The One Thing I’m Going to Teach My Kids About Investing

The One Thing I’m Going to Teach My Kids About Investing 
By Porter Stansberry, Editor, Stansberry Alpha

Over the years, I've explained a lot of Wall Street's "secrets"...

I've explained how discounted bonds are sometimes vastly better investments than stocks. I've covered how selling naked puts is almost always safer and more profitable than buying stocks outright.

These concepts (and others) are critical to active investors. They all play a role in giving you the tools you need to increase your returns. You ought to know all about them and be able to use them tactically to take advantage of opportunities in the market.

I've written about these concepts many times over the years. And I've said they're the "most important" thing I could teach you from time to time. I wasn't lying. All of these strategies have their "time in the sun."

Believe me... having this tool bag and knowing when to use these strategies will make you a much better investor. It will allow you to profit from opportunities the market always creates.

But... how can you learn to be patient enough to wait for these opportunities? That's what I'd like to show you with today's essay. I hope you'll print this one out... mark it up... and keep it near your desk.

The Real Secret…
The real secret is in this one...

So what's the most important idea I've discovered in finance? What's the one thing I'm going to teach my kids beyond the obvious stuff about saving, compounding and risk management? What do I believe is the real secret to investment success? 

And... the biggest question of all... How do I invest my own money in securities?

Over the long sweep of your investing lifetime, strategies that only work extremely well in certain market situations are unlikely to play a dominant role. The big secret, therefore, is something you can use all the time, for your entire life, as an investor. And here it is: Some companies are much better than others at compounding capital. Much better.

If your goal as an investor is to compound your savings over time, wouldn't it be easier to simply figure out which companies will compound your capital at an acceptable rate, buy those firms (and only those firms) at reasonable prices and then do something else with the rest of your time?

Here's a simple but powerful example...

Well-run insurance companies can produce what's called an "underwriting profit." They are literally paid money in advance to manage your capital. And they get to keep not only the investment profits, but profits from the premiums, too. 

That's like paying the bank to keep and use your money. No other business can compound capital so consistently.

Insurance companies have other fantastic advantages, too. They're able to legally defer most of their taxes. They're nearly immune to economic factors. They're scalable. I could go on...

They're a focus for us because well-run insurance companies are legendary compounders of capital. Buy them at reasonable prices, and it's impossible not to do well.


Natural Wealth Compounders
In the March 2012 issue of my Stansberry Investment Advisory, we explained that insurance stocks had rarely been cheaper. We recommended several through the year. Since then, stocks of all stripes have exploded higher... but they haven't outpaced insurance companies. 

Insurance stocks as a whole – as measured by the SPDR S&P Insurance Fund (KIE) – have far outpaced the S&P 500.



It's not an accident that the greatest investor in history, Warren Buffett, has long focused on insurance stocks and other companies that are highly capital efficient. That is, companies that are natural wealth-compounders.

Starting with his 1972 investment in See's Candies, Buffett gradually over the years shifted the bulk of his wealth into a simple, long-term compounding strategy...

While Buffett didn't abandon all other forms of investing, his largest allocations since 1972 have all used this compounding strategy. That famously includes his 1988 purchase of Coca-Cola... when Buffett put roughly 25% of Berkshire's capital into a single stock! 

And it wasn't a cheap stock, either. At the time, Coke was trading for 16 times its annual earnings. Buffett had figured out the one real secret of finance... the one secret to "rule them all." 

Three Important Questions
To use a long-term compounding strategy effectively, you really only have to answer three questions:

•		First, is the company in question able to produce very high returns on its assets? In other words, is it a great business?
•		Second, are these unusually high returns very likely to continue for decades, without requiring large and ongoing capital investments?
•		Third, can the management of the company be trusted? Will bankruptcy never be even a remote possibility?

If the answer to these questions is "yes," then all you have to do is simply not pay too much when you buy the stock. Most of the companies that fit these criteria are branded consumer-products companies – stocks like McDonald's, Coke, Heinz and Hershey.

Long-Term Earnings Power
Buffett explained in his 1983 shareholder letter how he thinks about these companies. The secret to their long-term earnings power is very simple: It's their brand and the relatively unchanging nature of their products. 

