February 5, 2010
Mexico City, Mexico

Greetings once again from Mexico; I’m sure many who listen to the mainstream press would be amazed to find that I have spent 48 hours on the ground here with nary a swine flu infection nor simple mugging to report.

I did, however, miss my flight to Canada.

What can I say… Mexico City traffic has got to be the most dangerous thing in this country. I was able to change my plans and will be in Vancouver this evening.

Before I get started on answering your questions from the mailbag, I wanted to mention a brief administrative note– if you ever have difficulties opening or reading the daily email in your inbox, you can always read it online at www.SovereignMan.com; in the meantime, my staff is working on resolving all readability issues.

Moving on to questions.

To start off, John asks: “Hi Simon- you don’t talk about politics much, though I have a feeling where you stand by reading your letter each day. Can you give me a better idea of how you see the world, politically?”

First and foremost, I want to make an important distinction. I am an avowed anarchist. Just the word itself has an incredibly negative connotation– it conjures images of subversion, treachery, and treason… or at least crazy guys hoarding guns in Montana.

People too often confuse ‘anarchy’ with ‘chaos’, usually citing examples like “if there were no laws, what would keep people from driving on the wrong side of the road?” or “who would come and put out the fire when your house is burning?”

These arguments are weak and only serve to indicate the extent to which governments have brainwashed people. Most citizens now believe that the political establishment is vital for their own survival, as if we would all spontaneously combust were it not for the FDA.

Anarchy is not chaos. The political establishment is chaos. Politicians have a horrific track record managing wars, finances, education, health care, and just about everything else they put their hands on… all at the expense of public resources.  Very little changes for the better, at least thanks to the government.

And yet, every few years, we still put on a charade to cast our vote, as if this ridiculous exercise has any meaning whatsoever. It’s an unpopular thing to say, but participating in the political process is a complete waste of time… particularly since we have a much more powerful voice.

The most important votes we cast are as consumers, not constituents… we vote with our dollars every single day. The best candidates, i.e. the producers, win our votes, and the worst candidates go bust. No amount of baby-kissing can save a defunct company.

Hell, not even a government bailout could keep Chrysler and GM alive.

Personally, I would prefer to have all of my tax dollars back in my pocket and pay a usage fee for privatized roads, or an annual subscription for a privatized library, rather than have some bureaucrat funding pet projects with my hard-earned money.

I recognize that this is all just a pipe dream, at least for now. Political institutions are here to stay, and the trend is bigger government, not more limited governments.

That’s one of the reasons why I have chosen this lifestyle– with a multiple flags approach, I minimize the impact that any single government has on my life.

Betty sends along the following comment: “You wrote that hospitals in Boquete, Panama were substandard. You are badly misinformed. Hospital Chiriqui is a modern hospital with excellent doctors who speak English for the most part; I should know, I was in intensive care there for three weeks and had five specialists attend to me.”

Noted, Betty. Thanks.

Captain asks, “Simon, do any ex-US real estate markets employ US-style mortgages?”

Yes. Panama is one of them; foreigners can get a 50% to 70% mortgage, and a better rate if you become a resident. Many European countries also underwrite mortgages for foreigners.

The other thing to consider is developer financing instead of bank financing. This tactic is being used in a lot of places around the world to mop up extra inventory. I see this everywhere now– Spain, Thailand, Morocco, and here in Mexico.

Standard packages generally require 10% to 30% down, and will finance the balance on a 30-year amortization schedule for a 5-year term.

Nathan asks: “Simon- Regarding China, I know a lot of people have been high on the country for some time. But what is the real analysis here?”

To be clear, I am not a blind China bull… but I’m happy to call a spade a spade. The ‘good’ part of the analysis is fairly simple. In the long run, there are two things needed for sustained economic growth: technology and savings.

Technology makes production (i.e. wealth generation) more efficient, and a large pool of savings becomes investment capital to create businesses, build factories, etc… things that add value to an economy.

China has both, and so the foundation for its economic growth is sound. However, there are a LOT of potential problems with China– the economy succeeds despite its government, and I’m concerned about future political instability.

Furthermore, I expect one day that China will go through significant challenges as it finds that it can no longer compete with its neighbors for low-skill manufacturing. The country will have to develop entirely new industries, and that could be painful.

Lastly, the Chinese are become cultural consumers… shop-a-holics really. This consumption depletes the pool of savings, and if sustained, will create long term structural issues.

That’s all for today, I’m off to Vancouver.  Have a great weekend.

I’m sitting in a comfortable, overstuffed leather chair this morning typing away at this letter while a team of local women give me a traditional Thai foot massage.  30 minutes in the chair will set me back about $4, and I can’t think of a better way to part with my money.

It is with great hesitation that I’m even sitting in this chair– not because I don’t like massage, but because this particular chair happens to be at the airport.  You see, I’m waiting for my departure to Europe, and if it weren’t for an important meeting in Spain that I’m looking forward to, I would be staying right here in Asia.

It’s not that I don’t like Europe– I love it, actually… the scenery, the people, the history, the architecture. It’s hard to not feel alive on a summer day in Krakow, racing down a ski slope in the Italian Alps, or driving a Porsche down the Croatian coastline.

In terms of value for the money, however, Asia has Europe beat hands down.

Take this simple, $4 massage; it would be difficult, and entirely cost prohibitive, to find a team of European professionals who would be willing to provide this level of attention; Europeans feel that ’serving’ another human being is elitist, which is part of their egalitarian socialist dogma. The session would be courteous, at best.

Many cultures in Southeast Asia, on the other hand, are happy to go the extra mile, especially when there is a gratuity attached.  The ladies who staff this airport location, for example, wouldn’t even let me remove my own shoes and socks– they did it for me.

Having another person do that honestly makes me feel a bit uncomfortable… but providing this level of service is what they are accustomed to, if nothing else than for the gratuity at the end.

The motivation to earn more by providing excellent service is clearly more prevalent in the Orient than in Europe.  Neither mentality is right or wrong, just different. Naturally, though, as a consumer, I prefer a greater level of service.

Price is also a major factor. In Asia, with few exceptions like Singapore, Japan, and South Korea, you have to put up with some level of squalor– trash in the streets, gratuitous displays of poverty, etc. While these indications are not completely lost on Europe, it’s safe to say that cityscapes in the west, in general, are cleaner.

That being said, however, the price difference is enormous. The cost of living very well in Europe is easily five times the cost of living very well in Asia.  Is Europe five times as nice? Depending on what you are looking for, most likely not.

