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The Fed A Conversation Real Money

Dont Mean with Julian and Why You


a Thing Assange Need It Now
Page 44 Page 48 Page 28

AMERICAN CONSEQUENCES
I D E A S T H AT M AT T E R E D I T E D B Y P. J . O R O U R K E

Introducing the
Escher Economy
page 14

JUNE 2017
WELCOME TO
AMERICAN CONSEQUENCES

From Editor in Chief P.J. ORourke

Dear reader, I make fun of things for a living. But over


Welcome to the first issue of our magazine. the years, Ive found that making fun of
things can be an excellent way to understand
Stansberry Research and I are doing
them. And making fun also allows me to be a
something different in the field of financial
neutral referee. I dont take sides. The absurd
news and newsletters.
is the absurd whether you find it on the left,
For about 20 years, Stansberry Research on the right, or in the middle.
has been known for its investment tactics
and strategies and for its examination of the An absurdist is well prepared to see that ideas
macro- and microeconomic trends that drive matter. Just take any idea and reduce it to the
marketplace shifts. absurd and youll see what really matters and
But theres more to Stansberry Research than what doesnt.
wise analysis and practical stock, bond, and For example, if enough Americans get the
commodity advice. Behind the expertise are
idea that the North American Free Trade
Stansberrys people. And behind the people
Agreement is a way for Canadians to destroy
are ideas.
the American ice industry and gain a global
Ideas matter. Ideas shape the market. Those monopoly on hockey rinks, there will be
ideas also have social, moral, intellectual, and
consequences like a run on ice-cube trays
political effects.
at Target and strong feelings against folks in
The ideas people have lead to the ways people plaid flannel shirts and earflap hats who say
behave. And the ways people behave lead to... eh at the end of their sentences.
American Consequences.
The other writers for American Consequences
Were establishing a forum where good minds
will give you something more substantive
tackle current ideas and think through the
results those ideas will have. than that to think about. But I promise you I
wont.
Im the editor of this magazine not because
I know a lot about business, finance, and Regards,
economics, but precisely because I dont. P.J. ORourke
CONTENTS JUNE 2017 ISSUE 1

14 22

36 28 48
AMERICAN
05 Letter from the Editor 44 The Fed Dont CONSEQUENCES
Mean a Thing
10 What Moved the Market BY DR. DAVID EIFRIG
Editor in Chief: P.J. ORourke
Editorial Director: Carli Flippen

14 Introducing the 48 A Conversation With... Editor: Steven Longenecker


Escher Economy JULIAN ASSANGE Contributing Editors:
Porter Stansberry, Dr. Steve Sjuggerud,
BY PORTER STANSBERRY
52 Your Last Bull Market
Dr. David Eifrig, Bill Bonner, Buck Sexton

22 The Strange, Shape-


Newswire Editors:
BY DR. STEVE SJUGGERUD Scott Garliss, John Gillin,
Shifting Symbol of Value Greg Diamond
BY P.J. OROURKE 58 Get Me a Quote on That Cartoon Director: Frank Stansberry
Contributing Cartoonists:
28 Real Money and Why 60 The Final Word Michael Ramirez
You Need It Now BY BUCK SEXTON Creative Director: Ricky DAndrea
BY BILL BONNER This Months Cover: Nigel Sussman
Advertising: Jared Kelly

36 Deciphering Fed Speak Advertising inquiries: advertising@


americanconsequences.com
BY P.J. OROURKE
Editorial feedback: feedback@
americanconsequences.com
INSIDE THIS ISSUE

From Editor Steven Longenecker

In our inaugural issue of American Former Goldman Sachs derivatives trader


Consequences, youll hear from editor in chief Dr. David Eifrig explains how interest rates
P.J. ORourke as he points his finger at one really affect your investments... and why
of the biggest absurdities in the world today the Fed rate increase this week is essentially
the power of the Federal Reserve... And meaningless...
he wonders, what if he could have his own
While 25-year industry veteran Dr. Steve
personal Central Bank?
Sjuggerud explains why this stock bull
And he deciphers a speech from the Federal market could be your LAST and how to
Reserve putting into plain words the true play it. (If youre invested in stocks, this will
intentions of the Fed. Like this definition for both be a comfort... and a warning.)
forecaster: somebody whos not only wrong,
Julian Assange, one of the most controversial
but gets paid for it.
figures you can bring up in polite conversa-
Bill Bonner, the founder of our nations tion, shares important insight about the War
largest underground news network, explains of Leaks in DC... Whether you support his
how money has changed dramatically in exposure of state secrets or believe hes endan-
recent years and why theres only ONE gered U.S. lives, hes worth listening to.
currency that will truly protect your savings
And nationally syndicated talk radio
going forward.
program host Buck Sexton has advice for
Youll understand why Porter Stansberry President Trump on the Beltway brawl
has called Bill one of the great minds in to come wading through a siege of
America today. As for Porter, a financial journalists, embittered Hillary voters, and
analyst who has been labeled remarkably self-inflicted wounds. As a former CIA
prescient by Barrons magazine, hes officer, Buck doesnt pull any punches... and
introducing the Escher Economy... he doesnt advise the President to, either.
Its all about how todays risk-free money We hope you enjoy the issue. We enjoyed
policies are warping capital markets, making putting it together.
them look like one of M.C. Eschers most
Until next month,
famous. There is no up. There is no down. And
how, as a result, investors may not be able to Steven Longenecker
find safety in the next crisis. Editor, American Consequences

2 | June 2017
Big news To ensure you never
miss an episode of
Stansberry Investor Hour
Porter Stansberry is back on the air
hosting Stansberry Investor Hour, with Step 1: Simply visit the
brilliant co-host: Buck Sexton. Buck iTunes store by
is a former intelligence officer for the clicking here
CIA, and worked for the Intelligence
Department of the NYPD. Step 2: Click Subscribe

Together, Porter and Buck are Look for


interviewing some of the most influential this logo!
(and sometimes controversial) figures in
the world.

From Julian Assange, the besieged


founder of WikiLeaks, to Cactus ITS ALL TOTALLY
Schroeder, a Texan oil man known for FREE OF CHARGE.
inking multi-billion dollar deals, our guest
list is never short on notoriety. We simply want you and
every Stansberry Research
Every Thursday, the Stansberry Investor subscriber to have convenient,
Hour podcast will upload to iTunes, unconditional access.
keeping investors (like you) in touch with
whats happening in the markets and So be sure not to miss out.
critical world events. Subscribe to Stansberry
Research Hour and even
check out Porters past
interviews by accessing our
iTunes podcast archive.
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LETTER FROM THE EDITOR

P.J. OROURKE

My Personal
Central Bank

Most of my colleagues here at American members are okay with weenies and burgers
Consequences are skeptical about Central on the grill and a cooler full of beer.
Banks. Not me. I like them. I want one of
No, what I want is a compact, household-size
my own.
type of Central Bank for my own personal
Of course, I dont want an enormous Central use. A small, handy ORourke Central Bank
Bank like the Federal Reserve. Where would that would fit in the laundry room or in the
I put it? Although we live in a big old mudroom between the dog kennels.
house in the country, we dont have enough
bedrooms to host seven Federal Reserve The reason I want my own Central Bank
Board Governors and a dozen Reserve Bank is that Ive been reading up on the Federal
Presidents at those Federal Open Market Reserve Act of 1913 and the mandate it gave
Committee (FOMC) meetings they have all to the Federal Reserve Bank specifically,
the time. Wed have to put some of them in the mandate as it was amended during the
the hayloft. (Do they bring their families?) 1970s and 80s in Section 2A. Monetary
Plus, wed have to feed them. I hope FOMC policy objectives.

American Consequences | 5
I have two monetary policy objectives. Fed that I dont want anything to do with,
such as mopping up government deficits and
1. Monetary objective: Get rich.
pissing on free enterprise.
2. Policy objective: Stay rich.
I prefer a private facility. In fact, I prefer
Therefore, I was interested to see what a private everything private railroad car,
Section 2A had to say, which I quote below private jet, private tropical island. But
with my own comments in brackets. these are expensive. According to what Ive
The Board of Governors of the Federal read about the history of central banking,
Reserve System and the Federal Open a private Central Bank would seem have a
Market Committee shall maintain long zero-dollar purchase price and virtually no
run growth of the monetary and credit maintenance costs.
aggregates [e.g. the ORourke checking (An extremely condensed history of central
account balance and Visa card limit] banking: In 1694, the English King William
commensurate with the [my] economys III was fighting the Nine Years War with
long run potential to increase produc- France and ran out of money. He said, Lets
tion [maybe someone will turn one of my have a Bank of England to borrow some
books into a hit movie], so as to promote from. The Chancellor of the Exchequer
effectively the goals of maximum em- Charles Montagu, 1st Earl of Halifax, said,
ployment [I could do without maximum Jolly good idea. And Bobs your uncle.)
employment, but Ive got three kids to
Most of what a Central Bank does is
put through college so its not like Ive got
open market operations. These consist of
a choice], stable prices [especially for the
buying bonds from a government. In the
shoes and clothes my wife and daughters
case of the ORourke Central Bank, Im
shop for on the Internet], and moderate
the government. I have any number of PJ
long-term interest rates [on the credit card
Treasuries, P-Bills, J-Notes, etc., all
debt to pay for those shoes and clothes].
neatly hand-lettered on my personalized
My kind of mandate! stationary and available in denominations up
to $1 godzillion with maturities ranging from
But theres a problem with getting the
after Im dead to when hell freezes over.
United States Federal Reserve Bank to
exercise its mandate on my individual behalf A Central Bank pays for bonds by issuing
and help me reach my monetary policy currency. Ill use the color Xerox down at
objectives. I have to stand in line. the copy store. Its not counterfeiting when a
Central Bank does it.
The Federal Reserve is a large establishment
for use by the general public kind of like Of course, my Central Bank will need to be
the mens room at Penn Station in New York. a politically independent institution, the
And, kind of like the mens room at Penn way the Federal Reserve is. The President of
Station, all sorts of stuff goes on inside the the United States cant just tell the Chairman

6 | June 2017
of the Federal Reserve what to do.
On the other hand, the President does The main difference between
appoint the Fed Chairman and the Fed governments and individuals
governors too.
is that governments
So Im going to appoint my dogs, Clio,
Georgie, and Bodey. Theyre very cute dogs
have Central Banks and
so I dont foresee any problems with Senate individuals dont. The other
confirmation. (Senators rejecting cute dogs
main difference between
would cause a furious national outcry on
Facebook and Twitter.) governments and individuals
I assure you my dogs are very independent. is that governments are much
If I tell them, sit, or stay, or come, they stupider.
just look at me with dull incomprehension
and keep on chasing squirrels. And yet I
think I can get them to give me a unanimous that the return on my savings account falls
bark of approval for pursuing my monetary somewhere between Venezuela government
policy objectives... Clio, Georgie, Bodey bond yields and Mafia loan shark vigorish.
want a treat?!
My Central Bank can take care of this
Now, what else can I get my Central Bank to because another thing Central Banks do is
do for me? oversee commercial banks.
A Central Bank manages the currency and And my local bank could use a little
money supply of a nation. In this case thats oversight. Next time I go there Ill bring
the United States of Me. Im headed back to Georgie, the chairman of my Fed. Georgie
the Xerox machine at the copy shop right now. is an adorable black Lab, but she also has
A Central Bank also manages a nations teeth like a set of steak knives and a deep
interest rates. There are a number of different and fearsome growl. Then Ill explain to
interest rates that a Central Bank manages the bank manager that when I balanced my
target rate, nominal rate, effective rate, checkbook, yes, I did add a $1,230 check I
discount rate. Therefore my central bank will wrote to my previous balance of $984 instead
manage interest rates so that I, too, have a of subtracting the $1,230 from the $984.
variety to choose from. But thats what a government does with
Theres that ultra-low rate on my Visa card off-budget federal spending involving such
balance that I mentioned before. But in programs as Social Security. Therefore, using
other situations, Id like other rates. No official U.S. federal budget math, I now have
more 0.4% six-month CDs, please. The $2,214 in my checking account, not -$246.
Reserve Bank of My House will make sure And Georgie will provide oversight by

