We Didn’t Leave Our Country…
At the risk of sounding like a couple of wishy-washy pansies, this is an emotional time. We are bombarded with emotion as we prepare this first-anniversary issue of Without Borders. The emotions we are experiencing are significantly different from those of the masses, the political class and the financial “experts.” Let us compare, if only so you can see where we are coming from and how we view the crisis that will create a new class of the destitute and a far smaller class of extraordinarily wealthy survivors.
FEAR AND RELIEF
Last week, when the market at large seems to be gripped with fear, we were feeling relieved. This is not schadenfreude but rather the relief at having our long-held hypothesis confirmed. We had moments of self-doubt over the last year as markets continued to defy economic gravity and “decouple” from our view of reality. We spent many, many hours testing and “what if-ing” our economic and geopolitical outlook on which we base our capital allocation. Not just our money but also our time, our energy, and our efforts, as capital includes much more than financial instruments.
Now we are at least seeing the manifestation of what we have been expecting, albeit later than we thought. The Fed, Treasury, and foreign central banks keep creating unprecedented “solutions” to one crisis after another. However, each crisis seems to be getting more serious than the previous, and eventually there will be no “solution.” The handling of AIG, the ban on short selling, the “guarantee” of money market funds, and whatever is next pulled out of the hats of the politicoramuses will eventually have much more severe unintended consequences than even we can imagine.
Though later in arriving than we had expected, it is looking as though the Greater Depression may be even more dramatic and painful than we expected. So, while most investors felt fear at crumbling markets, we felt relief, and when most investors felt relief when the government stepped in, we experienced fear. Fear that it will make the situation much worse and much more painful in real human terms for many a family that has blind faith in “the system.”
But we are also genuinely relieved that we were able to sidestep the market carnage. As you know, we chose to stand on the sidelines rather than jump into most of the world’s capital markets. We could sense some of your frustration, knowing full well that you wanted us to recommend more exotic stocks and exotic locales, but we are relieved we were able to refrain as most emerging-market stock indexes are off more than 35% in the last twelve months. For a couple of guys who spent a good chunk of their youth getting shot at, we are cowards when it comes to financial risk. It is hard to be out of the game, but we believe that smart investors and speculators only play the game when the odds are overwhelmingly on their side. Over the last twelve months, we were lucky to get even odds anywhere, and judging by the performance of the emerging markets, we are glad we remained spectators as speculators and intimidated as investors.
Notice the recent rebound. Since that is linked to the liquidity pumped into the system by central banks and the magic “mega bailout,” we think the lows will be tested sooner rather than later.
The world markets at large have fared similarly. Below is the chart of the world stock market index as compiled by the statisticians at Dow Jones.
WITHOUT BORDERS – ONE-YEAR PERFORMANCE
If you look at the WoB portfolio as an equally weighted fixed pool of capital, then the annual performance for the year was 9.95%. We calculated this by assuming you bought an equal amount in dollar terms of each recommendation, including the one-time alert, on the day of publication and sold when we said sell. Dividends are included. We also included the losses on the Austria ETF and Edenor SA, as well as the small gain on Copa Airlines. No capital was redeployed and no interest was paid on the free cash. Think of it in comparison to buying a mutual fund or an ETF one year ago. While our readers know that we are not impressed by relative performance and just being better than bad is not acceptable, we remain confident that we can find investable opportunities in a falling market. In particular our strategy of taking advantage of great macroeconomic forces while shunning the risks inherent on some of the more volatile exchanges. By way of example, let’s compare the performance of West China Cement and Eredene to the performance of their home stock exchange.
At the risk of sounding like a couple of wishy-washy pansies, this is an emotional time. We are bombarded with emotion as we prepare this first-anniversary issue of Without Borders. The emotions we are experiencing are significantly different from those of the masses, the political class and the financial “experts.” Let us compare, if only so you can see where we are coming from and how we view the crisis that will create a new class of the destitute and a far smaller class of extraordinarily wealthy survivors.
FEAR AND RELIEF
Last week, when the market at large seems to be gripped with fear, we were feeling relieved. This is not schadenfreude but rather the relief at having our long-held hypothesis confirmed. We had moments of self-doubt over the last year as markets continued to defy economic gravity and “decouple” from our view of reality. We spent many, many hours testing and “what if-ing” our economic and geopolitical outlook on which we base our capital allocation. Not just our money but also our time, our energy, and our efforts, as capital includes much more than financial instruments.
