February 3rd, 2012
Talca, Chile

After a week away, I’m really happy to be back down on the farm in Chile. This is one of the most peaceful places I’ve ever been on the planet… and each day, it’s becoming more and more a place where all of the fiat bubble kleptocratic nonsense doesn’t matter in the least.

Central bankers can print all they want, politicians can bicker and spend all they want… down here, it really doesn’t matter. I have more food and water than thousands of people could ever consume, and enough renewable energy resources to power a small city.

More on that soon, let’s move on to this week’s questions. First, Frank asks, “Simon, I know you gave a rare public appearance in the Bahamas earlier this week; can you tell us what your speech was about?”

Sure. BFI Capital Group held an intimate private briefing earlier this week, and they asked me to give the keynote address.  While I almost always turn down speaking requests, I’m glad I made this exception; there were a number of Sovereign Man subscribers in the room, and it was a real pleasure to meet face to face.

As for my remarks, I explained to the audience that what’s happening right now in the west is not new. This is not some apocalyptic, end of the world scenario– imperial collapse has been happening for millenia, from the Macedonians to the Mongolians to the Ming Dynasty.

Empires are born. They rise. They peak. They decline. And they collapse. Big deal. The same thing is happening in the west right now– it’s not new, and we’re not special.

The larger point, is that rational, thinking people need to acknowledge this reality and understand the lessons from history. Collapse of empire is seldom smooth or peaceful. I encouraged everyone in the room to take rational steps based on measured outcomes… and avoid emotional reactions based on fear.

Fortunately there are plenty of good news stories in the world and a multitude of really exciting opportunities. Then we walked through some of my own steps that I’m taking, or have taken… including multiple passports, foreign accounts, and the farm down here in Chile.

I’ll be putting together a video on the topic soon to explain more.

Next, Sarah asks, “Simon, I listened to your recent teleconference about Mongolia banking and brokerages… very insightful, and it seems like a land of real opportunity! My question, though, is about inflation. I’ve read that inflation in Mongolia is quite high. Doesn’t that make the local currency a poor choice to hold?”

Mongolia is definitely a land of tremendous opportunity, and in our recent teleconference, we explained to members a number of different ways to stake your claim in the country, including by opening a bank account there.

As we’ve discussed before, Mongolian bank accounts denominated in the local currency (tugrik) yield up to 14% or more for short-term deposits. In a world full of 0% yields, this is an extraordinary rate.

That being said, there is no asset class or instrument on this planet that carries zero risk and is on a one-way elevator ride up. Is it possible that the tugrik will depreciate against the US dollar?

Certainly. And in the short-term, it’s impossible to predict what will happen. But when you look at the fundamentals, the long-term picture looks very bright.

The biggest thing to keep in mind is that the Mongolian currency is in tight supply, especially compared to dollars, euros, and renminbi. The tugrik market is tiny… and that generally keep speculators away. There is no Goldman Sachs trading desk in Ulan Bator (at least, not yet) speculating writing huge contracts worth hundreds of billions of dollars.

It also means that, as a nation with unimaginable resource wealth and export potential, the relative demand for the Mongolian currency will be extremely high relative to other major currencies.

The tens of billions of dollars flowing into the country should continue to put upward pressure on the currency, and this means a lot more to the tugrik’s trajectory than how much the price of lettuce went up last year.

I have no doubt that Mongolian politicians and central bankers will play games with their money supply just like every other country in the world. But given the absurd amount of resource wealth in Mongolia, it seems implausible that they could screw the tugrik up too badly in the long run.

Ultimately, as with most things in finance these days, it will also depend on Ben Bernanke. If he keeps easing and printing, tangible assets (or paper tied to tangible assets) will likely appreciate. That includes the tugrik, which will become one of the world’s staple commodity currencies down the road.

Next, keeping in line with the currency theme, Mark asks, “Simon, what are your thoughts on the Iraqi Dinar? I have a chance to purchase $3,000,000 worth of dinar for approximately $4,000 USD. Would this be a prudent investment? Thank you for your input, and keep up the great work.”

Are they selling a bridge too?

Look, I know this is a really touchy subject for some folks… there’s a religious fascination with the Iraqi dinar these days. The prevailing rumor is that the Iraqi central bank is going to revalue the dinar 1:1 to the US dollar, making instant millionaires out of anyone holding the old currency.

This is a get rich quick scheme, nothing more. If you have any doubts, I encourage you to take a trip to rural Iraq and spend time with the locals there. They’ll happily sell you their dinars for hard currency. Are they all fools, trading in future millions for a few measly bucks? Or simply realists who recognize a good scam when they see it?

Decide for yourself. But at least do the research.

[Hypothetically, even if anyone holding dinars does become unimaginably wealthy, I should point out that US taxpayers who realize a profit on physical currency get taxed at ordinary rates, not on long-term capital gains. See IRC section 988 for more.]

Last, Chuck asks, “Simon, out of curiosity, do they show NFL games in Chile?”

You bet. In fact I had a bunch of friends over to my home in Santiago a few weeks ago to watch the NFC championship game over pizza and beer. We may do a repeat this Sunday.

February 2, 2012
Undisclosed location

If you’re like almost every single Internet user on the planet, you probably use Google for something. Maybe Gmail, maybe Google search, maybe Google Docs, maybe Google Voice… or maybe all of the above.

Google recently began circulating a new privacy policy that will take place effective March 1, 2012.  With so many services ranging from a new social network to an online office platform, Google has consolidated all of its privacy policies into one. And it’s a good reminder of what’s at stake.

Anytime you perform a Google search, for example, it’s logged. Your computer’s IP address and cookie (unique identifiers that can essentially pinpoint you and your location) are also included, so your computer’s entire search history is archived.

When you receive an email through Gmail, or a voicemail on the Google Voice service, it’s archived on their servers. Even if you delete the messages, there’s still a copy on Google’s servers. The marginal cost of digital storage is so ridiculously cheap that they have little reason to delete this data.

Then, of course, there are all the government requests for user data. In the first half of 2011, the US government requested information on over 11,000 Google accounts. Google complied with a full 93% of those requests.  Your account might have been one of them, and you would never know.

It’s not just Google either. Between Google, Microsoft, Yahoo, and AOL, the four companies power the email accounts of over 1 billion people. And all of them are in bed with the US government.

In a way, they have to be. They’re all US companies– headquartered in the US and subject to US law. When the government comes looking for information, or some judge decrees that a user’s emails be confiscated as evidence, they have to comply.

Big Brother compliance also goes far beyond email. Skype, the popular instant message and VOIP software that was once thought to be private and secure, is now owned by Microsoft… meaning that Skype chats are now also subject to courts and police agencies.

So what to do? First, and most importantly, be mindful about what you put in an email or online chat platform. The best rule of thumb is that sending an unsecure email is like shouting the contents across the street.

Further, consider using an offshore email provider that can securely host your account abroad. There are a number of them available, services like:

https://secure.runbox.com/ (Norway)

http://www.SwissMail.org/ (Switzerland)

http://www.NeoMailbox.com/ (Switzerland)

If you have your own custom domain email address (for example, admin@sovereignman.com), you can keep your existing email address and simply change the mail servers. I’ve asked my IT staff to put together a short guide showing exactly how to do this, and I’ll send it out to you soon.

February 1st, 2012
Location Undisclosed

The latest Case-Shiller numbers released yesterday showed that the US residential housing market is still very weak. After three straight months of declines, home prices are now at 2003 levels. Duh.

To some, it was a shocking revelation. The pundits I saw discussing it yesterday practically had a seizure they were in such disbelief. CNBC even ran an article on their website in response, extolling the strong fundamentals of US housing.

Let’s look at those fundamentals:

1) Most people cannot afford to write a check for $200,000 or more (roughly the median home price), which means they’ll require bank financing. Consequently, speculators and investors aside, home prices must be a function of income– do buyers make enough money to be able to afford the monthly mortgage payment?

2) Mortgage affordability is tied directly to income levels, and where there’s no job, there’s no income. When you aggregate that notion across an entire economy with high unemployment, it restrains housing affordability.

3) Millions of people have been taken out of the housing market as potential end-user owners. These are the ‘former’ homeowners who have lost their jobs and/or been foreclosed on. They can no longer qualify for a mortgage, particularly at the ultra-low rates we’re seeing now.

4) There’s a lot of talk about how low interest rates are making homes affordable. Maybe so, at least to the people who qualify for a mortgage. And while it’s possible that interest rates could go lower, there’s a lot of potential for rates to rise. And when rates rise, homes become more UNaffordable.

Example: if you can afford $1,500 per month to spend on a home, you would be able to afford a $300,000 home at today’s low rates. If rates go up to 6%, $1,500 per month only buys you a $250,000 home. If that’s what the average guy can afford, that’s where home prices will converge.

5) Many local governments are completely bankrupt; we’ve read about looming municipal defaults and laying off cops and fire fighters. Property taxes will likely rise as a result, adding an additional cost in buyers’ monthly payments.

Again, if a buyer can only afford $1,500/month, and his property tax rises by $600/year, that takes about $10,000 off the price of the home s/he would be able to afford.

6) Ditto for homeowners’ insurance rates, which are rising rapidly.

7) There are currently 15 million vacant homes in the US according to the latest census figures, and every day, more people are being foreclosed and getting kicked out of their homes. Housing prices can’t have any meaningful rise as long as there’s such excess supply in the market.

8) In bad economies, people double up in homes. Roomates. Live-in relatives. The number of households is contracting, and this is a demographic issue– too many homes, not enough families to fill them.

9) Even if every unemployed American were simply given a home to live in, it would still leave millions of vacant homes on the market.

10) Given how US Homeland Security treats everyone like a criminal terrorist, foreigners aren’t exactly lining up to tighten the slack.

Ultimately, while there are bright spots in any market, the fundamentals for US housing remain poor.

It can be tempting to jump into the market as an investor with prices so low. But gobbling up a low-grade track house simply because it’s cheap is not a sound investment strategy. There are a lot of things in this world that are cheap. That doesn’t mean the price will go up. It just means that they’re cheap.

A great investment is one that is both cheap, -and- has a catalyst for growth. Median housing in the US has few, if any, catalysts to growth. If you want to invest, stick to the highest quality assets you can find– premium homes in the best locations. They’ll be the first to recover.

January 31, 2012
Nassau, Bahamas

Wegelin & Co used to be Switzerland’s oldest private bank. Founded in 1741, they managed to survive every threat across three centuries: revolution, financial disaster, and war… from being invaded by Napoleon to the Sonderbundskrieg civil war to Adolf Hitler.

Every threat except for one, that is: the United States Government.

I say that Wegelin “used to be” Switzerland’s oldest private bank because they’re now finished, courtesy of Uncle Sam. They had no office in the United States, no employees in the United States. They were 100% Swiss, and violated no Swiss law whatsoever.

Yet US authorities believed that a handful of Wegelin’s US clients were hiding assets and not paying taxes. The fact that the bank wasn’t subject to US law was irrelevant. The fact that the bank has zero legal responsibility in ensuring their customers filed tax forms was irrelevant.

The government crushed Wegelin regardless.

By threatening them with lawsuits, investigations, IRS penalties, and criminal charges (levied personally against the bank directors), the US government succeeded in its mission. The scare tactics were enough to chase away the bank’s customers, and Wegelin is now selling what little of its business remains.

It’s another despicable example of the US government doing whatever it wants, wherever it wants without any legal basis of any kind. It gets worse.

On top of this, there’s the new FATCA legislation– Foreign Account Tax Compliance Act. The law effectively requires every bank in the world to make a choice:

1) Accept Americans as customers, but agree to share information with the US government;

2) Close the door to all US citizens and residents forever; or

3) Thumb your nose at the law, but risk becoming the next Wegelin & Co.

Needless to say, most banks are opting for #1 in order to avoid unnecessary scrutiny and disclosures.

This is why it’s getting harder and harder for Americans to do business overseas. Many foreign companies now don’t even want US citizens (or residents) as shareholders, officers, or directors. It’s just too much hassle, too much risk.

As FATCA is rolled out, it will be commonplace for foreign banks to give the ole’ heave-ho to their US customers. And as we have discussed so many times before, having a foreign bank account is one of the most important steps in declaring your financial independence. Briefly,

1) a foreign account takes your hard-earned savings out of the direct control and supervision of your home government’s kleptocrats.

2) A foreign account allows much easier diversification outside of your home currency.

3) And perhaps most importantly, a foreign bank is likely to be safer and better capitalized, devoid of the toxic assets that plague US and European banks.

But are there any options left? You bet. As the saying goes, whenever one door closes, another one opens. OK not exactly. But for every few dozen banks that are closing their doors to US customers, one or two are happy to welcome Americans with open arms.

The US market is huge. And a few banks out there are willing to do the extra work and crawl in bed with Uncle Sam in order to get a slice of that pie. Some of them are right here in the Bahamas, or in nearby Turks & Caicos.

While I’m not at liberty to mention any bank names in this public forum (they really freak out about this), suffice it to say that you won’t have too many problems opening an account with the major international banks in either location.

Just make sure you have your passport, driver’s license, utility bill (or other proof of address) and two bank reference letters (or one letter plus a professional reference from a lawyer or accountant).

It’s a short flight that’s well worth the time and effort.

As a reminder, US taxpayers with foreign accounts are required to file form TDF 90-22.1 to the Treasury Department (not the IRS) each year by June 30th, as well as Schedule B (1040) with their usual return by April 15th. Starting this year, some filers may have to submit form 8938 as well… I’ll write more on that soon.

January 30, 2012
Nassau, Bahamas

Here’s something unexpected. According to IMF data, the central bank of Kazakhstan recently purchased 3.1 metric tons of gold, increasing its reserves by 4.2%. In an even more stunning development, Mongolia’s central bank purchased 1.2 metric tons, increasing its reserves by a whopping 52%.

To be fair, 4.3 metric tons of gold is not much. At current market value, it’s around a quarter of a billion dollars, just a small fraction of last year’s worldwide gold production. It is an interesting, trend, though.

Years ago, most radidly developing countries enjoying their first taste of wealth would have been more than happy holding dollars. Today, it’s becoming obvious to everyone that sitting on a bunch of worthless fiat paper does not make a sound balance sheet.

Over the years, central banks have managed to accumulate trillions of dollars worth of foreign reserves, the vast majority of which is in dollars, euros, and yen.  This is a big problem. Asset managers (including central banks) need a reasonable store of value to hold their cash and reserve funds, and none of those three is a good option.

What’s more, as the euro drama continues to unfold, central bankers will be increasingly forced to choose between the fundamentally flawed US dollar, and the fundamentally flawed yen. No other currency can absorb hundreds of billions of dollars worth of capital flows.

One suggestion being discussed openly by many central bankers is to hold foreign reserves in a new, specially created reserve currency similar to the IMF’s SDR– essentially a global currency that’s only accessible as a medium of exchange for central banks.

Now, this may be the dumbest idea in the history of modern finance– solving the problem of too much structurally unsound fiat currency by creating a new fiat currency backed by other fiat currencies? It’s unimaginably stupid.

For now, though, there is no solution… which means that big economies weilding hundreds of billions, even trillions of dollars, have very few options. And it’s a tough problem to manage.

For example, a friend of mine who works at one of China’s sovereign wealth funds once told me that they don’t look at any deal where they can’t deploy at least one billion dollars.

As any successful investor knows, finding a great deal is not easy. Finding one that’s worth at least a billion dollars is seriously difficult. Finding thousands of them across which you can invest trillions of dollars is an impossibility.

This is why sovereign fund managers, just like pension funds and bank asset managers, keep falling back on the same old, tired investments that don’t make any sense– US Treasuries, Japanese government bonds, etc. It’s the only asset class on the planet where you can park a billion dollars with relative ease.

Little guys like Kazakhstan and Mongolia don’t have that problem; they can fly under the radar, build reserves, and continue accumulating precious metals in meaningful quantities (as a proportion of their holdings) without moving the needle too much. China and Saudi Arabia can’t.

It’s a good model for the rest of us to follow– stay liquid, steadily acquire precious metals, and fly under the radar.

January 27, 2012
Manila, Philippines

[Editor's note: Tim Staermose is filling in today while Simon is at the farm in Chile.]