American Consequences | 7
Central Banks and individuals
dont. The other main difference
between governments and
individuals is that governments
are much stupider. This is
because governments have
Central Banks to fund their
stupidity.
Individuals are forced to be fiscal
conservatives. If we become
ridiculously indebted far beyond
By permission Michael Ramirez and Creators Syndicate, Inc. our ability to repay, we lose the
house, the car, and the boat.
going, Grrrrr... Individuals are required to have a sensible
macroeconomic policy. Its fine for the Fed
Thats one more thing Central Banks do to ruin whole sectors of the economy by
facilitate government debt and deficits. In creating an immense pool of assets that only
fact, harking back to King Billy in 1694, exist on paper. But when an individual does
thats all Central Banks do. that, hes Bernie Madoff.
And Ive got plenty of debt and deficits Individuals are constrained by a cautious
already and dont need any more. and moderate foreign policy. An individual
cant afford to invade a neighbors home.
Also note that, per King Billy, the debt and
Hell be shot (especially up here in rural New
deficits always seem to be used to finance England where I live).
bad ideas such as a Nine Years War with
France. Or nowadays, massive entitlement Individuals dont have the assets to damage
programs that devastate work ethic, destroy the social fabric with public policies that
family ties, and strip people of their personal turn inner cities into war zones. The only
individuals who have those kinds of assets
responsibility and self-respect. In my case
are drug lords... and they get arrested.
the debt and deficits would probably finance
a Harley-Davidson. At my age this would So... I wonder. If I had my own Central Bank
quickly turn me into a rolling organ donor. and the unlimited power that an unlimited
amount of money would give me, would I
Which makes me wonder whether having start to become as stupid as a government?
my own personal Central Bank is such a
good idea after all. Whats to stop me?

The main difference between governments Regards,


and individuals is that governments have P.J. ORourke

8 | June 2017
What Moved the Market

EDITORS: MAY 24 MAY 26


Scott Garliss General Motors cheating on
CBO releases Obamacare
John Gillin emissions
Repeal analysis
Greg Diamond
The focus of the report was on New report that General Motors
how many people stand to lose (GM) accused of cheating on
coverage (23 million) and its emissions standards. The lawsuit is
directed at their diesel truck unit.
deficit effect (cut $119 billion
Fiat Chrysler has been dealing
through 2026). A rational person
with similar accusations and has
would ask why all of this was not agreed to pay an $800 million
scored before the first vote in the fine. That is just the beginning.
House and subsequent keg party
in the Rose Garden. We have been pounding the
table about lower used car prices
MAY 25 and the damage that is doing to
lenders and rental car companies.
OPEC extends oil supply cut Diesel is the next shoe to drop.
Tune in to At this point, the markets Couple that with cheating
Stansberry expected this and it has become a on emissions and this mess is
Newswire, live sell the news type of event. So morphing into a wild fire.
every morning the trend likely remains positive
MAY 30
and afternoon, near term but prices cant go up
at 8:30am and indefinitely. You do have to have a Barrons cover story on Ford
4:30 pm. pull back every now and again. The article is excited over the

10 | June 2017
CEO change from Mark
Fields to Jim Hackett. They Electric technology is a game changer
like his having run the Ford
Smart Mobility unit and and its here to stay. However, we bet
think the self-driving fleet- that Goldmans estimates on profits
management business could
be more profitable for Ford
are likely too high. It will take time for
down the road than their that to play out. In the meantime, there
current car-making business is serious pain in auto land around
is today. (At 2% margins, its
hard to be worse.) subprime lending and the flood of used
Electric technology is a cars coming onto the market.
game changer and its here
to stay. However, we bet
that Goldmans estimates on the U.S. down the road. underwhelmed investors.
profits are likely too high. It The questions and answers
Sectors that benefit from
will take time for that to play didnt produce anything new
the cancelled Accord are oil,
out. In the meantime, there and markets rallied after
though more drilling and new
selling off.
is serious pain in auto land projects would eventually
around subprime lending pressure oil prices... Coal, JUNE 8
and the flood of used cars particularly clean coal, also
coming onto the market. benefit. Utilities and any House votes on
company involved with Dodd-Frank
If you want to invest in
cement, aluminum, iron and In addition, the House
self-driving cars and the
steel rally. Even automobile approved a sweeping bill that
technology revolution
stocks rallied at least makes significant headway
around those platforms, why
initially. Dont forget these are in changing cumbersome
not invest in names with
bad business models. Dodd-Frank regulations.
growth potential like Nvidia
But the problem is that in
(NVDA), Intel (INTC), and The losers are solar and all its current form, it wont
Microsoft (MSFT). alt-energy related names. get any play in the Senate.
Same with electric car maker All the legislators have their
JUNE 1 Tesla (TSLA). own agendas and will want
The U.S. walks from to make their mark on the
JUNE 8
Paris Accord new rules. Its a start, but
President Trump has opted Former FBI director like healthcare reform, its
out of the Paris Accord to James Comey testifies a long way from everyone
save jobs and expects to The months political main singing from the same sheet
negotiate a better deal for event of Comeys testimony of music.

American Consequences | 11
JUNE 9 legislation that will curtail Rising rates coupled with
a lot of the legislated rules. slowing inflation typically
UK election results in
The argument has to do with leads to an erosion in equity
hung Parliament
pulling back regulations value.
Theresa Mays decision to to create a more business
call a snap election looks to Keeping it simple, the Fed
friendly environment.
have been the wrong call owns trillions of dollars
as her party failed to keep There must be a middle worth of Treasury and
as many seats prior to the ground. People need mortgage-backed debt.
election and no party has sound advice and when the Much of this is longer in
the majority rule. She has markets get rattled, having duration. The perfect plan
stated she will not resign a real hand to hold will would be a gradual unwind-
and will seek permission aid performance. But the selling of these assets, which
from the Queen to form fee structure is disrupted would ever so slightly raise
a government. Brexit and working towards a fair long-term rates.
negotiations will most resolution as opposed to
The easiest way to
likely be more complicated lobbying for status quo is a
conceptualize this is the
and the British Pound was logical plan.
U.S. the sovereign buyer
pummeled, falling as much
JUNE 13 & 14 has been a consistent buyer
as 2.4%.
of these assets for years
Federal Open Market
JUNE 9 now. Removing that buyer
Committee (FOMC)
would cause prices to dip
Fiduciary Rule meeting
and interest rates to rise.
implemented As expected, the FOMC Exactly what financials and
The intent of this rule is raised the federal funds rate insurance companies are
to protect investors from by 25 basis points. What banking on.
getting over-charged is more important is the
for investment advice. language that follows the WATCH THESE DATES
Department of Labor decision around the inflation
June 23: Markit U.S.
analysis has found that picture and what the Fed
Manufacturing, Services,
many, many people have intends to do with its
and Composite Purchasing
had their money invested in balance sheet...
Managers Index gives us a
higher cost products when The comment that they good idea on growth.
there are lower cost products are monitoring inflation
available and they do the June 30: PCE inflation
developments closely
same thing. Seems fair. data released. This is a key
does not instill confidence
inflation gauge for the Fed.
However, the Labor on growth. Inflation is a
Secretary, Mr. Acosta, has key signal, and the data July 5: FOMC minutes
left open a rewrite of the continues to moderate. released.

12 | June 2017
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By Porter Stansberry

Introducing the
Escher Economy
ABOUT FIVE YEARS Japans big demographic saved the kings bacon, Law
AGO... Investors around problems? No. Japans convinced the king to give
the world began piling into population is declining. him a monopoly on trade
Japanese stocks. Japan is expected to lose with the new world in
more than 30% of its Louisiana.
It was a surprising move.
population by 2050.
Japanese stocks have been a The combination of virtually
So... why were investors limitless paper money and
virtual graveyard for capital
suddenly interested in Japan? the hottest initial public
since the last 1980s. Thats
offering (IPO) in history
when Japans big real estate JAPAN WENT JOHN
saw Law pay off the entire
and investment bubble LAW WITH ITS
French governments debt
collapsed. The Japanese CENTRAL BANK
Dow the Nikkei 225 just by issuing another
briefly soared from around John Law was the Scottish 300,000 shares of the
10,000 to more than rogue and murderer who Mississippi Company.
40,000... and then collapsed. convinced the French King The share price, which
Louis the XV to allow him went public at 75 livres,
Over the next 20 years, every to set up one of the worlds eventually rose to 15,000
rally in Japan was followed first central banks, the before the peak.
by still yet another, bigger Banque Gnrale, in 1716.
decline. It was this bubble... the
The bank brought paper forerunner to every modern
By 2009, the Japanese stock money to France and financial bubble... that saw
market was still down over allowed the king to finance the creation of the word
60% from its peak. (See his soaring debts. Having millionaire.
chart to the right.)
So what was it that spurred
global investor interest a few
years ago?
Did Japans economy
suddenly come back to life?
No. Japan has consistently
had the worst economy
among the G20 group of
major economies. Economic
growth hasnt been above
2% since 2012.
Was there some
breakthrough in solving

American Consequences | 15
So naturally, Japan captured campaign. As Jesper Koll, coming.
investors attentions when who runs fund sponsor and
And in the meantime, look
it announced in 2012 that asset manager WisdomTree
at Fast Retailing (9983.T)
it would vastly increase the Japan, explained to the
on the Tokyo Stock
asset purchases of its central Financial Times: There was
Exchange. If youve ever
bank... no other equity market in the
seen a pro golfer wearing a
world that covered this sort
And its central bank brand you cant pronounce
of fundamental downside
the Bank of Japan (UNIQLO), then youve
protection.
wouldnt just buy Japanese seen the companys products.
government bonds... Theres little doubt these Golfer Adam Scott, for
huge moves will continue. example, is sponsored by
Japan was the first major Last year the Bank of Japan
economy in the world to UNIQLO, among other
announced it would double major athletes.
see its central bank begin its purchases of shares,
to buy huge amounts of spending at least 6 trillion
stocks. $30 billion or so per yen ($60 billion) on stocks.
year.
John Law would be
In an attempt to make sure impressed.
these purchases werent
politicized, the bank But remember... About a
explained it wouldnt buy year after the Mississippi
stock directly (it wouldnt Company went public, food
pick stocks). It would only prices began to soar. To stop
buy via exchange-traded the runaway inflation, Law
funds that allocate capital had to raise interest rates.
according to the structure of That pricked the bubble in
various preexisting indexes. Mississippis stock. Within a
few weeks, the whole scheme You can think of the
As youd imagine, this policy collapsed. Food prices soared business as something
has produced a boom in another 60%, the king like the Japanese Under
Japanese stocks. And it outlawed gold, and shares Armour, a fast-growing
has attracted a lot of hot of the Mississippi Company sports apparel business.
money from around the collapsed. But unlike Under Armour
world.
YOU CANT PRINT (UAA), which has very
Buying Japanese stocks PROSPERITY few stores (just 29), Fast
between 2012 and 2016 (as Retailing continues to invest
they doubled) was virtually Keep a careful eye on the heavily in actual physical
risk-free, thanks to the markets, and especially on locations. It has opened
size of the Bank of Japans the outlook for inflation. Its more than 1,000 stores since

