Silicon Valley Bank's Collapse Proves The US Is In Obvious Decline

Silicon Valley Bank's Collapse Proves The US Is In Obvious Decline

March 17, 2023  Simon Black, Founder  Sovereign Research & Advisory

Throughout history, whenever there has been a major shift in the world, it has usually been accompanied by a single iconic event that is associated with that change.  For example, historians often point to 476 AD as the year that the Western Roman Empire fell, when Odoacer and his barbarians forced the abdication of the Emperor Romulus Augustus— even though it was obvious that Rome was in decline way before 476.

People also often associate the start of the Great Depression with the stock market crash of 1929 (even though there were many signs of economic distress well in advance of that).

But these clean, precise dates are only chosen in retrospect. People experiencing the events at the time rarely understand their significance.

I think it’s possible that future historians may look back at Silicon Valley Bank’s collapse as one of those iconic events that signals a major shift... potentially the end of American geopolitical and economic dominance.

I’m not making this assertion to be dramatic; rather I think that anyone who takes an objective look at the facts—

the appalling $31+ trillion national debt

the government’s addiction to spending and multi-trillion dollar deficits

social dysfunction and “mostly peaceful” protests

the decline in military strength

rampant inflation and central bank folly

extreme government incompetence

insolvency in major programs like Social Security

— will reach the same conclusion that the United States is past its peak and in decline.

Now on top of everything else we can add a loss of confidence in the US banking system.

Obviously I take no pleasure in acknowledging the US is in decline. But that doesn’t make it any less true. And this has been Sovereign Man’s core ethos since inception back in 2009.

Back when I started this company it was considered extremely controversial when I said the US was in decline, or that there would be larger problems in the banking system, or that the breakdown of social cohesion would only get worse.

But today these challenges are so obvious that they’re impossible to deny.

You can never solve a problem until you first admit you have one.

And most of the corrupt sycophants masquerading as political leadership are incapable of admitting problems, nor discussing them rationally, let alone solving them.

But you and I do not have that disability. We are free to exercise the full range of human ingenuity and creativity with which we have been fortunately endowed.

So while the people in charge continue to never miss an opportunity to demonstrate their uselessness, we have a whole world of freedom and opportunity at our disposal.

This is the topic of today’s podcast.

First I review the huge issues with the Silicon Valley Bank collapse. Honestly when you look at it from a big picture perspective, it’s littered with mind-numbing incompetence.

The politicians who received donations from SVB’s Political Action Committee missed it. The Wall Street hot shots missed it. The credit ratings agencies missed it. The regulators missed it. The Federal Reserve missed it.

But now the Federal Reserve has launched a new program that exposes the US dollar— and everyone who uses it— to significant risk.

Think about this from the perspective of foreign governments and central banks.

Foreigners bought boatloads of US government debt over the past few years, especially in the early days of the pandemic.

In fact foreign ownership of US government debt has increased by $1 trillion since the start of the pandemic, and now amounts to more than $7.6 trillion.

But thanks to Fed policy, these foreign institutions are in the same boat as Silicon Valley Bank— they’re sitting on huge losses in their bond portfolios. They’ve also suffered from pitiful returns, high inflation, AND exchange rate losses.

In short, any foreign institution that bought US government bonds over the past few years is sitting on huge losses.

Plus now they’re watching with bewilderment as US politicians prove completely incapable of solving their debt crisis.

And on top of everything else they’ve just witnessed multiple bank runs in America, followed by the Federal Reserve’s pledge to put the dollar at further risk.

If you were a foreign government or central bank, would you want to continue buying US government debt? Would you want to continue holding your national savings in US dollars?

Probably not. Rather, they’re probably sick to death of all these histrionics.

We won’t know until years into the future, but SVB’s collapse (and the Fed’s response) may end up being the final nail in the coffin for the US dollar’s dominance.

You can listen to the podcast here.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/podcast/silicon-valley-banks-collapse-proves-the-us-is-in-obvious-decline-146340/

The Federal Reserve Just Hijacked American Democracy

The Federal Reserve Just Hijacked American Democracy

March 16, 2023 Simon Black, Founder  Sovereign Research & Advisory  

You know the old joke-- “Predictions are hard… especially about the future.” And it’s true, nobody has a crystal ball.  But it’s astonishing to see just how horribly wrong the people in charge can be in their predictions, especially about the very near future.

You probably remember Joe Biden famously insisted in the summer of 2021 that the Taliban was “highly unlikely” to take over Afghanistan.  

Boy did he turn out to be wrong.

Only a few weeks later, the Taliban was in control of the entire country... and the world watched in utter astonishment as US military helicopters evacuated embassy personnel from Kabul in one of the most shameful episodes in modern American history.

Not to be outdone, it appears that the Federal Reserve has just had its own Afghanistan moment.

It was only Tuesday of last week that the Fed Chairman testified before a committee of concerned senators who thought the Fed may be tightening monetary policy (i.e. raising interest rates) too quickly.

This was a valid concern; rapid interest rate hikes DO create a LOT of risks. And one of those risks is that asset prices-- especially bond prices-- plummet in value.

This risk is particularly problematic for banks because they tend to invest their customer deposits in bonds.

In fact, now that the Fed has tightened its monetary policy so quickly, banks across the US have more than $600 billion in unrealized losses on their bond portfolios. This is a pretty major problem… because that $600 billion is ultimately YOUR money.

And it’s not like the Fed doesn’t have access to this information; after all, the Fed supervises nearly EVERY bank in the US financial system.

And yet last week the Fed Chairman completely rejected this risk, telling worried senators flat out that “nothing about the data suggests to me that we’ve tightened too much. . .”

In other words, he believed the Fed’s rapid interest rate hikes posed ZERO risk.

Talk about a terrible prediction; just THREE DAYS LATER, one of the largest banks in the US imploded, multiple bank runs unfolded across the country, the bond market fell into turmoil, and the Fed had to essentially guarantee the entire US banking system in order to restore confidence. (More on that in a moment.)

The mental image of bank runs in America, just days after the Chairman dismissed any risk, is the Fed’s equivalent of the Afghanistan debacle. It’s shameful.

But what’s REALLY concerning is the Fed’s response to this panic-- their de facto guarantee of the entire US banking system. Because ultimately they just put YOU on the hook for the potential bond losses of every bank in America. I’ll explain--

After Silicon Valley Bank went bust, the FDIC announced that they will guarantee ALL deposits at the bank.

This is a departure from the FDIC’s normal pledge to guarantee deposits of up to $250,000, and their decision drew a lot of ire from pundits and politicians across the ideological spectrum. Many people concluded that the FDIC’s pledge was tantamount to a “taxpayer-funded bailout.”

But that assessment is wrong. Anyone who is intellectually honest and well-informed will easily understand that the FDIC is not funded by taxpayers. The FDIC is funded by charging fees to its member banks.

So when the FDIC decided to guarantee every depositor at Silicon Valley Bank, including those with balances exceeding $250,000, it means they’re bailing out SVB’s wealthy customers at the expense of big Wall Street banks.

But most people seem to have missed the real story… because the ACTUAL bailout is coming from the Fed, not the FDIC.

Despite the Chairman’s terrible prediction in front of the Senate Banking Committee last week, the Fed now seems keenly aware of the risks in the US banking system. They realize that there are LOTS of other banks that are sitting on massive unrealized losses, just like SVB.

So in order to prevent these banks from going under, the Fed invented a new facility they’re calling the “Bank Term Funding Program”, or BTFP.

But the BTFP is really just an extraordinary lie designed to make you think that the banking system is safe. They might as well have called it, “Believe This Fiction, People”, and I’ll show you why.

Whenever people borrow money from banks, we normally have to provide some sort of collateral. Banks make home equity loans using real estate as collateral. They make car loans where the car is collateral. Manufacturing businesses borrow money using factory equipment as collateral.