Now we are at least seeing the manifestation of what we have been expecting, albeit later than we thought. The Fed, Treasury, and foreign central banks keep creating unprecedented
“solutions” to one crisis after another. However, each crisis seems to be getting more serious than the previous, and eventually there will be no “solution.” The handling of AIG, the ban on short selling, the “guarantee” of money market funds, and whatever is next pulled out of the hats of the politicoramuses will eventually have much more severe unintended consequences than even we can imagine.
Though later in arriving than we had expected, it is looking as though the Greater Depression may be even more dramatic and painful than we expected. So, while most investors felt fear at crumbling markets, we felt relief, and when most investors felt relief when the government stepped in, we experienced fear. Fear that it will make the situation much worse and much more painful in real human terms for many a family that has blind faith in “the system.” But we are also genuinely relieved that we were able to sidestep the market carnage. As you know, we chose to stand on the sidelines rather than jump into most of the world’s capital markets. We could sense some of your frustration, knowing full well that you wanted us to recommend more exotic stocks and exotic locales, but we are relieved we were able to refrain as most emerging-market stock indexes are off more than 35% in the last twelve months. For a couple of guys who spent a good chunk of their youth getting shot at, we are cowards when it comes to financial risk. It is hard to be out of the game, but we believe that smart investors and speculators only play the game when the odds are overwhelmingly on their side. Over the last twelve months, we were lucky to get even odds anywhere, and judging by the performance of the emerging markets, we are glad we remained spectators as speculators and intimidated as investors.
Notice the recent rebound. Since that is linked to the liquidity pumped into the system by central banks and the magic “mega bailout,” we think the lows will be tested sooner rather than later.
The world markets at large have fared similarly. Below is the chart of the world stock market index as compiled by the statisticians at Dow Jones.
WITHOUT BORDERS – ONE-YEAR PERFORMANCE
If you look at the WoB portfolio as an equally weighted fixed pool of capital, then the annual performance for the year was 9.95%. We calculated this by assuming you bought an equal
amount in dollar terms of each recommendation, including the one-time alert, on the day of publication and sold when we said sell. Dividends are included. We also included the losses on the Austria ETF and Edenor SA, as well as the small gain on Copa Airlines. No capital was redeployed and no interest was paid on the free cash. Think of it in comparison to buying a mutual fund or an ETF one year ago. While our readers know that we are not impressed by relative performance and just being better than bad is not acceptable, we remain confident that we can find investable opportunities in a falling market. In particular our strategy of taking advantage of great macroeconomic forces while shunning the risks inherent on some of the more volatile exchanges. By way of example, let’s compare the performance of West China Cement and Eredene to the performance of their home stock exchange.
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Since our recommendations, Eredene and West China Cement have held steady and increased in value whilst the Indian and Chinese exchanges have fallen dramatically. We will endeavor to bring you more of these type of opportunities until such time as the smaller indexes have corrected to the point where there is real value. Right now, we think the sheer amount of foreign capital that will be sucked out of these markets and other emerging and frontier markets will drive share prices lower. As we have mentioned before, capital flight and not the underlying value of the companies listed on the exchange moves these markets in times of crisis.
MORE EMOTIONS: SADNESS AND BETRAYAL
Last month, we told you how difficult it was to write “Once a Drug Tsar, Always a Dope,” because in many ways it was openly turning our backs on the system that was so seminal in our lives from such an early age. We were both on active duty when we were first able to vote. We eagerly internalized the concept of Duty, Honor, Country. Contrary to popular belief, there is no real indoctrination or brainwashing involved. We willingly and eagerly subjugated our personal liberty for the “greater good” and internalized “selfless service” as the highest ideal. We went on to risk our lives on many occasions while “in the service of our country” or in retrospect “in service to our government and disservice to our country.” But we certainly did not realize that at the time.
WHAT HAPPEND ?
So how did two red, white, and blue soldiers of patriotism become wary expatriate critics who have left their homeland to seek peace and prosperity elsewhere? With a tip of the hat to the rhetoric of Ronald Reagan, “We didn’t leave our country, our country left us!” What do we mean?
We grew up believing that what made the United States of America different was that we were a nation of individuals. The U.S. was a nation of rugged individuals who believed in self-government, self-reliance and responsibility. It was a nation purposely created to prevent government from imposing its will on the individual. We grew up believing our enemy, the communists, were the enemy because they oppressed the individual. Americans believed in freedom above all else. Freedom of movement, freedom of speech, freedom to assemble, freedom to worship or not worship as you see fit, freedom to fail and succeed through the free market. Communists believed in the collective at the expense of the individual. The Soviet Union was the “evil empire” because the all-powerful state dictated the lives of its citizens, the economy, and the press. This made sense to us and this struggle was worth the sacrifice. Freedom, not the United States or any state or system, was the concept we were drawn to naturally.
