July 29, 2010
Budapest, Hungary

“Take your package and shove it!”

This was the tone set by Hungary’s new Prime Minister Viktor Orban last week as he engaged EU and IMF officials about his country’s bailout package.

Back in the early days of the financial crisis, Hungary’s economy was one of the hardest hit in the European Union.  The EU and IMF moved quickly to stave off a total collapse by promising a 20 billion euro standby bailout package to back the country’s finances.

This package is enormous by any standards, comprising over 15% of the country’s GDP.

As in common in these sorts of deals, though, the IMF likes to dish out a lot of cash and then tell the recipients exactly what they should be doing with it.  This was all fine and well in the last administration, but earlier this year, Hungary elected a new Prime Minister in Victor Orban.

Oban is apparently the sort of individual to look a gift horse in the mouth; Hungary’s most recent talks with the IMF disintegrated into a macroeconomic punch line, and Orban has made one thing perfectly clear to the IMF:

“I run this country, not you.”

As a populist by nature, Orban has ruled out the possibility of any further austerity budget cuts and is instead shifting the burden to the financial sector. The IMF, bond creditors, investors, and financial markets are just going to have to take their lumps under Orban’s administration.

This sentiment has made Hungary a particularly unattractive place for bondholders to hang out. Rating agencies Moody’s and S&P, always the last to show up to the party, are now threatening to cut Hungary’s credit rating to junk; just yesterday, Hungary’s PM acknowledged that their rating would suffer.

All of this adds up to a situation that is as bad, if not worse than what is happening in Greece: no one will lend to them, and they’re just about out of cash. Unlike Greece, though, Hungary looks like it may have to deal with its debt problems alone.

That would leave only a handful of strategies:

1) Inflate. Hungary is not part of the eurozone, so it can print as much as it wants of its own currency to pay off local currency debt, EU inflation targets be damned. As the forint is not exactly a global reserve currency, however, this would lead to substantial inflation in the country, and decimate the exchange rate against the dollar and euro.

2) Tax. Foreign currency debt can only be paid by generating actual revenue, not conjuring it out of thin air. Therefore, Hungary’s government must raise taxes in order to close its budget gap and pay the interest on its debt. This, however, is unlikely to happen with this populist government considering that income taxes are already at 40% at VAT at 25%.

3) Default. This is the ultimate option, and may in fact be their most logical choice. With their sovereign debt likely to be rated at ‘junk status’ shortly, Hungary’s leadership would have little to lose by defaulting… or threatening to default.

This would force the EU and IMF to either back Hungary at all costs, or sit by and watch the country go bankrupt.  Either way, it’s going to be costly for both Europe and Hungary… and here’s why it matters:

Back during the good times when their currency was strong, many Hungarian borrowers took out loans in euro and Swiss francs because those interest rates were lower.

Because the loan balances and monthly payments are denominated in a foreign currency, however, if the forint appreciates then suddenly the borrowers have to come up with more forint each month to meet the minimum payment. This increases the risk of loan default dramatically.

This wouldn’t be a big deal if it were just a few loans here and there… but the total amount of exposure that western European banks have to the Hungarian market actually exceeds the entire GDP of Hungary.

If Hungary breaks and sets off this chain reaction, the markets will experience European Financial Crisis 3.0. I would expect the dollar and yen to surge again in this case as the ‘least worst’ of the major currencies, and all world markets to fall on the standard line of risk aversion.

Stay tuned for more.

July 22, 2010
Krakow, Poland

If you pay attention to currencies much, you’ve probably been following the euro closely over the last few months.  The euro hit its 24-month high in US dollar terms on November 30, 2009, right around $1.50. It’s been on a steady slide ever since.

Earlier this year, serious concerns began surfacing about the balance sheets of many European governments.  The “PIIGS” nations were all simply borrowing too much money; for many, it reached the point where they had to borrow just to pay interest on what they had already borrowed.

Needless to say, this model is completely unsustainable.  Investors’ concerns were justified, and the euro absolutely cratered.  It reached a low in May that had not been seen since 2006.

Over the last six weeks, though, something interesting has happened. The euro has come off of its lows, surging as much as 9%. This is a huge move for any currency, especially one that commands a 30% share of global reserves.

Some level of retracement was to be expected; nothing moves up or down in a straight line forever. To me, the best indicator is simply watching a bit of Bloomberg or CNBC. When all the guests who come on the show talk about euro/dollar parity, it’s time to exit the short position.

What’s been so strange, though, is the reasoning behind the euro’s recent strength. Spain, Portugal, and Greece have all held a series of bond auctions over the last several weeks, each of which was oversubscribed.

In other words, the Greek government found more than enough people to buy yet another 1.6 billion euro (roughly $2 billion) worth of fresh debt in a recent issuance. Markets cheered this optimism, and the euro surged.

Wait a minute. Full stop.

The eurozone has been in a crisis for months because Spain, Greece, etc. had unsustainable levels of debt. Now they’ve all held bond auctions and taken on even more debt… and everyone is happy about this?

Something is definitely wrong with this picture.

Greece’s ability to indebt itself even further is nothing to cheer about, plain and simple. This crisis was set off by too much debt, and increasing those nations’ debt levels should make the crisis worse, not better.

This utter lunacy suggests to me that we are experiencing the early stages of the “race to the bottom.”

The world’s three major open economies– the EU, US, and Japan– are all in major debt trouble, and trillions of dollars of institutional funds are sloshing around the system trying to figure out which one is the ‘least bad.’

For a while, everyone was avoiding Europe like the plague. Now it seems that the market is more concerned about the deteriorating balance sheet of the United States.

I think we’re going to see this game of financial hot potato play out for the next several years. Trillions of dollars of institutional funds will flow in and out of the major currencies, perpetually swapping one for another in search of safety and a reasonable store of value.

The euro will likely be the first of the three majors to fail; this is because none of the sovereign nations in the eurozone can print money– only the European Central Bank has this power.

In America and Japan, the governments can simply conjure more money out of this air. As ridiculous as it seems, this gives institutional investors a bit more confidence. They might not generate an inflation-adjusted return, but at least they don’t have to worry about an outright default… or so they think.

In the long run, smaller currencies like the Australian dollar, Norwegian krone, Canadian dollar, etc. will begin commanding a larger share of global reserves.

The final nail in the coffin, though, will come when a viable alternative to the major currencies emerges. There needs to be a safe home for the trillions of dollars worth of global capital out there… if not the US dollar, Japanese yen, or euro, then where?

China’s renminbi may be the most reasonable alternative in the future, but its economy will not be large enough for another several years. Not to mention, China’s exchange controls need to be dropped altogether before the renminbi could even be seriously considered as a reserve currency.

This will happen in slow, baby steps… assuming silly distractions like global warfare don’t get in the way first.

Meanwhile, be mindful in which currency you’re parking your long-term savings, especially if it isn’t actively invested in meaningful assets. You should be comfortable that your savings instrument is a reasonable store of value… if not, consider alternatives.

You know the argument for gold and silver, so I won’t get into that today. As another option, though, consider offshore real estate, and arable land in particular.

This may be one of the best stores of value you could buy… after all, it’s tough to go wrong when you can pick up great farmland in South America for less than $25 per acre that actually has agricultural yield.

More on this in future letters.

June 23, 2010
Oxford, England

Yesterday in the UK, something happened that has significant implications for us all.

Old western economies are clearly losing their dominance. Particularly in Europe, the costs of broken pension plans and entitlement programs are bankrupting entire economies.

Yet, national governments continue to perversely borrow and consume; politicians have been acting like degenerate gamblers, borrowing money from anyone they could, blowing it all on terrible bets, borrowing more money to make even worse bets, and actually expecting different results.

Something needs to change… and it appears that Britain is the first major western government to face the music. As such, British Chancellor of the Exchequer George Osborne unveiled yesterday what has been touted as ‘emergency’ budget austerity.

Osborne’s budget cuts deep. It hits the elderly, it hits low income workers, it hits single mothers, it hits business owners and investors… it even hits the Queen, who will see her multimillion pound salary frozen for several years.

To give credit where credit is due, Osborne should be commended for looking his nation in the face, speaking about a very grim reality, and being candid about the tough sacrifices that everyone will have to make.

But here’s the scary part, and what we need to learn from:

While there was significant talk in Osborne’s speech about spending cuts, most line items have yet to be fully determined. What they are absolutely clear about, though, are the tax changes.

Britain’s VAT, for example, will increase from 17.5% to 20%.  Many personal income tax rates will rise as well, particularly for high income earners.  These changes will be phased in gradually… except for one.

Osborne announced that Britain’s capital gains tax will increase from 18% to 28% for higher income earners. Yet unlike the other changes which are phased in over time, capital gains tax change occurs IMMEDIATELY.

There is a serious lesson here: governments have the power and willingness to make major changes overnight. With the stroke of a pen, they can impose capital controls, higher taxes, gold forfeiture, confiscation of retirement savings, or anything else they can dream up.

Britain’s emergency budget underscores this point even more, and reminds those of us who aren’t in the UK that we need to prepare NOW.  Why? Because other countries won’t be far behind, including the United States.

At a certain point, President Obama will be forced by circumstance to look the American people in the eye and ask them to sacrifice… and pay higher taxes effective immediately.

Also, it’s likely that the US government will get its hands on private retirement savings some day soon… there’s about $5 trillion out there, and at some point that they’ll mandate a portion of all managed retirement accounts to be held in the ’safety’ of US Treasuries.

I can’t stress this enough– proper financial planning should be an integral part of your multiple flag strategy.

To protect yourself from overnight tax hikes, this means using existing, legitimate tax shelters.  US tax code, for example, provides a means for people to set aside tax-deferred savings for retirement through an IRA or 401(k).

Most of these entities, though, are unfortunately engineered to generate profits for the financial institution who manages the account, rather than the individual who is busting his butt every day to save for retirement.

The best solution that protects your savings from rising tax rates and government confiscation is to hold your investments in an Open Opportunity IRA structure.

Similar to a regular IRA, an Open Opportunity IRA allows you to generate tax-deferred (or tax-free) returns on your savings. Unlike a regular IRA, this structure gives you complete control and flexibility to do what you want with your retirement savings– like planting multiple flags overseas.

With an Open Opportunity IRA structure, you can buy foreign property, store gold overseas, establish an offshore bank account… as well as invest in all the other instruments that you might already be investing in right now with your retirements savings.

The big difference? It’s nearly impossible for the government to get their hands on it.  And if you start investing through this tax deferred structure, you won’t wake up one morning to higher tax rates that will pummel your investment returns… which is exactly what happened in the UK this morning.

This is one of the biggest no-brainers for US taxpayers… even if you’re just starting out, establishing one of these structures provides a long-term solution to generate tax-deferred or tax-free savings as you make contributions over time.

Terry Coxon is a leading expert in this industry; he’s authored numerous books on tax and personal finance issues, and his latest e-book is one that you should absolutely own.

In Unleash Your IRA, Terry explains the real magic behind these structures– how to set one up, how to protect yourself and your assets, and all the amazing things you can do while still following the tax rules.

Click here to get this book now.

I strongly urge you to take action now… continuing to kick the can down the road is a very dangerous course of action given all the warning signs around us.

May 19, 2010
Quad Cities, IA, USA

I wanted to send you a short note today from America’s heartland to tell you what I’m doing with my investment capital, and why.

I’m closing out almost all of my speculative positions and going to sit on the sidelines for a bit because I’m concerned that the markets are entering another major deleveraging period.

Here are the facts which concern me-

1) Interbank lending in Europe is on the decline. Banks are now hesitant to lend to each other for fear and skepticism of what may be on others’ balance sheets; sovereign debt default has everyone worried, and lenders are mistrustful of anyone who may have exposure to the PIIGS.

The consequence is that European banks are now sitting on their cash and not extending credit to businesses, consumers, and investors. As the modern financial system depends entirely on the availability of credit, a major reduction in credit curtails output and demand, reducing asset prices.

We saw how a credit crunch affected asset prices in 2008, and what’s happening with European banks right now is similar.

2) Markets have been incredibly volatile lately, and this trend is likely to persist in the near term. Extreme volatility can often cause capital flight from risky markets, either due to margin calls or risk aversion.

When capital flees markets, prices fall. We also saw this in the autumn of 2008.

3) Government intervention is on the rise. Yesterday, Germany dropped an 800 pound gorilla on the markets by announcing a series of bans on certain short trades. Among the consequences is that credit markets now have reduced capability to hedge their exposure to risky sovereign debt.

In Switzerland, the central bank (SNB) has dramatically intervened in the currency market, boosting the euro by over 225 pips against the franc for a roughly 1.4% gain overnight. This is a huge move for a major currency.

History shows us that government interventions do not stabilize the markets. At best, intervention discourages private capital from participating in the markets; at worst, intervention encourages gross misallocations of private capital by trying to second-guess future interventionist moves.

Either way, the effect is negative for markets and asset prices.

4) Substantial risks still exist which could cause another leg down in the markets and create more capital losses for banks. These risks include sovereign debt erosion (which is happening), continued rise in foreclosures (which is happening), and a major currency crisis (which is unfolding).

In each of these cases, the net result will be reduced lending and credit availability as banks have to focus on rebuilding their balance sheets and increasing loss reserves.

Again, we saw the effects of these risk factors in 2008. Banks have been on the sidelines ever since, and the consequent lack of credit availability created major cash shortages in the broader economy.

The result is a fire sale of all assets, which causes steep price declines.

To be clear, I think this will affect the gold market as well, mostly because of the reciprocal effect of ETF instruments. The SPDR Gold ETF, better known as GLD, is allegedly the largest private holder of gold in the world.

In the event of a market meltdown, significant sales of ETF shares trigger a sale of gold holdings, which would in turn cause a further decline in the ETF shares, triggering more sales of gold holdings.

It’s a cycle of momentum. Just as we saw oil prices quickly rise to $147 in 2008, the inverse of this cycle is a rapid unwinding. Gold could get caught up in this because there is so much ETF exposure. Consider this if you are holding gold for speculative purposes.

Silver, however, would likely fall even more… and that’s why a bet on a rising gold/silver ratio is one of the few speculations that does make sense to me right now. I could see it rising from 63 to 75 or 80 in the near future.

In full disclosure, none of these assessments is a foregone conclusion in my book, but I see enough risk in the marketplace to take my speculative cash off the table… and that’s really what I wanted to tell you today.

I don’t have a high risk tolerance with my money, and when I see one ‘investment professional’ after another on CNBC telling me why I should jump into the markets because everything is rosy, I get really nervous.

The truth is that until there is some finality with the challenges in the eurozone (which will take quite some time), I don’t see how the markets can do any better than trading sideways.

May 13, 2010
Undisclosed Location

Ask yourself an important question: how will you know when the proverbial fat lady is about to sing?

In our regular conversations, we talk a lot about the importance of being prepared… history is full of examples of pigs that got slaughtered for not being prepared, for not heeding the warning signs, and for waiting until it was too late.

For example, we may be able to agree that major currencies like the dollar, pound, euro, and yen are all ‘headed to zero.’ Much is written in the financial blogosphere about the fundamental weaknesses of these currencies, and of the massive, untenable debts that their governments have assumed.

But what does it actually mean when a major currency ‘goes to zero’? How will the world function afterward? And most importantly, how will we know when it’s happening?

As we have discussed before, institutional wealth is generally held and denominated in one of the three major currencies– the dollar, euro, and yen. Why? Because they are the only ones large enough to consistently absorb institutional capital flows.

To put it more clearly, if $50 billion moves into the Costa Rican colon, the colon will spike. If $50 billion moves into the yen, it will barely register a blip.

These three currencies effectively represent the three dominant economies in the world– the Eurozone, the United States, and Japan. As you’re undoubtedly aware, these are also the places with the most debt, hence the largest bond markets where capital can freely flow in and out of.

Each day, however, it appears that investors are losing confidence in these struggling economies. Europe has been the first on the chopping block, and I suspect that Japan won’t be too far behind.

As Europe and Japan fall out of favor, the US bond market is the ‘winner’ by default, at least for the short-term. Investors require a highly liquid, low risk medium to park their capital, and the US dollar is simply the “least worst” of the three major currencies.

Make no mistake, though, institutional investors are looking for an alternative.

This is one of the reasons why gold has been going through the roof, and will likely continue to do so– investors are now starting to choose the gold market to store their wealth rather than rely on suspect bond markets.

The gold market is so much smaller than the major sovereign debt markets, though, so it is not a viable alternative. Gold prices will certainly benefit

So what else is out there? Is there another country with trillions upon trillions of dollars worth of currency units whose large, growing economy inspires the confidence of global investors?

Almost, but not quite… though I think China could be there in a few years.

China is already one of the world’s largest economies, and will likely become THE largest economy by the end of the decade. Furthermore, its substantial pool of savings and ability to produce (rather than compulsively consume and import) certainly inspires the confidence of investors.

Like other governments, Chinese policymakers have inflated their currency; there are trillions of renminbi circulating in their economy. At the moment, though China has some of the world’s tightest exchange controls, and these are what prevent China from being a viable alternative right now.

The Chinese government presently fixes its currency, the renminbi, to the US dollar; they also do not allow the free flow of capital across borders, which is an absolute requirement for investors.

Over the next few years as China’s economy continues to grow, though, the prospect of a more free renminbi is quite likely, and I suspect that the government will slowly take steps to achieve this.

In the long run, the government wants China (and Shanghai in particular) to be the world’s #1 financial center, and they know this requires an open currency and a highly liquid bond market.

Furthermore, as the Chinese economy shifts away from the Asia export model towards domestic consumption, the government will welcome a stronger currency in order to keep imports cheap and inflation under control.

When this happens, you can be sure that global institutional investors will quickly embrace the renminbi as a new reserve currency, and dump the dollar along the way.

This will be the official end of the dollar as the world’s dominant currency, and you’ll know it’s here when you read in the paper about a major Wall Street firm selling renminbi-denominated bonds for a US company’s debt issuance.

At this point, the dollar will truly have become a worthless piece of paper, and all of the world’s wealth will likely have migrated to Asian financial markets. This is when all confidence in the dollar will collapse, and inflation could spiral out of control.

In other words, the fat lady will be hitting her high note.

I suspect these events could take several years to transpire; in the meantime, though, the major signs to watch for will be significant changes in China’s policy towards a more open currency regime.

Next week we’ll talk more about what you can start doing today to protect yourself and your wealth from a sudden currency crisis.

May 12, 2010
Undisclosed Location

First of all, I really want to thank all the well-wishers who were kind enough to write me and wish me luck on my operation yesterday. Everything went off without a hitch, and I’m already feeling much better.

I will unfortunately need to stay in place for a few weeks while I recover and have a few follow-up visits, but I expect to get airborne again quite soon.

To be honest with you, the place I’d love to be the most right now is Greece. I think history is unfolding right in front of us, and I really want to see it with my boots on the ground.

I thought it was absolutely amazing when European leaders came to the table this week with almost $1 trillion to defend the euro against the market’s siege. Yet, by the end of the day after the initial euphoria had worn off, Europe’s support didn’t register so much as blip in the euro’s strength.

Specifically, after the announcement of the trillion dollar support package, the euro finally closed Monday afternoon at $1.27. Prior to the announcement before the weekend, the euro closed Friday at… $1.27. Not exactly much of a difference.

In other words, the market essentially laughed off the government’s trillion dollar pledge of support. Why? A few reasons-

First, no one really believes the European support truly exists, especially not in that magnitude;

Second, even if it did, investors now finally realize that these politicians are simply playing with their own worthless monopoly money;

Third, and most importantly, anyone with two brain cells to rub together recognizes that Europe’s economic woes cannot be contained with more paper money… and now the problem just became $1 trillion worse.

Battling back from an economic crisis requires hard work, savings, and minimal disruption from the government. There’s no magic pill, entitlement program, or paper money bomb that will suddenly make things better.

Instead, governments should be curtailing social benefits that encourage people to be lazy, while simultaneously stripping taxes to the bare bones in order to give entrepreneurs and investors the proper motivation to work hard, take risks, and hire employees.

These things are not happening, nor will they ever happen in the foreseeable future. And so, backed by Europe’s trillion dollar pledge, Greece will likely go back to business as usual… spending money that it doesn’t have, and making its problems exponentially worse.

Last summer, when I was in Europe, I wrote a short piece about the euro. At the time, I explained why it was overvalued (at around $1.43 back then) and that its fair market value should be in the range of $1.18 to $1.25 to achieve similar parity as the US dollar.

In the past, investors were desperate to dump their dollars, and the euro seemed like the most viable alternative. Investors paid a premium for the euro, bidding the price well beyond its fair market value to as much as $1.60.

Today, the euro is once again trading near its fair market value range that I estimated at $1.18 to $1.25. This is because the market no longer views the euro as a viable alternative to the dollar, hence it is not worth paying a substantial premium to fair market value.

Remember, due to the size of their respective bond markets and relative lack of capital controls, there are only three currencies in the world that have the capacity to absorb large institutional capital flows– the dollar, the yen, and the euro.

If you’re a small investor with a few million dollars, you can park that cash just about anywhere without affecting the exchange rate.

But if you’re a large institution with billions of dollars, only the dollar, yen, and euro can consistently absorb huge inflows/outflows of capital without drastically affecting the exchange rate.

For now, those capital flows are moving out of the euro and into the dollar. The reasons behind the ‘europremium’ are gone, so the purchasing power of the two currencies should be roughly the same.

As such, I would be uncomfortable having a short euro/long dollar position in this range unless there were a very clear signal that the euro’s collapse is imminent.

Since the PIGS have a trillion pieces of paper to burn through for the time being, I expect this won’t happen for some time.

Additionally, for the time being, I’m happy to maintain my short euro/long gold position (XAUEUR) as I continue to believe that institutional funds are starting to shun government bonds in favor of gold. This position has returned us 30% since I first mentioned it a few months ago.

