suffer through wars, recessions, and all sorts of national unpleasantness. But the moment that rapidly decaying economics and shortages prevent people from being able to put food on the table for their families, they rise up. Just look at the Arab Spring.

This is all playing out with nearly perfect historical precision. Time and time again throughout history as once great empires accelerated their declines, governments have taken steps to protect their interests against the people.

In the past, they have imposed curfews, disarmed the population, curtailed civil liberties, and declared national emergencies, usually against some great faceless enemy from abroad who threatens their way of life.

As it turns out, though, our great faceless enemy is not some mythical boogeyman living in a cave, nor some angry brown person who hates us for our freedoms… but the very people within the system who’ve taken an oath to ‘support and defend the Constitution of the United States against all enemies, foreign and domestic.’

Have you hit your breaking point yet?

March 19, 2012
Talca, Chile

Here’s the scene. It was an overcast day in southern England last March. That is to say, a normal day in southern England.

Attempting to retrieve something that had blown into the water, 41-year old Simon Burgess slipped and fell into a 3 1/2 foot-deep pond. He then suffered a seizure. His body, lying motionless and face down in the water, was spotted at 12:15pm by a witness who immediately called 999 emergency services (like 911).

Within five minutes, emergency crews began arriving. Then more. Then more. 36-minutes after the initial phone call, no fewer than 25 emergency workers were at the scene. They brought out a state of the art emergency medical tent, resuscitation equipment, several fire engines, ambulances, and specialty dive gear.

For more than thirty minutes, emergency crews set up a complex operations center. Fire fighters positioned their trucks. Police officers cordoned off the area for crowd control. Water Support Unit officers donned protective gear and checked the pond for underwater hazards.

Yet with all of this commotion, nobody bothered to fetch Mr. Burgess. For 36-minutes, he floated in the center of the pond, face down, while dozens of first responders scurried about with their ‘make work’ projects.

Why? Because they hadn’t been ‘trained and certified’ by their various government agencies to enter water that was more than ankle deep. According to the UK’s Daily Mail,

“When a policeman decided to go in anyway, he was ordered not to. A paramedic was also told not to enter the water because he didn’t have the right ‚”protective” clothing and might be in breach of the Personal Protective Equipment at Work Regulations 1992.”

And so, the emergency crews stood by waiting until a specialty team arrived, donned protective gear, and waded into the waist-deep water (at maximum depth) to retrieve Mr. Burgess. Needless to say, doctors formally pronounced him dead by the time his body arrived to the hospital, roughly 90-minutes after he fell in the lake.

Following public outcry over how Britain’s impotent bureaucracy could manage to cost a man his life, the government held a formal investigation into the matter a few weeks ago. As expected, public service workers and politicians closed ranks, defending their decisions on the ground and claiming that they were only ‘doing their jobs’ and following the rules.

It’s certainly not the first time this has happened. Last year, a 14-year old girl in London collapsed while in the middle of a cross-country competition. It took emergency workers 30-minutes to arrive, at which point they refused to carry her body through the muddy park to the ambulance as it was against health and safety regulations.

Then there was the case of 44-year old Alison Hume in Scotland; she had fallen into a mine shaft and was trapped there for six hours suffering from hypothermia because emergency service supervisors claimed that using their winch to retrieve her would be a violation of regulations.

Or the case of 10-year old Jordon Lyon of northern England, who was drowning in a local pond when two police officers arrived to the scene… and did absolutely nothing because they weren’t properly trained. Apparently you have to be trained by the government in order to jump in the water and save a drowning child.

The public outcry in each of these (and similar) incidents more often than not results in a call for more regulation. This is such a typical government reaction– the solution to a problem created by too much regulation is more regulation. It’s the only thing these people know how to do.

These examples focus on the United Kingdom… but the issue exists around the world. Common sense and human decency are becoming increasingly sidelined to what the regulation says. Any good people in the rank and file are being crushed by an amoral bureaucracy.

In the United States, the government has gone so far as to state that it has no obligation to provide police protection or emergency services; courts have routinely upheld that “a government and its agents are under no general duty to provide public services, such as police protection, to any particular individual citizen…” (Warren v. District of Columbia)

It’s all a stark reminder that government is a disease masquerading as its own cure… and that, ultimately, we only have ourselves to rely on. Trust me, this is good news. The sooner people wake up to how horrifically incompetent and amoral their governments are, the better off we’ll all be.

March 15, 2012
Santiago, Chile

In advance of St. Patrick’s day coming up this weekend, I thought I’d spend some time today talking about the second best thing to come out of Ireland– its nationality law.

There’s no insurance policy quite like having a second citizenship. Sure, it would be great if we could roam around the world without having to brand ourselves by arbitrary political boundaries. I’m Mexican. You’re Canadian. He’s British. Big deal.  They’re irrelevant lines on a map that change with every war.

However, since we can’t really exist in the world without citizenship, the better option is to have as many of them as possible. If you are beholden to a single country, then your entire livelihood is tied to that government. You literally have all of your eggs in one basket.

Think about it. Are you comfortable being completely tied to your government?