There is a delicious irony in the world of economic policy at the moment.
Back in 1997 and 1998 I had a ringside seat to the Asian financial crisis from my trading desk in Seoul. When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia’s sick economies was to:

1. HIKE interest rates,
2. CUT government spending,
3. Further deregulate, liberalize, and open their economies to foreign investment to attract capital;
4.  And let their zombie banks FAIL.

Though, they experienced brutal recessions after swallowing this tough medicine, the two countries which carried out these policies to the fullest extent:  South Korea, and Indonesia, are today among the most successful and dynamic economies in Asia, and the WORLD.

Since emerging from recession in 2000, Indonesia has enjoyed more than a decade of fast, uninterrupted economic growth. In fact, one emerging markets funds manager told me this week that Jakarta today is “far too modern” to interest him now.  It has already “emerged.”

South Korea also emerged bigger, better, and stronger from the crisis 14 years ago.  On my last trip there in late 2010 ahead of the G20 meeting in Seoul, I was astounded how far it had come since I’d last been there in 2003.

I remember having a chat with my cab driver and telling him it really looked to me as though Korea had  reached “developed country status.”  Becoming a “seon-jin-guk” as they call it in Korean was always one of the burning desires of Korean politicians, bureaucrats, business people, and ordinary citizens alike.

My cabbie was far too modest and said, “No. We still have a long way to go,” as he waved my visa card in front of a payment gadget mounted on his dashboard that instantly deducted the fare and had me on my way in about 5 seconds flat, without having to fumble around for change or sign anything.

South Korea today is the most wired country on the planet.  So good are their technology companies, spearheaded by Samsung Electronics, they even have Apple running scared.

I recently retired my Blackberry.  The replacement won’t be an iPhone.  It’ll be Samsung’s Galaxy S2.  All my friends who have them say they’re, “Way better.”
Bottom line — Indonesia and South Korea “reset” their systems back in the late 1990s and have emerged stronger and more dynamic than ever.

The Asian crisis, back then was brought on by the same things that led to the current crisis in Europe and the US (and the one I believe is coming to China):  Too much cheap money.  Too much borrowing by people who couldn’t afford it, to buy non-productive assets.  And an insanely leveraged banking system run amuck.

Today, the same Western policymakers whose advice got Indonesia and South Korea quickly back on the rails are giving the EXACT OPPOSITE prescriptions for their own economies.

They’ve CUT interest rates to near ZERO.  Governments have SPENT trillions of borrowed money that they have no hope of ever repaying on ill-advised “stimulus.”

They’ve BAILED OUT nearly all the brain-dead banks, keeping them on life support in a coma.  Protectionist rhetoric is building up, and more onerous regulations are being ushered in.

This is what Japan did after its 1980s bubble.  And look at them now.  They’re stuck in a time warp, and the Japanese economy remains in a funk.

It doesn’t take a genius to see that if they persist with their current approach, Europe and America are going to end up exactly like Japan. And places such as South Korea, and even Indonesia, are eventually going to leave them in the dust.

Until next time,

Tim Staermose,
Chief Investment Strategist
Sovereign Man

[Editor's Note: Simon's friend Craig Ballantyne is filling in today to talk about the importance of the internet in generating independent income]

In the late 1970′s one of my best friends and his family escaped from Armenia, then under communist rule. In fact, his father bought their way to America via Italy, eventually settling in California (legally). In the decades since then, my friend has gone on to graduate high school, drop out of college, and eventually build a 7-figure business on the Internet allowing his family to live the American Dream.

Sure there were rough times along the way after they arrived in Southern California with almost no money and poor English. For the first few years my friend had to dumpster dive behind grocery stores in order to help feed the family. But over time, things got better. His parents got jobs. They worked hard. And my friend went on to experience the rewards of being an entrepreneur who adds value to the world.

For those who say money can’t buy happiness, this story proves them wrong.

If you include freedom as part of your happiness equation, then there is no denying that money plays an important role in acquiring happiness. Money gives you the freedom to live anywhere in the world, to get out of many sticky situations, to support your family’s goals and dreams, and to protect your family from the strange world we live in.

Almost every penny my friend’s father had went into bribing their way out of despair and misery and into creating a better opportunity in America. Money buys freedom. And freedom is almost essential for happiness.

You don’t need a lot of money to improve your freedom today. As Simon has shown you, there are many inexpensive places in the world that offer greater freedom than cities with a high cost of living.

But let’s be clear, unless you are independently wealth today, you’ll always need some sort of income to pay for the necessities in life, let alone the extra special experiences that can bring you even greater freedom and happiness.

When and if you move – and even if you don’t – it may be tough for you to replace your current job. Many Americans are having a tough enough time replacing their jobs as it is in their home towns.

If you have no income, you have no money. No money, no freedom. No freedom, little chance of happiness and security.

There is a solution. It’s called taking control of your financial situation through the creation of a web-based business, one that you can run from almost anywhere in the world – even in Armenia today.

The Internet continues to be the Great Equalizer, allowing average, ordinary men and women all over the world to create an independent income under their own control. You may be out of a job today but you’re never out of opportunity when it comes to building your own online business.

It worked for my friend from Armenia, for me, and for literally hundreds of people I have met personally at seminars and conferences around the world.

Now I understand it might sound ironic to invite you to Washington, D.C. to learn about how you can create your freedom, but in less than 6 weeks time that is where there will be the biggest congregation of Underground Internet business owners in the world.

It will be your opportunity to learn from everyday, average folks like James Schramko from Australia and Shelby Larson, the creator of one of the largest work-at-home-moms businesses in the world, , who have all built Internet businesses they can run from anywhere in the world. It’s through these businesses that they have supported their freedom and happiness.

If you want to control your income and create your financial independence, this is the best event you can possibly attend. It doesn’t require risky investing, wiring money overseas, or “trusting” the locals to not rip you off.

Instead, you’ll meet positive people happy to help you and show you the way towards building your own online business, including Matt Smith and myself.

In fact, should you choose to stick around for the bonus day, you’ll meet and hear from both myself and Matt Smith on how to go from your first sale to your 1000^th sale online using our website business blueprint.

You might even get your turn in the hot seat…but don’t worry, it’s the good kind of hot seat, where you’ll be able to share your website business idea with Yanik Silver and Matt Smith and have them dissect your business plan and offer life-changing ideas and instructions to help you succeed faster than you could on your own.

The Underground Online Seminar sells out every year, and Tuesday, January 31^st is the last day to reserve your seat at the special Early Bird price (and with access to all of the fast action bonuses).

Reserve your spot here

I look forward to seeing you there and helping you get on the path to freedom and happiness that you deserve.

Craig Ballantyne
Editor, EarlyToRise.com
Contributor, Sovereign Man

I woke up this morning to a flurry of emails– “Did you watch the State of the Union address last night?” I did not. Rather, I was busy sharing a delightful meal at one of my favorite restaurants with some close friends; I didn’t even know that the speech was going on yesterday.

When you break away from the confines of a single geography, the political theater becomes completely irrelevant. And State of the Union addresses represent the absolute worst of this absurdity.  All the applause, the silly introduction traditions, and of course, the Newspeak. A quick glance at the transcript from last night shows plenty of gems, such as:

1) US military involvement in Iraq “has made America safer and more respected.” No comment.

2) “In the last 22-months, businesses have created more than 3 million jobs.” Nevermind that the BLS’s own statistics show that the employment to population ratio has been steadily dropping since 2006.

3) “Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.” Regrettably, the government was borrowing all of that money to begin with… so in essence the President is asking to take half of borrowed money to pay back borrowed money.

4) “Your country will do everything it can to help you succeed.”

5) “But challenges remain. And we know how to solve them.”

Those last two are among the best, particularly when viewed in light of recent legislation that has been introduced, such as:

HR 3798, which requires a uniform national standard for the housing and treatment of egg-laying hens;

HR 3791, which would require certain American companies to undergo an additional level of reporting bureaucracy in how much they pay women and minorities;

HR 3784, which would impose a windfall profits tax on oil, natural gas, and related products production;

… and my favorite …

HR 3806, a bill submitted for ending “the practice of including more than one subject in a single bill… AND FOR OTHER PURPOSES.”

It would be funny if it weren’t all true.

Just as elections do every four-years, State of the Union addresses give people an annual dose of hope… that whoever is in office has a credible plan to fix all the problems. To improve education, to take care of seniors, to win the peace, to bolster the economy, to create jobs.

Sure, it may be inspiring. But ultimately, like campaign promises and electoral rhetoric, it’s just hot air. Real hope and inspiration comes from within… from embracing self-reliance and taking charge of your own destiny.

A lot of people are waiting for their politicians to serve up opportunity and job skills on a silver platter. This is simply not going to happen. Politicians don’t create jobs (unless they’re unproductive government jobs). The market creates jobs. And those jobs are based on products, skills, and services that are in demand.

The opportunities are out there, no doubt. Down here in Chile, droves of new software and biotech companies are flourishing. My friends in Singapore tell me that they can’t find enough workers to hire in finance, real estate, and personal services. Unemployment in Hong Kong is just 3.3%.

Our partner Tim Staermose recently wrote about several business opportunities in the Philippines that he is personally financing. And this Friday, our monthly SMC teleconference is dedicated to unique opportunities in Mongolia.

Things might seem a bit slow where you live, but the world is a big place full of possibilities. And action trumps hope any day.

January 24, 2012
Santiago, Chile

Yesterday, Kentucky senator Rand Paul was detained by the TSA in Nashville after refusing to be fondled by the airport agents.

Paul has been a vocal enemy of the TSA, blasting the agency last year after agents conducted an invasive search of a 6-year old girl despite her parents’ objections. TSA Director John Pistole suggested that, because a young child in Afghanistan is capable of detonating a roadside bomb, all children should be considered potential threats.

Paul raised the issue again yesterday in an opinion piece. As usual, the Obama administration closed ranks around the TSA yesterday, defending the agency and insisting that “we take necessary actions to ensure that air travel is safe.” Such as treating 6-year old girls like criminal terrorists.

Air travel is never going to be safe. We’re talking about a 500,000 pound flying building crammed with hundreds of strangers criss-crossing the skies nearly 100,000 times in a single day. There’s a lot of room for things to go wrong.

Criminalizing travel, which is the effective net result of the current passenger screening process, has minimal impact on weeding out the boogeyman. There are so many holes in the TSA procedures– medication, baby formula, pilot exceptions. Not to mention a whole world of softer targets. Who needs airplanes when you have shopping malls?

One of the first things I learned in the intelligence business years ago is that smart enemies will always adapt their tactics. It’s not rocket science; Sun-Tzu wrote the same 2,500 years ago– focusing on a single approach (like airport security) is useless.

Thing is, TSA airport security has nothing to do with security, and everything to do with making sure that every human being who transits within or through a US commercial airport knows exactly who is in charge. We call it the Tip of the Spear.

The idea is to desensitize people to government intrusion, generally with something shocking (like treating a 6-year old girl as a criminal terrorist). That’s the tip of the spear. As the spear drives further and further into its target, subsequent intrusions seem less and less acute.

Psychologist Robert Cialdini, whose writings on influence and persuasion have been read by millions across the world in dozens of languages, discusses three key principles which apply to this ‘Tip of the Spear’ approach.

The first is called social proof. It’s easy to understand– like lemmings, sheep, or milk cows, people standing in the security line watching everyone else get patted down and go through body scanners, will most likely comply with the social norm. Monkey see, monkey do.

The second is the principle of authority. Also easy to understand– people will obey authority figures even if it requires taking objectionable action. Uniforms establish an authority image, as do the training programs that teach intimidation tactics to government agents– voice projection, direct eye contact, use of professional vocabulary, etc.

The third is a bit more complex; Cialdini calls it the principle of commitment and consistency. Simply put, if people commit to an idea in word or deed, their future actions will be consistent with this idea because it becomes part of their own self-image.

In this context, people who submit to government intrusion the first time (e.g. watch their children receive pat-downs at TSA checkpoints) are more likely to continue acceding to further government intrusions down the road. It’s a bit of a boiling frog approach.

When you step back and look at the big picture, ‘security’ is an utter farce. The moral argument for such measures is rooted in a silly myth that men in caves wish to do us harm. The legal argument is questionable at best. Many folks forget that the Fourth Amendment to the US Constitution states:

“The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated…”

Does anyone truly consider it reasonable to subject passengers to demeaning, invasive searches? Or to douse travelers in radiation from machines that cost over $100,000? Or to waste billions of dollars and man-hours each year on security procedures that are routinely proven to be ineffective?

If the answer is yes, then you obviously don’t see eye-to-eye with your neighbors, hence you’re probably living in the wrong country.

If the answer is no, then it should be obvious that your government has hijacked liberty… in which case you’re probably living in the wrong country.

January 23, 2012
Santiago, Chile

January 20, 2012
Santiago, Chile

Greetings once again. It’s another beautiful, sunny day in Chile today, and I’m about off to our farm south of town to spend a wonderful weekend with good food and great friends. Before I sign off for the week, though, there are a few questions I wanted to address:

As you’re probably aware, yesterday was the much ballyhooed blackout of several popular web sites in protest of new legislation that threatens the Internet as we know it.

The United States Congress has teed up two separate bills which give government agencies sweeping new powers to punish millions of innocent users, criminalize harmless activities, and effectively make entire web sites disappear at their sole discretion without any judicial oversight.

In a nutshell, these bills would create the online equivalent of Nazi Germany.
But what can we really expect from these people? It’s not the first time that Congress has gone out of its way to destroy freedom and prosperity, and it certainly won’t be the last. Just look at the last decade for a plethora of examples:

USA PATRIOT Act, 2001. The US Constitution officially became toilet paper when this bill of over 60,000 words just happened to be introduced only a few weeks after 9/11. Roving wiretaps, suspension of due process, and a complete loss of privacy became the norm.

Sarbanes-Oxley Act, 2002. In the wake of the Enron scandal, Congress did the only thing it knows how to do– pass stupid laws with no thought of long-term consequences. SOX, as it became known, was one of the most burdensome pieces of legislation to American business in history.

The disclosure requirements alone added millions of dollars of unnecessary expenses to US businesses and sent foreign companies who were thinking about listing on the formerly prestigious NYSE running for the hills. Places like Hong Kong and Singapore benefitted from such short-sighted regulation, and the US became less competitive. Again.

Hiring Incentives to Restore Employment Act, 2010. The inappropriately named HIRE Act essentially puts a gun to foreign banks’ heads and forces them to make a decision: any bank with US clients must either enter into a costly information sharing agreement with the IRS, or be subject to a 30% withholding tax on US-sourced capital flows.

Consequently, a number of foreign banks have begun dropping their US clients. Taken in conjunction with various US Securities rules, many foreign businesses have also begun dropping US citizens as partners, shareholders, and directors. It’s simply too onerous to have to deal with all the disclosure filings and risk action by the SEC or IRS.

Net result? US citizens are less capable of competing internationally in a world where the economic power is shifting overseas.

National Defense Authorization Act, 2011. Signed by President Obama on Saturday, December 31st with little fanfare when hardly anyone was looking, NDAA is the latest gem in a long line of liberty-destroying legislation that authorizes indefinite military detention (without trial) of suspected terrorists.

Thing is, NDAA provides a ridiculously broad definition of ‘suspected terrorist’, essentially giving carte blanche to local, state, and federal police agencies who no longer need to worry about justifying their decisions in front of a judge.

Don’t worry, though. President Obama issued a statement acknowledging the controversy of the bill, but clarified that his administration “will not authorize the indefinite military detention without trial of American citizens.”

Heartwarming. But hardly a secure guarantee. President Obama isn’t exactly batting 1,000 on his promises to the American public, and future presidents certainly won’t be obliged by the same pledge.

There are, of course, dozens of other examples. Obamacare. Dodd-Frank ‘financial reform’. And now the Stop Online Piracy Act / Personal Information Protection Act.

Hey, these laws like SOPA and PIPA always have great names. Just like wars. Operation ‘Enduring Freedom’ was the moniker given to the early days of the US War of Terror. It all sounds very noble. The reality is always different.