16 | June 2017
2012 and now operates over
Fast Retailing Dodges Retail's Long-Term Decline
3,000 stores throughout
Asia. Thats nearly twice as Business 10-Year Share Price
many locations as Target
has in the U.S. (1,807). (See Sears (SHLD) -96%
chart to the right.) JC Penney (JCP) -94%
Physical retail has been a Esprit Clothing -83%
tough business for about a
decade, as more and more Marks and Spencer (MKS.L) -45%
shoppers prefer to buy Macy's (M) -44%
everything from books to
shoes online. Fast Retailing, Target (TGT) -14%
on the other hand, has seen
H&M (HM.STO) 0%
its share price soar.
Fast Retailing (9983.T) 332%
Since hitting a low in 2011
below 1,000 yen, the stock
price has gone virtually
straight up... climbing over nobody can pronounce? and Google recently both
6,000 yen at its recent peak. Is there something unique saw their share price racing
This soaring share price about its Vietnamese-made to $1,000. (Google won,
has helped the company shirts...? twice its shares previously
gain access to billions in passed the $1,000 prior to
additional, new capital. No, of course not. Whats its 2014 stock split.)
special about Fast Retailing,
In 2016, Fast Retailing at least in the eyes of global But theyre not the only
took on $2.4 billion in debt investors, is its nominal companies that have
(moving its debt to equity share price. Not its market deliberately let their
leverage ratio from 4x to capitalization, the sum total nominal share price soar.
47x) and the companys value of its shares. The share Theres a host of super-
CEO has announced plans price itself. Compared to expensive nominal share
to spend another $11 billion its peers, Fast Retailing has price companies today,
on a huge global expansion, a huge nominal share price, like Priceline (PCLN), at
moving into the U.S. and around 37,000 yen. $1,890, NVR (NVR) at
European markets. $2,395, Seaboard Corp
Why should nominal share (SEB) at $4,150, AutoZone
WHAT IS FAST price matter? (AZO), at $600, and
RETAILINGS SECRET? Intuitive Surgical (ISRG) at
You might have noticed the
sudden popularity of very $930.
Is it the mystery of
embroidered shirt patches large share prices. Amazon Huge nominal share prices

American Consequences | 17
havent always been popular. That is, some people are to split their stock to gain
You might remember that investing, knowingly the attention of investors are
during the dot-com boom or unknowingly, into now not splitting their shares
of the late 1990s, investors stocks simply because the for the exact same reason.
would pile into companies nominal price is high. And in Japan, that kind of
that were announcing a investment rationale has
Theyre not buying
stock split. Thats when been taken to an extreme...
because the business is
a company increases
the number of shares undervalued.... or because In Japan, the central bank is
outstanding, sometimes by it pays a good dividend... the greater fool.
100%, by simply exchanging or because its growing
Japans central bank the
one of your shares for two fast. Theyre buying simply
Bank of Japan has been
new ones. because the nominal share
buying around 3 trillion yen
price (which conveys zero
Share splits dont change ($30 billion) worth of stocks
information about the
anything about the via ETFs each year, radically
relative attractiveness of the
business. It doesnt make warping the equity market.
investment), is a very large
the company more valuable The Bank of Japan focused
number compared its peers
in any way. The share price its buying on ETFs that
and thus is more likely to
should simply fall in half were structured according to
attract subsequent capital.
as the companys shares the Nikkei 225 index, which
outstanding double. But Said another way, the is a price weighted index,
back then, investors believed greater fool is more likely much like the Dow Jones
that simply making the stock to buy a big nominal share Industrial Average.
more affordable would lead price stock over any other
Again, in a price-weighted
more investors to buy it... stock.
index, the larger the nominal
and that alone would push Thus, the same kinds of share price, the larger the
the total value of the stock management teams that used allocation in the index. Fast
higher.
Today, however, most
people are investing
A Price Only a Central Banker Would Love
through exchange-traded
Fast Retailing's share price is around
funds (ETFs). Many of 10-30 times higher than its peers
these funds are structured
according to various indexes. Fast Retailing 37,000 yen
And some of these indexes Aoyama Trading 3,960 yen
are price-weighted, United Arrows 3,425 yen
meaning that the capital
Adastria 3,060 yen
is allocated according to
Nishimatsuya 1,178 yen
nominal share price.

18 | June 2017
Retailing, with its huge share
price, makes up about 8%
of the Nikkei index, a huge
position relative to the total
size of its company.
For comparison, consider
that Fast Retailing makes up
only 0.3% of the larger Topix
index, where allocations are
made according to firms
total market value, not
merely the nominal price of
their shares. (See chart on the
previous page.)
It didnt take long for endorsement of its nominal hurt investors and stock
investors to figure out how share price. You see, after jockeys.
to take advantage of the Fast Retailing, Softbank is
policy. the second-highest-weighted THERE IS NO UP,
CLSA one of Asias stock in the Nikkei 225. THERE IS NO DOWN
biggest brokerage firms
And sure enough, Softbanks Our capital markets are
recommended clients sell
shares have soared, thanks supposed to be efficient.
shares of auto giant Toyota
to the Bank of Japans That is, modern financial
(7203.T), one of Japans best
investment scheme. theory explains that by
global companies. It replaced
Toyota in its recommended Softbanks stock was dead allowing capital to be
portfolio with... Fast money due to the collapse allocated by the inputs
Retailing, purely because of of the tech sector until of millions of investors,
its huge weight in the Nikkei 2012. But once the Bank of vast amounts of disparate
225 index. Japan ramped up its equity information can be processed
purchases, Softbanks stock and capital can be allocated
The broker also has more than quadrupled, where its needed most, so it
recommended Japanese moving from around 2,000 can be used most efficiently.
communications giant yet to over 9,000 yen.
Softbank (9984.T), But allocating capital
(See chart above.)
which is pursuing a risky, according to nominal share
highly leveraged global The decision to use the price? And putting the most
acquisition strategy. It awesome power of a central amount of capital into the
wasnt an endorsement of bank to invest in the stocks with the highest
Softbanks strategy. It was an stock market wont only nominal share price? Thats

American Consequences | 19
not likely to be efficient explode higher (reaching Sprint hasnt made a profit
at all. It seems utterly over $9 billion last year) since 2006 and will probably
ridiculous, in fact. and has had to borrow run out of money before
over $30 billion to remain mid-2018. If Sprint defaults,
Why would a company
competitive. Softbank will likely lose all
with a high share price be
of its $21 billion.
particularly adept at putting Meanwhile, a price war has
And what about Fast
more capital to work? broken out with the leading
Retailing? Will building new
What if theyre merely good vendor of wireless service,
retail locations all around
promoters and have figured Verizon (VZ), knocking of
the world as Fast Retailing
out a way to game the Sprints flat-rate pricing offer.
intends to do prove to be a
system? During the 2015-2016 wise use of capital?
In 2013, riding the wave of correction in corporate
Will Japans enormous
the Bank of Japans investing bonds, Sprints most recently
equity purchases, which
spree, Softbank bought $21 issued debt fell to $0.75 on
have supported both
billion worth of Americas the dollar, indicating that
Softbank and Fast Retailing,
fourth-best wireless telecom, most investors dont believe
generate real economic
Sprint (S). Immediately the company is likely to repay
growth, by stimulating the
after the purchase the these obligations in full.
economy? Or will this huge
shares began to decline Dennis Saputo, a senior inflation only promote
and eventually fell in half. credit analyst at Moodys reckless speculation and bad
Sprint, meanwhile, has seen Investors Service, told the investments?
its network investment costs Wall Street Journal that
What will happen around
the world as more countries
By permission Michael Ramirez and Creators Syndicate, Inc. to try to emulate Japan?
Can you successfully back a
currency with the shares of
highly volatile companies?
In 2014, Switzerlands
central bank began buying
equities, too. But since its
domestic economy is so
small, it decided to invest
globally...
Today, the Swiss central
bank owns more than $60
billion worth of U.S. stocks,
including a huge $1.7

20 | June 2017
billion position in iPhone resulting
maker Apple (AAPL) and possible
$800 million in social-media inflation.
titan Facebook (FB). And And theres
the Swiss bank continues no way to
to expand its balance sheet predict when
at almost $100 billion a the value of
year. Its total balance sheet the currency
has now grown to around will collapse.
$700 billion. Thats almost When money
$90,000 in securities per has no firm
citizen... and growing every value, its
year... just by printing impossible to
more Swiss francs. know what
somethings
In M.C. Eschers most actually worth... or if an
will investors seek in a crisis?
famous prints, the viewer investment makes sense... or
cant figure out which way is safe. Official currencies? They too
is up. In Relativity, a maze will be tied to the success
Today, as stocks rise by huge
of stairs interconnects (or failure) of Apples new
amounts all over the world,
each with a different gravity phone... or of Softbanks
investors are cheering these
orientation. The paths wind latest gamble. Like an Escher
central-bank moves...
and intertwine. There is no maze, there may be no
up. There is no down. But they may rue them conventional way out of the
(See image to the right.) tomorrow. After all, if these next crisis. There may be no
investments sour, how will way to get to level ground.
When central banks around investors flee to safety...
the world begin to spend when inflation forces central Well look at one possible
trillions on financial assets, banks to stop the inflation out for investors in our
the same thing happens to and to increase interest July issue of American
the worlds financial markets. rates... how will investors Consequences. Were
When stocks become the find safety? focused on gold, oil,
basis of our global financial and even new forms of
system... stocks are the When the Swiss franc money like Bitcoin. But
is backed by shares of
money we use... theres no whatever happens next, just
Facebook... and the
way to exit the risks of the remember... the soaring stock
Japanese yen is backed by
equity markets. prices youre seeing arent real.
Fast Retailing... and the
Theres no up. Theres no U.S. dollar is backed by Theyre just stairs in a giant
down. Theres no limit to the mortgages... what firmament financial Escher print.

