 | | The Daily Reckoning | Friday, April 22, 2011 |
- Choosing your part in "first world tragedy" or "third world prosperity"...
- The anit-dollar currency and how to diversify your money outside the US...
- Plus, Bill Bonner on Argentine wine, government-sponsored Ponzi Schemes and the road to Hell...
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The View From Atop the World
| Emerging Market Growth and Prosperity from Brazil to China
| |  | | Joel Bowman |
Checking in from Leblon Beach, Rio de Janeiro...
We're a bit foggy-headed this morning, Fellow Reckoner. We blame the locals. Unlike their Argentine cousins who, despite growing some of the best wine in the world, barely drink, the Brazilians really know how to party. Not that they don't have good cause to...
Brazil is on top of the world these days. And the whole world is coming to its cities to catch the view. They'll host the soccer World Cup here in a few years, and the Olympics a couple of years after that. Head down to Ipanema Beach on any given afternoon and you'll quickly discover that the whole country has taken to the running tracks and the volleyball courts. Everybody is in training. They must think hosting the Olympics means everyone gets to compete in it! Well, at least they'll all look good in the grandstands...something the impossibly beautiful people here don't have too much trouble doing.
Oh yes, and their economy is booming too. Their currency, the real, goes from strength to strength. Offshore oil discoveries are coming online thick and fast. And, on the world stage, the Brazilians are carving out a larger slice of the geopolitical pie, pressing hard for more favorable trade deals alongside their "BRIC" brothers and sisters. Just this week the four emerging juggernauts - along with newly christened member, South Africa - agreed to begin transacting more in their own currencies, shunning the once mighty dollar.
"If China buys up Brazilian soybeans," explained Addison in The 5 a couple of days ago, "or Brazil buys finished goods from Russia, such as they are...the countries have unilaterally agreed to transact their deals in real, yuan, or rubles...and now rand...bypassing the greenbacks you have stuffed in your wallet."
Addison's takeaway from the deal? "Get used to it."
Yes, Fellow Reckoner, the world is turning. The "mighty" are fast becoming the "once mighty"...and the "once fallen" nations are registering growth figures the developed world can only dream about.
That's one of the reasons we love to travel. There's something about being in a country with real growth, with real economic expansion and activity that you just can't read about in the pages of a magazine or see on TV. It's real...and it's exciting. You can feel it in the air and hear it in the people's voices. They know that better days are to come, that every sunrise brings with it a new opportunity, a new day to seize. That's not to say there aren't bumps and hurdles along the way, of course. But they are the kinds of bumps and hurdles that one scales on the road to a bigger and better future...not the kind that precede a fall from great heights...to even greater depths.
The world economy today is a tale in two parts. One is the story of the weakening, faltering developed world. It is a tale familiar to readers of these pages, one mottled with debts and deficits and all that goes along with political chicanery and bumbling bureaucracy. It is a story, increasingly, of frustration and despair. The other gives cause for hope and optimism. This is a tale of graduating middle classes, rising wages and living standards and opportunities for the tens of millions who are daily striving to capitalize on them.
Thanks to the age we live in - where one can be in Buenos Aires for breakfast and New York for dinner...where individuals can transact with others anywhere in the world with the click of a mouse - we have an opportunity, largely, to choose which story we wish to take part in. You can invest your money - and your time, your life - playing a part in a "first world" tragedy...or a "third world" rags to riches story.
Readers will choose their own path, of course, and to each his own. For those among us who are curious about the world beyond our immediate borders - and the potential that lies therein - we offer a couple of "ex-US" essays in today's issue.
The first is from Rob Marstrand, who heads up investment research for Bill's Bonner & Partners Family Office project. The second is from our friends over at the Casey Research group. Both pieces were actually penned late last year, but both - for many reasons, as you'll see - are even more pertinent today than they were then. We hope you enjoy this "double decker" edition for your Daily Reckoning...
P.S. If you're really interested in the "Fight or Flight" question - that being, should you (and your money) stay in the US and fight, or head overseas for safer pastures - we'd encourage you to join us in Vancouver for this year's Agora Financial Investment Symposium.
Our conference director, Bruce Robertson, actually sent an email to you this morning with some of the details. Bruce has organized a world class line up of contrarian thinkers and international investors to help you get a better handle on what's going on...and to offer solutions on how you can both protect and grow your wealth, even in the face of crippling rules and regulations at home.