These companies' products are so well known (and adored) by customers that these firms can constantly raise prices to keep pace with inflation.

Meanwhile, the brands – while requiring some advertising – aren't like factories, gold mines or drugs...

They don't require massive investments of new capital. There's no new gold mine to find and build. There's no patent that's going to expire. And there's not even any new product that must be created: Coke's fans went crazy with anger when the company tried to change its product in a small way back in 1985.

All these firms have to do is continue to deliver the same thing, year after year. And that means they can afford to return huge amounts of capital to shareholders.

Merely buying and holding any of the stocks I mentioned above would have made you 15% a year if you'd just reinvested the dividends for the last 30 years. 

Even if all you did was invest $10,000 and then nothing else – not a penny more – you'd still end up with $575,000 at the end of 30 years. If you invested $10,000 annually, you'd end up with $4.3 million.

And the best part? This approach can be used by anyone.

Simple Math
The math is simple. And is it really that hard to realize that Heinz is the best sauce company... that Coke is the leading soft-drink business... or that McDonald's makes the best hamburgers for kids? 

The No. 1 objection I get from readers when I talk about this strategy is: "That's great, Porter. Wish I'd known about that when I was 25. But it's too late for me now. I don't have 30 years."

That's nonsense. Think about it this way... Buffett was born in 1930. He didn't buy Coke until 1987. He was 57 years old. It has been one of the greatest investments of his life – bar none.

If that doesn't convince you, just think about it this way. How often do you make more than 15% on your portfolio in a year? Whether you've got three decades to invest or only one, you should aim to produce the highest possible annual return without putting your capital at undue risk.

There's no safer investment approach than this one, as your returns are being manufactured by great businesses. You don't need a "greater fool" to pay too much for your shares to make a profit. In fact... the biggest risk you face is selling at all because that will trigger taxes (in most accounts).

It's this seemingly invisible power that allows these companies to return massive amounts of capital to shareholders – a factor that sets them apart and greatly reduces investor reliance on capital gains. This is incredibly important over the long term.

Source: Bonner and Partners

Follow us on Twitter: @blacklioncm

The Swiss’ Pearl Harbor Sneak Attack

The Swiss’ Pearl Harbor Sneak Attack
by James Rickards

The most dramatic battle yet in the currency wars took place last Thursday. It was the financial equivalent of a Pearl Harbor sneak attack…

“I find it a bit surprising that he did not contact me,” IMF Director Christine Lagarde told CNBC’s Steve Liesman that day, “but, you know, we’ll check on that.”

You can almost imagine the conversation afterwards between Mario Draghi of the European Central Bank (ECB) and Swiss National Bank (SNB) President Thomas Jordan…

Mario Draghi:“Did you tell Christine?”

Thomas Jordan:“I thought you were going to tell her…”

Mario Draghi: “Wait, I thought you were!”

Switzerland had just abandoned its peg of the Swiss Franc to the Euro. The result was mayhem with an immediate 30% drop in the value of the Euro against the Franc, and billions of dollars of trading losses by banks and investors around the world.

Several foreign exchange brokers went bankrupt because their customers could not settle their losing trades. The Swiss operated in total secrecy.

Currency wars resemble real wars in the sense that they do not involve continuous fighting all the time. At certain times, there are intense battles, followed by lulls, followed by more intense battles.

But there is nothing new about the Swiss National Bank’s move. It’s the latest salvo in the currency war that President Obama started in 2010 and it won’t be the last. It was in 2010 that the president announced his National Export Initiative designed to double U.S. exports in five years.

The most dramatic battle yet in the currency wars took place last Thursday.

The only way to do that was with a cheaper dollar, so the president’s policy amounted to a declaration to the world that the U.S. wanted other countries to let their currencies go up so the dollar could go down. Ten months later, the Brazilian Finance Minister, Guido Mantega, shocked global financial elites by publicly proclaiming what everyone knew, but no one would say — that the world was in a new currency war.

The problem with currency wars is they last a long time; sometimes even fifteen or twenty years. The reason is they have no logical conclusion, just back-and-forth devaluations and revaluations as countries retaliate against each other.