May 3, 2010
35,000 feet over the Sonora desert

You’ll have to forgive me for taking the day off yesterday. This past weekend’s Casey Research Summit was simultaneously exhilarating and exhausting… but after standing on my feet all weekend taking rapid-fire questions from hundreds of subscribers, I really needed some time to myself.

As I’m presently en route to see my family for a few days (Wi-Fi on airplanes is a convenient curse), I now have the opportunity to digest everything that happened this weekend and share my observations.

First, I learned that we absolutely need to have our own SovereignMan conference dedicated to internationalization solutions.

The demand for information from this past weekend’s conference attendees was frankly a bit overwhelming, and I recognize now that we need to put together a high quality, comprehensive offshore conference.

This is not a question of “if”, but rather “when”. These things take time to plan and organize, so I’m thinking about sometime this autumn. I don’t commit to anything unless I can make it the absolute BEST, and I promise that our own conference will set the standard for the offshore industry.

In the coming weeks and months, I will have much more to discuss with you about our conference, so stay tuned for that.

I also got a lot of great investment insights from this weekend’s speakers that I’d like to share.

Andy Miller, one of the country’s premier institutional real estate investors, gave a very sobering assessment of commercial property.

In his very informed and experienced opinion, it’s only a matter of time before commercial real estate crashes. The entire industry is using pie-in-the-sky valuations for properties, yet rents and occupancy rates are all falling.

Meanwhile, delinquency rates on commercial property mortgages are rising, and Andy expects this to start having a major impact on the financial sector later this year.

Bill Bonner, the founder and chairman of Agora publishing, also gave some rather interesting remarks. In Bonner’s own words, “things that are very out-of-whack tend to get back into whack,” which means that, in the longer-term, today’s bubbles will have to revert to the mean.

There’s no good reason, for example, why US Treasuries have been rising since 1983. The rest of the world is now loaning money to the world’s biggest debtor at very low interest rates. This is out of whack and needs to be corrected.

Bonner recommended shorting US and Japanese Treasuries (the Japanese bond market is even more out of whack) and going long Japanese small cap companies, which have been in decline since 1989.

You can read excerpts from his speech here.

Finally, Bud Conrad gave what I thought was the best speech of the weekend. Bud has a best-selling book out right now, and his speeches are always full of very interesting data and analysis.

According to Bud, right now the economy is caught in the eye of a hurricane. The first wave of the storm already passed us by from late 2008 through mid 2009. It was devastating, but it blew through.

Now the eye of the storm is upon us. It’s calm, and people think that the storm is over. The second wave, however, is charging towards us, and it could have an equally devastating effect.

As you’re undoubtedly aware, world government are trying to paper over the issue by borrowing and printing enormous amounts of money to drop into their respective economies. This is an absolutely terrible idea, and if you look at the numbers you can see why.

In the United States, for example, the federal government has ’stimulated’ its economy with $385 billion that it never had to begin with. This doesn’t count the trillions in additional deficit spending, or other entitlements / bailouts / guarantees.

You’d think that if the government invests $385 billion in the economy, there should be at least $385 billion in economic growth… and hopefully more.

Not the case. We’ve recently seen a mere $116.8 billion in US economic growth. This means that the federal government has managed to lose nearly $270 billion in money that it had to borrow from the Chinese.

Not only can politicians not generate a positive ROI, but they manage to lose 70% of their investors’ capital. If Uncle Sam were an institutional money manager, he would be charged with criminal negligence and hauled off to jail.

Bud believes that buying gold is one of the best ways to preserve wealth and mitigate looming economic disaster. As for speculative recommendations, Bud also has some really fantastic picks.

His past track record is stellar, including a 93% gain on shorting MBIA on 10-months, and a quick double on wheat futures. In fact, his recommendations have personally put a lot of money in my pocket… so if you want to follow Bud and his monthly insights, I definitely recommend giving his Casey Report a try.

As for my own predictions… well, I’m much more optimistic than most of the other speakers were. I think that there are clearly major challenges that the world has to deal with, or is at least forcing itself to deal with– climate change, resource shortages, overpopulation, economics, etc.

When you think about it, though, these challenges are nothing new. History has never seen a time when there haven’t been wars, genocide, government failures, and general calamity. And yet, humanity manages to limp along just fine despite the consistent corruption and incompetence of its political leadership.

For the sharp, patient, and well-prepared, these challenges provide substantial opportunities to make a lot of money… so rather than be fearful and gloomy, I suggest adopting a more upbeat perspective.

And if you’re not prepared, i.e. your livelihood depends on the very fragile system that is in danger of breaking again, I strongly urge you to focus on making preparations– planting multiple flags; safeguarding yourself, your family, and your assets; and seeking alternate forms of income.

April 28, 2010
St. Michaels, MD, USA

Since I arrived from Santo Domingo on Monday evening, I’ve been enjoying some peace and quiet in this quaint, quiet, wealthy little town on the Maryland shoreline.

St. Michaels is where Porter Stansberry is holding his annual ‘idea conference,’ which he sponsors each year around this time. The goal? He brings together successful people from a variety of backgrounds to discuss their best ideas– investments, business concepts, or anything else of intellectual value.

These events always generate a lot of promising ideas from which everyone can profit; Porter himself tells stories about how a single idea from a past conference generated millions of dollars for his business. I know that I personally will benefit substantially from many of the investment ideas I’ve heard.

While I’m not at liberty to write about everyone else’s ideas in this forum, I can at least tell you what I’m talking about– gold.

As an investment or inflation hedge, gold is nothing new… and to be clear, I am far from a die hard gold bug. But a few months ago, I wrote the following about gold vs. the dollar:

—

“Naturally, the chief reason that Treasuries are considered safe is because they are backed by the full power of the US government’s printing press. Investors are wise to this trick, and smart money will not be fooled into longer term bonds unless there is another financial cataclysm.

As I survey the situation, I’m convinced that gold is nowhere near peaking exactly for this reason. In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.

To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.”

—

Yesterday, we started seeing the first signs of this bifurcation. World markets tanked. The Dow shed over 200 points, silver and copper dropped, oil fell, etc. It was a pretty bad day for bulls.

The dollar, on the other hand, strengthened considerably, especially against it’s ugly European sisters. Accordingly, US Treasuries rallied as worried investors piled into the perceived safety and security of bonds.

Ordinarily when these types of events occur, gold falls right alongside everything else… especially since many gold investors are sitting on large gains, and they’d rather take profits than assume the risk of holding gold during so much uncertainty.

And uncertainty there this… Credit expansion is showing symptoms of a bubble in China. Thailand is having major political challenges. The Eurozone is under intense pressure. Dubai still can’t pay its debts. The British pound is looking like a third-world peso. etc.

Curiously, though, gold rose handily yesterday against the dollar, which itself had risen against nearly every other currency, index, and commodity. This is highly unusual, and I’m considering it a possible sign that the market’s perception of risk may be starting to change.

Specifically, we may have hit the bifurcation point where investors consider gold to be less risky than loaning money to sovereign governments. We’re already seeing this with many corporate bonds that have much higher ratings and lower yields than some first-world sovereign debt.

One of the best ways to play this bifurcation trend for now is to buy gold and short non-dollar currencies. In December, I recommended buying gold at 760 euro. We nailed that one– since then, gold has risen and the euro has tanked… and gold hit a high of 890 euro yesterday. I expect this trend to continue over the medium term.

Will gold go up in a straight line? Absolutely not.

Remember, the value of all the gold ever mined currently amounts to about $5 trillion, only a fraction of world financial market values. Thus, in a cataclysmic financial event when institutional money leaves risky assets for quality, it simply won’t be possible for everyone to pile into gold.

In the longer term, this means that gold will likely have some breakaway runs to higher and higher levels in US dollar terms, similar to how the oil market was behaving in 2007-2008. I think that yesterday’s market reaction foretells this trend.

I would suggest keeping a close eye on the gold/dollar relationship over the next weeks and months as the Greek debacle plays out, and investors start looking at other sick economies like Japan. If the trend holds, it is an extraordinarily bullish sign for gold.

April 26, 2010
Santo Domingo, Dominican Republic

For most people, there are really only three reasons for going to Santo Domingo, Dominican Republic:

The first is to transit to some other, ‘nice’, part of the country.

The second is for sex tourism, which is in incalculable abundance here for both men and women.

The third is to establish residency in the hopes of eventually obtaining a passport from the Dominican Republic.

I’ve spent the last few days here investigating the third.

Local law states that a foreign person may become a naturalized citizen of the Dominican Republic after continuous residence for two years. Obtaining residency, the first requirement, is a fairly straightforward process which the local bureaucrats have been dealing with for years.

Applicants must fill out several forms, provide a letter of guarantee (usually from your immigration lawyer), a police record, health certificate, evidence of financial health, and a few other odds and ends.

3-4 months after filing the application, a provisional residence is granted that lasts for one year. After the first year, the applicant may request permanent residence… which isn’t exactly ‘permanent’ since it must be renewed every three years.

The fast-track investment program to obtain residency in the Dominican Republic is to contribute a minimum of US $200,000 towards certain real estate, financial assets, or local companies.

Officially, once initial residency is approved, it takes two-years of residency in the country before you can apply for naturalization.

While the law is technically unclear, most people are granted citizenship without actually being present in the country for that two-year period. In fact, many applicants only show up twice– first to apply for provisional residency, and second to apply for permanent residency.

After the two year timeline, it can take up to another two years to obtain the President’s signature for naturalization, get published in the ‘Gaceta Oficial’, and be issued a passport.

Unofficially, there is no shortage of bureaucrats working within the government offices that, for a fee, is willing to backdate residency permits and issue a passport within 3-6 months.

This practice has become so widespread and without any discretion whatsoever that the value of Dominican Republic citizenship has eroded substantially.

Passport holders now have heavy visa requirements all over the world, even including countries like Aruba, Jamaica, (oooo I wanna take you), Bermuda, Bahamas… seriously, it’s not just the song. Dominicans care barely go see their Caribbean neighbors, so forget about Mexico, Brazil, the US and EU.

I wanted to address this issue because so many people have asked me about the Dominican Republic; here’s the bottom line:

Taking steps towards Dominican Republic citizenship would not be a terrible idea… frankly, I think second citizenships should be on everyone’s mind, and there are definitely cost effective ways (in some cases nearly free ways) to go about it.

However, since the clean, ‘official’ route in the Dominican Republic can take over 4-years, not to mention possibly tie up $200,000 in a banking system that I wouldn’t want any part of, I believe that there are far better alternatives out there that I’ll be discussing with you soon.

April 15, 2010
Medellin, Colombia

Each year, the junior class at West Point must take a compulsory class in International Relations. Cadets call it “Sosh,” and the major milestone of the class is a mini thesis that ties together current events and irrelevant IR theories.

If memory serves, the deadline is right around Thanksgiving break, and the paper must be turned in by 1600 hours sharp, not a minute after.

The exercise, along with just about everything else at the academy, is supposed to reinforce the Army tradition of timeliness. In this case, though, cadets take the opportunity to poke fun at deadlines.

It’s called the Sosh run– they dress up in strange outfits and make a mad dash across campus with term paper in hand, mocking the deadline. It’s a real crowd pleaser as you can see in this video.

I’ve always thought that tax day could be spiced up a little bit in this way… with large crowds gathering outside the post office at 11:50pm to watch costume-clad taxpayers colorfully parade their disdain for the IRS.

I’d be there cheering them on (or parading) because I despise the IRS. It’s nothing personal, I simply abhor the legalized robbery of wealth from productive citizens to further finance bureaucratic waste.

It is precisely this waste that is driving the US into the ground. Don’t get me wrong, I truly love the country– it’s beautiful, boundless, and as diverse as it gets… but I loathe the corrupt charades of all politicians who further their own ends at the expense of their constituents.

Each year around this time, the government’s wallet gets a little bit fatter with the money that they have confiscated from productive citizens…they’ll blow through it in no time, and then go back to the well for more tax collections and more debt issuances.

Is there anything we can do about it?

Some people simply choose to not pay into the system. Don’t go this route.

Most tax protestors stand behind an argument that there is no actual law requiring an individual to pay income tax. Now, I’m no attorney, but I don’t understand what they are unclear about.

IRC (Title 26 of US Code) section 1 states: “There is hereby imposed on the taxable income of every individual… who is not a married individual a tax determined in accordance with the following table:”

Seems clear to me…

Law or no law, though, it doesn’t really matter. The court system will throw us all in jail if we don’t pay.

The smart move is proper planning.

We’ve discussed Open Opportunity IRAs before as a structure to defer or eliminate taxable gains on everything from gold coins to operating business income.

A properly deployed offshore structure can generate similar results, with the added benefit of additional privacy and asset protection.

Offshore structures get a bad name because people use them to hide money and assets. That’s the wrong idea. The name of the game is full disclosure.

If you file the proper forms and stay within the letter of the law, offshore structures can be a powerful tool that in some cases may even completely eliminate US tax liability.

Moreover, I think the full scope of planning should include planting multiple flags like a foreign bank account, overseas property, and second citizenship.

You might not be ready to leave unless/until things get really bad. But with minimal effort, you can safeguard your assets, reduce your taxes, and have an overseas landing pad ready to go that is generating tax-free income while you wait.

These are the sorts of topics that I will be discussing at the sold-out Casey Research summit in Las Vegas this month. I’m looking forward to meeting subscribers, and I have personally requested that the conference organizers open up a few more slots to our community.

If you’re waitlisted, or you just can’t make it out to Las Vegas, there is something else that you should consider if you want the information.

Recently, my friend Porter Stansberry asked me to participate in a private, members-only teleconference to discuss expatriation strategies. I was joined on the call by one of the world’s premier tax attorneys who specializes in international banking.

We spent about an hour on the phone, feeding off of each other’s knowledge, and it was precisely what I will be discussing at the Vegas conference, including some valuable insider tips on passports and bank accounts.

What I didn’t know at the time was that Porter conducts these ‘closed door’ teleconferences regularly. He invites some of the sharpest experts he can find in the investment world to discuss their ideas with a select group of subscribers.

At first glance, I thought this service was expensive at $800… until I realized that it’s much cheaper than attending a live conference, plus you get 12-full months of expert opinions, plus archive access.

I fully intend on participating again on future calls as a panelist, and that’s why I asked Porter to make this private service available to our community… I wanted to make sure that you still have the opportunity to get this information.

If you’re interested, you can find out more about it here. And try not to laugh when they refer to me as “one of the most dangerous men in America…”

April 12, 2010
Medellin, Colombia

As tectonic plates slowly drift over millions of years, an occasional fissure opens up in the earth’s surface.  We call them volcanoes, and they provide a means for the earth to release some of the intense pressure that builds up over time.

Volcanic eruptions are typically harmless… the earth blows off some steam and everything settles quickly. In rare instances, though, when significant pressure builds up near highly populated areas, an unmitigated disaster can occur.

Over the last few days, several geopolitical hotspots have simultaneously erupted around the world– the violence in Thailand, the coup in Kyrgyzstan, the plane crash in Poland which killed its President, etc.

Kyrgyzstan and Poland are the harmless eruptions that generally blow over… nothing to worry about. Kyrgyzstan is only significant to US interests as a supply base for the pointless Afghanistan conflict, it’s only significant to Russia for ego, and it’s not really significant to the Chinese at all, even though they share a border.

Similarly, Poland has a strong economy and will continue to shine despite the untimely demise of its political leadership.  While the plane crash was truly unfortunate, it may likely highlight how much an economy can succeed when it is unconstrained by bureaucrats.

Thailand, on the other hand, has some potential to be one of the disastrous eruptions.

When I was living there over the last few months, I watched the “Red Shirt” opposition group really step up its anti-government protests– their ultimate goal has been to force new, open national elections.

The Red Shirts have been vigilant in maintaining constant pressure on the current government, even employing creative tactics to garner attention like dumping blood in front of the Prime Minister’s house.

Most of their demonstrations, though, have been largely ignored… until now.

This weekend, the Red Shirts staged another protest in Bangkok that coincided with a major Thai holiday. As protestors stood eyeball to eyeball with Thai military and police forces, it seemed like just another day in Thailand– political demonstrations are incredibly commonplace in the kingdom, so nobody pays much attention.

At some point during the evening, however, gunfire rang out and all hell broke loose.  Over 20 people were killed on both sides with hundreds wounded, and no one seems to know exactly where the gunfire came from or what started the violence.

If you want to see a first hand account of what happened, check out this video from blogger Tony Joh. He gives an incredibly balanced (and colorful) report with his boots planted very firmly on the ground in the thick of it.

(note: If you get squeamish easily, stop watching at exactly 7 minutes into the video.)

It’s funny how death can really get the ball rolling on political issues. A bill might be tied up in Congress for years, but the moment a 12-year old boy dies, suddenly it becomes important.

In Thailand, the protestors haven’t been able to make a dent in their goals despite months of their best efforts. The government has remained in control with the full support of the military, one of Thailand’s most powerful institutions.

Today, however, after so much loss of life, Thailand’s Army chief called for new elections. This is the clearest sign that things may actually be changing in Thailand, and it’s also fueling speculation that the initial gunshots over the weekend may have actually been staged by the Red Shirts.

To be clear, political instability in Thailand is nothing new.  If it’s not political demonstrations, then there are rumors about the King’s health. If it’s not the King, then there’s a new dispute with neighboring Cambodia… it’s always something.

Most of the time, instability in Thailand is totally peaceful, and markets shrug off these events. Despite ongoing tensions, the Thai Baht has steadily appreciated for months against the dollar, and this provides an interesting indication of the market’s perception of risk: blood in the streets is a better bet than 30-year Treasuries.

Today, though, markets woke up to the realization that Thailand may be entering an extended period of instability; it could take months to sort out the consequent election issues resulting from this weekend’s bloodshed– and if something happens to their 82-year old king during that period, the country will be in real trouble.

The Thai stock index dropped 5% today, undoubtedly due to a rush of foreign capital being pulled out of the country. In the near-term, there may be significant buying opportunities in the market as solid companies become undervalued by capital flight.

I’m watching a handful of Thai stock like Bangkok Bank, Bumrungrad Hospital, and Krung Thai Bank, all of which have strong businesses, decent dividend yields, and US pink sheet listings.

March 29, 2010
Mexico City, Mexico

I was reading some US government propaganda disguised as educational literature the other day, something from the Treasury Department and Federal Reserve… it’s the sort of corrupt dogma is typically used to instill blind and unquestioning faith in a defunct money system.

Laughably, I noted the following passage from the Philadelphia Fed’s “Money in Motion,” intended for children aged 11-14:

“For money to be useful it must function as a unit of account, store of value, and a medium of exchange.  To be a good medium of exchange, money must also be portable, divisible, durable, scarce, acceptable, and stable in value.”

In my imagination I see Comrade Bernanke leading a group of America’s youth on a guided tour of the Federal Reserve, reading aloud from this text as he explains the natural of the Federal Reserve System.

“Yes, that’s right. Scarce. As in, cannot be conjured out of thin air. Now please excuse me, children, I need to go buy $30 billion worth of Treasury securities.”

It is for this reason that I really have a difficult time getting behind bonds, particularly US Treasury securities.

In fact, there is a fundamental question that any serious investor must ask: given the government’s massive deficit spending and printing spree, does it possibly make sense to loan this bureaucracy money for 30-years at 4.75%?

Before dismissing the concept altogether on instinct alone, the idea is at least worth exploring.  Consider that there are essentially two ways to make money, i.e. generate a positive inflation-adjusted return on a 30-year bond investment:

First, the investment would be reasonably sound if the US government does not default on its payment obligations, and if the rate of inflation stays below the 4.75% yield for the duration of the bond’s term.

Unless a massive fiscal restructuring occurs soon, it certainly seems doubtful that the federal government would be able to make good on all of its payments for 30-years.

On its current path, the US will eventually be obliged to spend the preponderance of its cash on interest payments, all before buying a single cruise missile or bridge to nowhere.

Given the political no-brainer of having to choose between paying the ‘Chinese,’ or providing for America’s common defense, America’s politicians will clearly choose to default… at least to foreigners that will be branded the new axis of economic evil.

Additionally, the prospect of inflation not spiking beyond 4.75% for the next 30-years also seems quite dismal.  Based on the fiscal hole that will need to be plugged, there are few realistic options beyond inflating the currency and higher taxes.

Higher taxes are like steroids for prices– they experience massive growth, practically overnight. And it absolutely will happen… when people like Bill Gates, Sr. say things like “society has a just claim on these fortunes,” in regards to estate taxes, you can bet on higher taxes.

So, effectively, an investment in 30-year bonds does not appear to be sound since there is significant likelihood of the government defaulting and/or inflation spiking beyond 4.75%.

The other way to make money on bonds is if the value of the bond increases; this would typically happen if future interest rates will be lower than today.

Needless to say, as interest rates are at historic lows, the likelihood that future rates will be even lower is negligible.

The best scenario one could hope for is that interest rates will stay at current levels for the long-term… though the prospect of sustained historic lows for three full decades certainly seems unlikely.

What seems more likely is that rates will eventually move higher, in line with their historical averages. Since 1980, the 30-year has yielded 7.80% on average.  If this occurs again, the market value of today’s 30-year bonds will fall substantially.

Overall, given the prospect of inflation, default, and declining value, US long-term bonds are clearly financial folly, especially when one considers the risk-adjusted, inflation-adjusted return.  There’s less risk in stuffing it under your mattress.

Finally, it’s worth noting that, since December, the 30-year yield has been quite volatile. Just in the last week, the yield has risen 20 basis points, which is not insignificant.

Former Fed Chairman Alan Greenspan recently called this a ‘canary in the coalmine,’ suggesting that the rapid rise in yields indicates the market’s intense concern for the growing federal debt.

Clearly, Greenspan has an agenda. He’s doing his best to shape a historical legacy that doesn’t blame him for the current economic mess… which is completely laughable. Regardless, though, he’s probably right on the money about the treasury yields.