Now… there are a number of ways to obtain second citizenship. If you include bribery and coercion, the opportunities are boundless. The simplest, easiest, most cost effective way, though, is for a fortunate group of folks who are part of the lucky sperm club.

Certain countries– Ireland, Italy, Poland, etc. grant citizenship to descendants of their natural born citizens, and the process is pretty painless. Let’s explore Ireland:

First of all, Ireland is a great travel document. You can live anywhere in the European Union, come and go from the United States and Canada without a visa, and travel to dozens of other countries around the world with very little hassle.

At the moment, non-resident Irish citizens have very little burden. There is no compulsory military service to worry about, no worldwide taxation, and dual nationality is allowed.

According to Ireland’s most recent nationality law, a person is an Irish citizen at birth if “either parent was an Irish citizen, or would, if alive, have been an Irish citizen.” This is where it gets a little bit tricky.

Ireland’s old nationality law used to grant citizenship to anyone born within Ireland. Therefore, if you have at least one parent who was born in Ireland, s/he was automatically an Irish citizen at birth. As such, you would also be an Irish citizen, no matter where you were born.

If this is the case, you can apply for citizenship directly to the Passport Office at your nearest consulate.

So what about grandparents?

Well, the same logic follows. If you have at least one grandparent who was born in Ireland, s/he would have been a citizen. Moreover, his/her children (i.e. one of your parents) would have been automatically entitled to Irish citizenship regardless of where they were born… and so would you.

The process works a bit differently in this case– you would have to go through something called a Foreign Birth Registration. There are a few hoops to jump through, but it’s all doable.

Every applicant for Foreign Births Registration must provide certain documentation about the grandparent from whom the citizenship is being claimed. Specifically:

1) Birth certificate including place of birth, date of birth, full name
2) Marriage certificate, if applicable
3) Copy of passport (if alive) or death certificate (if deceased)

Then you’ll need some documentation on your parent through whom the citizenship is being claimed. Specifically:

1) Birth certificate (indicating details of his/her parents)
2) Marriage certificate, if applicable
3) Copy of passport (if alive) or death certificate (if deceased)

And finally you’ll need some documents for yourself, including:

1) Birth certificate (including the details of your parents)
2) Marriage certificate, if applicable
3) Passport copy
4) Two photographs
5) Proof of address (bank statement, utility bill)
6) Application form (which you can download here)

All of the documentation, together with the application, must be submitted to your nearest Irish consular mission.

And what if you have children of your own? If you’re claiming citizenship through your grandparents, your children can only become citizens if you registered with the Irish government before their birth. In other words, once you become a citizen through your grandparents, future children can also claim citizenship.

If you’re claiming citizenship through your parents, however, all of your children can claim citizenship.

So where can you obtain all of these records? Well, if you’re a do-it-yourselfer and you have enough information, you can contact the Government Records Office (www.groireland.ie) directly. They have records of births, deaths, and marriages since 1864.

There are also services out there like RootsIireland.ie and Irish-Certificates.ie that do most of the heavy lifting for you in accessing the records.

March 14, 2012
Manila, Philippines

[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

Back in mid-December, I called buying platinum the “most obvious trade in precious metals.”  I pointed out that it had fallen all the way to $1,440 per ounce and was selling for well under the price of gold, which was at $1,613 per ounce at the time.

I predicted that it wouldn’t be long before the natural order of things reasserted itself, and platinum — which is MUCH rarer than gold — would climb back above its precious metal cousin.

Sure enough, three months to the day since I wrote that column, platinum has again exceeded parity with gold.  It’s up 18% to $1,697 as I write.  Gold is up 4% to $1,676.

So, if you followed me and bought platinum, you should be grinning from ear to ear.  But I don’t think it’s time to take profits just yet.

It’s likely this upward trend in platinum will continue.  As I pointed out back in December, there are three main factors driving the platinum market.  All are bullish at the present time.

First, platinum is highly susceptible to supply disruptions.  About  80% of the world’s platinum supply comes from South Africa and Zimbabwe.  South Africa’s platinum mining industry is plagued by unreliable power supplies.  Zimbabwe is a basket case and anyone counting on a reliable, uninterrupted supply from there must have rocks in their head.

Second, the demand for platinum for use in catalytic converters, which help clean automobile exhaust fumes, can only continue to increase longer-term.  It’s not just in the developed economies that strict emissions controls will apply in future.  The emerging economies, led by China, are choking on some of the worst air in the world.

Third, there is a strong and growing demand for platinum in jewelry.  Again, China is at the forefront.  Many Chinese are choosing platinum over gold nowadays, as they see a relative bargain.  And why not?  They can get a much rarer product, for about the same price as gold.  It’s a no-brainer.

For all these reasons, I wouldn’t be surprised to see platinum continue to rise in price over the medium and long term.  That said, I couldn’t blame you for locking in a quick 18% profit if you bought platinum on my advice back in December.

Personally, I’m still holding.  My main platinum exposure is in the 1-ounce US Eagle platinum coins.  Compared to holding shares in the Platinum ETF (PPLT), for example, these coins have an added kicker.

According to a friend of mine, who has one of the most valuable US coin collections and is as knowledgeable in the field of numismatics as anyone I know, the extremely low mintages of these coins — often under 10,000 — means they’re ripe for price appreciation above and beyond the value of their bullion content.