Throughout history, governments on the brink of insolvency have routinely enacted similar policies. Sliding into economic obscurity, they’ll engage in reckless, cannibalistic initiatives– higher taxes, burdensome regulation, war, destruction of the productive class, etc. It only hastens the end game.

This time is not different. And we can expect more and more of the same. Up next will be new laws that:

- restrict cash transactions over a certain amount (Italy has already passed such measures for amounts exceeding 1,000 euros)

- nationalize pension funds and private retirement accounts (again, has already happened around the world from Ireland to Argentina)

- impose a national sales tax and reduce death tax exemptions (already at the forefront of the ongoing tax debate in the US)

- ban gold and silver personal holdings (if you think this can’t happen, ask any of the 250,000 people who used to own Liberty Dollar coins before they were seized by the FBI in 2007…)

And more.

The thing is, every time one of these new bills crops up, there always seems to be a small resistance movement fighting it tooth and nail on the ground. Hence yesterday’s SOPA/PIPA blackout.  But ultimately, the political establishment wins.

It’s impossible to shake the public from its apathy… to steer people from the mind-numbing drivel of prime time airwaves… to rescue them from the PSYOPS campaigns of the 24/7 news channels.

We can only take care of ourselves. Any money or energy spent fighting the government or rousing grassroots support is inherently better spent looking after your own interests and making sure that you and your family aren’t victims of historical certainty.

And make no mistake, collapse of empire is a historical certainty. From the Babylonians to the Persians to the Romans to the Mayans to the Mongolians to the Ottomans, no empire is built to last. And the final years are anything but smooth-sailing.

[Editor's note: Simon's friend Tim Price is a delightfully witty fund manager in the UK, one of the few free-thinking individuals in all of institutional finance. His recent thoughts below on the euro debacle, gold, and hyperinflation are some of the best ever written on the topics.]

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” Debt talks “have not produced a constructive response.”
- The Institute of International Finance, January 13, 2012

“The war situation has developed not necessarily to Japan’s advantage..”
- Japanese Emperor Hirohito after the atomic bombing of Hiroshima and Nagasaki, announcing Japan’s surrender to the Allies.

There is a terrible hubris at the heart of mankind. Like every other living thing on the planet we are products of nature, but we consider ourselves to be well above it. We are beset by regular reminders of our vulnerability, but quickly dismiss them off-handedly to a spiritual plane, calling them “acts of God” as if to show that we could never have prevented them.

In a significant essay for Foreign Affairs, “The Black Swan of Cairo,” Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous.

“Although the stated intention of political leaders and economic policy makers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”

There is an analogy from the natural world. In the 1960s and 1970s, mid-western American states fell victim to scores of wildfires. Constant interventions by the US Forest Service appeared to have little positive impact – if anything, the problems seemed to worsen. Over time, foresters came to appreciate that fires were a normal and healthy element of the forest ecosystem.

By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future. Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable fire to come has a far greater store of latent fuel at its disposal.

Economist Murray Rothbard jangled the sensibilities of the Keynesians when he wrote his classic study, “America’s Great Depression:”

“If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery.”

But politicians must be seen to be doing something – like encouraging the construction of a £33 billion white elephant rail link in the middle of an austerity recession.

Not interfering with the market’s adjustment process is simply allowing Schumpeterian “creative destruction” to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example.

So while “laissez faire” would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan’s zombie banks from the 1990s is still fresh, but ignored in the west.

Rothbard identified the ways in which government can hobble the adjustment process:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments which, in their turn, will have to be liquidated in some later depression. A government’s “easy money” policy prevents the market’s return to the necessary high interest rates.

3. Keep wage rates up.

4. Keep prices up.

5. Stimulate consumption and discourage saving. More saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment “insurance”, relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

An iatrogenic illness is one caused by the doctor himself. The economies of the west now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which are more likely to do harm to the patient and prolong the recession.

Taleb uses the example of the turkey before Thanksgiving. The turkey is fed for 1,000 days and every day seems to reaffirm the farmer’s generosity of spirit. Until the last day, when the turkey’s confidence and contentment is at its maximum. The “turkey problem” occurs when “a naïve analysis of stability is derived from the absence of past variations”.

To put it another way, the US property market cannot decline because it hasn?t declined in living memory. As Taleb puts it, as humans we inhabit two systems simultaneously: the linear and the complex.

The linear is predictable and permits the use of mathematical tools of high predictive value.

Complex systems,on the other hand, are marked by an absence of visible causal links between their elements, “masking a high degree of interdependence and extremely low predictability.” They also incorporate non-linear elements often called “tipping points.”

One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work.

The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back.

The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control.

As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.”

“The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

It may be a new year, but we are beset by the same problems that have been recurring since the crisis began. In most cases, those problems have worsened. One of the few improvements has been in the recapitalisation of Anglo-Saxon banks, but continental European banks seem acutely vulnerable to the potential outcome of a disorderly sovereign default.

Since the problems are the same, so are our preferred solutions: a specific focus on only the most creditworthy sovereign and quasi-sovereign debt (where it offers a positive real return); a specific focus on only the most defensive and internationally diversified equities; genuinely uncorrelated investments; and exposure to objectively the highest quality currencies, namely precious metals.

Euro zone politicians and policy makers have had plenty of time to come to terms with the continent’s problems, and continue to show no willingness to grasp admittedly difficult nettles.

It is symptomatic of the balkanised and adversarial nature of politics in the euro zone (a unified body that exists in theory but barely in fact) that Christian Noyer, chairman of the French central bank, anticipated France’s credit downgrade by suggesting that Britain should be downgraded first.

As the Hildebrand scandal also revealed, most of Europe’s central bankers are not fit to sweep the streets. And still time is running out. Readers of a certain age will recall a late 1980s “big hair” rock anthem called “The Final Countdown.” It was released by essentially a one-hit wonder band.

Its name was Europe.

Tim Price

Director of Investment
PFP Wealth Management

January 17, 2012
Santiago, Chile

One of the most phenomenal human beings I’ve ever met hails from Harare, Zimbabwe of all places. His name is Time. That’s seriously his name. When you ask him about it, he shrugs, grins, and says, “My mom felt that she was in labor for way too long.”

Time is a real Sovereign Man. He understands that his family comes first and foremost above all else, and growing up under the regime of Robert Mugabe, he had to get very creative in order to support his loved ones.

By the time he was 15-years old, Time could see the writing on the wall. Mugabe had all but destroyed the market and private property rights, and Time knew there would be absolutely no prospects for him in Zimbabwe.

So what did he do? He learned a valuable skill and looked beyond his own borders for the best opportunities. He spent years in the wilderness living with the native bushmen learning how to track animals. He worked diligently to improve his English. He read everything he could get his hands on about botany.

He traveled to Tanzania and Botswana to cut his teeth as a safari guide while Mugabe plunged Zimbabwe into hyperinflation. He worked hard, saved his money, and always sought to improve his professional capabilities to become a better guide.

When the smoke cleared, he returned to Zimbabwe and took a tracker job at one of the most exclusive lodges in southern Africa. I got to know him when I was visiting the lodge last year, and we became fast friends due to our common philosophical outlook.

[As an aside, I should say that Zimbabweans are some of the warmest, friendliest, most engaging people on the planet. I tend to visit the country each year, and I highly recommend putting it on your short list. It's unlike any other experience.]

Time and I talk regularly, and I’ve been helping him to invest in Zimbabwe’s burgeoning agricultural sector. Mugabe’s economic policies absolutely devastated what used to be one of the most fertile places in the world… but now it’s starting to make a comeback. Time is eager to capitalize on the opportunity.

A few months ago, he scrapped his savings together and bought a small piece of land that he wants to begin planting with various small-scale organic crops. I offered to pony up the $3,000 he needs to buy submersible pumps for irrigation.

“Western Union,” he told me, “is the most efficient way to receive cash in Zimbabwe. As you know, because of Mugabe, we don’t have our own currency anymore. But be advised, they’re going to give you a hard time when you tell them that you want to send money to Africa.”

My next call was to Western Union.

“I’d like to send money to Zimbabwe,” I announced to the operator.

“What’s the city and state, sir?”

“Zimbabwe.”

“Is that an international transfer?”

“Yes!”

“What country?”

“Zimbabwe.” I was about to lose it. I heard the familiar click, click of the keyboard as his system pulled up the country-specific rules.

“Uh, sir, we are obliged to discourage you from sending money to people that you don’t know. Did you receive this request to send money from an email?”

“No, it’s cool, I know this guy, we’re friends.”

“Yes, sir. But did you receive this request by email from an unknown person?”

“What did I just say? No. I know the guy personally, quite well. Let’s proceed.”

“Yes, sir. Will you be sending the money in local currency?”

“There is no local currency in Zimbabwe.”

“… sir?”

“Nevermind. Let’s just send US dollars. $3,000 total.”

“Yes sir. Now, US government regulations require that I collect your social security number for any money transfer in the amount of $3,000 or more.”

“What? Seriously? I’m calling you from Chile trying to send money to Zimbabwe. What business is that of the US government??”

“…”

“Look. Let’s just make the total $2,995. OK?”

“Yes, sir.” And then he proceeded to collect all the information about Time, confirm my credit card information, and all the other nonsense. After a few more minutes, he submitted the order for processing, and then told me,

“I’m sorry sir, the transfer has been declined.”

“What? Why? Was the credit card declined? I can call Mastercard.”

“No, sir, it was declined on our end. Our system refused to take the order. US government regulations require…”

Steaming angry, I politely thanked the man for his help, hung up, and sent an email to my banker in Singapore asking if they could send money to Zimbabwe.

“No problem!” she replied. Exactly the answer I was hoping for.

As I write this note, I’m happy to say that the funds are on the way to Time, and that he should be up and running by the middle of next week.

The whole affair was just another friendly reminder of why I try to avoid doing anything in the US at all. Regulations, financial tracking, consumer protection… it’s just too damn difficult to get anything done.

In fact, that I achieved my objective by using a flexible, “can do” bank in Singapore is probably the perfect conclusion to this allegory. Time well spent indeed.

January 16th, 2012
Manila, Philippines

[Editor's note: Tim Staermose is filling in for Simon today.]

January 13, 2012
Manila, Philippines

January 11, 2012
Santiago, Chile

Last week, the US government’s Financial Crimes Enforcement Network (FinCEN), an agency of the US Treasury Department, published its 2011 annual report. There are a few numbers that are pretty startling.

We’ve discussed before that FinCEN is the executive agency tasked with ensuring that every US banker is an unpaid government spy through Suspicious Activity Reports.

A Suspicious Activity Report, or SAR, includes details of any transaction that may be deemed ‘suspicious’. Naturally, there’s no clear guidance on what is/is not considered suspicious. Banks, brokerages, money service businesses, precious metals dealers… even casinos are required by law to fill them out.

If you withdraw an unusual amount of cash from your bank account, that could be deemed suspicious. If you set up a new payee in your billpay service, that could be deemed suspicious. Anything and everything is fair game.

Banks and other businesses who do not fill out SARs face hefty penalties, including imprisonment. If they disclose to a customer that s/he is the subject of a SAR, they have hefty penalties, including imprisonment.

When push comes to shove and they have to choose between a nasty penalty, or submitting a SAR about your unusual cash withdrawal, which option do you think they’ll pick?

Unsurprisingly, nearly 1.5 million ‘suspicious activity reports’ were filed across the US banking system in 2011, well over twice the number reported in 2004. On top of this, there were an additional -14.8 million- ‘currency transaction reports’ filed in 2011, a 6% jump over last year.

It’s an unfortunate trend which highlights not only the end of financial privacy, but also the massive amount of data being collected by the government to keep tabs on its citizens.

According to this year’s report, a full 36 distinct federal law enforcement agencies requested information from FinCEN (and even more who haven’t). Three dozen. And that doesn’t include state or local law enforcement.

That there are this many federal law enforcement agencies to begin with is mind-boggling… let alone the thought that some knucklehead at the Fish and Wildlife Service has access to bank records.

This is one reason why international diversification is so important– the likelihood of such collection and monitoring is greatly reduced when you bank overseas. Moreover, should one of these dozens of agencies or courts decide that your ‘suspicious activity’ warrants locking you out of your accounts, they have zero jurisdiction overseas.

This is a common tactic in the US; financial activity is one of the many, many areas with a ‘guilty until proven innocent’ burden of proof. You don’t even need to be doing anything wrong (which is the case most of the time this happens) for one of these agencies to freeze your account ‘pending investigation’ with a simple phone call. Good luck getting it unfrozen.

They don’t have that kind of pull overseas. That’s why we’ve been writing for years to more than 100,000 subscribers that the most important thing you can do for your financial security is to have a foreign bank account, no matter where you’re from. Planting a ‘banking flag’ outside of your home country is a very prudent, simple insurance policy.

More and more people are starting to wake up to this reality. FinCEN also tracks the Report of Foreign Bank Account and Financial Accounts, commonly known as the FBAR. This form is required to be submitted by any US taxpayer with foreign financial accounts whose aggregate total exceeded $10,000 at any point during the year.

For example, if you have a bank account in Uruguay with $9,000, and a small brokerage account in Panama with $2,000, you would have to submit the form by June 30th of each year to the Treasury Department.

In 2011, 618,134 US taxpayers filed an FBAR (which would have covered the calendar year 2010). This is more than a 100% increase over the filings just two years ago… a huge jump. I suspect the 2012 figures will show similar growth.

As a percentage of the population, though, the number is embryonic. It still leaves 308,127,404 Americans who have no backup plan, no insurance policy for their hard-earned savings. In other words, 99.8% of the population holds all of their money in an insolvent, corrupted, government-controlled, unsecured (though cleverly disguised) banking system.

Are you one of the 0.2% who is paying attention? If not, what’s holding you back? I’d like to know.

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

January 9, 2012
Manila, Philippines

A few days ago, I read a that famed hedge fund manager John Paulson, who’s best known for personally making over $5 billion from the sub-prime meltdown, lost more than HALF of his investors’ money last year.  His Advantage Plus fund was down a whopping 52%!  That’s not a misprint.

Paulson’s thesis that US financial stocks would come bouncing back, for one thing, proved totally unfounded.

That one of the world’s previously most successful investors can blow up so spectacularly is yet another indication to me that the old rules of investing and money management currently don’t apply.

Markets have been taken over by politics… which means that Paulson and many of his hedge fund cohorts must accurately predict what central bankers and politicians will do, correctly guess how such actions will affect the markets, and nail the timing.

This is a dangerous game to play.  Paulson’s epic failure last year is proof enough to me that it’s useless trying to play this game.

The worst part is, even if their investment thesis is well-grounded, the politics can still push the market in the other direction. You know that old Wall Street saying—“The market can stay irrational longer than you can stay solvent.” It certainly truly rings true now.

But it wasn’t only Paulson who imploded spectacularly in 2011.

According to data from Bloomberg, the average hedge fund return was -4.9% last year.   Hedge Fund Research says it was -5.17%.  Whatever way you slice the data, the bottom line is that performance was lousy.

Even these traditional alternatives to the mainstream “buy-and-hold” strategy espoused by Wall Street failed investors in 2011.

So, what to do?

Well, as I’ve written before, cash is not a bad place to be right now.  Playing defense is likely to serve you best until we get some sort of “system reset.”

But, with interest rates in most places across the globe negligible, the next question become how you can earn a return on your cash.

Seeking out higher yielding currencies is one way. Simon has reported that his bank in Mongolia is paying up to 14% per annum in local currency (and SMC members will find out how to do this in their upcoming February edition).

But if this sounds far too exotic or risky, there are still other options. Australian and New Zealand bank accounts consistently pay comparatively higher returns than their counterparts in the developed world—4% to 5.5% on savings or short-term time deposits.

[Editor’s note: regulatory constraints unfortunately prevent us from mentioning the bank names in this public forum; the last time we did this several months ago wasn’t pretty…]

In order to maximize the risk-adjusted returns on my own cash, I developed a proprietary system long ago called the 4^th Pillar. This is a unique strategy that makes very low risk bets on a specific niche of takeover deals that meet a set of clearly defined rules.

When developing this system, my primary consideration was to NOT LOSE MONEY.  And it’s stood the test of time through various market ups and downs over the years. The system’s long-term success rate has exceeded 90% with minimal volatility.