It’s possible (and likely) that another panic will send investors rushing back into the perceived ’safety’ of bonds, pushing yields down and bond prices up.  This would be a short-term anomaly, though, and mostly affect the 12-month and 2-year notes much more than the 30-year bond.

Overall, I’m short 30-year debt, and I think this is long-term low-hanging fruit. There are a variety of ways to play this, which I can discuss in future letters if you’d like.

March 16, 2010
Pattaya, Thailand

Several months ago, I told you about a strategy for building substantial wealth and planting an important flag with your Individual Retirement Account.

There are a few trillion dollars worth of retirement savings trapped in the United States, the vast majority of which is eeking out inadequate returns that make the money managers rich and leave the rest of us grateful for crumbs.

With this important strategy, though, anyone’s IRA can be unchained and free to invest in whatever you see fit– physical gold and silver coins, foreign real estate, Asia/Pacific currencies, etc. But these examples only scratch the surface.

It’s called an Open Opportunity IRA, and at the time, I described this strategy as the biggest investment “no brainer” I’d seen in a long, long time. Today, it makes even more sense… and here’s why:

This year, for the first time ever, the IRS has opened up a window for everyone to convert their traditional IRA into a Roth IRA.  Frankly, I think they provide these retirement incentives because they know that social security is broke, so they try to give responsible savers an extra leg-up on retirement.

The huge plus for making the conversion to Roth is that when you eventually withdraw the money, it’s tax free.  Naturally, though, the IRS will tax you on the value of your retirement account when you make the conversion… but if you have one of these Open Opportunity IRAs, you can cut the tax bill in half!

For an IRA worth $200,000, the savings could be nearly $40,000. It works, and it makes a lot of sense.

Furthermore, most people have unfortunately little control over their retirement savings… they’re only able to invest in pre-packaged products with often meager returns.  That’s because the large, retail money managers have a larger incentive to make themselves rich than to make you rich.

What most people don’t know is that IRA’s were designed to be much, much more. Being able to take the gloves off and invest your retirement funds in just about anything on a tax-deferred or tax free basis is really the best game in town.

When I first started talking about this last year, it was before the IRS conversion change… and I didn’t really have a great resource to refer you to.

Fortunately, my friend Terry Coxon, best-selling author and renowned economist, just released a new e-book about the topic this week.  It’s called Unleash Your IRA, and I cannot recommend it more highly– it’s a highly actionable guide that walks you through Open Opportunity IRAs step-by-step.

If you have an IRA, you should consider this book. Terry is highly respected for good reason– his thoughtful work is always full of value and insight, and in his new book, he takes on a topic that EVERY American needs to fully understand and exploit… and yet it’s something that almost nobody knows is even possible.

Click here for more information.

March 15, 2010
Pattaya, Thailand

I was laying in bed sick recently watching Conan the Barbarian… yes I admit it. Some people eat chicken soup, I drown myself in cheesy Hollywood violence.

If you haven’t see it, you’re not missing much of a plot– Arnold Schwarzenegger at his physical prime wields a big sword and searches for treasure to plunder.

As I watched the Governator decapitate his foes two at a time, I couldn’t help wondering if this was the image that Nouriel Roubini had in mind when he called gold a “barbarous relic” in the highly publicized tit-for-tat argument he was having with Jim Rogers…

In blasting gold and gold bugs alike, Roubini indicated that gold is a new bubble waiting to burst, and that the idea of $2,000 gold is merely speculative fantasy.

To be clear, I am not a gold bug… but I’ve found Roubini’s comments to be off-the-mark. How can there be a gold bubble without widespread gold mania? Wait until the shoeshine boy is having conversations with his customers about Eagles and Maple Leafs… that’ll be a clear sign of mania.

With all the ‘Cash for Gold’ locations I’ve seen sprouting up all around the world, we may be in the very early stages of developing this mania, but for now, the vast majority of people still don’t own a single ounce.

The chief problem with gold is that there is no reasonable way to value the metal, so it will be impossible to quantify when the metal finally has reached bubble phase.

Sure, there are a plethora of technical indicators and moving averages to consider, as well as a comparison between the market value and its production costs… but there is no clear means to define a clear price for gold.

As an example, you can value the balance sheet of a company against very clear, quantifiable assets– cash on the books or dividend yield for example– and determine if the company is undervalued or overvalued.

There is no similar approach for gold… and this makes direct pricing predictions the stuff of wizardry and good headlines.

My suggestion is that, if you want to speculate in gold, it’s probably better to buy shares of gold mining companies instead, which have audited assets and earnings to evaluate.

I view physical gold, on the other hand, much more like a form of cash instead of a speculation… a form of cash that is totally private, uncontrolled by any central bank, and to be used in emergencies only.

To give you an example, I have a euro bank account.  I don’t watch the euro spot price all day, buying/selling the currency based on its fluctuations against the dollar and constantly recalculating the accounts value in dollar terms.

Rather, I only care that the bank holds on to my euros and that I can access the funds to buy things priced in euro. If I have 100,000 euro in the account, I look at it as 100,000 euro, not whatever value it has in dollars at the moment.

I look at gold in the same way. I accumulate gold as money, and I even travel with a bit of it just in case I wake up one morning and find that the global financial system has completely collapsed.

(when you travel as much as I do, this is the best insurance policy, along with a second passport…)

The other benefit to me is that there are no reporting requirements, and no unpaid government spies that snoop over what I’m doing with my ounces. This form of financial privacy is definitely worth considering.

In terms of market value, though, I do not pay much attention to the fluctuations of the gold price in dollar terms, up or down.

I will not cheer if it hits $1,500, nor will I cringe if it drops below $1,000. Just like my other foreign currency holdings, the value of my gold in dollar terms has little significance… besides, obsessing too much about its dollar value defeats the purpose of accumulating gold to begin with: having a private alternative to the dollar.

Tomorrow I’m going to talk about a unique way to buy gold, write-off the storage costs, and hold it overseas in a tax-deferred or tax-free vehicle.

Stay tuned.

March 10, 2010
Pattaya, Thailand

Yesterday I apparently declared a premature end to major combat operations against the virus that has invaded my body.  Maybe it was just the celebratory Mexican food I ate last night to commemorate the end of my 4-day sickness, but I now seem to be experiencing my own W-shaped recovery.

Always the optimist, though, I’m actually grateful for a few things; namely, I’ve been too consumed with the rugby match being played inside my cranium to pay much attention to the most recent socialist musings of European leaders– something that would ordinarily have me spitting fire at the magnitude of their arrogance.

Most glaringly, Greek Prime Minister George Papandreou has been on a bicontinental tour seeking political support to eliminate some forms of derivatives trading… all with the goal of preventing “unprincipled speculators” from making money by betting on a Greek default.

Rather than misdirecting his criticism at speculators, though, Papandreou should look no further than the nearest mirror to levy criticism.  As a legendary Greek political family, three different Papandreous have spent a combined 10-years as Prime Minister, so there has been ample opportunity to get spending under control.

To lay blame at “unprincipled speculators” as a chief cause of the Greek crisis is thus completely ignorant and hypocritical.  Not to mention, Papandreou should be courting speculators to buy his country’s debt, not vilifying them.

His biggest ally in Europe right now is German Chancellor Angela Merkel. As head of the continent’s largest economy, she is completely on board with the idea of banning credit default swaps (CDS) for the sake of speculation.

A CDS contract for sovereign debt is a bit like an insurance policy designed to protect the downside risk of a bondholder in case the country defaults. As you could imagine, the price of the CDS contract rises and falls based on the creditworthiness of the bond issuer.

As an example, an investor who owns a lot of Greek debt may want to enter into a CDS contract so that he will receive a payout if Greece defaults. As part of the deal he makes payments (like an insurance premium) to the CDS counterparty… who is… guess what? A speculator!

Without speculation, there would be no counterparty on the other end of the deal, and without these credit default swap insurance policies, no one would be willing to buy Greek debt because the risk would be too high.

Meanwhile, in the opposite corner of Europe, UK Prime Minister Gordon Brown gave a rather frantic speech today as he struggles to stay relevant in the upcoming election.

For the duration of his remarks, Brown defended his response to the financial crisis, indicating that the borrowing and printing of unprecedented volumes of money were the only sensible things to do given the situation, and insisting that he is the right man to lead his country through the recovery.

When you look at the data, though, despite all the money he has been borrowing, printing, and spending, it doesn’t seem to be doing the UK economy much good.

Ah, nevermind those “conflicting statistics,” Brown said. And as for the UK’s AAA credit rating, which is under serious scrutiny due to the country’s significant debt and deficit, Brown insists that his country will not be downgraded.

How does he know? Apparently his gut told him. Or maybe his cat. Because he sure as hell didn’t ask Fitch, one of the groups responsible for the UK’s ratings.

Ironically, Fitch’s head of sovereign ratings recently said: “Britain had seen the most rapid rise in the ratio of public debt to gross domestic product (GDP) of any AAA-rated country. . . Why the UK thinks it has more time than other countries [before being downgraded], we’re not sure.”

Like most career politicians, Brown is completely clueless, yet concerned only about being reelected.  This is truly sickening, but unfortunately all too common.

So what are the investment implications of Gordon Brown continuing to ravage his economy, and Merkel handicapping European market liquidity?

For starters, I believe this will result in capital flight.  Of the major currencies in the world that can actually absorb huge capital flows, the dollar is, believe it or not, the least ugly one at the moment, so there will likely be some continued dollar strength against the pound and euro.

Not to mention, a stronger dollar would be most welcome by Europe’s exporters.

As the dollar is, however, fundamentally weak, I would expect the European currencies to post an even larger decline against the strongest Asia-Pacific currencies, as well as precious metals (a position I first recommended in December).

Lastly, I don’t think that any of this news is good news for European equities, and I personally plan on taking a large short position in those markets with some protective options.

To be clear, I will make a lot of money on these investments if Europe continues down this path of destruction… and I suppose that makes me an “unprincipled speculator” too.

March 4, 2010
Pattaya, Thailand

It wasn’t too long ago that there was a concrete dividing line down the center of Europe with large scale nukes pointed at both ends. It wasn’t long before that when two sides were battling it out in Normandy, or in the trenches before that.

Throughout the last thousand or so years, in fact, there are few and short-lived periods of peace among European countries. Just in the last 200 years, over 60 wars and armed conflicts were fought between at least two European powers.

This is why the whole idea of Europeans patching up their differences and playing nice under the auspices of a central bank-controlled fiat currency makes absolutely no sense at all.

I’m not trying to predict another armed conflict here… but these are sovereign nations who have a rich cultural history of going to war against each other to expand their sovereignty. For the past 10-years they’ve given up their sovereignty to the European Central Bank… and for what?

It worked for the better part of a decade because times were good. Now times are tough, and the alliance is frayed once again.

My friend Porter Stansberry (whom I believe to have one of the best common-sense investment approaches in the business) recently wrote, “next to corn-based ethanol, the euro might be the worst large-scale political/economic experiment I can think of…”

Agreed. Now, I discussed this all last week and don’t want to belabor the issue… but I would like to raise two important points:

1) As a rule of thumb, never base your economic analysis on anything that any government tells you.  Yes, Greece is sounding the ‘all clear’ bell because it’s raising taxes to plug the budget gaps. But anyone who understands basic economics should be running away, despite the ECB’s encouragement.

2) Don’t be a contrarian for contrarian’s sake. Some people are constantly looking for an angle, and that angle is to do the exact opposite of what everyone else is doing.

That line of reasoning works if the fundamentals make sense. But occasionally, even the irrational market knows what it’s doing… just ask the people who bought Lehman stock as it was collapsing, thinking that the market had it all wrong.

There’s being a contrarian, and there’s bringing a toaster with you into the bathtub.

I’m telling you this because I recently read a contrarian blogger’s essay on the coming financial tsunami… originating not from European economic challenges, but from an imminent -Singapore- debt crisis.

Singapore?

The blogger described how the debt problems in Greece are nothing compared to the debt problems in Singapore, indicating that Singapore’s debt to GDP ratio is a ‘whopping 99.2 per cent.’

Let me pause for a moment and explain something about this number.

Debt to GDP ratio is one important measure of a country’s economic health– in a way, it’s sort of like a nation’s body fat percentage.  You could be a skinny-mini with a really high body fat percentage (Seychelles), or you could be a 250 pound pro-athlete with a really low body fat percentage (China).

Decreasing a nation’s body fat percentage and thus promoting economic health requires going on a diet (paying down debt by cutting spending) and/or adding muscle mass (real GDP growth).

Greece is having its current problems because its body fat is too high, it doesn’t have the discipline to go on a diet, and it’s too old and broken to hit the gym anymore.

In fact, Greece has hit the tipping point where it has to borrow money just to pay the interest on the money that it’s already borrowed… these are nearly irreversible challenges despite any cheerleading you hear from the government (see point #1 above).

Regarding Singapore, the debt-to-GDP ratio of 99% is completely and totally overstated. Singapore’s actual debt is a small fraction of that– the government routinely runs a budget surplus and doesn’t have the terminal debt addiction that other developed nations are afflicted with.

The reason Singapore’s debt ratio is so overstated is because of the way that the IMF conducts its accounting:

With just a thousand dollars or a million dollars, people with spare cash simply hold it in a bank account. Large institutions with hundreds of billions of dollars, however, need safe, highly liquid debt markets to hold cash for the short-term.

Thus, in order to attract institutional capital flows, Singapore runs a high volume, robust sovereign debt market. It has to, otherwise institutional investors wouldn’t take it seriously as a global financial center.

Unlike US treasuries which are consumed and reissued in a dangerous and unsustainable ponzi scheme, Singapore’s bonds are investment securities that facilitate liquidity in the secondary market.

Because of IMF accounting rules, however, these bonds count ‘against’ Singapore and are included in the country’s debt.

The global economic crisis has certainly hit Singapore squarely on the chin, but to say that the next financial Tsunami will result from a Singapore debt crisis is just being a [misinformed] contrarian for contrarian’s sake.

March 2, 2010
Pattaya, Thailand

Thanks to completely draconian US-led regulation, opening a bank account anywhere is about as fun as a barium enema.  Opening a foreign bank account can be an even greater nightmare.

Most of the time, a foreign bank will want you standing there, in person, to open an account, as well as to provide a seemingly endless array of notarized documents, stamped papers, and letters of reference.

Trust me, it’s not their preference either… in order to keep from being blacklisted by the OECD, though, banks have to resort to this level of bureaucracy.  They’re called “Know Your Customer (KYC)” rules, and the idea is to over-collect personal and financial information in order to determine that a bank customer is not a terrorist.

Anyone with half a brain can see that this is one of the stupidest notions in the world.  It’s like locks on a door– if someone wants to break in, a pithy little lock is not going to stop him.  Similarly, if a “terrorist” (I hate even using that word) wants to open a bank account, an avalanche of paperwork is not going to stop him.

As an example, I would point to accused arms dealer Victor Bout who currently sits in prison right here in Thailand; Bout was placed under US and UN sanctions back in July 2004, and yet he was still able to register numerous Delaware companies with bank accounts.

All the KYC regulations do is make it much more difficult for everyone else.

In our regular conversations, we’ve talked about the importance of having a foreign bank account… it is an essential flag to plant overseas, and you want to really consider low-tax jurisdictions with a strong, stable financial sector that have a history of not plundering the banks.

This includes places like Switzerland, Hong Kong, Singapore, Panama, UAE, Qatar, and a few others.

Many people understand the need to move some money out of their home country but are simply unable to take a far away trip just to open a bank account.  If you’re one of these people, here’s an easy back door. It’s less than ideal, but it works.

The first thing you need to do is pick your banking jurisdiction, i.e. Hong Kong, Singapore, etc. and then find a large multinational bank in that jurisdiction that has a branch near you.

As an example, I will use Hong Kong and HSBC… though there are other jurisdictions and banks that you could use as well (Standard Chartered, etc.)  HSBC is a good example because it has a presence in more than 60 countries, and you’d be hard pressed to find a civilized place that does not have a branch.

Among HSBC’s many branches are offices in Los Angeles, Miami, Vancouver, etc. So first you call HSBC in Hong Kong, explain that you are a foreigner, want to open a bank account, and would like to certify all the paperwork through your local HSBC branch.

The HSBC rep in Hong Kong will fax you all the appropriate paperwork, and when you have completed the documentation requirements, you should get in touch with the nearest HSBC branch in your home country and make sure they have “international banking services” available.

Let’s say you live in Orlando… that means you should head down to Miami, and the Miami branch will validate all the documents on behalf of the Hong Kong office.

Afterwards, the Hong Kong office will receive the documents and finalize the account opening.

This is the fastest and easiest way to open a foreign bank account without actually having to fly to a foreign country and go through the process on the ground.

The obvious disadvantage is that many people do not want to deal with a large, multinational foreign bank like HSBC, Standard Chartered, etc. I agree; it’s better to deal with a solvent local bank that does not have a large international presence.

However, unless/until you are able to get on a plane and fly to Asia, Europe, or the Middle East, this is one of the best and most cost effective interim solutions.

To be clear, even though you are opening it through a local branch in your home country, the bank account will be considered foreign and based in the offshore jurisdiction that you chose. If you are a US citizen, this obliges you to file US Treasury form TDF-90-22.1 by June 30 of each year.

March 1, 2010
Pattaya, Thailand

There’s something not right with the world.

Yes, I’m dismayed by this weekend’s earthquake in Chile (I really adore the country), and am quite disgusted by the US government’s extension of the PATRIOT Act. Fortunately, I know the Chileans will pull through just fine, and the US government will eventually collapse under its own weight.

What’s really grabbing my attention right now is what’s happening in the markets.

A few weeks ago I wrote about “Lessons from the Intelligence Business,” in which I discussed the Gold/Silver ratio as an indicator of economic expectations. The higher the ratio (the more silver it takes to ‘buy’ gold), the greater the indication of uncertain expectations in the marketplace.

Similarly, and perhaps more importantly, I pay very close attention to the “TED Spread,” which is essentially the rate difference between three-month Treasuries and LIBOR. In other words, the TED spread (Treasury/EuroDollar) is the difference between what banks pay each other for 3-month loans, and what the US government pays.

Naturally, since the US government is erroneously deemed “risk-free”, the banks’ rate is higher… usually averaging about 0.3% to 0.5%, or 30 to 50 basis points higher than the Treasury rate. When times are tough and banks are going out of business, the TED spread rises– it peaked at 460 basis points in October 2008 when banks were terrified to lend to each other.

Now, the opposite is happening.

For the last several weeks, the TED spread has dropped on an almost daily basis, well below its normal range and moving averages. In fact, its current value of 13.71 basis points hasn’t been seen since… well, hardly ever.

Even during the rip-roaring good times of 2003-2006, when banks would throw money at everything and “risk” was just a punchline at happy hour, the spread was still within its normal range.

The TED spread is dropping for two reasons– first, the yield on 3-month treasuries has been inching up lately as investors are starting to demand more for their loans to Uncle Sam.

Second, the three-month LIBOR rate (at which many non-US banks lend to each other) is less than half of the rate from 6-months ago. This suggests that banks are now much more comfortable with their balance sheets and willing to lend to each other.

Both of these factors occurring simultaneously in such a dramatic fashion portends a significant correction.

Some may suggest that the low TED spread is simply an indication that the global economy is recovering. Possibly. If you read this letter each day you know that I have a relatively upbeat view of things given what I see on the ground.

But the TED spread being much lower than its levels during the bonanza times is simply insane.

There is much greater risk and the need for caution in finance… and banks know this. The more likely scenario is that investors are starting to become skeptical of sovereign debt– and rightfully so, considering Dubai, PIIGS, and the US treasury ponzi scheme.

Two months ago, after spending a great deal of time in China and listening to their anti-treasury saber-rattling, I wrote about investor skepticism towards sovereign debt:

–
“Naturally, the chief reason that Treasuries are considered safe is because they are backed by the full power of the US government’s printing press. Investors are wise to this trick, and smart money will not be fooled into longer term bonds unless there is another financial cataclysm.

As I survey the situation, I’m convinced that gold is nowhere near peaking exactly for this reason. In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.

To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.”
–

What we’re seeing right now could be evidence of this shift in risk perception– that gold is starting to be considered ’safer’ than Treasuries. The low TED spread suggests an aversion away from sovereign debt, and the high gold/silver ratio indicates that investors are putting a lot of faith in gold as a protective measure against uncertainty.

Because nothing moves up and down in a straight line, though, and as the TED spread is at historic lows, I would expect a correction, at least back to the range of 20-30 basis points.

I absolutely consider this low-hanging fruit at the moment, and I’d encourage you to consider investments that bet on the spread between the Treasury rate and LIBOR widening beyond its current level.

February 16, 2010
Bangkok, Thailand

The popular press has been bandying a lot of cute acronyms for the ’sick’ European countries. I have seen PIIGS, STUPIDs, and DUHs… and while the individual circumstances of each country are different, they all have one thing in common–

Their obligations far exceed their assets, and they have to borrow money just to pay interest on the money that they’ve already borrowed.

We don’t need a new acronym because there’s already a word for it: junkie. Before too long, the entire euro zone may be heading in this direction… in fact, while the final nail may be a long way off, markets are clearly starting to build a coffin for the euro.

To give credit where credit is due, I believe that Doug Casey and Jim Rogers were among the first well-known figures to declare the euro ‘doomed’ from its inception.

Their idea, long dismissed as a delusional paranoia for the better part of a decade, is now cascading through financial markets as a distinct possibility.

I came to my own conclusions a few years ago when I was traveling through Europe looking for cheap property; I didn’t find any. European costs are much higher than most of the world, and one of the chief reasons is that the governments tax everyone and everything to death.

Yet, despite the high taxes, most European governments were still run budget deficits to pay for legions of useless, omnipresent government workers and social welfare program.

I remember the day very clearly when I came to this realization– I was sitting on a train bound for Giulianova on the Adriatic coast with a gorgeous Italian girl, and the newspaper headline she was reading said “Italy’s budget deficit to exceed the EU limit of 3% of GDP”

That was in 2004 when times were good. I remember thinking to myself, ‘How are these people going to make it during a down cycle when they can’t get their act together during the up cycle?’