As I look around the world and price compare, I wholeheartedly believe that Asia and Latin America still provide the most value for the money.  My top picks for those regions are:

- Latin America -

1) Chile: Strong economy, beautiful landscape, modern and developed infrastructure. Living costs are low, and the cleanliness makes it feel like you are in Europe. The biggest concern with Chile is that it is growing too quickly; the Chilean peso is one of the best performing currencies in the world, so costs for foreigners are going up.

2) Panama: Also a strong economy with developing infrastructure and increasing local standard of living; costs in Panama City are going up, but if you get out of the city, you’ll find that you can still live incredibly well for very little.

3) Colombia: Clean, modern, and home to some of the best weather on the planet (especially in Medellin). You have to be willing to look past the “Colombia stigma,” but I guarantee it’s well worth the exercise in intellectual independence.

- Asia -

1) Malaysia: Home to a growing influx of Islamic funding, the country is on solid economic footing while maintaining very low living costs. Medical care is strong, and the “My Second Home” program provides an easy route to permanent residency.

2) Philippines: Stable economy, cheap real estate, and excellent English proficiency. Manila and Quezon can be tough, but just outside of the cities you can find inexpensive, pristine coastal property. I know many expats who are happily living out their years being fed grapes on a hammock with just a meager retirement pension.

3) China: Lack of English proficiency can be very frustrating… but China is becoming nicer and more livable by the day. In terms of its modernity, it will be the first developing nation in Asia to match the west, and it will happen in the next 5 to 10 years.

Naturally, I will provide more about these locations in future letters, but I wanted to give you a quick overview today; if you have any specific questions or your own additions, please let me know.

I spend a great deal of my time on the road, traveling around the world in search of opportunity. I put boots on the ground while I’m on the hunt and end up screening a tremendous amount of both business and investment ideas.

Some of these ideas make the cut, and we take the concept further. Others don’t.

Regardless, the time that I spend on the ground getting to know the cityscape and the local players becomes quite valuable to me personally… and over time, I have assembled a list of what I consider to be the finest places in the world to reside based on what I have seen with my own eyes.

I’ll be sharing that list with you soon, but in the meantime, I thought I would focus my attention briefly on China.  Having spent the majority of the last two months here, I can honestly say that it is worthy of everyone’s consideration.

Sure everyone knows the mainstream story– full of opportunity, the fastest growing number of millionaires, and a varied, beautiful landscape… but you can find beauty and opportunity in a lot of places. There are five key reasons that set China apart:

1) It’s cheap– for now. The Chinese government keeps the value of its currency, the renminbi, artificially low… so China is very cheap to dollar and non-dollar spenders alike.

World class hotels (I’m talking about the Shangri-La) are $125/night, hiring a car **with driver** runs as little as $500/month, and going out on the town is a fraction of what you would pay in the west.

In terms of the world’s nice ‘cheap’ countries, China is definitely one of the nicest… and the best part about it is that nearly everything is brand new, from the hotels to the airports to the gyms to the restaurants, right down to the park benches.

This ‘newness’ is a result of China only recently having become wealthy. The country is now on a feverish spending spree, investing heavily in its domestic economy– and that means a lot of construction, a lot of development, and a lot of shiny new stuff.

The low prices in China will NOT last forever. You can be sure that the Chinese will eventually let the renminbi appreciate. I wouldn’t be surprised if the currency rose from 6.8/$ to 6.2/$ by the end of 2010. Needless to say, this will make everything in China much more expensive.

If you’re interested in speculating on the currency appreciation, you can even come to China and open a renminbi bank account; any foreigner can open an account here… it takes about five minutes and only about $50 to start.

2) In China, you can cut in line without having to ‘put your time in.’ For example, rather than spend the first several years of their careers getting someone coffee, many recent college graduates took a leap and moved to China seeking fortune and adventure.

They found out very quickly that there are several areas of critical need, including finance, marketing, management, and customer service, and that anyone with competency in these areas can rise quickly.

As a local official from China’s southern city of Kunming recently said in an interview with the Straits Times, “we lack experts in many top positions who can take our industries and companies to the next level, to go international.”

The financial industry here has even more telling statistics– a recent survey of fund managers in China showed that, of the 376 respondents, 22% had less than one year of work experience, and only three have worked in the industry for over 10-years.

3) Yes, the economy in China is booming. I don’t necessarily buy the government’s official statistics, but things here are definitely buzzing. If you are looking for a job, chances are you will find something in China.

More importantly, though, if you are not looking for a job and just want to get away from the doom and gloom of negative news on mainstream media (war, unemployment, deficits, etc.), China will feel like a beacon of optimism.

Frankly, it’s much less depressing to be here than in a lot of places in the west.

4) ANYTHING you want can happen in China.  Chinese people are an industrious lot, and they respond very favorably to money.

There is no order that is too tall or too complex– do you want someone to deliver your groceries? build you a rocket ship? customize a special casing for your laptop? reproduce an out-of-print book? design official-looking novelty documents?

It can all happen in China; the only limitation is creativity.

5) Living in China is a differentiator… it sets you apart from others. For years, people will gather around to hear you tell stories about the curious things you saw in China, from the Shaolin Temple in Henan Province to the bustling business in Shanghai’s Pudong financial district.

This distinction that you draw between yourself and others can be critical to expanding your personal network. As we discussed in our free Network Infiltration report, differentiation is a core element to getting noticed and being accepted into powerful, exclusive networks.

Spending a lot of time overseas in a place like China certainly qualifies.

Overall, I firmly believe that China should be on everybody’s radar, even if just for a brief visit. To be clear, the country is far from perfect.  But in my opinion, for a foreigner, the advantages far outweigh the inconveniences.

I spent the better part of my day today at a small conference attended by many of Shanghai’s wealthy, plus their lawyers and accountants.  Considering the subject material is highly frowned upon by the government, I was surprised that so many were in attendance.

So what was the topic of discussion at today’s event? Second citizenship.  Specifically, the St. Kitts second citizenship program.

Throughout the afternoon, local Chinese listened intently as speaker after speaker extolled the virtues of St. Kitts and its economic citizenship program. 

In case you haven’t heard of the program, it’s one of the oldest economic citizenship models still in existence.  An interested applicant must invest $350,000 (plus government and legal fees) in a government-approved real estate project, as well as undergo a background and medical examination.

If accepted, the applicant will be awarded with citizenship of the Federation of St. Kitts and Nevis.  Since the island-nation is a Commonwealth country as a former British colony, St. Kitts citizens enjoy visa-free travel to the UK and European Union.

There were several developers at today’s conference with lots and homes for sale.  From what I could tell, the average price point was around $700,000.  The locals stared eagerly at the sales brochures, full of Caribbean Sea views and vibrant green tropics, which made for a stark contrast against today’s gray skies in Shanghai.

The St. Kittsians in attendance today were in demand because they can solve multiple problems for wealthy Chinese.

