In the spring of 1871 after a miserable defeat in the Franco-Prussian War, Paris plunged into a major crisis as local citizens revolted against the government.
Financial markets went berserk as a result, and the prices of French government bonds plummeted.
There’s an old story that an heir to a large fortune came calling to the offices of the Rothschild banking family looking for investment advice.
According to accounts republished several years later by the Wall Street Journal and Chicago’s Daily Tribune, Rothschild advised the man to buy French government bonds.
“But the streets of Paris are running with blood,” exclaimed the investor.
Rothschild is reported to have replied, “My young friend, that is the very reason that today you can buy securities for 50 percent of their face value.”
This story gave rise to a common saying in finance: ‘buy when there’s blood in the streets’.
This is easy to understand intellectually… harder to do in practice.
When there’s blood in the streets, i.e. markets are collapsing, our human emotions kick in. We tend to panic.
Rather than think that the worst is probably over, we often think that the worst is still to come… and that good times will never return.
Buying at a time when everyone else is selling takes courage. People tell you that you’re crazy.
Looking out my window of the lovely Vanderbilt Hotel here in San Juan, Puerto Rico, I can’t see any blood. Not yet.
But there is zero doubt that this island is in dire financial straits.
Puerto Rico is flat out 100% bankrupt. There is no other way to state the case.
The island’s government is in default. The development bank is in default. Even the local utility company has filed for bankruptcy.
The fallout has been so severe that it borders on ridiculous.
Power outages have been commonplace. The government hasn’t had enough money to hire workers to fill vacant positions. Over 180 schools have been closed due to lack of funding.
Most notably, locals are leaving the island at historic rates. Puerto Rico lost 7% of its population in the half-decade from 2010-2015, a pace which exceeds the mass exodus in the 1950s.
The economy has been in recession for NINE out of the last TEN years.
Real estate prices have tumbled. Dozens of banks have failed.
So… not exactly blood in the streets. But easily the biggest public finance disaster in modern US history.
This is a big opportunity.
To be fair, just because something is at/near crisis levels doesn’t mean that it can’t stay that way for a LONG time. Things could even get worse. Much worse.
Venezuela is a great example.
And just because an asset is cheap doesn’t mean it can’t stay cheap forever.
There has to be a catalyst… something to stop the bleeding and jump start growth.
Well, Puerto Rico might have found its catalyst.
A few years ago the government here passed a number of tax incentive laws, the most famous of which are known as “Act 20” and “Act 22”.
Act 20 allows entrepreneurs to start certain types of businesses here and pay just 4% tax.
Act 22 allows individuals to generate unlimited investment income, subject to a few simple rules, with absolutely zero tax.
(There are a number of other tax incentive laws as well– finance, manufacturing, etc. In fact, I started a bank here under one of the incentive programs.)
These programs are phenomenal for just about ANYONE, whether you’re from Canada, Europe, or China.
But if you happen to be from the (mainland) United States, Puerto Rico’s tax incentives are EVEN MORE compelling.
US citizens are lifelong tax serfs of the federal government. You’re taxed when you earn. You’re taxed when you save. You’re taxed when you spend. And you’re taxed when you die.
Even if you move away and live in a foreign country, Uncle Sam will STILL tax you on 100% of your investment income, and tax you on wage income above a certain threshold.
Yet there is an exception under US tax law.
US citizens who move to Puerto Rico and meet certain qualifications can free themselves entirely of their traditional US tax obligations.
And by the way, US tax code doesn’t even require you to live full time in Puerto Rico in order to qualify for this exemption. You could still spend several months a year on the mainland.
So in other words, by spending 3-6 months on the beach in Puerto Rico you could virtually eliminate your taxes.
[Read more about this incentive program .
Needless to say this is starting to attract the right kind of people to the island– people who have capital, talent, and ideas. It’s a growth catalyst. And so far it’s working.
Unemployment, though still high, is starting to fall. San Juan’s infamous violent crime rates are also falling, according to FBI data.
For the time being, though, Puerto Rico remains cheap and full of opportunity.
There are only three large foreign investors who have had the foresight to invest heavily here, like billionaire hedge fund manager John Paulson who has picked up trophy assets at fire sale prices.
(I’m actually staying at one of his hotels right now– it’s first class.)
I’ve been reviewing a number of unique opportunities; one of my employees is a veteran in the local banking sector, and we’re reviewing some distressed asset portfolios that the FDIC acquired when the banks failed.
Many of these high quality assets are still available for pennies on the dollar.
These types of opportunities don’t come around that often. And they especially don’t come around in a place that’s technically part of the United States.
It’s definitely worth considering the opportunities here… and at a minimum, spending some time on the beach to slash your taxes.