Today I want to make an important announcement in the hopes that you will join me in a few weeks time.

If you’ve been following this missive for any period of time, you know that I spend a lot of time all over the world, but only very rarely do I spend time in the U.S.

With so many great and interesting places I love around the world, it takes something really special (or an emergency of some kind) for me to choose to go to the U.S.

In this case it’s something really special…

Yesterday I accepted an invitation to speak at the upcoming Casey Research “Crisis & Opportunity Summit” which will be held in Las Vegas from April 30 to May 2. They’ve asked me to host a special panel on expatriation, and I’m really excited about the event.

If you’ve never been to a Casey Research summit before, I should take a moment and try to describe the environment. They’re unlike any other ‘investment conference’ out there, most of which sadly tend to degenerate into a marketing circus or political pep rally.

Conversely, the Casey summits focus strictly on information– providing actionable solutions to the most critical issues of the day, debated by the industry’s most knowledgeable and successful people.

The faculty at Casey Summits is always impressive– I have been to several of them and am always amazed at the caliber of individuals who speak… many of whom are household names.

Even more, though, I’ve been amazed at the caliber of individuals who attend– and that’s precisely why I hope you will come. The information you’ll receive at the conference will be immensely valuable, but the contacts you’ll make will be even more important.

Plus it will give us an opportunity to meet face to face and get to know each other a bit. In fact, Matt, my business partner, will be there as well, along with several Atlas 400 members.

Honestly, I can’t wait to host the expatriation panel… one of the nice things about Casey summits is that they don’t record the event, so speakers can feel more free to speak their mind… not to mention, it keeps the information exclusive to a small and intimate audience.

In my case, I plan on discussing some second passport and banking strategies that I normally only share with insiders… things that I absolutely don’t want to put in print.

Anyhow, I hope you will consider attending. There’s a steep discount to the normal price until March 15th, so don’t wait too long. If you’re interested, click here for more information, which includes the current (and growing) speaker list.

See you there!

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.

First of all, thanks for all the well-wishes for my speedy recovery. I’m feeling much better today, no doubt due to this exotic root that my ladies have been giving me. I haven’t asked what it is yet, but rest assured I will be traveling with it from now on.

Since I’m still a bit groggy from my illness, though, I thought today would be the perfect time to introduce you to a colleague of mine who has kindly offered to pen a few words in my stead.

To give you a bit of background, Mark is a friend and sometimes business partner who has been traveling the world in search of a new home.  He’s traveled extensively in Latin America and Asia, and has been living in New Zealand for about 5-months to get a feel for the place.

Below are some of his recent insights from that country:

When Simon approached me to write a piece on New Zealand I was a bit surprised.

I’m just a regular guy… sort of.  Like Simon, I’m a serial entrepreneur.   I’ve pretty much always worked for myself.  I don’t have a family, but I am married.  Unlike Simon, there are no topless Peruvian sunbathers in my life…  My ‘work’, if you can call it that, allows me to travel wherever a cell phone and laptop can find a signal.

Nowadays that’s pretty much anywhere and everywhere, so New Zealand seemed a reasonably ‘safe’ bet for me.  Plus I had wanted to visit for as long as I can remember.  It’s a safe, clean, green and under-populated country where one can reconnect with nature and man’s inner spirit… and I think it lives up to its marketing hype.

So what makes New Zealand a place worth considering for an American or European expat?

Let’s start by looking at what was important to me, since my values are probably not that much different than most people, and see how New Zealand stacks up.  I’ll list my Top 10 ‘criteria’, in no particular order:

1.    Geo-politically and physically ‘Remote’
2.    Abundant and reasonably priced lifestyle type properties
3.    Plenty of water.  Ocean, lakes, rivers…
4.    Reasonable annual sunshine hours
5.    Clean environment
6.    Educated, English speaking population
7.    Safe, clean and readily available organic food
8.    Physical safety and the rule of law
9.    Fair taxation
10.    Accessible, high-quality health care

I can tell you that New Zealand checks all the boxes, with the exception of fair taxation; New Zealand is NOT a tax haven.  I believe the only ‘fair’ taxation is no taxation, but you won’t find that here, or anywhere.  Like most first world countries, taxation in New Zealand can get complicated.

Is it perfect? Absolutely not… but if it’s wide open spaces, beautiful beaches, majestic mountains, mirror perfect lakes, roaring rivers, quaint towns, empty roads, great food, cheap property (if you know where to look) and an educated, English speaking population that you seek… look no further.

