Why Real Assets Are a Safe Haven Against Inflation

Why Real Assets Are a Safe Haven Against Inflation

Notes From The Field By Simon Black  September 25, 2023

The first time I ever visited Zimbabwe in late 2010, the country was barely one year removed from the end of its legendary hyperinflation.

Hyperinflation in Zimbabwe had become so extreme-- roughly 90 billion trillion percent (that’s not a misprint) -- that the government finally capitulated in 2009 and simply abandoned the currency altogether.  And when I first landed in the capital of Harare, the infamous Zimbabwe dollar had become so worthless that many people were using it for wallpaper.

Zimbabwe had once been a vibrant, highly productive economy based on valuable mineral and agricultural exports. Even by the early 2000s, after two decades of independence under Robert Mugabe, inflation was still ‘only’ around 20%.

But inflation began to spiral out of control.

There was no end to Mugabe’s bad policy ideas, ranging from price fixing to land reform. And after confiscating assets from citizens in the late 90s and early 2000s, Zimbabwe’s economy contracted viciously.

If that weren’t enough, Mugabe also ballooned government spending. He borrowed heavily and increased Zimbabwe’s national debt. So naturally, the central bank began printing vast quantities of money.

We all know what happened next; Zimbabwe’s economy was in the dumps, so fewer goods and services were being produced. Yet the central bank created substantially more paper money. So inflation soared.

By 2003 it reached nearly 600%. By 2006, over 1,000%. And yes, by November 2008, 90 billion trillion percent.

Most of us from developed countries can’t imagine the living conditions of a collapsed economy. And the locals I met in Harare told me incredible stories of food shortages and endless lines at banks, grocery stores, and pharmacies.

If you were lucky enough to be inside of a store where there was actually food on the shelves, workers were constantly putting new price tags on products. And while you were shopping, a voice would come over the loudspeaker and announce the new price of soup, bananas, and rice.

Everything was a constant rush. You had to race through the aisles to grab whatever you could, and check out before the prices went up.

It was the same at restaurants; several times during a meal, a waiter would come out and inform you about the new price of the beer you were drinking.

I remember one person told me that he used to buy two loaves of bread every morning on his way to work. He would eat one of the loaves during the day, and then sell the second loaf in the evening at a significantly higher price.

He realized that bread, bizarrely enough, held its value-- at least for the day. It was also a highly ‘liquid’ asset; he would always able to quickly find a buyer and sell his extra loaf at market value.

It’s not hard to understand why: bread has a real use in that it provides critical nourishment. And in a time of economic chaos and shortages, this is far more valuable than rapidly deteriorating paper currency.

The same logic applies to “real assets”, i.e. they hold their value during inflationary times because they provide something vital. And this is a key point to understand.

Think about consumer behavior: during economic boom periods, inflation is low. Unemployment is low. Interest rates are low. People have confidence and optimism about the future, so we tend to borrow more and spend more freely.

And the best performing assets during these boom periods mirror that sentiment.

Just think about the economic boom period from, say, 2016 through 2021. Unemployment, inflation, and interest rates were all at historic lows. Consumer spending soared.

And the most valuable companies in the world were the so-called “FAANG” stocks:

- Facebook, which just enables people to waste time swiping and scrolling

- Apple, which makes the devices for people to swipe and scroll

- Amazon, which makes it easy to shop and spend money

- Netflix, which is basically just an entertainment business

- Google, whose YouTube division is another entertainment business

In other words, the world’s most valuable companies were all consumer-oriented… and even more specifically, oriented towards shopping, recreation, and entertainment.

Over the same period, companies who produced some of the world’s most essential products were ignored.

Facebook stock soared nearly 500% between 2014 and 2019. Yet shares of Exxon Mobil lost about 10%. Netflix stock exploded more than 1,000%, while an ETF of gold miners lost 21%.

But today’s harder economic times are forcing changes in people’s focus and behavior. It’s only natural.

Most people have started paying a lot more attention to their expenditures. Spending $2,000 on a new iPhone suddenly doesn’t seem like such a great idea when oil is approaching $100/barrel.

And this is what leads me back to real assets. But first let’s define what that actually means--

“Real Assets” are defined in a variety of different ways. Sometimes people define real assets by citing specific asset classes, i.e. commodities and real estate. ChatGPT tells me that a real asset “is a tangible physical asset that has intrinsic value due to its substance and properties.”

I think these definitions miss the point. To me, a real asset is something that provides a critical need, like food, energy, economic productivity, or a store of value.

This could be a tangible, physical asset, like a barrel of oil or bushel of corn. But not necessarily.

Productive technology that makes the world better, faster, cheaper, etc. is considered intangible intellectual property. But it provides a critical need, which makes it a real asset.

Conversely, Mark Zuckerberg’s new “Threads” app is also technology. But given that it makes the world less productive, it is not a real asset. It’s just another recreation asset.

Similarly, 500 acres of prized, high-quality farmland provides critical value. But a Class C office building in a declining tier-3 city does not.

Viewed through this lens of “critical need”, it’s a lot easier to understand what is/isn’t a real asset… and why they can hold their value during inflationary times: it’s all about shifting priorities.

Real assets (including real asset businesses) have been largely ignored for more than a decade, in favor of ‘recreation assets’ focused on shopping and consumption.

Consider that, in 2019, a ripe banana that was duct-taped to the wall sold for $120,000 at an art exhibition. Critical need? Hardly.

Meanwhile, that same year, the high priests of climate change (like Blackrock’s Larry Fink) were working diligently to cut-off funding for vital industries like oil, coal, and natural gas.

And this bizarre mismatch of priorities continued for years, through at least the first half of 2022.

But priorities are finally starting to shift. And this means that the ‘real assets’ which are critical to solving the world’s challenges will become much more important than ‘recreation assets’. And that’s what makes them such a great hedge against inflation.

To your freedom,   Simon Black, Founder Sovereign Man

https://www.sovereignman.com/investing/why-real-assets-are-a-safe-haven-against-inflation-148196/

It will take nearly 7,000 years to achieve Greta Thunberg’s fantasy

It will take nearly 7,000 years to achieve Greta Thunberg’s fantasy

Notes From the Field By Simon Black  September 20, 2023

In 1958, Leonard E. Read wrote the book I, Pencil.  As the book’s title suggests, this is the story about a pencil, told from the pencil’s perspective.

The pencil traces his beginnings – from the cedar forests of Northern California and Oregon – to the mill in San Leandro, California, where specialized equipment cuts the logs into pencil-length slats.

Next, the newly-cut slats move to the pencil factory, where machinery cuts eight grooves into each slat and inserts graphite.

Read goes on to further describe each part of the pencil manufacturing process.

His point: Even something as simple as manufacturing a pencil is a highly complex process. Yet left to the free market, profit incentives allow individuals and companies to efficiently combine raw materials and produce any in-demand product.

No committee of central planners is required anytime during the manufacturing process.

So, if central planning cannot produce something as simple as a pencil, how can governments expect to coordinate and control a product as critical and vital as energy – whose production is exponentially more complex than a pencil?

They can’t. But they’ll still try.

To be fair, although the current administration in Washington has enacted plenty of anti-energy policies, they aren’t solely responsible for the world’s dire energy predicament. In fact there’s plenty of blame to go around.

In recent years, “woke capitalism” has gained a serious foothold in western financial markets.

Led by the movement’s high priests, like Larry Fink (who manages $10 TRILLION at Blackrock), and Klaus Schwab of the World Economic Forum, one of their key tenets is replacing fossil fuels with green energy solutions.

