First Thing’s First-- I Screwed Up

First Thing’s First-- I Screwed Up.

Notes From The Field By Simon Black 

March 31, 2020   Bahia Beach, Puerto Rico

First thing’s first-- I screwed up.

Yesterday I wrote to you about the US government’s initiative to loan money to small businesses, and I was wrong about an important detail.   https://dinarrecaps.com/our-blog/the-small-business-administration-is-now-bigger-than-walmart

I said the maximum amount of the loan was equal to 2.5x a company’s annual payroll expense. That’s incorrect.

The correct maximum loan amount is 2.5x a company’s average MONTHLY payroll expense over the past 12 months.

[The total amount that the government intends to shovel into the economy through this program-- $350 billion-- is still correct.]

So, apologies for the error… that’s what I get for reading legislation at 5am on Sunday.

A few readers alerted us to my oversight. And when I re-read the legislation to confirm my mistake, I couldn’t believe what I was seeing.

Honestly, a loan of 2.5x annual payroll made sense to me. It would give small businesses plenty of firepower to stay afloat for the long haul.

But this bailout is just 2 ½ months! That’s nothing. It implies that the government thinks everything will be back to normal by mid-June.

This is the “V-shaped recovery” theory-- the idea that, while the economy has come to a screeching halt, it will come roaring back in a few months… and we’ll see an economic bonanza by the end of the year.

Most of the world certainly seems to buy into this belief, swinging from one extreme to another.

Not even ten days ago the general mood was abject terror, fear, and hysteria. Today we’re back to complacency and misguided optimism.

Stock markets worldwide have surged; the MSCI World Index (which tracks 1600+ large companies from 23 advanced economies) is up nearly 20% just in the last week, and the bear market is already over.

Governments are shoveling money into their economies, and central banks are printing trillions of dollars worth of currency… so the prevailing sentiment among investors is that companies will have a bad quarter or two, but everything will be back to normal within a few months.

Now, I need to caveat what I’m about to say by stating yet again that the world is not coming to an end. Rational, thinking people will always prevail, so please don’t take my comments as pessimistic.

Last week I wrote to you about a gentleman named James Stockdale-- a US Navy pilot who spent more than seven years being tortured in a Vietnamese prison camp.

Years later when asked about how he cultivated the mental strength to survive such brutal conditions, Stockdale replied:

“You must never confuse faith that you will prevail in the end—which you can never afford to lose– with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

As I explained last week, the facts of our current reality are absolutely brutal.

This virus has spread at a rate never before seen in modern history.

Reducing the contagion requires shutting down most of the global economy, resulting in a wide range of catastrophic consequences, including countless jobs lost, millions of businesses going under, and even entire nations going bankrupt.

If they keep the economy shut down, hundreds of millions will suffer. But if they don’t keep the economy shut down, millions could die.

Now, the uncomfortable reality is that many people who might die of Covid-19 would likely end up dying of some other pre-existing condition. But still-- what politician wants the blood of a million people on his hands?

There are, of course, patches of good news. Infections in Italy have fallen. China is starting to carefully open up for business again after a nearly 3 month hiatus.

But in the United States it’s a different story.

Infections continue to grow exponentially. Two weeks ago there were only 4,596 confirmed cases in the US. Yesterday there were 163,844, an increase of more than 35x in two weeks.

At least some of that growth rate can be explained by the increase in testing; the more people get tested, the more positive cases will be confirmed and reported.

But regardless, it’s clear that the virus is still rapidly spreading… and that’s why I find all this optimism to be so incomprehensible.

The S&P 500 rose 17% over a period of three days last week. There seems to be zero consideration given to the possibility that the pandemic could become much worse. Or there could be a second or third wave of infections.

Or that the hospital system could become totally overwhelmed. Or that many of the businesses which have closed will NEVER re-open. Or that the unemployment rate could remain elevated for quite some time.

Or that the stimulus will fall far short of the mark. Or that the market will lose confidence in the central bank. Or that social unrest will take hold. Or that supply chains could be disrupted.

It’s clear that very few people have the discipline to confront the most brutal facts of our current reality.

There are literally thousands of potential risks and consequences from this pandemic. And they’re all being ignored.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=20200331_economy&inf_contact_key=1ba3e30ee5e359a6a5c1e04cd7c514d4b7af0999dac2af6212784c39e05d2aef 

The ‘Small’ Business Administration Is Now Bigger Than Walmart

The ‘Small’ Business Administration Is Now Bigger Than Walmart

Notes From The Field By Simon Black 

March 30, 2020  Bahia Beach, Puerto Rico

As you’ve probably already heard, the US government unleashed a giant tsunami of money on Friday, passing a $2 trillion stimulus bill to help boost the economy during the Covid pandemic.

Let’s put that number in context:

$2 trillion is more than it cost to wage 18+ years of war in Afghanistan and Iraq.

It’s nearly THREE times the size of the bailout from 2008.

It exceeds ALL corporate and individual income tax revenue collected by the IRS last year

We are clearly living in unprecedented times… and this bailout is equally unprecedented.

Among the bailout’s many provisions (which go on for more than EIGHT HUNDRED pages!) is a whopping $350 billion to the Small Businesses Administration.

The Small Business Administration is ordinarily a tiny federal agency. But this funding exceeds the budgets of the Army and Navy COMBINED. It’s 8x the size of the United States Marine Corps. It’s more than the entire market capitalization of Walmart.

You get the idea. The SBA just became one of the biggest organizations in the world.

Now, in normal times, the SBA’s mission is to help startups and small businesses obtain bank loans; it’s usually pretty difficult for a startup to borrow money from a bank loan because the business is too risky, and banks don’t want to lend.

So the SBA’s role is to provide a guarantee for the loan. They’re essentially telling the bank that if the business fails and doesn’t pay back the loan, the federal government (i.e. American taxpayers) will make up some of the difference.