We have seen this seesaw pattern re-emerge. The weak dollar of 2011 has turned into the strong dollar of 2015. Countries that complained the weak dollar was hurting their exports in 2011 now complain that the strong dollar is hurting their capital markets in 2015.

That’s the other problem with currency wars — no one wins and everyone loses. Currency wars don’t create growth; they just steal; growth temporarily from trading partners until the trading partners steal it back with their own devaluations.

The surprise revaluation of the Swiss Franc on Jan. 15 will not be the last such surprise. There are many important pegs left in the international monetary system they are vulnerable to being broken. Right now the Hong Kong dollar and the major Arab currencies are all tightly pegged to the U.S. dollar.

The Chinese Yuan is loosely pegged to the U.S. dollar, too. If the U.S. raises interest rates this year as the Fed has warned, the stronger dollar may force those countries to break the peg because their own currencies become too strong and hurt their exports.

If the Fed does not raise interest rates, the result could be a violent reversal of current trends and a weaker dollar as the “risk on” mantra causes capital to flow out of the U.S. and back to the emerging markets. Either way, volatility is the one certainty.

The other problem with the currency wars is what the IMF calls “spillover” effects, also known as financial contagion. Many mortgages in Poland, Hungary, and other parts of Central and Eastern Europe are made not in local currency but in Swiss Francs. The stronger Swiss Franc means those borrowers need more local currency to pay off their mortgages.

This could lead to a wave of mortgage defaults and a mortgage market meltdown similar to what the U.S. experienced in 2007. This shows how a decision made in Zurich can wipe out a homeowner in Budapest. Financial contagion works just like Ebola. Once an outbreak begins, it can be difficult to contain. It may not be long before the Swiss Franc sneak attack infects investor portfolios in the U.S.

We’ll be monitoring the danger on your behalf. Financial contagion can also be a two-way street. It not only creates dangers, it creates opportunities for investors who can connect the dots in the currency wars. The easiest conclusion you can draw and act on is this simple truth: Do not believe government and central bank lies.

This maxim is not without historical precedent. You’ve probably heard about Franklin Roosevelt’s own sneak currency attack. In 1933, President Roosevelt devised a plan to increase the price of gold in dollars, effectively a dollar devaluation. But he had a problem. If he increased the price of gold while Americans owned it, the profit would go to the citizens, not the U.S. Treasury. He knew that he had to lie to the American people about his intentions in order to pull off the theft of the century.

So Roosevelt issued an emergency executive order confiscating the gold at about $20.00 per ounce, and then revalued it to $35.00 per ounce, with the Treasury getting the profits.

On Thursday, the Swiss National Bank pulled a similar stunt. Last November, the Swiss citizens voted on a referendum to require an informal link of the Swiss Franc to gold. The Swiss National Bank argued against the referendum on the ground that it would cause them to break the peg of the Swiss Franc to the Euro.

The people believed them and voted “no” on the referendum. But now the Swiss National Bank has broken the peg anyway. The price of gold is spiking as a result, but the Swiss citizens have lost the benefit of that because the referendum is now a dead letter. The Swiss National Bank lied to the Swiss people about their intentions with regard to the peg.

The lesson of history is that citizens should own some gold, store it safely, and don’t believe government and central bank lies. In fact, we could see more investors fleeing to the safety of gold in the coming months as trust in central bankers wanes.

Regards,

Jim Rickards

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

The Currency Wars of the 20th Century

The Currency Wars of the 20th Century
by Addison Wiggin

Jim Rickards is no ordinary hedge fund manager. Lots of guys can boast 35-year careers on Wall Street.

Only Rickards is also a lawyer who was the chief negotiator during the 1998 rescue of Long-Term Capital Management — in which 14 of the world’s biggest banks ponied up $3.6 billion to prevent a global financial meltdown. And only Rickards is a consultant to the Pentagon who walked senior military planners through their first-ever “financial war game.”

His best-selling book Currency Wars opens with a two-chapter account of this war game — held at the Warfare Analysis Laboratory in Laurel, Maryland — a strategy room whose website boasts “14 plasma displays for defense exercises” and “3-D scenario modeling and visualization.”