And since we formally launched the 4^th Pillar subscription service last year, the portfolio returned a very healthy 11.8% (in USD terms). At no point has it ever been in the red. Meanwhile the S&P 500 lost 3.5%, and as I told you already, the big hedge funds are down even more.

To be perfectly candid, it’s not because I have a crystal ball. The difference is that the fund management business depends on the ability of a single person to correctly divine the direction of markets (and politics). Our system, on the other hand, was designed to return superior results with much lower risk… irrespective of politicians and central bankers.

Whatever you choose to do, I encourage you to heed the lesson of the John Paulson story—investing based on the old rulebook is truly dangerous to your portfolio. Success in these markets requires unconventional thinking and a fresh approach.

January 6, 2012
Santiago, Chile

We recently received a great question from a reader, Chuck, who asked, “Simon, I’m going to HK in 10 days to open a bank account, and I know there are options to do this in several foreign currencies. What foreign currency would you recommend to hold over the longer term?”

I could never make a personal recommendation as I’m not a financial advisor, nor do I know the details of your situation. But let’s review the options.

First off, Hong Kong is an excellent place to bank. One of the best in the world, in my opinion… and I say that as someone who keeps a lot of money in Hong Kong. Why? Because the banks are strong, stable, innovative, and well-capitalized.

I have far fewer concerns about a bank going under in Hong Kong than I do in the US or Europe. And in Hong Kong, with just a few clicks, I can move money into gold or any number of currencies.

It’s quite easy to open an account in US dollars (USD) in Hong Kong. Now, the downsides of holding USD are clear– continued expansion of the Federal Reserve’s balance sheet coupled with excessive spending habits of the US government make it an increasingly worthless piece of paper in the long run.

There is a flip side to this view, though, as we have discussed before. Historically, the USD has been viewed as a safe haven currency. When things get bumpy in financial markets, financial institutions and foreigners tend to hold dollars.

It’s bizarre to view the biggest debtor in the history of the world as safe, yet this is due to a few factors– the dollar’s free-floating convertibility; the ridiculous size of the US dollar (and bond market) which makes for easy liquidity; and the US government’s guarantee to never default (by simply printing more).

Hong Kong banks also offer a plethora of other currency options– like the Singapore dollar, Australian dollar, Korean won, Canadian dollar, and in some cases the Norwegian krone.

These are typically export-oriented countries with healthier balance sheets. They have better fundamentals and a much brighter future. In a sane, rational world, they are the obvious choice… and still make sense with a much longer-term view.

Unfortunately, we don’t live in a sane, rational world. And the choice is a constant tug-of-war between the deeply flawed safe haven status of the US, and these smaller, healthier economies. As such, the foreign exchange markets are extremely volatile.

Trillions of dollars move in and out of currencies each day depending on the prevailing rumor.  One day the dollar is surging, the next day it’s tanking. The euro and pound are getting beaten around like some third world peso. It’s embarrassing, really… this is supposed to be the pinnacle of finance.

One compromise that is worth considering is the Hong Kong dollar (HKD). Pegged at 7.80 HKD per USD for several decades now, holding HKD is essentially the same as holding USD. There is a very narrow band of volatility, but it’s a tiny rounding error.

If the USD’s safe haven sentiment holds, the HKD will be a good place to be as it will appreciate against other currencies and commodities as well. If the USD slides into oblivion, you can safely bet that the Hong Kong (i.e. Chinese) government will make a one-off revaluation of the peg.

In this way you can essentially maintain the upside potential of holding US dollars, but limit the downside risk.

Next, Kay writes, “Simon, I’m scheduled to soon fly to Ecuador to look at property to invest in as a step in internationalizing my resources and setting up a possible place to escape to if necessary. What are your thoughts on the country?”

I like Ecuador. It’s incredibly cheap and really beautiful. Quito and Cuenca are lovely cities. But given the government’s long-term track record of instability and populism, it does merit some caution.

In my view, small property holdings are fairly low risk. I wouldn’t want to make a target of myself by buying a 1,000+ acre farm in Ecuador, but a few acres or an apartment in town are pretty harmless.

January 5, 2012
Undisclosed location

Today I want to share with you a brief conversation I’ve just had with our Chief Investment Strategist Tim Staermose.

Aside from being a really, really sharp investor in the model of Warren Buffett, Tim is easily one of the most interesting people I know… and you’ll find out why. As an Australian citizen and Hong Kong permanent resident living in the Philippines, he exudes the multiple flags lifestyle. International diversification is in his DNA.

Over the last few days, our daily conversations have focused on thinking differently. The old rules of the game no longer apply… and that doubles for investing.

Socking away your savings in some S&P index fund for 20-years is no longer the path to prosperity. And Tim sheds some valuable light about some places to look, places to avoid, and what he’s doing with his own money– it’s called the 4th Pillar System.

You can listen to our brief conversation here. (or right click and save as to download)

January 4, 2012
Seat 5F, Undisclosed location at 35,000 feet

Date: January 3, 2012
Coyhaique, Northern Patagonia

Yesterday we discussed certain events that, in my view, are nearly mathematical certainties. Things like a restructuring of public pensions and Social Security in Europe and the US. Western governments blocking Internet and mobile networks. War. The US government being forced to issue debt in a foreign currency.

All of these events are underpinned by a simple premise:

1) Public and private debts included, most western nations are insolvent. Big time.

2) History shows that economic growth in such an environment is nearly impossible when such a large percentage of GDP must be allocated solely to interest. Most countries in this position either default or [hyper]inflate. Both have catastrophic consequences.

3) Continued political and monetary intervention in the economy is counterproductive. From ‘Cash for Clunkers’ to negative real interest rates, such intervention only serves to make the problems, and their impacts, much worse.

4) The combined ingredients of sovereign insolvency; a global financial system based on worthless paper currency; and consumptive, import-oriented, public entitlement economies have created conditions for an epic, long-term economic depression.

5) Deteriorating economic conditions drive social unrest. [In fact, there's a great paper by two European economists which defines an explicit correlation between government budget cuts and things like rising crime rates, riots, and even attempted revolution.]

6) Faced with a marauding population that threatens their own survival, governments will stop at nothing to maintain the status quo: their power, our expense. Again, history shows that police states, boogeyman enemies, a total loss of privacy, capital controls, higher taxes, etc. will all become the norm.

7) None of these delay tactics can prevent human and financial capital from eventually migrating to where they are treated best. This will ultimately force a complete system reset by starving the beast.

8) This is not the first time this has happened, and it won’t be the last. This time is NOT different. Our modern society is not a unique and special snowflake that can ward off the consequences that have plagued empires for millennia.

Everything from the way I invest to how I allocate my time and plan for the future is based on this view. It’s why I’m in Chile, why we purchased a 1,000+ acre farm, and why we plan on sharing it with like-minded people.

I may be a bit early, but I’d much rather be early than thinking through these implications while I’m packing my bags. After all, things can ‘feel’ quite normal for a long time. Changes take place gradually, then faster and faster, until the decay looks like an upside-down hockey stick.

The Roman Empire, for example, began its spectacular decline shortly after Augustus became de facto emperor in 27 BC. He was followed by a long series of dismal failures– Tiberius, Caligula, Claudius, Nero, etc. But Rome muddled along for hundreds of years, wavering between growth and decay.

The changes were gradual. A little currency debasement here, a bit of excess spending there, and throw in plenty of assassinations and foreign wars for good measure.  Along the way, though, thinking people could see the writing on the wall… and many of Rome’s citizens set sail for greener pastures.

The gradual changes became more and more pronounced… and the more pronounced, the more people left. As Gibbon recounts in his seminal work, The History of the Decline and Fall of the Roman Empire, the city of Rome lost nearly 75% of its population in the Empire’s final 50-years in the 5th century.

History is full of other examples of once proud nations that, facing problems for decades (or even centuries), completely unwound in a matter of years. The Ottoman Empire. The Ming Dynasty. Feudal France. The Soviet Union.

Bottom line, when the real change comes, it comes very, very quickly.

Think about the pace of change these days. It’s quickening. Europe is a great case study for this– when concerns about Greece first surfaced, European leaders were able to contain the damage. There was disquiet, but it soon dissipated.

Fast forward to today. We can hardly go a single day without a major, market-rocking headline. And European politicians’ attempts to assuage the damage have a useful half life that can be measured in days… sometimes hours now.

Like the Ottomans, the Soviets, the Romans before them, Western civilization is entering the phase where its rate of decline will start looking like that upside-down hockey stick.

There is no crystal ball that can tell us exactly how/when it will all go down. It stands to reason that certain events (perhaps this year’s Presidential elections in the US, Russia, France, etc.) will be pivotal in the decline, but suffice it to say that time is not on our side given the pace of change.

Each of us has a finite amount of resources– time, energy, capital, etc. And I really want to encourage you to think clearly and deliberately about how you allocate those resources… e.g. you’re better off buying an ounce of gold than making a political campaign contribution.

2011 was a challenging year. 2012 will likely prove even more. But this isn’t anything to dread. It’s is an incredibly exciting time to be alive– change should be embraced, not feared.

Empires always run their course. Bubbles burst. But creative, thinking human beings always survive and thrive.

December 23, 2011
Santiago, Chile

First off, happy holidays. I hope this email finds you in good health and cheer.

Down here in Chile, I intend to spend the weekend (and most of next week) doing absolutely nothing but reading, relaxing, and riding horseback with friends around our new 1,000+ acre farm. I’m excited that many readers will soon be joining me.

Personally I’m not much for the holidays. The last two months of the year (starting with Halloween) feel a lot more like forced consumerism– people buying useless trinkets with money they don’t have for the sake of others they hardly know, or for close friends who simply don’t care.

I prefer to opt-out of the whole nonsense and simply tell the people I care about that they’re important to me. On that note, I’m truly grateful for our daily conversations and the many wonderful relationships that this letter has brought.

2012 will undoubtedly be a difficult and challenging year for the global economy. But I can promise you that the world is not coming to an end. The game is simply being reset with a new set of rules.  And whether young or old, rich or poor, the decisive, creative mind will thrive.

It’s overwhelming to see how many people are waking up to reality, educating themselves, and taking action. And I’m truly humbled to play a part in this movement. Thank you for being a reader, and I look forward to our continued conversations.

With that, a few questions from this week:

Tom Childs writes, “Simon, regarding Chile, what are your thoughts about the very considerable risk of burgeoning volcanic activity in the country? Is your retreat in any way threatened by an expanded volcanic crisis?”

Quite frankly, volcanic activity in Chile is actually Argentina’s problem.

The prevailing Pacific winds blow to the east, picking up ash and dumping it on neighboring towns in Argentina. During the last minor eruption, ash was swept as far east as Uruguay.

I wouldn’t want to be at the foot of a volcano, in Chile or anywhere else. Our farm, however, is more than a safe distance away. We have great views of some volcanoes and snow-capped Andean peaks… but I have zero concern of seeing any lava in my living room.

Next, in response to my comments about weaknesses in the banking system, Patrick writes, “Simon, while the US government may be bankrupt, they will just print more money to cover any FDIC insured assets if a major bank went under. More than likely they wouldn’t even let it go under.”

At this point, the FDIC’s insurance fund is woefully undercapitalized. Meanwhile, banks are sitting on nearly incalculable losses (real and nominal) for having accumulated so much worthless paper.

Some people may take comfort that the US government will bail out depositors by printing more money… that the deposit risk in the US banking system is negligible because Bernanke will simply conjure more money out of thin air. I’m not one of these people.

To me, a bank is safe because it is profitable (not because of clever accounting tricks) AND well-capitalized. False promises and guarantees of monopoly money provide me no sense of confidence.

What’s more, for individuals with a higher net worth, the insolvent FDIC can only guarantee up to $250,000 anyhow. So fundamentally, the central issue falls back on a bank’s creditworthiness. I’m not willing to take that chance with US banks.

Last, Stefan asks, “Simon, you mentioned that you’re investing in precious metals… suggesting that you hold a consensus view that inflation is what we’re in store for. What if the crisis actually produces the opposite effect– deflation– and the value of precious metals falls?”

Deflation certainly is a possibility. I’m not squarely in one camp or the other… I look at the totality of circumstances, and in my travels around the world (I hit over 40 countries this year), I objectively look for signs of both.

At the moment, I see far more signs of -inflation-, but that’s because I’ve spent my time this year in many developing nations where the US exports inflation.

Here’s the thing– if the debt bubble bursts and many of these insolvent countries do default (which is quite likely), it could cause a massive deflationary chain reaction in which the price of gold drops dramatically.

Whether any potential deflationary effects are short-lived (like 2008) or long-term (Japan), I still want to own gold. Along with a debt-bubble bursting will come a severe loss of confidence in the fiat system… and gold is a great hedge in this scenario.

More on that soon. I hope you have a great and restful holiday period. Best wishes from all of us to you and your family.

December 22, 2011
Toronto, Canada

[Editor's note: Simon's close friend Craig Ballantyne, now editor of the Early to Rise publication, is filling in today while Simon storms the new farm in Chile.]

If you’re like Simon and I and you spend any time at all reading the daily news headlines, it undoubtedly feels like the world is inches away from going off a cliff.

There’s a lot of truth to this news… and it can literally put so much fear, anxiety, and apprehension into people that is paralyzes them from doing taking any steps to protecting themselves, let alone advancing their situation in life. You can’t let that happen.

Listen, even if the world is becoming unglued, there’s nothing you personally can do about global economic problems. Just like there’s nothing the last lemming at the end of the line can do about all the other lemmings in front of it.

However, that last lemming still has a choice. It can take action… because action is the only thing that can overcome anxiety and apprehension.

I recently had this ‘a-ha’ moment when penning my weekly internal newsletter to my team of amazing employees. I wrote to them:

“We’re always taking action. Moving ahead. Finishing a project, celebrating the success, and hitting up a newer, bigger project. That’s why we’re going to continue to prosper no matter how crazy the rest of the world gets around us. Because we keep on taking massive action.”

It’s important for them to hear it and to be reassured that if we keep on pushing, we’ll get what we earn. And in this case, the advice I gave was even more important for me to hear, and it this quote which I also shared with them is helpful too.

“Success seems to be connected with action. Successful people keep moving. They make mistakes, but they don’t quit.” — Conrad Hilton

Don’t let apprehension or anxiety stop you from taking action. Some things might not work out in life, but if you keep taking action, past failures often end up contributing to future successes.

I struggled three times to launch one specific type of online business. The first time it just fizzled out.

The second time it failed miserably… and then voila, the 3rd time turned into a business that will bring in 7-figures in 12 months.  I wouldn’t have been able to do this if I hadn’t failed the first two times.

Overnight success is something that I’ll never promise anyone. However, action taken every day is a habit that I’ll guarantee will bring you success in time.

Action causes momentum… momentum breeds more action… and action combined with momentum ultimately lead to success.

“Nothing is particularly hard if you divide it into small jobs.” – Henry Ford

It doesn’t matter if your goal is building wealth, internationalizing your assets, or simply creating a second income online with an Internet business, all components of life reward action.

[As editor of the daily e-letter Early to Rise, Craig is an eternal optimist and believes that everyone can still realize their own unique 'American Dream', wherever you are in the world.  Craig's advice about using the Internet to build income is without peer, and you can find out more about how he does it here.]

December 21, 2011
Santiago, Chile

Let’s speak plainly.  If you are in the United States or Western Europe, chances are incredibly high that your bank is simply not safe. In other words, your money is at risk. Big time. Let’s review some of the chief concerns:

1) A black box of assets

Banking is a complicated industry… and especially when larger banks are concerned, nobody really knows what’s under the hood. Can we say with any accuracy what’s on Bank of America, Deutsche Bank, or Citi’s balance sheets?

No way. There’s $8.5 trillion worth of mortgage-backed securities floating around the system. Not to mention, tens of trillions of dollars worth of derivatives contracts tied to mortgage-backed securities on top of that.

These assets are all highly susceptible to downturns in housing, a rise in interest rates, and a host of other systemic risks. Yet we have no earthly idea who owns what, or who the counterparties are. It’s all a black box of assets.

In a world where the most basic foundations of the financial system can no longer be accepted as truth, we cannot assume away that bank balance sheets are healthy without more careful investigation and transparent information.

