Those of you who have followed my blog know that I am not inclined to exaggerate and that I am pretty unbiased. I was the biggest silver bull out there, but also silver’s biggest bear when it started resembling a bubble. I was also the biggest real estate bear, criticizing misguided policies like the first-time homebuyer tax credit along the way, but I packed up everything and moved to Las Vegas to profit from a rebound in housing I saw coming in 2012. Investor sentiment swings wildly in opposite extremes; all I’m trying to do is be on the correct side of swings.
The Major Trends
The major trends are really easy to spot. Most people know something is wrong, they just can’t pinpoint exactly what it is. Their confusion leads them to false conclusions such as “the rich don’t pay their fair share. Let’s raise taxes on those bastards!” Little do they know that this kind of class warfare has occurred throughout history, and getting the rich bastards never solves anything.
We are witnessing capital flight of proportions unmatched in modern history. The wealthy are selling their investments and locking in their profits before capital gains taxes rise. Americans are renouncing their citizenship in record numbers, and one of my friends in Asia confirmed that this trend is indeed occurring among expats. All these things are occurring before the economic implosion. Why? Well just like in any bull market, the “smart money” gets in on a trade before anyone knows what’s happening. The “smart money” right now is getting its capital the hell out of the U.S.
Austerity and Higher Taxes
It’s pretty clear that Obama is set on cutting spending and raising taxes. This is an utterly asinine policy, but that’s what we’re getting. Austerity is inherently deflationary, so we must understand that bondholders, aka banks, are the ones who benefit; believe me, they will continue to push austerity on the government. Unfortunately, this is going to create civil unrest of the magnitude none of you has ever witnessed. Some see this as a grand conspiracy of bankers, but it’s more accurate to say that bankers are just looking out for themselves and guaranteeing profits. Greedy? Yes. Sinister? No.
As far as taxes, a lot of intelligent people see the top rate rising from 35% to 39.6% and say: “what’s the big deal?” Well first of all, it’s not really the increase in earned income tax rates that’s the problem, it’s the dramatic rise in capital gains and dividend/interest tax rates. But more importantly, it’s out in the open that the government’s policy is to increase taxes on the wealthy until we have this debt crisis under control. Well, anyone with half a brain understands that this debt crisis is unavoidable, which implies the braindead government will continue to raise taxes until this whole thing implodes. So what does a prudent person do, stay here until all their wealth is confiscated or go to a country with a 0% capital gains rate where capital is welcomed with open arms? You don’t have to be a genius to answer this one.
Consumed by Interest
When you study the composition of national debt, you come away understanding that compounding interest is the problem, and there is no plan to stop this process. The majority of the national debt at this point is composed of accrued interest payments. Even if our government magically closed the deficit of over $1 trillion annually (unlikely), interest payments would continue to compound. Given current interest rates, the annual interest payments on our debt will rise to roughly $500 billion in 2017. And this is assuming record low interest rates. To put that in perspective, interest payments on our debt by 2016 will outstrip the combined spending in: The Department of Education, Department of Homeland Security, Department of Energy, Department of Justice, Department of Agriculture, Department of Transportation, Department of Interior, and Department of Commerce. So this policy of austerity and spending cuts in a recession sounds nice, but it is entirely misguided and doesn’t solve the problem of interest.
The CBO, aka the government, is predicting over $5.3 trillion in interest expenditures over the next decade. Common sense tells us the numbers will be far worse because of flawed CBO assumptions. The CBO assumes that the 10-year Treasury yield will rise from 2.3% this year to 5% by the end of the decade with the yield on 3-month T-bills increasing from 0.1% to 3.8%. We have been in a 30-year bull market in government bonds and still the majority of the bull market was at interest rates of above 5%. The bull market will end simply from a cyclical perspective, and when interest rates rise, they rise very quickly. Assuming interest rates in the 7.5-10% range is much more realistic. 15-20% is not really out of the question either. But the point is that even with a modest rise in interest rates, the interest payment alone will consume the majority of our tax revenue. Game over.
Political and social unrest always follow economic implosions. A profound meltdown is avoidable, but policy needs to shift 100%, which is not happening. I am losing hope that anything will change before a monumental crisis hits. Europe is on the verge of collapsing once Spain falls, and then you will really understand what volatility means. Tremendous investments opportunities will arise, but this crisis is going to wipe out the average person who blindly believes the government and the media.
I am now advising things I never thought I would: get your capital out of the country if you can. Get out of the country if you can. It will only take 2 or 3 years to really understand why I’m saying this. Asia is where all the opportunity is. I will be talking more about Asia in my subscription service.