Sadly, many of the world’s largest energy companies have bent the knee to the Holy Climate Warriors. Now, at Sovereign Man, we like a clean and pristine environment as much as anyone, and we have a strong desire to leave a better world for our children.

But inefficient green energy solutions like solar and wind simply aren’t the way forward. Here’s why:

Let’s suspend reality for a moment and pretend that Klaus Schwab and Greta Thunberg are right… and that global energy should be 100% renewable.

What would it actually take to do this? Remember, solar panels, wind turbines, and batteries require lots of raw materials.

According to estimates by Professor Simon Michaux of the Geological Survey of Finland, achieving the Schwab-Thunberg-Fink dream world require:

• 218 million tons of cobalt

• 899 million tons of lithium

• 4.3 billion tons of copper.

Let’s tackle copper first.

In 2019, the world produced 22 million tons of copper. So, a full transition to renewable energy would require 100% of the world’s annual copper production for the next 195 years.

That means that, for the next two centuries, there would be ZERO copper left over for anything else. Only renewable energy. Also bear in mind that solar panels wear out after a few decades… So, after 195 years, the world will have had to replace all of its panels at least 5 times.

Now, if you think that’s a daunting challenge, lithium and cobalt are even more interesting…

Global lithium and cobalt production in 2022 were approximately 130,000 tons each. Therefore, based on Prof. Michaux’s estimates, the transition to renewable energy requires 1,676 years of annual cobalt production, and a whopping 6,915 years of lithium production.

No, those are not misprints.

In short, the climate fanatics don’t realize that their renewable energy dream requires so many raw materials that it would take nearly 7,000 years to mine all the necessary resources.

But reality has never been their area of expertise. Instead, they fly around on their private jets to luxurious climate conferences, to complain about fossil fuel companies. They pass legislation and resolutions. They put out hit jobs in the media.

But just like the humble pencil at the beginning of this article, the fanatics and central planners don’t contribute a single thing. They don’t mine an ounce of lithium, manufacture any solar panels, nor produce even 1 kilowatt-hour of electricity.

Does this sound a bit ridiculous? We think so too. And this is why, no matter how fanatical the climate cult becomes, fossil fuels aren’t going anywhere for a long, long time… not without most of the world’s population sitting in the dark. And we don’t think people will stand for that.

From an investor perspective, this is a critical point to understand, because fossil fuel companies have become some of the most hated in the world.

Large funds and woke investors have sold their shares of fossil fuel businesses, pushing valuations down to absurd levels. We’ve written about this before – highly profitable oil and gas companies sell for as little as TWO times earnings… simply because no one wants to own them.

We think that sentiment will eventually change… and even Team Green Dream will realize that oil and gas companies are vital to the global economy, and even vital to a green transition.

(They’ll also eventually realize that nuclear power absolutely MUST be part of the solution, hence why we think uranium has such substantial upside potential.)

When that day comes, and the renewable energy fantasy starts to collapse, many of today’s most hated energy companies will soar in value. And investors who are savvy enough to buy shares today, while they’re still absurdly cheap, stand to do extremely well.

To your freedom,   Simon Black  Sovereign Man.Com

https://www.sovereignman.com/trends/it-will-take-nearly-7000-years-to-achieve-greta-thunbergs-fantasy-148186/

Maybe It’s Time For Plan B To Become Plan A

Maybe It’s Time For Plan B To Become Plan A

Notes From the Field By Simon Black  September 13, 2023

The top two headlines in today’s Wall Street Journal say it all:

The first one is “US Inflation Accelerated in August as Gasoline Prices Jumped”.

And the second explains that “Exploding Budget Deficits” are here to stay.

These are technically two different stories about two separate issues. But I’ll show you how they’re related, and how they point to the same conclusion: higher inflation is not going away.

The first story talks about the latest inflation numbers. No one who has visited a grocery store or gas pump over the past few months should be surprised-- fuel prices are higher, and inflation has risen.

And ultimately this is a story about the rising cost of energy.

Remember that energy is one of the most important commodities in the world. Full stop. Every single activity in our modern world-- driving to work, browsing the Internet, heating a home, manufacturing new iPhones, mining copper, farming soybeans, etc. requires energy in some form-- gasoline, electricity, propane, etc.

And this means that cheap energy is critical to keeping inflation low.

Yet energy demand increases every year, for two key reasons:

First, there are obviously more people in the world each year. And rising global population means more energy demand.

Second, per-capita energy demand is also on the rise; in other words, the average individual around the world consumes more and more energy each year.

It’s pretty easy to understand why. In the US, for example, primary energy consumption is about 88.2 MWh per person per year. (A MegaWatt-hour, or Mwh, is a unit of measurement for energy).

That’s about 5x more than the global average, according to the US government’s Energy Information Administration.

So as lesser developed economies (like India) grow and become more advanced, their per-capita energy consumption rises dramatically.

And this is what’s actually happening; per-capita energy consumption rose more than 7% in India last year. In Indonesia it rose nearly 20%.

So global energy demand is clearly on the rise. And with very few exceptions, this trend has been very steady for the past several decades.

Energy supply, on the other hand, is a troubling story.

The #1 source of new energy supply growth over the past ~15 years has been shale oil in the United States. Shale created an American energy bonanza, propelling the US to triple its oil production in less than a decade and surpass Saudi Arabia as the #1 oil producer in the world. It’s all thanks to shale.

But those shale fields are quickly becoming depleted. This isn’t some crazy conspiracy theory or hidden secret-- the shale oil CEOs have been very public about their peak production.

Given that US shale oil accounted for virtually ALL the growth in energy supply over the past ~15 years, the depletion of these shale fields means there could be quite a bit of stagnation in oil supply.

It doesn’t help that other major producers like Saudi Arabia have also reached peak production. Again, this isn’t a conspiracy theory; Saudi Arabia’s Crown Prince “MBS” stunned the world last year when he said that his country didn’t have the capacity to increase its oil output.

The result of these future supply and demand imbalance issues should be pretty clear: higher energy prices.

And, again, since energy is a major factor in nearly everything-- food, fuel, manufacturing, etc., higher energy prices will cause higher inflation.

In theory this is an easily fixable problem. It’s not like energy companies don’t know how to explore, drill, and produce. And there are still places in the world (like Venezuela) that have vast, untapped oil reserves.

Unfortunately there’s an army of fanatics who are doing everything they can to block energy companies from producing more… including idiot protesters who literally glue themselves to the pavement or interrupt sporting events with glitter bombs.

The US government never misses an opportunity to frustrate and obstruct oil companies. They deny permits, they pass costly regulations, they impose punitive taxes, and they regularly demonize the industry.

Moreover, powerful investors like Larry Fink have forced banks and funds to deny much-needed capital to the energy sector, which reduces new discoveries and future production.

These same fanatics also willfully reject other obvious energy solutions like nuclear power, while clinging to the mythology that inefficient solar technology-- which requires a 9-year old child in the Congo to mine cobalt with his bare hands in toxic conditions-- will save the world.

Nothing goes up or down in a straight line, and gasoline prices will certainly go through periods where they rise and fall. But over the next several years, the current trajectory is pretty clear: energy will remain expensive. And that means higher inflation.

The second story in the Wall Street Journal this morning was about government spending.

And while there are some states in the US which routinely achieve exemplary fiscal results, politicians at the national level have absolutely no clue how to live within their means.

