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The Daily Reckoning | Thursday, March 1, 2012 Getting less for your dollars in the world’s most expensive cities, A loonie, a Kiwi and an Aussie walk into a bar... Plus, a handful of anti-Bernanke assets to consider, and plenty more... --------------------------------------------------------------- Is this the miracle America has been waiting for? An unbelievable phenomenon is quietly sweeping the nation. The railroad age... the steel age... the electronics age... the technology age — this phenomenon triggered them all. Now it’s happening again! Watch this special, time-sensitive presentation now to find out how it could affect your job... your lifestyle... and your wallet. Sparing No Expense Carry Trade Currencies and the World's Priciest Cities Joel Bowman Reckoning today from Auckland, New Zealand... We hope you enjoy today’s issue of The Daily Reckoning, dear reader. It’s costing us a fortune to produce; NZ$0.68 per minute (up to NZ$29.90 for 24 hours), to be exact. That’s what the hotel charges for accessing the Internet. Seems kind of strange, really. They give us sausages and eggs for breakfast, along with a stellar selection of fresh-squeezed juices and pastries...then, when we’re overfed and slow to compute, they slam us for thirty bucks for a day worth of something Starbucks outlets around the world give away for nothing. And it’s limited data! How are we supposed to reckon when we can’t stream our favorite Justin Bieber songs straight into our headphones? This remote island nation is not cheap, as we’re coming to find out. Just to give you an idea... A 25 minute taxi-ride from the airport to our hotel set us back NZ$75. A modest lunch for two in the Viaduct area cost roughly $150 (rather spectacular wine included, we admit). And the ATMs on Ponsonby Street, Auckland’s hippest strip, sometimes nicknamed “Pon- snobby” Street, keep one in three of your banknotes per transaction...just for servicing fees. O.K., so we’re kidding about that last one...but you get the picture. Not that we’re complaining, Fellow Frugal Reckoner. (We would never do that!) It’s just interesting is all. Plus, money is our beat...both investing it and spending it. And here in New Zealand’s main metropolitan hub, the latter verb is very easy to accomplish. The most recent Worldwide Cost of Living survey, published by the Economist Intelligence Unit (EIU) last month, ranked Auckland the 15th most expensive city to live in the world, up nine places from last year. Wellington, the tiny nation’s capital and home to not more than 400,000 souls on the southern tip of the North Island, tied for 17th...alongside London (and Brussels...and Adelaide). It jumped 16 places on the list. In case you’re interested, Zurich became the most expensive city in the world to live this year, narrowly beating out last year’s top spot, Tokyo. The Swiss capital weighs in at 70% more costly than New York, which, way back in 47th place, tied with Chicago as America’s most expensive city. The Economist’s bi-annual report analyzes the cost of living in 140 cities in 93 countries worldwide, comparing prices of costs such as food, drink, clothing, renting a home, transport, schooling and domestic help. Here’s the top ten list: 1. Zurich, Switzerland 2. Tokyo, Japan 3. Geneva, Switzerland 4. Osaka Kobe, Japan 5. Oslo, Norway 6. Paris, France 7. Sydney, Australia 8. Melbourne, Australia 9. Singapore, Singapore 10. Frankfurt, Germany Turns out your editor is heading to Melbourne AND Sydney in the next couple of weeks...you know, because things are just too cheap in Buenos Aires, even with inflation running (unofficially, i.e., actually) at 25%. Editor of the EIU survey, Jon Copestake, highlighted the role currency swings had on the cost of living in a recent interview with Radio NZ. Stuff website was on the story: “The main issue here is currency movement,” Mr. Copestake said. “It seems that the New Zealand dollar and the Australian dollar have become haven currencies. They’ve had a lot of investment in them over the last few years. And this is what’s really driven the rise up the rankings for New Zealand and Australian cities. “People coming into New Zealand will see the relative cost of living much higher. I think in fact, in a sense, there’s a benefit to Wellington and Auckland people in that they might actually see the cost of imports going down because things will become relatively cheaper in other currencies, and they will actually find maybe the cost of traveling abroad slightly cheaper.” With an annual GDP of roughly $130 billion (driven