Well, banks do the same thing when they borrow money. And sometimes banks will even borrow money from the Federal Reserve. This is actually one of the reasons why the central bank exists-- to act as a “lender of last resort” if banks need an emergency loan.

And when banks borrow money from the Fed, they have to post collateral too.

Instead of automobiles and houses, though, banks use their financial assets as collateral-- specifically their bonds.

This is actually codified by law (12 CFR 201.108) whereby Congress lists specific assets that the Fed can accept as collateral when making loans to banks. The list is basically different types of bonds.

But this is the root of the problem. Banks are in financial trouble because their bond portfolios have lost so much value. Some banks (like SVB) are even insolvent because of this.

So, through the BTFP, the Fed will now accept banks’ sagging bond portfolios as collateral, but loan the bank MORE money than the bond portfolios are worth.

Let’s say you’re an insolvent bank that invested, say, $100 billion in bonds. Those bonds are now worth $85 billion, and your bank is about to go under. “NO PROBLEMO!” says the Fed.

The bank simply posts their bond portfolio (which is only worth $85 billion) as collateral, and the Fed will loan the bank the full $100 billion… as if those losses never occurred.

It’s a complete lie. Everyone is pretending that the banks haven’t lost any money to give you a false sense of confidence in the financial system. “Believe the Fiction, People.”

Remember that banks in the US have more than $600 billion in unrealized bond losses right now. And that number will keep increasing if interest rates continue to rise.

So this means that the Fed has essentially guaranteed that entire $600+ billion. Commercial banks won’t lose a penny -- they can now pass their financial risks down to the Federal Reserve.

This isn’t a bailout… it’s a time bomb.

We can keep our fingers crossed and hope that this time bomb never explodes. But if it does, the Federal Reserve is going to be looking at hundreds of billions in losses… which would trigger devastating consequences for the US dollar.

This means that everyone who uses US dollars… including every man, woman, and child in America, is ultimately on the hook for the potential consequences of the BTFP.

And that’s what is so remarkable about this: the Fed just made this decision all on its own.

Congress didn’t pass a law. There were no hearings, no judicial oversight, no votes.

Instead, several unelected bureaucrats who have been consistently wrong got together in a room and decided to guarantee $600+ billion in bank losses… and stick the American people with the consequences.

This is the same organization that said in February 2021 that there was no inflation.

The same organization that said in July 2021 that inflation was transitory and would pass in a few months.

The same organization that said in June 2022 that they finally understand “how little we understand about inflation.”

The same organization that said THREE DAYS before SVB’s collapse that “nothing about the data” suggested any risks with their policy actions.

The Fed has been wrong at every critical point over the past few years. And they’ve now unilaterally signed up every single person in America to a $600+ billion bank bailout without so much as a courtesy phone call to Congress.

This is apparently what Democracy means in America today.

We’ve all been subjected to endless vitriol over the past few years with people on all sides howling that “Democracy is under attack.”

Well, we just watched an unelected committee of central bankers hijack democracy and stick the American people with a potential $600+ billion bank bailout.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/trends/the-federal-reserve-just-hijacked-american-democracy-146308/

If SVB Is Insolvent, So Is Everyone Else

If SVB Is Insolvent, So Is Everyone Else

Simon Black  March 13, 2023

On Sunday afternoon, September 14, 2008, hundreds of employees of the financial giant Lehman Brothers walked into the bank’s headquarters at 745 Seventh Avenue in New York City to clear out their offices and desks.  Lehman was hours away from declaring bankruptcy. And its collapse the next day triggered the worst economic and financial devastation since the Great Depression.

The S&P 500 fell by roughly 50%. Unemployment soared. And more than 100 other banks failed over the subsequent 12 months. It was a total disaster.

This bank, it turned out, had been using their depositors’ money to buy up special mortgage bonds. But these bonds were so risky that they eventually became known as “toxic securities” or “toxic assets”.

These toxic assets were bundles of risky, no-money-down mortgages given to sub-prime “NINJAs”, i.e. borrowers with No Income, No Job, no Assets who had a history of NOT paying their bills.

When the economy was doing well in 2006 and 2007, banks earned record profits from their toxic assets.

But when economic conditions started to worsen in 2008, those toxic assets plunged in value… and dozens of banks got wiped out.

Now here we go again.

Fifteen years later… after countless investigations, hearings, “stress test” rules, and new banking regulations to prevent another financial meltdown, we have just witnessed two large banks collapse in the United States of America-- Signature Bank, and Silicon Valley Bank (SVB).

Now, banks do fail from time to time. But these circumstances are eerily similar to 2008… though the reality is much worse. I’ll explain:

1) US government bonds are the new “toxic security”

Silicon Valley Bank was no Lehman Brothers. Whereas Lehman bet almost ALL of its balance sheet on those risky mortgage bonds, SVB actually had a surprisingly conservative balance sheet.

According to the bank’s annual financial statements from December 31 of last year, SVB had $173 billion in customer deposits, yet “only” $74 billion in loans.

I know this sounds ridiculous, but banks typically loan out MOST of their depositors’ money. Wells Fargo, for example, recently reported $1.38 trillion in deposits. $955 billion of that is loaned out.

That means Wells Fargo has made loans with nearly 70% of its customer’s money, while SVB had a more conservative “loan-to-deposit ratio” of roughly 42%.

Point is, SVB did not fail because they were making a bunch of high-risk NINJA loans. Far from it.

SVB failed because they parked the majority of their depositors’ money ($119.9 billion) in US GOVERNMENT BONDS.

This is the really extraordinary part of this drama.

US government bonds are supposed to be the safest, most ‘risk free’ asset in the world. But that’s totally untrue, because even government bonds can lose value. And that’s exactly what happened.

Most of SVB’s portfolio was in long-term government bonds, like 10-year Treasury notes. And these have been extremely volatile.

In March 2020, for example, interest rates were so low that the Treasury Department sold some 10-year Treasury notes at yields as low as 0.08%.

But interest rates have increased so much since then; last week the 10-year Treasury yield was more than 4%. And this is an enormous difference.

If you’re not terribly familiar with the bond market, one of the most important things to understand is that bonds lose value as interest rates rise. And this is what happened to Silicon Valley Bank.

SVB loaded up on long-term government bonds when interest rates were much lower; the average weighted yield in their bond portfolio, in fact, was just 1.78%.

But interest rates have been rising rapidly. The same bonds that SVB bought 2-3 years ago at 1.78% now yield between 3.5% and 5%… meaning that SVB was sitting on steep losses.

They didn’t hide this fact.

Their 2022 annual report, published on January 19th of this year, showed about $15 billion in ‘unrealized losses’ on their government bonds. (I’ll come back to this.)

By comparison, SVB only had about $16 billion in total capital… so $15 billion in unrealized losses was enough to essentially wipe them out.

Again-- these losses didn’t come from some mountain of crazy NINJA loans. SVB failed because they lost billions from US government bonds… which are the new toxic securities.

2) If SVB is insolvent, so is everyone else… including the Fed.

This is where the real fun starts. Because if SVB failed due to losses in its portfolio of government bonds, then pretty much every other institution is at risk too.

Our old favorite Wells Fargo, for example, recently reported $50 billion in unrealized losses on its bond portfolio. That’s a HUGE chunk of the bank’s capital, and it doesn’t include potential derivative losses either.

Anyone who has purchased long-term government bonds-- banks, brokerages, large corporations, state and local governments, foreign institutions-- are all sitting on enormous losses right now.

The FDIC (the Federal Deposit Insurance Corporation, i.e. the primary banking regulator in the United States) estimates unrealized losses among US banks at roughly $650 billion.

$650 billion in unrealized losses is similar in size to the total subprime losses in the United States back in 2008; and if interest rates keep rising, the losses will continue to increase.

What’s really ironic (and a bit comical) about this is that the FDIC is supposed to guarantee bank deposits.

In fact they manage a special fund called Deposit Insurance Fund, or DIF, to insure customer deposits at banks across the US-- including the deposits at the now defunct Silicon Valley Bank.