I’ve been traveling the world, in a modest way, for the better part of the last few years.  I’m an American, so of course I started off in Canada, worked my way down to Panama (where I met Simon and continue to do business), Ecuador, Peru (an organic banana business gone wrong), Uruguay (where I enjoy residency), Argentina, over to Viet Nam (where I was involved with the first Vietnamese company to list its shares publicly in the US), and now New Zealand.

I’ve been here for almost 5 months, and it’s been phenomenal. While it doesn’t tick all the boxes, I’m sure that I’ll continue to live here on a part time basis unless/until I reach the point of becoming an ‘involuntary tax resident.’

Simon again. If you’re interested in hearing more from Mark about New Zealand, let me know by dropping a comment, and I will ask him to write something more customized based on your requests.

I managed to pick up some nasty bug that has knocked me into next Tuesday… But while I feel completely miserable at the moment, this little bacterial bout has given me the opportunity to experience, first-hand, the joys of the Thai medical system.

First, doctors make house calls. When you’re as sick as I am, the last thing you want to do is get dressed, sit in the car, and go to the doctor’s office. Not a problem in Thailand… they come to you, all for about $30. And yes, they speak perfect English.

Second, if you’re a believer in medication, you can buy pretty much buy whatever you want over-the-counter– from antibiotics to codeine to Viagra. And everything costs a small fraction of what you would expect. You almost feel guilty, like you’re ripping off the pharmacy.

I paid 80 baht, roughly $2.50, for a 5-day batch of antibiotics, ibuprofen, and throat lozenges.

Third, if you so choose (and I do), you can have a team of nurses attending to your every need while you’re getting better. I’ve got a couple of ladies whose sole mission in life is to take care of whatever I need– changing the sheets, making a bowl of soup or tea, giving me a massage, or just sitting next to the bed with a wet washcloth over my forehead.

It’s funny what kind of misperceptions people have about medical care overseas. I’m frequently asked “What happens if you get sick overseas? Aren’t you concerned about the quality of medical care?”

Trust me, if/when I get sick, especially in an emergency, I truly hope that I’m in a place like Thailand or Panama instead of wasting away in waiting room back in the US, or paying through the nose for medicine.

Anyhow, I’m going to cut this short today for obvious reasons… depending on how I feel tomorrow I may or may not post something, so don’t be surprised in case you don’t hear from me.

Greetings from Malaysia, where I’m spending an extended weekend before heading briefly to Singapore on business.  I’ll tell you more about the country next week… but if you’re interested in Asia, it should definitely be on your radar.

Before turning to this week’s questions, I wanted to give you a quick update on the job posting from a few weeks ago.  Ordinarily, Matt and I would have made a decision by now, but the applications keep rolling in… I lost count after a few hundred.

To expedite our decision, we’re going close the posting at 11:59pm EST, Monday night March 8. No other applicants will be considered after that time.

Please remember, since there have been so many applications, my staff and I will not be able to respond in order to confirm receipt. Rest assured, if you sent us an email, we received it.

On to this week’s questions:

Tom writes, rather emphatically “Simon, I left the US over a year ago. I now need a 2nd passport as I am almost out of pages on my current one. Problem is, I can’t go to the embassy due to some legal problems back home, and I don’t have $50k to spend on a new passport. What can you recommend?”

Tom has an interesting and unfortunately all-too-common case. I don’t know what he’s done or if he’s guilty of any wrongdoing, but a last-minute second passport is no panacea for criminal troubles.

(to be clear, I don’t equate ‘law’ with morality, but this is a different subject altogether)

Why? Because even if you’re completely innocent of some trumped-up charge, any new country that would consider accepting you for citizenship would first do a background check, and if you’re in hot water, they probably won’t take you.

Conversely, if you actually have done something immoral, you should probably just face the music. After all, the cosmic forces of the universe have a way of working these things out.

Regardless, I think this underscores the importance of taking action. If you have the means, going through a second citizenship process NOW, before it becomes a critical need, is a smart thing to do.

I discussed a few cost effective second passport options last week, and I will continue to do so in future letters.

Speaking of second passports, I made a mistake when I mentioned something about Polish citizenship last week– my thanks to “anonymous” for sending along this correction:

“Simon, you said that a Polish citizen could establish permanent residence in another European country like France or Italy and  become eligible for citizenship there after 7-10 years.  The EU rule is that local citizenship can be applied for after 4 yrs residence, though it’s much faster with marriage.”

She is absolutely correct, my apologies for the oversight.

Stephanie in New York writes, “Simon, thanks for the great information on opening a foreign bank account this week. As a US citizen I understand that I need to file a form to the Treasury Department each year– what are the details on that?”