Lest you think we were abnormally philosophical for teenagers and spent hours reading Jefferson and Locke, we were young and the idea of testing ourselves in a physically competitive environment while seeing the world, jumping out of airplanes, traveling in alias, and committing espionage just seemed too cool to resist. There were also those cool uniforms we thought would impress chicks.
Surely some of our views have just evolved as we matured and experience replaced absolutism. That is natural. But the more we think about it – and we think of it daily – we believe that the America we thought we were serving has slipped away. We realize that the slippage started long before we showed up at West Point as brand-new cadets one May day. We realize that the principles on which America was founded have deteriorated since the formation of the Federalist Party. Intellectually, we know the damage done to America by two of its most popular presidents named Roosevelt. Gunboat diplomacy and the New Deal both oiled the slippery slope. In fact, we can’t find any administration we can point to that did not reduce our freedoms.
But for us, it is the events since the collapse of the Soviet Union that have brought us to where we are geographically and philosophically. The America of today was unimaginable in 1989. We scratch our heads and nearly shed a tear when we wonder how our country has come to believe that aggressive foreign wars, illegal search and seizure for “our own protection,” xenophobic anti-immigrant legislation, and the repeal of Posse Comitatus are beneficial to our society. And now, with the latest rounds of government interference in the marketplace being so blatantly welcomed, our worst fears have been realized. It will take a dramatic catastrophe if “our America” is to ever be seen again. And that may be wishful thinking because if modern history is a guide, the populace will welcome increased government intervention and control in both their daily lives and the economy when times get tough. While freedom in the abstract and in practice is the highest moral ideal, democracy is not. In practice, democracy is at best messy and very often merely a process by which the majority impose their will on the minority. And now that the majority of the people in the U.S. and Europe are net recipients of government largess, you can expect your freedom and independence to deteriorate rapidly.
WHAT’S NEXT?
The overwhelming conclusion that we have reached is that there is no way things will end well for North America and Europe. There is a confluence of factors that will result in catastrophe. We have highlighted the economic reasoning in these pages over the last year and think the case for calamity is pretty clear. Inflation and deep cuts in living standards will last more than a decade. However, of equal importance is the domestic social instability in the United States and Western Europe, as well as the geopolitical tensions between East and West on an unprecedented scale. Here is a taste of what we see coming.
EAT THE RICH
You think medical care is expensive now? Just wait until it is free! It makes no difference if a socialist Obama or a fascist/imperialist McCain gets elected to the White House. Obama knows nothing but government and eagerly looks forward to picking up where FDR left off. McCain, although ideologically more sound when it comes to the size and role of government, has no grounding in economics, has always collected a government check, and will certainly bow to the whims of Zogby and Pew long before he defends the ideals of Goldwater and Franklin.
Demands for more and more government “solutions” will come at the same time the government is on the hook to start paying out the promises made during the Great Depression. Baby boomers will start racking up those Medicare bills and collecting Social Security, just as the unemployment lines start to wrap around the corner colliding with the bread line on the other side of the block. Chaos.
Expect the next five years to be marked by public outrage against the wealthy, reminiscent of the muckrakers and robber barons. Anti-wealth policies, including windfall profits taxes, annual net worth taxes, and luxury taxes on everything from cigarettes to second homes will be passed in the first session of the next Congress as “emergency measures.” So-called fiscal conservatives will shake their head and say, “I don’t like this decision, but it sadly is necessary given the gravity of the situation.” Liberals (in the big-government sense of the word, not the Libertarian sense of the word) will express outrage and vindication. They will then promise to hold hearings to get to the bottom of this crisis and determine the responsible parties. No doubt it will be the free market that was responsible for the ills. It makes no difference that there has not been a free market in many years, the capitalists will be blamed and those with capital will be punished.
If you are a clever investor with a portfolio of cash flow-positive, productive rental properties, then beware, it is only a matter of time before rent control runs you over. Inflation will eat you alive once the “fairness to the underprivileged” policies are in place. It won’t be long before talk of “needs-based ownership” becomes popular rhetoric. As in “You don’t need those rental properties to live in, so they should be given to those who ‘need’ a home of their own. After all, it is not ‘fair’ that you have so much more.”
It will go much beyond that, but this will be a tasty starter. When Barney Frank finally gets his day in the sun, all of the productive class with assets will feel as though they are living through a never-ending solar eclipse. Nationalization will be the next major trend, probably starting with the auto industry and energy producers.
