 | | The Daily Reckoning | Friday, November 17, 2010 |
- Getting your IRA out of Bernanke's reach and into your dream home,
- Following the Fed's new dollars...all the way to the emerging markets,
- Plus, Bill Bonner on Mr. Market's sneaky surprise and the latest briefing from Zombieland...
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|  | | | New Money Flows Overseas | | Why Emerging Markets are Benefiting the Most from QE2 | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Anyone who contends that Ben Bernanke's latest round of money printing is not having a material impact on either job growth and/or meaningful investment is clearly not looking hard enough...or in the right place.
While it is true that US equities have, after a rollercoaster fortnight, retreated below their pre-QE2 announcement levels...and while the employment outlook in the US remains stubbornly entrenched in economic reality, much to the chagrin of central planners/bankers with a mandate to achieve "full" employment, Mr. Bernanke's newly created dollars are, indeed, beginning to find their way into productive capital formation and much needed reinvestment...abroad.
"You're seeing leakage from quantitative easing," Stephen Wood, chief market strategist for Russell Investments in New York, recently told Bloomberg. "That leakage is going into emerging markets, commodity- based economies, commodities themselves and non-US opportunities."
Readers of these pages are familiar with the recent run up in resource prices and, although a bit of the froth was blown off the commodity cappuccino during the past few sessions, the long-term trend supporting higher resource prices - i.e., voracious demand from emerging markets and the debasement of the dollar in which most of these things are priced - remains in place. But what of the emerging markets themselves? Could Bernanke's promiscuity at the printing press actually be encouraging the flow of EZ money out of the US and into these foreign markets? Almost certainly.
"The best way to visualize this process," writes Dr. Marc Faber, editor of the highly-recommended Gloom, Doom & Boom Report and a perennial favorite at our annual investment symposium in Vancouver, "is to think of a huge money- printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.
"Some of these dollars then find their way back to the US and support Treasury bond prices," continues Dr. Faber, before adding, "But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out."
Indeed, in the first half of this year, figures compiled by the Commerce Department show that overseas investments by US firms outpaced the rate at which foreign firms invested in the US by an annual rate of about $220 billion. For perspective, back in the first half of 2006, when the US economy was humming along - towards disaster - and the term "quantitative easing" had not yet found its place in the common, politico-doublespeak of the day, the US was a net recipient of funds. The annual net inflow was then about $30 billion.
Such a massive turnaround was not (entirely) lost on policymakers. As Richard Fisher, president of the Federal Reserve Bank of Dallas, pondered in a recent speech, "I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places."
Of course, that speech was given in October...long before Bernanke's QE2 ship set sail.
According to data compiled by Bloomberg, US corporations have issued more than $1.07 trillion in debt year-to-date. On the surface, that might appear to be a good sign. The willingness to go into debt is, in a way, a measure of confidence...or stupidity...or, more likely, a combination of the two. Perhaps, therefore, these companies are raising cash for expansion plans, for research and development and to hire new workers. Wouldn't that be a good thing for the US economy in general? It would...except that much of that cash will be deployed overseas, where higher growth rates offer a more attractive return on investment. The newswire cites a host of US-based companies taking advantage of this EZ money trade. Here are three of them:
- Southern Copper, a Phoenix-based mining outfit that raised $1.5 billion in an April debt offering, will use that money to improve and upgrade its facilities...at its mines in Mexico and Peru
- Cliffs Natural Resources Inc., North America's largest iron-ore producer, will use part of a $400 million offering to repay debt...associated with a Brazilian mining project
- Valmont Industries Inc., an Omaha-based light pole and communications outfit, will use the proceeds of a $300 million debt issuance to help fund its $439 million acquisition of Delta PLC...a London-based maker of similar products.
To be clear, this is by no means an indictment of these, or any other, companies looking to shore up or expand their bottom lines by investing overseas. Rather, your editor is simply observing that money - and the companies trying to make it - invariably flows to where it is treated best. And, right now, you can mail a postcard to many of those "best" places without the need to include a US zip code at all.
But none of this should come as any real surprise, Fellow Reckoners. You can't unleash - and/or promise to unleash - $600 billion worth of liquidity into the US market without some "leakage." That's especially true when the pool of growth opportunity in the United States is so very shallow, and the depth of potential in emerging markets is so very great. It's a bit like trying to fill a thimble with a fire hose...most of the water ends up where it wasn't intended.
In today's guest essay, International Living's globe-trotting real estate investor, Ronan McMahon, investigates another foreign opportunity that you can actually access directly - today - with your IRA account. Considering what Bernanke is doing to the value of the currency on which you will one day retire, it's well worth the read...today. Details below.
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| | The Daily Reckoning Presents | | The Best Ways to Buy Foreign Real Estate | |  | | Ronan Mcmahon |
There has never been a better time to buy development land in Latin America. It's a buyer's market...and there are many creative ways to buy - for large and small investors alike.
Many landowners in Latin America are under financial pressure...and buyers are thin on the ground. Sales in many markets have slowed as a result of financial and economic problems in the US. This has kept land prices artificially low, and means that many developers need to tap alternative sources of finance.