2) The assets that we do know about aren’t winning any beauty prizes

When governments auction-off tens of billions of dollars worth of bonds, it’s often the banks that buy. Large banks wielding hundreds of billions, trillions of dollars have few options where they park capital. They require enormous liquidity, and it’s ironic that the most liquid bond markets are the most dangerously indebted nations.

When $13 billion worth of 30-year bonds were sold last week at record low yields as low as 2.815%, your bank may very well have been one of the buyers.

In the all-too-likely event that price inflation surpasses 2.815% thanks to all the easing, twisting, and printing going on, your bank will essentially be sitting on even more worthless paper. And this doesn’t take into account the possibility of an all-out default.

3) Core banking business has all but shuttered

Do you remember the good old days when banks used to be responsible stewards of capital, paying depositors a fair rate (which exceeded inflation) and making sensible loans to creditworthy businesses and individuals?

I don’t either. But I’m told that’s how banking used to be. These days, banks hardly loan to anything that doesn’t come with a government guarantee.

This is not a well-functioning system. “Safe” banks are profitable… and in order to be profitable in the long-term, banks must engage in sound deposit and lending practices. This is no longer part of the banking landscape.

4) Lies, regulatory loopholes, and accounting tricks

Banks are adept at hiding the true nature of their financial condition. They conjure fake profits out of thin air and stuff their liabilities into off-balance sheet entities. And it’s all legal.

A recent paper by the Adam Smith Institute shows how banks book ghost profits from assets that are clearly toxic. The paper, appropriate entitled “The Law of Opposites,” discusses the material flaws in IFRS accounting and mark-to-market profit recognition on uncertain future cash flows:

“Much of the activity in the banking sector is aimed at nothing more than exploiting these accounting rules to register inflated fake profits and hence convert shareholders’ equity and, in extremis, debt-holders’ and taxpayers’ funds into executive bonuses.”

Government legislators and regulators are willing accomplices in the fraud. For example, risk-weighted capital adequacy ratios are the industry standard in assessing a bank’s safety. Even the Federal Reserve acknowledges that insufficient capital ratios portend bank failure.

Current regulations, however, allow banks to materially misstate the real risks on their books. Government bonds are assigned a risk weighting of zero… hardly a fair assessment in today’s environment.

As such, a bank filled with worthless government paper can legally tell its depositors, “we are completely safe.”

5) The backstops need backstopping

Today, “government-guaranteed” anything is a joke. Federal deposit insurance is just another false promise like social security. Deposit insurance funds are even more poorly capitalized than the banks, and the ultimate backstop (the government) is completely insolvent.  The buck stops nowhere, and depositors assume 100% of the risk.

6) No one is isolated

Even if your bank has acted responsibly, the issues are global. Given the derivatives exposure that cascades across the entire system, no bank is credibly isolated from the misfortunes of the others.

Here’s the bottom line: money is serious business, and the decisions we make should not be taken lightly. We don’t buy a stock without conducting a lot of research about the company and its growth prospects. Yet we make banking decisions without the most cursory consideration of the institution’s creditworthiness.

I want to urge you to think about options overseas, especially if you’re in the US or Western Europe. These banks are in precarious shape, and there are better options abroad where banks are much better capitalized.

You may want to consider Sharia-compliant banks in places like Abu Dhabi or Singapore (which has never had a bank failure) since Islamic code requires financial institutions to maintain significantly higher liquidity ratios.

You could also consider physical precious metals as they carry no counterparty risk. There are security risks with gold and silver, however such risks pale in comparison to the systemic risks in today’s banking environment.

December 20, 2011
Santiago, Chile

Here’s a quick crash course in how the intelligence business works these days.  Despite the Hollywood mystique of suave, womanizing, pun-dropping men of mystery flitting around the world, it’s much more mundane.

In reality, government operatives from a host of three-letter agencies are working to develop large networks of informants. These are mostly folks who deal with other people and are in the know– the bartender in Beirut, the luxury car dealer in Bogota, the money changer in Riyadh, the hotel manager in Shanghai, etc.

These assets are constantly being pumped for information– who did you see, what were they buying, where did they go next, who were they with, what were they discussing, etc. And in exchange, informants typically get paid.

In the United States, there are a number of laws on the books which are theoretically supposed to prevent the three letter agencies from spying on US citizens. Naturally, the government dispenses with such inconvenient formalities in its sole discretion, and Congress frequently passes legislative exceptions (USA PATRIOT Act, NDAA, etc.)

There’s a little known division of the Treasury Department called the Financial Crimes Enforcement Network (FinCEN) whose mission is to “to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.”

Here’s a government agency rule of thumb: The more noble-sounding the mission statement, the more villainous the agency.

FinCEN is basically the CIA of the financial system. But unlike the CIA which is technically not allowed to spy on US citizens and typically has to pay informants, FinCEN has complete legal authority over US persons. And they’ve managed to turn the entire financial system into the world’s largest network of informants.

Simply put, your banker is an unpaid, often unwilling spy of the US government.

Case in point– last week, FinCEN announced that a California banker had been slapped with a $25,000 penalty for notifying a customer who had become the subject of a federal “Suspicious Activity Report” or SAR.

SARs are required to be filed by bankers, brokers, money changers, check cashers, and even casinos. You may have been the subject of dozens of SARs and never know, because it’s against the law for your banker to notify you.

As for what is considered “suspicious”, there is no clear guidance on this. It could be anything– depositing or withdrawing too much cash, ATM withdrawals in foreign countries, unusual fund transfers into your account. Basically, anything that’s a departure from a completely sterile existence.

What’s more, financial institutions frequently have a minimum quota of SARs to fill out, and those who do not comply face severe penalties. Financial institution employees can even face CRIMINAL charges for failing to file a SAR.

Now, your banker may be a good guy, but do you think s/he’s willing to do jail time? No chance.

This is how normal, everyday people end up on government watch lists or have their assets frozen ‘pending investigation’. And with the recent passing of the National Defense Authorization Act and its catch-all terrorism clauses, we can only expect this to get worse.

It’s truly despicable when you think about it– the federal government creates a currency monopoly at the point of a gun (try buying your groceries with Swiss francs). Then they make it nearly impossible to function in this world without using the banking system, and then turn the entire banking system into a network of spies.

If you want to reduce these risks and dull the impact of the coming wave of SAR-driven civil asset forfeiture, it would be a really smart move to open a foreign bank account.

Nearly every country in the world has anti-money laundering rules now. Some (such as Mongolia, where I recently opened an account yielding nearly 14%), are easier than others. But the bottom line is that you’d be moving your money out of the jurisdiction where you live, and into a place where those agencies have zero (or limited) authority.

And if you want even more financial privacy, I’d strongly recommend holding precious metals in an anonymous overseas vault like Das Safe in Vienna.

December 19, 2011
Santiago, Chile

Ten years ago, Goldman Sachs’ Jim O’Neill coined the term “BRICs” to lump together a group of large, rapidly-growing economies that we all know well: Brazil, Russia, India, and China.

True to his thesis at the time, growth and development in these countries has left the rest of the world for dead over the past decade.

But all good things must come to an end… and it’s now clear that the BRICs are in for a much more difficult period.

China is slowing fast. Property prices have stalled and begun pulling back, souring a huge component of economic growth. The same goes for the country’s infrastructure spending.

Even China’s stalwart manufacturing sector is showing signs of contraction based on the most recent November numbers.

In Brazil, the economy (which is highly dependent on exporting natural resources to Asia) has ground to a halt. Further, the debt-fueled domestic consumption binge among Brazilian households is slowing as debt service burdens have reached nearly 30% of the average Brazilian paycheck (vs. 16% in the US).

India, meanwhile, is struggling with runaway inflation, a collapsing rupee, political gridlock, and a series of high profile corporate collapses– led by Kingfisher Airlines, the plaything of flamboyant tycoon Vijay Mallya, who has been forced to personally guarantee the company’s debts.

The  rupee is the worst performing currency in Asia this year and has just fallen to a record low versus the US dollar.  The Indian economy is really on the skids.  Industrial output was 5.1% lower in October versus a year ago.  Output of capital equipment, which is considered a good leading indicator of future economic activity, fell a much more drastic 25.5%.

And now, to top things off, political unrest in Russia following the recent election there has seen troops battling protestors on the streets of Moscow.

It’s clear that the BRICS cannot be the engine room of global economic growth.

Meanwhile, Europe is a complete basket case, and the euro is looking increasingly as though it will be consigned to the dustbin of history. Across the pond, the US is trying to put a brave face on its jobless recovery whilst kicking a $15 trillion debt bomb down the road.

Anyone who steps back and looks at the big picture has -got- to recognize the absurdity of this situation.

Now… here’s the good news: you and I have a huge advantage. Citi, Deutsche Bank, Unicredit, etc. are sitting on incalculable losses, unrealistic obligations, and worthless paper that will destroy their organizations. They’ve been accumulating these for years and have no way of avoiding the endgame. We do.

We, on the other hand, are little guys. If you and I want to cut our exposure to these silly pieces of paper that governments pass off as currency, we can do that easily. We can easily do that by buying gold or productive land overseas.

Bank of America, on the other hand, has to hold Tim Geithner’s dirty laundry.

These banks that are crushed under the weight of managing hundreds of billions of dollars have very few choices– government A’s worthless bonds, or government B’s worthless bonds. We have an entire universe of options.

No matter if you have one hundred dollars, one hundred thousand, or one hundred million, your choices are far, far greater than these pitiable schmucks who are desperately clinging to the fraud that is our global financial Ponzi system.

The stores of value and investment opportunities for our savings are still out there; you just have to look in nontraditional places.

As for me, I’m investing my time, money, and energy in-

a) precious metals (a traditional store of value to some, a barbarous relic to others)

b) business opportunities in exciting frontier economies like Mongolia (and perhaps soon to be North Korea!)

c) shorting the obvious financial system absurdities (like loaning the US government money for 30-years at 2.9%)

d) deeply undervalued and distressed assets (such as stocks that are trading for less than their net cash per share)

e) farmland in Chile… where no matter what happens in the world, we will have high quality organic food to eat and the possibility of obscene profits in the event of steep inflation.

Your own list and preferences may be different, but the opportunities are there just the same.

December 16, 2011
Santiago, Chile

It’s done. Yesterday afternoon, after years of searching, months of preparation, and weeks of stress, my wonderful partners and I closed on a gorgeous farm in central Chile, about 2 1/2 hours south of Santiago.

The land is over 1,000 acres of productive crops, plentiful water, mountainous horse trails, and insanely beautiful views. It’s situated off the beaten path, but not isolated from civilization.

The location is a dream. Within an hour’s drive, there are world-class (and mostly empty) surf spots, Andean ski areas, golf courses, thermal hot springs, polo fields, casinos, and more wineries than you could imagine.

When I look around at what’s happening in the world, I really don’t think the timing could be better. It’s a safe haven among safe havens– a place that, no matter what happens, we will control our own organic food, clean water, and renewable energy.

Europe can keep kicking the can down the road, the Fed can keep printing, and the entire financial system can plunge into chaos. It won’t matter for those of us down here.

And, should the impossible happen and world governments suddenly embrace fiscal and monetary discipline, we won’t be worse off for it… and we’ll still have the option of turning a tidy profit by selling hundreds of thousands of kilograms worth of organic fruits, vegetables, and livestock into the market.

I’ll have more on this in future letters. For now, let’s move on to questions.

First, Cara asks, “Simon, I know you’ve been vocal about encouraging young people to look abroad for better opportunities. And I agree with you. I’m graduating in the spring and there doesn’t seem to be anything for me here. But every time I talk about going overseas, my friends and family try to talk me out of it.”

This is really common. Look, most people know that the situation in their town and country isn’t so great. But few will actually take action to do anything about it.

Hundreds, thousands of years ago, human survival depended on our willingness to take action. If Paleolithic hunter/gatherers didn’t hunt or gather, they starved. Today we can just sit around on Facebook all day collecting food stamps and other entitlement benefits.

Moreover, there’s a psychological tendency for people to feel threatened when anyone within their circle or peer group breaks away and does something different. Heading overseas to find better opportunity falls within this category.

So first they’ll try to talk you out of it. They’ll tell you that you’re crazy and try to explain how RISKY it is to go abroad. They’ll tell you that [insert country name] is dangerous or unstable. Bear in mind they have no idea what they’re talking about.

Eventually they’ll come to accept your decision, and then respect you for it. Then one day you’ll start getting emails from people wondering how they too can follow in your footsteps.

Bottom line, if you really want to break free, most people will have to ignore their friends and family. Do what’s right for you, not what’s comfortable for everyone else.

Next, Marcos asks, “Simon, you wrote some time ago that you were thinking about shorting government bonds. I’m just curious if you ever did this.”

Yes, I recently went short US Treasuries– I believe it was when the 10-year yield was about 1.85%.

Now, I dislike ETFs– the counterparty risk is just too high these days. But for the sake of convenience and a unique tax situation, one of the instruments I bought was a triple-short ETF (ticker symbol TYO).

For a much larger investment, I’m looking right now into shorting Japanese government bonds through an offshore broker; I’ll let you know when and how I pull the trigger on this.

Last, Alan writes, “Simon, do you think that the IRS’s foreign bank account reporting requirements for US citizens pose a drawback to having a foreign bank account? The penalty for not reporting is rather severe, I believe.”

It’s true that the US government has ramped up its reporting requirements for assets held offshore; this applies not only to US citizens, but US residents as well.

Here’s the thing- we’re talking about the most insolvent government in the world. In the history of the world, for that matter. Yes the tax reporting requirements for people holding assets overseas are getting more onerous. What makes you think that tax obligations for everyone else aren’t going to get more onerous too?

The way I see it, -every- US taxpayer is going to be feeling the pain down the road. More forms, more paperwork, more reporting… and more taxes. Just wait for a national sales tax.

As long as you’re going to be feeling the pain, you might as well have your assets safely tucked away overseas outside of the jurisdiction of your home government and creditors… in a place where the banks are actually solvent and reliable.

Hong Kong and Singapore are great places to start.

In the meantime, if you’re a US taxpayer, make sure you file the appropriate forms. Noncompliance is simply not worth the hassle. For foreign bank accounts, this may include the TDF 90-22.1, schedule B of your 1040, plus the new FATCA form 8938.

December 13, 2011
Santiago Chile

Something incredibly unusual happened yesterday– I was interviewed by a popular radio program broadcast by a -very- mainstream media outlet.

This is unusual for a number of reasons; we receive countless interview requests… but I almost always turn them down. I don’t particularly care to draw attention to myself, and simply put, I don’t like media in general.

In the past, I’ve done a few live TV bits with these bimbo hosts who have no understanding of the issues. They ask really stupid questions, and you have to try to explain everything within the 90-second blocks between erectile dysfunction commercials (talk to your doctor…)

Thanks, but no thanks.

I made an exception in this case simply because I was so curious– are mainstream media sources really starting to get interested in international diversification? Possibly, yes.

The hosts were two really sharp guys in Texas who have a very clear understanding of the problems. They know the financial system is crumbling, and as a close friend and I were joking yesterday, the life expectancy of these political solutions (like the European bailout package) can now be measured in hours… soon to be minutes.

These guys get it. They know that there is no political solution to fix a broken system. They understand that the unsustainable nature of global Keynesian-fiat bubble will not be sustained. And that’s why they were so interested in second passports.

I was really surprised. Shocked, actually. I couldn’t believe that the idea of diversifying out of your home country was starting to hit a mainstream audience.

The other thing they wanted to discuss was the good news. With so much doom and gloom on the tube, over the airwaves, and on the net, they wanted to get a different perspective. Things might be dismal in the west, but are there any opportunities left in the world?

You bet.

As I’ve traveled just in the last few months to places from Zimbabwe to Mongolia to Lebanon to Japan to here in Chile, I can say that there are a lot of compelling stories out there.

The thing to keep in mind is that the rules of the game have changed, and the same old plays don’t work anymore. Looking for opportunity and value in traditional places is not going to work.

We’ve been brought up to believe that the stock market will average a 12% return. That government bonds are the safest (risk-free) investments. That low-yield muni’s are great instruments for tax efficiency.