The federal budget deficit for Fiscal Year 2023 (which closes in 17 days on September 30th) will reach approximately $2 trillion. And as the Journal points out, there is no end in sight.

Annual spending on mandatory entitlement programs like Social Security and Medicare will reach a whopping $3 trillion over the next several years. And yet politicians from both parties insist that those programs will not be cut.

Simultaneously, gross interest on the debt could rise to $2 trillion annually within the next five years if interest rates remain at current levels.

This means that annual deficits will keep rising… and this is highly inflationary. Everyone alive has experienced first hand how excessive government spending over the past couple of years has contributed to nasty, stubborn inflation problems.

But it’s even more important to understand that the US government NEEDS inflation to stay alive. At $33 trillion (and rising), the US national debt is simply too large at this point. And their only realistic option is to keep inflation in the 5-6% range, and repay the debt with increasingly worthless dollars.

These two points together-- energy and government spending-- paint a very clear picture of why inflation will likely remain higher for a long time.

And there are other forces as well which will contribute to higher inflation-- geopolitical conflict, rising taxes, anti-capitalist “Bidenomics”, etc.

Again, these are all fixable problems. But the people in charge seem to have neither the competence nor desire to fix problems. They usually just make things worse.

Even when someone slaps them in the face with an obvious warning, they ignore it. When Fitch downgraded the US government’s credit rating last month, for example, the President and Treasury Secretary were genuinely bewildered; they found it incomprehensible that analysts wouldn’t have 100% confidence in their administration.

These people have a dangerous reality distortion field, and they’re clearly blind to the glaring dangers on the horizon.

Ever since I launched Sovereign Man back in 2009, I’ve been writing about the need to have a Plan B, just in case some of these risks come to fruition.

Yet when the risks are this obvious, and the people in charge so incompetent, it’s time to think about Plan B becoming Plan A.

To your freedom,   Simon Black, Founder   Sovereign Man

https://www.sovereignman.com/trends/maybe-its-time-for-plan-b-to-become-plan-a-148159/

This Unique Loophole Exempts 100,000 Americans from Taxes

This Unique Loophole Exempts 100,000 Americans from Taxes

Notes From the Field By Simon Black  September 11, 2023

By the late 1800s, the South Pacific island chain of Samoa faced an existential crisis. After squabbles between German, British, and American forces over the previous decades, Germany had taken the western islands of Samoa, and asserted its unpopular control over the people.

The eastern islands, however, were controlled by the United States with a lighter touch. And these Samoans had a good relationship with US merchants involved in the island’s coconut trade.

But rival Samoan factions still fought amongst each other.

High Chief Mauga was a prominent leader on the island of Tutuila which included the Pago Pago harbor— a site that was strategically important to the US Navy.

High Chief Mauga calculated that by aligning with the United States, his island would be protected from German aggression and internal strife.

And that’s why he was among the chiefs who signed The Deed of Cession of Tutuila, on April 17, 1900.

Importantly, this agreement protected Samoan autonomy and property. And it specifically made American Samoans US “nationals”— a status later solidified by the passage of the Samoa Act of 1929.

Now, there is a bizarre legal distinction between being a US citizen and being a US “national”.

To this day, as US nationals, Samoans are issued US passports and can travel globally just like any US citizen. Samoans can also visit, live, and work within the United States. They cannot, however, vote in federal elections or hold certain public offices.

This makes American Samoans distinct among the inhabitants of other American territories such as Guam and Puerto Rico who are born US citizens.

To clarify, all US citizens are also considered nationals. But not all US nationals are US citizens. Strange, right?

Today, between 50,000 to 100,000 American Samoans globally enjoy this unique status. And I say “enjoy” because being a US national and not a US citizen comes with a huge benefit:

US nationals are NOT subject to the United States’ policy of taxing citizens on their worldwide income, no matter where in the world they live or earn money.

It’s true that other US territories can set their own tax policy for bona fide residents to follow. That is why living in Puerto Rico is such a great option for Americans to legally reduce their tax rate.

But if Puerto Rican born citizens move off the island, whether to the United States mainland or overseas, they will owe taxes to the IRS because they are still US citizens.

But this is not the case for American Samoans. As US nationals, they are not subject to worldwide taxation while living in American Samoa, or anywhere else.

Sure, if an American Samoan as a US national lives in, say, California, he or she will pay all the applicable federal and state taxes, just like any other US resident.

However, if they leave the United States, they stop being subject to IRS jurisdiction altogether. That means US nationals (who are not citizens) can have a tax-free and reporting-free life if they move to one of the many countries with no income tax, or a territorial tax.

And again, that’s a critical distinction from US citizens, who remain under Uncle Sam’s tax jurisdiction no matter where they live.

Now, I’d love to tell you that there’s an easy way you could swap your US citizenship for US nationality. So far we haven’t found one... but we’re still looking.

There is, however, a way for some people to create this benefit and set their future children up to be US nationals.

Most people won’t qualify; if you’re a US citizen and have lived in the United States for at least one continuous year at any time during your life, then even if you have children born in American Samoa, they would inherit your US citizenship.

If, however, you are one of the approximately 9 million “accidental Americans” globally who were born with US citizenship but have never actually lived in the US, then technically you could have a child in American Samoa... and that child would become a US national (NOT a citizen).

In addition, non-Americans could also make this work.

Children born in American Samoa to non-American citizens also become US nationals but not citizens.

There are still challenges...

For example, American Samoa only allows non-Americans to visit for 30 days at a time. It is possible, however, to extend this another 30-days with a local sponsor, or up to a year if you enroll in the local community college, or get a job on the island— they are somewhat desperate for certain qualified professionals.

Naturally we realize that this is a unique situation that will apply to only a handful of people.

But this is just one of many obscure legal quirks that we routinely uncover in our research that can be used to reduce taxes, expand your living options, or pursue other global opportunities.

The point is that having a broad understanding of these sorts of policies can open up doors all throughout the world.

And when you’re forming a strategy to live your life by your own design, it pays to be armed with this sort of knowledge.

To your freedom,  Simon Black, Founder   Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/this-unique-loophole-exempts-100000-americans-from-taxes-148152/

The Dollar’s Decline Remains an Extremely Likely Outcome

The Dollar’s Decline Remains an Extremely Likely Outcome

Notes From The Field By Simon Black  September 5, 2023

When the first shot rang out at Dealey Plaza on November 22, 1963, most bystanders didn’t even realize that it was the sound of gunfire.

But Texas Governor John Connally was an avid hunter. He recognized the sound, sensed danger, and turned behind him to check if President Kennedy was OK.

Moments later, the second shot was fired, striking Connolly in his back. And as he looked down and saw his blood-soaked shirt, he shouted, “My God, they’re going to kill us all.”

President Kennedy, of course, did not survive. But Connally eventually made a full recovery. And, having achieved near mythical status in the State of Texas, he was re-elected twice more as governor.

Then, in 1971, President Richard Nixon asked Connally to be Treasury Secretary. Connally accepted the post despite having almost zero experience in finance or economics. And when questioned later by reporters about his obvious lack of credentials, he famously quipped, “I can add.”

(Connally later declared personal bankruptcy.)

The US economy was in bad shape at the time; Nixon’s predecessor, Lyndon Johnson, had spent aggressively on the Vietnam War while simultaneously spending billions of dollars-- a prodigious sum in the 1960s-- on education, anti-poverty, and welfare programs.

And inflation rose to around 6% thanks in large part to this excessive government spending.

