(Versión en español)
The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is honored to present an exclusive interview with Simon Black. Black is an international investor, entrepreneur and his blog SovereignMan.com is dedicated to the achievement of freedom. We invite you to subscribe to it.
Guillermo Barba: Simon, from your perspective, how do you perceive the state of the global economy?
Simon Black: In a word, there’s risk everywhere. I have a lot of concerns about the financial system.
There’s been so much money created by central banks that nearly every category of financial assets is currently at an all-time high. Many governments (whose own financial statements state that they are insolvent) are borrowing money at negative yields.
Even just keeping your money in a bank has become risky. And we’re seeing banks in Europe now charging their customers negative interest rates.
At the same time, growth is slowing. China has for a long time been the major driving force in the global economy, but now that’s changing.
As a result, Chinese policymakers are resorting to their own unprecedented tactics. They’re slashing interest rates and the reserve ratio, as well as trying the old-fashioned move of printing money.
They’re doing everything they can to stimulate growth, yet it’s not working.
But the part that really concerns me is that so many major players in the financial system aren’t concerned.
Investors seem perfectly happy to loan money to bankrupt governments at negative yields, to buy stocks at all-time highs, and to pay their bankers negative interest.
This defies all common sense and is probably the greatest indicator of all that we’re in an epic bubble.
GB: You have traveled all around the world. You have repeatedly advised investors to have two passports. Why is that?
SB: Most people only have one option. Through sheer accident of birth they became citizens of one particular country.
A second passport, however, gives you a second option. And an additional option means additional freedom and additional opportunity.
It means always having a place to go. Where you’re welcome, where you can work, and earn money in a safe, comfortable place.
With the right one, it’s hard to imagine that you’re worse off because you have the ability to live, work, and do business in another country. Particularly when it’s a place where you enjoy spending time.
Ultimately—for those who hold all of their savings, all of their assets, all of their income, and all of their financial interests in one country, their personal fortunes are inextricably tied to the fortunes of that country.
As most of these countries, especially in the developed West descend further into insolvency this puts a lot of people at personal risk.
Having another passport is the best insurance policy one can have against this.
GB: In your opinion, where are the best opportunities for investing? And in which markets do you recommend to invest?
SB: The “where” is the most important question, because even if you get everything else right, but you get the country wrong, then everything can go very badly, very quickly.
Cyprus is a great example of this. You could have invested in the best business in Cyprus, and in 2013, you would have been frozen out of your savings along with everyone else in the country.
So, I generally avoid countries where the sovereign risk is high. Governments that are in poor financial condition, where things like bank bailouts and capital controls are a distinct possibility.
Then there’s a question of asset class.
I think most conventional asset classes are losers right now. Again, most stocks are at all-time highs. And history shows that it’s usually not a great investment to buy stocks at their all-time highs.
We’ve had a lot of success recommending a select group of deep value companies to our readers. These are often companies that are trading for less than their cash value.
One company in the oil sector for example has a market cap of about $100 million. It has no debt and $105 million in the bank. Plus it makes about $2 million a year in profit.
It’s pretty hard to get hurt with that kind of investment.
This makes much more sense to me than buying into some “tech” company that’s trading at 100 times earnings.
Most of all we’re in to real assets. Specifically private businesses and cash producing agricultural real estate.
These assets generally do well in any macroeconomic scenario, whether there’s inflation, deflation, or just about anything else that central bankers can engineer.
GB: As you know, central banks and governments seem to have a war against cash money. You have commented on it many times on Sovereign Man. Why does it seem so important for them to abolish it?
SB: If your banker called you up tomorrow and said that you now have to pay him 0.25% interest. You’d probably be pretty upset and entirely mystified at how ridiculous things have become. But you might not close your account right away.
But if your banker called you up and said you have to start paying him 50% interest, you’d probably close your account right away.
But we all have a certain breaking point, a pain threshold. And the more negative rates become, the more risky and constricting the financial system, the more people are going to abandon ship.