In other words, the high likelihood of strong demand for these coins from collectors in future gives you leverage to the platinum bullion price.

Until next time,

 
Tim Staermose, Chief Investment Strategist
Sovereign Man

March 13, 2012
London, England

[Editor's note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]

“Investors back historic Greek debt swap” -    FT headline 9.3.2012.

BANK, n. Bottomless cavity in the ground that sucks in money and the unwary.
I had quite a bit of money but then I put it in the bank.

BOND, n. A profitless contrivance used for catching the gullible or feeble-minded.
That pension fund is 100% in bonds now.

BROKER, adj. A comparative descriptive state for a client of a Wall Street bank.
He didn’t exactly have a lot of money before he started dealing with Goldman Sachs. Now he’s even
broker.

BUBBLE, n. Fundamental prerequisite for a functioning Anglo-Saxon economy.
We need a new bubble to replace the ones we had in dotcom and property.

CENTRAL BANK, n. Lobbyist for commercial banks well versed in alchemy.

CURRENCY, n. Largely intangible substance with an inherent property that tends to instantaneous evaporation, the destruction of life and the permanent impairment of wealth.
I had money once but then I exchanged it for currency in a moment of madness.

DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years.
I was worried for a second about that Greek default, but I realise there’s nothing to see now and all is well.

FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.

GREECE, n. An undesirable or unfortunate happening that occurs unintentionally but results in harm, injury, damage and colossal loss of wealth. And profits for Goldman Sachs.
Did you see Greece ? Sheesh.

HORLICK, n. Progressive and insufficiently appreciated investment visionary.

HOUSE, n. In most countries, simply a place to live. In Britain, a theoretically infinite source of perpetual tax revenue for deluded Lib Dems. (This is tautological. – Ed.)

INVESTOR, n. Plucky protagonist admired for brave deeds and quixotic struggling who is about to get shafted by Wall Street interests.
I was an investor in euro zone sovereign bonds but then everything went Greek.

JAPAN, n. Where hopes of profit go to die.

KEYNES, n. Slang: Vulgar. Disparaging and offensive.
That joker Posen is a complete Keynes.

POLITICIAN, n. Someone better informed than you about how to spend your money.

RATINGS AGENCY, n. A professional entertainer who amuses by relating absurd and fantastical tales.
That ratings agency’s credit assessment was so funny, I had to change my trousers.

RESTRUCTURING, n. Statutory rape.
Those bondholders are undergoing a voluntary restructuring – you might even call it a ‘credit event’.

ROGUE TRADER, n. Unprofitable proprietary trader. (Hat-tip to Killian Connolly.)

SOCIETY, n. The process whereby wealth is diverted from taxpayers to banks.

TAXPAYER, n. Simple-minded dolt too foolish to be working for the government.

US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we’ve still got hundreds of ‘em.

VINCE CABLE, n. (No longer in technical use; considered offensive) a person of the lowest order in a former and discarded classification of mental retardation.
Don’t be a Vince Cable – get down off that wardrobe and come and eat your tea!

Further contributions gratefully received.

March 12, 2012
Caracas, Venezuela

Panama has become a popular place for expats to plant flags and diversify internationally. And with good reason– the country has had a lot to offer. But quite a bit has changed over the years, and I thought it important to spend a few minutes today reviewing some of Panama’s most prominent international diversification options.

Banking: There are better options if you’re not living or doing business in Panama

Years ago, Panama was called the “Switzerland of the Americas” for its tight banking privacy; customer details were known only to bankers, and a breach of this commitment was a punishable offense.

In August 2009, Panama was put on the OECD’s “gray list” of countries deemed uncooperative with global tax standards. To get off the list, Panama entered into a number of international tax agreements with places like Singapore and Japan– ‘harmless’ countries where very few of its banking customers originated from.

After a few more years of intense pressure, though, the government of President Ricardo Martinelli capitulated to the United States and signed one of the most unilaterally disarming comprehensive tax treaties in history.

The 2011 agreement between the US and Panama effectively gives the US government carte blanche over any information it wants from Panamanian bank accounts. The agreement authorizes ‘fishing expeditions’, and it requires Panamanian authorities to cooperate with US investigations even when the charges are not criminal in nature or violate Panamanian law.

Many banks simply closed their doors to US taxpayers (though there are a number of banks like HSBC, Tower Bank, and Banvivienda that still open personal accounts for Americans).

With all semblance of privacy gone and the Panamanian banking system sitting firmly in the US government’s pocket, its single best feature had vanished practically overnight.

Devoid of its competitive advantage, the banking sector now has to stand on its own and compete head to head against Hong Kong, Singapore, Abu Dhabi, etc. And today, for someone who isn’t living in Panama or doing business in the country, there are far better homes (like the aforementioned) for your hard-earned savings.

Corporations: US taxpayers may want to consider other jurisdictions

Panama has also traditionally been a popular jurisdiction for corporate structures because of the country’s territorial tax system. Panama does not tax foreign-sourced income, so anyone who registers a corporation and does no business in Panama is not subject to Panamanian tax.