Developed countries around the world began to rapidly lose confidence in the US dollar and the American government’s ability to manage its finances. And the Treasury Department started receiving demands from foreign governments who wanted to redeem their US dollars for gold.

Nixon was in a bind about how to fix the economic mess. And it was Connally-- full of Texas swagger (and little else)-- who convinced the President to formally end the dollar’s convertibility into gold.

Nixon made the announcement on Sunday night, August 15, 1971, unilaterally ending the “Bretton Woods” international monetary system that had been in place since 1944.

The announcement became known as the “Nixon Shock”. And “shock” is probably the right word. Foreign governments were in a panic; their entire financial system had been snatched away, overnight, without any warning. And politicians don’t tend to handle uncertainty very well.

This is where Connally stepped in yet again to smash foreign governments in the face with their new reality. “The dollar is our currency,” he told his fellow finance ministers in late 1971, “but it’s your problem.”

Connally was essentially pointing out that the rest of the world didn’t have an alternative to the US dollar. Nearly every nation on earth conducted international trade in US dollars. And because they had no other alternative, the US government could do whatever it wanted… including rack up huge deficits and painful inflation.

And that’s what happened. With no reason to restrain itself or have any financial modesty whatsoever, US government spending soared. Deficits piled up year after year, leading to a particularly nasty episode of stagflation in the 1970s.

Connally was a major architect of this mess, leading one of his critics to later say, “He ain't never done nothin' but get shot in Dallas. . .”

In fairness to Connally, that judgment isn’t entirely true. One of his lasting legacies was scaring the world into setting up an alternative to the US dollar.

Europeans in particular were freaked out by the Nixon Shock… so much, in fact, that western European nations eventually banded together to form their own currency as an alternative to the US dollar; today the euro has about a 20% share of global financial reserves.

But with a 60% market share, the US dollar is still dominant. For now.

More than fifty years after the Nixon Shock, the US government still has no financial restraint. Annual deficits easily top $2 trillion, nearly 10% of GDP. America’s fiscal situation is so bad that, within the next decade, 100% of tax revenue may be consumed just to pay for mandatory entitlements (like Social Security) and interest on the debt.

If that weren’t bad enough, the Treasury Department has also made a habit of weaponizing the US dollar, i.e. threatening individuals, businesses, and foreign governments to bend to its will or else be cut off from the global financial system.

It’s no wonder that there’s been so much in the news lately about alternatives to the US dollar. Late last year, for example, Saudi Arabian officials said that they were “open” to selling oil in a currency other than US dollars (i.e. Chinese yuan).

And just a few weeks ago, members of the “BRICS” alliance expanded their membership in an effort to directly challenge the dollar’s dominance.

Now, I’ve been writing about the eventual decline of the US dollar for several years. More than a decade ago, for example, I argued that the market would seek an alternative to the US dollar “gradually, rather than suddenly”.

That was considered a highly controversial assertion back then. Today, the dollar’s decline is a mainstream view.

But even though I held this view way before it became popular, I have to be contrarian now and say the burgeoning “BRICS” agreement is NOT the end of the dollar.

The BRICS members include Argentina-- a country that is perennially in a state of default and hyperinflation; Ethiopia, which has a GDP per capita of just $925; and South Africa, a borderline failed state.

China is obviously the anchor of the BRICS alliance. But at the same time, no one really trusts the Chinese government. And America, for all of its problems, is still viewed as a more reliable steward of the global reserve currency than the CCP… whose threats against Taiwan are not inspiring confidence.

What is clear is that the international financial order is going to change. The United States can no longer impose the “Connally Doctrine,” i.e. the dollar is our currency but your problem.

This is hardly controversial anymore. The US cannot have a gargantuan debt, uncontrolled spending, incompetent leaders, and a weakened military, and yet still expect to be the world’s dominant reserve currency.

I think a far more likely scenario is that there will be an event… probably some time between 2028 and 2035, that triggers a formal agreement to reset the global monetary system.

It could be Social Security running out of money (currently projected in 2033), which requires Treasury to borrow $10+ trillion to bail it out. Or perhaps another debt ceiling showdown that results in a default on the national debt. Or it could be another major banking crisis. Or even a major global war.

Whatever the cause, I suspect this event will compel leading nations to call a formal conference, similar to the Bretton Woods conference in 1944 that established the first modern financial order.

The US will be much weaker at that point. But it will still have a seat at the negotiating table.

Today, BRICS is a very loose affiliation of countries who don’t trust each other. This isn’t going to replace the dollar.

My view is that whatever agreement ultimately knocks King Dollar from its throne will have the US Treasury Secretary’s signature on it.

But regardless of how it plays out-- and what ultimately triggers it-- the dollar’s decline remains an extremely likely outcome.

Technically the dollar’s problems are still fixable. The national debt is fixable. All problems are fixable.

However America’s pitiful leadership seems to lack both the ability and desire to enact real solutions. And as long as this trend holds, it makes sense to plan on the dollar’s eventual decline as the world’s primary reserve currency.   And this means real assets… and in particular exposure to gold.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/he-aint-never-done-nothin-but-get-shot-in-dallas-148113/

America Desperately Needs “Captain No”

America Desperately Needs “Captain No” 

Notes From the Field By Simon Black  August 29, 2023

I’ll never forget the first time I met “Captain No”.

I was a young, 17-year old new cadet at West Point about to take my first Physical Fitness test-- a semiannual requirement in the military that involved a bunch of push-ups, sit-ups, and running. The physical fitness test was proctored… meaning that a veteran Army officer would literally stand there and watch me do push-ups. And if I didn’t do them properly, i.e. go all the way up, all the way down, the repetition wouldn’t count.

By sheer misfortune, the Army officer proctoring my first exam was a stern, mean-looking captain. He was built like a featherweight boxer but had enough pent-up anger to punch like Mike Tyson. I suppose I would too if I had to watch teenagers do push-ups for a living.

Little did I know that this Army officer was legendary at West Point for his fanatical, absolutist approach to physical fitness tests. And the cadets had given him a special nickname: Captain No. I soon found out why.

When it was my turn, I walked over to the exercise area and greeted him. He brusquely told me to get into position, and then he blew the whistle. My two minutes of push-ups had started.

The first 10 or 15 repetitions were a breeze, and I remember thinking, “this guy is no big deal”. Then came the first “No!” from the captain. Apparently I hadn’t gone down all the way. Or all the way up. Who knows.

But I didn’t let it faze me and went down for another push-up. “No,” he announced again, with similar disregard as a police officer who has demanded to see your license and registration.

I couldn’t figure out what I was doing wrong-- push-ups aren’t exactly a complicated maneuver. But the more I cranked out, the more he kept rejecting them. “No. No. No. No,” he went on, like a monotonous broken record.

I barely passed my exam that day. And, fortunately for me, I never ran into Captain No ever again during my time at the academy. But he became one of those people that, you only have a brief encounter with, but remember for the rest of your life.

Sometimes I randomly think about him and wonder what he’s doing.

And, to be honest, lately I’ve been wishing that he would suddenly turn up and announce his candidacy for President. Because I believe that America desperately needs Captain No.

I watched last week’s Presidential debates-- mostly out of curiosity.

And, while I came to the conclusion that there are a handful of candidates who understand the problems, it’s also obvious that hardly anyone (including the moderators, or the public in general) actually understands the limits of Presidential authority.

This is pretty common. Every four years, candidates invariably make promises to voters about what they’re going to do. Most of the time they stick to high-sounding platitudes like “invest in jobs” or “get the economy going” or “stand up to China”.