All of that may have been true under the old rules. But in the new system that’s emerging, government bonds and munis are among the riskiest investments you can make. And the stock market has become enslaved by central bank policy and political innuendo.

With so much uncertainty looming, volatility has been fierce; the past few years of the S&P have been a white-knuckle ride just to barely break even. Not exactly what we were brought up to believe about investing.

Investing in Stocks

Success in the markets these days requires new strategies and creative, out-of-the-box thinking.

As an example, our Chief Investment Strategist Tim Staermose developed a unique system called the 4th Pillar that has never had a down day since inception; through market booms and busts, Tim’s portfolio has maintained steady value and delivered consistent returns– even during the market’s darkest days.

This is all by design. Tim’s first rule is ‘never lose money,’ so he built a system around this principle that would deliver superior risk-adjusted returns.

As for other examples, we’ve discussed things in the past like investing in Mongolia (where I am currently getting nearly 14% interest at a well-capitalized bank), or private agricultural opportunities down here in South America. It’s hard to feel like I’m taking a huge risk when my downside is backstopped by the organic food we produce.

Ultimately, I want to urge you to think differently. If you’re investment decisions are aligned with the old system and way of thinking, it may be time to step back, look at the big picture, and make some serious adjustments.

[Note- unfortunately my iPhone dropped the call while I was on the interview and we were cut short... so I suspect we'll reschedule. More to follow on that.]

Date: December 12, 2011
Reporting From: Talca, Chile

[Editor's note: Sovereign Man's Chief Investment Strategist Tim Staermose is filling in today while Simon spends a few days with designers and engineers at the farm in Chile. More on those developments soon.]

For a few decades now, the Communist Party in China has had an implicit social and political contract with the Chinese populous for decades, which goes something like:

“We will deliver economic growth and improvements in your material living standards.  You will meekly do as you are told, refrain from dissent, work hard, save a huge percentage of your money, and ignore obvious corruption.”

While nearly everyone in China has benefited to some degree under this current “system,” the wheels are definitely starting to come off. Official GDP numbers are now slowing, real estate prices are falling, and inflation is quickening.

Now, I’ve made no secret that I’m decidedly bearish on China’s medium-term prospects.  After my trip there back in June to conduct some good old-fashioned “boots on the ground” research, I wrote extensively about the massive overbuilding of apartments, office blocks, and all manner of infrastructure on an almost unimaginable scale.

Put simply, every year since 2005, more than 50% of China’s GDP has consisted of construction-related spending.  The law of diminishing marginal returns says this simply cannot continue.

It represents a misallocation of the household sector’s hard-earned savings on a colossal scale, and I believe it will end badly.  Not a day goes by that there aren’t riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point.

Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered.  And they’re not hanging around.

For a number of years, mainland Chinese buyers have accounted for nearly all new apartment sales in Melbourne and Sydney.  On numbers I’ve seen, they have been investing between A$2 billion and $3 billion a year.

An increasing number of mainland Chinese are establishing permanent residency and sending their child(ren) to school and university in Australia. And Simon recently reported that from an offshore strategies conference in Shanghai that the room was packed full of Chinese people learning how to diversify abroad.

They all want to have their options open when China’s economy and political system hits turbulence.

Judging by the poor economic numbers coming out of China, this day of reckoning is drawing ever closer.  One alarming indicator is that the Chinese renminbi has traded down to the lower limit of its strictly controlled trading band for SEVEN TRADING SESSIONS IN A ROW.

This suggests that there is more money leaving China than being earned from overseas trade or invested there. The exchange rate may be only one simple indicator, but it’s a great barometer for what is going on: China is not going to be the savior of the global economy, but rather another casualty.

If you have stashed some money in a Yuan-denominated bank account for the long haul, you’ll probably still be fine relative to other paper currencies.  But, I would caution against expecting it to be a smooth, one-way ride to the top.

Personally, I’d rather have the bulk of my savings in real wealth:  things like gold and silver bullion, productive real estate, and strong cash-generative businesses.

And for the cash that I do hold, it’s virtually all employed trading my 4th Pillar investment system earning superior risk-adjusted returns with minimal volatility.

[Editor's note: Tim's 4th Pillar investment system has delivered consistent gains throughout this year's massive market turmoil.  Members following his trades have enjoyed a nearly 90% success rate. Next week, enrollment in the 4th Pillar will be opened once again for a very limited time, stay tuned for more.]

[Editor's note: Simon's close friend Craig Ballantyne, now editor of the Early to Rise publication, is filling in today while Simon sits in boring meetings with his Chilean attorneys.]

Imagine being a recently divorced mother of two young women who were about to enter the expensive American college system, and yet your job at a local government agency paid peanuts. Oh, and your hobby was knitting. How the heck would you be able to afford living in Southern California and sending those girls to college?

The answer, of course, is the Internet. The world wide web is the great equalizer in today’s economy. It’s the business equivalent of having a second passport, foreign bank account, and second residence, all rolled into one.

You see, the Internet allows you to play the role of David in the battle against Goliath. It allowed Penny Halgren, the woman I described above, to create cheap websites where she sells hundreds of thousands of dollars of quilting books and information each year. Oh, and her cat helps, too, by being the “voice” of her emails sometimes. (And no, her cat is not named Simon Black.)

But you don’t even need to create your own product to generate a second income or full-time income on the Internet. One of the affiliates for my fitness product, Rusty Moore, started generating thousands of dollars per month through his website by selling other people’s fitness products.

And he did all of this while working full-time as a sales manager at a men’s clothing store in Seattle. Eventually Rusty was able to quit his job and now makes three times his old salary with his website business.

You don’t need a $3000 website. You don’t need to be a technical Harry Potter. You don’t need to know computer language coding or what java script is (Note: It’s not a recipe for coffee).

In fact, I coined my own law when it comes to Internet success. Ballantyne’s Law states:

“The more technical expertise you have about such things as building websites, connecting merchant accounts to your online shopping cart, or writing computer code, etc., the LESS money you’ll make on the Internet.”

(Okay, Mark Zuckerberg excluded, but the majority of the men and women I know who are making six-figures per year, and more, on the Internet don’t know how to put up their websites. Believe me, I’ve met Simon Black, and he’s no Mark Zuckerberg.)

What’s really important for web-based business success is for you to know:

a)      How to communicate
b)      How to connect with other people
c)      How to add value to your customers and to all your business relationships
d)      How to solve customer’s problems
e)      How to be persistent

You don’t need a computer science degree for ANY of those factors of success when it comes to making money with the world’s great equalizer.

The reality is that you can piggyback off the largest companies in the world, including Amazon, Apple, Google and Facebook (Note: Recent state tax law changes have caused Amazon to eliminate affiliate opportunities in a few areas of the United States, all the more reason to follow Simon’s advice on planting multiple flags).

Simply put, if you have an Internet connection, you can start and operate a number of very successful businesses for minimal cost. I still remember the feeling I had when it first really hit me that I could make money anywhere in the world as long as I had the Internet.

I was sitting on a plane in Dubai in 2006 ready to return home after visiting a few friends who had moved from Canada to the UAE for work. Back in those days I was still working part-timer as a personal trainer while building my online fitness business.

Being in Dubai, I obviously had to give up my training income for the week, however, my writing a few emails to my fitness list, I was able to make over $1500 that week in online sales, including $300 the morning I checked my sales on my Blackberry while sitting on that plane ready to go home.

That’s when I knew I had beat the system.

The Internet remains the greatest opportunity for the average person to control their economic future.

Believe me, I’ve gone to dozens of seminars and met literally thousands of Internet entrepreneurs, and the majority of them are unassuming, regular, “folks next door” types who stumbled across the Internet and leveraged this unique opportunity into a business they can run from their kitchen table in their underwear. Or the coffee shop.

And if I may be politically incorrect for a second, a lot of these people are not rocket surgeons. In fact, some of my best friends who make money with the Internet probably couldn’t hold down a 9 to 5 job in the real world.

But my friends can follow proven systems for adding value to the lives of their customers by communicating the solutions to their customer’s problems.  It’s often that simple. Sovereign Man is fantastic example of identifying a problem in the marketplace and communicating solutions to the people that have these problems.

Oh, and one more thing. The successful people I know are persistent. They refuse to give up. They look at a failure in a positive light because of the lessons learned that can then be applied to future success.

Like Simon, I’m an optimist. In fact, I still believe the ‘American Dream’ is possible, no matter where you may live. I’ve achieved it (and I’m Canadian), and I see people achieving it every day, all because of the Great Equalizer.

And you can do it too, from anywhere in the world, as long as you have an Internet connection and the determination to add value and solve other people’s problems.

You can beat the system and take control of your future.

[As editor of the daily e-letter Early to Rise, Craig is an eternal optimist and believes that everyone can still realize their own unique 'American Dream'.  Craig's advice about using the Internet to build income is without peer, and you can find out more about how he does it here.]

Say what you want about him, but Bernie Madoff was a guy who knew how to keep the party going. For years, he ran one of the largest private-sector Ponzi schemes in history and always heeded the golden rule of financial scams: make sure your inflows are greater than your outflows.

He was finally done in when redemptions exceeded new investments. He didn’t have enough cash to pay out investors, and he wasn’t able to scam more people into paying in to the scheme. As a result, Madoff finally had to admit that the whole thing was a total fraud.

Governments around the world are in similar situations right now with their own public sector Ponzi schemes. Faced with failed auctions, declining demand, and rising yields, politicians are having to resort to desperate measures.

Like any good scam artist, they’re appealing to the masses first; all over Europe, governments are sponsoring new marketing campaigns suggesting that it’s people’s patriotic duty to buy government debt.

In Spain, they’re actually issuing instruments called ‘Bonos Patrioticos,’ or ‘patriotic bonds’. Ad campaigns say that the bonds are “good for you, good for the future.”

In Ireland, they’ve issued “Prize Bonds” which carry a 0% interest rate; instead of receiving interest, bondholders are entered into a weekly lottery contest.  Naturally, lottery winnings are only possible as long as people keep buying the bonds… pretty much the definition of a Ponzi scheme!

In Italy, they’re rolling out the country’s sports celebrities to encourage everyone to buy Italian sovereign debt.

What’s ironic is that Italy’s dismal balance sheet is almost universally acknowledged. It’s as if everyone knows the country has almost no chance of making good on its obligations, but they still feel the need to willingly throw away their hard earned savings for the greater good of political incompetence.

Thing is, it’s not the millionaire sports stars, wealthy business leaders, or political elite who are buying these bonds… at least, not in anything beyond a token, symbolic amount. It’s the average guy on the street who really stands to get hurt when the government finally capitulates.

This is a truly despicable act and amounts to theft, plain and simple.

The United Kingdom, which is rapidly reaching this banana republic sovereign debt status itself, has unveiled a plan to issue roughly $50 billion in infrastructure bonds. This would be the equivalent of issuing $300 billion in the US– not exactly chump change.

Given Britain’s already colossal debt level, private investors aren’t exact diving in head first to loan the government even more money.

Undeterred, British Chancellor George Osborne plans to ‘highly encourage’ UK pension funds to mop up about 60% of the total amount. “We have got to make sure that British savings in things like pension funds are employed here and British taxpayers’ money is well used,” he said.

In other words, ‘we are going to make sure that British people buy our junk, one way or another.’

The last year has seen numerous pension funds around the world, from the United States to Argentina to Hungary, be raided for the sake of keeping these Ponzi scheme going.  The UK is already lining up to be the next.

It’s one of the last acts of a truly desperate government to begin directing public and private savings into their Ponzi schemes.

Fast-forward a few downgrades and you can plan on seeing the exact same thing in the United States– appealing to people’s patriotism to loan their hard-earned savings (if they even have any) to the Federal government at a rate of interest that fails to keep up with inflation.

It’s nothing more than a very clever (and subtle) form of theft. 

December 2, 2011
Santiago, Chile

Last night I had some close friends over for dinner and a few bottles of Chile native Carmenere wine. A lot of the conversation focused on food– we’re all very conscious about what we put in our bodies and tend to reject the garbage that passes for food in ‘developed’ countries up north.

There’s so much chemical poison in food these days– trans fats and hydrogenated oils, high fructose corn syrup, aspartame, and a host of ingredients that were manufactured in laboratories rather than grown on farms. Many have been linked to various forms of cancer, liver disease, diabetes, etc.

And yet, they’re all perfectly legitimate. Governments certify such dangerous chemicals are fine. We have organizations like the FDA, CFIA, FSA, etc. to tell us what is safe and what is not… what we can and cannot put in our bodies.

Never mind that they consistently fail.

Just days ago, in fact, a new study published by Consumer Reports showed that many children’s fruit juices being sold on grocery shelves actually contain high levels of arsenic.

All of this is why our resilient community project has such an intense focus on organic agriculture. Think about it… in difficult economic times with rising input costs and oil prices, do you think the Big Ag companies aren’t willing to cut a few corners for the sake of profitability?

I’m not taking this risk… and it’s a big reason why we’re investing so much in our own agriculture here in Chile. More on that later, let’s move on to this week’s questions.

First, Ashok asks, “Simon- I know you held a conference call earlier this week to discuss the resilient community project in Chile and an upcoming event to tour the property. Are any slots still available to come down?”

Unfortunately, no, not at the moment. Both weekend events to come down here and tour the property sold out in just 6 1/2 minutes. Given the wait list, though, it’s clear we’re going to have to organize more events. Stay tuned for more details about that.

Next, Carolina asks, “Simon, you seem fairly bearish on financial markets at the moment. Can you explain why?”

Easy. The financial system is completely broken. Markets are supposed to match willing buyers with willing sellers to determine the true equilibrium price for a particular product, service, or asset.

This ‘price discovery’ is no longer happening. Every day, asset prices around the world rise and fall based on politics, rumors, and manipulation– not any sense of value. One day it’s RISK ON, the next it’s RISK OFF. One day everyone’s buying stocks, the next day some rumor causes them to run for the exit.

Not to mention, can we really have much certainty what’s on anyone’s books anymore? Trillions of dollars are sitting on corporate balance sheets, typically invested in sovereign debt.

Years ago, sovereign debt used to be considered a safe ‘cash equivalent’. Today, not so much. With so many insolvent governments teetering on the edge of bankruptcy, ALL of this money is at risk.

The MF Global disaster (the eighth largest bankruptcy in US history) should have underscored this point in spades. But apparently the market has a very, very short memory. Just 32 days later, MF Global is forgotten, and it’s RISK ON once again.

Famed hedge fund manager Mark Mobius recently summed it up nicely when he said, “There’s definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis.”

On that note, Roger asks, “Simon, there’s a lot of uncertainty in the world. One day stocks are soaring because of central bank intervention, and the next day stocks tank because of these sovereign risks. What’s an investor to do?”

I certainly can’t give any personal financial advice, but I will say what I’m doing.

For the most part, I’m investing my time, energy, and money in agriculture down here in Chile. Regardless of what happens– stability or calamity, inflation or deflation, this investment will literally bear fruit.

I’ve also purchased precious metals recently– not for investment, but simply as a safe haven “anti-currency”. I’m also holding a fair amount of cash (including physical currency sitting in my safe) and waiting patiently for markets to seize and asset prices to crash.

The only exceptions I have to this rule are Tim Staermose’s proven 4th Pillar trading strategy, as well as some very lucrative private investment opportunities in Mongolia. My boots on the ground analysis there leads me to believe that Mongolia will prosper, whether inflation, deflation, or stagnation occurs.

December 1, 2011
Santiago, Chile

My business partner Matt is a great friend and hell of a guy. He’s also a big technology buff and is an early adopter of new products.  A few weeks ago he gave me a Kindle Fire, Amazon’s new touch-screen digital reader. It’s great. Fabulous, actually.

I used to do all of my reading on an iPad, and I instantly made the switch. The screen resolution is much bolder and brighter, and the size is more ‘book-like’. If you’ve been thinking about buying one, I highly recommend it.

One of the things that I immediately subscribed to on my new Fire is the Financial Times; I have it automatically delivered to my device each morning, and it’s now become the first thing that I reach for when I wake up in the morning.