There is a problem with Panamanian corporations for US taxpayers, though. The IRS considers the standard Panamanian corporation (Sociedad Anonima) to be a ‘per se corporation’, which means that it will always be treated as a corporation for US tax purposes.

You cannot check the box on form 8832 and elect to treat a Panamanian corporation as a pass-through entity, and this opens up the business to problems like double taxation, extra filings, etc.

In the past when banking in Panama was a much better option, establishing a local company was an easy way to create an additional layer of protection for holding cash and other assets. Now that the banking sector has lost its key advantage, the advantages of establishing a local corporation have also diminished.

For operating businesses or holding companies, there are a lot of places in the world to structure a company that do not tax foreign-sourced income (or any income at all) and are still favorable for US tax treatment– Marshall Islands, British Virgin Islands, or Brunei.

Business Environment: Lots of opportunity, lots of labor challenges

The Panamanian economy is undoubtedly booming right now, and there is no shortage of opportunities for entrepreneurs. That’s the good news. The bad news is that you’ll need a high pain threshold to negotiate the labyrinth of labor regulations (which are not business-friendly), permits, and certifications.

Labor, by far, is the biggest challenge. Panama is very protective of its labor market, and the basic ratio of Panamanian to foreign workers that companies are authorized is about 10:1. Entrepreneurs are not able to bring in the best talent they can find for their business, and it’s extremely difficult to find skilled, reliable employees from the local pool.

Even if you do, the market is so competitive that they’ll likely jump ship within a few months and go work for someone else.

Healthcare: Good quality, reasonably priced

In the western hemisphere, Panama is still one of the better places to receive medical treatment, particularly if you’re hamstrung by the ridiculous cost and regulation in the United States.

Panamanian doctors at the country’s best hospitals are frequently trained abroad in the US or Europe, have international experience, and are fluent in English. Some of the hospitals are even internationally accredited (like Hospital Punta Pacifica).

Living: Panama is still a great place to spend time

At the end of the day, Panama is still a nice place to be. It’s getting much more expensive and the traffic is horrible in/around Panama City, but the overall quality of life is excellent. In comparison to its peers in Central America and the Latin-Caribbean basin, Panama still stands above the rest as a safe, modern, reasonably civilized place to live.

March 8, 2012
Panama City, Panama

I had dinner the other night with a bank executive in charge of government finance who told me that the aggregate spend of all the infrastructure projects in Panama totals more than $13 billion. This is roughly 50% of the entire Panamanian economy.

The equivalent in the United States would be the government announcing a ‘Rebuild America’ infrastructure spending initiative in the range of $8 TRILLION! No doubt, it’s a lot of money for this small country.

Panama (and particularly Panama City) has been in a seemingly perpetual state of construction for nearly 10-years. The long boom in residential construction created an impressive skyline of condo towers along the new Cinta Costera. But residential demand peaked and petered several years ago.

In an effort to keep the party going, the government has essentially swapped a residential construction boom for an infrastructure boom.

There are so many projects here, you’d think you were in Chonqing, China. And it’s made life miserable for anyone who has to get into an automobile– Panama City’s already dismal traffic has now become utterly hopeless.

The real issue is that Panama’s debt has been steadily rising to finance several projects. In many cases, the debt increase has outpaced the country’s dizzying GDP growth. For example, Panama’s debt rose 10.3% in 2010, while GDP only increased 7.5%.

According to some of my local attorneys who work on the deals, many of these infrastructure projects are now being creatively financed: selling bonds of off-the-books quasi-government entities that own securitized future cash flows.

It’s all an elaborate process to keep the debt from hitting the government balance sheet and obfuscating Panama’s true fiscal status. Official debt is now hovering near 50% of GDP, but the actual figure is much higher.

It’s possible that some of these projects will prove to be good investments– it’s not the same as Chinese ghost cities down here, Panama has legitimate infrastructure needs and is building accordingly.

What remains to be seen, though, is what happens after the infrastructure projects are complete in, say, another 5-years. The hope is that the real economy will have grown enough to absorb the loss of infrastructure spending. This supposition is not out of the question… but it’s definitely not guaranteed.

For now, nobody seems to mind. People are working, they’re making money, the country is improving… and except for the obvious and ridiculously high inflation rate, life is good.

To be clear, Panama is definitely a good news story. It has had one of the most resilient economies in Latin America over the past few years, and perhaps more than anywhere else in Central America, Panama has a very clear (and growing) middle class.

When you go out at night, you see Panamanians out on the town spending their discretionary income… and I mean regular Panamanians, not just the Porsche-driving 20-year olds who inherited papi’s business.

A strong middle class with disposable income is important in any healthy economy, and its emergence marks the transition from ‘developing’ to ‘developed’ nation. Panama still has a -long- way to go, but it’s moving in the right direction.

When I think back to how this place used to be 10-years ago (and all the years in between that I spent here) versus today, the positive change is overwhelming. When I think about how places like the US and Europe used to be 10-years ago, the change is resoundingly negative.

It’s this trend, by far, that’s most important.

March 8, 2012
Panama City, Panama

I’ve been having breakfast at Cafe Manolo’s ever since I started coming to Panama, going on ten years now. They make the best ‘batido’ ever… it’s sort of like a milk shake crossed with a fruit smoothie. And it used to be ridiculously cheap. Not anymore.