This slow-down in demand is temporary. The medium-term drivers in the market are just too strong. One of those drivers is a large group of Americans, born in the years 1946-1964, and dubbed the baby boomers. More than 4.5 million North Americans (mostly baby boomers) are now considering living in, or owning property in, Latin America.
Baby boomer retirement will largely drive the market for overseas real estate in parts of Central and South America for the next 20 years. This trend is in its infancy. Financial and economic difficulties in the US will increase this trend, not retard it. Many retirees simply can't afford to live in the US on their retirement savings. Boomers will look to the tropics for new, affordable lifestyle opportunities. There's more than one way to profit from this trend.
You could just buy retail property (lots, condos, etc)...or you could take another approach: investing in a development.
The biggest returns in development come to those who get in at a wholesale level. Buying large tracts of land, obtaining permits, planning and building, selling and marketing is only for those with the experience, resources and the team to pull it off...or for those of us who invest in the right people.
Today, there are opportunities to get in at this ground-floor wholesale level and let someone else do all the work. But you should look for deals where the developer has the same type of equity at stake as you...so he'll work just as hard for you as he will for himself. Don't invest in a developer who's going to use your money to pay himself a fat cut before he puts your money to work.
Look for deals where you get to participate in the purchase of development land at undervalued prices. This land needs to be in a market you like. Debt should be kept to a minimum.
Most importantly the development team needs to have a track record of delivering projects like this and getting things done. And the deal needs to be structured in a way that you get to enjoy the maximum upside potential. There are a number of ways you can participate at an investment level from your armchair:
Pure equity investment. This amounts to becoming a shareholder in a development company. You make an investment, and you get an agreed number of shares in return. Invested amounts vary from a couple of hundred thousand dollars to seven-figure sums. Some groups offer opportunities where smaller investors can get in with as little as $50,000. Return on investment can take several years - but sometimes deals like this can start making disbursements to shareholders as soon as sales start flowing. I like these deals because investors' returns are uncapped. They enjoy the same upside potential as the developers.
Hard money loans. More and more developers are offering this type of investment as banks tighten their lending policies and credit dries up from other sources. A hard money loan behaves in a similar way to a corporate bond. A developer borrows money from you and agrees to pay it back in a fixed time period. Meantime, you get monthly or quarterly interest payments. Your loan should be backed by a real and liquid asset. You need to be comfortable that in a default scenario you could recoup your investment by selling the asset your loan was secured on. Interest rates can be high, 20% and higher. Unlike the equity play, your return is capped at this level. With the right security available, this can be a relatively easy way to earn an annualized 20%.
Bulk purchase of units. Once a developer has locked down a piece of land, it takes time to nail down the master-plan and get all the relevant permits. During this period, a developer may offer an agreed number of lots in return for a cash investment. In effect, you are buying lots before the master-plan has even been drafted. In return, you get lots at a deeply discounted price to the projected retail price.
Sometimes deals like this are structured in a way that you buy shares, and your dividend payout is lots. You receive your dividend once the master-plan is finalized and permits are in place. I like this type of arrangement because once you are allocated your lots you have control and flexibility. For example, you might want to sell some of your lots to recoup your original investment.
The bulk purchase of lots is perfect for a small or mid-sized investor who wants to retain full flexibility and control over his asset. Again, security is key. You need to be sure that your investment is secured against land or held in escrow until title is transferred on your lot.
For smaller investors, there's another compelling way to invest in foreign real estate...and you may not even know about it. I'm talking about using your IRA.
The IRS is flexible and accommodating when it comes to doing this. You can do this as long as your IRA is "self directed" and you don't work with a custodian who imposes his own investment restrictions.
Many Americans I know have already done this. You can own pretty much any kind of real estate in your IRA or other retirement account. Everything from raw land to single-family homes to condos to office buildings...once the investment complies with some straightforward rules that outline what you can and cannot do. A simple rule of thumb is that your retirement plan is designed to benefit you at retirement and not beforehand. That means that you can invest in any type of real estate, as long as it is an investment and not for personal use before your retirement.
You can buy your dream retirement home using IRA funds today. Once you retire, you can take possession of the property...in effect taking it as a distribution of your plan. Between now and retirement, you can generate income for your plan by renting out the property. You can buy and flip properties within your IRA and you can even use your IRA to buy an option on a property or piece of land.
International real estate continues to offer both diversification and growth opportunities. Diversify your investment portfolio outside the US economy and the dollar into growth markets and appreciating currencies. Real estate in Brazil, for example, continues to rapidly appreciate, while the real (Brazil's currency) has strengthened in value against the US dollar.
So, not only can you finance your dream home using IRA funds...you can put your retirement planning on a more diversified footing. Of course, there are rules and regulations. To find out how to use your IRA funds to purchase international real estate,click here for our free report...and find out how owning that overseas slice of paradise you're dreaming of could be closer than you think.
Regards,
Ronan McMahon,
for The Daily Reckoning
| | | | Chris Mayer's Special Situations Presents... |
American experts call this unconventional new natural gas recovery program...
