With over 150 million registered users, the file sharing site MegaUpload.com is one of the most popular on the Internet. At least, it was.

The site has now been seized by the US government and its homepage converted to an FBI anti-piracy warning. Its founder, a high tech entrepreneur named Kim Dotcom (yes, he had it legally changed), was arrested in New Zealand after his homes were raided and assets seized.

These actions were all at the behest of the US government. And it’s just the latest example of Big Brother overextending its authority across the entire world.

Last week, we discussed the grassroots efforts to stop passage of the SOPA/PIPA legislation that would give the US government jurisdiction over the Internet. Wikipedia blacked out its English language pages to raise awareness of the issue, and people went completely nuts.

Congress subsequently withdrew the bills amid popular outcry, and the public rejoiced that their efforts successfully thwarted further encroachment on their liberty. Or so they thought.

On the exact same day that everyone was celebrating victory over SOPA/PIPA, the US government simply used another set of regulations to nab Dotcom and seize his assets. The fact that SOPA was scrapped turned out to be completely irrelevant, they just found other rules to apply (or break).

As usual, it’s probably not legal. But such technicalities don’t matter in the ‘guilty until proven innocent’ system in which we live. Executive agencies exercise extreme latitude when confiscating assets, and victims often don’t have the opportunity to address the matter in front of a judge for years, if ever.

In Dotcom’s case, the man probably won’t even successfully make it past the extradition process for at least a year… let alone bring the issue to trial. The government is using its bureaucracy to completely circumvent due process and make an example of somebody that they consider a nuisance.

So why should they care? What interest could the US government possibly have in a silly file sharing site? None. But the entertainment industry does.

You see, we don’t live in a representative democracy. Democracy is an illusion to make people believe that they’re free. Instead, it’s blocs of large corporations who are really in control. If the entertainment business wants Kim Dotcom to go away, the government will invent or break any law necessary to make it happen. They’re all in bed together.

What’s more, it doesn’t matter which group or party is in power. Democrat or Republican, Labour or Conservative, Liberal or New Democratic… they’re all for sale. Citizens concern themselves with the outcome of elections, investing heavy emotional and financial support for ‘their guy’. Companies just wait it out and buy off whichever candidates win.

Kim Dotcom, though a wealthy and successful entrepreneur, was essentially a lone wolf standing against the entire industry. Rather than find ways to work with him in what is clearly emerging as a dominant media platform, they chose to eliminate him… by having the US government send the New Zealand government to arrest him and seize his assets.

It’s mind numbing when you really think about it.

Ultimately, Dotcom may successfully find his way back to a normal life after years in court and perhaps some time in jail. In the meantime, though, his case certainly makes a strong argument for flying under the radar. It’s a stark reminder that, if they really want to get you, they’ll apply, invent, or break whatever laws are necessary to do so.

First, Louise asks, “Simon, that last edition of SMC really blew me away, I appreciate you serving up such great boots on the ground intelligence for me so conveniently. Tell me, though– you talked a lot about offshore banking. What’s the best way to check out these banks and brokerages to see if they’re safe?”

Great question, and thanks for the kind words.

We live in a time when you can no longer assume away counterparty risk simply because banks and brokerages are regulated by a government. If you’re depositing money with someone, you should look at them like a financial partner. And, as with any partner, it’s imperative to get to know who you’re dealing with.

Unfortunately, there is no easy way to do this. You can’t just Google “Is XYZ Bank safe?” It takes a bit of homework.

With banks and brokerages, the first place to start is by talking to key people within the organization. Ask to see the financial statements. Talk to them about the company’s operations. Ask about their audit history.

At a high level, this is mostly a test. Anyone in the business of being a financial steward of other people’s money should be completely transparent. If you get the sense that they’re uncomfortable discussing these issues, or that they don’t really know, it’s a major red flag.

I also dive into the books and look for positive cash flows, strong liquidity, and adequate capitalization. Banks can book phony profits out of thin air using clever accounting tricks, but cash positions are much more tangible.

I’m also deeply concerned about liquidity. I want to see very high levels of liquidity that can withstand bank runs in case of market panic. If a bank has $123 billion on deposit and only $4.6 billion in cash (a ratio of just 3.25%), I’m not interested.  [Editor's note: those are Suntrust Bank's actual Q3 numbers.]

Islamic banking centers tend to have higher liquidity ratios; Abu Dhabi and Lebanon are great examples, and both accept most non-resident nationalities (except Israelis) as customers who show up in person with passport in hand.

Capitalization is also important; you obviously want to pass if a bank is teetering on insolvency, or if the slightest market route would wipe out all the equity.

Unfortunately this is much more difficult to ascertain. Bank loan portfolios are notoriously a black box of assets– does anyone really know what’s on Bank of America or Deutsche Bank’s books? Nope. And neither do they.

Conduct your own research. I often drive around town to get a sense of what the bank is investing in. Banks often proudly display signs at construction sites and the like, showing off to the world that they loaned $XYZ to the project.

When you see enough of these, you get a strong sense that the bank is incredibly exposed to the real estate market. At that point it’s a judgment call.

Even better, though, I’ll often try to go through a borrowing process myself. If a loan officer is just begging throw money at me with some ridiculously low interest rate, minimal down payment, and no credit check, I run away like a scalded dog because I know they’re not doing their homework on anyone else either.

Ideally, you want to see very strict, conservative lending practices and formal due diligence.

I could go on about this for pages and pages, but I hope this gives you a good start.
Next, Dave writes, “Simon, I’m on a two-year assignment in Kuala Lumpur, Malaysia. I have a bank account here and am considering moving more into it. What are your thoughts on Malaysian banks?”

If you’re living overseas, it always makes sense to have a local account for small purchases. After all, you’ve got to pay the cable bill somehow. But for real savings, pick the place that’s best for your money.

Kuala Lumpur is right next door to Singapore, which is one of the best places in the world to bank. Singapore has never had a bank failure, and the banks there are extremely well capitalized. It would be well worth the short trip down to Singapore to give your savings a good home.

Last, Kristen asks, “Simon, I heard you were giving the keynote speech at a conference in the Bahamas this month. Are you finally surfacing!??! Any truth to that rumor?”

Ha. Yes, it’s true. I detest the speaking circuit and routinely turn down requests to appear at conferences or do interviews, but this is a rare exception.

I’ll be delivering the keynote at BFI Capital Group’s private Inner Circle Briefing on Paradise Island, January 31st. The event dovetails into the Bahamas Freedomfest, though I’ll probably skip that to make room for short trips to Haiti and Turks & Caicos. Drop by and say hello if you’re in the area.

[Editor's note: Simon's friend Tim Price is a delightfully witty fund manager in the UK, one of the few free-thinking individuals in all of institutional finance. His recent thoughts below on the euro debacle, gold, and hyperinflation are some of the best ever written on the topics.]

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” Debt talks “have not produced a constructive response.”
- The Institute of International Finance, January 13, 2012

“The war situation has developed not necessarily to Japan’s advantage..”
- Japanese Emperor Hirohito after the atomic bombing of Hiroshima and Nagasaki, announcing Japan’s surrender to the Allies.