Of course, these slogans mean absolutely nothing because they’re accompanied by no detail whatsoever.

Occasionally, however, political candidates make specific promises… like banning assault weapons, banning abortion, raising taxes, cutting taxes, etc. Sometimes candidates will even promise to do these things “on Day 1 in office”.

The reality is that most of these promises go far beyond the legal authority of the President. With VERY limited exception, the President cannot change tax rates, ban anything, or even so much as spend much money without Congressional approval.

The one key power he has-- especially when it comes to the economy-- is to veto Congressional spending bills. And that’s why “Captain No” is so desperately needed.

Excessive federal spending is quickly becoming the most critical issue affecting the US economy. There’s simply been too much of it for far too long.

Nearly four years ago, just after the close of Fiscal Year 2019, I wrote a concerned letter about the state of government finances.

FY19, I wrote, was “literally, the BEST year EVER measured by short-term US financial performance.”

In 2019, the stock market had reached an all-time high. Real estate had reached record highs. Corporate profits were at record highs. Unemployment was near an all-time low.

Things couldn’t get better for the US economy. And as a result, federal tax revenue also reached an all-time high; the US government was swimming in cash like Scrooge McDuck.

Not to mention, there were no major emergencies in 2019. No recession. No war. Everything was perfect.

Yet even with all that perfection, the federal government STILL managed to increase the national debt by more than $1 trillion that fiscal year.

And I wrote on October 1, 2019,

What’s going to happen when the economic sun isn’t shining so brightly?

It would be foolish to expect every year to look like Fiscal Year 2019. Honestly, the combination of so much good news and so little bad news in FY19 was pretty rare.

There absolutely WILL be problems in the future. Recessions, panics, downturns, bear markets, natural disasters, trade wars, military conflicts, debt crises, pension crises, etc.

Well, we found out the following year. Disaster struck. And by the close of FY20 (on October 1, 2020), just one year after I wrote those words, the national debt had increased from $22.6 trillion... to $27 trillion. In a single year.

Today the national debt is almost $33 trillion, up $2 trillion from the start of the current fiscal year that started last October. And yet, like in 2019, this year there was no national emergency. No pandemic. No existential crisis where they had to spend “whatever it takes”.

And yet, even under fairly normalized conditions, the people in charge have still managed to overspend by $2 trillion this fiscal year.

This level of reckless spending is cancerous for the US economy.

For starters, reckless federal spending is a major driver of inflation, which hurts just about everyone.

Reckless government spending also means that there’s less private capital available to invest in the economy… something known as the “Crowding Out Effect”.

In other words, whenever the government spends too much, it means they have to borrow more money. This is why the national debt increases.

But the amount of savings in the economy is not infinite… especially now that the Federal Reserve is reducing the money supply.

So as the government borrows more money, there will be less money left over to invest in businesses. This hurts US productivity… which actually makes the problem worse.

Lower productivity means the economy will grow more slowly (or not at all). And slower growth means lower tax revenue… which means the government will have to borrow even more money.

You can see how nasty the cycle can become.

It’s also worth noting that continued deficits also risk the US dollar’s status as the dominant global reserve currency… which would be yet another catastrophe.

The Land of the Free is quickly reaching a bifurcation point where excessive spending and outrageous deficits could create a terrible economic spiral that is very difficult to escape.

If the US wants to avoid complete disaster, the deficits have to stop, and the government has to learn to live within its means.

This takes me back to the President’s authority.

The only real power the next President will have is to veto any budget or legislation that exceeds tax revenue.

And this is why America needs “Captain No”.What’s the worst that could happen if excessive Congressional budgets are vetoed?

I would have loved to see the guy on stage at the debate last Wednesday and say, “I will literally reject every Congressional action that increases the national debt by a single penny. And if you think I’m bluffing, just try me. I’m Captain No, dammit.”

What’s the worst that could happen if excessive Congressional budgets are vetoed? Another government shutdown? Hallelujah.

Do you remember the last shutdown a few years ago? I doubt any of us woke up in a cold sweat fretting that the Department of Commerce was closed.

The ‘essential’ workers (like the military) still came to work… leading me to wonder why the government even has ‘non-essential’ workers to begin with.

This situation is fixable. There is still a VERY LIMITED window for the US government to get spending under control, re-establish the primacy of the dollar, and increase economic productivity.

It might take “Captain No” to get it done. But in case the guy doesn’t show up, it certainly makes sense to put together your Plan B… before you need it to become your Plan A.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/america-desperately-needs-captain-no-148097/

If You Think Gold Is Worth Owning, Wait Until You See Uranium

If You Think Gold Is Worth Owning, Wait Until You See Uranium

Notes From the Field By Simon Black   August 21, 2023

Gold has its merits. It has been valuable for thousands of years, and has some industrial applications as well.  But holding a kilo of gold in your hand, all you can really do is admire it, and appreciate that it is a great store of wealth.

Holding a kilo of uranium, you have in your hand a resource that has enough energy to supply a day’s power to 30,000 people.  That's not just impressive; it's transformative in a world being run by absolute buffoons.

Politicians, in their infinite wisdom, continue to plunge the US into deeper debt, racking up trillions in deficits year after year. 

And when global credit rating agencies like Fitch sound the alarm on their fiscal irresponsibility, these politicians don't just turn a deaf ear; they outright reject and ridicule the warnings.

 They gaslight the public and say: No! There is absolutely nothing wrong with borrowing trillions and trillions and racking up debt worth 120% of GDP. Fitch is the crazy one, not us!

Then they dump all this borrowed money into things like the “Inflation Reduction Act." Shockingly, turns out that had nothing to do with inflation. It was a thinly veiled attempt to appease climate fanatics.

Don't misunderstand me. I'm all for clean air and a pristine environment. But I also believe in making informed decisions. The hard truth is that wind and solar energy are not efficient nor cost-effective.

But fanaticism blinds people to facts and data.

We witnessed this during the pandemic, with decision-makers adopting a "whatever it takes" approach, sidelining critical data in favor of emotional reactions. And emotional decisions are usually bad decisions.

The climate fanatics dream of a world powered solely by wind and solar.

But that’s delusional.

Just consider that the largest solar field in the world requires nearly FOUR HUNDRED square kilometers, and produces about 11,400 GWh of electricity per year.

The Kori nuclear plant in South Korea, on the other hand, has a footprint of just a few dozen acres, yet it produces 4x as much electricity.

Converting the world to solar would require hundreds of thousands of square kilometers full of solar panels and wind farms. Just imagine how expensive that land would be. Or how much cobalt, silicon, lithium, etc. would need to be mined and produced.

To transition fully to wind and solar, the world would need billions and billions of pounds of extra materials that are simply not available.

Or you could use one little rock of uranium to provide the daily energy needs of 30,000 people.

Sure, the up-front capital costs are much higher for nuclear. But over the life cycle of a modern plant, the average cost per kWh of electricity is comparable (or less) than solar.

And finally, after being abandoned and ignored for years, policymakers are starting to turn back to nuclear. This isn’t just wishful thinking. It’s happening… if not in the US, then around the world.

There are around 415 reactors currently supplying nuclear energy to the world. There are 59 new ones under construction, and 111 in early stage development. Another 300+ have been proposed. The vast majority are in Russia, India, and China.

(The US has just one under construction. Germany removed all theirs and now has 0. Sweden has 0. France has 1. The “developed” countries are way, way behind.)

Yet even with just 415 active nuclear plants, uranium is already in short supply.