But the DIF’s balance right now is only around $128 billion… versus $650 billion (and growing) unrealized losses in the banking system.

Here’s what really crazy, though: where does the DIF invest that $128 billion? In US government bonds! So even the FDIC is suffering unrealized losses in its insurance fund, which is supposed to bail out banks that fail from their unrealized losses.

You can’t make this stuff up, it’s ridiculous!

Now there’s one bank in particular I want to highlight that is incredibly exposed to major losses in its bond portfolio.

In fact last year this bank reported ‘unrealized losses’ of more than $330 billion against just $42 billion in capital… making this bank completely and totally insolvent.

I’m talking, of course, about the Federal Reserve… THE most important central bank in the world. It’s hopelessly insolvent, and FAR more broke than Silicon Valley Bank.

What could possibly go wrong?

3) The ‘experts’ should have seen this coming

Since the 2008 financial crisis, legislators and bank regulators have rolled out an endless parade of new rules to prevent another banking crisis.

One of the most hilarious was the new rule that banks had to pass “stress tests”, i.e. war game scenarios to see whether or not banks would be able to survive certain fluctuations in macroeconomic conditions.

SVB passed its stress tests with flying colors. It also passed its FDIC examinations, its financial audits, and its state regulatory audits. SVB was also followed by dozens of Wall Street analysts, many of whom had previously issued emphatic BUY ratings on the stock after analyzing its financial statements.

But the greatest testament to this absurdity was the SVB stock price in late January.

SVB published its 2022 annual financial report after the market closed on January 19, 2023. This is the same financial report where they posted $15 billion in unrealized losses which effectively wiped out the bank’s capital.

The day before the earnings announcement, SVB stock closed at $250.04. The day after the earnings call, the stock closed at $291.44.

In other words, despite SVB management disclosing that their entire bank capital was effectively wiped out, ‘expert’ Wall Street investors excitedly bought the stock and bid the price up by 16%. The stock continued to soar, reaching a high of $333.50 a few days later on February 1st.

In short, all the warning signs were there. But the experts failed again. The FDIC saw Silicon Valley Bank’s dismal condition and did nothing. The Federal Reserve did nothing. Investors cheered and bid the stock

And this leads me to my next point:

4) The unraveling can happen in an instant.

A week ago, everything was still fine. Then, within a matter of days, SVB’s stock price plunged, depositors pulled their money, and the bank failed. Poof.

The same thing happened with Lehman Brothers in 2008. In fact over the past few years we’ve been subjected to example after example of our entire world changing in an instant.

We all remember that March 2020 was still fairly normal, at least in North America. Within a matter of days people were locked in their homes and life as we knew it had fundamentally changed.

5) This is going to keep happening.

Long-time readers won’t be surprised about this; I’ve been writing about these topics for years-- bank failures, looming instability in the financial system, etc.

Late last year I recorded a podcast explaining how the Fed was engineering a financial meltdown by raising interest rates so quickly, and they would have to choose between a rock and a hard place, i.e. higher inflation versus financial catastrophe.

This is the financial catastrophe, but it’s just getting started. Like Lehman Brothers in 2008, SVB is just the tip of the iceberg. There will be other casualties-- not just in banks, but money market funds, insurance companies, and even businesses.

Foreign banks and institutions are also suffering losses on their US government bonds… and that has negative implications on the US dollar’s reserve status.

Think about it: it’s bad enough that the US national debt is outrageously high, that the federal government appears to be a bunch of fools incapable of solving any problem, and that inflation is terrible.

Now on top of everything else, foreigners who bought US government bonds are suffering tough losses as well.

Why would anyone want to continue with this insanity? Foreigners have already lost so much confidence in the US and the dollar… and financial losses from their bond holdings could accelerate that trend.

This issue is particularly of mind now that China is flexing its international muscle, most recently in the Middle East making peace between Iran and Saudi Arabia. And the Chinese are starting to actively market their currency as an alternative to the dollar.

But no one in charge seems to understand any of this.

The guy who shakes hands with thin air insisted this morning that the banking system is safe. Nothing to see here, people.

The Federal Reserve-- which is the ringleader of this sad circus-- doesn’t seem to understand anything either.

In fact Fed leadership spent all of last week insisting that they were going to keep raising interest rates.

Even after last week’s banking crisis, the Fed probably still hasn’t figured it out. They appear totally out of touch with what’s really happening in the economy. And when they meet again next week, it’s possible they’ll raise rates even higher (and trigger even more unrealized losses).

So this drama is far from over.

To your freedom,  Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/trends/if-svb-is-insolvent-so-is-everyone-else-146244/

How Crazy Is This? No One Wants To Own the World’s Best Performing Industry

How Crazy Is This? No One Wants To Own the World’s Best Performing Industry

March 1, 2023  Simon Black, Founder  Sovereign Research & Advisory

Benny Grossbaum was the embodiment of the American Dream.

Born in London in 1894 during the reign of Queen Victoria, Benny and his family moved to New York City (through Ellis Island) when he was still a baby.

At first the family was well off; his father ran a successful business, and they lived in a posh brownstone on Fifth Avenue in Manhattan.

But Benny was just 9 years old when his father suddenly passed away from pneumonia, and the family lost everything. The rest of his childhood was spent in abject poverty, and he later referred to this time of adversity as “the years that formed my character.”

Living in squalor also lit a fire within Benny to become wealthy; he developed a passion for money... and for study. And from the time he entered kindergarten, Benny’s teachers recognized his strong intellect and work ethic.

Benny Grossbaum flew through school. He was so advanced that he skipped several grades, all while mastering Latin and Greek. And he ultimately graduated from an Ivy League university where he studied mathematics.

This was a time, however, of significant anti-German and anti-Jewish sentiment in America. So the Grossbaum family formally changed its name… and henceforth Benny Grossbaum became known as Benjamin Graham.

You probably know that name well; Graham was a legendary investor who is considered the “father of value investing”. And during his career he taught Warren Buffett, Sir John Templeton, and a host of other prominent investors.

But Graham’s track record was far from flawless.

In 1926 as a young, 30-year old Wall Street hot shot, Graham started his own hedge fund called the Graham Joint Account.

Graham’s fund performed really well for the next few years, returning an average 25.7% per year. Not bad.

But this was the Roaring Twenties-- a period of time in the United States were the economy was red hot and the stock market was booming… thanks in large part to the Federal Reserve’s rapid expansion of the money supply.

The Dow Jones Industrial Average rose 2.5x in a roughly three-year period from 1926-1929, and Graham rode that wave.

But even someone as smart as Graham didn’t see the crash coming. In late October 1929, his fund almost got wiped out when the market had its worst decline in history.

The stock market continued to tumble for the next three years, finally bottoming out in 1932; at that point Graham’s fund was down 70%, and he knew he needed to reassess his strategy.

It was from this reassessment… out of his personal failures of the 1929 crash… that modern value investing was born.

Value investing is conceptually very simple. It means we’re looking for a bargain… and we buy assets that are underpriced.

Most people do this every day of their lives. When we go shopping at the grocery store, or browse the Internet looking for discounts, we’re always trying to find a good deal.

In this way, value investors are little different than bargain hunters who research where they can get the best deal on a new pair of shoes.

But it’s been very difficult to be a value investor for most of the last decade; the vast majority of assets in nearly every advanced economy around the world-- stocks, bonds, real estate, etc. were all selling at irrationally high prices.

A lot of investments were priced at absurd levels; even junk bonds sold at record high prices. The sovereign bonds of insolvent European nations traded at NEGATIVE yields. And money losing businesses with no hope (and no plan) to ever turn a profit traded at record high valuations.

It was really, really hard to find a great deal in the midst of all that chaos.

But market conditions have now changed dramatically, and there are plenty of great deals out there.

I’m particularly drawn to ‘real assets’ and businesses in real asset sectors-- particularly mining companies, energy companies, agriculture companies, and companies that develop productive technology.