This guarantee doesn’t make a small business loan risk-free for banks-- there are still things that can go wrong. But the guarantee helps reduce the risk.

But typically, in order to receive an SBA guarantee, business owners have to provide their own ‘personal guarantee’ to the government. In other words, if the business owner defaults, the government can seize their assets in order to recover loan losses.

That’s the way SBA loans normally work. But these times are not normal.

According to this new bailout legislation, “no personal guarantee shall be required,” and the government “shall have no recourse against any individual shareholder, member, or partner . . . for nonpayment”.

In other words, the legislation implies that these loans don’t have to be paid back.

Moreover, the law also states that “no collateral shall be required for the covered loan.”

So you don’t even need any assets to qualify. In fact you need barely anything to qualify… except a pulse.

According to the legislation, “any business concern, nonprofit organization, veterans organization, or Tribal business. . . shall be eligible to receive a covered loan” as long as you have fewer than 500 employees.

Honestly the only real requirement is that you have to keep paying your employees. That’s the entire point of the legislation-- lawmakers wanted to provide funds so that small businesses could continue paying workers.

The maximum loan amount is equal to your payroll costs over the last 12 months multiplied by 2.5.

*Payroll costs include salaries, wages, and payments paid to employees and independent contractors, including yourself, up to $100,000 each. It also includes medical insurance payments, retirement benefits, state/local tax, and payments for sick leave, family leave, or vacation.

*Payroll costs do NOT include federal income or unemployment tax withholdings, or compensation for employees based outside of the United States.

So if you had, say, $400,000 of qualifying payroll costs over the past year, your maximum loan amount is $1 million.

And the maximum interest rate (according to the legislation) is just 4%.

If you have a qualifying business and you want to apply for a loan, you can do so here:   https://covid19relief.sba.gov/

Now, I’m sure that plenty of people will use these loans as intended-- to stay in business, continue paying workers, etc. And eventually they’ll do the honorable thing-- pay the loans back, with interest.

But let’s be honest. Countless people are going to completely abuse this. They’ll borrow as much money as they can with absolutely no intention of paying back a single penny.

This means there’s going to be a ton of loan losses.

Remember-- banks are the ones who will be making these loans, using their depositors’ money. YOUR money.

And even with the SBA guarantee, there are still things that can go wrong. If the paperwork was wrong, if the loan wasn’t made in the prescribed way, if the business didn’t actually qualify, etc. the banks can still suffer losses.

(Taxpayers will obviously suffer huge losses as well.)

But despite these risks, the legislation specifically tells banks that “a covered loan shall receive a risk weight of zero percent.”

Translation: banks should count these small business loans as ‘risk free’ even though there’s a strong chance that tons of people will never pay them back.

The legislation also says that banks “shall not be required to comply” with accounting rules that require them to disclose when their loans go bad.

So the government is essentially telling banks to make loans to everyone, with no personal guarantee, no recourse, and no collateral… and to maintain these loans on their books as risk free. And even when these loans default, to continue reporting them as risk-free.

What could possibly go wrong???

It’s clearly a great time to be a borrower. That’s one thing we learn from bailouts—they’re always going to take care of people in debt, and help people go into more debt.

But it’s more concerning to be a depositor.

Even with the SBA guarantee, it’s obvious that banks are riskier than they want you to believe.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/trends/the-small-business-administration-is-now-bigger-than-walmart-27604/

Powerful Wisdom From One Of The Toughest Men Who Ever Lived

Powerful Wisdom From One Of The Toughest Men Who Ever Lived

Notes From The Field By Simon Black 

March 24, 2020  Bahia Beach, Puerto Rico

One day back in the late 1990s when I was a wide-eyed 20-year-old cadet at West Point, we were told that a distinguished visitor was coming to speak, and to be seated in the auditorium by 1pm sharp.

This was pretty routine; one of the great things about attending West Point was the seemingly endless line of world leaders, athletes, scientists, and even celebrities who would address the Corps of Cadets.

During my time at the academy we heard from people like Colin Powell, Oliver Stone, Bill Clinton, and countless more.

On that particular day, the speaker was Vice Admiral James Stockdale.

Stockdale isn’t a household name, but as I would come to learn, he was one of the most impressive and toughest human beings who ever lived.

He was in the twilight of his life when he came to speak to us, just a few years before his death. But even at his advanced age, he had the presence of a giant.

Stockdale had been a US Navy fighter pilot. His full name was James Bond Stockdale, so his call sign became “007”. Perfect.

Stockdale’s life changed in September 1965 while flying a mission over North Vietnam. He was shot down, captured, and spent the next 7 ½ years as a Prisoner of War in the infamous ‘Hanoi Hilton’.

As a POW, Stockdale was tortured regularly, beaten savagely, and exiled to solitary confinement.

But he never broke.

At one point during his captivity when he found out that he was to be paraded out in public in Vietnam, he beat his own face to a pulp with a wooden stool, and slashed his scalp with a razorblade, so that he couldn’t be used as a propaganda tool.

He also slit his own wrists once, demonstrating to his captors that he would rather give up his own life than capitulate.

Stockdale was eventually awarded the Medal of Honor for his extraordinary leadership and personal sacrifice.

Years later in an interview with author Jim Collins, Stockdale was asked about his captivity in Vietnam—how on earth did he deal with such harsh circumstances and uncertainty?

“I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”

When Collins asked, “Who didn’t make it out [of the POW camp],” Stockdale replied,

“Oh that’s easy. The optimists. They were the ones who said, ‘we’re going to be out by Christmas.’ And then Christmas would come, and Christmas would go.

And then they’d say, ‘We’re going to be out by Easter.’ And then Easter would come, and Easter would go. And then Thanksgiving. And then it would be Christmas again.

And they died of a broken heart.

“This is a very important lesson,” Stockdale continued. “You must never confuse faith that you will prevail in the end—which you can never afford to lose-- with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

This is the situation that each of us is facing right now.