If you missed Bruce's email, you can find all the details about the symposium, including the speaker line up, here.
We hope to see you there.
| | | | Uncovered: A Way to Tap into an "Other" Pool of Government-Backed Income Potential... |
..that only a handful of Americans know about.
And with Social Security becoming less and less of a guarantee, now is the time to act.
Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security.
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| The Daily Reckoning Presents
| Where to Find the “Anti-Dollar” (Hint: It’s
Not Gold)
| |  | | Rob Marstrand |
There's a currency I think of as the "anti-dollar" that continues to appreciate against the US dollar.
Unlike gold, the "anti dollar" can be used to maximize other investments. I'll reveal this currency in a moment.
But first, why would you want an "anti-dollar" in the first place?
The US has a multi-decade history of borrow and spend. Worse than that, it's more extreme today than ever before. The government has to borrow about half of what it spends. And policy makers are printing money like crazy to "stimulate" the economy (even if they do give it fancy names like "quantitative easing").
If there is more money but the same amount of things to buy with it, prices of the things go up, measured in money. This is inflation, and it shows up in different places at different times. Whether its food, gasoline or house prices.
This might sound a bit weird at first, but money has a price like everything else. Looked at in reverse, inflation means the "price" of money has gone down, when measured in "things." Money has lost value. It buys less.
One way to protect yourself from inflation is to have investments in stronger currencies. These can be held as cash, bonds, stocks, or real estate. Where I live in Argentina, the locals keep their savings in dollars, because they keep their value better than Argentine pesos. Everything's relative. But there are much stronger currencies than the US dollar.
One such strong currency is the Singapore dollar.
A hedge fund trader who is a friend of mine recently described it to me as an "Asian version of the Swiss Franc". This is a big compliment. Switzerland's currency has been strong for decades, and is well known as a safe haven in times of trouble.
The reason that Switzerland, and now Singapore, have strong currencies is that these countries live within their means. While the US borrows and spends, these countries earn and save. This is how people get rich, and it's the same for countries. No one got rich by spending money faster than they earned it.
In 2009, Singapore's current account balance - the net money coming into or going out of the country - was a surplus of $26 billion. That was just behind Saudi Arabia, the world's biggest oil exporter. By comparison, the US had a deficit of $420 billion!
Singapore has very low external debt. That means it owes very little to people overseas. Again this is the opposite of the US, which owes trillions to places like China, Japan and Saudi Arabia.
And foreign exchange reserves - the country's rainy day piggy bank - work out at $40,000 for every man, woman and child.
In the future, Singapore has a crucial advantage over Switzerland. Switzerland sits in the middle of the "old continent" of Europe, which looks set for a decade of slow growth and stagnation.
But Singapore sits in the middle of Asia - in fact right on some of the busiest shipping lanes in the world. And Asia is home to 60% of the world's population, and with many decades of fast economic growth ahead of it.
This means that over time the Singaporean dollar is likely to gain value against the US dollar. In fact over the past five years it's gained over 23% in value, measured in US dollars.
That's a really useful kicker to any type of investment. So I'm on the hunt for ways to profit from the Singaporean "anti-dollar". You should be, too.
Regards,
Rob Marstrand
for The Daily Reckoning
Joel's Note: As we mentioned above, Rob is currently heading up research for Bill's Bonner & Partners Family Office project. It's a pretty exciting undertaking, and one we get questions about all the time. ("What's Bill doing with his own money?" being the most frequent.) You can learn more about what Bill and Rob are up to - their investment strategy, ways to grow and protect "family money," etc. - right here.
| | | Expatriate Your Wallet
| | | | Terry Coxon |
If everything you own is held in your own name in your own country, then you are not merely exposed, you are vulnerable absolutely, to whatever decisions the government might make about how you should behave and who gets the wealth you've earned. Tomorrow's new government measure, which might land out of the blue, could be a law that affects everyone, or it could be a rule devised to deal with people like you. Or, it could be an administrative action aimed at you alone. In any case, with all your assets at home, you'd find out how the lobster feels when his trap is being hauled out of the water. Nothing he can do about it.