American Consequences | 21
By P.J. ORourke

The Strange,
Shape-Shifting
Symbol of Value
M
oney isnt the
root of all evil. In ancient times, money didnt
Money is the root
of everything. exist. Or rather, everything that
What money is, is necessary. existed was money. If I sold you
Necessary for good stuff.
Necessary for bad stuff.
a cow for six goats, you were
Necessary for all the stuff charging it on your Goat Card.
that comes in between the
stuff of life.
a puppy. Money is not a We need economic goods all
But what money also is, is specific thing. Money is a the time, but we dont always
very hard to comprehend. symbol of things in general, need money for them. And
Whys this soiled, crumpled, a symbol of how much you thats a good thing, since for
over-decorated piece of want things, and a symbol of most of human existence,
paper bearing a picture of a how many things youre going there wasnt any money at all.
man who was something of to get. Money is an abstract
a failure as a president worth In ancient times, money
representation of value.
$50? Meanwhile, whys didnt exist. Or rather,
this clean, soft, white, and But what is value? The brief everything that existed was
cleverly folded piece of paper answer is its complicated. money. If I sold you a cow for
worth so little that I just Value varies according to six goats, you were charging it
blew my nose on it? time, place, circumstance, on your Goat Card.
and whether the puppy
And its not just me whos ruined the rug. Anything thats used to
confused. All the worlds measure value, if it has
top economists, powerful Plus, some things are value itself, is commodity
central bankers, and difficult to place a value money. Societies that didnt
leading politicians seem on. This is why we dont have dollar bills picked
to lack a basic conceptual use money to measure all one or two commodities as
understanding of money. of our exchanges. Kids get proto-greenbacks.
food, clothing, and shelter
What exactly is a dollar? from parents. And in return, The Aztecs used cocoa beans
If its a thing that I want, parents get... kids. for money, North Africans
why do I prefer to have 50 used salt (the origin of the
Important emotional,
grimy old dollars instead of word salary), and medieval
moral, and legal distinctions
one nice new one? This isnt Norwegians used butter and
are made between sex and
true of other things like dried cod. (Their ATMs
paying for sex, even if the
puppies, for instance. were a mess.)
socially approved kind of sex
Of course, money is not costs a dinner and a movie. Some commodities work

American Consequences | 23
alloy called electrum.
Its hard for anyone but a
chemist (and there werent
any) to tell how much gold is
in a piece of electrum versus
how much silver. The king
of Lydia, Croesus, became
proverbial for his wealth.
In China, the weight of
bronze cash was supposed
to be guaranteed by death
penalties. A lot of people
must have gone to the
electric chair (or would have
if the Chinese had
had electricity).
A horse cost 4,500 one
cash coins during the Han
dynasty (206 B.C to 220
A.D.) and 25,000 cash
during the Tang dynasty
(618 A.D. to 907).
better as money than others. much it weighs.
Celebrities would make bad Its very hard for the people
Moving from weighing who issue cash to resist the
money. Carrying a couple
money to stamping coins is temptation to debase that
around would be a bother,
a simple step, but a couple cash.
and you would have to hack
thousand years passed before
a leg off to make change. Kings, emperors, and
the step was taken. Nobody
even lowly congressional
Precious metals, however, trusted anybody else to do representatives have
make good money and have the stamping. expenses. It is to a
been used that way for more governments advantage to
When coins were invented,
than 5,000 years. pay for those expenses with
the distrust proved to be
Metal commodity money is well-founded. The first funny money.
portioned out by weight. A Western coins were minted One reason that the concept
commodity money coin is by the kingdom of Lydia, in of money so often violates
just a hunk of precious metal what is now Turkey. They common sense is that
stamped to indicate how were made of a gold-silver governments so often do

24 | June 2017
crazy things with money. notes backed by the value skinny sideburns, large
of Frances land holdings belt buckles, and live on
Another reason that money
west of the Mississippi. armed compounds in Idaho.
violates common sense is
Banque Royale issued too Money ought to be worth
that we dont have to use
many notes, and the French something, and gold seems as
real commodities as money.
government went broke. good as whatever.
We can use pieces of paper
promising to deliver those The largest Western But the relationship
real commodities. This is experiment with fiduciary between money and value
fiduciary money, from the money took place right is endlessly perplexing. The
Latin word fiducia, meaning here in America. In 1775 high value of gold is a social
trust. the Second Continental convention, a habit left over
Congress not only created from the days when bright,
In Europe, paper money paper money, but passed unblemished things (people
was developed privately, in a law against refusing to included) were rare.
the 13th century, from bills accept it. The Continental
of exchange traded among Congress issued too many Gold may go out of fashion.
Italian merchants and from notes and... a pattern begins I dont think this is likely,
receipts given by goldsmiths to emerge. but a generation may come
to whom precious metals along that regards gold as
had been entrusted for All fiduciary money is gross or immoral, the way
safekeeping. backed by a commodity, millennials regard veal.
even if the backers are lying
Public fiduciary money was about the amount of that And gold is a product.
first printed in Sweden. commodity. We may discover different
Swedish commodity money methods to get huge new
came in the form of copper Historically, the commodity amounts of it.
plates. Thus, in Sweden, most often chosen has been
gold. By the 19th century, This happened to the
a large fortune was a large
the major currencies of Spanish. When they
fortune.
the world were based on conquered the New World,
In 1656, the Stockholms gold, led by the most major they obtained tons of gold,
Banco began issuing more currency among them, the melted it down, and sent
convenient paper notes. The British pound. it to the mint. It never
bank issued too many notes, occurred to them that they
This was a period of
and the Swedish government were just creating more
monetary stability and,
went broke. money, not more things to
not coincidentally, great
spend it on. Between 1500
In 1716, Scotsman John economic growth. Some
and 1600, prices in Spain
Law helped the French people think we should go
went up 400%.
government establish the back on the gold standard,
Banque Royale, issuing and not all of them have Presented with the vast

American Consequences | 25
wealth of Americas oceans, lie about the amount of a something more important,
fields, and forests, Spain took commodity that is backing such as Kleenex.
the gold. It was as if someone its currency the way
robbed a bank and stole Concerning this faith, the
the Stockholms Banco,
nothing but deposit slips. Banque Royale, and Second experiences of Weimars
Continental Congress did Germany, Carters America,
Gold is not an absolutely, Yeltsins Russia, etc., make
perfectly rational basis for why cant a government lie
about everything? agnostics of us all.
a currency. But the real
problem with fiduciary Instead of passing a law The only thing that
money from a government saying one dollar equals X protects us from completely
standpoint is that its amount of gold, why not worthless money is our
inconvenient. pass a law saying one dollar ability to buy and sell.
A currency that can be equals one dollar? This is We can move our stock of
converted into a commodity fiat money, from the Latin wealth from the imaginary
limits the amount of word for a binding edict. value of dollars to the
currency that can be printed. And fiat money is almost fictitious value of euros to
A government has to have at the only kind of national the mythical value of stock
least some of the commodity currency left in the world. shares to the illusory value of
or the world makes a Fiat money is backed by real estate, and so forth.
laughingstock out of its nothing but faith that a
banknotes not worth a Our freedom to not
government wont keep use a particular kind of
Continental.
printing money until
money keeps the issuers
So if a government can were using it in place of
of that money honest
wouldnt be the word
By permission Michael Ramirez and Creators Syndicate, Inc. somewhat moderate in their
dishonesty... or it used to.
Money is a symbol of value,
but its a symbol thats
strange, shape-shifting, and
hard to define. And value
is something thats personal
and relative, and changes
from moment to moment.
Money cant always be
valued. And value cant
always be priced.

26 | June 2017
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Credit in excess of available real savings is a fraud...
And it produces fraudulent, unsustainable growth.
M
any years ago, to settle transactions without And to put them together in
before the having to trust the people any sensible way, you need
invention of they were doing business to know what each of them
modern money with or remember who owed costs. Getting your rubber
or capitalism, people still what to whom. from Malaysia will be a lot
had wealth although more efficient than trying to
When Aristotle described
limited. And they still had get it from Finnish suppliers;
money he had our modern
ways of keeping track of it. the price, expressed in units
money in mind something
of money, will tell you that
The principle of fair trade that is not wealth but acts as
immediately.
seems to be in our DNA. a placeholder for wealth. It is
information; it tells you how Thats one reason high
If you give something to
much real wealth you can levels of inflation bring
your neighbor, you dont command. an economy to a halt. The
expect him to hit you over placeholder loses its place.
the head. You expect him to For the last 5,000 years, the
You just dont know what
give you something back. best money has been gold
anything costs. And from
And if you give him a whole (and to a lesser extent, silver).
one minute to the next, your
cow and he gives you half of Gold is very useful as money. place in line changes.
a rabbit, some instinct tells With it, you can do business
you it isnt fair. Another important feature
with complete strangers.
of modern money is that
Small communities could It can be used to stand in
transactions are final. I give
keep track of who owed for almost any amount of
you a chicken... you give
what to whom. But as wealth. Later, paper money
me a small gold coin. Done
civilization evolved, a new representing units of gold or
deal. I dont have to worry
kind of money was needed. silver made commerce even
about what happens to you
easier. Without this modern
In a group of related people in the future. Ive got my
money, an advanced economy
in an isolated valley, you coin. I have no further claim
wouldnt be possible.
could remember that your against you. Youve got no
cousin should give you Real money permits an claim against me.
something roughly equal elaboration of the division
Yes, there is always a chance
of labor, and it provides
in value to the wild pig you that gold might lose value...
the whole system with the
gave him... and that you that it might not hold its
information it needs to
should offer your son or place in line very well. It is
operate. You cant build an
daughter to the family from not a great concern, though.
automobile, for example,
which you had gotten your
without an extensive Prices go up and down. But
wife... and so on.
network of inputs labor, according to The Golden
But as the group grew steel, batteries, glass, rubber Constant by Roy William
bigger, people needed a way from all over the world. Jastram, the value of gold

American Consequences | 29
today is about the same as Trillions of dollars worth third party the custodian
it was to the extent these of new hotels, houses, of the currency.
things can be measured companies, malls, factories,
Say you build a business
accurately 500 years ago. dinners, drugs and just
and sell it for $1 million.
And I dont have to worry about everything else have
You know that you can
about a third party because been financed with this
empty credit. exchange that money for
theres no third party, or
a million dollars worth of
counterparty, in the deal. Sooner or later, this debt goods and services. The
Gold is a trustless money. must be reckoned with money represents a million
We dont have to trust the either in deflation... or in dollars worth of resources.
guy we got it from. And it inflation. But someone It came from something
wasnt issued or created by pays. With deflation, the with tangible value that was
some government agency, creditor pays when his credit added to the economy.
so we dont have to trust the goes bad. With inflation,
everyone pays as prices rise. But if that million dollars
feds to maintain its value.
was lent into existence by
So far, since 1971, the
A NEW WRINKLE the bank or printed into
typical Americans trust in existence by the central
When the U.S. money the dollar has been rewarded bank, rather than honestly
system was changed in two with a huge loss about
earned and saved, there
moves first when Lyndon 95% of the dollars 1971
would be no corresponding
Johnson asked Congress value has disappeared. As
addition to the worlds
in 1968 to repeal the you would expect. This new
supply of goods and services.
requirement for a gold reserve money is no longer trustless.
to back U.S. currency and Every transaction involves a This is just another way to
second when Richard Nixon
ended dollar convertibility
to gold in 1971 the U.S.
government reintroduced
a more primitive form of
money. It also introduced a
queer wrinkle. (See chart to
the right)
With this new money, the
U.S. economy and, by
extension, much of the
world economy has been
shaped by credit above and
beyond available savings.