Just yesterday morning as I scanned the headlines, a number of things caught my eye that I have copied and pasted for your review. These were all actual headlines from the FT’s digital edition on November 30, 2011:

“Businesses plan for possible end of euro”

“ECB bond purchase snag sends warning”

“Moves to boost rescue fund amid shortfall fears”

“Ten crucial days in race to save single currency”

“Banks suffer surge in withdrawals”

“UK announces extension to austerity policies”

“Traders prepare for endgame”

“Miserable outlook as deficit reduction plans are blown off track”

“Beyond Europe, executives make plans for the unthinkable”

“Time to Act- Italy must restructure its debt now (Editorial)”

“Doubt over firepower of rescue fund grows”

Then later in the day were all the headlines of world central banks’ coordinated action to print money. Stock markets soared as markets cheered this move… whereas instead they should have been looking at this for what it is– the last act of a desperate man.

Then there were the headlines related to geopolitical instability:

“UK vows ‘serious consequences’ as Tehran embassy is stormed”

“Defiant Iran vows to fight back”

“Oil prices surge ahead of EU ministers’ talks over embargo”

Not to mention the fiasco with Pakistan. Or Russia putting its radar stations on ‘combat alert’ in preparation against European missile defense systems. Or the situations in Syria and Saudi Arabia. Et cetera.

Ideas that once seemed unthinkable in the developed world– war, social unrest, sovereign collapse– are now becoming mainstream realities. And just a casual glance at these headlines shows that the problems aren’t going away.

Let’s be frank. Is the world coming to an end? No. Absolutely not. I’m actually quite optimistic about humanity’s ability to adapt and overcome. Human beings have survived ice ages, horrible plagues, natural disasters, nuclear war, and utter economic devastation. We’re still here despite ourselves.

But we cannot ignore a basic truth– the current world order and corrupt, plutocratic, debt-laden fiat system is completely unsustainable. These headlines are symptomatic of a change that is already taking place– a complete reset in the way the world operates.

And whenever there has been great change in our past, there has been great chaos and turmoil. Finding your own safe haven in such times to secure your assets, your family, and your livelihood is an incredibly prudent decision. Some basic steps include:

1) Consider an international safe haven location out of harm’s way that you can go to if/when things get too uncomfortable in your home country. Start looking now, you don’t want to begin thinking about this when you’re heading to the airport.

Chile, Uruguay, New Zealand, etc. are all excellent options.

2) Consider moving a portion of your assets overseas to a stable, sound banking jurisdiction. Singapore, Hong Kong, Abu Dhabi are great choices. Store precious metals overseas in private (preferably anonymous) vaults in non-bank facilities like Global Gold or Das Safe.

3) Look for alternative ways to generate income should your current source of livelihood dry up. Developing markets like Mongolia are full of opportunities, as are thriving foreign economies like Singapore.

Taking these basic steps will put you light-years ahead of the crowd in terms of being prepared for whatever may come. And, should some miracle arise and we all wake up tomorrow to world peace and prosperity, you won’t be worse off for it.

November 28, 2011
Santiago, Chile

If the global financial crisis has taught the world anything, it’s that there is massive weakness running through western banking systems.

The big banks in New York and London, once considered to be the strongest and most stable in the world, have been completely exposed for what they are– weak, toxic, and corrupt.

Between subprime debt, shaky sovereign bonds, and uncertain consumer loans, most of these banks are sitting on incalculable losses. They get around disclosing their true financial condition by using clever accounting tricks (which are completely legal thanks to government regulators).

As such, they can go on borrowing money from the Federal Reserve at 0% and loaning it to the US government at 2%– a practice that has essentially become the banks’ core business.

If you haven’t noticed, most banks hardly lend against anything that isn’t guaranteed by the government anymore. A Fannie Mae conforming loan is a no-brainer, but making a small business loan is a non-starter.

By way of personal experience, one company that I co-own is a very successful retail products brand. We went to the bank to obtain a loan to buy more inventory, secured by accounts receivables and contracts from mass retailers (think Wal Mart and Target).

And yet, no bank would finance us, even with our strong revenues, brand success, documented future cash flows, and excellent credit. The only loan they would grant had to be matched and secured by cash. In other words, they would happily loan $1 million… as long as we deposited $1 million in cash as collateral.

This is hardly a well-functioning system… let alone the pinnacle of global banking.

I’ve long pounded the table on banking overseas– foreign banks are often healthier, more innovative, more secure… and best of all, not controlled by your home government.

You may be surprised, for example, to learn that, according to recent FT data, the country with the most profitable banking sector (as a percentage of average capital) is none other than… Pakistan! The country’s banks posted an average profit of 36.41% of capital. Brazil, Indonesia, and Egypt rounded out the top 4, all exceeding 30%.

(Australia and Canada were the only big western nations in the top 25 at roughly 20% each.)

In terms of regional profitability, Latin American banks lead the world with an average return on capital of 27.09%. This is more than twice as high as North American banks (11.16%) and European banks (8.5%).

Real profits certainly count for something; banks that are legitimately profitable are healthier, and healthier banks are safer for depositors. In this day and age, bank safety is paramount.

I’ve often cited the fact that certain places like Singapore have never had a bank fail, ever, partly due to the high capitalization levels. This is a key measure of bank safety– and some of the top jurisdictions in the world (as measured by stricter tier 2 capitalization levels) are Israel, Chile, Colombia, and Hong Kong.

By way of comparison, the US, UK, Canada, etc. are nowhere to be seen in the top-20 for this category.

One of my preferred metrics for bank safety, however, is the loan-to-deposit ratio. For example, if a bank has $100 million in deposits, and their loan portfolio amounts to $95 million, then the loan to deposit ratio is 95%.

Clearly, the lower this ratio, the better; a safe bank has a lot of cash on hand and loans out funds judiciously.

Banking jurisdictions with some of the lowest loan-to-deposit ratios (i.e. the safer places) include Lebanon, the Philippines, Hong Kong, and Andorra. Places with the highest ratios (i.e. the riskiest) include old favorites like Italy, Ireland, Portugal, and Sweden.

With banking systems (and governments) collapsing all around us and the very nature of fiat currency being called into question, it’s important that people no longer ‘assume away’ things like bank safety.

Just because a bank has been around for a hundred years doesn’t mean it can’t collapse. Just because there’s a government guarantee doesn’t mean the whole system can’t collapse… including the government itself.

November 27, 2011
Santiago, Chile

Some friends and I spent most of the weekend touring the future site of our resilient community in central Chile, just a few hours’ drive south of Santiago on a very modern highway.

As I’ve mentioned before, the site sprawls across roughly 1,000 acres in a gorgeous setting; a healthy chunk of the property is already planted as a working (and profitable) farm, and it was exciting to see so much in bloom over a beautiful, sunny summer weekend.

We picked organic vegetables out of the ground and made a fresh meal with full knowledge of exactly where our food had come from and how it had been grown. This is real power. And freedom.

When I returned to my apartment in Santiago and got caught up on major news events from around the world, some friends sent along the usual batch of Black Friday shopping videos. They’re hilarious… and utterly pathetic.

Almost without exception, the situation gets worse every year. People get bruised and bloodied as crowds battle each other for deep discounts. Last year several people died… and in response, most of the major retailers adjusted their specials and staggered their stores’ opening times to reduce the crowd levels.

It didn’t help much, as this year’s barrage of Black Friday incidents underscores yet again how hopeless the mindless culture of consumerism has become. People still trample each other, fight each other, etc. Now they are pepper-spraying each other… or even waiting in the parking lots to mug each other as shoppers exit the stores.

(A friend even told me one unconfirmed story of a group of Wal Mart parking lot muggers who themselves got mugged by a rival group of Wal Mart parking lot muggers.)

Then there’s this video showing the utter chaos and calamity that ensued when shoppers were fighting over towels put on sale at $1.28 each. Towels.

If this is how people act when towels are on sale, it certainly makes one wonder how well society will function when there’s actual chaos– like supply disruptions for food, fuel, or electricity.

Have you ever seen those UN Aid videos where mobs of Africans start violently looting the trucks carrying humanitarian supplies? Or the more recent videos of Haitians battling each other in the streets over bags of rice? Western society is not much more advanced.

If you truly believe there is a 0% chance of social unrest occurring where you live, then I encourage you to do absolutely nothing. And this is what most people will do.

If, on the other hand, you see several issues on the horizon which may threaten the smooth, orderly flow of modern society, then I encourage you to watch those Black Friday videos and answer a simple question– “Do you want to be around those people when it happens?”

[Editor's note: Sovereign Man: Confidential members are reminded of this Wednesday's special Resilient Community presentation at 1pm Eastern. If you're interested in the community, you won't want to miss it. If you're not a member yet and want to attend the call, you can sign up here.]

November 25, 2011
Santiago, Chile

I can’t even begin to describe how happy I am to be back in the land of the free… and yes, I’m talking about Chile.

I arrived a few days ago to beautiful summertime weather (remember, the seasons are flipped down here in the southern hemisphere). As usual, the customs officials at the airport were speedy, courteous, and efficient. From plane to cab I was out of there in 20-minutes– with luggage. This is par for the course in Chile.

It’s so nice to be in a place where you’re treated like a human being and agents of the government don’t go around robbing, molesting, and pepper-spraying peaceful citizens.

This is one of the many, many reasons why we’ve selected Chile as the home for our resilient community, and I’m happy to be back in-country so that I can dedicate myself to furthering this effort over the next several months.

[Editor's note: Sovereign Man: Confidential members are reminded that Simon will be unveiling details of the resilient community during this month's call on Wednesday November 30th. If you'd like to hear the details but aren't a member yet, we encourage you to sign up for a risk-free trial today.]

When you step back and think about it, it’s extraordinary that we’re even talking about such a thing. Just five years ago, anyone who talked about a global economic slowdown was laughed out of the room. Today we are facing an all-out collapse of the fiat system. How quickly things change.

One of the best books on the subject that I’ve read lately is John Mauldin’s appropriately titled Endgame; John is one of the most accomplished and knowledgable financial writers on the planet, and he clearly explains why the end of the global debt supercycle is a foregone conclusion.

(FYI, the book is an easy read and I highly recommend picking up a few copies to give as gifts to all of your friends who still don’t get it…)

Last weekend, John and I had the chance to share a bowl of chips and salsa in an uptown Dallas bar and trade views about which governments might collapse and which have a shot at survival.

It was simultaneously depressing and hilarious… and I was certainly glad to be heading off to our farm in Chile afterwards. More on that next week– first, a few questions:

Trisha asks, “Simon- you probably heard that the Anonymous group posted the pepper-spraying policeman’s personal contact information on their website. What do you think of that approach?”

Hey, you know what they tell criminals– if you do the crime, you do the time. In this case, if you spray a peaceful crowd with a ‘less-than-lethal’ lachrymatory agent at point blank range, you get publicly shamed.

Police generally go unpunished for such actions. Whenever a cop is caught on tape tormenting peaceful protestors, the politicians and administrative officials always say that they’ll conduct a ‘full investigation’.

And then nothing happens. Months go by and the incident is forgotten. This is the unwritten rule between police thugs and the state– you protect my interests, and I’ll let you get away with brutalizing citizens to your heart’s content.

Assault is assault. We go to jail. They go on paid administrative leave. It’s a broken system, and Anonymous simply circumvented it. Outing the guy online to billions of people isn’t exactly Hammurabi’s code, but it’s a good start.

Next, Doug asks, “Simon, what’s the downside to obtaining a second citizenship? Obviously there’s some cost and time involved, but what else should I be concerned about?”

The advantages of having a second passport are extraordinary– more freedom, more opportunity, more options; most of all, it’s a great insurance policy against sovereign calamity.

Most North Americans and Western Europeans are blind to these advantages. They don’t understand why they’d ever need another passport because they already live in the pinnacle of civilization… or so they think.

Russians, Chinese, Argentines… these sorts of folks have personally experienced the ramrod fist of government. And they’re not taking chances.

Slowly, the developed West will begin to understand that their home government is their greatest threat. Unfortunately most of the second passport opportunities will be closed by then.

To address ‘disadvantages’, there may be some depending on the country. For example, if you obtain US citizenship as your second passport, you’re signing up for taxation on your worldwide income. Congratulations.

If you obtain Israeli citizenship, you (and/or your kids) may be obligated to military service. If you obtain Dutch citizenship, you may have to renounce your other one.

Taxes, conscription, and dual nationality limitations are generally the three big categories to watch out for, though most issues can be sidestepped with some planning.

Last, Neil asks, “Hello Simon, since you travel everywhere, I thought you could help me with this question: where in Latin America has the most potential to support an upscale (U.S. quality) veterinary hospital / dog kennel? I’d like to start such a business abroad.”

Candidly, the best market right now for upscale pet care is in Asia, specifically mainland China and Taiwan. I was just recently in both Shanghai and Taipei, and the streets are lined with luxury stores selling high priced pet accessories, poodle perms, and gourmet doggy biscuits.

The level to which the Chinese and Taiwanese are spoiling their pets is mind-boggling… so there’s serious opportunity there.

If Latin America is where you’d like to end up, though, I’d focus on Panama, Brazil, and Chile. The pet culture is not as extreme in these countries, however the growing middle class and disposable income levels certainly warrant higher quality services.

November 24, 2011
Santiago, Chile

Today, a lot of readers are enjoying time with friends, family, fowl, and football. Others are perhaps commemorating the first day of the Roman solstice holiday Brumalia. Still others may be celebrating Teacher’s Day in the Republic of Turkey. And for others, it’s just Thursday.

Here in Chile, it’s just Thursday. And I’m spending my day in meetings with our attorneys in Santiago to get caught up on all remaining legal and structural issues pertaining to our resilient community project before I head down to the property this weekend.

Before I head out, I’d like to briefly pass along two interesting articles and one video that have struck me recently, and should you find the time today for a quick dose of reality, I highly recommend them.

The first is from Ross DeVol of the Milken Institute  ‘The Eight Best Innovation Ideas From Around the World.” Now, while it’s hard for me to support state-sponsored anything, DeVol does a great job of underscoring one of our primary points in this publication– countries around the world are starting to offer huge incentives and COMPETE for the best talent, labor, and capital.

From Singapore to Finland to Switzerland to South Korea, DeVol breaks down just a few of the places in the world that have made key policy changes to attract foreign businesses, professionals, and investment.

The second is a short article profiling Chinese professor and TV host Larry Lang’s recent comments during a lecture he gave in mainland China. In Lang’s words, the Chinese government is on the brink of bankruptcy, and that “every province is Greece.”

We’ve been beating this drum for quite some time, and if just a fraction of what Lang is saying pans out, the implications to the global economy will be severe. It makes me happy to be in Chile at the moment, working hard on our resilient community.

The last is a short investigative clip from German television (try not to fall in love with the hostess) shedding light on the corruption and personal gain that goes on in the halls of the European Parliament.

It’s just another example of the political class criminally enriching themselves at the expense of the taxpayers.

November 22, 2011
Dallas, Texas, USA

There are a lot of things to detest about traveling in, out, and through the United States. Coming in through customs can be one of the most demeaning experiences ever as the agents from the Department of Homeland Security tend to treat everyone like criminal terrorists.

Then there’s the TSA… standing there supervising the mass assembly line of fake security, crowned by the radiation-dousing body scanners.

The TSA currently uses two types of technology– millimeter wave scanner, and backscatter X-ray. Backscatter is the more insidious of the two as it emits ionizing radiation that is generally considered to be carcinogenic.

Not to worry, though, the TSA is armed with plenty of propaganda to make Americans feel good about their radiation baths. From the TSA website:

“Since imaging technology has been deployed at airports, more than 99 percent of passengers choose to be screened by this technology over alternative screening procedures. According to a new CBS poll, 4 out of 5 Americans support the use of advanced imaging technology at airports nationwide.”

So there you have it– since most Americans don’t care about the radiation from body scanners, neither should you! So GET BACK IN LINE!

Curiously, late last week the European Commission issued a new ruling suggesting that such x-ray technology is medically hazardous, and that “[i]n order not to risk jeopardising citizens’ health and safety, only security scanners which do not use X-ray technology [will be] added to the list of authorised methods for passenger screening at E.U. airports.”

Given the serial bailout and sovereign debt debacles on the continent, this may be the smartest thing to come out of Europe since Albert Einstein.

