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Why You're Likely Exposed To One Of The Dumbest Investments In History
05-24-2018, 05:11 PM,
Why You're Likely Exposed To One Of The Dumbest Investments In History
Why You're Likely Exposed To One Of The Dumbest Investments In History

<p><a href=""><em>Authored by Simon Black via,</em></a></p>

<p>Last June, in one of the most egregious displays of economic insanity, Argentina was able to raise $2.75 billion by selling bonds with a ONE HUNDRED YEAR maturity.</p>

<p><strong>Even more miraculously, the bond turned out to be <a href="">wildly popular</a> with investors.</strong></p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/moneyfire.jpg?itok=E6PIY_dm" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="427dcdec-ca50-448c-9543-22c99979036e" data-responsive-image-style="inline_images" height="261" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p><strong>So basically investors willingly forked over billions of dollars to a country that has a history of defaulting on its debt, confiscating private assets, and engaging in rampant corruption… for an entire century.</strong></p>

<p>It’s as if everyone was oblivious to Argentina’s past.</p>

<p><strong>The country has defaulted twice just in the last twenty years, and eight times since its independence in 1816.</strong></p>

<p>So the chances that Argentina DOESN’T default within the next century (or even the next decade) is slim to none. And slim’s out of town.</p>

<p><strong>11 months later, reality is starting to set in.</strong></p>

<p>Investors have begun to realize that Argentina doesn’t actually have any money, that inflation is more than 25%, and the central bank has blown through $8 billion (more than twice the amount of the bond issuance) trying to prop up their weak currency.</p>

<p><strong>Oh yeah, and the Argentine government has asked the International Monetary Fund (IMF) for an emergency $30 billion credit line to remain solvent.</strong></p>

<p>The worse things get for Argentina, the deeper the bond plunges in value; <strong>earlier this month it was worth about 83 cents on the dollar.</strong></p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/2018-05-24_10-47-40.jpg?itok=PViZLvbf" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="0cd14e92-93df-473c-844b-9762d754a913" data-responsive-image-style="inline_images" height="258" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p>And while making 100-year loans to an insolvent country with a long history of default is especially insane, <strong>it’s important to realize there are a lot of “Argentinas” out there today.</strong></p>

<p>For example, <u><em><strong>more than 20% of the companies in the Russell 2000 index and nearly 10% of S&P 500 companies need to borrow money just to pay interest on their debts.</strong></em></u></p>

<p>Plus a full 50% of the entire, investment-grade corporate debt market ($2.5 trillion in paper) is rated just one notch above junk.</p>

<p>And what do troubled governments and companies do to get out of this jam of too much debt? They borrow more money…</p>

<p><strong>But that becomes more difficult and expensive as interest rates rise.</strong></p>

<p>Rising interest rates mean heavily indebted companies and governments have to borrow even MORE money just to pay interest on the money they’ve already borrowed.</p>

<p>And this cycle only compounds the problem.</p>

<p>Now, you might be thinking, “OK Simon, but big deal. I’m not dumb enough to buy Argentina’s bonds, or invest in loser companies.”</p>

<p>Great. And that’s probably true.</p>

<p><strong>But due to the interconnectedness of our modern financial system, even if you’re not DIRECTLY buying a toxic asset, you’re probably exposed to someone else who is.</strong></p>

<p>Think about it: <strong><em>even if just you own a basic index fund, you’re exposed to dozens of insolvent companies.</em></strong></p>

<p><em><u><strong>Your life insurance company. Your pension fund. Your bank. The fixed-income mutual fund where you invested your retirement savings.</strong></u></em></p>

<p>Any of these could have easily scooped up a bunch of Argentina bonds. Or loaned money to any number of countless insolvent businesses or governments.</p>

<p><strong>Ever heard of JP Morgan? They loaned money to Argentina.</strong></p>

<p>So did Fidelity and Invesco. And those are just a few of the big names.</p>

<p>You don’t have to be crazy enough to buy a toxic asset. You’re probably already exposed merely if one of your financial counter-parties was crazy enough to do so.</p>

<p><strong>It was the same phenomenon back 15-years ago prior to the Global Financial Crisis.</strong></p>

<p>In the early 2000s, banks were providing no-money-down mortgages to borrowers with pitiful credit, then rolling thousands of these loans together into gigantic bonds.</p>

<p><strong>These bonds became some of the most popular investments in the world.</strong></p>

<p>My guess is that you probably didn’t own a single one of those toxic bonds.</p>

<p>But your bank did.</p>

<p>So did your pension fund. Brokerage. Or some company that you might have invested in, like Lehman Brothers or AIG.</p>

<p><em>(Lehman went bankrupt, and AIG has never recovered from its losses.)</em></p>

<p>You were financially exposed to somebody else’s stupidity.</p>

<p>And due to the incredible lack of transparency in the banking system, the truth is, you’ll NEVER know if you’re exposed to these risks.</p>

<p>Bernie Madoff is an even better example…</p>

<p><strong>Some people lost every penny they had, and <em>they hadn’t even heard of Bernie Madoff</em>.</strong></p>

<p><strong>But they had money in a pension fund that invested in some feeder fund that gave money to Bernie.</strong></p>

<p>They were three degrees of separation away from Madoff and they STILL got wiped out.</p>

<p>The reality is, you’re exposed to this stupidity whether you realize it or not because you’re probably exposed to someone else who’s invested in this financial lunacy.</p>

<p><u><strong>That’s one of the reasons I’m holding so much cash outside of this complex, interconnected system.</strong></u></p>

<p>Specifically, I’ve been buying 28-day Treasury bills for most of the last eighteen months.</p>

<p>These T-bills are basically like a 4-week certificate of deposit that’s held by the Treasury Department.</p>

<p>I make just under 2% per year, and I know exactly who my counterparty is: Uncle Sam.</p>

<p>That’s compared to 0.02% in a checking account, and I have no idea what’s on that bank’s balance sheet.</p>

<p>Now, if you’ve been a reader of this letter for more than a week, you know I have zero confidence in the US government’s ability to repay its massive debts over the next several decades.</p>

<p><strong>And I think you have to be certifiably insane to buy a 30-year bond issued by the US government. That’s way too far out into the future.</strong></p>

<p><strong>But 28 days? That’s pretty low risk.</strong> However you feel about Donald Trump, he’s probably not going to default by next month.</p>

<p>And to continue learning <strong>how to ensure you thrive no matter what happens next in the world</strong>, I encourage you to <a href="">download our free Perfect Plan B Guide</a>.</p><img src="" height="1" width="1" alt=""/>

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