More importantly, since European tax rates are among the highest in the world, and the individual governments of the eurozone cannot simply print more money at will, the only way out of a fiscal pinch is to borrow.

It seems so strange that Italy, which collects 43.4% of GDP in tax revenue, can’t figure out a way to make ends meet… and because it cannot realistically squeeze out too much more tax revenue, the government must borrow compulsively.

Italy’s debt level is now well-over 100% of GDP, and investors are rightfully worried.  Given the even more dire situation in Greece, markets are now finally starting to question the legitimacy of the common currency euro zone.

Like all fiat currencies, the euro is fundamentally toxic. It is in a unique situation, though. Unlike the US, European governments don’t have room to raise taxes because their taxes are already so high. What’s more, they have many more social welfare programs and lack the political will to cut them.

That makes Europe first in line for judgment day.

The junkie countries like Greece and Italy will be the catalyst– they refuse to cut their budgets with any serious meaning, and are thus unable to raise any more debt capital from the markets.

That only leaves the prospect of a bailout from Europe’s stronger nations… except that even Germany and France cannot withstand the brunt of multiple bailouts. Obviously, if Greece is bailed out, Spain, Italy, etc. will line up with hat in hand as well.

And while the Greeks may be holding mass demonstrations to protest budget cuts, what will happen when the French start rioting in the streets to protest Greek bailouts?

European financial solidarity cannot stand, and there is no long-term solution except for a breakup of the eurozone. For now, the politically expedient answer is the current dog and pony show– bureaucrats gripping hands in a charade that is long on theatrics, short on substance.

Eventually, though, and it will have to be soon, something has to give. Greece is going to run out of money in a few weeks… so it’s either bailout or default. Neither will be pretty for the euro in the medium term.

The euro may rise briefly if Germany and the ECB signal a bailout, but the long-term implications of the moral hazard will be detrimental for the single currency.

One way to invest is to short the euro against gold and silver (XAUEUR and XAGEUR); I recommended this trade two months ago, and each has returned about 8% so far. I expect precious metals to keep rising against the euro, and to hold their value even if the world resuffers another deflationary cycle.

Another implication to consider is the effect on the Swiss franc; the Swiss do not want their currency to appreciate too much against the euro, and the government there has a history of intervening when necessary, so it may be worth opening a short position on the franc in the next few weeks.

Lastly, the implications for the US dollar and yen are significant. Until the global financial system agrees on another safe haven that can absorb massive capital inflows, the dollar and yen should see continued appreciation against the euro until the market’s anti-euro fever has bottomed out.

More on this in future letters. Happy investing.

February 11, 2010
Bangkok, Thailand

Years ago, when I was a bright-eyed lieutenant anxious to defend the world against evil and tyranny, the government decided to ship me off to become an intelligence officer.

I remember a lot of the classroom training, learning about the enemy’s order of battle and maneuver capabilities. Ironically, we were still studying Soviet tactics at the time, even though the Berlin Wall had become a tourist attraction over a decade prior.

During my field training, we focused on collection efforts and intelligence gathering. My instructors would continually hammer into us the importance of ‘indicators,’ signs or symptoms that strongly imply a future action or trend.

According to our threat doctrine, for example, a small isolated scout platoon would be an indicator for a heavily armed vanguard only a few kilometers behind. Ground commanders would rely on these indicators to make tactical decisions, e.g. reinforcing defensive positions in expectation of the vanguard’s attack within the hour.

In his book Art of War, Sun Tzu wrote, “Intelligence is the most important work, because the entire force relies on it for every move… It is the essence of strategy.” Outside of war, the same holds true in finance. Savvy investors rely on market and economic indicators to provide intelligence on future trends.

Part of the trick is differentiating the valuable indicators from the worthless ones… and too many people pay attention to worthless indicators.  Government-manufactured statistics like inflation and unemployment rates, for example, are merely comical charades masquerading as economic indicators.

To get an indication of where the economy is headed, you have to listen to the economy. To get an indication of where the market is headed, you have to listen to the market.

I’ll give you a few examples:

In a weak economy, voluntary employee turnover is very low–  workers tend to stay put because they won’t be able to find a job elsewhere.  In a strong economy, however, businesses generally experience higher employee turnover because workers are confident they can find better pay somewhere else.

This is exactly what is happening in Panama; I saw it with my own eyes a few weeks ago– workers who would voluntarily quit because they had total confidence in being able to find a better paying job elsewhere.

This is a far more insightful indicator than any official statistic in determining an economy’s prospects.

Moreover, when the intelligence becomes too extreme or out of line from the norm, it’s usually a great indication of a top or bottom. Case in point– I pay close attention to the gold/silver ratio, which is the number of ounces of silver required to buy one ounce of gold.

When gold was actually money during the time of Alexander the Great and the Roman Empire, the ratio was fixed around 12.  Over time, the fixed ratio increased to 15, which stood firm until the beginning of the 20th century.

Once worthless paper money took over, metals started floating more freely against each other, hitting a high of 100 and a low of 17, with an average range of 50-60 over the past few decades.

In general, the higher the gold/silver ratio, the higher the ‘fear factor’ in the marketplace. This is because the market for gold is much more capitalized than the silver market.  Thus, institutional investment capital can flow into gold much more easily than into silver, which pushes up the ratio.

Naturally, this only happens when institutions are looking for safe havens for large amounts of capital.  Consequently, when expectations are poor and risk tolerance is very low, the gold/silver ratio increases. When risk tolerance is high and expectations are strong, the gold/silver ratio decreases.

Right now the ratio is about 71… higher than the norm of 50-60. I think this is an indication that markets are becoming risk averse.  It certainly mirrors what has happened with world equity and currency markets lately.

Given the level of uncertainty in the world right now, I think it is too early to make a trade on the gold/silver ratio… but I am continuing to watch it; if it rises beyond 75, I will likely respond by shorting long-dated gold futures and buying long-dated silver futures.

When this trade is properly structured, it doesn’t matter if the metals prices rise or fall– the trade will make money when the gold/silver ratio declines back into the normal range.

This will happen once market and economic tensions ease… and I’m watching what is happening in Europe very closely to help make that determination. It is, after all, an indicator.

February 9, 2010
Bangkok, Thailand

Money is just a tool… nothing more. It’s not the only tool, but it’s certainly a useful one that can be leveraged to acquire more freedom; we can trade money for time, money for health, money for experience, and money for assets that safeguard ourselves and our families.

As such, it certainly behooves any free individual to have some means to generate capital– this can often be through a business or entrepreneurial venture.

Once wealth has been accumulated, though, it is equally important to be able to maintain and grow the account through sensible, well-grounded investments.

Before allocating any investment capital for the long-term, though, investors need to address a fundamental question: will the world’s pent-up economic deficiencies ultimately result in inflation or deflation?

This is an absolutely critical issue to resolve because the investment implications of either case are drastically different. In a deflationary scenario, prices fall. This means that that cash and reliable cash equivalents gain in value while stocks and commodities are losers.

In an inflationary scenario, the general price level rises. This erodes the value of cash against goods and services while the value of stocks and commodities rise.

A completely objective analysis shows very compelling evidence for both sides.  Record high deficits, soaring national debts, and unprecedented expansion of central banks’ balance sheets, particularly in the western world, absolutely portend future price inflation.

Each of these influences effectively creates more paper currency without a similar increase in the aggregate amount of products and services available in the economy.

In addition, consider the effects of population growth, demographic shifts in the developing world, resource scarcity (water, arable land, oil), climate change regulation, and of course, rising taxes in bankrupt western economies.

The combination of these elements certainly seems to make an obvious case for substantial price inflation.  The evidence for deflation, however, is equally compelling.

The accumulated and potential destruction of wealth from toxic assets far surpasses the amount of money that governments are printing, while anemic unemployment and GDP growth rates are pushing down aggregate demand and price levels.  The emergence of new technology also has an effect on reducing price levels.

Moreover, much of the new liquidity created by central banks is not making its way into the financial system.  Risk-averse commercial banks have become a bottleneck to new money creation, and a further meltdown in commercial real estate, sovereign debt, etc. will reduce banks’ willingness to lend.

This credit contraction will reduce the amount of money circulating in the economy, putting downward pressure on price levels.

For someone to invest blindly and unhedged for the long-term without objective consideration for both sides of the argument is frankly irresponsible.

With due regard for both inflationary and deflationary contentions, I think one of the most sensible investments to make right now are high quality companies that trade at a discount to their tangible book value.

In other words, I’m talking about strong companies in growth industries that are woefully undervalued by the market relative to their net assets… small town newspaper chain sitting on a mountain of debt– bad; profitable energy company with enormous cash reserves– good.

This way, if the world undergoes a deflationary cycle, your investment will have essentially bought you cash at a discount, likely one of the best investments you could make.

Otherwise, if the inflation gorilla wins out and prices soar, the company’s earnings and stock price should keep pace, maintaining the value of your capital.

These types of companies are absolute gems, and not to mention quite difficult to find. And you can forget about scoring one in most emerging markets; stocks in China, for example, trade at dizzying multiples of their earnings and book value– think Amazon.com in 1998.

Conversely, the Tokyo Stock Exchange has several undervalued companies right now; Japanese stocks are trading at much lower valuations than most other markets because local investors there have fled low-yielding, yen-denominated assets.

Instead, Japanese capital has been parked in places like China, Thailand, and Australia, where even a simply term deposit account can yield 8%. The exodus of capital has left the Japanese stock market with miniscule valuations, and many companies are trading at less than their book value and at a single digit multiple to their earnings.

Overall, I’m negative on Japan… but even a long-term stagnant economy has solid companies that will continue to be profitable year after year.

If you want to find out more, I’d encourage you to take a look at The Casey Report, which is without doubt one of the best macro-level investment advisories out there.

The most recent issue has some really brilliant commentary on the Japanese market, and the research team routinely uncovers some of these deeply-discounted companies that I’m talking about.

In fact, I’m about to put a BUY order in for their most recent recommendation, a marine transportation company that specializes in the upstream oil and gas industry. It’s trading at a mouth-watering discount to its tangible assets, and is loaded with cash… a very safe bet, in my opinion.

You can read more about it here.

January 12, 2010
Estepona, Spain

There is really a great deal of information out there about offshore corporate structures… frankly it’s mind numbing. Do a search for “offshore corporation” and you will undoubtedly return over a million websites promising you fast incorporation in Panama or the BVI, as well as a host of ‘benefits’ for that particular jurisdiction.

Are these benefits real? Does it make sense to structure a business overseas?

Yes. Planting a flag overseas provides asset protection benefits, and in many cases, significant tax benefits… even if you are a US citizen. It is possible, for example, to generate corporate profits free of tax liability, and to defer personal income tax liability indefinitely.

Let me first back up for a moment and explain some of the lovely US regulations that govern foreign corporations for US taxpayers. (as an aside, you should realize that I am not a tax attorney, nor does this constitute tax advice)

The first is section 957 of the Internal Revenue Code pertaining to “Controlled Foreign Corporations (CFC)”. A CFC is any foreign registered company with more than 50% direct or indirect ownership by a US person.

If a company is deemed to be a CFC, the IRS essentially views it as a domestic US company and expects the foreign company to file a tax return every year.

That’s where places like Panama come in. Some people try to get slick and form a Panamanian company, hiding behind their lawyers as nominee directors. If their name is withheld from a public registry, the US government will never know about their ownership interest… right?

Guess again. Basing your tax strategy around another human being keeping your secrets in just plain absurd. Your lawyer may be a good guy, but when push comes to shove and the US government comes knocking, he’ll sing like a canary.

Let me underscore this point again even more clearly– do NOT expect to hide profits through an offshore company without the government finding out. They will find out. Privacy and secrecy are gone, at least for now.

Fortunately, there’s a big fat silver lining. Most people do not realize that there are perfectly legitimate ways to structure your business interests overseas and realize significant benefit.

Big businesses do this all the time; large multinationals have subsidiaries and affiliate offices all over the world. Consider Boston Scientific, which manufactures products in Ireland and then ’sells’ them around the world. The company only pays a 12.5% tax to Ireland on its profits from those sales, rather than 30% to the IRS.

You might be thinking to yourself right now– “Great… except I don’t plan on opening a multi-million dollar medical device manufacturing facility in Ireland.” Believe it or not, in many ways it’s even easier for some small businesses to capitalize on this concept, especially if you have an online presence. Here’s why:

A foreign corporation is subject to US income tax, depending on the situation, if any of the following are true–

First, if the foreign company has a permanent establishment in the United States; ‘permanent establishment’ is ordinarily defined by specific tax treaties, but usually includes things like an office, factory, or workshop.

Second, if the foreign company is engaged in a “US trade or business” or has US-source income; income source rules are defined by Internal Revenue Code section 862.

For example, if a business produces inventory, the source of income is where the inventory is produced; if a business performs personal service, the source is where the services were performed. For businesses that sell inventory, the source of income is where the products are sold.

As you can see, these rules clearly favor many types of enterprises, including e-commerce businesses, some service providers, overseas manufacturers, and businesses owned by expatriates.

Foreign corporations that fit these circumstances are not subject to paying US taxes. The company may be subject to tax in its own jurisdiction, but many (BVI, Cayman Islands, Labuan, Singapore, etc.) do not tax corporations on income earned outside of their borders.

In this manner, the corporate entity is free of tax liability. However, when the corporation makes dividend distributions to its owners (US taxpayers), the US citizen will pay tax on those distributions.

Presently, the dividend tax rate is quite low, but you can be sure that the Obama administration will raise the dividend tax in the future. If the corporation does not distribute profits to the owners, however, the individual has no immediate tax payment due and effectively defers his tax liability indefinitely.

Here’s an example– you are a US citizen and own an e-commerce company based in BVI. You have no permanent establishment in the US and have no US-source income by the IRS rules. The company does not pay tax to the US, nor does it pay tax to BVI.

Assume your company nets $1 million annually. You do NOT distribute this income, and rather invest all of your profits with a 20% annual return. At the end of 10-years, your business has accumulated $25.958 million.

Now assume the same business is structured in the US paying 30% to the government. At the end of 10-years, the business will have accumulated $13.536 million.

The compounding power of tax-deferred profits is extraordinary– you make an extra $12,422,575.54 with a properly structured foreign company.

This week I’m going to be interviewing one of the country’s premier international tax attorneys who specializes in offshore business structures. As a personal favor to me, he has agreed to walk you through the regulations and explain how you might be able to realize these benefits.

Somewhere after paying over $100 for a tank of gas, $35 for a haircut, and $15 for a fast food sandwich, it dawned on me last week.  The euro is terribly overpriced against the dollar.

I wrote about this extensively last week, arguing that, because of a litany of taxes and fees, and due to overselling of the dollar, the euro zone is excessively expensive in dollar terms. Clearly there needs to be an adjustment.

Taxes are simply another form of inflation, and one that has been felt acutely in Europe; politicians impose new taxes, and ’stuff’ becomes more expensive. Employees demand higher wages to maintain some semblance of their living standards, and in the end, all prices have gone up without any real value having been created.

If the current administration gets its way, the same thing will be happening soon in the US.  A national sales tax will likely be introduced, along with a host of other income and luxury taxes, pushing up the prices of everything, from gasoline to haircuts to fast food.

Gold is generally regarded as a proxy on both safety and inflation; when price levels of ’stuff’ go up, the price of gold rises accordingly… often outpacing the rise of inflation due to increased concerns about safety.

Gold’s rise this year has been more about safety than inflation; price levels generally show stable or declining prices around the world, but institutional money has voiced significant concern regarding investments that were once considered safe.

Dubai, Greece, Latvia, Ireland, Spain, UK, etc. all give investors a lot of reason to worry. Ironically, when things get really bad in the rest of the world, investors rush into the US dollar as the ultimate flight to safety.

I know I don’t have to tell you that this line of reasoning is utter nonsense. Institutional money managers realize it too– the prospect of loaning money to the largest debtor in the history of the world for 30-years at less than 5% is certifiable lunacy.

That’s why so much sovereign and institutional money flows into shorter-term treasuries– they want to sit on the sidelines for a short period of time, and they’re willing to lose on the yield in order to guarantee the safety of their funds.

Naturally, the chief reason that Treasuries are considered safe is because they are backed by the full power of the US government’s printing press. Investors are wise to this trick, and smart money will not be fooled into longer term bonds unless there is another financial cataclysm.

As I survey the situation, I’m convinced that gold is nowhere near peaking exactly for this reason. In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.

To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.

For now, it’s not happening yet, and that’s why I recommended going long gold against the euro– the euro has been overpriced against the dollar, and while gold has dropped roughly 5% against the dollar since I recommended this trade last week, it has risen 3% against the euro.

Despite its historic nominal highs, gold still has a long way to go before achieving this bifurcation. The idea that US treasury securities are safe must be eradicated from the investment community before it’s safe to say we have reached a top.

I know you have heard this before, but gold is way off its inflation adjusted highs. Most of the time people talk gold’s inflation-adjusted high in 1980. But if you want to get a better sense of gold’s potential, you need to go back even further. 

The best apples-to-apples comparison of gold prices is in British pounds sterling (GBP); Britain is a much older country and historic gold prices exist in pounds for nearly 1,000 years. 

Gold’s highest price was recorded in the late 1400s at an inflation-adjusted price of roughly GBP 1200 during what was called the ‘great bullion famine.’ The 1980 peak in sterling terms was about 30% lower than this.  Today gold sells for less than GBP 700 per troy ounce.

The length of the present dollar rally, which technically started several weeks ago, is unknown. From the beginning of the meltdown in 2008 to the dollar’s peak earlier this year was about six-months. This one may be shorter, or if there is a great cataclysm, much longer.

One thing is inevitable, though, and that is the investment community’s eventual abandonment of the dollar as a safe haven. As such, from a fundamental perspective I have great difficulty playing this rally by buying dollars and dollar assets.

I’m sticking with the long gold/short euro position; gold may fall in dollar terms, but I expect it to stay stable and gain against the euro. I also intend on bargain shopping for long-term silver options; as a speculation, I prefer silver to gold as the ‘cheaper’ metal is still over 50% off its nominal high. Gold is less than 10% off its nominal high.

You can do this with long-term options on any of the silver ETFs, or if you have a futures account, you can buy call options for long-dated silver futures contracts like December 2011.

It took three speeding tickets in the south of France on the way from Monaco to Barcelona, but we made it to Spain late yesterday evening.  I had forgotten how expensive it is to drive in France. Fuel is among the most expensive in Europe thanks to a series of extraordinarily high taxes.

Gasoline, as people often forget, is a fungible commodity… in its pure form it should cost the same everywhere because it is priced by the market and traded on futures exchanges.

Aside from some variations in distribution costs, the major reason why fuel is priced differently around the world is government meddling– some governments subsidize fuel so that it’s artificially cheap (Venezuela, Dubai); others tax it to death (France, California).

It’s no secret that western European governments enforce an incredibly high tax burden on their citizens in order to pay for the ‘greater good’ of all members of society.  Taxes, as we are all aware, eventually lead to higher prices.  In this case, I’ve been actually shocked… even offended, at the prices of what I have seen in Europe.

After a series of tax increases over the last 2-years to pay for the effects of the economic slowdown, Europe has become much more expensive than I remember even six-months ago. I spend a few months on the continent each year and have a good feel for pricing; it seems to me that things are starting to get out of control.

$82.50 for two burgers and three beers; $13.50 for a fast food sandwich; $7 for a cup of coffee; $4 for a small pack of gum at a gas station. You get the idea.

Part of this pricing scheme is clearly based on recent dollar weakness. Much of the world’s institutional capital has lost confidence in the dollar simply due to the prospect of an extended period of ultra-low interest rates.

Last Friday’s jobs report gave the market a brief period of confidence in the dollar– investors believed that the US economy had reached a turning point, meaning that interest rates would rise earlier than expected.  Interest rate futures soared, and investors ran back into the dollar.

This only lasted briefly, for as soon as Comrade Bernanke opened his mouth on Monday, he assured markets that he would continue to keep interest rates artificially low. And just as quickly as they piled in to the dollar, investors went looking for the exit once again.

There are only three currencies in the world that have the ability to absorb enormous capital flows like this– the dollar, the euro, and the yen.  When investors flee the dollar and are looking to park their capital, it goes to the yen first, and then the euro. As such, there has been a steady rise in both of these currencies this year.

The price disparity that has developed between Europe and the United States, though, is enormous… and the exchange rate only tells part of the story.

In economics, the “law of one price” suggests that, everything else being equal, identical goods should be priced the same everywhere in the world– an iPod in Paris should cost the same as an iPod in New York. 

But everything else is not equal.

In Europe, merchants are plagued by higher taxes across the board– sales (VAT) taxes, payroll taxes, income taxes, excise fees, and a variety of others. All of these taxes are eventually baked into a higher price for products, and the consumer is the one who ultimately pays.

This is simply another form of inflation. Taxes push up the price of goods, employees demand commensurate wage increases, and the price of everything increases… yet there has been no real wealth created.

It is for this reason that I see two things happening;

First, the euro is due for a fall against the dollar. Yes, investors view the dollar as risky, but as the worthless ratings agencies are circling over Greece for a downgrade, investors also view the euro as risky. This reduces demand for the euro, and as there are few options available to absorb large currency flows, the dollar stands to gain.

Besides, in the long run, prices need to be similar, and that means a currency correction… leading me to point #2:

It’s not that the euro is terribly overpriced; it’s that the dollar is significantly underpriced, relative to ’stuff’.  iPods and apple pie should all cost more in the United States, and they will.  The next round of new taxes to pay for carbon, health care, etc. will cause European-style price inflation as US merchants have to increase the price of ’stuff’ to keep up with taxes.

End result? The euro falls against the dollar, and the dollar falls against ’stuff’.  You can play a euro/dollar short, but I think it would be an even better trade to short the euro against gold and silver.