by a population of just four and a half million), New Zealand punches in roughly the same weight class as Peru (pop. 30 million) and Ukraine (pop. 45 million). Even so, as a popular “carry trade” partner, its currency is frequently among the most traded in the world. And, for the same reason, it is notoriously prone to violent swings. A carry trade is essentially where a speculator sells short a lower- interest-bearing currency (like the Japanese Yen or the once mighty Greenback) and uses the proceeds to purchase a higher yielding currency (like the Kiwi of 2007-08, when the official cash rate was 8.25%, or the Aussie dollar of today, at a relatively solid rate of 4.25%). It works like this (using an NZD/JPN currency pair example): Our trader borrows and sells short an amount in Japanese Yen, paying virtually no interest for the borrowed yen. He then uses the proceeds to buy high-yielding bonds denominated in New Zealand dollars. Thus, our hypothetical trader profits handsomely on the spread between what he pays to borrow yen and what he receives from the New Zealand bonds. [The trades work beautifully, as long as currency-exchange rates don’t move in the “wrong” direction]. Carry trades are big business. And, for a hotly-traded currency like the Kiwi dollar, it can mean big swings (in both directions) that have less to do with the underlying economic strength of the domestic economy and more to do with price distortions perpetrated by carry traders. As such, it’s near impossible to predict which direction the Kiwi — sometimes described as a “cork at sea” currency — will go and, therefore, how the relative pricing power will impact the cost of living in some of the country’s prime locales. Of course, there’s plenty else to consider when looking for a place to reside. Although price it is a big thing, it isn’t everything. If it were, we would recommend you move to the Iranian capital of Tehran, a city noted by the EIU survey as one of the cheapest places in the world to live. Judging by the deafening beat of war drums emanating from inside Beltway 495, it might well have been turned to glass by the time you get there...but that’s another tale for another day. Moreover, there is something to be said about paying for peace of mind when you are in a foreign nation. Maybe New Zealand is overpriced right now. Maybe not. But it is calming to again be in a country where things work. Taxis, although expensive, take you more or less directly where you want to go. The place is clean. Impeccably so. Environmentally, the dramatic backdrop for the Lord of the Rings movies has few competitors on the planet. And you can still invest in a world class, Sauvignon Blanc/Pinot Noir-inspired hangover...just not quite as many of them as in, say, Buenos Aires. Then again, that’s probably not such a bad thing either. Make “Big Oil” pay for your retirement Oil fat cats got rich on $4 gas. Now how’d you like to make them pay you back? This little-known “loophole” let’s you collect up to triple the retirement income most stocks or bonds pay... without touching the stock market... and all while “Big Oil” gets stuck with the bill. Click here now for all the details. The Daily Reckoning Presents Buying “Loonies” Isn’t Crazy AddisonWiggin The US dollar has been rallying strongly for several months. That’s what we call a “gift horse.” And just as the saying goes, “Don’t look a gift horse in the mouth.” Instead, look for ways to exchange your strong dollars for other currencies and investable assets that don’t fly out of Federal Reserve Chairman Ben Bernanke’s printing press. For many Americans, foreign investments are more of an accident than an objective. They might own a few foreign stocks through a global mutual fund. Or they might have some exposure to foreign economies and currencies through the shares of an American multinational corporation like Johnson & Johnson or GE. But American stocks and bonds remain the steak and potatoes of traditional American investment portfolios. Foreign stocks and bonds are merely the spices and sauces. This provincialism — epitomized by the spectacular success of Warren Buffett’s Berkshire Hathaway — has served American investors very well for several decades. But a reassessment may be in order. Simply stated, the America of the future may not reward investors as handsomely as the America of the past. For example, despite doubling from its lows of March 2009, the S&P 500 index has produced a negative total return during the last five years... and only a miniscule return during the last 10 years. The US dollar’s role as the ultimate “safe haven” currency is also due for a reassessment. While the dollar may be safer than the euro, for example, the dollar is hardly safe in any absolute sense. The dollar is safer than the euro... just as a rabid squirrel is safer than a rabid wolf. But you don’t really want to cuddle up at night with either one. America’s federal debt has exploded to more than 100% of GDP — an astonishingly large Greek-like debt load. Yet none of America’s political or financial leaders seem to have any plan for reducing the nation’s debt... except maybe to add a graveyard shift to the dollar-printing production line at the Philadelphia Mint. Our advice: Spend your strong dollars while you can. Reallocate them into other currencies and asset classes. Throughout the eurozone crisis of the last few months, the US dollar has been attracting widespread “flight to safety” demand. But the dollar is not merely rallying against the euro; it is rallying against almost every investable asset on the planet. For example, a dollar buys 36% more silver today than it did six months ago. A dollar also buys 20% more wheat, 13% more corn... and even 2% more “American house.” If we broaden out our analysis to include stocks and currencies, the results are similar. A dollar buys 32% more French stocks today than it did six months ago... as well as 34% more Indian stocks and 18% more Japanese stocks. Among world currencies, a dollar buys 11% more Norwegian kroner today than six months ago... as well as 15% more Swiss francs and 8% more Canadian dollars. It is that last financial asset — the Canadian dollar — that we find particularly compelling as an alternative to holding US dollars. The Canadian dollar, known affectionately as the “loonie,” possesses many virtues. In no particular order: Canadian government finances are fairly solid; US government finances are spiraling out of control. Canada stands out as being one of the few countries that is not only rated AAA by the major credit agencies, but actually possesses a AAA balance sheet... or at least something close to AAA. Canada’s GDP growth is outpacing US GDP growth. Canadian employment growth is booming; U.S employment growth is moribund. The Canadian economy has created nearly 800,000 jobs during the last five years, while the US economy has lost more than 5 million! In other words, the Canadian labor force has expanded by 4%, while the US labor force has contracted by 4%! As a result of these trends, Canada is becoming an increasingly attractive investment destination, relative to the US The Canadian dollar, in particular, is increasingly attractive. The Canadian dollar’s appeal is hardly a new story, but it remains a very relevant story. As the nearby chart illustrates, the Canadian dollar has been trending higher against the US dollar for several years. We expect this trend to continue — more or less — over the next several years. But investors should expect some bumps along the way. Currencies can sometimes bounce around even more than stocks. The Canadian dollar plummeted more than 25% during the depths of the 2008 credit crisis, for example, as terrified investors piled into the US dollar. Once the crisis eased, the Canadian dollar recovered. But the lesson is clear: Currencies can be volatile. If you have a mind to Fed Reserve-proof a strong dollar, we like the Canadian dollar. Regards, Addison Wiggin for The Daily Reckoning Joel’s Note: It’s hard to put one’s finger on the exact date it began, but harder still to deny that the American Empire is in gradual, inexorable decline. It’s nothing personal. All things come to an end...even world dominance. Some say the beginning of the end ticked over in 1913, with the passing of the Federal Reserve Act and the introduction of the Income Tax. Others argue all was well until Richard “Tricky Dick” Nixon cut the dollar’s last, tenuous ties with gold in 1971. Or maybe it was when the military industrial complex found the excuse it needed to kick into overdrive at the beginning of this millennium. Who knows? In any case, the writing has been on the wall for some time. What we do know is that, as the managed economy attracts more and more meddlesome parasites, each with a nosier fix than the last, the boom-bust cycle increases in both frequency and magnitude. This general trend has led Addison to forecast the “Mother of All Bubbles.” Find out what he’s talking about...and discover the safe haven investments you can employ to help protect yourself, right here. ---------------------------------------- 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 at joel@dailyreckoning.com