Economists use a term ‘menu costs’ to explain why retail prices are ‘sticky’ and resistant to change. The analogy is that, even in the face of rising input costs, a restaurant owner will resist raising his prices because it costs a lot of money to print new menus.

Apparently someone forgot to explain this concept to Mr. Manolo. Rather than printing new menus, the staff at this once cheap establishment simply scratches out the old prices and scrawls in the new prices.

Without doubt, Panama is becoming very expensive. And if they handed out Academy Awards for inflation, I’m sure the first person that Panama would thank in its tearful acceptance speech would be none other than one Ben Shalom Bernanke, Ph.D.

As you’re probably aware, Panama is a dollarized economy. In fact, since Panama’s independence was engineered by JP Morgan in 1903, the country has never circulated its own currency. Officially, Panama’s currency is the ‘Balboa’, though it has been pegged to the US dollar at parity since inception, and US dollar notes are the only currency in circulation.

In the old days, this was practically viewed as being on the gold standard. Panama has never had authority to print US dollars and expand the money supply, just like currencies backed by gold in the 19th century couldn’t simply conjure more gold out of thin air.

Decades ago when the dollar was actually a respected store of value, Panama’s dollarization really meant something. Today is a different story. Yet while Panama is still unable to print its own currency, Ben Bernanke obviously has no such restrictions.

The trillions of dollars that Bernanke has created over the last few years have made their way into the financial system and reduced the purchasing power of US dollars. Right now this is being felt acutely with respect to fuel prices denominated in USD.

The consequent rising prices hit dollarized countries like Panama very hard because there is no central bank here to monetize the debt and finance populist deficit spending.

Case in point– Ricardo Quijano, Panama’s Minister of Industry and Trade, confirmed this morning that the government’s fuel compensation fund has completely run out of money. In the face of rising fuel prices, the government is now no longer able to subsidize gasoline.

As Quijano said, “We are almost in a national emergency. Oil prices are not going down.”

It seems clear now that the Panamanian government recognizes the challenges of being dollarized and is exploring a number of options to circumvent its limitations.

For example, while the government isn’t able to print US dollars, they do have the authority to mint their own Balboa coins. Only US paper notes are used in Panama, but there are local Balboa coins in circulation of similar look, feel, and value as their US counterparts.

Until recently, the Panamanian government had historically only minted penny, nickel, dime, quarter, and 50-cent pieces… more out of necessity to make change than anything else. Importing paper currency is easy, but importing coins is costly and inefficient.

Late last summer, though, the government began circulating a new 1 Balboa coin, equal in value to $1. Forty million coins were minted and issued at a cost of roughly 25 cents each, netting the government a cool $30 million in the process… not a trivial sum here.

As you could imagine, 2 Balboa coins ($2) are now on the table, making all of this a rather bizarre twist in the global currency wars of competitive devaluation.

The United States can print all it wants, and, at least until now, export the worst of the inflationary effects overseas to those poor suckers in Asia who keep buying Treasuries. Panama cannot export its inflation to the same extent, so rising prices have made a permanent home down here in the tropics over the last few years.

Panama is essentially absorbing all of the downside of being dollarized, but receiving little upside. Minting its own coins constitutes the country’s opening salvo in the currency wars– a mutiny of sorts on the dollar side. Panama is unwilling to take a backseat to Mr. Bernanke any longer and is taking steps to reduce reliance on US dollar hegemony.

If a country as small and US-aligned as Panama is taking these steps, it’s an interesting indication of what will happen in larger, quasi-dollarized places like Hong Kong and Saudi Arabia. Perhaps a “Dollar Spring”?

March 7, 2012
London, England

[Editor's note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]

An engineer, a biologist and an economist are washed ashore on a desert island. After a few days without food they are starving. Eventually, they stumble on a can of beans on the beach.

They spend a few minutes considering how they might feed themselves. The engineer is the first to speak: “We could hit the can with a rock until it opens.”

The biologist counters, “We could suspend the can in a seawater solution and wait for erosion to work its magic.” The economist is last to contribute: “Let’s just assume we have a can-opener.”

OK, so it’s not the funniest joke in the universe. But it has the ring of truth.

For example, one colossal presumption of mainstream economic theory holds that the economic mean reverts to some form of stable equilibrium; all that is required from our enlightened monetary leaders, we are told, is a gentle nudge of this policy lever or that, and the path back to stability is assured.

But what if the presumption is fundamentally wrong at its core? What if the economy is never destined to reach a stable equilibrium- a state in any case analogous in its cold sterility to the dynamism of air molecules in a perfect vacuum?

Judging by recent market action (on the part of equities and euro zone government bond yields), investors would appear to believe that the euro zone debt crisis has been largely resolved.

The market’s supposed saviour has been the European Central Bank, benignly tipping half a trillion euros of liquidity onto the continent’s banks. More pertinently, a crisis of overmuch credit provision seems to have been resolved through the medium of… more credit provision.

Computer scientists coined the phrase “garbage in, garbage out” to describe the vulnerability of computers to process meaningless input data and produce comparably meaningless output. One could drawn similar conclusions about the modern financial system and all the economic garbage going into it.