We want to be optimists. We want to believe that this pandemic is going to magically vanish tomorrow morning and that we’ll all be able to go on with our lives as if nothing has changed.

But that’s not going to happen.

The brutal facts of our reality are that this pandemic continues to spread rapidly, and it has the potential to kill millions of people.

Reducing that projection requires shutting down the entire global economy… resulting in a wide range of catastrophic consequences, including tens of trillions of dollars of prosperity wiped out, countless jobs lost, millions of bankruptcies and defaults, entire governments going broke, and more.

Saving the economy condemns millions to die. But saving millions from dying condemns hundreds of millions to suffer.

These are the facts. And they are brutal.

To make matters even more difficult, we’re also dealing with a tremendous uncertainty.

There’s no telling what’s going to happen next. Or when. We could see martial law. Supply chain disruptions. National defaults. Looting. Bank failures. Even hyperinflation.

EVERY scenario is on the table… even ones that seemed unthinkable just a few weeks ago. Anyone who says, “There’s no way that could happen,” clearly doesn’t grasp what’s happening.

And frankly we haven’t even seen the real problems yet.

Just wait until the healthcare system is totally overwhelmed, the unemployment rate soars, and major companies start declaring bankruptcy.

I mean… there are still millions of people around the world right now (including countless shit-faced university students on spring break) who aren’t taking this pandemic seriously yet.

We’re clearly still in the opening phase of this crisis; so things could become much worse before they improve.

But amid such harsh circumstances and uncertainty, we should also recognize, as Stockdale did, that the world is not coming to an end.

We cannot afford to be misguided, ignorant optimists who irrationally believe that everything will go back to normal tomorrow morning without any consequences.

Everyone needs to confront the most brutal facts of our current reality—both the challenges and opportunities.

But we should never lose faith that we will prevail in the end and may look back on this pandemic as the most formative and defining event of our lives.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/trends/powerful-wisdom-from-one-of-the-toughest-men-who-ever-lived-27575/

If You Think It’s Too Late, Think Again. There’s Still Time

If You Think It’s Too Late, Think Again. There’s Still Time

Notes From The Field By Simon Black 

March 23, 2020  Bali, Indonesia

[Editor’s note: This letter was written by Tim Staermose, Sovereign Man’s Chief Investment Strategist and Editor of the 4th Pillar newsletter.]

I’m writing from my remote rural villa in Southern Bali. I made a mad dash to get back here from Hong Kong before the borders effectively shut to visitors, and airlines cancelled virtually all flights.

Nearly a quarter of a million tourists and other temporary visitors have left Bali in February and March, and no one has come in to replace them.

Up to 80% of the island’s economy relies directly or indirectly on the tourist trade. So, it’s going to be very hard for most people here to make ends meet for as long this coronavirus pandemic, and the extreme government measures instituted to try and deal with it, last.

My family and I are fine, and we are well prepared to ride this sort of thing out. But I do fear a break down in law and order if the shutdown goes on for months.

Mentally, I was prepared for this sort of event. I had a plan to deal with it. And I am in a position of relative strength. Though, the scale and speed of the complete meltdown of the world economy and financial system has surprised even me.

It’s like a giant rolling earthquake striking one country after another, pushing health systems to the brink and wrecking the economy.

Amazingly enough, there are still countless people in the world who are not taking this seriously and are cluelessly going on about their lives as if there won’t be any consequences.

They’re like ostriches with their heads stuck so far down in the sand they can’t see what’s right in front of them.

As a Sovereign Man reader, I know you’re different. You’ve hopefully already made preparations with things like cash and gold, and have also taken the opportunity to sell marketable investments prior to the crash, just as we have been writing about.

If you haven’t, there are still things you can do.

When I was in Hong Kong briefly last week, I was very surprised to find that I was still able to buy physical gold at the bank, and at only a minor mark-up above the spot price. (I often buy gold coins at Wing Hang Bank on Queens Rd Central).

While people have been stripping the shelves bare of toilet paper and instant noodles, they have apparently not been buying gold. Yet.

But as Simon will no doubt be discussing later this week, we predict that precious metals are going to very valuable as this crisis continues to play out.

The economic effects alone will be devastating. Central banks will have to print trillions of dollars, euros, etc. to bail out EVERYTHING, from big airlines to small businesses.

And that bonanza of paper money will have a big impact on gold and silver prices.

Moreover, in a crisis, it makes sense to have at least a portion of your precious metals holdings in a place that’s readily accessible to you… for example, in a safe at home.

(That’s also a great place to store some physical cash, which makes sense to own in case the banks start having problems too.)

So, if you haven’t done these things yet, you’re not too late.

My take is that we’re still early in this crisis. And as the old saying goes, the wise man does in the beginning what the fool does in the end.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/trends/if-you-think-its-too-late-think-again-theres-still-time-27572/

Writing To You From Lockdown in Puerto Rico

Writing To You From Lockdown in Puerto Rico

Notes From The Field By Simon Black 

March 16, 2020  Bahia Beach, Puerto Rico

As you might have heard, Puerto Rico is now on lockdown. Government offices and private businesses are closed, and no one is allowed to leave their homes except to buy food, attend medical appointments, etc.

This is quickly going to become global policy, at least in the West. If these measures haven’t hit yet where you live, they’re probably coming soon.

So much of what we’ve been writing about for so long is now happening. But even still, it feels surreal.

I think a lot of people are still in a deep fog right now. Reality still hasn’t quite hit. It reminds me of that line from the first Matrix movie when Morpheus tells Neo—

“You have the look of a man who accepts what he sees because he's expecting to wake up.”

I imagine a lot of folks still think that the government is going to sound the ‘all clear’ in a couple of days... that the virus has been eradicated and life will quickly go back to normal.

Realistically that’s probably not going to happen.

A vaccine is still months, maybe even a year+ away.

The only way to really contain this is extreme social distancing-- to eliminate any non-critical interactions with other people.

