LATVIA / SWEDISH BANKS

The link between the fate of Latvia and the stock price of Sweden’s major banks became even more apparent this week.  On Monday, Latvia’s government announced that it had rejected a bailout deal with the IMF, spurring new concerns of devaluation.

In response, investors sold off shares of Sweden’s Swedbank to the tune of a 5% decline.  The market sees these two parties as inextricably linked: as Latvia goes, so goes Swedbank.

We also learned that over 50% of Swedbank’s Latvian mortgages are under water, i.e. the value of the home is worth significantly less than the principal balance that the bank has loaned against it.

When this happened in the United States, default rates skyrocketed. I don’t see how this won’t happen in Latvia, especially given risk (certainty) that the country will devalue its currency.

Let me know if you disagree, I would love to debate the analysis.

LITHUANIA

In a related story that shows interesting promise, the government of neighboring Lithuania announced that its economy contracted by a whopping 24% rate from last year.  Twenty-four. Not a type-o.

This has several implications.

First, Latvia is in much worse shape than Lithuania, and it’s apparent in the streets. If Lithuania has posted a 24% drop in GDP, Latvia’s numbers will be even more crimson. This only bolsters the case for a currency devaluation.

Second, the Lithuanian government response is indicative of mainstream political convention: rather than make the economy more competitive and ease the burden of its businesses and citizens, the government plans on raising taxes even further to support its own largess.

I find this line of thinking to be suicidally incompetent, akin to a starving animal thinking that it can eat its own innards to survive.

The interesting thing about Lithuania, though, is that the country is small enough for protests and grassroots political action to actually make a difference… so I am very interested to see if/how the people respond in Vilnius.

Naturally, my hope is that they will rise up and say “I’M MAD AS HELL, AND I’M NOT GOING TO TAKE IT ANYMORE…”  If this happens, it will set an admonishing anti-government precedent for the rest of region.

This, to me, is the greatest potential benefit of the economic downturn: I am hopeful that societies and main stream media will finally begin to question the legitimacy of government action and realize that all the billions and trillions being spent have either been conjured out of thin air, borrowed from other countries, or stolen from productive citizens/businesses.

Politicians are not spending their own money, and they are not spending “the country’s” money, they are coercively collecting and spending people’s money, despite being the most woefully incompetent financial managers in history.

Small countries like Lithuania and Latvia are the key to starting a movement back to limited government; such a movement is sorely needed right now given the direction that the entire world is headed.

BANKING AND GOLD STORAGE IN AUSTRIA

For the record, NO place on earth is 100% safe and secure from corruption, thievery, confiscation, or the prying eyes of government… unless, of course, you figure out a way to shove your bullion up your fourth point of contact.

Well… I have a bad relationship with my proctologist, which is why I store some gold in Austria (among other places).  Austria is a good compromise, but as some of you have indicated, it is not without risk.

Could armed government thugs go rushing into Das Safe tomorrow under the authority of some obscure anti-terrorism or anti-drug law? Possible… but unlikely.

If this is your chief concern, there are other jurisdictions that may be more favorable, predominantly in Asia. I will be discussing these in future letters.

Remember, though, gold storage should be in a place that you not only regard as safe, but in a country where you frequent and can get to easily.

I find myself in Europe all the time, and as Vienna is so conveniently located, it’s easy for me to pop in, drop off some gold, and pop out.  There are some places in Asia that I frequent as well, and I use storage facilities in those countries.

PHARMA INVESTING

I received a few emails yesterday you couldn’t get yesterday’s interview with Dr. George Huang to work properly; I’ve reposted the interview here, and you can read more about his advisory service here.

I subscribe to his service and find his track record to be stellar, which is why I am sharing it with you.

TRAVEL

I am cutting my Europe adventures short… I was originally intending on staying in Europe until the weather turns cold (September for my blood), but Matt and I have entered into a very exciting new deal for a company in Panama that I hope to be sharing with you very soon.

As such, I am on the way to New York this weekend for a meeting, will visit my family in the US briefly, and then head to Panama to close the deal.  More to follow.

Unfortunately that means I will not be headed to Atlanta next week for the racecar driving school… but I think my aerobatics ride last week certainly makes up for it.

Croatia, in my opinion, is one of the most beautiful countries in the world, and the drive down here has been spectacular.  From Budapest, the drive to Croatia took me south along highway M7, which arcs gently across Hungary’s rolling hills and hot springs.

But what brings me here is not the beauty of the drive, nor the sun-seeking Europeans on vacation… I came to town to visit a friend of mine who has one of the finest investment minds I know.

Gianni Kovacevic is Croatian by descent and spends a lot of time down here.  He’s an international man, a great guy, and an incredibly shrewd investor, so when he calls me with a recommendation, I listen. So do a loyal following of Swiss bankers and fund managers that have made money with him in the past.

By nature, I don’t really like stocks.  The larger an organization grows, the more bureaucratic, top-heavy, and inefficient it normally becomes.  Corporate executives can be like politicians and sometimes struggle to understand the realities that exist beyond their own cubicles.

One wrong move… and poof, shareholder value eroded. Too many wrong moves and the company goes under. Frankly I trust myself and the people around me to run deals more than most professional managers who have cut their teeth on TPS report cover sheets.

That’s why as a general rule, I only buy companies that are trading for less than tangible asset value, or are in an industry with such enormous growth potential that they could be run by a team of well-trained monkeys. This is how I cover my downside risk.

When Gianni recommends a company to me, it’s because he has identified these critical characteristics in addition to a winning management team. I’m always confident that my investment will go forth and multiply.