Eventually there will be outright class warfare. Violence in the streets will be met by calls for the government to do more and more until police powers eclipse even our worst fears.
If you are thinking it can’t get that bad, this is just like the ‘70s, think again. Now, technology and all the data that are out there about your personal finances make it much easier for the government to determine your assets. In 1970, if you lived in Chicago but had a series of rental properties and bank accounts in Michigan, that information was hard to find. Property records were registered on paper in the backroom of the county clerk’s office. Now records nationwide are online. In 1970, you would have probably had a local bank with six or seven branches in one or two counties, now with bank consolidation, all the government has to do is request the electronic records of a couple of dozen banks. In the 1970s, it would have been prohibitively hard to determine who had what where, now it can be done simply and before you even knew it was happening.
WAR
Throughout history, when economic hardship settles in, people look for someone to blame. The poor blame the rich, the rich blame middle class consumptive excess, the academics blame the market, the left blames the right, and so on. The tougher times get, the more angry people become. They feel compelled to determine who is “us” and who is “them” and how they can “make things right.” There are several ways this can play out, but two we think likely, depending on who the greatest amount of people come to determine as “them.”
SCENARIO ONE: FRACTURES FROM WITHIN
Before this is all over, the United States could be four or five separate nations. As class struggles as well as anti-immigrant sentiment increase, demographic lines will be drawn, redrawn, and then reinforced. People in Wyoming, Montana, Washington, Idaho, North Dakota, and Nevada will think, “I have nothing in common with those people in the Northeast, yet they take 30% or more of my hard-earned labor and I get nothing in return.” The vast majority of the people in Southern California, Texas, New Mexico, Southern Colorado, Arizona will likely tire of those “rich white men in Washington” and want to finish the “Reconquista once and for all.” Dixie has never really given up on the idea of independence, and it won’t be hard to convince many a Southeasterner that it would be better to go it alone. As far-fetched as this sounds, we think there is a real chance that the United States could rapidly devolve as most Americans, for a host of separate and conflicting reasons, would feel better off on their own. This is not only true for the U.S. Canada has similar issues as those rugged producing provinces of BC and Alberta may feel better off joining the Western Union along with Washington, Oregon, Montana, and others than tugging their forelock to the socialists back east. And this is even more likely inside the European Union, where demographics and nationalism are even more problematic.
SCENARIO TWO: AN EXTERNAL “THEM”
If the above scenario starts to play out and there is internal strife that borders on violence, the most common technique used by the state is to find a common enemy to unite against. This has been done and is being done successfully. Israel today is a classic example. If Israel did not have a wolf at the door, it would have disintegrated from within by now. Given the fact that American troops have been involved in ongoing combat operations for over five years, and the vast majority of the country still does not feel like they are at war, this will be hard to pull off. Americans are weary and wary of the fear mongering that has been so prevalent since 2001. Russian aggression could do it. The political situation with Russia has not been this tenuous since the Cuban missile crisis. The use of nuclear weapons by a terrorist organization close to home would also likely unite the country. Otherwise, we struggle to see how, after the Bush Administration has squandered all the good will available domestically and internationally, anything less than a clear and present danger would bring people together. That is not to say it is impossible, but it would be difficult.
In Europe, war would be far more likely, except no major European power has a military to speak of. The past sixty years of military doctrine have been based on NATO and the idea that the U.S. would bear the brunt of the labor in defending Europe. This was constructed intentionally to keep the European powers, especially Germany, from growing powerful. Russia, on the other hand, has never had such restrictions, and although their capabilities are not overwhelming, they possess nuclear weapons in abundance, and they have disdain for the opinion of the international community. There are, however, several real scenarios whereby nuclear conflict could still result in a scenario short of the Cold War version of Mutually Assured Destruction (MAD). The Russians without a doubt are increasing their covert activities, and we would be shocked if they were not working with any group that would further destabilize the delicate power-sharing arrangement in Europe. A growing, resource-hungry Asia combined with a chaotic, struggling Western Europe and North America is the best possible scenario for Russia. We have recently heard of reports that the Russian clandestine services have redoubled their efforts in the Middle East, North Africa, Turkey, and Finland. Eerily reminiscent of the Cold War periphery. Stay tuned for more on this.
Our point is not to call for doom and gloom. This is not our nature. Quite the opposite. We are generally optimists. However, we think the breadth and depth of the coming economic, social, and demographic crisis will be more severe, with much greater ramifications, than most believe.