But that’s obviously going to have a catastrophic economic impact.

A friend of mine just sent me an email this morning saying that he was going to have to lay off all 45 of his employees this morning.

I can’t even begin to guess how many millions of people will lose their jobs, and how many companies will go bankrupt, because of this virus.

Frankly I expect entire nations to go broke over the next few months.

Italy was already teetering on the brink of disaster. Now its entire economy has shut down. Tax revenue has dried up. And Italian bond yields are actually increasing, which makes it more expensive for the government to borrow.

The arithmetic is grim, and Italy is far from alone.

So I literally laughed out loud when I read that Goldman Sachs had forecast a 5% economic contraction.

What are these people smoking? It would be amazing if the economy -only- shrank by 5%.

The entire world is shutting down. And there’s very little that a government or central bank can do about it.

The Federal Reserve in the US announced another emergency interest rate cut over the weekend, dropping rates down to 0%.

It’s extraordinary that the Fed cut rates to zero... and the recession hasn't actually even started yet.

How low will we see rates go in the coming months once the real economic damage surfaces? How much money are they going to print?

(This is one of the many reasons we have long encouraged our readers to hold physical cash and gold bullion.)

But nothing the Fed does is going to matter. There is no interest rate cut, no amount of money they can print, which will defeat a global pandemic.

It would be just as silly if the headline had read: Federal Reserve cuts rates to zero to fight California wildfire.

Printing money won’t put out a fire, and printing money won’t stop a viral pandemic.

Plus, another thing to contend with is the emotional scarring that will come from this.

Just imagine, for example, that the virus dies down over the next month. By June, everything starts to seem normal again, and we go into the northern summer like nothing ever happened.

And then, boom. October rolls around and the news reports a single case of the virus in Chicago.

“Here we go again,” they’ll say. People will totally freak out. The stock market will crash. The run on toilet paper will begin anew. Pandemonium.

So, it’s going to be quite a while before those scars heal and things truly start to feel normal...

But on the bright side, while people have totally underestimated almost everything about the Corona virus so far, I think they’re really underestimating how much opportunity there will be on the other side of this.

This is not a once in a lifetime event. This is not even a once in a century event.

A pandemic so fast and so global has only occurred a handful of times in all of human history. And in our modern age, it’s unprecedented.

It would be foolish to think that everything will go back exactly to the way things were before.

No chance.

Even something as virulent as the Black Death in the Middle Ages gave way to the Renaissance-- one of the most productive periods in history.

It was because of the Black Death that the Feudal System (one of the most ridiculous economic models ever created) finally came to an end.

Personal freedom, prosperity, exploration, scientific discovery, private property rights, all boomed in the aftermath of the plague.

The world became better. Rapidly.

And when this is finally over, we’ll experience an unprecedented renaissance where talented, responsible people will flourish amid near-infinite opportunity.

We can’t even imagine yet how extraordinary it will be.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/trends/writing-to-you-from-lockdown-27533/

.The Federal Reserve Might As Well Use Carrier Pigeons

The Federal Reserve Might As Well Use Carrier Pigeons

Notes From The Field   By Simon Black
August 13, 2019   Spoleto, Italy
 
The Federal Reserve Might As Well Use Carrier PigeonsThe Federal Reserve Might As Well Use Carrier Pigeons

In the early 1760s, Mayer Rothschild began building a banking dynasty that would last for centuries.

The elder Rothschild sent his five sons across Europe to establish banks in cities like Paris and London.

One son, Nathan Rothschild, took the lead and expanded the family’s banking dynasty.

With siblings in different countries, the family now had a trusted network of lenders with whom they could finance large government projects like infrastructure and war.

To quicken the pace of their financial transactions, the brothers used a network of carrier pigeons to send messages to one another across Europe.

This allowed them to quickly react to financial news from other markets. That way they could always be the first in a local market to react to news from abroad.

Bad news in Paris markets could be sent by pigeon to London, where Nathan could sell a stock that would be negatively affected.

Things have gotten a lot faster these days

Scientists have discovered how to accelerate an ion to 99.9999% the speed of light.

The Internet allows us to speak to someone across the globe, instantaneously, anytime of day or night.

We’re even on the verge of commercial space flights. By 2023, SpaceX plans to send a Japanese billionaire around the moon.

And yet, despite all this speed, it can still take several DAYS to send money from one person to another using the traditional banking system.

Rather humorously, the Federal Reserve announced last week that a ‘real time’ payment system would be (hopefully) released in about FOUR YEARS time.

Bear in mind that companies like PayPal that allow for real time payments have been around for 20 years. Cryptocurrencies like Bitcoin have been around for more than a decade.

And now, FINALLY, the Federal Reserve might get around to implementing the same thing.

This is pretty crazy when you think about it. The Fed is supposed to be leading the way in banking; they’re the top regulator and largest central bank in the world.

But they’re hilariously far, far behind the rest of the industry.

Domestic money transfers in the United States rely on the ‘ACH’ payment network to send and receive money.

If your paycheck is direct deposited into your bank account, or mortgage payment automatically deducted, these typically use ACH.

 
ACH payments take 2-3 DAYS to clear. That’s totally insane in this day and age. Seriously, the Rothschilds’ network of carrier pigeons didn’t even take that long.

And if you’ve ever dealt with international financial transactions, you have probably heard of the SWIFT network

SWIFT is a worldwide banking network that allows financial institutions to ‘securely’ send and receive messages about wire transfers and payments.

I’m putting ‘securely’ in quotes because the system has been hacked a number of times. And it runs on pathetically outdated technology. 

As many readers know, I own a bank. And I’ll never forget when we joined SWIFT, they told us that in order to run some of their software we needed to install an obsolete version of Windows that Microsoft stopped supporting years ago.

Seriously? This is the ‘secure’ system that is responsible for trillions of dollars of worldwide financial transactions?