30 | June 2017
look at the classic quantity
theory of money. The supply
of goods and services always
has to be balanced against
the available money. If the
amount of available money
(or credit) doubles and the
supply of goods and services
remains unchanged, prices In an ideal, honest money system, you cannot lend
should double, too. Not money you dont have.
immediately. But often
suddenly.
Gold is distinct in that it records and the custodians inflation (neither in assets
cannot be mined easily. commitment to maintain nor in consumer goods and
The costs of mining tend the value of the dollar is services). No artificial boom
to increase with GDP and demonstrably weak. The feds = no consequent bust.
general price levels. So the actually want a weaker dollar So, you see, there are
supply of this type of money and dont hesitate to say so. obvious benefits to gold if
tends to rise more or less in
But at least that threat is you want to run an honest
line with the supply of goods
understood, if not fully money system. And while
and services.
appreciated. It is textbook. the pre-1971 money system
Prices remain roughly stable. Add to the supply of money did not meet this ideal,
There is no custodian you and, other things being the dramatic unreliability
have to worry about. It is a equal, you will raise prices. of the post-1971 money is
trustless currency. You can You will not increase wealth well demonstrated in the
see above how golds dollar levels nor GDP; you are chart above. Its dishonesty is
price remained fairly stable only changing the relation of illustrated by the amount of
until the new money system available goods and services credit created since it began
was put into place in 1971. to the available money. about $59 trillion worth.
Since the custodian the Also textbook is this: In an This is textbook, too. This is
third party came into ideal, honest money system, credit in excess of available
the deal, the value of the you cannot lend money you real savings. It is a fraud,
greenback has fallen from dont have. You couldnt and it produces fraudulent,
$40 per ounce of gold to lend out gold unless you had unsustainable growth.
$1,200 per ounce. gold to lend. No lending in WHY YOU WILL
This is something to worry excess of available savings = NEED GOLD
about, especially as debt no artificial increase in the
levels are reaching new money supply = no price What troubles my sleep is

American Consequences | 31
what is not in the textbooks. banks vaults. It is as if it had practically drool when they
disappeared completely. think of it... a paradise
Central banks are in the
process of making trillions in The debt may disappear. But where governments can
government debt disappear. the credit the money put redistribute wealth and
Governments borrow money into the economy to create undertake huge capital
that doesnt exist. The debt the debt lives on. It spends investment projects roads,
is bought up by the central its days chasing asset prices. hospitals, bridges, harbors
bank, which creates money Stocks, bonds, real estate, at no cost. The feds get to
for that purpose. The interest art all go up. Bread and borrow money, hire people,
paid to the central bank on automobiles remain more or and spend on pet projects.
the debt is paid back to the less where they were. Who Then, as if by magic, the
U.S. Treasury (thats the deal complains? debt vanishes. What could
between the Fed and the be better?
U.S. government). Keynesian economists Larry
Summers of Harvard and The only thing that might
Then, when the bond Paul Krugman of Princeton be better would be negative
matures, the normal thing
would be for the borrower
the U.S. government
to repay the loan. This The government borrows. The central
repayment money would bank buys its debt. Then it never asks
have to come out of the
economy and into the to be repaid.
Feds vaults, thus reducing
the amount of money in
circulation and triggering an
economic slump.
The federal government
would have to run a surplus
in order to actually be a net
payer of debt rather than
a net borrower. Thats not
going to happen. Instead, it
borrows more to repay the
old loan and adds further
fuel to hot asset markets.
The debt is never settled...
it goes on forever... eternally
unpaid, forgotten in the

32 | June 2017
interest rates, in which the controlling interest in almost program, 40 million young
government is actually paid all the worlds publicly listed people count on the feds to
to borrow. That is already companies. And who would not foreclose on their lives.
happening. In Europe, object? Stock prices would
The only significant asset
rates have fallen so low that go through the roof.
that remains out of their
currently, Switzerland can
As for the nations debt grasp is gold. And they may
borrow for 10 years at a
public and private who grab that soon.
MINUS 0.2% rate.
minds if the feds buy it...
It wouldnt be the first time.
This allows the government and disappear it? Nobody.
In 1933, Franklin Roosevelts
and only the government,
As the price of debt goes Executive Order 6102
because it is the only
up, the financial industry decreed that all gold should
institution that can
becomes richer. And be turned in to the U.S.
positively, absolutely
government and recipients Treasury at $20 an ounce.
guarantee that you will
of government money Then, after the gold was in his
get your money when you
are happy, too; the money hands, he was able to devalue
are supposed to to go to
just keeps flowing in their the U.S. dollar by 75%,
heaven without dying.
direction. pricing gold at $35 an ounce.
Further disturbing my sleep
Leading economists Gold was cash back then.
has been a report from
notably Ken Rogoff of And Roosevelt was trying to
Japan that the central bank
Harvard and Willem avoid the very thing weve
has intervened directly
Buiter of Citigroup also seen happen in Argentina,
in the stock market. The
encourage the feds to Cyprus, and, most recently,
significance of this is
outlaw cash... giving them a Greece a dash for cash.
staggering. Because now, the
trifecta of financial control.
feds have in place the means With free money available to
They would have a grip on
apparently to take control them, the feds today could
Americas equity, debt, and
of nearly all our wealth. easily close that door, too
bank accounts.
The government borrows. declaring private gold reserves
Already, government- illegal. They might offer to
The central bank buys its
sponsored agencies Fannie buy it for, say, $1,500 an
debt. Then it never asks to
Mae and Freddie Mac are
be repaid. ounce. Who would object to
backing approximately 60%
a 25% premium?
As Japan shows, it can of new U.S. mortgages since
also buy stocks with the 2008. Meaning the feds The feds are the lenders and
same free money. Bidding effectively own $4.8 trillion buyers of last resort. As the
against a buyer who gets worth of U.S. housing. quality of assets declines,
his money for nothing will The Federal Reserve owns a more and more assets
be impossible. Gradually, further $4.5 trillion in debt. debt and equity end up
the feds could acquire a And through the student loan in their hands. Gradually,

American Consequences | 33
they control more and more foretelling a long period of Ice Age formula dousing
of the capital structure sluggish growth and low a debt-soaked economy
bought with free money price inflation. The economy with more debt is not
under cover of financial may want to go into a a way to build a healthy
necessity. Gradually, there deflationary hibernation, economy. It is just a way to
is less and less free in free they say. But since the feds shift real resources to the
enterprise. And gradually, can print and spend with government and its cronies
there is less and less real impunity, it may be a long without causing either a
wealth created. time coming. Plus, if the frightening spell of inflation
Gradually, too, the noose government is able to force or deflation.
tightens around your people into bank accounts
financial neck, as there are and out of cash it will It might work for a while.
fewer and fewer doors open be able to tax savings and But the falcon of asset prices
and fewer places that are further stimulate spending. becomes deaf to the falconer
safe to keep your wealth. of the real economy. Then,
With these new tools,
the feds should be able to in a kind of financial never-
No one likes to have his never land, he gets lost
wealth nationalized at the prevent a real correction for
many years. They suggest completely and flies into a
point of a gun. But everyone
that we prepare for an tree. Asset prices fall to the
likes having it bought from
him for more than it is worth. economic Ice Age, with ground. Investors panic.
little change year to year. Lenders call their loans.
This is what has happened Art investors rush to auction
already in the QE programs Asset prices wont fall
off their tableaux. Lines
in Europe and America... because the central bank is
form at ATMs.
and even more so in Japans actively buying bonds, and
QE program (with an extra maybe even stocks, adding I am not going to speculate
helping of equity buying). new money to the financial on how or when this occurs.
How much more of it the economy. Consumer prices
If youre in a theater and
world can take is anybodys wont rise because there is
no real growth in demand. one person walks calmly
guess. No one knows how
Debt will increase but it to an exit, it doesnt attract
far this can go. But as far as I
know, no economy has ever is hidden and forgotten in much notice, said Vern
been successfully Sovietized central-bank vaults. Gowdie, an Australian
by printing money and using colleague. Two... three...
Maybe so. But I dont think probably not much reaction
it to buy assets. you should expect it. It either. But if you have three
DONT SWEAT could lead to a dangerous
people suddenly run for an
THE ICE AGE complacency. The feds might
exit, youll have a panic.
be able to hold this together
Many economists are and they might not. This What then?

34 | June 2017
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Annotated by P.J. ORourke

FED SPEAK

Deciphering Fed Speak


AN ANNOTATED AND ABRIDGED VERSION OF:

Navigating the Different Signals from Inflation


and Unemployment
Speech Annotation
A speech by Federal Reserve Bank Governor Lael Brainard at the New York Annotations by
Association for Business Economics, New York, New York. Editor P.J. ORourke
May 30, 2017 Match number with speech annotation.

For the first time in many years, we are seeing signs of 1. In a muddy sort of way...
GDP growth rates have
synchronized economic expansions at home and abroad, and been falling for the past two
the balance of risks globally has become more positive. Recent quarters.
data suggest that the underlying momentum of the domestic 2. Of which there's been none.
expansion remains solid.1 While U.S. consumption was weak Volatility, measured by the
VIX, is at all-time lows. It
in the first quarter of 2017, the data so far are consistent slipped into single digits the
with a rebound in the current quarter. Moreover, financial day before Gov. Brainard
conditions remain supportive of continued economic gave her speech.

expansion despite some recent volatility.2 3. Not! Labor force


participation is down to
The ongoing progress in bringing Americans back into 62.7%, the lowest rate since
productive employment is especially heartening.3 With the 1970s.

continued strength in the labor market, economic activity 4. Yard sale at the Fed!
regaining momentum, and a brighter outlook abroad, it
would be appropriate soon to see the federal funds rate
moving closer to its neutral level. If the economy evolves in
line with the March Summary of Economic Projections (SEP) 5. Number of folks not in
median path, normalization of the federal funds rate is likely the labor force is hitting
to be well underway before too long, setting the stage for a all-time highs. It's not even
the same city, much less
gradual and predictable running off of the balance sheet.4 neighborhood.

Even so, I see some tension between signs that the economy 6. Progress? Since when
is in the neighborhood of full employment5 and indications does increased inflation
make things better for
that the tentative progress we had seen on inflation may be people? The Consumer
slowing.6 If the tension between the progress on employment Price Index has gone up
2.2% in the past year with
and the lack of progress7 on inflation persists, it may lead me double-digit inflation on
to reassess the expected path of the federal funds rate in the gas, 3.5% inflation on
shelter, and 3.1% inflation
future, although it is premature to make that call today. on healthcare. You call that
progress?
Different Signals from the 7. There's that progress
Labor Market and Inflation again. Even with a seemingly
low 2.2% annual inflation
rate, a dollar will lose half
Let me start by reviewing the conflicting readings we are its value over the next 30
years.
getting from the labor market and from inflation.

American Consequences | 37
Annotation Speech (cont.)
8. Never mind that wage The labor market has continued to strengthen. Payroll
and salary growth has
been stagnant since growth8 has averaged 175,000 over the past three months,
the Great Recession. more than sufficient to absorb new entrants into the labor
market. Although earlier in the recovery, it appeared that
the U-3 unemployment rate was running ahead of broader
indicators of slack, more recently, it has been encouraging
9. Don't blame us old folks,
we can'taffordto retire. to see other margins of slack being drawn down. The labor
force participation rate has held stable, against what many
believe to be a downward trend based on demographics9, and
the employment-to-population ratio has reached a new post-
10. As opposed to working recession high. Moreover, the share of employees who work
for kicks and giggles.
part time for economic reasons10 has recently moved down
close to its pre-crisis level, after a long period of remaining at
11. Most commonly used
elevated levels.
because it's inaccurate
and hilariously optimistic.
The most commonly used U-3 measure11 of the unemployment
rate moved down to 4.4 percent in April. This happens to be
the cyclical low reached in 2006-07, although unemployment
was at or below this level much of the time from the middle
12. Yeah, there areonly6.9 of 1998 to the middle of 2001. Relative to recent decades,
million Americans looking
for a job.
the unemployment rate is now quite low. In fact, some have
voiced concerns that the economy has proven unable to sustain
13. The history of mistakes the its expansion when the unemployment rate has fallen below
Fed made has sure repeated
itself plenty of times. these levels.12 With that in mind, it is worth asking whether we
should be worried that history will inevitably repeat itself.13
14. Weasel phrases alert!
The truth is, we cannot know for sure.14 Although rising
inflation often heralded the death knell of economic
expansions in earlier decades, inflation expectations have
been well anchored and rising inflation has presented less
15. What the heck is core
personal consumption? of a risk in the most recent business cycles. From 1998 to
Is that what you've got left 2001, for instance, core personal consumption15 expenditures
after you've been peeled and
eaten alive?
(PCE) inflation never exceeded 2 percent on a four-quarter
basis. Core PCE inflation did reach as high as 2.4 percent in
16. Neither of which is the period from 2006 to 2007, but, at the time, this higher
happening at the moment,
making the whole preceding inflation was viewed as reflecting the pass-through of a
paragraph as meaningless significant run-up in energy and non-energy import prices.16
as it sounds.
Today, there is little indication of an outbreak of inflation

38 | June 2017
Speech (cont.) Annotation

rather, the latest data on inflation have been lower than 17. Our definition of forecaster
somebody who's not only
expected. If anything, the puzzle today is why inflation wrong, but gets paid for it.
appears to be slowing at a time when most forecasters17 place
the economy at or near full employment.