There is a terrible hubris at the heart of mankind. Like every other living thing on the planet we are products of nature, but we consider ourselves to be well above it. We are beset by regular reminders of our vulnerability, but quickly dismiss them off-handedly to a spiritual plane, calling them “acts of God” as if to show that we could never have prevented them.

In a significant essay for Foreign Affairs, “The Black Swan of Cairo,” Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous.

“Although the stated intention of political leaders and economic policy makers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”

There is an analogy from the natural world. In the 1960s and 1970s, mid-western American states fell victim to scores of wildfires. Constant interventions by the US Forest Service appeared to have little positive impact – if anything, the problems seemed to worsen. Over time, foresters came to appreciate that fires were a normal and healthy element of the forest ecosystem.

By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future. Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable fire to come has a far greater store of latent fuel at its disposal.

Economist Murray Rothbard jangled the sensibilities of the Keynesians when he wrote his classic study, “America’s Great Depression”:

“If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery.”

But politicians must be seen to be doing something – like encouraging the construction of a £33 billion white elephant rail link in the middle of an austerity recession.

Not interfering with the market’s adjustment process is simply allowing Schumpeterian “creative destruction” to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example.

So while “laissez faire” would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan’s zombie banks from the 1990s is still fresh, but ignored in the west.

Rothbard identified the ways in which government can hobble the adjustment process:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments which, in their turn, will have to be liquidated in some later depression. A government’s “easy money” policy prevents the market’s return to the necessary high interest rates.

3. Keep wage rates up.

4. Keep prices up.

5. Stimulate consumption and discourage saving. More saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment “insurance”, relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

An iatrogenic illness is one caused by the doctor himself. The economies of the west now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which are more likely to do harm to the patient and prolong the recession.

Taleb uses the example of the turkey before Thanksgiving. The turkey is fed for 1,000 days and every day seems to reaffirm the farmer’s generosity of spirit. Until the last day, when the turkey’s confidence and contentment is at its maximum. The “turkey problem” occurs when “a naïve analysis of stability is derived from the absence of past variations”.

To put it another way, the US property market cannot decline because it hasn?t declined in living memory. As Taleb puts it, as humans we inhabit two systems simultaneously: the linear and the complex.

The linear is predictable and permits the use of mathematical tools of high predictive value.

Complex systems,on the other hand, are marked by an absence of visible causal links between their elements, “masking a high degree of interdependence and extremely low predictability.” They also incorporate non-linear elements often called “tipping points.”

One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work.

The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back.

The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control.

As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.”

“The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

It may be a new year, but we are beset by the same problems that have been recurring since the crisis began. In most cases, those problems have worsened. One of the few improvements has been in the recapitalisation of Anglo-Saxon banks, but continental European banks seem acutely vulnerable to the potential outcome of a disorderly sovereign default.

Since the problems are the same, so are our preferred solutions: a specific focus on only the most creditworthy sovereign and quasi-sovereign debt (where it offers a positive real return); a specific focus on only the most defensive and internationally diversified equities; genuinely uncorrelated investments; and exposure to objectively the highest quality currencies, namely precious metals.

Euro zone politicians and policy makers have had plenty of time to come to terms with the continent’s problems, and continue to show no willingness to grasp admittedly difficult nettles.

It is symptomatic of the balkanised and adversarial nature of politics in the euro zone (a unified body that exists in theory but barely in fact) that Christian Noyer, chairman of the French central bank, anticipated France’s credit downgrade by suggesting that Britain should be downgraded first.

As the Hildebrand scandal also revealed, most of Europe’s central bankers are not fit to sweep the streets. And still time is running out. Readers of a certain age will recall a late 1980s “big hair” rock anthem called “The Final Countdown.” It was released by essentially a one-hit wonder band.

Its name was Europe.

Tim Price

Director of Investment
PFP Wealth Management

[Editor's note: Tim Staermose is filling in today while Simon is down on the farm in Chile.]

Amid all the doom and gloom in the world economy as insolvent western nations slowly suffocate under a mountain of debt, it’s easy to forget that there are places in the world that are still BOOMING.

I went out to dinner with a friend in Manila last night. Each of the first three restaurants we wanted to go to were completely booked. There is construction everywhere in Manila’s central business district. The roads are chock full with bumper-to-bumper traffic. Shops are full. People are spending money.

My dinner companion last night is an executive with a major international bank. He’s new to the country, and on Wednesday was given a tour of the stock exchange. As he stood on the trading floor, the Philippines’ benchmark PHISIX index hit an ALL TIME HIGH.

The government’s fiscal balance is improving, not deteriorating. 20% of the funds earmarked for “stimulus” last year are still in reserve. They simply weren’t needed.

Like in most of the world, benchmark interest rates are at an all-time low. The difference is that, unlike in the west, banks are confident to lend, and consumers are confident to borrow and spend. Commerce is still happening. This is not an isolated example.

In Thailand, my contacts tell me employment is so strong it’s hard to even find service staff for bars and restaurants. And this is in a place that was recently devastated by floods.

Simon has written about the booms in Cambodia, and Mongolia. Myanmar is slowly but surely opening up, and there are already hordes of opportunity seekers descending on Yangon.

It’s a message that we’ve stressed in our conversations with you before. But, it bears repeating. If you’re willing to look beyond your current horizons, there are alternatives out there.

And the message is getting out.

When I first moved to the Philippines 14 years ago, young expats like me were VERY thin on the ground. Sure, there was a motley assortment of non-natives living here. But they were generally older, grizzled veterans, if you know what I mean.

Nowadays, I see many younger people, including those with families. More tourists are also coming. One of the biggest new groups of visitors are the Russians.

Already a force in the Thai tourism industry, Russians appear to be checking out the Philippines as well. My wife reports that the area where she has her surf hotel is bustling with Russian kite surfers now.

Back here in Manila’s CBD where I spend most of my time, I don’t think it’s an exaggeration to say that the whole character of the place is changing. And there is lots of opportunity.

 Manila’s modern and exciting central business district

I have ideas for at least 3 businesses that could be a big success here — two in real estate, and one that would utilize the large pool of educated, English speaking labor here to provide a service that could be marketed internationally.

I don’t have the time to execute on these ideas at the present time. But, if anyone is interested in hearing about them, or willing to roll up their sleeves and help me make them a reality, I’d be interested to hear from you.

If you’re stuck in a rut back home and finding fulfillment in life hard to come by, or you just aren’t seeing any opportunities, I urge you to look internationally.

I did it. As a young graduate straight out of the Australian National University, I headed off to work in South Korea. I haven’t looked back since. I couldn’t imagine a life that wasn’t filled with new and different experiences all around the world. This is my reality.

Talking the talk is one thing. Walking the walk is something entirely different. And one of my resolutions this year is to help more people in this community actually EXECUTE on the things that we talk about.

If only 1% of the people who read this take action, it will have been well worth it. As Simon often asks, “What’s holding you back?”

Until next time,

Tim Staermose
Chief Investment Strategist

We recently received a great question from a reader, Chuck, who asked, “Simon, I’m going to HK in 10 days to open a bank account, and I know there are options to do this in several foreign currencies. What foreign currency would you recommend to hold over the longer term?”