Real assets tend to be a great way to hedge inflation… and as I’ve written before in previous letters, I believe inflation is here to stay.

What’s incredible is that there are so many ‘real asset’ businesses that are available at extreme discounts right now… which sounds perfect. And yet very few people are buying.

Energy companies are a great example.

There are profitable, well-managed natural gas businesses right now that are selling for as little as TWO times earnings (i.e. a P/E ratio of TWO).

Bear in mind that natural gas prices in the US are only $2.70 right now… and there’s a STRONG case to be made that prices will rise substantially in the future thanks to the new Liquefied Natural Gas (LNG) export boom.

For decades, the United States barely exported any of its natural gas abroad, due in large part to the difficulties in transporting gas across oceans.

But now that LNG transport has been perfected and new LNG export terminals are being built in the US, it’s very likely that more and more US natural gas will be shipped overseas to Europe and Asia (where prices are MUCH higher).

This trend would leave less natural gas in the US… and most likely lead to higher prices… and even higher profits for natural gas companies.

And yet it’s possible to buy shares in their companies right now for just 2x earnings. That’s cheap. That’s value.

It’s not just natural gas companies; plenty of mid-size oil production companies are also selling for ultra-cheap valuations.

It really is amazing that oil companies had their most profitable year EVER in 2022. Yet nobody wants to own them.

And the reason is simple: it’s apparently evil and immoral now to own oil and natural gas companies. Fund managers (under pressure from the woke elite) have sold off their oil and gas stocks because they’re all terrified of Greta Thunberg.

Other ‘real asset’ sectors are also cheap. There are even some fertilizer companies and agriculture businesses trading for low, single-digit multiples to their current/future cash flow, and price/book ratios below 1.

Value investors have been waiting patiently for more than a decade for great bargains to emerge. And, finally, there are some high quality, well managed businesses out there that can be acquired at a steep discount.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

P.S. Karl B, the new editor and publisher of The 4th Pillar, has already featured two such promising companies in the January and February 2023 issues. Karl has found unique ways to gain exposure to the gold industry's upside... but without nearly the same level of risk as mining companies. For more about the opportunities that Karl is regularly uncovering for The 4th Pillar readers, you can click here.

https://www.sovereignman.com/investing/how-crazy-is-this-no-one-wants-to-own-the-worlds-best-performing-industry-146122/

Biden Aims To Shatter Record For Fastest Tax Increase

Biden Aims To Shatter Record For Fastest Tax Increase

February 27, 2023  Simon Black, Founder  Sovereign Research & Advisory

In 1969 while testifying to Congress, US Secretary of the Treasury Joseph Barr called out 155 Americans who were not paying their “fair share” of taxes.

Those 155 Americans had managed to reduce their federal tax liability to essentially zero by using perfectly legal deductions and credits in the tax code.

Congress was furious. Even though these taxpayers were following the law, the politicians didn’t like it. So they created a new, highly bureaucratic layer of tax complexity on the entire nation, specifically to target those 155 people.

It became known as the Alternative Minimum Tax (AMT).

But don’t worry, Congress said, this new AMT will only affect a couple hundred people...

The idea behind the AMT is to ensure that high-income earners pay at least a minimum level of taxes, regardless of the various deductions and credits they might be eligible for.

So they’re forced to calculate their taxes under two different systems:

The regular tax system which allows deductions for things like state income tax, local sales tax, property tax, and itemized deductions.

The Alternative Minimum Tax system which does not allow most deductions and exemptions.

The taxpayer must then pay the higher of the two taxes.

I don’t know about you, but doing my taxes just once is a big enough waste of time.

And again, while the AMT originally targeted just 155 specific people, within decades millions of Americans— including many in the middle class with modest incomes— were forced to calculate their taxes twice, and pay the Alternative Minimum Tax.

And while the Tax Cuts and Jobs Act of 2017 increased the exemption amount for the AMT, hundreds of thousands of taxpayers are still subjected to it. Plus, when those tax cuts expire in 2026, the AMT is expected to once again ensnare seven million taxpayers.

This story is not unique.

For example the 1913 income tax was only supposed to affect the wealthiest households in America. Just 3% of the US population paid it, and the base rate was 1% while the top rate was 7%.

By 1922— just nine years later— the government had increased the tax to beyond 50%. Plus they had created DOZENS of tax brackets, with most of the middle class having to fork over a hefty portion of their income to Uncle Sam.

But that isn’t even close to the record time between when a tax was introduced, and when the government declared its intention to increase it.

Look at the recent stock buyback tax, which politicians snuck into the Inflation Reduction Act last year.

It is a 1% tax on companies which buy back their own stock, and it went into effect on January 1st of this year.

38 days later, Aviator-Sunglasses-in-Chief announced in his State of the Union address that he wants to quadruple the tax to 4%.

That’s almost certainly a record— thirty eight days from the time a new tax took effect to the time they start trying to increase it!

Even the first income tax, introduced in 1861 (and later declared unconstitutional) took 11 months until the rates were nearly doubled, from 3% to 5%.

The key lesson is that taxes are never truly targeted, nor temporary.

But even more crazy is that increasing taxes doesn’t even guarantee more money for the government.

Top marginal income tax rates in the US have ranged from as low as 28% during the 1980s, to as high as 94% just after WWII.

But during that time US tax revenue since 1946 as a percentage of GDP has remained around a narrow band of around 19%.

In other words, the government’s slice of the nation’s economic pie is always around 19%– no matter how high or low they set tax rates.

So you’d think they’d understand the obvious implication here: if you want to maximize tax revenue, you need to concentrate on making the pie bigger... not on making your individual slice bigger.

With a bigger pie, everyone wins. But these progressive socialists don’t understand that simple maxim.

Instead they’re talking about wealth taxes, billionaire taxes, or making the rich pay their “fair share”. And they think you’re too stupid to realize that the middle class will soon be paying these taxes too.

Even the President’s campaign promises to not raise taxes on families making under $400,000 have already gone out the window. Now they want people making just $600 from online platforms like Etsy and eBay to be reported to the IRS.

Plus they’re going after undeclared tips from waiters and other food service employees. Not exactly millionaires...

These politicians are like ravenous beasts, and they’re coming to feast on your livelihood .

That’s why it makes so much sense to take advantage of the perfectly legal ways to reduce your taxes. I’m not talking about dodgy schemes and creative loopholes. I’m talking about easy deductions written right into the tax code.

We talk about these all the time— things like maximizing contributions to retirement accounts, moving overseas, or even moving to Puerto Rico can slash your tax rate (in some cases to 0).

They think you are too stupid to notice these tax increases, or to realize that sooner or later they’ll apply to you.

But using their own legal rules to reduce what you owe is a great way of saying, I’m not as stupid as you think.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/tax/biden-aims-to-shatter-record-for-fastest-tax-increase-146105/

America Is About To Go Supernova

America Is About To Go Supernova

Simon Black, Founder  Sovereign Research & Advisory  February 20, 2023

On the evening of April 17, 1006 AD, a little more than 1,000 years ago, human beings from around the world looked up into the night sky and saw a brilliant light, the likes of which they had never before seen in their entire lives.  Most people thought it was a new star-- the brightest, by far, that anyone had ever observed. Some thought it was an omen or a sign from the gods.

We know now that neither was the case. The phenomenon that everyone saw that evening was actually a supernova originating more than 7,000 light years away from Earth. And scientists now refer to it as “SN 1006”, named after the year of its observation.                   

SN 1006 is especially famous because it is likely the brightest ever recorded in human history.

It was so bright, in fact, that its light could even be seen in the daytime. It was also seen by people as far away as China, Iran, Egypt, and Europe.

A group of monks in Switzerland reported being able to see SN 1006 for three months after its initial appearance, while astronomers in China’s Song Dynasty continued to observe the supernova until at least December of that year.