18. Maybe in the Fed's


Editors note: We have abridged some longwinded checkbook, but maybe not in
talk on inflation and Phillips curves and picked yours.
back up on risks to the economy.
19. Both being up in the
stratosphere.
Broadly speaking, financial conditions today appear to be 20. By not loaning any money to
more balanced:18 In most markets, house prices seem fairly well anybody.
aligned with rents.19 Large banks are much better capitalized
21. P/E ratios are at altitudes
than before the crisis and appear to be managing their risk not seen since the dot-com
exposures and liquidity much more carefully.20 While todays bubble and the Shiller Cape
Ratio is at 30, a peak last
equity market valuations appear somewhat elevated, they do attained in 2000. Dizzy yet?
not seem to be near the dizzying heights reached in 1999
22. Gov. Brainard was an Obama
and 2000.21 Moreover, for a variety of reasons, importantly appointee and is presumably
including critical financial reforms22 as well as changes in risk a fan of the Dodd-Frank
bill legislation written by
appetite, leverage and maturity transformation are at much a man who hates all banks
lower levels than they were before the crisis. (Frank) and a man who
didn't read what Frank wrote
One area that merits ongoing vigilance is corporate (Dodd).
indebtedness, which remains at a high level and where investor
23. At least Gov. Brainard gets
appetite still seems strong. 23 Another area of concern is auto this right.
lendingparticularly in the subprime segmentwhere
24. Hello, Camel. Meet Last
underwriting appears to have become quite lax last year and, Straw.
consequently, delinquency rates indicate more borrowers
struggling to keep up with their payments.24 Eight years 25. Do not appear to be
into the recovery, it is important to recognize that financial flashing red? Don't go for a
conditions can change rapidly and bear special vigilance. car ride with a Fed governor
at the wheel. Debt levels
Nonetheless, risks to the U.S. financial system do not appear exceeding their 2008 highs
to be flashing red in the way they did in the run-up to is about as dangerous a
stoplight as you can run.
previous downturns.25
It is also possible that the natural rate of unemployment
has moved lower or that the unemployment rate still may

American Consequences | 39
Annotation Speech (cont.)
26. Translation: Just between be overstating the strength of the labor market. While it is
you, me, and the lamppost,
we at the Fed don't have a encouraging that the share of employees who work part time
clue. for economic reasons has continued to move down, there may
well be slack remaining along this margin. 26 And another key
measurethe prime-age employment-to-population ratio
remains more than 1 percentage point below pre-crisis levels,
and further improvement there would be welcome.
27. This being what the Fed
said before the first quarter.
The Outlook
28. Translation: The
numbers we give you are Looking at economic activity more broadly, although first-
meaningless. But that's ok,
we'll give you some other quarter gross domestic product (GDP) was soft, the data
numbers. so far suggest a rebound in the second quarter. 27 The weak
29. Steve Sjuggerud gives Q1 reading follows a recurring pattern in recent years, with
Gov. Brainard props for the first quarter of the year often weaker than subsequent
noticing, at last, what he's
been talking about for
quarters. Moreover, below the top-line number, 28 there were
months. some encouraging signs of strength: Residential construction
posted a double-digit increase and contributed 1/2 percentage
30. Translation: Despite every
effort that the president point to first-quarter GDP growth. 29 Drilling for oil and
who appointed me made natural gas is rebounding sharply, 30 and nonresidential
to stifle it.
construction contributed 3/4 percentage point to first-
31. The copier broke. quarter GDP growth. Business spending on equipment 31
and intangibles, 32 which fell slightly in 2016, rebounded
32. Lame attempts at Twitter
marketing campaigns. to a 7 percent annualized increase in the first quarter and
contributed another 3/4 percentage point to the overall
increase.
A key reason overall GDP was so weak last quarter was
33. Spend! Spend! Spend!, you consumer spending, which rose only 0.6 percent at an annual
consumer suckers.
rate. Nonetheless, there are good reasons to think that the
34. After 6 p.m. when the first-quarter weakness in consumer spending will not persist.33
consumers have been Household incomes should continue rising with the
drinking.
continued strengthening in employment and wages, home
35. As opposed to the prices should be contributing through improved household
pretend economy?
balance sheets, and consumer sentiment remains upbeat. 34
Recent changes in financial conditions have, overall, been
supportive of further gains in the real economy. 35

40 | June 2017
Speech (cont.) Annotation

The S&P 500 index is up almost 8 percent since the start of


the year. At the same time, a broad measure of the exchange
value of the dollar is down about 4 percent so far this year,
which should help boost net exports. After moving up sharply
late last year, long-term interest rates have moved down
36. We love the idea of an
somewhat so far this year. upside risk. Watch out or
you might gettoorich.
In addition, the balance of risks has shifted over the past two
quarters, with a number of downside risks receding and some 37. Cue the applause from Wall
Street.
upside risks emerging. 36 In particular, the latest international
economic data have suggested waning downside risks from
abroad, while continued labor market strength and the
prospect for fiscal stimulus in the United States 37 present a
possible upside risk to domestic demand.
Importantly, we are seeing synchronized global growth for the 38. Where is Gov. Brainard
getting her political
first time in many years. Growth forecasts for both advanced analysis? From the
and emerging market economies are being marked up, Rainbow, Unicorn & Flying
Pony News Network?
breaking a pattern of repeated downward revisions from 2013
to 2016. Recent political developments significantly enhanced 39. Anybody want to bet
euros-to-donuts on that?
the prospects for policy continuity in the euro area, 38 and
there has been continued growth in euro-area employment 40. 'Cause Greece, Portugal,
and economic activity. 39 While Italy continues to face and Spain are rolling in
dough!
political, economic, and financial risks, recent developments
augur well for the resilience of the broader euro area. 40
41. Is this the Fed making
Chinas first-quarter growth came in above 7 percent at foreign policy? We think
China still has a lot of
an annual rate, although there appears to have been some growing to do.
moderation since then, and capital outflows slowed notably. 41
Chinas economy bears watching in the medium term, 42. Have the drug cartels run
especially given financial-sector risks and elevated debt out of bullets?
levels. Although Mexicos growth may moderate this year, 42
both the Mexican equity market and the exchange rate have
strengthened, along with confidence, following sharp falls late
last year.
Along with the favorable shift in foreign risks, recent
announcements on fiscal policy suggest some upside risk to
U.S. aggregate demand. The Administration has proposed

American Consequences | 41
Annotation Speech (cont.)
43. Unspoken subtext: Deep deep tax cuts, 43 which, if implemented, could amount to
tax cuts are bad, bad, bad.
Sub-subtext: Trump is bad, about 2 percentage points of GDP in the first few years
bad, bad. according to independent estimates. Most estimates suggest
44. Because the Fed doesn't
that the supply-side effects of these policies would be fairly
believe in supply-side small, 44 so, if enacted, the net effect could well be a boost to
economics unless, of U.S. aggregate demand at a time when the economy could
course, it's the Fed doing
the supplying by coining be at full employment. Nonetheless, there is considerable
money until the U.S. Bureau uncertainty about the magnitude and timing of any policy
of Engraving and Printing
explodes. changes. There is also important uncertainty about the
deliberations over the debt limit, which are likely to garner
45. Translation: I have no idea
what's going on.
increasing attention in the early fall and will factor into my
considerations of risks to the outlook. 45

Editors note: We have abridged the section on the


Path of Policy because we believe it is useless and
much easier said than done.

46. Translation: There's going


to be an itty-bitty interest Conclusion
rate increase. Wouldn't you
like to know how much?
Wouldn't you like to know In recent quarters, the balance of risks has become more
when? I'm not telling! Nah, favorable, the global outlook has brightened, and financial
nah, nah-nah, nah!
conditions have eased on net. With the labor market
continuing to strengthen, and GDP growth expected to
47. Cue Pete Seeger to come
out and start singing If I
rebound in the second quarter, it likely will be appropriate
had a hammer... soon to adjust the federal funds rate. 46 And if the economy
evolves in line with the SEP median path, the federal funds
48. As Goldilocks put it, And
this bed isjust right! rate will likely approach the point at which normalization
Although, in the real world, can be considered well under way before too long, when it
bears maul unwanted
houseguests. will be appropriate to adjust balance sheet policy. I support
an approach that retains the federal funds rate as the primary
tool 47 for adjusting monetary policy, sets the balance sheet
to shrink in a gradual and predictable way for both Treasury
securities and MBS, and avoids spikes in redemptions. 48
While that remains my baseline expectation, I will be

42 | June 2017
Speech (cont.) Annotation

watching carefully for any signs that progress toward our


inflation objective is slowing. With a low neutral real rate,
achieving our symmetric inflation target is more important
than ever in order to preserve some room for conventional
49. Andreallyscrew things up.
policy to buffer adverse developments in the economy.
If the soft inflation data persist, that would be concerning
and, ultimately, could lead me to reassess the appropriate path
of policy. 49

Editors note: For full references, footnotes, and full


contents of abridged sections, please click here for the
original speech on the Federal Reserve website.

American Consequences | 43
By Dr. David Eifrig

RATES
MIGHT..
GO UP.

SELL
EVERY
STOCK
YOU
OWN!

The Fed Dont


Mean a Thing
You can safely ignore the Federal Reserve headlines...
T
he Feds decision on
interest rates at its
June 13-14 meeting
should have had
virtually no effect on your
life or your investments.
Much like the first interest
rate increase in December
2015... the second increase
in December 2016... and the
third increase in March...
folks in the financial media
are again warning that Fed
action may send the stock The S&P 500 Index is up about 20% from
market tumbling. the first time the Fed raised its interest
For example, when the rate in December 2015... about 7% from
Fed first raised rates a year
and a half ago, Bloomberg
its increase in December 2016... and up
declared, No One Knows another 2% from its March increase.
How Messy the Fed Increase
Could Get... on selling all your positions changing your entire portfolio
Business Insider warned: based on a prediction based on what might happen
The Feds rate hike could of a market crash. No in the next month. Or worse,
cause chaos in markets... successful hedge fund, what has happened in the
portfolio manager, pension previous month.
The Guardian called it the fund, or private wealth
rate rise heard around the manager operates on such a And sure enough... the U.S.
world... nonsensical scheme. economy has kept grinding
on... while stocks have
And an analyst at the Royal At times, you may increase done the same. In fact, the
Bank of Scotland even your allocation to cash and S&P 500 Index is up about
issued a recommendation to defensive plays. You may add 20% from the first time the
sell everything except high- some short positions. Fed raised its interest rate
quality bonds.
But the best way to minimize in December 2015... about
All this fearmongering was losses and stress in a market 7% from its increase in
ridiculous... downturn is through asset December 2016... and up
Not a single, coherent allocation, diversification, another 2% from its March
investment strategy relies and using stop losses... not increase. (See chart above.)

American Consequences | 45
Every single Fed rate
Maturity Interest Rate
pullback has been met with
buying. And stocks have 2-year 1.3%
consistently bounced back...
and repeatedly set new highs 5-year 1.8%
since.
10-year 2.3%
Here are four reasons why
you should completely 30-year 2.9%
ignore what the Fed does...