In 2021, for example, nuclear plants used 73,698 metric tons of uranium to produce electricity. Yet total uranium mine output that year was just 56,377 metric tons.

In other words, mines aren’t producing enough uranium... and they haven’t been for most of the last decade. Nuclear plants have had to draw down on their previous stockpiles.

(My colleague Adam Rozencwajg of Goehring & Rozencwajg recently published some great research on the topic, showing uranium stockpiles to be at their lowest levels in nearly 20 years.)

Think about it— if uranium is already in short supply today, just imagine how undersupplied the market will be in the future when these new reactors come online.

Most likely this would result in a major price surge in uranium.

We’ve talked recently about how gold could double, triple, or even more in price over the coming years.

Uranium essentially has similar upside as gold, but with the additional benefit of being a transformative fuel that can provide a cheap and abundant source of energy.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/if-you-think-gold-is-worth-owning-wait-until-you-see-uranium-148076/

Why We Think Gold Companies Can Go 10X In The Coming Boom...

 Why We Think Gold Companies Can Go 10X In The Coming Boom...

Notes From the Field By Simon Black

With a current annual budget deficit of $1.6 TRILLION – set to hit $2 trillion by the time the fiscal year ends in September – the US Federal Government is putting drunken sailors everywhere to shame.

At the end of the 2019 fiscal year (just before Covid-1984 hit), the US national debt was $22.7 trillion. Today, it’s nearly 50% greater: $32.7 trillion. And it keeps growing each year.

Just yesterday, our founder, Simon Black, explained that most of the US national debt was accumulated over the past ~15 years, when interest rates were super low. The Treasury Department got accustomed to being able to borrow for less than 1%.

In fact, as late as August 2021, the average interest rate that the US government was paying on its national debt was just 1.45%.

But now interest rates are MUCH higher. The government is now paying an average interest rate of 2.8%, almost twice as high as just two years ago.

The national debt is so high, though, that even 2.8% is too expensive for the US government.

This fiscal year (which ends on September 30, 2023), the Treasury expects to spend a whopping $864 billion just paying interest on the national debt. Again, that’s with an average rate of just 2.8%.

The real problem for the federal government is that roughly 75% of the debt will mature over the next five years. And as their current debt comes due, they’ll pay it back by issuing NEW debt at a HIGHER interest rate.

This means that the government’s average interest rate that it pays on the national debt could rise to 5% over the next five years.

Including all the new debt they project to accumulate over that period of time, this means that the government would have to spend $2 TRILLION of taxpayer money, each year, just to pay interest.

And frankly, paying an average 5% interest on the national debt is still pretty low given US financial history.

The average rate was 5% as recently as 2007. In 2001 it was nearly 7%. And throughout much of the 1980s, rates were in the double digits. So forecasting a 5% average interest rate on the national debt within five years is totally reasonable.

Remember too that, in addition to paying interest, “mandatory” spending on entitlement programs like Social Security and Medicare will hit $3 trillion in a few years.

This means that Social Security, Medicare, and Interest on National Debt could soon exceed 100% of the US government’s tax revenue.

This looming fiscal crisis will fast become a mainstream issue. And politicians will predictably react by raising your taxes sky high to pay for their incompetence.

Simon anticipates the Federal Reserve to try to bail out the government… by slashing interest rates back to 0% and printing trillions of dollars to buy US Treasury bonds.

The consequence, of course, will likely be more inflation.

Why buying gold – and gaining portfolio exposure to it – makes a lot of sense in 2023

As longtime readers of Sovereign Man will know, all of the above is exceptionally bullish for gold.

Now, gold can be a lot of things. It can be a great asset protection tool. It can be a great speculation. It can be a great way to pass on wealth to your kids.

But gold also has a 5,000 year track record as a reliable hedge against inflation and a range of systemic risks.

Most people suffer to some degree from normalcy bias; this is the belief that tomorrow will be very similar to today. Yet the past few years have shown that the world can become radically different… overnight.

And it is precisely during these kinds of Black Swan events and sudden system shocks that physical gold can be an invaluable asset. This is one of the reasons why gold predictably went through the roof during the pandemic.

Yet now that the dust has settled on the pandemic, few people are thinking about buying gold.

In fact, gold prices have remained pretty flat since 2022. An even better example is that many gold-related businesses (including mining companies) are currently trading at ludicrously cheap levels.

But when you consider the obvious risk of a major financial crisis in the US over the next five years, you don’t need to be a gold bug to appreciate gold’s significant potential upside…

It should also be noted that central banks were extremely active buyers of the metal in 2022, buying at a speed not seen since 1967. (Central banks’ purchasing behaviors are a key driver of gold price increases.)

Karl Bagga, the editor of our investment newsletter The 4th Pillar, (which is focused on real assets) believes that we are in the early stages of a significant bull market for gold.

Simon agrees. In fact, he’s argued a few times why gold could trade at $5,000+ in the coming years, up from around $1,900 per ounce today.

How YOU Can Cash In On The Coming “Gold Rush”...

Many investors who consider investing in gold automatically buy into an ETF (exchange-traded fund). Simon has written before that these gold ETFs carry substantial hidden risk which most investors won’t notice… unless they do what Simon does, and actually read all the legal disclosures.

That’s why, at Sovereign Man, we far prefer owning physical gold over ETFs. But more on that another time.

Rising gold prices also present tremendous upside for mining companies and related businesses, including:

Mining royalty companies

Mining financial services providers

Gold millers and refiners

Mining services companies

As well as technology and service providers for mining and complementary sectors…

These are the exact kinds of companies that regularly feature in the page of The 4th Pillar (4P), our real asset focused investment letter.

For example:

One of the recently featured companies from Karl’s research in The 4th Pillar is a gold-related business that specializes in drilling, site work, and processing.

It’s a “picks and shovels” business rather than a mine itself. So the company makes money from a gold mining boom, but without the same downside risk.

The business has been performing exceptionally well, has very little debt, and is generating record revenue with very strong profitability. And yet, with a price-to-earnings ratio (PE) of just 4.5, the stock is incredibly cheap right now.

Another example from Karl’s research is a gold ore processor; this is a company that purchases raw gold (i.e. rock ore) from small miners, processes it in bulk, then sells the processed gold to a large refiner.

Being an ore processor will position them for enormous gains in the coming gold boom; their business – already very profitable – will likely grow even more dramatically over the next few years, resulting in a big win for investors.

In the meantime, the company is already paying its investors a healthy dividend. Plus, they have zero debt and tons of cash on the balance sheet. Yet it also currently trades at a laughable 5.5x valuation.

The Bottom Line

Gold miners and gold production companies offer excellent opportunities to make serious profits from the coming boom in gold prices. And that opportunity exists right now because, for whatever reason, investors are largely ignoring the entire sector.

That’s probably not going to last.

Good investing,

Simon Black & Sovereign Man Editorial Team

To find out more, click here.

I’m Rooting For Gold To Go To Zero. Too Bad It Won’t

I’m Rooting For Gold To Go To Zero. Too Bad It Won’t

Notes From the Field By Simon Black  August 15, 2023

By the time Wang Mang seized the imperial throne of China’s Han dynasty in the year 9 AD, he had already been a long-standing politician and government bureaucrat with decades of experience.

Not that Wang’s experience was especially helpful to the people of China.

As a seasoned politician, Wang’s biggest skills were setting up his opponents, cheating his way to the throne, and coming up with terrible ideas to destroy prosperity.