First, wealthy Chinese want to be able to travel internationally with ease, and this is something that is simply not possible with a Chinese passport– there are far too many visa requirements, and staying somewhere for more than a couple of weeks is problematic.  The St. Kitts economic citizenship program would provide an excellent passport for them and their family members.

Second, purchasing foreign property is an effective way to get money out of China because it cannot be forcibly repatriated.  Chinese are normally subject to extreme exchange controls with transfer limits of about $50,000, and moving money requires a litany of stamps and approvals.

Property purchases are slightly less cumbersome, and most buyers are able to more easily execute this by first sending the money to an account in Hong Kong, which has no exchange controls at all.

Third, and most importantly, Chinese want to be able to establish residency somewhere else, preferably in a place where they can send their children to school.  For Chinese families, this is the ultimate priority– to have a western educated child and a place for the family to live outside of China. They start planning these things from the day the child is born.

Overall, I am convinced that today’s event is indicative of an enormous trend.  Chinese clearly want additional travel freedoms and the ability to reside, even if temporarily, overseas. They have the money to pay for it.

Ironically, Chinese are not able to find the answers themselves… many websites that discuss second citizenship programs are blocked, so they need these live meetings to get a better understanding of the opportunity.

Meanwhile, foreign developers and lawyers really want access to the Chinese market.  Their traditional markets from the past several years– wealthy North Americans and Europeans– have dried up.  China represents the next growth market of people who have both the necessary appetite and available capital to acquire foreign property and/or second citizenship.

In my opinion, there is a fortune to be made for an entrepreneur who can match the buyers and sellers together. I think this is a very real opportunity, and I’d like to hear what you think… especially if someone is interested.

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.

Like all governments, I’m sure the Chinese lie about their macroeconomic indicators– but when you witness the sheer volume of transactions that take place in black and gray markets like this one, 8% GDP growth does not seem so far-fetched.

Wandering around the maze of vendors (which included several stunning women bearing loads of mobile phone accessories), you can’t help but contemplate the nature of intellectual property rights.

Chinese factories are responsible for a huge chunk of global technology manufacturing, which includes both internal components and finished goods… consequently these ‘knock-offs’ are generally comprised of exactly the same parts and labor as the name brand.

Thus, the general reputation that these products are all of poor quality and design is an inaccurate stereotype. Sure, there are a lot of low quality manufacturers out there– though I would argue that there are poorly manufactured goods in legitimate retail outlets all over the world.

Chinese knock-off producers are, at the end of the day, businessmen trying to turn a profit. After all, the vast majority of their customers are locals (I was one of 3 westerners in the building today out of thousands of other patrons).  Producers who routinely manufacture products of questionable quality develop that reputation and soon go out of business.

On the contrary, many producers have ingeniously reverse-engineered popular electronics and redesigned them to include a host of fantastic features– like the new $90 iPhone look-alike that comes with dual SIM cards and a built-in TV tuner.

For these manufacturers, their approach towards intellectual property rights is similar to the software industry’s “open source” movement, in which source code is freely available for anyone to improve upon.  Google is a strong proponent of open source projects and has released over 1 million lines of code under this free license.

Chinese technology manufacturers know that they must constantly be innovating in order to create value and stay competitive; they view it as rather stodgy for western companies to build a business model around sitting on their existing patents.

Benjamin Franklin, who never patented any of his inventions, said in his autobiography, “… as we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours; and this we should do freely and generously.”

While Franklin’s tone is a bit altruistic, his statement is practical and true; after all, the greatest discoveries and advances of modern science are based upon the works of great minds from the past… and last time I checked, no one is paying any royalties to the estates of Isaac Newton and Pythagoras.

To be clear, I am against outright theft in which a manufacturer or vendor adds no value; I am also (naturally) unopposed to those who profit from their ideas and information. 

I believe, however, that ideas are the greatest endowment of mankind; they should be set free to be improved upon by others, not locked away in a government bureaucracy.

I think these Chinese innovators have the right concept.

The sight of nuclear missiles being paraded down the street in a perfectly crisp formation is simultaneously revolting and awe-inspiring.  Yet the Chinese government knew exactly what it was doing when it orchestrated its most prominent display of military hardware in the middle kingdom’s history.

This week is China’s biggest holiday week of the year, celebrating ‘National-day,’ when Mao’s communist revolutionaries took control of the country.  The government  kicked off festivities earlier this week with a military parade that was so intricate and precise it made their 2008 Olympic opening ceremony appear utterly amateurish.

Tanks, armored personnel carriers, and yes, nuclear missiles, were all on the march down Beijing’s main drag; overhead were squadrons of fighter jets and attack helicopters. They all moved in perfect symmetry like a team of gold medalist synchronized swimmers (who just happen to have nuclear annihilation capabilities).

China has been beefing up its military for years, and this week was show time. Sure there were hundreds of thousands of adoring locals beaming with pride, but Beijing was really sending a message to the rest of the world:

We are to be taken seriously.

The thing that most westerners do not realize is that China’s military is largely home grown.  While US and European defense contractors peddle their wares in this part of the world (Raytheon and General Dynamics do big business in Taiwan and South Korea), Soviet-era weaponry still dominates the inventory in this part of the world.

In fact, US intelligence analysts still cut their teeth on Soviet weapons and tactics due to wide scale use in the developing world.  Not the case in China.

The Chinese have their own advanced military weaponry, including 55 publicly traded defense contractors that are just as big and profitable as Lockheed.  If you think that China is ever going to invade Taiwan, these would be a good bet (Xi’an Aircraft International Corporation, Jiangxi Hongdu Aviation Industry Co)

Personally, though, I don’t think that’s going to happen.

For all of its military posturing of late, which includes recent joint military exercises with the Russians, the Chinese have built up their defense capabilities for, err… national defense.

(Conversely, notwithstanding the misguided Bush doctrine, I have long argued that the US should rename its own bureaucracy the Department of Offense, which is indicative of both its true military posture as well as moral aggression.)

Three key factors will likely prevent China from entering an armed conflict:

1) Its military is completely untested; despite China’s shiny new advanced weaponry, its armed forces have not participated in a single combat campaign, so there is no institutional knowledge that will improve combat effectiveness.

2) Children rule family life in Chinese society.  Parents invest heavily in their “little emperors” because children are widely viewed as the older generation’s retirement plan. Who needs social security when you have junior’s spare bedroom?

This is a direct consequence of China’s long held ‘one child’ policy, and no Chinese parent wants to see his investment crushed by unnecessary foreign folly.

To be clear, this is not to say that the US enjoys sending its children into combat; rather, armed conflict is something that American society has unfortunately become accustomed to over the years.  The United States broke the seal a long time ago.