It was Nobel laureate William Sharpe, for example, who devised the capital asset pricing model in the 1970s in an attempt to establish the sort of risks that can be reduced by diversification.

But the CAPM (as it became known) also contains a number of assumptions about financial markets that can variously be described as either quaint or ridiculous, including:

* Financial markets are perfectly competitive
* Tax does not exist; nor do transaction costs
* All investors have the same time horizon
* All investors have the same expectations of returns and volatility
* All investors can borrow and lend at one risk-free rate
* Investors can go short any asset and hold any asset fractionally

Clearly the natural world we actually inhabit simply does not behave according to the sort of models that economists use.

In “The Origin of Wealth,” Eric Beinhocker makes a convincing case that the rot set in to field of economics when serial French loser Leon Walras, having failed as engineer, novelist, journalist and banker, set his mind to this exciting new discipline. Beinhocker writes:

“Prior to Walras, economics was not a mathematical field. Walras and his compatriots were convinced that if the equations of differential calculus could capture the motions of planets and atoms in the universe, these same mathematical techniques could also capture the motion of human minds in the economy.”

And so erroneous, inappropriate, and flawed models were lifted wholesale from the world of physics, and made to fit, somehow, jammed and crammed, no matter what pieces broke or flew off, into the unstable and probably unforecastably wild world of the economy.

This matters. And it may be one of the most overlooked aspects of the financial crisis: widely accepted economic wisdom may be fundamentally inappropriate in “the real economy”, and the scope for potential losses in “the real economy” driven by such fundamentally inappropriate economic wisdom is almost infinite.

March 6, 2012
Caracas, Venezuela

With an annual murder rate estimated as high as 67 homicides per every 100,000 inhabitants in his country, Hugo Chavez is about to show the world that he’s tough on crime. At least, the non-governmental kind.

Chavez’s government claims that 98% of the homicides in Venezuela involve firearms. His solution? Restrict firearm ownership.

In recent remarks to the Latin American Herald Tribune, Venezuelan Interior and Justice Minister Tareck El Aissami announced that the government will begin suspending firearm importation, effective this month. Furthermore, local gunsmiths will no longer be able to market or sell firearms and ammunition.

According to El Aissami, “As of March, every last gun shop remaining in Venezuela – and there are less than 80 – should be closed. That is to say, in Venezuela, the perverse chapter of the commercialization of firearms and munitions is over.”

That ought to fix the problem. Murderous criminals obviously have no means of acquiring firearms illegally. And hapless victims clearly prefer to defend themselves with soup spoons and Tae Bo lessons.

Apparently Hugo Chavez is simply unwilling to accept having only the 4th highest murder rate in the world. In disarming his people, Chavez is clearly shooting for the top spot and absolutely will not stop until Venezuela surpasses its rivals. Watch out, Ivory Coast, El Salvador, and Honduras!

With a command of typical government logic– borrow your way out of debt, spend your way out of recession, fudge the statistics to fix unemployment– Chavez has now managed to disarm innocent people in order to ‘fight crime.’

This is not the first time Chavez has tried to disarm his people. The stated goal of his 2006 ‘National Weapons Control Plan’ was disarmament and weapons control– reducing the number of weapons, both legal and illegal, in Venezuela.

29 separate programs followed, including bribery, snitching incentives, and new monitoring initiatives. The UN obsequiously applauded the moves.

Then, as now, they said that it’s for the safety and well-being of the people… to protect the population. Just like molesting children at airports, authorizing military detention of citizens, and bathing travelers in radiation.

Needless to say, the political establishment, whether a dictator like Chavez or the ruling kleptocracy up north, doesn’t give a damn about protecting people. They care about protecting themselves, their interests, and the status quo. Curtailing gun sales in the name of ‘fighting crime’ is a means of achieving those goals.

Historically, disarmed populations seldom make too much trouble. Regardless of where you personally stand on firearms, the idea that police and government agents should be the only folks toting weapons ought to sound the alarm bells for any reasonable individual.

It is, perhaps, not entirely coincidental that Chavez is rumored to be suffering from terminal cancer (having just announced another malignancy), and the spectre of revolution is once again rising in Venezuela. If something happens to Chavez, they’re expecting trouble– and taking steps to seize the advantage now.

March 5, 2012
Caracas, Venezuela

Here’s a fun question to ask yourself: if you had to disappear and live out the rest of your days below the radar, where would you go?

Think about it seriously for a moment… it’s an interesting thought experiment. Assuming you had a dream team of angry creditors, bounty hunters, private investigators, and/or government agents chasing after you, where would you go?

There are several countries where disappearing is a relatively easy thing to do. We’ve talked about a few of them in the past– places like Morocco, Brazil, Lebanon, and the Philippines.

Venezuela is also one to consider.

Now, a country that’s known as the murder capital of the world and is run by a notoriously corrupt, populist dictator has a bit of a PR challenge. And frankly, this is a big advantage when trying to move off the reservation.

Like neighboring Colombia, there’s a terrible stigma about Venezuela. And also like neighboring Colombia, the stigma is way overblown.