I could never make a personal recommendation as I’m not a financial advisor, nor do I know the details of your situation. But let’s review the options.

First off, Hong Kong is an excellent place to bank. One of the best in the world, in my opinion… and I say that as someone who keeps a lot of money in Hong Kong. Why? Because the banks are strong, stable, innovative, and well-capitalized.

I have far fewer concerns about a bank going under in Hong Kong than I do in the US or Europe. And in Hong Kong, with just a few clicks, I can move money into gold or any number of currencies.

It’s quite easy to open an account in US dollars (USD) in Hong Kong. Now, the downsides of holding USD are clear– continued expansion of the Federal Reserve’s balance sheet coupled with excessive spending habits of the US government make it an increasingly worthless piece of paper in the long run.

There is a flip side to this view, though, as we have discussed before. Historically, the USD has been viewed as a safe haven currency. When things get bumpy in financial markets, financial institutions and foreigners tend to hold dollars.

It’s bizarre to view the biggest debtor in the history of the world as safe, yet this is due to a few factors– the dollar’s free-floating convertibility; the ridiculous size of the US dollar (and bond market) which makes for easy liquidity; and the US government’s guarantee to never default (by simply printing more).

Hong Kong banks also offer a plethora of other currency options– like the Singapore dollar, Australian dollar, Korean won, Canadian dollar, and in some cases the Norwegian krone.

These are typically export-oriented countries with healthier balance sheets. They have better fundamentals and a much brighter future. In a sane, rational world, they are the obvious choice… and still make sense with a much longer-term view.

Unfortunately, we don’t live in a sane, rational world. And the choice is a constant tug-of-war between the deeply flawed safe haven status of the US, and these smaller, healthier economies. As such, the foreign exchange markets are extremely volatile.

Trillions of dollars move in and out of currencies each day depending on the prevailing rumor.  One day the dollar is surging, the next day it’s tanking. The euro and pound are getting beaten around like some third world peso. It’s embarrassing, really… this is supposed to be the pinnacle of finance.

One compromise that is worth considering is the Hong Kong dollar (HKD). Pegged at 7.80 HKD per USD for several decades now, holding HKD is essentially the same as holding USD. There is a very narrow band of volatility, but it’s a tiny rounding error.

If the USD’s safe haven sentiment holds, the HKD will be a good place to be as it will appreciate against other currencies and commodities as well. If the USD slides into oblivion, you can safely bet that the Hong Kong (i.e. Chinese) government will make a one-off revaluation of the peg.

In this way you can essentially maintain the upside potential of holding US dollars, but limit the downside risk.

Next, Kay writes, “Simon, I’m scheduled to soon fly to Ecuador to look at property to invest in as a step in internationalizing my resources and setting up a possible place to escape to if necessary. What are your thoughts on the country?”

I like Ecuador. It’s incredibly cheap and really beautiful. Quito and Cuenca are lovely cities. But given the government’s long-term track record of instability and populism, it does merit some caution.

In my view, small property holdings are fairly low risk. I wouldn’t want to make a target of myself by buying a 1,000+ acre farm in Ecuador, but a few acres or an apartment in town are pretty harmless.

Last, Alex writes, “Simon, I’ve been reading about Tim Staermose’s 4th Pillar with great interest. But I’m curious– how has Tim’s system fared with all this volatility going on?”

Great question. You should understand that Tim’s first rule of investing is this– never lose money. As such, Tim’s 4th Pillar trading system is designed to maintain steady, consistent returns, even in extreme market conditions.

Tim’s own long-term success rate is over 90%, and since inception last March, he’s delivered a 13% return to his subscribers (in USD terms) while most stock markets have lost.

More importantly, though, Tim’s 4th Pillar portfolio has never had a down day. There have been no wild swings, no crazy ups and downs– just a steady, smooth, upward trend.

You can find out more about the 4th Pillar and our limited-time special offer by clicking here.

Today I want to share with you a brief conversation I’ve just had with our Chief Investment Strategist, Tim Staermose.

Aside from being a really, really sharp investor in the model of Warren Buffett, Tim is easily one of the most interesting people I know… and you’ll find out why. As an Australian citizen and Hong Kong permanent resident living in the Philippines, he exudes the multiple flags lifestyle. International diversification is in his DNA.

Over the last few days, our daily conversations have focused on thinking differently. The old rules of the game no longer apply… and that doubles for investing.

Socking away your savings in some S&P index fund for 20-years is no longer the path to prosperity. Tim sheds some valuable light about some places to look, places to avoid, and what he’s doing with his own money– it’s called the 4th Pillar System.

The 4th Pillar is an incredibly innovative, proprietary system that Tim developed some years ago. And it allowed him to essentially retire in his early 30s from the rat race.

How does it work? Essentially, Tim invests his capital in a series of short-term, low-risk deals (traded on Australia’s ASX) that generate very consistent returns.

Think about it like a baseball team, where 8 out of 9 players always get on base. A few of them will even hit home runs and grand slams. Only one player on your team strikes out. You could imagine that with a roster like this, you’d win a lot of championships.

That’s what the 4th Pillar is like– a championship investing strategy. You can read more about it here , including the very special offer we’re extending on new enrollment through Monday, January 9th at 11:59pm Eastern Time.

You can have a listen to our brief conversation here.

Most of us have grown up steadily ingesting a hearty line of crap that has made its way into the social consciousness. Governments can’t go bankrupt. Government bonds are safe. Banks are safe. Real estate always goes up. The US dollar is king.Yet even the dullest bystander has begun to realize over the last few years that such platitudes are questionable, at best. Many independent contrarians have abandoned them altogether.The big issue is this: there is no such thing as risk free. Government bonds carry risk. Cash in a bank carries risk. Cash under your mattress carries risk. The oldest, most well established companies in the world carry risk. There is no escaping it. We can no longer assume away risk with anything.

Even the nature of the market itself has become risky, particularly in the developed world. The price discovery mechanism no longer exists — a consequence of the market being dominated by fresh swaths of newly-minted money and the latest round of political innuendo.

As an example, a few months ago US Rep. John Larson introduced H.R. 2835. It’s purpose?

“To establish a joint select committee of Congress to report findings and propose legislation to restore the Nation’s workforce to full employment over the period of fiscal years 2012 and 2013, and to provide for expedited consideration of such legislation by both the House of Representatives and the Senate.”

What will they think of next — a bill proposing that the S&P 500 readjust to 2,000?

These people will never learn that you cannot legislate your way into prosperity. And yet, it’s organizations like the United States Congress, the Treasury Department, the Federal Reserve, the European Central Bank, and the International Monetary Fund which underpin the modern financial system.

As long as these guys are around, those old timeless investment strategies are nothing more than a recipe for financial ruin. Municipal bonds for tax efficiency? S&P index funds for guaranteed long-term investment results? US Treasuries for safety and security? Throw all that nonsense right in the garbage.

Entrusting your hard-earned savings to such conventional thinking is incredibly risky. And with this notion of risk in mind, it’s really time to think differently about investing.