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| | | | Bill Bonner | | Why True Prosperity Doesn't Come from a Printing Press | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Ooooh...
Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.
Did you pay attention to our "Crash Alert" flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie - that EZ money from the Fed's printing press will cause stocks to rise, interest rates to go down, and the economy to revive.
It ain't gonna happen.
Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It's not. It's a daredevil maneuver in which the Fed funds about 100% of the US government's borrowing needs over the next 8 months.
Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities...or emerging markets...or anything else.
But real, genuine, honest-to-God prosperity? By just printing up money?
Nope. Not possible. It's not that easy.
The risk is that investors may connect the dots. Let's see... Stocks haven't made them any money in 10 years. Yields are still down around 2% - so they can't expect any decent returns from that quarter. And stocks are still expensive - with P/Es close to 20.
So, what can investors expect? Will P/Es go up? We can't think of any reason why they should. Will stock prices rise? Again, they can do what they want...but we can't think of any good reason for them to go up.
On the other hand, we can think of several good reasons for them to go down. The best one is this: that's what markets do. They go from peak to valley...and back to peak. This one was at a record peak in 2000 and then another record peak in 2007...and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed...that valley still lies ahead.
And wouldn't it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in '07-'09. Their houses are down 30%...and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven't saved enough money. So, they're hoping to make some money now.
Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer...and then, like magic, they ARE richer.
But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?
No one knows. But there is no guarantee that the feds' gamble will raise stock prices. On the other hand, wouldn't it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?
Yes it would. Will he do it? We don't know. But it's a risk. Stay out of stocks. Buy gold on dips. Be happy.
And more thoughts...
What's this? The US government was set up to protect the liberties of its citizens. Here's the latest police bulletin from Zombieland:
CHAPPAQUA, NY (AP) - Some parents in a New York City suburb are upset because a local politician called police on two 13-year-old boys for selling cupcakes and other baked goods without a permit.
The Journal News in Westchester County reported Monday that New Castle Councilman Michael Wolfensohn had called police last month on the boys.
Andrew DeMarchis and Kevin Graff had a brisk business selling cupcakes, cookies, brownies and Rice Krispie treats in a Chappaqua (CHAP'-uh- kwah) park.
Kevin's mother, Laura Graff, says the teens are "good kids" who were scared by the police call. She said Monday they haven't set up shop anywhere since. *** Back to Venezuela. Yesterday, we noted that old Hugo is promising to give investors guaranteed returns from government owned industries (including those recently expropriated from private owners).
Well, if you want to make a lot of money by investing in foreign markets you should put your money where blood flows in the streets. And maybe Venezuela is getting close. It is the most mismanaged economy in the Western hemisphere - with the possible exceptions of Haiti and Cuba. In the past 12 years, it has exported nearly half a trillion dollars' worth of oil. Yet, by all indications, the Venezuelan economy is falling apart.
Chavez has not been able to deliver on his promises. Key indicators - poverty rate, literacy, etc. - have generally improved, but not as much as in Mexico and other Latin American countries. And expropriations and continued rabble-rousing has scared off foreign investment.
Voters seemed to turn against Chavez in last month's legislative elections, so the man has turned on the heat. More expropriations. More threatening rhetoric. More nonsensical policies.
We have not followed prices on the Venezuelan stock market, but brave investors might want to have a look.
*** Hey, if Hugo Chavez can guarantee investment returns, why not the US government?
It's coming, dear reader.
Once again, we are grateful for the opportunity to see in real time such spectacularly stupid things as must make the gods weep. Or laugh.
When governments become desperate for money, they take it wherever they can get it. It's probably just a matter of time before they begin to eye the American retirement system. They've been living on "excess" Social Security contributions for many years. That is, people paid more into the system than they got out of it. Until this year. Now the system is in deficit.
So, they're bound to look at 401(k) and other retirement programs.
It was reported in the press that there was a proposal to seize these private retirement plans. Not so. But on October 7th, Teresa Ghilarducci, a professor at the New School for Social Research in New York, proposed to Congress that they introduce a program where workers could "swap their 401(k) assets...for a Guaranteed Retirement Account...that would be composed of the equivalent of government bonds that pay a 3% real return."
How about that? A guaranteed return of 3%. Wait, is that AFTER inflation? Hmmm. Yep. That's what the proposal calls for.
Another crackpot idea...but just wait. The feds will pitch it as a solution to the problem of negative returns in 401 k plans. After inflation, deflation, maybe even hyperinflation, and a bear market...these GUARANTEED returns will sound like a good deal. A guaranteed 3% ain't bad.
This is, effectively, what Argentina did. It nationalized private pension plans to protect retirees! Could the US do it too? You bet.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | “Good Yields” Guaranteed for Venezuelan Investors?
Most of the work of activist governments is hopelessly ineffective and unproductive. But that doesn’t stop them. When their programs don’t work, the feds rarely wonder why. Instead, they force the issue...with more regulation, penalties and coercion. Look at Hugo Chavez in Venezuela.
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| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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