Most foreigners (and especially North Americans) think that they’ll be kidnapped the second they set foot on Colombian soil. Or rounded up and shot upon arrival to Venezuela. This is obviously not true, but it’s enough to keep most people away.

Moreover, the population of Venezuela is nearly 30 million, with several million living here in Caracas. And like Brazil to the south, Venezuelans have a rich ethnic mix– African, European, indigenous, etc. Almost any westerner can pass as Venezuelan, so white or black, you don’t necessarily stick out.

Further, Hugo Chavez’s brand of National Socialism has created a largely cash society in Venezuela. There are few financial records from which anyone could be tracked, unlike in developed countries up north where constantly using your MasterCard pinpoints your exact location to any government agency paying attention.

Then there’s the bit about the extradition treaty. If you saw the Coen brothers 2008 film Burn After Reading [spoiler alert], you may remember George Clooney’s character hopping a flight to Venezuela at the end of the movie because the country has no extradition treaty with the United States.

This is actually incorrect. There is a US-Venezuela extradition treaty dating back to 1922. However it’s riddled with ambiguities and contains an extremely limited list of extraditable offenses (e.g. bigamy… seriously?) Even when the treaty does apply, Hugo Chavez rarely cooperates.

Under the terms of a 1988 UN Drug Convention agreement, narcotics trafficking and money laundering are considered to be extraditable offenses. However, once again, Hugo Chavez rarely cooperates, and it’s for this reason that a number of financial shadeballs are hiding out in Caracas… some even hoping to obtain citizenship.

Among the 350 articles from Venezuela’s most recent 1999 constitution– the one that changed the country’s name to ‘The Bolivarian Republic of Venezuela’– is one that expressly forbids the extradition of Venezuelan nationals.

(In case you’re wondering, it takes five years of residency to officially become a Venezuelan citizen, or about $20,000 and a few weeks to unofficially become one. I don’t recommend the latter.)

Anyhow, while Venezuela is not anywhere near the top of my list of places to spend meaningful amounts of time, there are definitely worse places to be.

In Caracas, the weather is fantastic. It’s never too hot, and it never gets cold. Venezuela itself is gorgeous with pristine mountains and beaches. And despite their reputation for being murderous thugs, Venezuelans are actually friendly people.

(As a matter of fact, Venezuelans tend to be close-talkers. It’s a cultural norm to invade personal space in conversation.)

I would also be remiss if I failed to mention that single people will be absolutely delighted down here, especially men. There seems to be a beauty pageant every other weekend with no shortage of gorgeous women vying for the title.

So if you’re expecting that proverbial knock-knock at the door from Big Brother… think about heading down to Caracas while you consider your options.

March 2, 2012
Santiago, Chile

When I was a kid, I remember watching that Schoolhouse Rock cartoon about how a bill becomes a law. That single cartoon probably brainwashed three generations of children into believing in the checks and balances fantasy of the US federal government.

The reality is what we see everywhere today– self-regulating, self-legislating executive agencies with nearly unlimited scope and authority. Even the most mundane offices within the Fish and Wildlife Service can confiscate people’s private property without any judicial oversight.

These agencies can also conjure new rules out of thin air, all on their own, that have the same weight and effect as laws. In fact, Regulations.gov shows that there have been nearly 500 newly posted regulations or proposals just in the last week… and roughly 6,000 over the past 90-days. Truly mind-numbing.

One of these new proposals has come from our friendly neighborhood regulators at the Financial Crimes Enforcement Network (FinCEN).

As you’re probably aware, FinCEN is a bureau of the Treasury Department that overseas the ridiculous post-9/11 regulatory environment; there are oodles of regulations that have obliged bankers to nitpick every last detail of new customers’ lives when someone wants to open an account.

These requirements are called “KYC” or “Know Your Customer” rules… but in actuality, they have nothing to do with knowing your customer. Knowing your customer is sitting down and having a chat… talking about their families, their kids, their life experiences. The same sort of stuff you’d do if you were getting to know anyone in general.

KYC policies, on the other hand, are nothing more than burying customers under mountains of paperwork and forcing them to jump through ridiculous administrative hoops for the sake of “the folks upstairs in the compliance department.”

The net effect is that it’s more difficult to open any form of financial account, just about everywhere in the world. Naturally, they claim it’s all for the benefit of ‘fighting terrorism,’ but this is total nonsense.

Making bank customers submit to reams of paperwork ‘fights terrorism’ about as much as fondling little old ladies at the airport… or authorizing the military detention of US citizens on US soil.

Yet in a 37-page draft released only days ago, FinCEN spelled out new requirements that it intends to implement in order to ‘fight terrorism’. The agency attacked everything from financial intermediaries to nominee managers and shareholders, to the use of shelf companies.

FinCEN’s proposed changes would increase the burden, not only to financial institutions, but also to customers opening new accounts.

For example, FinCEN wants all new customers to explicitly forecast what the monthly inflows and outflows will be when opening an account. Any deviation from this forecast will require the banker to submit a Suspicious Activity Report (SAR).

Now, anyone who has ever started a business knows that forecasts are for finance wonks. It’s extraordinarily difficult for entrepreneurs (or investors, for that matter) to make accurate predictions, especially for startups. There’s simply too much uncertainty.