Here’s the good news: it’s a great, big, giant world out there that’s full of opportunity. If you start by looking at places that actually have solid structural fundamentals (i.e. countries and markets that are in good shape and have a bright future), you’ll come up with some incredible possibilities.

Here are just a few that score highly on my radar:

Mongolia: We’ve talked about this before– the evidence is overwhelming that Mongolia will be among the richest places in the world in terms of per capita GDP within 10-years based on its natural resource wealth.

The Mongolian market is small, but there are a number of ways to invest– including a local brokerage account (which is completely open to foreigners), a high-yielding bank account (though you do have to show up in person), direct real estate holdings, or foreign companies which invest in Mongolia.

Chile: In full disclosure, I’ve invested a great deal of my time and capital in the country. And with reason. Chile is a wealthy, market-oriented, export-driven economy, and I’m hard-pressed to think of a better, more stable place to be well-positioned for the emerging boom in agriculture.

Singapore: Did you know that more than half of Singapore’s population (of nearly 5 million people) falls within the world’s top 8.8% wealth bracket? The country’s average wealth per adult is nearly $300,000 (USD) and rising.

Given its favorable (and growing) wealth demographics, easy regulatory framework, and market transparency, Singapore is a great place to both start a business and to invest.

Cash: If you’re looking for a paper currency to hold, any of the above-mentioned (Singapore dollar, Mongolian tugrik, Chilean peso) demonstrate stronger fundamentals to any of the major currencies out there (dollar, euro, yen, pound).

For generating superior risk-adjusted returns on unallocated cash, though, I’ve found no better solution than Tim Staermose’s 4th Pillar method. More on that soon.

Here’s a quick crash course in how the intelligence business works these days.  Despite the Hollywood mystique of suave, womanizing, pun-dropping men of mystery flitting around the world, it’s much more mundane.In reality, government operatives from a host of three-letter agencies are working to develop large networks of informants. These are mostly folks who deal with other people and are in the know– the bartender in Beirut, the luxury car dealer in Bogota, the money changer in Riyadh, the hotel manager in Shanghai, etc.These assets are constantly being pumped for information– who did you see, what were they buying, where did they go next, who were they with, what were they discussing, etc. And in exchange, informants typically get paid.

In the United States, there are a number of laws on the books which are theoretically supposed to prevent the three letter agencies from spying on US citizens. Naturally, the government dispenses with such inconvenient formalities in its sole discretion, and Congress frequently passes legislative exceptions (USA PATRIOT Act, NDAA, etc.)

There’s a little known division of the Treasury Department called the Financial Crimes Enforcement Network (FinCEN) whose mission is to “to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.”

Here’s a government agency rule of thumb: The more noble-sounding the mission statement, the more villainous the agency.

FinCEN is basically the CIA of the financial system. But unlike the CIA which is technically not allowed to spy on US citizens and typically has to pay informants, FinCEN has complete legal authority over US persons. And they’ve managed to turn the entire financial system into the world’s largest network of informants.

Simply put, your banker is an unpaid, often unwilling spy of the US government.

Case in point– last week, FinCEN announced that a California banker had been slapped with a $25,000 penalty for notifying a customer who had become the subject of a federal “Suspicious Activity Report” or SAR.

SARs are required to be filed by bankers, brokers, money changers, check cashers, and even casinos. You may have been the subject of dozens of SARs and never know, because it’s against the law for your banker to notify you.

As for what is considered “suspicious”, there is no clear guidance on this. It could be anything– depositing or withdrawing too much cash, ATM withdrawals in foreign countries, unusual fund transfers into your account. Basically, anything that’s a departure from a completely sterile existence.

What’s more, financial institutions frequently have a minimum quota of SARs to fill out, and those who do not comply face severe penalties. Financial institution employees can even face CRIMINAL charges for failing to file a SAR.

Now, your banker may be a good guy, but do you think s/he’s willing to do jail time? No chance.

This is how normal, everyday people end up on government watch lists or have their assets frozen ‘pending investigation’. And with the recent passing of the National Defense Authorization Act and its catch-all terrorism clauses, we can only expect this to get worse.

It’s truly despicable when you think about it– the federal government creates a currency monopoly at the point of a gun (try buying your groceries with Swiss francs). Then they make it nearly impossible to function in this world without using the banking system, and then turn the entire banking system into a network of spies.

If you want to reduce these risks and dull the impact of the coming wave of SAR-driven civil asset forfeiture, it would be a really smart move to open a foreign bank account.

Nearly every country in the world has anti-money laundering rules now. Some (such as Mongolia, where I recently opened an account yielding nearly 14%), are easier than others. But the bottom line is that you’d be moving your money out of the jurisdiction where you live, and into a place where those agencies have zero (or limited) authority.

And if you want even more financial privacy, I’d strongly recommend holding precious metals in an anonymous overseas vault like Das Safe in Vienna.

It’s done. Yesterday afternoon, after years of searching, months of preparation, and weeks of stress, my wonderful partners and I closed on a gorgeous farm in central Chile, about 2 1/2 hours south of Santiago.

The land is over 1,000 acres of productive crops, plentiful water, mountainous horse trails, and insanely beautiful views. It’s situated off the beaten path, but not isolated from civilization.

The location is a dream. Within an hour’s drive, there are world-class (and mostly empty) surf spots, Andean ski areas, golf courses, thermal hot springs, polo fields, casinos, and more wineries than you could imagine.

When I look around at what’s happening in the world, I really don’t think the timing could be better. It’s a safe haven among safe havens– a place that, no matter what happens, we will control our own organic food, clean water, and renewable energy.

Europe can keep kicking the can down the road, the Fed can keep printing, and the entire financial system can plunge into chaos. It won’t matter for those of us down here.

And, should the impossible happen and world governments suddenly embrace fiscal and monetary discipline, we won’t be worse off for it… and we’ll still have the option of turning a tidy profit by selling hundreds of thousands of kilograms worth of organic fruits, vegetables, and livestock into the market.

I’ll have more on this in future letters. For now, let’s move on to questions.

First, Cara asks, “Simon, I know you’ve been vocal about encouraging young people to look abroad for better opportunities. And I agree with you. I’m graduating in the spring and there doesn’t seem to be anything for me here. But every time I talk about going overseas, my friends and family try to talk me out of it.”

This is really common. Look, most people know that the situation in their town and country isn’t so great. But few will actually take action to do anything about it.

Hundreds, thousands of years ago, human survival depended on our willingness to take action. If Paleolithic hunter/gatherers didn’t hunt or gather, they starved. Today we can just sit around on Facebook all day collecting food stamps and other entitlement benefits.

Moreover, there’s a psychological tendency for people to feel threatened when anyone within their circle or peer group breaks away and does something different. Heading overseas to find better opportunity falls within this category.

So first they’ll try to talk you out of it. They’ll tell you that you’re crazy and try to explain how RISKY it is to go abroad. They’ll tell you that [insert country name] is dangerous or unstable. Bear in mind they have no idea what they’re talking about.

Eventually they’ll come to accept your decision, and then respect you for it. Then one day you’ll start getting emails from people wondering how they too can follow in your footsteps.