The only way to protect yourself against the risk of being boiled in a government pot is to keep some of your assets in another country. Depending on how you go about it, the specific benefits you might achieve are:
- Protection from currency exchange controls
- Protection from the confiscation of precious metals
- A lower profile as a lawsuit target
- Income tax planning advantages
- Estate planning advantages
- Easier access to investments in other countries
- A measure of financial privacy
- Practical readiness to move additional assets quickly
- Psychological readiness to think and act internationally when you need to
There are many ways to go about getting those benefits. None is right for everyone, and they all come with some element of cost or inconvenience. Here's the main menu.
Small bank account. A small account at a foreign bank gives you a ready and private landing spot if you ever decide you want to move a large amount of money in a hurry. If you're a US person, the account is non- reportable, so long as the balance (together with any other foreign financial accounts you own) never reaches $10,000.
Large bank account. A large account at a foreign bank also provides a landing spot for anything you want to send later. If foreign exchange controls are ever imposed, the new rules may require you to repatriate the money - or they may not. Depending on the specifics of the new rules, your account may be grandfathered. In that case, the overseas funds would enable you to travel outside your own country while others are forced to stay at home.
A foreign bank account also slows things down if you're ever under attack. It's safe from an instant seizure by functionaries of your own government or by the unassisted order of a court in your own country.
The disadvantage of a large bank account vs. a small bank account is the loss of privacy. If you're a US person, you are required to report your foreign financial accounts if their aggregate value reaches $10,000.
Physical gold. Gold stored in a safe deposit box in a foreign bank is not a foreign financial account, nor is physical gold in segregated storage with a non-bank safe-keeping facility. So a US person can store an unlimited amount of metal that way without triggering any reporting requirements. Avoiding a need for annual reporting is a plus, but don't rely too heavily on the privacy you get with a safe deposit box, since the steps the gold takes to get there may create records of their own.
Foreign variable deferred annuity. As with an annuity issued by a US insurance company, a variable annuity issued by a foreign company is tax-deferred for a US investor until he withdraws the earnings. The annuity can be invested in major currencies or in portfolios of international stocks and bonds. If the annuity is big enough (a minimum of $1 million or more, depending on the insurance company), it can be invested in real estate, a private business, or just about anything else.
It's only conjecture, but if foreign exchange controls are imposed, they are unlikely to disturb any foreign annuity that's already in place, which is a big plus for an annuity vs. a foreign bank account.
A foreign variable deferred annuity isn't private for a US investor. When you buy one, you generally must file an excise tax return and pay a 1% tax, and you must report the annuity as a foreign financial account.
Swiss immediate lifetime annuity. A Swiss annuity that begins paying you an annual income when you buy it isn't a foreign financial account, which may save you a reporting burden. And under a tax treaty with the US, Swiss annuities are exempt from the 1% excise tax. There's nothing private about it, however, since part of each annual payment you receive will be taxable income.
You can make it difficult for a creditor (such as someone who won a lawsuit against you) to get his hands on a Swiss immediate lifetime annuity by electing not to have the option to cash it in. A forced assignment to a creditor generally would not be valid under Swiss law.
Offshore mutual funds. The array of mutual funds available internationally is even broader and more varied than what's available in the US. And, like a foreign bank account, your share account with an offshore fund is safe from a lightning seizure by your own government. But for a US investor, an investment in a foreign mutual fund comes with certain tax disadvantages. They are tolerable if you handle the investment properly or truly ugly if you don't. And your shareholder account would be a foreign financial account and so would be reportable.
Offshore LLC. You can use a limited liability company formed outside your home country as an international holding company. It, not you personally, would buy and hold the overseas investments you want.
An offshore LLC can be designed to be very unfriendly to your potential future lawsuit creditors, even more so than an LLC formed in the US. An additional plus is that while many banks, mutual funds, insurance companies, and other financial institutions shun business from individual Americans, many of the shunners will welcome business from a non-US LLC even if it is American-owned.
An offshore LLC owned by a single US person (or by husband and wife) can elect to be treated as a disregarded entity for US income tax purposes, which makes it absolutely income-tax neutral. Or it can elect to be treated as a partnership, which makes it almost income-tax neutral. The LLC also can be used for estate-planning in the same way as a US LLC.
By the ratio of benefits to cost and complexity, an offshore LLC rates especially high. But it does not eliminate your reporting burden. If the LLC owns a large foreign bank account, you will be required to report it. And there will be annual reports for you to file about the LLC itself.