Nearly every major worldwide banking authority is playing a pitiful game of catch-up with non-bank technology companies that have developed vastly superior ways to conduct financial transactions.

Think about it-- nearly every single function of a bank-- deposits, loans, foreign exchange, payments-- can be done better, faster, and cheaper outside of the banking system.

You can hold money in the Blockchain (or even something low-tech like T-bills, which pay 100x more interest than your bank account. Or gold.). You can borrow money from peer-to-peer websites. You can send money with firms like Venmo or TransferWise.  LINK

Banks are becoming useless antiques. And by the time the Federal Reserve has figured out how to make real time payments, I expect the technology at that time will have leapfrogged their best efforts.

Facebook could easily have hundreds of millions of people using its digital currency Libra within 12 months.  LINK

So sending money could become as easy as sending an email, all without using a bank, and three years before the Fed joins the 21st century.

Until tomorrow,

To your freedom and prosperity, Simon  Black,  Founder, SovereignMan.com

Predictions Are Hard. But Here Goes…

Predictions Are Hard. But Here Goes…

Notes From The Field By Simon Black   March 12, 2020  Bahia Beach, Puerto Rico

We certainly live in extraordinary times.

Even people who have been irrationally dismissive of the Corona pandemic up until this point finally had to wake up and smell reality yesterday. The NBA. Tom Hanks. European travel ban.

Our human brains, while magnificent and inspiring, are also wired in bizarre ways. We’re filled with countless ‘cognitive biases’ which affect our judgement, usually for the worse.

Among them is that human beings often cannot accept the possibility that tomorrow could be radically different than today.

Things that were completely unthinkable just a few days ago have now happened. And pretty much everything is on the table right now.

So I wanted to spend a bit of time today thinking through some potential outcomes that might have seemed inconceivable before this outbreak.

I’m not suggesting these are foregone conclusions. But they’re definitely possible.

1) Supply chains will break down

Nearly everything you buy at the store or online is the result of a ridiculously complex, global system of commerce, finance, and logistics.

This computer that I’m using right now was sourced from hundreds of different materials—plastics, metals, etc. that were mined and produced from dozens of places. The component parts were manufactured by different suppliers, assembled in China, and transported on boats and trucks to wholesalers, retailers, etc.

The whole process involves countless people, dozens of companies, and thousands upon thousands of miles.

This system works great under normal conditions. But it’s not resilient. It’s unable to cope with severe global shocks like we’re seeing now.

I think we could see (and are already seeing) factory workers stop coming to work. Mail delivery could be curtailed. Or just imagine there’s an outbreak at an Amazon Fulfilment Center, and the company goes down to minimal staffing.

All of this will have an impact in the smooth production and delivery of goods around the world.

I don’t think we’ll have any sort of Mad Max shortages. But the virus effect could likely create scarcity, especially for anything that’s manufactured outside of your home country.

2) Rationing and export prohibition

Countries will become increasingly protectionist, especially with critical items like masks and medicine. We’ve already seen the German government blocking a shipment of 240,000 face masks to Switzerland.

And demand for several items is going to skyrocket. You might have heard about the toilet paper heists across Asia, or fistfights breaking out in Australia over antibacterial cleansers.

Here’s a photo that a friend sent to me a few hours ago of the hand sanitizer section at Walgreens-- almost empty. LINK

 This isn’t going to stand for very long before the companies themselves start to limit purchases, or governments impose full-blown rationing. And that leads to…

3) Some people will become totally unglued. Others will be saints

Let’s be honest— there’s already so much anger in the world. Strikes, riots, protests, Twitter rants… even armed thugs in the streets (Antifa) physically assaulting people with ideological differences.

Introduce a little bit of scarcity into all that anger and a few people will become totally unhinged.

Just think about how violent some shoppers can be on Black Friday, punching each other’s lights out in WalMart for the last big screen TV on special.

At the same time, this pandemic also has the potential to bring out the best in people. And countless others will be at their very best: respectful, generous, and responsible.

4) Curfews and martial law

This one is extremely realistic right now given that we already saw martial law in China, and it’s happening in Europe now too.

It could easily happen in the US, with state governments deploying the national guard to enforce curfews, or even the federal government deploying the military to keep the peace. It already happened in New York state, and we could see a lot more of it soon.

5) The Federal Reserve intervenes directly in the stock market, cuts rates below zero

It’s not remotely unprecedented for a central bank to buy stocks. Central banks in places like Japan and Switzerland took their total equity holdings to more than a trillion dollars last year.

And it’s totally reasonable that the Fed begins printing money again and buying stocks directly to prop up financial markets.

I do think that negative interest rates are nearly a foregone conclusion. The Fed’s headline interest rate is already as low as 1.5%, and the real economic impact of the Corona Virus hasn’t even been felt yet.

Just imagine how low they’ll go once people start losing their jobs. They won’t be bound by zero for long.

6) Some incredible discoveries and developments will come out of this

I’ve written this several times before—the world is not coming to an end. But I think it’s reasonable to assume that all of our lives are going to be a lot quieter and simpler for the next few months. No big outings, no big trips, and a lot of time at home with the family.

And that’s going to be whatever we make of it.

Back in the mid-1600s after an outbreak of the Bubonic Plague (more than 300 years after it originally surfaced in Europe), the University of Cambridge made the decision to close its doors for TWO YEARS in an effort to reduce the spread of the plague.

Isaac Newton had just completed his degree at the time. But his budding academic career had to be put on hold because of the university’s closure.

So he threw himself into independent study, retiring to a small farmhouse where he spent the next two years developing calculus, optics, and gravitational theory.

In other words, some of Isaac Newton’s most profound and lasting work came from his own quiet period.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

https://www.sovereignman.com/trends/predictions-are-hard-but-here-goes-27525/?inf_contact_key=72b139cf549e6c41c2a0a12e1447904eb7af0999dac2af6212784c39e05d2aef#photo

Decades-Old Investment Wisdom From Albert Einstein

Decades-Old Investment Wisdom From Albert Einstein

Notes From The Field By Simon Black 

March 3, 2020 Bahia Beach, Puerto Rico

Albert Einstein is rumored to have said that “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

These days interest rates are near zero. The average savings account currently pays .09% interest per year, according to the FDIC.