More on this later.

It’s true what they say about the Autobahn… there really is no speed limit.  I’ve been in the car all day with my close friend and business partner Matt, racing our BMW from Stuttgart to Monaco.  Our goal is to reach Spain by the end of this week where we have some important meetings lined up on your behalf.

If everything goes as planned, I will be able to bring you some incredibly unique opportunities very soon… and you’ll see what I’m talking about in a moment.

To begin with, one of my missions on this trip to Europe is to investigate some new international brokerages; I’ve discussed Denmark-based Saxo Bank in the past, and I have had reasonably good experiences with them. Unlike many other financial institutions in Europe, they still open accounts for US citizens, which is becoming quite unusual.

I’ve looked into two other brokerages so far on this trip… and while I’m confident in their financial stability and execution, they are unfortunately NOT for US citizens. 

The first is Luxembourg-based Internaxx, which is a joint venture between TD and BNP Paribas. Backed by roughly $50 billion in assets, Internaxx trades stocks, futures, and foreign currency from one account with reasonable commissions and instant execution.

The second is Cyprus-based FxPro; it is an online brokerage that, despite the name, trades a wide variety of products.  Its bread-and-butter is currency transactions, for which the brokerage offers leverage up to 1:500.  For example, with a $10,000 account, a customer can trade up to $5,000,000 in currency transactions.

Clearly this would be a tremendously risky move, but exercising a bit of leverage can multiply returns while avoiding significant downside.  I use this technique frequently in my own trades.

FxPro’s currency transactions are also well-priced, with many spreads as tight as 0.5 pips with no commission, putting it among the lowest in the business.

In addition to currency transactions, FxPro also trades major US equity CFDs, or ‘contracts for difference’.  A CFD is a financial contract whereby an investor receives the gains and losses from the value of a security, without actually owning the security.  For example, if the value of CocaCola stock increases by 10%, an investor who has acquired a Coke CFD will also realize a 10% gain.

CFDs are commonplace among foreign brokerages that want to provide customers with the benefit of US stocks but without the unnecessary hassle of the US government or financial compliance.  CFDs are generally offered for the largest blue chip stocks with lots of 100 shares each.

Similar to equity CFDs, FxPro trades futures CFDs for the most popular commodities like crude oil and natural gas.  Personally, I don’t find CFDs very compelling as I would rather buy the underlying security if I decide to make an investment… but for some people, particularly based on tax situation, CFDs can be an excellent investment option.

Most importantly, FxPro trades in the spot market for precious metals; you can buy gold and silver 24-hours a day during the work week, with a maximum leverage of 1:50. Again, this means that you can leverage a $10,000 account to purchasing power of $500,000, borrowing the remainder from the brokerage at ultra-low rates thanks to Comrade Bernanke.

FxPro has offices all over Europe, and the brokerage is regulated by the Cyprus Securities and Exchange Commission under the EU Markets and Financial Instruments Directive.  It is also part of the “Investor Compensation Fund,” which is sort of a European version of the SIPC.

You can fund an account with a wire transfer, credit card, and even Paypal… and opening an account is fairly simple; a short application and scanned copy of picture ID is required. 

Again, though, neither Internaxx nor FxPro accepts US clients anymore… it has really become a black eye to carry around the blue passport.  This is just one of the many, many reasons why you should consider second citizenship.  In a way, it is the ultimate insurance policy, providing you a way to mitigate social, political, and economic risks.

Think about it– a US citizen who wants to move his money out of quasi-government controlled US banks is finding it almost impossible these days to find a foreign bank willing to work with him.  Uncle Sam makes it too much of a hassle for them.

History is full of lessons that demonstrates that government is unequivocally fallible. The recent debt crisis in Dubai underscored this point further, particularly as it relates to finance. Having your entire security, livelihood, and future tied up under a single government is quite literally putting all of your eggs in one very frail basket.

There is nothing illegal about any of this.  It’s completely legal to have foreign accounts (as long as you report them). It’s completely legal to obtain second citizenships. These are intelligent, sophisticated solutions that I would encourage everyone to consider… and it is exactly for this reason that we are heading to Spain at a very high rate of speed.

Stay tuned.

I’m spending a few days in the Baltics to review how things have changed since I was last here over the summer.  This region was among the hardest hit in the world, and as I have stated numerous times, I’m convinced it will end with a devaluation in Latvia.

The big news of the day here is that Lithuania’s main nuclear reactor, which supplies the preponderance of this small country’s electrical needs, is being forcibly decommissioned. 

As part of their agreement to enter the United States of Europe (EU), Lithuania had to agree to destroy the plant, effectively ending the only sliver of energy independence it had.

Now the country must rely on power from Poland, Sweden, and those all-too-reliable Russians.  Problem is, most of the infrastructure that will carry the load hasn’t been built yet, and even when it does, it’s unclear if there will be enough excess capacity for Lithuania to import.

My friend Gianni Kovacevic , a successful investor whom I have discussed before in this letter, recently sent me an email along the same lines.  Gianni is an incredibly sharp mover and shaker in the Vancouver resource scene, and he’s also quite bullish on copper.

He sees a coming surge in demand for electricity and thinks that most of the world is now scrambling to keep up with demand: 

Simon,

Like you, I travel all over the world… and based on what I am seeing around the world, I wanted to write you a quick letter to address some major trends that I am seeing as they relate to copper.

It’s a scientific fact that electrical energy requires copper for conduction and transmission. Anything electric has copper, and the more ‘major’ an electrical appliance, the more copper it contains.  A window air conditioning unit, for example, contains about 15-20 pounds (7-9 kg) of copper, including the tubing, wiring, motors, etc. 

Now think about Russia.  It wasn’t even 7 or 8 years ago that there were hardly any air conditioning units in an average Moscow apartment building. This has now changed entirely; as you can see in the picture I’ve attached, virtually every window has a split A/C unit.

Obviously, this creates significant demand for copper… and even if copper climbs to $8 per pound and the entire unit cost $100 more, would that prevent anyone from purchasing comfort in the summer heat? Probably not.  

More importantly, though, consider what could take place in city after city due to the lack of an advanced electrical grid.  All of these new electrical appliances– air conditioning units, refrigerators, freezers, space heaters, computers– are power hogs.

Moscow, with a three-month summer, had every other citizen buying, installing, and living with air conditioning, albeit for only 3 months each year.  This creates a major problem for utility companies in developing countries that have been deficient in generating capacity. 

With just one heat wave each year, many nations’ electrical systems will face catastrophic failure as we saw a few years ago on the Eastern seaboard, and just a few weeks ago in Brazil. 

In response to this energy threat, Russia and Ukraine now have two of the largest planned nuclear power expansions in the world.  Other countries are also building multiple megawatt projects at an unprecedented rate. 

The US will be expanding its own electrical infrastructure as well, installing a new “smart” grid for all the new green, clean electrical plants.  As many other countries never even installed the first generation electrical systems, though, they are now efficiently leapfrogging to the most modern power balancing systems.

Sure, it’s true that items are becoming more energy efficient. But consider that in 1980, the average US home had 3 electronic gizmos.  Today it has 25!  Many of these items are not regulated to be energy efficient, thus certain items like plasma televisions are still power hogs.

Homes all over the world are now starting to resemble the average western household, plasma screens and all. For whatever reason there are a few naysayers who ‘don’t believe’ this trend, but I wouldn’t listen to stories on this subject from anyone that doesn’t have stamps in their passport.

Facts are facts and the reality is that just about every place on the planet is using more electricity today than 20 years ago, 10 years ago and even a few years ago.  As the developing world plays catch-up, their power needs are really outpacing the west.

All of this– from the appliances to the electrical generation to the grid expansion– requires copper.  Global appetite for the red metal has grown annually by 4% on average for the last century. Sure there may be corrections, but long-term demand is clear.
 
The Chinese are now all over the globe in a silent economic war, securing and trading their dollar reserves for long-term supplies of commodities they need. No oil, no steel, no copper, no growth, and that simple truth is exacerbated by the never-ending ascent of man.

All of these facts are paving the way for a long-term bull market for all commodities.  While prices won’t move straight up or down without correction, higher average commodity prices will continue to baffle and confuse pessimistic permabears who have little first hand knowledge of basic electricity and way too much Sino-phobia. 

Simon again. I agree with Gianni, and while there may be a short-term technical correction soon, our on-the-ground observations suggest that the long-term outlook for resources is very bright. 

Aside from resource stocks that Gianni personally recommends to me, I’m considering long-term futures contracts and options on futures (similar to my July silver trade that is up over 300%).

The ticking time bomb in Dubai finally exploded late last week.

On the eve of their most important Muslim holiday, which happened to coincide with the eve of Thanksgiving in the west, Dubai authorities made two statements spaced a few hours apart.

The first– that the heavily indebted, government-owned flagship holding company Dubai World had successfully raised a few billion dollars.  Investors collectively exhaled, temporarily relieved that the company would be able to make good on its colossal debt payments.

The second statement came only hours later: Dubai World announced that it was asking creditors for a standstill on its outstanding debt… in other words, everything freezes– no more payments.

It’s a real life example of the adage, “If you owe the bank $100K and can’t pay, you have a problem. If you owe the bank $100 million and can’t pay, the bank has a problem.”

In Dubai’s case it’s around $80 billion.

Default and debt restructuring occur all the time, especially in the worst downturn of modern history.  The part that stings investors about Dubai, though, is the utter lack of transparency and potential subterfuge. For months, the emirate has been reassuring investors that it would be able to raise money and make its debt payments. 

Even Dubai’s ruler, Sheikh Mohammed gave worried investors the “talk to the hand” earlier this month, insisting that Dubai World (essentially his personal holding company) would be well capitalized and supported by Abu Dhabi, its rich neighbor.

Just a few weeks later, after months of tap-dancing, Dubai finally pulled back the curtain and confirmed investors’ fears– it had run out of cash. The nonchalant, innocuous way in which it was handled, however, will continue to infuriate investors for a very long time.

The reality is that lack of transparency defines the business culture in the Gulf region. I’ve been doing business and traveling there since 2001, and I can say unequivocally that this sort of behavior is typical. 

In an investment deal, for example, you never actually know where you stand until the moment they write the check. If they’re not interested, they will string you along for months and never actually say “no.”  In some parts of the Gulf, outright lying is considered to be the honorable thing to do.

Thus, it’s not surprising that while Dubai authorities were reassuring investors, local banks were busy raising money, preparing for what they knew was a certain outcome.

First Gulf Bank, for example, closed a $500 million issue for “general corporate purposes” less than a week before the Dubai news broke. Moreover, since September there has been a flurry of fund raising by banks and governments in the region, including the government of Qatar’s $7 billion debt issue this month.

Coincidence? Doubtful. Regional banks and governments likely seized the opportunity to raise cheap money while it was still available, probably with advanced knowledge of Dubai’s timeline. This is simply the way it’s done in the Gulf… and while it seems obtuse, there are some important things to keep in mind:

First, Abu Dhabi Islamic banking institutions are going to be just fine. The vast majority of Dubai exposure is with foreign banks, namely HSBC and RBS. Regardless, UAE’s central bank has indicated that it will support any bank that needs help, including the foreign banks.

Remember that the direct scope of the problem is ‘only’ $80 billion. This is equivalent to about a 2% drop in the Dow.

Abu Dhabi has already sustained losses of $125 billion so far in the financial crisis thanks to bad investments in western financial institutions like Citi. Yet with roughly $1 trillion in reserves and new oil revenue flowing in on a daily basis, this wealthy emirate is hardly breaking a sweat.
 
Dubai’s ruling Sheikh Mohammed, however, is going to have to dig deep to navigate his emirate through the downturn.

Foreign investors will certainly adopt a ‘fool me twice, shame on me’ attitude towards loaning any more money to the Sheikh. And with its credibility and creditworthiness in shambles, Dubai will likely cede its position as the region’s financial hub to Doha and Abu Dhabi.

I wrote about this just last month on October 27th:
—–
In a crunch, many of the companies under direct or indirect control of the ruling family had to go to the main office with hat in hand looking for funds. . . Dubai has become cash poor and its bills are piling up. . .

The price they are paying is great, but between this successful bond sale and the backing of big brother Abu Dhabi, Dubai’s cash flow issues should be solved for the next five years. . .

In the end, though, I think financial constraints prevent Dubai from winning– bruised and battered, it won’t make the final cut… always a contender, never again a champion.
—–

Now this outcome is even more certain. Dubai will recover financially with Abu Dhabi’s help, but investors won’t be able to wash out the sour taste.  Doha and Abu Dhabi will be there, cash in the bank, welcoming them with open arms.

** Lastly, a quick administrative reminder: if you signed up for the Panama Black Paper pre-notification, you will be receiving an email tomorrow with a purchase link.

Long ago, physical commodities were used as a mediums of exchange… gold and silver were quite popular because they were scarce, divisible, durable, and hard to replicate.

If you had a few extra ounces laying around and wanted to store it securely, you would seek out the people who dealt with precious metals all the time and had the right equipment and staff to keep it safe.  At the time, those were goldsmiths.

In exchange for keeping your wealth safe, goldsmiths would charge a fee… and for that fee, you could drop by any time and withdraw some of your gold on demand.

In other cases, if you wouldn’t be needing your gold for a while, you could leave it with him for a fixed period, say 1-year. In this case, the goldsmith would pay you interest on the deposit, knowing that he could loan out the gold to someone in need of capital at a higher rate for the same duration.

It was a simple, admirable system. When you wanted your money, it was there; if you didn’t need it, you could earn a return.

Over time, the system changed. Goldsmiths (turned bankers) began issuing paper notes which were redeemable for the gold that was secured in their vaults. The paper notes circulating around town were ‘as good as gold,’ depending on the bank’s reputation.

Occasionally, a greedy banker would circulate too many notes around town– $100,000 worth of gold in the vault, $110,000 worth of notes circulating around town. The banker got rich, and no one really noticed… until $110,000 became $150,000 became $200,000.

Then suddenly, noticing the spike in money supply, the townspeople would lose confidence in the note and descend on the bank to demand their gold. The banks collapsed and depositors took it on the chin.

Naturally, governments eventually became involved.  They standardized a single paper currency for the country and took charge of securing the nation’s gold reserves.  In the United States, perhaps the greatest change took place in 1913.

After intense Congressional deliberation, Woodrow Wilson signed the Federal Reserve Act into law in December of that year. Aside from creating the United States Federal Reserve, the Act created a regulatory structure for a nationwide fractional reserve banking system.  And from that day forward, every bank in the country became effectively insolvent.

Fractional reserve banking is the practice of loaning out more money than is on deposit. Someone deposits $10 in a bank; the banker keeps $1 in the vault and loans out the other $9. That $9 makes its way through the economy and is eventually deposited in the bank. The banker keeps $0.90 and loans out the other $8.10.

This scheme is repeated over and over again until there is $100 floating around the economy based on a single deposit of $10.  An additional $90 was conjured out of thin air by the bank.

Suppose you went to a storage facility and paid them to secure your furniture… if the facility owners went behind your back and loaned out your kitchen table, this would constitute fraud.  Yet in banking, this is standard practice thanks to the Federal Reserve Act.

The Fed governs the ‘reserve ratio,’ which is the amount of deposits that banks actually have to keep on hand. Depending on the type of deposit, it ranges from 0% to 10%.

The system works when everyone has confidence. When they don’t, banks go under– and that is exactly what is happening right now.  Between balance sheet deterioration and loss of depositor confidence, banks are dropping like flies… but hey, don’t worry, the taxpayers have you covered.

Personally, I want to put my money in a place where the bank will actually hang on to it and no one has to rely on a taxpayer bailout.

One solution that you won’t hear too many people talk about is Islamic Banking.  Based on the ‘Shariah’ principles of Islamic law, Islamic banks in theory must hold 100% of their demand deposits in reserve.

In practice, thanks to creative deals and a bit of leniency from Muslim scholars, the reserve ratio is a bit less than 100% for Islamic banks… but as a whole, their reserves and financial strength are extraordinarily higher than western banks that are on the fractional reserve system.

If you are concerned about what another financial meltdown will do to your bank account, consider opening an account at an Islamic bank. Abu Dhabi Islamic Bank in the UAE is one example– they work with US citizens and even have safety deposit boxes for rent.  ADIB has branches across the country, including in Dubai.

Outside of the Gulf region, Singapore and Malaysia are two up-and-coming Islamic Banking centers that have interesting tax advantages. Malaysia is particularly interesting because of its tax-free Labuan region.  I’ll be discussing this in future letters.

As a final note this afternoon– I know Turkey day is tomorrow in the United States even though it will just be Thursday here in Asia, but I will likely refrain from email for the next two days and talk with you again on Monday.

And don’t forget that next Tuesday will be the 2nd release of the Panama Black Paper– only 25 copies will be sold, so if you want a copy, make sure you sign up to be on our pre-notification list. 12/1/2009 update: We received a lot of feedback from subscribers around the world in ‘inconvenient’ time zones that would be unavailable for the pre-notification launch… I understand this more than most people– 12pm on the east coast is the middle of the night in Sydney. Consequently, we are sending out a public notification on December 1st will keep it open for 24-hours.

I was having breakfast this morning at my favorite Bangkok cafe– they do a delicious American breakfast with eggs, bacon, toast, orange juice, and fresh fruit for under $3… and it’s delicious.  For another $3 I could get a backrub while I eat.

As I was reading the local paper, something caught my eye in the business section– a full page ad for a real estate development about 2 hours outside of Bangkok. The development looked generic enough– another condo tower with a pretty view of the ocean, nothing special.

The catch? They are giving away a gold bar with each sale.

Particularly in tough times, sales managers come up with all sorts of gimmicks to improve their numbers. If the sales gimmick speaks to a specific need or concern in the marketplace, chances are it will probably succeed.

In Missouri, for example, many people report concerns that President Obama will modify their 2nd Amendment right to bear arms. In fact, there has been a massive wave of gun sales across the US since Obama won the election last year.  To capitalize on this fear, a Missouri car dealer decided to start giving away a free handgun with each new car sold. 

His sales volume quadrupled. 

In China, uneven demographics have young males substantially outnumbering by young females, and it’s becoming harder and harder for men to find available women.  Capitalizing on young men’s concerns, Chinese development company Jin Tai Cheng that promised a $9,000 to anyone who would buy a home and marry one of their pretty sales agents, most of whom were single and good looking.

Naturally, the promotion was of great interest to male buyers seeking a wife. 

These cases indicate that the market responds quickly when promoters address a specific need or fear.  In Thailand, at least one developer seems to have hit a chief concern squarely on the head.

According to local agents, sales activity has jumped since the developer started running the ‘gold bar giveaway’ promotion, though I was not given precise figures as they are a private company.

Asians in general have a deeper gold tradition than western cultures; Thailand, for example, has been issuing gold coins for centuries. I saw seeds of gold mania in China when I was there most of the last two months, and I have seen it here in Thailand this month. 

Gold is quoted in the daily papers in both US dollars and Thai baht, and there seem to be gold shops on just about every block.

The majority of gold shop inventory is jewelry, but the local Thais (similar to the Chinese) have been buying it up as an investment, not because it looks pretty. Gold bars also tend to be bought up very quickly, the most popular of which is the ‘10 baht’ variety, roughly 4.9 ounces of 965 purity.

To me, the most interesting part of the story is that the advertisement is specifically catered to Westerners… although the condo price points are within reach of well-to-do Thais, the ad was printed in English and being marketed in a foreigner newspaper.

The pickup in sales activity suggests that foreigners are attracted to the sales promotion because it speaks to one of their major concerns– perhaps inflationary expectations, perhaps economic misgivings, or perhaps the fear of being left behind the gold boom. 

Either way, the increased interest at the consumer level translates into increased retail bullion sales activity, and this should have a positive price affect for both gold and silver. I wouldn’t be surprised to see more of these types of promotions, and I’ll be on the lookout for similar signs when I arrive to Europe next week.

It was a rare, cool evening in Bangkok, so we decided to take a tuk-tuk back to the hotel.  You’ve probably seen them– they’re like open-air rickshaws attached to a lawn mower engine, and the drivers will take you anywhere in town for a buck or two.

I was riding with my friend Gianni Kovacevic who had just flown in from Zurich on his way back to Canada; at 35, Gianni is one of Vancouver’s great up and coming dealmakers, and I consider him to be among the finest investment minds I know.

To put it even more clearly, I have always made money on his recommendations, and that is a pretty winning track record in my book.

When he’s not traveling, he spends his time analyzing the markets, keeping up with his network of fund managers and Swiss bankers, and performing some very selective consulting services, which he conducts by invitation-only.  Needless to say, he’s plugged in.

As the tuk-tuk driver sped a long, weaving in and out of Bangkok’s notorious evening traffic, Gianni and I talked about normal guy things– women, sports, and cars. We share a penchant for fast cars and made plans to ship my Stingray to his place in Croatia when the garage is finished.

By the time we pulled in to the Four Seasons Hotel, though, the conversation had shifted to economics.  There was much to discuss. 

We rejoined our other friends for dinner, and our party became quite a cast of characters, setting the stage for an interesting discussion.

Jess, an American, is a full-time investor, entrepreneur, and adventure traveler.  Vran, a Slovenian who formerly owned a high-end liquor distribution business, is also a successful investor.  Agron, a savvy European entrepreneur, secured the exclusive rights to distribute BMWs in Kosovo when he was only 22 years old at the time.  Agron and Vran had just arrived from Burma.

Including Gianni and myself, it was a lively and insightful meal.

As we are all heavily travelers, we see much of the world with our own eyes and form assessments based on empirical evidence.  One thing we all agreed on– the world has not come to an end.

Yes, the economic situation has gotten worse in recent years, and in all likelihood, certain aspects will likely get worse from here. The dollar is strained, as is the anemic US labor market.  Commercial real estate carnage is just a few stops away, and the residential market is a long way from a real recovery.  Major resources like fresh water and oil could see future shortages.

