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The Daily Reckoning | Friday, March 23, 2012 Forget emerging markets…let’s go a little farther afield, The EU debt crisis…about to get a whole lot more interesting, Plus, a back door entrance to the fat wallet club and plenty more… ------------------------------------------------------- World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY! Joel Bowman, Reporting from Rancho Santana, Nicaragua... Joel Bowman Emerging markets are for wussies. If you want some real action, head to frontier markets. So says Doug Clayton, the pioneering founder of Leopard Capital. Doug is not interested in tired old emerging market stories like those of the much-ballyhooed BRICs – Brazil, Russia, India and China – except insofar as these giants impact the satellite economies of their respective regions. China, for example, is interesting because of the investment opportunities that it ignites in places like Cambodia (which happens to be the location of Leopard Capital’s H.Q.), Thailand and Laos…all countries in which Doug and his group either have, or are, invested. Likewise, India is interesting for the knock-on effects she has on smaller, lower cost economies of Sri Lanka, Bangladesh and Pakistan. We’re here in Central America to listen to and mingle with folks who have come from all over the world to attend our inaugural Rancho Santana Sessions [insert LINK to CDs]. People are here because they want to discover non-mainstream investment opportunities. So when Doug began talking this morning about the excitement surrounding the recently democratized Myanmar, he had the audience’s attention. With some 139 countries fitting the bill, the frontier market universe accounts for 72% of the total number of countries in the world…and a lot more of its potential profitability. The roads to wealth can be rough, of course….and that’s if there are indeed roads there to begin with. But the rewards for thinking outside and beyond the CNBC world view can be worth the bumpy ride. “If you get in early, when there’s still a lot of game around, the hunting can be quite easy,” Doug assures us. And so if, like us, you’ve never met a line you wanted to join, you might consider paying a little more attention to the frontier markets of the world. The lines are empty...and “you can gain a vital edge,” says Doug, “simply by showing up and having a good look around.” We’re heading back in for the afternoon session now…so we’ll have to leave it there for the moment. But rest assured, we’re plotting and clearing our own schedule to make room for some frontier market research trips in the weeks and months to come. In the meantime, we’ll have to settle for the relatively emerged settings of Nicaragua. Sigh… External Advertisement The China Catastrophe China is about to make an announcement that will shake the world to its foundations – and that will destroy everything you’ve ever worked for. So says a renowned financial journalist on assignment in Asia – and the crazy thing is, he’s famous for being right. He was one of the few to warn of the great tech stock meltdown of 2000 ... the housing and banking bust of 2007...and the recent boom in gold and commodity prices. Is he right again? Watch this shocking free video here, and judge for yourself. The Biggest Fire Sale in History Chris Mayer It’s going to be the biggest fire sale in history — and it begins in 2012. Europe’s banking sector holds 2½ times as many assets as the U.S. banking sector. It’s huge. And it’s in big trouble. Europe’s banking sector needs cash — mountains of cash. As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003–10. “The list of asset sales is the longest I’ve seen in 10 years,” says Richard Thompson, a partner at PricewaterhouseCoopers in London. Knowing how these things work, the final tally could well be double that. The world has never seen anything this big before. Where will the cash come from? This is our opportunity. There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from. Believe me, I know. I was a vice president of corporate banking for 10 years before I started writing newsletters in 2004. I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers. I once had a big real estate deal go bad on me. But I knew I was covered by good collateral twice over. You’d never know it based on the pressure I got to get rid of the thing once the borrower stopped paying and the bank took the asset. I knew, given a little time, I could sell the property and make a bundle for the bank. But the folks at the top didn’t want to hear it. They wanted that bad loan gone. They wanted to wipe it off the books fast. So I sold it quickly, basically at fire-sale prices. It was still the most-profitable loan the bank made that year, because I got a price a good 35% above the loan amount. But the group I sold it to — which could’ve been more patient in marketing the property – flipped it again and made an easy 50% above that. The bank left a lot of money on the table and knew it — and didn’t care. But institutionally, banks can’t really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear ’em out as fast as possible. (Unless you’re swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.) With the EU banking sector loaded with trillions of stuff it must sell, the mouths of knowing investors drool with money lust. These are deals the big boys do. Prem Watsa, the brain behind Fairfax Financial and dubbed by some as “the Warren Buffett of Canada,” gets to do these deals. Wilbur Ross, the billionaire investor famous for investing in distressed assets, gets to do these deals. Warren Buffett he gets to do these kinds of deals. Normally, you need a fat wallet to get in this club. But I recently found a way to get into this “club” that a public-school teacher could afford. One such investor is a guy named Bill McMorrow. You’ve probably never heard his name before. But his current joint venture fund has returned 42% annually since it began in 1999 by buying up distressed property from banks. McMorrow has a lot practice buying stuff from banks. In 1995, he bought up property debt from troubled Japanese banks. In 1997, he waded into Hawaii’s busted property market, picking up a 450-acre land parcel at Kohanaiki on the “Big Island.” In the U.S. financial crisis in 2008, he bought up apartment buildings in California. This is the sort of thing that builds 42% annual returns through the storms of crisis-filled markets. His company and partners recently bought $1.8 billion of U.K. real estate from the troubled Bank of Ireland at a 20% discount to the face value of the loans. “This is a very high-quality loan portfolio,” McMorrow said. “All the loans are current.” There are 170 properties that secure these loans. All of the property is in the U.K., and 60% is in London. It’s a mix of office, multifamily and retail, with a smattering of industrial property, hotels and land. I’m betting he’ll make a mint. McMorrow is a real estate guy through and through. It’s what he knows. He’s been at it for 36 years. So his opinion and track record ought to carry water. “When you look at the opportunities around the world,” McMorrow said, “we really feel over the next three–five years that the greatest opportunities — for all the reasons that everybody reads about now everyday — exist in Europe. The markets here in the United States, although there will always be some opportunities to buy things at prices that we like, have become, I would say, way more efficient. There is more capital and there is more efficiency in the market, so prices in many cases got bid up to the point where we’re probably not buyers.” But in Europe, the banks have to raise cash. I think the EU crisis, as boring as it is, is about to get a lot more interesting as investors get a chance to pick up cheap assets from the biggest fire sale in the history of earth. Regards, Chris Mayer, for The Daily Reckoning Joel’s Note: Chris was one of the speakers here at our inaugural Rancho Santa Sessions. If you weren’t able to join us down here this time, don’t worry. You can still grab an audio set of the sessions right here. Little-known “loophole” could triple investing income In 1986, Ronald Reagan signed a little-known “loophole” into law. Today, the special “10-86 Payback Plans” it created are allowing some Americans to collect as much as three times the income that regular bonds and stocks pay. We’re talking solid yields — without even touching the stock market. Click here now for all the details. 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