So over the course of a decade, saving $100 with compound interest would give you a grand total of $109.37.

But at the same time, the opposite force is working against us. Inflation currently stands around 2.5%. And that compounds too.

What $100 can buy now will cost $102.50 next year. After ten years, assuming inflation stays the same, it will cost $128.

So just by saving $100 for ten years, you’ve lost $18.63 of real value.

That’s why these days, you have to invest to make money. Luckily stocks, real estate and pretty much every asset class is close to all time highs right now.

But last week's “coronavirus drop” is a good reminder that it’s not going to last forever.

If you have substantial unrealized capital gains, and you’re looking for an exit strategy, there is one available right now. It allows you to compound your current gains for almost six years before paying capital gains tax.

I’m talking about Opportunity Zones. These were created by Trump’s tax reform law to reward investors who fund projects in distressed areas.

One of the major benefits of investing in an Opportunity Zone is the chance to compound your gains BEFORE you pay taxes on them.

For instance, if you bought $100,000 worth of stocks that are now worth $200,000 you have $100,000 worth of capital gains. At current tax rates, you could owe as much as $23,800.

But by investing those $100,000 of gains in an Opportunity Zone, you can defer paying those taxes until 2026. That means the $23,800 that would have gone to taxes instead grows from the new investment.

Let’s say that the new investment increases in value by 10% each year. When the time comes to pay the capital gains taxes on the original investment, you will have earned an EXTRA $18,363 just from deferring taxes.

In addition, after holding the Opportunity Zone investment for several years, you’ll finally pay tax on your original capital gain, but at a discounted rate. (Technically they call this a ‘step-up in basis’, so instead of being taxed on $100,000 you are taxed on a gain of $90,000.)

This can save you even more money.

But there is yet another major tax benefit of Opportunity Zones.

If you keep your funds in the Opportunity Zone for ten years, you’ll NEVER pay tax on the capital gains from your Opportunity Zone investment.

So to continue our example, say that after ten years, your $100,000 Opportunity Zone investment has compounded into $259,374-- a total capital gain of $159,374. Your total capital gains tax bill will be ZERO.

Remember, ALL capital gains are eliminated on Opportunity Zone investments held for at least 10 years. So if you invest in the next Facebook and turn $100,000 into $100 million you still owe ZERO capital gains taxes on that $99,900,000 gain.

But like most good things, this won’t last forever.

And some of the benefits have already expired.

For instance, you could have had a 15% step-up in basis on your original capital gains (i.e. only paid tax on $85,000 instead of $100,000).

But you had to hold the Opportunity Zone investment for seven years. And with the deadline to pay the original capital gains set at the end of 2026, it is too late to hold the investment for seven years.

But you can still get the discount of 10% by holding for five years, as long as you get into an Opportunity Zone by the end of 2021.

It’s worth looking into. And a good place to start is our new in-depth article: Opportunity Zones: Ultimate Guide and My Personal Experience.

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

 https://www.sovereignman.com/international-diversification-strategies/decades-old-investment-wisdom-from-albert-einstein-27401/

The US Fertility Rate Hit Another Record Low

The US Fertility Rate Hit Another Record Low

Notes From The Field By Simon Black 

February 17, 2020  Bahia Beach, Puerto Rico

Last month the US government’s National Vital Statistics System released data showing that the birth rate in the Land of the Free has dropped to -yet another- ALL TIME LOW.

It’s the FOURTH year in a row that the fertility rate has reached a record low in the US, meaning that the issue just keeps getting worse.

And it’s one that has enormous, long-term economic consequences.

If people are having fewer babies today, it means that, in the future, there will be fewer workers in the system paying taxes.

And the biggest loser in that scenario, by far, is Social Security.

The entire long-term viability of Social Security depends on having enough workers paying taxes to support the retirees who are currently receiving benefits.

They call this the worker-to-retiree ratio, and Social Security monitors this very closely.

Social Security’s administrators project that they need a worker-to-retiree ratio of at least 2.8 in order to keep the system functioning. If the ratio drops below 2.8, there simply won’t be enough workers paying taxes to support the monthly benefits for current retirees.

Clearly this system requires steadily rising population.

If you have 1 retiree today, that means there should be at least 2.8 people paying in to the system.

A generation from now, those 2.8 people will be retired, requiring at least 7.84 (2.8 * 2.8) workers paying in to the system. A generation later, those 7.84 people will be retired, requiring 21.95 (7.84 * 2.8) workers paying into the system.

It’s easy to see how this can get totally out of control within just a few generations.

This brings us back to the central problem: birth rate.

Back in the 1960s, the average woman would have nearly 4.0 children in her lifetime.

But this rate has been steadily declining for decades. By 2007 it had fallen to 2.12. And it has fallen every year since then, now down to 1.73.

A fertility rate of 1.73 is below what demographers consider the ‘population replacement level,’ meaning that there are more deaths than births.

More importantly, this long-term decline in the fertility rate has had a slow, damaging effect on the worker-to-retiree ratio.

Back in 1960 there were 5.1 workers for every retiree according to Social Security’s own data. Baby boomers were just starting to join the work force and there weren’t too many people collecting Social Security benefits yet.

By 1990 the ratio had fallen to 3.4 workers for every retiree. That was a lot lower than in 1960, but still sufficient to keep Social Security running.

By 2012, the ratio had already fallen to the minimum 2.8. And given that the US fertility rate continues to decline, the worker-to-retiree ratio is also going to keep falling.

Baby boomers are retiring by the tens of thousands. People are living longer than ever. And there are fewer people being born to pay taxes into the system in the future.