#1
#2
Theyre all controlled by
THERE ARE supply and demand. If a lot
DIFFERENT of investors want to lend
INTEREST RATES for five years, theyll buy up THE CHANGE IN
the bonds and the interest INTEREST RATES IS
There are lots of different rate on five-year bonds will EXTRAORDINARILY
interest rates... from interest decline.
SMALL
rates on U.S. bonds to the
interest rate you earn on The only interest rate the When the Fed raises rates, it
your savings account. Fed controls is the federal has been taking very small
funds rate... the rate at steps say, one quarter of
The most chatter is about one percent. The Fed will
bonds... Bond prices and which banks and credit
unions lend to each other on then, in the future, continue
yields move in opposite to raise rates very slowly.
directions. So some people an overnight basis.
are worried that the Fed Thats what we saw the last
Now, in theory, if the Fed
raising interest rates means three times the Fed raised
raises that rate, it would
bond prices will fall. rates in December 2015
hurt bonds with longer
and 2016 and then in March
The table above shows the maturities (what wed call this year. A rate increase of
current interest rate youd further out on the curve). 0.25%.
earn on different maturities But in practice, this effect is
of U.S. government Treasury miniscule. Remember that prior to
securities, depending on the financial crisis of 2008,
time to maturity... Supply and demand will the federal funds rate was
determine what happens regularly as high as 3% or
Heres the point: None of
with the interest rates that 4%. So we could have about
these rates are controlled by
the Fed... None. affect everyday life most, not a dozen raises before were at
the Feds rate. normal levels again.

46 | June 2017
Make no mistake about it, leads some to claim that relative to stocks.
this is still an easy money the day the Fed hikes rates,
In reality, the Fed typically
policy. bonds will plummet. But do
raises interest rates when
you really think theres an

#3
the economy looks healthy
investment manager sitting
enough to withstand it.
on a pile of bonds who
Right now, GDP is growing,
hasnt considered that rates
THE CHANGE IN employment is strong, and
are set to go up?
INTEREST RATES even wages are growing a

#4
IS PRICED IN AND little.
MEANINGLESS In my experience, its the real
economic factors pushing
Financial markets are STOCKS PERFORM stocks up that outweigh the
forward-looking... If WELL WHEN theoretical ones that could
everyone knew that a INTEREST RATES RISE push stocks down.
stock would be worth $10
tomorrow, theyd buy and Many investors fear that Looking at historical data,
sell until it was $10 today. rising rates will choke the when interest rates rise from
life out of the stock market. low levels, like from 0%-
Markets arent always 4%, stocks tend to rise with
perfectly priced, but this The theory goes that higher interest rates. (Its not as safe
rise in interest rates has been interest rates reduce profits if rates start at a higher level...
anticipated for years. for companies because they When rates rise from 5% and
pay more to borrow... Plus, higher, that does tend to put
Again, in theory, higher
other interest-paying assets pressure on stocks.)
interest rates drive down
will look more attractive
the price of bonds. This Talking heads in the media
place more importance
on interest rates than they
should.
Over the long term
spanning a business cycle
that includes a recession
and recovery the Fed can
certainly affect the path of
the economy.
But when the Fed announces a
small change it doesnt mean
much at all. Ignore it.
By permission Michael Ramirez and Creators Syndicate, Inc.

American Consequences | 47
A Conversation With . . .
Julian Assange, Founder of WikiLeaks

Picture by
Allen Clarke
48 | June 2017
T
his month, Julian Assange: Wall Street Journal, which
WikiLeaks co- Exactly. The New York Times is typically a right-leaning
founder Julian and Washington Post have publication, all hammering
Assange joined giant slander cannons is Trumps administration day
Stansberry Investor Hour the way to think about it. after day after day.
hosts Buck Sexton and
Theyre like beefed up It seems like Trump
Porter Stansberry for threatens the political
an interview from the destroyers with slander
cannons all over the deck. establishment both
Ecuadorian Embassy in sides of the aisle and the
London. And when someone irritates
them or threatens them, newspapers are fighting back
No matter what you think of they can point those slander on behalf of their friends
him... Whether you support cannons and blast. That and contacts in the political
his exposure of state secrets causes the government to establishment. Is that the
or believe hes endangered keep its distance. right read?
U.S. lives... Julian Assange
On the other hand, they also
is worth listening to. Being
are involved in ingratiating Julian Assange:
a bold truth-teller and being I think its a lot along those
themselves constantly. So
a dangerous maniac are not, lines. Its shifting as time has
they also have giant flattery
after all, mutually exclusive. gone by.
cannons. They deploy this
Their conversation revealed combination of slander and A very interesting
important insight about the flattery and occasionally experiment: what happens
War of Leaks in DC... how even telling the truth to when youve got a populist
the political establishment maximize their institutional candidate in this case, a
is attempting to shove power. And at a social populist-right candidate.
President Trump back into level, the power interests of You imagine the same
line... and how the public the journalists who work thing wouldve happened
benefits from transparency there. Then of course, to to Sanders if he had been
and sharing of information... tie in with the interests of chosen by the Democratic
the proprietor: Washington Party. Youve got a populist
Q: The New York Times and Post now is owned by Jeff candidate not connected to
the Washington Post publish Bezos, who owns Amazon existing establishments in a
(AMZN). substantive way.
classified information and
they dont get prosecuted. Trump, during the election
So why is there a who- Q: Its very odd to see both the only establishment that
the-law-will-be-applied-to the New York Times and he had was the evangelicals
difference when it comes to the Washington Post, which via Pence. And thats it. He
WikiLeaks? are typically left-leaning had no one else. He didnt
publications, as well as the have the military. He didnt

American Consequences | 49
have the security services, With Obama and other happened, given how
didnt have the banks, etc. presidencies, usually that experienced Clinton was
I guess he had the coal has already played out in the and how unexperienced
industries, but theyre so Senate. In their career before Trump was. Thats a terrible
small as to be just not a they become a president, failure that would normally
factor. theyve gotten into position, result in a post-election
and most of theyre not purge of all those people
So, he gets into government.
straying too much from involved. But I think none
And then of course theres
what the politically correct of that is that surprising or
been a kind of push and
position is. that interesting.
shove, where the president,
through his ability to hire Whereas Trump was all over What is interesting is how
and fire, has been showing his the place as soon as he got the security state has joined
power. But the intelligence into office and now hes the fight. And how people
agencies and Saudi Arabia being shoved and pushed who would call themselves
and the other serious players into line. liberals or neo-liberals
in the United States and out Q: Are these sorts of now joining into bed and
have also been demonstrating accusations the modern celebrating the FBI and CIA.
their power. And so you see political playbook? That the And even a fair chunk of
a give and take between the government opposition U.S. mainstream media are
White House and those other whether led by Democrats palling up to that project. I
players. or led by Republicans, or think that is quite worrying.
And so if you look at his perhaps both attack the Q: In America, theres this
shift in some security policy president with a special belief that the one who
how long did that take? prosecutor and allegations publishes the leaks is a
They kept beating him up, of wrongdoing that dog him good guy, but the one who
and it took about 70 days. until he turns over? leaks the information to
So you have an untrained, Julian Assange: the publisher is not just
undisciplined president it I think from the Democratic somebody who should
takes about 70 days for the perspective, yeah, theyre be punished, but is a bad
security sector to whip them trying a standard playbook guy. But is that a more
into position. of trying to harass the complicated ethical question
administration any way they than people allow it to be?
Its not completely there...
I think Trump is hard to can that they think will lead Julian Assange:
keep him in a box, even if to its downfall... In my view, what allows us
you get him in a box for a It also distracts from an as individuals as a civilization
while. So just speaking as a epic loss by the existing to not do stupid things and
journalist, its a fascinating Democratic leadership. to do the humane thing or
thing to see play out. That really shouldnt have the intelligent thing is that

50 | June 2017
Picture by Mark Condren,
Irish Independent

we know something about everything fails. For the full interview


the world. Were not kind and a debate between
So when an individual,
of drifting through it blind. Buck and Porter about
whatever their motivation,
And therefore, processes
helps contribute to the what we should do with
which result in human whistleblowers, click
advancement of human
beings knowing more about here to sign up for the
civilization by providing it
the world, I support. Stansberry Investor Hour
information that allows all
It doesnt mean that in of us to understand whats notification list.
every single instance that really going on, then I think Like American
I necessarily agree, but I we should encourage that.
Consequences, its 100%
think that principle is very And we should encourage it
free. Each week, youll
important. Its so important by applauding those people
receive new show updates,
I think it is probably the for helping us. We should
most important thing that previews, and access to
encourage it by offering
human beings do. Because them financial rewards transcripts and show
if human beings arent in some cases. We should notes. Whether its about
communicating with each encourage it by defending investing... business...
other, teaching each other them from prosecution. politics... or a controversial
about how the world really We should encourage it by social issue... youll get the
works, were like rabbits or changing the law to make it unfiltered information from
stones or something, and easier for them. behind the scenes.

American Consequences | 51
By Steve Sjuggerud

Your Last
Bull Market
We ARE on the verge of a
massive market panic. But not
the kind most people expect.
mind...
Where is the market going next? In March 2009 within
days of the stock market
When will it peak? bottom Grantham said
buy. He wrote a letter to
And when will the bubble burst? his customers saying that
stocks were worth 30%
above todays price.
Im sure youre asking these EXACTLY right.
Again, he got it exactly right.
questions... But who are you
At the time, nobody wanted
looking to for answers? I love reading Granthams
to believe him. He was
thoughts (even when I
I like to look to the guy who labeled a perma bear
disagree with them) because
called the last major stock someone who always looks
he is an original thinker. He
market top and bottom, for the negative in the
is willing to go against what
with amazing accuracy... markets. But he was just
everyone else is saying.
calling it like he saw it.
Jeremy Grantham is a So what does Grantham
78-year-old Englishman In late 2008 near the
the bubble guru say
best known for studying bottom of one of the worst
about the likelihood of a
stock market bubbles more nine-year runs in stock
stock market bubble today?
thoroughly than anyone, market history Grantham
ever. Hes the co-founder became incredibly You might think the guy
of GMO, an investment- optimistic. That time, he known for spotting bubbles
management firm in Boston. was the lone bull among would be looking for
bears. He wrote: one today. Since March
In 2000, Grantham called 2009, the stock market
the stock market peak with For an unparalleled
has gone up practically
incredible detail... 20 years, [stocks]
uninterrupted for eight
have been overpriced.
That year, he gave an years. Weve got to be hitting
Now, finally, they are
interview in Outstanding bubble proportions
cheap and likely to
Investor Digest titled right?
get cheaper. Likely,
Bubbles have always given I believe, to set up Not so fast. Grantham gave
back everything. There a once-in-a-lifetime the Wall Street Journal his
have been no exceptions investing opportunity opinion last week and
NONE. In it, Grantham (or maybe twice in a what he said surprised me.
delivered a dissertation on long career).
exactly why, and exactly Heres what he told the
how, the stock market crash Finally, stocks appeared to Journal about the U.S. stock
would unfold. He got it hit bottom in Granthams market today:

American Consequences | 53
It doesnt have the
characteristics of a
bubble... Remember
the style from 2000,
or Japan in 89, or the
U.S. housing market...
or 1929 in the old
days was a classic. We
have almost none of
that euphoria. We also
have very imperfect
fundamentals.
[I dont see] mad
desire to invest in the
stock market. THE MELT UP BEFORE Stocks often have their
I agree with him, 100%. THE MELT DOWN biggest, most explosive gains
at the ends of major bull
We are not seeing the classic What were experiencing markets.
signs of a bubble, yet. We right now is what I call the
dont see mad desire to In short, before the big
Melt Up. Its the final push
invest in stocks, yet. Melt Down arrives, we
higher in the bull market.
have the big Melt Up.
Investors know that stocks And the gains could be
extraordinary. Its the final push higher
have gone up for eight years.
before the bear market
So they think they have to Stocks have gone up for kicks in.
come down. seven straight years... one of
the longest runs in history. The most recent major
Stocks will come down,
example of this happened
eventually... But we are not And after seven years, you at the end of the 1990s
at that point yet. might think that the big bull market. The Nasdaq
Jeremy Grantham the guru gains are behind us. You Composite Index soared
of bubbles says that were might think that you missed more than 86% in 1999
not in a bubble today. Who out. But thats not the case. alone. Now that was a clear
would know better? The Melt Up is a powerful Melt Up period.