This is ultimately what they’re trying to prevent. Because there reaches a certain point, where no rational person will continue to hold their savings in a bank.
Physical cash pays 0% interest. But when saving money at a bank begins to cost me money, what’s the point?
A rational person would hold the minimum amount possible in a bank account-- just enough to pay bills, etc., while keeping everything else in a safety deposit box in physical cash money.
Doing this, however, would cause the banking system to collapse.
This isn’t some wild conspiracy theory. The publicly available data shows—without a doubt—that there’s simply not enough cash in the system to back up deposits.
The amount of physical US currency in circulation is about $1.3 trillion, yet the amount of M2 money supply is roughly ten times that amount.
So there’s just not enough physical cash available in the system, meaning that a major shift to physical currency would cause major problems for banks.
If governments have proven anything to us over the last seven years, it is that they will do anything to keep the banks from going down.
This is a chief reason why they’re trying to get rid of cash, and in some cases even criminalize it under the ridiculous auspices of the “War on Terror.”
GB: Investors and analysts debate on when the Fed is going to raise the interest rates. Do you think that Janet Yellen will do something like that this year or at some point in the near-future?
SB: I couldn’t possibly speculate what possibly goes on in the mind of Janet Yellen.
It seems clear that the Fed is under a lot of pressure to raise interest rates, simply because everybody expects them to raise interest rates.
And the financial system is so heavily focused on expectations that if the Fed doesn’t raise interest rates it’ll cause a lot of problems.
That’s why we’ve seen major weakness in the dollar lately; after months of surging, a lot of US economic data has been pretty dismal, leading to new expectations that the Fed will NOT raise interest rates.
Even if they finally get around to it, long-term, any interest rate rise would really be just a token amount. Sure, they might go up by a quarter of a percent, but any meaningful rate rise would bankrupt the US government.
The US government already paid $430 billion in interest in fiscal year 2014, at a time when interest rates are practically nothing.
Debt growth is substantially outpacing tax revenue growth in the United States. And any meaningful rise in interest rates would mean that the US would be spending the preponderance of it’s tax revenue just to pay interest.
This is essentially where Japan is already today. And where the US is headed.
Miss Yellen knows this. So I seriously doubt we’re going to see the return to historically normal interest rates.
GB: Tell us your thoughts on gold and silver. Is it important for investors to have them in their portfolio? If so, why?
SB: I don’t think that gold is a good fit for an “investment portfolio.” When we think about a portfolio, a portfolio is what we hope to achieve a rate of return on. But gold is not an investment.
The idea behind gold is that it is a form of savings, albeit a very long-term savings.
It’s a form of savings that can’t be conjured out of thin air by central bankers’ quantitative easing program. Or printed by a government’s printing press.
And it’s consistently shown to maintain its purchasing power over time.
Thus gold is an anti-currency. It’s a kind of asset that you own because you don’t have confidence in the paper currency issued by governments and central bankers.
So with that in mind, the idea of trading in your paper currency for gold, hoping to trade it back for more paper currency at a later date misses the point entirely.
I do think that everybody should consider owning precious metals. Again, not as an investment or speculation, but as a form of savings that exists outside of the conventional system.
Sometimes people buy too much gold and silver, and then they fret over the daily fluctuations in the price. They lay awake at night worrying about whether gold is going to go below a thousand dollar or below whatever level.
I think this is a sign that you probably own too much gold. If you’re worried about it, then you’re probably over exposed.
If you have an app on your phone telling you the gold price and you’re constantly looking at it, then that’s your instinct telling you to lighten your load.
Rule number one is to be comfortable with your exposure. That means having a gold position that you are comfortable with, that you can lock away and not even think about how the price is moving.
Then you can sleep well, knowing you have some real savings that can stand the test of time.
GB: Currently, what are the best countries for entrepreneurs and investors to live in?