The financial war game was made more intense by the fact it took place amid the market panic in late 2008 and early ’09. We won’t give too much away here; suffice it to say Team Russia announced it would accept only gold in exchange for its oil and gas — no dollars. Then Team China made its own move to “tighten the noose around the U.S. dollar’s neck.”

As it happened, on the second and final day of the war game, Russia’s Vladimir Putin declared of the dollar, “The one reserve currency has become a danger to the world economy: that is now obvious to everybody.”

Rickards believes the real currency war presaged by Putin began in early 2010. He labels it Currency War III.

“Currency wars,” Rickards writes, “are fought globally in all major financial centers at once, 24 hours per day, by bankers, traders, politicians and automated systems — and the fate of economies and their affected citizens hang in the balance.”

Both previous currency wars both took place within the last century. Currency War I erupted from the ashes of World War I in 1921 when Germany began its epic devaluation of the mark — the one memorialized in pictures of wheelbarrows full of paper money that weren’t enough to buy a loaf of bread.

Thus did the rest of the world race to devalue their own currencies to remain “competitive.” France leaped first in 1925, devaluing the franc. Britain abandoned the gold standard in 1931. The United States infamously devalued the dollar against gold in 1933 — from $20.67 an ounce to $35. France and England devalued again.

Rickards believes the real currency war presaged by Putin began in early 2010

“In round after round of devaluation and default,” Rickards writes, “the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction along the way.”

Currency War I ended in a whimper in 1936 with a three-way deal between the United States, Britain and France. Germany by that time was goose-stepping to its own drummer, and a shooting war followed three years later.

Currency War II blew up in 1967 when Great Britain devalued the pound against the dollar. Soon the dollar itself was under pressure — a matter complicated by the fact the dollar was still tied to gold in international trade.

The rest is monetary history: France turned in scads of dollars for America’s gold, nor were the French alone. The Treasury’s gold supply dwindled from 20,000 metric tons in 1950 to barely 9,000 when President Nixon “closed the gold window” in 1971. The entire world was now on a floating fiat currency standard.

The dollar sank throughout the ’70s, but soared in the early ’80s under Federal Reserve Chairman Paul Volcker. The world’s other principal currencies, the Japanese yen and West German mark, went on a roller-coast ride the whole way. Exhaustion set in. The Plaza Accord of 1985 set the dollar on another downward trajectory, and the Louvre Accord of 1987 resulted in equilibrium — more or less.

“There was relative peace in international monetary matters,” Rickards writes, “yet this peace rested on nothing more substantial than faith in the dollar as a store of value based on a growing U.S. economy and stable monetary policy by the Fed.”

That faith finally broke in early 2010.

On Jan. 27, 2010, President Obama fired the first volley of Currency War III in his State of the Union speech. He announced the National Export Initiative. Its aim — to double U.S. exports in five years.

“The traditional and fastest way to increase exports had always been to cheapen the currency,” Rickards writes in Currency Wars. And everyone around the world knew it.

Later in 2010, the Federal Reserve stepped in with a second round of “QE,” or money printing. “By using quantitative easing to generate inflation abroad, the United States was increasing the cost structure of almost every major exporting nation and fast-growing emerging economy in the world all at once.”

And so began another race to the bottom, a new round of competitive devaluations. “We’re in the midst of an international currency war,” declared Brazil’s finance minister Guido Mantega in September of 2010, “a general weakening of currency.”

No one will be left untouched by Currency War III, but Rickards says it will take place in three major theaters. In two of the theaters, the combatants have mutual aims. The third is the most likely source of outright conflict.

The Atlantic theater is the balance between the United States and the eurozone. “The euro and dollar,” writes Rickards,” are best understood as two passengers on the same ship… moving at the same speed, heading for the same destination.”

The euro topped at $1.59 in July 2008 and bottomed at $1.10 in June 2010. As we go to press, it’s at $1.29 — essentially where it was in early 2007, and again in early 2011.

That relative stability is no accident: Washington aims to prop up the euro to the point of the Fed engineering a secret bailout of European banks in 2008 — $3.08 trillion in loans that became public only in 2011.