A supernova, as you’re probably aware, is an exploding star. It’s essentially the final phase of a star’s life cycle.

When stars are born, they’re nothing but gas and dust. In time, they grow into enormous stellar forces that cast their light and power across the solar system and give life to satellite planets. Everything in their domain literally revolves around the star.

But even stars eventually peak… and decline. They deplete their primary resources, and their core begins to shrink. Eventually, with its resources completely exhausted, a star begins to collapse… at which point it can explode in a giant supernova that can cause havoc and destruction across the galaxy.

This is in many ways a great analogy for empire. Like stars, empires are born from often humble beginnings. A handful of people come together in difficult circumstances, and the odds of success are very low.

But with luck, that small group of people turns into a fledgling civilization that continues to grow… and eventually rises into a vast and powerful empire that shines its light across the region, or possibly the world.

Like a star, everything else revolves around the empire; even tiny, distant nations are in its orbit and depend heavily on the empire for trade and economic activity.

But eventually the empire exhausts itself. It eats away at itself, depleting its most precious resources until there’s nothing left.

Just like a star that declines and collapses after consuming all the hydrogen in its core, an empire consumes the very things that made it successful and powerful to begin with. And when an empire declines and collapses, just like a star, the effects of that collapse cascade across the region for years to come.

It should not be a controversial statement to say that the world’s dominant empire today, the United States, is in obvious decline.

The US has steadily depleted and destroyed the very resources that made it so powerful in the first place-- things like freedom, capitalism, self-reliance, social cohesion, reputation, military strength, and fiscal restraint.

The latter bears some additional discussion.

On Friday I wrote to you that the US government had just published its annual financial report showing, among other things, that they lost a mind-blowing $4.1 trillion in Fiscal Year 2022, which was $1 trillion worse than the year before.

Going through the rest of the report, you’ll see them describe the utterly dire situation of Social Security, whose trust funds are set to run out of money within the next 10 years or so. They also forecast the national debt to reach more than FIVE HUNDRED PERCENT of GDP.

But what really struck me about this report... above everything else… was the cover letter; this is the one-page executive summary from the Treasury Secretary right at the beginning of the report.

You’d think with such horrific financial results and long-term projections that the Treasury Secretary would spend her cover letter calling for immediate reform and fiscal discipline.

But there wasn’t a single word of caution in her letter.

Instead the Secretary bragged about how great the economy is, and praised their ridiculous Inflation Reduction Act as “our nation’s most aggressive action to tackle the climate crisis.”

Come again? Wasn’t the Inflation Reduction Act supposed to, you know, reduce inflation?

But they’re not even trying to tell that lie anymore. Now they’re fully admitting that the Inflation Reduction Act was just climate change legislation masquerading as economic support.

The rest of her letter is more useless bombast… making it crystal clear that the people who prepare these reports are just fanatical bureaucrats steeped in their own self-righteousness, as opposed to responsible managers trying to solve problems.

So it’s REALLY difficult to study this annual financial report and not come away with a highly disquieting long-term outlook for the United States.

I’ve been talking about this for years, so this is nothing new to long-time Sovereign Man readers.

I’ve written extensively about the accelerated financial decline of the government. Fourteen years ago when I started this publication, I looked at the trajectory America was on and predicted rising inflation, dwindling freedom, growing social divisions, soaring deficits, and more.

But even I’ve been surprised at government officials’ complete inability to take these problems seriously, let alone come up with rational solutions.

Perhaps some day they’ll finally realize that they’re out of resources and that their star is about to collapse. They’ll look up in the sky and see the brilliant flash of light and realize, “Jeez we really need to do something about all this debt.”

But by then it will be too late.

When people across the world looked up in the night sky 1,000 years ago and saw the brilliant light of SN 1006, what they didn’t know is that the light was from an exploding star more than 7,000 light years away.

In other words, the star had actually exploded 7,000 years prior; it just took that long for the light to travel all the way to Earth and be visible to people on this planet.

Similarly, by the time the inhabitants of Planet Politician see the light of their fiscal supernova, the star will have already exploded long before then… and there won’t be anything they can do about it.

But you can.

You have all the power and all the resources at your disposal to diversify internationally, legally slash your taxes, put away more for retirement, grow your income, generate higher investment returns, protect your assets, secure your family’s future, and much more.

To your freedom,  Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/trends/america-is-about-to-go-supernova-145937/

A Balanced Budget is Now “Irresponsible”

A Balanced Budget is Now “Irresponsible” 

February 7, 2023  Simon Black  Sovereign Research & Advisory

“Irresponsible.”

That’s the word that some politicians in the United States Congress have been using this week to describe their opponents’ demands to balance the federal budget.

Just imagine what that says about the state of US public finances: that even the mere thought of having a balanced budget... of living within your means... is “irresponsible”.

What’s really sad, though, is that even the politicians who want to balance the budget don’t seem to have a firm grasp of the facts.

Consider that, in fiscal year 2022, the federal government brought in $4.9 trillion dollars of tax revenue.

That is an insane, record amount of money. With nearly $5 trillion in tax revenue, you should be able to do anything you want and still have plenty of money left over.

In fact even as recently as 2019, $5 trillion in tax revenue would have easily covered the entire federal budget, with about half a trillion dollars left over to start paying down the debt.

So if the government had just kept the budget steady, last year it could have paid off $500 billion of its $31.5 trillion national debt.

Instead, last year the government opted to ADD $1.375 trillion to the debt by spending $6.27 trillion in FY2022.

Now politicians insist on raising the debt ceiling, so that the government can once again borrow to overspend its revenue by more than a trillion dollars.

The obvious solution is to slash spending. But this is a lot more complicated than most people realize.

In FY2022, for example, the government spent $706 billion just to pay the interest on the national debt. In other words, they had to borrow money just to pay interest on money they have already borrowed.

And if rates keep rising, the government’s annual interest bill will quickly reach $1 trillion or more.

Then there’s the obvious problem of entitlements, like Social Security... and the spending that is considered ‘sacrosanct’, like defense spending.

These components of federal spending are so vast, in fact, that if you take Defense, Veterans Affairs, Social Security, and Medicare off the table for cuts, you would have to cut 85% of all other federal spending in order to balance the budget.

National parks. The electric bill at the White House. John Kerry’s private jet travel to Davos. Highway spending. Thousands of federal agencies that most of us have never heard of, like the Office of Human Research Protection.

85% of all of that would need to be eliminated in order to balance the budget... and few politicians have the courage to make such deep cuts.

Compounding the problem is that tax revenue could easily fall if there is a recession.

During recessions, consumer spending slows, company profits shrink, unemployment increases, and incomes contract. That means the government will not collect as much money from corporate taxes, income taxes, and capital gains taxes.

A recession probably also means more federal stimulus, i.e. higher spending. So the deficit would increase even more.

Another major issue, of course, is that Social Security is set to run out of money in the early 2030s. And this is not some wild conspiracy theory.

As I’ve pointed out on many occasions, the Social Security Administration admits every year in its annual report that Social Security will be insolvent within a decade or so.

This is most certainly going to require a multi-trillion dollar bailout... which is going to put even more extreme pressure on public finances.

It also practically guarantees higher taxes, especially payroll taxes.

In the United States, federal payroll taxes currently take 15.3% of each paycheck when you add up both the employer and employee contributions to Social Security and Medicare.

15.3% is actually quite low when compared to other countries internationally. For example, after recent increases, the combined employee and employer payroll taxes in the UK have reached 28.3% of each paycheck (with certain exclusions).

Even Estonia, which is generally considered a low-tax country because of its flat 20% corporate income tax rate, charges a 33% payroll tax.

So the US has a LONG WAY up on its payroll tax before getting anywhere close to international averages.

And there are already calls for higher individual income tax rates, wealth taxes, higher capital gains taxes, and more.

Most likely this is going to be part of the “solution”, i.e. the grand bargain that politicians will finally be forced to make a few years down the road.