And it has.

One of Gianni’s most recent recommendations to me was Quadra Mining, a cash-rich copper and gold miner that generated a quick 400% return on my capital in just a couple of months.  I have asked him to write an occasional short essay for this audience with his latest ideas, and he has agreed to do so.

Tonight, though, over a fresh seafood dinner in Zagreb, our discussion focused on Croatia.  We were joined by a local Croat who is an ex-Special Forces commando turned successful entrepreneur.

I have been to Croatia several times, but with an accomplished local right in front of me, I took the opportunity to probed with a series of questions about his country.

The most interesting thing that I learned is how extensive the gray economy is in Croatia; most locals, particularly those who operate tourist related businesses on the seaside, do not pay taxes, at least not on their full incomes.

On average, a Croatian can expect to make roughly $3,000 per month, putting their per-capita wealth on par with that of the United States or developed Western European nation.

This is not, as people expect, a poor country.  I would gauge the standard of living in Croatia to be much higher than in neighboring Italy, which also boasts a beautiful coastline but appears slightly dilapidated.

English prevalence is strong in Croatia, and economic freedom is high– you can start a business in a couple of hours, all online, and the capital gains tax is zero… EU citizens, particularly those from Slovenia, open trading accounts in Croatia to avoid paying taxes.

Since the beginning of the downturn, the country has not suffered dramatically; the gray economy has kept the locals financially insulated while the government struggles to balance its budget amid declining tax revenue.

Earlier this month, for example, the Croatian prime minister unexpectedly resigned in the middle of his term, citing ‘new beginnings,’ and fueling speculation that the economy may be in the same trouble as other Eastern European nations.

It’s budget deficit notwithstanding, Croatia is no Latvia or Ukraine. There is great promise in the country’s economy and natural resources, and I am hoping that the market will irrationally punish the Croatian Kuna, which I would look at as a buy opportunity.

It’s almost 1am here (long dinner tonight) so I need to push this out the door. More tomorrow.

Burgers make better economic indicators than official statistics ever could.

As I travel, I typically perform an informal price study of my own basket of consumer goods– a loaf of bread, a pack of cigarettes, a liter of petrol, and a handful of… non-family friendly wares.

This is the type of information that is most valuable for me because, everything else equal, goods of similar quality should cost the same around the world.

Unfortunately, Heisenberg was correct when he postulated that I am not capable of being in multiple places at exactly the same time… which is why I get excited whenever the Economist releases a new iteration of its Big Mac Index.

The Big Mac Index compares worldwide prices, converted into dollars, of the McDonald’s signature sandwich.  It is an excellent, though certainly not conclusive, indicator of whether a nation’s currency is undervalued or overvalued.

The most recent release from July 16th confirms absolutely what I am seeing on the ground here in Europe: the Eurozone is seriously overvalued…by roughly 30% according to the index.

In other words, the burger will set you back $4.62 based on the current euro/dollar exchange rate, 30% more than the $3.57 paid in the US.

This would suggest, in theory, that the euro should fall from $1.42 to $1.08 in order to achieve parity with the dollar’s purchasing power.

Admittedly, there are some flaws in the index.

Europe is, and always has been, more expensive than the United States– taxes, regulation, and employer contributions are out of control… though I suspect the United States will catch up shortly.  These obligations drive up natural price equilibrium and pollute purchasing power parity.

My own experiences suggest that government influence adds 10% to prices in Europe, meaning that the euro’s range should be between $1.18 to $1.25.  At its present valuation, the euro is terribly overpriced.

More on this later.

Right now I am in Budapest, one of my favorite cities in the world… Budapest has an amazing mix of culture, beauty, and elegance, with just a hint of sordidness so that it’s not too stuffy. Not to mention it’s every bit as nice as Paris at a significant discount.

I was last here in December when the Hungarian forint was trading at 230 per US dollar.  At the time, Budapest was the cheapest ‘nice’ city in the world… this was based on an artificially low, panic-induced exchange rate that I knew couldn’t last.

It didn’t.

Despite being on the brink of economic collapse, Hungary’s forint has gained to 195 per US dollar, an 18% increase; that, plus a small dose of inflation, has reduced Budapest’s price appeal for dollar consumers and investors.  Prices are still reasonable, but certainly not ‘cheap’.

In fact, I would say that in terms of cost of living competitiveness, the ship has sailed for the entire European Union, at least for now.  There are certainly a few exceptions– parts of Poland, Bulgaria, and Lithuania to a degree.

Fortunately, I expect this to change in the future. The entire continent is anchored on the euro, and that currency is dead man walking… for all of the problems in the United States absolutely pale in comparison to old Europe’s economic and fiscal woes.

Italy, Greece, and Spain in particular are in such financial turmoil, their only solution is the oldie but goodie political tactic of inflating the currency by printing more of it. Barrack Obama is giving a clinic as we speak.

In order for these countries to have full monetary flexibility, they would have to break apart from the Eurozone. The resulting loss of confidence would send the currency spiraling into a historical footnote.

Even monetary disruptions in countries that have pegged their currencies, but not yet fully adopted the euro (… Latvia, for example) have the power to shake confidence in the unified currency.

The likelihood of just one of these events occurring (Italy or Greece dropping the euro, Latvia devaluing, etc.) is effectively 100%– and this is low hanging fruit in my book.

I have an idea to safely profit from the euro’s demise, but I would like to hear from you first, as always… especially if you have an alternative assessment on the euro’s future.

In the meantime, I believe that Asia and Latin America currently present the best cost of living value, and I will be focusing on these regions in future missives.