Most governments are doing all the wrong things, trying to prop up weakness instead of letting recessionary forces cleanse the excess out of the marketplaceca. Taxes will rise and civil liberties have been eroding, especially in the west.

Surprisingly, though, we’re quite upbeat and optimistic.

In our collective travels, we have seen some amazing recovery stories; companies and local economies have reinvented themselves to adapt to new conditions. Businesses are more productive, people are saving and investing carefully and deep discounts are starting to draw consumers back to the market.

Asia is showing the world that it can eat its own cooking as domestic consumption from China to Thailand picks up steam.  Gray market employment is at an all-time high in many countries, and even some real estate markets are showing signs of improvement.  The “poor” countries of yesterday now have emerging middle classes that are becoming eager consumers.

More importantly, nonfinancial factors are routinely ignored.  Technological and medical innovations continue to exceed expectations.  Peace and stability are becoming the norm in places like Sri Lanka that were at war for decades.  Countries that were formerly closed off like China, North Korea, and Burma are showing signs of opening up.

Clearly, we are not seeing a wide-open lane full of green lights… there are major hazards ahead as there would be in any situation, including life itself.  Things happen; people get cancer, get hit by a car, slip in the shower, get mugged, etc.

The same sorts of things happen to society and the world economy. And from our perspective, humanity has started to pick itself up and dust itself off instead of just lay there in the fetal position.

Despite the hazards, smart people are figuring out ways to adapt, survive, and prosper. 

Focusing solely on the doom, though, while ignoring boots on the ground reality is close-minded and likely unproductive.  And so, from our take, we are largely optimistic.

Jess described what I think is a brilliant new business idea; Vran and Agron were wheeling and dealing in Burma; Gianni travels the world lecturing about a boom in copper; and me… you know what I do.

Amazingly enough, Hugo Chavez is giving us a gift.  Allow me to explain.

World leaders are gathered today in Berlin, celebrating the 20th anniversary of the fall of the Iron Curtain.  What would have been the greatest armed conflict in the history of the world was successfully avoided… peace prevailed.

Meanwhile, thousands of miles away, Hugo Chavez is stoking the flames of war in his region.

Notwithstanding the collapse of European communism, Hugo steers a rather unwieldly ship of socialism in Venezuela.  Hugo calls his brand “Bolivarian Socialism,” named after the famous Andean political leader Simon Bolivar who had served as President in Colombia, Venezuela, Bolivia, and Peru. 

Ironically, despite the moniker bestowed by Chavez, Bolivar was an avowed proponent of the free market who admired Thomas Jefferson and traveled with Adam Smith’s Wealth of Nations.  Hugo’s policies are a far cry from Bolivar… but then again, the US government does not exactly promote the ideals of the Constitution either.

Now Chavez and the United States find themselves pitted against each other once again, this time through Colombia as an intermediary.  Colombia and the US recently signed a military agreement that allows the US to do what it does best– station American military troops in a foreign land.

In this case, the agreement calls for US troop deployments to seven military bases across Colombia.  Their mission will focus on counter narcotic operations and fighting the paramilitary insurgency. 

Realistically, though, the US is clutching on to its presence in the region.  American forces have already been kicked out of Ecuador, and since the withdrawal from Panama in 2000, the closest military installation with US troops is Soto Cano Air Base in Honduras… and as you are undoubtedly aware, Honduras isn’t exactly a beacon of stability these days.

Furthermore, to say that the US military is stretched thin is definitely the understatement of the day.  Sending even more troops overseas to fight yet another noun (this time it’s the war on ‘drugs’) may end up being the straw that broke the camel’s back.

Fortunately, we have little to fear from Hugo Chavez, at least in terms of conventional warfare.  Over the weekend, while Sarkozy and Merkel glad handed with former resistance leaders like Lech Walesa in Berlin, Chavez was addressing his troops.

“Let’s not waste a day on our main aim: to prepare for war and to help the people prepare for war, because it is everyone’s responsibility,” he said.  A few days before, he sent 15,000 troops to the  border with Colombia, citing fears that the US would use its new presence in the region to attack Venezuela.

The fact remains, however, the Venezuela unequivocally does not want to start an armed conflict.

Colombian forces are battle hardened veterans; they have fought for years against guerilla and paramilitary groups, and their combat experience is among the most extensive in the region.

Not to mention, the Colombian military is well-funded thanks to its alliance with the United States… and military funding means top of the line weaponry.

Venezuela forces, by comparison, are poorly trained, dreadfully equipped, and inexperienced.

Sure, a similar matchup took place in the 1980s between Iraq (funded and equipped by the United States), and Iran.  The Iranians had very little equipment or training– their chief combat tactic was to hurl waves of warm bodies at oncoming Iraqi tanks… and Iran had  a lot of bodies at the time.

The tactic worked.  Millions died, and the long battle of attrition between Iraq and Iran ended in a stalemate. 

Venezuelans, however, do not have the Iranian’s overzealous religious resolve, nor do they particularly care for Chavez and his brand of socialism.

Consequently, if Chavez initiated an attack, it would look like amateur night on the Colombian border. 

Chavez knows this, so all of his rhetoric is simply bombastic statement that won’t be backed up with action– unless something truly catastrophic and unexpected happens, like a clear act of war from the Colombians or the United States. This is highly unlikely.

In the meantime, Chavez will continue his peacock strutting and scare the world into thinking that war is imminent.  I think he’s actually giving us a gift, though.

In 2006, Israel and Lebanon held a brief war… a few people came. Markets got jittery, and both the Israeli shekel and Lebanese pound had a brief plunge.  They returned to normal levels quite literally within days.

In the last few weeks since the Colombia/Venezuela saga began, I’ve watched the Colombian peso sink by 8% against the US dollar.  Part of this has been a dollar rally, but most of the swing has been because markets are scared of war with Venezuela.

I’m convinced the fears are unfounded.

Chavez is shrewd and at least reasonably intelligent to have gotten this far. Venezuela is beset by major problems– crumbling oil infrastructure, water scarcity, frequent power outages, etc. War is a great way to distract and unify the masses, but walking in to an absolutely certain military defeat is a fool’s bet.

As such, I think that if the Colombian peso continues to fall, especially past 2,050, it should make a reasonable short-term investment.

What if they held a bond auction and nobody came?

This is exactly what happened in Latvia a few weeks ago, as the country failed to receive a single bid for $16 million of debt, maturing in April 2010. In other words, investors were not willing to loan what amounts to international finance pocket change to a sovereign government for a measly 6-months.

Why? Because everyone expects that Latvia will devalue its currency; consequently, no one wants to be holding on to local assets there because the value of those assets will drop like rock once the Latvian government finally faces the music and devalues.

I talked about this in July “You Can profit from this countrys Devaluation ” after spending a great deal of time in the Baltics.  Latvia’s currency, the lat, is pegged to the euro at very high rate– the agreement was made in 2004 when Latvia’s economy was growing very rapidly. At the time, the peg seemed reasonable.

Today, Latvia’s economy is collapsing 17% per year, and the central bank is running out of funds to intercede in the market. In order to maintain the peg, Latvia’s central bank has to buy lats and sell euro, essentially creating artificial demand for the lat.  It can only do this for so long before it runs out of euro.

For months, it has been getting euro loans from rich European countries and supranational central banks. Each of these loans has been burned through as Latvia desperately tries to keep the peg alive.  For the euro lenders, this is akin to buying bonds in GM… it’s a lost cause, and any new money you throw at it will surely be lost.

European governments have sternly warned politicians in Latvia that severe austerity measures had better be implemented if they want more loan money. Realistically, though, Latvia would have to eliminate entire divisions of its government and economy in order to meet the EU’s budget demands.

This is not likely to happen.  Consequently, devaluation is looking more and more like the only remaining option.

The greatest fear of devaluation in Latvia is that locals who took out mortgages denominated in foreign currencies (because the interest rates were lower) would suddenly owe a hell of a lot more on the balance after devaluation.

For example, suppose someone took out a mortage of 100,000 at .7 lat = 1 euro.  Latvians think, earn, and spend in lat, so the borrower would consider his mortgage to be 70,000 lat. If Latvia devalues to 1 euro = 1 lat, his mortgage balance in euro would stay the same (100,000 euro), but the equivalent would now be 100,000 lat.

Well… that would certainly make for a bad day.  Imagine waking up one morning and owing another 40% on your mortgage when you already had negative equity to begin with!

Apparently, though, Latvia’s government has already thought this through this issue.

According to the Financial Times, Latvia’s legislature is taking steps to protect locals from the negative effects of a devaluation.  Any overnight increase in mortgage principal as the result of devaluation, for example, will have to be assumed by the bank, not the Latvian borrower.

With such a populist, consumer-protection policy designed to cushion the blow of a devaluation already in the works, there is little remaining for Latvia’s government to do but devalue. It is not a question of if, but when… unless something truly miraculous happens, like Latvia wins the sovereign equivalent of the lottery.

Investment banks like Barclays and RBC are betting that Latvia will devalue 15% by the end of 2010. Sweden’s largest banks (which are the also the largest lenders in Latvia) are  preparing for a devaluation scenario as well. They have to– devaluation in Latvia will hammer their balance sheets.

Swedbank, for example, has about 16% of its loan book in Latvia. When Latvia devalues, Swedbank’s equity will be hit hard and the stock price will suffer. In preparation, the bank conducted a $2.2 billion rights offering this month in order to cushion its balance sheet.

I still think shorting the banks is the best way to play this opportunity, but through carefully selected PUT options that limit risk exposure. If you directly short the stock, be prepared for a volatile run.

I think the market will also punish Sweden’s currency when devaluation occurs, so it would make sense to short the krona against the dollar, euro, and yen.

Let me know what you think about this strategy and if you have other ideas for how to profit.

It had to happen eventually.

Nothing moves in a straight line in either direction, up or down… and when it does, there’s clearly room for a correction. 

In this case, I’m talking about the dollar, which has surged in the last week. 

What a roller coaster ride– we watched it continually slide for years against major currencies while the credit bubble fueled capital flows into foreign currencies and commodities.  When the bubble finally burst last year, capital came flooding back to the dollar as fast as a cracking whip.  Within months, though, the dollar’s slide started again.

Since its recent peak in March, the dollar index has slid 16%, including a nasty spill of 6% in May, and another 5% drop since the beginning of September.  Frankly, the dollar index would be looking much worse if it weren’t for the even more terrible economies of Sweden and the UK, whose currencies comprise part of the index along with the yen, euro, Canadian dollar, and franc.

Sure, the dollar’s fundamentals are exceptionally weak, but such a rapid slide is unsustainable without a brief recovery period.  A dollar rally has nothing to do with renewed confidence in the dollar; rather, it is simply a matter of investors taking advantage of the dollar’s ‘cheapness’ to buy US assets.

Additionally, when investors start feeling a bit skittish again about world economic prospects, they tend to rush back into the dollar to buy the ’safety’ of US Treasury securities.  This is happening now, to a degree– investors may be realizing that the extreme stock market rallies we have seen recently are clearly overdone, and that the world economy is not yet on solid footing.

Overall, these are indications of strength for the dollar, and explain why the dollar index shot up 1.5% in the past week.  Like I said, it had to happen eventually.

To be clear, the dollar’s fundamentals are not improving in the slightest; they’re getting much worse– more paper, more printing, more debt, more obligations, more stimulus programs, more political pandering.

As to how long the rally will last, though, is anyone’s guess… it could be days, weeks, or months, or possibly longer.  For example, another major financial crash could create a stampede for US Treasuries again, just like we saw last year, and the dollar will surge.  Whatever lift the dollar gets, though, will only be temporary.

Unfortunately the timing on these things is impossible to predict; that’s why I’m looking longer-term. I don’t know what’s going to be happening in the markets tomorrow or 3-months for now, but I’m pretty confident I know the general direction over the next few years– consequently, I’m buying gold and silver futures from 2011-2013. 

For example, July 2012 silver contracts are selling for about $16.94/ounce.  Based on the dollar’s fundamentals, I can easily see silver in the $25 to $30 range by then.  I don’t have to be right by tomorrow or next month– I have two and a half years for the market to reflect the reality of an overly inflated currency.

If I’m right, I stand to make a lot of money. If I’m wrong, I will be happy to take delivery of 5,000 ounces of physical silver.

He has ruled through 12 US Presidents, a string of military dictatorships, several coups, and a historic transition to democracy. At 81 years of age, King Bhumibol of Thailand has really seen it all.

Despite his essentially ceremonial position, King Bhumibol is revered, almost worshiped, by his people– not like other constitutional monarchies where the royal family is merely a rubber stamp soap opera.

He has used his extreme influence on several occasions during his reign to intervene in many of Thailand’s crises, which seem to occur every other Tuesday when there’s a coup or ingredients for violent protest.

In 2003, for example, after an idiotic Thai actress sparked an international incident with neighboring Cambodia, angry Cambodians burned the Thai embassy in Phnom Penh to the ground. Naturally, an enraged Thai mob gathered in the streets to storm the Cambodian embassy in Bangkok… but Bhumibol intervened, requesting calm and that the people disperse. They obeyed like dutiful subjects.

I don’t really understand what makes one human being subjugate himself to another human being– to bow and curtsy and protect as inviolable even mere photographs of a monarch… yes, in Thailand, not only are insults to the King punishable by imprisonment, insults to his image are as well– by up to 30 years.

The ‘king culture’ is so deeply inculcated in Thai society that his death would have an enormous impact on the country and its economy. Two weeks ago, when rumors began circulating that the King was on his deathbed, Thai equities were rocked, falling 10.7% in just two days. Bond yields rose. Thailand’s currency, the baht, fell against major currencies.

The rumors turned out to be false, but the market’s reactions gave an indication of what will happen when the King’s reign finally comes to an end: investors view a Thailand without Bhumibol with the same level of risk as a Thailand in crisis without an elected government (1992, 2005-2006, 2008).

Each of these crises, whether a coup or the eventual demise of the King, is buying opportunity. There is no change to the long-term value of Thai equities or local assets due to political turmoil– as Thailand’s recent history shows, the country always rises from the chaos relatively quickly, and the markets recover accordingly.

In the case of this month’s health rumors, Thai markets recovered in about three days. The King made a public appearance to assure everyone that he is very much alive, and the Thai SET Index settled pretty close to its pre-rumor level.

When the King actually does pass away, it will be difficult to tell how long Thailand will be in ‘chaos’– perhaps hours, days, or a few weeks at the most, similar to how the entire Catholic world waits with baited breath for the College of the Cardinals to burn white smoke after the passing of a Pope.

Regardless of the duration, though, it will undoubtedly be a buying opportunity; once Thailand gets back to the business of doing business, markets will once again recover and investors can feel very smart for taking the risk.

In all fairness, the timing on these things is impossible to predict. Despite his advanced age and long list of existing medical conditions, King Bhumibol could end up being like Pope John Paul II was– very old, very decrepit, but seemingly able to last forever… and we’ll all be talking about him 10-years from now in the same way.

Statistically speaking, though, this is highly unlikely… and that’s why I’m headed to Bangkok next week where I will put boots on the ground to uncover some of the country’s best investments.

If you want to take a position in Thailand, you can buy the currency through an online FOREX platform like GFT Forex (www.gftforex.com), or you can purchase equities in the Thai market through Hong Kong based BOOM Securities.

I have the temporary misfortune today of feeling a bit under the weather. I’ve always wondered how such an expression came to pass, but if it is meant to be any sort of metaphor, my ‘weather’ is something like a category five hurricane.

As a consequence, I was unable to attend this week’s Asia gold conference which took place in Hong Kong; fortunately, though, my friend and colleague Christine Verone was in attendance, and her account of the event was quite interesting.

To listen to Christine describe it, the conference was a veritable who’s who of Asian investment managers, many of whom have their eye solidly fixed on the yellow metal’s growth potential.

Here on the mainland, there has been much debate over the central bank of China’s easy monetary policy and fiscal stimulus measures; unlike in the United States where broad measures of money supply (“M2″) have changed relatively little, Chinese money supply has grown nearly 30% year over year, according to the Financial Times.

Considering that the government’s stimulus programs will total roughly 15% of GDP, and lending is up 149%, there is certainly reason for caution. With credit flowing so easily, everyone has access to large sums of capital– and that capital has to find a home somewhere.

Typically, loose cash tends to find its way into real estate and equity markets– and this is exactly what is happening now; easy money leads to an abundance of capital that goes rushing in to property and stock… both markets surge.

One could point to the Shanghai Stock Exchange as evidence, which has more than doubled since its March low. What I find more interesting, however, is the new “Chinext” stock exchange that literally just launched today.

Chinext is designed to be China’s version of NASDAQ or the American Exchange– a low cost stock market where small and medium sized companies can access eager public funds.

The average Price/Earnings ratio of the first round of companies to be listed on Chinext? 55… a valuation so high that it’s almost comical.

Clearly, Chinese investors have been seeking new instruments for their capital, even when the abundance of capital pushes up valuations to surreal levels.

The grumblings about a bubble in the equity and property markets, though, have already begun… which means that, before too long, a great deal of that capital will be looking for a new home. Based on our observations on the ground, it looks like that new home will be gold.

This to me will be one of the biggest catalysts for an increase in gold prices, even as much as the rapid expansion of the US Federal Reserve’s balance sheet. China, having recently launched its own homegrown gold exchange, now has the appetite, capital, and platform to make serious gold investments.

I do not expect gold to rise in a straight line on Chinese demand– there will likely be a concerted effort from world governments to occasionally tame the price. In the long run, though, I expect that we will look back in a few years and regard 1,050 gold as a bargain.

Have a great weekend.

The US Internal Revenue Service was feeling rather proud of itself yesterday; IRS Commissioner Doug Shulman held a press conference to release the final results of 2009 amnesty program.

Over 7500 taxpayers came forward this year to confess hiding income in overseas bank accounts; this number is substantially greater than the several hundred which usually step forward.

Obviously, the unity of insolvent western governments against overseas ‘tax havens’ coupled with the UBS/Swiss banking debacle has lit a fire under noncompliant taxpayers… and of the 7500 individuals who came forward under the amnesty program, their bank account sizes range from $10,000 to over $100 million.

To be clear, having an overseas bank account is not illegal… it’s actually a smart thing to do. Generating offshore income, hiding it in an overseas bank account, and not telling the government about it, though, is illegal.

The Obama administration continues to beef up the IRS with financial and manpower resources– 800 new agents are currently being trained specifically to go after international tax evaders. They have even announced opening up new offices in places like Beijing and Panama… though I’ll believe it when I see it.

With their new mountain of resources, I expect the IRS to go after a few noteworthy tax dodgers (Wesley Snipes, Bradley Birkenfeld) in highly publicized trials. My prediction, however, is that most people the IRS finds will more than likely be subject to financial penalties, probation, and suspended sentences.

Why? Because incarceration costs money, and the government needs tax revenue. Someone who can make $100 million and stash it away in a Swiss bank account is more useful to the government creating jobs in society rather than playing the harmonica behind bars.

Regardless of the penalties, though, trying to ‘hide’ money in offshore accounts is just a dumb thing to do. There are a lot of people out there who think that their trustees and banking secrecy will protect them from tax authorities.

They won’t. Depending on the discretion and secrecy of another human being is a sure-fire way of getting caught. No banker or trustee in the world can withstand the pressure of the federal government and its limitless resources.

There is a bit of good news in all of this, though.

The Obama administration has recently abandoned its plans to go after overseas corporate income. Current tax code allows US corporations to defer paying taxes on income earned overseas until that money is repatriated to the United States. Obama wanted to change this law, but has recently abandoned his plans.

I’m sure that US companies threatened the administration with another round of deep job cuts if the tax hike were passed… and considering that Obama needs their support for changes to climate, healthcare, and financial regulations, he walked away from the idea altogether.

Entrepreneurs with overseas income can greatly benefit from this tax rule; with a properly planned business structure, businesses can defer paying taxes on overseas income, indefinitely, until the funds are brought back to the US.

Let me know if you’re interested and I can refer you to some knowledgeable and by the book tax attorneys who will give you expert advice.

THE BEST GAME IN TOWN:

Legitimate tax deferral strategies are often the cornerstone of good tax planning.  Find out what options are available for your particular situation and take action right away.

For individuals, an easy way to do this is with the Open Opportunity IRA structure that I have mentioned a few times. I don’t want to beat a dead horse, but it’s a no-brainer strategy.

The best way to find out more about this strategy is to check out the guide written by our friend and noted Economist, Terry Coxon. Check out Terry’s Guide, Unleash Your IRA

I need to start off today’s missive with an important update. Last month I wrote a few articles about something that I believe is an absolute no-brainer if you have retirement savings– setting up a self-directed IRA.

Most retirement savings plans are locked in to a handful of investment options– employees are forced to make a selection among four or five choices, most of which are poorly managed funds run by the same institutions that clearly demonstrated their incompetence last autumn.

A self-directed IRA provides a mechanism for an individual to allocate his retirement savings in whatever way he chooses– whether his own portfolio of equities, physical gold, foreign real estate, overseas bank accounts, private placements, etc.

With a self-directed IRA you can take control of your retirement savings to ensure that some bumbling moron at a bankrupt financial institution doesn’t lose it all investing in Fannie Mae. More importantly, you can ship your savings offshore in a perfectly transparent, legitimate way.

I believe in this approach so much that I went through the trouble of negotiating a subscriber discount with Checkbook IRA, the same service providers that set me up with my self-directed IRA structure a few years ago. These guys are an honest, efficient, highly competent family operation, and I was grateful that they extended a $500 discount to subscribers.

I am writing about this again today for two reasons. First, I’ve exchanged a few emails with Jordan Sheppard at Checkbook IRA, and due to the amount of volume they are receiving and limited capacity within the shop, the discount will be discontinued effective next Friday, October 16th.

Second, and perhaps more importantly, I’m concerned about the direction that the market is going to take. There are a lot of people whose retirement savings are literally trapped in some blue chip index fund.