3) China’s policymakers realize that their most effective foreign policy tool is economics, not bullets. Their beefy military is around simply to make war-mongering politicians think twice before rattling any sabers.

Consequently, I would bet on huge profits in Chinese tourism and agriculture before I’d even think about positioning my investments for war with Taiwan (or anyone else for that matter).

Because of the holiday, it’s very slow in Shanghai this week… which is good for me considering that I am in the final throes of my jet lag. Plus it affords me time to scout for an apartment.  More on that adventure later.

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.

“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.

If you’re an entrepreneur and want to make an absolute fortune, you need to head to Asia.

The last several weeks on the ground here have only reinforced my long-held premise that Asia’s economies represent vast, wide open potential.  These economies are growing, and shall continue to grow thanks to solid macroeconomic fundamentals like a large pool of savings, lack of reliance on credit, and dual trade/budget surpluses.

Nowhere is this more clear than in China.  Despite its dizzying growth rates in recent years, the middle kingdom is still developing, albeit rapidly.

What does this mean?

In the US or Europe, true innovation is uncommon– anything that could possibly happen has pretty much already happened. If an entrepreneur wants to start a business in New York or London, s/he will be competing in shark infested waters against dozens if not hundreds of other businesses.

Not so in China.

In most cases, the market is wide open simply because there is a critical shortage of qualified talent… this is readily apparent in Shanghai’s financial community where everything from gold traders, CFA analysts, accountants, fund managers, and experienced executives are in short supply.

The latest statistics show that of 376 listed funds in China, nearly 22% of the fund managers have less than 1 year of experience, and only 3 have been in the business for more than a decade.  Pudong, Shanghai’s financial district, should be a haven for Wall Street refugees… if anyone has the insight to be looking east.

In China, as in most countries, the ’stiffest’ competition is in the Tier-1 cities, which means Shanghai, Hong Kong, Beijing, Guangzhou. And while I am convinced that hard-working entrepreneurs can make a killing in these cities, the virgin territory is in China’s Tier 2 / Tier 3 cities… you know, the ’small’ cities with fewer than 10 million people.

For example:

Kunming, Yunnan province: This is a major logistics hub of southwest China that is known by its pleasant sobriquet “city of eternal spring” because of its fantastic weather.  Despite having a population greater than Miami, Houston, and San Francisco, few people have ever heard of it.

Kunming has been experiencing double digit growth rates due to its direct trade routes with key partners in Asia; it is strategically located to do business with Vietnam, Myanmar, India, Thailand, Malaysia, Cambodia, and Singapore… in fact, foreign investment from Singapore in particular has been surging.

Right now the city is raw, cheap, and full of opportunity– the government has problems that need solving and has the money to throw at sharp entrepreneurs who can provide solutions.

Qingdao, Shandong province: I pen this missive tonight from a city of ‘only’ 7.5 million; originally settled by Germans in 1903, the city is most famous for its “Tsingtao” brand beer (pronounced ‘CHIN-dao’).  What’s more though, this coastal city is a major eastern seaport and manufacturing hub with strong ties to Korea (both of them).

Qingdao is also a strong agricultural and fishing center, and the government is desperately trying to figure out how to meet the growing demand for organics.  These are all problems that need solving… and this is the key theme of entrepreneurship.

A brief anecdote– several years ago, a British man who was an expert in the beer and wine industry stumbled upon Qingdao and determined that it was ideal for a wine vineyard.  He also realized that wine consumption would grow with affluence rates.  He was right– wine consumption is now growing at a 15% annual rate.

With just a $700,000 initial investment, his brand is now considered to be the best white wine in China, and the vineyard makes a metric truckload each year.

I could cite you examples all night of other successful entrepreneurs who came to China, spotted a trend, solved a problem, and made a fortune.  Christine, my friend and colleague who has given me a personal tour over much of this trip, is one of them.  More on her story tomorrow.

The formula is not complex; the best entrepreneurs are the ones who solve the biggest problems in the most efficient way. Because it is developing so rapidly, China is experiencing significant problems and simply does not have the expertise to solve them organically.

Let me know if you are interested and we can have a discussion about specific examples.

There are a lot of people in the financial community, including a few notable figures, that are highly bearish if not outright suspect of China’s growth.

I’m always puzzled by this opinion. I’ve been to the country several times before and keep regular tabs with influential players and insiders, and my own assessment has always been quite positive on the country.

This trip, though, was specifically designed to check my premise and make sure that I wasn’t just drinking the mainstream media Kool-Aid about China. Furthermore, I wanted to spend enough time on the ground to explore more than just the key cities; sure, everyone knows about Beijing, Guangzhou and Shanghai, but what’s going on in Tier-2 and Tier-3 cities?

The facts and observations from this trip thus far point to a single, inexorable conclusion– China’s growth is very real.

In fact, I will go a step further and say that an enterprising foreigner can still make a fortune here; China is very much still a ‘developing’ country– despite it’s advanced age as one of the oldest countries in the world, economically it is quite adolescent.

Consequently, the country is a ‘target rich environment’ for skilled entrepreneurs that specifically fall in the ‘pioneer’, ‘expeditioner’, and ‘internationalist’ categories.

Here are the fundamentals which compel me to make this point:

As I have mentioned in previous missives, real economic growth is based on two factors– technology and the accumulation of savings. China has both in mass quantities. Accumulation of savings provides a deep capital base for funding trade, infrastructure, manufacturing capacity, and small business loans… all of which create additional economic activity.

And technology? China has everything that is required– brainpower, design creativity, equipment, and skilled labor. Take a walk through one of the knock-off technology markets to see for yourself.

With both of these elements, China is investing heavily in its economy; new businesses are being created, more workers are being hired, and average wealth is expanding… which propagates continued economic growth.

Domestic consumption is also picking up steam. In theory, people have two options with every dollar earned– save it, or spend it. In the past, Chinese have opted for the former– working hard, saving their money, and building for the future.

Well, the future has arrived.

I have never witnessed such levels of consumption before, both in the white markets and the gray markets… mega-stores, knock-off markets, shopping malls, bars, restaurants, etc. are all packed with patrons. The crowds are overwhelming, would definitely make a fire marshal nervous.

There are long-term consequences for Chinese consumption– a dollar consumed is a dollar not saved, so China is now effectively trading future growth rate for consumption today. In the LONG run, China will find itself in the same position that the United States is in now– a depleted capital base thanks to decades of mindless consumption.

This economic causality, however, is at least a generation away. For the next several decades, you can expect that internal consumption will be a major growth engine of the Chinese economy… and consumers are barely getting warmed up.