Foreign real estate. A direct investment in foreign real estate is free of any special US tax or reporting rules. It's just like buying a farm in Kansas. It would also present added difficulties for a lawsuit creditor looking for ways to collect. And it is unlikely that any regime of foreign exchange controls would touch existing foreign real estate investments.
Foreign real estate can also pay you a psychological dividend. Knowing you have a place to go to, should you ever want or need to go, provides a sense of security. That apartment in Buenos Aires or the acreage in New Zealand means you'll never be a lobster.
Foreign real estate partnership. By investing in a private foreign partnership or LLC that owns foreign real estate, you can achieve all the advantages of a direct investment. In addition, you increase your protection against foreign exchange controls and lawsuit creditors because there is no ready resale market for your partnership interest.
International IRA. An IRA or a solo 401(k) is permitted to own anything other than life insurance and so-called "collectibles." Anything.
Some IRAs and solo 401(k) plans own a domestic limited liability company and use it as a vehicle to buy and hold other investments. Such an LLC can own an offshore LLC that does the real investing. As with your direct ownership of an offshore LLC, this does nothing to reduce your reporting duties; in fact, it adds to them.
The advantage of such an arrangement is that it allows you to internationalize your retirement plan. Anything international you might do with your personal investments, you can do with your IRA's investments. And it's the ideal structure if you want to invest in offshore mutual funds. The IRA short-circuits the special tax rules that apply to investments in offshore funds, and the offshore LLC's shareholder account application is likely to get a warmer reception from the fund than would your own American hand knocking on the door.
Private international investment contract. Depending on your circumstances, it may be possible to structure an investment contract between you and an international financial institution that is tax- deferred, non-reportable, and protected from future exchange controls or prohibitions on owning gold. This is custom work, so, of course, it's only practical for large chunks of capital.
International asset protection trust. A properly structured international asset protection trust provides the maximum level of protection from anything that happens in your own country. It does so by leaving you with a measure of influence, but not control, over the trustee. The trustee is outside of your home country and thus is not subject to its laws. And you don't possess the authority to compel the trustee to invest or distribute the trust fund in any particular way. Thus there is no direct means for your own government to impose any regime of exchange controls or investment restrictions on the trust fund.
An international asset protection trust is far and away the most powerful of all financial planning devices. Handled properly, it is virtually impenetrable to future creditors and is especially helpful in estate planning. It is also the most complex device and hence the one most likely to be handled ineptly. And of all the tools mentioned in this article, it comes with the heaviest reporting burden if it is funded by a US person.
Of course, this is the briefest of overviews of a complex topic. For specific guidance on each of the menu items listed, and pros and cons related to your own circumstances, you'll need to seek qualified counsel.
Regards,
Terry Coxon,
for The Daily Reckoning
Joel's Note: With an ever-growing number of regulations and financial restrictions that gradually choke your ability to build and maintain wealth, protecting your assets by getting them out of the country should be a critical part of every investor's strategy. The Casey folks recommend you get started before it's too late. Read more about the 5 best ways to internationalize your assets.
And again, please feel free to join us this year in Vancouver for our annual investment symposium. Details for our Fight or Flight: Your Capital at Risk special can be found here.
| | | WARNING: This is Controversial. It Offends "Gloom and Doomers" |
Here's why it's NOT the end of America...
Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here.
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| | | Bill Bonner
| Warning: Investors Still Confident in the US
Bond Market
| |  | | Bill Bonner |
Reckoning from Buenos Aires, Argentina...
First let us catch up with a news report from earlier this week. Bloomberg:
April 18 (Bloomberg) - Standard & Poor's put a "negative" outlook on the AAA credit rating of the US, citing a "material risk" the nation's leaders will fail to deal with rising budget deficits and debt.
"We believe there is a material risk that US policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013," New York-based S&P said today in a report. "If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns." Well, the press described the news as a "warning shot" or a "wake-up call." Both of those descriptions are fairly positive. You get a warning shot...and you can turn around. You get a wake-up call and you wake up.
But what do you do when you're running the world's biggest Ponzi scheme? Do you stop? Do you "wake up"?
No, you deny it! "Don't worry," you tell investors.
The New York Times:
...Treasury secretary, Timothy F. Geithner...said on Fox Business Network there was "no risk" that the United States would lose its AAA credit rating, disagreeing with Standard & Poor's negative assessment, and said that investors were still confident in government bonds. Well, yes. Investors are still confident in US bonds. Then again, investors were still confident in US houses in 2007...and still confident in US tech stocks in 1999.