Bottom line, if you really want to break free, most people will have to ignore their friends and family. Do what’s right for you, not what’s comfortable for everyone else.

Next, Marcos asks, “Simon, you wrote some time ago that you were thinking about shorting government bonds. I’m just curious if you ever did this.”

Yes, I recently went short US Treasuries– I believe it was when the 10-year yield was about 1.85%.

Now, I dislike ETFs– the counterparty risk is just too high these days. But for the sake of convenience and a unique tax situation, one of the instruments I bought was a triple-short ETF (ticker symbol TYO).

For a much larger investment, I’m looking right now into shorting Japanese government bonds through an offshore broker; I’ll let you know when and how I pull the trigger on this.

Last, Alan writes, “Simon, do you think that the IRS’s foreign bank account reporting requirements for US citizens pose a drawback to having a foreign bank account? The penalty for not reporting is rather severe, I believe.”

It’s true that the US government has ramped up its reporting requirements for assets held offshore; this applies not only to US citizens, but US residents as well.

Here’s the thing- we’re talking about the most insolvent government in the world. In the history of the world, for that matter. Yes the tax reporting requirements for people holding assets overseas are getting more onerous. What makes you think that tax obligations for everyone else aren’t going to get more onerous too?

The way I see it, -every- US taxpayer is going to be feeling the pain down the road. More forms, more paperwork, more reporting… and more taxes. Just wait for a national sales tax.

As long as you’re going to be feeling the pain, you might as well have your assets safely tucked away overseas outside of the jurisdiction of your home government and creditors… in a place where the banks are actually solvent and reliable.

Hong Kong and Singapore are great places to start.

In the meantime, if you’re a US taxpayer, make sure you file the appropriate forms. Noncompliance is simply not worth the hassle. For foreign bank accounts, this may include the TDF 90-22.1, schedule B of your 1040, plus the new FATCA form 8938.

You might know of my friend and colleague Mark Nestmann. In case you don’t, Mark has become one of the world’s foremost authorities on international diversification, and he’s a frequent contributor to our publications.

What you might not know about Mark is that his journey into international diversification began many years ago… after the government wrongfully seized his assets. It was a real wakeup call and taught him a hard lesson in how the world really works.

Fast forward a few decades, and Mark has literally written the book on international diversification. Well, several books, actually. His latest update to the Lifeboat Strategy (available at his website, MarkNestmann.com) is a top-down, comprehensive guide to the multitude of options that you may want to consider for your own strategy.

I really want to encourage you to listen to the interview I just conducted with Mark; it’s about 20-minutes and jam-packed full of useful information… like how to avoid living in a police state, what the future is for capital controls, and the top things you can be doing right now if you see the writing on the wall.

You can listen my interview with Mark here.

[Editor's note: Simon's close friend Craig Ballantyne, now editor of the Early to Rise publication, is filling in today while Simon sits in boring meetings with his Chilean attorneys.]Imagine being a recently divorced mother of two young women who were about to enter the expensive American college system, and yet your job at a local government agency paid peanuts. Oh, and your hobby was knitting. How the heck would you be able to afford living in Southern California and sending those girls to college?The answer, of course, is the Internet. The world wide web is the great equalizer in today’s economy. It’s the business equivalent of having a second passport, foreign bank account, and second residence, all rolled into one.

You see, the Internet allows you to play the role of David in the battle against Goliath. It allowed Penny Halgren, the woman I described above, to create cheap websites where she sells hundreds of thousands of dollars of quilting books and information each year. Oh, and her cat helps, too, by being the “voice” of her emails sometimes. (And no, her cat is not named Simon Black.)

But you don’t even need to create your own product to generate a second income or full-time income on the Internet. One of the affiliates for my fitness product, Rusty Moore, started generating thousands of dollars per month through his website by selling other people’s fitness products.

And he did all of this while working full-time as a sales manager at a men’s clothing store in Seattle. Eventually Rusty was able to quit his job and now makes three times his old salary with his website business.

You don’t need a $3000 website. You don’t need to be a technical Harry Potter. You don’t need to know computer language coding or what java script is (Note: It’s not a recipe for coffee).

In fact, I coined my own law when it comes to Internet success. Ballantyne’s Law states:

“The more technical expertise you have about such things as building websites, connecting merchant accounts to your online shopping cart, or writing computer code, etc., the LESS money you’ll make on the Internet.”

(Okay, Mark Zuckerberg excluded, but the majority of the men and women I know who are making six-figures per year, and more on the Internet don’t know how to put up their websites. Believe me, I’ve met Simon Black, and he’s no Mark Zuckerberg.)

What’s really important for web-based business success is for you to know:

a)      How to communicate
b)      How to connect with other people
c)      How to add value to your customers and to all your business relationships
d)      How to solve customer’s problems
e)      How to be persistent

You don’t need a computer science degree for ANY of those factors of success when it comes to making money with the world’s great equalizer.

The reality is that you can piggyback off the largest companies in the world, including Amazon, Apple, Google and Facebook (Note: Recent state tax law changes have caused Amazon to eliminate affiliate opportunities in a few areas of the United States, all the more reason to follow Simon’s advice on planting multiple flags).

Simply put, if you have an Internet connection, you can start and operate a number of very successful businesses for minimal cost. I still remember the feeling I had when it first really hit me that I could make money anywhere in the world as long as I had the Internet.

I was sitting on a plane in Dubai in 2006 ready to return home after visiting a few friends who had moved from Canada to the UAE for work. Back in those days I was still working part-timer as a personal trainer while building my online fitness business.

Being in Dubai, I obviously had to give up my training income for the week, however, my writing a few emails to my fitness list, I was able to make over $1500 that week in online sales, including $300 the morning I checked my sales on my Blackberry while sitting on that plane ready to go home.

That’s when I knew I had beat the system.

The Internet remains the greatest opportunity for the average person to control their economic future.

Believe me, I’ve gone to dozens of seminars and met literally thousands of Internet entrepreneurs, and the majority of them are unassuming, regular, “folks next door” types who stumbled across the Internet and leveraged this unique opportunity into a business they can run from their kitchen table in their underwear. Or the coffee shop.

And if I may be politically incorrect for a second, a lot of these people are not rocket surgeons. In fact, some of my best friends who make money with the Internet probably couldn’t hold down a 9 to 5 job in the real world.

But my friends can follow proven systems for adding value to the lives of their customers by communicating the solutions to their customer’s problems.  It’s often that simple. Sovereign Man is fantastic example of identifying a problem in the marketplace and communicating solutions to the people that have these problems.

Oh, and one more thing. The successful people I know are persistent. They refuse to give up. They look at a failure in a positive light because of the lessons learned that can then be applied to future success.

Like Simon, I’m an optimist. In fact, I still believe the ‘American Dream’ is possible, no matter where you may live. I’ve achieved it (and I’m Canadian), and I see people achieving it every day, all because of the Great Equalizer.

And you can do it too, from anywhere in the world, as long as you have an Internet connection and the determination to add value and solve other people’s problems.

You can beat the system and take control of your future.

[As editor of the daily e-letter Early to Rise, Craig is an eternal optimist and believes that everyone can still realize their own unique 'American Dream'.  Craig's advice about using the Internet to build income is without peer, and you can find out more about how he does it here.]