Meanwhile, the government is spending an enormous amount of money, businesses are investing heavily in capacity and new infrastructure, and exports are still net positive. All of this spells significant economic growth.

Yes there will be problems like any other country– inflation, resource shortages, social strife, corruption; none of these factors is strong enough to derail China’s growth– there may be hiccups along the way, but the country’s fundamentals are solid.

Do I buy the Chinese government’s official numbers? Of course not. I don’t believe any official numbers from any government. Nor do I believe in popular industrial indicators like counting the number of tower cranes dotting the skyline (which can often be a clear sign of overdevelopment).

The most obvious indication of China’s potential can be seen on the streets and in shops far away from the bustle of Shanghai in Tier 2 and Tier 3 cities that most people outside of China have never heard of. The wealth effect is cascading across the entire country, and consumers in remote provinces are buying televisions, air conditioners, automobiles, etc. for the first time ever… and most of it is paid for with savings, not credit.

I traveled to Shangdong province so that I could get an up-close assessment of ‘Anytown, China,’ and I’m here to tell you that the business opportunities are very real.

More to follow tomorrow.

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.

In full disclosure, I am heavily biased.  Hong Kong is one of my favorite cities in the world.

Remember those ‘7 expat categories?‘ well, I am definitely a mix of several… maybe all. But Hong Kong ticks all the boxes for me, and always has– I’ve been coming here for years and love it more every time.

To give you an example, I like having access to modern conveniences and the availability of goods and services. I like quality infrastructure, beautiful architecture, and a thriving nightlife.

But I also like a little bit of anarchy… a seedy underbelly that makes my spidey-senses tingle… a heavy international flavor where there are people from all over the world dogging it out with each other to come up on top.

To me, Hong Kong has exactly the right blend of the Yin and Yang– order vs. chaos, Wild West vs. City of London.  This stands in stark contrast to the very orderly and somewhat sterile environment of Singapore.

A lot of people fretted when the British gave up control in 1997… 12-years on, however, so far so good. In fact, Hong Kong has vastly improved in many ways. The expatriate community has grown, as has its importance as a financial center.

As an example, my very plugged-in colleague Christine Verone gave me the inside scoop on the gold scene: the local government just recently announced that they were moving gold reserves out of London and into their new high tech vault (located at the Hong Kong International Airport).

According to Christine, this has significant implications for not only Hong Kong, but the entire region: for starters, there is now going to be same-day settlement of precious metal trades in Asian time zones. It also means that Asia will have its own gold ETFs.

The gold facility will clearly support Hong Kong’s rise as a global trading center for bullion, reducing London’s role in storage and settlement.  Similarly, as the CFTC in the United States continues down its over-regulatory warpath, there will be a flood of new business and capital heading east.

Christine’s analysis is spot-on (as it should be given her extensive background in wealth management).  If you look you can see signs everywhere that capital flows and financial infrastructure are migrating to Asia with Singapore, Hong Kong, and Shanghai as the crown jewels.

So why should you be interested in Hong Kong?

1) There are still jobs in Hong Kong (and Singapore). If you’re looking for work and are on top of your game, these are the cities where you need to be looking… and for an internationalist, there is the right mix of opportunity for you and stability for the family to make it a great place.

2) For the pioneer, Hong Kong is definitely one of Asia’s capital cities– and you can bet that the explosive growth of places like Burma, rural China, Cambodia, and Vietnam is going to be ruled from Hong Kong. The city will be a great place to base a business that focuses on these markets.

3) The banking industry hasn’t rolled over and probably isn’t going to with mainland China standing by its side. The West can kick and scream all it wants, but Hong Kong, Shanghai, Singapore, and Abu Dhabi are all standing shoulder to shoulder; this is why the OECD keeps picking on countries like Costa Rica.

Any downside? Of course.

Like Singapore, cost of living can be quite high in Hong Kong– this is not the place to retire on $500/month.

Hong Kong’s currency is still pegged to the US dollar.  Lately the HK dollar appears to be busting at the seams, clutching desperately at the peak-end of it’s allowed trading band with the greenback.  I don’t see any way that Hong Kong can maintain this currency peg, though I regard this more as an investment opportunity than an inconvenience.

The weather is not spectacular (unless you love humidity) and air quality is certainly not the cleanest in the world… though probably not excessively worse than most other major cities.

Tomorrow I am off to Shanghai and will be attending a wealth management conference showcasing the up-and-coming jurisdiction of Labuan. As always, it should be interesting.

It normally takes me less than five minutes to pack, even for a three week trip.  In this case, though, I’m having a tough time– too many climate zones in Asia, too many events. I need to cram SCUBA gear, beach clothes, professional attire, and formal wear all into one little suitcase…

… plus leave plenty of room for all the custom suits I’m going to have tailored.

I haven’t been watching the markets much today, and frankly I’m sick to death (no pun intended) of the obsequious eulogizing of the late Senator from Massachusetts, so I’ll refrain from comment.

But in the spirit of my forthcoming Asia sojourn tomorrow, I’d like to pass along a recent email from Christine Verone who sent along her thoughts on an emerging mega-trend in China:

—-
Simon-

I’m excited for you to come; I have an ambitious agenda lined up for when you arrive in Shanghai, so don’t show up here with any jet lag… CEOs, brokers, and government officials are waiting, plus I know you will want to meet with your sovereign fund guys.

By the way, from our earlier conversation I need to clarify something (and please make this change to your website).  From the ‘Gold in China’ article a few weeks ago, it says that Chinese people were not allowed to own physical gold or silver until 2009.

This is not accurate and I think you misunderstood me when you edited the email.  Gold was attainable by Chinese via Panda coins (China’s version of Eagles) or jewelry since the 1980s.  Walking into a bank and buying coins/bars however is a recent phenomenon.

The critical point to understand is that the government has never before pushed gold and silver as an investment vehicle. It has gone from being illegal to being the hottest assets on the market simply because of the government’s marketing efforts.

I’m convinced that this will create significant upside, especially for silver. You should see how people stand in line at banks to buy silver bars now.

The other thing I wanted to discuss is an emerging megatrend on the mainland.  The Chinese are aware they need to decrease their dependence on exports, especially now that American spending power has evaporated.

Consequently, the government has prioritized building up infrastructure and domestic consumption (two things that foreign analysts on Wall Street won’t be able to see). This included Chinese tourism.

The government supports the tourism industry and encourages domestic travel far more than international travel… just watch 20 minutes of the daily CCTV news in China and you’ll begin to understand what I’m talking about– I can just about guarantee that you will see travel/tourism commercials promoting the importance of the ‘travel experience’ in some far off city with cultural flair.