These are the same people who probably had a bad feeling last August that things were about to get really bad. They watched with horror as their positions took a 70% nosedive.

Fortunately, the last six months has been a period of irrational exuberance, and markets have recovered 50% from their lows. As markets tend to be forward-looking, though, can we realistically say that near-term prospects for the US economy are rosy?

Not by a long-shot. The Dow hovering near 10,000 makes about as much sense as lipstick on a pig.

Top line corporate revenue growth is weak at best, and there are numerous long-term factors which hamper earnings growth, namely: baby boomer retirees pulling their capital out of the market; costly health care regulation; increased corporate taxes; capital flows to emerging markets; etc.

Each of these factors has a negative bearing on long-term equity valuations. It is difficult to predict what will happen over the next few months, but given the carnage that we all experienced last year, it is probably more sensible to make low risk investments that mirror our economic outlooks.

To me, this means companies that are trading a steep discount to net asset value, precious metals and certain commodities, Asian currencies, foreign real estate, and carefully selected private placements.

This is why it is so important to unlock your retirement savings– with a self-directed IRA, your money will be protected from idiotic fund managers if the market takes another leg down.

If you currently have a retirement account that boxes you in to limited investment options, or keeps all of your savings within the United States, I’d highly encourage you to find someone that can set you up with a self-directed structure.

I’m comfortable recommending Checkbook IRA since I have worked with them in the past, and they understand unique needs like using a retirement account to buy physical gold and store it overseas.

If you give them a call, make sure you mention the Sovereign Man discount, which is good until October 16th.

While I was en route to China, somewhere over the Sea of Japan, gold hit a record high on ‘concerns’ about the long-term value of the dollar.

Frankly, 1974 was probably the time to be ‘concerned’ about the long-term value of the dollar.  The remaining institutional investors who are only now finding reasons to be concerned about the dollar are probably the same ones that thought Ford and Fannie Mae were bargains last year.

The dollar is likely having such a volatile day thanks to this article from the UK’s Independent. The article asserts that Russia, China, and the Gulf Arab states have been holding secret meetings to plan a transition away from dollar-priced oil.

According to the article, which cites ‘Arab and Chinese banking sources in Hong Kong,’ the plan’s deadline for complete transition is 2018.  This date makes sense considering that the longest-dated oil futures contracts expire in December of that year… but are the claims legitimate or simply rumor?

Who knows. Saudi and Russian authorities have already denied the newspaper’s allegations, but this is to be expected.

While gold may be getting a friendly bump thanks to the Independent’s article regardless of whether the claims are true, it is unquestionable that the dollar’s long-term value is heading south.

On the plane ride to China, I was reading a rather interesting “Trade and Development Report” published recently by the United Nations.  The report provides concrete data for how governments around the world have reacted to the financial crisis.

One of the things that caught my interest in the report was a table on page 66 tallying fiscal stimulus programs and government bank guarantees as a percentage of GDP.

The United States, for example, has backed its banking sector with a whopping 81.1% of GDP.  The United Kingdom, Sweden, Netherlands, and even Japan ring in at 81.7%, 70.2%, 46.5% and 22.3% respectively.

“Developing” nations like Brazil, Chile, Taiwan, Philippines, and Thailand? 0.0%. China came to the table with 0.5%.

The data certainly begs the question– which of these groups should actually be considered ‘developed’?

Ironically, most western ‘developed’ governments, led by the United States, have only been able to make these multi-trillion dollar bank guarantees because of the generosity and savings provided by ‘developing’ countries through US Treasury purchases.

‘Developing’ countries are weary of this model– Chinese and Taiwanese no longer live for the pleasure of exporting their products to the West in the hopes of being paid in US dollar IOUs.  Consequently, the concept of a new reserve currency is one that has legs and will in all likelihood become a reality.

If, under influence from western governments, the IMF decides to not go along with a new reserve currency scheme, the strongest developing nations will likely conspire to create their own internal mechanism.  The US and Europe will be forced to go along with it as a matter of necessity.

This is why gold and silver have such tremendous long-term potential– they will anchor the new reserve currency. Sure, there is the inflation/hyper-inflation argument that will send gold sky-high (though I would suggest that there is ample evidence of deflation as well).

Predominantly, though, precious metals will rise as a function of capital inflows– foreign governments are sitting on trillions of US dollar reserves that they are trying to get rid of.  Gold is where they are going to park most of it.

Three months ago I wrote about some silver investments that I was making– I sold $10 December 2011 put options and bought $15 December 2011 call options. In each of these investments I was betting that the future value of silver would rise.

In 3-months these investments have more than doubled, and I am now analyzing the futures markets to find the best ways to invest directly in gold and silver.

In part, this is what I am doing back in Shanghai.  My longtime friend and colleague Christine Verone is the first foreigner ever to be certified by a Chinese exchange, and I plan on taking new gold and silver positions based on her insight of the Asian markets.

More on this in future letters. In the meantime, look after your savings if you’re dollar-based.  If your savings is sitting in the bank collecting dust, either get it out of the dollar, or put it to work generating a real return.

It’s not time to be on the sidelines anymore.

Apparently I’ve been traveling too much, because I was recently caught out of the loop.

On Wednesday I published an article about Panama’s Resolution 52; the law effectively makes it illegal for landlords to rent property in Panama for less than 1-year.

I predicted in the letter that, based on the past track record of Panama’s National Assembly, the law would be repealed shortly due to significant pressure from the real estate industry and expat community in Panama.

Well, it turns out that I was simultaneously entirely right, and entirely wrong.  By the time my letter was published, Resolution 52 had already been repealed.  Crisis averted.

I found out about it thanks to Augusto, my very dedicated Panamanian attorney.  Even though he was somewhere shy of the 14th green at the time, Augusto somehow managed to read my letter and instantly correct my mistake with the following email:

“Your article is completely wrong. Resolution 52 was already revoked by Resolution 79.”

Did I mention he’s blunt too?

Frankly I couldn’t ask for a better attorney; I have burned through dozens of lawyers in Panama over the years, and Augusto is truly among the best in the business. He has literally saved me tens of thousands of dollars by steering me away from the wrong deals and connecting me with the right people to profit with.

Augusto’s example underscores and incredibly important point: a key element to success in many ventures lies in who you know.  The ability to leverage contacts to make things happen often makes the difference between a home run and a strike out.

I believe in this principle so much that I try to make it a core theme of this letter.

Last month, for example, I published my Panama Black Paper.  It was essentially my personal rolodex of high-level contacts in Panama– lawyers, bankers, real estate agents, gold dealers, etc. whom I trust and have dealt with in the past.

The idea behind the Black Paper was to provide people who are serious about living, investing, or doing business in Panama with a well-connected network of influential individuals who are trustworthy and highly competent.

All of my most profitable deals, most important relationships, and the best experiences have all come to me because of who I knew– my network.  I know it’s cliché, but it’s the truth.  “It’s not what you know, it’s who you know”.

It’s also true that you can dramatically expand your opportunities and experiences if you know how to grow your network; there’s an art to doing it, and it’s something that I’ve been successful with in the past.

For example, when I was working in the intelligence business, infiltrating networks was part of the job description.  Now I use the same tactics to walk in to a foreign country and make a big splash with the upper ranks in a short period of time.

There’s no mystery to doing this, it’s a question of process and persistence… and sometimes even paying to be in the room.

Do you want better investment returns? Become friends with the people who have it mastered. Do you want to make a lot of money? Get networked with talented entrepreneurs and deal makers.  Do you want to meet beautiful models? Get close to photographers and fashion designers.

Once you understand the strategy and tactics involved in building a new network, you’ll be able to immediately change the scope of opportunities in your life, solve problems, and create deep, rich relationships with the kind of people you want to associate with.

I’m thinking of writing a free report about how to generate goodwill, build contacts, and penetrate any network.   This isn’t for everyone, but if you’re looking to take your available opportunities and experiences to the next level, “who you know” can make all the difference.

If you’re interested in this information let me know in the comments below.   The more requests I receive, the higher priority this free report will be.

Years ago, in my early 20s, I had my first taste of investment success.  I wish I could dazzle you with a great story about a goldmine in the jungle or negotiating land rights with warlords… Unfortunately, no. All that would come later.

Rather, my first deal was a set of very plain brick apartments on the wrong side of the railroad tracks.  They weren’t very sexy, but I was able to pick them up for pennies on the dollar… and it was a hell of a learning experience.

Over the next several months and years, my property investments grew, until eventually I became a ‘known player’ in my local real estate market.  Bankers and developers even started calling me to ask advice or offer deals.

My success was based on developing and sticking to a system for valuing real estate transactions based on three methods– comparative market value, “replacement cost,” and income.

I actually use these same three approaches today to value companies as I run around the world in search of exciting business and investment opportunities.

Of the three approaches, the most important one to me was the income valuation… to me, an investment property was literally worthless if it didn’t cash flow enough to cover the debt service– I would have been better off stashing my money under the mattress.

Consider the residential investment property market.  The formula is quite simple: landlord owns property, landlord leases property to tenant, tenant pays landlord, landlord covers all expenses from the rent and pockets the rest.

A landlord’s key operating expenses are property management service, maintenance, taxes/dues, insurance, and any utilities paid.  On top of this the landlord must service any mortgage debt.

If the rental income exceeds the operating and interest expenses, the property is cash flow positive, and the landlord is happy.

If the expenses exceed the rent, however, then the landlord has a problem and must feed the property. Naturally, a landlord can only afford to do this for so long before s/he runs out of money.

This is a similar situation to many start-up businesses that are unprofitable for the first several years of operation; obviously the owners expect the business to eventually turn a profit so that they can recoup their initial investment.

Businesses, however, often have exponential revenue growth potential that can make up for early losses. Investment properties do not; a landlord can only increase rents at a low, linear rate.

Thus, an investment property must have some mechanism for the owners to turn a profit, especially if the property is cash flow negative.  Most landlords expect that the appreciation in the property’s value will bridge this cash flow gap.

For example, if a property fetches $20,000 in rent annually, yet costs $35,000 in annual expenses and interest, an investor would have to be crazy to buy this property… unless, of course, s/he believed that the property would appreciate by at least $15,000 annually.

This price appreciation, in theory, would cover the cash flow shortfall.  But it is based entirely on expectation.

When property markets are in a bubble, the cash flow gap of investment property is enormous, i.e. rents are miniscule compared to the cost of maintaining the property and servicing the debt. This is because buyers have an expectation that properties will increase in value, and the increase will more than make up for the negative cash flow.

You’ve seen it happen– real estate agents, TV infomercials, etc. all urge buyers to run out and make their real estate millions.  People begin to make irrational financial decisions based solely on the expectation that property values would increase, and increase big.

Even the banks believed it– they wrote trillions of dollars of no-doc, zero-down loans based solely on the premise that the US real estate would increase substantially in value, cash flow be damned.  We all know what happened next.

In the long-run, the natural, steady state of a real estate market should be cash flow neutral; cash flow positive properties will be bid up by investors, and prices of cash flow negative properties will fall from lack of demand.

This is exactly what is happening in the United States, as well as many other world property markets right now.  Eventually, once the negative cash flow gap had become too wide, the bubble burst.

NCREIF chart of property returns

The formula starts with RENT– annual rent must cover debt service and operating expenses in order for a property to break even; and in order to find a tenant who is able to pay, rents must be affordable. Affordability, as we know, is directly proportional to the health of the economy.

This is one of the key metrics that I use to evaluate property markets around the world. In the United States, I still see many local markets where rental yields do not support property prices.  Consequently, I believe that US housing prices still have room to fall.

With this is in mind, I will start reporting on rental yields of local property markets as I travel to give you a better idea of which countries present the best real estate investment opportunities.

“We are very concerned with what’s happening in Panama, or to put it another way, what’s not happening.”


– Jeffrey Owens, director of the OECD Centre for Tax Policy and Administration

Earlier this month, a group of tax commissioners, finance ministers, and NGO representatives descended upon Los Cabos, Mexico for the 5th annual “Global Forum on Transparency and Exchange of Information” sponsored by our friends at the OECD.

You will likely recall that the OECD published its ‘black list’ and ‘gray list’ of non-compliant financial centers, coinciding with the G20 summit in London this past April.  Offending nations ranging from Uruguay to Switzerland immediately scrambled to have their names stricken from the list.

The OECD called this month’s forum in Mexico to make sure that remaining tax havens have either already stepped into line, or are breaking their necks to get there.

The primary regulation in question is the OECD’s controversial standard for information exchange, known as “Article 26.”  This is the standard which requires countries to exchange information with other nations for the purposes of tax reporting, regardless of domestic bank secrecy laws.

Austria, Belgium, Luxembourg, and Switzerland were the last of the OECD members to hold out on Article 26, but each has recently caved to pressure and acquiesced to violating their own laws for the sake of international tax information exchange.

With a united OECD standing against them, smaller countries who were holding out against Article 26 compliance have no remaining support, and you can be sure that each of them will fall into line: this is evidenced by the spate of “Tax Information Exchange Agreements” signed by smaller countries in the last month.

29 exchange agreements have been minted this month alone by countries like Gibraltar, San Marino, Andorra, Liechtenstein, Monaco, Aruba, Anguilla, and Nevis.  Conspicuously missing from the list?

Panama.

In the introduction to this missive, I quote the venerable Mr. Owens as he responded to a reporter’s question in Mexico– why does Panama attract such little scrutiny since it has not signed any tax information exchange agreements?

Panama was placed on the OECD’s “gray list” in April as a “jurisdiction that has committed but not yet substantially implemented the internationally agreed tax standard.”  In order to be taken off the list, gray list jurisdictions must sign exchange agreements with at least 12 other jurisdictions.

Apparently Mr. Owens’ remarks lit a fire under the Martinelli administration in Panama; the country recently announced that it would begin sharing tax information and is close to inking deals with Spain and Mexico already.

You can expect deals with the United Kingdom, United States and Canada to be close behind.

So does this spell the end of Panama as a financial center?  No. Likely it means the survival of Panama as a financial center because noncompliance will threaten its financial infrastructure.

BNP Paribas, for example, which is one of France’s largest banks, recently announced that it would close all branches in non-compliant countries, including Panama.  Similar announcements by other banks will likely be forthcoming.

Consequently, if Panama does not want to lose the integrity of its financial center, compliance is a must.

The unfortunate reality of the global financial system is that traditional tax havens like Panama, Hong Kong, BVI were specifically designed to hide money; this veil of secrecy has now been ripped to shreds by the OECD, and privacy is no longer a reason to hold money offshore.

Governments are scrambling to become compliant, and sooner or later every bank in every jurisdiction will be coughing up depositor information to foreign tax authorities.

That’s the bad news.

The good news is that banking offshore still provides substantial benefits for consumers and their after-tax income, namely:

• Many overseas banks are stronger, more liquid, and better capitalized than western banks, and they don’t depend on an insolvent organization to guarantee deposits
• Overseas banking provides opportunities for currency diversification
• When western countries begin imposing capital controls (we know they’re coming), your money will be safe in a foreign bank, allowing you to freely withdraw, transfer, and invest your capital as you see fit without asking permission from the government.

Despite the OECD’s actions, I still believe that banking overseas is a smart move for everyone… just be sure that you personally comply with your reporting obligations. US Citizens, for instance, must report overseas bank accounts to Uncle Sam every year, and if you received a penny of interest, it must be reported on your tax return.

Roughly $100 billion.

Even in today’s world where politicians throw out the word ‘trillion’ as if it were a casual dinner garnish, $100 billion is still a lot of money… especially when you’re desperate to sustain glimmers of economic growth and trying to plug a budget shortfall that amounts to 13% of GDP.

And yet, roughly $100 billion is exactly what got sucked out of the United States in July by foreigners: “Net capital outflows” increased to $97.5 billion for the month of July, according to recent data released by the Treasury department. Meanwhile, net long-term capital inflows fell to a paltry $15.3 billion in July, an 80% decline from June’s $90.2 billion capital inflow.

What do these numbers mean?

Foreigners are continuing to lose confidence in the US economy at a record pace and are finding better places for their money. This would certainly support the US Dollar Index’s dramatic 3.5% decline in July– though the dollar index only tells a partial story. “DXY” as it is known, though, only tells part of the story.

The dollar index measures the value of the dollar only relative to a small basket of currencies– euro, pound, Canadian dollar, Swedish koruna, yen, and Swiss franc. Powerful Asian nations like the Gulf, China, Singapore, etc. are conspicuously missing. And yet, DXY still dropped 3.5% in July.

Conclusion? If these ‘relatively harmless’ countries that comprise the US Dollar Index are losing confidence in the greenback, you can be sure that China and the Middle East are knocking over women and children on their way to the emergency exit.

Telling you that the dollar will be continually worth less until it is ultimately worthless is nothing new. So if you would indulge me a moment, I’d like to prognosticate on the greater implications.

As the pace of these outflows picks up steam, you can be sure that a group of out-of-touch politicians are monitoring the data and thinking to themselves, “we need to regulate this before it gets out of hand!” And this sentiment is exactly what spawns capital controls.

Capital controls by design are intended to regulate the flow of capital in and out of a currency; in times of uncertainty, shaken politicians always pull this oldie-but-goody out of the playbook… it happened in Iceland, and it’s been discussed around the world recently– Russia, India, Brazil, the Baltics, Poland, Czech Republic, Kazakhstan, etc.

Not to mention, a world largely free of capital controls is a relatively new phenomenon. We can look to history for a recent example of a world superpower turning to capital controls for ’stability’:

In the mid 1970s after the collapse of the Bretton-Woods system, the British economy was in serious trouble. GDP was contracting, unemployment rising, investment falling, and the government was drowning in red ink, all while social obligations were climbing.

Financial markets responded by turning their backs on Britain’s Pound Sterling, and the currency was crushed. The Wall Street Journal advised investors to ditch the British pound, running headlines “Good-bye Great Britain.” And the government came under intense pressure to ‘do something.’

The first thing the UK did was go to the international community with hat in hand to prop up the currency with loans and bonds. This is already happening in the United States as Tim Geithner attempts to woo China and Middle East into buying US Treasuries.

Subsequently, the British government imposed a slate of capital controls that essentially penalized investors for moving capital out of the country and requiring that all investment transactions go through ‘authorized dealers’ who were charged with enforcing this policy.

The penalty ranged from a 10% to 30% premium on the dollar/Pound spot rate at the time– essentially the same tactic that the Cuban government is employing today.

Frankly I can see the same thing happening in the United States, perhaps starting off with a penalty in the Treasury markets where there is the biggest sucking sound… imposing a sort of ‘restocking fee’ for foreign investors who don’t roll over to new issuances upon maturity.

Eventually, though, you can be sure that the government will impose controls at the consumer level as well– requiring a certain allocation of bank deposits to be held in US Treasuries, restricting foreign remittances, and mandating scrutinous approval for overseas wire transfers above a certain amount.

Naturally, US politicians would never call such measures ‘capital controls,’ because the world’s reserve currency must be freely convertible. They will likely wrap up these policies in the ‘anti-terrorism,’ ‘money-laundering,’ or ‘tax evasion’ blankets, and simultaneously wage a PR war against evil gold and currency speculators.

So what can you do? As I’ve mentioned before, buying foreign real estate is the single best way to move money overseas where it cannot be forcibly repatriated. Physical gold stored overseas is an excellent option as well– there are no reporting requirements for either.

I’ve also strongly suggested buying up such assets with tax-deferred retirement savings. In my opinion, there’s no better way to stay within the letter of the law than to buy foreign investment property and physical gold through a self-directed IRA… I am such a strong believer in this tactic that I negotiated a special discount with a trusted service provider who can set this up for you.

As I conclude this missive today, I see that the “world’s leaders” are gathered in Pittsburgh to listen to the sound of their own voices. Nothing will be accomplished, and they will emerge from their summit with nothing but sound-bytes, empty promises, and a continued fervor to exact tighter control over the markets.

Each of us has the ability to either plan for it, or dismiss reality and do nothing.

Updated 9/23/2009 (thanks JES)

People ask me this question a lot– what’s the best way to diversify US dollar holdings into other currencies?

Well, ‘best’ is certainly relative… I prefer commodities and precious metals as a way to protect my savings, but I can’t exactly pay my American Express bill with the bullion that I have locked away in South America.

Living in the 21st century among our modern conveniences nearly requires that we at least keep part of our wealth within the financial system– this means converting US dollars into another currency, and tucking that currency away at a bank or brokerage that is still plugged in.

So what’s the best way to do it?

Naturally, I think everyone should have at least one foreign bank account, preferably in a strong banking jurisdiction.  This has nothing to do with privacy or secrecy; rather, having a foreign account is an insurance policy against stupidity risk from the stooges who run most governments.

The day they decide to implement exchange controls, take an unsolicited dip in people’s bank accounts, force people to buy their debt, or a variety of other destructive measures, your money will be safely fenced off in foreign lands.  Additionally, in most cases you will be diversified out of the dollar, safeguarding the purchasing power of your savings.

In the past, I’ve discussed opening foreign bank accounts in places like Austria, Panama, and Asia… though I have to admit that I’m a bit of WC Fields when it comes to foreign bank accounts.  For most people, though, a single well-placed foreign account is an excellent hedge, as long as you select a bank, jurisdiction, and currency that you feel comfortable with.

But what if you want the ability to move your savings in and out of different currencies– you think the Australian dollar will do well, and then months later decide that the Swiss Franc’s fundamentals look attractive.  It would certainly be inconvenient and costly to transfer savings among multiple bank accounts.

In this case I would point you towards three specific brokerages that provide an elegant solution to this problem.

Interactive Brokers (US-based), Saxo Bank (European based), and Boom Securities (Hong Kong based) all allow users to log on and change their account’s “base currency” with the click of a button.  US citizens can open accounts at any of these brokerages.