Neither this email communication nor content posted to the website SovereignMan.com is intended to provide personal financial advice. Before undertaking any action described in this letter, financial or otherwise, you should discuss your options with a qualified advisor– accountant, financial planner, attorney, priest, IRS auditor, Tim Geithner… Also, nothing published in this letter constitutes encouragement to avoid or evade tax obligations in your home country.  Furthermore, you should understand that SovereignMan.com may in some instances receive financial compensation for products and/or services which are mentioned in the letter, and in other cases, SovereignMan.com receives no compensation.  The needs of the community come first, and the presence or lack of financial compensation in no way affects the recommendations made in this letter.

Last night I had some close friends over for dinner and a few bottles of Chile native Carmenere wine. A lot of the conversation focused on food– we’re all very conscious about what we put in our bodies and tend to reject the garbage that passes for food in ‘developed’ countries up north.

There’s so much chemical poison in food these days– trans fats and hydrogenated oils, high fructose corn syrup, aspartame, and a host of ingredients that were manufactured in laboratories rather than grown on farms. Many have been linked to various forms of cancer, liver disease, diabetes, etc.

And yet, they’re all perfectly legitimate. Governments certify such dangerous chemicals are fine. We have organizations like the FDA, CFIA, FSA, etc. to tell us what is safe and what is not… what we can and cannot put in our bodies.

Never mind that they consistently fail.

Just days ago, in fact, a new study published by Consumer Reports showed that many children’s fruit juices being sold on grocery shelves actually contain high levels of arsenic.

All of this is why our resilient community project has such an intense focus on organic agriculture. Think about it… in difficult economic times with rising input costs and oil prices, do you think the Big Ag companies aren’t willing to cut a few corners for the sake of profitability?

I’m not taking this risk… and it’s a big reason why we’re investing so much in our own agriculture here in Chile. More on that later, let’s move on to this week’s questions.

First, Ashok asks, “Simon- I know you held a conference call earlier this week to discuss the resilient community project in Chile and an upcoming event to tour the property. Are any slots still available to come down?”

Unfortunately, no, not at the moment. Both weekend events to come down here and tour the property sold out in just 6 1/2 minutes. Given the wait list, though, it’s clear we’re going to have to organize more events. Stay tuned for more details about that.

Next, Carolina asks, “Simon, you seem fairly bearish on financial markets at the moment. Can you explain why?”

Easy. The financial system is completely broken. Markets are supposed to match willing buyers with willing sellers to determine the true equilibrium price for a particular product, service, or asset.

This ‘price discovery’ is no longer happening. Every day, asset prices around the world rise and fall based on politics, rumors, and manipulation– not any sense of value. One day it’s RISK ON, the next it’s RISK OFF. One day everyone’s buying stocks, the next day some rumor causes them to run for the exit.

Not to mention, can we really have much certainty what’s on anyone’s books anymore? Trillions of dollars are sitting on corporate balance sheets, typically invested in sovereign debt.

Years ago, sovereign debt used to be considered a safe ‘cash equivalent’. Today, not so much. With so many insolvent governments teetering on the edge of bankruptcy, ALL of this money is at risk.

The MF Global disaster (the eighth largest bankruptcy in US history) should have underscored this point in spades. But apparently the market has a very, very short memory. Just 32 days later, MF Global is forgotten, and it’s RISK ON once again.

Famed hedge fund manager Mark Mobius recently summed it up nicely when he said, “There’s definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis.”

On that note, Roger asks, “Simon, there’s a lot of uncertainty in the world. One day stocks are soaring because of central bank intervention, and the next day stocks tank because of these sovereign risks. What’s an investor to do?”

I certainly can’t give any personal financial advice, but I will say what I’m doing.

For the most part, I’m investing my time, energy, and money in agriculture down here in Chile. Regardless of what happens– stability or calamity, inflation or deflation, this investment will literally bear fruit.

I’ve also purchased precious metals recently– not for investment, but simply as a safe haven “anti-currency”. I’m also holding a fair amount of cash (including physical currency sitting in my safe) and waiting patiently for markets to seize and asset prices to crash.

The only exceptions I have to this rule are Tim Staermose’s proven 4th Pillar trading strategy, as well as some very lucrative private investment opportunities in Mongolia. My boots on the ground analysis there leads me to believe that Mongolia will prosper, whether inflation, deflation, or stagnation occurs.

My business partner Matt is a great friend and hell of a guy. He’s also a big technology buff and is an early adopter of new products.  A few weeks ago he gave me a Kindle Fire, Amazon’s new touch-screen digital reader. It’s great. Fabulous, actually.

I used to do all of my reading on an iPad, and I instantly made the switch. The screen resolution is much bolder and brighter, and the size is more ‘book-like’. If you’ve been thinking about buying one, I highly recommend it.

One of the things that I immediately subscribed to on my new Fire is the Financial Times; I have it automatically delivered to my device each morning, and it’s now become the first thing that I reach for when I wake up in the morning.

Just yesterday morning as I scanned the headlines, a number of things caught my eye that I have copied and pasted for your review. These were all actual headlines from the FT’s digital edition on November 30, 2011:

“Businesses plan for possible end of euro”

“ECB bond purchase snag sends warning”

“Moves to boost rescue fund amid shortfall fears”

“Ten crucial days in race to save single currency”

“Banks suffer surge in withdrawals”

“UK announces extension to austerity policies”

“Traders prepare for endgame”

“Miserable outlook as deficit reduction plans are blown off track”

“Beyond Europe, executives make plans for the unthinkable”

“Time to Act- Italy must restructure its debt now (Editorial)”

“Doubt over firepower of rescue fund grows”

Then later in the day were all the headlines of world central banks’ coordinated action to print money. Stock markets soared as markets cheered this move… whereas instead they should have been looking at this for what it is– the last act of a desperate man.

Then there were the headlines related to geopolitical instability:

“UK vows ‘serious consequences’ as Tehran embassy is stormed”

“Defiant Iran vows to fight back”

“Oil prices surge ahead of EU ministers’ talks over embargo”

Not to mention the fiasco with Pakistan. Or Russia putting its radar stations on ‘combat alert’ in preparation against European missile defense systems. Or the situations in Syria and Saudi Arabia. Et cetera.

Ideas that once seemed unthinkable in the developed world– war, social unrest, sovereign collapse– are now becoming mainstream realities. And just a casual glance at these headlines shows that the problems aren’t going away.

Let’s be frank. Is the world coming to an end? No. Absolutely not. I’m actually quite optimistic about humanity’s ability to adapt and overcome. Human beings have survived ice ages, horrible plagues, natural disasters, nuclear war, and utter economic devastation. We’re still here despite ourselves.

But we cannot ignore a basic truth– the current world order and corrupt, plutocratic, debt-laden fiat system is completely unsustainable. These headlines are symptomatic of a change that is already taking place– a complete reset in the way the world operates.