The Eurasian theater of the war, meanwhile, is the balance between Europe and China. “China has a vital interest in a strong euro,” Rickards writes — not least because the European Union is China’s largest trading partner, larger even than the U.S.

Bottom line: “Europe, China and the United States are united in their efforts to avoid a euro collapse despite their mixed motives and adversarial postures in other arenas.”

Which brings us to the Pacific Theater — the big show.

The U.S. trade deficit with China was less than $50 billion in 1997. By 2006, it swelled to $234 billion. Politicians grandstanded about American jobs “lost forever to China” and Chinese leaders “manipulating” their currency.

Never mind that the evidence linking currency value to jobs is, er, slim at best. Even if the yuan doubled in value, Rickards points out a Chinese furniture maker would be making $236 a month — and a furniture maker in North Carolina still wouldn’t be competitive.

If we still had a gold standard — or even the Bretton Woods system in place between 1944-71, such yawning trade gaps would be impossible. The flows of gold between creditor and debtor nations — consider our example at the start of the issue — would, naturally, maintain an equilibrium.

Meanwhile, manipulation is a two-way street: “China’s policy of pegging the yuan to the dollar,” Rickards writes, “was based on the mistaken belief and misplaced hope that the Fed would not abuse its money printing privileges.”

Fool me once…

“Given the choice,” Rickards writes, “between uncontrolled inflation with unforeseen consequences and a controlled revaluation of the yuan, the Chinese moved steadily in the direction of revaluation beginning in June 2010, increasing dramatically by mid-2011.”

You can see the result in the chart nearby. Through mid-2010, it took 6.8 yuan to equal one U.S. dollar. But with the conscious decision to strengthen the Chinese currency, it now takes barely 6.1 yuan to equal a dollar.

Thus, “the United States had won round one of the currency wars.” There will be more to come.
“Everything’s a cross rate,” Jim says. “There’s a dollar euro cross rate. There’s a dollar yen cross rate. There’s a dollar Chinese yuan cross rate, Swiss francs and so on. And it’s dynamic. The dollar could be going up against the Euro, which it has been lately but going down against the Chinese yuan.

“Is the dollar going up or down? Well, the answer is compared to what? And this is what we do in currency wars. We look at this. We understand these dynamics. We understand that any two currencies are a zero sum game.”

Regards,

Addison Wiggin

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

Investment Advice TO a World Champ

Investment Advice TO a World Champ By Dr. Steve Sjuggerud Tuesday, January 13, 2015