It is only because they are confident that bond yields are so low. But what would bond yields do if investors began to be less confident? Imagine where the price of gold would go!
Well, it turns out that confidence goeth before a fall. Especially in the bond market. Bond market cycles move so slowly that a whole generation of investors is led into great confidence...and then another generation mistrusts them forever. The proof comes to us from a report from Credit Suisse, by way of our Family Office strategist, Rob Marstrand. Rob is looking for real returns over long stretches of time. Bonds work...but like everything else, only sometimes. And this is not one of those times. [You'll find out more about our Family Office project here.]
If you go to an investment manager and tell him you want to invest some money for your children, safely, securely, most likely he'll tell you to buy bonds. And he'll be right - but only when the bond market is in one of its boom phases. When it goes into a bust phase, watch out. You could be looking at losses for 50 years. Or maybe even permanent losses.
Rob reports:
The [Credit Suisse] report highlights two major periods when US bonds were in bear markets in real terms. The first was between August 1915 and June 1920. Bond values declined 51% and then remained underwater until August 1927. The recovery period from start to finish was 12 years. Or about the same as the recovery periods for stocks.
But far worse was the second bear market. Between December 1940 and September 1981 bonds fell 67% in real terms. And they took until September 1991 to get back to even. In other words, the bond market recovery period was over 50 years! And some countries have had negative real returns in their bond markets for the entire 111 years covered by the study - including Belgium, Finland, Germany, Italy, and Japan.
US bonds have been going generally up in the US ever since Paul Volcker tamed inflation in 1983. That's a long period in which to form opinions. Not surprisingly, the opinion shaped by this upward stretch is that investors have nothing to fear from US bonds. Confidence is high. But so is the risk of disappointment.
Today, the feds are committed to EZ money. We look around. We don't see a Fed putting on the brakes after a "warning shot." Instead, we see America's central bank going full speed ahead. We don't see a "Tall Paul" Volcker raising rates. Instead, we see "Short Ben" Bernanke holding them down at zero. We don't see an administration "waking up" to the need to cut spending; we see the Obama Team dead asleep on the job, dreaming of more income redistribution, more social programs, more tax-the-rich money raisers...with no real idea of what is going on.
What we see is a huge Ponzi Scheme...where old debts are serviced only by raising new ones. The schemers don't know it, but they're on the road to Hell.
And more thoughts...
Our old friend Doug was right.
We were sitting at a restaurant in Cafayate. The sun was shining. The mountains turned gray...then purple...then mauve as the sun dropped. Dogs walked lazily across the main street. Women pushed their children in strollers. Pickups drove up, parked directly in front of us. Their owners - sometimes ranchers...sometimes winemakers...sometimes backpackers...often Europeans - got out and chose a restaurant.
Cafayate is what a small town should be. It is safe. It is easy. And yet, it has dozens of good restaurants...and some of the best wine in the world.
You can imagine the town hosting a major film festival... You can imagine it becoming a magnet for the rich... You can imagine all sorts of things. And Doug Casey imagines that it will go the way of Aspen, Colorado, becoming a place where wealthy, successful, fashionable people arrive in private planes and build big houses all around town.
We paid a brief visit to Doug's project next to town - a private development that he hopes to turn into a refuge of sanity, prosperity, and joviality, even as the rest of the world goes through what Doug colorfully describes as a "financial sh**storm."
The place is beautiful...with a small lake nestled between the golf course and the vineyards. The main clubhouse, with its unique dome roof, was completed more than a year ago. Now, a spa/gym complex is under construction...along with several new homes. And a new social club is scheduled to begin in a couple of months.
Physically, the place is magnificent. But Doug's real ambition - which as far as we know has never been attempted before, at least not in the world of real estate developments - is to populate his new community with people he personally wants to live near. It is meant to be a community not only of people who share a certain standard of living, but people who also share certain ideas.
The community is almost completely surrounded by grape vineyards. Part of the cost of maintenance is supposed to be covered by the sale of wine. And if that doesn't work, at least residents will have plenty to drink.
*** Speaking of drinking...
We just got word from the ranch. This year, we harvested 3,700 kilos of grapes from our hectare of vineyard. That should produce about 1,700 bottles of wine. Even for us, that's a lot of wine to drink in a single year!
Regards,
Bill Bonner
for The Daily Reckoning |
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