And whenever there has been great change in our past, there has been great chaos and turmoil. Finding your own safe haven in such times to secure your assets, your family, and your livelihood is an incredibly prudent decision. Some basic steps include:

1) Consider an international safe haven location out of harm’s way that you can go to if/when things get too uncomfortable in your home country. Start looking now, you don’t want to begin thinking about this when you’re heading to the airport.

Chile, Uruguay, New Zealand, etc. are all excellent options.

2) Consider moving a portion of your assets overseas to a stable, sound banking jurisdiction. Singapore, Hong Kong, Abu Dhabi are great choices. Store precious metals overseas in private (preferably anonymous) vaults in non-bank facilities like Global Gold or Das Safe.

3) Look for alternative ways to generate income should your current source of livelihood dry up. Developing markets like Mongolia are full of opportunities, as are thriving foreign economies like Singapore.

Taking these basic steps will put you light-years ahead of the crowd in terms of being prepared for whatever may come. And, should some miracle arise and we all wake up tomorrow to world peace and prosperity, you won’t be worse off for it.

Moments ago, we wrapped up another subscribers-only teleconference for Sovereign Man: Confidential members. This particular call was very near and dear to my heart. Why? Because it focused exclusively on our resilient community project.

Just take a casual glance at the headlines and you can see that the world is in utter chaos right now. The entire global financial system is hanging in the balance, and geopolitical  instability is sprouting up all over the world.

What’s next? Trade war with China? Invasion of Iran? Collapse in the stock market?
Nobody can say with any certainty what’s going to happen, but it’s clear that the
system is under a lot of stress.

For me, the best way to deal with these issues is our resilient community project; this is a place where, no matter what happens , like-minded people can deal with the world from a position of strength.

We grow our own food and have multiple water sources. We generate our own energy. We have robust communication capabilities. We have the capability to thrive and build wealth. And it’s  all in an absolutely gorgeous place with amazing people.

Make no mistake, this is no survivalist  compound. We’re not donning tin foil hats and building walls to run away from the world.  Rather, this is a place to engage with the world… without being dependent upon it.

I explained all the details on today’s call– where the property is, what we’re already growing, why we selected it, how people can participate, and where to sign up for our limited engagement  launch event in February.

If you’ve ever had any interest in this project, you need to listen to this call as soon as possible. Right now, the information is available exclusively to  SMC members, so I’d like to invite you to take a risk-free trial of Sovereign Man: Confidential today.

If the global financial crisis has taught the world anything, it’s that there is massive weakness running through western banking systems.

The big banks in New York and London, once considered to be the strongest and most stable in the world, have been completely exposed for what they are– weak, toxic, and corrupt.

Between subprime debt, shaky sovereign bonds, and uncertain consumer loans, most of these banks are sitting on incalculable losses. They get around disclosing their true financial condition by using clever accounting tricks (which are completely legal thanks to government regulators).

As such, they can go on borrowing money from the Federal Reserve at 0% and loaning it to the US government at 2%– a practice that has essentially become the banks’ core business.

If you haven’t noticed, most banks hardly lend against anything that isn’t guaranteed by the government anymore. A Fannie Mae conforming loan is a no-brainer, but making a small business loan is a non-starter.

By way of personal experience, one company that I co-own is a very successful retail products brand. We went to the bank to obtain a loan to buy more inventory, secured by accounts receivables and contracts from mass retailers (think Wal Mart and Target).

And yet, no bank would finance us, even with our strong revenues, brand success, documented future cash flows, and excellent credit. The only loan they would grant had to be matched and secured by cash. In other words, they would happily loan $1 million… as long as we deposited $1 million in cash as collateral.

This is hardly a well-functioning system… let alone the pinnacle of global banking.

I’ve long pounded the table on banking overseas– foreign banks are often healthier, more innovative, more secure… and best of all, not controlled by your home government.

You may be surprised, for example, to learn that, according to recent FT data, the country with the most profitable banking sector (as a percentage of average capital) is none other than… Pakistan! The country’s banks posted an average profit of 36.41% of capital. Brazil, Indonesia, and Egypt rounded out the top 4, all exceeding 30%.

(Australia and Canada were the only big western nations in the top 25 at roughly 20% each.)

In terms of regional profitability, Latin American banks lead the world with an average return on capital of 27.09%. This is more than twice as high as North American banks (11.16%) and European banks (8.5%).

Real profits certainly count for something; banks that are legitimately profitable are healthier, and healthier banks are safer for depositors. In this day and age, bank safety is paramount.

I’ve often cited the fact that certain places like Singapore have never had a bank fail , ever, partly due to the high capitalization levels. This is a key measure of bank safety– and some of the top jurisdictions in the world (as measured by stricter tier 2 capitalization levels) are Israel, Chile, Colombia, and Hong Kong.

By way of comparison, the US, UK, Canada, etc. are nowhere to be seen in the top-20 for this category.

One of my preferred metrics for bank safety, however, is the loan-to-deposit ratio. For example, if a bank has $100 million in deposits, and their loan portfolio amounts to $95 million, then the loan to deposit ratio is 95%.

Clearly, the lower this ratio, the better; a safe bank has a lot of cash on hand and loans out funds judiciously.

Banking jurisdictions with some of the lowest loan-to-deposit ratios (i.e. the safer places) include Lebanon, the Philippines, Hong Kong, and Andorra. Places with the highest ratios (i.e. the riskiest) include old favorites like Italy, Ireland, Portugal, andSweden.

With banking systems (and governments) collapsing all around us and the very nature of fiat currency being called into question, it’s important that people no longer ‘assume away’ things like bank safety.

Just because a bank has been around for a hundred years doesn’t mean it can’t collapse. Just because there’s a government guarantee doesn’t mean the whole system can’t collapse… including the government itself.

Some friends and I spent most of the weekend touring the future site of our resilient community in central Chile, just a few hours’ drive south of Santiago on a very modern highway.

As I’ve mentioned before, the site sprawls across roughly 1,000 acres in a gorgeous setting; a healthy chunk of the property is already planted as a working (and profitable) farm, and it was exciting to see so much in bloom over a beautiful, sunny summer weekend.

We picked organic vegetables out of the ground and made a fresh meal with full knowledge of exactly where our food had come from and how it had been grown. This is real power. And freedom.

When I returned to my apartment in Santiago and got caught up on major news events from around the world, some friends sent along the usual batch of Black Friday shopping videos. They’re hilarious… and utterly pathetic.

Almost without exception, the situation gets worse every year. People get bruised and bloodied as crowds battle each other for deep discounts. Last year several people died… and in response, most of the major retailers adjusted their specials and staggered their stores’ opening times to reduce the crowd levels.

It didn’t help much, as this year’s barrage of Black Friday incidents underscores yet again how hopeless the mindless culture of consumerism has become. People still trample each other, fight each other, etc. Now they are pepper-spraying each other… or even waiting in the parking lots to mug each other as shoppers exit the stores.

(A friend even told me one unconfirmed story of a group of Wal Mart parking lot muggers who themselves got mugged by a rival group of Wal Mart parking lot muggers.)

Then there’s this video showing the utter chaos and calamity that ensued when shoppers were fighting over towels put on sale at $1.28 each. Towels.