I met a legend over the weekend… He's a now-retired international sports hero. I don't want to share his name today, because he told me quietly that he could use some financial help, and he probably wouldn't want that word out in public. I didn't really answer him when we were together. But as I thought about it later, the right advice for him is the same advice that I would give to you… This is serious stuff. I urge you to take it seriously, and commit these ideas to memory. Let's get started:  1. Nobody will care more about your finances than you.  This is critical for you to embrace, immediately. Nobody is going to care more about your finances than you. You simply can't just find somebody smart and hand your money responsibilities off to them.  You can't just hand off your life and hope it goes okay – this is your life we're talking about! How many rock stars and sports stars have you read about that are broke today because they handed off this responsibility? Don't do it.  The quicker you take control and ultimate responsibility with your money, the quicker you will start building your legitimate fortune. And you can't ever give up that responsibility.  Let me be clear… It is alright – even smart – to work with smart people, and to delegate some of your money responsibilities to carefully chosen people. The important part is, you just can't "check out." You have to be the team captain here… the captain of your money ship.  2. There is no magic bullet, or shortcut.  You didn't become a sports legend by taking shortcuts. You had to work harder than the next guy, learn more than him, and focus with more intensity than the next guy to achieve your goals.  If you want to invest successfully, you have to do the same thing. You can't get by on one hot tip after another. The shortcuts don't work. This leads us to the third idea…  3. If you don't understand it, don't buy it.  It's easy to get dazzled by promises of big profits… It's even easier to get sucked in when the promises are accompanied by slick brochures and fast talk with a lot of words that you don't understand.  You'll save yourself a lot of loss (and time) if you remember this: If you don't understand it, don't buy it. Don't ever cheat on this one. It will cost you.  4. Buy investments that are 1) cheap, 2) hated, AND 3) in an uptrend.  I've built my wealth and reputation on this philosophy. In short, you can't buy what's already incredibly popular – because if you do, chances are you've already missed it. Instead, you have to buy what people are skeptical of.  Separately, waiting for an uptrend is a crucial part of this strategy as well… It helps take the risk out of the idea, and it helps "confirm" that your investment thesis is "right."  If you want my opinion today, property is probably your best bet. Here's why:  It's surprisingly affordable (when you factor in today's record-low interest rates). I say "surprisingly" because most people look at house prices versus incomes, and they wrongly assume that house prices are expensive. The correct way to look at it is relative to monthly payments (interest rates). And based on that, house prices are plenty affordable after all.  Also, investors are skeptical about property now, wrongly thinking that it is overpriced. (So it is hated – or at least not loved). AND property is in an uptrend. PERFECT.  Best of all, you can understand it. You hold the keys, you paint the walls… with YOUR property, you control your destiny.  My money is where my mouth is with this one… Back in 2010, I owned no property outside of my home. Today, property makes up the biggest percentage of my own financial assets – by far.  Property is what I'm doing with my own money.  You will always hear about ways to make higher returns, or faster ways to make a buck, than property. But chances are today you'd be risking much more than you can imagine, relative to the potential reward. It's simply not worth it.  Again, right now, property is affordable, unloved, in an uptrend, and understandable. You control your destiny, to a better degree than with other investments. Particularly if you are not an expert in investing, and don't intend to be, then property makes sense for you.  I could go on and on about "do's" and "don'ts" when it comes to your money… But I won't.  Instead, let's leave it at these simple-but-absolutely-critical points…  1. Nobody will care more about your situation than you, so don't hand off your finances. 2. There is no magic bullet or shortcut. (The "hot tip" doesn't exist.) 3. If you don't understand it, don't buy it. (If it sounds too good to be true, it probably is.) 4. Buy investments that are cheap, hated, and that have started their uptrend. That's it. Commit these points to memory.  Again, property, right now, ticks a lot of these boxes. That's where I'd suggest you start…  Good investing,  Steve Source: Daily Wealth Follow us on Twitter: @blacklioncm

The Most Important Story in All of Finance

The Most Important Story in All of Finance 
By Richard Duncan, Editor, Macro Watch

The classical gold standard existed up until the time of World War I. At that point, all the European nations went off the gold standard because they didn't have enough gold to fight the war. 

Under the gold standard, gold was money. So you had to pay for things with gold. 

You couldn't have big trade deficits with other countries because you'd have to pay with your gold. After a while, you wouldn't have any more gold… and so you'd stop buying things from other countries. 

But during World War I, European governments went off the gold standard… printed a lot of paper money… and used it to finance the government debt. 

This led to the giant worldwide credit bubble we call the Roaring Twenties. 

In 1930, the credit couldn't be repaid. The banking system failed. Global trade collapsed. And the Great Depression began. 


War Stimulus
Most people don't see it that way, but the Great Depression was a direct result of going off the gold standard… and the credit bubble that occurred when we went off the gold standard.

The Great Depression lasted until the outbreak of World War II. Then the US government increased the amount of money it was spending. 

Government spending increased by 900%. That 900% increase ended the Great Depression. And we had World War II. You know what happened then. Sixty million people died.

After the war the US and Britain – the good guys – won, they wanted to reestablish a global monetary framework. They would have liked to have returned to the gold standard. 

But that wasn't possible because the US had almost all the world's gold. And so it wouldn't have been possible for the US to trade with other countries if they didn't have any gold.

So the Allies created the so-called Bretton Woods system. The US dollar would be backed by gold – at $35 an ounce – and all the other countries in the world would either peg their currency directly to the dollar or to gold. 

It more or less amounted to the same thing – pegged exchange rates. That's the way things worked from roughly 1945 up until the late 1960s. 

The Dollar Standard
At that point, the Bretton Woods system fell apart because the US was no longer willing to abide by the Bretton Woods rules. 