On one hand, they will agree to deep cuts to countless government programs.

They’ll also likely roll back the retirement age on Social Security, which essentially constitutes a default on the promises they’ve made to millions of Americans.

So instead of retiring at 62 or 65, it will be increased to more like 72 or 75.

But in exchange, politicians will also agree to radically increase taxes...

Naturally, the guy who shakes hands with thin air won’t say any of this in his State of the Disunion address tonight. But realistically it’s the only path forward over the next few years.

There are a few key implications here:

One, don’t rely on Social Security to fund your retirement.

Two, take steps now to reduce your tax rate.

You can actually do both of these things in one step by using tax advantaged retirement accounts.

For example, if you contribute an extra $5,000 per year to your 401(k), that reduces your current taxable income by the same amount...

PLUS that $5,000 invested through your retirement account will grow tax free.

If you do that every year, and it compounds at a rate of 9%, you are talking about an extra $461,000 saved for retirement after 25 years.

Meanwhile, you contributed $125,000 that you didn’t have to pay taxes on.

Sure, you’ll have to pay taxes when you collect distributions. But FIRST it will grow tax free for 25 years.

And that makes a huge difference. (You’d earn about $111,000 LESS over 25 years if you first paid a 24% tax on each $5,000 BEFORE investing it.)

This is just one example to highlight the fact that while these problems are unlikely to to be solved by the government, you can make sure that they don’t destroy your retirement.

And you can make sure you don’t get left holding the bag by paying higher tax rates than necessary.

That’s the whole point of a Plan B — to take control of your own circumstances, so your future is not a gamble left up to politicians.

Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/trends/a-balanced-budget-is-now-irresponsible-145741/

America Once Again Turns the Other Cheek

America Once Again Turns the Other Cheek

February 6, 2023  Simoon Black Sovereign Research & Advisory

When the infamous British smuggler Robert Jenkins sailed past Jamaica in April of 1731, he probably thought he was home free.  Jenkins had a ship full of contraband which he had picked up in the West Indies, and he was heading back to England to sell his goods in London’s premium markets.  But Jenkins wasn’t transporting drugs or alcohol, or even anything especially exotic. His ‘contraband’ was sugar. Big deal.   The West Indies at the time, though, were mainly under Spanish control. And Spain insisted that no one could export sugar from their territory without their express approval, along with paying heavy taxes and fees.

Most traders didn’t care. By 1731, Spain was a declining power. Everyone knew it. The once-dominant Spanish Empire had been vanquished by military defeat, political incompetence, succession crises, internal rebellion, and more, and it had become a hollowed out shell of its former self.

So even though it was technically illegal to export sugar from Spanish lands, British privateers and smugglers routinely thumbed their noses at the rules. After all, not only was Spain a declining power, but Britain was a rising power… so the Brits felt emboldened.

But luck was not on Jenkins’s side on that fateful day in April 1731. Somewhere off the coast of Cuba, his ship Rebecca was intercepted by a Spanish patrol boat named La Isabela.

Jenkins knew that his small vessel was outclassed, so he dropped anchor and permitted the Spanish to board his ship.

They quickly found the sugar… and we can only imagine Jenkins responding with a shrug of the shoulders and claiming “I have no idea how that got there.”

Whatever his response, the Spaniards were unimpressed. So they tied Jenkins to a mast and interrogated him for a while, until the Spanish commander finally drew his saber and sliced off Jenkins’ left ear.

Jenkins was then let go, and he hastily made his way back to London where he protested directly to King George II himself. There are even stories (though uncorroborated) that Jenkins even told his story in the House of Commons, waving his severed ear at shocked Members of Parliament.

Needless to say, Britain and Spain eventually went to war in what became known as the War of Jenkins’ Ear.

Jenkins wasn’t necessarily the primary cause. Tensions between the two kingdoms had been rising for years.

Britain was growing rapidly and wanted to muscle in on Spanish trade routes. Spain was shrinking and desperate to hold on to what it had.

War between rising and declining powers is actually a very common theme throughout history; it’s known as the Thucydides Trap, named after the ancient scholar who wrote the history of the wars between Athens and Sparta.

Athens and Sparta were also rising and declining powers in the 5th century BC. As Thucydides himself wrote, “the growth of power in Athens, and the alarm which this inspired in [Sparta], made war inevitable.”

World War I, which involved several rising and declining powers (Germany, the US, Austria-Hungary, the Ottoman Empire) was another Thucydides Trap.

And the rising tension between the US and China is quickly trending towards another.

This conflict is palpable, and in my opinion, obvious. I believe that China has been at war with the US for years, and they haven’t even tried to hide it.

Everyone is aware of the recent Chinese balloon found over nuclear sites in Montana. But the attacks have been taking place for years.

In 2018, for example, suspected Chinese double agent Jerry Chun Shing Lee was arrested at JFK airport after US authorities found evidence that he had infiltrated the CIA and sent classified material to Chinese intelligence.

In 2016, Chinese spying was so blatant that the US Department of Justice actually filed charges against China’s General Nuclear Power Group for stealing US nuclear secrets.

Over the past several years there have been several high profile corporate espionage incidents involving US companies like Google, Dow Chemical, and defense contractor Northrup Grumman.

In 2018 a group of Chinese hackers infiltrated a network associated with the Naval Undersea Warfare Group and stole US submarine cryptography.

Then there were other revelations in 2018 that China was electronically eavesdropping on then-President Trump’s iPhone calls.

In 2019 China was found to have hacked dozens of universities who were performing research from the US Navy.

In 2020, the California socialite Christine Fang was exposed as a Chinese intelligence operative who had managed to establish and maintain sexual relations with a number of prominent US politicians.

Then there was the Harvard University professor who had been paid off by Chinese intelligence to leak sensitive research.

Or the 2021 Microsoft Exchange Server attacks, in which Chinese hackers infiltrated several Microsoft mail servers and gained administrative access to countless corporate email systems.

Or China’s role in the 2020 Solar Winds attack, which breached millions of systems, plus hundreds of corporate and government networks, including classified systems.

China has even weaponized its popular social media app TikTok.

TikTok has not only stolen the most sensitive information from its users-- lifestyle habits, likes and dislikes, goals, locations, financial details, biometric data, etc.-- but it has also developed algorithms to essentially reprogram teenagers’ personalities and take them down a dark rabbit hole of anxiety, violence, depression, and even suicide.

Through TikTok, China has essentially created a tool to wage psychological warfare against an entire generation of young Americans.

And let us not forget, of course, that China also unleashed COVID-19 on the world. But, hey, we’re not allowed to talk about that lest Google and Mark Zuckerberg cancel us off the Internet again.

It’s remarkable that, despite incursion after incursion, attack after attack, the United States has done practically nothing about any of it.

Instead America has adopted a sort of 1930s style European ‘appeasement’ strategy. Or as I call it, “turn the other *** cheek”.

Chinese leaders must be aghast that they’ve been able to get away with so many brazen attacks. And it would be absurd to think their incursions will not continue.

They’ve already stolen mountains of classified information, infiltrated thousands of corporate and government networks… and pre-positioned who knows how many zero-day exploits on critical cyber infrastructure.

In other words, China has already given itself a major tactical advantage should any armed conflict break out.

What are key policymakers in the US doing about it? Well, their top priority seems to be pushing the US military and intelligence agencies to become more woke.

US military combat power is objectively in decline. The Pentagon itself acknowledges that mission readiness is falling, recruiting is abysmal, equipment is aging, and key weapons systems have lost their technological superiority.

But at least everyone is using the right pronouns!!!! We can only imagine how terrified China must be of US Special Operations Command’s diversity and inclusion.

To be fair, I don’t believe that either side really wants a war. If nothing else, China knows that its demographic pyramid is upside down, and they cannot afford for young people to die in combat.

But wars between rising and declining powers have been fought for dumber reasons… like contraband sugar, and a smuggler’s left ear.