SB: Well, it’s 2015. Hundreds of years ago it was very difficult to invest abroad without being there. These days it’s no big deal.
Whether you’re in Austin or Acapulco you can now invest around the world. Including owning real estate, private businesses, equities, and anything you can imagine. All without leaving your living room.
This means you can live where you want and invest in the places where you feel the opportunities are best for your risk appetite.
I spend a lot of time in Chile, and there’s some really great opportunity, particularly in agriculture. But this pales in comparison to the frontier bonanza in Myanmar. Then there’s the coming boom in Colombia, the rise of Indonesia, and the rapid transformation of many nations across Africa.
There might even be some nice bones to pick in the European graveyard as well.
Frankly, I see opportunity all over the world. But again, unless you’re running a physical business, I don’t think you have to move unless you want to.
I think in this day and age, people should live where they want to live. Exercising their freedom to hold their savings in an entirely different country, while investing in yet another one.
And yes, having another passport in an entirely different country as well.
Today all these things are possible.
GB: Is the US Dollar doomed? Do you think that a post-USD era would include gold and RMB?
SB: I don’t like using that language, “doomed”, because it’s a bit sensational. And I go out of our way to be very data-driven.
But if you look at the data, it’s not a pretty picture for the dollar.
Remember that the dollar is ultimately issued by the central bank of the United States, the Federal Reserve. In fact if you look at a dollar bill, it is labeled as a “Federal Reserve note”.
It’s hard to even call it a dollar anymore. After all, the dollar was defined by the Coinage Act of 1792 as 27.0g of pure silver.
So, what we have today are not dollars, they are “notes” issued by the Federal Reserve.
The Federal Reserve right now, on a mark-to-market base is insolvent. So when the issuer of the dollar is insolvent, the value of the currency becomes extremely dubious.
This of course is all supported the US federal government, which by its own financial statements, is insolvent. The government Accountability Office posted a negative equity of the US government of minus $18 trillion. And it gets worse every year.
History shows that there have always been dominant reserve currencies in the world going back more than a thousand years to the Byzantine solidus. Reserve currencies, like superpowers rise, peak, decline, and ultimately get displaced by another.
The dollar—like the solidus and every other reserve currency in history—has no natural given right to being the world’s reserve currency forever.
It too, will be displaced. Perhaps by the renminbi, perhaps by gold, or by any other number of options.
But ultimately I think it’s foolish to think that the system is going to continue like this forever.
GB: Are China and Russia an economical and/or military menace for American dominance?
SB: American dominance is already finished. There are a number of moments that future historians may look back on and circle on the calendar as being the date on which that happened.
They may choose September 15th, 2008, the day that Lehman Brothers collapsed and the US financial system was exposed for all of its material weaknesses.
Or almost exactly five years later, when Vladimir Putin singlehandedly blocked the United States from invading Syria.
Or they could choose when China formed the BRICS bank. Or when the UK signed up for the Asian Industrial Infrastructure Bank.
Certainly the United States still has an incredibly talented military. But the best fighting force in the history of the world doesn’t do you any good if you’re too broke to buy fuel for the tanks.
GB: You were in Mexico recently. The GDP growth has been disappointing over the last few years, despite the structural reforms. What does Mexico need as a country to achieve high rates of growth and development?
SB: I think any country needs to stop looking to government to engineer economic growth. It isn’t the responsibility of the government to reform or stimulate growth.
Growth comes from the private sector. Growth comes from freedom. Not from a bunch of politicians who make up laws.
So I think that what Mexico needs is what every country needs-- minimal government influence in the economy.
If you look at the most successful growth stories in the world, you look to places like Hong Kong, where economic freedom abounds and the economy is perpetually booming.
And even though tax rates are amongst the lowest in the world, the government of Hong Kong is still awash with cash.
These examples are out there. It’s not as if it’s some great mystery as to how to create economic growth.
All you have to do is look and see what the countries with strong economic growth and no debt are doing differently than we are, and the answer is pretty clear.