Under President Johnson, it started sending too many dollars abroad to finance the Vietnam War. Meanwhile, US corporations were investing heavily in Europe. So a lot of dollars were going overseas and being accumulated by the foreign central banks. 

Under Bretton Woods, foreign governments had the right to directly convert their dollars into US gold. They did that. And as a result, during the 1960s the US lost half of its gold reserves.

By 1971, when President Nixon "closed the gold window" – he ended the direct convertibility of dollars to gold – there were four times as many dollars overseas as the US had gold available for those dollars to be converted into. 

It was simply no longer possible for the US to allow other countries to convert their dollars into gold. Nixon stopped that. And that international monetary system collapsed.

There were some efforts to create a new gold-backed system after that. But they were unsuccessful. The system that evolved from the ashes of Bretton Woods I call the "Dollar Standard." Because dollars became the dominant global currency. 

An Explosion of Credit
That changed everything. 

First, it removed all constraints on how much credit banks could create. And after 1971, credit in the US exploded. 

As long as you had to have some gold backing for dollars, there was a limit to the amount of gold you had. So there was always a limit to how much credit you could create. Without gold backing, there were no longer any limits.

In the US, total credit expanded from $1 trillion in 1964 to $50 trillion in 2007. So in 43 years, total credit expanded 50 times. And that explosion of credit really built our world. 

The other important change was that when we had the gold standard, or the quasi-gold-standard Bretton Woods system, trade between countries had to balance. 

Let me give you an example. One hundred and fifty years ago, if Britain had a big trade deficit with France, Britain's gold would have been put on a ship and sent over to France. Because gold was money, Britain's money supply would have contracted. 

That would have caused Britain to have a big recession. Unemployment would have gone up. And Britain would have had deflation. 

The opposite would have happened in France. France would have more gold. So credit would expand. The economy would boom. And pretty soon France would have inflation. 

Soon the rich French people would start buying more cheap British goods. Poor, unemployed British would stop buying so many expensive French goods. And trade would come back into balance again. That's the way trade always worked up until that point.

When Adam Smith and David Ricardo were writing their classical economic theories, their world was a world where gold was money and trade between nations had to balance. 

A Return to the 1930s?
Today, the global economy is like a big rubber raft. Instead of being inflated with air, it's inflated with credit. On top of the raft you have all the asset classes – stocks, bonds and commodities, including gold – and 7 billion people. 

The problem is the raft has now become fundamentally defective. So much credit has been created that the income of the 7 billion people is insufficient to service the interest on the debt… and they keep defaulting. 

When they default, the credit leaks outside of the raft. In other words, the raft is full of holes. And the credit keeps leaking out. 

There's a fundamental flaw in the raft now. There's too much credit relative to the income, at least in the way that world income is currently distributed.

The natural tendency of the raft is to sink. And when it sinks – as it did in 2008… and when QE1 and QE2 ended – all asset classes go down together. 

Stocks go down… commodities go down… house prices go down, etc. People start to get their feet wet. And they start to panic. 

There's only one possible policy response – and that's to pump in more credit. 

That's what the QE is about. Central banks pump in more credit. And when they do the raft reflates. Asset prices all go back up again… people have dry feet again… and they're all happy again.

What happens if policymakers completely cut off money printing now and don't step in with some other policy, like more aggressive fiscal stimulus? 

The raft would sink just like it did in 1930. We would get sucked into a deflationary whirlpool… the international banking system would collapse… and global trade would collapse. 

When that happened last time, Berlin ruled Europe and Tokyo ruled Asia. 

Source: Bonner & Partners

Follow us on Twitter: @blacklioncm

Welcome to the Machine

Welcome to the Machine

Paul Rosenberg

Editor, A Free Man's Take

I’ve been flying around to conferences and warning folks about electronic surveillance for years. At first, people were generally willing to believe me (I presented them with evidence, after all), but more than a few thought I was probably exaggerating. Then came Edward Snowden, and a few more people believed that the threat was real. But Snowden’s revelations were only part of the story, and not really the most important part.

The electronic surveillance machine is far larger than Snowden’s slides portrayed, including not just government abuses, but massive commercial abuses. And the structure of this vile machine is being completed now.