China’s Han dynasty had once been the pinnacle of civilization, most likely even surpassing the grandeur and wealth of the Roman Republic and ancient Greece. But Wang was one of the key figures who helped tear it down.

As emperor he was a total disaster. Wang had a thing for social and economic justice… so he imposed a bunch of idiotic land reforms to reduce inequality and form a more egalitarian society.

Instead of the ‘justice’ that he had envisioned, agricultural production plummeted and a lot of people went hungry.

Failing to see his error in judgment, Wang Mang doubled down by nationalizing entire industries, which only stifled investment and entrepreneurship.

Soon the Chinese economy was in the dumps. Prices soared. So the Emperor then (naturally) hatched the genius idea of imposing severe price controls… resulting in even more shortages and economic hardship.

He then tried to fix the shortages by taking over the labor market and essentially try to control what everyone did and where they worked.

But Emperor Wang wasn’t quite finished with his crusade for justice. He tried to pay for his mistakes by severely debasing the currency… which caused even more inflation and social unrest.

Wang Mang’s story is one of how complete and total incompetence results in disastrous consequences for an entire nation. History has witnessed countless other examples… and we’re seeing it play out again in our own time.

Today’s incompetent leadership is just as bad as Wang Mang; as I spelled out in yesterday’s missive, the US government has lost all ability to live within its means. They have spent trillions of dollars on their perverted ‘justice’ programs and environmental crusades.

Spending has gotten so bad that a $2 trillion yearly deficit is NOTHING anymore. Yet the continued accumulation of these deficits has created a gargantuan national debt.

As I mentioned yesterday, MOST of US national debt will mature over the next several years. Since the Treasury Department clearly does not have the money to pay back $25+ trillion in debt, their only option will be to issue NEW debt to pay off the old debt.

The problem, of course, is that the new debt comes with MUCH higher interest rates… and I explained that simply paying interest on the debt could exceed $2 trillion within the next five years.

On top of that, mandatory entitlement spending like Social Security and Medicare will hit $3 trillion. This means that just paying for Social Security/Medicare, and interest on the debt, could exceed 100% of tax revenue.

This scenario is potentially just five years away. At that point, it will be almost impossible for investors to have confidence in US government bonds.

US government bonds have long been considered the safest asset in the world. But if the Treasury Department has to blow $2 trillion just to pay interest, investors will quickly start looking for other safe havens. And one of those will be gold.

Think about it: there’s (currently) $32+ trillion in total US government bonds. This is MUCH larger than the gold market. So if even a small fraction of that US debt were to flow into gold instead, the gold price would go through the roof.

But there’s another scenario to consider, which frankly I think is more likely: the Fed steps in to save the US government.

One of the key reasons why the US government is in trouble (aside from their horrific spending habits) is that interest rates are so much higher than they used to be.

So the Fed can help the government out by slashing interest rates back down to 0%, which will make it affordable for the US government to finance its debt.

But this would come at a consequence; if the Fed slashes rates back down to zero, this would almost certainly result in another nasty bout of inflation… which would also mean higher gold prices.

So either scenario is bullish for gold.

Of course these two scenarios don’t even scratch the surface of all the political, financial, and economic problems in the US.

For example, there are still major risks lurking in the US banking system, including the fact that the Federal Reserve itself is hopelessly insolvent.

Social Security has less than a decade until it needs a bailout to the tune of tens of trillions of dollars.

And there’s also the likely possibility of the US dollar losing its dominance as the global reserve currency, likely this decade.

Gold should perform extremely well in any of these scenarios.

So in what scenario does gold NOT do well?

Well, gold does poorly in the “everything is just fine” scenario.

The war ends. Sensible politicians reign in spending. China plays nice and stops threatening to invade Taiwan. Economic growth goes through the roof. Inflation falls due to high levels of productivity and relative peace. Global trade booms.

As I’ve written before, this scenario is completely achievable, presuming competent leaders were in charge. And I’m really rooting for it.

In this scenario, gold would become a pointless relic… but I would happily welcome that outcome because everything else would be fantastic.

Unfortunately that scenario is unlikely… because the world is being run by a bunch of morons like Wang Mang.

If you feel like the trend in the world is more stupidity, more war, more socialism, more bad leadership, then you really ought to consider owning gold. In my view, a $5,000+ gold price is a pretty conservative estimate of where things go from here.

To your freedom,    Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/im-rooting-for-gold-to-go-to-zero-too-bad-it-wont-148054/

If You’re Not Thinking About Real Assets, You’re Going To Get Left Behind

If You’re Not Thinking About Real Assets, You’re Going To Get Left Behind

Notes From the Field  By Simon Black   August 14, 2023

“Scary” is the word that the Wall Street Journal used this weekend to describe the looming financial crisis in the US.  They said bluntly, “Washington has laid the seeds of a crisis that Wall Street can no longer ignore.”

I’ve been writing about this for 14 years; back then, it was highly controversial... almost conspiratorial... to suggest that the US government was in deep financial trouble. Today it’s front page news in the most prominent financial publication in the world.

To give you an idea of the problem, we can once again look at the government’s own data:

According to the Treasury Department’s most recent report from July 31, they’ve taken in $3.69 trillion in tax revenue so far this fiscal year.

Yet they’ve spent nearly $1.8 trillion on Social Security and Medicare, $726 billion paying interest on the debt, almost $900 billion on the military and veterans benefits.

In short, there’s only $284 billion left over for everything else in government. National parks. Homeland Security. The light bill at the White House. And $284 billion doesn’t go very far anymore.

Bear in mind that these people have spent (rather ominously) $666 billion so far this fiscal year just on “income security” alone, which is basically welfare and food stamps.

That’s why the budget deficit is already $1.6 trillion; by the time the fiscal year ends in September, it will probably be around $2 trillion... which is a complete train wreck by any standard.

Even worse is that this isn’t a one-off bad year. A $2 trillion deficit is actually a pretty good year for these people.

Before COVID, at the close of the 2019 Fiscal Year, the US national debt was $22.7 trillion. Today it’s nearly 50% greater, at $32.7 trillion. And it grows leaps and bounds every year.

The scariest part of the problem is that most of the US national debt was accumulated over the past 10-15 years (and especially the last 3-4 years) when interest rates were historically low.

That’s why the average interest rate on US government bonds back in, say, August of 2021, was just 1.45%. Rates were super low back then, and the government could borrow for almost nothing.

Today it’s a different story. All of the new debt that the Treasury Department borrows today carries much higher rates, upwards of 5%.

And this is an enormous problem for the US government: MOST of the current national debt will mature over the next five years.

But since Uncle Sam doesn’t have $32 trillion lying around, they won’t be able to pay that money back. Instead, they’ll refinance the debt by issuing new bonds to pay back the old bonds. Frankly it’s a bit of a Ponzi scheme.

But the new debt they issue won’t be at the ultra-low rates of the past. The government will have to pay whatever the current interest rates are— perhaps 5% or more.

And if the average interest rate on US government debt rises to 5% over the next few years, then they would have to spend a whopping $2 trillion just to pay interest each year.

On top of that, the annual bill for Social Security and Medicare would reach roughly $3 trillion.

Think about it— JUST paying interest, plus Social Security and Medicare, would exceed ALL federal tax revenue.

The US government will find itself in a position where they’ll need to borrow money and go deeper into debt just to fund the military, let alone everything else the government does.

Again, I’ve been writing about this for 14 years, so this analysis and conclusion is nothing new for long time readers.