Social Security knows that the fertility rate is critical to its program, and the statistic factors heavily into their long-term projections.

According to its most recent annual report, Social Security’s ‘intermediate’ scenario (i.e. its conservative, base-case projection) assumes a fertility rate of 2.0.

Again, the actual fertility rate in the US is now just 1.73… FAR below Social Security’s assumption. Moreover, the 30 year average fertility rate in the US is around 1.9, which is still below Social Security’s assumption.

Now, you might be thinking that immigration should pick up the slack. As foreigners move to the US, they’ll join the work force and pay taxes into the system, improving the worker-to-retiree ratio.

That’s true in theory. But you may be surprised to learn that the US “net migration rate” has also been falling for decades.

After peaking around 2000, net migration rate in the US has fallen by more than half.

And the Census Bureau announced in late December that just 595,000 net migrants moved to the US in 2019; that’s the fewest net migrants of the entire decade, and a continuation of this trend of declining migrants.

This is another huge problem for Social Security; the program’s base-case scenario assumes that net migration in the US will be nearly 1.3 million people each year.

Yet the average net migration over the past decade was just 840,000… and the rate continues to decline.

You can see the problem here: many of Social Security’s most critical assumptions are totally off-base.

Their assumption about the nation’s fertility rate is far rosier than reality. Their assumption about the net migration rate is far more optimistic than reality.

And with some of the most critical assumptions so off-base, it’s difficult to see how they’re going to meet their projections.

Oh, remember that Social Security’s base-case projection is that its primary trust funds will run out of money in 2035… and that the program will be underfunded by trillions of dollars.

Yet even this dismal forecast is based on highly flawed assumptions… so the reality may be even worse.

This is a global problem, by the way.

Japan and Europe are in the same boat with their fertility rates, and populations in many developed nations are declining. The median age in Japan is nearly 50, and the country sells more adult diapers than baby diapers.

In Italy, deaths exceeded births in 2019 by a whopping 212,000… the biggest figure since World War I ravaged the continent. Even the global average fertility rate has fallen by half since 1960.

These are all critical challenges for pension and social security funds.

I’ve said it before: there is no magic wand to fix this. No politician can sprinkle pixie dust on their pension programs and miraculously make them solvent again. It’s simple arithmetic.

But if you rely on yourself, you can solve this problem with a bit of discipline and planning. LINK

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com

To continue reading, please go to the original article here:

https://www.sovereignman.com/trends/the-us-fertility-rate-hit-another-record-low-27247/

It Turns Out the Bolsheviks Love the Top 1%

It Turns Out the Bolsheviks Love the Top 1%

Notes From The Field By Simon Black 

 February 12, 2020 Bahia Beach, Puerto Rico

One of the really interesting things about where I live here in Puerto Rico is that my house is located within the grounds of a resort… so I bump into a fair number of tourists when I’m at the gym or walking on the beach. People engage me in conversation a lot-- they can’t imagine actually living in such a paradise, and they’re full of questions about what it’s like.

I always enjoy talking about Puerto Rico and giving visitors a candid view of the advantages and disadvantages of living here. But almost invariably as part of that conversation, someone asks:

“Yeah, but don’t you lose the right to vote when you move here?”

Yes, it’s true that Puerto Rican residents cannot vote in a national election. Puerto Rico does hold a presidential primary. But once the party nominees are decided, Puerto Ricans cannot participate in the general election in November.

And I’ve heard this dozens of times since I moved to Puerto Rico in 2018-- it seems people REALLY cling to their right to vote.

My view is that it’s a completely pointless exercise, and one that I was happy to trade for Puerto Rico’s generous tax incentives.

I always respond in the same way when people bring up this issue-- “Do you really think your vote actually counts?”

And what’s happened so far this month in the primary race really proves the point.

Just look at the Iowa race; the party is so hapless and incompetent that they can’t manage to properly count the votes (yet these same people want to be in charge of your healthcare and children’s education…)

And when they do count the votes, it still doesn’t seem to matter.

More people voted for Bernie Sanders in the Iowa race than for any other candidate. Yet Pete Buttigieg ‘won’ the state because he received the most delegates.

Then there are ‘superdelegates’, i.e. party elders who can choose whichever candidate they want regardless of who the voters pick.

And of course, by the time the national convention takes place this summer, it’s entirely possible that no single candidate will have won enough delegates to lock up the nomination.

At that point, all the votes will be discarded and it will be up to the party insiders-- delegates and superdelegates-- to decide who the nominee should be.

How can these people possibly say with a straight face that votes actually matter?

The even bigger quirk is the outsized importance of these earliest caucuses and primary races.

About 300,000 people voted yesterday in the New Hampshire primary. That’s less than 0.1% of the US population.

And yet those 300,000 New Hampshire voters have enormous influence over the entire Presidential race.

Joe Biden came in a distant 5th in yesterday’s New Hampshire primary. As a result, the media is now saying that he is no longer viable, and his former campaign donors are lining up to fund other candidates.

But in actuality the gap between Joe Biden and Bernie Sanders (who came in first place) was just 50,522 votes.

Nationwide, that’s a drop in the bucket. It’s scarcely a rounding error.

That’s 50,522 people in New Hampshire who have effectively sealed the fate of Joe Biden’s campaign.

And if he drops out in the next few weeks, it means that people who live in states that don’t hold their primaries until May or June won’t even have the opportunity to vote for Joe Biden.

Don’t get me wrong-- I have no love for Joe Biden… or any of these people for that matter. I like politicians as much as I like a visit to the proctologist.

But it strikes me as a bizarre that a tiny fraction of a percent of the population has so much influence over a national race. Is this really the most advanced republican democracy in the world?

These Bolsheviks are constantly howling about economic inequality and complaining about wealthy people in the top 1%.

Well, they have managed to engineer massive electoral inequality and created a top 1% among voters.

