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SOVEREIGN MAN

Arbitrage lessons from the most expensive city on Earth

January 9, 2013
Sydney, Australia

 
[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

No matter where you live in the Western world right now, the sands of your local economic landscape are likely shifting. To gain your footing, it’s essential to learn classic arbitrage techniques.

Take Sydney, Australia, for example, one of the most spectacular cities in the world. The stunning geographical setting alone… a natural, sparkling-blue harbor with high cliffs and rolling hills either side… is enough to take your breath away.

So are the prices. On a recent visit, the menu at my five-star hotel’s restaurant offered a hamburger for A$36 (US$37.80).  Local friends and contacts confirm that most half-decent restaurants now charge at least A$25 (US$26.25) for a simple burger.  Crazy stuff.

My sister, a medical specialist, was recently sending out claims forms to medical insurance companies.  I noticed she was putting A$0.65 (US$0.6825) stamps on the envelopes.

I choked on my coffee.  You can send a letter from Hong Kong, airmail to Australia, for the equivalent of only A$0.36, almost half the price.

This leads to an arbitrage opportunity: she could send PDF files via email to Hong Kong, have the letters printed there, and then mail them back to Australia. It might take a few days longer, but she’d realize big savings. Classic arbitrage.

Another example: My father runs his own accounting practice in Australia.  To obtain staffing, he must pay through the nose, as it’s not uncommon for an entry-level number cruncher to earn a six-figure annual salary.

Fed up, my father recently experimented with outsourcing some work to India for less than one third of what he’d have paid a local.

I bring these examples up for two reasons:

First, wherever you are in the world, there are always ways to play similar arbitrage opportunities, pitting various countries against each other to save (or make) money, often without having to even leave town.

Second, as more people do this, Western economies will realize great losses. In Australia, this will almost certainly lead to a fall in the Aussie dollar.

Worth about 1.05 US dollars now, the Aussie dollar is really too strong.  Costs are out of whack on a global scale. It’s choking off local job creation.  And, it’s making Australian exports — even in the all-important mining and resources sector — uncompetitive.

Australia’s strong union traditions, minimum-wage laws, insanely complicated mandatory pay-scales, and pedantic occupational health and safety rules make running a profitable business here a very difficult task.

The BASE minimum wage for a burger flipper at McDonald’s in Sydney is currently A$15.87 an hour… plus penalty and holiday rates tacked on top of that. Restaurant union rules require that dishwashers START at A$20 (US$21) per hour.

How can you run a business with these costs?

Which leads to my last arbitrage example: If you are a young, flexible person willing to work casually in odd jobs in order to fund your travels, Australia could be a great place to come and work for a few months.

Young people from many countries in Europe and North America, plus Hong Kong, Singapore, South Korea, and Japan, can easily qualify for working holiday visas to Australia.

If you are a young person in the jobless queue in the UK, Spain, Greece, Italy or Portugal, for example, Australia might be an option.  There are few places on earth where wages are higher, provided you’re wiling to roll up your sleeves and take a service job that most of the locals seem to shun.

Just don’t put all your Australian dollars in one basket.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

Comments on this entry are closed.

  • James

    “How can you run a business with these costs?”

    Make more money than you are spending. For example one person buying a $36 hamburger and a drink just paid for 2 staff members for the hour.

    I agree prices are ridiculous but seems to be working ok so far for the Australian economy.

    Given the economic basketcase that is europe, japan and the USA I’m not sure your prediction for a lower aussie dollar is accurate.

    Your entry level salary for a number cruncher is not accurate, starting salaries after university are typically 40-60k per year.

    • http://www.facebook.com/MichaelBelba Michael Belba

      Really? What you actually paid for is one staffer for 1 single hour of their time. The Staffer makes $21 per hour, then there is his benefits, and then there is the employer’s taxes – so on an after tax basis, the employer is probably not even covering the cost of single hours pay from the sale of a hamburger. Obviously, you have never ran a business.

      • James

        I appreciate your deep insights, my example was hypothetical only. Please note it may be possible for one staff member to produce more than 1 hamburger in one hour, making the venture much more profitable.

        The employer does not pay tax on top of the employees salary. Tax is paid on profit, so saying it will not be profitable after tax as opposed to before tax is by definition impossible. Also in Australia there is no additional benefits like health care payable on top of that $21.

        Source: every profitable hamburger shop in Australia

      • rob

        James,

        How about Super? Holiday pay accrual, Payroll tax, sick leave?

        $21 is the base, the real cost is more (providing the employee is on the books, etc)

  • Adrian

    Tim, played right you can set your self up.
    You come to Australia on a working holiday for 1 year.
    You skip working in the cities and instead go fruit and veggie picking.
    After 3 months working on a farm the government will extend your visa for another year.
    Then you continue to work picking fruit and veg for the remaining 21 months.
    Save as much as you can and when its time to go home you will have a nice nest egg.
    Also by working in farming you will only be taxed at 15% if you take a city job it will be more like 30%
    Also you can travel around Australia following the seasonal fruit picking so you get to see the country at the same time.
    It gets even better as some farmers work on a contract basis where you get paid for how much you pick.

    http://jobsearch.gov.au/documents/nationalharvestguide.pdf

    • jiggs747

      If you want to work for assholes and you are physically fit and fast then yes this is a good option for someone. 24 months of fruit picking.. i keep hearing the only good thing about these jobs is the people you work with not for.

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