For example, suppose you fund your Interactive Brokers account today with $500,000 US dollars.  Immediately, you decide that you would rather have your money in Swiss francs (CHF)… no problem. Log on to your account administration, select CHF under ‘base currency,’ and at the end of the day, the brokerage will convert your capital into francs at the spot rate.

The next time you log on to your account, the value will be CHF 510,000 (reflecting a spot rate of $1 = CHF 1.02).  Afterwards, regardless of how much the dollar falls against the franc, your account value will always be CHF 510,000.

You can do this as many times as you like, as frequently as you like.

Interactive Brokers denominates accounts in US dollars, euro, British pounds, Canadian dollars, Hong Kong dollars, Indian rupees, Japanese yen, Mexican pesos, Swedish koruna, Swiss francs, and Australian dollars.  IB is US-based, so there is no disclosure paperwork to be filed with Uncle Sam. Update: IB charges a fee ($10) for inactivity, so check with them before you open an account.

Boom Securities denominates accounts in Hong Kong dollars, Singapore dollars, Australian dollars, US dollars, and Japanese yen; furthermore, Boom accounts pay interest on deposits. Update: Boom charges an annual fee of about $25.

Saxo Bank denominates accounts in Hong Kong dollars, British pounds, euro, Swiss Francs, Canadian dollars, Hungarian forint, Czech koruna, Norwegian koruna, New Zealand dollars, Singapore dollars, Turkish lira, Israeli shekels, South African rand, UAE dirhams, and Japanese yen; plus they can take credit card deposits from Visa and Mastercard.

Each of these brokerages is plugged in to the global financial system, so you can move funds to and from your brokerage account as easily as you can with your existing bank account.  Furthermore, even though these brokerages are set up for trading, you can hold your capital in a variety of currencies without ever placing a single trade. Fees may apply.

“Dear Simon- Jeff Clark from Growth Stock Wire recently wrote that ‘China is a fraud’ and that ‘If Americans aren’t buying big-screen TVs or $100 sneakers, Chinese stocks are ultimately headed for trouble.’  I would like your opinion on his view.”

Great question. I like Jeff Clark and generally agree with his analysis… but like I said in Monday’s essay, I am puzzled that a few notable figures in the financial community are bearish on China.

Jeff’s analysis underscores the fact that the American consumer has dropped off the face of the earth. This is absolutely true, and it was a foregone conclusion that had to happen sooner or later. A society cannot persist on a negative savings rate without serious consequences.

That being said, China (and Asia in general) is now developing a robust domestic consumer economy that is picking up the slack.

I cannot emphasize this point enough.  In the 1950s, Asia’s economies were undeveloped, squalid backwaters whose only aspiration was to sell products to ‘rich’ America, the world’s beacon of freedom and prosperity.

That was the past. Today is a different story.

After years of working hard, producing far more than they consumed, and accumulating a substantial pool of savings, Asia is now entering the same position that the United States was in following World War II.

During the war, the US economy was in a state of full production.  Women entered the work force for the first time ever while the men were overseas fighting the war.  As a result, the average American family effectively had two salaries, and because nearly all manufactured goods went towards the war effort, there was nothing to spend money on.

Families built up substantial savings during this period, and by the end of the war, Americans had built up a large pool of capital that financed economic growth for the next several decades.

Asia is in this position now.  China, Singapore, South Korea, etc. are not frauds, but rather emerging consumers sitting on a huge pile of savings.  The growth is real, the macroeconomic fundamentals are solid.

On the other hand, would I invest in the Chinese stock market? No chance– I’d rather play craps in Macau… and Jeff correctly raises this point.

Last week when I was staying in Shanghai, I walked across the street from my hotel and saw what looks like an off-track betting operation: hundreds of Chinese people crammed into a small room staring at a giant data screen. Every few minutes when something would flash across the screen they would rush to the other side of the room to ‘place their bets.

My friend Christine Verone told me later that this is where Chinese daytraders gather, betting on momentum as blindly as lemmings following each other off a cliff.  This is not the market for me.  To be clear, I have little confidence in Chinese accounting standards, market transparency, or accuracy in official economic indicators…

… but I have every confidence that a bright, talented, hard-working entrepreneur can still make a fortune in Asia, and especially in China. The market is wide open in most cases, and the growth fundamentals are completely legitimate.

So if I’m not buying Chinese stocks, what am I investing in these days? Let me caveat this answer by saying that my risk tolerance is quite low. I generate income through various worldwide entrepreneurial ventures, and I multiply that income with what I consider to be ‘no brainer’ investment opportunities.

In my opinion, the best things to invest in these days are strong companies that are anomalously trading for less than their cash value– for example, a profitable company with $50 million in the bank whose market capitalization is only $40 million.

You get the company’s profits for free, plus $10 million in cash– the risk is incredibly low and the upside is huge.

It sounds unreasonable that such anomalies would ever exist… and you’re right, it is unreasonable. But it happens from time to time. Why? Because despite the drivel that they teach at most business schools, markets are NOT EFFICIENT– they are comprised of highly emotional participants, manipulative players, and authoritarian governments.

Consequently, great BUY opportunities emerge from time to time when the market becomes scared or otherwise irrational.

My friend Dr. George Huang has made a career out of finding these opportunities, mostly in the biotech sector.  I invest in his recommendations because he frequently brings me profitable companies that are trading for less than their cash value.

The last few picks have generated returns of roughly 50%, 100%, and 100% in less than 3-months each. Why? Because the market eventually realizes that a solid company trading for less than its cash is… completely absurd. And eventually, usually within a short period of time, the market bids the stock price back up to a reasonable level.

I mention Dr. Huang’s letter from time to time because I think it’s some of the most valuable investment insight out there.  If you haven’t listened to this interview we conducted with him a few weeks ago, it’s definitely a great use of your time.

Otherwise if you want more information about his letter and money-back guarantee, click here for more info.

I’m flipping through channels at 1am here in Seoul, and do you know what I see? Math problems– nutty professors, Korean-style, working out complex partial differential equations and geometric progressions with the intensity and flair of a concert pianist.

In fact, it’s not just one channel… it’s five, roughly 20% of the entire late night channel line-up.

When you think about it, this makes perfect sense. South Korea, once dismissed as an Asian backwater where American GIs defended the frontiers of freedom, has developed itself into a formidable economy on the back of an incredibly hard-working, educated, entrepreneurial culture.

GDP per-capita is now about $28,000 per person, making South Korea’s economy roughly equivalent to Italy, Israel, and New Zealand.

It shows. The landscape is well-developed with wide, clean highways, soaring skyscrapers (at very high occupancy), extensive port facilities, and a highly advanced digital infrastructure.

The great unspoken fear of South Korea is that all of this beautiful infrastructure would be wiped off the face of the earth on the day that North Korea’s Kim Jong-Il threw a nuclear temper tantrum.

It won’t happen. South Koreans do not live in fear of North Korea– it simply doesn’t register on their radar. The North Korea invasion fear, which have kept a US military presence in the south for roughly 60-years, is one of the biggest scams in geopolitical history.

Today, the North Koreans are as much of a military threat to South Korea as the Russians are to Germany (which begs the question– why are US troops still in Europe preparing to defend the Fulda Gap against Soviet Hordes?)

If US troops pulled out of South Korea, the economy would take a short-term hit and present a major buying opportunity. But within 3-years, the private sector will have reallocated the economic resources formerly tied to US military bases– it happened in Panama between 2000 and 2003 after US troops left, and I would venture to say that Panamanians are not half as good businessmen as the South Koreans.

The export-centric Korean economy took quite a hit at the start of the crisis because of the slowdown in global trade. Korea’s large conglomerates like Samsung, LG, Hyundai, POSCO, etc. all suffered in the early days as demand cratered and economists pontificated about whether Asia’s economies could decouple from the west.

Exploring this ‘decoupling’ issue was one of my primary missions in going to Asia… I wanted to put boots on the ground and see for my own eyes whether or not these economies are still dependent on the west.

My conclusion? The slowdown in U.S. consumers activity will continue to be a weight on the shoulders of the Asian exporters. But, while western consumers are dying, Asia’s massive pool of consumers are just beginning to bloom.

I saw it in China, where the level of Chinese consumer activity can only be described as ‘overwhelming.’ I saw it in the Philippines where remittances from overseas workers support domestic spending. I saw it in Singapore where the slowdown seems to have had minimal impact; and I can see it here in South Korea.

Asia is exporting to itself, building up vibrant domestic economies while governments spend their increasingly worthless dollar reserves on stimulus projects. To me, this is a clear indication that Asian currencies will continue their rise against the dollar (as well as the euro) since ‘cheap’ currencies relative to the west are no longer a priority.

But which ones to buy?

The Japanese yen is not a good option in my opinion– Japan is an aging economy that still depends heavily on the United States, and my expectations is that the government will not allow the yen to appreciate much beyond 85 yen to the dollar.

The Chinese renminbi is also not a good option for now– China plays too many games with its currency, and exchange controls are a capitalist’s nightmare.

I do like the Thai baht and think that Thailand has a great future in general, though I would definitely wait to invest until its 81-year old King passes away, leaving the country in temporary turmoil.

The Taiwanese dollar (TWD) and South Korean won (KRW) are good bets for now as proxies on thriving Asian tiger economies; I also really like the Australian dollar (AUD), which has great fundamentals, as an extension of Asia’s growth.

Gold is quickly reaching the mania phase in China, and there are clear signs of it on the ground.

About a month ago, we reported that for the first time ever, the Chinese government is promoting gold and silver as investments.  And by “promoting,” we meant cramming it down people’s throats.

We knew this was ground-breaking news at the time– a clear indication of long-term demand growth, as well as a sign that the government will be accepting higher inflation in the future.

Ironically, this story was little noticed in the gold industry at the time, mostly because the information was only being circulated in China (in Chinese, for that matter).  Fortunately, my friend and China insider Christine Verone was able to get me the scoop, and we ran it here first.

Since that report, three things have happened;

First- the mainstream media has latched on to the story about Chinese gold… Forbes, Moneyweek, Reuters, the blogosphere; it’s out there now, and adding a bit of extra buzz to the gold market.

Second- the government has stepped up its promotional campaign, and Chinese consumers have responded on cue. Gold demand has grown dramatically just this year, particularly as savvy local investors are starting to view Chinese stocks suspiciously.

Third- and perhaps most importantly, Christine literally made history by becoming the first foreigner EVER in China to be certified in any professional capacity by a Chinese commodity exchange.

I’m looking forward to all the great information that Christine will be able to share with me about Asia’s gold markets when she’s not tied up making deals in Mongolia or working with bankers and offshore trusts in Singapore and Labuan.  In the meantime, the two of us had quite an interesting tour of Chinese gold shops.

You can buy gold in China at any bank– even tiny banks in tier-3 cities sell gold. The government has also set up official Chinese Mint stores all over the country.  On the inside, they look like jewelry shops– armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.

The government mints bars in sizes ranging from 5 grams (which are so tiny they’re actually cute) to 1 kilogram. The prices are updated instantly– they have a Bloomberg screen which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence).

The bars are all serialized and 9999 purity, the same as you would get from Switzerland.  They are also certified by the gold exchange, which validates the quality. The premium runs 10 renminbi per gram, or roughly $30 (US) per ounce.

We went into several stores and saw Chinese people buying like crazy… all with cash. The most popular denominations were 10 grams and 50 grams, as well as every piece of jewelry in sight. I’m surprised the mint shops didn’t sell out at the inventory was flying off the shelf.

Christine has some great contacts at the shop across the street from the Westin Hotel– if you take a taxi there, ask for the WEE-stin (that’s how they say it) and you will see the shop on the opposite corner. Ask for Gao Ping, he speaks great English.

Given the ultra low cost, storage options (that I will get into later), and ease of transport, China is a great place to buy and store gold… especially if you find yourself there for business already.

And remember, if you are a United States taxpayer, one of the best ways to buy gold is through a self-directed IRA. You will be able to hold physical gold (and even store it overseas), all through your tax-deferred retirement account.

In my opinion it’s an absolute no-brainer. The above link is to an interview we conducted with an agency that sets up these self-directed IRA accounts, and I think you’ll find it incredibly informative.

“Simon – Are you ever available for a consult? I have several business related questions I would like to review.”

Each day, without fail, people ask if they can hire me to help them with their problems… these are usually unique in nature ranging from “I want to liquidate and move somewhere” to “can you help raise money for my business” to “do you know anyone in the woodchip industry in Burma…”

I think that most people ask me for help because they can’t find answers through any conventional outlet… I suppose we’re a bit of the A-Team over here at Sovereign Man.

Honestly, I like to help people, especially like-minded people. But time is my most valuable asset and I guard it closely.   At any given time I have at least half a dozen irons in the fire.  I’m not a ‘newsletter guy,’ but rather a busy investor and entrepreneur that is constantly traveling, making new connections, and firming up deals.

In the past, I have met an occasional subscriber on my travels and ended up talking through their challenges. I generally found the consultations to be a worthwhile endeavor and I have even funded the occasional startup as a result, including one this week that I am very excited about.

At this point, though, as our community grows, the demand for my time is spiking.  Because of my other commitments, I can only set aside a very limited amount of time to help advise subscribers, so I’ve decided to set up a more formal structure to provide consultation on an extremely limited basis.

If this might interest you, click here for more information.

SINGAPORE and LABUAN

There are a lot of offshore financial centers in the world, but what makes Labuan and Singapore particularly exciting is the ability to raise capital– Singapore bends over backwards to support its registered businesses, and Labuan provides a direct line to Islamic financing, which is awash with cash looking for a good home.

I received some specific questions about rental costs in Singapore; in short, rentals are reasonable, but not cheap. The government’s statistics show that the median rental price is roughly $1,500 (USD) for a 2 bedroom flat. This is the median price, so nicer neighborhoods will command a 20%+ premium.  Add another 10% for furnishings.

Also, I should be clear about my recommendation for Singapore– for an Internationalist, particularly a working professional with family, I am hard pressed to think of a place with a better mix of opportunity and amenities.

For other expat categories– the pioneer, retiree, etc., Singapore is not a good choice.  The city is fairly boring, organized to a fault, and yes, the weather is absolutely terrible. You can have a lot more adventure at a fraction of the cost in Manila, Malaysia, and Indonesia.

Regarding Labuan, I intend on exploring this jurisdiction much further.  Christine is very-well plugged in to the Labuan International Business and Financial Center (www.labuanIBFC.my), and we spent most of the day yesterday meeting with trust company presidents and bankers.

If you’re looking for Labuan service providers, you will be able to find many on the IBFC directory. I will be working directly with Christine’s contacts to vet them more closely before passing those along to you.

Today I found out first hand how much Chinese are looking to avoid taxes.

I attended a conference today sponsored by the government of Labuan, Malaysia at the Grand Hyatt here in Shanghai.  Labuan is Asia’s newest financial center, and the government there is heavily courting wealthy Chinese investors and businesses to migrate their capital.

There are a lot of rich Chinese businessmen who are looking for a way to reduce their tax burden, and most don’t have a clue where to begin. This conference was a significant step in educating high net worth individuals, as well as their advisers, on the advantages of proper offshore planning.

Christine Verone, my local contact and old friend here in Shanghai, pulled some strings to score us some tickets. We were nearly the only white people at the conference… but her insider connections have paid off because the contacts I could turn out to be priceless.

Labuan’s key principals gave presentation after presentation, highlighting the benefits and advantages of doing business there. Christine and I were able to meet with many of them in a more intimate setting after the conference to get the real scoop on how things work.

Quick overview: Labuan is a federal territory of Malaysia– essentially an independent state with its own laws but protected by the sovereignty of Malaysia… replete with access to the double taxation agreements (69 of them), common law standards, and easy access to Asia’s key markets.

Naturally, like most other low tax jurisdictions, Labuan levies essentially no tax for most companies with non-Malaysian sourced income… no income tax, no stamp duties, no withholding tax, no dividend tax, no service fees, etc. Even salaries paid to company directors are not taxable in Labuan.

Consequently, the jurisdiction is becoming more popular with Asian businesses. For example, Air Asia, one of Asia’s low cost carriers, bases its operations in Labuan.  According to the company CEO, this decision saves the airline millions of dollars each year and affords it the opportunity to keep fares low and stay competitive.

But this is all standard stuff for low-tax jurisdictions. Labuan excels in other areas, and this is why you should really care:

- ANYONE can open a bank/brokerage account there, and the process is incredibly simple and transparent. In the time it takes you to open an account in Hong Kong, you can probably open 100 accounts in Labuan. Nearly every sophisticated banking institution in the world now has a branch in Labuan, and they have actual professional bankers staffing the branches, unlike Seychelles, Cayman Islands, etc. where you get a bunch of ninnies in monkey suits.

- Labuan is part of Malaysia. Malaysia is a Muslim country in Asia. This puts Labuan effectively under both the Chinese umbrella and the Middle East umbrella, making it extraordinarily easy to raise money and providing geopolitical independence that other low-tax jurisdictions do not have.

- Unlike other ‘name plate’ jurisdictions like BVI where lawyers churn out companies simply to avoid taxes, Labuan incorporation agencies provide a full suite of cost-effective back office services to fully staff operations with qualified employees.

- Brokerages set up through Labuan trust accounts provide access to all of Asia’s financial markets with nearly unbreakable protection against creditors.  Setup costs are roughly 1/3 as much as Hong Kong.

- Like Singapore, raising money for start-ups is much easier in Labuan than other jurisdictions because of the availability of capital. Banks are awash with money, and structuring a tax-advantageous fund is a relatively uncomplex procedure there.

Based on the contacts that we made today, I will be having further discussions with many key principals in Labuan to explore the full range of services that these lawyers, trust companies, and private bankers offer.  In my opinion, for anyone with significant international operations, Labuan is definitely worth looking into.

More to follow.

Right now, your retirement funds are probably locked up and being managed by a handful of bureaucratic monkeys– the same ones who thought the US real estate market would always go up and the Dow would hit 20,000.

But there’s an easy way to take control of your financial destiny– to invest your retirement funds in whatever you like, wherever you like, including foreign real estate.

I’ve long believed that buying property overseas is the single best way to move money out of the country, protecting your capital from a depreciating currency, exchange controls, and government scrutiny. Foreign property is not reportable, and it’s a hell of an insurance policy in case things get really bad.

You probably have the money to buy foreign property sitting right in your retirement account… but you can’t use it because you had to park your funds into one of six paltry mutual funds.

Taking control is critical.  If you have an IRA or a retirement plan and are not taking advantage of this simple self-directed structure, you could be making a huge mistake.

So… given the extreme volume of questions that I have received on the subject, I once again turned to my friend and partner Matt to help find the answers.  Matt, who is a very astute investor and entrepreneur, went straight to the source– Steve Sheppard, the founder of CheckBookIRA, a company that sets up these self-directed IRA structures.

Matt got Steve on the phone to explain a little more about how the program works– the interview could be the most informative 23 minutes you’ll have this year.   You’ll love how Steve’s wife uses her IRA to make 35% a year (tax free)  in the cattle business.   Near the end Steve says some really great things about our subscribers and mentions the discount that we negotiated specifically for our subscribers.

Do yourself a huge favor… Grab a pen and paper, go to a distraction free environment and set aside the next 23 minutes to listen to this interview.

Click here to download the mp3 file:

http://media.libsyn.com/media/withoutborders/Skype_20090901_1807.mp3

With tax rates ranging from 5% to 35%, the Philippines can hardly be called a tax haven.

And yet, in a very public “guilty until proven innocent” attack several months ago, the OECD black listed the Philippines along with Uruguay, Malaysia, and Costa Rica.

The OECD is an aged, irrelevant organization comprised of mostly insolvent western nations; the organization has a penchant for bullying smaller countries into changing both their laws and local culture in order to assimilate.

Frankly, these coercive tactics constitute modern day imperialism and demonstrate an overwhelmingly ignorant worldview.

Case in point, the OECD has gotten itself into a twist over the years because Singapore issues a 10,000 Singapore dollar (roughly $7,000 US) note.  The OECD views this as a crystal clear indication of money laundering.

Hardly the case… carrying a lot of cash is merely a cultural tendency in many parts of Asia, so the government makes a super-sized bank note.  Western bureaucrats ignore this simple reality and instead try to beat smaller countries into submission.

The Philippines has recently fallen victim– but so far has only suffered a flesh wound. I spent a large part of my day today talking to bankers here in Manila; the general consensus among them is that  financial transparency has increased in the Philippines… but only slightly.

For example, bankers in the Philippines do not require personal information on beneficial shareholders for corporate accounts.  This is a stark contrast to other popular banking destinations like Panama (which did not make the OECD black list).

Honestly, there are not too many banking jurisdictions that do not require beneficial shareholder information for corporate accounts. Off the top of my head, I can think of the Philippines… and…. oh, right: The United States of America.

Funny how the Philippines ended up on the black list and the US was the one leading the charge.  But I digress.

Customer information at Philippine banks is not shared with tax authorities… or any other authority for that matter.  The one exception is by judicial decree, and only if the customer is undergoing litigation in the Philippines.

To open an individual account, a prospective customer must provide two valid forms of identification, a photograph, and an ‘alien certificate of registration,’ which indicates residency disposition.

For non-resident foreigners, the easiest thing to get around residency requirements is incorporate a business– in this case, the Department of Trade will provide certification.

Assuming all the documentation is in order, it only takes about 10-15 minutes to open an account, and at many branches the ATM card (on the worldwide Maestro network) can be acquired immediately.

Bank accounts can be opened in a variety of currencies, including US dollar, Philippine peso, euro, yen, and Australian dollar. Furthermore, bank accounts in the Philippines are protected by a depository insurance organization similar to the FDIC (except that it’s not insolvent).

The “PDIC” as it is called, insures deposits up to 500,000 Pesos or equivalent (roughly $10,000).

I met with the branch manager at one of the larger banks in the Philippines… they are willing to accept customers of any nationality as long as the basic requirements I described above are met.  I have no personal experience with any of the banks here though, so I cannot vouch for anyone specifically.