But this looming fiscal crisis is very quickly becoming a mainstream issue. This means you’ll start seeing it more in the news... which will compel politicians to say something.

Their knee jerk reaction will be to raise taxes... which conforms to the rising popularity of socialism. For some reason there are still growing numbers of people who foolishly believe that high taxes and government spending create prosperity.

The other thing that is almost inevitable is that the Federal Reserve will start slashing interest rates again. No Fed Chairman wants to be held responsible for bankrupting the federal government. The only way to push this crisis further down the road is by returning to historically low rates.

So we can probably expect a reduction in interest rates, simply to bail out the federal government. And this would most likely lead to sustained, higher inflation.

In theory this is all fixable. America still has time to solve its gargantuan challenges. But time is rapidly running out.

And it’s for this reason why I’ve written for so long about having a Plan B... because, based on the government’s current trajectory, they’re just making things worse.

One key element of a Plan B in my opinion is considering real assets.

A real asset is a valuable resource that requires hard work, talent and ingenuity to produce, and cannot be conjured out of thin air by politicians or central bankers.

Real assets are scarce. They have universal value. And they are productive, or can at least be put to productive use.

Gold is an obvious example. It takes a lot of effort to produce an ounce of gold, and gold can be put to productive use. Most of all, central banks cannot conjure it out of thin air like they can print trillions of dollars.

This is the case with most commodities as well.

However some commodities are far more valuable and in-demand than others. Agriculture and energy, for example, are the most important resources in the world and will always be in demand.

Productive technology is also an important real asset; anything that makes the world better, faster, and cheaper has value (which is a key distinction from ‘consumer technology’, which just involves swiping and scrolling and wasting time).

Real assets are important because, historically and logically, they tend to perform extremely well in a fiscal crisis. People start looking for safe havens— and the best safe havens in a crisis are quality, valuable, scarce resources.

The time to be thinking about this is now; even though the fiscal crisis is completely obvious, most people are ignoring it... and hence ignoring real assets.

For now this is a huge benefit to investors, because many real assets (including many commodities, commodity-based businesses, productive technology) have never been cheaper.

So there are a number of bargains out there that could protect your wealth down the road in the event that America’s fiscal crisis continues to unfold.

To your freedom,   Simon Black, Founder   Sovereign Man

https://www.sovereignman.com/investing/if-youre-not-thinking-about-real-assets-youre-going-to-get-left-behind-148040/

Another Day, Another Downgrade For America. Today It’s The Banking Sector

Another Day, Another Downgrade For America. Today It’s The Banking Sector

Notes From the Field By Simon Black  August 8, 2023

Another day, another downgrade for America. Today it’s Moody’s Investor Service, one of the three major credit rating agencies alongside Fitch and S&P.  Last week Fitch downgraded the sovereign debt rating for the United States of America. And late yesterday, Moody’s downgraded the ratings of several US banks.  The implication? The seismic activity that we saw in the banking sector back in March isn’t over. This is no surprise for our readers-- we’ve talked about the ongoing risks in US banks several times since then.

The bottom line is very simple: higher interest rates are bad for banks… and it’s easy to understand why:

Banks typically own vast portfolios of bonds, including US government bonds, commercial real estate bonds, housing bonds, municipal bonds, and more. And one of the key influences over these bonds’ values is interest rates.

If you know nothing else about bonds, just keep this one simple rule in mind: when interest rates rise, bond values fall.

Remember that banks spent most of the pandemic buying up huge amounts of bonds at record low interest rates… as little as 0%. But now interest rates are MUCH higher than they were a few years ago.

This means that all the bonds that banks purchased back in 2020 and 2021 have lost an enormous amount of value.

In finance this is known as an ‘unrealized loss’. It’s similar if you buy a stock, but then the stock price falls. You haven’t actually lost money yet because you haven’t sold the stock. But on paper, you’re down.

It’s the same with the banks; their bond portfolios have lost a ton of value because interest rates have risen so quickly. So on paper, they’re down. A lot.

According to FDIC data, banks across the US had $620 billion in unrealized losses at the end of 2022, equivalent to roughly 30% of total capital. That’s a big number.

But banks actually account for their unrealized losses quite dishonestly. Yes I know it’s shocking to think that banks would be dishonest about anything, but it’s true. I’ll explain--

Banks have the option to categorize their bond portfolios in one of two ways. The first category is called Hold to Maturity, or HTM. By classifying a bond as HTM, the bank is essentially saying, “Hey, we will never sell this bond and intend to keep it until the bond matures.”

So if the bank buys a 30-year US government bond and classifies it as HTM, it means they intend to hold that bond on their books for three decades.

The other category is called Available For Sale, or AFS. Bonds that are classified as AFS are, as the name suggests, available to be sold on the market. So if the bank needs to raise some quick cash, it can liquidate some of its AFS bonds.

There is a key difference in how banks account for these different categories, though. Because AFS bonds might be sold, banks are required to revalue them every quarter and record a gain or loss.

So if the value of their AFS bonds decreases, for example, because interest rates keep rising, then the bank will record a big loss.

HTM bonds, however, don’t have to be revalued. No matter how far the HTM bonds may fall in value due to rising rates, banks never have to record a loss.

Naturally, bank executives don’t want to record losses. Losses mean falling stock prices, which mean lower bonuses and compensation.

So, instead of being intellectually honest about their bond losses, banks hide their AFS bond losses by magically reclassifying them as HTM.

This is a huge scam; it means that banks are deliberately understating their losses and overstating their financial strength.

Remember, the losses that the banks are actually reporting amounts to $620 billion. But how big would the unrealized losses be if they were actually honest?

Well, according to one recent working paper from the National Bureau of Economic Research, the real estimate on potential losses is $2.2 trillion.

This is a number so big that it virtually wipes out all the equity in the US banking system. Incredible.

Not to be outdone, the Federal Reserve is sitting on close to $1 trillion in unrealized losses-- also thanks to the rapid increase in interest rates that they themselves are perpetuating. It boggles the mind.

So it’s quite possible that the largest, most systemically important central bank in the world is hopelessly insolvent, and the US banking system has wiped out all of its equity.

The larger point is that the problems in the banking sector that we saw unfold several months ago haven’t gone away. In fact, given that interest rates are even higher than they were when Silicon Valley Bank went bust, the problems in the banking system have gotten worse.

Almost everyone (except for us) has been happy to ignore the growing risk in the banking sector. The Fed. The FDIC. The Treasury Department. Financial media.

Moody’s has finally pointed out that the emperor obviously has no clothes, citing the banks’ “sizable unrealized losses”.

Now, don’t get me wrong… I’m not suggesting that another major banking collapse is imminent. A house of cards can stand for a really, really long time as long as nothing disturbs it.

But don’t kid yourself and assume that banks are risk-free. The risks are obvious, regardless of whether anyone wants to admit the truth.

Fortunately there are alternatives; many banks (especially smaller banks and some foreign banks) have much safer balance sheets and take less risk. But there are also options to hold savings outside of the banking sector altogether, including cash, gold, and crypto.

It’s also worth noting that many major banks in the US were recently reprimanded by the FDIC for deliberately manipulating data in an attempt to downplay the risks of their uninsured deposits.

These institutions are clearly pathological liars with no respect for their customers’ dignity. Coupled with the ongoing risks to their bond portfolios, it certainly makes sense to consider alternatives.

Simon Black, Founder   Sovereign Man

https://www.sovereignman.com/trends/another-day-another-downgrade-for-america-today-its-the-banking-sector-148019/