OUR STRATEGY
Now is not the time to dive back into the major equities markets looking for bargains. We know many of you subscribed to find the hidden gems in far-flung locales, but for the last year, we just could not bring ourselves to recommend placing capital at risk. Now there are isolated cases of value, and we expect to see more opportunities over the coming months. But in general, our strategy will be to keep capital on hand for the multi-generational, wealth-creating opportunities that will come, and to prepare for the worst. In addition to bringing you more public market opportunities, we will start to bring you more private opportunities to invest in small companies in places that will be outside the fray. As these places are also a good second home and place to go if things really get bad at home, we will also focus more on ways to establish a bolt hole in another country – be it a financial bolt hole or a second crib, there is precious little time to delay in this regard.
Our recommended personal portfolio looks like this: 25% in physical precious metals; 40% in foreign productive real property, including a second residence you can rent out profitably when not using it; 25% in very well-positioned investments like the ones we cover in WoB ; and 10% in speculative investments like the speculations covered in FLASH CABLE.
At the risk of sounding like a couple of wishy-washy pansies, this is an emotional time. We are bombarded with emotion as we prepare this first-anniversary issue of Without Borders. The emotions we are experiencing are significantly different from those of the masses, the political class and the financial “experts.” Let us compare, if only so you can see where we are coming from and how we view the crisis that will create a new class of the destitute and a far smaller class of extraordinarily wealthy survivors.
FEAR AND RELIEF
Last week, when the market at large seems to be gripped with fear, we were feeling relieved. This is not schadenfreude but rather the relief at having our long-held hypothesis confirmed. We had moments of self-doubt over the last year as markets continued to defy economic gravity and “decouple” from our view of reality. We spent many, many hours testing and “what if-ing” our economic and geopolitical outlook on which we base our capital allocation. Not just our money but also our time, our energy, and our efforts, as capital includes much more than financial instruments.Now we are at least seeing the manifestation of what we have been expecting, albeit later than we thought. The Fed, Treasury, and foreign central banks keep creating unprecedented“solutions” to one crisis after another. However, each crisis seems to be getting more serious than the previous, and eventually there will be no “solution.” The handling of AIG, the ban on short selling, the “guarantee” of money market funds, and whatever is next pulled out of the hats of the politicoramuses will eventually have much more severe unintended consequences than even we can imagine.Though later in arriving than we had expected, it is looking as though the Greater Depression may be even more dramatic and painful than we expected. So, while most investors felt fear at crumbling markets, we felt relief, and when most investors felt relief when the government stepped in, we experienced fear. Fear that it will make the situation much worse and much more painful in real human terms for many a family that has blind faith in “the system.” But we are also genuinely relieved that we were able to sidestep the market carnage. As you know, we chose to stand on the sidelines rather than jump into most of the world’s capital markets. We could sense some of your frustration, knowing full well that you wanted us to recommend more exotic stocks and exotic locales, but we are relieved we were able to refrain as most emerging-market stock indexes are off more than 35% in the last twelve months. For a couple of guys who spent a good chunk of their youth getting shot at, we are cowards when it comes to financial risk. It is hard to be out of the game, but we believe that smart investors and speculators only play the game when the odds are overwhelmingly on their side. Over the last twelve months, we were lucky to get even odds anywhere, and judging by the performance of the emerging markets, we are glad we remained spectators as speculators and intimidated as investors.Notice the recent rebound. Since that is linked to the liquidity pumped into the system by central banks and the magic “mega bailout,” we think the lows will be tested sooner rather than later.The world markets at large have fared similarly. Below is the chart of the world stock market index as compiled by the statisticians at Dow Jones.
WITHOUT BORDERS – ONE-YEAR PERFORMANCE
If you look at the WoB portfolio as an equally weighted fixed pool of capital, then the annual performance for the year was 9.95%. We calculated this by assuming you bought an equalamount in dollar terms of each recommendation, including the one-time alert, on the day of publication and sold when we said sell. Dividends are included. We also included the losses on the Austria ETF and Edenor SA, as well as the small gain on Copa Airlines. No capital was redeployed and no interest was paid on the free cash. Think of it in comparison to buying a mutual fund or an ETF one year ago. While our readers know that we are not impressed by relative performance and just being better than bad is not acceptable, we remain confident that we can find investable opportunities in a falling market. In particular our strategy of taking advantage of great macroeconomic forces while shunning the risks inherent on some of the more volatile exchanges. By way of example, let’s compare the performance of West China Cement and Eredene to the performance of their home stock exchange.
If you like what you see here, why not try Without Borders risk free for three months? We guarantee you multiples of value on your money or we will give it back.