I agree with him. We are not idea... But few investors Importantly, the Melt Up
truly understand it. typically begins after a time
in a stock market bubble
yet. Dont let em tell ya any of extreme fear.
Its based on a simple
different. premise... In late 1998, stocks had

54 | June 2017
fallen dramatically in the doing the same thing today Stocks fell in the fall of 2015
wake of the Asian Crisis, and that they did back then. and at the beginning of 2016.
we hit a fear extreme. Then, Stocks fell dramatically late
In both cases, the short-term
stocks surprised everyone into that bull market... And downside was 10%-plus.
and soared higher the then they soared dramatically, Those were the first 10%-plus
Nasdaq Composite Index to new all-time highs. declines in stocks since 2011.
rose 200% in 18 months
And thats happening again Investors had gotten used
during the dot-com bubble.
today. to consistent gains and easy
(See chart to left.)
Lets take a closer look money in the previous four
I cant guarantee a massive years. But stocks showed a
at these Melt Up setup
move like that again, of crack in their armor, and
conditions this time
course. But I do believe that caused a major spike
around...
that the coming years could in fear.
resemble the late 1990s. STOCKS HIT A FEAR
EXTREME... THEN How do we define fear?
We could be in the very Its more challenging than
late innings of a great bull RISE DRAMATICALLY
you think youre trying to
market... And the fastest put a number on a human
First, weve had two recent
gains happen in the final emotion.
falls in stocks. And both led
innings.
to major extremes in fear. We look at it in a variety of
Why am I so confident? different ways, but the most
You can see both clearly by
Theres one major reason. looking at the chart below of common way to size up fear
To put it simply... Stocks are the S&P 500... in the markets is through
the Chicago Board Options
Exchange Volatility Index
(the VIX) often referred
to as the markets fear
gauge.
When stock prices move
wildly, the VIX goes up.
When stock prices arent
volatile, the VIX moves
down.
The VIX spiked during both
recent falls. Generally, a
VIX reading of more than
20 shows fear in the market.
In late-2015, the VIX rose

American Consequences | 55
Interest rates are still
near multi-generational
lows which should
help fuel the economy
and help drive stock
prices and house prices
higher.
Everyone who wants
a job can get one. The
unemployment rate is
extremely low at under
5%.
Everyone who wants
a home can get one
(except in California
Theyve also hit new all-time highs
and New York City).
since Donald Trump won the presidency. You can borrow money
And all of this makes me confident that at around 4% for a
30-year mortgage, and
the Melt Up is starting now. house prices in America
are still a fantastic
value... significantly
above 40 a level not seen Stocks have moved higher cheaper than other
since 2011. The VIX nearly since their recent falls just major countries.
hit 30 again in February like at the end of the 1990s
2016. Take a look above... bull market. And the Melt Up is
here.
This is exactly what Theyve also hit new all-time
happened before stocks highs since Donald Trump You can always find a reason
Melted Up in the late 1990s. won the presidency. And all NOT to invest. Stocks and
of this makes me confident real estate have soared higher
A batch of fear hit than you can imagine.
that the Melt Up is starting
investors... stock prices fell... But the Melt Up will help
now.
but then they recovered. bring prices even higher...
They reached new all-time Its here... and we have to to a point that doesnt feel
highs and continued to soar take advantage of it! comfortable.
during the final stage of the
Look, right now is an Believe me, you will know
bull market the Melt Up.
incredible moment for when it feels crazy and
This is all happening now. investors... were not at crazy yet.

56 | June 2017
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spectrum. more leveraged than before of society than to debauch the
2008, and I dont think the currency.
financial system is more sound.
-J
 ohn Maynard Keynes,
- Paul Singer | System May Be Economic Consequences of the
More Leveraged Than 2008, Peace, 1919
Bloomberg

Without a doubt, this will be


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the very spirit of capitalism is... yes, the Fed can easily take down
to flood the country with notes of the stock market in retaliation...
high face-value without financial It would be as if someone
guarantees of any sort. flipped a switch and we veered
- Vladimir Lenin, from Quantitative Pleasing to
newspaper interview 1919 Quantitative Plaguing.
-D
 anielle DiMartino Booth |
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But actually nobody borrows
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58 | June 2017
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- Milton Friedman, Capitalism


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American Consequences | 59
THE FINAL WORD
TRUMP MUST BEAT THE SIEGE

BUCK SEXTON

The White House is under a siege worthy of We are only five months into Trumps
the Ottoman Turks in 1453. presidency, and the press has gone on a new
anti-Trump offensive every week.
And like the destruction of Constantinople
and the end of Byzantine Empire, President From lawsuits over the Emoluments
Clause to the Logan Act to the most
Trumps whole regime will fall unless he
intricate international conspiracy since The
manages to shore up the defensive walls Manchurian Candidate (Russia Collusion!
and keep out the embittered Hillary-voting they say), the allegations and assaults have
hordes. been endless, vicious, and perhaps worst of

60 | June 2017
all, successful in slowing Trumps agenda.
To stave off an outright collapse, President Trump and the GOP-led
Trump needs messaging discipline, a steely-
eyed focus on his agendas implementation,
Congress must get either
and no more self-inflicted wounds from his tax or health care reform
team.
through this year. Both
Unfortunately, the recent appointment of
a special counsel has made such refocusing would be great, but despite
even more difficult. Do not be influenced the Trumpian bravado, that
by the so-called legal analysts in the media
who will tell tales of former FBI director seems unlikely.
Robert Muellers unparalleled honesty and
integrity. Its a trap. toasting this taxpayer-funded witch hunt.
Mueller is a close confidante of former FBI No matter what happens, the purposes of
Director James Comey, who with his recent the Trump opposition will have been served.
testimony admitted that he is a savvy, if There will be months of injurious
underhanded, bureaucratic infighter who speculation some based on leaks from the
knows the ways of the D.C. swamp all too investigation itself, no doubt about who
well. He wanted a special prosecutor to even the targets are, how close the Department of
the score with Trump, and he stacked the Justice is to filing charges, and who is going
deck to make it happen. to flip and give testimony against Trump
No matter how decent a man Mueller may or one of his top advisors. By the time its
be, the special counsel is a political weapon. clear the special counsel appointment was
For President Trumps enemies, this has been fake news, the damage will have been done
the plan all along. and the media will have moved on.
Comey lit the match with his leak of In a worst-case scenario for the White
private memos to the New York Times, House, the grinding, remorseless machinery
but the mainstream media were piling of the special counsels investigatory process
up the gunpowder for months. The sheer will claim a hapless victim.
repetition of Russia election hacking
Perhaps a senior Trump advisor will get
stories in the media created the perception
caught in a perjury trap, or there will
of a vast conspiracy without a shred of
be some allegation of sloppy procedural
verifiable evidence. And now the country
misconduct. All it takes is for one of Trumps
will be put through months (if not years) of
special assistants or aides to destroy the
investigation started without a specific crime
wrong file or type a careless e-mail, and
in mind.
Muellers squad of G-men will swoop down
Assorted latte-drinking coastal elites are and bring the sanctimonious fury of the

American Consequences | 61
Department of Justice to bear. business investment, and better quality of
jobs, then the melodramatic alarmism on
It happened to Lewis Scooter Libby during
cable news about the coming Trump tyranny
George W.s tenure. It can certainly happen
wont make much difference to people who
again.
just want the country to be in better shape.
And if it does, the Democrats and their
Time is running short. Before long,
media allies will be howling for the
Congress will be on recess, the fiscal year will
maximum punishment while claiming
end, we will be in the midst of the holidays
that even the most mundane infraction
and then the political focus will shift to the
is evidence of Russia Collusion hiding
midterms. That means Trump needs to use
somewhere, somehow. In truth, it will be
those deal-making skills he has honed over
petty retribution for Hillarys loss dressed
decades and get something big done soon.
up as justice. But as long as it harms Trump,
the media will egg it on and a coalition of Keep in mind, if the Democrats win the
cowardly Republicans will run for cover. House, there is a very good chance they
will impeach President Trump. They wont
There is, however, another way this can all
succeed in removing him from office as
go...
long as the Senate is in GOP hands, but a
President Trump was never going to have successful impeachment proceeding would
even a smidgen of goodwill from the still be politically toxic.
Democrats, and the medias shrieking hatred If the Democrats manage to make Trump
for him has been at a maximum decibel a one-termer, then the swamp will persist.
since he announced during the primary. He Hillary-ism, whether through Elizabeth
is an unorthodox political brawler elected Warren or some other Democrat statist,
not to dance around and get along, but to wont have been so much deterred as it was
throw punches. While his administration has delayed.
already taken its fair share of punishment,
it is still standing, still pushing on, and can Those are the stakes. The pathway for
still, ultimately, win. But itll be a Beltway Trump is littered with obstacles, most of all
brawl every step of the way. the special counsel, but with a little more
discipline and Trumps pugnacious resilience,
Trump and the GOP-led Congress must get he can still get the job done.
either tax or health care reform through this
year. Both would be great, but despite the Its going to be quite a fight.
Trumpian bravado, that seems unlikely.
Policy success for Trump will be the best
political antidote against the special counsel
and other Russia Collusion investigations
(five at last count). If the American people
see a jump in GDP growth, rising wages,

62 | June 2017
THIS ISSUES CONTRIBUTORS

Bill Bonner is the Today, he publishes a free daily letter on


underground news mogul health and wealth that shows readers how
and founder of The Agora to live a millionaire lifestyle at
publishing company. He's http://retirementmillionairedaily.com/.
written the New York Times
bestselling book Empire of Debt
Dr. Steve Sjuggerud is the
and most recently published Hormegeddon:
editor of True Wealth, an
How Too Much Of A Good Thing Leads To
investment advisory which
Disaster. He is one of the great writers and
specializes in safe, unique
minds in America today.
alternative investments
He publishes a free daily letter, Bill Bonner's overlooked by Wall Street, and
Diary, here: https://bonnerandpartners.com/. based on the simple idea that you dont have
to take big risks to make big returns.
Buck Sexton is host of the He alerts readers to some of the biggest
nationally syndicated talk opportunities in the market every weekday at
radio program, Buck Sexton http://www.dailywealth.com/.
with America Now, heard on
over 100 stations across the
Porter Stansberry founded
country.
Stansberry Research in 1999
A former CIA and NYC Police Department working on a borrowed
Intelligence Officer, Buck is also the co-host computer at his kitchen table.
of Stansberry Investor Hour, a weekly radio Since then, he has built the
show that you can subscribe to for free right firms flagship newsletter,Stansberrys
here: http://investorhour.com/ Investment Advisory,into one of the industrys
most widely read publications.
Dr. David Eifrig worked in Today, Porter is well-known for doing
arbitrage and trading groups some of the most important and often
with major Wall Street controversial work in the financial advisory
investment banks, including business.
Goldman Sachs, Chase
Manhattan, and Yamaichi in Japan. In 1995,
Dr. Eifrig retired from Wall Street, went to
UNC-Chapel Hill medical school, and
became an ophthalmologist.
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