Never forget that the ‘leader of the free world’ is a guy who shakes hands with thin air, so it’s anyone’s guess how this plays out.

A shooting war would clearly be a terrible outcome. But so is the status quo of turning the other **** cheek while China continues to weaken the US.

Neither is a good option. Yet once again America’s leadership has absolutely no answers to an obvious threat.

Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/trends/america-once-again-turns-the-other-butt-cheek-145703/

Proof Of Time: A Different Way To Think About Gold

Proof Of Time: A Different Way To Think About Gold

February 3, 2023  Simon Black

Gold is really an amazing metal when you think about it.  It doesn’t corrode. Coins buried underground or sunk at the bottom of the ocean for hundreds of years are routinely pulled up and brushed off, and they’re good as new.  This strength and durability is precisely what makes gold so interesting as an inflation hedge.

It undoubtedly takes a lot of work to produce a gold coin or bar-- so much labor, energy, technology, etc.  A gold coin essentially represents all of the work… all of the effort and labor… that went into producing it.

This is not unique. In the same way, a bushel of wheat represents all the labor that went into producing the grain. An iPhone represents all the labor and effort that went into producing it. Except that wheat doesn’t last. iPhones don’t last. Gold does.

So gold essentially encapsulates all of the resources, including TIME, that went into producing it… in a way that lasts forever.

Right now, for example, it costs major mining companies about $1,270 to mine a single ounce of gold. So if you buy gold today, you’re essentially locking in a $1,270 production cost.

This is the reason that gold does such a great job of maintaining its value against inflation, because, over time, production costs tend to increase. And higher production costs eventually result in higher prices.

This is true with just about any product or industry. We’ve seen companies like Procter&Gamble, Unilever, CocaCola, McDonalds, etc. all increase prices because their production costs are rising.

Again, though, you cannot use a Big Mac as a store of value. It won’t last forever. It won’t even last a day.

But gold lasts. You can buy a Canadian Maple Leaf coin today, and, ten years from now, your 2023 coin will be worth exactly the same as a brand new coin minted in 2033.

And if you anticipate that inflation will push up production costs over the next decade (which tends to happen), you can easily make a case that gold prices will be higher by then.

This is the topic of our podcast episode today; we take a deeper look at why gold has long-term value-- a variation of ‘proof of work’ that I call Proof of Time.

We start out in Yap Island, in Micronesia, and discuss how the natives there developed one of the most advanced financial systems in the history of the world based on the concept of ‘Proof of Work’.

Anthropologist William Furness wrote that, despite the Yapese having no understanding of economics, they realized that “labor is the true medium of exchange and the true standard of value.”

I believe this is true. But more than labor, I believe that TIME is real standard of value.

Time is the ultimate scarce resource. No one, no matter how rich or powerful, can create any more of it. And once it is used, it is gone forever.  Labor is one of the ways that we use time. And gold is a rare asset that transmits both time and labor… forever.

We also talk about different BUY signals for gold. We talk about miners’ gross profits-- and why it makes sense to think about buying when profits are low… or even when the price of gold falls below the price of production.

In a way that’s like buying a house for less than the cost of construction; it’s a SCREAMING deal and definitely worth considering.

Gold isn’t at that level right now. But it could be soon… and that’s why it’s worth understanding how to think about gold, and many other assets, through this lens of ‘time’.

You can listen to this week’s episode here.

To your freedom,   Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/podcast/proof-of-time-a-different-way-to-think-about-gold-145695/

The Eight-State Suicide Pact Is Advancing Quickly...

The Eight-State Suicide Pact Is Advancing Quickly...

January 30, 2023  By Simon Black

By the early 300s AD, ancient Rome’s population was in significant decline.  Modern historians haven’t nailed down a precise number for Rome’s population— and estimates vary— but the clear consensus is that population peaked in the first or second century AD, and then began a rapid fall.

We know the reasons why. Roman citizens were sick and tired of the corruption, inflation, taxes, crime, social decline, constant chaos, etc. and they sought greener pastures elsewhere.

Bear in mind that this was happening at a time when the barbarian invasions had already begun. Every year there were more and more border incursions from the Goths, Alemanni, etc., many of whom stayed and settled in Roman territory.

This is important to understand; even though Rome was gaining population from these migrant tribes, its overall NET population was still declining.

This means that the number of Roman citizens leaving must have been staggering.

But Emperor Diocletian decided to put a stop to all of it, and in the late autumn of 301 AD, he proclaimed his infamous Edictum De Pretiis Rerum Venalium, or Edict on Maximum Prices.

In addition to setting strict wage and price controls on EVERYTHING across the empire (in an absurd attempt to ‘fix’ inflation), Diocletian also ordered for taxes to increase... AND for everyone to be tied to the land.

No one could leave. No one could quit their job. All occupations were made herediatry, so children had to follow their parents’ profession. It was essentially the start of the feudal system.

Naturally Diocletian’s decree did not have its desired effect. Despite the emperor imposing the death penalty on anyone who did not comply, Roman citizens flouted the rules, and the population declined even more.

It’s hard to not think of this story when reading about the nascent suicide pact being discussed between several of the most ultra-progressive, high tax US states.

Earlier this month, the states of California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington each introduced bills to impose state-level wealth taxes on residents.

This is not a coincidence. Politicians are deliberately coordinating with their counterparts in other states to ensure that the legislation passes in ALL of the eight states.

As one state senator put it, they are working together to ensure they don’t “get pitted against each other.”

Heavens forbid there’s actually competition among the states to reduce their tax rates and attract the most productive talent and businesses. That would be unthinkable.

So instead they’re all signing up for a terrible, destructive idea so that they can all be anti-competitive at the same time. It’s genius!

But of course, these people are totally delusional.

These are the states who, like Ancient Rome in the first and second centuries AD, have already been losing a LOT of people.

California has said bye bye to hundreds of thousands of residents over the past few years since the start of the pandemic.

This isn’t a huge number in terms of the state’s overall population. The problem is, though, that a huge percentage of these people fleeing California are wealthy, high-income earners.

In other words, California is losing some of its most valuable taxpayers.

Remember that the top 1% of taxpayers in California pays roughly FIFTY PERCENT of the state taxes. So losing even a few hundred thousand people can be devastating to the state budget.

Ditto for some of the other states who have joined this suicide pact, like New York and Connecticut.

In fact Census Bureau data show these eight states are among those with the fastest declining populations. And those who leave tend to be higher-earning taxpayers. So their state budgets are being gutted.

It’s also clear that the people who leave aren’t going to other high-tax, ultra-progressive states. Californians aren’t leaving en masse so they can live in New Jersey or Illinois.

Instead, they are moving to low tax, low regulation states like Nevada, Idaho, Texas and Florida. And this new wealth tax movement will likely cause an even greater exodus.

Of course, California has a plan for that too. If its wealthier citizens decide to leave, California’s government will simply continue to enforce the tax even AFTER people relocate to another state. Not even Diocletian thought of that!

(Naturally that would be completely illegal, and the State of California’s petty arrogance will be eviscerated by the Supreme Court at some point down the road.)

It’s not just individuals; businesses are also relocating out of these states. A report from the Hoover Institute found that Texas was the number one destination, attracting at least 114 businesses which were previously based in California from 2018-2021.

Obviously this business migration trend is going to have an even deeper impact on California’s state tax revenue.

But, just like Diocletian, they’re willfully taking a bad situation and making it much worse. Rather than simply stop the destructive behavior that’s making everyone want to leave in the first place, the politicians are doubling down and giving people even more incentive to relocate.

It’s hard to imagine that such a level of incompetence could actually be real. And yet it is.

Fortunately this is a very easy problem to solve.

First, it’s important to recognize that, whatever these politicians promise, their so-called wealth tax is NOT just for the ultra-wealthy.

Perhaps at first it will only affect $50MM+ households. But like nearly all taxes, it will eventually find its way down to the professional class, then upper middle class, etc.