A voter in New Hampshire has far more influence than a voter in, say, Kentucky, who won’t have the opportunity to vote until May 19th.

By then, the pool of candidates that a Kentucky voter will have to choose from in his/her primary election will be much more limited.

This is effectively a form of disenfranchisement. This idiotic system gives a handful of voters more power, and more choices, than other voters.

And I have to say, for as ‘woke’ as this Bolshevik party pretends to be, it’s certainly ironic that this top 1% voting elite happens to be in states that are predominantly white.

Try explaining to a Native American living in South Dakota whose primary isn’t until June 2nd that his/her vote counts as much as the white guy in New Hampshire.

This system is a complete farce, rampant with insider corruption, comical incompetence, and a deliberate lack of innovation.

And I don’t exactly cry myself to sleep every night that I’m no longer able to participate… I’m more than happy to trade away my voting rights for the extraordinary 4% tax incentives of living in Puerto Rico.

To continue reading, please go to the original article here:

https://www.sovereignman.com/trends/it-turns-out-the-bolsheviks-love-the-top-1-27196/

Fed Official: “If there’s a recession, don’t worry”

Fed Official: “If there’s a recession, don’t worry”

Notes From The Field By Simon Black 

January 29, 2020  San Juan, Puerto Rico

Earlier this week I sent one of my team members to a banking conference here in Puerto Rico hosted by the Federal Reserve.

It might strike you as strange that the Fed would be holding an event in Puerto Rico, but it’s not that unusual.

Puerto Rico is a US territory and hence part of the US banking system. So just like the rest of the United States, banks in Puerto Rico (including my own) fall under the umbrella of the Federal Reserve.

The whole point of the event was to help showcase large-scale investments in Puerto Rico that local banks can help finance.

This is actually part of the Fed’s responsibility, something that comes from an old law from the 1970s called the Community Reinvestment Act.

There were definitely some compelling projects on display yesterday, and I’m particularly interested in a few solar power deals.

(You might recall some of my earlier comments on the pitiful electrical infrastructure in Puerto Rico… the island sorely needs investment in that sector, and the pro-forma numbers look quite lucrative.)

But aside from the investment projects, the really interesting part about the event was what the keynote speakers from the Federal Reserve had to say about the economy, and the Fed itself.

One very senior Fed official, for example, told the audience, “if there’s a recession, don’t worry,” because “the Fed is very powerful” and has all the tools it needs to support the economy.

My colleague was astonished at what had just been uttered, and texted me immediately.

I was dumbstruck. “Don’t worry…???” That’s a bold statement.

Former US Treasury Secretary Larry Summers summed it up recently when he wrote that “the United States is one recession away” from joining Europe and Japan in “monetary black hole economics. . . interest rates stuck at zero and no prospect of escape.”

And he’s right. In every single recession since the 1970s, the US Federal Reserve slashed interest rates by an average of 5%.

At this precise moment the Fed’s key benchmark interest rate is just 1.55%.

Do the math-- if the Fed reduces interest rates in the next recession by this average 5% cut, that would make interest rates NEGATIVE.

Summers calls this the “Black Hole,” because once the economy hits zero or negative rates, there is no escape.

More than 75 years ago, a prominent mid-20th century economist named Alvin Hansen wrote about this concept extensively.

He called it “secular stagnation”-- a prolonged period in which reasonable economic growth can only be achieved with unsustainable financial conditions (like ultra-low / negative interest rates).

One of the core theories in economics is that low interest rates tend to compel people and businesses tend to spend more money.

Low interest rates mean (in theory) that they can afford to borrow more money to buy cars, invest in factories, etc.

So in times of recession or slow growth, the Federal Reserve cuts interest rates to encourage more borrowing and more spending… which in turn generates more economic growth.

But as Alvin Hansen wrote, this theory has limits.

Eventually the lower rates stop achieving any meaningful economic growth, and the Fed has to cut rates even more to move the needle.

The US, Europe, and Japan are all in this position already.

In Europe, for example, interest rates are NEGATIVE. But the combined economies in the ‘eurozone’ grew by just 1.2%. That’s pitiful.

Rates in the US are positive, but still near all record lows. And yet US economic growth is barely 2%.

Back in the 1980s, the US economy routinely grew by 4% to 6% per year, even after adjusting for inflation. And that’s when interest rates were more than 9%.

Today interest rates are almost nothing. The economy should be growing like crazy. But it’s not.

Even the Fed chairman Jerome Powell admitted this to Congress in November: “The new normal now is lower interest rates, lower inflation, probably lower growth... all over the world.”

And when the Fed tried to raise interest rates to a paltry 2.5% last year, the US economy started to suffer, and the Fed was forced to cut rates back to 1.5%.

This is classic ‘secular stagnation,’ just like Alvin Hansen wrote about. These economies can’t manage any meaningful growth, even with rates at / near record lows.

And just a tiny increase in rates creates severe risk of recession.

Well, recession is coming no matter what.

Bloomberg (the news organization, not the guy) recently published some interesting data showing a clear connection between recession risk and low interest rates.

Low interest rates tend to cause extreme financial speculation. People borrow tons of money to buy homes they cannot afford (i.e. the 2008 housing bust), or throw ridiculous sums of money at cash-burning, loser investments (ahem, WeWork!).

Bloomberg points out that since 1985, every recession has been caused by these factors: low interest rates and excess financial speculation.

And these are exactly the conditions that we’re seeing right now in the Land of the Free.

Yet whenever that recession comes, the Fed’s only option is to make interest rates in the US negative, taking the economy deeper into this ‘secular stagnation’ black hole.

I appreciate the Fed official trying to put on a brave face yesterday when he told the audience not to worry.

But the reality is they’re simply not equipped to deal with what’s coming next.

To continue reading, please go to the original article here:

https://www.sovereignman.com/trends/fed-official-if-theres-a-recession-dont-worry-27120/

To your freedom & prosperity, Simon Black, Founder, SovereignMan.com