But before I go through the details, I’d like you to remember, if you can, a song called Wlcome to the Machine,” by Pink Floyd. Here are two sections of the lyrics that encapsulate the essence of the new surveillance machine:

Welcome my son
Welcome to the machine
Where have you been?
It’s all right; we know where you’ve been…

Welcome my son
Welcome to the machine
What did you dream?
It’s all right; we told you what to dream

I’m not a huge Pink Floyd fan, but they sure nailed this one. There are two primary functions of this machine: full-life surveillance (“We know where you’ve been”) and persistent, deep manipulation (“We told you what to dream”).

I’m here to tell you that this has already been built and that most Westerners are sitting right in the middle of it.

Yes, I know this is something many people don’t want to hear. Far too many are like the ones who complained to the prophet Isaiah, telling him, “Speak unto us smooth things.” But some things are not smooth… and they’re true anyway.

Why Facebook MUST Sell You

Facebook—and all the other big, free services—are selling your minds, thoughts, and lives just like a butcher sells meat. And please understand: They have no choice. Not if they want to keep their quarterly numbers positive.

Think about this: Facebook users pay the company nothing, as in not a single penny. So if you’re a Facebook user, you are not its customer. Someone pays Facebook; those revenues come from somewhere, but they don’t come from you.

So if you’re not the company and you’re not the customer, what are you?

Yep, that’s right—you’re the product. Facebook, Google, and their ilk are selling you to their customers.

And please understand that the free model gives these companies no choice at all. Their users won’t pay, and they have to make money somehow.

“That’s okay; a few ads won’t kill me.”

Facebook’s gross revenue is running at over $1 billion per month. Google’s is approaching $4 billion per month. Do you really think they get all that money by selling lame ads for backpacks and skis? These companies are selling you in far more sophisticated ways than that.

Google’s boss, back in 2009, bragged that, “We know where you’ll be Tuesday morning,” and you can be very, very sure that they’ve been selling such information for the past five years. You can further be sure that they’re a lot better at it now.

Did you know that Facebook—three years ago—ran an experiment on 689,000 of its users, to see if it could alter their moods by altering the headlines they saw? And did you know that the experiment was a success?

So three years ago, Facebook found out that it could alter people’s moods, making them happier or sadder as it wished. And Facebook found something else: those users would transfer those moods to their friends in a cascade effect.

Do you really think Facebook hasn’t done anything with that information in the meanwhile? Do you really think Google hasn’t?

Making things worse, both of these outfits are in bed with the feds. Facebook’s infamous experiment was partly financed by the US Army, and Google is deeply intermingled with the US State Department (as well as other agencies). If you’re curious about this, read Julian Assange’s new book on the subject.

You Want Proof?

Think about being in Google’s position. Auctioning off little ads would never bring in billions per month; you’d have to find better ways of supercharging your ad revenue. So what would you do?

First, you’d tell your advertisers you could get ads to people the moment they expressed the first interest in their product. That’s a good idea, but that moment came, was monetized, and went more than 10 years ago. You need new ideas to juice your quarterlies.

So what do you do?

The answer is easy: You learn how to implant desires in your users. And if you want to do it well, you do it in ways that are specific to each individual. After all, what works to manipulate me may be completely ineffective for you.

That’s where we are now. And when I say that these companies fulfill Pink Floyd’s lyric of “We told you what to dream,” I don’t mean that they tried to make everyone dream the same thing; I mean that they got your friend to dream things that will squeeze money out of her life… and that they’ll make you dream different things, things designed to squeeze money out of your life.

Here's how to prove this: Take your laptop to a friend’s house. Both of you log in to YouTube, or Facebook, or Google. You’ll both see different screens. And that means that you’re already getting customized environments.

So if you were Facebook or Google, why would you give people customized environments? Shall we really pretend that Google, Facebook, and the others are doing this as a public service?

Of course not; the purpose of everything they do is to generate more revenue. In other words, they’re manipulating you for their profit. That’s the only way they can make money from you.

I’ll leave you to decide where this is likely to go.

If you want to do something about it, here’s Cryptohippie’s Guide to Online Privacy. The guide is free; the service is not.

Source: Casey Research

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