To clarify, travelers in the United Kingdom do not get this reprieve; the British Transport Secretary recently affirmed that ALL travelers in, out, and through the UK would be required to pass through body scanners. In other words, you soon won’t be able to ‘opt-out’ in the UK.

The US is definitely headed in this direction. And make no mistake, it has nothing to do with security and everything to do with control. Anytime the government takes away a bit of freedom and obliges the people to do something, it’s all to send a message: “We are in charge. You are not.”

Tens of millions of Americans are going to fly through US airports this week, each of whom will be subjected to these procedures. If these statistics are to be believed, most won’t care… and they’ll dutifully stand in line to remove their shoes and be doused with radiation.

If you’re in the minority who does care, my advice is to find another security line.

To give you an example, when I fly out of DFW airport, my international flight will be out of terminal D. The D terminal is equipped with body scanners. Instead, though, I’ll go through security in terminal A where there is at least one security checkpoint with no body scanner, and then I’ll take the tram to terminal D within the secure area.

And then I won’t come back for a really long time.

November 21, 2011
Dallas, Texas, USA

Did you hear about the latest civil unrest in Syria? Police in full riot gear swarmed peaceful students who were staging a completely non-violent, human-chain sit-in at a university campus.

The Syrian police came up at point-blank range and hosed these kids down with pepper spray. If you’ve never been assaulted with pepper spray before, let me assure you that it is easily one of the most uncomfortable experiences you could ever go through in your entire life.

It was a truly disgusting display– meeting peace with violence and brutality. Just the sort of thing you would expect from an oppressive regime like Syria.

Except… it wasn’t in Syria. It was in California… right here in the land of the free.

This sort of thing has become totally commonplace. A few days ago, a Tampa, FL newspaper published a photograph of their local police force’s latest and greatest piece of equipment– a 12-ton armored personnel carrier (APC). In laymen’s terms, it’s basically a tank.

Needless to say, the cops rolled it out, proudly displaying it in an upscale Tampa neighborhood. Never mind that the APC tracks destroy city streets at taxpayer expense…

Why are they doing this? Why are so many police forces arming to the teeth, receiving federal aid, and meeting nonviolence with violence? Recent events this weekend may give us a clue.

At a NASCAR race on Sunday, both Michelle Obama and Jill Biden were booed by the crowd. This is on the heels of both ladies getting booed at Game 1 of the inappropriately-named World Series just a few weeks ago.

Halfway across the world in Moscow, Russian Prime Minister Vladimir Putin was also booed when he stepped into the ring to congratulate a fighter at a mixed martial arts match.

These minor instances are emblematic of the massive rift that has emerged between the ‘people’ and their leaders. Politicians may be completely out of touch, but they’re not stupid… and they’re taking steps to prepare.

In so many places around the world right now, anger, animosity, hostility, and anxiety rule the day. For the time being, though, the vast majority of this negativity has an outlet in the political process.

You see, between now and the end of 2012, several hundred national and provincial elections are scheduled around the world– from this past weekend’s parliamentary elections in Spain to presidential elections in Russia, France, the United States, Mexico, Finland, Iceland, India, Switzerland, South Korea, Yemen, Egypt, and more.

Consequently, people have an outlet to invest their anger and hostility. Emotions are running high, but people at least have a shred of hope that if ‘their guy’ gets elected, everything will get better.

It won’t. And, next year once the election-cycle has disappeared, there will be no more peaceful outlet for all of the anger that has been building up.

That’s when emotions will spill into the streets. And it won’t be peaceful protests being met with violence… it will be violent riots being met with even worse violence.

Politicians are cunning. They can see the writing on the wall, they know that social unrest is a foregone conclusion, and they’re preparing to defend the status quo at all costs.

As such, it’s no wonder why we’ve been seeing a militarization of police forces and more violent tactics to quell any measure of dissent. And we’re only going to see more.

This is the real ‘new normal.’ The state is taking steps to protect its interests. What about you?

Denver based Barnhardt Capital Management is a futures brokerage firm that focuses on agriculture, round-the-clock broker access, and inexpensive commissions. At least, it used to be.

Barnhardt shuttered its operations yesterday after six-years in the business. The firm’s founder Ann Barnhardt posted the reasons online for the entire world to see:

“I could no longer tell my clients that their monies and positions were safe in the futures and options markets, because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse.”

Ms. Barnhardt further explains that markets are completely fractured… that the rule of law in the United States no longer exists. She decries Jon Corzine of MF Global for having outright stolen customer funds, and various exchanges and government regulators for having frozen out customer accounts as a result.

Given that the entire industry is “suicidally-leveraged” and exposed to “European sovereign junk debt,” Barnhardt recommends that ALL customers “withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity.”

We couldn’t agree more with this sentiment. Our Chief Investment Strategist Tim Staermose wrote just last week that cash is a great place to be right now… and we’ve been arguing for months that markets are completely broken. The market’s price discovery mechanism has given way to rumor and political innuendo.

A real economy cannot function under such circumstances. With Europe on the precipice and roughly $600 TRILLION in global derivative notional value lurking in the system, can a real collapse be that far off?

Famed hedge fund manager Mark Mobius recently said, “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis.”

Not only have the major issues not been resolved, but governments continue making things worse. More bailouts, more printing, more deficits take an enormous problem and make it unfathomable.

As we discussed yesterday, though, most people are completely unaware. Everything ‘feels’ normal, so there’s no cause for alarm. They’re just going on about their lives while Rome is burning all around them.

At least a handful of people are paying attention. We received a note this morning from a subscriber in Portugal who writes,

“Very well-informed people in Portugal are withdrawing money from the banks and either keeping it at home or buying gold. In fact, I heard on the news yesterday that we are breaking records in Portugal in terms of gold purchases.”

Meanwhile, the government of Spain insisted, rather emphatically yesterday, that it has absolutely no need of being bailed out… all while its borrowing costs shot up to record highs.

Given Spain’s debilitating debt and deficit woes, this is obvious nonsense; the government is simply trying to put on a brave face and restore confidence just three-days before the election.

Our entire financial system, in fact, is based on confidence. Our currencies are backed by nothing but empty promises by politicians. Our banks barely have any cash on the books as a percentage of deposits. Most western nations are completely insolvent. And EVERYONE is exposed to EVERYONE else.

Everything can ‘feel’ normal as long as that trust and confidence is still in-tact. But it’s a frail, razor-thin breaking point. And when people lose confidence in the system, things can collapse very, very quickly.

To paraphrase the late German economist Rudi Dornbusch, the loss of confidence takes longer than you think it should and happens faster than you thought it could.

I had lunch yesterday with one of the sharpest financial minds I’ve met in a long time at a rather picturesque setting overlooking Evergreen Lake, west of Denver.

The restaurant patrons were all well-to-do residents of this wealthy community… in fact, the whole area is like a bubble, largely shielded from any negative effect of the economic fallout thus far. Most of these folks have gone about their lives over the last few years completely oblivious to the global financial crisis.

My friend agreed; he told me, “Most of the people sitting in this restaurant haven’t felt a thing. Their guard is down, and they have no idea what’s coming. It makes me nervous.”

Indeed, there’s a large segment of people in this country who have not been directly affected by the meltdown. They still have their jobs, they haven’t been foreclosed, they haven’t been directly threatened by the government, they haven’t been robbed (by the private sector).

Their experience with the poor economy is second-degree… what they read in the papers or see on TV. But overall they live in a bubble. I can only describe this as the calm before the storm… and people are completely blind to the clouds forming around them.

Being blind to the obvious is part of the human condition.  And this morning, a friend from London sent me an email describing a rather interesting experiment on the subject. It’s called the Invisible Gorilla.

Subjects in the experiment are asked to watch a video in which groups of players are passing basketballs back and forth. Half of the players in the video are wearing black uniforms, half white.

The subjects are asked to -ignore- the players wearing black jerseys and count the number of times the players wearing white pass the ball to each other. Halfway through the short video, someone wearing a gorilla suit walks on to the screen, thumps his chest, and walks off.

Here’s where it gets interesting– about half of the subjects participating in the experiment don’t notice the gorilla. They’re so focused on counting the white team’s passes and ignoring everything else that their minds naturally filter out something completely obvious.

What’s more, when they’re told about the gorilla after the experiment, most people refuse to believe it. It shows without doubt that (a) people can be blind to the obvious… and (b) people can also be blind to their blindness.

There’s a lot of this happening right now. A lot of people live in their bubbles, detached from reality and completely blind to obvious signs.

The truth is that the insolvency of entire nations in the western world is an unequivocal fact.  And it’s not just Greece or Italy or Ireland. It’s the United States as well.

According to the US government’s own 2010 financial statements, the cost of just three sacrosanct programs– Defense, Social Security, and Medicare– exceeded all of the tax revenue collected that year by $10 billion.

In other words, the US government was already in the hole by $10 billion before it paid the light bill at the White House. Or hired any child molesting TSA agents. Or provided bailout funds to Solyndra. Or even paid a single dime of interest on the federal debt.

For several years now, the government has been in a position where it has to borrow money just to pay interest on the money it has already borrowed.

This is the point of no return. Examining the long and distinguished list of countries over the last 800-years that have been in this position before, there is hardly a single example of a nation escaping default and/or hyperinflation. This time is not different.

Now… when the decay comes, it comes quickly. Remember the 2008 Lehman collapse? The markets were plodding along with minor volatility for the months leading up to it. The warning signs were there, but almost everyone was blind to the gorilla thumping its chest. Then suddenly, poof. Trillions of dollars of wealth wiped out.

The same thing happens when a nation collapses. Everything is fine until it isn’t. Look at how quickly the situation deteriorated in Greece. Or Argentina.

We have to force ourselves to wake up… to stop being blind to the giant gorilla thumping its chest right in front of us.  It’s easy to believe that nothing bad is going to happen. That this time is different. That this country is different. That the system can’t collapse.

Dangerous words. Things may be fine now, but as quickly as the situation can deteriorate, rational, thinking people have a limited window of opportunity to take action. The gorilla is thumping its chest now. How soon will the next ‘Lehman-style’ event be? Can you afford to wait?

November 16, 2011
Golden, Colorado

Longtime readers know that I don’t spend much time in the United States; I usually swing by for a month or so each year to visit friends and family, and the period in-between visits can often stretch 6-months or more.

This is sufficiently long enough that I notice a lot of changes… some so drastic that they hit me in the head like a baseball bat.

For example, just last week when I was at Los Angeles International Airport, the police set up a checkpoint outside the main entrance as if we were in downtown Baghdad driving into the Green Zone.

And I couldn’t believe my eyes when, driving down Santa Monica Boulevard last Wednesday, I saw a police urban assault vehicle modeled after a US Army mechanized infantry fighting vehicle. It’s designed for one thing: maximum destruction.

It’s truly appalling how police forces across the country have become militarized. The concept of ‘peace officer’ no longer exists. Police are now paramilitary forces who only protect and serve the political class.

Because I’ve been out of the country for so long, I notice these changes more acutely; it’s like diving in head first into ice-cold water as opposed to wading in slowly. And this rise of the police state is accelerating.

Here’s the thing– when you look around the world, you can see a lot of chaos and turmoil. Hardly a day goes by when there’s not multiple riots and protests in the western world being met with overwhelming force from the government.

The government is sending a clear message: “We are in charge.”

It’s no wonder that, according to a recent Gallup poll, a record-high 81% of Americans are dissatisfied with the way the country is being run. On a proportional basis, this is 25% higher than during the Watergate scandal.

What’s even more stark is that, according to the same poll, roughly HALF of Americans believe the federal government has become so large and powerful that it POSES AN IMMEDIATE THREAT to the rights and freedoms of ordinary citizens.

This certainly explains why the government is increasing its offensive capabilities.

Now, clearly there are a lot of disgruntled Americans. There’s a lot of anger… even class tensions. The OWS movement is emblematic of this sentiment for sure, but in terms of taking action, most people still believe in the political process.

All of their angst and negativity will be taken out in the voting booth. Until then, it’s the calm before the storm. But the unfortunate reality is that no matter which way the 2012 election turns out, chaos will ensue.

If President Obama wins a second term, many conservative Americans will have reached their breaking points. If a republican candidate should win, a huge portion of Americans will feel they have lost their champion.

No matter what, though, people will quickly realize that absolutely nothing has changed.  They’ll recognize that the insolvency of the United States government is a simple arithmetic problem; that social security is bankrupt; that the Treasury Department is a giant Ponzi scheme; and that there is. no. recovery.

For now, Americans are still investing in the political process. Come next year, though, all the hope that’s building up will turn quickly into disappointment… and then anger. Then they’ll take that anger to the streets.

This is what happens when governments go bust. It’s happened numerous times throughout history, and it’s playing out right now from Greece to Argentina.

Social unrest becomes commonplace. Governments engage in financial repression, giving rise to asset seizures, inflation, and capital controls. Militarized police states categorize ordinary citizens into combatants and non-combatants. Collateral damage becomes an acceptable risk. Society turns on itself, and crime rates soar.

Watching the farce of America’s political theater play out, it’s clear that this ticking time bomb will go off after Election Day 2012. As polarized as voters are, and as dismal the federal balance sheet is, there’s little chance of society keeping it together afterwards.

What’s happening right now is merely an overture… and you can mark a date on your calendar for when the real fun begins.

November 14, 2011
Manila, Philippines

[Editor's note: Tim Staermose is filling in for Simon Black today.]

In the back of a chauffeured SUV limo, my friend Phil recently told me, “What I love about coming to the Philippines is that I feel like a rock star… not like at home where I’m a short, balding nobody. They treat me better than Bono here.”

When the limo arrived to Manila’s Intercontinental Hotel, the doors were whisked open, and a platoon of smiling attendants took care of every detail– the kids, the bags, the strollers, welcome drinks, hot towels, etc. The whole experience, including the royal suite, ran a whopping $150/night.

Another friend of mine was feeling a bit down about his lack of female companionship at home in North America.  So, summoning up his courage, he sent a profile to an Asian dating site, no doubt thinking, “What would anyone want with an old has-been like me..?”

Within a week he’d received private correspondence from 48 different eligible ladies ranging from a gorgeous university student to a sophisticated woman with a Masters degree in engineering.

[Lest we receive droves of hate mail, my female friends who have tried this approach had an even higher response rate. After all, there is a major shortage of women in many countries throughout the world.]

I relate these stories to make a point.  If your life at home sometimes feels dull and unexciting, it doesn’t have to be that way.  As Simon writes, when you expand your options to include the entire world, opportunities really open up.

If you want to go to school and can’t afford the ridiculous tuition, look at universities overseas. (You can go to the Swiss Federal Institute of Technology where Einstein attended for just $750 per semester. )

If you’re an entrepreneurial and having problems due to the dismal economic conditions at home, look overseas to stronger economies. In fact, in this month’s Sovereign Man: Confidential, Simon is profiling some specific business ideas he came across in the world’s fastest growing economy.

If you’re an unemployed worker and can’t find a job, you’ll have brighter prospects overseas no matter what your skill set. Places like Singapore, Qatar, Bermuda, Hong Kong all have thriving job markets for people ranging from cocktail waitresses to molecular biologists.

And if nothing else, your speaking English is a skill that over 1 billion people on the planet would like to have.

I have another friend who dreamed of being a drummer in England.  He’s talented but never got the right break and used to work odd jobs to barely make ends meet.

He hated it, and about 15 years ago he finally took a leap.  He studied for a diploma in teaching English as a second language and got a job in South Korea.

To this day, he’s still there. He plays the drums in one of the popular expat bands in town and is appreciated in a way he never was back home. He’s not making huge money.  But he’s content.

Naturally, his friends and family undermined the decision at first. When he rang them up to announce that he was moving to Korea, they all said he was nuts. And that’s how society works– people want people to stay average.

When we start to deviate from ‘normal,’ our friends and family tell us that we’re nuts and try to pull us back into the fold. Don’t listen to them.

There is nothing to lose by acting and thinking exceptionally. What’s the worst that can happen– you go back to what you were doing before?

Inertia is a powerful force.  If you’re not happy with what’s happening around you, I urge you to expand your options and think bigger. Think globally. The cost is negligible, the benefits are enormous, and the incredible experience is forever.