Overall, domestic Chinese tourism is going to be one of the biggest China growth stories over the next decade.  You have hundreds of millions of people now that have enough money to leave their little town, their province for the first time ever.

Plus, culturally, Chinese travel in groups… we’re talking big parties on guided tours. Think Japanese tourists in the US in the 1990s and you’ll have the right idea. Naturally this creates a whole cottage industry with enormous growth potential.

A few months ago, as a play on Chinese domestic tourism, I bought a local company called Airmedia (NASDAQ: AMCN). At just a quick glance, most analysts would simply label it an innocuous ‘digital media provider.’

But if you put boots on the ground here, you’d see that Airmedia dominates Chinese airports and airplanes, particularly related to air travel advertising sector. And by ‘dominate’ I mean they are the exclusive advertising provider for some of the highest traffic airports in all of China.

Also, they’re expanding heavily into gas station advertising– on average, China is adding roughly 3000 miles of highways each year (this is expected to triple)— and its predicted they’ll soon surpass the US, taking the #1 position in terms of constructed expressways.

With so much highway construction connecting rural towns to urban mega centers (thanks to the Chinese stimulus package), there will be a lot of new gas stations sprouting up across the country… and Airmedia recently signed a deal to become the exclusive digital media provider at the state owned gas stations (Sinopec), essentially giving them the lock on road traffic as well as air traffic.

(Ironically, Mcdonalds is also capitalizing on this trend– they have signed with Sinopec to build over 30,000 drive-thru’s at highway gas stations.)

I bought at $3.91 and the stock now fluctuates between $6.90 and $7.20.  Would I buy it now? No. But if it drops below $5, I’ll consider buying more assuming the fundamentals haven’t changed… so keep this one on your radar– the company stands to profit as millions of China’s new middle class take their first family vacations this year.

By the way, when you’re picking up your luggage at the baggage claim in Shanghai, look at the massive flat screen above your head… all the mini TVs, even wall adverts– this is all Airmedia.

– Christine

I’ll admit, even I was surprised.

When I think about Asia growth and investment opportunities, places like Singapore, Thailand, Vietnam, and even the Philippines come to mind.  But lately, in my regular discussions with key Asia contacts– brokers, sovereign wealth fund analysts, etc., one place keeps coming up again and again.

Mongolia.

Mongolia is one of the largest, most resource rich countries in the world with a population smaller than Panama– that’s a lower population density than Wyoming.  And with such a low population to support with its abundant resources, the country has the good fortune of being sandwiched in between resource-hungry China and Russia.

Many of my friends and colleagues who are based in Asia make routine trips to Mongolia and describe it as the Wild West– young, fast-paced, and full of opportunities with neither the benefits nor restrictions of established structure.

My old friend Christine Verone, who has an uncanny 6th sense about Asian markets, recently sent me this in an email:

———–

I’m not buying in China right now because I’m not seeing the right indications from the government yet. I will let you know when things change and we can start making money in Shanghai again. In the meantime I am buying in Mongolia as fast as possible.

The stock exchange there is among the smallest in the world; it had a 68% run-up but has since rebalanced to 50% below that level, and there are some fantastic buys. Aside from the broad “metals and mining” sector which is all most people know about Mongolia, there are many plays to found in uranium, cashmere, agriculture… and even new changes in toll roads and water.

It can be seen as another way to play China seeing as nearly 80% of their exports are to the mainland, and an absolute tidal wave of Chinese money is being invested in Mongolia– new infrastructure, luxury hotels, telecom deals, real estate developments, etc.

Everyone from American Express to Ericsson to ZTE is establishing themselves in Mongolia– even Blackberry is launching service in the country… all because a flood of investment dollars and joint venture projects to tap natural resource wealth is creating legitimate, overwhelming demand for services.

I am also looking at clues in demographics– population trends are good predictors for change, and Mongolia is a country that is dominated by young people: 70% of the population is under the age of 35.  This means that they move extraordinarily quickly and are hungry to get deals done.

The stock exchange was started in the 1990s by a 26-year old entrepreneur– this culture is full of people who want to make things happen.

In contrast to my time working in Switzerland in private wealth management, the Mongols move at light speed.  If I were you, I would get this out to your community to see if there’s any interest… and I would suggest two things:

1) The Mongolian Stock Exchange is sitting on multi-year lows; the entire market capitalization is less than $250 million, and daily turnover is often less than $1 million… so institutional capital tends to move prices in a big way.

It’s fairly transparent for foreign investors to get in to this market– which is exactly what I am doing right now. My guess is that there will be a Mongolia ETF very soon once the market has tripled and you start hearing about it on CNBC.

Too late in my book.

2) I know you have a lot of expats who read your letter and are looking for a place to go… I would highly suggest Mongolia– if you have the means and are looking for adventure, Mongolia is a land of opportunity.

Mongolian entrepreneurs are itching to do JV deals with subject matter experts to bring new services to the country… and there’s no such thing as ‘paying your dues’ in Mongolia. You show up, and if you’re smart, you move to the top of the food chain immediately.”

———-

Simon again. What Christine says rings absolutely true… to me, the biggest benefit of living the expatriate lifestyle isn’t the cultural adventure or cheap cost of living– it’s being able to immediately plug in to the movers and shakers who can get deals done and make things happen.

In New York City, San Francisco, LA, etc., it can take years to clutch and claw your way up the ladder and get noticed. Around the world, though, in places like Colombia, Mongolia, Palau, and Panama, it’s possible to become a player very quickly.

Before moving anywhere, though, it’s always a good idea to see the country first hand and scout the opportunities for yourself on the ground. If you’re interested in Mongolia, consider checking out the annual Mongol Rally which takes place in September each year… there is no more unique way to see a country in my opinion.

Let me know if you want to hear more about investing in or moving to Mongolia, and I will do my best to answer your questions.

Greetings! I’m going to dive right into the questions from this week:

== TRANSPORTING GOLD OUT OF THE COUNTRY ==

I appreciate all the comments and anecdotes in response to Tuesday’s letter about my run-in with TSA. . Based on the questions I received, there are a couple of things that should be clarified:

1) In most cases (see below), you don’t have to tell the US government that you’re leaving the country with gold.  However, that doesn’t mean that you don’t have to tell your destination country.

Some places in the world that require you to file paperwork if you enter the country with gold, such as Uruguay and Taiwan.  Check before you go.

2) American Eagles are considered legal tender at face value ($50 for a 1-ounce coin); keep this in mind if you are a high roller and happen to be traveling with 200 of them– you will be over the reporting threshold and need to file the paperwork.

3) Similarly, some foreign minted coins may be considered foreign currency at face value.

4) If you need to fill out the paperwork, ask the airline check-in agent at the airport; s/he should be able to point you in the right direction.