First- standard disclaimer: check with your tax advisor for any updates. But the current rule is that US taxpayers must report foreign bank and financial accounts on form TDF 90-22.1 each year by June 30.

According to the IRS, A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts, including any savings, demand, checking, deposit, or any other account maintained with a financial institution.

As of now, you do not have to file the form if the aggregate value of all of your foreign accounts was less than $10,000 for an entire calendar year. If the aggregate value of foreign accounts exceeded $10,000 at any time during the year, you are obliged to file the form by the following June 30th.

James asks- “Simon- you’ve been in Thailand for a month but you haven’t said anything about the nightlife or social scene!”

That’s because you can read about Thai nightlife anywhere. I figured you’d be more interested in the hydroponics plantations where I buy organic vegetables than a review of the Go-Go bars…

… but to put it briefly, you can find whatever you want in Thailand. Sex, drugs, and rock n’ roll are as pervasive as Buddhist monks and the works of Shakespeare. If there’s interest, I’ll write a dedicated post about this, just let me know.

Lastly, Pat asks: “OK Simon- I owe $136k on a house that I bought 4 years ago; it’s now “worth” about $70k, tops.  I make plenty of money, but the payment is slowing me down.  Would it be immoral to jump ship and go rent somewhere else?”

Personally, I have an immensely open mind to not judge people for the way that they live. I only broadly repudiate things based on very few moral absolutes– for example, genocide and pedophilia are clearly ‘wrong’ in my book.

Walking away from your mortgage does not make my list.

If you do decide to walk away (and I’m not encouraging you either way), just bear in mind the single universal law of causality… there will be consequences from your actions, and you must be prepared to accept them.

That’s all for this week; enjoy your weekend, and we’ll talk again on Monday.

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.

One of reasons that a lot of people are hesitant about making a move overseas is because they’re concerned about being isolated. The world can be a cruel place, especially to newbies.

Sure there are the nomads out there who want to be left alone with their little slice of paradise in the middle of nowhere… but most people crave some human interaction from time to time, especially from like-minded souls.

I’m one of those people. I enjoy the company of interesting, like-minded, and well-rounded individuals.  This is the chief reason that I’ve encouraged kindred readers to join us in the private Atlas 400 group, whose next gathering is coming up next month in Panama. I’ll be there.

On the subject of social interaction, I think Panama is one of the easier places in the world to meet people, both foreign and local. Despite Panama being a Spanish speaking country, the English language is absolutely pervasive, particularly in Panama City and Boquete.

It’s easy to meet anyone, and with the exception of a handful of elitist gringos who think too highly of themselves for having lived in the country for so long, most people are actually quite friendly and welcoming.

As a rule of thumb, the more ‘international’ a city is on a per-capita basis, the easier it will be to meet like-minded, English-speaking expats who are at your level.  Panama City has about 50,000 expats and roughly 1 million locals.  Boquete has a population of about 20,000 with at least 5,000 expats.

By contrast, as city like Shanghai has 300,000 expats and 17 million Chinese people, most of whom do not speak English.  You get the idea.

I’ve honestly found both Phuket and Pattaya, Thailand, which are fairly small cities of about 100,000 each, to be among the most international cities in the world on a per-capita basis.

Here in Pattaya, for example, I have gotten to know people from 6-continents– a Russian movie producer, a French investment banker, a Norwegian surgeon, Canadian entrepreneurs, a retired Australian footballer, an Indonesian factory owner, Yemeni medical tourists, Sudanese vagabonds, and a lovely topless sunbather from Peru.

In fact, Pattaya is the only place in the world that I have been to where on a single block you can see a dry cleaner’s sign in Arabic, a restaurant shingle in German, a real estate billboard in Russian, a newspaper kiosk in Thai, a travel agency in Mandarin Chinese, and a Go-Go bar promotion in English. It’s really amazing.

Just recently I was having lunch in an Arabic restaurant owned and operated by former Iraqi soldiers of the elite Republican Guard. When I looked around and saw Russians, Europeans, Africans, Arabs, and a handful of Jewish tourists eating large meze plates, I thought that I must have stumbled upon the center of the universe… or some strange version of MLK’s dream.

In these sorts of ultra-international locales, breaking the ice is as simple as asking the question, “where are you from?” Be prepared for long answers.

Other places that you may want to consider are Singapore, Hong Kong, Qatar, Capetown, Dubai (though it’s a bit pretentious), Georgetown (Malaysia), Punta del Este (Uruguay), Hanoi (Vietnam), Colima (Mexico), Medellin (Colombia), Cuenca (Ecuador), and just about any mid-sized city in Brazil (Natal, Florianópolis).

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.

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.