Needless to say, it’s unlikely that anyone at FinCEN making up these rules has ever run a business before. In their bubble reality, everyone should be able to accurately forecast bank balances, and anything to the contrary is ‘suspicious’.

The really crazy part about all of this is that FinCEN has the authority to implement these rules all on its own. There will be no Congressional Debate, no Presidential signature… simply a short waiting period until the final version is published in the Federal Register and becomes part of the Code.

Afterwards, they’ll push the same rules down the throats of every major banking jurisdiction around the world, making it much more onerous to open a bank account anywhere.

Opening a foreign bank account is perhaps the single most important first step in international diversification. It moves a portion of your savings abroad to a jurisdicition overseas that your thieving home government does not control. It can diversify your money out of a failing currency… and most importantly, the foreign bank might actually be solvent!

FinCEN is taking steps to make it much more difficult.

The sheer volume of so many new regulations, and the velocity with which they are spawned, should be a stark reminder that the time to take action is now. Tomorrow may bring yet another stupid rule that will make it more difficult, or impossible, to do what you’ve been putting off today.

Date: March 1, 2012
Reporting From: Santiago, Chile

Earlier this week, the British government announced that Barclays PLC, one of Britain’s oldest and largest banks, was facing an $800 million penalty for engaging in a tax avoidance scheme. Barclays had been exploiting loopholes in legislation in order to avoid paying a higher tax rate, and the government is now drafting legislation to close these loopholes.

Hang on a sec. Full stop.

If the government has to pass legislation in order to ‘close the loopholes’, then the loopholes right now are obviously legitimate. Hence Barclays tax avoidance practices that were perfectly legal.

After all, that’s what tax avoidance is– legally avoiding taxes by exploiting loopholes and legitimate deductions in the tax code. Tax evasion, on the other hand, is willful misdirection or underreporting of income that violates tax code. Barclays engaged in the former.

How is it that the Treasury can penalize Barclays for having done something that is perfectly legal? Technically, it can’t. That’s why the legislation being proposed to close these tax loopholes is going to be RETROACTIVE.

In other words, since the British government can’t legitimately penalize Barclays, they’re going back in time to change the law to make what Barclays did illegal… all to collect some extra dough.

In related news, the Treasury also announced that recent tax receipts have failed to meet expectations. Despite Britain’s constantly increasing tax rates (now as much as 50%), income tax revenues dropped by $810 million from a year ago, a 4.68% decrease.

British government, meet the Laffer Curve. Even the guy flinging spitballs in the back of a high school economics class can tell you that raising tax rates often decreases overall tax revenue.

Consider that, with a 0% tax rate, government revenue would be zero. Similarly, at a 100% tax rate in which people didn’t keep a single penny of what they earned, government revenue would also be zero because nobody would have an incentive to work!

Working up from 0, and backward from 100, would yield similar results. At 1% tax rate, the government would collect a bit of revenue. At a 99% tax rate, a small handful of people might work, also generating some revenue for the government.

Economist Art Laffer is credited with describing this relationship between tax rates and government revenue, however philosophers going back to the 14th century also examined the idea.

Laffer’s point was to show that there’s an equalization between the government taking a small piece of a big pie (low tax rates, huge incentive for economic productivity), and a big piece of a small pie (high tax rates, very little incentive for economic productivity).

Britain is trying to take a big piece of a rapidly diminishing pie. As the pie gets smaller, they keep increasing the size of their slice by upping tax rates… which is the exact opposite of what they should be doing.

There are a lot of other places in the world that are happy to take a smaller slice of a big pie. In Hong Kong and Singapore, where tax rates are very low, both of those governments are awash with surpluses.

Even in Bulgaria, income tax rates are a flat 10%. It’s such a low rate, it’s not even worth the effort to avoid. People have an incentive to pay simply because it’s so cheap and easy.  It’s perhaps for this reason that Bulgarian Finance Minister Simeon Djankov has been openly courting UK investors to relocate to Bulgaria.

Meanwhile, back in the UK, the British government is fighting hard to shake every pound they can out of the people. Revenue & Customs (the British IRS) is launching a whopping 30 new task forces, going after everybody from used car outlets to flea market sales booths.

This is so absurd, it seems like a headline from the Onion: “British Treasury Preparing Task Force for Flea Markets”. Unfortunately it’s true.

Look, here’s a simple truth. Governments are so bankrupt and desperate that they’re willing to do absolutely anything to confiscate people’s wealth. They’ll steer away from sound economic policy, completely reject the rule of law, and even go back in time… just to keep the party going a little while longer.

International diversification– selectively diversifying your assets and interests across sound jurisdictions– is a very solid strategy to protect yourself against such runaway government theft.

This includes things like buying property abroad, storing physical gold and silver in a non-bank secure storage facility overseas, and opening a foreign bank account.

If you think that taking such steps (and making the appropriate disclosures) makes you a target, you may be right. But by doing nothing, you’re still going to be a target. Just ask any flea market salesman in the UK.

Further reading:

Financial Times on the British government’s reaction to Barclays-

http://www.hmrc.gov.uk/stats/tax_receipts/tax-nic-receipts-info-analysis.pdf