== PANAMA ==

Depending on your perspective, Panama can either be the land of opportunity or a total headache. This week, in two separate letters, I tried to portray both views.  If I left you confused, here’s the bottom line:

Panama is on an upward trend. Miami (and most of the US for that matter) is on a downward trend. At the moment, the difference between the two is vast– Panama has only been modernizing for about 10-years, so it’s going to take some time to catch up.

Meanwhile, the US is beginning to deteriorate very quickly… so while life improves in Panama, things are getting worse in the states.

Panama is not perfect, and will never be. There are problems– social, institutional, environmental, etc. But taken as a whole, I am convinced that both the business environment and quality of life will surpass those of the US, and Miami in particular. Eventually.

For now, one of the chief problems (that I wrote about yesterday) is that pricing inflated far too quickly… it was as if Panama was pricing itself on par with Miami without having actually reached parity yet.

This fundamental value imbalance is what needs to be sorted out in the local property market with sellers capitulating to the lack of demand, at least at existing prices.

It will happen. In the meantime, value investors can find extraordinary bargains in closely held foreclosure listings, as well as buying distressed contracts.

I will provide more information on both of these topics in my forthcoming Panama Black Paper, which is nearing completion.  To be clear, there will be a charge and limited distribution– the Black Paper is only intended for people who are truly serious about living or investing in Panama, not tire kickers.

== CHINA ==

The issue of China’s growth is a surprisingly divisive issue in the financial community. Many people are ’suspect’ of the country’s growth, while others zealously invest in every Chinese issue they can find.

Do I believe the official GDP statistics released by the Chinese government? Of course not. I think they use the same mathematicians to calculate GDP growth that they used to compute the age of their female Olympic gymnasts last August.

HOWEVER, and this is the important point– real, fundamental, long-term economic growth is fueled by two things: the accumulation of savings, and advances in technology.

China has both… in immeasurable abundance.  We’re talking about a culture that values producing, saving, and studying; thus, in my opinion, China’s long-term growth fundamentals are very solid.

=== KEY INVESTMENTS ===

People ask me a lot whether or not I think the US is going to experience significant inflation or deflation.  This assessment is core to an investment strategy: in deflation, accumulating cash makes sense. In inflation, accumulating cash is foolhardy.

I will address this issue in future letters, but suffice it to say that there are indications of both at the moment.

This is why one of the best, no-brainer investments in my opinion is buying cash at a discount– growth companies whose market values are worth less than their net cash. You split the difference and stand to benefit in either case– inflation or deflation.

Believe me, it is hard to find great companies trading for less than cash; usually such valuations are linked to one time market anomalies when investors become completely irrational.

Dr. George Huang, who I have mentioned before, does a phenomenal job of finding these companies, and his returns have been spectacular.  He recently recommended QLT on June 24th, for example, and the stock is already up 85%.

I like his recommendations because I feel like the downside risk– buying cash at a discount– is covered, and there is still tremendous upside potential (like the QLT pick).

If you’re interested in finding out more about these types of investments, I strongly suggest you get your hands on Dr. Huang’s FDA Report.

I’ve been spending a lot of time this week talking to my sources in China, one of whom is inside one of the country’s sovereign wealth funds (SWF).

He could not discuss the details of the Rio Tinto bribery scandal, but indicated that it was far more about saving face and establishing position than anything else.

He also indicated that the SWF analysts were working around the clock trying to put deals together… for China it’s a race against the clock for how fast they can convert their $2 trillion in US dollar holdings into strategic assets– namely oil and gold.

At today’s deflated prices, putting together a really good billion dollar deal is a difficult thing to do. Putting together 2,000 of them is impossible.  Doing it before the dollar collapses? No chance. And they know it.

So as a hedge, the government appears to be pumping up demand for gold and silver among the public, possibly preparing them for an imminent dollar decline.

I asked Christine Verone, my China insider you heard from last week, to shed some light on the Chinese gold market to provide some clarity:

It’s funny you ask, I just got off the phone with one of the key executives at the Shanghai Gold Exchange.

You know, for the past 50 years, the Chinese government has controlled the distribution of all types of gold. They dictated prices and forbade citizens from owning or trading any type of precious metal.

It didn’t matter if you were an individual investor, a gold miner or a processor…it was state asset.

In 1959, if you were caught with gold in your possession you were thrown in jail. The result of this policy has been widespread indifference and very little understanding for precious metals as asset class or sound money.

The government is now taking radical measures to change that.

Fast forward to 2009– the FIRST year that the Chinese public is allowed to own physical gold or silver.  The government is now trying to drum “gold/silver as an investment” into their heads at every corner.

Banking products, investment products, checking accounts linked to gold.  In fact, Chinese have more precious metal investment options than Americans, and the statistics are alarming:

In 1950, China had next to nothing in gold reserves. Today they rank 10th globally, and they are frantically mining for more on their own soil.

For the past half a century, the Chinese had the lowest per capita consumption of gold in the world. Next year, Chinese gold demand will likely surpass that of India.

This year, the government banned silver from being exported… and by July, it was being promoted as an “investment” to the Chinese public on the 6 o’clock news.

You do the math– how does that affect global demand if just 10% of Chinese begin to perceive silver as an investment?

Will the Chinese turn into goldbugs overnight? No. Over the next 5 years? Probably, yes.

I like your long-term silver option strategy for this reason.  Even the smallest shift in Chinese investor/consumer preferences can dramatically alter global demand and commodity prices.

From what I’m seeing from the ground, the Chinese government is engaging in one of the most explosive financial marketing campaigns in history.  Instead of Maoist propaganda, though, they are attempting to change the entire perception of  gold/silver in the Chinese public.

Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working.

The Chinese public now has gold trading platforms on steroids.

You can buy silver bullion or gold bars at any Chinese bank in four different sizes.  Wealth management products tied to gold are skyrocketing in popularity, and the public can now instantly buy, sell, and trade gold 24 hours a day in five different forms with different eight types of services.

Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a “Lucky Gold” card.

I can’t even get Bank of America to open a foreign currency account.

Simon again. There is a reason that the Chinese government is promoting gold and silver ownership, this is not coincidental. More to follow.

I’m taking a quick break in Miami to see friends and family before heading down south again to dive head first into a large, complicated, and very exciting business dealing… so next week I will be writing to you from Panama once again.

While I am in Panama I plan on putting the finishing touches on the Black Paper that I have mentioned before– this will be a “who’s who” list of banks, brokers, lawyers, agents, developers, etc. that I trust and have done business with in the past, as well as names of crooks who are dishonest in their dealings.

I’m working on this as fast as I can and will let you know when I have it ready to go. I plan on a limited release and may do a pre-reservation, so let me know if you’re interested.