It’s “Judgment Day” in Thailand. I wrote about this on Monday– a Thai high court will rule today on the disposition of ousted former PM Thaksin Shinawatra’s frozen assets valued at several billion dollars.

According to the mainstream media, the entire country is supposed to erupt in chaotic and violent protests today. Even BloombergTV, which I normally respect, has been running sensationalized stock footage of fires, vandalism, and Thai soldiers shooting semi-automatic weapons in the street.

Without doubt, there will certainly be renewed political turmoil in time… this happens in Thailand about every other Thursday, and they present great buying opportunities. But the reality of the situation on the ground here is anything but chaos. Thais are going on about their everyday business, and today is like any other day.

It just goes to show how unreliable a lot of information out there can be.

On to the questions for this week–

Axel and Daniela ask: “Simon, what do you know of the Uruguayan economy and financial system– how much is the peso pegged to the dollar/dependent on it? Are there any problems owning/buying/selling gold?”

Uruguay has a small economy that is highly dependent on foreign trade for most consumer and industrial goods. The country has some level of agricultural independence, but generally has to import just about everything else, from hair spray to televisions to refined fossil fuels.

Its largest trading partner by far is Brazil, and in the long run, the Uruguayan peso’s performance will more closely match that of the Brazilian real, not the US dollar.

There are a couple of unfortunate things about Uruguay, though– first, they tax the hell out of anything deemed a ‘luxury good,’ which is usually most imports that are not everyday items. Cars, consumer electronics, shoes, etc. cost two to three times as much as you would pay in North America.

Second, they stupidly imposed an income tax recently that essentially eliminated the country as a reasonable financial center.

Third, the Uruguayan government does force you to declare gold upon entering the country, and any sizeable amount will be taxed.

Jein asks: “Simon, I’ve been considering the Swiss National Bank’s move to sell Swiss francs recently against the dollar and yen. Is this a hedging technique to get ahead of the markets, or do the Swiss see the slowing of US M2 money supply endangering equity markets and causing a carry unwind?”

Switzerland has repeatedly demonstrated that it will intervene in the currency markets to prevent a rapid appreciation of the franc vs. the euro; given the euro’s recent fall against the dollar and yen, I think the SNB is selling francs as a hedge to offset the rapidly declining euro.

I’ve recently gone long the euro against the franc because I expect the SNB will continue to intervene and offset the franc’s rise against the euro. This should cause a further decline in the value of the franc against the dollar.

Ellen asks: “Simon, if one is eligible for a Polish passport, which is an EU country, doesn’t that mean the person is automatically eligible for another EU passport, i.e. s/he would automatically be eligible for French or Italian citizenship?”

No. Citizenship does not transfer across the EU, only residency. In other words, as long as the EU/Schengen area continues to exist, a Polish citizen has the right to live and work anywhere in the European Union… but as a Polish citizen.

A Polish citizen could realistically establish permanent residence in another European country like France or Italy, and eventually become eligible for citizenship there after 7-10 years.

Frankly, I think that if you’re eligible for Polish citizenship, you should not even think about ‘old Europe.’ Poland is one of the strongest economies in Europe by far, and I think it will stay that way for quite some time. Poland is the future. Italy is the past.

Dee asks: “Greetings, Simon. What are your thoughts on purchasing natural colored diamonds as a means of wealth protection, asset accumulation and privacy?”

I don’t like diamonds for wealth preservation. Technology already exists that can create a chemical replication, which completely eliminates the stone’s scarcity in my book. All that remains is the sex appeal from clever marketing.

I also find diamonds to be too politically contentious with all the chanting about African slave mines. It’s just not worth it. Gold and silver are much more reliable stores of value. No one is going to spray paint your fur coat for owning some Krugerrands.

Mike asks: “Simon, I understand that Moody’s is set to raise Panama’s country rating to investment grade within the next 3 months. What effect do you believe this will have on the local economy and will it give real estate prices a ramp up?”

Honestly, not much. Moody’s is a relic of the old financial system, and the only people who still pay them any attention are institutional investors that still believe in the Tooth Fairy. A Moody’s upgrade will make it easier for Panama to raise cheap capital through a sovereign debt issue, that’s about it.

At this time, the country doesn’t have plans to raise any additional debt, though it may capitalize on cheaper money to refinance existing, higher interest debt, which would save a few bucks for its budget.

Panama’s economy has many opportunities for small to medium sized investors, but with only a $19 billion GDP, it’s simply too small to absorb capital flows from large institutions. Consequently, there really won’t be much of an economic effect from a Moody’s upgrade.

That’s all for this week. We’ll talk again on Monday.