If this is how people act when towels are on sale, it certainly makes one wonder how well society will function when there’s actual chaos– like supply disruptions for food, fuel, or electricity.

Have you ever seen those UN Aid videos where mobs of Africans start violently looting the trucks carrying humanitarian supplies? Or the more recent videos of Haitians battling each other in the streets over bags of rice? Western society is not much more advanced.

If you truly believe there is a 0% chance of social unrest occurring where you live, then I encourage you to do absolutely nothing. And this is what most people will do.

If, on the other hand, you see several issues on the horizon which may threaten the smooth, orderly flow of modern society, then I encourage you to watch those Black Friday videos and answer a simple question– “Do you want to be around those people when it happens?”

[Editor's note: Sovereign Man: Confidential members are reminded of this Wednesday's special Resilient Community presentation at 1pm Eastern. If you're interested in the community, you won't want to miss it.  If you're not a member yet and want to attend the call, you can sign up here.]

“We think we have an agreement, but we are not sure what it is.”
- Negotiator at the Euro Zone “crisis summit” last month, as reported in The Economist.

“You don’t have to be paranoid to be terrified.”
- Ditto.

If a ballistics expert were so poor at his job that his artillery routinely fired missiles into the sea or, worse still, at his own men, he would soon be removed from office. He might perhaps be purged more dramatically, pour encourager les autres. No such logic would seem to apply, however, in either politics or economics in the west, where discredited practitioners of failed theories are allowed to pontificate and spend into absurdity.

We cannot say with certainty what was spooking European investors prior to last week’s make-or-break summit (the 14th such “crisis summit” in 21 months), but it seems plausible to argue that they were concerned about an unsustainable build-up of credit, credit risk and leverage. Happily, those concerns have now been put to rest, because the Euro Zone’s leaders have pledged more credit, more credit risk, and more leverage.

To put it another way, President Sarkozy and Chancellor Merkel have bought more time, albeit time paid for with yet more borrowed money. A three ring circus of blind, incontinent clowns would have more class.

The term ‘haircut’ seems somewhat redundant

Source: Financial Times

We know from previous climactic bailouts that money, being so debased by our central banks, doesn’t get you very far these days. We have now had a €1 trillion bailout whose benign market impact lasted all of a day.

By Friday last week, Italian 10 year bond yields were back up at 6% – the ”danger zone” – which does rather make one wonder just what the hell our monetary and political “leaders” think they are achieving with all this thinly disguised but very costly can-kicking. Evolution Securities? fixed income research team called the bailout plan “a sugar rush” of stimulus.

A one-day wonder is neither here nor there; what matters is where Italian government bond yields are in 6 or 12 months’ time.

The Euro Zone’s leaders faced at least three specific objectives. Resolution to each would have been and remains necessary but not sufficient to ease the crisis:

1. Put Greece out of our misery.
2. Recapitalise the banks.
3. Do something magical and sexy with the EFSF.

What we actually have is a peculiar fudge even by the standards of eurofudge whereby a Greek default mysteriously doesn’t appear to trigger credit default swap protection, as Alen Mattich of the Wall Street Journal points out. Separately, and not for the first time, banks are being tasked with mutually exclusive objectives: keeping the lending taps open without compromising and indeed actively improving the quality of their balance sheets.

This is impossible. The Economist (whose coverage of the summit this week has been excellent) cites Morgan Stanley’s Huw van Steenis, who suggests that European banks might end up pursuing a “crash diet” that results in a shrinking of balance sheets by up to €2 trillion over the next year, which would be a disaster for SMEs and others.

And in the meantime, a credit bust that is the natural response to too much inherent leverage and financial engineering is being “solved” by… leverage and financial engineering. At least the acronym for the Special Purpose Investment Vehicle is a fair reflection of the intellectual bankruptcy being deployed. One summit attendee noted of the bailout plan that “the more zeroes the better.”

It is unclear whether he was referring to taxpayers’ further involuntary capital commitments, or to political non-entities.

One cannot really avoid the conclusion first reached by writer Adam Fergusson in his study of the Weimar era collapse and hyperinflation, When Money Dies :

“What really broke Germany [and which may end up breaking the Euro Zone] was the constant taking of the soft political option in respect of money.”

Talk of hyperinflation will, one trusts, ultimately be both premature and irrelevant, but wishful thinking is no sustainable basis for an investment approach when we have the current crop of political and economic no-talent ass clowns calling the shots.

Last week we hosted our external investment panel, an oversight committee in effect, and one of the panellists pointed out that the anticipation and preparation for acute inflation, like that for financial panic, cannot be finely timed.

One minute the system is deemed to be secure. The next minute, pensioners are queuing up outside Northern Rock.

Since we have mentioned the “W” word, we have an obligation to discuss what strategies best preserved the wealth of German investors during that dark period. (“Life was madness, nightmare, desperation, chaos,” writes Fergusson. We are not quite there yet – but we also note that sensible financial commentators have already begun to refer to Japan as our Weimar in waiting.)

Other, more valuable foreign currencies, for example. In 1923, that meant the US Dollar. This time round, since the Swiss National Bank has lost the plot, we would favour the Canadian andSingapore Dollars. Back then, the answer lay in gold, and we think it does this time, too, as the finest currency protection paper money can buy.

One can also consider gold and silver mining companies – John Hathaway of Tocqueville Asset Management has written very nicely about the “Golden Mulligan” being presented to investors who missed the gold bull on the way up.

Markets very rarely offer second chances; investors without any form of gold exposure would, we think, be well advised to step on board now.

Other forms of real assets will play their part (we note the substantial increase in the cost of British agricultural land). And since sins of omission can also be costly, investors looking for “safe havens” would be well advised to be highly selective in their choice of bonds (if they choose bonds at all), as well as common stocks.

Those who have studied the Weimar experience suggest that the point of no return in the inflationary process did not come about through currency depreciation alone, nor from the growing velocity of money in circulation (as German savers tried desperately to spend their fast-eroding paper wealth), nor from the balance of payments deficit.

In fact it came from a devaluation of political principles. Yale Economist Robert Shiller has suggested that one of the reasons for equity investors’ irrational exuberance in the 1990s (it was Shiller, and not Greenspan, who coined the phrase) was the fall of the Berlin Wall- which seemed to conclusively display the superiority of western free market capitalism over the discredited Soviet model.

Now the superiority of the western model is so apparent that we have cash-strapped eurocrats looking to raise money from the Communist leaders of a country, most of whose citizens live in abject poverty. This writer is proud to call himself British; he would be disgusted to be regarded as European.

Tim Price

Director of Investment
PFP Wealth Management

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Tim Price is Director of Investment at PFP Wealth Management  in the
UK. PFP is an indepe ndent wealth management partnership with over 20
years’ experience of institutional and private client investment
management. Tim is a specialist in low risk, multi-asset, absolute
return investing and has enjoyed success in the UK Private Asset
Managers Awards programme, having been shortlisted for five successive
years, and was a winner in 2005 in the category of Defensive
Investment Performance. He was also shortlisted in the 2007 Spear’s
Wealth Management Awards in the category of Asset Manager of the Year.
He is a regular contributor to Money Week magazine in the UK and to
other financial media.