I’ve had a great conversations with Christine Verone this morning (my China insider that you heard from on Wednesday).  The response for her boots on the ground insights was quite strong, so I’ve asked her to write another essay next week describing her take on Asia markets.

Given Christine’s phenomenal investing track record, I think you’ll find it quite insightful.

She also wanted me to emphasize that she is not a blind, overzealous China bull. You see these guys on TV frequently touting China’s uninterrupted economic ascent based on unverifiable ‘official’ government numbers. Most of them have never set foot on the continent.

Despite its promise, China certainly has major problems to deal with– pollution, water shortage, income gap, ethnic tension, intellectual property rights, Kim Jong-Il, too many dollars, and oh yeah, that totalitarian government.

It takes a real understanding of the region to be able to navigate these challenges and recognize the key triggers for investment success; that’s the benefit of having boots on the ground. More to follow.

Lastly for this week, I want to clarify a passage from Monday’s letter about Poland in which I questioned, “how could the Poles be complacent enough to not make preparations for the coming crisis?”

It was 1939. Hitler had already invaded Austria and Czechoslovakia and made no secret of targeting Poland next. With Nazi and Polish forces massed at the border preparing for combat, residents of Krakow were enjoying carefree summer days on the banks of the Vistula River.

Polish military commander Edward Rydz-Śmigły attended an open-air mass in the city, proclaiming of Hitler at the end of the sermon “If anyone thinks we love our Fatherland any less than he loves his Fatherland, then he’s in for a surprise.”

It was as if the German invasion was a foregone conclusion… and yet the citizens remained confident in their government and turned their attention to more pressing matters… like staying cool in the August heat.

Cracovians at leisure, summer 1939. source: Krakow Post

And so I wonder… how could such complacency possibly be achieved? At what temperature does the boiling frog finally jump out of the pot?

My guess is that the locals who found themselves staring down the wrong end of a German Karabiner 98 Kurz bolt action rifle a few months later probably wished that they had taken precautions well in advance by devising their own lifeboat strategy.

I’ve said before– I’m actually quite an optimistic person… grounded in realism, but optimistic. I do not spread unnecessary doom and gloom and believe that the headline “all the planes landed safely today” would be just fine.

That being said, given the level of risk we see around us on a daily basis, it seems like sheer lunacy to not begin taking basic precautions– protecting the family; staying healthy; finding alternate ways of generating income; safeguarding assets; maintaining purchasing power of savings; increasing personal privacy.

These are the critical topics of this letter that I try to stick to on a daily basis.  I’ve mentioned in the past that, in my opinion, the single best quick start book for anyone looking for initial answers is Mark Nestmann’s Lifeboat Strategy.

Once you have a firm grounding, I invite any and all questions to this forum and shall do my best to give you actionable solutions.

It’s no secret that China is already starting to dominate the world economy.

Understanding the country, its culture, and its economic infrastructure, however, is a daunting task, particularly for outsiders.  Official reports and media accounts are hardly worth basing an investment opinion on– it’s critical to have boots on the ground.

I have spent a fair amount of time in the country and built up a list of valuable contacts who live and work there.  One of them is an old friend of mine, a really gutsy lady who moved to Shanghai on her own to seize a piece of the opportunity several years ago.

Christine Verone has a strong finance background having worked for a variety of funds and brokerage houses in Chicago, Switzerland, Singapore, and China. She is proficient in Mandarin and has become a ‘go-to’ person in Shanghai, particularly from growing businesses that want to interface with the west.

I’ve been at her for months to do a bit of writing for me– she is a phenomenal analyst and understands the complexities of Asian markets, including Shanghai, Hong Kong, and Singapore.

Her most recent letter to me was quite interesting:

Sorry this is late… I was actually in the hospital! On the bright side – I do see a lot of opportunity in the medical sector here and got a great first-hand perspective of the Chinese healthcare system.

Here’s what’s interesting– you know how the western media says Chinese save 40% of their income? It’s true… but they aren’t buying  TV’s, Rolex watches, and cars that they don’t need.

Chinese are saving up in case they get sick– at hospitals, any Chinese person that can afford it goes the VIP section and receives the best medical treatment that money can buy. They prioritize healthcare over mindless consumption and commit to saving for it.

It is also worth noting that there are skyrocketing rates in diabetes, cardiac problems, and cancer in China… all of this thanks to poor food quality, pollution, and cultural changes.

You know how Americans became obese over the span of 60 long years post World War II? All those chemical and sugar-infused snacks were absorbed over a span of two to three generations. China has compressed 60 years of dietary shift into a single decade.

In fact, many Chinese people even think it’s prestigious and “cool” to have chubby children. The cartoon characters that brand soy and dairy products here have fat kids on them. This is attractive to parents.  Crazy, I know.

The concept was further driven home to me last week when I was in an antique store in search of a copy Mao’s Little Red Book (the most printed book in the history of world, next to the Bible).

Anyway, I was looking at old Chinese postcards and stamps from the 50’s — and they depict fat smiling babies in vegetable patches. That was the dream. Everyone was starving.

Today as the average Chinese enjoys a rapidly increasing standard of living, this fat baby dream is finally being realized.  The end result? a diabetes epidemic.

Don’t get me wrong, I’m not saying the “majority” of Chinese people are fat by any means. But the diabetes growth rate is truly alarming… and to be honest, it translates into major opportunities for certain pharmaceutical and medical companies.

The concept is similar to your friend Dr. Huang’s FDA strategy, but instead of FDA approval in China, you are looking for government support and policy action.

Naturally, there are only a handful of government-approved firms that are positioned to profit from each epidemic. Foreign firms don’t have access. If they do, you know about it months in advance– no one is sneaking in.

The major risk you need to look out for? Can the product (drug) be copied…is it easy to copy? Will the government ensure that it will not be copied? This is important because the instant that a drug is copied, the company loses market share dramatically.

The companies that are best positioned to profit from Chinese epidemics are easy to spot and they can be just as explosive as Huang’s biotech approvals. On top of that, the government ensures that Chinese companies have limited (or zero) competition.

I’ve got to run for now but will send you some listed companies including China’s tylenol company, and another that makes prenatal supplements (huge growth industry here). Both are traded on US exchanges.

Simon again. These are really valuable insights, and I’m eagerly anticipating her follow-up email so I can rip apart the balance sheets of these Chinese companies.

I’m fortunate that Christine knows these markets and major players so well, and having worked in Zurich’s secretive wealth management industry, she also knows Singapore structures inside-out.  In fact, I’ve even got her working on the Asia portion of our forthcoming Second Passport book.

Let me know what you think of her boots on the ground insights and if you’d like to hear more.