Remember that even the original income tax was first meant to only hit the ultra-wealthy.

But soon the thresholds were lowered and the tax brackets expanded to cast a very wide net.

Same with the Alternative Minimum Tax; it was initially passed as a tax on a handful of people. Today it ensnares millions.

Wealth taxes will likely be no different. The tax base will expand, the tax rates will increase, and before you know it, it will be part of your annual tax ritual. Never underestimate the potential creep of a new tax.

Second, also recognize that where you live ought to be a deliberate decision. Obviously everyone has a personal choice to make. But it’s an important decision, affecting everything ranging from potential wealth taxes, to how your children are being educated (indoctrinated).

It makes sense to examine your values and priorities, and then make a decision about the best place to be. Prioritization is important. No place is perfect. No place will tick every single box on your list. But you will likely find somewhere that matches the most important priorities, plus a few nice-to-have’s.

If taxes and freedom are priorities, you might see a significant boost by moving to another state where your values are shared.

There’s also the possibility of moving abroad, which can often have an even larger impact on lifestyle.

And although US residents are taxed on their global income, you can use the Foreign Earned Income Exclusion to make $120,000 in 2023 without owing taxes to the US. When you double that for married couples, and add in the housing benefit, you’re at roughly $250,000+ in nearly tax-free earnings.

You could also consider going to Puerto Rico— a US territory that sets its own tax rates.

In Puerto Rico you could cut your income tax rate to 4% and your capital gains to 0%. Those who qualify, and meet some other conditions, will owe nothing to the federal government. In many cases you don’t even have to file a federal return anymore.

Even if you’re not ready to go... or you have certain constraints in your life preventing a move at this time, it at least makes sense to consider where you might go just in case you need to make that decision down the road. Do the research and analysis now. It will make life much easier in the future.

To your freedom,  Simon Black, Founder  Sovereign Research & Advisory

https://www.sovereignman.com/trends/the-eight-state-suicide-pact-is-advancing-quickly-145533/

They Finally Figured Out How To Lower Inflation!

They Finally Figured Out How To Lower Inflation!

By Simon Black January 24, 2023

We all know that inflation has been well above the Federal Reserve’s target rate of 2% for nearly two years now.  It peaked at over 9% last June and has remained stubbornly high since then.  But it seems like the bureaucrats have finally found a way to reduce inflation.

No, it has nothing to do with reducing regulations, cutting taxes, and re-embracing capitalism.  The bold solution that our courageous policymakers have come up with is to change the way inflation is calculated.

So rather than actually stop the destructive things they’re doing that are actually causing inflation, they’re simply inventing a new way of calculating it. It’s genius!!

The US Bureau of Labor Statistics (BLS) announced that, beginning this month, they will calculate the Consumer Price Index (the CPI, which is one of the key benchmarks of inflation) in a different manner.

But they’ve actually provided very little information about how they’re going to do that (and nothing builds confidence more than a total lack of transparency).

One small detail that we do know is that they’re only going to use one year of consumer expenses to calculate long-term average price weights.

But they don’t give us any more information than that.

For example, will they use average or median consumer expenditures for the year? Will they weigh the first three months of the year, which had low inflation, higher than the final nine months of 2021?

Without more information, we can’t know exactly how the changes will affect inflation numbers.

But it’s a safe bet that they’ll choose weights which make inflation appear lower on paper.

This tactic of “moving the goalposts” to achieve the outcome they are looking for is becoming something of a trend...

Last year, the United States experienced two consecutive quarters in which the economy shrunk.

This has long been the standard criteria to define a recession in practically every corner on earth.

But the White House conveniently argued in July 2022 that this method is “neither the official definition nor the way economists evaluate the state of the business cycle.”

Instead, the US government says that the “designation of a recession is the province of a committee of experts...”

Perfect! Who needs clear, unchanging definitions of words when we have experts to make up new standards on the fly? And when have the experts ever been wrong before?

They also did this during the pandemic, when Lord Protector Fauci refused to define what ‘herd immunity’ meant, or give any specific measure that would tell us we could take off the masks.

But when it comes to inflation, we don’t need the “experts” to tell us that it is driving up costs. We all know this when we go to the grocery store, look at home listings, and fill up the gas tank or oil burner.

And we’ve discussed the reasons for this on many occasions.

There are extremely inflationary forces at work that didn’t exist for decades.

For example, the world has been in a state of relative peace for quite some time. For decades there were no major wars, and most countries were happy to trade and get along.

But that’s no longer the case. We’re involved in a proxy war in Ukraine, and China has ramped up its divisive rhetoric.

Conflict is inflationary. Conflict makes it harder to trade among nations. It means countries become insular and impose sanctions and tariffs instead of opening up for business.

You don’t need a PhD in economics to understand that will lead to higher costs.

Another factor is that, for a long time, the manufacture of American consumer goods such as clothes and electronics trended cheaper, creating higher profit margins. And that savings was passed on to consumers.

But those days are done.

Slowly, as China’s economy grew, it was no longer so cheap to offshore manufacturing there. So the US moved to Indonesia, then Vietnam, and now Bangladesh... each of which saw its own economic growth.

Now there’s nowhere left to turn to make cheap stuff. Instead, there is an on-shoring movement to bring manufacturing back to the United States and Europe. That is obviously going to be inflationary.

Energy prices are another huge driver of inflation. History is clear that it is not just about cheap prices, but the return on energy invested. The more energy it takes to produce more energy— whether that’s hydrocarbons, solar, or whatever— the less return there is on energy invested.

And like reduced profits, that means there is less energy leftover to grow.

But not only are we having to drill deeper and explore harder to find new sources of energy. The investment to do so has been choked out by governments and environmental fanatics who demonize the entire industry.

And with all these headwinds, the US government is still borrowing well over $1 trillion a year to fund its deficit spending.

So despite the celebration over a couple months of inflation trending downwards, it is disingenuous for the “experts” to claim that inflation is falling, and the worst is behind us.

In mid-2021, at the beginning of this inflationary period, I wrote that inflation is not a passing fad that’s here one day and gone the next. It is a long-term phenomenon. Some months it will be higher, some months it will be lower. Some years it will be higher, some years it will be lower.

But over the long-term, inflation will continue driving prices higher, and making people less prosperous.

I’m not saying there will be hyperinflation. But the unprecedented last couple of decades of sub-2% inflation are likely gone.

At this point, if inflation drops to, say, 4.5% we will likely see victory celebrations from the Fed and US government.

But regardless, it makes it pretty hard to trust their numbers when they just go and change the way it’s calculated.

And that is why the official inflation numbers should have little bearing on the decisions you make.

You are far more equipped than a room full of experts to figure out how big a problem inflation is to you. Just walk down the aisles at your local store.

And if you determine that inflation is a problem, consider taking refuge in real assets.

Throughout history whenever inflation hits, it’s almost invariably been a good idea to have direct ownership of an asset that cannot be conjured out of thin air by a central bank.

Real assets include things like productive land, shares of a well-managed private business, or physical gold and silver.

Most people don’t have an easy opportunity to buy productive land or shares of a well-managed private business.

But gold and silver are totally within reach.

Yet despite the highest inflation in decades last year, gold was pretty flat.

Now it is starting to tick up, but is still about $150 dollars off its all time high of around $2,060 per ounce in 2020.

And silver costs less than half the price of its all time high of around $50.

But the reason to buy precious metals is not price speculation.

Short term, there are many different factors that drive the price, and it does not align perfectly with inflation. But it is driven by supply— which is relatively constrained— and demand— which is largely driven by central banks buying boatloads of gold, not retail investors buying coins.

Gold isn’t going to shoot to the moon like meme stocks or DogeCoin.

But long term, gold has been the best protection against inflation throughout history.

To your freedom,  Simon Black, Founder   Sovereign Research & Advisory

https://www.sovereignman.com/trends/they-finally-figured-out-how-to-lower-inflation-145346/